When Diversified Isn't Diversified

Torsten Slok's Saturday email included the following chart and he said the index' concentration is moving toward 50% in the top ten if/when Anthropic and SpaceX go public.

He said the "S&P 500 basically doesn’t offer much diversification anymore."

Here's a fascinating quote from Jeff Currie at Carlyle, he said "in the 1970s, energy at 25% provided a natural portfolio hedge. At 3%, that hedge has vanished."

Mike Zaccardi Tweeted out this chart.

I think I randomly noticed the duration getting a little longer at some point but I don't really keep tabs on this the way I do for S&P 500 index composition. 

The Oregon Public Employees Retirement Fund has had its hat handed to it for getting lousy returns from its 26.5% allocation to private equity. "They appear to be after the highest-returning asset without respect to risk-return considerations and without regard to their seeming lack of selection skill." CIO Rex Kim is cited as calling the criticism myopic, the fund is focused on the long term. That would be ok except for the various budget cuts, one small school system had to make serious cuts to staff, occurring now not in the long term. 

The tie in for all of this is how to embed robustness or resiliency into an investment portfolio. Here's Bob Elliott from Unlimited Funds giving his thoughts on how important this is.

We obviously spend a lot of time here on how to do that. The balance is walking the line between kneecapping long term growth of the portfolio while not taking the full brunt of large declines or being a forced seller after a large decline to meet income needs. 

Obviously the belief here of how to best do this is to combine small weightings to esoteric fixed income niches and alternative strategies with differing attributes. 

In the past, we've frequently said putting it all in an equity index fund is valid but not optimal. Currie's observation about no built in hedge speaks to part of this, another part is the occasional enormous declines that might reasonably induce a panic sale at exactly the wrong time. The right combo of robustness and resiliency can prevent ever being in a position of potentially panicking. 

The anecdotes about AGG and OPERS are different manifestations of the same issue, not having a great understanding of how risk works. Also with OPERS, if there really are budget cuts now because "long term" investments are doing poorly, then the investment team has mismatched its assets versus its liabilities. 

Making portfolios more robust is not rocket science and it gets a little easier when you can accept that not every alternative strategy or esoteric fixed income niche will do well in every single adverse event. That is why you diversify your diversifiers. 

Don't make it harder than it needs to be. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.