Diversify by style

SPONSORED CONTENT – Willis Towers Watson CIO Craig Baker, Chair of the Alliance Trust Investment Committee, reveals how to achieve long-term returns with lower risk

Diversification, or not putting all your eggs in one basket, is one of the golden rules of investing. By spreading your investments around, a dropped container shouldn’t have too much of a negative impact on your whole portfolio.

But there are different ways of achieving diversification. You can do it by asset classes, mixing equities, bonds and property investments, for example, with the proportions in each depending on your appetite for risk and your time horizon. You can also diversify within an asset class like equities by spreading your investments across geographic regions or market sectors. Or you can diversify by type of market, developed and emerging, or by market capitalization (large, medium, or small companies). In all cases, the goal is to combine investments which don’t always move in the same direction at the same time.

The Alliance Trust multi-manager global equity portfolio ticks many of these boxes, including diversification by geography, market type and sector, but it also blends into the mix diversification by a manager’s investment style. The portfolio combines the best stock selections of nine-best-in-class managers*, all experts in their fields with different philosophies and processes. Because they have different approaches to investing, they naturally pick different stocks, covering all sectors and geographies, including emerging markets with few, if any, overlaps. For example, there is:

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  • Rajiv Jain, of GQG Partners, who seeks out high-quality businesses that can weather macroeconomic storms;
  • Andrew Wellington of Lyrical who specialises in identifying lowly priced stocks trading with the potential to recover; and
  • CT Fitzpatrick, of Vulcan Value Partners, who, despite his firm’s name, doesn’t start by looking for cheap companies. Instead, he focuses on durable businesses, only investing when their prices drop significantly below his estimate of fair value.

The other six managers are equally distinctive. The key point is that all nine provide differentiated sources of potential return. In other words, they aren’t correlated, they have little relation to one another which means there should always be an engine for investment growth, irrespective of the economic weather. That can help to smooth out the peaks and troughs of any one approach on its own.

The danger of diversification, of course, is that owning too many stocks can make it difficult to outperform the market. Alliance Trust avoids falling into that trap by restricting each of the managers to between 10-20 of their top stocks.

Balancing risk and return

It’s well established in academic literature that highly focused portfolios can potentially deliver significantly higher returns than the market. Indeed, one well-known professor, Hendrik Bessembinder of Arizona State University, has argued that the entire gain in the US stock market since 1926 is attributable to the best-performing 4% of listed companies. So being selective and choosing the right companies can be highly rewarding.

The problem with highly concentrated portfolios is that they are inherently risky and volatile. Get a few stocks wrong and they can make a big dent in a portfolio’s returns because each one represents a significant proportion. Adding more stocks can spread risk and reduce volatility, but it may also dilute returns if they are merely second-best choices designed to play it safe and fill out the portfolio so that it hugs the index.

A Low Maintenance Core Holding

Alliance Trust squares the return/risk circle by blending the highly focused stock selections of our nine managers into one high conviction portfolio. By combining the outperformance potential of high conviction investing with the reduced risk of loss and volatility that diversification by geography, developed and developing markets, sector and manager style provides, Alliance Trust can represent an ideal long-term core holding for all generations of investors, either on its own or as a building block in a broader portfolio. With multiple layers of diversification, it does the hard work of selecting and monitoring the appropriate mix of stock pickers for you, leaving you to focus on marrying equities with other asset classes to achieve a well-balanced portfolio.

Find out more about Alliance Trust here

*As rated by Willis Towers Watson.


Towers Watson Investment Management Limited (“TWIM”), part of Willis Towers Watson, has approved this communication. This communication is intended for general information purposes only and it should not be considered a substitute for specific professional advice. In particular, its contents are not intended by Willis Towers Watson to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. As such, this material should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice.

Craig Baker

Global Chief Investment Officer Willis Towers Watson

Craig is ultimately responsible for all aspects of Willis Tower Watson’s investment philosophy and process. He is Chair of the Investment Committee which selects and oversees the nine managers who run Alliance

Trust’s global equity portfolio of high conviction stocks. Craig joined WTW in 1994. He is a Fellow of the Institute of Actuaries.

Willis Towers Watson (WTW), a leading investment group with roots dating back to 1828, was appointed as Alliance Trust’s Investment Manager in April 2017. WTW is responsible for driving investment outperformance, selecting, monitoring and overseeing Stock Pickers, reviewing portfolio blending, balancing risk at the stock, sector and geographical level, implementing any hedging and gearing. This is a financial promotion from Alliance Trust PLC.