No apologies needed – The Diversification Apology Index

Rosenberger 150 x 150Andrew Rosenberger, CFA, Senior Investment Manager

Being truly diversified means always having to apologize for something.  Diversification, like investing in general, is oftentimes easier said than done.  We can theorize about 30 year time horizons; but emotions, herd mentality, individual circumstances, and a largely unpredictable future make practice far more difficult than theory.  For example, prior to the Financial Crisis when international stocks were ripping higher, investors questioned why more of their equity exposure wasn’t allocated toward international and emerging market stocks.  Last year, clients questioned why any of their equity exposure was allocated toward international companies.  As diversified asset allocators, we are constantly facing something in our portfolios which is lagging the broader markets.

With that said, 2017 certainly “feels” like it is shaping up to be a good year for diversified investors.  Most asset classes are up on the year with select ones, like international equities, handily outperforming the S&P 500.  But why does this year “feel” different than those in the past?  To answer that, let me introduce the “Diversification Apology Index.”

Diversification Apology Index 2

Source: Brinker Capital, FactSet, Lipper: 1/1/05 to 8/31/17

To explain further, let me first mention that not everything is performing well this year.  Commodities are slightly negative year-to-date, while REITs cling to only fractionally positive returns.  Yet, when you look at most investors’ portfolios, commodities and REITs make up only a minor portion of their overall asset allocation.  International equities, on the other hand, tend to represent a much larger investable universe and thus tend to make up a more significant portion of a diversified asset allocation.  To demonstrate this idea, we complied all U.S. open-end mutual funds and grouped them into broad asset classes based on their Lipper classifications.  With the entire mutual fund universe in hand, we then asset weighted each fund according to its corresponding asset class.  In short, we created a proxy for the ‘market portfolio.’  While we don’t believe this represents the average investors’ asset allocation per-se, it does give us some indication on relative positioning.  For example, we can see that the assets under management (AUM) for the international and global equity mutual funds is nearly twice as large as that of commodities, natural resources and MLPs.  Similarly, REITs make up only 3 percent of the total mutual fund AUM.  Although investors will differ based on their risk tolerance, objectives, biases, and investment philosophy, the aggregate mutual fund AUM provides some insight as to where the investors tend to allocate their investable capital.

US Mutual Fund Universe by Asset Class 2

Source: Brinker Capital, FactSet, Lipper: as of 6/30/17

With an idea relative asset class weightings, we can then compare recent performance of each of these asset classes to how a very traditional 60 percent S&P 500, 40 percent Barclays Aggregate portfolio would perform.  When asset classes with relatively small weights underperform, investors tend not to take all that much notice.  Hence, there is little to ‘apologize’ for.  However, when more meaningfully weighted asset classes underperform, the results stand out like a sore thumb.

Therein lies the basic methodology for the “Diversification Apology Index”.  After staying in an elevated range since 2011, we now see the benefits of diversification more similar to that of before the Financial Crisis.  Although we shouldn’t interpret this gauge as having any predictive power, it does bring hope that conversations with investors will be more focused on goals and how to meet objectives rather than why one may not be keeping up with the S&P 500.  Ultimately though, we should take comfort in knowing that it’s a good thing when select asset classes underperform, as it means that we are truly benefiting from a diversified portfolio.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.



Bridging the Alternative Investment Information Gap

Sue BerginSue Bergin, President, S Bergin Communications

The groundswell of interest in alternative investments continues to build, creating a thirst for clear, comprehensive and client-facing educational materials.

According to Lipper, alternative mutual funds saw the biggest percentage growth of any fund group, with assets under management increasing 41% to $178.6 billion in 2013. A recent report by Goldman Sachs projects liquid alternatives are in the early stage of a growth trend that could produce $2 trillion in assets under management in the next 10 years. In order for this to happen, however, investors must gain a better understanding of how alternative investments work, how they function within a portfolio, and where potential benefits and risks could occur.[1]

EducateAlternative investment strategies are a separate beast than the traditional methods of investing and traditional asset classes that most investors are familiar with. From divergent performance objectives, to the use of leverage, correlation to markets, liquidity requirements and fees, a fair amount about alternatives is different from traditional investments. Understandably, investors have many questions before they can decide whether to and how much of their portfolio to dedicate to alternative investments.

The task of educating investors about alternatives is falling largely on the shoulder of the advisory community. Well over half (60%) of the high-net-worth investors recently surveyed by MainStay Investments, indicated financial advisors as the top resource for alternative investment ideas. Trailing advisors was internet-based research (41%), research papers and reports (35%), and financial service companies (30%).[2]

Historically, advisors have shied away from recommending alternative investment strategies because they are too difficult to explain. The conundrum they now face is that 70% of those advisors surveyed also acknowledge the need to use new portfolio strategies to manage volatility and still seek positive.[3]

Bridge the Education GapIt’s important that advisors start to value the use of alternatives and find ways to bridge the information gap for investors. The good news is that investors have tipped their hands in terms of what they really want to know. According to the MainStay survey, clients want more information in the following areas:


  • Explaining the risks associated with alternative investments (73%)
  • Learning about how alternatives work (71%)
  • Finding out who manages the investments (54%)
  • Charting how alternatives affect returns (46%)


 [2] “HNW Investors Turn to Advisors For Alternative Investment Guidance,” InsuranceNewsNet, April 3, 2014.

[3]Few advisers recommend alternative investments: Respondents to a Natixis survey said that they stick to strategies that can be explained to clients more easily,” InvestmentNews, October 24, 2013

The views expressed are those of Brinker Capital and are for informational purposes only.