Stuart Gray

Most investors are familiar with the term diversification – avoiding risk in an investment portfolio by ensuring a spread of assets. Diworsification, on the other hand is less well known but means the opposite, i.e. holding too many assets that are similarly aligned.

What we mean by this is when you put lots of funds together, the risk is that you cancel things out and you end up averaging everything out to the benchmark.

This means most of your money ends up replicating the index and only a very small amount of money is active against the index and that of course means it is very hard to make any active returns.

While many investors understand diversification, avoiding the risk of diversifying badly is not so easy.

The principle of diversification is pretty much common sense – if people are managing their pot of life savings the idea of not putting all your eggs in one basket is reasonably well understood. So, I think it is normal for investors to hold multiple funds.

Doing that well and avoiding diworsification is pretty critical and something many investors either struggle with or frankly many can’t measure or manage at all.

When a team is trying to build a portfolio, it is also trying to maximise the benefits of diversity and avoid diworsification.

We deliberately build our portfolio so that it doesn’t cancel out the index – in fact 75-80% of the money in our portfolio remains active against the benchmark and only a small amount of money is covering index stocks.

For context, if you compare that with a single manager fund, that 80% active money is pretty high and if you compare it with a multi-manager fund it is very high. That’s how we try to maximise the diversification benefit and avoiding diworsification and making sure that the portfolio overall is still a very active portfolio.