Diversification Matters

Even before Burton Malkiel popularised the term in 1973, investors had begun taking random walks and applying other theories supporting diversification of their portfolios.  Yet today, the investment community, in particular the decision-making community, might be observed to be concentrating.  Five asset managers control 55% of the total assets of US mutual funds and ETFs – largely driven by passive flows[1], [2].

In the current downturn, and that hedge funds have been benefiting from the strict risk parameters under which they operate.  One consequence of the growth of the largest funds, however, is increased concentration in the industry. There are fewer hedge fund launches, and smaller funds are struggling to compete with established names for investment.  Furthermore, the “pass-through” expense model cited may also be disadvantageous to end investors.

At Noviscient, we believe that there is a need to support emerging managers and a diverse investment ecosystem, allowing investors to access a broad range of investment managers with independent investment thesis, varied research providers and information sources, and alternative tools to analyse and interrogate data.  Larger funds do benefit from economies of scale, as the FT article suggests, and have held up of late.  However, smaller funds have more consistently rewarded investors over time.  A platform that effectively selects those funds which are getting it right, that also enables investors to manage the cost of accessing these funds, supports the growth and incubation of these industry innovators to mutual gain.

If you are interested in supporting access to diverse investment strategies, we would love to hear from you.  Whether an investor or a fund with a good idea, we would like to help.