“Unusual economic conditions make investors unwilling to put too many of their eggs in one basket,” according to Edelsten who manages the Artemis Global Select Fund. But investors need to be savvy about diversification and remember that there is never a case for diversifying into an asset whose investment characteristics are poor, he said. After all, many multi-asset funds have missed the mark over the last couple of years, despite boasting more diverse investment universes, he noted.
While the number of central banks that have adopted negative interest rates is unprecedented, Edelsten argued that this scenario still fits a historical pattern which favours equities.
“Remember too that the great global bear markets of the past – when share prices worldwide fell all at once – have generally had one of two characteristics: either economies were riddled with debt, as in 1980 and 2008, or the valuation of equities had become overstretched, 1987 and 2000. Currently, governments are indebted but companies tend to be flush with cash – perhaps the credit risk of a diversified portfolio of quality companies is lower than lending money to sovereign borrowers?”
Although assets like index-linked bonds, gold and property all come with their investment pros and cons in the current negative interest rate climate, Edelsten holds that investing in global equity markets provides investors with a more “diverse and not overly correlated set of choices.”
“For example, Japanese companies, currently driving their share prices higher by improving shareholder returns, have very little correlation with internet stocks in the US,” said Edelsten. “Neither group has much correlation with European bank shares. As long as one can find a broad range of different investment opportunities one can end up with a well-diversified portfolio.”
Edelsten added that to ensure adequate diversification in his fund he limits his exposure to any one sector or investment theme to around 20% and keeps his exposure to any single stock below 3%.
