Diversification is a cornerstone of our investment process. At a high level, diversification exists within asset classes, such as allocations to various sectors within equities or various sovereign sukuk issuers. The goal of diversification is to avoid too much concentration in any one company or asset class. Doing so ensures that a well-constructed portfolio has many uncorrelated asset classes that are driven by different variables and react differently under stressed market conditions. Below, we can see the performance of various asset class during the volatile market conditions in Q4 2018
Within equities, diversification across various sectors and companies ensures investors have exposure to different business models and revenue streams, which ultimately drive stock performance. Despite U.S. equities ending 2018 down roughly -6%, there was wide dispersion in performance across sectors as shown in the chart below.
Allocations to sukuks, which typically exhibit lower volatility than equities, provide a stabilizing asset class in portfolios. Finally, gold provides uncorrelated returns, improving portfolio efficiency, but also can serve as a safe haven asset that performs well when there are fear and investor uncertainty in the market.
We constantly monitor how various asset classes are behaving, to ensure they’re functioning as intended in client portfolios, and regularly revisit our assumptions and analysis to affirm client portfolios reflect the most efficient allocation depending on risk profile.
Please note that the content of this article may not be applicable to all jurisdictions Wahed is live in.