The Diversification Illusion: Why Most Multi-Asset Funds Fall Short on True Risk Diversification

Many investors choose multi-asset funds believing they deliver balanced portfolios with built-in diversification. But analysis from Key Capital Private suggests that for many multi-asset funds, diversification is more illusion than reality.

Despite holding a wide range of assets, most traditional multi-asset portfolios are dominated by the same underlying exposures:

• Bonds

• US large-cap equities

• Unintended concentration in the US dollar

The result? Portfolios that appear diversified have significant portfolio concentrations.

When Diversification Failed: The 2022 Reality Check

The breakdown of the bond–equity relationship in 2022 exposed structural weaknesses in multi-asset investing. Historically, bonds acted as a stabiliser during equity sell-offs. But in 2022, both fell sharply.

Even conservative funds with low equity exposure experienced losses similar to higher-risk portfolios.

Hidden Concentration in the US and the Dollar

Global stock markets are now heavily dominated by US mega-cap stocks. For euro-based investors in traditional multi-asset funds, this may create an unintended level of currency exposure.

While US markets have performed well in the past, concentration increases risk when trends reverse.

Multi-Asset Investing Reimagined: A “2.0” Approach

Key Capital argues that diversification must evolve. In today’s market environment, investors need to consider:

• Alternative assets

• Specialist active managers

• Diverse and independent return drivers

• Active currency management

The Key Capital Balanced Multi Strategy Fund (BMS), managed by Schroders, is one example of this next-generation design. The fund provides Irish investors with access to hedge funds, catastrophe bonds, emerging market debt and institutional strategies, while actively managing currency exposure within a disciplined range.

Redefining Diversification

True diversification does not come from owning more assets, it comes from avoiding reliance on the same underlying risk factors.

In a world of changing correlations and concentrated markets, investors must look beyond labels and consider what really drives differentiated performance.

Diversification today is about resilience - not just allocation.

Read more about the Key Capital Balanced Multi Strategy (BMS) Fund.

IMPORTANT INFORMATION

This is a marketing communication. It is for information purposes only and is not intended as investment advice or recommendation, nor is it an offer to buy or sell any financial instrument.

Investment involves risk. The value of investments and the income from them may go down as well as up, and investors may not get back the amounts originally invested. Past performance is not a reliable indicator of future performance and may not be repeated. Exchange rate changes may cause the value of investments to fall as well as rise. Any forecasts or projections are for illustrative purposes only.

Tax treatment depends on individual circumstances and may be subject to change.

BMS, a sub-fund of Schroder Special Situations Fund SICAV, is an open-ended, daily dealing UCITS fund created exclusively for the Irish market. Please refer to the latest Prospectus of the Schroder Special Situations Fund and the Key Information Document (KID) before making any final investment decisions.