The way we approach one of the most important concepts in investing is flawed

The approach to investment diversification that focuses on regions is flawed and limiting.

That was the takeaway from a panel at UBS’ CIO Global Forum on Thursday.

In one sense, diversification is about holding different asset classes to lower risk.

Apart from achieving a higher expected return, it’s one way to find pockets of the market that can deliver more in a sluggish growth environment.

And often, investors have a bias towards focusing squarely on regional diversification. It could be a US-centric stance, or a bet on emerging markets as a whole.

But this approach can end up restricting returns, according to participants on the UBS panel.

“My bet is that 10 years from now, we will be thinking about how to get diversification and how to do asset allocation on a totally different framework — thinking across the world, not by timezone allocation,” said Colin Moore, global chief investment officer at Columbia Threadneedle.

The better approach to diversification is thematic, said Dan Roarty, CIO (global growth and thematic) at AllianceBernstein. He was answering a question about whether non-US and foreign currencies should play a greater role in dollar-denominated portfolios.

It’s an active approach, Roarty said, that focuses on well-run companies linked to areas of growth which aren’t tied to short-term movements in the global economy.

Roarty’s examples included the rise of driverless cars. He noted that on Thursday, BMW announced a partnership with Intel and Mobileye, a maker of collision-warning systems, to break more ground in the space.

Innovation in renewable energy and waste management are other examples. Their common characteristic is that they are not confined by geographies.

“What we’ve found, at least in conversations with clients, is that it’s easier to relate to them [thematically] than when you’re just talking about US stocks or international stocks,” said Stephen Freedman, head of US thematic and sustainable investing strategy at UBS.

For example, a focus on the electric-car market could lead a US-centric investor to Tesla shares. However, BMW shares could serve a bet on that theme just as well.

“Don’t get too tied into one specific geography because you’re going to miss all the opportunities,” Moore said. “Your opportunities for better risk-adjusted returns are there if you just eliminate that home bias.”

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