Diversification Still Matters -- Investment Advice From Papamarkou Asset Management

Investors can benefit from understanding that proper diversification in your portfolio can reduce volatility, manage risk and increase returns.

Investors must understand that correlations drift

and correlations between risky assets will always rise in times of global crisis.

Portfolio volatility can be managed with proper asset allocation. One lesson to take from 2008 includes maintaining sufficient levels of high quality fixed income and cash to mute portfolio volatility, but there's much more you can do.

We're proponents of maintaining exposure to strategies that display low or negative correlation to the broad capital markets. Specific examples include discretionary commodity funds, credit managers in the asset backed space and global macro hedge funds. Many of these managers performed beautifully in 2008 which helped offset negative returns in other asset classes.

We're fundamental optimists and believe that portfolios should maintain allocations to long-only managers which generally correlate to the capital markets. We also urge clients to be broadly diversified, with diligent attention paid to asset class, manager, sector, geography, and their respective correlations.

One needs to be well advised when building out a diversified portfolio - investment and manager selection is paramount. Rigorous due diligence should be performed to ensure the opportunities being reviewed are appropriate for each investor's risk profile and fit well within the overall investment plan.

a properly assembled portfolio finds a medium between an efficient rate of return and a corresponding assumption of risk.

(PRWEB) June 19, 2009 -- At a time when many investors are smarting following a painful year of losses, the financial media seems rife with skepticism regarding rising correlations and the reduced benefits of diversification. Thorne Perkin, Vice President of Papamarkou Asset Management, disagrees "diversification still matters."

"Investors must understand that correlations drift," says Perkin, "and correlations between risky assets will always rise in times of global crisis."

Indeed an annualized comparison of the S&P500 and the EAFE index since 1970 (EAFE inception) through 2008 demonstrates an average and modest correlation of 0.59. However, consider the dramatic annual rise in correlation between these indices during recent "crisis periods" including: the bursting Internet Bubble in 2001 (0.91), the turmoil pusuant to September 11 in 2002 (0.86) and the most recent global credit crunch in 2008 (0.91).

"Portfolio volatility can be managed with proper asset allocation. One lesson to take from 2008 includes maintaining sufficient levels of high quality fixed income and cash to mute portfolio volatility, but there's much more you can do."

Perkin points out that Papamarkou Asset Management also looks to alternative investment opportunities to further reduce standard deviation (volatility) in the portfolios that they manage.

"We're proponents of maintaining exposure to strategies that display low or negative correlation to the broad capital markets. Specific examples include discretionary commodity funds, credit managers in the asset backed space and global macro hedge funds. Many of these managers performed beautifully in 2008 which helped offset negative returns in other asset classes."

"Our client's portfolios also benefitted from various private equity investments that we've been able to access, including a pipeline infrastructure opportunity and an investment in an alternative energy fund. We even participated in a major professional sports franchise transaction -- each of these investments adds diversification to a portfolio with the benefit of reduced overall volatility.

"We're fundamental optimists and believe that portfolios should maintain allocations to long-only managers which generally correlate to the capital markets. We also urge clients to be broadly diversified, with diligent attention paid to asset class, manager, sector, geography, and their respective correlations."

Perkin warns, "One needs to be well advised when building out a diversified portfolio - investment and manager selection is paramount. Rigorous due diligence should be performed to ensure the opportunities being reviewed are appropriate for each investor's risk profile and fit well within the overall investment plan."

Given the recent context of volatile markets coupled with fraudulent activity, this research process is more important now than ever and investors can greatly benefit from the guidance of experienced investment professionals who maintain a comprehensive understanding of risk management, asset allocation and portfolio construction.

Asset management professionals can also help investors analyze the many determinant factors that comprise an individual's investment profile which include: risk tolerance, return expectation, tax situation, liquidity demands, income generation, domicile, lifestyle expenses, and time horizon.

While risk can never be completely eliminated, access to, and an understanding of, the appropriate investment opportunities will serve investors well in their goal to achieve investment success.

In summary, investors can benefit from understanding that proper diversification in one's portfolio can reduce volatility and manage risk. A key to successful long term investing involves correctly determining an investment profile and matching fitting opportunities. Perkin concludes "a properly assembled portfolio finds a medium between an efficient rate of return and a corresponding assumption of risk."                   

Thorne Perkin is a Vice President for Papamarkou Asset Management(www.papamarkou,com), an independent, SEC registered investor advisor based in New York. Papamarkou Asset Management, founded in 1982, advises the management of several billion dollars for its US and international client base.

Source: S&P500, EAFE

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