A few years ago, I wrote about diversification; investing in a blend of different companies of different sizes, in different regions and industries. Funds are a great way of achieving this diversification as you enjoy economies of scale by having your money pooled with other investors. You can now invest in thousands of companies, something that is impossible for an individual investor.
But something I am seeing quite regularly is people investing in almost identical funds for the purpose of diversification.
Take Zurich Life’s flagship funds for example; the Balanced, Performance and Dynamic funds. These are all very fine funds which have been running for almost 30 years. But one is just a less risky version of the others, with the Balanced being less volatile than the Performance which is less volatile than the Dynamic.
If you look at the factsheets for each fund, they all hold about 400 stocks, which you can guess are the same. The factsheets list the top ten holding of each fund:
| Balanced | Performance | Dynamic |
| Apple | Apple | Apple |
| Microsoft | Microsoft | Microsoft |
| CRH | CRH | CRH |
| Amazon | Amazon | Amazon |
| JP Morgan Chase | JP Morgan Chase | JP Morgan Chase |
| Alphabet | Alphabet | Alphabet |
| Johnson & Johnson | Johnson & Johnson | Johnson & Johnson |
| Exxon Mobil | Exxon Mobil | Exxon Mobil |
| Berkshire Hathaway | Bank of America | Berkshire Hathaway |
The top ten equity holding in the Balanced and the Dynamic funds are the exact same. The Performance fund has Bank of America in its top 10 instead of Berkshire Hathaway, otherwise they’re all the same. You can be sure it features high enough up the list though.
I also see people investing in different managed funds in an effort to diversify their portfolio. It used to be peddled that investing in funds with managers with different management styles was also giving you diversification. In reality, they largely invest in the same stock anyway. If Apple, Google etc are the biggest companies in the world, you are going to invest in them in your Managed fund.
Advisors used to think that we had show clients how great we were by picking loads of different funds with different percentages in each. To be honest, it’s a lot easier to just pick one global equity index. It will rebalance automatically and be a lot easier to manage. You can then add other asset classes such as property, bonds and cash.
If you have any questions, you can send me an email at steven@bluewaterfp.ie