Resilient portfolios through asset diversification

• Diversification has evolved alongside the global context and new asset classes, aiming to reduce exposure to adverse events.
• Asset allocation focuses on distributing capital based on goals and risk profile.
• At FlexFunds, we securitize assets to issue exchange-traded products (ETPs) that can enhance diversification and liquidity in investment strategies. For more information, feel free to contact our team of experts. 

Diversification remains a cornerstone strategy for asset managers looking to build more resilient and better-prepared investment portfolios.

FlexFunds outlines the key concepts behind diversification and asset allocation amid today’s turbulence, particularly the ongoing trade wars that have fueled investor uncertainty.

In the face of today’s macroeconomic shocks, balancing portfolio risk and returns has become one of asset managers’ top priorities.

Amid market uncertainty, dollar volatility, and the strength of so-called safe-haven assets, managers rely on diversification to navigate today’s challenges.

Sources such as asset manager BlackRock¹ define diversification as the distribution of investments across various asset types to reduce risk.

Combining instruments within an investment portfolio allows for strategic exposure to different economic sectors and geographic regions.

In this context, FlexFunds plays a strategic role by facilitating the creation and launch of listed investment vehicles (ETPs), allowing managers to build more diversified strategies with global reach.

Through its platform, FlexFunds offers asset securitization solutions—a process that transforms different types of financial assets into marketable securities.

This makes it possible to convert illiquid or alternative assets—such as private funds, real estate investments, private loans, or hedge funds—into listed instruments, enhancing liquidity, enabling international distribution, and improving access to private banking.

FlexFunds collaborates with managers and administrators worldwide in the design and maintenance of these listed vehicles.

This way, it contributes to presenting investment strategies in a way that is more accessible, liquid, and scalable for an international audience.

Asset allocation

Asset allocation—the process of distributing investments across asset classes—is essential to building any portfolio.  

In doing so, asset managers may choose equities, bonds, cash, real estate, or alternatives such as securitization, depending on investor profiles.

The goal is to balance risk and return, as each asset class behaves differently across economic cycles and carries its own complexity.

That’s why asset allocation depends on factors such as the client’s objectives, investment horizon, and risk tolerance.

External elements like interest rates, inflation, and geopolitical events also influence allocation decisions.

Diversification isn’t about accumulating assets, but about selecting the right ones for each strategy.

Within this framework, financial services firm UBS² introduces the concept of “Diversification 2.0,” which argues that portfolio construction should account for multiple dimensions beyond traditional approaches to achieve true diversification.

UBS notes that excessive diversification can dilute performance and make portfolios harder to manage.

Diversification is constantly evolving—new assets, changing investor profiles, and shifting markets make proper asset allocation more critical than ever.

“The word diversification is about as ambiguous as is the word risk. When told ‘don’t put all your eggs in one basket,’ we quick-wittedly reply ‘What kind of eggs? How many baskets? What kinds of baskets? Which eggs in which baskets?’” says UBS. “We label this the problem of the three ‘R’s’ – replication, risk reduction, and representation.”

The potential of diversification

Proper diversification and asset allocation have the potential to improve portfolio returns.

BlackRock illustrates that between 2000 and 2018, a $100,000 investment in the S&P 500 could have grown to $246,570—while a diversified portfolio could have reached $266,060.

Although the S&P 500 outperformed in some years, the diversified portfolio showed more consistent performance and smaller losses during downturns, delivering a better long-term result.

“The more diversified a portfolio, the more likely it is to grow in the long-term,” explains BlackRock.

Just as diversification is important, so too is the investment horizon. Historical returns for equities can vary significantly depending on the time frame.

A well-diversified portfolio enhances resilience in the face of market changes.

Over a one-month period, BlackRock estimates the probability of positive returns between 1928 and 2018 was 62.4%. For a 10-year horizon, that figure rose to 94.6%.

Asset managers play a key role in guiding investors in the pursuit of higher returns—relying not just on historical data, but also on current factors shaping global markets.

They build allocation strategies based on quantitative models, macroeconomic scenarios, and market analysis.

Some employ active methods, adjusting portfolios frequently, while others opt for passive or automated approaches.

In all cases, the goal is to maximize risk-adjusted returns while managing exposure to adverse events.

The role of alternative assets in diversification

Within the broad spectrum of diversification and investment instruments, alternative assets play a significant role in asset managers’ strategies.

Diversifying a portfolio is not only about including different asset types—it also involves spreading investments across sectors, regions, currencies, and strategies, all of which can be achieved through alternative assets.

Generally, these types of assets are included in portfolios to improve overall returns while simultaneously mitigating the impact of volatility.

Each financial instrument serves a specific role within an investment strategy.

That’s why it’s essential for managers to first define the portfolio’s objectives and then identify the most suitable vehicles to meet them.

Financial services firm J.P. Morgan³, for example, explains that private equity can enhance a portfolio’s performance, although it typically doesn’t provide regular income or significantly improve diversification.

In contrast, the firm highlights that real assets—such as real estate and infrastructure—tend to have low or even negative correlation with a traditional 60/40 portfolio, and are known for offering stable income and inflation protection.

Other examples include instruments such as securitization, which—as previously mentioned—involves transforming financial assets into marketable securities.

This tool enables portfolios to gain exposure to a wider range of asset types, such as future income streams or non-traditional investments.

Today’s environment calls for more strategic and targeted diversification.

Today, asset managers have access to a wide array of tools to design diversified portfolios that respond to each client’s specific needs.

FlexFunds offers solutions such as FlexPortfolio, Flex Private Program, and FlexFeeder, designed to support the structuring of products aligned with different investment strategies.

These solutions allow managers to package their portfolios or assets into ETPs, resulting in efficient investment vehicles.

In a market where alternative assets are playing an increasingly important role in portfolio allocation, FlexFunds’ approach enables the integration of these instruments into flexible, standardized structures that offer greater visibility to global investors.

Diversification, in this case, is not only achieved by asset type but also through access channels, geographic exposure, and legal structures—significantly expanding the available investment universe.

Allocating and diversifying: A combined strategy

Asset allocation and diversification are complementary processes.

Allocation allows capital to be distributed strategically, while diversification helps mitigate concentration risk.

For example, a portfolio allocated 60% to equities and 40% to bonds can still be further diversified by investing across different sectors and regions.

Managers also seek assets with low correlation to one another—so when one declines, it doesn’t drag down the entire portfolio.

Implementing strategic allocation and proper diversification provides several benefits: it improves the risk-return profile, reduces overall volatility, helps meet long-term financial goals, and enables the capture of opportunities in global markets.

In an increasingly complex financial landscape, these tools are indispensable for asset managers—and combining both approaches can help enhance performance.

It’s not about choosing one over the other, but about using them together strategically to manage risk and improve returns.

For more information about FlexFunds and its asset securitization program, feel free to contact our team of specialists. We’ll be glad to assist you!

Sources:

• ¹https://www.google.com/url?q=https://www.blackrock.com/americas-offshore/en/education/portfolio-construction/diversifying-investments&sa=D&source=docs&ust=1749430247122319&usg=AOvVaw0HXvbWSrZeulNik9-AT1EN
• ²https://www.ubs.com/us/en/assetmanagement/insights/investment-outlook/the-red-thread/trt-end-year-2024/articles/diversifying-the-diversifier.html#diversification
• ³https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-alternatives/portfolio-discussions-alternatives/