Content Provided by Case Eichenberger, CIMA – Senior Client Portfolio Manager
Diversification or di’worse’ification — Can you be too diversified?
File under: Managing Portfolios
Is there such a thing as too much diversification? Can we include too many asset classes in our portfolios and, thus, harm returns?
There are two ways of looking at this:

  1. No, there is no such thing as too much diversification. Modern Portfolio Theory (published 1952) proposes that investors can reduce risk by diversifying and can continue to reduce risk by adding more securities that are less correlated. However, risk never completely goes away.
  2. Yes, you can have too much.
    1. While diversification offers a free lunch, most (all?) areas of Wall Street cost something.
    2. Trading costs, management costs, advice costs, etc., all add up. Eventually, after adding in numerous securities, your portfolio can become the market! That means you may have diversified your portfolio to look an awful lot like the benchmark you are trying to beat, and you’re being charged for it.
    3. As portfolio managers, we take this into account. It is why we review metrics such as active share and tracking error. We want to control risk and diversify, but we also want to ensure our clients have a portfolio that can statistically beat the benchmark. CLS President and CIO, Rusty Vanneman, wrote more about this here.
    4. Stay balanced.

How to pay less attention and gain more
File under: Behavioral Coaching
Investing is simple, but it’s not easy. The more you pay attention, the more you trade. The harder you try, the less returns you end up with. This is the reason the behavior gap exists.
Consider the accompanying charts. Each illustrates the last three years of returns in the Vanguard Balanced Fund. The first shows returns reviewed on a daily basis, and the second shows returns reviewed biannually.


Checking returns every day or checking returns twice a year – which offers investors a better chance of avoiding the pitfalls of timing the market? While the fund gets to the same place either way, I know my answer. Choose a Risk Budgeted portfolio that gets you to retirement, diversify globally, and wait!
Inside the largest ETF conference in the world
File Under: ETF
Last month, members of the CLS investment team attended Inside ETFs. Some highlights below:

  • A major discussion topic was direct indexing. In some ways, this is anti-ETF.
    • Instead of buying an ETF and paying the management fee, you can easily buy all the underlying stocks (or some) and tax loss harvest to produce better after-tax returns.
    • CLS is working very closely with Orion on the ASTRO tool to conduct direct indexing.
    • Joe Smith and Shana Sissel of CLS are heading this project, which we believe is key to the future of investment management.
  • QARP was up for ETF of the Year.
    • This ETF invests in high-quality, U.S.-based companies but adds a value screen, so investors don’t end up overpaying.
    • CLS worked closely with the issuer of this ETF to bring this unique fund to the investment landscape.
    • You can listen to audio of the pitch made by an independent ETF expert at the event.
  • As a leader in the ETF strategist space, CLS meets with top brass in the industry to share our initiatives, ideas, and to discuss how we can leverage each other in partnership.
  • Below are some folks we had the privilege to meet with at the event:
    • Sue Thompson, Executive Vice President and Head of SPDR Americas Distribution
    • Jerome Schneider, Head of Short-Term Portfolio Management at PIMCO
    • Lukas Smart, CFA, Senior Portfolio Manager at Dimensional Fund Advisors
    • Holly Framsted, CFA, Director and Head of U.S. Factor ETFs for iShares/BlackRock
    • Fiona Bassett, Head of Americas Passive for DWS
    • Mark Carver, CIMA, Executive Director and Global Head of Factor Index Products at MSCI
    • Gene Podkaminer, SVP, Head of Multi-Asset Research Strategies at Franklin Templeton Investments
    • We also had several other meetings with Vanguard, Schwab, Fidelity, EventShares, and Allianz
  • CLS continues to be heavy users of ETFs, but we believe the future may look different for our investors, and those possibilities must be explored.

Thank you for reading.