We haven’t done one of these for a while but the idea that you can diversify your portfolio holdings by spreading your investments across a range of companies is one that we wanted to challenge.
Spreading your bets?
It’s easy to assume that if your money is being looked after by a range of companies, it will be invested in a wider spread of funds. After all, the platforms are all separate and there are a lot of businesses out there to hold shares in! But if you’re spreading your investments across funds carrying similar risk levels you might be surprised to find out just how much overlap there is between those funds.
Not all that different
We found two ordinary funds that share their data on our system to take a closer look at the allocation of their portfolios. These are Standard Life (as owned by Phoenix, rather than the wrap company abrdn) and Zurich’s managed funds. A managed fund is the off-the-shelf type of fund a workplace pension might use.
The funds are comparable in terms of levels of risk – Standard Life has a risk score of 57 and Zurich is 55. As of March 2022, of the top ten holdings in each fund, more than half of the companies invested in appear in both lists. There are no big surprises, and these are companies that it’s quite hard to avoid investing in – Alphabet (Google), Amazon, AstraZeneca, Microsoft, Shell and Unilever.
It just goes to show that buying from two completely different funds won’t actually diversify your portfolio as much as you think.
Look for differences in approach
Our own funds – Sarasin and Vanguard – are also likely to have holdings in these companies, although Sarasin don’t hold Shell as they don’t fit their responsible investing criteria. It’s quite likely therefore that there is crossover between the two funds – Sarasin hold a Vanguard gilt fund for example (although of course that isn’t shares).
However, the difference in the approaches taken by Sarasin and Vanguard – responsible and active vs traditional and passive – means that the overlap is going to remain relatively minimal. It’s hard to be totally precise as Vanguard hold up to 24,000 companies and there’s no comprehensive list to cross-check against, but with that many businesses, the percentage per company has got to be pretty small… (For comparison, depending on the risk level of the portfolio, Sarasin hold between 45–65 companies.)
It’s not that easy to check these things yourself, as fund managers like to keep their full holding lists to themselves to protect their intellectual property. After all, this is what their fees are charging for. They do tend to publish the top ten holdings on the fund factsheets though, so you can have a look at those.
Ultimately, just holding funds with two different companies likely won’t be enough to diversify your portfolio. The styles of the funds are what matters – a mix of active and passive, or responsible and traditional is what makes a real difference with diversification.