“Diversification is the only free lunch.”
-Renowned economist Harry Markowitz
It could be argued that diversification matters more to successful investment outcomes than ever before. The concept of diversification is straightforward: investors can reduce portfolio risk by including uncorrelated securities without reducing expected returns. Historically, there has been no generally accepted measure of diversification … until recently.
In 2006, Yves Choueifaty, CEO of Paris-based asset manager, TOBAM, introduced a measure of diversification: the Diversification Ratio. His premise was to create the most diversified portfolio in order to capture the risk premium of an asset class. The TOBAM Maximum Diversification Index differentiates itself by providing more even and consistent exposure to market risks. By improving diversification, portfolio biases can be reduced and risk-adjusted returns can be enhanced. The risk of the combination is lower than the combination of risks. This is achieved by avoiding excessive concentration using a well-designed, systematic approach to portfolio diversification. Maximum Diversification selects stocks and weights to reduce correlations between holdings which mitigates inherent biases in index construction. Historical results indicate enhanced performance vs. benchmarks of 3-5% per annum along while reducing volatility by 20-30% over a market cycle.1
Maximum Diversification also involves an SRI screen with exclusions for tobacco, coal mining, controversial weapons, breach or violation of international treaties & norms; 20% reduction of carbon footprint, direct engagement as well as collaborative engagement with management; carbon offset of 150% through reforestation, signatory to UN Principles of Responsible Investment
In 2016, Mackenzie Investments partnered with TOBAM to launch a suite of Maximum Diversification Index based ETFs and mutual funds. The ETF lineup now consists of six equity offerings covering Canada, the U.S., Europe, Global, Developed Markets ex North America and Emerging Markets. Mackenzie Investments was recently recognized by Refinitiv Lipper with the prestigious Canada ETF Award for Best Equity Group (Three Year). This reflects the strong risk-adjusted performance of these innovative solutions that ranked from 69th to 93rd percentile of peers beaten over that three-year period. This award represents a great validation of the TOBAM value proposition.
Click here for more details on the Refinitiv Lipper Canada ETF Group Equity Awards.