Undiversified portfolios were a risky bet in 2011

Philip Salter
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BEFORE the bust of 2008, investors coveted their neighbours’ investments, jealously looking elsewhere for the next big thing. Now in a bust, success is measured not by how much you make, but by how little you lose. 2011 was cut through with fears about persistent inflation, while the equally unrelenting crisis – or crises – in Europe had investors running for cover. And China’s slowdown – the dragon in room – finally spooked investors, as they started to face up to the possibility that there may be no sino-salvation.

Ian Brady of Oaktree Wealth Management explains: “Quite simply, in 2011 asset classes, indices, sectors and stocks perceived as less risky did well and those considered to be most at risk from economic and financial contagion fared worst.” He says: “As would be expected, banks and miners felt the brunt of the sell off, while tobaccos and pharmaceuticals actually made very good absolute returns.”

“Despite all the furore over last year and disturbing headlines, from a statistical point of view, 2011 will go down as just another year,” says Adrian Lowcock of Bestinvest. He points out that throughout 2011, politicians time and again proved themselves incapable of making a decision: “In Europe each bailout became more of a farce than the last one and in the US the brinkmanship resulted in a downgrade by S&P.”

Jason Witcombe of Evolve says: “If ever proof was needed that past performance is no guide to the future and that diversification within a portfolio makes sense, look at 2011’s fund performance figures.” He notes that less than one in six funds returned a profit in 2011, compared to 97 per cent in 2010. Eight of the top 10 performers were from the IMA’s UK gilts and UK index linked gilts sectors – with the top performing funds growing by around 25 per cent. However, he cautions: “The message for 2012 shouldn’t be that the top funds from 2011 will continue to outperform. Instead, make sure that your portfolio is diversified across a number of asset classes to ensure a smoother investment experience.”