Can’t We All Just Get Along? Distinctions, Differences and Diversification

The election season just past featured candidates on both sides indulging in the usual artful dodging — the making of distinctions where sometimes few differences exist. That maybe is to be expected in politics, but it does little to help people in their day-to-day lives.

Instead, on the front lines looking out for them are their financial advisors, helping them navigate the financial world which, like life, is filled with distinctions that do contain important differences.

Today’s markets are mired in their own two-party system, with an increasingly stark divide between the emerging cadre of risk-minded managers — rigorously focused on risk profiles and security selection — and those managers who indiscriminately seek exposure to broad investment categories like asset class, market cap, credit rating or duration.

In evaluating performance of fixed income in particular, distinguishing between these approaches to portfolio construction matters enormously. But many advisors overlook these differences when choosing an investment manager. They often believe them to be, like a stump speech, just window dressing: immaterial or irrelevant to ultimate returns.

But when capital preservation is the objective, as it usually is with fixed income, and particularly when the bond market is swinging as it has in recent days, the truth is likely the opposite: Even small distinctions can beget large differences. Far from ignoring them, investors must pay closer attention than ever before.