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Diversifiers Explained

Updated: Jul 20, 2023

Diversifiers are asset classes with potentially attractive return potential and historically lower correlations when compared to core investments such as investment grade fixed income and most equities of developed markets. We believe the diversifiers below can be deployed in search of improved returns or lowered risk, and may help build more balanced portfolios.


Global High Yield Bonds

High yield bonds are corporate bonds rated below investment grade (BB/Ba or lower). High yield bonds are subject to higher interest rate, credit, and liquidity risks than bonds graded BBB and above but may also provide attractive return opportunities. And generally should be part of a diversified portfolio for sophisticated investors. High yield bonds may do well when the credit environment improves and default rates are low.


Emerging Market Debt (EMD)

Emerging market debt includes US dollar-denominated bonds issued by emerging market governments, government agencies, and corporations. The potential benefits of these investments may include strong risk-adjusted returns and yield. Economic growth may support this asset class but geopolitical turmoil may pose risks. Emerging market debt may have interest rate and credit risk, but has lower volatility and less currency risk than its cousin, Local Emerging Market Debt, which is denominated in emerging currencies.


International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. International debt securities involve special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. These risks are often heightened for investments in emerging markets.


Local Emerging Market Debt (LEMD)

Local emerging market debt includes bonds issued by emerging market governments that are denominated in local currencies. These bonds typically have currency risk and may be influenced by the economic health of the issuing country. Economic growth may support this asset class, but geopolitical turmoil may pose risks. In a well-balanced portfolio, local emerging market debt may provide diversification and strong risk-adjusted returns.


Commodities

Commodities are raw materials, the values of which are traded on futures exchanges. Examples include natural gas, oil, agricultural products, metals, and livestock. Commodity prices can fluctuate because of changes in global supply and demand. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings. However, commodities may benefit a well-balanced portfolio by providing diversification to equities and contributing to returns during inflationary times caused by economic growth.


Global Real Estate Investment Trusts (REITs)

REITs are publicly-listed entities which own and/or operate commercial, corporate, and residential real estate properties. REITs may provide exposure similar to equities with potentially significant yields, especially in times of economic expansion. Investing in Real Estate Investment Trusts (REITS) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. REITs may benefit from inflation caused by economic growth. REITs can be risky and may underperform, for example, when in a contracting economy.


Developed International Small Cap Equities

These are investments in publicly-traded non-US companies with market capitalizations ranging approximately between $300 million and $2 billion USD, i.e. “small caps.” These companies may enjoy strong growth. The price of small cap stocks are generally more volatile than large cap stock. International small caps tend to receive less research coverage from stock analysts, which may create pricing inefficiencies – a potential opportunity for active managers. However, these small companies tend to be sensitive to local economic conditions and may respond aggressively to changes.


Emerging Market Equity

Emerging market equity refers to publicly-traded large- and mid-cap companies in developing countries, such as China, South Korea, Taiwan, and India. These stocks tend to fluctuate strongly in reaction to changes in global economic cycles and investor sentiment. They could provide higher returns than developed equities, though potentially taking more risk.


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