Morningstar, Inc.

3 Great Portfolio Diversifiers and 3 to Avoid

The video outlines a framework for building a resilient investment portfolio by pairing a solid core of large‑cap equities and investment‑grade bonds with true diversifiers that move independently of that core. It highlights three assets that can add low‑correlation returns: merger‑arbitrage funds, which capture modest premiums by betting on likely completions; BlackRock’s Tactical Opportunities fund, which uses quantitative signals to generate single‑digit calendar returns unlinked to broad markets; and Artisan Developing World, an emerging‑markets vehicle run by Lewis Kaufman that selects cash‑flow‑rich companies and behaves unlike traditional EM indices. Each recommended play is described in detail. Merger‑arbitrage’s performance is largely insulated from market direction because gains stem from deal spreads rather than price moves. BlackRock’s strategy blends long and short positions across a wide index universe, delivering consistent, modest upside. Artisan’s focused approach yields a portfolio that rarely mirrors the S&P 500, offering genuine diversification for investors seeking exposure to the developing world without the volatility of broader EM funds. The presenter also warns against three popular but flawed diversifiers. The New Global Infrastructure fund lost its edge after its founder retired, making its tactical trading less coherent. Teton Westwood’s micro‑cap fund suffers from severe liquidity constraints, with four‑fifths of holdings trading under $10 million daily, risking price impact on exits. Finally, cryptocurrency, once touted as an inflation hedge, has behaved more like a leveraged tech index, offering little protection for equity‑heavy portfolios. For investors, the takeaway is clear: prioritize assets with demonstrable low correlation and robust liquidity, and steer clear of niche funds whose performance hinges on individual managers or illiquid securities. By reallocating a modest slice of capital to the three endorsed diversifiers, portfolios can achieve smoother returns and better risk mitigation in volatile markets.