You bought diversification. You're getting concentration

“Does what it says on the tin” is a phrase you hear often when talking about financial products and investment strategies. It’s shorthand for a simple promise: the label matches the outcome. A lot of the fund-rating ecosystem is built on that principle. If Fund 'A' claims to offer stable income and low volatility and delivers it consistently, year after year, chances are the rating will be high – even if the performance numbers pale in comparison to what’s available via other asset classes. Furthermore, if Fund 'B' promises stable income and low volatility, but actually delivers wildly variable returns, chances are the fund won’t rate so highly – even if the average return figure over 5 years tops that of Fund A. That framework matters because most investors don’t allocate capital randomly. They invest for specific reasons, at specific points in life, and often to play a specific role in a portfolio, such as diversification. The problem is that markets don’t stand still. And right now, a handful of structural forces are distorting what many products actually produce. The most obvious is concentration. The market has been discussing it for years as “all the eggs in one basket” risk, but it’s now showing up in more practical ways: investors buying passive funds for broad exposure may be far less diversified than they assume, and their future returns may be far more dependent on a small number of expensive winners than they realise. As Allan Gray’s Senior Investment Specialist, Chris Hestelow, put it: “Investors in these types of very popular benchmarks may think they're getting a lot of diversification, but today they're actually taking some pretty concentrated bets.” In the interview above, Hestelow unpacks three market distortions, explains the problems they can create for forward returns, and outlines a few ways investors can mitigate the risks without throwing passive investing out the window. You can also read a summary of the interview below.