Want a well-diversified portfolio? Here’s how to create one, according to a Morningstar portfolio manager
Investing in a volatile market is a tricky business — but one portfolio manager has tips on how to create a well-diversified portfolio to navigate that. “A good portfolio is a well-diversified one — and by well-diversified I mean a portfolio that has exposure to asset classes that have different drivers of growth,” Nicolo Bragazza, associate portfolio manager at Morningstar Investment Management, told CNBC Pro . For instance, stocks tend to perform better when an economy is growing, while bonds — especially high-quality government bonds — make better investments during times of uncertainty when security and safety are key, he explained. “If we look at the underlying drivers of different assets, it’s very important to diversify across them. So a well-balanced portfolio should always have something that protects you in case things don’t go as planned,” added Bragazza, who was speaking on Aug. 14. While investors’ asset allocation strategy is dependent on their financial goals and life stage, the portfolio manager said, the traditional 60% stocks and 40% bonds split makes for a good baseline. He suggests that investors below the age of 40 who are looking to grow their wealth consider having 80% to 90% of their investments in stocks and the remaining 10% to 20% in fixed income. Conversely, retirees, or older investors focusing on wealth preservation, “could have a 50/50 split” to enjoy the security of bonds and protection against short-term risk that stocks present, Bragazza noted. ‘Barbell’ strategy Beyond his focus on portfolio allocation, Bragazza is seeking “opportunities in both cyclical and defensive areas of the market.” This is called a barbell strategy and allows for returns regardless of market conditions, the portfolio manager explained. The strategy strikes a balance between risk and reward, involving investments in both high and low-risk assets. U.S. small-cap stocks are one area he’s bullish on, as they are “quite cheap when compared against history versus large-caps,” according to him. For reference, the S & P 600 small-cap index is down by almost 1% this month, while the large-cap S & P 500 is up nearly 4.1% over the month to date. Bragazza is playing the sector via BlackRock’s iShares S & P SmallCap 600 UCITS ETF , which invests in 600 U.S.-listed small cap stocks . The exchange-traded fund is up close to 8% so far this year, according to FactSet data. Also on Bragazza’s radar are Chinese stocks. No one stock stands out right now, he said, adding that what he really likes is China’s broad recovery story. Other areas he is overweight on include consumer staples, health care and utilities, thanks to “their defensive nature and also because they are more attractive — from a valuation perspective — than other parts of the market.” The utilities sector stands out, said Bragazza, who is playing it through BlackRock’s iShares S & P 500 Utilities Sector UCITS ETF , which invests in “leading” U.S. companies in the utilities sector. The ETF is up around 22.1% so far this year, according to FactSet data, more than the 18.1% gains by its benchmark S & P 500 Capped 35/20 Utilities index . ‘Different shades of bonds’ On the fixed income front, Bragazza is looking at bonds ranging from high-quality government bonds to junk bonds as a hedge for different economic situations. High yield and emerging market bonds provide higher returns in strong macroeconomic environments but are sensitive to risks. High-quality government bonds, on the other hand, offer reliable returns during economic downturns. “A fixed income portfolio should always include the different shades of bonds to provision for cyclicality,” Bragazza said.
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