Carl Sagan may not be a household name in the UK. But in the US, where I was educated, he remains a familiar face from his groundbreaking TV series, Cosmos, which for decades was screened in the nation’s classrooms to spark youngsters’ curiosity in science.
An acclaimed astronomer, astrophysicist and cosmologist, Sagan had impeccable credentials. In the mid-1970s he was a major figure in NASA’s Voyager missions, the principal purpose of which was to journey to the furthest reaches of our solar system.
In their own way, investors can easily relate to the notion of discovering the wonders of other planets, the galaxy and even beyond. After all, the investment universe is itself vast and just waiting to be explored.
Yet the reality in many cases is that the search doesn’t stretch especially far. Whether deliberately or not, a sizeable number of investors confine their adventures to one or two regions, themes, indexes or asset classes.
This calls to mind one of Sagan’s pithiest quotes. “The universe is a pretty big place,” he once said. “If it’s just us, it seems like an awful waste of space.”
The extreme market volatility of the past few weeks has underlined the potential shortcomings of a narrow, unimaginative outlook. With the Middle East crisis disrupting markets, the challenge of controlling risk while maintaining a degree of performance has been significant.
As a result, the appeal of diversification, agility and – maybe less appreciated – innovation has been thrown into ever-sharper focus. In our opinion, all three are more likely to be derived from a solutions-based approach to investing. Let’s quickly examine each in turn.
Diversification
It’s rarely prudent for investors to put all their eggs in one basket. The persistent pre-eminence of US technology stocks might have suggested otherwise in recent years, but the merits of diversification are seldom obscured for long.
The advantages of looking beyond the obvious demanded renewed attention long before the start of hostilities between the US, Israel and Iran. The pandemic, trade tariffs, simmering geopolitical tensions and doubts over the longer-term sustainability of the AI boom have all strengthened the case for casting the investment net more widely.
An essential task, of course, is to determine how widely. Striking out in all directions just for the sake of it may be no better than refusing to see past, say, a handful of headline-grabbing mega-caps.
Sagan perhaps offered a clue when he spoke of the “exquisite balance” needed for scientific progress. “If you are only sceptical then no new ideas make it through to you,” he said. “If you are open to the point of gullibility and have not an ounce of sceptical sense in you then you cannot distinguish the useful ideas from the worthless ones.”
To frame it in investment terms: effective diversification is likely to stem from informed decisions. These, in turn, are likely to stem from knowledge, insight and expertise.
Agility
Investors are invariably urged to stay calm when confronted by volatility. This makes a lot of sense, since calm is likely to trump hysteria and guesswork during periods of uncertainty.
Yet composure isn’t the same as inertia. Rather than out-and-out inaction, what’s usually required is a measured response that takes account of short-term shifts without losing sight of long-term goals.
Amid the fallout from the Middle East, for example, we set out to curtail the tracking error in our portfolios and mitigate active risk while awaiting greater clarity. Risk becomes more expensive in the face of heightened uncertainty.
Specifically, we rotated towards large-cap stocks in the US, Japanese equities and various emerging markets (EMs). We also found UK gilts and EM debt to be attractive.
Agility of this kind shouldn’t be confused with randomly leaping in and out of markets on the strength of little more than conjecture, blind panic or what some investors tout as “gut instinct”. As Sagan once remarked: “I try not to think with my gut. If I’m serious about understanding the world, thinking with anything besides my brain is likely to get me into trouble.”
Innovation
In 1977, two years before Cosmos’s debut, the twin Voyager probes headed into space with a message for any alien civilisation they might encounter. Along with an array of images and sounds capturing life on Earth, the intergalactic greeting was contained on a gold-plated record that Sagan described as “a bottle in the cosmic ocean”.
Inviting extraterrestrials to use a glorified phonograph – complete with stylus, no less – might seem laughable now, but it represented the cutting edge back then. Sagan’s successors would very likely do things radically differently today.
Similarly, asset management has to move with the times. Like almost every industry, it has been built on a commitment to sustained innovation.
Take the sphere of portfolio construction. Efforts to combine investment disciplines are increasingly helping clients assemble portfolios that are both resilient and cost-conscious. How to blend the best features of passive and active strategies is just one area of ever-growing interest in this arena.
Innovation occasionally brings genuine revolution. More often, just as importantly, it brings evolution. Ideally, irrespective of whether the backdrop is benign or testing, it continues to bring solutions.
Lisa Wang is head of EMEA investment strategy at Franklin Templeton Investment Solutions. The views expressed above should not be taken as investment advice.