A Simple Diversified Portfolio Strategy

Forthcoming, Journal of Investment Management.

24 Pages Posted: 18 Dec 2013 Last revised: 3 Jan 2017

See all articles by Bernd Hanke

Bernd Hanke

Global Systematic Investors LLP

Garrett Quigley

Global Systematic Investors LLP

Multiple version iconThere are 2 versions of this paper

Date Written: December 17, 2013

Abstract

We present a simple portfolio construction approach which is a blend of market weights and equal stock and sector weights. Our approach results in a highly diversified portfolio both on a stock level and on a sector level and generates higher portfolio returns at slightly lower risk than a market weighted index. We demonstrate that the higher returns of our diversified portfolio originate both from mitigating the link with market weights and from its higher return benefit due to diversification which we are able to capture because we rebalance our portfolio on a regular basis.

Our diversified portfolio exhibits only slightly higher turnover than a market weighted index and is less concentrated in mega-cap stocks. Instead it assigns somewhat higher weight to smaller stocks and sectors than a market weighted index. At the same time the diversified portfolio retains the characteristics of a broad market index and is therefore highly implementable and has very high investment capacity.

Our simple diversification strategy appears to be a superior way of capturing the equity risk premium compared to a market weighted portfolio. It therefore establishes a tougher benchmark for active fund managers than market weighted indexing as it results in well-diversified, high-capacity and low turnover portfolios that can be delivered very cheaply.

Keywords: diversification, diversification premium, equity

JEL Classification: G10

Suggested Citation

Hanke, Bernd and Quigley, Garrett, A Simple Diversified Portfolio Strategy (December 17, 2013). Forthcoming, Journal of Investment Management.. Available at SSRN: https://ssrn.com/abstract=2368920

Bernd Hanke (Contact Author)

Global Systematic Investors LLP ( email )

45 King William Street
1st Floor
London, EC4R 9AN
United Kingdom

HOME PAGE: http://www.gsillp.com

Garrett Quigley

Global Systematic Investors LLP ( email )

75 King William Street
London, EC4N 7BE
United Kingdom

HOME PAGE: http://www.gsillp.com

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