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Over the last few years, the prices of most asset classes have risen strongly and a major factor behind this has been the availability of cheap money. This continued to be the case until about a year ago. Almost all assets rose whereas their performance would normally have diverged to a greater extent. This process was driven by strong flows of liquidity into markets.

However, since the situation changed last year, no one can reliably predict which asset class is most likely to perform the best. This makes it particularly important at this juncture for investors to have exposure to as wide a range of asset classes as possible in order to capture performance and diversify risk.

The basic idea of asset and geographical diversification is, in itself, a defensive strategy which may be appropriate in such turbulent times.

Within a global portfolio, over the last 18 months, as well as diversifying by geography, it would have been beneficial to trim exposure to fixed- income and equity instruments. At the same time, increased exposure to alternative assets such as hedge funds, commodities – one of the great winners of the past two years – short-dated fixed interest, currency and property would have paid off.

The inclusion of a variety of asset classes, all influenced by different factors, provides valuable diversification and is designed as a means of improving capital preservation.

Many of these investment areas can be difficult for private investors to access and are highly complex, meaning that they are better accessed through specialist managers with the resources and expertise required.

Particularly for a multi-manager approach, it is important to offer as broad a degree of diversification as possible geographically, with no regional bias, leaving the underlying managers free to explore opportunities wherever they might find them.

In addition, there is sometimes the opportunity to add global long-term themes to a portfolio and these can also increase diversification.

An example of this would be the Impax environmental markets fund which invests in the long-term themes of clean energy, clean water, clean waste management and recycling. This is a growth area as various governments continue the process of tightening the regulation of waste disposal and water use.

Another theme is the development of Africa which appears to have a low correlation with other stockmarkets. This could be represented by the Imara African opportunities fund which invests in lesser targeted African markets such as Kenya, Uganda, Botswana and Zambia. These markets are much less affected by world events than other emerging markets, although they are subject to their own local risks.

Typical stockholdings in the Imara fund would include local banks, which have no exposure to the credit crunch, brewing companies and consumer goods and staples which are benefiting from developing consumer demand.

Nick Pothier is senior multi-manager portfolio manager at HSBC Global Asset Management

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