Building Diversification by Adding Strategy to Your Portfolio

Building Diversification by Adding Strategy to Your Portfolio

Written by: John Lunt | President, Lunt Capital Management

The principal of diversification drives asset allocation for both institutional and individual investors.  The benefits of diversification do not come from simply adding more investments to an asset allocation, but rather, from adding investments with lower correlations to existing investments within the allocation.   However, a prospective investment may have a higher correlation to existing investments, while still bringing desirable attributes like the potential for lower volatility, downside protection, or upside outperformance.  Ultimately, investors hope to generate more return per unit of risk.  Return requires risk, and we believe that risk is either derived from the asset class (market risk or market beta) or from the manager (strategy risk). 

In most asset allocations, the equity portion represents the majority of the total risk.  Fixed Income is used to lower volatility and to cushion portfolio drawdown.  Today, many investors are concerned about how public policies (particularly monetary policy) have distorted returns for both equities and fixed income.  This has raised concerns about potentially high valuations for equities while at the same time fueling worries about the potential for rising rates and widening credit spreads in fixed income.  In short, investors are worried about “market risk.”  With heightened concerns surrounding market risk, it seems natural for many investors to seek additional ways to diversify portfolios.  In this quest for diversification, investors may ask: what does not necessarily correlate with market risk or market beta?  The answer: active investment decisions or investment strategy.

Related: A New Take on Portfolio Diversification

Investment strategy is defined as any movement away from market capitalization-weighted beta within any asset class.  Introducing investment strategy is associated with a unique set of risks.  Adding strategy risk to an investment allocation does not eliminate risk—the risk simply changes form from market risk to strategy risk.  Determining how much market risk to transfer to strategy risk is a critical question when managing a portfolio.  Actively managed mutual funds introduce strategy risk, but many mutual funds are still dominated by market risk.  On the spectrum from market risk to strategy risk, most mutual funds are still closer to market risk (more beta, less strategy).  Some managers keep pushing further towards strategy on this spectrum by introducing rotation across factors, sectors, or countries (balance between beta and strategy).  Strategies that move in or out of an asset class, or that move long or short an asset class, are closer to the strategy risk end of the spectrum (less beta, more strategy).

Too often, investment zealots present an “either/or” choice to investors.  One side pushes exclusively for market cap-weighted “buy and hold” investing.  The other side demands a portfolio that could move completely “in or out” of a market.  We reject an “either/or” investment world, and instead propose an “and” investing world by combining market risk (maintain asset class exposure) AND strategy risk (introduce varying degrees of active).

Strategies come in all types of shapes and sizes.  Understanding the engine behind the strategy is essential.  Is the strategy qualitative or quantitative?  Is it based on bottom-up fundamentals or top-down macro inputs?  Is it based on momentum or relative value?  What is the time frame associated with the specific strategy? Investors should not move assets from market risk to strategy risk if they are unwilling to allow a strategy to do what it is designed to do—which is look different from the asset class beta.  The amount allocated to strategy within a portfolio should be driven by the tolerance for underperformance in both magnitude and time relative to where the allocation comes from.

Related: Factor in a Smarter Approach to ETFs

ETFs have revolutionized the ability to introduce strategy into portfolios in an efficient, cost effective, and targeted way.  Investors and financial advisors have access to ETF strategists who actively manage portfolios of ETFs in an effort to add value through the tactical management of asset class beta.  Also, investors have increasing opportunities to invest in ETFs that introduce the strategy within the ETF itself.  A prime example is the JP Morgan Diversified Alternatives ETF (Ticker: JPHF).  JPHF not only introduces strategy to a total asset allocation, but also brings diversification by strategy.  This ETF provides the opportunity to access equity long/short, event driven, and macro-based strategies within one ETF. 

Most investment portfolios are dominated by market risk.  We believe a compelling case can be made to take a portion of the market risk within a portfolio and transfer it to strategy risk.  In the continual quest to add diversification, investors should consider adding investment strategy to their portfolios.

Call 1-844-4JPM-ETF or visit to obtain a prospectus. Carefully consider the investment objectives and risks as well as charges and expenses of the ETF before investing. The summary and full prospectuses contain this and other information about the ETF. Read them carefully before investing.


The foregoing is not investment advice or a recommendation or offer to buy or sell any security.  Views expressed are those of the author.  Past performance of an investment is no indication of future performance. © 2015 Lunt Capital Management, Inc. 

Lunt Capital Management, Inc. is not affiliated with JPMorgan Chase & Co. or any of its affiliates.
J.P. Morgan Asset Management
Empowering Better Decisions
Twitter Email

See how ETFs differ from other investment vehicles, learn how to evaluate them, and discover how ETFs can be used effectively to achieve a diversity of investment strategies. ... Click for full bio

NBA Player Carl Landry Demonstrates the Value of Persistence in Life and Work

NBA Player Carl Landry Demonstrates the Value of Persistence in Life and Work

Written by: Jon Sabes

When you meet Carl Landry, stand-out college basketball player and nine-year NBA player, you imagine that becoming a professional basketball star was a straight forward run for the 6-foot-nine-inch power forward. 

However, when you go deeper into Carl’s background, becoming a NBA professional was less than certain and little came easily to the 33-year-old from Milwaukee:

  • He was cut from his high school team as a freshman and averaged less than ten points a game when he did play as a senior.
  • He started his college career not at Purdue, but a junior college where it was not clear he would play.
  • When he finally got to Purdue, he tore his ACL in his knee his first year and reinjured it the next year.
  • While his family held a party for him the night of the NBA draft, he slept in the Philadelphia airport after missing a flight following a workout for the 76ers.
  • In the NBA playoffs, Carl had a tooth knocked out, but came back in the same game to make a game-winning blocked shot as the Rockets beat the Utah Jazz 94-92.

Landry, who I interviewed on my podcast, Innovating Life with Jon Sabes (, is a remarkable example of the value of “persistence.” In a time where technology creates the image that anything is possible at the touch of a button, persistence is an under-appreciated trait. When I spoke with Carl, I clearly saw someone for whom success has only come through a force of will that made him a NBA player, but it also made him a better player every year he played. That’s the kind of personality that has produced greatness in business as well as sports.

Carl was, in fact, drafted that night he spent in the airport. The Seattle Supersonics chose him as the 31st overall pick and then traded him to the Houston Rockets where he rode the bench for much of the first half of the season. When All-Star teammate Yao Ming was injured, he stepped in and played a key role in the Rockets astonishing 22-game winning streak (the third longest streak in NBA history). And, that season, after sitting on the bench for 33 of the first 36 games, he was named to the All-Rookie second team.

Carl was the first in his family to go to college. “I told myself that this was my ticket out, so I did everything I possibly could to be the best person in school and also on the court,” he said.

His family life in Milwaukee showed him what he didn’t want to do. “Just being honest with you, seeing some my cousins, peers, they went to work for jobs paying six, seven dollars an hour or they didn’t go to work at all and then living off welfare. I didn’t want that.”

When he was first injured, he had to contemplate the end of a career before it even got started. “When you have an ACL tear, it’s over…no more basketball,” he told me. “I said, God, give me health again and I’ll do everything I can to leave it all out on the line and be a successful individual.”

On my podcast, Carl pointed out another interesting lesson he learned in the NBA: Not doing things just to fit in.

“Fitting in was easy,” he said. “Doing everything that everybody else does was easy. If I stood out in some type of way, I’m going to have different results. I’m going to have stand-out results.”

That’s called the “Law of Contrast” and it produces that exact effect of changing the outcomes that everyone else is experiencing.  Carl is smart, he recognized that differences make a difference, and doing whatever it takes is what is required to make real, meaningful differences.

Every off-season for the last 11 years, he has run a camp for kids in Milwaukee where he tells youth his story of hard work and persistence. “I always tell the kids to apply themselves and always be persistent,” he said. “If you dream, apply yourself and be persistent. With hard work, man, the sky’s the limit.”

When Carl says the sky’s the limit he means it.  He is smart to recognize that it’s important to dream big, because if we don’t – we may be selling ourselves short. “You have to dream bigger than your mind could ever imagine,” he said. “I wanted a nice house. I wanted a nice car. I said, and I got all of that. So, what do I do, do I stop now? Maybe I didn’t dream big enough.” That’s a big statement coming from a kid who grew up to be the first in his family to graduate college and go on to be not only a top NBA basketball start, but a good businessman, father and someone who gives back to the community.

I’m convinced that in whatever he takes on as a basketball player or in his post-hoops career, Carl Landry is not going to stop getting better at whatever he does, and in the process of doing so, make the world a better place.

GWG Holdings, Inc.
Investing in Life
Twitter Email

GWG Holdings, Inc. (Nasdaq:GWGH) the parent company of GWG Life, is a financial services company committed to transforming the life insurance industry through disruptive and i ... Click for full bio