Investor Q&A Identifying True Diversification ... and Why It's Vital The following is a copy of an article issued by our parent, Frank Russell Company in Tacoma Washington. I thought I was diversified since I had assets spread out in stocks, bonds and cash. But over the past two years, my portfolio has gotten hammered. If I'm diversified, as the investment pros recommend, why have I taken such a big hit? You're right to see the wisdom in a diversified portfolio. But spreading your assets across stocks, bonds and cash isn't enough. It's beneficial to diversify within your stock holdings to include different investment styles. But that's not all. To truly diversify — which spreads risk and takes advantage of new opportunities — you may need different money managers (and their differing investment philosophies). Russell's MULTI ASSET MULTI STYLE MULTI MANAGER™ investment approach does just that:   Multi Asset invests across stocks, bonds and cash, then divides equities into US (with the added sub-categories of small-, medium- and large capitalization) and international stocks. Multi Style further breaks down equities into various investment styles, such as growth and value along with market cap size. Multi Manager places assets in any one style with multiple management firms. A Revealing Comparison Let's evaluate a hypothetical portfolio often thought of as diversified vs. another that deeply is, specifically within its stock holdings. This example is on the minimal side of the diversification rainbow. The stocks constitute a single style — growth — and are making a sector bet in technology. The past two years of evidence makes the problem here clear. Technology took an enormous hit in 2000 and 2001. Even if some tech stocks are now undervalued, a sudden downturn could cause equities to tumble. Broader diversification can provide a built-in shock absorber when one style or sector goes down and another finds favor. The illustration below shows the US stocks portion of a MULTI ASSET MULTI STYLE MULTI MANAGER™ portfolio based on one of several Russell asset allocation strategies. It contains international stocks, bonds and real estate as well, but let's just look at the US equities portion. True Diversification in Depth (Sovereign US Equity Pool) We've diversified here by investing in different capitalization classes ¡ large-cap and mid-cap on one hand, small-cap in the other. But that's just the start. Look at the Sovereign US Equity Pool. There are opportunities to diversify among distinct investment styles such as Growth, Market-Oriented, Value, and Small Cap. Drill down deeper and there is further diversification within each investment style. In an area such as Growth, stock selection is divided among a team of money managers. The skills of these combined managers provide complementary investment approaches. This approach is intended to level market volatility while outperforming the proper benchmark. Of course, if you could guess which style, sector or industry — or even particular company — will be the next "hot thing," you may be able to outperform the diversification-in-depth approach. As history has shown though, even professional money managers rarely make the right moves to outperform their benchmarks for extended periods. Few Managers Stay in the Top Quartile Consecutively Source: Six-Year performance history of Frank Russell Company equity accounts universe of 293 major banks, insurance companies, and investment advisors. Experience has shown — especially in recent years — that relying on one manager, let alone one sector or style, can yield a frightening experience. The Professional Edge Can individuals structure detailed and deeply diverse portfolios given all the information available in the electronic age? Maybe, but finding and monitoring money managers is no easy task. It is one with many subtleties and points of minutiae where expertise can truly provide added value. No one knows managers like Russell. The manager research staff at Russell is larger than many investment firms. Resources, proprietary software and years of experience provide a remarkable platform to evaluate the world's money managers. Placing managers in complementary groups allows for strength in diversity intended to develop long-term growth in a risk-aware fashion with minimal volatility discomfort. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.			Future TOPICS Is there a particular issue you'd like to see addressed in future Investor Q&A articles? Submit your question via e-mail. Submissions won't be replied to directly but selected ones will be used to generate future columns.   More on DIVERSIFICATION Diversification In-Depth — Thinking Inside the Box Staying Balanced Amid Market Volatility Using Diversification to Combat Risk Printer friendly version of this page Send feedback or comments Site Search

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