The MECE, a management concept, is an interesting way to think about portfolio diversification. MECE stands for Mutually Exclusive, Collectively Exhaustive. Think about portfolio diversification through two dimensions.
One, a diversified portfolio should have assets that are mutually exclusive or unique. Now, it is unlikely that you will be able to find mutually exclusive assets given few have correlations that are close to zero, but an investor should try and look for assets that have uniqueness. This will mean that you want to hold many asset classes.
Two, you should ensure that your assets are collectively exhaustive. Make sure that you set of assets cover the entire frontier of potential assets. Do not leave out any asset class. If you are a managed futures or global macro manager, make sure that you include some markets from every asset class, equities, fixed income, commodities, and currencies.
As an investor, when you ask about diversification place it in the context of MECE. This does not take long and it better frames any discussion about portfolio diversification construction.
Hat tip to Bowmoor Capital for presenting this concept in their TTU podcast.
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