Diversification - A Multi-Facetted Concept

By default, most investors equate a passive investment such as a traditional market capitalisation based index with a welldiversified investment. However, “diversified” and “passive” should not a priori be considered as synonymous. We have attempted to show that “passive” should not necessarily be equated with “well diversified”. Investing in just one type of indexing method often leads to unwanted concentration- and cluster risks. To avoid this, it is crucial to not solely focus on intra-index diversification properties, but to diversify across the different indexing methods. Diversification is a multi-dimensional and multi-facetted concept. A (passive) equity portfolio is only truly well diversified if it is diversified not just across constituents, but also across the different indexing methods