Finding the balance of portfolio diversification

Massimo di Tria, Group Chief Investment Officer, at Cattolica Assicurazioni, discusses the pitfalls of too much diversification.

Insurance Investor Editorposted on Friday, July 22, 2022

Massimo di Tria, Group Chief Investment Officer, at Cattolica Assicurazioni.

Diversification is seen often as a great way to secure profits in volatile times, but there are multiple examples of where too much complexity was being added into certain portfolios that ended up being detrimental. Massimo di Tria, Group Chief Investment Officer, at Cattolica Assicurazioni.

In a Clear Path Analysis panel discussion, di Tria, Group Chief Investment Officer at Verona-based Cattolica Assicurazioni, featured in Insurance Asset Management - Europe 2022 report, where he debated this issue and what the wider industry should look at in order to mitigate areas of concern, post-pandemic.

“Covid-19 has been spatial. I call this kind of pandemic risk a semi-systemic risk because when you think about it, it impacts everyone."

“Diversification in general is sometimes a bit overestimated,” said di Tria. He explained that at Cattolica Assicurazioni, they used diversification as a tool readily in the past but now have more complicated thoughts on it. “We did so in order to protect the portfolios against idiosyncratic risk, but diversification cannot protect our portfolios against systemic risk. For this we needed to use hedging, portfolio insurance, and other tools.”

The effects of covid-19 on portfolio diversification have also been widely felt in this area, he explained, but have hit various places at specific times and in different ways.

“Covid-19 has been spatial. I call this kind of pandemic risk a semi-systemic risk because when you think about it, it impacts everyone,” he said. “It is systemic but at the same time, you have geographic areas that have been hit before others and certain specific sectors that have benefitted out of it.” In this respect, di Tria said, diversification was effective – but only partly effective.

“It is also interesting to show that sometimes we need to be patient and don’t have to overreact to short-term events. Sometimes the fewer liquid assets are forcing us to be a little more cautious because we can’t do anything in the very short term, which is not necessarily wrong.”

He continued that there were big chunks of assets that were affected, especially in terms of low liquidity panic selling, for example. “There was another portion of the assets that promptly reacted, such as the digital assets like digital distribution. When you have something so unexpected like [the pandemic] with the reaction of the central banks, then suddenly you discover that some illiquid assets are performing in a better way.”

This, he said, is also a form of diversification, but not a straightforward or rational one. “It is also interesting to show that sometimes we need to be patient and don’t have to overreact to short-term events,” he said. “Sometimes the fewer liquid assets are forcing us to be a little more cautious because we can’t do anything in the very short term, which is not necessarily wrong.”

The lesson learned is that there is a new kind of diversification and not thinking about only the pandemic risk, but also cyber risks, which can be another big issue, di Tria said. “These risks are semi systemic and there is some degree of diversification which can help the portfolio, especially if you look at the specific sectors which can benefit in case these risks are hitting us.”

To learn more about this issue and others facing insurers, read our report Insurance Asset Management Europe here.

 

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