Diversifying vs De-Risking Funds
Getting more bang for your buck
July 2026. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Investors should differentiate between diversifying and de-risking funds
- Most fixed income funds are de-risking strategies
- Equity strategies provide the lowest diversification benefits
INTRODUCTION
In our recent research article, Diversification vs De-Risking: Evidence Across Asset Classes, we differentiated between diversification and de-risking: the former involves providing positive, uncorrelated returns, while the latter can be achieved simply by reducing the equity allocation and moving into cash or risk-free assets like T-Bills.
We evaluated long-term U.S. government bonds, U.S. investment-grade corporate bonds, REITs, gold, and U.S. small-cap stocks for this differentiation. The analysis highlighted that the improvement in the Sharpe ratio of an equities portfolio from a 25% allocation to any of these assets ranged from -0.11 to 0.03 over the last 100 years, when compared to an equivalent allocation to T-Bills. Aside from gold, the diversification benefits versus T-Bills can be viewed as marginal.
In this research article, we will investigate the diversification benefits for a wider set of investment strategies.
DIVERSIFICATION VS DE-RISKING
We select all mutual funds and ETFs trading in the U.S. with a track record of at least 19 years, resulting in a universe of more than 6,000 funds. We compute the Sharpe ratio of an equities portfolio comprised exclusively of the S&P 500, then simulate adding a 25% allocation to T-Bills with quarterly rebalancing, which would have increased the Sharpe ratio from 0.49 to 0.51. The de-risking impact of the allocation to the risk-free asset would therefore have been 0.02. If an investor had allocated 25% to gold rather than T-Bills, the Sharpe ratio of the combined portfolio would have been 0.63, resulting in a diversification benefit of 0.12.
