In Chapter 23 of Don Quixote, Sancho Panza advises: “It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” In this paper, Arnerich Massena describes the firm’s philosophy on how best to put this advice into practice.

Paper contributors, which include co-CEO and co-CIO Bryan Shipley, CFA, CAIA; Arthur Coyne, CFA; James Ellis, CFA; Chris Van Dyke, CFA, CAIA; and Luka Arnerich, CAIA, note that turning Señor Panza’s advice into practical reality requires detailed decisions about what qualifies as a basket and how many baskets to use – focusing on the importance of using well-differentiated asset classes when structuring a portfolio.

The paper points out that finding genuinely uncorrelated assets is not as straightforward as simply combining a few stock and bond asset classes. “To achieve long-term portfolio risk management, the asset classes should ideally perform independently of each other, so they don’t all fail at the same time. Unfortunately, history shows that in practice, this is easier said than done, since many seemingly different types of investments have historically tended to deliver surprisingly similar performance results.” Instead of using a highly granular and duplicative asset class structure, the authors recommend that investors consider adopting a more streamlined list of broadly defined asset classes that are more meaningfully differentiated and capable of providing better diversification. The full paper details the “baskets” the firm uses and discusses the advantages of this approach.