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Diversification helps, but for money managers it’s still scary out there

Money managers have plenty on their minds these days. Business headaches abound, from the ongoing scramble for alpha, compressed yields and growing consolidation among manager ranks, as firms race to beef up resources and gain scale.

But as several stories in this issue illustrate, geopolitical risks also seem to be bubbling up more and more these days, adding to the uncertainty.

Such risks stretch beyond the familiar portfolio concerns and aren't defined by events that one might rightly expect could pop up in less-developed markets.

No place, it seems, is immune.

In the U.S., managers face uncertainties stemming from new regulatory and diplomatic priorities of the Trump administration and Congress, with ever-increasing talk of renegotiated trade agreements, an abrupt change-of-face regarding the U.S.'s participation in the Paris climate agreement and vocal criticism of NATO allies.

Meanwhile, in Europe, ramifications stemming from the U.K.'s surprising 2016 vote to exit from the European Union have yet to fully present.

One worry now is whether the populist sentiment that is sending the U.K. packing will give an edge to Italy's euroskeptic Five Star Movement when the next election is held, definitely by next spring. Other industry observers say another independence referendum by Scotland and its entry into the EU also could be in the cards.

The EU turmoil not only affects U.K. managers' investments, but also their business lines as they figure out whether a move to another EU-member country will be the best for their own bottom lines.

Markets have shown surprising resilience and even growth in the face of upsets such as Brexit and the U.S. presidential election. The key, of course, is to determine if these latest bumps are truly one-off events, or developments that could lead to fundamental changes in markets, which definitely should influence how assets should be put to work. Asset owners, who are investing for the long term, are depending on managers to make the right calls and produce the returns they expect.

That long-term, measured approach does provide a certain measure of comfort, giving managers and asset owners time to assess geopolitical risks as they appear. And a well-diversified portfolio provides a much-needed cushion against such risks.

But it's unnerving all the same.

This article originally appeared in the June 12, 2017 print issue as, "Diversification helps, but it's still scary out there".