Guest opinion: The importance of diversification, selectivity, and active management by Sean Mills, Senior Portfolio Manager
Periods of uncertainty are nothing new for markets. What is different today is the nature of that uncertainty. Geopolitical fragmentation, rapid technological advances driven by artificial intelligence, the reshaping of global energy systems and the re-industrialisation of supply chains point to an era of structural change rather than a short-lived economic cycle. In such an environment, diversification, selectivity, and active management matter more than ever.
Diversification as a remedy to uncertainty
Diversification is widely accepted as the cornerstone of prudent investing, but its importance becomes even more pronounced during periods of regime change and disruption to the status quo. When economic leadership shifts and correlations behave unpredictably, relying on a narrow set of outcomes can leave portfolios exposed to unintended risks. True diversification today means spreading risk not just across asset classes, but across styles, geographies and underlying drivers of return.
In periods of disruption such as the one we are experiencing, it also becomes increasingly important to distinguish between those likely to benefit and those at risk – whether at the level of individual companies, sectors, or regions. Being selective, active, and discerning is essential in navigating exposure to both perceived risks and long-term opportunities.
When passive investing becomes complacent investing
One of the less discussed risks in today’s market is the increasingly status-quo nature of passive investing. By design, passive strategies own the market in its current form, accepting prevailing prices, weights and leadership as given rather than challenging them. This approach can work well in periods of stability and incremental change, as seen over much of the past decade.
However, during times of significant disruption, the potential divergence between winners and losers within an index increases materially. While passive strategies are often perceived as diversified by default, investors may in reality be making a concentrated bet on existing market leadership and dominant themes. That concentration can amplify drawdowns and volatility when leadership changes and index constituents evolve more rapidly.
Why disruption favours active management
Periods of technological and economic disruption tend to produce clear winners and losers. While broad market exposure captures the average outcome, it does little to differentiate between businesses adapting successfully and those whose models are being structurally challenged. Active management, at its best, enables greater selectivity: increasing exposure to companies positioned to benefit from long-term trends such as artificial intelligence, automation, robotics, energy infrastructure and critical commodities, while avoiding those facing persistent headwinds.
This is not about attempting to time markets, but about recognising that index composition is inherently backward-looking, while disruption is forward-looking.
Positioning portfolios for an uncertain world
For portfolios, the challenge is balancing participation with protection. Remaining invested is essential – many of the most powerful long-term returns are generated during periods of volatility and transition. At the same time, thoughtful risk management through diversification, selective active exposure, and appropriate hedging can help mitigate the impact of inevitable setbacks.
As we look through 2026 and beyond, we expect opportunities to continue emerging from long-term themes such as artificial intelligence, the energy transition, and resource scarcity. Successfully navigating this environment will require discipline, diversification, and an active approach to differentiate between enduring winners and those more vulnerable to structural change.
Warnings
The views, thoughts and opinions expressed within this article are those of the author, and not those of Capital International Group Limited (Group) and/or any of its subsidiary companies and as such are neither given nor endorsed by the Group or any company within the Group.
Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Group to buy or sell any product or security or to make a bank deposit.
Any reference to past performance is not necessarily a guide to the future. The value of investments may go down as well as up and may be adversely affected by currency fluctuations.
The Group, its subsidiary companies, clients, and officers may have a position in, or engage in transactions in any of the investments mentioned. Opinions constitute views as at the date of issue thereof and are subject to change.
