Why Issuer Diversification Matters: Reducing investment risk within your portfolio

Do not put all your eggs into one basket is an age old saying which rings true when it comes to investing, it being investing in stock and shares, investment funds or structured products. Diversification is an important strategy for managing risk in any investment portfolio. In this article, we will discuss why Issuer diversification (sometimes also called Counterparty diversification), a key component of Structured Products, is important and what are the benefits.

Structured products, due their ability to provide defined returns, are a great tool to add diversification to any investment portfolio. One of the best ways to enhance diversification within a portfolio of structured products is to spread investments across multiple Issuers. The Issuer, often an investment bank, is responsible for creating and issuing the structured product. Issuer diversification will ensure that not all your investments are impacted if one Issuer would fail on their obligations and defaults.

Whilst Issuer defaults are not common occurrence, the demise of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank in the US over the recent months and UBS taking over Credit Suisse (CS) in Europe in 2023 highlighted the importance of not over relying on any one Issuer. Banks are subject to tight regulation and reporting, but we should not forget banks sensitivity to market confidence and liquidity.

The key benefits of Issuer diversification

Mitigates credit risk

Issuer diversification can reduce credit risk, which is the risk that an Issuer will default on its financial obligations. If investors have all their investments with one Issuer and that Issuer defaults, they could lose all their investments. However, if investments are spread across multiple Issuers, the risk of losing all investments is greatly reduced.

Reduces concentration risk

Concentration risk is the risk of having too much exposure to one Issuer or investment. This can occur if one invests heavily in one company or hold all their investments with one bank or broker. If that Issuer or investment performs poorly, investors can suffer significant losses. Issuer diversification helps to reduce concentration risk by spreading investments across multiple Issuers.

Enhances portfolio performance

Diversification is a key driver of portfolio performance. By spreading investments across multiple Issuers, investors can capture the benefits of diversification, such as reduced volatility and increased and/or more consistent return over time.

Provides access to different investment opportunities

Different Issuers may offer different investment opportunities via different underlying assets such as stocks, bonds, or mutual funds. This can help to improve portfolio's risk-return profile and increase chances of achieving investment goals.

Provides flexibility

Issuer diversification provides flexibility to adjust portfolio as investment needs and goals change over time. By spreading investments across multiple Issuers, investors can easily adjust portfolios to take advantage of new investment opportunities or reduce exposure to certain types of investments.

Conclusion

In conclusion, Issuer diversification is an important strategy for managing risk and improving portfolio performance. By spreading investments across multiple Issuers, investors can reduce credit risk, concentration risk, and gain access to different investment opportunities. It can also provide flexibility to adjust portfolio as investment needs and goals change over time. Therefore, it is important to consider Issuer diversification as part of an overall investment strategy.

Causeway Securities is an independent brokerage company and not tied to any one Issuer, we offer structured products from a number of highly rated Issuers. For more information on Issuer diversification and how Causeway Securities products can help you to add diversification to your clients portfolios, contact us.

Important information

This publication is intended to be Causeway Securities own commentary on markets. It is not investment research and should not be construed as an offer or solicitation to buy, sell, or trade-in any of the investments, sectors or asset classes mentioned. The value of any investment and the income arising from it is not guaranteed and can fall as well as rise, so you may not get back the amount you originally invested. Past performance is not a reliable indicator of future results. Movements in exchange rates can have an adverse effect on the value, price, or income of any non-sterling denominated investment. Nothing in this document constitutes advice to undertake a transaction, and if you require professional advice, you should contact your financial adviser.

As with all forms of investment, there are risks involved with structured products, including those on our website.

It should always be understood that:

• Structured products are not suitable for everyone
• Past performance is not a reliable indicator of or guide to future performance and should not be relied upon, particularly in isolation
• The value of investment and the income from them can go down as well as up
• The value of structured products may be affected by the price of their underlying investments
• The potential returns of a structured and the repayment of money invested in a structured product depend on the financial stability of the Issuer and Counterparty
• Capital is at risk and investors could lose some or all their capital

Causeway Securities incorporates Causeway Securities Ltd, authorised by the UK Financial Conduct Authority, and Causeway Securities LLC, a subsidiary of Causeway Securities Ltd, granted FINRA membership in July 2022 to conduct business in the US.

Causeway Securities Limited is authorised and regulated by the Financial Conduct Authority (FCA FRN 749440) in the UK and is an authorised financial services provider in terms of the Financial Advisory and Intermediary Services Act (Act No. 37 of 2002) in South Africa. Causeway Securities Limited is registered in England and Wales with company number 10102661. Registered address Causeway Securities, 60 Cannon Street, London, England, EC4N 6NP.

Causeway Securities LLC is a subsidiary of Causeway Securities Limited. Causeway Securities LLC is a SEC registered broker/dealer and member of FINRA and SIPC. Causeway Securities LLC acts solely as distributor/selling agent and is not the guarantor of any structured note products. You can check the background of Causeway Securities LLC on FINRA Broker Check.