Regional/Geographical Diversification

The concept behind diversification in investments is about spreading the risk, which can be done in a number of different ways. Regional, or geographical, diversification is one of the ways an investor can consider doing this within their investment portfolio.

A global equity fund invests in companies operating around the world, but there are funds whose primary focus is to invest in companies operating in certain countries, territories or continents. For example a fund might invest in emerging markets whilst another focuses on developed markets. A fund might have a wider focus such as investing in companies domiciled in, or operating within, Europe, Africa or Asia Pacific. A fund that is country specific, such as Thailand or UK, will primarily invest in companies operating within that country.

The premise behind regional diversification is that many countries are not highly correlated to each other because different parts of the world are developing at different paces. This provides opportunities to invest in countries that have a reasonably steady and stable economy, such as the U.S., or to take a risk in investing in emerging market countries, such as China or India, who might have better growth prospects, the trade-off being that with higher growth potential comes higher risk and higher volatility.

Investing in funds across different regions within an investment portfolio can help compensate for the volatility of investing in a single economic region, but whilst investing over a variety of geographical regions spreads risk, an investor should also make sure they are aware of the risks of each region before they invest their hard earned savings.