Introducing FTSE Russell Target Diversification

Key takeaways:

• Target Diversification framework, is a breakthrough solution for today’s increasingly concentrated market environment
• Target Diversification offers strategic management of concentration risk
• The FTSE Russell Target Diversification Methodology is customisable and efficient

Points of differentiation:

• The FTSE Russell Target Diversification approach offers benefits that traditional capping does not
• Target Diversification considers the entire portfolio’s diversification characteristics rather than just limiting individual stocks
• The FTSE Russell Diversification Factor provides an intuitive, easily understandable metric (equivalent number of equally weighted stocks) that allows investors to target their exact desired level of diversification
• Target Diversification applies a non-linear transformation to all constituents, not just those breaching arbitrary thresholds, creating a smoother weight distribution
• Target Diversification is specifically designed to minimise distortions to industry exposures and factor/investment style exposures while improving diversification
• Target Diversification can be calibrated to different markets and conditions without changing the underlying methodology

The FTSE Russell Target Diversification approach delivers many of the diversification benefits of equal weighting while addressing its key limitations:

• By preserving more of the market-cap structure while still improving diversification, Target Diversification typically reduces tracking error by 30-50% compared to equal-weighted approaches
• The Target Diversification methodology results in significantly lower portfolio turnover—often 40-60% less than equal-weighted strategies—leading to lower transaction costs and improved tax efficiency
• Target Diversification maintains greater allocations to larger, more liquid securities while still achieving diversification targets, enhancing implementation efficiency
• The Target Diversification methodology minimises unintended industry tilts common in equal-weighted portfolios, maintaining closer alignment with the economic structure of the market

What does our research mean for investors?

FTSE Russell’s research offers investors deep insight into investment strategies and uncovers new and novel methods that can help make them more effective in changing markets.