DEFINITION of ‘Granular Portfolio’

A Granular Portfolio is a type of portfolio that is well diversified across a wide variety of areas, typically with a significant number of holdings. Because these portfolios contain a large number of positions in different asset classes and/or sectors, they are considered to have a lower overall risk profile. Conversely, portfolios that have “low granularity” have fewer positions or contain highly correlated assets, are less diversified and have a higher overall risk profile.

BREAKING DOWN ‘Granular Portfolio’

A granular portfolio can refer to a credit, currency, equity, bond or mixed asset class portfolio. Highly granular portfolios, sometimes referred to as infinitely granular, diversify most of the unsystematic risk (individual security risk) out of the portfolio so that it is exposed to systemic risk only, which investors can’t minimize through diversification.

Advantages of a Granular Portfolio

• Reduces Risk: Having investments across many sectors and asset classes help to reduce a portfolio’s risk. For example, if healthcare stocks are underperforming, a granular portfolio with exposure to other sectors, such as technology, financials and consumer goods helps to offset those positions. Bonds can be added to a granular portfolio to provide income when stocks go through range-bound periods.                                                                                                                                                                                                      
• Customization: Because granular portfolios have many holdings, they can easily be adjusted to meet the investors financial objectives. For instance, an investor might have his or her asset allocations split between equities, bonds and cash. When the investor is young, 90% of the portfolio may be invested in equities, with 5% in bonds and 5% in cash. As the investor approaches retirement, they can easily adjust the portfolio to have more conservative allocations.                                                                                                                                                                                                                                                                                                                            
• Asset Choice: A granular portfolio gives investors the flexibility to diversify across multiple asset classes as they see fit. For example, if precious metal commodities, such as gold and silver are trending higher, an investor could add some futures contracts to his or her portfolio to gain exposure to the move.

Limitations of a Granular Portfolio

• Windfall Gains: The diversified structure of a granular portfolio means that a large gain in a single investment has a minimal impact on overall returns. For instance, a stock in an investor’s portfolio may increase by 75%, but that holding only accounts for slight gain if it represents 5% of the portfolio’s value.                                                                                                                                                             
• Exposure: In a stable economic environment, a granular portfolio takes advantage of uncorrelated asset classes and sectors offsetting each other to help reduce risk. These correlations may break down in a financial crisis to actually increase risk. For example, during the global financial crisis between 2008 and 2009, price moves in equities and commodities became strongly correlated, while bonds and equities became uncorrelated. Investors who hold a granular portfolio should continually monitor changing correlations between asset classes to ensure that don’t overexpose themselves. (To Learn more, see: 4 Reason Why Market Correlation Matters.)

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