Achieving true diversification with managed funds

“Diversification is the only free lunch in finance.”

That classic quote, usually attributed to Nobel Prize-winning economist Harry Markowitz, is repeated frequently - and for good reason. Diversification remains one of the most powerful tools available to investors. But in our experience, too many investors don’t take advantage of the free lunch. They stop at the entrée and never get to the main course.

The average Australian investor often holds a mix of Australian shares, perhaps some international ETFs, a little property exposure, some cash and maybe some bonds. It sounds diversified. But when markets hit turbulence, many of these assets can start moving in the same direction. Down! That’s when you find out whether you were diversified in theory or in practice.

For investors looking to use diversification to build a genuinely resilient portfolio that can survive (and even thrive) across all stages of the market cycle, unlisted managed funds can offer benefits. They can provide access to investment strategies and managers that cannot be achieved using ETFs or listed securities alone.

Let’s unpack how, and why, unlisted managed funds can elevate your diversification game.

A common mistake

The biggest misconception about diversification is that it simply means spreading your money across lots of investments. That’s a good start. But it’s not necessarily enough.

Buying four different Australian banks isn’t diversification. Neither is owning several ETFs that all track variations of the same equity index, or even multiple different equity indices. During periods of market stress, assets that usually behave differently can suddenly move in tandem. This is especially true when investors rush for liquidity, selling anything and everything that can be easily realised.

True diversification is about have some exposure to assets that behave differently under pressure—particularly during downturns. This includes strategies that aren't reliant on rising markets to deliver returns, asset classes with different economic drivers, and investments with varying levels of liquidity and volatility.

How managed funds can help

Unlisted managed funds allow investors to access a much broader set of investment opportunities than listed securities, including ETF’s typically provide. Some examples include:

• Private Credit – Lending directly to businesses or to fund hard assets, often with floating-rate structures that can benefit in rising interest rate environments.

• Private Equity – Backing businesses before they list (or instead of listing), often with longer investment horizons and the potential for outsized returns.

• Direct Property and Infrastructure – Exposure to assets like office buildings, data centres, toll roads or renewable energy infrastructure.

• Alternative Strategies – Including hedge funds, long/short strategies, absolute return funds, and others designed to perform independently of market direction.

• Specialist Sector or Niche Funds – Focused exposure to areas underrepresented in listed markets, such as agriculture, litigation finance or micro-cap innovation.

Quality unlisted funds provide the opportunity to gain exposure through skilled managers, pooled structures, and thoughtful diversification. And while some opportunities in these areas are available through various listed structures, the array of opportunities in unlisted funds is much broader.

Diversification by source of return

One way to think about portfolio diversification is by identifying what drives returns for each investment. In most listed portfolios, returns are driven, or at least significantly influenced, by movements in the broader equity or bond markets.

Unlisted funds can introduce exposure to different return drivers. Examples include credit spreads, real asset valuations, private business growth, or arbitrage strategies. These sources of return often have a low correlation with stock markets, meaning they move in different ways. This can significantly improve the risk-adjusted performance of your portfolio.

For example, when interest rates spiked in 2022, listed stocks and long-term fixed bonds both suffered. Meanwhile, most unlisted private credit funds continued to generate stable, positive income, because their returns were tied to lending margins and floating interest rates, not market sentiment.

Unlisted assets can lower volatility

One of the underrated benefits of managed funds that own unlisted assts, is the more stable pricing. In listed markets, volatility can be brutal. News flow, sentiment swings, and algorithmic trading often drive short-term price movements that have little to do with underlying fundamentals. This can lead to poor short-term decisions, such as selling after a significant market correction, when prices are near cyclical lows.

In contrast, unlisted assets are typically valued monthly, quarterly or even less frequently. Valuations are usually based on independent opinions or realised transactions, and prices tend to relatively stable over short periods. This tends to assist in smoothing portfolio returns.

Of course, it’s important not to mistake the absence of volatility for the absence of risk. Just because the price doesn’t move every day doesn’t mean the value hasn’t changed. But in practice, this reduced day to day noise helps investors stay the course. And as we’ve seen time and again, reducing emotional decision-making—particularly the temptation to sell at the wrong time—is very helpful for long-term investment success.

Illiquidity premiums

Unlisted funds do come with trade-offs. Chief among them is reduced liquidity. Many unlisted funds only allow redemptions weekly, monthly, quarterly, or even less frequently. In some cases, redemptions may be gated or suspended altogether during periods of market stress.

That’s why we advocate a tiered or “bucketing” approach to liquidity. You don’t want all your capital locked up. But having a sensible allocation to less liquid investments - balanced with cash and liquid investments - can allow you to benefit from the diversification and return potential of unlisted funds, without compromising your ability to meet short-term needs.

At Affluence, for example, we generally cap illiquid exposures at no more than 20% in any portfolio. This ensures we retain flexibility and portfolio liquidity, while still being able to access the full menu of diversification options.

Diversifying by Strategy and Style

Diversification isn’t just about asset classes. It’s also about how managers invest.

Different managers approach markets in different ways: value vs growth, top-down vs bottom-up, concentrated vs diversified, actively traded vs buy-and-hold. Some seek to outperform benchmarks; others aim to deliver absolute returns regardless of market conditions.

By combining managers and styles, you can reduce the reliance on any single investment thesis or market outcome. The range of managers and strategies available through unlisted funds is typically much wider than the listed alternatives.

At Affluence, we regularly seek out specialist unlisted managers with niche expertise in a particular area, strong risk management practices, and the flexibility to adapt through cycles. Many of these managers don’t offer listed equivalents, and their return streams can materially improve a portfolio’s resilience.

Global and Thematic Access

The ASX is home to many great companies—but it represents only about 2% of global equity markets. Limiting your investments to the Australian domestic market means ignoring 98% of the world’s opportunities.

You can invest directly in offshore funds, listed companies and ETF’s. But that can bring with it tax, logistical and valuation challenges that serve to complicate portfolio management.

Australian domiciled unlisted funds (and ASX listed ETFs) can provide access to global strategies and thematics that are hard to reach via ASX-listed securities. Examples include:

• US and European private equity.
• Asian infrastructure projects.
• Global thematic funds focused on decarbonisation, healthcare innovation, or AI.
• Currency strategies and international fixed income.

These exposures not only broaden your opportunity set, but also reduce concentration risk tied to the Australian economy—which is heavily reliant on banks, mining, and property.

The Psychological Advantage

Perhaps the most underappreciated benefit of unlisted funds is behavioural.

During sharp market corrections, many investors panic. They sell at the bottom, lock in losses, and miss the recovery. This behaviour is deeply human - and can be deeply destructive to your portfolio.

Unlisted investments, by their nature, discourage knee-jerk decisions. Because they’re not priced daily, and often can’t be exited on a whim, they nudge investors toward patience. And in investing, patience is often rewarded.

At Affluence all our funds offer monthly applications and withdrawals. Our investors can still access their funds quickly, but it’s not as tempting to act rashly. A great example of this was the tariff driven market correction in April 2025. Part way through the month, markets had fallen 5-10%, and many investors were selling listed stocks in response to uncertainty. By the end of the month, markets were net positive. Panic selling near the lows would not have been the smart move, but plenty were tempted.

Putting It All Together

Diversification is a critical tool for navigating market volatility. But the quality of diversification matters far more than the quantity of investments you hold. Unlisted managed funds can provide that quality—through access to alternative assets, differentiated strategies, and return streams that behave differently when markets are under stress.

They’re not a silver bullet. And they’re not suitable for all capital or all situations. But for investors with a multi-year horizon and a desire to build more robust portfolios, unlisted funds deserve a place at the table.

In a world where uncertainty is the only constant, genuine diversification isn’t just a free lunch. It’s a wonderful diet for long-term wealth creation.

Disclaimer: This article is general information only and does not constitute financial advice. You should consider your personal circumstances and consult an adviser before making any investment decisions.

This article is prepared by Affluence Funds Management Limited ABN 68 604 406 297 AFS licence no. 475940 (Affluence). It is not an investment recommendation. Prospective investors are not to construe the contents of this article as tax, legal or investment advice. Neither the information nor any opinion expressed constitutes an offer by Affluence, its subsidiaries, associates or any of their respective officers, employees, agents or advisers to buy or sell any financial products nor the provision of any financial product advice or service. The content has been prepared without considering your objectives, financial situation or needs. In deciding whether to acquire or continue to hold an investment in any financial product, you should consider the relevant disclosure documents for that product which are available from the product provider. Affluence recommends you consult your professional adviser to determine whether a financial product meets your objectives, financial situation or needs before making any decision to invest.