Our investment Foundation No. 3, is our diversification across the following asset classes: Public Equities (globally-traded equities), Fixed Income (globally), Private Equities, Real Assets (commodities, real estate) and Absolute Return (hedge funds, managed futures) above. The individual allocation to these different asset classes are fine-tuned and rebalanced per our strategic asset allocation view in Foundation No. 1.

The Mosaic Global Fund has a very wide investment mandate compared to most of our competitors who track an index or benchmark. Ours is a completely different opportunity set where we can increase the number of assets that we hold in a portfolio much beyond the standard stocks, bonds and cash.

By doing so, we can increase or at least maintain returns while we dramatically reduce volatility and the risk of loss to our capital. The increased diversification includes, for example, investing in a global portfolio instead of only in a particular local market we can separate between value and growth shares as well as large and small cap which have distinctly different return patterns. Beyond that, we can include hedge funds and managed futures investments in the portfolio as well as real estate and commodities.

A very simple and stripped down, still powerful example on how diversification works, may be seen in the chart below. As we can see, by only adding one additional equity market rebalancing the two on a quarterly basis, we achieve a very nice increase in the return on our portfolio. When doing this with between 6-8 different asset classes, the impact becomes even larger which is what is achieved in the Mosaic Global Fund.

Source: DFA - Quarterly data: 1970-2007, rebalanced quarterly. The S&P data are provided by Standard & Poor's Index Services Group. MSCI data copyright MSCI 2009, all rights reserved. Results represent past performance and do not predict future performance.