Diversification vs market-cap weighting: why cores concentrate

Market-capitalisation benchmarks are often treated as neutral. They are not. By construction they overweight what has already grown large, and they inherit the correlation structure of those winners.

For institutional cores, that means “passive” can still be highly concentrated in a small set of risk drivers. Counting securities is not diversification if those securities move together.

TOBAM’s Maximum Diversification® approach starts from a different objective: maximise a mathematically defined Diversification Ratio without forecasting expected returns. The result is a core that seeks broader risk contributions across the investable universe.

Allocators comparing Smart Beta and anti-benchmark approaches should ask: does the process target return prediction, or does it target diversification itself? TOBAM’s answer has been consistent since 2006: diversification is the objective.