Welcome to Investment News. I'm Greg Greenberg, reporting live from the Schwab IMPACT Conference in Denver. I'm here with Dr. Michael Hunstad. He's the chief investment officer for global equities at Northern Trust Asset Management. Welcome, Dr. Hunstad.

Thanks for having me here.

So you spoke earlier at Schwab IMPACT about compensated risk versus uncompensated risk. What were you talking about?

So there's this pervasive notion that if you take risk in an asset market, you necessarily get return, or the corollary, if you want return, you have to take more risk. We know today that that's not true. There is a lot more data, a lot more analytics at our disposal. We can slice and dice markets into individual risks-- sector risk, country risk, currency risk, style, factor risks.

And we know that some of these risks do come with return. They're compensated risks. Many of them do not, so they are uncompensated in our vocabulary.

OK, I want to get paid for the risks I take. So how do I avoid uncompensated risk?

And I want to get paid for the risk I take too. The answer is precision. So we have analytics, we have data. As I said, it's all about making sure you control those aspects of risk that you don't want in the portfolio and the ones that you do as well.

But it's really about technology and how you can employ that technology. Instead of just controlling your market exposure, you need to control your exposure to, potentially, hundreds of different risks. So being precise is the way to go.

Well, you also talked about the unseen risks associated with diversification. Now, I always thought diversification was a good thing. Maybe it's a bad thing. Why don't you tell me?

Yeah, it's another rule of thumb that we're sort of challenging. You know, diversification is a great thing, but only if you're diversifying away uncompensated risks. If you're diversifying away the stuff that you want, the stuff that you want to keep, the compensated risks, then you're doing yourself a disservice.

So we have to differentiate between those two. And there is a good diversification and a bad diversification. We have to make sure to understand the difference between the two.

Then finally, what's a good diversification look like because I want to make some money? And you can make money through concentration.

Yeah, good diversification-- you make a great point. Good diversification means you have enough securities in your portfolio to express your view, whether that's a sector or a style factor or on quality on low volatility, but not so many in the portfolio that you are too diffuse, effectively. So you want to make sure you get what you're trying to get at the end of the day. And that's tough to do.

And that's also a technology consideration, how do I decompose between the good kind and the bad kind? It used to be a blunt tool, and now we have a lot more precision.

All right, well, thanks a lot for coming on and talking about it. And thank you for watching Investment News. I'm Greg Greenberg.

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