Why is a diversified portfolio essential when seed investing?

Matthew Cushen, co-founder at Worth Capital, and Andy Davidson, founder at Nova, explore the importance of a diversified portfolio when seed investing.

Many investors and professional advisers are tempted to put all their Seed EIS investments with a single investment manager who they believe has a good track record, but by doing so they are potentially increasing their risk — it’s important to have a diversified portfolio when seed investing.

Many investment managers are investing at Seed EIS and with the follow-on EIS investments in the broad technology sector, partly because technology is a large sector which has accelerated in popularity since on the onset of the pandemic.

Two Seed EIS investment managers, Nova and Worth Capital, argue that diversification is essential because just as investor would not put all of their investments into a single company listed on the public markets or a single main stream investment fund, so putting it with a single SEIS manager is not advisable.

Andy Davidson, one of the partners at Nova based in Liverpool, says academic research consistently shows diversification is achieved with a portfolio of around 30 companies, whereas most Seed EIS funds have between 5 and 10 portfolio investments. Simple maths suggests an investor should spread their Seed EIS investments between three to five fund managers.

Matthew Cushen, one of the founders of Worth Capital says’ As well as the number of underlying companies it is important to get a spread across business sectors and investment managers with different expertise. We think our branding and marketing expertise is perfect for the companies we invest in, but that can be quite different from the needs of the technology businesses which Nova invests in.’

Mr Davidson believes investors and their advisers should look at both Worth and Nova, as well as other experience investment managers such as Deepbridge or Jensen, because all four groups invest in different areas, and he discusses these issues with Mr Cushen in a short video.

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