How does diversification relate to the duty of care in investment management?

Diversification is a foundational concept in investment management that aligns closely with the duty of care owed by investment managers to their clients. By diversifying a portfolio, an investment manager spreads investments across various asset classes, sectors, or geographies, which reduces the impact of any single investment's poor performance on the overall portfolio. This is particularly relevant to demonstrating prudence, as it reflects a careful and considered approach to managing risk.

Implementing a diversified investment strategy signifies that the manager is making decisions with the aim of protecting client assets and achieving more stable returns over time. This aligns with the fiduciary duty to act in the best interests of clients, as prudent diversification can help to safeguard capital and reduce the likelihood of significant losses.

In contrast, a lack of diversification could expose a portfolio to higher risks, emphasizing the importance of spreading investments to demonstrate diligent management. By adhering to diversification principles, an investment manager showcases their commitment to fulfilling their duty of care through responsible risk management and decision-making in investment strategy.