By Akshay Sardana, VP – Strategy & International Development, The Continental Group

In the world of investing, diversification is the only free lunch.

It’s becoming increasingly clear that diversification is not just a buzzword but a necessity from a de-risking standpoint. Whether you’re an individual investor trying to safeguard your savings or a financial institution managing large portfolios, spreading your investments across different asset classes, sectors, and geographies is crucial. We are navigating a phase marked by rising inflation, geopolitical tensions, and market volatility. Diversification is a crucial part of your financial safety net. It is just as important to think of how many different ways you can be invested, as it is to think of how long you will be invested.

Portfolios are often built primarily around time in the market; on face value, this is not a bad practice on its own. It is true that the likelihood of  risk-adjusted gains goes up the longer you stay invested. But there are plenty of examples over the last five years which show that it should not be your only priority.

Remember the market uncertainty caused by the COVID-19 pandemic? While some sectors took significant hits, others, like technology, pharma, and commodities, saw substantial gains. Such disparities highlight the importance of a diversified portfolio. A large economic downturn doesn’t mean the potential for portfolio growth must fall.

Portfolio diversification is about spreading your investments to reduce exposure to any single risk. For financial institutions, diversification helps manage client portfolios more effectively. For individual investors, it safeguards savings against unexpected market downturns.

Strategies for effective diversification

Here is some data that points out why there is financial prudence in considering a diversified approach.

The table above illustrates how diversification enables investors to reduce concentration risk by spreading their investments across various sectors, asset types, and regions to achieve better results over time.

Asset class diversification: Allocating investments across different asset classes – such as equities, bonds, real estate, commodities, is the most rudimentary form of diversification. Equities might offer growth, while bonds provide stability and income. Real estate can offer inflation protection, and commodities like gold can serve as a hedge against market volatility. This approach ensures that an investor’s portfolio is not overly dependent on the performance of a single asset class. In its most ideal form, this kind of diversification allows for convenient rebalancing – changing the ratio of your investments in different classes – based on market trends.

Individual asset diversification: This strategy involves investing in a variety of assets within the same class. For example, rather than putting all your money into one tech stock or one sector, you might invest in a mix of various sectors. This approach reduces the risk associated with any single company or sector’s performance. This is critical as companies within a sector tend to have correlated performance, whereas different sectors tend to perform differently. By spreading investments across sectors, investors can leverage the strengths of multiple opportunities while cushioning against unidirectional risk.

Geographical diversification: By spreading investments across different regions, investors can hedge against local economic downturns. Investing in both emerging and developed markets can balance risks and rewards. For instance, while emerging markets may offer higher growth potential, developed markets typically provide stability. Recent geopolitical conflicts have shown that even local events can have global repercussions – having your portfolio spread across multiple regions is the only way to guard against such events.

Alternative investments: Beyond conventional asset classes, alternative investments like hedge funds, private equity, private credit, and real estate offer unique advantages. These investments often come with flexible terms and the potential for high returns, though they usually require a longer commitment. For instance, hedge funds, managed by professional fund managers, aim to maximize returns by strategically deploying investments. Private equity and private credit investing can also provide substantial returns but typically involve higher risks in terms of both capital deployed as well as timeframe.

Implementing diversification into your portfolio

Managing volatility in investments is much easier than managing emotions while investing.

To get started, there are two critical ingredients to get right:

1. Getting the right financial advisor
2. Setting up the right asset mix

If it’s a personal portfolio, you can start by automating your investments under the guidance of your advisor to ensure consistent allocation into diverse assets. Automating investments helps mitigate the risk of emotional decision-making, ensuring that a portion of your income is regularly allocated towards diverse assets. Regularly review your portfolio – at least once a quarter – and rebalance as needed to align with your financial goals and risk tolerance.

For example, if you’re nearing retirement and looking for more stability, you might reduce your equity exposure and increase investments in dividend-paying stocks and real estate investment trusts (REITs), or even fixed-income assets. Dividend-paying stocks can provide a steady income stream, while REITs offer exposure to the real estate market with relatively lower volatility compared to direct real estate investments.

Of course, none of this is set in stone – it’s essential to stay informed about market trends and adjust your strategy accordingly, as the performance of different asset classes can vary significantly over time. Make sure your plans are dynamic and avoid generic thumb rules, because personal finance is not a one-size-fits-all sphere.

Institutional diversification has some principles that can come in handy. Institutions focus on strategic asset allocation tailored to client needs, leveraging their expertise to adjust portfolios based on market trends. One effective strategy is investing in thematic funds that target specific growth areas, such as technology, healthcare, or renewable energy. Typically these are sectors that show resilience and growth potential, making them attractive even during market volatility. By maintaining well-rounded and flexible portfolios, institutions better navigate economic shocks and sector-specific downturns.

Common pitfalls

Diversification is not without its challenges. Common pitfalls include over-diversification, where the portfolio becomes too complex to manage effectively, and under-diversification, which fails to provide adequate risk mitigation. Over-diversification can lead to diminished returns, as the positive performance of some investments may be offset by the poor performance of others. On the other hand, under-diversification exposes the portfolio to higher risks, as it relies too heavily on the performance of a few assets.

Remember, the key to successful diversification lies in regular reviews, strategic rebalancing, and staying focused on long-term objectives. It’s crucial to remember that financial markets are inherently volatile, and short-term fluctuations should not drive investment decisions. Think of diversification as not just a financial strategy but also a stress management tool for yourself – a sufficiently balanced portfolio will keep you from making hasty decisions. Professional guidance to set up such a balanced system can be especially beneficial during periods of economic uncertainty.

By: Akshata Namjoshi, Associate Partner, KARM Legal
Kabir Hastir Kumar, Associate, KARM Legal

Blockchain and digital assets are transforming the financial landscape, with increasing applications in payments, lending, and asset management.

Stablecoins are particularly being explored for payments due to their price stability. According to the CoinGate Q1 2024 report, USDT transactions accounted for 41.4% of all crypto payments, highlighting a growing trend towards stablecoin use in commerce. Additionally, Deloitte’s report underscores that over 60% of merchants express significant interest in accepting cryptocurrency payments, aiming to enhance customer experience and expand their market reach.

Merchants are increasingly interested in enabling their customers to pay with cryptocurrency. They partner with various acquiring platforms that facilitate these transactions through third-party crypto liquidity providers. Enabling such payment options benefits merchants by expanding their customer base, offering payment flexibility, and enhancing overall customer experience.

In the UAE, the Central Bank of the UAE (CBUAE) has recently introduced the Payment Token Services Regulation (PTSR), which imposes specific requirements on payments in virtual assets. This article discusses the impact of this regulation on merchant payments and its potential to shape the virtual asset industry in the region.

Risks with unregulated Crypto Merchant Payments

Many solutions globally have operated in a legally grey area, where fiat-to-virtual asset conversions were facilitated by both regulated and unregulated liquidity providers, posing risks particularly related to AML practices. Accepting crypto payments without stringent AML/KYC checks, including wallet screenings, could facilitate money laundering by integrating illicit funds into the traditional financial system. This highlights the importance of comprehensive AML measures to prevent illegal activities and ensure the integrity of the financial system. This can only be accomplished through regulation of all players invovled.

Position under PTSR

The new PTSR clarifies the legal framework for crypto payments in the UAE. Contrary to some beliefs, PTSR does not ban crypto payments but regulates them.

The PTSR stipulates that merchants can only accept payments for goods and services in dirham-backed stablecoins.

While many have interpreted this to mean an outright ban on crypto payments, there is no express prohibition on licensed Virtual Asset Service Provider (VASP) first converting virtual assets to fiat or dirham backed stablecoins.  

The conversion of virtual assets into fiat or dirham-backed tokens through VARA or SCA -regulated VASPs is still permissible provided the appropriate no-objection registrations and licenses are procured from the CBUAE.

Implications on Existing Merchant Acquirers and Payment Aggregators

Merchant acquirers and payment aggregators in the UAE, regulated under the Retail Payment Services and Card Schemes Regulation (RPSCS Regulation), enable merchants to accept payments through various methods including debit cards, credit cards, and bank transfers. The PTSR though supersedes references to virtual assets in the RPSCS Regulation. Merchant acquirers and aggregators regulated under RPSCS Regulation can seek a custody and transfer license under PTSR for settlements in dirham-backed stablecoins, or a conversion license for facilitating fiat-to-stablecoin exchanges. If they wish to only handle the fiat leg of the transaction, they may continue under their existing license.

To enable trading of virtual assets – fiat/dirham backed stablecoins pairs, partnerships with VARA based VASPs can be explored. Such partnerships would involve front-end integrations to allow paying customers to acquire fiat/ dirham backed stablecoins for payment to merchants. All players must ensure that they operate within their licensing scopes for such arrangements.

Similar models can be seen in other jurisdictions, where the conversion of cryptocurrencies to fiat is handled by licensed VASP, and the fiat leg of the transaction is managed by payment service providers (PSPs), often operating in distinct regulatory environments.

Depending on the structure of the solution offered, contractual relationships will exist between (i) VASPs-paying customers for trading of crypto to fiat/dirham backed stablecoin; (ii) PSPs and merchants for acceptance and settlement of payments; and (iii) between PSPs and VASPs for front-end integration.  

These partnerships benefit all parties: customers enjoy flexible payment options, merchants expand their payment methods, and payment service providers and VASPs gain an additional revenue channel.

Implications for Merchants

Merchants should seek comprehensive solutions for seamless crypto payments. These solutions streamline payment processes and enhance customer satisfaction by providing more payment options. Additionally, adopting crypto payments can position merchants as forward-thinking and tech-savvy, attracting a broader audience and potentially increasing sales.

However, in the absence of such licensed solutions in the market currently, some platform structuring may have to be undertaken for quick go-to-market.

Conclusion

While the full impact of the PTSR on payments and the virtual asset market in the UAE is yet to unfold, this regulation marks a progressive step. It offers legal clarity, fosters trust among customers, and ensures regulatory compliance, mitigating AML risks. This novel approach is likely to positively influence the perception and adoption of virtual asset payments in the region, enhancing overall market confidence.

By Jerome Mortel, COO of Sumo Sushi & Bento

In the ever-evolving landscape of the hospitality industry, maintaining high service standards is paramount to ensuring customer satisfaction and business success. At Sumo Sushi & Bento, we have long recognized that our greatest asset is our team. The role of continuous staff training, and development cannot be overstated when it comes to delivering exceptional service and creating memorable dining experiences for our guests.

Staff training serves as the foundation of excellence in any hospitality business. It equips employees with the necessary skills, knowledge, and confidence to perform their roles effectively. From understanding the menu and mastering culinary techniques to perfecting the art of customer service, comprehensive training programs ensure that every team member is well-prepared to meet the high standards set by the organization.

At Sumo Sushi & Bento, our training programs are designed to be thorough and ongoing. New hires undergo a rigorous onboarding process that covers everything from food safety protocols to customer interaction techniques. However, training does not stop once the initial onboarding is complete. We believe in the importance of continuous learning and development to keep our team motivated, engaged, and up to date with industry trends.

Adapting to Industry Changes

The hospitality industry is dynamic, with trends and customer preferences constantly evolving. Continuous staff training enables our team to adapt to these changes swiftly and effectively. Whether it’s incorporating new culinary trends into our menu or adopting the latest technology on our website or app to enhance customer experience, our training programs ensure that our staff is always at the forefront of innovation.

For instance, the recent surge in demand for contactless dining and digital payment options has necessitated a shift in how we operate. Through targeted training sessions, our staff has become proficient in using these new tools, ensuring that we continue to provide seamless and efficient service to our guests.

Enhancing Customer Experience

Customer experience is at the heart of the hospitality industry. Well-trained staff are better equipped to anticipate and meet the needs of our guests, leading to higher levels of customer satisfaction. Training programs that focus on soft skills, such as communication, empathy, and problem-solving, empower our team to create positive and memorable interactions with our customers.

Building a Strong Team Culture

Continuous training and development also play a crucial role in building a strong team culture. When employees feel valued and supported in their professional growth, they are more likely to be engaged and committed to their roles. This sense of belonging and loyalty translates into better teamwork and collaboration, which are essential for maintaining high service standards.

We believe in recognizing and rewarding our team’s achievements. Regular feedback sessions, performance reviews, and opportunities for career advancement are integral parts of our training programs. By investing in our staff’s growth and development, we create a positive work environment where excellence is the norm.

Investing in our Manpower

The role of staff training in maintaining high service standards cannot be underestimated. We are committed to providing continuous learning and development opportunities for our team. This commitment not only ensures that we deliver exceptional service to our guests but also drives our success in the competitive hospitality industry while fostering a culture of excellence that sets us apart.