Does the transfer of an investor's Legal & General fund to Fidelity reduce diversification?

Question

I live in the UK, and over the years have put savings into funds with several different institutions with a view to diversification to reduce risk. Two of these institutions are Legal & General and Fidelity. During 2021 I received notice that funds managed by Legal & General would be transferred to Fidelity, and this change has now been effected (eg to view the value of my holding of a Legal & General fund I must log in to Fidelity's website).

I think I broadly understand the arrangement. In outline:

• Legal & General still manage their funds (see here), meaning that they make the decisions on which companies etc a fund will invest in and what proportion of the fund in each.

• Fidelity handle the interface with investors including purchases and sales of the fund and provision of periodic statements.

Question: For an investor who holds a fund managed by Legal & General and a fund managed by Fidelity, does this arrangement between these two institutions imply a reduction in diversification and consequent increase in risk?

Answer 1

TL;DR: As described, this change would have no effect on diversification (as I understand the term), and therefore no change in risk (from not being appropriately diversified).

However, your use of "put savings into funds with several different institutions with a view to diversification to reduce risk" suggests to me that you may be using diversification and risk in slightly different ways than what I believe is their standard use in relation to investments.

In my understanding, diversification is predominantly about what your money is invested in, not where (i.e. with which institution) it is invested. At a high level, this will be balancing savings accounts, bonds, shares, property etc. Focusing on shares/funds, it encompasses having a mix between sectors (tech, travel, manufacturing etc.) and a mix of markets (UK, European, US, emerging markets etc.).

The risk of not being appropriately diversified is that if you are over-exposed to one sector/market, a disproportionate "hit" to that sector/market will have more severe consequences than with a more balanced portfolio.

Simply investing in "funds with several different institutions" does not – in itself – alter your level of diversification. For example, a general purpose "balanced fund" at L&G could easily contain broadly the same mix of companies as a similar "balanced fund" at Fidelity. To increase diversity you would need to be in funds with different spreads of investments (e.g. "tech focused", "UK index fund", "World index fund"), but it doesn't really matter whether that's two different funds with L&G, or one fund with L&G and another with Fidelity.

Using multiple institutions can reduce your risk should an institution itself fail. However, (a) I personally wouldn't call that diversification, and (b) it mainly applies to savings if they exceed the FSCS limit of £85,000.