Diversification is a starting point for investors looking to mitigate the risks of their share portfolio. Diversifying for the sake of it is risky, so it's important to understand the risks in an industry or sector and take advantage of the companies best positioned to grow your exposure when diversifying.
There are a number of booming sectors on the ASX which boast long-term tailwinds, but have price tags which underestimate their long-term potential.
Cyclical / Construction / Building
Fletcher Building Limited (ASX: FBU) is currently primed to outperform the index in 2014 and beyond. It has diversified exposure to markets around the globe with a majority of earnings coming from Australia and New Zealand. Both markets are currently experiencing low interest rates, spurring on investment in construction. The company has strong operating margins and returns on equity. It pays a trailing 3.7% dividend yield.
Gold
In 2013 the gold price (and subsequently the miners themselves) suffered its worst fall in 30 years, which means now is likely the time to buy in. My favourite gold miner is Northern Star Resources Ltd (ASX: NST). It recently utilised its superior balance sheet to buy two more mines in Western Australia. It has an all-in sustaining cost of A$996 per ounce of gold and is on track to produce 117,000 ounces in FY15 from existing mines, excluding its recent acquisitions.
Resources
Resources stocks have proven time and again to be high-risk high-reward investments. In the iron ore space, Rio Tinto Limited (ASX: RIO) is king. But its shareholders haven't experienced a pleasant 10 years. Despite the turbulent past, things may be turning. Rio is increasing production schedule, implementing cost reductions and improving balance sheets to present a strong investment case. However, investors must be bullish on the price of iron ore (and therefore Chinese markets) before purchasing any shares. It will soon be the world's biggest producer of the steel-making ingredient, but also has profitable gold and copper mines spread throughout the world.
Services
In the services space, Slater & Gordon Limited (ASX: SGH) is proving to be a market darling yet it still trades on modest earnings multiples. It is rapidly expanding its presence in the massive UK market via acquisitions. Further earnings growth looks likely thanks to the company currently boasting modest balance sheets and a very profitable Australian business.
Telecommunications / Technology
In this sector, both Telstra Corporation Ltd (ASX: TLS) and M2 Group Ltd (ASX: MTU) have a significant growth runway ahead. A growing dependence on the internet, handheld devices and communications networks will enable these two companies to grow profits for a long time. At current prices both offer outstanding dividends and safety.
Foolish takeaway
Each of these companies are strong household names in their respective industries and, as a result, are extremely lucrative businesses. Diversifying your exposure across industries allows you to not only mitigate risk but benefit from industry specific tailwinds.
