Should we diversify?
January 11th, 2011
We have been receiving a number of enquiries from larger funds wanting to know if we could handle specialist portfolios for them. One has asked if there is a way of running a portfolio of alternative assets for them, as a complement to their core portfolio in bonds and shares. Others have asked if we can run specialist emerging market portfolios, giving them higher overall exposure to these faster growing areas of the world. The answer is, of course, that we can.
Investors and Trustees are naturally thinking about how they can improve returns and tailor their portfolio to the new conditions post Credit Crunch. All can now see the speed of emerging economy development, and fear that the West is in for a slow period as it seeks to sort out the residual banking problems, the over indebtedness of the private sector and the growing issue of state borrowing. Many portfolios of shares still have most of the money concentrated in western markets. Maybe the investment managers do not have specialists who research Chinese or Indian shares in the way they can follow US or UK ones. Maybe the Trustees feel more comfortable buying and holding shares in advanced western markets where reporting is in English.
Many smaller and medium sized funds have not found it easy to enter the world of alternatives. They may have ventured into a few hedge funds, but often found the results disappointing in recent years. They are asking themselves if there is a better and cheaper way of diversifying risks a bit more.
It is certainly the case that markets like the Chinese and Indian ones are different from Wall Street and London. I would not myself feel able to choose individual Chinese shares from London, unable as I am to read or speak the Chinese language. The normal things a share analyst does in the West, reading the Report and Accounts, talking to management and staying in touch with the policies and results of the companies concerned would be that much more difficult. However, it is possible to find enough English language material about the economies, general trends of profits and dividends, and progress of the market overall. There is plenty of information about money supply, economic growth and government policy.
That’s why we think it makes sense to concentrate on the big issue, should you be invested in these emerging markets at all? If the answer is “Yes”, as we think it still is, why not buy the index through low cost tracker funds? That way you avoid the extra risk and complexity of needing local research on individual companies. We can build a portfolio, seeking to have a suitable mixture of the major emerging markets for you which reflects our view of relative values and growth prospects.
It is also possible to buy alternative investments, or good proxies for them which follow the main alternative asset indices. If you do this through a suitable portfolio of Exchange Traded Funds you can build investments which are more liquid than the underlying asset classes you want to follow, and you can keep the costs of management down. On Friday I will talk more about the range of alternatives on offer, and how you can find ways of buying into them which avoid long lock-ups and very high costs.
