Fine-tune port­fo­lio diver­si­fi­ca­tion with the fam­ily tree of in­vest­ing

Weekend Witness - - Money - ALEC HOGG Money me­an­der­ing on SAFM week nights at 6 pm. DAVID GREEN

FOR once, share prices and eco­nomic data dropped off the busi­ness­lunch cir­cuit this week. Talk, in­stead, fo­cused on DSK — Do­minique Strauss-Kahn — the 62-yearold French­man whose spec­tac­u­lar fall is matched only by the sala­cious tale which caused it.

For those who’ve been in the bushveld, DSK spent most of the past week in New York’s Rik­ers Is­land prison. He stands ac­cused of forc­ing him­self on a ho­tel cham­ber­maid young enough to be his fifth daugh­ter. Bail was granted on Thurs­day, at the sec­ond at­tempt, with con­di­tions con­sis­tent with those im­posed on se­rial sex of­fend­ers.

Un­til last week, DSK was best known as man­ag­ing di­rec­tor of the In­ter­na­tional Mon­e­tary Fund, the body which mon­i­tors the world’s eco­nomic risks, and those of its 187 mem­ber coun­tries. Within a month he was ex­pected to an­nounce his can­di­da­ture for the French pres­i­den­tial elec­tion, where he was likely to de­feat the un­pop­u­lar Ni­co­las Sarkozy.

DSK’s ac­cuser is a 32-year-old sin­gle mother who says she thought the $3 000 a night suite at the New York Sof­i­tel had been va­cated. She says that she started clean­ing when the naked grand­fa­ther pounced on her from the bath­room. Adding to the tabloid drama are re­ports that later that af­ter­noon, United States po­lice hoisted DSK out of his first-class Air France seat only min­utes be­fore its take­off for Paris.

Con­spir­acy the­o­ries have been quick to sur­face. Lon­don’s Tele­graph news­pa­per re­ported that news of the scan­dal first ap­peared on a right-wing blog (DSK is a so­cial­ist), sug­gest­ing that there is more to this than a poor im­mi­grant from Guinea be­ing abused by a pow­er­ful rogue. Ac­cord­ing to a French poll, 60% of DSK’s coun­try peo­ple be­lieve that he has been set up by po­lit­i­cal op­po­nents. The man him­self says that the sex was con­sen­sual.

The trans­par­ent U.S. court process prom­ises to make this a me­dia event ri­valling the OJ Simp­son trial. But what­ever the ver­dict, DSK’s ca­reer is on the scrap heap. The reemer­gence of all-but-for­got­ten al­le­ga­tions of sex­ual abuse by two other women has seen to that.

We might never re­ally know whether DSK is the vic­tim of a clas­sic “honey trap”, or is a lech­er­ous rapist. But apart from launch­ing a 1 000 opin­ions, i i hi his t trou­bles bl d do pro­vide id a new fo­cus for those watch­ing global power shifts. For decades, the rich coun­tries have fol­lowed a sim­ple tra­di­tion on the twin Bret­ton Woods mul­ti­lat­er­als — a Euro­pean is man­ag­ing di­rec­tor of the IMF and an Amer­i­can heads the World Bank. This is so en­trenched that me­dia pun­dits make French fi­nance min­is­ter Christine La­garde the favourite to suc­ceed DSK.

The real suc­ces­sion dis­cus­sions, though, should pro­vide a re­minder that lead­ers of de­vel­op­ing coun­tries are tired of such tra­di­tions. They have long grum­bled about an oldboys’ club that for­gets that half the world’s eco­nomic ac­tiv­ity and 80% of its growth is now gen­er­ated out­side the rich north. That it comes from coun­tries home to nine in ev­ery 10 peo­ple on Earth.

Last Wed­nes­day, Fi­nance Min­is­ter Pravin Gord­han is­sued a state­ment re­mind­ing us of an agree­ment that “a trans­par­ent and com­pet­i­tive process” would be used in fu­ture on ap­point­ments at the IMF and World Bank. He added: “There are sev­eral can­di­dates from de­vel­op­ing coun­tries who are cred­i­ble and are em­i­nently suit­able to run the IMF.”

That Gord­han’s for­mer boss, T Trevor Manuel, M li is one of f th those can­didi dates hasn’t es­caped any­one. In­clud­ing on­line book­mak­ers who put his chance of suc­ceed­ing DSK at six to one. His only se­ri­ous emerg­ing­mar­ket com­peti­tor, ac­cord­ing to the book­ies, is Turk­ish econ­o­mist and for­mer United Na­tions De­vel­op­ment Pro­gramme head Ke­mal Dervis, at odds of three and a half to one.

Most of the cash, though, has been put on the tra­di­tion con­tin­u­ing.

La­garde is even-money favourite to be­come DSK’s suc­ces­sor at the IMF with Ital­ian cen­tral bank gov­er­nor Mario Draghi, who is next favoured at two to one. The other Euro­pean on the book­ies’ short­list is the Swiss Josef Ack­er­mann, cur­rently CEO of Deutsche Bank. His odds are four to one. For the ad­ven­tur­ous, you can get 250 to one on Al­lan Greenspan mak­ing a spec­tac­u­lar re­turn. But given the way global power is mov­ing, I wouldn’t mind a lit­tle of that six to one on Manuel. • Alec Hogg is the founder and edi­tor-in-chief of Money­web. He presents Mar­ket Up­date with Money­web THE size of South Africa’s to­tal listed-com­pany uni­verse means that lo­cal stock-mar­ket in­dices are dom­i­nated by a hand­ful of large com­pa­nies. As a re­sult, many lo­cal as­set man­agers with broad equity man­dates may be forced to hold cer­tain shares sim­ply be­cause of their in­dex weight­ings, of­ten with lit­tle dif­fer­ence in the share­hold­ings of two funds in the same cat­e­gory.

We typ­i­cally see quite a large over­lap among the top share­hold­ings of as­set man­agers in the var­i­ous equity sub-cat­e­gories. Funds with sim­i­lar bench­marks can eas­ily over­lap by more than 50%.

It is this over­lap that can ex­pose pri­vate in­vestors with too many ac- tively man­aged unit-trust funds to the threat of closet in­dex­a­tion.

Closet in­dex­a­tion oc­curs when an in­vestor buys such a wide range of in­vest­ment funds that he or she ends up with the mar­ket re­turn. The more funds you put into your col­lec­tion, the more your net per­for­mance re­sem­bles that of the over­all in­dex. And that’s not the out­come you ex­pect for the ex­tra fees you pay your ac­tive fund-man­age­ment team.

While the in­vest­ment re­turn from an ac­tively man­aged fund is a func­tion of the skill of the man­ager, as well as the man­ager’s abil­ity to trans­late his or her mar­ket in­sights into the port­fo­lio con­struc­tion, it is the breadth of the op­por­tu­nity set that is es­sen­tial. As­set man­agers will be most ef­fec­tive with the fewest pos­si­ble con­straints.

In­stead of fo­cus­ing only on as­set al­lo­ca­tion or money-mar­ket funds, in­vestors need to con­sider op­por­tu­ni­ties from the dif­fer­ent branches of the fam­ily tree of in­vest­ing — rep­re­sented in the unit-trust space by cat­e­gories such as off­shore, eq­ui­ties, prop­erty, fixed in­come and as­set al­lo­ca­tion.

The “fam­ily tree of in­vest­ing” con­cept refers to a math­e­mat­i­cal tech­nique where funds with sim­i­lar per­for­mance pro­files are grouped. This usu­ally pro­duces clus­ters of funds with sim­i­lar un­der­ly­ing as­set ex­po­sures and per­for­mance driv­ers.

The fam­ily tree of­fers deeper an­a­lyt­i­cal in­sight into re­turns across as­set classes than the fa­mil­iar Asisa (As­so­ci­a­tion for Sav­ings and In­vest­ment SA) fund cat­e­gories.

By analysing the over­lap be­tween funds and port­fo­lios in terms of per- for­mance and ac­tual share­hold­ings, I be­lieve the best way to at­tack closet in­dex­a­tion is to im­ple­ment an ap­pro­pri­ate diver­si­fi­ca­tion strat­egy. But diver­si­fi­ca­tion can­not be achieved by buy­ing an end­less suc­ces­sion of as­set-al­lo­ca­tion funds. Choos­ing mul­ti­ple funds of­fer­ing sim­i­lar strate­gies is not proper diver­si­fi­ca­tion.

A care­fully struc­tured se­lec­tion of dis­sim­i­lar funds di­ver­si­fies a port­fo­lio and spreads the in­vestor’s risk. A idea is to use a multi man­ager fund. Mul­ti­man­ager funds of­fer a de­gree of diver­si­fi­ca­tion that is not easy to achieve in a sin­gle-man­ager fund. • PPS has over 200 000 mem­bers who have ac­cess to a suite of fi­nan­cial and health-care prod­ucts to meet the needs of grad­u­ate pro­fes­sion­als.

PHOTO: SUP­PLIED

Alec Hogg is

the founder and edi­tor-in

chief of Money­web.

PHOTO: SUP­PLIED

David Green, chief in­vest­ment of­fi­cer at PPS In­vest­ments.

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