Diversification is becoming an industry hot topic
Since the beginning of 2017, global economies have seen rapid growth off the back of significantly strong head winds which are being driven by consumer demand to find alpha.
While this is only being felt in South Africa now, the question that is being asked around the world is pertinent to the South African market. That question is: how do we diversify our client’s investments so that alpha is not illusive?
Take heart
The question about diversification was one of the pertinent topics that was discussed at the Navigate Seminar, which was hosted by Glacier by Sanlam. Fund managers from around the world participated in panel discussions where they spoke openly about the task of diversification.
Kevin Johnson, Vice President at Dodge & Cox, said that before we can look at diversification, we need to look at how difficult it has been to source alpha since 2015.
“The global investment industry had a tough time during 2015. It was a tumultuous year and there were a lot of concerns regarding global growth. This hit companies hard and forced them to return to the fundamentals of investing to try and find a possible solution to the problem,” said Johnson.
Fortunately, 2016 was a year of recovery for companies as global markets started to find their footing. Johnson pointed out that the following year (2017) was considered a great year as there was low volatility in the markets and investment companies from around the world started to perform well.
Its about companies
One of the topics we have heard a lot about in the investment industry is that there is a lot of interest in investing in emerging economies; currently three out of the world’s fastest growing economies come from emerging markets.
However, Johnson warns that it not about investing in countries, but about investing in companies which are growing rapidly. “Bottom up management really focuses on looking at the fundamentals which drive a company to perform well. These are companies that have strong profit streams and are continuously investing in themselves to improve their performance,” said Johnson.
Naspers is one such success story. Through smart investments, the company grew from humble beginnings to become one of the largest stocks on the Johannesburg Stock Exchange. The secret to Naspers’ recent success is the purchase of a majority shareholding in Tencent. This is a perfect example of investing in companies and not countries.
It is also about finding a company that has a specific vision to grow. Pigeon is a Japanese company that specialises in the manufacturing of baby bottles and pacifiers. If this company operated mainly within Japan, the company would not find much success as Japan has an aging population. However, Pigeon branched out into China and is one of the biggest suppliers to this market. China is a country where the middle class is growing and parents are having bigger families after more relaxations to the one child policy.
A future of possibilities
Like all industries around the world, technology also has an impact on the investment industry.
Of particular concern is artificial intelligence (AI) and machine learning. Alex Tedder, Head and CIO of Global and US Large Cap Equities at Schroders, said that in the early days, there were a lot of difficulties with AI and particular machine learning.
However, platforms have improved, and it is now possible for machines to make decisions on the same level as humans. This can be seen on platforms such as Netflix and Showmax where accurate suggestions of choices can be provided after the user makes one selection of a television series or movie that they want to watch.
“While the Netflix example is not related to the investment industry, we need to bear in mind that the though process behind the platforms driving Netflix is important and is used in a range of industries. Machines can now perform some calculations better than humans and can perform certain tasks better than humans. We need to come to terms with this,” said Tedder.
Tedder added that AI and machine learning may eventually replace some active fund managers but it won’t replace them completely. Machines are good at spotting trends and making decisions based on this. What they cannot do is read the context into why the price of a stock is fluctuating. And this is an important aspect of investing. All investments are driven by context; so is diversification.
Editor’s Thoughts:
Diversification will become a hot topic in the coming years as clients are becoming more educated in the fundamentals that drive the investment industry. Advisers and fund managers are increasingly being expected to be thought leaders and subject specialists when prices fluctuate. What role does expert advice play in this? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
