Developing economies?

By September 22, 2017Financial Planning

When a fund manager invests in a portfolio, it is not simply to make the highest possible return. If that was the case, you would simply invest in the one company that you believe has the highest growth potential. The obvious downside is the decimation of your wealth if that decision is incorrect.

So the other side of the process in portfolio construction is the manager’s analysis of risk. At a recent presentation by a very highly regarded and reputable fund manager, they displayed their top five and bottom five portfolio stocks over the past year. The top stocks had returned more than 30% over that period, whereas the bottom stocks had lost more than 20%. The overall portfolio had performed very satisfactorily, but the point is that it was the same team and same research process that led to investment in all 10 stocks.

One attendee asked if there was any intention to sell the poor performers. The portfolio manager replied that in some cases that may happen, but in most it would be likely that they would increase their exposure to the investment. In fact, reasons for sale are likely to be for many other reasons apart from short term share price variations. This particular manager has recently sold out of one of the largest electrical goods manufacturers in the world, not because of a lack of profit, but because of concerns over governance of that company.

Another area of risk relates to regions or countries of investment. Traditionally, portfolio managers have allocated only minor amounts to the so-called developing countries, preferring to invest in Europe and Northern America, based on a perception that they are more stable economies and markets. It is interesting that many of these managers are now looking to increase those allocations, as the developing markets are rapidly turning into developed markets. The opportunities within those markets also look compelling.

Some of the statistics revealed in a study by McKinsey’s that reinforce this change in attitude are:

  • By 2025, annual consumption in emerging markets will reach $30 trillion, representing almost half of the global total projection.
  • In the same year, there will be 4.2 billion emerging market consumers, out of a global population of 7.9 billion.
  • China has already overtaken the US as the world’s largest market for car sales.
  • Perhaps most importantly, more than half of all global internet users are in emerging markets.

Naturally, while the statistics represent massive opportunities, there will still remain the uncertainties that are part and parcel of countries and economies that are catching up to the rest of the world at such a speed. This is all part of the risk analysis that managers must conduct when assessing appropriate investments for a portfolio.

At FB Wealth Management, we place a strong emphasis on quality research, have respect for those managers which display consistency in approach and have the courage in their convictions. They know there will be bumps along the way, particularly as more wealth and growth transfers to non-Western economies, but the rewards will be well worthwhile for the patient investor.