17 December 2009

A virtual interview with the WSJ and the FT - Part 5 (end)

FT: Regarding asset allocation, it seems that you disregard all studies that advocate a balanced portfolio and diversification: could you elaborate?

M&B: One should not make a confusion between balanced and diversification. A balanced portfolio has no signification per se; what matters is to build a portfolio with respect to each investor's objective and risk tolerance -and often they contradict each other- hence, beyond well understanding the objectives and risks, the need to educate clients.

To me, a balanced portfolio is a mix bag and a way to dilute responsibility: it is more marketing than anything else and make sure you are within the industry average. I do not consider I am paid to be balanced but to have opinions (strong ones more often than not!) that are the result of a longstanding experience and deep analysis. If I am not balanced, I however diversify investments, not only because of the themes my Partners and I at P&C Global Wealth Managers are absolutely convinced are secular trends but because it is common sense: no fund manager can be good on all instruments on all markets. Many empirical studies show that portfolio performance results from a very large part from asset allocation (some studies concluded 90% of the performance), stock picking representing the balance: I focus on asset allocation and timing (to some extent - one never can be exactly and always right on timing) and leave the stock picking to specialists, particularly for mid and small cap companies (Remember, we may be 100% cash is warranted - and it served my clients very well in July 2008!. Here a slide that we include in some of our presentation and perfectly illustrate this:

We put the team together, but we leave each specialist competing to be first in his category.

My investments are centered around 8 themes:
  • Energy and alternatives
  • Supply inelasticity
  • Aging population
  • Emerging middle-class in developing economies
  • Global outsourcing
  • Emerging China
  • Water shortages & ecology
  • Japan restructuring
You will take notice that beyond Japan (located nearby the world fastest growing zone economically and still an innovation powerhouse, despite it long term problem that is its aging and diminishing population - this can be reversed however- and record debt/GDP ratio), no Western country is included. However, Supply inelasticity and Energy are also plays on Canada and Australia for example.

WSJ: Many of your themes are redundant however

M&B: Yes, and why not? True the emerging middle-class implies more energy and commodities consumption but also excellent opportunities in retailing for example. And whilst there is no Western country/zone that is included in my themes, many companies based in these countries are investment vehicle (water treatment or energy for example); but it does not make any sense to invest in France, Europe or the US as a theme (I have already discussed this on this blog at length).

I wrote several time that the shift of power towards Asia is in motion and quick motion, despite all the imperfections in these countries that need to be addressed and changes that are required for a generational growth and success.

Going back to the first question I would link my answer to the current financial, political and economic crises (and soon social one): There is a huge difference between developing a business where you have a share ownership and being an employee judged on the annual (quarterly?) performance: in one case your interest is to develop a long term viable business, in the other your next bonus; this is human nature and can work in the short term. It is worth revisiting the agency theory; it would explain a lot about the evolution of capitalism during the last 20 years.

WSJ: This concludes our first round of interviews; thank you for your insight

: This was somewhat refreshing and quite different from the mainstream: thank you.

M&B: Thank you to both of you, to have allowed me to express some of my thoughts. One last word: we are living in Historical times and the forthcoming few years will shape the world for at least a century. If I have one wish, it is that the quality of Western policy makers dramatically improve for the sake of our children, grand-children and great grand-children since, as Chruchill said once, democracy is the worst system after all the other ones.