As we navigate through this uncertainty the modern portfolio concept, a theory adopted by the biggest global asset managers, emphasises one point: diversification. Diversification by country, industry, and asset class. For instance, a closer look into the enormity of the global bond markets and we have corporate debt issued by stable large cap companies with sound fundamentals and healthy balance sheets with a presence globally. Looking for a bond instrument that hedges against inflation, look no further than US government TIPS (treasury inflated protected securities) whose coupon rate adjusts accordingly. To further optimise a
diversified allocation spread your holdings over multiple countries where individual country economic cycle tends to move with a lag.
The vast array of opportunity abroad may compel an investor to act one dimensionally: word of caution however is advised. The Kenyan economy represents just 0.2% of global GDP[i]. In principle the 99.8% of the global markets must be studied thoroughly with a sound methodology backed by extensive research in line with one’s risk appetite. The tail must not wag the dog! Consider this hypothetical example where an Exchange Traded Fund (ETF) representing the NSE is sold, and the proceeds are directed towards the purchase of an S&P 500 ETF. Such an example merely shifts concentration risk from the Kenyan to US markets. True diversification is exposure to thousands of individual securities where at any given time if one security is underperforming its impact on the overall portfolio is minimal. Exposure to these thousands of securities are channelled through an active selection of several ETFs.
On a closing note, as the title of this article goes the right boat – dinghies don’t cross oceans – has to be chosen when navigating international waters. The seas can be an uncertain medium with rough waves but with a the right boat and a seasoned captain the destination will be reached successfully.
Arjun Chudasama
Account Executive Star Capital Management Limited.
