Buffett Was Wrong!

FYI | Sep 25 2018

By Peter Switzer, Switzer Super Report

Buffett said diversification is for wimps. He was wrong!

The eye-opening experience from our Switzer Listed Investment Company conference was the variety of listed products/funds that are now available for anyone seeking diversity, exposure to alpha [stock specific, rather than market, risk] and the opportunity to get on board investments that could be the next big thing going forward.

 A variation on a theme

Diversification is a subject that brings about a diverse range of reactions. Financial advisers, who don't want their clients to suffer the aggressive ups and downs of the stock market cycle, go for diversification, but great investors (like Warren Buffett) have criticized diversification saying it is for "wimps".

And that's where I take issue with Wazza. He might be right that more testosterone-led investors should follow his lead and research a company to great depth, and then go long, but not all people are strong, confident investors.

Some investors are ‘wimps' who are happy with 7%-10%, or less, per annum over a long time and for these people diversification is quite an appropriate strategy.

So for those wimps out there, here are a few less-than-wimpy ideas for your consideration.

One that completely shocked me was an offering that local fund manager Pengana Capital, in conjunction with a Chicago-based company called Grosvenor Capital Management, is working on for the first global private equity listed investment trust on the ASX.

What's interesting about this kind of investment was spelt out by Aris Hatch, the managing director of Grosvenor, who pointed out that over many years, private equity has shown to have better returns than listed equities, and, importantly, it has a relatively low level of correlation. And that's what diversification-seeking investors want.

Pengana's team says private equity funds launched between 2004 and 2006, before the financial crisis, had outperformed global listed equities by about 1 percentage point per year until the end of December 2017.

The fund should go to market in 2019, and Ms Hatch was at pains to point out that the fund pursues high-quality companies with great diversity within the global portfolio, and due diligence on the respective companies was a high priority.

More global opportunities

Staying Stateside, and for those tired of 3% term deposits and wanting to reduce their exposure to stocks, the listed investment trust based on overseas bonds of Neuberger Berman deserves to have some homework done on their offering.

These guys are a $US300 billion outfit from the US but they've been providing their bond fund products to local institutions for decades. To date, the local take up in this offering has been solid, and this listed investment trust will see invest in some 350 high-yield corporate bonds.

The fund, which is structured as a listed investment trust, is targeting an income of 5.25% per annum, paid monthly. Neuberger Berman's Adam Grotzinger explained how the fund invests in some of the big name companies of the world from Netflix to Hertz, to Virgin, to the owner of Pizza Hut, KFC and Taco Bell, Yum Brands. And Fortescue's bonds are in the mix too.

He explained that a fund like this actually performs well in a rising interest rate environment, as it implies these companies are benefiting from an improving economy and, as they are relatively short-dated bonds, they roll off one bond on to another at a higher rate.

"Most of our portfolio is BB rated and above – that's the sweet spot as these companies get upgraded from non-investment to investment grade, where there is a good total return," said the fund's portfolio manager Vivek Bommi, who appeared on my TV show a few weeks ago.

Adam explained the investment process as focusing on large liquid companies first. Then they diversify across industries, countries and credit quality and they avoid companies with deteriorating fundamentals.

(Obviously this product is not as safe as term deposits but they look like they have a pretty good risk-reducing approach to investing.) The NB Global Corporate Income Trust is scheduled to go live on the ASX this week.

Solid as a rock

Another intriguing offering came from Tribecca Investment Partners, with their Tribeca Global Natural Resources LIC. This is a long/short fund and it invests in both soft and hard commodities.

"The natural resources sector is inherently volatile. Consequently, we believe there is an opportunity to deliver positive absolute returns over the long term using our active and global strategy, regardless of macro conditions," said Ben Cleary, portfolio manager of the company.

Cleary says that Central to the investment thesis is that the cyclical nature of the demand in natural resources means investors must be active.

"The high degree of volatility in the natural resources sector means some assets will be mispriced, which creates investment opportunities for investors who have the research capability and deep industry knowledge."

This is not for the wimps with the LIC's strategy set to be similar to Tribeca's existing Global Natural Resources Fund, which has delivered a cumulative net return of 233.75% since inception at an average compound annual return of 57.21% after fees, since it was established in October 2015!

Tribeca says that the LIC seeks to generate a compound annual return in excess of 15% after fees and expenses whilst preserving capital over the long term (five years-plus).

Tech talk

The final ‘outside the square' products that diversifiers might like having a look at, are a number of ETFs from ETF Securities. These ETFS help you get a slice of the robotics and artificial intelligence industries, the battery world and the already expanding world of tech.

The tech ETF with the ticker code TECH, or the ETFS Morningstar Global Technology ETF, relies on Morningstar to select the best tech companies in the world, all rolled up into one ETF. Names like Alphabet (Google), Microsoft, Apple, Adobe and even our own SEEK are all in the mix in this ETF.

For those who don't want to miss out on the future of robotics and artificial intelligence, which my tech-mates tell me will be "huge", ETF Securities have their ROBO exchange traded fund. The company has assembled some of the world's greatest experts on these subjects to collect a huge number of relatively new companies in this new sector. They know many companies will fail, but those that succeed will be fast-growers and the goal is to find the FANGS of tomorrow.

The company has another ETF that puts all the alternative battery technology firms into one product with the great ticker code of ACDC.

I could see many speculators giving themselves a small exposure to these potential big companies of the future.

Interestingly, the TECH fund is more a ‘now' stock and the recent yield was 5.8%.

As you can see, our LIC conference had a variety of alternative investment offerings that would have excited wimp investors, who like to spread around their risk. And that sounds like me!

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual's objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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