DON’T put all your eggs in one basket. This is the most basic definition for diversification of your assets. The purpose of using many “baskets” in a portfolio is to reduce risk that all your “eggs” will break if the one basket that’s holding them all falls apart. I think it might be better to consider this saying instead, “Don’t only eat eggs for breakfast.” By mixing up your breakfast choices to include fruits, cereals and, of course, bangus and fried rice you can reduce the risk of high cholesterol and enhance your chances of living a healthy and balanced life.
Asset allocation is becoming increasingly more complex as a wide variety of choices are now available for investors in the Philippines. Gone are the days when your choices were limited to the traditional asset classes of equities, fixed income, and the money market. Today, alternative asset classes such as hedge funds, private equity, commodities and real estate investment trust are asset classes Filipino investors have access to.
Let’s not forget art, fine wine, jewelry, stamps and coins. These emotional assets are also considered an asset class. It makes sense to invest some of your hard earned cash in that Amorsolo or Ben Cab for your dining room. I guarantee that seeing those beautiful paintings while you enjoy you bangus and fried rice for breakfast will bring a smile to your face and is a great way to start the day.
One of the most important reasons why you need to diversify your assets is that no one asset class out performs all other asset class at all times. It is also important to understand the correlation of these assets with one another. Selecting the right combination of assets and managing them actively makes it possible to reduce the volatility of the portfolio and enhance the risk adjusted return.
The challenge is to find the right mix of these assets that fits your risk tolerance, goals and investment time frame and to manage the asset mix actively over time. This is called dynamic asset allocation combined with active portfolio and risk management. When determining the right mix for you, fund managers need to find out your honest to goodness investment goals and the risk you are willing to take to reach the final objective. I see too many investors who want to hit home runs but are not willing to step up to the plate and face the fast ball. They are afraid of getting hit by the pitcher. You need to be honest with your fund manager so we can help you determine the type of pitch coming your way and also give you the signal to swing for the fences.
In these times of major uncertainty in the world, investors need to adopt robust risk analysis. Pacific Investment Management Co. Inc., the fund manager of the world’s largest mutual fund, describes this period as the “new normal.” The basic theory behind the new normal is that global growth rates will be slower than they have been in the past three decades. The good news for us is that it is also theorized that growth in emerging markets, of which the Philippines is one, will be faster than it has been in the last three decades. The new normal means that large investors will be searching for value outside of their comfort zones and this may good news for the Philippines. But like trying anything new, you must try to understand the risk involved. A foreigner who has heard of balut may think that eating a duck egg is no problem until they see what must be consumed and suddenly suffer from mild gag reflex. “Don’t knock it until you’ve tried,” is my motto.
Gone are the days of static asset allocation tied to a traditional benchmark and traditional asset classes. In the fast paced world of today, investors can switch from one asset class to another with a click of a mouse. For your portfolio to thrive in this environment you need an approach that is not constrained by traditional benchmarks. You need dynamic asset allocation combined with active risk and portfolio suited to your goals. This will require you to embrace some new techniques. As Nelson Mandela wrote in his autobiography: “The brave man is not he who does not feel afraid, but he who conquers that fear.”
(The author is the investment director for equity portfolio management for ATR KimEng Asset Management and chairman of its investment committee. For comments, you may e-mail him at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .)
