Page 9 - DIY Investor Magazine - Issue 23

incorporate significant style bias into the portfolio. There is always a danger that income managers simply load up on the oil majors and healthcare and their
‘WE ALSO AIM TO BE DIVERSIFIED BY SECTOR, BY GEOGRAPHY AND BY SOURCE OF REVENUE’
portfolio becomes poorly diversified and vulnerable to specific risks.
We also aim to be diversified by sector, by geography and by source of revenue. For this reason, our top five holdings provide 20% of our income, rather than the top five holdings providing 35% if an investor buys the FTSE All Share.
Another way to build resilience into a portfolio is to focus on quality. We are looking for companies with good, defendable market positions, which give them pricing power.
Or we want to see innovation – again, this gives companies pricing power in an otherwise undifferentiated market.
Ideally companies should make a high return on the capital they invest and have low levels of debt, plus a skilled management team. All of these factors can make a meaningful difference when the economic environment changes.
More recently, we have been looking for companies that are not as dependent on the economic cycle.
We are keeping a balance between domestic and international companies: on the one hand domestic
companies are cheap, but on the other, there are real risks to the UK economy.
This has seen us move away from companies with exposure to, say, high street spending, and towards companies that can win market share and sustain their earnings even if there is a broader economic downturn.
These are companies such as fund manager Ashmore. Ashmore specialises in emerging market debt funds. Generally, we are wary of the fund management sector, because earnings tend to ebb and flow with financial markets. If markets drop, revenues fall. Or a key manager will leave and take the funds with them.
This makes it a little unpredictable.
9 DIY Investor Magazine | Oct 2019