There are plenty of theories about how best to run a portfolio of risk assets. It’s just that they are not very easy to put into practice.
Conventional wisdom teaches that a diversified range of equity assets, in different asset classes and across different markets, should produce superior returns than a less diversified portfolio. But we now know this is not always true – especially not in markets experiencing high levels of fear. Scared investors act as a herd and sell off a range of diversified assets, regardless of underlying fundamentals.
This risk-flight phenomenon has prompted some to propose simple switching between S&P 500 index tracker funds (risk assets) and US Treasury Bills (less risky assets), using technical analysis to decide when, ie a ‘risk-on risk-off portfolio. But, personally I’m not sure that this would work for most investors.
Another attack on conventional portfolio theory come from investment houses such as Pimco, who suggest that portfolios need to address other risk factors, such as inflation. Again, a sensible idea – but difficult to apply in practice.
Then, there those who maintain it is all about backing long-term trends, such as ‘peak oil’ or Jeremy Grantham’s “age of scarcity”, which means investing in commodities over the next 10 or 20 years. However, I’m more than a little ambivalent as this argument is essentially a bet against human ingenuity and the ability of capital markets to allocate capital rationally.
Investing in high-growth companies before an initial public offering (IPO) of shares is hugely important in capturing profits from emerging and frontier markets. But it is almost impossible for private investors to do. This column has previously suggested using frontier market funds, so I take some meagre comfort from the fact that they have performed moderately well in the recent volatility. According to frontier fund specialists Advance Emerging Capital: “Frontier markets have been less affected, with the MSCI Frontier Index down just over 5 per cent since the end of August. Cheaper valuations going into this period of volatility and the reduced liquidity they offer have insulated them to some degree, clearly.” For me, frontier markets still make sense, especially those in Africa – as long as you’re invested in the right assets.
Even if you do want to access these long-term trends, you frequently find yourself limited to to illiquid asset classes. For example, if you believe green technology firms will capture the growth of the carbon-lite economy, you have to invest in venture capital. Emerging markets offer plenty of growth, too – but research shows that rising GDP doesn’t always translate into rising share prices and dividends. In fact, some of the most explosive growth comes from investing in companies before they’ve listed on local stock markets.
Thankfully, some entrepreneurs are now trying to develop platforms that will let adventurous types access these early-stage opportunities in frontier markets. In Africa, investing in private equity and venture capital is already being made easier by Homestrings (www.homestrings.com). This is a web-based investment platform, based in the US but operational in the UK as well, that lets experienced, wealthy investors access private investment opportunities across the continent. It is the brainchild of the Guinea-raised veteran Wall-Street investor Eric Vincent Guichard.
A World Bank veteran, Guichard already runs a New York based asset management firm called Gravitas that funnels institutional money into African businesses. But he quickly realised that many African émigrés living in the West wanted to follow in his footsteps.
“There is $40bn a year in remittances flowing from the West into Africa – and that figure is growing at 15 per cent per year” says the Homestrings chief executive. And émigrés are not the only investors pumping money into the ultimate frontier market. Many family offices – the investment arms of wealthy families – and some adventurous institutions are starting to move into a market where returns for savvy investors have been as high as 15 to 20 per cent for the last decade.
Homestrings web-based platform will initially concentrate on working with existing private equity fund managers, such as Actis, but it will soon branch out into syndicates that raise money for public private partnerships and investing directly in sovereign debt programmes.
Understandably, this is only for the uber-adventurous who are also “qualified investors” – able to show professional experience, under UK regulations. However, the minimum investment through the platform is a reasonable £5,000.
I still think you’d probably need a few hundred thousand pounds to access the full range of investments, and most investors would still rather focus on listed companies. If you’re sure you want to early exposure to the African growth story, though, the Homestrings concept looks a welcome and practical initiative.
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