Home' Trinidad and Tobago Guardian : September 14th 2014 Contents Many readers may still
be digesting relevant
parts of the national
budget that was pre-
sented last Monday
while others may be
reviewing the 2013
financial literacy survey that was released last
Wednesday. This week, I will depart from my
usual focus on company-specific information
This article will touch on some practical
aspects of investment diversification. It ques-
tions the need for excessive or comprehensive
diversification and closes with some thoughts
on how retail investors can get better value
for their money.
The diversification concept
Most investment advisers will usually want
to create a balanced portfolio for a qualified
client. Typically, this includes holding varying
percentages of (local and international) stocks,
bonds, real estate assets (direct or indirect) and
even commodities, such as gold.
The prevailing view is that a diversified port-
folio provides a kind of protection against the
vagaries of market fluctuations, uneven eco-
nomic growth within industries and countries,
skewed government policies, unrest, wars and
a host of other variables.
The theory is that losses in one area can be
compensated for by gains in another area that
is doing better. In practice, most customers
get average to mediocre returns and the invest-
ment advisory industry gets to keep huge fees
Diversification attempts to "even out" the
advisers inability to predict the future and to
know which investment will be "hot" at any
given point in time. These observations are
also applicable for the retail investor.
Naturally, investments have to be "rebal-
anced" at periodic intervals; this process pro-
vides opportunities to generate trading and
related fees. Of course, these fees, which reduce
his gains, are paid by the investor.
Scenario # 1
What can we say to an investor who has,
say 75 per cent (or more) of his investments,
tied up mostly in conglomerates, such as ANSA
McAL Ltd, Massy Group Ltd and GraceKennedy
Ltd? Even Goddard Enterprise Ltd, which is
geographically well diversified, could be on this
list.A traditional adviser may be shocked at this
portfolio and he may quickly want to "get to
work" on creating a "balanced portfolio" for
On the other hand, the investor may argue
that he is doing "just fine with his small num-
ber of investments. He can make a case that
these companies, in varying degrees, are diver-
sified across both industries and economies.
And he would be right.
To different extents, each of these companies
is involved in retailing, manufacturing, distri-
bution and finance. Although they operate
mainly within the Caribbean, they are beginning
to "spread their wings" into both neighbouring
economies and in selected foreign markets.
As long as they continue to do reasonably
well, the investor may have no serious incentive
to sell his shares.
Scenario # 2
Another example might be an investor who
owns shares almost exclusively in Republic
Bank Ltd and, despite its recent problems, Sco-
The adviser might quickly point out that he
is "heavily exposed" to the finance sector. This
is true, but only to a limited extent. How so?
Banks operate in a heavily regulated envi-
ronment, which is likely to become even more
intensely regulated in the future. This provides
the investor with a strong measure of comfort.
But, what then, you ask, about diversifica-
Banks diversify their loan business across
both type of customer and industry. Aside
from a general and sustained economic down-
turn in one or more Caribbean countries, it
is very unlikely that any one industry will
experience sufficient decline to pull down an
Very quickly, you point to the experience
of First Caribbean International Bank, which
could be considered to be operating on "life
support" from its parent company, CIBC.
This bank s exposure to the fickle tourism
and property sectors in some of the weakest
and smallest territories in the Caribbean com-
prises a large part of FCIB s troubles. This is
an exception, rather than the rule. Eventually,
things will improve and FCIB will resume
making serious money.
Both Republic Bank and Scotiabank are
based in Trinidad, which probably has the
strongest economy in the Caribbean islands,
thanks to oil and increasingly, gas.
In the case of Republic, it has significant
operations in Guyana, Grenada and Barbados;
currently, it is expanding at a measured pace
into Africa, via Ghana.
In Scotiabank s case, majority ownership
by its Canadian parent probably helps keep
Scotia Bank on a disciplined path to relatively
good (though, not spectacular) growth.
The Canadian financial sector is extremely
well-regulated, whereas the American and
British jurisdictions have more than their
share of financial eruptions from time to
Scenario # 3
In our third scenario, we look at an investor
who has shares primarily in West Indian
Tobacco Company Ltd (Witco) and Unilever
Caribbean Ltd (UCL). Both these companies
pay a consistent and ever-increasing dividend.
In addition, their share prices mostly move
in a positive direction.
In many ways, investing in these companies
is almost like receiving an annual pay increase
In the case of Witco, we have a legal prod-
uct that is highly addictive to its users; at
best, it has a "lifestyle choice" value. In addi-
tion, the company is banned from advertising
its products. Basically, what they do is keep
the place running smoothly, attend to main-
tenance, count their profits and pay out
almost all of it to shareholders.
In the case of Unilever, they do provide
socially useful and acceptable products, pri-
marily under the foods and healthcare seg-
ments. With the support of the big arm of
a strong multinational parent, who probably
guides their major decisions, the local sub-
sidiary will not be allowed to stray far in
terms of performance and profitability.
When needed, they can call upon a benev-
olent parent to fund upgrades, help with mar-
keting strategies and similar challenges. In
turn, they are sometimes called upon to pay
dividends in excess of their current earnings.
This latter "obligation" improves returns to
Why bother with diversification when you
have an (almost) guaranteed income stream
and a steadily appreciating asset, which is
both marketable and liquid?
Scenario # 4
Finally, owners of a profitable small business
know their business inside out, their products,
strategies, suppliers and customers. Their
major need for diversification might be to
hold investments in companies that operate
outside of their industry speciality. However,
they are having so much fun doing their
thing, that this is not often a priority for
Do we still need a complex and intricate
diversification programme? Of course, three
to five streams of income are preferable to
having only one or two. But, could we have
too much diversification? What do you think?
Is the investment advisory industry "taking
us for a ride" (and generating too much fees)?
We have considered if "full-fledged" diver-
sification, as defined by the investment advi-
sory industry, is always a necessity. This
industry feeds on commissions and fees, both
of which are not easy to explain or justify.
For example, how does it justify an "invest-
ment advisory fee" of one per cent of the
assets under management? In the case of
most of the assets, there is very little man-
Many investors who trade on international
exchanges are familiar with fixed transaction
costs. For example, you may pay $50 for trad-
ing up to 1,000 shares.
In other words, the fee is not based on a
percentage of the transaction value. When
will local brokers start adopting this method
for their trades?
The traditional excuse is that the local mar-
ket is too small.
Perhaps, in your dreams, your insurance
agent or financial intermediary make the fol-
lowing disclosure: "I have sold you The ABC
Policy/ Financial Product because I believe
that it will help resolve the problem(s) as you
have described it (them) to me."
This explanation may follow: "On that
basis, I will get a "closing commission" of
$X. In the first year that you retain this prod-
uct, I will receive $X in commission. There-
after, in the second year, I will get $Y. This
figure declines over the next few years, as
shown in the attached schedule. If you have
a whole life policy, you will note that, for the
first 2 or 3 years, there is little or no cash
value. This is because the company first has
to build adequate reserves (and pay commis-
sions) before you can start enjoying that ben-
Do you think that any bank, insurance
company or mutual fund sales company (these
days, many companies, including "full service"
banks, wear multiple hats) will issue a state-
ment like that in writing?
We should remember that stock investing
attempts to preserve and, hopefully, grow
wealth over time. In addition, investments
can and often do generate current returns
Perhaps, the more practical and common-
sense approach of a financial planner is more
desirable and understandable to most
investors. These individuals are more likely
to sit on "the same side of the table" as their
customers. In other words, the relationship
is more likely to collaborative than adversar-
ial.Generally, you will pay for their time and
expertise. If they receive commissions on the
products that they recommend, they would
be more inclined to disclose this information.
(You will probably still have to ask, because
we have not yet developed a strong culture
of transparency, accountability and trust).
In addition to helping craft an investment
blueprint, they can work with you to develop
a more comprehensive and integrated financial
plan. The latter includes areas such as insur-
ance and risk management, estate planning,
employee benefits and retirement planning.
Investing isn t phenomenally difficult, how-
ever, investment professionals will convince
you that you need their help...and laugh all
the way to the bank, while keeping you in
SEPTEMBER 14 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
STOOCKS | SBG13
in their place
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