In the article and video below, our sister company, Orbis, looks at one of the first rules of investing – diversification. “Don’t put all your eggs in one basket” is a phrase familiar to many of us, and when it comes to investing and minimising risk, it should be a sensible approach. But what if you thought you were spreading your eggs across many baskets – by investing in the ‘well-diversified’ FTSE World Index for example – but in reality they were concentrated in just one basket? Portfolio diversification aims to mitigate risk for investors. One of Orbis Global’s primary risk mitigation strategies is to ensure that they pay a discounted price based on their assessment of the intrinsic value of a stock. This video looks at ‘traditional’ notions of diversification as a risk mitigation strategy and compares it to Orbis Global’s approach to risk mitigation, which is based on fundamentals and intrinsic value.




When it comes to investing rules of thumb, don’t put all your eggs in one basket is pretty uncontroversial. In fact, the more baskets the better when it comes to spreading risk. The problem with rules of thumb, however, is that they often oversimplify. Sure, it may feel safer having a lot of baskets, but if the market forces affect those baskets in the same way, then that feeling of safety is just an illusion.

This is precisely what’s been happening in world markets over the past few years. Investors have thought that they’re far more diversified than they actually are. For example, if you are an equity investor and you’re looking for a well-diversified global portfolio, it wouldn’t be surprising if you invested in the FTSE World Index. After all, it is a great reflection of world markets.

But, if you take the 3,100 companies which are in the FTSE World Index and rank them by two criteria: on the x-axis how expensive they are, and on the y-axis, how economically sensitive they are, you would get exactly what you would expect. A nice diffuse smattering of companies scattered across all the quadrants.

This is great diversification right? Unfortunately not. If you want to see the true exposures that you’re getting you need to adjust those dots for the size of that company in the index. And, when you do that, you get a very different picture, the capital shifts down to the bottom right-hand quadrant.

So, while you think you might be getting a well-diversified global portfolio, you’re getting outsized exposure to these growth defensive stocks. This is an anomaly: if you take a stroll through time, you’ll see that the exposures have historically been far more evenly spread. But we have seen this once before, and that was in 1999, just before the tech bubble burst.

So why is this happening today? Well as is the case with most market distortions, it starts off with a good idea that then gets overblown. In a world of low growth and high unpredictability, companies which offer the opposite—those found in the bottom right-hand quadrant—were understandably attractive.

Ultra-low interest rates and stubbornly low inflation have been huge tailwinds for these growth stocks. And yes, there are fantastic companies in this bottom right-hand quadrant that do warrant a premium, however in most cases the share prices of these companies have become untethered from fundamentals. If they are to warrant the prices that they’re trading at today, then the future needs to be a perfect reflection of the recent past, and we’re just not sure that will be the case.

We are not in the business of predicting the future, but you just need to look at the headlines over the past few months to realise that things might be very different for these companies in the years which lie ahead.

So what are we doing? As is so often the case, when the market is rushing in one direction, we are going in the other, and this is most apparent in the extremes. For example, in 1990 during the Japan bubble, Japan made up 42% of the world index, yet we didn’t own a single Japanese stock. It was a similar story in 2000 with the tech bubble and, more recently, we’ve been significantly underweight these growth defensives.

In fact, it is during these extremes when it is most important to invest differently. That is why we are sticking to our investment philosophy of simply investing in a handful of companies which we truly understand, and that we believe are trading at a deep discount to what they’re worth, regardless of their sector or geography.

The result of this is a portfolio which is significantly cheaper than the market, despite having just as strong fundamentals.

And while outcomes can be unpredictable in the short term, we believe that building these deliberately different portfolios is what will make the difference for our clients in the long run.


Financial advisers can contact their local Regional Manager to learn more about the Orbis Global Equity Fund.