More diversification needed
How many finance company investments should an investor hold?
Wednesday, March 23rd 2005, 6:42AM
New Zealand Funds David Wilson says that one of the key things for success is to have significant diversification in a portfolio to protect against capital loss.
He told delegates at the FundSource conference that the minimum holding was 10 different investments.
“I believe it should be significantly higher (than that),” he said. He says with 10 holdings an investor is “capable of suffering one default, but your capital remains intact.”
Wilson suggested that investors and advisers start using more managed funds for fixed interest investing as they provide “sufficient diversification and should be able to understand risk.”
Another key point Wilson made is that default rates are episodic. That is while people, including research houses, talk of default rates as a standard percentage, history shows that corporate defaults go in peaks and troughs.
Currently the economic cycle is in a trough (low default rates) but these are likely to pick up.
Standard and Poors director financial services ratings Gavin Gunning suggested that when defaults start occurring in the finance company sector, they may be multiple events.
A possible outcome of this is that there may be some merger and acquisition activity which would help the issue of a lack of diversification amongst finance companies. For instance a company which plays in the property space could join up with a consumer finance company.
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