Portfolio Construction - Part 12

There are very few active equity portfolios within portfolios available - i.e. individual funds tend to be characterised by the style of their manager and aren’t sufficiently adaptive to circumstances. There are a few and we’re able to buy and stick with because at the individual fund level they’re actively making the necessary changes.
A good example is Orbis Global Equity and the same manager’s absolute return funds, Optimal and Leveraged. The former has the remit to hunt the world’s stock markets for realizable value from equities and does so without either closet or rigid benchmarks, the absolute return funds have similar criteria but with the intention of sacrificing return in order to reduce volatility and risk of loss. This freedom from benchmarking sets them apart from 99% of global equity investments - as does their stock-picking ability. It’s interesting to read in one of their more recent commentaries, however, that picking the right stocks can become blurred by the impact upon their funds of the currently prevailing M&A activity.
This makes sense - the value of impartial, active, smart stock-pickers should be that they lead the market which eventually does catch up. M&A sometimes speeds this process, although in the Nikko Cordial case it can result in ‘too little, too soon’ if the buyers have enough weight to throw around.
However, let’s look at the real issue - how well have the Orbis funds performed within our client portfolios and for their other clients over the last 17 years:

				Annualised		Cumulative
	Currency	March-07	2007 YTD	Last 3 Yrs	Last  5 Yrs	From Inception	Date of Inception
Equity Funds
Orbis Global Equity Fund	US$	5.4	5.5	17.4	17.4	1082.5	1-Jan-90
FTSE World Index	US$	2.0	2.5	15.9	11.6	284.8
Average Global Equity Fund	US$		1.8	14.0	10.2	232.6
Absolute Return Funds
Orbis Optimal (US$) Fund	US$	4.0	4.7	5.5	8.3	584.2	1-Jan-90
Orbis Leveraged (US$) Fund	US$	7.0	6.6	4.0	10.2	1074.5	1-Jan-90
US$ Bank Deposits	US$	0.4	1.3	3.7	2.7	119.8
Average US$ Bond Fund	US$		1.2	2.3	4.4	171.2

Slam dunk - Global equity has outperformed both the index and the average fund over the last 1 month, 3 months, 3 years, 5 years and 17 years. Optimal and Leveraged have outperformed both bank deposits and bond funds over the same timescales. These portfolios are actively managed according to risk, opportunity and the changing economic landscape. In both relative and in absolute returns - how do all 3 of these funds compare to other opportunities at similar risk levels and above all do they satisfy our first criteria of outperforming cash, they’re sufficiently flexible in their approach to have achieved acceptable returns in all conditions and while they continue to do so I would envisage that they remain a part of our portfolios.
To be held throughout the cycle, a portfolio allocation needs either to be able to generate sufficient Alpha (i.e. to yield returns because of manager skill irrespective of the sector that it invests in) or to be able to genuinely capture Beta from a variety of non-correlated markets (Orbis is the proof of the contention that money can be made from equities even in falling markets) otherwise it will need to be bought and sold actively as conditions change.
Brandeaux, as we have discussed before, is a typical example of a fund that for a period within the cycle should be bought and then sold. The Orbis funds are much more unusual in their suitability to be held throughout the vast majority of the cycle. There are a few other examples - Turnstone’s long/short funds that manage to outperform the equity markets on the upside while also offering downside protection and Man’s diverse trend-following CTA funds, which aim to make acceptable returns in all conditions.
So, portfolio construction should be an active adaptive process - the putting together of a disparate range of assets connected by the matrices of their correlations and abilities to generate returns in the potential range of economic conditions ahead.
To be continued…

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]@mbmg-international.com.com

Snap Shots: by Harry Flashman

Do you need the latest super-digital SLR?

One of the most famous portrait photographers was Sir Cecil Beaton. Don’t worry if you don’t remember him, he died 27 years ago, but look up any book on portrait photographers and he gets a star billing. Cecil was a real photographer in the fact that he had an ‘eye’ for the final picture, but he was not at all skilled in the mumbo-jumbo of photographic technique.
Beaton’s first camera was a Kodak 3A folding camera. Over the course of his career, he employed both large format cameras and smaller Rolleiflex cameras; however, many of his best portraits were taken with a Box Brownie. A Box Brownie! Hardly the epitome of cutting edge cameras.
During the Second World War, Beaton was initially posted to the Ministry of Information and given the task of recording images from the home front. During this assignment he captured one of the most enduring images of British suffering during the war, that of three-year old Blitz victim Eileen Dunne recovering in hospital, clutching her beloved teddy bear. When the image was published, America had not yet officially joined the war - but splashed across the press in the USA, images such as Beaton’s helped push the American public to put pressure on their government to help Britain in WW II. Make no mistake, the power of a photograph is not produced by the equipment. It is the way the subject matter is presented. And that is under the photographer’s control. The photographer’s “eye”.
Famous glamour photographer Francis Giacobetti used a Contax 35 mm for his photography, including when he shot the Pirelli calendar, I believe. Large format calendar pictures taken with a small format camera. Once again, the “eye” far outweighs the equipment.
So do you need the very latest super mega-pixeled SLR with lenses covering everything between 12 mm to 1,200 mm? The simple answer is no. The first thing you need to have to take superb photographs is that “photographic eye”. I am not saying that good equipment is superfluous, but what I am saying is that the final arbiter is the human eye. How you got the photograph is incidental and even unimportant. The final picture is the only really important factor in photography.
So is the photographic eye something you are born with, or something you develop? Such semantics are beyond the confines of this article, but I believe that it is something which may come more naturally to some folk than others, but it is still a concept anyone can master.
It is worthwhile taking a few ideas on board. First, try looking at the whole picture you are about to take. Do not get so totally engrossed in the subject that you fail to see an intrusive background. “Antlers” growing out of someone’s head does not make a great photograph, unless the subject is called Rudolph.
Composition is important. The first rule of composition is to “Look for a Different viewpoint”. While the standard, “Put the Subject in the Middle of the Viewfinder” idea will at least ensure that you do get a picture of the subject, it will also ensure that your photographs will most likely be dull and boring!
In attempting to get that different viewpoint also try to take some shots not from the standard eye-level position. Squat down, lie down, stand in the back of a pick-up, climb a ladder - anything! Just don’t get stuck with standard eye-level views. If nothing else, take two shots, one in the “usual” horizontal format and the second one in a vertical (portrait) format. That’s at least a start!
The next way to add interest to your photographs is to take the subject out of the geometric center of the frame. Be brave and place the subject one third in from either edge of the viewfinder. Just by placing your subject off-center immediately drags your shot out of the “ordinary” basket. The technocrats call this the “Rule of Thirds”, but you don’t need to know the name for it - just try putting the subjects off-center.
Finally for this weekend, walk several meters closer! It will produce much better shots.

Modern Medicine: by Dr. Iain Corness, Consultant

How to stop feeling old

You’re only as old as the woman you feel, is a well known ditty around some of the bars. That means there must be a lot of 18 year olds drawing British old age pensions!
However, despite the flippant first paragraph, aging, growing older if you like, does happen to the majority of us. The exceptions to this golden oldie rule ride motorcycles in Thailand. (You work it out!)
If you’ve been having a bad day, console yourself by picking up a text book on Geriatric Medicine! Gloom, doom and disaster! However, the picture is not really as bad as all that, so I thought that this week I would go through the aging process, and then what we can do about it. The recipe for the elixir of youth is not enclosed, but instead, some ways you can stay feeling ‘young’!
Let’s begin with the depressing news that you have actually been going downhill since the age of 14 (mentally) and from the age of around 30 (physically). That other bar-room ditty that relates to what you used to do all night, now taking all night to do, can be too close to the mark for some of us. But don’t despair, help is at hand. Metaphorically, not literally!
The geriatric books suggest that the aging of our individual organs is influenced by diet, environment, personal habits and genetic factors. Read that again - did you notice that three of them (diet, environment, habits) are actually under our control, so the angle of the slippery slide can be changed. Good News number one.
The physiological changes associated with aging include an increase in body fat (especially around the middle in beer drinkers), a difficulty in reading and a clouding of the optic lens. Glucose metabolism goes a little awry as well, as we get older. In the lungs, the elasticity goes out of the lung tissue, meaning that the lungs don’t absorb the oxygen as well as they should.
It doesn’t end there. The arteries become less elastic too, so the heart has to pump harder to force the blood around, increasing blood pressure and enlarging the heart. The liver doesn’t cope as well with toxic chemicals as it used to, and the bowel gets a little lazy as well, leading to constipation. For men, the prostate slowly enlarges and makes it difficult for the bladder to empty properly, so you have to get up to pee a few times a night. Finally, the brain shrinks and you begin to forget things, “I’ll never forget what’s-her-name” being a real problem!
So what to do? The main thing is to make sure your organs get enough oxygen to work properly. Oxygen gets into the blood via the lungs. Clogged air sacs in the lungs is a big problem. Answer? Stop smoking - immediately, and get some exercise every day, so that you start to use the lungs, and their vital capacity, again.
Now we have some oxygen back in the blood we have to circulate the magic red fluid. Cholesterol build-up in the arteries produces blockages. Reverse it by lowering cholesterol in your diet. You do this by decreasing animal fats and increasing vegetables. That’s not too difficult either, is it? Half way to the elixir of youth already!
Now the sugar problems. Another one with an easy fix - cut out all the ‘extra’ sugar in your diet. You don’t have to use sugar in your coffee, and chocolates should be a very occasional indulgence only. (Are you listening, Hillary?)
The liver? The main toxic substance the poor old liver has to deal with is ethanol, otherwise known as booze, and it makes no difference to the liver what the label was on the bottle. Give the liver one day a week to recover. That’s called your AFD (alcohol free day).
So look at the three items again under your control - diet, environment, habits. The answer to aging is there. Begin with fags, fat, booze and fancy foods. It’s the right start.

Learn to Live to Learn: with Andrew Watson

A promise kept

How well we were matched. Eight years is a long time. I had no idea when I left her, heartbroken, how long it would be until I saw her again. I knew only two things; firstly that having promised to return, that I would, and second, that it was written. ‘Maktub’ as they say in Arabic, “It is written”.
I learned the hard way from quite early on in life that it was futile to rage against my destiny. Try as I might, there was always someone who knew better than me, someone who understood the ‘big picture’, who had given me more than everything I could ever have wished for, yet who was not in the least bit interested in giving me an easy life. I had to fight for what I believed in. The honesty, truth and justice, embodied in love was something that I felt I knew intimately, a love so pure and rich, like an orchard in full bloom, that when it burst into my life, like the cavalry out of the stockade, I knew that it was real and something to be cherished. It infiltrated every part of me and answered every question of my soul that I had ever asked. When I pictured her in my mind, or when I stroke the sun-bleached locket of her hair, which retained her sweet scent, I felt like I knew the secret to every conundrum proffered by the canopy of space. When I closed my eyes, I had her back and I was transported to a different place, a place without pain and suffering or longing.
Here’s the truth. For the interminable duration of eight years apart, three thousand days no less, there had been no formal, no orthodox contact between us. No letters, no phone calls, no frantic telegrams. Whenever I relate this aspect of our love, I invariably receive incredulous looks. “How can this be?” people ask, “How can any relationship survive without some from of regular reaffirmation of commitment?” Well the answer is simple. Firstly, there was ample reaffirmation, but perhaps not in immediately understandable ways (more of this in a moment). Secondly, our infinite love was not entirely of our own design. A greater hand was at work. Or so we believed. Perhaps, we sometimes conjectured, we had been the happy beneficiaries of a “good day at the office” for the almighty? Alternatively, twinned survivors in an accident of fortune. There was something “too good to be true” or maybe “too true to be good” about the whole business of our union that invited complete retreat from doubt and demanded faith in God. He had, after all, brought us safe thus far, why attempt to undo his arrangement of divine perfection by imperfect human interaction?
You see, we shared a secret. A secret that had brought us together in the first place and a secret that was, almost a decade later, destined to bring us back together. I speak of a shared belief; in love and of dreams. If it was the possibility of dreams coming true that had united us in love in the first place, then it was our shared belief in the power of dreams that kept our love alive. In dreams we met and talked and climbed the apple crates and kissed and loved each other. A secret world inhabited by us alone. It was a dream that told me that it was time to return. Often, in my waking hours, I had longed to make the journey, but from somewhere, a voice had always taught me to defer. “The time is not yet right” said the voice, “You will know when it is time”.
And so it came to pass. One January morning in 1990, I was being escorted “off the premises” of the UK, with “India” printed on my ticket. A corpulent confidant dropped me at Heathrow and I found myself at the ‘wrong’ terminal. Instead of “India”, in front of me was a sign to “El Al”. I had been travelling the world as a peripatetic artist for five years and my livelihood might have been on the line, but I never gave it a second thought. It was time to go back. It was time to make good the promise that had kept me alive for eight, long years.
When the doors of the 737 swung open, the familiar scent of balmy palm announced to my soul that it had arrived home. It was immediately as if I was once more drinking the elixir of life; I could hardly sleep for excitement. My hopes took me north, back to Kibbutz Yir’on, straddling the Lebanese border, but I couldn’t feel Sharona there. She had, I discovered, gone south to Rishon Letzion, the town of her birth, whence I sent word of my return. One evening a few days later, I was in the crowded communal dining hall and a lone telephone rang. I had never answered that telephone before but something within me told me to do so now. I knew it was Sharona and her voice was like honey on my heart, “I have come back,” I cried.
The next morning, I took an old Pullman train, the luxurious residue of the British Mandate, along the Mediterranean coast down to Tel Aviv. The sun scattered a million diamonds on the sea as wisps of sand danced across the dunes. I took a bus south to Rishon and my pulse quickened. This race was nearly run. I had kept the faith. We wound our way through Old Jaffa and I thought about where I had found the strength to keep right on until the end, to trust in something so fantastic? I blessed the stars and the moon, the sky and the sea and the earth, the elements which had conspired to persuade me of my destiny. As the bus reached its final destination on this hot, late August day, dusk was beginning to fall. It was dusty and the terminus was packed with commuters. I let the crowds pass and moved slowly towards the misty light of the exit. Then, I stopped, and watched the dust dissipate and the light illuminate the most wondrous sight imaginable. There she was, my love, standing, smiling, the same. The same glorious vision as I had first beheld eight years previously. We floated together and looked deeply into each others eyes and I felt a great peace descend into my soul.
Next week: Another year, another dollar