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By Bronte Capital (Reporter)
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A puzzle for the risk manager

Monday, January 9, 2017 21:23
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The last two posts were essentially about picking a value-stock portfolio and managing the risk. And they were lessons that I thought I could implement.

This is stuff I find harder. So I am looking for your input.

This is the portfolio of a fairly well known value investor in March 2008. I have taken the name off simply because it doesn’t help but there was roughly $4 billion invested this way.

To put it mildly this portfolio was very difficult over the next twelve months.


Sector allocation Positions
Banks – Europe 24% Fortis, ING, Lloyds, RBS
Banks – Japan 14% Millea, MUFJ, Mizuho, Nomura
Banks – USA 8% Bank of America, JP Morgan
Technology – PC & Software 18% Linear Technology, Maxim Integrated products, Oracle
Semiconductor equipment 14% Applied Materials, KLA Tenecor, Novellus Systems
Beer 20% Asahi, Budweiser, Group Mondelo, Heinekin, InBev
Media 15% Comcast, News Corp, Nippon Television
Other 14% eBay, Home Depot, Lifetime Fitness, William Hill
Net effective exposure 127%
Shorts -16%
Net exposure 111%
Cash -11%

The PE ratios mostly looked reasonable and all of these positions could be found in quantity in the portfolios of other good investors. Its just the combination turned out more difficult than average.

Your job however is to risk-assess the portfolio.

Even with the considerable benefit of hindsight how would you analyse this portfolio?

What would you say as risk manager that made the portfolio manager aware of what risks he was taking?

What would you say if you were a third party analyst trying to assess this manager?

What is the tell?

Remember the portfolio manager here has a really good record and the “aura” around them. They are smarter than you.

And yet with the restrospectascope up there is stuff that is truly bad.

They had four European banks making up a quarter of the value of the portfolio. Most European banks went through the crisis hurt but not permanently crippled. Permanently crippled came later with the Euro crisis.

The four European banks here (Lloyds, RBS, Fortis, ING) however received capital injections so large that they were effectively nationalised. If you had thrown darts at European banks it might have taken hundreds of rounds to pick four that bad… They could not have been picked this bad by chance – they had to have systematic errors here.
There is something really wonky about this portfolio – and it is not by chance – so there was something faulty about the way the portfolio was constructed.


PS. It is fair to say some of the portfolio (News Corp for example) was awful in the crisis and came back stronger than ever. And some that I would have thought ex-ante high risk (such as the semi-conductor capital equipment makers) turned out okay – having “ordinary” draw downs in the crisis and recovering them since.

PPS. I kept the document this came from because at the time I thought the portfolio was absurd and would end in tears. But some of my thoughts then were wrong too – especially re the semiconductor capital equipment stocks.


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