INVESTING IS OUR STRONG SUIT

A daily column on investing by Orbis Investment Management Limited

You may meet a senior representative from Orbis Investment Management Limited at the hotel. To make an appointment please contact the hospitality desk or call the Churchill Suite, room phone: 7554.

Managing Risk

The most effective way of managing risk is to diversify the portfolio across a wide range of different securities. Just as it is unwise to keep all your eggs in one basket, it is unwise to invest all your net worth in your favorite stock.

Diversification only works well if the assets you use to build the portfolio are sufficiently different from one another. To make sure this is the case, investors allocate a portion of their investment portfolios to different asset classes such as cash, bonds, equities, commodities, real estate and alternative investments (for more detail see the article published on Monday, January 10). Because these asset classes have different investment characteristics, the portfolio as a whole is more likely to appreciate smoothly and avoid large declines when compared to a portfolio invested in a single asset class or indeed a single stock.

Once the portfolio is diversified across asset classes, investors can turn their attention to the risk within each asset class. Diversification is again the primary risk management tool - the portfolio manager ensures that within any single asset class the portfolio is not over exposed to a single economic sector or investment theme. This limits the potential losses that could arise from an unexpected movement in an individual financial sector.

In addition, the portfolio manager ensures that the portfolio is not over exposed to one investment to avoid a large loss in the event of an unexpected company specific event such as a bankruptcy. The portfolio manager also ensures that the individual investments are of sufficient quality that a bankruptcy or default event is unlikely.

Ensuring the Security of Our Clients' Assets

As described earlier, Orbis uses a value based investment strategy. This means that we select stocks that are trading close to their perceived intrinsic value. These stocks tend to have a large potential upside and only a limited potential downside since stocks are unlikely to sell at prices that are well below intrinsic value. Thus the first part of our risk management occurs at the individual stock level by ensuring that the share prices of the companies we invest in are unlikely to decline substantially.

The second level of risk management ensures that we build a well-diversified portfolio across different economic and industrial sectors. This ensures that the portfolio generates more consistent returns and further reduces the chance of a large decline in value. The final consideration of risk management addresses the risk that a portfolio might under perform its benchmark. This is controlled by ensuring: