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Finding the middle between complexity and simplicity when investing

‘As investors, I suppose, we like to keep things simple and sometimes we keep things too simple by pigeonholing them’: Andrew Dittberner – CIO, Old Mutual Private Client Securities.

SIMON BROWN: I’m chatting now with Andrew Dittberner, who is a CIO at Old Mutual Private Client Securities. Andrew, I appreciate the early morning time. A note you put out last week, which I thought was great, really got me thinking loads around how we invest and how we allocate. I suppose at the core it is around pigeonholing. You make the point that acronyms can be fun – and there’s loads of them. We’ve got ‘nifty fifties’, Fangs, Brics, ‘fragile fives’, emerging markets (EMs). If you stay with EMs for a moment, the trick with this pigeonholing is it’s nice, it’s fun, it’s entertaining – but it can be dangerous. EMs, for example, are all fundamentally different from each other and we need to be cognisant of that.

ANDREW DITTBERNER: Morning, Simon. Investors, I suppose, like to keep things simple and sometimes we keep things too simple by pigeonholing them to various factors, as you say. Pertaining to emerging markets, I think it’s risky to categorise all of them as the same, or bucket them as the same, because we know they’re all very, very different. They might look cheaper than developed markets, and their growth outlooks often look different. But if you look at each one independently, they’re all very different. South Africa is very different from what China: its liberty, geopolitically, from a liquidity perspective, demographics, regulation. I think it’s a bit more nuanced than just taking a blanket approach and saying, let’s get emerging market exposure. You actually have to look at each country independently.

SIMON BROWN: I take your point on that. You mention it for commodities as well. In the commodities space we can say commodities have done great. But actually there are certain commodities which are doing great, there are others that are lagging, there are some that are under pressure.

But there are exceptions to this rule in a sense, and you make that point with, for example, semiconductors, you make it with biotech. In a sense this is because of maybe the complexity of those industries and also to a degree, particularly with biotech, the newness of it – where it perhaps is worth a thought to say go wider rather than niche.

ANDREW DITTBERNER: Yeah. Commodities is a good example. Investments, coming from my perspective, are incredibly difficult to value, they are very, very cyclical. The question that we often get asked is: ‘What’s your view on commodities?’ I think that’s the wrong question to be asking. You’ve actually just got to look at each one independently.

When you understand the different drivers and the long-term dynamics of the different commodities, suddenly that cyclical nature of them tends to disappear. You use the example of semiconductors. You can almost think of semiconductors as a commodity themselves, if you think about it. When you look back probably 10 or 20 years, [they had] a very cyclical nature, depending on [whether] the new iPhone was coming out, whereas now the demand is a lot more steady. Now they’re cyclical, given that semiconductors go into almost every single thing that you touch these days.

But commodities as well. Take your PGMs, for instance. There are a lot of other different commodities. Everyone thinks of palladium and platinum, for instance, but really there’s iridium, ruthenium and rhodium that are underneath there, and they’ve all got different drivers. There are lithium batteries, some are used in medical equipment, some are useful for cancer drugs, solar panels, etc. So again, pigeonholing and saying, ‘What’s your view of commodities?’, I think is the wrong question to be asking. Rather, again, look at each one independently. [They have] very different drivers and suddenly that cyclical nature tends to disappear.

SIMON BROWN: As investors it kind of then leaves us having to tread that line between complexity and, as I suspect you make the point in your article, we often veer to ‘too complex’ because we believe that will bring success. That’s not necessarily the case. We’ve got to tread that sort of line between keeping things simple and not over-complicating – and find that middle road.

ANDREW DITTBERNER: Exactly. Investors, and professional investors at that, I suppose, like to look very clever and have complicated formulas and use complicated systems to build portfolios or value equities. There’s a picture that’s done the rounds – how true it is I’m not too sure – but you see Warren Buffett sitting at his desk and in the background he doesn’t have a computer, there’s no Bloomberg terminal, there’s no army of analysts, but there’s a folder on his desk that says ‘too hard’. If something is he thinks too hard, he puts it in there and from there it’s a short jump into the bin. He keeps things very, very simple.

As I say, investors tend to err on the wrong side of that. But then you can also go to the complete other end of the spectrum and be too simple, and say it’s emerging markets, or tech companies.

Tech is another great example – very, very different businesses. Just look today. Netflix I think is down 70% this year; Apple’s down 15%. They are very, very different businesses. One’s monoline, one’s got diverse revenue streams. You can be too simple and say, well, it’s tech, or it’s value versus growth. That’s, I suppose, keeping things a little bit too simple. But again, we don’t want to go onto the other side of the equation and try and look too clever by using complicated systems.

SIMON BROWN: Yeah. My sense is that is, more than anything, perhaps what investing is – it’s finding that sort of thread through the middle between complexity and simplicity and not going too extreme either way.

Andrew Dittberner, CIO at Old Mutual Private Client Securities, I appreciate the early morning.



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