The recent collapse in the Steinhoff International’s share price has provided the opportune time to reflect on the fundamental pillars of portfolio construction and the effects of concentrating your portfolio in a few positions.
Stocks which may appear diverse can have unexpected similar price movements if there is a significant common source of risk. Between the 5th and 7th of December 2017, Steinhoff International share price plummeted by 78%, leading to losses of up to 9% across certain portfolios of South African asset managers.
During that period, the share also impacted negatively on other companies through shareholding (STAR, KAP Industrial and PSG) and through a common shareholder (Shoprite, Brait, Tradehold and Invicta).
To date, Steinhoff International has lost more than 84% of its market value. Such a market event highlights the inherent risk faced by many investors and how the neglect of fundamental portfolio construction principles can have a profound impact on the savings and wealth of investors.
At Oasis, we think that portfolio managers should not only worry about the implications of high volatility (implying high stock price fluctuations from the average price), but should also think of risk as the likelihood of permanent loss of investor capital.
Such a view is important in investment management as it implies that it is not enough to only assess/consider the risk of a share based on the actual movement of the share price from its average price (as is done in measuring volatility), but it is important to also consider the fundamental value of a stock and see risk as the magnitude of loss to the investor from the fundamental value.
The following discussion does not question investment managers’ stock selection capabilities but more focuses more on wealth management and the fundamentals of portfolio management.