Segment 2: Role of risk management in portfolio construction

Portfolio construction requires risk management rigorous enough to inspire client confidence across various market environments. At First Avenue, our portfolios contain three cohorts of companies, namely, (i) high, and medium quality businesses that compound shareholder returns over long periods of time, (ii) good enough businesses with significant turnaround opportunities, and (iii) businesses that address global systematic risk. The largest cohort in the portfolio is the one intended to compound returns over decades. We have a high active share in the sectors where we see the highest quality. The second cohort is harder to navigate but has high lumpy stock returns and requires deep expertise and experience in pattern recognition. The active share we run in sectors where we see opportunity is lower than in the first cohort. The third cohort is where basic materials and precious metals sectors of the JSE reside. We tend to run the lowest sector active share here and express ourselves through over-weights in preferred holdings (e.g., AngloGold overweight, and a slight Goldfields underweight, but a zero weight in Harmony). The latter cohort has historically driven the JSE higher in USD terms. One simply cannot afford to be too wrong here on the up or down. It is this sector that is creating the current chokepoint of market concentration. First Avenue’s approach to an age-old problem here is highly differentiated.