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The Problem With Active Management & a Lack of Diversification - Lessons From the Brisbane Lions

An interesting article was published in today's sport section of the Courier Mail.  It outlined the results from the Brisbane Lions (AFL club) AGM.  (I must be totally up front from the outset that I am an avid Carlton Blues fan and therefore could be seen to have a bias against the Lions.  However, as long as they are not playing Carlton I am a Brisbane supporter.)

The interesting part of the article for us financial boffins was the devastation in value of the club's equity portfolio.  It had fallen from a value of $5,026,093 at the 31st of October 2007 to a current value of approximately $2,006,911.  This equates to a fall of 60%.  The article reported that the portfolio was made up of Australian shares.

To put this in perspective, the ASX200 accumulation index had declined 40% decline over that period.  The ASX200 Listed Property sector fell 55%.  The MSCI World Index (ex Australia), a measure of the rest of the international share markets apart from Australia, saw a decline of 23.2% over the same period in Australian dollar terms.

This data shows up two key concerns with the Brisbane Lions approach:

• 
  Active Management
• 
  Lack of diversification

The active management approach that has been followed by the Brisbane Lions has come up well short compared to the less glitzy but much more dependable index style approach.  No one likes to see negative returns in their portfolio but if you are going to have negative returns I would much prefer a 40% decline compared to a 60% decline.

The past year has also shown up the concern of holding an undiversified portfolio of investments.  The Australian share market over the past 5 years to the end of 2007 had provided significantly better returns compared to international markets.  Thanks predominatly to the fall in the Aussie dollar exchange rate some of those gains have been reversed and it has been much better to be invested in international investments over the past 12 months.  Holding a diversified portfolio including Australian shares, international shares and listed property in our opinion serves clients much better in the long term.

In the long run we would expect that Australian shares, international shares and listed property to provide very similar returns for investors.   Holding this kind of a diversified portfolio therefore smooths out portfolio returns over time while still providing a similar or even better return than holding an individual asset class.  This smoothing effect is much more palatable for investors.  If you hold an index style approach you add even further diversification in your portfolio.

I love watching the Brisbane Lions play but I for one won't be following their investment approach!

Regards,
Scott Keefer
www.acleardirection.com.au

About the Author

Scott Keefer is the General Manager of A Clear Direction Financial Planning and has been a partner in the business since January 2007. He has completed a number of degrees related to financial management including a Masters of Financial Planning and Bachelor of Commerce. He also holds a Graduate Diploma of Education. Scott is currently a candidate in the Chartered Financial Analyst (CFA) program.

He is an Authorised Representative of FYG Planners Pty Ltd, Australian Financial Services License 224 543.

Prior to joining the business, Scott was involved in secondary education where he held middle management positions in schools in Brisbane and Jakarta, Indonesia. Part of these experiences involved teaching Indonesian students about Business Management and Economics principles as relate to the Australian context.

Scott is a co-author of the book 'It's Time You Knew the Truth: Building Investment Portfolios That Work' and ‘A Clear Direction – Your Guide to Being a Successful CEO of Your Life’. He has a passion to work with people at all stages of the financial planning process helping them to build successful financial solutions through well structured investment portfolios.

Ok I just bought a pair of those blue adidas predator absolute lion boots. How good are they?

I got the FG ones. These are the ones David Beckham wore during the World Cup.

i hear they r a great boot from my friends. i however, have nike 90's...and they r a kick@$$ boot 2!!!

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