Balancing Investment Complexity and Simplicity

SIMON BROWN: I am now chatting with Andrew Dittberner, who is CIO at Old Mutual Private Client Securities. Andrew, I appreciate the early hour. A note you posted last week, which I thought was great, really got me thinking about how we invest and how we allocate. I suppose that basically it’s around the classification. You point out that acronyms can be fun – and there are a lot of them. We have the “nifty fifties”, the Fangs, the Brics, the “fragile fives”, the emerging markets (EM). If you stick with EM for a moment, the trick with this classification is that it’s enjoyable, fun, entertaining – but it can be dangerous. Emerging markets, for example, are all fundamentally different from each other and we need to be aware of this.

ANDREW DITTBERNER: Hello Simon. Investors, I guess, like to keep it simple and sometimes we keep it too simple by categorizing it into various factors, as you say. When it comes to emerging markets, I think it’s risky to categorize them all as the same, or to categorize them as the same, because we know they’re all very, very different. They may seem cheaper than developed markets and their growth prospects are often different. But if you look at each independently, they are all very different. South Africa is very different from what China is: its freedom, geopolitically, from the point of view of liquidity, demography, regulation. I think that’s a little more nuanced than taking a broad approach and saying, let’s get exposure to emerging markets. In fact, you have to look at each country independently.

SIMON BROWN: I understand your point of view on this. You also mention it for commodities. In the commodities space, we can say that commodities have performed well. But actually, there are some commodities that are doing well, there are some that are lagging, there are some that are under pressure.

But there are exceptions to that rule in a sense, and you do it with, for example, semiconductors, you do it with biotechnology. In a way, maybe it’s because of the complexity of these industries and also to some extent, especially with biotechnology, how new it is – where maybe it’s worth saying go further rather than nesting.

ANDREW DITTBERNER: Yeah. Commodities are a good example. Investments, from my point of view, are incredibly difficult to value, they are very, very cyclical. The question we are often asked is: ‘What is your view on raw materials?’ I think that’s the wrong question to ask. In fact, you just have to watch each one independently.

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

But also raw materials. Take your PGMs, for example. There are many other different products. Everyone thinks of palladium and platinum, for example, but there really is iridium, ruthenium, and rhodium that sits underneath, and they all have different drivers. There are lithium batteries, some are used in medical equipment, some are useful for cancer drugs, solar panels, etc. So again, ranking and saying, “What’s your view on commodities?”, I think that’s the wrong question to ask. Rather, again, look at each independently. [They have] very different engines and suddenly this cyclical character tends to disappear.

SIMON BROWN: As investors it kind of forces us to cross that boundary between complexity and as I assume you point out in your article we often go to ‘too complex’ because we think that will bring success . This is not necessarily the case. We have to walk that kind of line between keeping it simple and not over-complicating it – and finding that middle ground.

ANDREW DITTBERNER: Exactly. Investors, and professional investors at that I guess, like to look very smart and have complicated formulas and use complicated systems to build portfolios or value stocks. There’s a photo that’s been around – how true I’m not too sure – but you see Warren Buffett sitting at his desk and in the background he doesn’t have a computer, he there’s no Bloomberg terminal, there’s no army of analysts, but there’s a file on his desk that says “too hard.” If he thinks too much about something, he puts it in there and from there it’s a little jump in the trash. He keeps things very, very simple.

As I said, investors tend to be wrong. But then you can also go to the other end of the spectrum and be too simple, and say it’s emerging markets or technology companies.

Technology is another great example – very, very different businesses. Watch today. I think Netflix is ​​down 70% this year; Apple is down 15%. They are very, very different companies. We are monoline, we have various sources of income. You can be too simple and say, well, it’s technology, or it’s value versus growth. This is, I suppose, keeping things a little too simple. But again, we don’t want to jump to the other side of the equation and try to sound too smart by using complicated systems.

SIMON BROWN: Yeah. I feel like that’s maybe more than just what the investment is – it’s finding that kind of thread between complexity and simplicity and not going too extreme in one way or the other.

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

Sharon D. Cole