MENU

One Key To Diversification Investors Might Have Overlooked

Risks

In a recent article by Singapore Exchange’s My Gateway investor-education service, they mentioned that the Straits Times Index (SGX: ^STI) is “well diversified with companies operating a wide range of businesses to an extensive range of customers across the region.”

That’s true to an extent. The index’s made up of 30 of the largest companies in Singapore, with some of its bigger constituents having bona fide multinational operations.

But, though there’s important geographical diversification, investors must also be aware that investing in 30 different companies by name can be a very different beast compared to investing in 30 unrelated companies.

Let’s take four of the STI’s components, Jardine Matheson Holdings (SGX: J36), Jardine Strategic Holdings, Jardine Cycle & Carriage and Hongkong Land Holdings, as an example.

An investor who had invested in these four companies might think he’s diversified, but he’s not: all four companies have inextricable links with each other.

JMH owns more than 80% of JSH, which in turn owns half of Hongkong Land and almost three-quarters of Jardine C&C.

And to top it off, JSH also owns slightly more than half of JMH. This creates a complex web of ownership-links between these few companies and unites them in the realm of risk-exposures. An untoward development in properties that Hongkong Land Holdings owns, for instance, might turn out to be a kick in the gut for JMH and JSH as well.

Over the past 12 months, Jardine C&C’s shares have declined by more than 20%, likely due to its poor corporate results thus far. The company contributes a fair share to JMH and JSH’s business performance and that probably got reflected in their share prices as they too have slid in tandem, falling by around 10% and 5% respectively in the same period.

That’s not all. Within the index, CapitaLand’s (SGX: C31) the parent company of CapitaMalls Asia and CapitaMall Trust; SembCorp Industries (SGX: U96) is the majority owner of Sembcorp Marine; and then there’s SIA Engineering, which is a subsidiary of Singapore Airlines (SGX: C6L).

The 11 companies mentioned are all different names. But in reality, due to the links they have with each other, an investor’s exposure to risks becomes a lot more concentrated.

This is important, as investors can sometimes be happy collecting different companies in the spirit of diversification without looking beneath the hood for correlated-risks.

The STI is indeed well-diversified in names. But, there’s still room for improvement in terms of risk-diversification.

Click here now  for your  FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by  David Kuo ,   Take Stock Singapore  tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool’s purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.