In what has been a relatively strong week on Australian markets, the sudden demise of ABC Learning Centres (ASX Code: ABS) has provided another wake-up call for two groups of investors -
- those taking an active approach to investments and
- those not being rewarded for taking on extra risk.
The philosophy of the active approach, in a nutshell, is that analysts can consistently find above market returns through extensive research into, and knowledge of, the markets in which they are investing. For some, it is about investing in riskier companies with the expectation that the returns will be higher compared to those received for a less risky company.
ABC has provided a clear example of where this approach just has not worked. We found the latest broker analysis of ABC using the Aspect Huntley data feed through ETrade. The recommendations summary had 4 strong buy, 1 moderate buy and 1 hold recommendations. To be fair, the last analyst update was provided on the 30th November 2007 with a hold recommendation. Out of interest, the share price at the close of trading on this day was $5.26. ABC shares were priced at $2.14 before a trading halt was placed on the company, a 59% fall from the 30th November. Over the same period the S&P ASX 200 has fallen 14%
For us, ABC provides more anecdotal evidence that, firstly, the active approach to investing does not work and secondly that investors that take on extra risk need to be fully aware of the potential consequences and where possible protect against these consequences.
At A Clear Direction we do acknowledge the nature of risk in investment markets and the long term greater expected returns for riskier companies. We expose a small proportion of our clients to riskier areas of the Australian and global sharemarkets through the use of Dimensional funds that have small exposures to value companies and small companies. The difference with our approach compared to someone who has sunk large amounts of money / proportions of their portfolio into ABC, is that the funds we use are very well diversified. For example as at 31st December 2007:
Australian Core Equity Trust - 471 holdings
Global Small Company Trust - 3,355 holdings
Emerging Markets Trust - 753 holdings
If you want to get a better sense of our investment approach please take a look at our - Investment Philosophy webpage.