The Dilemma of Concentration vs Diversification in Equities around East Africa.

There is an unpopular saying that, 'Diversification is for investors who don't know what they are doing.' I say unpopular because, most of the investors you'll ever talk with, diversify rather than concentrate their investments.

From personal experience, investing for various clients, I found out that clients whose portfolios I had invested in one or 2 companies, outperformed those whose portfolios I had invested in about 5 companies. this is bizarre seeing that I was the same individual making these investments, in companies that were performing extra-ordinarily against peers, at reasonable valuations.

Those clients, whose investments I'd concentrated into only 1 company namely MTN Uganda had a total return on Investments of about 60%, clients with 2 companies, namely MTN Uganda, and Stanbic Uganda Holdings had returns of 45.06%, clients with 3 companies, namely MTN Uganda, Stanbic Uganda Holdings and Bralirwa Rwanda had returns of 21.66%, while clients whose money I'd invested in all the 4 companies of my total portfolio namely MTN Uganda, Bralirwa Rwanda, Bank Of Baroda Uganda and Stanbic Uganda Holdings had total returns of 18.09%. And this was in no particular order. An investment in either of the companies named earlier brought a higher yield than an investment in all the above-named companies.

There were many factors leading to such results such as portfolio allocation of each Individual's assets, period of Investment (seeing that some people withdrew a portion of their investments), total returns brought about by each company, the fact that share prices are not stagnant and change almost every day, and The fact that some clients were making deposits each month, making me resort to the Dollar cost averaging technique in the companies chosen, where I was investing money almost every 3 weeks.

This personal analysis in the reports I'd given my clients concluded that it was better for investors whose money I concentrated in only one business versus those whose money I spread into the different companies.

The trouble is that most investors wouldn't have an idea on which company to concentrate in if they chose concentration, and hence miss out on lots of money. A colleague of mine, fully concentrated his investments worth almost a billion shs into Bank of Baroda Uganda, a move which most professional investors would shriek at, and yet, it was justified on his end. In fact, if he hadn't fully invested all that money buying BOBU at UGX 15 shs a share, he wouldn't have received a 63% return on investment, on his money, which includes a 50% return on share value growth and 13% in dividends. he was only able to achieve such a remarkable feat, because, he had a certain level of confidence, in what he was doing, and was sure about his investments, unlike most investors.

To spread the risk of business failure by diversifying is mostly beneficial if an investor can properly allocate carefully the assets he is allocating to either of those companies, at the right prices, in the right times, which most are unable to pull off, thus having mediocre results from their diversification approaches. It is also the best move if an investor is never fully certain of why they are investing in that business.

Why did I diversify for some clients and concentrate for others? my strategy is simple. I love being fully invested, and I use the money I have at hand, to buy into the best company at that moment, and at the right price, with my client having no say whatsoever, on how I choose to allocate the money, in the different companies. this allows me to be fully accountable for the results delivered at the end of the year.

Gitta Expedito