Want to Invest in the Australian Stock Market?

Hyperion Asset Management, a Brisbane-based management group, is launching a Shariah-compliant offshore fund in Bahrain which it says is aimed at giving so-called expert investors in the Middle EAst exposure to Australia’s stock market in a manner that complies with Islamic investment principles.

The Hyperion Australian Equity Islamic Fund, as it is called, is being managed in Australian dollars and reported in US dollars, and has been approved by the Central Bank of Bahrain, the market’s regulator.

The investment team  of Hyperion, which calls itself a “growth-style manager”, has worked together since1997, Hyperion said in a statement announcing the new fund. It said the fund’s Shariah advisers are Malaysia-based Dr. Mohd Daud Bakar and Bahrain-based Sheikh Nizam Yaquby.

Douglas Clark Johnson, chief executive of Codexa Capital, which has been involved in helping Hyperion to structure and market the new fund, said one of its attractions to Gulf investors was “as a China play, [but] with more regulation and transparency”, owing to Australia’s significant export exposure to what is now the world’s second largest economy.

“The Australian stock market is the second largest in Asia outside Japan, exceeding [those of both]  China [and] India,” he added.

What is more, “unlike many developed nations, Australian avoided recession during the global financial crisis, [and] is expected to sustain 3% to 4% annual GDP growth over the next several years”. 

As defined by Bahraini authorities, expert investors must be individuals and institutions that have at least $100,000 in financial assets. Governments and similar organisations may also invest in Bahrain funds intended for expert investors.

In Bahrain, Hyperion has retained the Bahrain offices of Apex Fund Services and Citibank for administrative and custodial services, respectively, of its new fund.

More information on the fund and Hyperion may be found at its website, www.hyperionbsc.com.

Quant Fund performance down..Effects of computerized investing!

 

Why They’ve Stunk It Up
Many quant funds rely primarily on models that pick stocks based on value, momentum, and quality factors. Those that do have been hit by a double whammy lately. Value models let quants down first. Stocks that looked attractive to value models just kept getting cheaper in the depths of the October 2007-March 2009 bear market. “All kinds of value signals let you down, and they’re a key part of many quant models,” said Sandip Bhagat, Vanguard’s head of equities and a longtime quant investor. Also, many quant funds that emphasize earnings or stock-price momentum were still following trends that had lasted for several years in the middle of the decade, such as the rise of energy and other economically sensitive firms–and these stocks were quickly crushed in the latter half of 2008.

As the bear market wore on, many quant funds’ models steered them to steadier firms that held up well in the downturn. Such companies looked attractive to both quality measures, such as balance-sheet strength, and earnings momentum because they were posting stronger earnings growth (or smaller declines) than most companies. Unfortunately, quant funds typically moved into these stocks just in time for March 2009’s sharp reversal. Investors started bidding up economically sensitive stocks in anticipation of an improving economy rather than on solid company financial results. Many quant funds that include earnings momentum in their models missed the initial (and strongest) stages of last year’s rally because the models didn’t pick the cyclical stocks until the improvement showed up in the companies’ results. So far in 2010’s choppy market, quant funds’ performance has been mixed.

 What Now?
It’s difficult to say when quant funds will mount a comeback. Some argue that they face a difficult future if they don’t make big changes to the way they invest. Robert Jones, former longtime head of Goldman Sachs Asset Management’s large quant team and now a senior advisor for the team, recently asserted in the Journal of Portfolio Management that both value and momentum signals have been losing their effectiveness as more quant investors managing more assets have entered the fray. Instead, he calls for quant managers to search for more-sophisticated and proprietary measures to add value by looking at less-widely available nonelectronic data, or data from related companies such as suppliers and customers. Other quants have their doubts about the feasibility of such developments. Vanguard’s Bhagat, for example, thinks quant managers need more secondary factors to give them the upper hand, but he also wonders how many new factors exist. “There are so many smart people sorting through the same data,” he said. Ted Aronson of quant firm Aronson+Johnson+Ortiz is more blunt: “We’re not all going to go out and stumble on some new source of alpha.”

There is reason to believe quant strategies have simply been temporarily out of favor. A number of quant managers–most notably Bridgeway founder John Montgomery–have said a big reason for their underperformance since the market bottom is that stock prices have followed big macroeconomic news instead of earnings. That trend isn’t sustainable, he contends. Indeed, in recent quarters, many of Bridgeway’s funds have had more money than their benchmarks in companies that have beaten earnings estimates, yet the funds have still lagged the indexes. At times, those Bridgeway funds that have done the best job of this have posted the worst relative performance. 

Another reason for optimism: Despite all the lost revenue, quant funds have lost very few personnel. True, Bhagat left Morgan Stanley for Vanguard, and the quant team he left behind has lost some of its fund assignments. But both Bridgeway and Bogle, for example, report they haven’t lost any investment professionals since the market’s peak. In fact, Bridgeway has hired a couple of academics and engineers to assist with further research.

Bridgeway also is nearly finished reengineering its 17 quant models, which may result in the scrapping of one or two models and adding others. Goldman Sach’s quant group says it, too, might tweak its strategy. The changes may not be cause for alarm. Most quant managers adjust their models over time as their research uncovers new ideas. To be sure, there is a risk that managers focus too closely on the recent past. Both Bhagat and Montgomery warned against fighting the last war by designing and relying too heavily on models that would have worked very well in the recent bear market.

It is premature to write off quant funds altogether, based on the evidence we’ve seen. But now more than ever, as their risks have been exposed, it pays to be selective. Investors should keep in mind that macroeconomic shocks may continue to overwhelm stock-specific data from time to time.

In Part 2, we’ll discuss the merits of certain quant funds.

Source:- Morning Star

Loomis Sayles & Co

 Dan Fuss: High on Kiwi Bonds and Laddering

Video:
Loomis Sayles Bond Fund co-manager Dan Fuss explains why he’s a buyer of New Zealand government bonds and why laddering is the best approach for investors who believe higher interest rates are on the way.

http://www.investmentnews.com/section/multimedia?bcpid=48121082001&bclid=70203382001&bctid=111591561001

Asset Allocation under current Market Volatility

Seeking safe haven
Date: 2010-05-13

By Eve Mitchell, Contra Costa Times, Walnut Creek, Calif.

May 13–When the stock market turns volatile like it did during this month’s dizzying one-day Dow drop, two contradictory things happen: Many investors consider moving their money to safer investments such as cash and bonds, and professionals urge them not to make drastic changes to their portfolios.

Bonds and cash always have a place in a well-balanced portfolio that includes stocks, with the percentage of bonds and cash holdings increasing the closer it gets to an investor’s retirement horizon. But during times of market volatility, it’s a mistake for investors to panic and trade their stocks for bonds and cash investments, experts say. That’s even more true today when certificates of deposits and money market accounts are offering low interest rates, and longer-term bonds are eventually expected to see a drop in value.

“You should not let day-to-day volatility drive your long-term investment allocation. I think the answer is to have a diversified portfolio,” said Greg McBride, senior financial analyst at Bankrate.com, a personal finance website. “It’s not all one or the other. You have to have exposure to a variety of investments and asset classes.”

A diversified mutual fund, which helps spread out the risk of stock market volatility, can be a sound investment in all types of markets.

“A good investment for all-weather conditions is an ‘asset allocation’ mutual fund. These funds not only invest in U.S.

stocks, but they also invest in a variety of other asset classes such as bonds and cash,” said Eric Flett, head of Lafayette-based Concentric Wealth Management LLC.

Big drops in the stock market can provide discounted buying opportunities for certain stocks that offer a lot of value when looking for attractive long-term investments.

“Volatility and risk, they are often equated as the same but they are quite different. We would define risk as the probability of permanently losing money. Volatility really has to do with the changes of prices and how dramatic they are,” said Karl Mills, head of Oakland-based Jurika, Mills & Keifer, an independent investment firm.

He pointed to the nearly 1,000-point drop in the Dow Jones Industrial Average on May 6 in response to fears that Greece’s debt problems would spread to Spain, Portugal and Italy, before recovering most of the loss that day. The following Monday saw a 405-point gain in response to a nearly $1 trillion plan to contain Europe’s debt crisis.

“When the stock market went down 1,000 points in a very short period of time, people say, ‘Gosh, that means you shouldn’t be in the stock market.’ The (drop) means the markets are very volatile. But you could have actually bought some of the companies for some of the prices they were selling at during that brief interlude when they were falling off the cliff. If you could buy a dollar for 40 cents, you’d be crazy not to,” he said.

Longer term bonds — those with maturity rates of two years or longer — are not the right investments at this time, Mills said, given that future interest rates are expected to rise in response to growing government deficits in the United States and other countries. When market interest rates rise for newly issued bonds, the price falls for a previously issued bond with a lower interest rate.

“The longer term bond portfolios are not going to do well in this environment. They are perceived as safe and yet in reality they’re very likely to lose value,” Mills said.

On the other hand, some corporate bonds and stocks that offer a high dividend yield would be a good investment, he said.

Gold, which is trading at a record level in the $1,235-per-ounce range, is worth considering now, but its value is not linked to market volatility, Mills said.

Gold is rising in response to weak currencies of the U.S. dollar, the euro, the British pound and the Japanese yen. “It’s a hedge against their purchasing power. They are going to get weaker,” Mills said.

Stock market ups and downs have to be put into context and not be viewed as reasons to get out of the market, experts say.

“I think the first question you need to ask yourself is whether the news of the day has a meaningful impact on your portfolio and your long-term goals. You want to ask yourself if a particular investment, or stock or mutual fund, is going to be negatively impacted over the next three to five years by the news of the day,” said Flett, an investment advisor. “However, you don’t do that to the point where you take your eye off the ball.”

Look at this way, he said: The Gulf of Mexico oil spill will definitely have a long-term impact on the stock price for BP. But that is not a reason for investors to get rid of other stocks.

Many investors like to have cash in their portfolios, especially at times of market uncertainty.

Cash investments such as certificates of deposits, savings accounts and money market certificates can be part of a well-balanced portfolio, but don’t expect a big return, because of their low yields. For example, on a nationwide basis, one-year CDs are yielding an average return of just 0.71 percent and 2.13 percent on a five-year CD, according to Bankrate.com.

“Holding a large percentage of your portfolios in CDs is not a successful long-term strategy and will often result in running out of money during one’s lifetime,” Flett said. “We continue to recommend a globally diversified portfolio including U.S. and international stocks, bonds, and liquid investments such as CDs and money market funds.”

Investors getting close to retirement age may want to consider bolstering their cash holdings, said McBride, of Bankrate.com.

“If you need the money in the next couple years, it doesn’t matter how low the yields are. If your time horizon is that short, you can’t risk loss of principal so you are not concerned as much with the return on your money. You want the return of your money,” he said.

It pays to shop around when looking for CDs, money market accounts and savings accounts to park your money, he said. Generally, a CD offered by a smaller or online bank will pay a larger interest rate than larger banks, he said. And some online savings accounts have better rates than CDs.

When investing in CDs, consider those with a term of one-year or less, even though interest rates on five-year CDs are higher right now, he said.

“You want the ability to reinvest when interest rates are on the rise,” McBride said.

Investors opt for Dividend Stocks

By Tim Grant, Pittsburgh Post-Gazette

May 13–Retirement is supposed to be about financial security, which explains why many senior citizens are leery of putting too much faith in an up-and-down stock market.

But safe investments, such as bank CDs and government bonds, hardly provide enough income to keep up with inflation.

“The big conundrum for … average investors today is they are frightened by the stock market, but they’re not happy with the returns they get in safe money market funds,” said John Buckingham, chief investment officer at Al Frank Asset Management in Laguna Beach, Calif.

That’s why retirees are so attracted to dividend-paying stocks that provide a steady income as well as the potential for capital growth if the stock price appreciates.

Like all investments, dividend stocks have their advantages and drawbacks.

While dividend stocks provide a stable stream of income regardless of whether a stock rises or falls in value on a day-to-day basis, if the company’s profits slide and the stock price takes a major dip, its board of directors can slash the dividend or — in a worse-case scenario that became more common during the recession — eliminate the payout altogether.

That is why it’s important when building a dividend stock portfolio to pick high-quality companies with long track records of paying dividends that have increased over time.

“Dividend-paying stocks offer a couple of benefits,” said Mark Luschini, chief investment strategist for Janney Montgomery Scott, Downtown. “Usually the payer of the dividend is a company whose financial situation is very stable and therefore tends to decline less in share price when the stock market swoons.

“The other benefit is the cash flow generated by the dividend that can complement other income for the investor with the growth potential a stock can offer that a bond cannot,” he said.

Big name companies are paying dividends equal to and higher than the current interest rates on bank money markets, CDs and government bonds. Johnson & Johnson (JNJ) is paying a dividend equal to 3.4 percent of its share price; H.J. Heinz Co. (HNZ) is paying 3.7 percent; McDonald’s (MCD) pays out 3.2 percent; while communications giant AT&T (T) pays a quarterly dividend equal to 6.7 percent; and Altria Group (MO), which owns major cigarette and tobacco brands, pays a whopping 6.7 percent.

Dividends usually are paid every three months. Some, however, are paid annually and semiannually, while others are paid monthly.

So why not just buy all of the highest-yielding dividend stocks you can find and use that as an investment strategy?

Mike Saghy, director of investments at PNC Financial Services Group, Downtown, said buying stocks based on only their dividend yield could be a recipe for disaster.

A 10 percent dividend might not be so great if the company’s share price falls 20 percent.

“The high yield may be the result of a declining share price, which could indicate a problem rather than an opportunity,” he said, adding that when he looks at a dividend-paying company, he considers its payout ratio, which is the percentage of its profits that are paid out in dividends.

“We look for 60 percent or less,” Mr. Saghy said. “Anything above that might give us pause before we invest.”

Dividends can be a crucial component of a stock’s total return. Even if the dividend is paying only 3 or 4 percent, if a stock returns 8 percent annually on average, the dividend is providing about half the return.

Larry Carrel, author of “Dividend Stocks for Dummies,” said in the past most stocks paid dividends but dividends fell out of fashion when investors focused on companies that had greater potential for capital appreciation.

During the Ronald Reagan administration, he said, tax laws were changed so that capital gains were taxed at a lower rate than dividends.

“So people decided it was better to focus on stock price appreciation because those profits were taxed as capital gains, while dividends were taxed at the same rate as ordinary income,” Mr. Carrel said. “That was the main reason a lot of companies stopped paying dividends.

“By reinvesting the profits instead of paying a dividend to shareholders, it boosted the share price.”

But in 2003 during the George W. Bush administration, the dividend tax was cut to 15 percent, which was the same rate as the capital gains tax, putting dividends and capital gains on a level playing field.

Today, about 72 percent of stocks on the S&P 500 Index pay dividends, Mr. Carrel said.

“Dividends give an investor a portion of the company’s profits now, and [he] can use it any way [he wants],” Mr. Carrel said. “[Investors] get money now instead of having to wait until they sell, and that’s very powerful. You are receiving profits constantly.”

Still bonds and bank CDs are considered safer investments because of the guaranteed fixed payout and the low risk of losing principal. Gary Stroik, co-author of “All About Dividend Investing,” said that protecting principal at all cost may not be wise.

“I’m old enough to remember old people eating cat food because they couldn’t afford groceries,” said Mr. Stroik, chief investment officer at WBI Investments in Little Silver, N.J. “That’s the ugly side of fixed income. You don’t get a raise when your costs go up.”

He said if someone were to invest in a dividend-paying company such as a utility, a rise in utility costs should send the dividend to and provide a bit more income to offset the rising costs.

While many seniors can be nervous about venturing into riskier assets, “They put dividend stocks in a different category in their minds,” Mr. Stroik said.

“There’s a different way people feel about a stock that’s helping them pay the bills as opposed to a stock they are rooting for like a lottery ticket.”

Source:- GARP

Mutual Funds help investors balance risk

Mutual fund employees explain product details to investors at their office in Mumbai, India. Investors today are looking for integrity, transparency and ‘cleanliness’ of the investment product. (AFP)

Investment in any instrument, basically, comes down to a game of risk-return trade-off. This simply means higher risk investments, such as equities, will fetch you higher returns, while investment in lower risk instruments, such as bank fixed deposits and bonds, generate lower returns.

Investing in mutual funds – also known as unit trusts in the UK, Australia and a few other countries – pitches in somewhere in the middle of these investment products. Here, generally, the returns are higher compared to the risks investors are exposed to, say experts. And the performance of mutual funds in the global markets speaks of itself.

“Mutual funds don’t expose you to leverage so you don’t have the same level of risk as when you buy a property and borrow money from a bank to buy it. So investing in stock markets via mutual funds is less risky than buying a property,” says Steve Gregory, Managing Partner, Holborn Assets, Dubai.

“The majority of mutual funds in the last 12 months averaged in excess of 50 per cent increase in the Far East and Bric [Brazil, Russia, India and China] economies.”

Only high-risk investors would go for buying stocks in companies directly. It makes much more sense to make a smaller profit but carry less risk by investing in mutual funds. The risks are much lower in mutual funds, he says.

Generally, commodity funds have done extremely well. Additionally, regional equity funds focused on non-western regions such as Eastern Europe, Far East, and Latin America have done well. Even many single country funds have done reasonably well, for instance, India, China, Russia, among others, Gregory says.

Experts say the more volatile funds, the better the returns over a long period of time. “Generally, equity funds tend to perform better than bond funds over a period of time. However, over the past five years, equity funds have underperformed bond funds,” says Paul Cooper, Managing Director, Sarasin-Alpen and Partners, Dubai.

However, keeping all eyes open on the return prospects while glossing over the objective of the fund – the crucial fine print of investment – is a big mistake investors make, say experts.

“Investors need to understand which fund they are specifically investing in and what the objectives of the fund are. For instance, they need to make sure whether it is an income fund, growth fund or a balanced fund, what is the investment strategy of the fund, what is the geographical focus of the fund, and which asset class the fund is focused on,” sasy Kashif Arbab, Managing Director, Killik & Co, Middle East & Asia, Dubai.

No investment is risk-free and mutual funds are no exception. There are no guaranteed returns, say experts.

“If the equity market goes down, the return of the equity funds also goes down,” says Cooper.

“Mutual fund risks are derived from the objectives of the fund. The risks also depend on the performance of the fund, the asset class or the region or sector where the fund is invested in.

Another risk could be the management of the fund. The investor also needs look at the volatility or standard deviation of the fund performance. The more volatile the fund is, the higher the risk is,” says Arbab.

The investor should also look at the performance and the net yield provided by the fund in the past, although past performance is no guarantee of future performance of the fund. The investor also needs to look at the fees involved, he says.

Should an investor need to look at one-year return, two-year return or say, five-year return? “It depends on how long the investor wants to stay in the fund. If he wants to stay invested in the fund for a year, he needs to look at the one-year return objective and so on,” says Firas Mallah, Head of Middle East, Dexia Asset Management, Manama, Bahrain.

However, apart from looking at the fund’s past performance, the investor also needs to see what is the investment horizon of each fund. If a fund has an investment horizon of say three years, then an investor, who intends to exit in one year from the fund, needs to be aware that his horizon of investment is not aligned with that of the fund. Therefore, this may not be his best investment vehicle and perhaps he would need to seek other funds for his investment needs, says Mallah.

Further, not checking the consumer protection made available around any fund is another big mistake made by investors, say experts.

People need to be certain that there is indeed consumer protection available. An investor needs to do due diligence on the fund such us who regulates the fund and what is the track record of that regulator, says Gregory.

Over a five-year time-frame, mutual funds have generally made profits in almost all markets globally. The stock markets can go up or down, so you need to be looking at longer term when you are looking for a mutual fund investment. You should keep cash deposit for short term and mutual funds for longer terms, he says.

Fund manager is very important and an investor should try to understand the circumstances under which a fund did well, says Cooper.

Investors today are looking for integrity, transparency and ‘cleanliness’ of the investment product. So the name behind the fund is a crucial differentiating factor today, says Mallah.

Secondly, an investor needs to look at the cost of investment in the fund. Investment in mutual fund involves a number of fees, such as subscription fee, transaction fee, manager fee, custodian fee and administrative fee. Overall, those fees are not very high, but investors need to inquire thoroughly to understand the cost structure and avoid any surprises. If the chargeable fees are not transparent and clear then this is not the fund they want to be in, he says.

Thirdly, the investor should also make sure how much return he seeks to make from the investment and how much risk he is willing to take for that, Mallah adds.

The GCC and the Middle East have a healthy macro-economic growth prospect as a promising mutual fund sector. However, in the regional market, there are few mutual funds managed within the region, say experts.

“While some mutual funds are offered for sale in this market, they’re not managed in the region. Most of them are domiciled elsewhere and managed by fund management companies which are regulated in their own countries. However, in the region, many of the banks do run and manage Shariah-compliant funds as fund managers,” says Gregory.

Another major emerging trend in the regional mutual fund industry is that the importance of diversified investment approach has assumed importance.

“The issue that needs attention is how transparent a fund is and how well regulated it is, no matter where it is domiciled. I believe investors in the region have understood the true value of diversification, and of actively investing internationally as well as locally,” says Mallah. “So while we saw overweight in local investment of a regional investor two years back, today we’re seeing the trend back into international diversification. The regional fund market is seeing increasing competition between local and international mutual funds,” he says.

Further, investors who used to trade equities and bonds on the market directly on their own have also learned that if they invested in mutual funds, they would be less exposed to risks and they would also benefit from the expertise of the whole investment team managing a fund, says Mallah.

MUST DO

Before you invest in mutual funds, you must:

– Look at the management team behind the fund

– Study the investment objectives and geographical focus of the fund

– Be clear on the fee structure

– Understand the risks involved

SENTIMENT FAVOURS US AND JAPAN

Globally, investors have recovered their bullishness towards equity markets but are shifting their focus away from Europe and into the US and Japan, according to Bank of America Merrill Lynch’s survey of fund managers for March. A total of 207 fund managers, managing $589 billion (Dh2.16bn), participated in the global survey, while 165 managers, managing $403bn, participated in the regional surveys.

After weakened sentiment in February, investors have restored their faith in equities with a net 46 per cent of asset allocators saying they are overweight the asset class, up from 33 per cent the previous month. However, the asset allocators have retrenched from Europe, the survey says. The net number of European fund managers predicting growth in their own economy over the coming 12 months has fallen to 45 per cent, down from 72 per cent in January. While European sentiment might have been expected to weaken, a similar fall in optimism is also evident among US investors. A net 43 per cent forecast growth in the American economy over the next 12 months, down from 76 per cent in January.

The US and European investors have significantly scaled back their cash allocations. A net nine per cent of the European panel is overweight cash this month, down from 26 per cent in February.

Berkshire Hathway- Buffet’s investment strategy

You don’t get to be the third-richest man in the world by tracking any stock index.

Is Warren Buffett a stock picker, a macro investor or just a good businessman? Actually, he’s all three. You can learn a lot about investing not by following what Berkshire Hathaway owns but by understanding the underlying themes of the past two years.

Buffett compares his performance with the S&P 500 even though his portfolio bears no resemblance either to the index or the component names thereof. Because McGraw-Hill annually adds or deletes sometimes as much as 10% of the weighted value of stocks in this index, there is no firm ground for historical comparisons. For the record, 1,675 common stocks list on the New York Stock Exchange.

Buffett notes in his annual report that he chose the S&P 500 because shareholders can compare his numbers with a passive index fund. I have no quarrel with Berkshire’s internal performance yardstick–changes in book value–but the comparison with the S&P 500 is specious in the world of money management.

Berkshire’s portfolio is closer to the Russell Value Index, which incidentally woefully underperformed the S&P 500 and Russell Growth Index last year. Underperformance of the financial sector and energy dragged down Russell Value because they constitute 43% of total index weighting.

What is the proper index to judge Buffett’s prowess? I’m rated by the S&P 500 and the Russell Growth Index as are trainloads of other operators. Trillions upon trillions of assets are measured by these yardsticks, which in many ways don’t fully reflect what’s going on in the economy or the world.

The Value Line Index, a straight arithmetic compilation of 1,650 stocks, is a better measurement tool. It rose over 60% in 2009 compared with 26.5% for the S&P 500. NASDAQ jumped 43.9%. Buffett eschews technology in his universe, something I’ve never understood. After all, Google ( GOOG – news – people ) and Apple ( AAPL – news – people ) are not exactly indecipherable, and now they are heavyweight properties in the S&P 500, over 3%.

The S&P 500 is capitalization weighted, so when big-cap properties like General Electric ( GE – news – people ), Citigroup ( C – news – people ), ExxonMobil ( XOM – news – people ), Wal-Mart ( WMT – news – people ) and Microsoft ( MSFT – news – people ) underperform or outperform they have a big impact. Money managers remain forever sensitive to stock weightings and even more to sector weighting. A good part of money management consists of gaming the index by ignoring or overweighting specific properties and sectors.

I still loathe Exxon, Citi and GE, and I remain indifferent to Coca-Cola ( KO – news – people ) and Microsoft. To the extent I’m more right than wrong, by underweighting these properties I could easily outperform my benchmark. Currently, I’m overweighted in technology, financials, health care and industrials. My underweights are in energy, consumer discretionary names, utilities, telecommunications and raw materials.

Implicitly I’m making multiple macro calls: Worldwide GDP momentum remains below normal, and our economy is led by industrial recovery. Consumer spending stays below normal, but the financial sector doesn’t suffer a relapse. If oil spikes and banks’ loan losses don’t come down, I’m going to underperform the S&P 500–unless my overweighted horses, Google and Apple, gallop down the middle of the track and win going away.

If I ran money like Buffett, the counseling firms monitoring my performance for clients would report to them that “Sosnoff is going crazy. Pull your money out fast before he buries you.”

Berkshire’s equity portfolio, some $59 billion at market value, shows 19% of its assets in Coca-Cola and 28% in the financial sector, largely Wells Fargo ( WFC – news – people ) and American Express ( AXP – news – people ). If the $5 billion in Goldman Sachs’ ( GS – news – people ) preferred stock with warrants is added, Berkshire is drastically overweighted, even compared with the Russell Value Index. The Coke holding along with P&G ( PG – news – people ) and Johnson & Johnson ( JNJ – news – people ) overweight the consumer discretionary sector of the S&P 500.

None of this ciphering captures Berkshire’s investment schemata or embraces its $300 billion in asset value. There is the recent $28 billion investment in the Burlington Northern ( BNI – news – people ), clearly a value play tied to GDP momentum. Insurance properties carry $37 billion in bonds, and then there’s the direct investment of $15 billion in preferred stocks. Clearly we are looking at a balanced portfolio of stocks, bonds and operating companies. In short, listed stocks constitute just 20% of Berkshire’s investments. The utility sector is big but directly owned.

Many of the operating properties fall into the financial sector, retailing and cyclical industrials like mobile homes. The NetJets holding carries $1.9 billion in debt guaranteed by Berkshire. Without this guaranty NetJets would succumb to bankruptcy. Berkshire carries some $34 billion in goodwill on its balance sheet. so this raises the question of prospective writeoffs. Direct holdings in the construction sector lost over $1 billion last year.

Turning back to the listed stocks portfolio, legacy holdings like Coca-Cola, American Express and Procter & Gamble make up 20% of assets but can’t be sold without paying enormous capital gains taxes. Why should Buffett single-handedly tackle the country’s budget deficit? But I wouldn’t give him more than a gentleman’s C for recent investments in ConocoPhillips ( COP – news – people ), Kraft Foods ( KFT – news – people ), Sanofi-Aventis ( SNI – news – people ), Wal-Mart ( WMT – news – people ) and U.S. Bancorp ( USB – news – people ), with almost $11 billion invested therein.

Investments made directly in the paper of Dow Chemical ( DOW – news – people ), Goldman Sachs, GE, Swiss Re and Wrigley ( WWY – news – people ), some $20 billion, made in the throes of the bear market, show a $5 billion paper profit. Buffett held over $40 billion in cash available for investment at the bottom. He could have been more aggressive. The Burlington Northern control piece, $22 billion, closed this year.

Definitely, it took courage and moxie for everyone to back his conviction that the market a year ago had touched down at intrinsic value. Legacy holdings like Wells Fargo and American Express faded away to what today look like ridiculous bargains, but they did need TARP to shore them up.

Goldman Sachs didn’t come to me for help and offer its high-yielding preferred issue with warrants. I had to go out and buy the common stock and wade into preferred stock issues of JPMorgan and Bank of America ( BAC – news – people ) along with their equities. I missed Amex but bought Capital One, which I still have difficulty modeling with precision for 2011 and 2012 earning power.

In the good ole days, the late 1950s and early 1960s when Wall Street’s research capacity was sketchy, even frivolous, Buffett, like Magellan (the explorer), ventured out, understanding that the world was round and could be charted. Magellan had to search for gold and spices. Buffett found stocks below the net asset value of their working capital.

Buffett’s special analytical scope was an understanding of the franchise value of properties like newspapers, television networks and purveyors of soda pop and credit cards who controlled their markets and exerted pricing power. Alas, this no longer holds true. The world has changed. The New York Times is a single-B credit and struggling.

Over the years Wall Street’s research capacity has gained traction. A good idea needs to be exploited overnight before it gaps to the upside. Nobody understands this better than Buffett. He is applying more of his conceptual insights into multibillion-dollar macro plays on the domestic economy, the valuation of the stock market, currencies and the course of interest rates worldwide.

The huge plays in the insurance sector now are mature businesses with choppy earnings of late. Today they are dwarfed by direct investments in capital intensive sectors like utilities and railroads. I see the “reversion to the mean” axiom in action here as defined by the major investments of late.

There are dozens of money managers who could run Berkshire’s listed portfolio of stocks better–good stock pickers who are cautiously audacious when there’s panic in the streets. But the past couple of years proved few operators got their hands around GE, Citi, Merrill Lynch and Bank of America, either at the top or bottom.

Heavyweight thinkers are few and far between. Buffett was smart enough never to employ much leverage. But making the $300 billion asset base sing the high notes demands a heldentenor and a soprano like Lily Pons.

Buffett’s maturing from a young, nerdy analyst with a scruffy desk, yellow pad, telephone and a pile of annual reports stands alone. The S&P 500 flows on as a dry and faulty index that doesn’t capture what he accomplished or his newly emerging schemata. Buffett does himself a disservice employing this untrue yardstick.

Ironically, Berkshire’s investment schemata today is virtually permanent, so Buffett’s replacement is academic and moot. Nobody would know where to look, anyway. In this sense, Buffett has created his own successor, namely, himself.

Courtesy: Forbes