Traditional Diversification: Balanced Portfolios
An investment portfolio must be balanced. Concentrating in one geographical region may result in overexposure to a given currency, sector, local monetary and fiscal policy, and the geopolitical risks of that region. For example, an investment portfolio comprised exclusively of Saudi public companies listed on Tadawul is affected by changes in oil prices, the Saudi riyal and the Saudi economy. An investor who invested in Tadawul 10 years ago would have achieved a 5.5% annualized return with annualized risk of 20.5% (see Figure 1).
Single-country risk can be mitigated by diversifying across multiple regions or countries, balancing exposure between developed and emerging markets, and different economies reliant on different industries.
A traditional balanced portfolio includes 60% in liquid fixed-income securities (e.g. bonds, or sukuk), which generally feature lower risk and regular coupon payments, and 40% in equities. Figure 2 shows that a portfolio split equally between Tadawul and a traditional balanced portfolio would have earned a higher annualized return of 6.7% with an annualized risk of 14.6%.
Modern Diversification: Private Investments
Private investments can provide additional diversification due to their historically low correlation to liquid assets and multiple sources of return. Low correlation provides stability and minimizes losses in times of market stress.
Just like spreading investments across geographies and liquid asset classes increases returns and reduces risk through diversification, adding illiquid investments such as private equity (PE) and real estate (RE) improves diversification further. Figure 3 shows that an investment portfolio split equally between (a) Tadawul, (b) a traditional balanced portfolio and (c) PE and RE investments would have achieved an annualized return of 8.7% with annualized risk of 10.2%. The three portfolios illustrated below in Figure 3 demonstrate clearly the benefit of including illiquid investments in an investment portfolio.
The Role of Alternatives in a Low-Return Environment
In a low-return environment, illiquid investments become an especially important component of the asset allocation in investment portfolios, offering superior risk-adjusted returns.
The Family Office has been focused in building diversified portfolios with allocations to PE, RE and private debt. We also offer income-oriented solutions aimed at preserving capital with diversification across asset classes, sectors, and geographies to help investors achieve their income targets.
We would be delighted to support you in your preserving and growing your wealth.
Disclaimer:
This presentation is provided to you by The Family Office Co. BSC(c) (“The Family Office”) for informational purposes only, and contains proprietary information that may not be reproduced, distributed to, or used by, any third parties without The Family Office’s prior written consent.
All information, figures, calculations, graphs and other numerical representations appearing in this presentation have not been audited and may be subject to change over time. Furthermore, certain valuations (including valuations of investments) appearing in this presentation are subject to change as they may be based on either estimates or historical figures that do not reflect the latest valuation. Although all information and opinions expressed in this presentation were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to their accuracy or completeness. The information contained herein is not a substitute for a thorough due diligence investigation. Past performance is not indicative of and does not guarantee future performance. Exit timelines, prices and related projections are estimates only, and exits could happen sooner or later than expected, or at a higher or lower valuation than expected, and are conditional, among other things, on certain assumptions and future performance relating to the financial and operational health of each business and macroeconomic conditions.
The Family Office makes no representation or warranty, express or implied, with respect to any statistics or historical or current financial data, whether created by The Family Office through its own research or quoted from other sources. With respect to any such statistics or data delivered or made available by or on behalf of The Family Office, it is acknowledged that (a) the investor takes full responsibility for making its own evaluation of the materiality of the information and the integrity of the quoted source and (b) the investor has no claim against The Family Office.
Amounts in currencies other than the US Dollar are translated using prevailing market rates as calculated by The Family Office or its service providers and may differ from the rates used by banks. The rates are indicative only and do not reflect the rates at which The Family Office would be prepared to enter into any transactions with other parties.
Certain information contained in this presentation constitutes “forward looking statements,” which can be identified by the use of words such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “plans,” “estimates,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. To the extent this presentation contains any forecasts, projections, goals, plans and other forward looking statements, such forward looking statements are inherently subject to, known and unknown, significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond The Family Office’s control and may cause actual performance, financial results and other projections in the future to differ materially from any projections of future performance, results or achievements expressed or implied by such forward looking statements. Investors should not place undue reliance on these forward looking statements. The Family Office undertakes no obligation to update any forward looking statements to conform to actual results or changes in The Family Office’s expectations, unless required by applicable law.
The Family Office makes no representation or warranty, express or implied, with respect to any financial projection or forecast. With respect to any such projection or forecast delivered or made available by or on behalf of The Family office, it is acknowledged that (a) there are uncertainties inherent in attempting to make such projections and forecasts, (b) the investor is familiar with such uncertainties, (c) the investor takes full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts so furnished to it and (d) the investor has no claim against The Family Office.
This presentation represents a summary of certain information, the full terms of which are contained in a Private Placement Memorandum that should be reviewed for a more complete understanding of the investments and their risks. In addition, this presentation does not constitute an offer to sell, or a solicitation to buy, any instrument or other financial product, nor does it amount to a commitment by The Family Office to make such an offer at present or an indication of The Family Office’s willingness to make such an offer in the future.
The Family Office is a Category 1 Investment Firm regulated by the Central Bank of Bahrain C.R. No. 53871 dated 21/6/2004. Paid Up Capital: US$10,000,000. The Family Office only offers products and services to ‘accredited investors’ as defined by the Central Bank of Bahrain.