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How investors can enable diversification, hedging

By Helen Oji
09 December 2019   |   3:09 am
Diversification is an investment technique that reduces risk by allocating portfolios among various financial instruments, industries, and other categories.

Diversification is an investment technique that reduces risk by allocating portfolios among various financial instruments, industries, and other categories. It aims to maximise returns by investing in different areas that would react differently to the same event.

A diversified investment is a portfolio of various assets that earns the highest return for the least risk. A typical diversified portfolio has a mixture of stocks, fixed income, and commodities. Diversification works because these assets react differently to the same economic event.

In a diversified portfolio, the assets do not correlate with each other. When the value of one rises, the value of the other falls. It lowers overall risk because, no matter what the economy does, some asset classes will benefit. One of the most important principles of investing is to ensure a diversified portfolio. This means ensuring that an investor spreads its capital amongst different investments to avoid over reliant upon a single investment for all of your returns.

The key benefit of diversification is that it helps to minimise risk of capital loss to your investment portfolio. Cordros Asset Management Limited (CAML) opened its Dollar Mutual Fund for public subscription. The offer opened on November 25 and will close on Friday, December 27, 2019. The minimum subscription amount is $500, which is five units and a minimum subsequent addition of $500 (five units).

According to the offer document, the mutual fund that allows investors to conveniently invest and earn returns in United States Dollars. “The fund invests in United States Dollar-denominated securities like Sovereign Eurobonds, Corporate Eurobonds, Money Market instruments and other quoted Corporate Eurobonds. The objective is to offer you competitive returns than is obtainable from an average domiciliary bank account,” the company said.CAML explained that the fund is targeted at retail, mass affluent, high net worth individuals, Africans in Diaspora, and institutional Investors who desire to meet future medium to long-term liabilities.

At the Codros Dollar Fund launch held in Lagos on Wednesday, the Chairman of Cordros Asset Management Limited, Emeka Ndu said Cordros started as a stockbroking business about 12 years ago and has grown into a financial service group that consistently provides investment solutions for various classes of investors.

“We now have a total of 4 mutual funds, Cordros Money Market Fund, Cordros Milestone Fund 2023, Cordros Milestone Fund 2028 and the new Cordros Dollar Fund and this is a testament of our sustained growth over the years.“Cordros Dollar Fund is highly beneficial to investors; especially at a time when investors need to protect their investments from the eroding effect of inflation,” he added.

The Managing Director of the company, Morenike Da-silva, said a good number of Nigerians have dollar obligations for academic and medical tourism, stressing the need to create a dollar-based investment for individuals who have dollar obligations.“Cordros Dollar Fund was created to enable Nigerian investors who desire exposure to USD denominated investments to achieve capital appreciation in the medium to long term.

“The Fund has a minimum subscription amount of $500 and an additional subscription amount of $500. ‘Investors who have been discouraged by high entry levels for US-based investments can now invest their US Dollars conveniently.”The Group Managing Director, Cordros Capital Limited, Wale Agbeyangi, said the fund was created to suit the changing operating environment, noting that the firm creates products based on market demand.

According to him, the fund would help investors to hedge against devaluation and eroding effects of inflation, as the underlying assets are high-quality Eurobonds and USD money market instruments.“The operating environment is changing and there is need for investors to hedge against this devaluation that happens from time to time. Diversification across products and currencies give opportunities to retail investors who ordinarily would not have the privilege to earn four to six percent yield.”

The Head of Investment, Codros Asset Management Ltd, Gbolahan Aina said: “At the moment, demand is majorly screwed toward dollar currency. The idea is to give retail investors the opportunity to have dollar investment. If you want to buy Eurobond, roughly $200,000 that is expensive about N75 million, not everybody can afford it.

“There are some of these retail products that has dollar needs, for instance some of them buy things abroad from Amazon, some of them have other things to buy but with dollar mutual fund, with a little of about $400, every body can have access of this investment.

“Our clients have been asking for dollar product and as investors, it is also good to diversify not just in terms of asset class but also in terms of currency as well. Some of them are long term dollar obligation to pay medical bills, some of them are planning for their kids to go and study abroad, and those expenses are in dollars. “With devaluation in naira, it is difficult to meet those dollar obligations. So having an investment in dollars helps protect or hedge against inflation. Dollars are like a store of value and over time, the dollar has outperformed the naira.”