Nobel Prize winner Dr Harry Markowitz showed us the power of diversification. ‘All eggs in one basket’ is way too risky. Too many baskets and portfolio fragmentation make good risk management and oversight also impossible and it will add additional costs. At Parmenion Group we are convinced that diversification is the only ‘(almost) free lunch’ in a complex world with inefficiencies and illiquidities.
Our sophisticated approach to diversification is embedded in work of CIO Erik L. van Dijk with Markowitz. Their quantitative research formed the basis for the structured approach to investments of our Group entities. When disentangling and interpreting the diversification component within our systems, we see that ‘diversification as a key component’ of our investment approach does also constitute of 7 pillars, similar to the 7 pillars of our Investment Philosophy.
The 7 pillars of diversification
1. Realistic World View
Not all countries or industries in our world are equally important or feasible when it comes to investments. Parmenion uses a benchmarking system in which their relative weights are a function of financial market weights, GDP weights (on a purchasing power basis), sector weights within countries and indicators measuring the ease of doing business. We will keep allocations within a bandwidth of ± 15 percentage-points of the relevant Parmenion benchmark weight.
2. Thematic Investing
All of our individual investments should at least have a positive net exposure to one of our three main investment themes ‘New Finance’, ‘Changing World’ and ‘Sustainability’ (see also here). At the overall Group portfolio level, the net exposure should be positive to all three of them.
3. Know Your Strengths
Our main strengths are:
- Top-down, structured approach to and expertise about countries and industries;
- International network of best-of-breed corporate and investment decision takers; and
- Ongoing performance distribution and analysis so we know what we don’t know or what we aren’t good at.
All of our investments and co-investments should at least benefit from 2 of these 3 strengths.
4. Partnership Model
We know that we don’t know everything. And even in our IPC meetings (investment policy committee), the diversification element might sooner or later be challenged. The same people with the same tools might too often end up with the same conclusion. We do therefore love to co-invest or partner with firms, institutional investors and/or family offices that bring added value and a different style. Even to the extent of giving them a veto in the IPC.
5. Key Sectors
Our key sectors are: Financial Services (including Investment Management & Advisory); Financial Technology (FinTech); (Renewable) Energy; Fashion & Luxury; Entertainment; B2B; Retail and New Media. At least 50% and at most 80% will be invested in these key sectors. Why at most 80%? Well, we know what we do know and what we don’t know. And there is most certainly added value in other industries. But obviously, the best fit will only be with a best-of-breed partner who adds value in those other industries.
6. Size Constraints
- Portfolio – indirect – Investments:
We stay far from excess fragmentation and will not allocate less than 0.5% of the overall investment budget to single holdings, but also never more than 20-30% of the overall portfolio allocation.
- Other – direct – Investments:
from 5 to 50% and with a maximum absolute size constraint of USD 10 million.
- New Parmenion Group companies:
from 50 to 100%, although we might contemplate minority stakes in selected cases.
7. Fundamental Quality
At least 80% of a direct investment deal and/or investment portfolio will have to be allocated to
one or more investments in companies that pass the proprietary ‘bankruptcy prediction model’ of our Group company Nicanor IC with a top quadrant score.