Join our community of smart investors

Hidden influence

Portfolio management even runs on this notion – the idea that bigger forces than the selection of individual securities shape portfolio performance. It is important enough to be factored into the core models that drive the investment industry. For example, the capital asset pricing model, perhaps the most important of the lot, says the expected returns from a security will be determined by the likely statistical relationship between the security itself and its biggest single influence. Usually, that’s assumed to be the market in which the security trades. So for UK-listed shares that’s likely to be FTSE All-Share index.

But it does not have to be. Macroeconomic factors may exert a major influence. For a commodities processor, the price of its most important raw material is likely to play a leading role and I have long suspected that the fortunes of the biggest holding in the Bearbull Income Fund are driven by the dollar/sterling exchange rate.

To continue reading...
Join our Community of Smart Investors
  • Independent full-length company analysis
  • Actionable investment ideas and recommendations
  • Expert investment tools and data
  • Stock screens from Algy Hall
Have an account? Sign in