Diversifying portfolio key for investors

By GEOFF SENESCALL

If ever there was a time for a disciplined approach to investment, it is now.

Amid today's excitement over soaring internet shares, there is still no substitute for a well-diversified portfolio, according to Frank Russell Company, one of the world's leading investment management and consulting firms.

"Sure, have some internet companies in your portfolio," says Craig Ueland, the firm's Washington-based chief operating officer, who is visiting New Zealand this week. "But don't bet your life saving on it."

Essentially, there is a need to spread risk across the market and across managers, he says. "Our approach has always been about adding value through careful planning and multi-manager diversification. The internet phenomenon reinforces this. Our story is more relevant today than ever."

The message not to get carried away with internet mania is backed up by a research report by Frank Russell entitled "Digital dej@ vu, or haven't we seen this all before?".

Its author, Scott Donald, who is a director of research for the firm in Sydney, points to common characteristics between the internet and the evolution of railroad and the telegraph. "The parallels to the 1840s, when life and commerce were revolutionised by first the railways and then the telegraph, are too startling to ignore: the question is, which of the lessons will prove relevant this time around?"

Railroads made travel three times faster, were cheaper and stimulated regional trade, Mr Donald said in Auckland this week. It attracted huge amounts of capital as lines and lines of railway track were put in. During the boom times in Britain, it attracted sterling 700 million, roughly 10 times the total annual imports for the country at that time.

"But few investors earned the fabulous returns that accrued to a few entrepreneurs. Construction costs almost always overran estimates as suppliers and landowners increased their prices in the face of increased demand caused by the railways," he said.

"Competition in an industry where physical factors caused natural monopolies repeatedly made older, smaller railways obsolete."

Reputable companies went bankrupt and by 1850 railway shares in Britain had declined 85 per cent from their peak. Mr Donald said while railways enabled people to travel three times faster, the telegraph permitted thoughts to travel at more than 30 million times faster.

This technological breakthrough made intercontinental communication almost instantaneous. A London importer sending a message to his agent in Bombay previously would wait 10 weeks for a response, whereas the advent of the telegraph compressed the same communication process to just four minutes. Such a change immediately reshaped the competition in business.

Mr Donald said pundits of the time confidently expected the telegraph to lead the world into a new age of prosperity.

"And yet within a few years the fences of containment were already being erected. In 1876 Alexander Graham Bell registered his patent, titled Improvements in Telegraphy and the telephone was born.

"By 1886 more than 250,000 telephones were in use across the US and the telegraph's use was entirely short-circuited."

Like its forbears, Mr Donald said, there were considerable economic benefits from applying the new technology to varying degrees across all sectors of the economy.

"That the early growth in size of the network has been explosive should also not have been surprising given the experiences of the 1840s and 1850s. But will the internet phenomenon follow the example of railways, where the speculative bubble burst, bringing financial strife to the investment community?

"Or will it, like telegraph, soon be made obsolete by another, more widely useful technology that lurks unseen around the corner?

"These are big questions. Nevertheless, investors would be wise to heed the lessons of history - while a few are made fabulously wealthy by leaps in technology like the internet, latecomers are typically better to look to the second-round beneficiaries than try to jump on the bandwagon.

"Companies that serve genuine needs of the population will have to come to terms with the implications of the new technology for their businesses. These more traditional companies, which still represent the largest part of most developed shares markets, are a safer and more familiar hunting ground for most investors."