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#1
11-27-2007, 11:33 AM
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Porfolio allocation strategy
Just been thinking about companies with debt and cash and had an idea. How about if you wanted to invest in a company with 100M MC and 100M in debt. The company's EV is half debt. Your normal position size is 5%. Instead of buying a 5% piece you buy a 2.5% piece to get a "normal" exposure to the equity piece. Conversely if a company has a 100M MC and 100M in cash, you buy a 10% piece (using leverage if necessary?) to get a "normal" exposure to the equity piece. I'm defining normal as a company with no debt, no cash where the MC = EV. Does this allocation strategy have any merit?
What about a broad based index fund using this strategy? Thoughts? Krishan 
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#2
11-27-2007, 12:39 PM
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Re: Porfolio allocation strategy
In the first case you have $200m ev and the second $0m ev. In the first case you have an investment with lots of leverage, the second has a business the market thinks is dead.
Personally, I look at allocations based on business risk. If co. 1 had huge cash flow and co. 2 questionable mgmt, I might view #1 as less risky. I think you should incorporate net debt into your risk analysis, but I don't think you can algorithmically allocate based on it.
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#3
11-27-2007, 04:02 PM
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Re: Porfolio allocation strategy
[ QUOTE ]
In the first case you have $200m ev and the second $0m ev. In the first case you have an investment with lots of leverage, the second has a business the market thinks is dead. Personally, I look at allocations based on business risk. If co. 1 had huge cash flow and co. 2 questionable mgmt, I might view #1 as less risky. I think you should incorporate net debt into your risk analysis, but I don't think you can algorithmically allocate based on it. [/ QUOTE ] Meh, I screwed up the examples. In example 1 I should have said 200M MC. In 2, 200M MC 100M cash. Krishan
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Linear Mode
