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Money managers under the microscope

A painful lesson in diversification

July 29, 2010

As if RAB Special Situations’ woes weren’t enough already (investing in Northern Rock before its collapse, putting a high percentage into illiquid assets, 70 percent loss in 2008,┬álocking up investors), the company told me yesterday of more bad news.

Explorer Falkland Oil and Gas, whose shares more than halved on July 12 when it revealed it hadn’t found any oil at the part-owned Toroa well, accounted for an amazing 24 percent of Special Situations’ portfolio before the fall (and presumably rather less now).

Of course, concentrated bets are great if they work (and would go some way to making back the losses suffered during the credit crisis).

But, as RAB is probably painfully aware, supposedly the only free lunch in economics is diversification. It will be interesting to see how Special Situations’ portfolio looks 6 months from now, and whether caution over further losses has outweighed the temptation to keep on big bets in the hope of big returns.

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