Guide to Analysing Companies

Asset allocation
The process of deciding how much capital to allocate to a
particular class or category of investment; for example, cash
and cash equivalent, fixed-income securities, equities,
property and so on. The process also applies to individual
markets or geographical areas within an asset class; for
example, government, municipal or corporate bonds
and equities listed in North America, Europe, Asia and emerg-
ing markets. The aim is to balance the potential for return
against the possibility of risk and is as relevant to private in-
vestors as it is to the largest institutional ones. A view of the
likely returns to be derived from particular asset classes or
regions will determine the size of an investor’s weighting of
that class or market. Professional investors aiming to beat a par-
ticular benchmark need to know whether the investments
they choose leave them overweight or underweight, and
thus exposed to more or less risk, in a particular asset class or
market. So, for example, a manager whose fund is measured
against the ftse 100 index has to be aware how much of the
index is accounted for by, say, food retailers. Holding more
food retailers’ shares than are represented in the index may help
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to boost the fund’s performance when the economy is down
because people have to buy food during good times and bad.
Yet if the economy were suddenly to pick up and such retailers
went out of favour, their shares would fall in value and drag
down the performance of the manager’s fund.
Asset-backed securities
bonds backed by a pool of instruments such as credit-card
receivables, mortgages or, in some cases, the income from
intellectual property such as published songs or books. The
bank or finance company that first lent the money sells the re-
ceivables, together with the right to receive interest on them,
to a new company or special-purpose vehicle, in which it
often retains a shareholding. The new company repackages the
receivables as bonds with a minimum face value of, say, $1,000
and a life of five years; an example is certificates of automobile
receivables (aptly known as cars). Like any fixed-income
security, the price of the bond varies according to demand,
the coupon or interest rate paid each year to the holder, and
the period left before it is redeemed or repaid. In 1997, David
Bowie, a singer and entertainer, broke new ground by raising
$55m through the issue of bonds backed by the income from his
past albums. His was the first such issue supported by assets
linked to intellectual property. Since then other singers, song-
writers and authors have raised money from investors in the
same way.