Steven Bavaria on Cohen & Steers FOF Strategy Revealed

Key Concepts

• FOF (Fund of Funds): An investment strategy of holding investments in other investment funds.
• Volatility: The degree of variation of a trading price series over time, measured by the standard deviation of price changes.
• Hedging: An investment strategy to reduce the risk of adverse price movements in an asset.
• Commodities: Raw materials or primary agricultural products that can be bought and sold, such as gold and silver.
• Diversification: Reducing investment risk by spreading investments across different asset classes.

FOF’s Increased Allocation to Metals and Commodities

The discussion centers around the increasing proportion of FOF’s portfolio allocated to metals, specifically gold and silver, and the potential implications of this strategy. The speaker acknowledges that FOF currently holds approximately 15-20% of its assets in metals – a significant increase compared to its holdings a few years prior. Previously, FOF’s investments were largely concentrated in closed-end funds.

Rationale for Diversification into Metals

The speaker attributes this shift to a proactive diversification strategy employed by FOF’s management. The rationale is to “hedge its bet” by entering into metals and commodities, recognizing the growing interest and apparent success of other investors in these asset classes. This suggests a belief that metals and commodities offer potential for returns or act as a buffer against potential downturns in other areas of the portfolio. The speaker explicitly states they “credit FOF’s management for being…smart enough to…diversify into some of these new fields.”

Potential for Volatility

The initial question raised concerns about potential volatility in gold and silver should there be a market “pullback” (a decline in price). While not directly addressed as a negative, the acknowledgement of this possibility frames the metals allocation as a potentially riskier component of the FOF portfolio. The speaker doesn’t dismiss the risk, but frames it within the context of a broader, strategically considered diversification.

Evolution of FOF’s Investment Strategy

The conversation highlights a clear evolution in FOF’s investment approach. The fund has moved from a strategy focused solely on closed-end funds to one that incorporates a broader range of asset classes, including metals and commodities. This demonstrates a willingness to adapt to changing market conditions and explore new investment opportunities.

Logical Connections & Synthesis

The discussion flows logically from an observation about FOF’s current portfolio composition to an explanation of the reasoning behind the increased allocation to metals. The speaker positions this diversification as a positive development, showcasing the management’s adaptability and proactive risk management. The acknowledgement of potential volatility serves as a realistic counterpoint, suggesting that the strategy isn’t without risk, but is nonetheless considered a prudent move.

The main takeaway is that FOF’s management is actively diversifying the fund’s holdings, with a notable increase in exposure to metals and commodities, driven by a desire to hedge against risk and capitalize on perceived opportunities in these markets.