As far as diversification goes within Canadian conglomerates, Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) is one of the leaders among its peers, providing investors with exposure to the range of businesses operated as subsidiaries of BAM, including: Brookfield Infrastructure Partners LP, Brookfield Business Partners LP, Brookfield Renewable Partners LP, Brookfield Office Properties Inc., and Brookfield Property Partners LP.
The list of subsidiaries owned by Brookfield has made this company one of the most difficult to analyze on the TSX due to the range of competencies needed to dig into each of the company’s underlying business units. Similar to Fairfax Financial Holdings Ltd. (TSX:FFH) or Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B), buying shares in Brookfield is much the same as buying shares in other conglomerates made up of controlling and non-controlling stakes in other businesses. In a sense, by buying Brookfield, an investor gets access to a somewhat-diversified portfolio of assets with a rock bottom management fee of 0% (excluding trading costs), making these options attractive for investors looking for mutual fund-like exposure minus the fees.
However, the fact remains that the majority of Brookfield’s assets are concentrated on sectors such as real estate, renewable energy, and private equity – sectors that are generally considered secondary to core sectors such as financials, technology, and consumer goods. The portfolio of companies Brookfield offers tend to be interest-rate sensitive, making the company’s recent strong performance stand out even more given that we are now in a rising interest rate environment.
This past year alone, shares of Brookfield Asset Management have increased by more than 25% on strong earnings growth and expectations of continued outperformance as economic expansion in North America continues to outpace forecasts. As a global player, Brookfield’s asset base benefits from geographic diversification as well, making this company especially appealing for investors seeking companies with exposure outside North America as well.
Investing an entire portfolio in Brookfield, Berkshire Hathaway, and Fairfax in the absence of any other investments is not an investment strategy I would recommend, although an argument could be made that choosing companies that pick stocks or concentrate holdings in specific sectors is a viable one in the long term should the chosen subsidiaries and sectors fit one’s investment mandate.
While diversification may be only a buzz word to some, while to others it may seem overrated, diversification as a risk-reduction tool has been proven time and again by academics and traders alike.
Stay Foolish, my friends.