'Motifs' Might Help Mitigate Restrictions on Portfolio Diversification

 |  Includes: AGRO, CRESY, NZFSF, UAGR
by: Roger Nusbaum

I found a lot of things to tie in to yesterday's post, "Investing Where It Rains." Of course, choosing to invest where it rains is a theme of sorts, really a subset of a theme. As I've said many times before, the big idea here is finding areas where we know money is going to be spent. This can guarantee nothing but money being spent into an area where there is obvious demand creates a good tailwind for long term success.

Tech Crunch had an article about an early stage startup called Motif Investing that is going to offer what it calls motifs for different themes. I had a very similar idea a couple of years ago that I think was called exchange traded baskets. There are certain rules about portfolio diversification that make some ideas impractical for ETFs but the motif might be a way to mitigate the restriction. Yes, the diversification rules are there for a reason, but buying a basket of five stocks will have less single-stock risk than buying one single stock.

Motif is still in its early days, so it remains to be seen how this develops, but to the extent themes and niches have been and will continue to be important (I think they will), this could democratize thematic investing more than ETFs.

I doubt there will ever be an ETF devoted solely to Chinese toll roads. I think there are about a dozen of them in total and the liquidity for a few, even in the Chinese markets, is pretty thin. I've been writing about this niche for a while now as I think it is a pretty good space for investing in China. Someone who might agree with this idea might not be real eager to buy one toll road, but five or six would be a different story, at least for some portion of people interested in the space.

On a related note, another possible theme for a motif could be publicly traded farms in Latin America. There are a few names I know of like NZ Farming Systems Uruguay (OTC:NZFSF), Cresud (NASDAQ:CRESY) (of which I own a few shares), the recently listed Adecoagro (NYSE:AGRO) and there will be another one this week with Union Agriculture Group (UAGR), which has farming operations in Uruguay. This article makes it seem like UAGR dominates the market in Uruguay, but on an incredibly shaky and risky foundation.

At times these names, or the farming companies traded in Europe with operations in Russia, will move a lot for no reason at all or what seems like no discernible reason in either direction. This can make owning the stocks individually difficult at times, which could be partially mitigated by the motifs, baskets or any other thing that might come along. Hopefully Motif moves forward and its offering is very robust.