I'm always on the lookout for ways to diversify my portfolio whilst maintaining strong returns. If you can mitigate risk whilst also beating the market then that's a powerful combination.
Diversification usually means investing into different industries and perhaps businesses that offer geographical diversification away from Australia.
Here are three shares that I think would offer good diversification:
MFF Capital Investments Ltd (ASX: MFF)
MFF Capital is a listed investment company (LIC), which means it invests in other shares on your behalf.
There are three main reasons why I think it should be in your portfolio.
It invests in high quality overseas businesses, meaning that it would provide a very different portfolio to most of your current shares and indeed most other LICs on the ASX.
MFF Capital has produced really strong returns over the past five years due to a falling Australian dollar and a strong performance of its chosen US-listed shares.
Finally, I have a lot of confidence in Chris Mackay's ability to outperform the market by investing for a longer-term investment horizon compared to other managers, and the MFF Capital team also seem well aware of how business trends are changing the world – meaning which shares are opportunities and which should be avoided.
Propel Funeral Partners Ltd (ASX: PFP)
Propel is the second largest funeral operator on the ASX. It just gave its first quarter trading update today which was a record first quarter with higher revenue, more funerals and more revenue per funeral.
I believe its earnings could be boosted strongly over the next few years as it makes tactical acquisitions to grow its network. It's starting from a relatively small base, so each acquisition will make a material impact to its annualised profit.
Over the long-term it could be a market-beater due to the relentless growth of required funerals due to Australia's ageing population. Death volumes are expected to grow by 1.4% per annum between 2016 to 2025 and then increase by 2.2% per annum from 2025 to 2050.
Kogan.Com Ltd (ASX: KGN)
Kogan.Com is now one of Australia's leading online retailers. In-fact it sells a wide variety of products and services (not just TVs and fridges) like health insurance, phone plans, internet plans and more.
The network effects of this is powerful when it can sell more 'stuff' to more people. It means that repeat business can increase and margins are likely to keep going up. It's cheaper to win business from a current customer than through advertising to a new customer. However, it is winning a lot of new active customers too.
Kogan's share price has roughly halved in recent months, meaning that it's now trading with a price/earnings ratio in the low 30s. This seems like an attractive PEG ratio for a business that has doubled its profit in each of the last few years.
Whilst investors will need to be wary of the threat from Amazon, Kogan could win a lot of market share from bricks and mortar competitors in the medium-term.
Foolish takeaway
At the current prices I think all three look attractive. Out of the three I'm unsure of investing in MFF Capital at the moment because of the low Australian dollar and the likelihood of a US share market fall, which would affect the LIC. However, now could be a good time to invest in Kogan shares after its fall.
