Some stock pickers are diversifying into riskier areas such as emerging markets and deep value situations to boost returns. There is definite upside, but also significant risks. Fidelity International’s Alex Duffy told Livewire that a risky balance sheet can trigger major write-downs of shareholder wealth “from which there is no comeback.” In this short interview, Duffy discusses how to manage that downside risk by avoiding stocks with balance sheet ‘red flags’, such as aggressive accounting recognition policies, above-market audit fees, and for emerging market stocks, $US loans to fund local currency projects.

“In the main I’m looking for mismatches; things that are anomalous… “

Duffy also outlines how he uses forensic accountants to scour balances sheets for risk, and the warning signs they look for.