FG Portfolio Change: Adjusting for Volatility

Today we initiated some changes in the FG portfolio which are explained below.

Sell First State Global Emerging Market Leaders and Baring ASEAN Frontiers

These sales have been made as part of a tactical asset allocation decision. With Fed tapering still a major issue and sentiment towards Emerging Markets not improving there is a likelihood for a further fall should the Fed signal tapering in September or October. The current P/B of many EM countries is very attractive and long term investors could see strong upside. Our tactical decision is to wait for further volatility before buying back in at hopefully cheaper prices.

Increase Ignis UK Absolute Return Government Bond

Our base case is for developed bond yields (Treasuries, Gilts and bunds) to continue to rise. There is a knock on effect for all fixed income which is priced off these government bonds. The Ignis fund’s strategy allows it to make money from these rising yields, which we find very attractive. At the same time it provides diversification to our equity holdings, helping to smooth volatility within our portfolio.

Increase 3x Short Euro Long USD

The Euro and Sterling have shown remarkable strength against the USD over recent weeks, making the entry point for this top-up very appealing. Should Bernanke signal tapering, then we are likely to see the USD strengthen. With Draghi keen to keep policy very accommodative in the Eurozone we think this should lead to a weakening of the Euro against USD. Another benefit of this trade is the protection against a tail risk of the German elections. If Merkel does not get back in there will be question marks over the Eurozone and this will likely lead to a weakening of the currency, helping this trade. With all currencies they need to be monitored very closely. From these levels we can see short term upside of 15%-25% as this is a leveraged trade, and we will evaluate along the way.

The Launch of the Fund Gurus Portfolio

We have launched a concentrated portfolio of 10 holdings (fund of funds) with an unconstrained mandate.  Follow us as we explain changes as and when we do them, actively managing market sentiment and looking ahead to what asset classes we think will deliver the top returns.

See more at http://www.fundgurus.co.uk/p/fg.html

Apologies for the inactivity...

We will hopefully will be returning in the not too distant future.

However for the meantime, read some of our other articles in which we carrying out in depth equity analysis.

Visit Seeking Alpha Articles....

Whoever Holds The Power, Holds The Key

Many investors are looking for the next big technology company like Apple, Google or ARM. However it is hard to know where to start.  Most of the companies that have risen to the top started from a very low price and took years to develop and evolve into the companies they are today.  So what will be next big thing?

Energy has been and will continue to be major driver in the world.  Oil and Gas rule currently, however as the world demands cleaner and more efficient energy, we seek the next step forward.  Within many products, portable power sources (batteries) play an important role and as other areas of technology develops, be it microchips or processors, the power source will be the key to whether things can develop further.  Phones have been gradually increasing in size over the past few years, from small flip phones through to 5 inch touch screen phones.   The new Samsung Galaxy S4 can last about day during heavy use, but this phone has one of the biggest batteries for a phone to date.  The faster processors require more power, but now things have come to a head.        

At the moment most small devices such as smart phones and mp3 players use Lithium Ion batteries, however these have reached the optimum capacity.  Graphite is used to store the lithium ions in the anode of the battery, however since reaching capacity you are limited to the power output.  Whilst increasing size will increase the total number of ions, a sacrifice will have to be made for weight and size of the products.  This is clearly not a solution, however a vast sum of money has been put into researching alternative storage materials for the lithium ions.  Currently, Silicon is leading the way as it offers the best prospect for ion storage.  But with a number of issues surrounding charging the silicon based battery, composites will have to be developed.  The hopeful result would be between a 30-50% increase in battery life to the current ones, offering a significant boost in processor development. 

Whilst we are still some time off having the finalized product available, technology continues to be a fundamental driver in the evolution of mankind, and funds investing in this can offer long term prospect for returns.

Whilst a lot of the technologies for new battery sources are in development stage, tech funds cover a broad range of companies.  Newly floated companies or those that develop this technology will attract huge demand and be sure to be a quick inclusion in technology funds.

Those investing in technology funds or specific companies would have had a fairly poor couple of months.  Whilst some of the big names, Apple have sold off on slowing growth concerns it presents an excellent buying in opportunity for the long haul.  AXA Framlington Global Tech fund has  great spread of companies and would be sure to capture fundamental technological developments over the long term.

Large Cap Oil Companies Limited to Mergers and Acquisitions for Growth?

There is a worrying trend for the large cap oil companies as existing reserves deplete, more look to M&A instead of exploration as it costs almost half to purchase the assets rather than develop them from the exploration stage.

Read more: Exxon Mobil: Is M&A The Only Way to Grow?

Has the Market Priced Crude Oil Correctly?

Currently the futures market is in backwardation (lower prices over the long term), read why I think the market may be wrong and how it presents an interesting buying opportunity.

Crude Oil: Has the Market Priced it Correctly?

Apple: A Contrarian Investor's Dream Stock?

It has been a turbulent time for Apple investors as the share price fell from highs of $705 last year to close at $390 on Friday.  With their Q2 results to be released on Tuesday, it may be a brave call to jump in before, however for the contrarian investor is this the perfect opportunity?

Why has the share price fallen?

The stock has fallen 45% since its high in less than twelve months on fears that their flagship products; the iPhone and iPad are losing market share demand of the ever more competitive market.   

A number of companies who supply Apple parts have announced slowing sales which have spooked investors.  Cirrus Logic (CRUS) which supplies analogue and audio chips for the iPhone and iPad announced good earnings, however ended the year with over $20m in inventory reserves which suggests slowing demand for Apple’s products.  

The last five years have seen Apple in its mass growth phase, and it is difficult to quantify earnings potential and product demand until market saturation has been met.   The latest announcement from Cirrus Logic highlights just this, whilst they had a great year, they may have overestimated continued demand for Apple products.

The IDC recently released data for their Quarterly PC Tracker and revealed preliminary estimates had Apple ship 1.4m units, a 7.5% decline since 2012.  They noted that this decline may have been due to a steep rise in competition for the iPad.  With more competitors producing cheaper products, market share has been eroded.

Will Earnings Suffer?

Whilst Apple has been relatively reserved about pipeline products their current ones do a great job in hooking people for their next models.  In 2011, UBS carried out some research into retention rates for the iPhone; this was a whopping 89% with its nearest competitor at 39%.  Whilst we are a couple of years down the line, previous earnings have supported the results.  The 2013 Q1 results showed a record haul for iPhone sales of 47.8m units compared to 37m a year before, iPads also followed suit selling 22.9m compared to 15.4m the year earlier.

Although Apple looks to have more competition against Samsung and Microsoft the projected earnings for this year don’t look to suffer that much as a result.

First quarter in 2013 saw record revenue at $54bn, however gross margin had decreased somewhat from the year before.

The fall in the share price has been attributable to very little hard facts and mostly on speculation. Whilst many have been worried over the reducing gross margin, this may have be down to cyclical factors used in product development.  With the earnings looking to remain solid for 2013, contrarian investors will be licking their lips as the stock remains out of favour falling below $400 a share. 

Earnings per share looks to remain flat for 2013 which will not come as a surprise to many because the gross margin looks to decrease somewhat from 2012.  Capital equipment expenditure ahead of the iPhone 5 release may have been the cause for this gross margin decrease and has the potential to rise again once the iPhone 5S is released as modifications to hardware are likely to be minimal. 

Using Apple’s lower end estimates they are looking to grow revenue and net profit for 2013.  The current share price, just based on earnings is very low and factoring in the vast amount of cash on their balance sheet, $150bn, the company looks even more attractive.   Looking at Google Inc (GOOG) a company with similar merit, they have a P/E of 24.3 compared to Apple’s 8.7 (without $150bn cash)!

What is next for Apple?

Pipeline products are fundamental in this fast paced technology sector, and the company has been relatively quiet about what is to come.  They have hinted at a cheaper iPhone which should help snatch up some of the market share against the cheaper competitors and a new iPad release.   It is likely there are more products on the development line which are sure to draw in a huge amount of revenue, however it is hard to pin point release dates.

China Mobile is one of the world’s largest mobile networks without direct access to the iPhone and this may be about to change as they look to invest $30bn in the new 4G network that will support it.  Much time has been spent in generating a relationship with the company and this summer may see Apple gain further exposure to the Chinese market.

One thing is certain, the ever growing cash level that dwarfs Apple’s competitors provides potential for some significant developments.  There are a number of uses for this cash that will be beneficial to the share price such as research and development, M&A, share buy backs or increased dividends. 

The share price has fallen back to levels seen towards the end of 2011 and it is unlikely earnings are going to do the same.  The market is pricing in a dramatic fall in earnings for 2013 and subsequent years (almost 50%) and do not take into account new product releases. 

Out of 55 broker recommendations, 80% rate this stock as a buy with a mean price estimate of $602.  

Apple is a prime example of what contrarian investor’s look for; stocks that are out of favour with earnings and balance sheet strength.   I agree with the brokers and at $390 Apple shares are a steal.

Check out our Latest Alpha Article

Why French equities are a great long term investment - read more

Monetary Easing - How will it all end?

The first round of quantitative easing was implemented by Japan back in the early 2000s as they embarked on ending years of deflation.  With interest rates at near zero they aimed to provide excess liquidity to banks in order to promote private lending and spur consumers to spend rather than save.  The bulk of the operation was involved in purchasing government debt in order to increase its targeted current account balance.  This policy was lifted 5 years later and there was little evidence to suggest much of an effect.  The excess liquidity had provided little impact as both borrowing rates and JGB yields were close to zero making the net effect minimal.

A few years passed before QE reared its head again, and this time in a much greater scale.  The financial crisis in 2008 saw central banks around the world embark on trying to rescue the global economy from recession.  The United States, Europe and UK commenced QE after interest rates were dropped to near zero.  Both the UK and US used a similar method of QE, buying government debt and mortgage backed securities to stimulate growth.  Europe used a slightly different approach, whereby they used a repurchase agreement via their Long Term Refinancing Operations (LTRO).  The ECB bought government debt mainly off banking institutions with the intention for these to be repurchased at a later date.  This enabled banks to have more liquid cash on their balance sheets to help during the financial crisis.  Being relatively successful, the first round of LTRO repayments have been made and more which is an encouraging sign banks have stabilized and resurrected their toxic balance sheets.

The UK has done £375bn worth of QE since 2008 and with the economy still in a fragile state this could be increased.  The US has done over $2.3tn worth so far and as they continue with monthly purchases of $85bn the total figure will be approaching almost $4tn globally towards the end of this year.

Japan’s new Prime Minister, Shinzo Abe, has vowed to get their economy back on track once more and combined with the new governor Haruhiko Kuroda they have established an extremely aggressive monetary easing policy which has flooded the economy once more with liquidity.  However this time it is different, previously it has been focused just on monetary easing through quantitative easing.  Now Abe is combining fiscal and monetary policy to achieve targets.  His three arrow strategy is as follows:

1. Monetary Easing - They have committed to $75bn worth of QE per month in order to achieve inflation target of 2% and GDP growth of 2%.
2. Deficit financed budget filled with public sector and infrastructure spending
3. Structural reforms to achieve growth through sthe timulating private sector.

As mentioned Japan was the first economy to undertake quantitative easing, however this new more aggressive approach combining structural and fiscal reform may just be what it takes to have a significant impact.

So does QE work?

Well central bankers would argue yes, it's achieved a lower borrowing rate, provided liquidity to banking institutions and supported businesses through this.  However, whilst it may have stopped the economy from being in a worse situation five years ago, the long term effects may be very detrimental.

What has happened?

Aggressive monetary easing has acted as a ballast to most asset classes.  As they are mainly purchasing government debt, it has driven prices to record highs, and yields to the floor.  Equity markets are another one that has benefited from this support as borrowing costs are maintained at a low level providing easing debt financing.   Gold is another one that has benefited as an inflation hedge, many would argue QE leads to inflation over the long term (see below). 

So what happens next?  

Many would argue, pumping all this money into the system will lead to inflation as the money supply has increased.  More money in the system means the value of the currency goes down and prices rise.  However, this is not the case, since 2008 we saw a slight rise in global inflation however it has now returned to fairly subdued levels with little sign of moving.  The reason why this money may not lead to inflation is down to the implementation of QE.  Governments have been purchasing debt which is predominately owned by banks, pension funds and insurance companies for purposes of liability matching.  As such these are all end game holders, whereby they would hold the debt to maturity.  When the government buys the bonds off these investors, the cash will be maintained and used to purchase another type of liability matching security, namely bonds.  The end result is the velocity of money remains very low and does not filter down through the economy being spent by various parties.  What has actually been happening is the vast monetary easing has slowly been depreciating the developed nation currencies and like Japan recently been exporting low prices around the world, bringing with it deflationary pressures. 

In past experiences, deflation has been present during times of QE, Japan has experienced this for over a decade and has not provided enough of a push to shift this trend.

As the US economy picks up, I am concerned with the detrimental impact to all asset classes when QE stops.  A number of FED committee members have expressed their hawkish (higher interest rates) views, and this is a cause for concern.  They do not want to continue with $85bn a month any longer than is necessary and this could essentially pull the rug from underneath everyone’s foot sending bonds especially spiralling from record high's.

A few words of caution here, but it is evident things are coming to a head, and I expect the end of this year will present some interesting opportunities for global markets.

The implications of Gold's sharp sell off

The dramatic fall in gold price has continued on Monday, with the price passing below $1,400 and heading as low as $1,390. Many investors, particularly retail investors, are often slow to react and it could be that Friday and Monday morning's sell off were just the start and we see further selling this week.

Short selling of gold, which has passed through various support lines, is also likely to increase and just adds further fuel to the flames, which are currently sending gold into meltdown! So what does all this mean for the wider world? Well obviously holders of gold bullion are going to be hit hard, with prices down over 10% from Friday. Gold mining stocks are also likely to be hit very hard, as many are a leveraged play on the gold price, and we have witnessed this today with many gold stocks down double digits already. The logic for gold miners falling in value is fairly basic; the price of the good they are selling falls, and assuming costs stay the same their margins are therefore eroded and so profits are likely to fall, all in all making the stock less attractive on various valuation techniques.

The question is just how low can gold go? Has it been oversold and is now a buying opportunity? Well this is probably the hardest question in investing. Equities and bonds can often be quantifiable, with companies have earnings (or predicted earnings) and cost structures that allow investors to generally determine fair value. Gold however, has no real economic value and so determining what price is fair value is very hard, and this is why, I suspect, gold will continue to fall further as sentiment is particularly important with the precious metal.

Factors driving the price back up are also harder to work out. Recent events such as Japanese Quantitative Easing, or North Korea tensions have historically been supportive of gold, but not of late, which does raise the question has gold lost its shine?

Absolute Return funds - a useful Portfolio Diversifier

Absolute Return funds are a relatively new concept and we are seeing more funds of this type launched into the investment market, particularly since the Credit Crunch.

Many investors are sceptical about these type of funds, and much of this sceptism is justified, with some funds just not performing as expected. However, if you do your research correctly, there are some good funds available and they should allow you to hopefully achieve positive terms over a year, independent of economic conditions. 

The reason I like these funds is that they can help diversify returns within a portfolio, as they are often uncorrelated with other assets classes. Also consistent absolute positive returns can underpin a portfolio nicely and provide downside protection in falling markets. 

Many of these type of funds don't target large returns, maybe only 5% above cash and it is important to have expectations of returns to help avoid disappointment. Some will also exhibit more volatility than others, so make sure you pick a fund to suit your style. 

Whilst not for everybody I would definitely consider a portion of my portfolio to be allocated to absolute return funds. Insight have good products; Insight UK Market Neutral fund is a very consistent fund and should return around 4% per annum with at current interest rates. Standard Life have their juggernaught fund, GARS, which is £25bn in size! It is a little more volatile but again has exhibited very strong past performance and has a credible strategy and process.

Gold Price Tumbles!

Gold, along with many other commodities have been hit very hard today. As I'm writing this gold has broken through the $1,500oz to stand at $1,498oz, which equates to over 4% loss for the day - a huge downward movement.

There's been a couple of big announcements this week that have contributed to this fall. Today, Goldman Sachs downgraded their long term price view, and we all know the weight with which Goldman can influence markets!

Cyprus has also announced plans to sell gold bullion in order to help them meet their debt burden. This means there is a lot of supply hitting the market, lowering price. Quite why Cyprus announced their intentions to sell before actually selling is a strange one to me, rather than sell and then let the market know! Maybe they have short positions on gold!!

By breaking through resistance lines such as $1,500 it could encourage further selling and the price continue to fall.

Long term holders will of course still be up in their investment in gold, but over the past 2 or so years the gold price has fallen significantly and maybe losing its shine with investors!

With the selling that is currently occuring in the market place it will be interesting to see who the buyers are? Many Central Banks have large gold reserves already and may be deterred from adding to this. Jewellery demand, particularly from China and India can be seasonal so this may not produce the immediate demand required to help stabilize the price.

Mining, Natural Resources and what lies ahead

The mining sector has provided excellent returns to investors over the years, however since the credit crisis it hasn't quite been the same.

Mining and natural resource based companies thrive during times of global economic growth and this was inherent between 2005-2007. Economic growth spurred by a huge amount of infrastructure and housing spending especially from China saw demand rocket for resources such as copper, tin and steel. But as the credit crisis hit, these companies were amongst the biggest fallers. Since then global growth has been anaemic which does not bode well for the natural resource investor.

Inventories of metals have reached 10 month highs recently as a lack of demand in China does not inspire confidence. Furthermore, hard commodities react heavily to geopolitical risks and recent news out of the Eurozone and issues with North Korea does not support future demand.

The main driver it seems for hard commodities these days is China.  A double digit growth rate in the past has meant the vast country has made up a significant proportion of global demand.  Worries over a hard landing were short lived, however investors came to terms with the end of double digit growth.  China now begins to focus on quality growth driven by structural reforms rather than mass export growth.  For the miners, this does not instil any confidence and as such we have seen a fall in prices and outlook for many of the top miners.  

We previously discussed the merits of gold equities, however whilst driven by different demand concerns, these miners continue to be out of favour and some major names have seen their prices almost half since the start of 2013.   

Many companies are looking fairly cheap and it begs the question is it time to buy? Those contrarian investors may be licking their lips.  

Natural resources covers a fairly varied sector and can encompass the commodities themselves (mainly metals) and the associated companies which offer more of a leveraged play. There are a number of funds are out there in this space one of which is JP Morgan's Natural Resources, whilst returns have been poor the last few years, it provides exposure to a number of large mining companies globally and positioned well to capture the upside from this sector.

This is one sector I would be wary of, the global out looks to remain pessimistic for growth and this will continue to put downward pressure on commodities as inventories continue to rise.  You may see a lot more pain here before you are rewarded for your bravery.

Japan - Exporting Deflation?

It's been well publicised how the aggressive 'loose' monetary policy adopted by central banks is likely to be inflationary. The logic of this seems sound; they are printing trillions of dollars of money, and an increase in money supply should lead to inflation over the longer term.

Japan has recently undertaken extensive quantitative easing and has also directly attempted to depreciate their currency. One would presume this will cause inflation pressures; as mentioned above they have more money supply and also imports will become more expensive, thus importing inflation.

However, there is another take on this which I think is worth some consideration, and something I have not read too much about to date. Firstly we need to consider the Japanese economy. It is an export driven economy. Then we need to consider what a weaker Yen means for these exports. Well in essence it makes exports cheaper to foreigners who are importing them and this is the key to the deflationary pressures that Japan's latest policy could cause. So around the globe countries will be importing goods and services from Japan which are now cheaper, allowing businesses to lower prices and still maintain margins which could lead to deflation.

So what are the possible implications of this? Well the world has generally come to a consensus view that inflation could spike at some point due to the monetary stimulus mentioned above. However, if in fact Japan and other nations with weakening currencies are exporting deflation this may not be apparent, or at least to the extent markets are pricing in.

If you believe inflation may be 'overpriced' then one option is to 'short' inflation linked bonds whose returns are directly linked to inflation. Their price will fall if they have priced in too high inflation.

So for now lets hopefully look forward to some cheaper goods from Japan and be aware that high inflation is not yet a foregone conclusion!

Bad News Fails to Spook Investors

Equity markets edged higher today continuing a three day rally following on from a turbulent week.  There has been a substantial change in market behaviour since the start of 2013 as fear and volatility are becoming much more digestable. 

Equities have been the asset class of choice this year, as investors sought to take advantage of improving economic conditions mainly from the US.  After reaching record highs and rising almost 10% in the first three months, many investors have become cautious as this rise in equties has occurred very quickly given the level of corporate earnings and economic outlook.

We can expect equity markets to calm down somewhat as Q1 results begin to flow through, however what gives me cause for concern is the way news, especially bad news has been interpretted by markets. This year has already thrown a few curve balls at us.  Starting with Italy, their elections ended undecided leaving questions being asked about whether a governement can be formed to continue along the path agreed with the ECB and maintain their involvement with the Eurozone.  Whilst volatility spiked during this period, markets were remarkably unaffected.  There was an initial sell off on the Tuesday the results were annouced, however by the end of the week markets had closed higher.  Secondly, more Eurozone worries flowed through, this time from Cyprus as peripheral countries and their people were reminded how vulnerable they were as bank depositers faced haircuts.  This spooked the market again, having a slightly more significant effect than Italy, however yet again, over the following weeks, markets rallied back being pushed along by optimistic data out of the US.

More recent news surrounding North Korea, has been fairly localised.  South Korea has seen its markets and currency fall as a result, however global markets have been fairly reserved.

So why is bad news being taken so lightly?  This could be down to a number of reasons however it is evident that the psycological impact of bad news has been numbed over the past 5 years.  Since the credit crisis in 2008, we have seen consistent flow of bad news from Europe, then the Arab Spring, China's possible hard landing, US fiscal issues, the list goes on.  Investors have become used to this  and as a result markets can recover fairly quickly from the intial shock.  If the issues with Cyprus occured back in 2011, markets would have almost certainly reacted extremely to this. 

Another possible cause for markets to be bought back so quickly is the rotation into equity markets.  Many investors would have had a large exposure to fixed interest over the past 3 years, and now as bond yields reach record lows, there has been a rotation into equity markets (Great Rotation and the Hunt for Yield). This has certainly occured with the large amount of money sitting on the sidelines in cash.  As a result many investors see market pull backs as an opportunity to increase thier positions.  There is still a significant amount of money still on the fence, and this could continue to act as a support to markets throughout 2013.

A word of caution, when investors become complacent bad things tend to happen, so be wary of asset bubbles. 

In the meantime enjoy the ride, and if you are one of those investors still on the side line, climb aboard there is still plenty of opportunities out there.

Are UK Households the key to the Recovery?

As a nation the UK has a long history as a dynamic, skilled country and has historically had strong manufacturing and exports attracting business investment.

However, over the recent years the UK seems to have lost its edge. Our manufacturing sector has stalled and we are now a nation of 'importers' rather than 'exporters'. Business investment, particularly foreign investment has also slowed. These trends have escalated since the credit crunch and it is a troublesome path to be on. So in order for the recovery to really take hold we are going to need to see UK Households driving this, and picking up the slack left by flagging manufacturing and export sectors.

So the big question is 'are UK Households in a position to increase consumption?' Well since the credit crunch we have constantly read how consumers have been squeezed and disposable incomes have fallen - a bad sign if we want consumers to go out and spend spend spend! However, mortgage payments for many households have fallen, freeing up capital to spend. Previously consumers had taken on debt (credit cards, loans) in order to purchase goods and services. What we have seen over the past 5 years is households beginning to de-leverage, paying off their debts and increasing their saving rates. This is a good sign on two fronts; firstly consumers have less debt and so could likely increase their debt levels in order to make purchases. Secondly if households have large savings, they may consider spending this now as they will be earning very low interest by having it in the bank.

So there are mixed signs that the UK Households could increase spending in the economy. What I think we need to see is house prices increasing. This makes home owners feel more wealthy and will encourage them to spend in the economy, this has occurred over the past year in the US. Until this time households will continue to be cautious of their spending, and as such the UK economy will continue to exhibit low growth.

Property Funds - A useful portfolio diversifier

An asset class many people favour is property.  Be it owning properties personally or buying a property fund, it can provide an excellent return for your money.  There are a number of ways to access this market within an investment portfolio.

Lets classify this into three different types:

1. Bricks and Mortar Funds
2. Real Estate Investment Trusts (REITs)
3. Property Security Funds

Property is generally uncorrelated to most other asset classes however this can be dependant on which type of investment vehicle you choose.

Bricks and Mortar funds do what they say on the tin, the fund will invest and manage a number of properties directly. These will provide a low volatile fund generating both capital growth through the net asset value of the properties held and rental income.

The next type of investment is a REIT, this is a closed ended property investment trust, where an amount of money is raised and then a fund manager selects a portfolio of property. They are generally run in a very similar way to bricks and mortar funds however, because they are closed-ended, capital is not required to be kept uninvested (for redemptions) therefore these can capture more upside. REITs are however more volatile, as they are listed on the stock market and therefore be subject to supply and demand. Generally they will maintain a close price (discount) to its net asset vale.  Read more on REITs and Investment Trusts.

The final type is a property security fund, these are invested in securities, namely REITs and equities associated with property and these are generally the most profitable and volatile during property bull markets.

The first option will provide you with sturdy incremental gains where as the later two will be more volatile having the potential for greater upside. Each type of investment have their uses, and one would need to clarify why property is going to be added to the portfolio. If you see immediate upside from the property market, REITs and property security funds will be best, however if this is merely to act as a source of steady income and long term capital growth I would suggest the first option. 

Some interesting examples of each type of property fund are Ignis UK Property; a top quartile performing bricks and mortar fund with a focus on London and the South East commerical property.  First State Global Property Securities would be my first choice for a more volatile fund, it invests in a global selection of REITs and companies associated with property.  Finally REITs offer a more sector specific approach to property investment, an example of which would be Primary Health Properties plc, whereby it invests in healthcare focused properties such as GP practices.  Or British Land plc for a more diversified portfolio of properties.

Having looked at our poll about where you would have your money invested, almost 40% said property.  This is unsurpising, especially for our US readers as the property market there is much more buoyant.   Also areas in Asia have seen capital values rise signifcantly espcially in urban areas.  There is certainly a lot of positives within the global property market, however for the UK I am affraid it will stay somewhat subdued for the immediate term.

Pick your markets wisely and your funds even more so!

Infrastructure Investing

Here at Fundgurus we've discussed various investment themes and this latest article looks at Infrastructure as an investment theme.

'Infrastructure' is a broad term and I generally think of it encompassing areas such as utilities, transport (airports, railways, roads) and schools and hospitals. Infrastructure investment is something that is always required, whether it be to initially install the facility, or to improve or update existing infrastructure.

Often infrastructure is heavily supported by public spending and government policy. By investing in high-speed railways for example, governments can make their country more attractive to businesses and investment which helps support the economy. At the same time it creates jobs in the immediate term to actually build the infrastructure. With governments looking to stimulate economies there is a possibility we will see them target infrastructure directly, and we have actually seen the beginnings of this with Japan and U.S. policy.

Infrastructure can also provide an inflation-hedge. Real assets such as buildings have exhibited inflation protection in the past. Revenues, such as those from toll roads, are often linked to RPI and therefore also offer inflation protection.

For investors there are various funds and stocks available to invest in this infrastructure theme. HICL Infrastructure is a closed ended investment trusts (HICL) and has an attractive yield (c. 5.7%). First State Global Listed Infrastructure is an open ended fund investing in companies that are linked to the inflation theme. This provides a more global portfolio, but has tended to exhibit slightly more volatility then HICL.

This type of investment can produce steady returns making an attractive addition for portfolios for the long term investor.

Rising Costs and Wage Inflation

Rising costs globally have had detrimental effects on company profits and a fundamental cause of this has been wage inflation particularly in emerging markets.

As Asia contributes to a large proportion of global manufacturing, company profits are being squeezed as it becomes more costly to produce in these countries.  Costs have been further amplified by the rising currencies.  Emerging markets have seen their currencies rise as investors seek to capitalise on high GDP growth.

Asia has seen soaring wages and average pay has almost doubled over the past 10 years compared to 5% increase per annum in developed countries.  China led the way almost tripling over this period, and as the country develops from an emerging market, workers began to demand minimum wage levels.

This rising wage inflation is not isolated to Asia, South America has also seen similar rises, and as workers demand higher pay, their demands then mature for better consumer products, food and standard of living.  This is the common path from an emerging market country to a developed.  However there are many obstacles to overcome, read more on this in Rural Expansion and the Control of Urbanisation.  

For companies based in the US or other developed nations it may become more economical to bring manufacturing and production back to their country.  As wages become closer between the countries, after eradicating shipping costs, the difference is not that high.  With energy prices reducing in the US this is becoming more common, and reshoring may gather further pace.

Whilst wages have increased significantly, one must remember it started from a lower base, Asia is still a very cheap place to produce, and many have shifted from China, to South East Asian countries such as Indonesia, Vietnam and Thailand, where the minimum wage in Thailand is 300 Baht a day, a little over $10.

There will undoubtedly be a lot of change in emerging market economies over the next 10 years, however as a large proportion of growth is derived from manufacturing and production of goods for overseas companies, one must remember to maintain the competitive edge otherwise growth may evaporate.

Active vs Passive Investing

A common question people ask is, "What are better, active or passive investments?" Many investors see no reason paying the extra annual management charges if they do not feel actively managed funds out perform the index they are investing in.

Let's take North America as an example, I compared the S&P 500, (the top performing US index over the past 5 years) against its respective actively managed sector performance.  The S&P500 has returned 13.35%, whereas the IMA (Investment Management Association) North America Sector returned 53.5%. It is evident here that the actively managed funds have outperformed.  This is down to a number of reasons.

Firstly fund managers have the ability to pick the best equities out of the index leaving those which will under perform.  Secondly, and possibly the most important is that they are able to manage risk across the portfolio.  Selecting not only the best funds, but the best sectors, one is able to diversify risk across the fund.  Further analysis into the correlation of each equity held you can combine the weightings together to ensure optimum protection on the downside whilst being able to capture growth through stock selection.

The most common way of purchasing an index is through an Exchange Traded Fund (ETF), these are cheap ways of accessing a basket of companies.  There are usually two types of ETF, those that invest the money in the physical asset, in this case the constituents of the index, or those that swap performance of a basket of assets for that of the index.  The later is considered to be less desirable as many investors do not like holding something that isn't the asset they have paid for.  Never the less, these offer the closest replication of performance as there is very little tracking error (the difference between the actual index performance and the fund).  With the synthetic ETFs most offer a collateralised swap, worst case if the swap counter-party fails, you are usually guaranteed to receive AA rated bonds.

For long term investing over 20+ years many see it beneficial to hold just the index, it is a cheap and effective way to gain exposure to a country or market, it requires less research and in some cases will out perform managed funds.

However, for the best returns I would recommend actively managed funds, these will offer the best downside protection which would have been important over the past five years and if you select correctly the best returns.  Taking the earlier example of the US equity market, the S&P 500, recently hitting new highs has returned around 1303% since 1985.  Compare this to our North American equity fund in Top 10 Funds of the Month, Gorden Grender who runs GAM North American Growth has returned 2700%.  So which one would you rather have?

Actively managed funds need to be reviewed as there will undoubtedly be funds that under perform the index, so pick wisely.  

For those of you who are not convinced by this argument  a number of providers offer cheap access to equities and other asset classes via both ETFs and a handful of unit trusts.  Namely Vanguard, BlackRock's Ishares and Deutsche Bank's db X-Trackers

Equity Markets Fall...

Global equity markets tumbled on Friday amidst a raft of bad news and political uncertainty.

Volatility in markets, until this week had been fairly benign, even through the Cyprus crisis. However, this week has seen a spike in volatility and led to big losses globally. So what has caused this steep fall?

Well there has been a run of poor data out of the U.S. this week. Manufacturing growth and jobless claims all disappointed and these are both significant indicators and naturally caused a pull back in equities.

Commodities have been hammered this week largely on the back of news of large inventories. This indicates to markets that there isn't the global demand to purchase these raw materials thus highlighting growth is not at expected levels, again causing markets to fall.

Then behind this disappointing back drop North Korea tensions have continued to boil and the market has also re-trained its eye on Europe following the Cyprus crisis... all in all a lot of bad news for markets to receive over a week or so!

The question is what now? Well safe haven assets, such as Treasuries and Gilts have had a good week, as there has been a flight to safety. I've been caught out a little by this given the historical high price (and therefore low yield) of these assets, however it still seems they are attractive to investors at certain stress times in markets. Gold, it seems has not behaved as one would expect and has fallen as low as $1,550oz this week. This has occured even when equities have fallen off and geo-political tensions have risen - there could be a fundamental shift in gold currently, definitely something to keep an eye on (Gold).

So many equity investors will have experienced losses this week - but all in all equities have still performed strongly this year. The question is what will happen next week, will it be a case of a rise in equities as investors pile in at a cheaper entry price, or will investors continue to be spooked, sell equities to lock in profits and prices fall further? In these volatile times it's often hard to call....

Where and how to invest £1,000

I have been asked a fair few times recently, “I have £1,000 to invest, where should I put it?” For many just starting out, it is difficult to pick an investment.  Usually people would have just left this money in a cash ISA or a fixed term bond, however nowadays with interest rates so low, this is not really the best option.

Many banks offer stocks and shares dealing accounts, however this will generally limit you to UK listed equities.  If you haven’t done so already, Stocks and Shares ISAs (individual savings accounts) will be your best bet, they offer tax free investments up to the annual ISA allowance of currently £11,520.  So you will be well within this limit with the £1,000 investment. A number of providers offer competitive ISAs such as Hargreaves Lansdown and Standard Life.  From here you can invest in a wide range of investment funds at fairly competitive rates.

Next stop is choosing the investment.  Most ISAs limit you to investing £500 in each fund, or £50 monthly.  Generally a portfolio should have anywhere between 10-20 funds to ensure diversification across asset classes and markets.  However, you are fairly limited here with only being able to choose 2 funds. 

A number of asset managers have managed funds, which incorporates a range of asset classes.  By investing in a managed fund you have access to a diverse and structured fund to ensure management of your money is maintained even when you are not paying attention. 

These should provide you with a good starting point for your money. 

The next stop is working out how much risk you want to take, let’s for the moment classify this into three categories, Cautious, Balanced and Aggressive.  A Cautious investor would have anywhere between 20 and 60% in equities, Balanced 40-80% and Aggressive 80-100%. 

Jupiter Merlin Portfolio funds are a great place to start, winning numerous awards over the past 5 years, the team, Peter Lowry, Algy Smith-Maxwell and John Chatfeild-Roberts have one fund to fit each of the three risk categories above.

Jupiter Merlin Income (Cautious) - The fund aims to achieve a high and rising income over the long term with the possibility of capital growth.  Like all three of funds, they invest in a range of collective investments from OEICs, Unit Trusts to ETFs.  Currently the fund is positioned to the heaviest equity weighting permitted within this sector (60%) as they believe we are at the start of an equity bull market. Past performance is not one to doubt their abilities on, returning 43% over 5 years.  Top fund! Literally.

Jupiter Merlin Balanced (Balanced) - The fund aims to achieve capital growth with income over the long term investing in a range of collective investments.  They have shown it is possible to provide real returns over the past five years with this slightly more dynamic fund.  Past performance again has been top decile returning 40% over the past five years.

Jupiter Merlin Growth (Aggressive) - This fund is the most aggressive of the three, and it invests almost 100% in equity funds.  With a spread across global markets this fund has performed well over the past five years again top decile returning 41.5%.  

The continued top performance over the long term from the Jupiter Merlin team has earned them the top name in the managed fund spot and seen their funds reach over £9bn in size.  

Whilst these funds have a higher total expense (underlying fund costs) than others as it invests in collective investments rather than direct equities, it does not detract from the excellent performance demonstrated.  

Whilst you may want to select a managed fund that is able to diversify across asset classes, some Aggressive investors (especially young ones) would prefer buying 100% equity funds in specific markets.  For the longer term, emerging markets should offer the greatest prospects as these countries have the highest growth rates.  A number of funds therefore may be of interest; Invesco Perpetual Latin America, Pictet Russia and First State Global Emerging Market Leaders all target these areas.

You alternatively could pick one of the investment themes discussed or check out our top 10 funds of the month for more ideas.

North Korea - is it different this time?

This week has seen tensions escalate between North and South Korea, with North Korea declaring they are in a state of war with South Korea.

North and South Korea have been at loggerheads for over 60 years and it could be that this latest flair up is simply 'tough talk' from North Korea and the situation passes without any implications. North Korea has also become very vocal towards the U.S. and this week ratified a law regarding "counter-actions" against the U.S. which includes a nuclear strike. They also plan to kick-start their old nuclear programs. So is it different this time? Well the answer we hope is "NO"! This is simply North Korea flexing some muscle as they like to do, and no military action will occur. Both the U.S. and South Korea have been fairly quiet, which is a good sign and there does not seem to be any out of the ordinary deployment of troops by North Korea.

Nevertheless, tensions like this can spook markets, and that has happened with the South Korean market falling to five month lows, and the currency depreciating. Other risk (equity) markets around the world have also slipped which may be partly due to the uncertainty around the situation. In general wars, terrorist strikes or severe threats lead to equity markets falling off. Safe haven assets may provide investors with some solace during these times, and gold could be a good answer, although of late that hasn't proven the case with the gold price falling to YTD lows (Gold).

Geo-political trouble is always hard to quantify when purchasing stocks but it is important to be aware of possible conflict and make sure the reward is worth the risk.

Hopefully this will all blow over with no violence, but it is definitely something to keep an eye on! 

(Does anyone have a spare Nuclear bunker lying around?)

Interest Rate Decisions and Further QE

It has been a busy day today as central banks around the world announced interest rates and quantitative easing for this month .  Japan led the way as the new Bank of Japan governor Haruhiko Kuroda hit the ground running after his first meeting as they announced further bond purchases of 7 trillion Yen ($75bn) a month over the next two years easily beating market estimates of 4 trillion Yen.

This commitment is what the market wanted and they certainly have delivered, the Yen fell 3.4% against the USD following the announcement and Japanese equity markets rebounded from earlier losses.  I expect many foreign investors will be eager to increase their exposure to the 3rd largest economy as other equity markets have hit a recent stand still.  This was certainly evident after the Japanese market closed up 2.20% the futures market rallied a further 2%. 

Back to Europe...Many were eager to here from Mario Draghi following issues with Cyprus and the worsening state of the Eurozone's economy.  Rates were kept the same as expected however, Draghi hinted at lower rates down the line if the economic situation did not improve.  His comments lacked the commitment many were hoping for as previous statements have been bold and provided direction.  The Euro weakened further as the hint of lower rates caught traders ears, however recovered slightly as the day went on.  A weaker Euro will help ease the blow for exporters, and Draghi mentioned an economic recovery should begin during the later part of 2013 (fingers crossed).

Mervyn King may have failed to convince the monetary policy committee once again that further quantitative easing(QE) should be implemented as interest rates and QE were kept level.  The UK's economy has been relatively flat since last month and data has failed to inspire either on the up or downside. 

An interesting time for equity markets, it highlights the importance of sector allocation, some markets this year I expect will massively outperform others so pick wisely.

Trouble in Egypt

A country that has fallen off many peoples radar is Egypt.  This used to be a top holiday destination and attractive investment area before Hosni Mubarak, the President for over 25 years was ousted by a public uprising.  Since then this country has slipped into the Abyss, continuing uncertainty and lack of structure within the country has led to many holiday makers and investors to stay away.

The two biggest income streams for Egypt are tourism and foreign investment, the land is rich with natural resources, hot weather and beautiful seas.  The political uncertainty has acted as a deterrent and with many business contracts that were put in place during Mubarak's reign under dispute it is making it less desirable for the overseas investor.  Subsequently Moody’s downgraded Egypt to Caa1, on par with the likes of Pakistan.   This on the face of it seems unruly, however if you delve a little further into the state of the economy you may understand why.

For years the people of Egypt have received significant subsidies for things such as oil and food, but as global costs rise this pressure has been passed onto the government.  Economic growth prior to 2011 was around 6%, an attractive level, however this has fallen off significantly as demand for Egypt has dissipated.  This economic weakness has been amplified by the weakening local currency.  This year alone the Egyptian Pound has fallen off 7% making those sought after imports such as fuel and food more expensive.  As such petrol shortages are now common throughout Egypt.  Price rises have been so severe many distributors are not buying the allowed quota as they fear the wrath of their customers when they see prices have risen so much.   Rolling blackouts throughout Cairo are not uncommon as during the midst of summer weather energy demand is in full throttle as people use air-conditioning. 

With many structural and political issues still to overcome there have been talks with the IMF about an emergency loan of around $5bn to keep things ticking.  The key importance is to make the country more stable and attractive for foreigners and generate demand again.  Political issues over business contracts certainly are not the way forward however, we may see heavy royalties inflicted on those already situated as a method for government income generation.

A number of companies operating in this area, such as Centamin (gold miner) are currently very cheap, however like many their mining contract is under dispute.  There are certainly  opportunities, however investors will most likely keep a close eye on over the coming months before jumping in.

The market is waiting for that bold statement, “We are ready for business”.

1st Quarter 2013 Round Up

For most investors Q1 has probably exceeded expectations and equity elements of portfolios should have performed strongly. Almost all markets seem to have advanced during this quarter, from Emerging Markets to Developed Markets, with the U.S. and surprisingly to many, Japan performing strongly. Currencies, like equity markets have moved considerably, with USD strengthening against a basket of most global currencies, and Sterling weakening as many consider the currency overvalued given the precarious state of the UK economy (Currency). 

The seemingly relentless climb in global equities did dissipate in March however. The Cyprus crisis helped to remind investors that although the global outlook may be improving there are still considerable headwinds that could stall the recovery. Although Cyprus is only a small nation, it did cause global investors to pause, with some taking the opportunity to lock in profits and sell equities. 

So what can we expect for Quarter 2? Well I think there is still a demand for equities from investors, coupled with a bearish view on developed world debt, particularly government debt, and as such I expect money to continue to flow into equities, and any dip maybe seen as a buying opportunity (buying on the dips) for investors. Although I expect equities to advance further, I do think there will be volatility along the way, and one must have a strategy to manage this. If you take a long term view, then this short-term volatility may not be an issue; others however may look to using hedging techniques to help manage volatility. I think we will continue to see QE from the US, UK and Japan which should be favourable for equities and I also expect rates to remain unchanged, given both inflation and growth is still low.

Q1 has hopefully been a profitable quarter for you as an investor and hopefully Q2 will be similar. However it is important to be aware of the headwinds and position your portfolio accordingly. 

Equity Markets Take Time to Reflect

Global markets paused as a number of countries celebrate Easter. Economic data out of Asia disappointed as PMI from China undershot estimates. The Yen strengthened against all major currencies as investors continue to wait for signs of economic improvement. As the earnings season for Q1 begins we may start to see signs of companies relishing in the cheaper local currency, however for now there seems to be little indicating this first round of QE has had much of an impact.

Elsewhere, the U.S. manufacturing data came short of analysts expectations as economic improvements showed how fragile they actually are. As fiscal cuts begin to bite, consumer demand may halter slightly during the mid part of this year.

The recovery in China is there, however not at the level many would hope for, commodity prices have fallen off somewhat amid fears of falling demand. China is one of Japan's largest export market and it fails to instill confidence that economic recovery will be driven from foreign demand.

A lot of data out again this week, Draghi is due to speak on Thursday after the ECB rate decision and much light will be shed on the state of the Eurozone's economy following the issues with Cyprus. Furthermore, the BoE are due to announce possible further quantitative easing on Thursday as George Osbourne failed to inspire during the Budget a fortnight ago.

Certainly an interesting time for equity markets, as the clocks go forward in the U.K everyone awaits the hopefully prosperous and sunny summer ahead.