Once again Bali recently hosted a World Tour seminar conducted by Financial Partners. Clients and invited guests heard the latest market views and predictions from specialists in a number of fields. The following are a few of the highlights, coupled with some related financial advice.
First – a surprising statistic!
Martyn Simpson of RMB Asset Management in London asked the audience how often it thought global stock market returns in the past 27 years were between 6% and 11%. Most thought this range would apply in many years, if not the majority. The surprising correct answer was that the returns have NEVER been between 6% and 11% in the past 27 years! They have either been higher or lower! What this demonstrates is that stock markets rarely produce ‘ordinary’ returns. They either have poor years or great years! Fortunately over time the great years outnumber the poor years, hence the strong returns over the long term. But in the short term the poor years must be accepted in order to enjoy the benefits of the great years. And no point in trying to stay out during the poor years; market timers have almost always got it wrong. When markets recover, gains can be significant in just a few days; nervous investors waiting on the sidelines for ‘signs’ of a turnaround invariably miss the boat.
This observation also highlights the importance of holding a diverse portfolio of assets so that extreme movements of the markets can be cushioned by holding assets that are not directly correlated with them.
Market performance – recent and looking ahead
Investors in stock markets will have seen sharp falls since markets reached their peaks last year. We have seen markets recover since they reached what may prove to have been the bottom but the drop from peak to trough was quite large, ranging from 18% in the US market to 40% in China. Of course these falls are dwarfed by the huge gains the markets made from early 2003. Investors who came in prior to or during the long bear market of 2000 to 2003 or even in the following two years should still be seeing strong gains. Only those who came in just before or at the top of the market (when unfortunately many inexperienced investors take the plunge) will be nursing their wounds. Advice to them is to hang in and be patient.
As to where the markets are going, Martyn thought that early next year should see a recovery. Global equity values were still reasonable; we do not have a ‘bubble’ as was the case in 2000. Recession was certainly on the cards however; he pointed out that whenever the housing market falls it is usually accompanied by a recession.
Private equity – just for the rich?
Private equity is a field that historically has been open to only the ultra high net worth, namely those with tens of millions of dollars to invest. Their money would typically be directed into companies in distress or underperforming companies with potential. The private equity fund would then have a say in managing that company, would expect to turn it around and finally sell it at a significant profit. Another variation is to use venture capital to start up a whole new operation or project. Finding the right experts to manage the capital is the key to success. The rewards can be much higher than investors would expect from conventional investments but the risks are also greater.
Duncan Hughes of Arch Financial Products outlined some of the opportunities now coming ‘down the line’ and becoming accessible to investors below the ultra high net worth bracket. In a world where demand for energy is exploding, by far the greatest growth in demand will be taking place in China. Investors with as ‘little’ as $75,000 can now participate in a fund that will be investing in new energy projects in China over the next five years. Another more general private equity fund is shortly to be launched that will be accessible to even smaller investors.
What we are now seeing is a trend for this previously exclusive asset class to become available to retail investors in the same way that hedge funds opened up to the public just over a decade ago. While this is good news, investors should seek best financial advice and weigh up all the options before going into funds that they don’t fully understand. High rewards require taking risks and it is important that the risks are fully understood. It is also important to have a large portion of one’s holdings in relatively ‘risk-free’ assets. Note again that no investment, not even a bank account, is entirely ‘risk-free’ hence the need to diversify.
Hedge Funds
On the subject of hedge funds, Sam Gibson of the Man group described how the performance of his group’s funds did not depend on the unpredictable movements of the stock markets. Many of the funds invest in a program run by AHL which is completely computer driven. By eliminating the human ‘emotional’ factor the program, which trades in 140 markets, has been able to generate average returns in excess of 15% per annum since its inception in 1991.
Again, this shows the importance of holding diverse investments. It’s good to have a fund that can make money when other assets are falling. The group’s hedge funds were not involved in the sub-prime mortgage market which caused the collapse of a number of hedge funds in the US and Europe. This again highlights the importance of getting the right advice when investing.
Need a mortgage?
If so you should not delay in applying, according to Neil Jensen of Lloyds TSB. The sub-prime mortgage crisis in the US has led to a global credit crunch and a tougher approach to mortgage applications. For those with the right credentials and who can provide close to 30% of the equity there is still money available for purchase, refinance or equity release. If thinking about a purchase a useful strategy is to obtain pre-approval for a mortgage. It is then possible to go to an auction or make a cash offer with the potential of making a large saving. Multi-currency mortgages can offer additional savings but be aware of the pitfalls. Again, getting proper advice is essential.
Colin Bloodworth, Financial Partners
World Trade Center, 8th Floor, Jakarta and
Jl. Sunset, Kuta, Bali
colin.bloodworth@financial-partners.biz
