UK Commercial Property.... in, out - shake it all about..?

Lots of chat over commercial property again - if you're looking for a subdued asset class then this might be it - just have a look at this chart I pulled from a well known UK fund.

One thing to be wary of is the need for good corporate lending to fund new property builds, boost occupancy rates etc. So you tend to need a recovering cap spend across the market. For this we need to be sure there are no lingering effects of the market dislocation in 2008 and that banks are happy to lend for new projects. I also wonder if companies will ever again be as ambitous in the size of builds - the RBS HQ is a lesson other companies may heed. The flip side is that more companies may lease existing prime real estate rather than build their on off-site locations. I think there are opps either way.

I'm going in quite hard - I'm trying to offset Global REITs (Real Estate Investment Trusts) with UK Commercial property - both via mutual funds which immediately makes them more long-term bets. In the US a lot of recovery has already priced in: the UK looks slower and so might have more margin. Generally property tends to lag the mainstream recovery - beware the risks and buy with a clear exit plan.

Have fun..
JB

The Quandry of Wealth Managers... 'competition and cost'

"banking products all corporations can give you the same (current account, TD, funds....etc), so services of wealth management is the difference that can allow you to compete in this market. What kind of services, not only pure market services as portfolio management but also other complementary as legal advise, inheritance planning ( an execution with lawyers....etc)"

As you know I'm all for transparency of charges and justifying how they are charged. The idea of setting universal standards for wealth services has its appeal.

The problem: 'Commoditising' and hence price competing ancillary wealth services is that they increase operating costs and on simple economies of scale this would favour the larger firms over the smaller wealth managers/advisers. Why?
Simple economics: However; generally speaking, the larger the wealth manager then the more akin to a DAM it becomes and I think the personal connection becomes diluted. Until that can be addressed then I am wary of making anything other than KYC and investment acumen the root of a wealth offering. It needs to be a fair and level playing field: at which point setting universal standards and costs for services makes great sense. We need to keep competion open and for many smaller firms that means sub-contracting legal and tax professionals if they are unable to keep up, in-house.
 
Overall the charges for wealth management must be justified, right across the offering, as great ancillary services can't mask sloppy portfolio management and visa versa. Intuitively - bundling feels wrong to me.
 

ETFs - one thing to think about..how to 'short'

A traditional ETF doesn't short its position so is always what we call 'long'..which means you are exposed if prices fall. Active managers on the other hand may short (and increasingly doing so) but you have no control over how much; (outside of the investment mandate/policy) nor how well they will hedge their position.

If you do chose an ETF then consider buying a corresponding 'short' ETF - it won't be geared so you can only buy corresponding units - think then of it more as either a way to mitigate (not remove) loss if markets do fall.. or as seperate investments that will cash in at different periods depending on market direction (a bit like a poor man's market neutral strategy)

Always remember the time horizon of each investment and stick to your BUY and SELL targets.

Food for thought.
JB

A handy gadget for Iphone/touch users.. try 'Hypocalc'.

In the 2nd half of last year I helped consult Appsrocket in the design of a simple financial modeller. My former colleague and owner of AppsRocket aptly named it 'HypoCalc'.

Web 2.0 applications are new genre that has grown exponentially in the last year, sparked primarily by the launch of Apple's IPhone. Although it had its challenges I'm sure you'll agree the results are worth it. My idea of a simple approach allows the user to select a different level of expected risk on the upside/downside while using the traditional bell curve range of expected returns. Although still bell-curve-derived; HypoCalc allows the user to change the confidence levels so that the expected range of return isn't symmetrical.. as we know - investment return is rarely symmetrical..!

By changing the level of expected upside and downside, volatility, expected return and investment horizon - the investor can start to consider hypothetical scenarios against their attitude to investment risk.

I'm really happy that HypoCalc is finally live on the Apps store for Iphone/Itouch users and congratulate Mahyad and Appsrocket on this achievement. From my pov it furthers education among normal and professional investors and I hope that we can develop more ideas together.

I'd recommend HypoCalc as a first step tool for all CCC'ers..

Go to: http://www.appsrocket.com/

Money on the move again - BUT where is Japan heading?

2009 was quite frustrating for me - the equity index levels at the bottom of the last trough were clearly underpriced and sentiment driven (as were YTMs on High Yield and EM bonds) - recession woes had a firm grip and of course liquidity was even more scarce then; than salt is now to clear my driveway from ice..! And so my pension transfer arrived late (October) and I missed the party.. Asia and EM Mkts were up and even the footsie has made easy double-digit returns.. doh! I consoled myself with some small gains in metals which I posted a few weeks back.

In terms of growth since March 2009 then Asian Equities already looked expensive - Emerging Mkt momentum into bonds/equities accelerated into Q4. However IF the UK's IMA numbers for November are replicated across Europe then I suspect that support has already slowed; IMA showed a fairly large rotation into Cautious Managed funds). What is clear is that assets are on the move again and rotating. If we look at the latest confidence indices then these appear to have fallen back by December; (still well above 2008 but down nonetheless) - the 'herd' seemed to be taking stock of the strong recovery and perhaps profit-taking on the assumption of a sluggish 2010; (similiar to 2004).


Lipper FERI are among the best trackers of sales flows in the world and I have the priviledge of working with them closely over the years. Their Asia coverage and research is becoming especially good.

Here is a link to their latest bulletin: http://www.lipperfmi.com/FERIFMI/Information/Files/FFAsia%200911%20Nov.pdf
I'll start tracking the performance and sales flow movment for Japan funds for your benefit.

"Japanese savers moved aggressively into Real Estate, higher-yielding bonds and the more racey equity sectors.. China, Hong Kong and Japan were in fact the only exception to Asia’s one consistent theme — the nearwholesale reluctance to invest in equities. In these three markets, the overwhelming bulk of new money went into Chinese stock funds" FERI

Q. If the Japanese are not buying Japanese Equities then why should we? The answer could be currency play of Yen..?

BUT a New Year and those end of year blues may give way to a new bull market. IF we see strong 'recovery' indicators for Q1; and supportive media, then there is no reason to assume anything other than the normal 2-3 bull market. What is perhaps plausible is that the bull market will not last as long simply because the previous drawdown occured and corrected faster than usual. This is in keeping with my earlier view that cyclical volatility will become more extreme due to the increase of investor information, greater private investor controls, de-institutionalisation of assets, globalisation and the rise of high frequency trading.

So what of Japan and is it a BUY or indeed heading down to China town?

A misnomer? Japan has always traded somewhat out of sync with its neighbours and indeed US/Europe. Primarily this has been much to do with the industrial make-up of Japan and it's unqiue inflation cycle and banking set-up. Japanese financial policy and political volatility have driven a weak Yen, which in turn fuelled the Yen carry-trade - for me this has been used excessively by outside investors/banks to keep the Yen weak. It has been the convenient source of easy liquidity to grow markets. However now Japanese banks are  strong again; (if a shadow of their former pre-97 glory).

The economics of Japan are complex and not entirely convincing - too much for me without some saki; and sometimes I don't think anyone really knows why Japan is out of sync with its neighbours. As China, India and Korea become more influential as trading partners within the ASEAN sector then perhaps that legacy won't last forever.

As one Hargreaves analyst wrote recently.. "After 53 years of single party dominance the market is still searching for firm direction from the newly elected Democratic Party of Japan. Will they be able to deliver the changes set out in their campaign? The jury is still very much out, and many in Japan remain sceptical. Nonetheless, in contrast with the previous government, the new Prime Minister has stressed the importance of deepening ties with other countries, notably China. This is a sign that Japan might become more fully integrated into Asia, which could be positive for many Japanese firms in the long term. Despite its problems, I think Japan still possesses the ingredients for a potential bull market: Low valuations, growth in mergers and acquisitions (Panasonic has just bought 50% of Sanyo for example) and a recovery in company earnings. I remain of the opinion that Japan will eventually have its time in the sun. What is still unclear is what the catalyst will be for market sentiment to improve."

So - simple says - for me Japan's TOPIX looks cheap at 3-5 yr levels - I am prepared to sit out for a cpl of years for a 20-30% recovery, vested via a cheap ETF. I am less certain of tier 2 smaller companies and so have opted for the main index; (the discount looks similiar). The one risk I haven't taken into account is Sterling v Yen and perhaps based on my notes above I should focus on the Yen rather than the stocks..

Picking funds in 2 easy steps.. wouldn't that be nice>?!

The article extracted below is written by John Coumarianos who is a fund analyst with Morningstar and editor of Morningstar's monthly newsletter that offers independent guidance on the fund family and helps investors find the best American funds. It is well written, anecdotal and fairly conventional among diversification, time horizon views - prevalent amidst media and advisers alike.. Posted to M'Star's site it is public knowledge and fair game for the CCC imo.

To read in full: http://news.morningstar.com/articlenet/article.aspx?id=321017&pgid=rss

Do you agree; personally I am less confident of historical patterns but I often catch myself buying for recovery. Hey - I am an ashamed multiple-personality investor? So in general I can still appreciate John's sentiment if not his on-the-fence conclusion (suspect we can thank M'Star for that).

The M'Star headline read:

'Two Things to Consider Before Picking Funds: Think about your goals, and learn about market history.'

"The appropriate place for money that you'll spend within two years is in cash--a money-market fund or a certificate of deposit. For a time horizon of two to three years, you can consider a conservative short-term bond fund or an ultrashort bond fund. Anything else is too risky. Then you must be prepared to see the return on that investment lag many other choices. In fact, it's virtually guaranteed that some asset class or sector funds will dramatically outperform that money-market account safeguarding next year's tuition payment or down payment for a house. Learn to live with the fact that returns on short-term money may look weak next to alternatives.

In short, getting the best possible returns on that money isn't the point; protecting it from loss is more important. Certainty comes at a price.

 

Over the long haul, stocks have been better performers than money markets and short-term bond funds, but they're no panacea. Knowing market history can help you build a successful long-term portfolio that neither overdoses on stocks nor avoids them altogether.

Stocks have returned about 10% annually for nearly a century, but they can go through extended periods of very poor performance. For example, the S&P 500 Index has posted a cumulative loss of 8% for this decade through Dec. 28, 2009, while the BarCap US Aggregate Bond Index has posted a more pleasing 85% return over that time. Additionally, stocks produced virtually no return from the period beginning in the mid-1960s through the early 1980s. Use this grim knowledge to set and temper your expectations.

Knowing what stocks have returned over the longer haul, and knowing that they can disappoint over multidecade periods, can also help you keep saving appropriately. Don't count on a roaring stock market to bail you out of not having saved enough for retirement or another major financial goal. Then, if the next decade for stocks turns out to be a great one, that will be icing on the cake. "

HNY: Bonds, bonds, bond yields.. North or South?

Firstly Happy New Year dear fellow CCC'ers..

To kick off I picked up on this bond discussion from one of the global wealth forums. Thought I'd post here for consideration.

Question: Is a secular bear market in bonds about to start? We are witnessing many fundamental and technical factors to suggest this including but not limited to an unsustainable expansion in the US monetary base and unprecedented amount of buying in the US Treasury and Corporate bond markets as stock market participants flee in droves. Technically, the 30-year US Treasury bond yield chart has put in a breakdown failure on the yearly chart after a consolidation in yields from 2002-2007. A move north of the yield highs of 2008-09 in 2010 would turn the trend up and start the secular bear. (see http://research.stlouisfed.org/fred2/graph/?s[1][id]=AMBNS )

Now there's a question - lots of talk about the fair value of bonds. I'm always cynical of technical indicators unless the 'herd' believes them (or I make them up myself).. but always open to chart patterns that emerge.


Where will yields go? - hard to say - prices will fall so most yields on existing issues will head north but what of new placings - the capital squeeze looks less severe, the need to raise capital less - I don't see (much) need for companies to give up high yields unless they need to restructure their debt; (we may see shifts in the SWAPS market for example). Sovereigns on the other hand have large deficits and every need to rob Peter to pay Paul. Investor sentiment will stabilise and we'll likely return to sth like a 2004 bond market. Tight but so-so efficient and relatively stable.. that would support a new equity market if we follow the events of 2003-2006.

In terms of buying patterns then, globally, the 'money' has already begun to rotate out of bonds - it is pricing for a decline. What's confusing the market is that institutions have had lots of capital in reserve since 2008 and are now investing it; (this is one of the few occassions where the average investor has little power over short term market direction). Be aware - any large influx of money will facilitate the greatest change in secondary market prices in bond markets.. bond traders will continue to do what they do.. I suspect behind the institutional injection; investors are moving away from bonds.

Just be ready to move to capitalise/defend your portfolios.

JB