Diversification Headache (29 June 2009)

It is getting harder to diversify these days. It used to be that the correlation between various region’s stock markets was lower. So, if you had a global portfolio, it was considered pretty well diversified. Many fund managers in the US did not even have any concept of investing outside of US as little as ten years ago.

As the year 2008 showed, these days, when there is a crisis, it can easily go global, and when it does, there is almost no place to hide in stock markets. That makes having a global portfolio no longer enough for diversification. Now, it is quite important to have asset classes other than just being in stock markets if you want to diversify properly. This is why even though I consider myself an “aggressive” type of investor, I still hold bond funds.

Within bonds, I am actually not that keen on the bond funds holding lots of G7 government debt. Interest rates are already so low, if I really wanted that kind of safety over anything else, I might as well stick to the cash fund. Emerging market and high yield bond funds give me a much higher yield, and they will also be beneficiaries of a global recovery, which I am positioning my portfolio for.

However, this also means that they also cannot completely diversify away risks in my portfolio. Only things like SGS bonds, Singapore bond funds and money market funds like the cash fund can provide that kind of safety to allow us to diversify out of equities effectively. Their returns though are relatively low at this point.

Nevertheless, every little bit helps. An un-hedged, totally one sided portfolio that is totally banking on the Asian economic recovery is going to be high risk, and very volatile. It may not be everyone’s piece of cake. So, while the thought of holding anything like cash fund or bond funds might seem too boring and delivering too low a “return” for many. The alternative, after seeing the swings that equity markets went through from last year till now, is likely to be unappealing to many investors as well.

Just remember, the key objective of diversification isn’t to improve your return, its to lower your risk.

After the Fed Meeting (26 June 2009)

The US Federal Reserve has had their meeting. As widely expected, they did not touch interest rates at all, instead leaving it at near zero. They even stopped talking about worrying about deflation. They are going to continue to buy back big amounts of US debt, and they will continue to keep liquidity in the system. They also indicated that they felt that the US recession was easing.

Markets fell initially because the Fed not raising rates was already priced in. However, as the week continued, and more digested that the Fed’s priority in the near future was going to remain the revival of the economy, stock markets globally rose. But expect to see lots of volatility in the weeks ahead.

More news from the Commerce department in the US just arrived. Based on the new numbers, the US economy did not drop quite as much as they originally though it did. US gross domestic product (GDP), fell 5.5% in the 1st quarter of 2009, which was not as bad as the original 6.1% they said it dropped. (They already revised that down to 5.7% once, this is the second revision).

What it does highlight though is that economic numbers are generally well behind the curve. We are at the end of the second quarter already and markets are looking into 3rd and 4th quarter of this year. Yet, the economists are still trying to fine tune the numbers for the 1st quarter. All it does tell me is that people, including economist were overly pessimistic about the economy.

Things can and will bounce back. A fore warning though, the recovery in the US is likely to be a rocky one. We will see more bankruptcies there, and even here in Asia. Badly run companies that run out of cash will still die, no matter how big they are.

US have a lot of structural issues to deal with. But at the same time, we should never under estimate the ingenuity of America. This is the nation that invented the internet, the Ipod, and many other things.

I sometimes sound very negative on US. It is because I have to acknowledge the big number of issues they have to deal with right now. It doesn’t mean I am writing them off though. If its any nation that can reinvent itself and come back, it’s America. But that’s good, because Asia can’t just grow on its own. Asia would be in a far better position to grow in future with a US economy that is recovering than a US economy that stays down on its back.

About the Fed, and about having lots of patience (24 June 2009)

All eyes are on the US Federal Reserve these two days. Expectations currently are that the US Federal Reserve will keep rates at near zero for at least the rest of this year. The main worry of investors was that the Federal Reserve, worried about rising US bond yields and that rising commodity prices might lead to high inflation, would slam on the brakes on any recovery by starting to raise rates too soon.

It is unlikely the Federal Reserve do raise interest rates though. As long as the economy has not yet shown enough signs of picking itself up from its feet, they will not raise interest rates. They may come out with some tough language about monitoring inflation and such, but in the end, talk is cheap and it is actions that speak far more than words. And their likely action (not raising rates) is going to show that the revival of the economy is a far bigger concern right now than rising commodity prices or inflation.

Markets seem to be in a situation of trading sideways these days, up and down each day. There is no clear direction in the short term. This doesn’t mean that the global economy won’t recover. It will. It’s a matter of time. Its just that markets are notoriously short sighted and will only look ahead 3 months, at most 6 months. A bottoming of the economy has been priced in. Now they want recovery numbers to flow in immediately.

However, such numbers will take time, and never arrive fast enough for markets. So, in the meantime, we will see the market gyrate up and down as the bulls and bears tussle and investors are unsure what to expect next.

I prefer to look further out than just the next few months to the broader recovery that will take hold eventually. Hence, I am staying the course with my own investments. Unit trust investing has some advantages to stocks, and one of these is that we tend to be a lot more patient. Also, we take short term changes in markets in our strides better. The short term stock traders are looking around for signals, any kind of signals in an essentially directionless market.

For me, that is like missing the forest for the tree. There is no one single signal, not even by the US Federal Reserve that dictates how markets will move conclusively. So, looking for any one signal and grasping on to it is not a good idea at the moment unless you are a day trader. Patience is the key word for unit trusts investors like me at the moment.

About the Fed, and about having lots of patience (24th Jun 2009)

All eyes are on the US Federal Reserve these two days. Expectations currently are that the US Federal Reserve will keep rates at near zero for at least the rest of this year. The main worry of investors was that the Federal Reserve, worried about rising US bond yields and that rising commodity prices might lead to high inflation, would slam on the brakes on any recovery by starting to raise rates too soon.

It is unlikely the Federal Reserve do raise interest rates though. As long as the economy has not yet shown enough signs of picking itself up from its feet, they will not raise interest rates. They may come out with some tough language about monitoring inflation and such, but in the end, talk is cheap and it is actions that speak far more than words. And their likely action (not raising rates) is going to show that the revival of the economy is a far bigger concern right now than rising commodity prices or inflation.

Markets seem to be in a situation of trading sideways these days, up and down each day. There is no clear direction in the short term. This doesn’t mean that the global economy won’t recover. It will. It’s a matter of time. Its just that markets are notoriously short sighted and will only look ahead 3 months, at most 6 months. A bottoming of the economy has been priced in. Now they want recovery numbers to flow in immediately.

However, such numbers will take time, and never arrive fast enough for markets. So, in the meantime, we will see the market gyrate up and down as the bulls and bears tussle and investors are unsure what to expect next.

I prefer to look further out than just the next few months to the broader recovery that will take hold eventually. Hence, I am staying the course with my own investments. Unit trust investing has some advantages to stocks, and one of these is that we tend to be a lot more patient. Also, we take short term changes in markets in our strides better. The short term stock traders are looking around for signals, any kind of signals in an essentially directionless market.

For me, that is like missing the forest for the tree. There is no one single signal, not even by the US Federal Reserve that dictates how markets will move conclusively. So, looking for any one signal and grasping on to it is not a good idea at the moment unless you are a day trader. Patience is the key word for unit trusts investors like me at the moment.

Danger of Boredom (22 June 2009)

Not that much going on right now.  Investors are watching for more economic data. Many eyes also on the Federal Reserve which are holding its Open Market Committee meeting on Tuesday and Wednesday. Personally, I don’t think they will do anything drastic. They don’t want to kill off any recovery by hiking rates, but they don’t like to see treasury debt yields go up either. At this moment though, they are unlikely to raise rates. So, at the most, they might come up with some strong language about inflation, but they are going to do nothing about it.
 

The biggest danger in the near term to many investors is boredom. We risk making moves and switching just because our investments aren’t moving much. Markets can’t go up 50% every other 3 months. At the same time, if they are not going to crash, then the investors waiting for it to come back down to levels of March 9th are going to be disappointed as well.

Boredom is a danger because people run out of patience. After the run up, we now need more proof from positive economic data and from companies. Yet, many typically have no patience. They want the signs to show up now. Economies move relatively slowly, and even if an economic recovery is now starting to take hold, you simply won’t see a massive turnaround in data that some seems to expect.

On the flip side, there is limited downside to markets as well because it is happening in the backdrop of a recovering economy (though not as fast as some wish to see), and there is a lot of liquidity. Its very possible we may see markets stay range bound, fluctuating up and down but going nowhere in the short term. I say possible, because short term predictions are notoriously unreliable.

But eventually, stronger data will start to come in. And that will form the basis for the next leg up. But investors who are too impatient or bored with markets going nowhere may switch for the sake of switching, or they pull their money out. So, beware the dangers of boredom.

Why I hold some bond funds even though equities have more upside (19 Jun 2009)

Markets have been going through a correction this week. As I mentioned in my previous entry, I took the opportunity to put in a further $10,000 into my portfolio. My continued confidence in equity markets stems from the strong belief that markets are limited to a forward looking view of just 3 months, at most 6 months. A fundamental question I ask myself at this point is "Will a recovery take place within this year, and will markets be higher at the end of 2 years times, when the economic recovery is in full swing?"

If the answer is yes, then corrections are opportunities for me to add more into my portfolio at cheaper prices. However, to have the patience and confidence to adopt such a strategy, a disciplined appraoch to investing is necessary. This means keeping one's risk within acceptable levels. For me, a suitable proportion between my bond and equity assets is also important. As some might note from lookiong at my portfolio, I have about 15% invested into bond funds (high yield bond and emerging market bond). This means that my total equity fund exposure is 85% of my portfolio.

I am not adverse to changing this ratio I have between equity and bonds. But only if I deem that the markets have moved in such a way that equities are available at great bargains, and it warrants going into 95% equity exposure instead of 85%. If markets continue to go up, then I will let them run, while ensuring that my new investments continue to include small proportion in bond funds. I have often spoke about rebalancing, and in truth, rebalancing works better when you have different assets classes that performs differently over time.

In todays markets, many equity markets are getting more closely correlated. There are differences in upside, but all too often, the direction of market's movements are similar. Only a seperate asset class from equities like bonds can give you a more diversified portfolio. Some investors prefer to stay all in cash instead. The danger though is that they adopt too risky an appraoch, they are either "all into" markets, or "all out of" markets. Its a very high risk appraoch towards investing.

Also, a further danger of staying in cash is that inertia sets in far too easily. Because nothing is going to happen if you leave your money all in cash, there is a strong tendency not to touch it. By the time you feel a greater urgency to shift money from cash into investments, its usually because you have missed most of the market's upside, and the sky is "clear". Being in cash is not being invested. Thus, even though I feel that the bond funds I have are likely to underperform my equity funds over the next 2 years, I believe they will definitely outperform cash. Plus it is a way of "forcing myself" to stay invested so that inertia does not set in.

Just added $10,000 to my portfolio (17 June 2009)

I just bought into 4 funds on totaling $10,000. These consisted of:

Aberdeen Pacific Equity - $4,000
Legg Mason SEA Special Situations -$4,000
Fidelity US High Yield USD - $1,000
Fidelity Euro High Yield EUR - $1,000

I will update my portfolio when the transactions are completed and priced.

I advocate buying on dips these days as a strategy. And to me, the fall in markets on Monday and Tuesday were sufficient enough as a “dip” for me to buy in further. A correction is normal and would have happened sooner or later.

The key question I ask myself, as an investor, is why I am investing? The reasons are many, but the biggest reason is that the economy recovery still hasn’t happened, and hence it is not fully priced in yet. There are far more people out there who are not going to re-enter markets until they see irrefutable data that an economic recovery is at hand. And by that time, it will be too late.

In the meantime, the stock market is like a boy that gets bored too easily. There is nothing exciting about waiting for the global economy to right itself because it won’t happen tomorrow, much as we want it to. And thus, boredom, profit taking, will cause the market to dip or go through various corrections.

The market may have priced in the initial stage of the recovery (still debatable), but it certainly can’t have priced in anymore than that, because it is only forward looking by 3 to 6 months. So, it can’t have already priced in a full recovery.

I am willing to be patient, and to look past these super short term gyrations of the stock markets. In fact, it is these dips that present me with the opportunity to go back in and acquire more investments at lower prices. I have time on my side. There are already signs that the economy is bottoming out (though still just “green shoots”), we will eventually arrive at a time when the recovery is irrefutable.

What some of you will notice though, is that I actually have two bond funds in my additional investments this time round. While I do like high yield bonds at this stage, a bigger reason why I have these are due to diversification. Even if they are just 10% to 15% of my portfolio, this is an asset class that does not move in line with equities. And it is always prudent to diversify.

The Love-Hate Relationship I have with Commodities (12 June 2009)

I know, we are supposed to not let emotions get in the way of investing. It’s the biggest reason why investors buy high and sell low thus losing money. Right now, the commodities sector is in a unique position. It is that one sector in which both the bears and the bulls are moving into. Why is that? Because this is the sector where heads I win, tails you lose. And it is also a sector that I both love and hate.

Firstly, Why the win/lose sitaution? Let’s take the bull’s perspective. The global economy is on a mend. China’s rise is unstoppable and inevitable. China’s thirst alone for oil (just look at how their car market has exploded) will drive oil, and other commodity prices up. It’s a long term trend. Even the shorter-term trends are positive because with the recovery in the global recovery, total demand for commodities will surge back up again. Hence, the bulls like the commodities sector.

You would think bears would always be the opposite of bulls. But now we have a situation where bears disagree with everything the bulls say, but they come back to the same conclusion – buy the commodities sector! Why is that? How can it be so? Let’s look at the bear’s perspective.

The bears feel that the global economic recovery is fake. That we are in for Global Depression II. They believe that US printing so much money will end up bankrupting the country and plunging it and the rest of the world into a crisis that will make the US financial storm look small. They predict that the US dollar will crash, and inflation will zoom away. Here’s the key, because hyperinflation will set in, the most valuable things will be the things that will still hold their value even when money becomes worthless. And these will be commodities. Everything from oil, to soybean, to gold. Thus, we have come full circle, and the end conclusion of the bears, is that they love commodities too.

That seems to make the commodities sector ironically the one sure bet whichever way you think the global economy will play out in the next few years. I belong to the optimist camp, and I believe recovery is on the cards. However, the current situation which has both bulls and bears favoring resources funds, commodity funds, energy funds, etc makes me uncomfortable.

For one, although I should be driven by just the motive to make money from investments, I can’t deny that if the rush into commodities by speculators and investors alike will push commodities prices up. It will become a self fulfilling cycle. However, what disturbs me is that while there will be investors who make money from this, there will be far more ordinary people who will be hurt by surging commodity prices.

The rich, the affluent can take commodity prices rising 100%. The poor, though, will be very miserable. Also, an over the top surge in commodity and energy prices will end a recovery prematurely before it even starts to take hold.

Hence, I watch the rise of commodity prices with both interest and with caution. I have a metals fund, and I even have a Russia equity fund as a play on oil price. But I personally do not wish to see oil revisit USD150 per barrel. These will translate to gains to a relatively small pool of investors who are in commodities, but much hardship to the millions of people in Asia who have no way to benefit from this, but just see their living costs spiral upwards.

I would rather make money from a natural expansion of Asia’s economic growth through which the entire Asia is lifted up, including its people. Hence, the love hate relationship I have with commodities right now.

And the more attention focused on this sector, the more hot money will flow into this sector. This also explains why in comparison to my total holdings, energy and commodities related funds are a relatively small part of my holdings. I would rather make money in other ways, even if this seems like a sure win since both Bears and Bulls end up liking this sector.

But I have stated the current situation with energy and commodities, and also my own internal dilemma. In the end, as Do-It-Yourself investors one and all, the power of choice is in your own hands, Fundsupermart investors.

Ah commodities, how I love/hate you?

Oil Price at 71 USD and a Repayment of 68 billion (11 June 2009)

Two things I will be talking about. Firstly, oil prices rose to 71 USD per barrel on Wednesday. This was the first time it was touched above 70 USD in seven months. The two reasons cited was that oil demand may have bottomed out and there was a larger than expected fall in crude oil stocks.

This further supports the growing signs that the global economy has bottomed out. It also means that as the whole world starts to rev up their economies again, demand for oil will rebound. Most importantly, China will try and move even faster to buy up more energy companies and secure more energy resources.

The memories of oil at 150 USD per barrel are still fresh in China’s mind and they would not want their continued economic growth, which is so vital, to be derailed by high oil prices again. China will stock up, and it will do so very aggressively as oil trends higher. I have a relatively small position in a Russia equity fund, which is essentially an oil play. Looking for it to continue moving upwards.

The other thing to mention would be that in US, ten of their largest banks will be allowed to return 68 billion in TARP money which was lent to them by the Federal Reserve. It reflects a major turn around in the US financial sector because the Federal Reserve would not have allowed these banks to return that money if they felt that they were not healthy enough yet.

Bank lending to companies are the life blood of the economy. To have enough confidence to return billions of dollars lent from the government also reflects that the credit squeeze has loosened considerably. Even banks that the US government ordered to raise more capital, have generally had no problems raising billions more dollars to meet those capital requirements. Greater confidence in banks filters down to greater confidence in lending to companies as well. (I am holding on to my Asian financial sector fund with confidence of a rebound in financial sector earnings.)

Even in the local stock markets, you see more rights issues and share placements for additional capital from companies. But instead of seeing a massive stock price drop (even the mere rumor of such capital raising 3 months ago would have resulted in the stock plunging.), we now see the stock prices remaining steady, or even rising in some cases.

Companies are finding it easier to raise money. Once their immediate survival is not in question, they will focus on profitability, the stronger ones will then focus on expanding their market share.  We will still see weaker companies die off, as they should. But the stronger ones will rise to take their place, and rise to newer heights. Thus, I am confident of a rebound in the global economy, and hence stock markets.
Some of the individual players (companies) may change, but the new and old companies which are the strongest survivors from this time round’s financial crisis will be the ones that will dominate the coming decade.

On US Job Data (8 June 2009)

US job data was released last Friday. It was closely watched because massive job losses in the US was one of the concerns by investors about the state of the US economy. The report showed that non-farm payrolls had 345,000 job losses in May. This was actually far fewer than originally expected, so that’s good news. However, unemployment rose to 9.4%, which was the highest in 25 years for the US.

My take on unemployment is that it is a lagging indicator. Companies try their hardest to keep employees and only start retrenching when they have no choice. Unemployment is generally at its highest at the bottom of the recession and persists even as things improve. Also, in an economy that is mainly based on capitalism and free market, the US labor market is quite responsive to changes. While there will be bitter pills to swallow in the US from many job losses. The way I see it, people who lose their jobs don’t just sit at home and wring their hands. They will try very hard to get a new job.

While US does have some issues to sort through, I believe its citizens have the ability to stand on their own through these tough times. (Not that the US government isn’t also trying to help makes things better). The reason why my portfolio has zero US equity funds is more because of my strength of conviction in Asia than in my lack of confidence in US. If I had only one dollar to invest right now, I would place it on Asia and not US at this point because I feel that it would make me far more money invested into Asia than into US.

Its admittedly not quite in keeping to the concept of having a globally diversified portfolio. However, I feel that in comparison, having even such a portfolio that is massively underweight US equities, is still more diversified than one that has mainly just a few Singapore listed stocks.

Asian markets could go through some consolidations in coming weeks. But I expect that any downside to be limited, and I would be looking to add more if markets do correct. Corrections are healthy and expected in the current market environment. What I also find good is that there are still many bears  out there. This means that we are far from the stage where everyone is coming out to say that the coast is clear and the sky is blue.

The Start Of A New Thing (5 June 2009)

Dear readers,

Today is the start of my blog. We live in very exciting times having coming off from a massive market crash, with many markets having recovered 50% from their bottoms. While I wished I can say I had so much foresight I sold everything and then re-entered the markets on 9th March. That was certainly not what happened to my personal investments. But I had been adding a considerable amount to my investments over the last few months (will likely to continue to add more in future). So, I am looking forward to the continued rally with great anticipation.

I was told that blogs need to be kept short and sweet. So, rather than post my entire portfolio in detail. I will just mention the more interesting investment choices I have made more recently.

Asia remains by far my biggest holdings (55% of my portfolio are Asian equity funds, and this doesn’t include Asian single country funds or the Asian sectorial funds I have). The reasons I like Asia are many and I won’t go into detail here. Suffice to say, Asia’s power is on the ascendance, and this will show up in every way from the confidence of Asians, to its purchasing power, and definitely, its stock markets as well. I am confident the Asian market rally will continue and my portfolio reflects that confidence. If you want details on why I believe so, this article “After the Strong Run up in Markets, What's Next?” that I wrote recently summaries this.

I have on late also added a Russia equity fund and an Indonesia equity as more speculative investments lately. Russia is an equity play on oil price. On Indonesia, while some still think that Indonesia has terrorists, Muslim fundamentals, racial riots. Nothing could be further from the truth. Politically, Indonesia is more stable than Thailand or Malaysia at this point in time. The large population of Indonesia also gives it many of the demographic advantages that China and India have currently as well.

These are small and admittedly more speculative investments within my much saner portfolio, and as such, together, they only take up 4% of my total unit trust portfolio. I hope to keep this up regularly, and welcome investors to share their views with me on this forum thread I will start as well. We are all here to learn, and everyone, including me, hopes to learn something new from the active sharing of ideas.