As an Old Year ends, a New One Begins (24 Dec 2009)

As we approach the end of the year, let’s take stock. It has been a tough year for many people, a global recession, many job layoffs, uncertainty in markets, have no doubt also caused a certain amount of anguish in many people.

Although stock markets looked as if they were on the edge of an abyss in March, the darkest time was followed by a huge rebound in the months that followed. I remember writing at the start of the year in my GM column in the Fundsupermart magazine that this year (2009) will surprise many an investor as it would turn out to be a positive one. Markets did in the end surprise on the upside, with many markets moving up 50% or more.

Despite the positive performance by markets this year, I suspect many investors remain in the red in terms of their investments which were bought at higher prices. The economic turmoil has wrecked havoc on many company’s earnings and in turn bonuses, increments, has been cut, amidst much job uncertainty. Many would heave a sigh of relief to put the year 2009 behind them.

But enough of looking back, it is more important to look forward. 2010 will usher in a new year. A new year, with new resolutions, worries, as well as new hopes. While challenges and concerns remain plenty, the economic environment is definitely on the mend. US, still a key export market, is clearly coming out of recession, its housing market showing signs of improvement. China is continuing its high rate of growth, and many Asian economies have also all swung out of recession.

Along with the recovery in the various Asian economies, companies are likely to see their earnings improve in 2010. 2009 saw earnings of many companies plunge as demand plummeted and fear made everyone cut back drastically. 2010 will see much needed confidence return to consumers, helping to drive earnings of many companies back up again. While we are still along way off from the highs of 2007, it would still be a significant improvement from the lows of 2009.

There are many concerns aplenty amidst this tide of growing positive news. But this is precisely why I am confident that there is still lots more upside to stock markets. Trading volume remains weak at this point, and there are huge amounts of money remaining in cash. From Greece going under scrutiny, to Dubai World’s troubles, from worry over hyper inflation, to worry about double dip recessions. All these concerns means that investors will not so quickly forget about fear, that greed will not set in so quickly. This means that markets will trend up steadily based on fundamentals rather than rocket up, carried by greed and over exuberance.

2010 will be a good year for investors, in particular those who are patient. I look forward to the new year in great anticipation, but tempered with prudence. We won’t see the kind of eye popping returns of 2009, and there will be volatility mixed in with times when the markets seem dead and stagnant. But ultimately, by the end of 2010, I expect that investors who persisted throughout the whole year will see decent returns. I expect Asian markets could return 20 to 30% for 2010.

So, after rebalancing your portfolios at the end of the year, look forward into the new one and take heart. 2010 will be a good year. Here’s wishing everyone a Merry Christmas and a Happy New Year!

Rebalancing My Portfolio (15 Dec 2009)

I am putting my own portfolio through a rebalancing exercise. I only do this once a year. The basic concept is to take profit for your winners, put some of the profits into your loser or laggard markets, and also, ensure that you don’t have too much into one particular area.

Looking at my portfolio. I remember that at the start of the year, I made a conscious decision to avoid US totally, more or less avoid Japan, and focus on Asia with some exposure into Europe. The strategy has paid off in 2009, as Asia led US and Japan markets by a mile. All the Asian funds have done at least over 50%, if not more, while the Japan fund is up 28%. I looked up the US equity funds on the fund selector and none of them did better than 34% over one year. The Europe funds I had though, did well, keeping pace with the Asian equity funds over one year.

However, its been one year in such an extreme position. Its time to move back to a slightly less extreme position. However, if you were to ask me, I would still say I favor Asia at this stage, though I also like Emerging markets as well. I am still rather iffy about Japan and US, but that’s the point about rebalancing, it forces you to put money even into areas you might not like. So, I came up with a new target allocation for my core allocation. Previously, the 60% I had in my core portfolio had 6% in Europe, 0.2% (negligible) in Japan, nothing in US, and 54% in Asia, including Singapore. My new target allocation would have 10% in Europe, 5% in US, 5% in Latin America, 5% in Japan, and the rest in Asia (35%)

Within my bonds portion, I wanted its total to make up 15% of my portfolio. As I made sure to add a portion of my new investments into my bond funds, and as the bond funds I choose this year had pretty eye popping returns over one year, they were actually not too far behind many of my equity funds. (Fidelity high yield bond fund was up 72% over one year, Fidelity US high yield was up 36%, and INF emerging market was up 64%). I was clearly too heavy into emerging market bonds though, so I decided on a final allocation of 4% into US high yield, 3% into Europe high yield, and 8% into Emerging Market Bond. So, I would be shifting some profits into my bond funds, and the US high yield bond fund would receive a bigger proportion since it was clearly the laggard.

Now, we come to my supplementary portfolio. This added up to 17.5%, and had seven funds in it! Three of these, the India, Russia and Indonesia fund had a return of 124%, 99%, 94% over one year. The South Korea fund and China fund were the laggards. Looking at South Korea, I found that I liked the valuations of the market, and its earnings growth for next year. Its one of my favorite markets for next year, so I decided to overweight it. Hence, I took profit on Russia, Indonesia, Asian financials, and added most of it all into South Korea. I left the precious metals fund and HGIF Chinese Equity alone as they were close to where I wanted their allocation to be.

I also left my CPF funds untouched as at this stage, I couldn’t add to them, and I was comfortable with their allocation.

My final portfolio had a target allocation that looked roughly like this:

Core Portfolio
Parvest Europe Alpha EUR	5%
FLF equity Emerging Europe	5%
LionGlobal Japan Growth	5%
Aberdeen Pacific Equity	25%
Aberdeen Asia Smaller Cos	5%
Aberdeen Singapore Equity	5%
Schroders Latin America	5%
FLF Opportunities USA	5%
Bonds Portfolio
Fidelity Europe High Yield Bond	3%
Fidelity US High Yield Bond	4%
INF RF Emerging Market Debt	8%
CPF Portfolio
AIGIF Acorns of Asia	7%
Lion Capital Balanced Singapore	1%
Supplementary Portfolio
HGIF Chinese Equity	3%
LionGlobal Korea	4.5%
HGIF India	1.5%
FLF Russia	1.5%
Aberdeen Indonesia	2%
DWS Noor Precious Metals	1.5%
Fullerton Asian Financials	3%
Total	100%

This actually looks like a lot of funds, and indeed, there is no necessity to have quite so many if you don’t wish to. A much simpler portfolio with a similar allocation would look like this:

Aberdeen Asia Pacific Equity	46%
Global Equity Fund	23%
BRIC Equity Fund	11%
Global High Yield Bond Fund	7%
Emerging Market Bond Fund	8%
LionGlobal Korea	5%

So, there you have it. Once you have established what kind of target allocation you want to have. To get to it just involves making the various switches to adjust to the new allocation. Don’t sweat the small amounts. For example, if you find you want adjust something from 5.5% to 5%, and it involves switching a very small amount, then don’t switch, it won’t make that much of a difference either way. It does not have to be a strict rebalancing either. I personally continue to have a heavy bias towards Asia, and it shows in my portfolio. But what the exercise does, is that it forces me to take some profit from Asia, Russia, India and add to some areas which have underperformed, like US, Japan, South Korea. Sometimes, these decisions, forced upon us by rebalancing, can be very surprising in their results. For instance, this year I never expected my high yield and emerging bond funds to do quite as well as they did this year, nor did I expect my Europe funds to actually keep pace with many of my Asian equity funds as well. I will update my portfolio when all the switches have been put through and updated in my holdings.

Year End is a Good Time for Rebalancing (4 Dec 2009)

We are in the month of December now, in the blink of an eye, it seems like the year has passed. The Lehman Brothers crash is now more than one year ago, and while it may not feel like it, most markets have been rising steadily for several months. I remember writing in a column in the Fundsupermart magazine at the start of 2009 that it would be a good year with positive surprises. So far, it hasn’t failed to disappoint. Many markets have shot up 50 to 70% year to date. But now that we have been through two such turbulent years, one with a massive crash, and almost through another with a big recovery, it is a good time to pause and rebalance our portfolios.

What exactly does rebalancing our portfolio mean, why bother to rebalance? The rebalancing method works as follows: Say we start an investment portfolio with $10,000. And as we have often suggested, we spread the investments so that the money is invested in stock markets all over the world. For example, we allocate 35% to US, 30% to Europe, and 35% to Asia. After 1 year, regardless of how well each region performs, we re-allocate our investments so that the percentage of money invested in each region remains the same. So, in a nutshell, rebalancing is about taking profit from your winners and adding money back into your losers on a consistent basis.

We back tested the results over the last 39 years on a $10,000 portfolio using rebalancing every year compared to one that just held throughout with no change. At the end of 29 years, the rebalanced portfolio with 80% into equities and 20% into bond had $176,586 whiel the buy and hold portfolio had $114,731. Hence, the rebalanced portfolio outperformed a buy and hold portfolio while being less volatile.

“Why does this rebalancing method work?” You may ask. It does seem weird because while it looks simple in execution, it requires you to sell off some of your funds that have been giving you the highest returns to invest in funds that might be causing you to lose money.

The clearest example would have been the massive swings in markets we saw from 2007 to 2009. In 2007, stock markets were on a roll, many Asian markets were up 15 to 30%, but bonds were having a flat year. Rebalancing would have resulted in money shifted from the strongest Asian equity funds, moved into bond funds. Then, in 2008, when most equity funds were down 50%, while bond funds were holdings steady, rebalancing would have resulted in money being shifted back from bond funds into equity funds

The whole crux of why rebalancing works, and why we should rebalance, is based on this “that all markets go through its ups and downs, and no single market will be best performing market all the time”. So, the markets that look so bad now, which people are trying to avoid, may eventually have their turn to shine again, and regardless of how hot or good a market looks now, rebalancing forces us to take profit from this market because it believes that such a market will eventually fall from its top spot.

While selling your winners and buying into your losers is tough to do in practice. Another key thing to remember about rebalancing is that it does not require that you sell all of your winning markets or funds. It just requires that you take profit on it. Hence, if one or more markets you selected happen to go through a multi year bull run with very strong performances, you will still benefit from having exposure to such a market. Rebalancing only requires that you take profit occasionally (I usually look to rebalance once a year).

The other part of it, which is to add money to your losing markets is also very hard in practice to do. But again, this method is based on losing markets eventually bouncing back, and the harder they fall, the stronger the eventual rebound would be. Think back again to 2008. The Asian markets fell the hardest compared to other markets like US, Europe, or bonds as a whole. Many Asian markets were down 50% or more. However, rebalancing your portfolio would have meant that you were forced to shift monies from bond funds, US, and Japan into Asia, and your actions would have yielded a handsome return in 2009, with Asian markets rebounding much more strongly than US, Japan or bonds as a whole.

This rebalancing method does not always work so well every single year, like how it did in 2009. (A market could be a strong performer over 2 to 3 years!). However, if practiced consistently over a long period of time, it would do better than just a simple buy and hold method. The reason is because while markets might remain strong, or weak over more than one year, but over a long period of time of ten years or more, then eventually, the strong markets suffer their crashes, and the weak markets get to shine.

In conclusion, as we approach the end of the year, it is a good time to take a good look at your portfolio and rebalance it accordingly. A very simple way could be just to take some profit from your winning investments, and to shift some of that profit into new or existing investments which have underperformed this year. One big caveat though, rebalancing your portfolio works far better with unit trusts and it may work with stocks. The reason being that unit trusts tend to invest into many stocks or bonds and into a broad market. While an entire stock market is likely to go through its cycles of ups and downs, an individual stock could fall flat, never recover or even go bankrupt eventually. Hence, insisting on adding and adding to such a stock will be terrible for your investment returns.

Dubai World (30 Nov 2009)

Last Thursday, Dubai World announced that it was seeking to delay loan repayments for 6 months. This shook financial markets all over the world as investors realized that what they once thought was Quasi-sovereign debt would was implicitly guaranteed by the government might still potentially default. Though the total amount owed by Dubai World, which is a state-owned holding company, which was reportedly 59 billion USD, is relatively small, compared to the hundreds of billion that had to be poured by the US government into financial institutions to bail them out from the US financial crisis last year, it was still a sobering reminder just because the worst seems to be over, and things seem to be on a recovery, doesn’t mean something like that can’t happen.

Dubai will take a long time to dig themselves out of the financial mess they have inflicted on themselves. Whether Abu Dhabi, Dubai’s oil rich neighbor cough ups from its oil riches the amount that Dubai needs to bail Dubai World out is a moot point, the massive oversupply in its property sector will take a very long time to recover.

However, from Asia’s perspective, the panic has been rather overdone. The Hong Kong stock market crashed more than 1000 points on Friday. (Singapore was spared because markets were closed due to Hari Raya Haji). From an economic perspective, although large, 59 billion is not an amount that by itself, can bring a recovering global economy back to its knees again. Also, the main impact of this will be felt in the gulf region, as a large proportion of the funding to Dubai World was from banks in the gulf region.

One can be excused for feeling a strange sense of déjà vu to see such an announcement from Dubai happen, slightly one year after Lehman Brother’s collapse triggered the start of a financial crisis in the US that spread to the rest of the world. However, it is important to keep thing in perspective. Dubai does not have anywhere near the kind of size or importance that the US economy or the US financial sector had. Asia, and for that matter the rest of the world, does not rely on the Dubai consumer, nor is it a major export destination market for Asia.

For now, the main worry is that this might have a financial impact on the already fragile balance sheets of banks which might have participated in helping to fund Dubai World’s grand expansion plans. But as I mentioned, the major casualties are going to be banks in the gulf area. While there may be some possible projects or financing done by some of the banks and other institutions here, these are unlikely to be big nor have a material impact on the banks here.

If fear does cause markets to tumble because of this though, then it would be a good opportunity to look for bargains in the market. Investor sentiment has been shaken, but economic fundamentals remain unaffected. It is then a matter of being patient until investor sentiment recovers, and if the global economic recovery continues, then investor sentiment will definitely recover.

To end up, we are also coming to the end of the year soon. Besides looking back at how things are, and looking forward to the new year, it is a good time to rebalance your portfolio. Given the big swings in many markets this year, and the last, rebalancing will be very important.

How I am Hedging my Portfolio (11 Nov 2009)

What a difference a couple of days make. Last week, markets were looking rather flattish. Then it picked up noticeably over the last few days. Patience remains the key here. Every time markets retreat a bit, there is always the fear whether it will go further south. I tend to handle it by asking myself whether fundamentals have changed, and what might derail a recovery. If I don’t, then I may actually buy more when markets dip.

In any case, so far, I am not seeing it. Yes, investors worry about what happens when the stimulus packages end, and every so often, you hear what if we get a double dip recession. But you have the world’s leaders here in APEC essentially saying that they are still very much concerned about the health of the recovery, and so, they will be careful about any exit strategies.

Most Asia companies had much stronger balance sheets than US ones, and other than having to deal with the drop in demand, which is now gradually recovering, at least most Asian companies did not have to also deal with having to refinance debt in a debt market that was frozen the way the US debt market locked up. Now, the worst is essentially over, and Asia is rebounding in a big way. While demand from the US is likely to recover slowly, other parts of Asia including China will step in to make up for it. A report issued this week confirmed what most of us already guessed. Trade within Asia has been growing. Its not an overnight change, but as intra-Asian trade continues to grow at a faster rate than external Asian trade, then we will be in a better position to pick ourselves up and recover from the recession simply because within Asia, trade activity is still increasing rapidly. Hence my confidence that we don’t need US’s economy to roar back in a big way just for Asia to continue growing.

Of course, even on that point, things are not that bleak. US consumer confidence hit rock bottom this year. As we move into 2010, things will look better. Measured against the low base that is the year 2009, most economic indicators and company earnings are likely to look good.

Within such a recovery backdrop though, there will continue to be concerns, and in Asia, asset bubbles are a danger to watch for. The low interest rates and stimulus packages have created a lot of liquidity, and a lot of it has flowed into Asia and emerging markets. If allowed to get out of hand, when they do burst, it will be very painful.

Because of this, I continue to do some hedging by holding my precious metals fund and my Russia fund. Commodities and oil are the weak Achilles heel of Asia because we generally have to import a lot of it. If its anything that could stop Asia’s recovery, it would be if price speculation pushed up such prices beyond their fundamentals. Hence, having some exposure into these would ensure that if this unhappy situation does come to pass, at least some of my funds will be making a lot of money.

Another area I am hedging within my portfolio is my exposure to bond funds – namely emerging market bond funds and high yield bond funds. At this point, I find it difficult to justify placing much money in fixed deposits, or even investment grade type bond funds simply because these are either earning really low interest, or are likely to be sensitive to a rising interest rate environment. Emerging market bonds and high yield bond funds are much less sensitive to that.

Also, it is a way to hedge against the scenario where the global economy goes sideways. I don’t see this as likely, but what if speculators drive up commodity prices so high that rising costs cuts into the profit margins of most companies in a big way? You can only pass on so much rising costs to a consumer that is already price conscious in the current environment. Or some other unforeseen event that doesn’t quite cause another recession, but results in little to no growth over the next 2 years.

In that kind of situation, high yield bonds and emerging market bonds would be my hedge. In the high yield bond market, many companies had already managed to refinance themselves for the next few years, and as long as they can meet their current interest rate obligations, they are unlikely to go under. The surprising thing is that we haven’t quite seen the number of bankruptcies that we expected to. The biggest example, during the great depression, over 3000 banks went under in the US, but up till now, less than 150 banks have been taken over by US bank regulators this year.

Its one year already since Lehman Brothers collapsed. If we haven’t seen a big round of company failures up till now, then, in a gradually improving environment, we won’t be seeing it either. Yet, interest rate yields for high yield bonds remain significantly higher than for investment grade bonds, when the very high possibility of interest rates going up eventually over the next 2 years is going to have a much more negative impact on investment grade bonds than high yield bonds.

Many emerging market bonds also remain at higher yields compared to the developed country sovereign bonds. This despite the fact that in today’s world, it is clear who are the major creditors and who are the major debtors. There is a disconnect here that is not going to change simply because rating agencies are used to giving emerging market bonds a higher risk premium. Yet, I ask myself. Who is in greater danger of defaulting on interest payments? An emerging market country which has strong foreign reserves, is growing fast, and is exporting either lots of goods (like China) or exporting lots of commodities (like Brazil) and is a net creditor, or a country that doesn’t have much reserves, spends more than it earns (has a big deficit), and is a net debtor. I think I can fit lots of developed countries with strong investment grade type ratings into this latter category. Yet, a lot of emerging market bonds continue to give a higher yield compared to the developed countries.

So, I remain highly positive, and I am looking forward to a next phase of market uptrend over the next 6 months to one year. In the meantime though, I am taking pains to hedge by having exposure to oil (through my Russia fund), precious metals, emerging market bonds and high yield bond funds.

Why You should DIY (5 Nov 2009)

It seems weird for me to suddenly talk about DIY or “do-it-yourself” with regards to investing. After all, investors with Fundsupermart are all DIY investors. But I still believe there are many people out there who do not take charge of their own finances, and yet, it is a very important decision.

There are so many reasons I have come across for people who do not want to DIY. But one of the biggest reason is that there is a spouse, a relative (father or mother), etc who is better and that relative handles it all for them.

This is not a very good reason I feel personally. Especially if the trust is to such an extent that they have no idea what is being done to their money, just that this trusted relative manages it for them. First, about the spouse. Let me state that no matter how secure a person feels about a relationship, at the very least, one has to know what your spouse is doing with your money.

Not asking might seem like the ultimate in a trusting relationship. But its your money, surely you have a right to know what is being done to it? For all you know, it was put into some risky business venture, and its all gone, if you never asked. Just because one’s spouse in more knowledgable in investing does not make him or her the best person to handle your money. You are the one that knows best how much risk you can handle.

Also, at risk of being overly brutal, divorce cases are going up, and money is often one of the factors that break up a marriage. No matter how much in love you might feel, one should always maintain a certain amount of independence. Relying on your spouse to handle something as important as your investments is a dependence that is very dangerous. What happens if the unthinkable happens and there is a divorce, by then, trying to think back and track and get back whatever money you placed with your spouse would be a very difficult task. Yet, it could be money you have saved for years, meant for retirement, kids, etc. And to lose track of all of that because it was “handled” by your spouse would be terrible. Imagine if he or she turned around and said that it was all lost in a huge market crash, or some risky overseas venture. You would have little recourse since you were the one who willingly left everything to be managed by your spouse.

Also, even if it didn’t happen. People can die. So, if you chose not to know anything about how your investments were handled previously and if your spouse (touch wood) suddenly passed away. Now, on top of the grief of losing a loved one, you would have to grapple with investments, which at this point, you might have no inkling or idea about.

This happens to anyone you place a huge amount of trust in managing your personal money on. No it your spouse, relative, etc. Things may change. One thing that doesn’t change though, is your own knowledge and your own motivations. No matter what, you will always be looking out for yourself, when you are managing your own money, and any knowledge that you gain with regards to investing, stays with you. They don’t disappear if someone died, or if your stock broker quit or something.

So, I am talking to my wife, trying to teach her more gradually about investing, even though she is exactly such a classic example. She nods off five minutes into a conversation about investing. And I mean to teach my kids about investing when they are young. Its always better to be well informed, and such investment knowledge can only be an asset as you get older.

So, go the DIY way. Take control of your own financial destiny. Only you know yourself best.

Added $4,000 Yesterday, and US on the Mend (30 Oct 2009)

After two days of falls in Asian markets on Wednesday and Thursday, I added in more to my portfolio yesterday. While psychologically, it is scary to add in more when the market is dropping, I have found that you usually get things cheaper during those times. Today is a pretty good day for markets so far, but I didn’t know how today would turn out when I placed my trades yesterday.

Additions were as follows:

Aberdeen Singapore Equity Fund - $2000
Aberdeen Asian Smaller Companies Fund - $2000

Total: $4000

Yesterday night, US also reported its third quarter GDP results. The US economy grew at a seasonally adjusted 3.5% annualized rate in the third quarter, the first quarter it has recorded positive growth after 4 consecutive quarters of negative growth before. While the road is recovery from here is likely to be a slow one for the US, we can all at least be relieved that it looks like the US economy is turning the corner. Economists are likely to be cautious about rushing in to declare that the recession has ended. It took months before the National Bureau of Economic Research declared that the recession in the US started in December 2007, so they are going to take some time before declaring that the recession is at an end (likely months after it has clearly ended).

The key thing is that one of Asia’s biggest export market, the US, is on the mend. I believe there are big changes involved going forward. Even on the mend, the US consumer is unlikely to go back to its free spending ways any time soon. So, the void will have to be filled up by emerging market consumers, including Asian consumers, which had previously been always been more interested in saving money than spending it.

But even for the stressed out US consumer, the signs of its economy recovering will also allow some of its consumers the confidence to start spending again. After all, its far easier to give into the temptation to spend money than it is to save it. This is why I think it is possible for Asian consumers to step up even as the US consumers take a step back. Just the other day, I was actually contemplating whether I should buy a car after all. (My two kids were growing bigger now). But with COE prices having gone up so much, and ERP charges going up as well, the high cost of owning a car again put me off. But going by the way COE prices have been going up, I am sure many others gave in to the temptation of owning a set of wheels even if I didn’t. So, can the Asian consumer help to fill up the gap left behind in the retreat of the US consumer? I am quite confident the answer is a “Yes!”