How markets have fared since the year started

We are nearly one month into the new year. Thus far, commodities had a good start, but are now seeing more downward pressure. Based on 24th January prices, the commodities funds within the alternatives space are on average up 1.31% year to date while resources funds are down 3.79%. Technology is doing better, with technology funds on average up 2.12% year to date. But the surprise so far at the start of the year has been financials. On average, financial funds are up 3.51%, but this figure was pulled up largely by a huge 9.46% gain from the Parvest equity Europe finance fund, which is up 9.46% year to date. Despite the ongoing worries about the European debt crisis, we have seen European financials recover ground since the start of the year.

Asian equity funds started the year strongly, but subsequently, worries over China’s potential rate hikes caused profit taking to set in. Asian equity funds are down marginally so far year to date. Korean equity funds on average are up 1.43%, Taiwan equity funds are up 0.13%, Greater China funds are down just 0.34%. Markets like Thailand and Indonesia, the strong winners of 2010, have tumbled. Thailand equity funds are on average down 8.43% year to date, and Indonesia equity funds are down 11.86% year to date.

The current jitters are not something I am too worried about. China’s tightening stance against inflation has been well documented since last year. Earnings of companies have remained strong, and this will be a big theme this year. As we have highlighted, we are negative on gold and neutral on commodities. Thus, my portfolio is also conspicuously empty of commodity or resources funds. The Russia equity fund I am holdings is a hedge against oil prices moving up too high, and I am actually glad that oil prices have moderated recently after they were in danger of breaching 100USD per barrel at one point. I am glad I sold off all of my Indonesia fund holdings as well.

So, the surprising stand outs at the start of the year has been Europe finance funds, Italy equity, France and Iberia funds. Some of these, especially the Iberia funds were something few would have dared to touch last year as the European financial crisis erupted. But they have shown surprising strength despite the situation in Europe over its debt woes not fully resolved. But again, sometimes, as I note, it is where angels fear to thread, where there is blood on the streets, there are bargains. If and when there is clarity in Europe and everyone knows that its debt woes are behind it, then Europe markets will see a big jump, and it would usually be too late by then. The situation in Europe remains shaky, but it bears close scrutiny. I added to my European and US holdings at the start of the year simply because I was too overweight in Asia. I don’t regret adding to these two regions one bit. While everyone (including me) remains convinced that Asia’s and Emerging market’s fundamentals are stronger, the growth is stronger, but US and Europe’s valuations are now quite cheap. Where there are bargains from a valuation standpoint, all that is required is a lot of patience, and sooner or later, such markets will be re-rated. US and Europe could be the dark horses for this year, based on their surprising strength at the start of the year.

The Big Year End Rebalancing (29 Dec 2010)

As I promised, I have rebalanced my own personal portfolio just today, and now there will be a big piece on it. Rebalancing is actually a pretty personal thing, because everyone’s portfolio will look different. But the basic concept is to take profit from the funds which have done well, and invest into the funds which are underweight.

But first, just a few tips on rebalancing. Don’t look at your previous portfolio first. First, take a blank piece of paper, and imagine that you were starting out afresh! If you had no historical baggage, regrets, etc holding you back at all. Say you simply had X sum of money to invest into a brand new portfolio, how would you do it?

With that in mind, I jointed down some of the allocations I wanted to have in this 2011 portfolio of mine. It worked out to this:

Let’s focus just on the cash portion, which made up the bulk of my investments. These totaled $395,500. The kind of asset allocation I was looking to have in 2011 looked like this:

Type	%	Amount ($)
Bonds	10%	$40,000
Core Equities	65%	$256,000
Alternatives	5%	$22,000
Supplementary	20%	$77,5000
Total (cash)	100%	$395,500

I wanted to take profit from equities, but I remained overweight equities relative to bonds. Thus, instead I turned to the alternative investment space to park some of my profits.

My Bonds Portion Allocation would look like this:

Type	%	Amount ($)
Global Emerging Market Bonds	28%	$11,200
US High Yield Bonds	36%	$14,400
Asian High Yield Bonds	36%	$14,400
Subtotal	100%	$40,000

My Regional Equities Portion would look like this

Type	%	Amount ($)
US	10%	$25,600
US Small caps	10%	$25,600
Europe	10%	$25,600
Europe emerging	10%	$25,600
Latin America	8%	$20,480
Asia	30%	$76,800
Asia small cap	15%	$38,400
Japan	7%	$17,920
Subtotal	100%	$256,000

As can be seen. I remain overweight on Asia, though I have now moved US and Europe back to a more reasonable weightage within this portfolio. And Emerging Markets play a big part in my core equity portfolio as well (made up of Asia, Latin America and Emerging Europe).

My Supplementary equity portion would look like this:

Type	%	Amount ($)
Tech	20%	$15,500
Singapore	20%	$15,500
China	15%	$11,625
South Korea	15%	$11,625
Russia	10%	$7,750
Taiwan	20%	$15,50
Subtotal	100%	$77,500

As this part showed, my favorites remain Technology and Taiwan. Singapore gets 20% because of pure home bias. Russia is my hedge against high oil prices, which are a risk to Asian equities. China is simply too big and important to ignore, though the fact that its valuations now are really attractive is a big plus point as well.

Now that I have envisioned what it should look like. Then it’s a matter of adjusting my portfolio to look like this 2011 envisioned portfolio. So, I line my existing portfolio alongside the new one, and I see what I have to adjust. Small adjustments, I leave out since a $500 or $1,000 adjustment to a $400,000 cash portfolio won’t make much of a difference, and I see how I can make the adjustments with the minimum amount of switching possible.

Having said that, it still required a fair bit of adjusting. So, I will cover what I adjusted, along with why I did it.

Actual Actions taken on my portfolio.

CPF portion of portfolio – left untouched.

Comments: This part was easy. As mentioned above. There are a limited choice of funds within this space, and I generally don’t make much adjustments even in the long term. So I left this part untouched.

Bond Portion of portfolio

1) Switched 3611 units or $5200 from United GEMs bond fund into Fidelity US High Yield Bond.
2) Switched 2083 units or $3000 from United GEMs bond fund into Fidelity Asian High Yield USD Bond Fund.

Comments: I did not add to my bond portion, though I planned to take profit from my equity portion. Instead, I shifted money from global emerging market bonds to my two high yield bond funds. I think currency played havoc on some bond fund returns in 2010, but I expected it to be slightly less volatile in 2011. In any case, the Euro remains a large question mark, hence I am still avoiding Europe bonds in 2011. High yield and emerging market bonds, though riskier, still remain the best bets within the bond universe because their yields are higher, which would buffer them against inflationary pressures increasing interest rates in 2011.

Alternatives Portion of portfolio

3) Switched 5099.78 units, or $23,000 from Aberdeen Pacific Equity into Man AHL Trend

Comments: This marks the first time I am going into alternatives. I remain bullish on equities, but rebalancing meant I should take profit. But I was reluctant to add more into bonds. So, I looked into Alternatives investments space to park my equity profits. The Man AHL Trend fund was one with a very low correlation to equities, and would cushion any unforeseen shocks to equities market well. I took profit from my Asian equity fund (Aberdeen Pacific Equity), as it had done very well this year, and even though I remained bullish on Asia, I was simply far too overweight in it.

Supplementary Portion of portfolio

4) Switched all of Aberdeen Indonesia Fund into Fidelity Taiwan (about $9,881)
5) Switched all of HGIF India Fund into Fidelity Taiwan (about $5,864)
6) Switched 2,468 units (or $10,614 ) of Aberdeen Singapore Equity into Legg Mason Royce US Small Caps Fund
7) Switched 7092 units (or $6,600) from Lionglobal Korea to Parvest Europe Alpha EUR
8) Switched 7092 units (or $6,600) from Lionglobal Korea to BNPP1 Opportunities USA
9) Switched 2193 units (or $3,200) from Henderson Global Technology to BNPPL1 eq Emerging Europe.
Left Russia and China funds untouched.

Comments: After looking at the adjustments required. I realized that I would be doing two things. First, I would be cutting down the funds I had in my supplementary portfolio (I had too many), and I would be channeling profits here into my regional equity portfolio. As a result. I sold off my Indonesia and India fund completely. These had done very well, but the valuations for these two countries were now higher than I was comfortable with. That Indonesia had been one of the top two best performing markets two years in a row made it unlikely it would fare so well in the third. Both were switched into Taiwan, which is our favorite market for 2011.

I took profit from Singapore, and placed it into US. I also realized I had added too much to Korea during the year 2010, and though I still liked the market, I had to trim it, and so I did, shifting parts of it to Europe and US. Similarly, I had fallen too much in love with Tech, and though I am still very bullish on it, I trimmed it and shifted part of it to Emerging Europe.

Core Regional equity portion of portfolio

10) Switched 9170.81 units (or $14,765) from Aberdeen Asia Smaller Coys into Legg Mason Royce US Small Caps Fund.

Once all the other actions were taken. There was little left to be done in my regional equity portion. Effectively, I had taken a chunk of profit from Asia and put it into the Man AHL Trend Fund. I had also put back profits from my supplementary portfolio into this portion. The main focus on this part, was to increase the weightage in Europe, in US, and to trim down on Asia. All my prior actions had already done most of this. So, all that remained to do, was to shift part of my Asia smaller caps into US small caps. The US small cap fund from Legg Mason is a new addition to my regional equity portfolio. While I recognized that I was far too underweight on US, I wanted a heavy tilt towards small caps because I feel that 2010 will see small caps do well as they play catch up to the large caps. Thus, I added to this fund.

With that, I am now rebalanced and well positioned for 2011. Have a happy new year everyone. Here’s to a great year for funds in 2011!

A Merry Christmas to All (24 Dec 2010)

It's Christmas time! When we do come back after Christmas, we will have our view on the new year 2011 and our favorite picks next week.

My own personal plans which included buying a car and moving house for next year is looking nervous because of the very sharp rise in COE prices. Being an investment professional makes buying a car even harder for me because I know how much of a depreciating asset a car is (at least $10,000 a year in expenses if not more depending on the car you buy), and the same amount invested over time each year will yield substantial gains. As such, I view the monthly increase in car COE prices with substantial dismay.

The increase in car COE prices does mean one thing though. Many Singaporeans are feeling richer now, and hence they are willing to pay increasing prices for car COEs. It also signifies a strong amount of confidence in the growth prospects of the Singapore economy, and strong job outlook.

I think when I finally do buy a car when I move house next year, it will likely be a used car … if I buy one at all. A brand new car does have a strong emotional pull to it (as with anything you buy that comes brand new). But would I pay so much more just so that I can get that emotional rush from getting a new car? Perhaps one of the new year resolutions for 2011 for me would be to control my emotional impulses on things like buying a car. If I can control my fear during a market crash, and greed during a bull run, then surely I should be able to control this!

Oh well, there’s still quite some time before I move house. And in the meantime, I wish all FSM investors a very merry Christmas!

Concerns Subsiding, Enjoy the Christmas Week (17 Dec 2010)

Christmas week is just ahead. We are almost coming to the end of the year. I know I have talked of rebalancing, but there is time enough for that. After Christmas, there is exactly one week before we officially end the year, and that will be when I rebalance my portfolio. Will we have a Christmas rally? Its possible, and I certainly hope so, since volume is light, and it takes little to bring markets up. The Christmas cheer, putting everyone in a good mood will help too. The Singapore market has been kind of stagnant this month so far, but other markets like South Korea, Taiwan, and Russia have charged ahead.

In any case, it is shaping out to be a pretty good year for equities. While markets did not charge through the roof the way they did in 2009, the overall trend was still up. Even the US market is now starting to buck up. So, when I take stock in the week after Christmas, I may be surprised at the returns of my US equity fund.

As things quiet down towards the end of the year, I believe a lot of the concerns that have plagued this year will also subside. We don’t hear any talk about the Korean tension anymore. The red shirts in Thailand? Nobody is talking about that anymore, and Thailand is one of the two best performing markets this year. US double dip recession? We still hear every now and then from either experts, analysts, or economists expressing concerns about the state of the US economy, but earnings continue to surprise on the upside, and the US economy continues to grow.

How about China tightening? They are still tightening, but they have been putting in property curbs, raising bank reserve ratios for the entire year. If the China economy was supposed to have a hard landing, we should be seeing it by now. It simply hasn’t happened, and now it appears that while China tightening will continue, they won’t just keep on raising interest rates blindly until the economy stutters.

Europe will continue to experience volatility every time the next European country faces a spike in interest rates when it tries to go to the market to lend money, but I think the situation is mostly factored into the market by now. We have been seeing this European crisis flare up again and again since May this year, and its starting to look like a rerun of a bad serial. It will get old after a while.

Ultimately, diversification is the key. Diversify into equity funds, bond funds, and even alternative investment funds so that you won’t be totally caught out even if stock markets stumble. I have been getting my research team to look into the alternative investment space, and we should be having a research article up on that soon. For now though, enjoy the upcoming Christmas week. After that, I promise that we will have a 2011 outlook, plus I will rebalance my own portfolio in the last week of the year.

How the Best Performers at the Start of the Year fare? (3 Dec 2010)

On 12th January, at the start of this year, I had a blog entry where I looked at the markets that was quickest out of the gate at the start of the year. At that time, it had only been one week into the new year 2010, but ranking up the funds in terms of category then then, Turkey equity funds was at the top, followed by Gold, Resources, Materials, Indonesia, and Energy. It has been 11 months now, and with only one month left to go, baring a huge shakeup in December, there shouldn’t be too much change in the rankings of fund categories. The list is not exhaustive in terms of categories, but this should be the majority of the ones of interest to investors. Let’s see how they stand towards the end of the year as compared to the start.

Fund Category	YTD Performance as at 8th Jan 2010 (%)	YTD Performance as at 1st Dec 2010 (%)	Ranking of performance YTD
Turkey	7.39	23.64	4
Gold	6.14	19.03	6
Resources	5.9	19.71	5
Materials	4.17	3.03	17
Indonesia	3.97	35.07	2
Energy	3.82	-6.39	23
Latin America	3.41	4.83	12
Global Agribusiness	3.37	4.23	14
Global finance	3.29	-7.78	19
Eastern Europe	3.29	0.44	25
Malaysia	3.16	23.68	3
Singapore small cap	2.72	16.08	7
Brazil	2.7	-3.36	22
Emerging Europe	2.28	0.44	20
India	2.2	11.61	8
Korea	2.13	3.72	16
BRIC	1.73	-0.59	21
Asia ex Jap	1.59	9.04	10
Middle East/Africa	1.57	8.31	11
Europe inc UK	1.52	-8.06	26
Greater China	0.92	3.93	15
Tech	0.8	1.85	18
Singapore	0.75	9.86	9
Thailand	0.48	42.36	1
Healthcare	0.43	-6.46	24
Property	-0.25	4.63	13

Performances are based on bid to bid prices and in SGD dollar terms, with dividends reinvested

From the table, Turkey equity funds, gold and resources equity funds have not disappointed, ranking 4th, 6th, and 5th as at 1st December in terms of bid to bid performances year to date. The same goes for Indonesia equity funds, which are currently the second best performer in terms of category. However, there are risks to going by this “fastest out of the starting block” strategy as well. Materials and energy funds ended up near the bottom of the table at 17th and 23rd respectively.

There were also some categories, which started out at the bottom of the table, which then surged up during the year. Thailand and Singapore equity funds are two such categories of funds. Both were really slow at the start of the year, but Thailand equity funds ended up the best performing category of funds so far year to date, and Singapore equity funds also ended up 9th, which is in the top ten.

On a regional basis, Asia is doing well so far near the end of the year, with category returns year to date of 9.04%. Given that many of our Fundsupermart investors are overweight in Asia, that is good news. Many should be up for this year, helped by their Asian equity funds. Europe has been hit badly, due to the European financial crisis, and understandably, many of the worst performing categories are situated in Europe.

As we come to the end of the year, don’t forget to rebalance your portfolio. I remain bullish on equities, and will be overweighting equities over bonds for next year. However, it doesn’t mean I don’t have to rebalance. It is likely that even with that factored in, my portfolio by now at near the end of the year is too overweight into equities and I will have to shift some out of equities.

Climbing a Wall of Worry (25 Nov 2010)

Investors have been through a rocky 2 weeks. Ireland seemed on the verge of bankruptcy and needed to be bailed out by the IMF and the EU. But just when that appeared to be sorted out, the government was in danger of falling. Fresh elections could be held as early as in two months time. China was busy putting in new measures to curb the flood of hot money unleashed that was flooding in after America’s quantitative easing, and control inflation, and to top it off, North Korea took this time to fire artillery at South Korea, causing some property damage and casualties.

If not for the fact that I intend to rebalance my portfolio soon because the end of the year if coming up, I would happily have put in more money into equities now. All 3 concerns happening now can be considered politically driven, and one thing I have observed about most political events, their effect on the stock markets are usually quite short term. Let’s go through each of these.

First of all, Ireland. It was just this year that the Euro financial crisis hit and many European funds are still down this year in SGD terms. But there was already a huge reserve set aside to address this issue. Ireland is just one of the financially weaker that now needs to tap into this reserve. Markets got worries because the danger of the government falling meant that a new government might not accept the bailout, and if that happened, would it fracture the Euro.

However, this is a very remote possibility. No matter how much the Irish people might rail against the harsh budget cuts and belt tightening that comes with the bailout package, they have no other alternative lender. No one else is going to lend them that much money, and its not like they can hold a big asset fire sale to raise the amount either. They could do without the loan of course, but it would literally mean cutting themselves off from all international funding, and without foreign currency, they wouldn’t be able to buy any foreign goods and services. Unless they literally want to cut themselves off from the rest of the world, it is hardly an option.

So, they can take it out on their current government, bring in a new one, but even the new government would come in, take a look at the grim picture facing them and then will still end up accepting the bailout package, with all of its conditions in the end. Europe is very interesting right now. There is enough bad news that there must be some bargains there. Its just that this is going to be a long drawn out issue, and every time the next European country faces problems in the bond markets and is forced to accept a bailout, we will have these concerns surface all over again. So, investing into Europe now is going to require a lot of patience. There won’t be any quick gains, but for those who are willing to wait (and I think 3 years is going to be a minimum for Europe), then the current valuations are very cheap for Europe.

North Korea’s shelling of South Korea is another so called political event. It is almost certainly motivated politically. If a country really wanted to invade, it is not going to just shell an island. It will do far more than that. The danger is more that South Korea gets pushed beyond a certain point, such that it feels that it must take military action in the face of aggression. Has it reached that point yet? Probably not.

China’s tightening measures against the flood of money unleashed by America’s quantitative easing is the one that has the most direct economic and market impact in the longer term. Today, China has replaced the US as many of Asia’s biggest export market. China’s continued strong economic growth is one of the key drivers within Asia. If too much tightening causes China’s economy to falter, Asia would definitely feel the repercussions.

However, again from the China government’s perspective, they don’t want to see the China economy crash anymore than the rest of us. They are in the process moving two to three hundred million people from the rural areas to the cities. That is a huge number of jobs, housing, infrastructure and more that they need to create for these people. They can’t afford to have their economy crash and have millions of people jobless on the streets. And it is not like they don’t welcome foreign investment, since it was foreign investment that has resulted in such strong growth in the costal cities. However, if too much hot money flows in, inflation and over speculation in selected sectors will create problems too.

So, I personally feel that they will try all sorts of means and ways to curb too much inflow of hot money, inflation and speculation, but they will try not to touch interest rates too much. This is because raising interest rates is a very crude tool to guide economic policy, and they want to see China’s economy continue to grow strongly as well.

Thus, I am not so worried about what is currently happening. I think this year has been a big year of worry. Rarely has there been so many different things cropping up all within one year for investors to worry over, yet despite everything that has happened, most markets are on track to end the year with gains. It’s a classic case of climbing this wall of worry. There is lots of worry about, but the market will take two steps forward for every step back, and hence, over one or two years, will still move upwards. In this type of situation, the key is to remain calm, and be patient. These worries will eventually recede and when they do, we will see a significant rise in markets then.

In the meantime, the end of the year is coming up soon, so don’t forget to rebalance your portfolio! I will be doing this as well in the coming weeks.

Ireland Concerns make Germany Interesting (16 Nov 2010)

We are currently in correction mode. After the rise in markets triggered by the Fed’s QE2, China raised some of its bank reserve requirements. The move raised fears that China might be increasing interest rates, causing profit taking in markets. China’s consumer price index rose 4.4% year on year in October. It is thought that China may be willing to accept slightly lower growth to prevent too much hot money from flowing into China and this would trigger a slowdown in demand. As a result, commodities also retreated in prices. Oil was down as well (thankfully).

My view is that further tightening from Asian governments is to be expected. Asian governments know that hot money, while driving up stock markets and other assets like property, can also cause problems, precisely because they are hot money. And with Asian economies all growing strongly, there is really a concern to keep asset bubbles from developing, and to keep inflation in check.

In the medium term though, money will continue to make its way into Asia. Be it via massive funds raised in Europe and the US aimed at investing into Asia, or via corporations all looking to get a slice of the action in Asia by setting up in Asia, or direct investments from individuals and governments alike. Even currency is in Asia’s favour at the moment. The US stock market is positive year to date in US dollar terms. Convert that to SGD dollar terms and you are now looking at a loss. To investors based in the US or Europe, putting some money into Asia is almost like a no brainer. Even money invested into Asian bonds or emerging market bonds are giving them double-digit returns once converted back to Euros or USD this year.

Will this trend continue? I think it will, at least in the foreseeable future. What might cause a pull back would be if Asia suddenly chokes. But what would make Asia choke at this point? The concerns over inflation and hot money are well documented, and after the 1997/98 Asian financial crisis, all Asian governments are much more prudent now. And since they also know that allowing too rapid an appreciation in their currencies would wreck their exports, most Asian countries are all trying to keep their currencies at least at a reasonable trading level with the USD. If US thinks they can somehow deflate their currency out of their current troubles, it’s a rather unrealistic dream. Asian countries will be eventually seeing their currencies appreciate against the USD and the Euro though, whether they like it or not. Market forces are too strong in that direction.

The big inflows into Asia notwithstanding, by virtue of Asia’s increasing economic power, its countries’ currencies should appreciate. Look at Europe’s ongoing problems. Ireland has been hit in the bond market over fears that its finances were deteriorating. The interest rates on its debt has been climbing in recent weeks, with reports saying it was now as high as 8%. Investors worry that it would have to go to the EU and IMF for a bailout, though so far, the Ireland government has denied that it would do so. Fears that this would again trigger another round of crisis on the Euro currency was also one of the reasons for the current selloff. However, Ireland remains a relatively small portion of the Eurozone, so impact is still relatively limited at this point, especially since its ongoing debt problems is well known by now.

Europe is an interesting case. Especially Germany. Yes, the Euro may continue to come under pressure. They have a long road ahead of them to sort out their various problems with Greece, and other countries (the spotlight just turned back to Ireland). However, this doesn’t mean there aren’t good companies in Europe, or Germany for that matter. For example, Germany’s carmakers like BMW, Mercedes are probably doing even better in light of the lower Euro since their overseas earnings from overseas car markets are likely to see a boost due to the Euro’s fall. And a Gucci, or an LV bag isn’t going to priced any cheaper just because the Euro fell. So, I am looking to add to a Germany equity fund if these worries about Ireland cause the Euro or Europe markets to take another fall.

So, in summary, Asia’s uptrend will continue, though we can expect profit taking every now and then. At the same time, the hot money flowing in, while continuing to push up asset prices here, will not stay forever, and will add to the volatility in the region. Don’t neglect to consider other regions or countries outside of Asia. Opportunities may present themselves, even in regions which one might find difficult to consider touching right now! Don’t forget that some of the best bargains are to be had when everyone is selling.