Asian Investors Becoming More Conservative

The latest survey from global research and consulting firm Cerulli Associates (Cerulli) reveals that Asia ex-Japan retail investors of all age groups and wealth tiers have become more conservative in 2016 compared to 2015.  

The Cerulli Report – Asian Wealth Management 2016, which the survey was part of, notes that Asia ex-Japan retail investors have become less patient in their investment horizons. According to the survey, the proportion of respondents with an investment horizon of three years or less rose 48.4% in 2016, from the 39.1% seen in the 2015 survey, mainly as a result of unsettled market conditions.

Overall, Asia ex-Japan investors have higher cash holdings in 2016 compared to in 2015. Investors in Asian markets, with India being the exception, pared down their exposure to unit trusts, mutual funds, and exchange-traded funds.

Indian investors apparently switched to investing more in managed funds at the expense of investment properties. Also, Hong Kong investors reduced their exposure to investment properties due to prices falling steeply in recent years, and were seen to show increased interest in directly held bond investments.

In addition, the shift to alternatives from other asset classes has been muted for the past year. The survey reveals China is the only country that showed a more than one percentage-point uptick in holdings in the asset class between the 2015 and 2016 surveys.

This is attributed to the types of alternative products available in China, Cerulli notes – which are unlike those available in Singapore. Alternatives tend to be in the form of structured products in China, whereas in Singapore, they are often more conventional liquid alternative funds. Allocations to alternatives in Singapore remained steady over the period, according to the report, helped by their availability to lower-wealth-tier investors.

The survey also discovered that funds-of-funds managed by foreign asset managers have become popular in Taiwan, as they oversee seven of the top ten funds-of-funds in terms of inflows year-to-date July 2016. Taiwanese investors are very keen for international exposure as this provides foreign asset managers with the opportunity to leverage their reputation and expertise to make greater inroads onshore, Cerulli believes.

The research and consulting firm also notes that it will be harder for smaller, boutique foreign asset managers with niche investment products to enter the Taiwanese market due to the island-state’s Financial Supervisory Commission continuing to tighten regulations on the offshore fund space. This might have an effect on the diversity of products available to Taiwanese investors, and Cerulli notes that it will be ideal for offshore and onshore fund management to co-exist in order to prevent a potential stifling of further product innovation. - asisasset

Investors Turn to Alternative Assets as Yields Fall

Investors around the world are getting creative as they hunt for yield in a low or even negative interest-rate environment that has rendered investment returns increasingly hard to come by.

A preferred tactic is emerging: targeting alternative assets.

Simon Smiles, chief investment officer for ultra-high net worth at UBS Wealth Management, which manages around $2 trillion in assets, said: “Negative rates are encouraging investors to go further afield."

Among his firm’s clients, he said, that means increased interest in alternative investments, such as private equity, real estate, infrastructure, private debt and hedge funds.

Greater interest in alternatives is also seen in the results of a recent survey by Bank of New York Mellon. More than one-third of investors surveyed said they would increase allocations to alternative investments; six percent said they would slightly decrease it.

In September, UBS said that family offices globally increased their allocations to private equity and real estate in 2016. The family offices increased their holdings of private-equity investments by 2.3 percentage points to 22.1% and their direct real-estate holdings by 0.2 percentage points to 11.5%.

Private debt and infrastructure markets are another area grabbing investors’ attention. French lender Natixis is looking to raise $1 billion to invest in debt backed by real estate, infrastructure debt and airplanes around the world.

Like government and corporate bonds, loans on these assets can provide predictable cash flows, says Laurent Belouze, head of private-debt real assets at the bank.

Dominique Senequier, the founder of Ardian, a Paris-based manager of private-equity and infrastructure funds, says current rates are driving more investors into private equity and also into infrastructure and real estate, where they can receive annual yields.

Ardian’s investors include sovereign-wealth funds, pension funds and insurance companies seeking to boost returns. The French firm is currently raising its first real-estate fund, following in the footsteps of US private-equity giants Blackstone Group, Carlyle Group and KKR, which are also managers of large real-estate funds.

Sovereign-wealth funds are increasing their exposure to private equity and real estate, according to research company Preqin. Some 55% of sovereign-wealth funds are investing in private equity in 2016, up from 47% in 2015, while 62% are investing in real estate, up from 59%, according to Preqin. By contrast, the percentage of sovereign-wealth funds investing in fixed income declined to 82% this year from 86% last year.

Hedge funds, meanwhile, which collectively manage almost $3 trillion globally, are struggling to come to terms with the low and negative rate environment. Many are finding it difficult to post superior returns, which makes it difficult to justify the high fees management charges.

Investors withdrew a net $23.3 billion from hedge funds in the first half of this year, according to Hedge Fund Research. That puts the industry on track for its first year of outflows since 2009.

Low bond yields have also pushed investor money into stocks, which hedge funds find challenging in today’s volatile markets. Many actively pick stocks and have been unsettled by huge flows of money that, by contrast, often fail to discriminate between good and bad companies.

James Inglis-Jones, fund manager at Liontrust Asset Management, said: “The negative-interest-rate environment has created a more challenging backdrop for hedge funds."

When stocks largely move in the same direction, as they have lately, he added, it can be harder for managers to beat their market benchmarks. Betting on falling stock prices, meanwhile, a process known as shorting, has become more expensive due to zero or negative interest rates, he says. Hedge funds borrow stocks to sell, but now earn no interest on the cash they receive, he explains.

Problems in the hedge-fund industry are contributing to a massive flow of money into private equity, which could cause excess competition and lower returns, says Simon Borrows, chief executive of 3i Group, a London-based private-equity firm. The squeeze on private-equity returns could result as the inflows chase the same opportunities, making it tougher to outperform.

In 2015, private-equity firms world-wide had a record $1.3 trillion of “dry powder” – a term that means the amount of money available to invest – according to Bain & Co.

The dry powder build-up, Borrows says, “could leave investors with problematic outcomes including disappointing returns”. - efinancialnews

Don't Ignore the Threat of Another Market Tantrum

Jeff Knight looks at why market tantrums are the greatest risk management challenge facing investors today - and three ways to help protect your portfolio.

On September 9, following more than 40 trading days where it failed to make a full percentage point move in either direction, the S&P 500 Index dropped by nearly 2.5%. On the same day, the yield on the benchmark 10-year Treasury bond rose from 1.60% to 1.68%, a loss of roughly 0.7% in price terms. Commodities fell by several percentage points. REITs lost almost 4%, and the list goes on. September 9 was a painful day for concentrated and diversified portfolios alike. While the damage was softened, if not reversed, for most asset classes by the end of the month, the pattern of performance that day should be noted, because it represents the most insidious risk management challenge facing investors today. Specifically, how can we protect our portfolio values if all asset classes decline at the same time, particularly if these declines become more significant or more durable?

Consider the likely source of the financial market's vulnerability to simultaneous declines. Nearly every major asset class has been increasing in value since the end of the financial crisis

Prices of most asset classes have steadily increased since the financial crisis

Asset class performance (annualized): 03/09/09 to 09/30/16
(Source: Bloomberg and Columbia Management Investment Advisers, LLC)

The link between monetary policy and previous tantrums

This price appreciation is a consequence of a global monetary policy designed to produce this very outcome. If low rates and quantitative easing can produce a rally in financial assets, the theory goes, then a wealth effect cannot be far behind once investors contemplate their portfolio gains. But we should note that this policy-driven windfall has a darker side. If the outside agent (monetary policy) that has washed over all of the asset classes in a positive way should change, then we should not be surprised if its removal has an opposite and negative effect.

We have seen this pattern before. The chart below plots the average performance of a variety of asset classes across four distinct episodes of market volatility. Each of these episodes was sparked by an inflection in monetary policy, beginning with the taper tantrum of 2013. We see a meaningful cause-and-effect pattern of these tantrum environments. The cause has been a hawkish inflection of monetary policy, while the effect has been simultaneous declines across asset classes.

Asset class performance during tantrums

(Source: Bloomberg and Columbia Management Investment Advisers, LLC)

Investors should plan for this risk management challenge now

Central banks appropriately regard their current monetary stance as reflective of special, almost emergency circumstances. This mindset sets the stage for eventual "normalization" of monetary policy, which should concern any investor who has seen the previous chart. The current "emergency" stance of monetary policy has been in place for quite a long time, making it increasingly difficult to view the measures as appropriate, given that the financial crisis itself ceased to be an emergency long ago. Also, the real world - as opposed to the financial market - benefit of these policies is difficult to detect. Given that there are winners and losers from these aggressive monetary policies, we would expect that a lack of real world response to these policies might eventually cause a shift in the overall policy recipe. Even without any significant improvement in economic data, the Federal Reserve seems to be deepening its resolve to continue with gradual rate normalization. Finally, the price inflation that has already occurred has, in most cases, outpaced any improvement in underlying intrinsic value for the world's asset classes. So some of the gains have come directly at the expense of future returns, meaning that future returns are likely to be lower than returns of the recent past.

The September 2016 tantrum is also noteworthy because the triggers were not actions, but merely words. For example, on September 9, the president of the Federal Reserve Bank of Boston, Eric Rosengren, observed that "a reasonable case can be made" for policy normalization. A well-known money manager added to anxieties that day by warning that the Federal Reserve might raise rates solely to counter the reputation that such moves don't take place if the markets aren't expecting them. The market reaction reveals an edginess on the part of investors that suggests even a small trigger can incite a relapse into these volatile conditions. Checking the fourth-quarter calendar, we see some potentially large triggers, including a U.S. presidential election, the December Federal Open Market Committee meeting and several key votes across Europe.

Defending your portfolio from tantrum risk

Dealing with this risk management challenge will be difficult in the presence of a more significant or durable tantrum. We suggest three portfolio adjustments:

1) Develop a plan to reduce risk if the prospect of a material tantrum arises. Two conditions would suffice to trigger the need for risk reduction. The first would be a decline in bond yields to a level where their diversifying potential is severely compromised. As long as bonds are reasonably priced, they should help to stabilize a portfolio through a protracted tantrum episode. Should yields fall below a fair value range, however, we would acknowledge the need to reduce risky asset positions. The other condition would be a clear-cut catalyst for monetary tightening, like a sequence of stronger-than-expected economic data.

2) Search for an expanded palette of diversifiers. Despite their recent struggles, we continue to advocate the incorporation of liquid alternatives or other investments with low correlation to traditional markets into overall portfolio strategy.

3) Identify hedging positions that may help offset simultaneous declines across asset classes. Some positions that would have been helpful in past tantrum episodes include long positions in volatility and the U.S. dollar exchange rate and put option protection for volatile equity positions. Each of these hedging positions should be evaluated in the context of its carrying cost. - seeking alpha

By Jeffrey L. Knight, Global Head of Investment Solutions and Co-Head of Global Asset Allocation

Diversification is the Best Approach in Uncertain Times

It seems that we live in a time when outcomes are only good or bad, heads or tails, yes or no. This is what mathematicians call binary outcomes.

In the battle against state capture, the outcome for our country will either be great or terrible; it’s hard to see a middle-of-the-road scenario in the near future. Similarly, the credit ratings agencies will deliver their verdict on our economic future by the end of the year. A positive announcement will be well received by the markets, whereas people will probably panic if we are downgraded. How do investors make rational decisions in this binary world?

Few investors can consistently make money by following an investment strategy that is based on trying to predict the future. This is called market timing, and it is an expensive way to invest your capital. First, you must be able to predict the outcome accurately – for example, the verdict of the ratings agencies on economy, or whether the British electorate will vote to leave the European Union. Currently, the verdict of the ratings agencies might seem obvious, but then so was the Brexit vote and look what happened there.

Second, you must be able to predict how other investors will react to the news. Let’s consider the aftermath of the Brexit vote. Although the London stock market fell initially, it has been on a strong upward trend since and is more than 15 percent higher than it was 12 months ago.

If you decide to sell your shares in anticipation of a ratings downgrade, because you are concerned that the stock market will collapse, you might be making a huge mistake. The most recent comparable country to study is Brazil, which was downgraded in February, but has seen its stock market jump by nearly 40 percent since. It is higher than it was a year ago, so investors who sold in the months before the downgrade are really losing out.

Who can say what will happen to our market and the rand if we are downgraded? It would be foolish to assume that the impact on the market will be negative.

In these circumstances, where the outcome of potentially significant political and economic events is so uncertain, it does not make sense to be too specific in your investment planning; instead, you should aim to spread your risk as much as possible, to ensure that portions of your capital will rise even if events don’t pan out the way you thought they would.

This means you should diversify by investing in a range of asset classes, including cash, bonds, listed property and shares. If the downturn does not materialise and markets rise, your investments in shares and listed property will rise.

It also makes sense to diversify across different countries and currencies. If you have most of your assets in rands, you should consider increasing your allocation to foreign investments. However, you should do this carefully and not in one batch.

I am not too concerned about owning a range of offshore currencies. If you buy a unit trust fund that invests in a portfolio of global investments, it will be denominated in a particular currency – for example, United States dollars – but this does not mean that the entire portfolio will be invested in the US; it will also be exposed to European, Japanese and other investments.

When you are investing at a time of market volatility, when the price can move dramatically within a few days, it makes sense to spread out the purchase (phase it in) over time, to mitigate your losses if you buy just before a major fall in the price. Starting a new investment and then immediately losing value can set you back a number of years. I buy foreign exchange in batches – preferably, at least three batches over a number of months.

Banks generally charge higher fees on foreign exchange transactions when you transact in smaller amounts, so you should aim to make the amounts as large as possible.

Don’t be too concerned about making major changes to your investments when political and economic events become media sensations; the hype is never good for rational investor behaviour. - IOL

Make Your Gold Purchase Count this Diwali, but No Jewellery Please!

Dhanteras and Diwali – India’s most eagerly-awaited festivals – are around the corner, giving us the opportunity to indulge in various pleasures such as sweets, shopping, socialising, gifting, and most of all – buying gold. 

The tradition of buying gold during Diwali has continued over thousands of years, and for all the right reasons. The yellow metal has delivered healthy returns over the long term. Moreover, it has provided essential financial security during trying times. 

This along with a timeless charm has made gold popular amongst the masses. 

An endorsement by tradition is just what is needed for buyers to rush into purchasing gold. In their eagerness, buyers frequently splurge on gold jewellery by convincing themselves that they are investing rather than spending, since the value of the ornaments is likely to increase in the future. While the justification isn’t entirely incorrect, it lacks some important considerations. 

Gold jewellery – a dull investment option 

Buying gold jewellery should not be confused with investing in gold. While gold jewellery is bought and used for its aesthetic value, it’s ineffective as an investment option. This is because of the loss in value on resale. The making charges on gold jewellery, which typically range between 6-14 per cent of the cost of gold (and may go as high as 25 percent in case of special designs) are irrecoverable. 

In this context, one may feel that gold coins and bars are better suited for investment. However, it should be noted that purchase of gold coins and bars comes at a significant premium of about 5-15 per cent over the price of gold (the lower the denomination of the coins and bars, the higher is the premium). This premium is irrecoverable on sale. 

Smarter ways to invest in gold 

Increasing awareness on the drawbacks of physical gold as an investment option has made people switch to gold exchange traded funds (ETFs) and sovereign gold bonds – the smarter ways of investing in gold. 

Gold ETFs are mutual funds that invest in physical gold. Each unit of a gold ETF represents 1 unit (or in some cases 0.5 units) of gold. Investors in gold ETFs do not bear making charges associated with physical gold. 

Moreover, gold ETFs are traded on the exchange at the prevailing market price of physical gold, which implies that investors can buy or sell their holdings at prices that are close to the market price, without worrying about paying a significant premium on purchase or selling at a discount. 

Sovereign gold bonds are government-backed securities denominated in grams of gold. Investors in sovereign gold bonds are assured of the market price of gold at the time of purchase and redemption. 

Gold ETFs vs. sovereign gold bonds 

At the outset, gold ETFs and sovereign gold bonds may seem similar. However, there are a few differences which are highlighted below:

Mathematically, sovereign gold bonds may seem more rewarding than gold ETFs; however, investors need to consider other factors such as: 

Upshot 

Gold is a safe haven asset, which makes it an effective portfolio diversifier. It’s thus prudent to allocate 10-15 percent of your portfolio investments to gold; Please consult your financial advisor before taking any asset allocation related decisions. It’s rational to seek higher returns within the same asset class. 

However, the potential to earn higher returns should be evaluated in the context of other important considerations. Liquidity is a key factor that should be considered while making any investment. Investors should be able to encash their holdings at any time without compromising on the value. 

Easy availability is another important consideration. The investment instrument should be easily available so that investors are able to deploy their funds without any delay. In these aspects, gold ETFs are better than sovereign gold bonds. - ET

A Fool and His Money

As the saying of our title goes, so goes the world in assessing stereotypical gold investors. More commonly, their approach is considered not only “old-fashioned,” but also likely to be without merit, as Gold is a non-yielding asset and at times even regarded as some sort of senseless doomsday allocation choice. 

It is not today’s objective to debunk all aspects brought forward by the critics, but instead to approach the topic from a purely factual point of view — recognizing that there is something going on “under the hood” that may silence the general opinion (as above) and mainstream media still favoring the most appreciated assets available in today’s market environment.

With aggregate gold holdings by the world’s countries and international organizations maintained over the past 15+ years (at approximately 30k tonnes), some nations continue to be engaged in an aggressive “catch-up” accumulation; for example, China and Russia have increased their gold reserves from 395 to 1823 tonnes and 423 to 1423 tonnes, respectively. At the same time, other major central banks/countries have allowed gold, when measured as a reserve asset held in proportion relative to their foreign exchange (FX) holdings, to increase materially — the U.S. from 55 percent to 76 percent, and “Euroland” from 28 percent to 57 percent.

It may be easy to “poke a hole” in our logic, since the price of gold has increased materially over recent years and because the U.S. and Germany (as the world’s largest holders in gold) have not been increasing and/or decreasing their allocation in absolute terms. However, the flipside of this argument is that gold, even at record prices seen last in 2013, was not “spent down” by policymakers, with the exception of a seemingly delusional Bank of England (BoE) that made the decision to cut its exposure nearly in half from 588 tonnes in 2000 to 313 tonnes today — a move that was highly criticized, especially given the average sales price of $275/oz at the time (vs. today at $1326/oz).

A new approach of how to evaluate today’s price of gold is not only to include aspects of “usage” by Central Banks, but also the notion that the world will continue to be stuck in a zero-rate (or negative-yield) environment for some time to come. Whereas on one hand policymakers have the benefit of monetizing their gold holdings as a recognized reserve asset (unlike other precious metals), on the other hand the argument of a non-yielding asset becomes less relevant due to the dilemma in bond markets.

There is a simple conclusion to the above provided analysis and background: an asset that nations and their central banks want, or even regret to have sold (BoE), is an asset that will very likely stay in demand. With a gold market that has been “tight” from a supply and demand perspective over the past years, gold should become more valuable. Before one parts from his or her money (especially when held in a denomination that has weathered the test of time), it should first be considered who the bigger fool may be today – the investor buying or selling gold?

For what it is worth: In support of our argument that gold may be more valuable than the current price and media suggests, it is at least anecdotally important to note that the German Bundesbank continues with a major project to bring gold home from “offshore” storage locations, predominantly in Paris and New York. - wealthmanagement

Alternative -10 Reasons Gold Will Outperform Stocks in the Next Decade

Gold has been beating stocks for 10 years, and it may continue to do so for another 10.

The S&P 500 has been in one of the strongest bull markets in history since 2009. Yet surprisingly, in the past decade, the SPDR Gold Trust (GLD) has actually outperformed the SPDR S&P 500 ETF Trust (SPY) by more than 15 percentage points (even including the SPY’s dividends). The GLD is up nearly 120% since 2006.

That didn’t come in a straight line, of course. That covers a major run-up all the way through 2011, the declines of the next five years and gold’s rebound in 2016.

More importantly to new money: Many of the reasons the GLD has outperformed the SPY in the past 10 years could hold true for the next 10 years as well. Here’s a look at 10 reasons gold could prove to be a better 10-year investment than stocks.

Gold for Diversification: Gold’s 12-month correlation to the S&P 500 in the past 45 years is exactly zero. Therefore, for investors looking to diversify their portfolios, owning gold (via the GLD or otherwise) is an easy way to reduce overall risk. Investors will continue to buy gold to diversify their portfolios in the next 10 years.

Rising Debt Levels: Global debt levels have been skyrocketing as a number of central banks try to spend their way out of slowing economic growth. When countries print money, and debt starts piling up, investors get nervous and turn to gold. It’s unlikely that global debt levels will start declining in the next 10 years.

Growing Gold Demand: Like any other free market, gold prices are determined by supply and demand. Growing gold demand from China and other emerging-market economies is showing no signs of slowing down. Last year, Chinese investors bought 985.9 metric tons of gold, up 3.7% from 2014.

Inflation Hedge: Gold prices tend to rise as the cost of living rises, which makes the precious metal a great hedge against inflation. Historically, gold and U.S. Treasuries have been the most popular inflation hedges. Unfortunately, 10-year Treasury yields recently hit all-time lows following the Brexit vote and remain severely depressed.

Negative Interest Rates: Speaking of Treasuries, even investors that normally wouldn’t consider the GLD are compelled to buy it these days because it’s extremely difficult in the low-rate environment to generate any significant returns from bond yields. As of the end of June, Fitch Ratings reported that $11.7 trillion of global debt is now in negative yield territory.

Flight to Safety: Gold’s perception as a safe haven in times of economic turmoil makes it a top choice for fearful investors. Carl Icahn and George Soros are two of a growing number of famous investors that are predicting a large stock market crash in the near future. If their prediction comes true, even more investors will soon be flocking into gold.

Stocks Have Limited Upside: Stocks clearly have momentum in the near-term, but the S&P 500’s cyclically adjusted price-to-earnings ratio (CAPE) is now sitting above 27. The only other times it was this high in history were just prior to Black Tuesday in 1929, during the dot-com bubble in 2000 and prior to the financial crisis in 2008. It’s hard to see much long-term upside remaining for the stock market.

The U.S. Dollar May Have Peaked: Despite the fact that the dollar has pulled back a bit in 2016, it remains near its highest level since 2003. If the dollar reverts back near its mean level for the past decade, the GLD will be headed higher.

Wealth Preservation Investors: Paper currencies come and go, but gold has been used as an actual currency for centuries. Although the metal has little practical use, investors perceive an intrinsic value in gold. It makes them feel safe during times of uncertainty. If you believe global economic uncertainty will be on the rise in the next 10 years, gold could be a solid play.

Gold as an Insurance Policy: Similar to No. 9, lots of people that are strangers to Wall Street have been scooping up gold in the past decade because they don’t trust the global financial system. Much of these fears stem from the near-catastrophic mortgage crisis back in 2008. The likelihood that fears of another major systemic crisis will pop up at some point in the next decade seems high. - kiplinger

As Asians Age Faster, More of Their Savings May Head Offshore

China and Taiwan to see outflows; youthful Philippines the exception

Asian emerging markets won't just need to worry about "taper tantrums" in future when it comes to the risk of capital outflows. And the hidden danger has nothing to do with the US Federal Reserve's appetite for monetary tightening.

It has everything to do with demographics. For the first time since 1950, the Asian emerging markets - a group that includes China, Thailand and South Korea - will see their populations age faster than those in the developed world in the coming two decades, according to Goldman Sachs Group Inc.

When workers hit their 50s and 60s, those are peak savings ages -  and times when households probably will want to put a portion of their investments abroad, according to Goldman research published this month.

Aging demographic profiles are already contributing to pressure for capital to move out of China, Taiwan, South Korea and Thailand, the banks' analysts wrote. Goldman tallied a net US$2 trillion exodus is poised to leave those countries in the next five years.

"Outbound investment of domestic savings would weaken local currencies, softening financial conditions and reducing the need to cut interest rates at the margin, in our view," the Goldman analysts, including Andrew Tilton, the chief economist for the Asia Pacific region in Hong Kong, wrote in the Sept 22 report.

If Goldman's estimates are correct, an aging Chinese society means pressures are bound to strengthen in an economy already hit by outflows. Of the US$2 trillion that the investment bank estimates will flow out of the four emerging markets facing the most severe aging risks, 70 per cent will come from China.

The Philippines, with its youthful workforce, stands out as an exception, with "virtually nonexistent" aging-induced outflow pressures on the horizon, Goldman says.

In Indonesia and India, outflows due to an aging population will represent less than 1 per cent of gross domestic product over the next decade, it said. - bloomberg

The Future of Portfolio Diversification

Whether you’re a millennial embarking on a relatively new investment journey, a hard working Baby Boomer seeking to grow your portfolio in order to someday enjoy retirement, or a retiree who needs to make your money last, it’s wise to pay attention to portfolio diversification and rebalancing. We have all heard that before!

While change is often uncomfortable -- even financial advisors sometimes dread discussions related to investment diversification -- the topic is one that cannot be ignored. Those who keep all of their investment eggs in one basket are missing an opportunity to profit from exposure to new asset classes while reducing risk overall. 

Indeed, studies show that only two percent of managers produced statistically significant alpha in 2015.* Maybe the status quo isn’t such a good idea after all. Are we perhaps, just in a sideways trend, or an unprecedented new era of portfolio management?

It’s important to understand that diversification is much more than simply buying stock in various industry sectors, tracking the charts and hoping for the best. When exploring ways to reshape your portfolio, it is essential to seek diversification by sectors, asset classes, position/size and geography. 

Don’t be afraid to step outside of your comfort zone and pursue emerging strategies with the potential to outperform. For example, technological advances now make it possible to use sophisticated algorithms to make investment decisions in inventive new ways. 

Did you know that in the coming years, robots are expected to replace commercial truck drivers? Did you realize that in some countries, the lack of a population base to take care of their elderly may result in the use of humanoid robotics to take care of the elderly and infirmed? How did this happen so “quickly,” and right under our noses? 

Technology, as it is evolving, is becoming more and more powerful, and making quantum leaps in the efficacy of the industries it impacts. Although I personally see the replacement of labor by robots as a serious economic concern to those directly impacted by the shrinking workforce, in other sectors, the use of technology has created massive opportunity as it pertains to one’s portfolio.

Here are a few forward-thinking ideas to keep in mind in today’s dynamic business climate. Let’s take a closer and more detailed look:

“Smart” Investing May Benefit from Artificial Intelligence

According to a TechCrunch article this week, robots are expected to replace more than three million humans in the workplace by 2018 and by 2020 smart machines will be a top investment priority for more than 30 percent of CIOs. In the investment arena, sophisticated artificial intelligence and algo-trading are already the basis for sophisticated, proprietary investment approaches. 

Mathematical models that optimize timing, price, quantity and risk are the cornerstone of algo-trading and are capable of reducing the risk of manual errors in placing trades as well as the possibility of mistakes by human traders based on emotional and analytical errors. In the case of Mediatrix Capital, our systems are capable of performing in a capacity that would require a minimum of 40 minds working at top speed and laser focus, instantly. Do you have a staff that large managing your portfolio exclusively? You can now.

Use Alternative Investments Like An Institutional Investor

Private equity, certain hedge funds, venture capital and other alternative investments are often a valuable addition to the investment portfolio. They offer higher levels of returns that are uncorrelated to the markets and add value in that they behave differently than traditional investments. 

Various types of alternative strategies offer different benefits and should be tailored to meet the investor’s individual needs and portfolio goals. Because they are often less liquid and very specialized, investors must be accredited. In the future, we predict that the alternative investment landscape will continue to expand and evolve with new offerings that take advantage of advanced technology.

Track World Events and Adjust Accordingly

This year’s Brexit vote sent markets spinning, as those who typically only make money in bull markets and do not understand how to profit in a bear market ended up on the wrong side of that trade! When the Black Swan event occurred in early 2015 and the Swiss Franc uncoupled from the Euro, markets were also in a tailspin. 

In 2015, at a time when many trading systems lost money, Mediatrix Capital clients actually made money in spite of having some trades on the wrong side during that month. This was possible due to proprietary artificial intelligence and an algorithmic approach that incorporates overlay and absolute return strategies with quantitative model building and order-flow analysis, which have the ability to limit the size of a trade and initiate defensive strategies.

Embrace Volatility, Stay Calm, and Stay Focused

When the markets are volatile, it’s easy to give way to emotions and forget to act logically when entering or exiting an investment decision. It’s imperative to understand that volatility can be used to one’s advantage if you are able to remain calm and focus on the best strategy for each unique situation. However, the component of speed is also critical, which is never the friend of the emotion. 

For example, algorithms show no emotion when they utilize software programs with a defined set of rules to place trades. Their ability to generate profits at a speed and higher frequency that is impossible for a human trader offers one way investors can defend their edge and at a macro level, augment their portfolio value.

Today, it is more important than ever to seek out smart managers that thrive on market movement and are able to make money both during bull and bear markets. Those managers need to be part of your investment portfolio in order to help secure your financial future. - equities.com

5 Ways to Recognize a Good Investment Opportunity

We all know the basic tenant to successful investing: Buy low and sell high. But this common adage can be difficult to implement, especially when many of your friends and colleagues are doing the opposite. Consider these strategies that will help you identify good investment opportunities and use them for your financial advantage:

Buy low. Figure out the baseline value for an investment or purchase, and wait to buy it until the purchase price is below what is reasonable. When the stock market drops and other people are panicking and selling, that is the time to look for buying opportunities. Ideally you want to purchase an asset after the price falls significantly, with the expectation that it will rise again in the future and produce a nice return.

Sell high. The time to consider selling an asset is after the price rises dramatically. This is often a time of stock market growth when many people are eager to buy into a rising market. When an investment shows significant gains, this is the ideal time to cash out and lock in your return. You could tuck the income into a safer investment or look for a new underperforming asset to try to repeat your success.

Learn from the storms. While trying to buy low and sell high, you are bound to make some mistakes. If it were easy to buy low and sell high, everyone would do it. When you lose money on an investment, try not to lose sleep over it or give up investing altogether. Perhaps you want to take a break from active investing for a while and capture market returns with an index fund. Or maybe you will learn to more carefully research an investment before putting more than you can comfortably afford to lose on the line. Don't let fear be the limiting factor that mutes your potential. Rather, let weathering that storm be the fuel that propels you to success.

Use your fear to self-assess. Take inventory of the investments you have made in the past, and think about what you could do to produce better outcomes in the future. There is tremendous insight that can be obtained from physically writing down outcomes you would like to avoid. A written plan can prevent you from making emotional investment decisions in the heat of the moment. If you have a financial planner, tax planner or someone else who will look over your investment ideas, that adds an even deeper layer of reliability and accountability.

Create a plan to avoid regret. A large loss can certainly cause you to regret a bad investment decision. But there's also the regret that comes from watching an investment soar when you could have gotten in on the ground floor. If you take the planning steps of inventorying and then analyzing your investment options, you can help avoid a negative result. Writing it down makes it easier to stick to a plan, especially when friends or pundits might try to tempt you to do otherwise. You can also take the planning process a step further to calibrate your life priorities and how your finances can help you achieve them.

Investing is ultimately about funding the lifestyle that you want to live. Choosing wisely could produce enough wealth to allow you to retire sooner or walk away from an unpleasant job. But you'll need to use logic and stick to a financial plan to successfully build wealth. Following the latest investment trend isn't likely to lead to financial success. - yahoo.finance

9 Financial Planning Tips for Responsible Living

If you weren't born into riches, chances are that you've had to grow up and get a job to earn the money you need to survive.

Particularly if you've formed a family along the way, it's important to do what you can to protect the money you're earning, the money you're saving, and the people who have come to depend on you and your income.

Let's take a look at some basic financial planning tips that can help you better secure your finances and build a solid foundation for your family's future.

1. Build an Emergency Reserve Fund

The first and most basic step toward improving your financial situation also happens to be the one that is most frequently overlooked or, worse, dismissed - establish an emergency reserve fund. This doesn't have to be a monumental or complex account; an ordinary savings account at your local bank will work perfectly.

Your goal should be to accumulate a minimum of 3-6 months' worth of expenses in this account. You'll sleep a lot better at night knowing that, no matter what happens, you've got enough cash socked away to continue paying the bills and living in the same style to which you and your family have become accustomed.

Think of your emergency reserve fund as the foundation on which the rest of your investment endeavors will be built. You won't be using that money to begin investing in bigger and better, more complex vehicles, but the fund's existence is the cornerstone of a solid economic progression.

Plus, the dedication and discipline you will have to demonstrate in order to consistently set aside a portion of every paycheck will serve to condition your mindset for future opportunities and the rest of your financial planning journey.

2. Pay Yourself First

Still on the topic of establishing an emergency reserve fund, there is a right way and wrong way to do it, believe it or not. When considering the generic concept of saving money, most people make the mistake of taking the position that, "I'll save whatever money I have left over when I get my next paycheck."

The problem with that, and the reason those people never end up with any real savings, is that there's never any money left when the next paycheck arrives.

There is a reason why consumer spending accounts for 70% of GDP - prone to spending practically all of their income no matter how much money they make. A recent Bloomberg article reported that close to half of those making between $100,000 and $150,000 per year have less than $1,000 in their savings accounts.

If you're serious about saving money, whether it be to continue building your emergency reserve fund, growing a retirement nest egg, or planning for a large purchase, the key is to set that money aside as soon as you get paid. Your savings goal should be a top priority - nay, a requirement - that's no less important or mandatory than your mortgage payment, utility bills, car notes, and health insurance.

Treat it just like you do the rest of your monthly financial obligations and write out a check to pay the "bill" that is your savings goal. Even if the amount you set aside is small, over time those small deposits equal one big one. So, don't get caught in the trap of trying to justify skipping out on a payment to your emergency reserve fund just because the amount wouldn't be significant.

3. Protect Your Ability to Earn Income

Once you've fully funded your emergency reserve account with 3-6 months' worth of living expenses, your next step is to protect the most valuable asset you'll ever have: your own earning potential. The way to do this is with a disability insurance policy.

Disability insurance is one of the most undersold policy types - but, it shouldn't be. This is especially true for families with only one major breadwinner; if that person is temporarily unable to continue working, where will the money come from to pay the bills until he's back on his feet?

On average, adults who suffer temporarily disabling injuries are out of work 3-5 months. Not surprisingly, disability is responsible for more than 50% of all mortgage foreclosures, and 65% of the public admits to having no way to pay their bills if they were unable to work.

A disability insurance policy would replace your monthly income until you were well enough to return to work, or until you exhausted the benefits available to you based on the policy you purchased. These types of policies can become extremely confusing, and it is always better to enlist the assistance of a trustworthy licensed insurance broker to help you navigate the sea of possibilities and paperwork.

4. Protect Your Family's Way of Life

The next step on the road to financial security - now that you've established and funded an emergency reserve fund and protected yourself against disabling injuries - is insuring your family's ability to maintain their style of living. I'm talking about life insurance.

With a disability policy, your bills will get paid until you're well again. However, what if you weren't simply injured, but had been killed instead? In that unfortunate scenario, your disability insurance policy won't do any good to making sure your spouse and children have the money they need to continue paying the bills.

Now, we're not forgetting about your emergency reserve fund, because obviously your family could use that savings to keep the lights on. But, what happens when that money is gone? Do you know, or have you even considered, what might happen to your family - financially, I mean - if your income was no longer available to them?

It's probably the most depressing subject to talk about, or even think about, for that matter, but if there are people who rely on your income to maintain their style of living then you must figure this out.

Life insurance is a type of policy that will pay your family a pre-determined sum of money in the event of your death. Ideally, that sum should be large enough to cover your final expenses and also pay the lion's share of your household bills for several years. This would allow your spouse and children to remain in their home with enough of a financial cushion to figure out their own course of action without the added overwhelming stress of looming foreclosure or eviction.

Multiple types of life insurance policies exist, each with its own set of pros and cons. In many cases, more than one insurance policy is necessary to accomplish your goals. Some types of life insurance last forever, typically called Whole Life policies, and the others expire after a chosen number of years, and those are called Term Life Insurance policies.

There is no one-size-fits-all life insurance product, as your financial needs and those of your family are unique. Careful consideration and analysis will help you determine the best amount for a death benefit, as well as which specific type of policy is more suitable for your goals and budget.

5. Understand the Basics of Investing

After you've established a fully-funded emergency reserve fund and protected your family's ability to maintain their style of living, only then are you in a legitimate position to begin expanding into the investment arena.

Understanding the basics of how stock market investing works is essential, as the performance of almost every common investment vehicle (other than guaranteed fixed instruments, i.e., Treasury bonds and bank CDs) will be, at least to some degree, affected by or involved with the broader market.

Having a grasp of what affects the price of stocks, and how share prices translate to gains or losses in your investment account, should make future investment-related decisions easier and potentially more successful.

The best way to increase your understanding of how the stock market works, and how it impacts the value of your own portfolio, is to read. Plain and simple. Visit websites designed to educate consumers about stocks and bonds, dividends, mutual funds, and other investment vehicles. The SEC and FINRA, regulatory bodies dedicated to protecting investors and ensuring legislation is properly followed, are a valuable resource for education.

6. Consider Your Risk Tolerance and Time Horizon

Since every investor's situation and financial capabilities are different, what's appropriate for one person may not be appropriate for another. The two most important factors that must be considered when determining whether a particular investment option is suitable are risk tolerance and time horizon.

Risk tolerance is, simply put, your investment personality, or your threshold for market volatility. Some people are much more comfortable with the possibility that the value of their account might fluctuate, while others may be more risk-averse and not comfortable with large swings.

For this reason, financial advisors evaluate risk tolerance with specially-designed surveys and questionnaires that reveal a client's comfort zone, and those results play an essential role in selecting suitable investments.

Time horizon refers to the length of time until the money to be invested is most likely to be needed or withdrawn. For longer time horizons (e.g., several decades), more aggressive options are often appropriate because enough time remains for any sustained losses to be recovered.

On the flip side, shorter time horizons tend to limit suitable choices to more stable, conservative investments that have a smaller possibility of decreasing in value. The tradeoff, however, is that these conservative vehicles generate smaller returns.

7. Don't Put All Your Eggs in One Basket

One of the most basic financial planning tips for investors is to spread risk. This is called asset allocation, and it refers to the process of purchasing different investment vehicles across varied industries, as well as using multiple types of securities (e.g., stocks, bonds, CDs, real estate, etc.).

The idea behind asset allocation is that only a portion of your portfolio would suffer if one particular investment or industry declines, while the remainder of your account should be less affected.

Proper asset allocation requires complex knowledge and understanding of the connections between different asset classes and industries, as well as how each one influences the other. This is another area where it can be helpful for newer investors to have the assistance of an experienced advisor or financial planner.

8. Commit to Dollar Cost Averaging

Along with asset allocation, dollar cost averaging is a time-tested, effective technique to building a solid investment portfolio. Dollar cost averaging refers to the process of making regular contributions to your account, regardless of the current performance of the stock market. The idea is to avoid futile attempts to time the market and predict future price swings, and instead focus on amassing as many shares as possible for the lowest average price.

Since you're regularly contributing a fixed dollar amount, you'll end up buying fewer shares when the market is up and more shares when the market is down, thus reducing your overall average share price.

Dollar cost averaging is only effective as a long-term accumulation strategy and doesn't benefit short-term trading behavior. For retirement portfolios and dividend investors, dollar cost averaging can be a powerful technique. Many companies also offer dividend reinvestment plans (DRIPs) to make the accumulation of additional shares even easier.

9. Get As Much Free Money as Possible

If you're lucky enough to work for a company that offers employees a 401(k) retirement account (or Private Retirement Scheme - PRS in Malaysia), you should definitely consider signing up. Aside from the tax advantages that come from deferring a portion of your income, one of the biggest benefits to a 401(k) is free money.

The free money in a 401(k) comes from the employer's matching contributions. Keep in mind, though, that not all employers provide such contributions and those that do may have their own criteria or schedule to qualify.

A common example of an employer's matching 401(k) contribution criteria is sometimes referred to as the 50/6/3 rule. In this setup, eligible employees will receive a 50% match on 401(k) contributions up to 6% of their annual salary, meaning the company's maximum contribution will be 3%. So, with this arrangement, any eligible employees contributing less than 6% to the 401(k) are passing up an opportunity to get free money deposited into their employer-sponsored retirement plan.

Those free contributions into your retirement plan could end up making a world of difference years down the road when it comes time to actually use that money.

Closing Thoughts on Financial Planning

Financial planning helps us understand our goals in life and take responsible, practical steps to achieve them. There is no right or wrong way to begin financial planning, but the important thing is to start the process and implement effective investing habits .

Knowing what we want for ourselves and our families helps in all facets of life and makes it easier to identify the financial steps we need to take to realize our goals. Dividend investing can play a big role in letting our wealth work for us, but that is just one part of the overall equation. - Nasdaq

Diversification Can Counter Time and Chance

The following words are beginning to sound like a broken record but, based on the emails and phone calls I've received, it seems many investors have forgotten that the financial markets can and do move erratically, unpredictably and chaotically.

The past several weeks have served as a nasty reminder that investing is not an express elevator ride to the top floor. However, as you peer into the black abyss of what lies ahead, please keep in mind two key principles.

The first is that the performance of individual securities is uncertain and the second is that the performance of a portfolio of securities is uncertain in the short-term.

Although no amount of prose can counter the emotions resulting from a loquacious pundit discussing a day's tumultuous trading activity on Wall Street, I would like you to once again consider the wise words of Lucien O. Hooper, a Wall Street legend.

"What always impresses me," he wrote, "is that the relaxed investor is usually better informed and more understanding of essential values; he is patient, less emotional and avoids behaving like Cassius (brother-in-law to Brutus and a key assassin of Caesar) by 'thinking too much'."

Yet, investors' attention is too often shifted away from their main objective; the search for underpriced quality stocks. Instead, they focus on questionable opinions from so-called experts over what might or might not happen and when.

Of course, it is an arduous task to buy when everyone else is selling or has sold. It takes super-human resolve to invest when things look grim, to buy when many so-called experts are telling you that the investment outlook is uncertain at best.

But if you purchase the same securities as everyone else, then you will have the same results as everyone else. And chances are if you buy what everyone else is buying, you will do so only after it is already overpriced. Furthermore, you cannot outperform the market by buying the market, i.e., a market index.

Many investors live in fear of an investment not working out. Consider the following example. Invest $20,000 in each of five investments for 20 years. Assume the first investment is totally lost, the second investment returns only the original $20,000, the third returns 5 percent, the fourth 10 percent, and you hit a home run and receive 15 percent on the fifth $20,000 for an average of 6 percent.

If you do the math, you will find that after the 20 years, you will have a total of $534,946 for a compounded annual rate of return of 8.75 percent. However, if instead of splitting the $100,000 up into five parts, assume you could invest the entire amount in a $100,000 certificate of deposit paying 6 percent. What would you have at the end of twenty years? The answer is $320,713.

The key is not the 20 years but rather that not every investment has to work out. Diversification can overcome adversity if you remain flexible and open-minded.

Wall Street's world is fragile, and depends extensively on time and chance. So invest with intelligence, engage in solicitous but sensible discourse when considering the future, diversify your holdings and finally be skeptical about every prognostication you are given, including mine. Above all, recognize and heed the wisdom of Ecclesiastes' profound warning: "The race is not always to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favor to men of skill; but time and chance happeneth to them all." - heraldtribune

Wealthy Families Boost Private-equity Bets in Reach for Yield

Private equity had the biggest rise in asset class allocation in family office portfolios

Wealthy families are increasing their bets on private equity, focusing more on alternative investments after a difficult year for returns, according to a report from UBS Group AG and Campden Wealth.

Family offices are “absolutely clamoring” to do more co-investing in alternative investments, with 51% seeking to increase such holdings, the firms said in their annual Global Family Office report released earlier this week. Their allocation to private equity rose 2.3 percentage points in the past 12 months, the most of any asset class, the report shows.

The findings, based on a survey conducted from February to May of 242 global family offices, are a “road-map for financial advisers” as they engage in discussion with their high-net-worth clients, according to Joe Battaglia, executive director for the Americas region of global family offices at UBS. Wealthy families are favoring private equity in search of higher investment returns in a low interest-rate environment that's making it tougher to produce gains.

Family offices, which tend to have longer-term investment horizons, are “giving up liquidity for yield,” Mr. Battaglia said by phone. “I would expect that investing in private equity is a trend that we see continued into next year.”

They're using their own cash to buy stakes in privately held companies, as well as investing in private-equity funds managed by large firms such as Blackstone Group LP, according to Mr. Battaglia. Their investments may be locked up for years as they aim to make a profit through a sale or public offering of shares, trading liquidity for the potential of higher returns.

Last year proved a challenging year for investment performance. Global family offices that participated in the survey produced a meager return of 0.3% in 2015 based on a global composite of their portfolios, according to the report.

The average family office portfolio has 18% of its assets in developed-market equities, the largest allocation to any single asset class, the report shows. The next largest is direct investing in real estate at 15%, followed by an 11% exposure to direct venture capital and private-equity investing. The fourth-largest asset allocation is developed market bonds at 9%.

Family offices are chasing double-digit returns in private equity. They're expecting 12.5% gains from direct investments in venture capital and private-equity deals, 8.9% gains from investing in private-equity funds and 13.9% from co-investing in deals, the report shows. Co-investing in alternatives is appealing to wealthy families because of its relatively low cost while sharing the risk with other partners, according to the report.

Multi-year participants in the survey increased their overall exposure to alternative investments by 1.7 percentage points, driven by the rise in private equity allocation. Their holdings in hedge funds declined by 0.9 percentage point amid concerns participants in the survey had about poor performance and high fees, according to the report.

“Yield is difficult to obtain,” said Mr. Battaglia. “There's almost no yield out of government” debt, and family offices are placing less emphasis on corporate bonds, he said.

Family offices scaled back their fixed-income holdings in developed markets this year by 1.5 percentage points, after the asset class underperformed expectations, according to the report. In developed markets this year, they're expecting 2.6% returns from bonds.

There was a slight pullback of 0.1% in developed-market equities, with return expectations of 5% this year, the survey shows.

Participants in the global survey have an average $759 million of assets under management and the majority are single family offices, according to the report. - investmentnews