Five Tips to Become a Better Investor

James Ashley, head of international market strategy at Goldman Sachs Asset Management explains how the techniques of behavioural finance can help investors navigate unpredictable markets

As anyone who has run money in the markets will agree, investing is often an emotional business. This is particularly true in volatile periods like the present. 

With a range of different factors at play – softening commodity markets, the uneven global economic climate, China’s slowdown and the uncertain direction of interest rates – the risk that emotions may unduly influence investment decisions is especially high.

We believe that short-term market events and the emotions they trigger can risk material interruptions to thoughtful long-term strategies. But to counter these risks we need to acknowledge them, without losing sight of those long-term investment goals.

Emotion is a fact of investing; the challenge is to identify and address biases before they exert undue influence in the investment decision-making process. We have identified five common emotional traits, for each of which there is a solution, below:

• Unrealistic expectations: Ensuring realistic expectations for investment returns

• Loss aversion: Identifying appropriate risk levels and the “highest acceptable loss”

• Familiarity bias: Striving to reduce “home country bias” and over-reliance on the familiar

• Anchoring: Avoiding undue emphasis on a single point of reference, such as a stock index

• Overconfidence: Learning to respect the limits of one’s knowledge or investment strategy

Unrealistic expectations can be prompted by “recency bias” – the expectation that recent trends will endure – and the more familiar concept of confirmation bias, the natural inclination to search for and prioritise information that fits our preconceptions.

These might manifest themselves in an expectation, despite evidence to the contrary, for previously high-performing asset classes to remain so.

The key to countering this is to accept the reality of the market before events force a reassessment. Investors should use all available data, maintaining long-term investment plans and focusing on goals rather than short-term performance against a benchmark.

Finance professionals can counter clients’ own bias by prompting a discussion about their views rather than by providing unsolicited advice.

Putting this in the context of the rocky start to 2016, one might observe that sell-offs are a normal investing experience, even if they don’t seem so to investors lulled by a benign period.

Performance of index in 2015

Source: FE Analytics

The equity market correction that began in mid-2015 might have been a brutal experience, for example, but 10 per cent declines are actually more normal than abnormal, occurring on average more than once a year over the last quarter century in the S&P 500.

But given that there hadn’t been a market decline of this magnitude for four years until late 2015, it was natural – if illogical - for expectations to shift in line with improving conditions.

Loss aversion describes the preference of those who seek to avoid losses more than they wish to acquire gains. Dealing with this isn’t a simple question of changing the bias, especially in view of the fact that higher risk strategies tend to produce more outlying results on either the positive or negative side rather than “average” returns likely to be within acceptable bounds for the investor.

Key techniques include identifying the extent of loss-aversion and the highest acceptable loss. This in turn can form the basis of a strategy to reduce risk using effective portfolio construction, designed with both investment objectives and the investor’s risk aversion in mind.

Well-constructed portfolios are an essential element of behavioural finance.

Relevant in benign markets as much as volatile ones, we believe robust portfolios require long-term allocation choices based on more than the recent past and on more than one or a few recently high-performing asset classes – exactly the kind of thinking that limits the risks presented by short-term emotional reactions.

Familiarity bias is both an emotional behaviour and a risk run by passive investors who automatically over-allocate to domestic stocks and other investments (“home country bias”). It carries three main risks: the exclusion of alternative investment opportunities; limitation of diversification; and the assumption of unnecessary total risk.

Home country bias in particular presents concentration risks – every national equity benchmark will have a particular bias to certain industries, as well as indirect exposures to other geographies via constituent stocks dependent on cashflows from key offshore markets.

Ways to counter familiarity bias include making a conscious decision to become more familiar with alternatives – the tools exist to enable investors to judge the relative performance of different asset classes.

Another option takes us back to the key principle of effective portfolio construction: a “core and diversified” approach, based on core investments in mainstream asset classes with a marginal overlay of diversifier investments such as high yield or international small cap equity, can reduce portfolio risk while leaving room for higher returns.

Performance of indices over 10yr

Source: FE Analytics

Anchoring, the mental shortcut by which investors place excessive emphasis on a single reference point, is a similar inhibitor of logical investment decisions.

Investors can counter this bad habit by questioning their reference points – especially the “high water mark” of favoured stocks – and by adopting diversified benchmarks.

Over-confidence is a perennial risk for investors and is a trait frequently rooted in most of the behaviours discussed previously.

Symptoms include investors’ tendency to overestimate the accuracy of their information; to hold insufficiently diverse portfolios; to retain underperforming investments while selling winners; and to trade with unnecessary frequency.

To combat this, we believe investors should embed an investment process based on confidence in their long-term strategy, thereby lessening the likelihood of unnecessary trading and turnover.

Part of this process is frequent self-assessment and appraisals of trading history, identifying in particular incidents of unnecessary trading that had a deleterious effect on performance.

These emotional characteristics are each an understandable quirk of human nature, the flipside of the creativity and ingenuity inherent in thoughtful investing.

By acknowledging them and putting in place measures to offset the associated risks, investors can turn potential weaknesses into strengths. - trustnet

Investing: Factors of Portfolio Performance

Asset allocation among other determinants accounts for most of the performance in a diversified investment strategy

Interest in stock market movement has grown during the past decade. More individuals own shares as part of their portfolio than a decade ago. It is very important to understand the determinants of portfolio performance. Empirical investigation in investment science literature during the last couple of decades established that a portfolio’s performance is largely a function of different factors. The factors that majority investors think that are important for performance are in fact relatively inconsequential. Let us discuss some of the important determinants of your portfolio performance.

Investment policy

The first is investment policy, which sets your default allocation of investible funds to each of the major asset classes, such as equities, fixed income, gold, cash, and so forth. The key characteristics of an investment policy are its long-term focus and asset allocation strategies. Asset allocation is the process of deciding how to distribute an investor’s wealth among different countries and asset classes for investment purposes. An asset class is comprised of securities that have similar characteristics, attributes, risk-return relationships. A broad asset class, such as bonds, can further be divided into smaller asset classes, such as treasury bonds, corporate bonds, and high-yield bonds. In the long run, the highest compounded returns will most likely accrue to those investors with larger exposures to risky assets. The asset allocation decision is not an isolated choice; rather, it is a component of a portfolio management process.

Market timing

The second major determinant in portfolio performance is market timing, which leads to deviations from the default allocations dictated by your own investment policy. Your investment policy might call for you to be fully invested in stocks, for example, but you also might believe that stocks are extremely overvalued right now and decide to be only 50% invested in equities. This deviation from policy is popularly known as market timing which is an important determinant in portfolio performance.

Market cycle

Asset classes have unique cycles. In some years, small and value stocks may outperform the market; in others they may underperform. It takes resilience and psychological preparedness to endure the times they underperform. Remember, investing in small and value stocks should augment the bottom line in the long run, but investors should understand that their portfolio will not identically track the market every single year.

Security selection

The other major determinant of portfolio performance is security selection. Do the particular securities you own do better or worse than their asset class as a whole – this is an interesting question which always ringer at the back of the mind of each investor. For instance, on average, being fully invested in stocks was very profitable during the decade of the 1990s. But it would have been a lot less profitable if your entire stock portfolio was invested in only a few particularly poor-performing small-cap value stocks. This could have lowered the return which is attributable to share selection.

Markets work

Capital markets do a good job of fairly pricing all available information and investor expectations about publicly traded securities.
Intense competition drives the market to near-efficiency though not complete efficiency. Securities prices are fair and reflect the best estimate of the company’s actual value. Efforts to identify undervalued stocks or markets are always rewarded in spite of fair pricing based on available information as there is always information asymmetry exists in capital markets across the globe.

Diversification is key

Comprehensive asset allocation can neutralize the risks specific to individual securities. It reduces the impact of individual securities and enables investors to scientifically employ the risk factors that offer higher expected returns.

Risk and return are related

The compensation for taking on increased levels of risk is the potential to earn greater returns. Only non-diversification risk is systematically rewarded over time. So, differences in the average returns of portfolios are due to differences in average risk. Multifactor investing brings a systematic approach to harnessing these risks to deliver above-market performance over time.

Portfolio structure explains performance

The asset classes that comprise a portfolio and the risk levels of those asset classes are responsible for most of the variability of portfolio returns. Asset allocation among other determinants accounts for most of the performance in a diversified investment strategy.

Deciding on the degree to which your portfolio should be based on the above factors is the challenge for the investor. Tilting towards small and value stocks will help you reach above global market returns, but portfolio risk must be tempered by adding other assets with low correlations. - financialexpress

Finding A New Balance With Alternatives

Summary

• The expected strong bond returns within a traditional 60/40 portfolio are unlikely in our current low yield environment.
• Investors should consider incorporating alternatives into their portfolios for optimum diversification.
• BMO Global Asset Management recommends compiling a complementary blend of active alternative managers and multi-alternative strategies.

Alternative investment options available to most investors present challenges and opportunities. Until recently, retail investors had limited access to alternative strategies and therefore may not be very familiar with these types of investments and how they can add value. They are increasingly popular, with assets in liquid alternative funds growing from around $50 billion in 2006 to more than $300 billion in 2015. What often gets lost when investors are sorting out all these distinctions is the reason they turned to alternatives in the first place. A better understanding of the role of alternatives in today's economic environment - and in tomorrow's - can help guide investors' decisions as they weigh their options in the alternatives space.

As we move further away from the Great Recession, the traditional 60/40 portfolio faces headwinds. This much-used paradigm allocates 60 percent of a portfolio to equities and 40 percent to bonds, balancing over the long term the growth (and higher risk) associated with equities with the stability (and lower risk) associated with bonds. Yet a significant assumption within the 60/40 paradigm - historically strong bond returns with low volatility - is no longer realistic with low bond yields in the current environment. We expect that even moderately risky balanced portfolios should expect more than a four percent decrease in returns over the next 10 years compared to what a 60/40 portfolio delivered in the last 35 years.

Investors need to find a way to adapt, as doing nothing may result in missing one's diversification objectives. Assuming lower returns, greater risk or reduced liquidity are unsatisfactory options; a plan to find new sources of return should involve choosing from a spectrum of alternative options, noting these should provide either a higher return for the same amount of risk or the same return for a lower amount of risk.

To meet these diversification challenges, investors will need to distinguish liquid alternative strategies that rely on new market exposure, such as volatility and frontier markets, and those that rely on manager skill, such as market neutral, 130/30, long/short equity and macro strategies. Here it is important to note that many "new market exposures" may already appear in investors' portfolios via REITs and commodities. The difficulty of finding truly new exposures, then, encourages a longer look at active management.

Our research indicates best practice may be to compile a complementary blend of active alternative managers specializing in different strategies, thus creating a multi-alternative fund. Manager selection in the alternatives space is arguably more difficult than in traditional long-only strategies. As evidence of this, we have found the dispersion of returns among several categories within the alternative space is greater than that of long-only funds. More importantly, we believe such dispersion among alternative managers suggests diverse sources of alpha: Alternative managers generate alpha using very different skill sets.

When conducting due diligence, it's important to take sources of differentiation into account in regard to strategy, performance, risk management, organization and structure, among other items. To avoid diluting the contribution of an individual manager, we recommend a pool of six to 10 underlying managers while evenly distributing allocation to each one.

A multi-alternative fund can offer access to a concentrated portfolio of alternative managers, combining front-end due diligence, portfolio construction and management, and risk oversight, all performed by experienced, professional managers. The built-in diversification of multi-alternative approaches helps answer the fundamental question that began the search process in the first place: Is the portfolio diversified by manager and strategy? In short, an alternative allocation that combines expertise on manager research, asset allocation, portfolio construction and risk management should offer a flexible, portfolio-ready option. - seekingalpha


About BMO Global Asset Management

BMO Global Asset Management is a global investment manager delivering service excellence from 27 offices in 17 countries to clients across five continents. Including discretionary and nondiscretionary assets, BMO Global Asset Management had CDN $304 billion in assets under management as of January 31, 2016.

Malaysian Ringgit Outlook: USD/MYR Bearish or Bottom?

Malaysian Ringgit exchange rate forecast versus the US dollar is bullish, and there is a high probability of USD/MYR moving towards $3.70. The currency appreciated lately Vs USD, as the latter one seems to be struggling to find a reason to move higher against MYR. Today, Malaysia’s CPI report was released, which missed the mark and putting some pressure on the currency in the short term.

If we have a good look at the daily chart of the USD/MYR pair, then a clear downtrend is visible. The pair started to move down after setting a top near the $4.40 levels. However, a question which may arise now is whether the pair has bottomed or can it continue to trade lower?

Malaysian Ringgit exchange rate to move down versus US dollar?

The Daily chart of the USD/MYR chart clearly points towards a solid bearish trend, and calling for more losses in the near future. However, there is a major support area at $3.70 where the US Dollar buyers may take a stand and push prices higher.

There was a monster support area at $4.10, which was broken in March 2016, opening the doors for more downsides. Currently, there is a bearish trend line formed on the daily chart of USD to MYR, which may continue to act as a barrier for the upside move.

Selling rallies remain a good deal in USD/MYR as long as the trend line resistance holds, as I think the pair may test $3.70 and then form a medium term bottom. So, in short the pair is bearish until it bottoms out at $3.70. If we consider the trend for the US Dollar, then the greenback is under pressure against other currencies as well like the Euro, British Pound, Indian Rupee, Japanese Yen and New Zealand Dollar.

USD/MYR and Malaysia’s CPI for March 2016

The Malaysian Consumer Price Index (CPI) report was released by the Department Of Statistics Malaysia.  The forecast was slated for an increase of 3.6% in the price of goods and services in March 2016, compared with the same month a year ago. However, the outcome was on the lower side, as Malaysia’s CPI rose 2.6%.

The report published stated that major contributors in the CPI rise were “Alcoholic Beverages & Tobacco by 22.7 per cent; Miscellaneous Goods & Services (+5.1 per cent); Food & Non-Alcoholic Beverages (+5.0 per cent); Furnishing, Household Equipment & Routine Household Maintenance (+4.7 per cent); Restaurants & Hotels (+4.5 per cent); and Health (+4.2 per cent)”.

Source – Department Of Statistics Malaysia

The result was definitely not what analysts were expecting, which may put some pressure on Malaysian Ringgit Vs the US Dollar. There is a chance of a minor upside move in USD/MYR, but overall, I think there is a chance of one final push towards $3.70 before the pair starts a major recovery.

In the US, there is hardly any market moving event this week except the Manufacturing Purchasing Managers Index (PMI), which will be published by the Markit Economics on Friday and forecasted to increase to 52.0 in April 2016.

USD/MYR Support Levels
$3.80 and $3.70

USD/MYR Resistance Levels
$3.90 and $4.00

Source - fxnewscall

Related - Malaysian Ringgit Forecast: USD/MYR Is All Bearish?

Rebalancing Your Balanced 60/40 Portfolio With Alternative Investments

Latest white paper makes the case for incorporating alternatives in traditional 60/40 equity/bond portfolio split

BMO Global Asset Management has released its latest white paper, titled "Finding a new balance with alternatives." The paper considers the evolution of the traditional 60/40 equity/bond balanced portfolio split over the past several decades and concludes that, given the current market environment, investors should consider including alternative strategies to generate potentially stronger returns.

Alternative investments feature a diverse group of strategies and management styles. Among those often included within liquid alternatives mutual funds are equity hedge, credit, relative value and macro-driven tactics. Combined within a multi-manager fund, the overall objective typically emphasizes absolute returns - relying less on the direction of markets to meet investor goals.

"Alternatives are an increasingly popular investment choice, having grown from around $50 billion in assets in 2006 to more than $300 billion in 2015," said Lowell Yura, Head of Multi-Asset Solutions, BMO Global Asset Management. "Until recently, retail investors have had limited access to alternative strategies and, as a result, may not be very familiar with these types of investments and how they can add value. This relatively new access - combined with a wide range of strategies that are now available - has created a need for clarity, proper selection and portfolio construction. A multi-strategy approach, which provides exposure to a wide selection of alternative investments, can help investors and financial advisors navigate this asset class efficiently."

To justify an allocation to alternatives, the paper points to a significant shift in the traditional 60/40 equity/bond portfolio construction paradigm that has traditionally relied on strong bond returns in a low volatility environment. In the paper, BMO Global Asset Management contends that historical returns are unlikely to be replicated in the current low yield environment. The firm predicts that even moderate risk balanced portfolios should expect more than a four percent decrease in returns over the next ten years compared to what a 60/40 portfolio delivered in the last 35 years.

"To meet today's diversification and return expectation challenges, investors will need to consider investments that utilize unique strategies or new market exposures," said Kristina Kalebich, Senior Alternatives Specialist/Co-Portfolio Manager, BMO Global Asset Management. "A good alternatives option should either give the portfolio a higher return for the same amount of risk, or the same return for a lower amount of risk. Our research indicates best practice may be to compile a complementary blend of active alternative managers and multi-alternative strategies to make the most out of diversification opportunities."

The firm concludes that alternative strategies are best managed from a holistic, total portfolio perspective, considering the available alternative vehicles and how they correlate to one another. The multi-manager investment team can screen and monitor large numbers of potential managers, separating market exposure from identifiable manager skill. They also construct alternative asset allocations that combine the expertise of several managers to deliver breadth and differentiation - coming together, by design, to serve as a complement to the traditional 60/40 portfolio. - marketwired

About BMO Global Asset Management

BMO Global Asset Management is a global investment manager delivering service excellence from 27 offices in 17 countries to clients across five continents. Including discretionary and nondiscretionary assets, BMO Global Asset Management had CDN $304 billion in assets under management as of January 31, 2016.

Asia's Rich Urged to Buy Dollars as Singapore Fuels Easing Bets

(Bloomberg) -- Money managers for Asia’s wealthy families are telling clients to buy U.S. dollars as a rally this year in regional currencies begins to sputter.

Credit Suisse Group AG is advising its private-banking clients to bet the greenback will gain versus a basket of peers that includes the South Korean won, Taiwan dollar, Thai baht and Philippine peso. UBS Group AG said investors should buy the currency against the Singapore dollar and yen. Stamford Management Pte, which oversees about $250 million for Asia’s rich, urged clients to buy the U.S. dollar each time it falls below S$1.35.

The Monetary Authority of Singapore’s unexpected easing on April 14 has fueled speculation that other policy makers, concerned about a worsening global economic outlook, will follow suit. A gauge of 10 Asian currencies excluding the yen has fallen 0.2 percent this month. The Bloomberg-JPMorgan Asia Dollar Index climbed 1.9 percent in the first three months of the year, the first gain in seven quarters, as traders adjusted bets on the timing of U.S. interest-rate increases.

“We see good opportunity now to hedge against U.S. dollar strength after the strong rally in Asian currencies in the first quarter,” said Koon How Heng, senior foreign-exchange strategist at Credit Suisse’s private banking and wealth management unit in Singapore. “There are risks that other Asian central banks may follow up with some more easing in the second half if their respective growth outlooks deteriorate further.”

The prospect of renewed weakness in the Chinese yuan and two interest rate increases by the Federal Reserve in the second half of the year will boost the greenback, Heng said.

Singapore’s central bank said last week it would seek a policy of zero appreciation against an undisclosed basket of currencies, returning to a neutral stance it adopted in the global financial crisis in 2008. It cited “a less favorable external environment” in its policy statement, two days after the International Monetary Fund warned of the risk of negative shocks to the global economy.

Regional Easing

Policy makers in New Zealand, South Korea and Taiwan will probably cut interest rates in the coming months to revive growth, said Mansoor Mohi-uddin, a strategist at Royal Bank of Scotland Group Plc in Singapore. The Bank of Japan is set to increase asset purchases and lower the deposit rate further when it sets policy on April 28, he said.

“The MAS move raises the risk other central banks become more willing to ease policy as Singapore’s economy is seen as a bellwether for Asia,” he said.

The U.S. dollar will advance to S$1.42 by the first quarter of 2017 and 122 yen in 12 months, said Kelvin Tay, regional chief investment officer at UBS’s wealth management business in Singapore. The greenback bought S$1.3517 and 108.87 yen at 6:15 a.m. in Singapore Tuesday.

“The rally in Asian currencies was overdone,” Tay said. “It wasn’t on the back of really strong fundamentals coming through.”

The greenback is set to gain to S$1.40 versus the Singapore dollar in the next few months, said Jason Wang, chief executive officer of Stamford Management. He had advised clients to buy the U.S. currency when it declined toward a nine-month low of S$1.3415 in March, saying that it was unlikely to fall below S$1.35 again this year.

“Dollar strength will continue to prevail for the next few months, which would be negative for emerging-market currencies,” Wang said. “I don’t expect any of the Southeast Asian currencies to diverge or outperform the dollar.” 

Negative Interest Rates: Keynes Revisited

Negative interest rate policies have started to unnerve investors, even though Sweden, Denmark, the eurozone and Switzerland have all had negative policy rates for over a year. 

This year, amid global growth jitters, investors have started to worry about whether negative deposit rates undermine the profitability of the banking sector. Japanese banking stocks have underperformed global peers by 17% since the Bank of Japan cut the deposit rate to -10 basis points on 29 January. Even more disconcerting were sharp spikes in bank funding markets, which led some commentators to question whether this could threaten their solvency. While these spikes were short-lived, many investors are wondering if cuts deeper into negative territory would see them return. 

We believe that negative policy rates are not as bad for commercial banks as most people think, and that markets have overreacted. Foremost, negative rates on deposits with the Swedish, Danish, Japanese and eurozone central banks apply only to new reserves. So it is far more important to focus on the average interest rate applied to the whole stock of reserves. 

In Switzerland and the eurozone, the mandatory reserves that regulators require commercial banks to hold with the central bank are not subject to negative rates. In Sweden and Denmark, a more complex system of refinancing provisions effectively negates the negative rate on mandatory reserves too. 

Of course, additional asset purchase programmes by the ECB and the BoJ are likely to raise the excess amount of money banks hold on reserve above the minimum requirement threshold, and this will push up that average rate of interest. However, the positive contribution to bank earnings generated by capital gains on holdings of government bonds will provide an offsetting force. Capital Economics also calculates that the annual cost of negative deposit rates to the Swiss banking sector is equivalent to 0.04% of bank assets, and just 0.01% in the eurozone, Sweden and Denmark. Given that European net interest income is circa 1-1.5% of bank assets, the cost is not that great. 

Central bank deposit rates: Negative rates are nothing new

Fundamentally, banks do not earn their profits from the money they hold on deposit – they make their money from borrowing short and lending long. In this regard, negative deposit rates are a more attractive prospect than extending QE to corporate bonds and asset-backed securities; smashing down yields here makes it even more difficult for banks to eke out a net interest margin. 

So will negative interest rates come up with the goods? We are, of course, in uncharted waters. Although not explicit, most readers of John Maynard Keynes’ General Theory infer the premise, ‘[given] that nominal interest rates cannot be negative’. Nobody has really challenged that theory for 80 years! The experience so far suggests that changes to modestly negative rates are passed through to money market rates. Moreover, there is anecdotal evidence that banks are seeking to avoid negative rates in their sovereign bond holdings by lending to riskier counterparties. 

Yet the evidence is mixed when it comes to lending rates into the real economy. Banks have been reluctant to pass on negative deposit rates to retail depositors for fear of substantial deposit withdrawals. It is much easier for a retail depositor to store their relatively small sums of cash in a small cupboard under the stairs, than for corporate depositors, who would need to rent specialist vault space! This reluctance may have limited the extent to which banks were willing to convert lower policy rates into lower mortgage rates, for example, eager as they were to avoid further squeezing retail net interest margins. In particular, Swiss banks have actually raised the lending rate on mortgages since policy rates turned negative, while mortgage rates in Sweden and Denmark have remained more or less unchanged. 

Overall, we think interest rate changes have a diminishing effect on money creation the more negative they become. However, there are few theoretical reasons to refute that a constructive relationship will remain intact, even though there is profound uncertainty about the behaviour of borrowers and savers if interest rates were to remain significantly negative for a prolonged period of time. 

The main limitation is the existence of hard cash. At some point it will become cost-effective to store deposits outside of a bank, and the longer negative interest rates are in place, the more competition will erode those costs. Even here there are plenty of interesting things that policymakers could do: large-value notes could be eliminated, pushing up the vault space required; bank notes could be taxed, making currency non-redeemable for deposits in banks; or cash could be eliminated entirely. However, we are a long way from the deeply negative rates at which these ‘wonk-tastic’ ideas might become a reality. 

We are sanguine on the impact negative rates will have on bank profitability, and tentatively optimistic on the potential for negative interest rates to help the economy – particularly when considered alongside other forms of stimulus. However, European banks are far from fixed. European bank loans did not start declining until a full four years after their US peers, so substantial losses still need to be crystalised by European banks. And yet, few of these banks have managed to make a return that covers their cost of capital over the last five years. 

As a result, we expect a series of mini-existential crises, triggered by rate cuts or otherwise, to continue to drive bank stock price volatility, for which investors are unlikely to be sufficiently compensated. - portfolio-advisers

The Investment Habits of the Wealthy Investor

The wealthy have always worn a mantle of mystery: their gated communities, private memberships, exclusive clubs and the like emphasizing this “otherness.” Their investment management activities are no different; most high-net-worth investors employ a professional advisor to stand between them and those who clamor to serve them.

Yet the wealthy share many of the same investment goals and objectives as institutions. They want returns balanced by reasonable risk, some form of income, long-range planning that fits their current and future anticipated needs, and diversification among assets. Wealthy investors are as suited for alternative asset allocations as the foundations, endowments, and institutions that have been actively investing in them for decades. But the strategies most successful in accessing the wealthy community require a different set of tactics. Data and analysis take a backseat to interaction and education when breaking through to the wealthy audience.

FOLLOW THE MONEY

A survey encompassed a cross section of 640 high-net-worth and ultra-high-net-worth adults with at least $3 million in investable assets, equally divided among those who have between $3 million and $5 million, $5 million and $10 million, and $10 million or more.

• First, 66% use some type of professional financial advisor such as a private banker, wealth manager, broker or financial planner, with about 25% relying on a private banker or wealth manager as their primary advisor.
• Second, among the two-thirds of the wealthy using a financial advisor, they are also notably more likely to be using non-traditional investments in their portfolios.
• Third, almost two-thirds of high-net-worth investors (62%) have 10% or more of their portfolio in cash, indicating continued uncertainty about market risk. Slightly more than a third (36%) said they would be willing to take on higher risk to achieve higher returns.

BREAK ON THROUGH TO THE OTHER SIDE

So, how should alternatives managers get the ball rolling with these elusive but potential investors? Start with what is important to them. The high net worth community has been very clear on several fundamental values they consider core: relationships, trust, expertise, and guidance. Investment managers need to show that they share these core values before they can hope to persuade these investors to consider their offerings. Tactically, there are several avenues managers can explore in this effort.

• Begin by building a relationship with their advisors. Most managers hold fast to the notion that, if they could only get an opportunity to sit down in front of an investor, they can sell them on their conviction and ability to deliver great results. What these managers fail to understand is that these high net worth investors are not the primary individuals they should pursue. As the survey findings reflect, most of these investors rely on the guidance of financial advisors to drive their investment activities. Managers who try to go directly to the investor often find themselves blocked or ignored, not because they are unsuitable, but because this method is outside the introductory channel preferred by most wealthy investors.

Time spent persuading advisors of the unique and attractive elements of their alternative offering will be time well spent in gaining introductions to the right types of high-net-worth investors who could potentially invest with them. This advisor outreach can be done in a number of ways: identification and individual contact, attendance at industry organizations and events where these advisors congregate, and referrals to appropriate advisors through professional networking.

• Demonstrate integrity to earn their trust. Managers must show a history of consistent, ethical, and reliable decision-making and execution to impress upon advisors and high net worth investors that they are worthy of exploration. Prior to beginning the relationship-building process, managers should take a personal inventory and get clear on articulating and demonstrating examples of this holistic behavior. They might assemble a short list of references that support this integrity looking back through their personal and professional lives. This might include prior work, volunteer activities, personal interests and affiliations, and others.

This reflection may be somewhat new to managers recently separating from purely institutional investment management roles, but is critical in forging new relationships within the advisor and high net worth communities.

• Explain your process and abilities through storytelling and case studies. The power of communicating through examples is an underappreciated investment tactic in alternatives. Relying on performance history, peer rankings, and data analysis doesn’t resonate as powerfully as insightful interaction with the wealthy audience. Crafting two or three comprehensive investment examples can bring this less-appreciated and often misunderstood strategy into focus for advisors and investors, while helping them relate to their own portfolio objectives.

As a general guideline, managers might articulate why a particular investment target was attractive to them for their strategy approach, what was the market environment surrounding this target at the time of initiation, what occurred during the holding that supported or detracted from its position, and what outcome resulted from the exit of the position for the manager’s portfolio. A flow such as this illustrates in tangible form market opportunity, strategy approach and execution, and the value-add of the alternative investment differentiated from general market performance. This outline works regardless of specific strategy, and is more memorable than a dry recitation of performance data to the majority of high net worth investors seeking to be educated about alternative investments.

• Educate them about the advantages of alternatives. Besides creating these strategy-specific case studies, managers can join the broader discussion of education by creating various forms of communication about the advantages of alternatives. While the institutional investment community is well-stocked by analysts, consultants, and investment management professionals with research, white papers, surveys, and regular reports on the discipline of alternative investing for portfolio allocation, there is a paucity of such material tailored for high-net-worth investors.

Most of the material currently available superficially discusses differentiation and non correlation in portfolio allocation. Adding the unique voices and expertise of alternative managers who build such products is much needed and desired by the advisors and investors who will ultimately select offerings from these managers. These managers can:

• lend their commentary as industry experts to financial channels read by advisors and investors,
• create their own educational newsletters or blogs highlighting a market perspective and outlook,
• offer themselves to alternative conferences or events as speakers or moderators.

Persuasion is the key to all these tactics. Managers who embrace both education and implementation of strategy will make greater inroads with the hard-to-crack advisor and high net worth community that is open to learn from them. - all about alpha

Currency Traders Punish Singapore Dollar

SINGAPORE, 14 April 2016: 

Singapore’s dollar was on track for its worst day in more than eight months today, leading losses among emerging Asian currencies, after the city state’s central bank unexpectedly eased its exchange-rate based monetary policy.
Regional currencies slumped on broad strength in the US dollar. The yuan slid as China’s central bank set its daily guidance rate at the softest level in April so far, reflecting the greenback’s gain.

The Monetary Authority of Singapore said it will set the rate of appreciation of the Singapore dollar’s nominal effective exchange rate (NEER) policy band at 0%, starting today, shifting from its previous policy stance of a “modest and gradual” appreciation of the Singapore dollar.

The MAS last shifted from “modest and gradual” appreciation to a 0% appreciation stance in October 2008.

The Singapore dollar dropped 1% to 1.3650 versus the greenback, its weakest since March 29. If maintained, the daily depreciation would mark the biggest slide since Aug 11, according to Thomson Reuters data.

Some hedge funds dumped the city-state’s unit after the  unexpected decision.
“The MAS surprised markets by moving to a zero appreciation slope,” analysts for Nomura said in a research note.

“We see some further risk of depreciation in the near term, not so much from this mild shift in policy (from +0.5% to 0% annualised appreciation), but from the risk that expectations of further easing this year could increase.”

The Singapore dollar has been the third-best performing emerging Asian currency so far this year, partially amid expectations that the central bank would keep the policy unchanged this week.

Its weakness was exacerbated as the US dollar rose broadly, posting its biggest one-day gain in more than a month against a basket of six major currencies.
“The impact we think will likely be transient. However, because of the slightly more supported broad USD in the last 36 hours, the USD/SGD may be incrementally more buoyant in the short term,” said Emmanuel Ng, a foreign exchange strategist with OCBC Bank in Singapore.

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2. Ringgit stronger vs Singapore dollar as Singapore central bank curbs currency appreciation
3. MAS surprise easing sends Singapore dollar reeling

Offshore Funds: Where is the Money and Is It Safe?

As the Panama Papers leak shines a light on offshore funds available in the UK, we examine the tax issues and what protections are offered.

The Panama Papers have given a glimpse into the secretive world of offshore funds used by wealthy individuals – including the prime minister’s father – to stash cash in tax havens but are they inherently dodgy or a legitimate way to invest?

An unprecedented leak of 11.5 million documents from law firm Mossack Fonseca, which is based in Panama, one of the world’s largest tax havens, has shed light on some of the labyrinthine structures the wealthy put in place to hide their money and avoid tax.

Within the documents, it was revealed 12 national leaders – among a total of 143 politicians and their families – have been funnelling cash into offshore tax havens, including a $2 billion trail that leads back to Russian president Vladimir Putin.

The UK’s own prime minister David Cameron has also been implicated as his father, Ian Cameron, was a client of the law firm and in the early 1980s set up a multi-million pound investment fund in the Bahamas called Blairmore Holdings, named after the family’s ancestral home in Scotland.

The fund managed millions on behalf of families including restaurant owner J Sheekey and private bank Leopold Joseph. However, in 30 years it has never paid any tax in the UK.

The prime minister has tried to distance himself from the furore over his father’s, and by implication his, tax affairs. A spokesman for 10 Downing Street said: ‘There are no offshore funds/ trusts which the prime minster, Mrs Cameron or their children will benefit from in the future.’

However, Cameron later admitted he previously held shares in Blairmore, selling them for £31,500 shortly before he became prime minister.

Although there is nothing illegal about the methods used by those named in the Panama Papers, aggressive tax avoidance has been heavily criticised by the Conservative government and it has made efforts to be seen as the party clamping down on wealthy tax evaders.

This included the introduction of a register of beneficial ownership, which is trying to crack the problem of offshore shell companies being used to avoid tax. By understanding who is the recipient of benefits from shell companies, governments can then tax the gains appropriately.

An Organisation for the Economic Co-operation and Development (OECD) agreement to share information will also help identify tax dodgers who have squirrelled their money offshore.

The Panama revelations show that information sharing is needed more than ever and again asks the question of whether pushing money offshore can ever be a truly legitimate way for UK residents to invest and tax plan.

Offshore offers

UK investors have access to over 4,000 offshore funds that have a combined value of £1.9 trillion, with the majority of the funds domiciled (or set up in) Luxembourg or Dublin, proving that it is a lucrative stream of business for asset management companies.

Jorge Morley-Smith, director of business support at the Investment Association, said there were ‘any number of reasons a fund would domicile offshore’ that did not include tax avoidance.

'Mostly it is to do with who the fund is being marketed to and how the fund is going to be run,’ he said.

Morley-Smith said regulatory rules also determined where investment managers liked to domicile funds, often moving offshore to get round investment regulation they believed would be a constraint.

‘Over the last 20 years people set up hedge funds and do not want to be constrained. The reason why they use the Cayman Islands is because they do not have the same restrictions on investment…there is more flexibility,’ he said.

It is not just regulation that fuels the creation of offshore funds, according to John Christensen, executive director of the Tax Justice Network.

He said offshore funds were set up due to a ‘combination’ of regulation, tax and secrecy.

‘Fund managers themselves are earning a small fortune so they like to be in a tax-free environment,’ he said. ‘The regulatory environment [in some offshore jurisdictions] is permissive by any standards and the supervisory environment is weak to non-existent – the law in the statue books may look fantastic but without supervision the [laws] are just bits of paper.’

He said people channelling money into offshore funds were ‘those holding cash offshore and who do not want it to be onshore and often they are operating offshore companies’, adding that offshore funds were ‘where money meets money on the street and does business’.

Christensen said there was no offshore jurisdiction that was more credible than another, as was evidenced by 2014's 'Lux Leaks' scandal, which implicated Luxembourg as the centre of tax avoidance deals orchestrated by the big four accounting firms.

Christensen said British jurisdictions such as the Isle of Man, Jersey and Guernsey, could not be seen as more legitimate than other tax havens as the rules were ‘just window dressing’.

‘It all depends on the politicians – if you have politicians who are not captive to the financial services industry and law firms then you have strong regulation and a strong regulator but if you have a captive state – which Panama and places like British Virgin Islands are – then you have a combination of weak politicians and a weak regulator and weak supervision.’

Should you go offshore?

The lax regulation and supervisory environments offered by offshore jurisdictions may be attractive to fund management companies who can use them to their advantage but there are question marks over the benefits they provide for individuals.

Morley-Smith said ‘it entirely depends on the investor’ if they feel comfortable investing offshore or not but said UK-based investors would face the same tax consequences whichever jurisdiction they picked.

‘There are the same [personal] tax consequences of investing in offshore funds [in whatever jurisdiction],’ he said.

‘The tax rules are designed so the choice of jurisdiction or vehicle does not matter. If you invest in an offshore fund you will have a requirement to fill in a certain box on a tax return [in the UK], it does not matter if the fund is in the Cayman Islands or Luxembourg.’

And investors shouldn’t try and skirt the law by failing to fill in offshore income and gains on their UK tax return as the OECD information-sharing agreement ensures they will be found out.

‘There is the agreement that the government has entered into to share information. The rules state that if you have investments in an offshore fund or have an offshore bank account the information will passed between the governments so a Cayman Islands fund will report to HM Revenue & Customs…It will be effective from this year and will make it harder to hide money [offshore]. Panama had not signed up but all countries where people typically have funds have signed up,’ he said.

Investors pulled offshore may not be doing so to avoid tax, merely because they are a fan of the investment on offer, however they should realise that investing offshore may leave them out of pocket thanks to the lack of compensation schemes operating in offshore jurisdictions.

If an investor puts money into an offshore fund, which subsequently collapses due to mis-management (there is no compensation for funds that perform badly) there will be little to no protection on offer. If a UK-based company or adviser encouraged an investor into a fund, then it may be possible to receive compensation from the UK Financial Services Compensation Scheme (FSCS), which pays out on losses up to a maximum of £50,000. 

Offshore Centers Around the World

1. Isle of Man

• Number of open-ended funds domiciled in the area: 13
• Collective value of the funds: £537 million 
• Information sharing with UK in place: Yes
• Compensation offered: 100% of the first £30,000, 90% up to the next £20,000 to a total of £48,000

2. Luxembourg

• Number of open-ended funds domiciled in the area: 2,775
• Collective value of the funds: £1.2 trillion 
• Information sharing with UK in place: Yes
• Compensation offered: No compensation scheme that covers Ucits open-ended funds

3. Ireland

• Number of open-ended funds domiciled in the area: 1,378
• Collective value of the funds: £637 billion
• Information sharing with UK in place: Yes
• Compensation offered: If a Ucits open-ended fund domiciled in Ireland (typically Dublin) collapses there is no recourse from the compensation scheme. However an investor can claim if the fund has been mis-sold by an Irish adviser. The scheme pays out up to 90% of the total claim up to a limit of €20,000.

4. Guernsey

• Number of open-ended funds domiciled in the area: 21
• Collective value of the funds: £1.2 billion 
• Information sharing with UK in place: Yes
• Compensation offered: The Collective Investment Scheme Rules 1988 provide compensation up to 90% of the first £50,000 and 30% of the balance up to £100,000 – a maximum total of £60,000. The compensation scheme pays out an absolute total of £5 million a year.

5. Jersey

• Number of open-ended funds domiciled in the area: 20
• Collective value of the funds: £7 billion 
• Information sharing with UK in place: Yes
• Compensation offered: No compensation scheme that covers Ucits open-ended funds

6. Bermuda

• Number of open-ended funds domiciled in the area: 1 
• Collective value of the funds: unknown
• Information sharing with UK in place: Yes
• Compensation offered: No compensation scheme

7. The Bahamas

• Number of open-ended funds domiciled in the area: 1
• Collective value of the funds: unknown 
• Information sharing with UK in place: Yes
• Compensation offered: No compensation scheme

8. British Virgin Islands

• Number of open-ended funds domiciled in the area: 2
• Collective value of the funds: £42 million
• Information sharing with UK in place: Yes
• Compensation offered: No compensation scheme

9. Cayman Islands

• Number of open-ended funds domiciled in the area: 5
• Collective value of the funds: £841.6 million
• Information sharing with UK in place: Yes
• Compensation offered: No compensation scheme

- citywire

Related - 

1. I feel sorry for David Cameron. The focus on his tax affairs diverts attention from the worst offshore rackets
2. Cameron admits he profited from father's offshore fund

How to Invest Amid a Negative Interest Rate Environment

Japan is one of the countries that has adopted a negative interest rate policy. Photo: Reuters.

The financial market volatility at the beginning of this year was partly due to investors’ concerns that a negative interest rate would be broadly adopted.

Although such a move aims to stimulate economic activity, investors worry about banks’ earnings and solvency ratios and the impact on the confidence of consumers and firms.

A negative interest rate is an unconventional measure. It’s like doing an experiment, and investors can’t know for sure how the policy will affect the market.

In most economies, the yield curves for government bonds become flatter.

It will suppress the willingness of banks to lend. Their net interest margin is likely to narrow, as the lending rate will be reduced while the deposit rate for retail clients remains above zero.

Investors should be clear that a negative interest rate is intended to encourage people to pursue risky economic activity instead of holding cash.

Identifying the long-term investment and economic theme is necessary to guide investors through a situation of low returns and high market volatility.

Uncertainties will come from negative interest rates, energy prices, China’s economic transformation and geopolitical issues, such as Brexit.

Besides accepting credit risk from the fixed-income market, investors can also make use of the risky nature of the stock market and the liquidity risk of alternative investments to realize higher potential return.

Valuation of stocks is at an attractive level now, especially in emerging markets and in Asia.

As for alternative investments, investors may consider private equity investments or hold physical assets.

Investors should focus on the contribution of the return from certain asset classes to the overall portfolio.

For example, in the past 10 years, the compounding effect of stock dividends and the return from reinvestment of the dividends provided over 60 percent of the overall return in Asian stock markets and 40 percent of the return in the Standard & Poor’s 500.

So, in the face of negative interest rates, market volatility will remain at a high level.

A super loose monetary environment will lead to lower expected returns and drive investors to make longer-term investments while taking market, credit and liquidity risks to enhance overall return.

We believe that fixed-income products and stock dividends will make bigger contributions to portfolio returns. 

This article appeared in the Hong Kong Economic Journal on April 11.