Your Post-Brexit Investment Plan

When markets tank, sometimes the best course is to do nothing.

Brexit has certainly been barf-inducing for those of us who own stocks.

U.S. stocks lost a total of $1.4 trillion of market value on Friday and Monday, the first two trading days after United Kingdom voters stunned the world by approving Brexit, a plan for Britain to exit the European Union.

This number, from Wilshire Associates, works out to a 5.57% loss. Sure, that’s a modest fall compared to the 9.28% drop in Britain’s leading stock indicator, the FTSE. But any time more than $1 trillion of U.S. stock market value evaporates in just two days, you’ve got to pay attention.

What should you, as a retail investor, do with your portfolio as a result of Brexit? My suggestion is that you do exactly what I’m doing: nothing.

Sure, if you had a time machine, you could go back to last Thursday and sell your U.S., British, and European holdings at prices substantially above what they currently fetch.

But I don’t have a time machine, and neither do you. So there’s nothing you can do about not having sold before the Brexit voting results were announced.

The one thing you don’t want to do is panic, and sell everything. The fact is that no one knows how Brexit is going to play out. Few people foresaw that U.K. voters would back Brexit. It’s not at all clear when and how Britain’s split from Europe will take place, and what the consequences will be. Or how financial markets will react. Or whether British voters will decide they need a do-over, though I wouldn’t bet on that.

It’s certainly creepy to watch the British pound fall 12% against the dollar in two days, and to contemplate the prospect of possible chaos and disunion in both the U.K. and the rest of Europe.

And it’s absolutely appalling to watch the share price of Barclays, the giant British banking institution, fall 35% in pounds (and 42% in dollars) in just two days.

But you need to get a grip. Even with those two horrendous trading days, the U.S. market is up 10.8% from its low this past February, according to Wilshire. If you didn’t panic then, which I hope you didn’t, there’s no need to panic now.

I don’t know where the U.S., British, and European stock and bond markets go from here. Nobody knows. In my recent column, I advised you not to be overly emotional about stocks. I’m saying that again, only more so. Stocks were up nicely today when last I looked, but who knows if that will continue?

Sure, I wish I had sold on Thursday, a day that my financial assets reached what was probably their all-time high (adjusted for the price of a condo unit that my wife and I purchased last February). But I didn’t sell, and I hope you didn’t, either.

So let’s take a deep breath, try to stay calm, and see what happens in the next few days, the next few weeks, and the next few months. That’s my plan. It should probably be your plan too. - time.com

5 Things You Must Know About Investing in Gold Funds

Gold funds are topping the return chart after a lull of last three years. According to Value Research, a mutual fund tracking firm, the gold fund category has returned an average return of over 15 per cent over the last one year. Even in the short-term of one to three months, returns were around 6.60-8.30 per cent. 
After a dream run on the back of the global economic meltdown in 2008, gold funds ran into rough weather in the last three years. Now, once again on the back of global uncertainties (think of Brexit, future of the European Union, Trump Presidency in the US, and so on), gold is riding high again as cautious investors are looking for safe havens to park their money. Many pundits forecast better days for the yellow metal as its safe haven status gain more currency. 

However, if you are planning to start investing in gold, you should always keep a few unique characteristics of the yellow metal in mind. 

Gold may not give you exceptional returns 

Surprised? Everybody is forecasting a bull run and we are telling you it won't give you exceptional returns. Sure, gold might shine bright if global woes are going to linger for a long time. Anyway, the negotiation between the United Kingdom and the EU is going to drag for a year or two. That alone may keep the markets world over in tenterhooks and demand for gold may remain high. 

However, once the mood changes, the yellow metal may soon lose its charm. Once investors regain confidence, they typically dump safe investment options and move to risky options like stocks and bonds to earn extra returns. Obviously, that will hit gold prices. In short, if you are investing with a long-term perspective, scale down your return expectations. Many experts believe that gold may offer only single-digit returns over a long period. 

Gold is a hedge, not an investment 

Is it another surprise you? Well, many investment experts subscribe to the view that gold is not an investment option. It is rather an insurance premium to hedge against economic shocks. They argue that gold is not all like other investment options like stocks, bonds, etc. For example, when you are investing in a stock, you own a part of a company that is engaged in a business. 

Similarly, a bond pays you interest. Gold, in comparison, is a commodity that would go up or down depending purely on the demand for it. Sure, as said before, gold shows its mettle and offer exceptional returns when investor sentiment turns bleak and all other markets are down and out. However, these phases normally do not last long. Critics also believe that most investors are not aware of the annualised returns offered by gold as they simply compare the price of gold in different points. 

You don't need to diversify into gold at all 

Many investment experts ask their clients to invest in gold to diversify their portfolio across different asset classes. However, there are many critics to this form of diversification. They argue that this strategy of diversifying just for sake of diversification could hurt investors with a corpus of small to medium size in the long run. This is because it may hit the overall returns from the portfolio. 

According to them, small investors shouldn't heed to the advice of diversify into every possible investment option; the focus should be about optimising returns and meeting financial goals without exposing oneself to unnecessary risk. However, investors with a large to very large corpus can invest across various assets because they have the resources to take meaningful exposure to a particular asset class. Also, they don't face the risk of not able to achieve various financial goals because of lower returns from the portfolio. 

Limit your exposure to gold 

Even if you are a die-hard fan of the precious metal, you shouldn't go overboard with you allocation to it. Most investment advisors ask their clients, even the very rich ones, to limit their exposure to 5-10 per cent. A large exposure could offer great stability during crisis, but it can also drag the overall returns down in the long term. 

For example, some top gold ETFs have given around 25-30 per cent annual returns between 2008 and 2011. The returns fell to around 10 per cent in 2012, and to -14 per cent in 2013. Even in 2015, gold ETFs gave negative returns. That means after reaping phenomenal returns between 2008 and 2011, the investors also had to deal with negative returns (losing money) in 2013 and 2015. Even in 2014, the returns were barely 1 per cent. 

Don't forget any of these points 

Gold ETFs haven't seen any jump in inflows so far, but the buzz around gold is likely to attract the attention of investors in the coming days. If you are also planning to join the bandwagon, it would be better to remember these points. If bullion experts are to be believed, gold is likely to see renewed interest in the coming months from investors because of the uncertainties around the globe. If so, you can reap the benefits for a couple of years. Demand for gold may weaken once the scenario changes for better. These lessons may come handy at that point. And if you are looking to ride the bull wave, be careful. It is not easy to get in and out of any bull run at the right time. - economictimes

Brexit May Be Start of Major Gold Bull Market

Alternative investment: Pedestrians walk pass a precious metal merchant in Hatton Garden, London. Gold has soared after the UK’s vote last week to quit the European Union as investors seek a haven from financial turmoil and contemplate the possible implications. — Reuters

Gold may stand at the start of a major bull market should the UK’s Brexit vote prove to be a forerunner of greater political and financial instability around the world, according to Evolution Mining Ltd’s Jake Klein, a veteran of more than 20 years in the industry.

With the rise in uncertainty, investors are coming back to the market, the executive chairman of Australia’s second-biggest producer said in an interview with Bloomberg Television. “It is an alternate currency, it’s performed that role” as a haven for over 2,000 years, he said.

Gold has soared after the UK’s vote last week to quit the European Union as investors seek a haven from financial turmoil and contemplate the possible implications. The vote threatens to fragment the world’s largest trading bloc should Britain withdraw, while also calling into question the future of the United Kingdom, with the possibility of Scottish independence. Former Federal Reserve chairman Alan Greenspan said Northern Ireland may also break away.

“I guess to me, the most interesting thing is: are we seeing the first fault lines of a major correction and change in the financial and political systems?” he said. “If that’s the case, then we could very well be at the early stages of a major bull market.”

Gold for immediate delivery rallied as much as 8.1% last Friday as poll results came in. The metal, which traded at US$1,311.94 at 4:52pm in Singapore yesterday, peaked in 2011 at US$1,921.17. It’s up 24% in 2016 after gaining to the highest since 2014 last week.

Gold miners have climbed, and holdings in exchange-traded funds (ETFs) have swelled further. Evolution rallied as much 19% last Friday, while in Canada Barrick Gold Corp’s stock closed on Monday at the highest since 2013. Global assets in ETFs expanded 32% this year, rising 12.6 tonnes on Monday.

Banks have also been raising their forecasts for bullion. Morgan Stanley boosted its 2016 outlook by 8% and 2017 view 13%, according to a report received yesterday. Goldman Sachs Group Inc increased its three, six and 12-month targets by US$100, citing flight-to-safety sentiment.

Not everyone is convinced that bullion will prove to be the best bet. Veteran investor Jim Rogers told Bloomberg on Monday he’d rather seek haven in the dollar than gold, given that bullion had already rallied in 2016 before the vote. Prices have risen this year as the US Federal Reserve failed to add to last year’s interest rate rise.

“We’re obviously benefiting a lot from the gold price rise,” Klein said. “I would point out that gold is only over US$1,300 now, and in 2011, it was over US$1,900, so there’s potentially still a long way to go. But certainly interest in gold, interest in gold stocks, and interest in Evolution is rising.” — Bloomberg

The Case for Putting Lots of Eggs in One Basket

Concentrating risk can pay off for savvy investors, but approach strategy with care

Financial experts are keen to tell us to put our hard-earned nest egg into a variety of assets such as stocks, bonds and real estate to get the best returns while hedging our risks but there is a powerful counter view.

When I asked DBS boss Piyush Gupta at a chat I hosted at the recent Singapore Coffee Festival what approach a person should take on his investments, I got a startlingly different answer.

He replied that it makes sense for a younger person to adopt a broadly diversified investment approach, but when that person reaches his 30s or 40s, he should take some concentrated risks in order to grow his nest egg.

"Most people don't tell you that. Most people will tell you to keep diversified," noted Mr Gupta.

"My response is to tell them to look at Warren Buffett. Warren Buffett doesn't diversify. Warren Buffett takes concentrated risks in what he believes in."

So which approach should we adopt - the conventional diversification strategy advocated by many financial experts or putting lots of our eggs in one basket as suggested by Mr Gupta? It is an interesting dilemma.

Some weeks ago this newspaper noted that the Investment Management Association of Singapore (Imas) advised retail investors that one of the most important investment decisions they have to make is not the stocks or securities they buy but how they allocate their investable funds to the various asset classes.

Yet, as Mr Buffett once observed, such diversification can put an investor into an unenviable "low hazard, low return situation".

Instead, he believes that investors should aim to make no more than 20 decisions in their life-time about what to buy or sell and that diversification is adopted by investors who do not understand what they are doing.

Adopting Mr Buffett's approach goes against the grain of the mainstream investment strategy pioneered by Nobel laureate Harry Markowitz, who showed that diversification could reduce risk when assets are combined whose prices move in an inverse relationship with one another.

But Mr Buffett is no ordinary investor and, unlike Mr Markowitz, who is an academic, he has walked the talk, turning his company Berkshire Hathaway into one of the world's richest investment firms by taking big stakes in companies that consistently outperform the stock market by big margins.

Mr Buffett is also by no means the only exception to the rule. If we look at the portfolios of many other rich and famous investors such as Microsoft founder Bill Gates, we will find that they are also mostly concentrated on a few investments.

Going back to the past 100 years, another good example would have been the great British economist John Maynard Keynes who was able to make a remarkable comeback by refocusing his attention on individual companies and taking huge wagers on them after losing a big fortune during the 1929 Wall Street stock market crash.

As Keynes later explained: "As time goes on, I get more and more convinced that the right method in investment is to put large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes."

Still, even though Mr Buffett and Keynes are big proponents of a concentrated portfolio strategy, we will have to approach this strategy with caution.

That is because while the strategy gives seasoned investors an excellent opportunity to maximise their long-term returns through a deliberate selection of stocks, investors who lack the skill to select suitable stocks can lose their shirts if they are not careful.

And this is where I find the other part of Mr Gupta's advice useful, namely telling an investor to expand his risk appetite only after he has gained some investment experience and gathered sufficient savings to enjoy a solid financial footing.

This advice runs counter to the impression given by many financial experts that investors in their 20s can afford to take more risks on their investments because they have youth on their side and time to make good any losses they may incur.

My worry is that it is precisely the lack of investment experience that can cause a young investor to come to grief in a big way, as I have known friends who had been so badly bruised by financial mishaps in their first few years of working life that they never quite recovered, even after working half a lifetime.

There is one asset where taking a concentrated risk is familiar to many of us - buying a property.

I asked Mr Gupta his views on this during the chat.

He noted that all the great fortunes in Asia, including those made by familiar names such as Hong Kong billionaire Li Ka-shing, are made from real estate.

"In the long term, property is fantastic and property is one place in Asia where one can make a lot of money because of the high leverage," he said.

But Mr Gupta warned that if an investor buys a large property, liquidity is always a big challenge because "you cannot sell it when you want to sell it".

It all boils down to risks and rewards. Take a big loan on the property and an investor stands to make a lot of money if prices go up.

But if prices slip and the bank wants the investor to deposit more cash or securities to cover possible losses, he has to ensure that he has other assets available to meet the margin call or he will be forced to sell off the property at a loss.

However, for potential home owners, he has this advice: "If you think you can afford a two-bedroom house but with a stretch, you can do a three-bedroom, I can tell you that five to 10 years from now, you will wish that you had gone for the bigger house."

So when should we turn to diversification as an investment strategy?

I find that as I get older and more risk-averse, preserving whatever I have already squirrelled away is far more important than amassing more riches - and this is where adopting a diversified portfolio to try to preserve wealth becomes an over-riding priority.

Another great investment guru, Mr Jack Bogle, the founder of the giant fund manager Vanguard, sums up this sentiment best when he observes that the average investor doesn't want to spend his life consumed with investing - and indeed, he should not spend his life consumed with investing.

That is why a sound diversification strategy works best for those who simply want a decent return without exposing themselves to too much investment risk - or find themselves so obsessed with how their investments are performing that they are oblivious to everything else.

Sure, all of us want to make money on our investments, but as the seasons of our lives change, so should our investment habits. How we adjust our investment approach will depend on the phase of life we find ourselves in. There is a time for everything. - straitstimes


Related - Concentrated Investing Is For Those Who Don't Know What They're Doing

Brexit: An Unlikely Scenario

UNFOLDING in Western mainstream media are reports of immense regret by the British young over the win by the “Leave” group through a slim majority. 

Britain, if the decision of the vote is faithfully executed, will leave the European Union (EU). 

However, given the initial reaction of one of the leading personalities of this group, Boris Johnson the Conservative ex-mayor of London, Britain exiting the EU (Brexit) is not a foregone conclusion. 

And, too, although he has announced his resignation, the prime minister who instigated the referendum in the first place, is not immediately triggering the Treaty of Lisbon clause to begin the withdrawal procedure. 

That some notable Brexiters are not protesting is a sign that some are having cold feet. Furthermore, the result of the referendum is not binding on the British Parliament, it is more advisory. 

The air of uncertainty after the assault on the market and the British currency — a clear indication that the money men are unhappy with Brexit — people are taking the advice of negative repercussions seriously. Of course, too, there is the obvious disadvantages that the young are loudly lamenting such as the resulting limit to their freedom of movement, their ability to seek employment and live anywhere in the nearly 30 member countries of the EU. 

But Brexit was won on the platform of restricting the inward migration of foreigners, especially the current influx of Middle Eastern refugees, whom the Brits were being forced to accept as a shared EU responsibility. 

Necessarily, the British far right is ecstatic and Nigel Farage, a leader of the right wing UK Independence Party is urging an immediate pull-out. 

On the international front, Brexit is viewed by the left wing and peaceniks as a positive move. Viewing Britain as the United States’ Trojan horse they perceive a weakening of US hegemony over the EU and with that a possible EU détente with Russia. 

Unfortunately, the peace dividend is not a priority with the financial markets and the neo-conservative agenda. 

As soon as the referendum brought news of Brexit, the pound plunged and the market shook, but note that the market is about big money sentiments. 

The US and European economies have had many years since the 2008 crash but there is a wilful neglect of correcting the economic fundamentals. Brexit alone should not bring the financial world to an end, but a domino effect — with France and Netherlands calling for a referendum — and the break-up of the EU could change the economic dynamics of the world. 

China’s economic dominance will arrive faster than anticipated. Given its foreign policies, the developing world should see a friendlier economic environment as the Asian Infrastructure Investment Bank gains ascendancy over such US-dominated institutions as the World Bank and International Monetary Fund. 

However, Brexit is unlikely, if it threatens to destroy the European bloc. In fact, signs are that the stage is being set for non-exit. - NST

Britain's Leaving the EU. What Should I Do With My Money?

As uncertainty roils global markets, experts urge U.S. investors to stay calm and carry on. How Britain's EU exit affects your investments and money.

As many people around the world are trying to wrap their minds around what just happened in Britain, you may also be wondering "What does the Brexit mean for my money?"

If you are worried about your 401(k), take heart. Most experts say you shouldn't rush to sell stocks and some even say it's an opportunity to buy. And, bonus for those looking to borrow: rates may fall.

Yes, things are going to be bumpy, but this is a time to stay calm and carry on.


STOCKS AND RETIREMENT

Investors with heavy investments in the U.K. and Europe may have felt a sting Friday. U.S. stocks fell more than 3 percent but some European indexes fell over 12 percent.

Market experts say the initial market reaction was largely emotional. But they noted that Britain's separation from the EU could take several years to play out and urged investors not to sell out of fear. And some said investors may even want to take advantage of the dip to buy.

"For the typical U.S. investor this is not really going to change anything," said Jurrien Timmer, director of global macro for Fidelity Investments. "It's not going to affect the U.S. economy, it's not going to tip us into recession."

Expecting the worst, Robien Christie of Fort Worth, Texas, checked his 401(k) Friday morning for the first time in months.

"I was actually surprised," the 25-year old said. "I thought it would be bad but it's still positive for the year."

He won't be touching his 401(k), but may put money into the British pound and into buying some stock in British companies as potential long-term investments.

Others, meanwhile, said they weren't ready to face the impact.

"I just don't want to know right now," said Leah Jones of Chicago.

The 39-year-old remembers sitting at her desk checking her retirement account when market crashed in 2008. She didn't want to relive that but plans to face it soon: She will call her financial adviser next week for some advice.

Understandably, it was a day for worry for many.

The VIX, known as the fear index, jumped from 17 to 25 Friday. That is far below the high of 80 it reached in October 2008 in the weeks that followed the collapse of Lehman Brothers.

"I think that things will work out over the long term. This isn't done in the short term ... the disappointment will roil the markets for a while," said John Manley, chief equity strategist at Wells Fargo Funds.

Whether it's the downturn in the stock market or the increase in global uncertainty, these events are a reminder of the need for a thoughtful financial plan, said Mark Hamrick, senior economic analyst for Bankrate.com. That means setting aside adequate savings and having a diversified portfolio.

If you don't have a financial adviser, look for information on the right investment choices for you with your retirement plan company.

"You need to have a plan that makes sense for you and you need to stick to that plan and that includes not freaking out when something like this happens," Timmer said.


INTEREST RATES

The Federal Reserve has been slow to raise interest rates due to concerns over global economic instability, and the U.K. vote makes it even less likely the Fed will act soon.

That's bad news for savers but great news for borrowers, particularly those looking to get a new mortgage or refinance.

Anxious investors seeking the relative safety of U.S. bonds sent prices for the 10-year Treasury note sharply higher. In turn, that pulled the yield on the notes lower Friday. Because long-term mortgage rates tend to track the yield on notes, mortgage rates may fall further.

"Mortgage rates are tumbling now and they're approaching record-low levels," said Greg McBride, chief financial analyst at Bankrate.com. "If you're a borrower, don't wait to lock your rate as this opportunity may not last long."

The average 30-year fixed-rate mortgage edged up this week to 3.56 percent from a 52-week low of 3.54 percent last week. How far rates drop and how long they stay there depends on the extent to which investors remain jittery.

"If markets bounce back next week, mortgage rates will too," McBride said. "But if the sell-off continues, mortgage rates will continue to fall."

The prospect of a drop in mortgage rates has some homebuyers shifting gears.

Zack Moore of Beaumont, California, says that, before Friday, he was ready to get prequalified on a home loan right away. But now he's going to hold off so that he can make sure to lock in a lower rate.

"If I see them drop at all, I may strike, I may try to wait a little while," said Moore, 41.

The Brexit could also indirectly benefit other borrowers if the Fed holds off on raising the central bank's key benchmark interest rate. When that rate goes up, it can raise short-term borrowing costs for banks, and that can ultimately lead to higher rates on things such as credit cards, home equity loans and credit lines. - usnews

Note - 401(k) Plan is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan.

Looking for the Right Alternative Investments? Be Sure You're Dipping Your Toes in the Right Place!

Even for those of us who see the market as a mostly cyclical, reliable environment, the past decade or so has been quite a wake-up call.

While many portfolios have seen a recovery since 2008, most investors still get the jitters whenever the market dips. The logical response for investors and advisors alike is to seek out new investment vehicles that produce yield and help protect assets—even in the face of another bear market. But where can you find that yield? The Fed is expected to raise interest rates in 2016, but even if they do, the jump won’t be enough to significantly improve yields for most income-oriented investors.

Seeking yield is a tricky business in today’s environment, which is why more advisors than ever are exploring alternative investments. If you’ve been exploring alternatives in an effort to find some level of reliable yield for your clients, it’s important to understand the complexity of correlation—especially when considering “non-correlated” alternatives. The desire for investments that don’t fluctuate with traditional financial markets (stocks, bonds, and real estate) is understandable, but the reality isn’t always what it seems at first glance.

The interesting thing about correlation is that it tends to hide when things are good, and becomes really visible (at the very worst time) when things are bad. 2008 was an all-too-painful reminder of how this works. Anyone invested in “non-correlated alternatives” like REITs, BDCs, and energy stocks at the time were under the illusion that these investments were providing diversification in their portfolios. But when the stock market crashed, all of these vehicles began to exhibit frighteningly high correlations—and returns suffered, to say the least. The same thing happened as recently as this past December and January when correlations of “non-correlated” assets spiked. The lesson learned? Correlation can be surprisingly relative, and so-called non-correlated assets only live up to their name if you look at them at the right time.

This puts advisors in a tough position. A recent survey by WealthManagement.com of 755 advisors revealed that most advisors (43% of those surveyed) use alternatives to provide greater diversification and uncorrelated return. But what if the alternatives being used aren’t truly uncorrelated? To achieve their goals, advisors need to find a new alternative—one that has no market correlation, yet has the potential to generate significant returns.

That new alternative is investments in life insurance.

If you’ve never considered life insurance as an alternative investment, you’re not alone. Just five years ago, they made up a very small niche market, which today is still small. Few advisors even knew they existed, and even fewer knew enough to take advantage of their benefits. But the confluence of unfavorable market conditions and an aging Baby Boomer population is opening the floodgates, and more advisors than ever are using life insurance as a tool to help generate non-correlated returns with low volatility.

Another plus: it’s easy to explain to clients. Most everyone holds at least one life insurance policy. They understand death benefits, and they understand premiums (perhaps all too well since those premiums are increasing every year). With a life insurance settlement, the policyholder sells a life insurance contract to a third-party investor and receives an immediate cash payment from the buyer (one that is typically much greater than the payment received if a policy is surrendered to the life insurance carrier). The buyer continues to pay the premium and then receives the death benefit.

The benefit to the seller is clear, especially if the policy is no longer wanted or needed. The benefit to the investor is just as clear. Unlike other alternatives, the factor that drives the return on this investment is inevitable. Whether a death benefit is collected depends on one thing: the policyholder’s longevity. No other factors are involved. Not the strength of the market. Not energy or commodity prices. Not global economics. It’s a truly uncorrelated alternative that’s growing in popularity every day. And for good reason. Retiring baby boomers—all 75 million of them—are looking for new ways to fund their retirements and pay for the long-term care that comes hand in hand with longer life spans. If this weren’t enough, the purchase and sale of life insurance policies is a highly regulated transaction providing transparency and safety to buyers and sellers alike.

The market is more volatile today than it’s ever been, which means we’re all looking for ways to hedge market risk. Whether you’re just now starting to dip your toes into alternative investments or have already taken the plunge, be sure to consider life insurance as the one option that offers all of the benefits of alternatives—with none of the potential market correlation (no matter when you look at the numbers). Even better, life insurance is easy to understand, which just may it the fresh, new alternative that finally gets your clients excited about investing in something they’ve never heard of…until now. - iris.xyz

Investors Could Lose Billions on 'Mind-numbingly Complex' Deal

Arbitration claims against Merrill Lynch highlights a potential hazard for other banks selling structured product investments.

Wall Street has been selling what one lawyer calls a "mind-numbingly complex" deal to retail investors for years, but now, it may come back to bite big banks.

Bank of America's brokerage arm, operated by Merrill Lynch, has a growing number of investors suing it for a volatility-focused structured product which charged double-digit fees as it lost retail buyers millions, one lawyer said. Now, according to a report in The Wall Street Journal, Merrill's Strategic Return Notes, which it sold to retail investors years ago, has also earned the bank a potential Securities and Exchange Commission civil enforcement action after whistleblowers turned on their former employer.

The whistleblowers, a pair of Merrill Lynch brokers who sold the volatility structured product beginning in 2010, taped conversations with other bank staffers before tipping off investigators. All in all, Merrill clients lost most of their investments in a $150 million fund.

The majority of the complaints about Merrill Lynch's volatility structured product came from customers of the brokers who went on to leave the bank and later act as whistleblowers, according to a spokesman for the firm.

The bank says it adequately disclosed risks to structured product investors and that it aims to defend itself from allegations and arbitration proceedings. Further, the product, by design, aimed to capture returns on market losses, which means that in a scenario where stocks outperformed, the investment would incur losses, the spokesman said.

The structured product Merrill Lynch sold is just a drop in the bucket, say industry observers.

A late 2015 JPMorgan analyst note tracked the asset class' enormous growth. From 2007 through last year, roughly $500 billion to $600 billion worth of structured products were sold by banks every year, with Asia Pacific investing in a growing portion of the deals. That compares to the 2000-2005 time frame, in which the report showed structured product sales rising from less than $100 billion to more than $200 billion annually.

"The sales of structured products have dramatically increased in the last five to seven years," said Andrew Stoltmann, the attorney representing dozens of Merrill Lynch clients who filed claims against it with the Financial Industry Regulatory Authority.
"These used to be sold to hedge funds and high net worth individuals," he said. "Now, brokerages firms target retail investors."

Officials at the SEC declined to comment.

Stoltmann, whom The Wall Street Journal quoted as having had 44 Finra complaints against Merrill for its volatility structured product, said he received more than a dozen additional investor inquiries as of Wednesday morning. He called the structured product his clients and others invested in "mind-numbingly complex." 

Next, other investors in unrelated structured products could push for arbitration if they allege they were misled and incurred losses.

"Some products are inappropriate for 99 percent of retail investors, even with full disclosure of their risks," said Erik Gordon, clinical assistant professor at the University of Michigan's Ross School of Business.

"Some risks are difficult to disclose in a way that puts retail investors in a position to make informed decisions," he said. "Houses that reach for commissions or that move their inventory by selling inappropriate products to retail investors should expect to end up in front of the SEC and a judge."

— By Jon Marino, Wall Street reporter

Related:

SEC will use whistleblower tip to sue Merrill Lynch for investment that lost 95%

‘Alternative’ Investments Require Extra Diligence, Caution

It is no secret the U.S. economy is performing poorly.

First-quarter 2016 gross domestic product, the broadest measure of economic output, advanced at a dismal 0.5 percent seasonally adjusted annual rate, according to the Commerce Department. It is the worst performance in two years. Both top and bottom lines for major U.S. corporations are being pressured, according to the Wall Street Journal. Apple Inc., Norfolk Southern Corp, 3M Co., Pepsi Co., and Procter & Gamble Co. all took hits.

With interest rates currently near zero, CDs, bonds and banks aren’t providing attractive yields. This is problematic for individual investors. Therefore, many investors are increasingly looking at “alternative” investments in search of higher returns or yields.

I believe that diligent homework and extreme caution are required. Truly, “the devil is in the details.” Anyone considering “alternative” investments should obtain the advice of trusted accountant, investment, legal and other professional advisers before making any investment decision.

What are “alternative” investments? Opinions vary to an exact definition but, to me, they are potential uses of funds other than for “traditional” investments, such as publicly traded stocks, bonds, ETFs and mutual funds.

“Alternative” investments include, among others, private real estate funds, nontraded REITs, oil and gas programs, startup companies, private equity and venture capital funds. They are extremely complex. Some of these “alternative” investments are legally available only to “accredited investors” defined by the U.S. securities laws.

A “private placement” is one type of an “alternative” investment. Under federal and state securities laws, “private placements” can fall within an exemption from SEC and/or state securities registration as a sale of securities “by an issuer not involving any public offering.”

“Alternative” investments require detailed scrutiny. Three overarching considerations are: 1) Each “alternative” investment must be evaluated individually; 2) The documents, disclosures and agreements for each must be received, read carefully and completely, and understood fully before moving forward (this will be time consuming; don’t rely only on presentations and representations provided by management); and 3) If you are asked to invest or commit any money without being provided with proper and complete legal documentation, walk away. Investing your hard-earned money is not a “handshake” deal!

The documents and agreements for a typical private placement generally include: 1) A “private placement memorandum” or “offering document” that contains important details and disclosures about the company, its business, its prospects, the applicable risks (internal and external to the company), use of funds, and the costs and expenses of the transaction; 2) A “subscription agreement” that contains the terms and conditions of the securities sale and purchase; and 3) information regarding the accredited or nonaccredited status of the investor.

The “securities” being sold can bear many names, including stock, shares, membership interests, limited partnership interests, convertible debt, warrants and options.

Below are eight considerations you should incorporate when doing your “homework” – your own due diligence. Remember, as a passive investor, you will have little or no say in the management of the entity in which you invest.

First, examine the management team’s professional qualifications, experience and past track record of investment performance. Determine if management is putting its own funds in the transaction. Be wary if management has no skin in the game. Check to make sure that management has no criminal or other disciplinary history.

Second, examine the risk factors of the product/service. Is the product/service new to the marketplace or is it a modification of an existing product/service? Would the product/service involve new or significant change in sales practices?

Third, does the entity have enough funds to execute its strategy? If not, the venture could fail quickly. In some transactions, you may be contractually required to invest additional capital in the future if capital calls are made by management.

Fourth, examine the anticipated internal rate of return in the context of the entity’s investment strategy. Is it realistic or is it pie in the sky?

Fifth, understand the duration of the investment. Many investments do not have redemption or “put” rights and are illiquid. Your money could be tied up for years.

Sixth, examine all management fees, costs and other expenses paid to management and others. Review the “use of funds.” A company must describe how it will use the net proceeds raised from the offering and the approximate amount intended for each purpose. Beware of vague statements like “the proceeds will be used for general working capital purposes.”

Seventh, closely examine the securities being sold. Understand the rights, restrictions and class of securities being offered, and management’s ability to change the capitalization structure. Sometimes, the founder or existing shareholders retain(s) full voting control of an entity.

Finally, if you can afford to invest, determine if you can afford to lose all of your investment should the investment crater.

A quote attributed to Will Rogers applies: “Be not so much concerned with the return on capital as with the return of capital.” - abqjournal

Alternatives Gain Bigger Share in Investor Portfolios

While alternatives are inarguably set to continue gaining a bigger share in investor portfolios in the current low interest-rate environment, institutional investors are also becoming increasingly selective when it comes to capital deployment, cautions Frank La Salla, chief executive officer of alternative investment services and structured products at BNY Mellon.

Mr. La Salla, in driving home his point, cites the demand by institutional investors for greater transparency and growing levels of data to support decision-making when it comes to alternative investments.

A recent BNY Mellon study entitled Split Decisions: Institutional Investment in Alternative Assets found that institutional investors are seeking to allocate more capital to alternative strategies, in their quest for higher returns.

The study surveyed 400 senior executives from institutional investors around the world including pension funds, investment managers and insurance funds, as well as 50 hedge fund executives.

The report also found that among the various alternative asset classes, private equity (PE) is the most favoured by institutional clients, taking up to 37% of their portfolios. This is followed by infrastructure (25%), real estate (24%) and hedge funds (14%).

However, a separate study by Invesco entitled the Global Sovereign Asset Management Study 2016 found real estate to be the primary driver of increasing allocations to alternatives in recent times; allocations to real estate have increased faster than that of both PE and infrastructure combined, rising from 3% to 6.5% over a three-year period, which represents a 29% compound annual growth rate.

According to the BNY Mellon report, nearly two-thirds of those surveyed said alternatives had delivered returns of at least 12% last year, whereas more than a quarter had achieved returns of 15% or more from their allocations to alternatives. Additionally, while 39% of those surveyed plan to increase their allocations to alternatives, only 6% say they will moderately reduce their exposures.

The report also found that emerging markets (EMs), on average, made up 31% of institutional investors’ allocations to alternatives. For Asia Pacific-based investors, EM-based investments accounted for 54% of their alternative portfolios, followed by investors in EMEA (Europe, Middle East and Africa) at 29%, and the Americas at only 16%.

When it comes to PE investments, 62% of those surveyed said they would look for lower management fees, whereas 55% would request for more transparency as they look to optimise value.

Downward fee pressures have also been experienced by hedge fund managers, with 78% of those surveyed saying that they would consider reducing their management fees over the next 12 months.

Jamie Lewin, head of product strategy and performance management at BNY Mellon Investment Management, opines that a steady stream of new products and strategies would support the continued growth in allocations to alternatives.

“Innovation and adaptability will be two key differentiators that determine which firms succeed in capturing what’s become an integral part of institutional portfolios,” he says. - asiaasset

An alternative View: Why It’s the Asset Class of the Future

In today’s era of low interest rates, stock market fluctuation, and economic uncertainty, most people are faced with either low returns or high risk on their investments. For this reason, interest in alternatives - with their ability to diversify investments, reduce risk and provide uncorrelated returns - has grown significantly in recent years, according to Ophir Gertner, founder of invest.com. 

In fact, McKinsey predicts that flows from retail investors will grow by more than 10% annually over the next five years, while PwC expects alternative assets to grow to $15.3trn (£10.8trn, €13.6trn) by 2020.

Increased risk aversion

In the wake of the financial crisis and with so much uncertainty still remaining (2016 is proving to be the ‘perfect storm’ for uncertainty with the EU referendum, US election, a number of elections in South America…), investors are more risk averse than they were a decade ago and seek investments that will provide long-term, sustainable returns.

Alternatives offer three key benefits: higher return potential – they seek to outperform traditional markets by being continuously active; market protection – unlike traditional ‘buy and hold’ investments, they can profit even when markets go down; and true diversification – alternatives can help lessen the correlation of a traditional portfolio to the stock market which can in turn, help protect it from market volatility.

Diversification conundrum

This point on diversification is key; in the past, when one part of the market went down, generally another would go up. For decades, investors could diversify portfolios across a number of investments to reduce risk and improve returns in the long run.

In recent years however, different parts of the market have started to move together and therefore become correlated with one another. Ideally, an investor wants to avoid this correlation, or at least keep it as low as possible, because if investments are all moving in the same direction, there’s little true diversification.

"Of course certain alternatives – namely hedge funds and commodities – have faced some difficulties in the current market environment."

A lack of diversification increases risk and can lower return, and this erosion in the risk-reducing power of traditional diversification has left many investors with much riskier portfolios than they think. The benefit of alternatives is their ability to create true diversification due to their uncorrelated nature.

Alternatives vs equities

If you need further convincing, the table below paints a clear picture as to the diversification benefits of including alternatives in an investment portfolio. During the fifteen worst quarters of the S&P 500 Index’s performance in the last 30 years, alternatives outperformed equities in all cases.

On average, alternative investments, as measured by the Barclay CTA Index (an index which analyses the performance of managed futures), performed 18.8% better, and in one quarter, this figure was as high as 39%.

Risks remain 

Of course certain alternatives – namely hedge funds and commodities – have faced some difficulties in the current market environment which is why we always recommend that only a portion of any portfolio be invested in them – typically between 10% and 40% – and that each alternative option be evaluated on its own merits. 

Our portfolio management service, for example, offers seven alternative investment strategies with next-day liquidity, which use computerised algorithms to trade automatically and aim to continually optimise the strategies and take advantage of changing market conditions. 

So while this asset class has historically only been available to very wealthy investors and as a result, has meant that some retail investors are still weary of it, we’re in no doubt as to the central role it will play in the investment universe and the global economy in the future. - international-adviser

Private Equity the Key Alternative

BNY Mellon's survey shows private equity is gaining traction as an alternative investment strategy

Private equity is the most sought after alternative investment strategy, accounting for 37% of investors’ alternative exposure, according to a survey by BNY Mellon.

This comes as the asset class delivered strong performance with 97% of investors telling BNY Mellon that private equity had met or exceeded expectations. Private equity is currently running record Assets under Management (AuM), according to Preqin, standing at $2.4 trillion at June 2015. 

The BNY Mellon paper acknowledged that by year-end 2014, seven of the year’s largest buyout funds raised $5 billion each, while smaller, niche or specialist funds had also witnessed a surge in popularity. Fifty-three per-cent of allocators confirmed they would increase their private equity exposure over the next 12 months, added the BNY Mellon paper.

“It is clear from our research that institutional investors are either looking for absolute returns, diversification and non-correlated returns. Private equity has been one of the best performing alternative asset classes over the last few years,” said Mark Mannion, head of EMEA relationship management for Alternative Investment Services at BNY Mellon, speaking at Fund Forum International 2016 in Berlin.

Despite the strong fundraising environment, private equity is facing some pressure, particularly around fees. Sixty-two per-cent of respondents to the BNY Mellon study they were looking to lower private equity fees over the next 12 months. Fees have been a contentious issue of late with investors complaining about the fee structures and expenses charged by their private equity managers. Californian pension fund CALPERS recently demanded greater transparency from private equity managers about their performance fees while a handful of US state legislatures are looking to introduce rules forcing fund managers to disclose their fee structures to external investors such as state pension funds.

“Fees are an increasingly important issue for institutional investors as they want value for money. Investors only want to pay for good performance, and there is a push from some investors to make fees more palatable than the traditional 2% and 20% model,” said Mannion.

National regulators including the Securities and Exchange Commission (SEC) have also criticised the lack of transparency and potential conflicts of interest that can arise in private equity fee structures. A much cited speech by Andrew Bowden, former director of the OCIE (Office of Compliance Inspections and Examinations) at the SEC said expense allocations and law violations around fees at private equity were endemic. It was inevitable that high-profile settlements would follow suit. Major private equity houses including KKR and Blackstone have settled with the US regulator over misaligned interests around fees.

In terms of other alternative strategies, infrastructure and real estate are the second and third most popular among investors. However, hedge funds account for just 14% of institutional investor allocations. Forty-five per-cent told BNY Mellon that they did not have any money invested in hedge funds. Hedge funds have incurred bad press of late with several major institutions criticising their disappointing performance relative to their high fee structure.  Indeed, CALPERS and Dutch pension fund PFZW have both confirmed they will no longer include hedge funds in their portfolios.

“A handful of high-profile US pension funds have publicly dropped hedge funds from their portfolios, but overall these are the exception rather than the rule. Most investors are sticking with alternatives, and increasingly deploying managed account or liquid alternative structures,” said Mannion.

Interestingly, the BNY Mellon study found 94% of investors are satisfied or very satisfied with their hedge funds. Nonetheless, the study concede that hedge funds have struggled to recover following the financial crisis. “To overcome this relative reticence, the hedge fund industry is developing a range of solutions to make it easier and cheaper for institutional investors to access the strategies that they offer,” read the BNY Mellon paper. 

Nonetheless, a sizeable portion of investors do see hedge funds as useful risk diversifiers away from stocks and bonds, particularly when markets are volatile. “Most investors are adopting a long term approach towards their alternative investments. While some hedge fund strategies underperformed last year, most investors are happy with their long term performance and that is encouraging,” said Mannion.

The BNY Mellon paper acknowledged that liquid alternatives were growing as hedge funds convert their strategies into UCITS or ’40 Act products giving them access to retail money. Data from Cerulli Associates indicates liquid alternatives are the fastest growing segments in the fund market, and could run 14% of industry assets by 2023. Others, however, are not so sure and feel that liquid alternatives may be running out of stream amid disappointing performance. They have also faced pressure from far cheaper index tracking funds. - globalcustodian

7 Important Financial Steps to Take in Your 30s

When you hit your 30s, you may start thinking about your major life goals, both personal and financial. Although you may be able to defer some of your personal life decisions, such as career changes, starting a family or moving to a new place, some major financial decisions should not wait any longer.

Many financial decisions can have a gradual, yet enormous, impact on your life. Making them at the right time ensures that you can meet your goals and achieve financial security. Here are seven key financial steps people in their 30s should take.


1. Build an emergency fund

Whatever your current income is, you need to establish an emergency fund. Think about how you would pay next month’s rent if you lost your job. Or, if your car broke down, would you have enough money to repair it? Having a financial buffer means you don’t have to hit the panic button — or go into debt — when faced with an unforeseen expense.

Start by aiming to save enough to cover up to three months of your household expenses and gradually grow your emergency fund to cover at least six months of expenses. If money is tight, building an emergency fund can be overwhelming, so start small. Contribute an hour’s worth of wages each workday and gradually increase it to two hours’ worth of wages per workday. If that’s unrealistic, save $50 per week ($200 per month) and increase it to $75 a week or more as you are able. Use automatic deposits to your savings account to ensure regular contributions.

2. Make a plan to pay off debt

As you turn 30, it’s smart to think about setting a strong financial foundation for your future, and that starts with paying off your debt. Not all debt is bad. Good debt includes your home mortgage or education loan, but if you have high-interest credit card debt or personal loan debt, it’s time to take these financial matters seriously.

The best strategy is to start paying off debt with the highest interest rate first. For instance, clearing credit card debt with a 22% interest rate would yield a better return on your money than paying off your home loan with a 4% interest rate. If you need help, work with a debt management professional to figure out how best to tackle your debt.

3. Start (or keep) maxing out your Retirement Scheme 

Unlike maxing out your credit cards, maxing out your retirement scheme or other retirement plans is a good thing — and now is the time to start.

The Private Retirement Scheme (PRS) is a voluntary long-term contribution scheme designed to help individuals accumulate savings for retirement. There are wide range of PRS funds that you may choose to contribute to based on your contribution time horizon, risk appetite and age.

PRS provides an additional savings option for all individuals to build up their retirement nest egg over the long term. As a member, you will get to enjoy tax relief when you contribute to any of the PRS funds offered by financial institutions. 

4. Start investing now

One of the biggest advantages you have in your 30s is time, so it pays to start investing early. Consider this example of two investors. At 30, Steve started investing $1,000 a month and did so until age 40. Even though he stopped, he didn’t withdraw his investment and let it grow until his retirement at age 60. On the other hand, Bob started investing at 40, contributing $1,000 a month until age 60.

Assuming an average rate of return of 5% compounded annually, Steve accumulated $154,992 at the end of the 10 years, but since he didn’t withdraw this money, it grew to $411,240 by age 60. Bob ended up with $407,460 with the same investment terms. This is the magic of time — and compound interest — working in Steve’s favor. With compound interest, your return is added to your principal each year, so your savings grow much faster than with a simple interest rate, when the return amount is the same each year, based on the original principal amount.

For newer investors with a limited understanding of the investment landscape, it’s a good idea to stick with passive investing, strategies that try to capture the overall movement of the market rather than predict which sectors or assets will outperform. You can invest passively through mutual funds or exchange-traded funds that are based on a broad-market index. I recommend starting with ETFs because of their lower fees and transaction costs.

5. Figure out the right investment strategy for you

If asset allocation is a foreign concept to you, now is the time to demystify it. Asset allocation is about picking the right proportion of different investment types (or asset classes) to match your portfolio with your risk appetite, investment time frame and financial goals. Some investments, like stocks, are more risky — and tend to yield higher returns — than others, like bonds. For instance, if you wanted a more aggressive investment strategy, you would want to create a portfolio with more exposure to stocks, and if you wanted less risk, you’d dial up your exposure to bonds.

Your asset allocation will have a huge impact on your net wealth over time. A portfolio that is too conservative may leave you with an insufficient nest egg, whereas a risky allocation could yield higher returns, but might keep you up at night when the market is volatile. It may be best to consult with a financial expert to come up with an investment strategy that fits with your goals and your tolerance for risk.

6. Diversify your investments

The other important part of building a portfolio is diversifying your investments. For example if you are invested in stocks, you would want to diversify your equity holdings by including stocks from companies of various sizes (such as large-, mid- and small capitalization stocks), categories (like growth or value stocks) and parts of the world. By holding a diverse selection of investments, you are able to spread around your risk and reduce overall volatility.

You may also want to start considering alternative investment options that can help you further diversify your portfolio to weather stock market fluctuations. The goal is to add investments that tend to not move in the same direction as the stock market and can offer stable returns over a longer period. Some of the most popular alternative investments include real estate, precious metals, life settlements, private debt placement or private stock. However, keep in mind that alternative investments require deep understanding, so make sure you are comfortable with how these investments work before you jump in.

7. Start saving for college

You should begin saving for college expenses as soon as you have a child. It may seem a bit early to get started, but college costs are going up, and the sooner you start saving and investing for this major expense, the better off you’ll be. A systematic investment plan in mutual funds can help you come up with the necessary funds to support your child’s college education. Considering the long time horizon, you may want to follow a relatively aggressive investment strategy for the plan.

Take the long view

“Setting goals is the first step in turning the invisible into the visible,” says author, entrepreneur and motivational speaker Tony Robbins. When it comes to your financial life, this couldn’t be more true. While working on a financial plan, you must consider the long-term perspective — the far-off personal and financial goals you want to achieve — to determine the best steps to take today.

Though it may not always feel like it, you have control over your financial life. Making educated decisions and taking action early can help set you on the path to financial security and achieving your goals. - nasdaq