John, Can you review
my 1,000,000 portfolio?
Yes that
was the request from Peter this week. The portfolio was 100% cash in one bank which was offering above market rates to
its ‘Retention’ clients.
It was
certainly easy to agree with Peter that
he appeared to be doing the right thing earning top interest.
We had a
few initial thought bubbles.
What if interest rates fall further & Peter may
have to come out of ‘hibernation’
& work to increase his income. Of course this is why Peter called us in the
first place.
The
government guarantee for bank deposits is only on the 1st 250,000
per institution & hence it might be wise to deposit into say 5 different
institutions. Some cash under the
mattress would be a suggestion although it doesn’t earn interest & Penny
doesn’t like it.
{We read
today a comparison between Iceland which did not support the banks &
supported the tax payers & of Ireland which guaranteed the banks &
hence not the taxpayers. Who is better off now?}
We also
mentioned that because everyone
including government wants his money then maybe a trust for
protection might be considered.
However he had closed his trust to
simplify his life.
Peter is
comfortable now so he says but his income has dropped over the year. Yes cash preserves your capital but it
doesn’t preserve your income.
If Peter’s
interest income has dropped from earning
6% to 5 % then he has dropped 17% in income. If he was to diversify
banks today he might get only 4.5%. That’s a 25% drop in income.
No wonder Peter questioned Black Duck’s good
news for Christmas. We heard similar questions to the Federal minister for
Aging a month ago.
i.e. anyone who needs interest income to
support their needs, needs interest rates up.
Peter also pays taxx say 7,800p.a. or 650p.m. on
his income which also reduces his lifestyle. This could be tuned up but
requires further answering the what ifs?
No wonder
Peter is in hibernation. However when he remerges then he may find he has acted
too late.
What is a
solution to Peter’s problem. He certainly can survive & remain as he is if
rates don’t change.
However the
only constant is change.
If they go up then yes maybe he will manage.
But higher rates are usually to contain inflation which means he is losing
purchasing power by sitting on his hands. We are all very aware that
governments globally are attempting to
inflate their way out of debt. Our power bill has increased to the extent we
will have to share showers again.
Peter who
travels for up to 3 months in the USA & a month in China is very aware that
costs there are a third of what they are here. Why is this so?
If rates go
down & they have been down in Japan for 20 years & are currently the
lowest for 500 years in the UK & the lowest in 100 years for the USA then
Peter really will be on struggle street. It may mean reduced prices of course. Peter might then need to live abroad.
John Murray
from Perennial sent this now.
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Honey Where's My
Income?
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As expected the RBA
dropped rates by another 0.25% and the banks kept a little, with mortgage
rates only declining by 0.20%. Non-mortgage holders are not rejoicing, with
term deposits falling to well under 5.0%.
So where to go to get income? The NAB provides an interesting example – you can invest in a term deposit at 4.40% or go up the risk scale and buy its listed income securities, currently yielding 6.33% but with a capital value determined by the stock market. Alternatively, an investor could look at buying NAB shares – a much riskier proposition, but with an attractive, high grossed up dividend yield. The dilemma for investors in terms of yield is illustrated by the following table.
Source: Bloomberg,
Bank Web Sites, RBS, Perennial Value. Forecast Gross Dividends for Financial Year ending 30 June 2013.
*Forecast return from June 2012 - June 2013. |
Peter sold
his property in 2010 as he anticipated correctly falls in house prices. He
commented that his current rental property has dropped by 125,000 since he has
moved in there. He has ‘no intention to own property again’ due to its costs
& maintenance demands. ‘Rich Dad’ & others would agree with him.
We suggested
that Peter consider a different
allocation of his 1,000,000. I.e. not all 100% cash.
But into
what & this means answering the what
ifs.
There are
too many what ifs & hence defining & countering these what if defines how his 1,000,000 is
allocated.
Let’s not
forget the what if of living too long. At the age of 52 then Peter could
run out of capital & relaying on the government is not where anyone wants
to go.
Peter also commented on current Chinese thinking. I.e. all Westerners are from USA
& Peter used the word ‘despise’
as the Chinese attitude. That certainly surprised us. He also pointed
out the current indoctrination of the younger generation on Japan & how a
Beijing museum is being renovated to
prove their arguments. That is a serious what if. That is completely
different from the National Museum in Taipei.
{ This
disagrees with an economist Jonathan Pain who correctly forecast the CFG in 2007 &
his expectations this week on China in
2013.} Email us for his article.
We also
attended another seminar with Matt Sherwood
from Perpetual who manage 24 billion.
He compared
the 5 asset classes i.e. cash, gold, property, listed property ,equities ..
Over any 20
year period equities produced 157 times the initial capital using growth & income.
Cash
produced only 25 times the
original capital
LPT
produced 78 times more.
Gold was
the worst with 12 times as it didn’t provide an income & arguably therefore
not an asset.
Residential
property was 44 times the original capital.
Here is
another what if. We read the Chinese want to own all the
gold in 2020. Why? They want to be recognised as a reserve currency.
Many fund
managers have an allocation between 5% & 10% gold. Why? It is Insurance.
Peter might
view Matt’s summary of the new investing
environment as having 5 long term trends.
1. Debt reduction
2. Demographic changes
3. Energy consumers & producers
changing
4. Productivity & technical
innovation
5. Emergence of the BRICs
Hence the
markets will be dominated by these long term trends
1. Downsizing earning risk in advanced
economies
2. Decline in valuations
3. Depreciating commodity prices.
4. Emergence of income investing as
source of wealth creation.
5. Risk & return dynamics to
change.
Matt is
saying as the world has changed & hence the old rules which have worked in the
past have changed.
Bill Gross
from PIMCO does call it the ‘New Normal’.
Peter has plenty of what ifs & the answer is asset allocation. However
his asset allocation must fit his view
of the world which is his ‘risk
profile’. He can weigh his assets in
the portfolio in many ways. Our suggestions is to tailor a model portfolio of
fund managers from asset managers according to his currently very conservative
profile.
Of course term deposits & direct shares &
most suggestions from Peter are available under the one umbrella which provides
wholesale products & sophisticated record keeping.
An
alternative is to use a specialist fund of fund managers after taking Peter’s
risk profile into consideration.
We could
discuss the Yale & Harvard endowment models & note from an email
today ‘During
the past 10 years through 2009, including the crash, Yale's endowment managed
average annual returns of 11.7%, allowing its endowment to reach $16 billion.
That put Yale ahead of the top-performing U.S. mutual fund of the decade’.
Once you look under the hood, it's a relatively
straightforward strategy of diversifying beyond a standard U.S. stock and bond
portfolio into a broader range of asset classes like timber, private equity,
real estate and global stocks and bonds.
‘a cockroach's portfolio "would be inflation resistant, deflation
resistant, credit inflation resistant, credit deflation resistant... despite having 'no view' on which
scenario was more likely at any one point in time." In short, a generalist
approach.
It should be clear to any longstanding readers that we nurse grave fears for the future. So we have, at least, two choices--
We can vote in favour of the asset specialists who, putting the wrong end of the telescope to a blind eye, suggest that there are no problems ahead, and no bubbles visible.
Or we can vote in favour of a somewhat generalist strategy that allocates to a diversified array of disparate asset types (creditworthy bonds, defensive equities, real assets, uncorrelated funds) and that then attempts to pick value in those dusty, neglected corners where it might exist.
We are more worried about risk than we are greedy for return. And if that makes us cockroaches, we can certainly live with the label.’
It should be clear to any longstanding readers that we nurse grave fears for the future. So we have, at least, two choices--
We can vote in favour of the asset specialists who, putting the wrong end of the telescope to a blind eye, suggest that there are no problems ahead, and no bubbles visible.
Or we can vote in favour of a somewhat generalist strategy that allocates to a diversified array of disparate asset types (creditworthy bonds, defensive equities, real assets, uncorrelated funds) and that then attempts to pick value in those dusty, neglected corners where it might exist.
We are more worried about risk than we are greedy for return. And if that makes us cockroaches, we can certainly live with the label.’
Peter at
some stage needs to act which is why he called
us on 07 3848 1088. You may also email us.
