Investment Articles

Investment Performance of Niche Property Investments

Again, it is difficult to define the investment performance of the property sector as a whole within the context of this document, due to the wide variety of sub-sectors and regions which must be considered. In the UK for example, residential real estate has delivered markedly different performance for each Investor that has participated depending on their strategy (buy to let/distressed assets/development etc), and residential property as a whole has delivered a different performance to commercial property or student accommodation. The same can be said for every combination of sector, strategy and region, therefore the context of this document does not allow for a detailed analysis of the investment performance of the sector as a whole.

Residential – The UK market offers some interesting opportunities, as depressed prices combine with a lack of buyer financing to create a viable rental market that can deliver yields of between 4% and 8% after costs. In other more distressed markets, properties can be acquired with heavy discounts, and rental yields can reach as high as 15% to 20%, although in many cases the quality (and therefore ability to dispose of) such property assets can be questionable, and Investors in these markets might better take advantage of current market dynamics by acquiring properties to refurbish and resell very quickly, capturing the discount as a capital profit and eliminating the long-term liability. Emerging markets also offer opportunities to invest in residential property, and the upside capital growth potential is often attractive, although the location risk associated with acquiring and owning physical property in many countries can be significant. Again, the cash-flow dynamics of direct investments in real estate are often very different from those of securitized investments such as property funds.

Commercial- Office space, shopping centres and industrial space have long been the focus of large Institutional Investors seeking stable income and long-term growth prospects. In developed markets where infrastructure is well established, commercial property is viewed as a stable income investment with some growth potential, and in less developed markets potential for growth is higher but so too is the level of risk to capital in terms of location and counterparty risk. The investment performance of commercial property varies from region to region, and across the varying sub-sectors such as office or industrial. One good point of reference for the global performance of commercial property investments is the FTSE UK Commercial Property Indices series encompassing the Retail, Office and industrial Indices; the All Property Index delivered 1.88% in the 12 months to March 2012.

Student accommodation – This is a growing sector, driven by demand for reasonable accommodation from University students; as the global population grows, so too will the volume of students attending University who will in turn require suitable accommodation in close proximity to their campus. Investors can purchase units in student blocks, effectively becoming the landlord of the unit themselves, or more often than not entering into an agreement with a management company who will manage the property on their behalf. Direct property investments in the UK student accommodation sector have delivered yields upwards of 10% p.a. There are also a number of funds investing in student accommodation which tend to acquire whole blocks, which investors taking a stake in the fund. The Brandeaux Student Accommodation Fund has delivered an average annual yield of 9.71% p.a., and the Mansion Student Accommodation Sterling Fund delivered an annual performance of 12.14% in 2011.

Care homes – Another niche sector that is gaining popularity amongst both institutional and private Investors is care homes, as both seek to correlate the performance of their investments with trends in socio-economic fundamentals such as an ageing global population, and capture financial gains from increasing demand for assisted living accommodation. Investors may purchase units within custom care accommodation and assign day to day management to an operator, or they may choose to invest in a fund specialising in such assets. Direct investments in care homes offer the potential for capital growth and in many cases a “guaranteed” rental income of around 8% p.a., although most opportunities for private Investors tend to be pre-construction projects, adding significant counterparty and strategy risk. Access to investment funds specialising in care homes is severely limited for retail investors, and therefore there is no credible performance data.

This is an excerpt from DGC Asset Management’s Alternative Investments Guide. Free to download at the DGC Asset Management website.

The United Nations does it. Governments do it. Companies do it. Fund managers do it. Millions of ordinary working people – from business owners to factory workers – do it. Housewives do it. Even farmers and children do it.

‘It’ here is investing: the science and art of creating, protecting and enhancing your wealth in the financial markets. This article introduces some of the most important concerns in the world of investment.

Let’s start with your objectives. While clearly the goal is to make more money, there are 3 specific reasons institutions, professionals and retail investors (people like you and me) invest:

For Security, ie for protection against inflation or market crashes
For Income, ie to receive regular income from their investments
For Growth, ie for long-term growth in the value of their investments

Investments are generally structured to focus on one or other of these objectives, and investment professionals (such as fund managers) spend a lot of time balancing these competing objectives. With a little bit of education and time, you can do almost the same thing yourself.

One of the first questions to ask yourself is how much risk you’re comfortable with. To put it more plainly: how much money are you prepared to lose? Your risk tolerance level depends on your personality, experiences, number of dependents, age, level of financial knowledge and several other factors. Investment advisors measure your risk tolerance level so they can classify you by risk profile (eg, ‘Conservative’, ‘Moderate’, ‘Aggressive’) and recommend the appropriate investment portfolio (explained below).

However, understanding your personal risk tolerance level is necessary for you too, especially with something as important as your own money. Your investments should be a source of comfort, not pain. Nobody can guarantee you’ll make a profit; even the most sensible investment decisions can turn against you; there are always ‘good years’ and ‘bad years’. You may lose part or all of your investment so always invest only what you are prepared to lose.

At some point you’ll want to withdraw some or all of your investment funds. When is that point likely to be: in 1 year, 5 years, 10 years or 25 years? Clearly, you’ll want an investment that allows you to withdraw at least part of your funds at this point. Your investment timeframe – short-term, medium-term or long-term – will often determine what kinds of investments you can go for and what kinds of returns to expect.

All investments involve a degree of risk. One of the ‘golden rules’ of investing is that reward is related to risk: the higher the reward you want, the higher the risk you have to take. Different investments can come with very different levels of risk (and associated reward); it’s important that you appreciate the risks associated with any investment you’re planning to make. There’s no such thing as a risk-free investment, and your bank deposits are no exception. Firstly, while Singapore bank deposits are rightly considered very safe, banks in other countries have failed before and continue to fail. More importantly, in 2010 the highest interest rate on Singapore dollar deposits up to $10,000 was 0.375%, while the average inflation rate from Jan-Nov 2010 was 2.66%. You were losing money just by leaving your savings in the bank.

Today, there are many, many types of investments (’asset classes’) available. Some – such as bank deposits, stocks (shares) and unit trusts – you’re already familiar with, but there are several others you should be aware of. Some of the most common ones:

Bank Deposits
Shares
Investment-Linked Product1
Unit Trusts2
ETFs3
Gold4

1 An Investment-Linked Product (ILP) is an insurance plan that combines protection and investment. ILPs main advantage is that they offer life insurance.

2 A Unit Trust is a pool of money professionally managed according to a specific, long-term management objective (eg, a unit trust may invest in well-known companies all over the world to try to provide a balance of high returns and diversification). The main advantage of unit trusts is that you don’t have to pay brokers’ commissions.

3 An ETF or Exchange-Traded Fund comes in many different forms: for example, there are equity ETFs that hold, or track the performance of, a basket of stocks (eg Singapore, emerging economies); commodity ETFs that hold, or track the price of, a single commodity or basket of commodities (eg Silver, metals); and currency ETFs that track a major currency or basket of currencies (eg Euro). ETFs offer two main advantages: they trade like shares (on stock exchanges such as the SGX) and typically come with very low management fees.

The main difference between ETFs and Unit Trusts is that ETFs are publicly-traded assets while Unit Trusts are privately-traded assets, meaning that you can buy and sell them yourself anytime during market hours.

4 ‘Gold’ here refers to gold bullion, certificates of ownership or gold savings accounts. However, note that you can invest in gold in many other ways, including gold ETFs, gold Unit Trusts; and shares in gold mining companies.

With the advent of the Internet and online brokers, there are so many investment alternatives available today that even a beginner investor with $5,000 to invest can find several investment options suited to her objectives, risk profile and timeframe.

Diversification basically means trying to reduce risk by making a variety of investments, ie investing your money in multiple companies, industries and countries (and as your financial knowledge and wealth grows, in different ‘asset classes’ – cash, stocks, ETFs, commodities such as gold and silver, etc). This collection of investments is termed your Investment Portfolio.

Some level of diversification is important because in times of crisis, similar investments tend to behave similarly. Two of the best examples in recent history are the Singapore stock market crashes of late-2008/early-2009, during the US ‘Subprime’ crisis, and 1997, during the ‘Asian Financial Crisis’, when the price of large numbers of stocks plunged. ‘Diversifying’ by investing in different stocks wouldn’t have helped you very much on these occasions.

The concept and power of compounding are best explained by example. Assume we have 3 investments: the first returns 0.25% a year; the second returns 5% a year; and the third returns 10% a year. For each investment, we compare 2 scenarios:

Without compounding, ie the annual interest is taken out of the account.
With compounding, ie the annual interest is left (re-invested) in the account.

Let’s look at the returns over 25 years for all 3 investments, assuming we start off with $10,000 in Year 0:

With 0.25% return a year, your investment will grow to $10,625 after 25 years without compounding; your investment becomes $10,644 after 25 years with compounding.
With 5% return a year, your investment will grow to $22,500 after 25 years without compounding; your investment becomes $33,864 after 25 years with compounding.
With 10% return a year, your investment will grow to $35,000 after 25 years without compounding; your investment becomes $108,347 after 25 years with compounding.

This shows the dramatic effects of both higher returns and compounding: 10% annual returns coupled with 25 years of compounding will return you more than 10 times your initial investment. And 10% returns are by no means unrealistic: educated investors who actively manage their portfolio themselves and practise diversification can achieve even higher returns, even with some losing years.

People of all ages and backgrounds need practical and customised guidance in developing their financial knowledge and skills in order to reach their financial goals. In this article we’ve tried to describe in simple terms some of the most important concepts and principles you need to understand on this journey.

Thomas Saw is the founder of the Traders Round Table ( http://www.tradersroundtable.com.sg ), a community of committed traders and investors. TRT’s mission is to help people be more successful in Creating, Protecting and Enhancing their wealth in the financial markets. We help fellow traders and investors by providing holistic, broad-based financial trading and investment education, mentorship and psychology. Vinay Kumar Rai is a freelance writer and a member of the TRT.

It is now a widely held belief that investing in stocks and other financial instruments in the traditional manner generates an investment return that is driven more by the latest piece of political rhetoric, or the most recent announcement of sovereign debt risk or unemployment figures from some far flung corner of the world, than by underlying company fundamentals like good management and a strong balance sheet. Aside from this inherent volatility, many investors also feel over-exposed to financial markets, especially those coming close to retirement that may have little time left to regain catastrophic losses in any one holding.

This shift in mind-set amongst investors has driven a huge growth in alternative investment management, with most financial institutions now offering investments that are organised and managed in such a way as to attempt to avoid volatility, or generate a return when markets fall, or some other such strategy.

Short Only
Short only funds bet on particular stocks losing value. Investors might buy into a short only fund if they felt particularly bearish (pessimistic) about the short term future of financial markets in general, and some may allocate capital to this strategy as a hedge against the impact of a general downturn.

Ultra-Short Bond Funds
This a type of investment fund that invests fixed-income bonds with very short-term maturities. Such a fund will usually invest in bonds with maturities of around 12 months. This strategy is designed to generate higher yields than traditional bond investing with less volatility.

Market Neutral
Market neutral is an alternative investment strategy designed to profit from growth and depreciation in the value of stocks. Whilst there is no finite technical definition for market neutral investing, for the most part, the overall strategy will involve taking long and short position in a stock (betting both for and against it) in order to maximise the return from making good stock selections and minimise the impact from broad market movements.

Absolute Return
The original name for hedge funds – absolute return investing involves a wide variety of alternative investment management techniques designed to capture financial gains during any and all market conditions. Absolute returns refer specifically to the return of the fund or investment over a given period of time i.e. the actual growth or depreciation. This differs from relative returns, which is a measure of investment returns when compared to similar investments or a sector.

Long / Short
A true mixed bag of investing, long short strategies involve taking long positions in one stock and betting against the value of another stock. In theory, as one sector or company makes a gain, there will be losses in competing sectors, and investment manager aim to identify such opportunities and capitalise on them. A broad example might be an investment manager who thinks oil prices will rise significantly based on some impending political or social crisis, so they might buy into oil company stocks and short stock of companies that rely heavily on oil as a key input in their business.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

Agriculture is an alternative investment class which is currently gaining traction on account of traditionally strong performance and positive returns to investors, especially in comparison with some other traditional assets. Nevertheless, it is important to think about the impact of agricultural investments in developing countries especially and to consider how to use those investments so as to contribute to sustainable development. Recently, the International Institute for Environment and Development (IIED), an independent non-profit research institute, published an article exploring the purchase of land by agricultural investment funds in developing countries and the actions that might be taken to promote investments that will genuinely support local communities.

The IIED article, entitled “Farms and Funds: investment funds in the global land rush” (published in the IIED Global Land Rush January 2012 news brief), notes the increase in investment funds land and agribusiness purchases in developing countries. Investors (financial players as well as individuals) are expecting high long-term returns due to a range of factors, such as increasing demand for food and rising land prices.

The article points out that even though in many African countries the agricultural sector has historically suffered from a lack of sufficient investment, it doesn’t follow that the investments being made now are ethical per se. The importance is stressed of considering how agricultural investments in developing countries can both benefit the investors and contribute to the sustainable development of the region where they are being implemented.

Among the measures recommended in the IIED article are the promotion of “good” investments and the discouragement of harmful ones by for example introducing disclosure and transparency requirements in the investors’ home countries as well as increasing government and investor accountability. As for the host countries, the article recommends the development of investment models which include local farmers. This is particularly important since in developing countries weak government structures can mean that the rights of local communities are often not sufficiently safeguarded by appropriate institutional measures.

In any event, agricultural investments will benefit local communities only so long as they are used for promoting sustainable agricultural practices. In relation to agriculture, sustainability means that natural resources such as soil or water need to be used at a slower pace than they are replenished, meaning that crop harvesting needs to be synched with necessary replenishment practices. And sustainable agriculture is beneficial for investors as well since it increases land productivity and crop resilience, meaning better returns in the long run.

Another fact not to be overlooked by governments and private investors is that the agricultural sector currently accounts for approximately 14 percent of global greenhouse gas emissions. The corollary is that investment in unsustainable agricultural practices can have serious environmental consequences. In this connection, the United Nations Food and Agriculture Organisation (FAO) has introduced the concept of “climate-smart” agriculture, defined as agriculture that “sustainably increases productivity, resilience (adaptation), reduces/removes greenhouse gases (mitigation) while enhancing the achievement of national food security and development goals”. In addition, the FAO also suggests an “energy-smart” farming model: making the agricultural sector less dependent on fossil fuels and to be achieved through investment in renewable energy sources such as wind, solar, or geothermal power which can be used for farming operations.

In December 2011, the FAO published its paper “Identifying opportunities for climate-smart agriculture investments in Africa”, which highlights the need of the agricultural sector in Africa for substantial public and private sector investments. The paper asserts that, with both agricultural and climate change investments being largely privately financed, investors have both the financial opportunity and the responsibility to contribute to sustainable development in the developing world. That increasing private sector awareness in sustainability is key is also stressed in the IIED article, which asserts that many investors do not actually know much about issues such as sustainable development and poverty reduction.

A heavy burden lies on the developing world’s agricultural sector, needing as it does to feed growing populations while at the same time reducing its own emissions so as to not further exacerbate global warming. This burden needs to be understood also by investors, who should be vigilant in looking for ways to support sustainable agriculture while harvesting the returns from their agricultural investments.

CONSUMER PRICE INDEX (CPI)

Who can benefit?

Everyone. An understanding of the CPI is important for measuring how well your investments really are performing, the amount of investment funds you will require to maintain your lifestyle in the long-term and how government benefits will increase over time.

What is it?

The CPI is a measure of inflation. A basket of goods and services is measured by a government department on a periodic basis. Most countries measure their inflation rate. In America it is theUS Bureau of Labor Statistics which is a monthly update while in Australia theAustralian Bureau of Statistics takes a survey every three months.

This basket of goods may include diverse items such as the cost of a loaf of bread, petrol, car registration and train fares. The difference in the total prices results in the rate of inflation or the change in the index. The rate is usually positive although short-term negative movements have occurred.

An example is useful. Let’s say the current basket of goods have an index value of 221. A year later the index is measured to be 233. The rate of inflation over this one year period is (233 – 221) / 221 = 12 / 221 = 5.43%. A rate of inflation over a one month period will of course be a much smaller figure, however this figure is usually given as an annualised rate to show the trend in inflation.

The basket of goods being measured will change over time to make it relevant. For example, the price of buggy whips and horse feed may have been important in 1920 but would not be included in the CPI of 2012.

What are the benefits?

The CPI may be used as a benchmark for the performance of your investments or the required performance to maintain your standard of living. If your income is not keeping pace with inflation then you will be unable to maintain your standard of living. Therefore an investment after taxation must return at least the CPI or your asset is losing real value.

Some investments, such as the income from an annuity, may be tied to the CPI so your standard of living is maintained. Other investments state their performance goal as a measure of CPI, say CPI plus 3%.

It is important to note that some investments do better than others during high inflation as compared to low inflation. Other investments do better when inflation is falling while some outperform when inflation is rising. For example, interest rates usually follow the inflation trend. As inflation falls bonds usually outperform, but under perform when inflation rises.

Example The “rule of 72″ is an easy way to determine how long (in years) a rate of inflation will cause prices to double. The number 72 is divided by the annual inflation rate. For example if inflation is 7%, prices will double every 72/7 = 7.2 years. It also works to show how soon a given rate of return will cause your investment to double in value.

Any downside?

The CPI is a basket of goods, which may have little relation to how you actually spend your money. Therefore, your personal inflation index may be far different from the official rate.

Benchmarking your investment against the CPI in isolation may be misleading. For example, the capital growth of your investment property may have outperformed the CPI by say 2% long-term. If the return increases to 4% above the CPI you may think that you are doing well. However if similar properties have outperformed by 10% during the same time period you have actually done poorly.

This is an amended excerpt from Financial Planning A to Z, to be published in late 2012. Refer my website www.barrylizmore.com.au for more details. Articles of a similar nature will be posted at the start of each week.

 

Exchange-Traded Funds (ETFs) are investment funds that aim to track the performance (value or price) of an index, a particular commodity or a group of commodities, or other financial products. For example, by buying shares of the DBS Singapore STI ETF you are effectively investing in the 30 stocks (ie, Singapore Telecommunications, Wilmar International, DBS Group, etc) that are tracked by the STI (Straits Times Index).

Like other funds (Unit Trusts, Mutual Funds, etc), ETFs invest in a portfolio of stocks, thus providing you, as the investor, access to a wide range of markets, sectors and asset classes. Unlike unit trusts, however, ETFs are listed on stock exchanges and are subject to brokerage commissions, just like shares on stock exchanges. (Unit trusts must be transacted through a fund manager, and are usually subject to management fees and/or sales charges.)

ETFs come in many different forms, including:

Bonds- Hold, or track the performance of, a basket of bonds (eg Singapore government bonds)

Equities- Hold, or track the performance of, a basket of stocks (eg stocks of Singapore companies; companies in emerging economies; globalompanies)

Commodities – Hold, or track the price of, a single commodity or basket of commodities (eg gold, silver, metals)

Currencies- Track a major currency (eg Euro)

In the US, there are ETFs that represent almost every sector of the market: stock indexes such as the Dow 30 or S&P 500; stock sectors such as healthcare, retail and technology; and commodity sectors such as agricultural products, gold or oil. There are ETFs for large companies, small companies, real estate investment trusts, international stocks, bonds and even gold and silver. Today there are also synthetic ETFs that use financial derivatives to mimic the performance of other ETFs, though these would not be suitable for the average investor because of the more sophisticated financial knowledge involved.

There are several advantaged and disadvantages associated with ETFs

Advantages of ETFs

Flexibility and Transparency – ETFs are publicly-traded products: since they are listed on exchanges, their prices are known throughout the trading day and they can be bought and sold the same way you buy and sell

shares (online or via your broker), during local trading hours.

Risk Diversification – ETFs allow you to achieve some degree of diversification: you gain access to multiple

markets in a single transaction, with minimum investment and via a single platform.

Low Expenses- Total expenses for ETFs (0.3-1%) are usually lower than for unit trusts (1.5-3%); in fact, they are

typically 0.65% in Singapore and even lower in the US.

Disadvantages of ETFs

Existence of Trading Costs – You must pay brokerage commissions to buy and sell ETFs, making ETFs more suitable for single, lump-sum investments than for small, regular investments. Investing in ETFs

ETFs in Singapore

Here are some quick facts on ETF trading in Singapore:

• As of Feb 2011, Singapore had 75 ETFs with about S$3.2 Billion (S$3,200,000,000) in assets listed on SGX, the Singapore Exchange. By comparison, the Asia-Pacific region (excluding Japan) had about 190 ETFs with about S$52.5 Billion in assets by end-2010, while the US alone had about 1,100 ETFs with more than US$1

Trillion (S$1,270,000,000,000) in assets by Feb 2011.

• SGX has:

» Country ETFs for Singapore (3 ETFs), Australia (1), Brazil (1), China (6), India (5), Japan (3), Malaysia (2) and Russia (2), amongst others;

» Region-wide ETFs, including those for the Asia-Pacific (5), emerging markets (4) and global markets (2);

» Commodity ETFs for a broad basket of commodities (5) and gold (1);

» ETFs for Fixed-Income instruments (mostly bonds) and Money-Market instruments.

• As of Jan 2011, ETFs made up just 1.5% of trading volume on the SGX, compared to 14% in Europe and 40% in the US. However, growth has been dramatic: ETF volume on the SGX in 2010 was 45% higher than the volume in 2009.

• You can currently use your CPF savings to invest in 3 ETFs:

» ABF Singapore Bond Index Fund;

» streetTRACKS Straits Times Index Fund;

» SPDR Gold Shares Trust.

• ETFs can be transacted through your usual SGX listed stock brokers; the usual commission rate of between 0.18-0.28%, depending on amount, applies.

Conclusion

ETFs are best viewed as combining the risk diversification of unit trusts with the flexibility of stocks. They are a practical implementation of the philosophy of Index Investing which downplays picking individual stocks in favour of picking sectors, markets or geographical regions.

However, you should understand that, like any investment, ETF investments carry risks. Diversify even when investing in ETFs. We suggest you spread your ETF investments amongst an ETF on precious metals, an ETF on the STI, an income ETF, an emerging market ETF, and an ETF on developed/global economies. This diversified portfolio is well within the means of the average Singaporean investor.

Finally, the fact that ETFs are listed on exchanges means that both investing strategies (eg, a longerterm, buy-and-hold approach) and trading strategies (eg, a shorter-term, more active, buy-when-low and sell-when-high approach) become possible.

Disclaimer: Traders Round Table has no interest, financial or otherwise, in any of the ETFs mentioned or in any fund management companies; names have been mentioned only to make examples easier to understand.

Additional Reading

• ETF assets and listings in Asia Pacific ex-Japan continue to grow (Professional Adviser)

• ETF trading in Singapore to grow (Channel NewsAsia)

• Exchange Traded Funds (SGX)

• Exchange-Traded Fund (Wikipedia)

Thomas Saw is the founder of the Traders Round Table ( http://www.tradersroundtable.com.sg ), a community of committed traders and investors. TRT’s mission is to help people be more successful in Creating, Protecting and Enhancing their wealth in the financial markets. We help fellow traders and investors by providing holistic, broad-based financial trading and investment education, mentorship and psychology. Vinay Kumar Rai is a freelance writer and a member of the TRT.

Even though stock markets are generally having a bad time of it at the moment, as an investor there is no need to panic unduly. There are several strategies you can adopt to ease the pain and to protect your portfolio in the current environment. Let’s start with a little perspective on the situation.

At the start of 2012, it’s worth looking back at 2011. There was the major natural catastrophe in Japan for starters. Then there were problems in Greece and other sovereign European states, culminating in threats to the Eurozone as well as the Euro itself – plus of course the downgrading of the US credit rating. There was no doubt that the media seemed to revel in the bad news and as bad news sells, this is sure to continue.

Certainly investors voted with their feet, as they staged the biggest retreat from the stock market in 20 years. According to the latest figures from the Investment Management Association, private investors pulled a record £864m from investment funds in November, bigger than the retreat from the crisis of 2008.

But what effect did all these problems actually have on the markets? Well, in Europe, unsurprisingly most markets ended down for the year. The FTSE 100 lost 5.6 percent, whilst Germany’s DAX lost 14.7 percent. Interestingly, Far East and Emerging Markets also suffered, roughly along the lines of Europe. Overall Emerging Markets were down 14.5%, Japan was down 14.1% and Pacific ex Japan lost 10.9% – so simply avoiding European equities was not a solution.

However, as reported in the Guardian, in the US, the Standard & Poor’s 500 index closed 2011 just a fraction of a point below where it started the year. The S&P closed at 1,257.60, compared to 1,257.64 at the end of 2010. So its loss for the year was just 0.04 point. The Dow was up 5.5 percent for the year, whilst the Nasdaq composite index lost 1.8 percent.

So the US is not looking in too bad a shape and there are encouraging trends there as well, with some improvements on the unemployment and housing market fronts. Obviously there is an election later this year so the issues of debt and deficit are likely to be put on hold until 2013, but there are at least glimmers of hope.

Away from equities, bonds did well in 2011 which is somewhat surprising as they usually do badly in times of rising inflation. Long term gilts (over 15 years) returned 24.3%, index-linked gilts returned 15.4% and all gilts on average returned 14.2%. Corporate bonds which are normally riskier than gilts returned 7.1%. Elsewhere, gold returned 25.3%.

Because of this, well diversified investors will have been cushioned from the fall in equities via their holdings of gilts, bonds and other asset classes.

So how do you keep your portfolio ticking over in these difficult times?

Well, firstly, by playing a long-game. As investors in equities know, the whole process is a long-term game, and losses are only crystallised once the funds are eventually sold. So don’t panic – and hold onto your equities.

Secondly, you should ensure your portfolio is diversified. If you have a well-diversified spread across a range of asset classes, it is more than likely that if one area goes down, other asset classes should help provide protection.

Thirdly, you should look to rebalance your portfolio. As 2011 was a fairly volatile time for markets, it is likely that the portfolios of most investors are somewhat skewed, and will need rebalancing to get back in line with their model asset allocation. This might mean selling some gilts or bonds that performed well last year, to get their portfolios back in line.

Fourthly, you should consider a focus on income. Higher yielding stocks tend to outperform low yielding stocks over the long term and can contribute towards total returns if the dividends are reinvested. In fact 2011 was a not a bad year if you invested in good quality, long-term, dividend-paying companies. According to Capita Registrars, 2011 was a record year for dividend pay-outs, with investors in UK companies getting a £67.8bn bonanza – up 19.4% on 2010. Record dividends therefore provided a real bright spot for investors in an otherwise gloomy world.

Finally, if you are still looking to invest but are a little nervous, you should consider “pound cost averaging” – the process where you invest amounts on a regular ongoing basis rather than as a lump sum. This process helps to smooth out your investment returns, as when share prices are low you end up buying more shares – but obviously fewer when the price is high. So when the market is depressed, you benefit by buying more shares, which will be good news when the stock markets rise again.

So the picture for 2012 may still look gloomy but it should be borne in mind that the markets have priced in a good deal of the problems already. Whilst the short-term could remain tough, particularly if something dramatic happens, like Greece defaulting for example, it should be remembered that on a historical price/earnings (P/E) basis, equities are now undervalued. So as mentioned above, holding on for the medium to long term would seem to be the sensible option.

A review of your portfolio also makes sense at a time like this, so if you haven’t done so already, contact your local independent financial adviser, who will be able to help you with an appraisal of your overall financial objectives and strategy.

Chris Flood, MA (Oxon), MBA, is a marketing and management consultant based in Bristol UK. He writes articles on investments and financial planning as well as other subjects. For a review of your investment portfolio, please go to http://www.kelland-gloucester.com/investment-management.asp

Further information about Kellands Gloucester and its services can be found at http://www.kelland-gloucester.com

There is a funny saying I heard today defining economics. It is the science of explaining tomorrow why the predictions you made yesterday didn’t come true.

Well the art and antiques market isn’t necessarily as volatile as some financial sectors, but like all businesses, encounters constantly changing trends. This makes it very difficult to predict what investments will perform better than others.

It seems to me that for many folk, having art and antiques in your investment portfolio can mean different things to different people. At one end of the spectrum there are professional investors who use the services of art investment funds to acquire important and internationally know works of art either on a shared or single ownership basis. Then at the other end, typically, are the average collectors who may simply have a family heirloom hanging on the wall or displayed on a sideboard. For the latter, fashion and investment trends generally are not as important, but it is nevertheless important to understand that whilst you may have thought your cherished collectable was worth thousands, the reality is that it may only be hundreds. Conversely, and thankfully, the opposite can also be true.

So how do you spot these trends as an amateur collector? Well without stating the obvious, quite literally, market research. I’ll give you an example. Three years ago I would buy regularly in Paris at many of the well know markets. Then, in lets say antique bronze sculpture, the trend was clearly defined and extremely strong in art nouveau, art deco and classical periods.

Compare that with today, and in the same market, you’ll find that great quality and unusual sculptures of those periods, have all but disappeared or are simply unviable at the market prices. For great items, dealers are simply holding on to their stock or putting ridiculous price tags on them. Where an unusual deco bronze by an important listed artist would go for $5-7000, today it would be more like $10-20,000. So what was it replaced by? Well, mostly decorative furniture and items from the 50’s era onwards, pieces which in themselves are unique and individual but more utilitarian in nature.

Does this have any correlation with the wider world? Are people choosing to make more of their existing homes? Perhaps given the rise in DIY company and home improvement stocks we could say yes. Then again, maybe these trends are cyclical. In the UK in the early 50’s and 60’s you couldn’t give away the traditional ‘brown’ furniture that graced most Victorian or Edwardian homes. It was all influenced by the context of the era, clean lines, the space race, futuristic. All terms that we so lovingly refer to today as ‘retro’.

What can we glean from all this discourse then? That depends upon whether you are in the market to buy, sell or speculate. For buyers, it pays to buy the best you can afford, that is in the best condition, and preferably by a well know and listed artist.

For sellers, it’s all about research, research, research. Get at least three appraisals for your item or collectable. If it has risen in value by at least fifty percent, then it’s worth selling. Anything under this, and depending upon how you will dispose of the asset, you could be liable to pay up to forty percent in costs and taxes, especially if you go the auction route and so its probably not worth selling at this point. For the professional or amateur speculator, you need to adopt both buyer and seller guidelines. It will take some time to buy well for profit, but with enough research and a little bit of luck, you should have a few success. Just remember all those additional fees, expenses and costs can really build up when its time to sell.

And finally, my top tips for the antiques market. Art deco bronzes; designer and decorative furniture from the fifties, sixties and seventies; pop art; deco furniture; fine watercolour paintings; fine decorative oil paintings; unusual or statement pieces.

Good luck and happy hunting.

Palladium Fine Art is a leading online art and antiques brokerage for the sale and purchase of desirable works of art. We welcome both trade and private clients who wish to sell or buy items and also offer unbeatable transaction rates for our extensive international client list. For a sample page of some of our listed items please visit: http://www.palladiumfineart.com/sculptures/bronze/ Please feel free to explore the rest of the site or email us for more information at: info@palladiumfineart.com

The most popular type of investments that people make are in collective investment schemes. This makes a lot of sense as it reduces risk for the investor.

Collective investments are funds where the monies of a large number of investors are pooled together under professional investment management. The investment manager then acts collectively on their behalf.

The most popular collectives are unit trusts, investment trusts and Open Ended Investment Companies (OEICs). Then there are offshore funds, with-profit funds, commercial property funds, corporate bond funds, exchange traded funds (ETF’s) et alia.

Of course, some people prefer to invest direct. This obviously takes a lot more time for them to do all the research – ideally beyond just reading the financial press. The problem is that, as several independent research studies show, people who invest direct tend to do worse than institutional investors for various reasons, mostly due to their own actions. These include lack of diversification, compulsive trading, buying high, selling low, going by hunches and simply by responding to media and market noise.

The latter often means that such investors end up investing on the basis of past performance. They read about good past performance for a 12 month period and then invest, when there is no certainty that this will lead to better returns the following year.

Financial markets are cyclical and the key to successful investment (as opposed to day trading) is not timing but patience. A buy and hold strategy may not be as sexy and exciting but it seems to work most of the time. On the other hand, becoming addicted to trading does not help in most cases.

A lot of the above behavioural traits that end up causing investor problems stem from over-confidence. In reality, what is required for most individual investors is to get their egos and emotions out of the investment process. One answer is to distance themselves from the daily noise by talking to an independent financial adviser, to help stop them doing things against their own long-term interests. It is quite likely that the financial adviser will recommend collective investments.

The major benefit of collective investments is that they can reduce the risk of investing, by spreading the risk of their investment. The fund manager is able to purchase a far greater number of investments than the individual investor possibly could. Because of this, the possible impact on the collective investment fund caused by one particular investment performing badly is low, as it forms only one small part of a much larger investment portfolio.

Collective funds also provide a higher degree of diversification. For example, if you were looking to invest in UK smaller companies, it would be impractical (in terms of costs and research time) to invest in more than a couple of companies. A fund manager, however, can buy shares in many companies and spread the investment further. The fund managers will also have the in-depth knowledge plus a team of researchers behind them to monitor the sector for new opportunities as well as potential problems.

A further benefit is that fund managers have access to markets and instruments where individual investors don’t have the knowledge, capital or perhaps even the legal right to invest. This includes hedge funds, emerging markets, private equity situations and complex derivatives.

With thousands of collective funds to choose from, the question is how to pick the best funds for you? It is not an easy process, even for professionals. But getting quality financial advice from an independent financial adviser should certainly help you with your overall investment planning process.

Chris Flood, MA (Oxon), MBA, is a marketing and management consultant based in Bristol UK. He writes articles on investments and financial planning as well as other subjects. To discover more about income investing, please go to http://www.kelland-hale.com/collective-investments.asp

Further information about Kellands Hale and its services can be found at http://www.kelland-hale.com/

Understanding investment

Investment can seem like an attractive option for increasing return on your capital, especially when interest rates on savings accounts are so low.

Whether you are looking to invest yourself, or for someone to invest your cash on your behalf, there are several factors you should consider before you begin.

How much can you afford to invest?

It is important to recognise that when you begin investing your money you will introduce an element of risk to your capital. Generally the higher the potential for return the higher the risk to your capital, so don’t be sucked in by high rates but consider carefully how the investment would sit with your attitude to risk.

Before you start investing you should ensure that you finances are in order and that you are not investing with money that you can afford to risk losing. For example, will you be able to pay all your debts easily? Do you have a buffer of savings to fall back on? Many experts recommend that you have the equivalent of at least three months wages to fall back on in case of hard times.

Why are you investing?

Before deciding on the right investment option for you, you should have some sort of financial goal in mind. Are you looking to generate an income from your investment, or simply to increase your capital?

Set a time frame within which you can realistically achieve your financial goals, and decide on how long you are willing to commit your capital in order to achieve your desired returns. This will help you to find the right kind of investment for you. If you have goals in mind, you can easily tell when they do not live up to or exceed your expectations.

What type of investment?

There are four main investment options available-

1) Stocks and shares

2) Investment funds (including Unit trusts, OEICs and tracker funds)

3) Investment trusts

4) Bonds

The right one for you will depend on you attitude to risk. For example bonds tend to be a safer option than investing in stocks and shares, but you will be likely to see lower returns. which option is most suitable for you will also depend on whether you are looking to make a lump sum investment or if you want to invest more regularly in smaller amounts.

Diversification

Investment almost inevitably comes with an element of risk, however by diversifying your investments you can reduce risk. Investing in areas of assets that have little in common means that if one area fail it won’t take your full investment down with it. You can diversify your investments by putting money into different companies, markets, assets or types of investment.

Understanding investment can be complex, and you may want to seek professional advice those who have a greater understanding of the market.

John T Hughes writes for Share Dealing Account, a leading online source of information on share dealing accounts in the UK.