Investment Articles

Should you hold Alternative Investments in your portfolio?

So you’ve decided to reduce your exposure to equities in order to avoid the price volatility that seems to be driven by the latest piece of political rhetoric about national debt or economic growth. You’re no longer seeing the value of your investments rise and fall by considerable margins on a daily basis, and you’re sitting on a nice pile of ’safe’ cash. But you probably also need to find a home for your capital where it will grow at least in line with inflation, hopefully generate some income, whilst sharing little correlation with the performance of equities, bonds and other traded financial instruments.

So now is the time you start to consider alternative investments. but where do you start? Do you buy fine wine, rare stamps, farmland, timber or any other of the plethora of emerging alternative investment asset classes currently being touted as the ‘perfect’ investment?

I suggest that the first place one should look should be to their requirements, really establish the end goals you wish to achieve, and the limits you have in terms of liquidity, asset allocation for your alternative investments (as a % your total portfolio) and risk. From there you can, with enough research, discover which asset class might be the right alternative investment for you.

Let’s look at a case study, and see if we can match the Investor to an alternative investment asset class that offer the performance e and characteristics he or she is searching for.

John has a total pension portfolio of £250,000, held in a flexible Self Invested pension Plan wrapper (SIPP). John chose to move his assets into a SIPP some time ago in order to take more control over decisions affecting his investments, rather than be reliant on a Financial Advisor who can only advise on a couple of asset classes – equities and bonds.

John pulled 50% of his portfolio into cash 12 months ago, with the remainder held in defensive stocks and bonds. He has decided to allocate 10% of his overall pension to non-financial, real-asset alternative investments. He does not need income, and he is prepared to hold an asset for up to 10 years, aiming to capture capital growth. John has self-certified as a Sophisticated Investor, but does not wants to invest in funds, he wants tangible assets.

Taking into account John’s position and requirements, it might be suggested that the following alternatives may be a good starting point for Johns research process:

Fine Wine
Land – Particularly productive agricultural land
Timber Properties
Collectibles

All of these assets display certain characteristics that John might find particularly appealing. Fine wine – when selected and managed by an expert – has been shown to deliver returns of up to 20 per cent per annum. The forward looking story looks good too, as increasing demand from Asia, particularly a growing wealthy class in China is demanding more fine wines that the world can currently produce, and they are prepared to pay increasingly large sums of money as wines get older and rarer as more of a particular year is consumed. This increase in demand for a finite asset is what drives capital growth, and a good wine investment manager might help John to pick and choose a suitable portfolio, or cellar’ of wine and also advise, perhaps on a discretionary basis, when to buy and sell to maximise profit and minimise risk. Also, the performance equities has absolutely no bearing on the investment performance of fine wines, allowing John to collect long-term capital appreciation.

Much the same thing can be said for collectible such as rare stamps, where again demand is driven by increasing rarity and increasing demand from wealthy overseas and domestic collectors and investors.

Agricultural land also benefits from increasing demand, as populations in developing economies grow and incomes rise, they demand more protein (meat), which requires many more resources to produce than their traditional grain-based diets. It takes about 3kg of grain to produce 1 kg of beef, so this adds considerable pressure to current agricultural productivity. At the same time we lose millions of hectares of arable land every year to urbanisation, degradation and climate change, so it is likely that farmland will continue to become more valuable over time, again giving John the long-term capital appreciation, as well as separation from financial markets that he requires. This would also generate income from farm rents, or perhaps even through a joint venture farming agreement that would allow John to share in the profits from harvesting.

Forestry investment may also offer John a potentials alternative. Essentially, purchasing a timber-producing property, through leasehold or freehold, and simply sitting back and watching the trees grow bigger and more valuable each year, a biological process that cannot be interrupted by an economic crisis. The actual price of timber also moves every year, having risen by an annual average of 6% for the past 100 years. This means John capture true growth in its truest sense. A huge number of institutional investors are investing in forestry, including pension funds, university endowments (Harvard and Yale to name but two) and hedge funds, all of which are investing in forestry for long-term capital growth. Again, the same principles of supply and demand hold true for forestry. We require more timber as the enormous populations of China and India enter into their most aggressive and resource-intensive phase of growth, requiring more timber for paper, biomass and construction, whilst at the same time natural forests are now protected, creating huge demand for sustainable sourced plantation timber.

In summary, there are a range of alternative investments for John to consider, and really the best thing for him to do would be to conduct his own research in to each subject, and speak to a range of Advisors with specific experience of each individual asset class and choose to work with a professional that can substitute a good track record of investment selection/management for the options he chooses. So, speak to a few fine wine brokers and measure their pitch against the knowledge gained from researching the asset class. Speak to a forestry investment advisor and agriculture investment advisor, and choose to work with someone that knows their sector, and has delivered success for Clients previously. Heck, why not ask to speak to any potential investment partner’s previous clients; I’m sure that any Advisor worth his salt would be proud to have a Client sing their praises.

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

The primary measure of farmland investment performance in the United States is the National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Returns Index. The index provides investors with a measure of the investment performance of a large pool of individual agricultural properties acquired in the private market for investment purposes. According to the index, US farmland returned 8.6% in 2010, and 5.85% to quarter 3 in 2011.

Regional U.S. farmland growth figures vary from state to state. A new report by the Federal Reserve Bank of Kansas City showed a 12.6% increase in mountain states farmland values over 2011.

The Minneapolis Federal Reserve Bank District reported farmland values as of second quarter 2011 up 17% from the same period a year ago, while the Kansas City District reports farmland prices up 20%.

Nebraska has seen one of the largest increases, with non-irrigated land up 30%. Oklahoma ranchland, suffering from a prolonged drought, saw values up just 6.4%, with what increase there was driven by oil and gas exploration.

There has been some concern amongst the agricultural community in the United States that land values have spiralled out of control, with demand for assets fuelled almost entirely by Investors seeking to diversify out of the stock market and into tangible assets. Don McCabe, an accredited farm manager with Soy Capital Ag Services said recently at an investment forum that, about 60% of all farmland is being purchased by active operators, with 15% purchased by nonlocal investors, 13% by local area investors, 7% by institutions and investment groups and 5% by other entities.

In Canada, Farm Credit Canada (FCC) monitors the value of a basket of 245 benchmark farm properties every six months. On average, Canadian farmland increased 7.4% in the first six months of 2011, and 9.5% for the year ending June 2011. Saskatchewan farmland led the nation in farmland price increases, up 11.6% in the six months ending in June, and up 14.3% year on year.

New York-based TIAA-CREF, the largest U.S. pension manager for teachers and academic researchers with $469 billion of assets said in October 2011 that farmland investments may return 8% to 12% per year as global food demand increases. The company has $2.5 billion in farmland investment assets and owns about 600,000 hectares.

Investors considering farmland investment should consult with an experienced Advisor in order to plan the most relevant and effective farmland investment strategy, identify suitable opportunities and identify and mitigate risk.

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

The investment performance of the agriculture sector can be monitored via a number of devices and measures that track the performance of traditional investment assets such as quoted equities, as well as a range of measures that reflect price movements in alternative investment assets within the agriculture space such as farmland.

In reality, the agriculture sector as a whole relies on a combination of demand for its products, weighed against agricultural productivity. When demand for food, livestock feed and biofuels is high then soft-commodity prices rise, as is also the case when poor productivity creates the same widening of the gap between supply and demand. On the other hand, if demand falls back, or bumper harvests create an oversupply of produce, prices fall.

If one is able to gain an understanding of current productivity and demand dynamics, then one is best able to predict the true performance of the sector as a whole.

The performance of agricultural equities alone – as measured by agricultural indices – does not truly reflect the state of fundamentals that support the sector. In many cases, individual issues that affect specific companies can either boost or lessen demand for the stock resulting in movement in the stock price regardless of the performance of the sector as a whole.

Indeed, many consider that the most efficient method of capturing financial gains resultant of the boom in demand for commodities from a population that is growing exponentially is to acquire farmland as an investment. The value of farmland is driven at the most fundamental level by the net revenue earning capability of the individual asset in question. As an example; a one hectare lot capable of generating a net annual income after costs of £1,000, will be worth more to a Farmer than a similar plot capable of earning only £500.

Farmland values are recorded by different indices in different regions. In the U.S. the National Council of Real Estate Investment Fiduciaries (NCREIF) records the quarterly investment performance of farmland. In the UK the Land Registry offers the most accurate picture, although anecdotal evidence from estate agents such as Knight Frank offer some insight, although on a very broad, national basis.

Agricultural equity indices include Standard and Poors GSCI Agriculture Index; S-Network ITG Agriculture Index; Dow Jones-UBS Commodity Index and Société Générale Index Global Agriculture, all of which provide a different viewpoint as they measure a different set of equities or commodities and use different weightings.

Overall, agriculture investments can best be assessed individually, and conclusions drawn as to the potential for each project as a standalone entity, be it an equity investments or acquisition of tangible assets. Investing in any business should not be simply because it operates in a particular sector, farmland should not just be bought simply for its agricultural status, and alternative investments are not going to be profitable just because they are alternative.

DGC Asset Management are an alternative investment consultancy providing Investors with research, due diligence and select opportunities to participate in the acquisition and development of productive, income producing agricultural property and renewable energy assets.

For traders of financial markets, “timing is (almost) everything.” They need all the tools available to gain an edge in perhaps the most difficult of all market tasks: trading.

Yet a number of people associated with financial markets will not be interested in short-term trading. It does not suit their temperament or life style. There are a number of tools associated with these market timing studies that can be invaluable for investors too. Therefore, let’s refine this article into three categories of market participants, according to the strategies involving different cycles and different time frames for chart analysis. The reason for making this distinction is because investors and traders will use different technical studies and chart patterns to determine a favorable point to enter and exit into a position.

Long-Term Investor

From a cycles’ perspective, a long-term investor is one who will create an investment strategy with the four-year cycle as the central focus. That means the 4-year cycle will be used in tandem with a longer-term cycle, such as an 18-year cycle, a cycle that is “above” (longer than) the time frame of the 4-year. Additionally the investor will use the subcycles or phases that unfold within the 4-year cycle, as the next cycle of a lower degree. That will involve the two- or three-phase classical breakdown of the 4-year cycle, which may include two 23-month cycles (with a usual range of 19-27 months), and/or three 15.33-month cycles, with a range that varies according to whether it is the first, second, or third phase. As outlined in Volume 1, the mean average of a 46-month cycle would be 15.33 months. But historical studies show that the first phase has a mean cycle length of 16.5 months with a normal range of 13-20 months. The last phase, however, is shorter, with a mean cycle length of only 14.3 months, with a very wide range of 8-23 months. Because it is the last phase of a longer-term cycle, it is not surprising that 54% of the historical cases of this third phase occurred outside the “normal” range of 13-20 months that were observed in the first phase.

In my own practice, I use the 18-year cycle as the “greater cycle” containing four or five 4-year cycle phases. In other words, historically there are usually 4 or 5 four-year cycles within the greater 18-year cycle. There has been at least one instance of 6 four-cycle phases within an 18-year cycle (see Table 1). The “lesser degree” cycles I use in tandem with the 4-year cycle are the 2- and 3-phase subcycles within the 4-year cycle. These are the 23-month and 15.33-month subcycles discussed previously. I will also use the 50-week cycle to help time a long-term entry or exit point. As demonstrated in Volume 1 of the “Stock Market Timing” series, there may be anywhere from three to five 50-week cycle phases within a 4-year cycle. Half of the time (50%) the 4-year cycle will contain four 50-week cycles. The other 50% of the time it will likely contain three or five 50-week cycle phases. Thus one starts with the idea that a 4-year cycle will contain four 50-week cycles, but at the same time be aware that it might contract to include only three, or expand to include as many as five 50-week cycles. The point to understand here is that a long-term investor who is applying these methods to enhance investment performance, will use a 4-year cycle, and tie it in with at least one longer-term cycle and one shorter-term cycle.

The long-term investor will also examine charts of at least three different time frames. The primary time frame to be used for analysis might be the monthly chart. Above that, perhaps he may tie it in with the yearly or quarterly charts. Below that, he may tie in the monthly studies with the weekly and maybe also the daily charts. The point is that he wants to invest in the direction of what his monthly charts are telling him. But he wants to make sure this conforms to the trend direction suggested by the yearly or quarterly charts and their technical studies. He then wants to make sure that the weekly chart is at a point of reversal, and ready to move into the direction of both the monthly and longer-term charts.

Intermediate-Term Investor

In actual practice, quarterly and yearly charts are not that practical for investment purposes. An investor can do just fine by concentrating on the weekly and monthly charts, and then maybe using the daily chart to fine tune entry and exit points. A distinction may be made between a “long-term investor” and “intermediate-term investor.” An intermediate-term investor, in this case, may use the monthly, weekly, and daily charts for applying technical studies in the pursuit of optimal investment entry and exit points. At the same time, he may use the 50-week cycle as his primary frame of reference, and tie it in with the 4-year cycle and its phases (a level above the 50-week cycle), and the primary cycle (one level below the 50-week cycle). This type of investor may be most comfortable holding a position for several months, and maybe even 1-3 years.

Position Trader, or “Trader”

The term “position trader” will refer to one who intends to be in a position less than one year but usually at least two weeks. This trader will primarily be focused upon the daily chart. But in assessing an entry or exit point, he will tie this in with the weekly chart (one time frame above), and quite possibly an intraday chart (one time frame below the daily chart), such as a 60- or 30-minute type. In reality, it seems that most position traders are not concerned about intraday charts. They use mostly daily and weekly charts, and perhaps some will use monthly charts, just as investors will.

In terms of cycles, this type of market participant would be advised to use the primary cycle as the central point of analysis, and combine it with both the 50-week longer-term cycle (one level above the primary), and the major and/or half-primary cycle phases within the primary cycle (one level below the primary). If entering the first primary cycle within the greater 50-week cycle, the trader may elect to hold onto this position for several months. If entering the final primary cycle phase of the greater 50-week cycle, he may elect to hold onto the position for only 2-8 weeks.

Short-Term Trader

Most professional traders are short-term or even aggressive traders. Their basic goal is to enter a trade that – according to their studies – has maximum profit potential with minimal market exposure. Their average duration in a trade may range from one day to three weeks, sometimes more.

The short-term trader will use the same time frame charts as the position trader. But he will tie in different multiple cycles in choosing his entry and exit points. That is, the daily chart will likely be the primary chart for reference. Against that chart, he will integrate studies from the weekly chart (one level above) and perhaps a 30- or 60-minute chart (one level below the daily). He wants to trade in the direction of the trend indicated on the weekly chart. If the weekly chart studies suggest rising prices, then he wants to enter the market when the daily chart signals are bottoming and exhibiting signals that it is ready to turn up. He will then use the 60- or 30-minute charts to fine tune his entry point.

In terms of cycle studies, the short-term trader may use the 6-week major cycle as the central point of focus. The level above the major cycle to use in this endeavor would be the 18-week primary cycle, and the cycle to use on the next lower level would be the 2-4 week trading cycle, or even the 4-9 day alpha-beta cycles. If the primary cycle is in its early stages, the short-term trader will look to buy on any corrective decline to a major or trading cycle trough. He may use the alpha and beta cycles to help him make this decision.

Aggressive Short-Term Traders

In my daily and weekly market reports, parameters are provided for both “position traders” and “short-term aggressive traders.” These suggestions for aggressive traders are for those willing to go against the trend of the primary cycle. Or, in some cases, it will refer to those who wish to be in a trade for perhaps only 1-4 days on average.

An aggressive short-term trader is going to use a host of intraday charts to find the right technical set up for entry and exit. He may be most focused upon a 30- or 60-minute bar chart. The next level up to tie his analysis in with may be the daily chart. He should always try to trade in the direction of the daily chart, except when he believes the daily chart is about to reverse. Because he is willing to “bottom pick” or “pick the top” of a move before the reversal is confirmed, he is an aggressive short-term trader. He is picking the top or bottom of a move before it has actually reversed. He understands that the sharpest price moves in the shortest amount of time occur when the market reverses its trend and starts a counter-trend move. This is especially true in bull markets when prices are making a crest. The decline is usually sharp and vicious at the end of the rally to the cycle’s crest. However, the decline is also brief in comparison to how long it took to reach the crest. That is why the most successful traders are willing to sell short at certain points in a bull market. Investors would never think of such an unconventional and risky approach. But aggressive short-term (and professional) traders know that the greater the risk, the greater the profit potential as well.

Below the 30- or 60-minute chart, this aggressive trader may use a 5- or even 1-minute chart to fine tune entry-exit points, and maybe even a “tick chart,” which records each and every trade as it is being made. This trader studies the technical signals of these very short-term charts, and waits until they are also ready to turn against the trend of the daily chart, as well as the 30- and/or 60-minute charts.

There are no three cycles to tie in with one another for this type of aggressive speculator, unless one uses intraday cycles, like 50-minute, or 3-hour cycles, which are not within the scope of this book. However, an aggressive short-term trader may use the fast-moving solar-lunar phases, within the field of geocosmic studies, to help determine days when 4% or greater reversals, lasting 1-4 days, are most likely. The Sun-Moon combination changes every 2-3 days, and many of these combinations have very high historical correlations to 4% or greater price reversals in various stock indices. These studies were reported in Volume 4 of this Stock Market Timing series, titled: “Solar-Lunar Correlations to Short-Term Reversals.” For the aggressive short-term trader, the studies in this book are invaluable for knowing when to enter and exit a 1-4 day trade that has a higher than normal probability of success, assuming the very short-term technical studies are set up properly. Once again, the primary purpose of this book is to know how to identify such a compatible technical set up.

Summary

The importance of using multiple time frames and multiple cycles to establish a successful trading plan cannot be underestimated. It is the most important factor in determining the trend. It is only through an understanding of where the market is in terms of its trend that one can consistently realize profitable trades or investments. But trend means different things to different people. It means different things to a cycles’ analyst too. The trend to a short-term trader may be completely opposite the trend to a long-term investor. The key to understanding trend is to focus on a particular time frame or cycle, and to tie it into a time frame or cycle that is “above” that level, and also one that is “below” that level.

The idea is to first of all determine when the “up one level” chart or cycle is in a clearly defined trend. Then patiently wait for the next lower time frame or cycle to finish a contra trend move (i.e. retracement) and indicate it is ready to begin a thrust in the direction of the “up one level” chart or cycle. When it appears the lesser cycle is ready to move in the direction of the greater cycle trend, then time the entry (or exit) to coincide with the “below one level” chart entering an oversold (if buying) or overbought (if selling) technical pattern. The central and “below one level” time frames or cycles should also be in a time band when a cyclical trough (if buying) or crest (if selling) is due. It should also be in a time band when appropriate geocosmic signatures correlating with a reversal are present. This concept will be repeated over and over again, for these are the steps within the methodology of this series that make the market timing studies work. These are the steps that provide the structure in which market timing can be a very valuable tool to the success of any investor or trader, regardless of one’s market temperament. But as with all successful endeavors in life, it requires work. It requires planning and proper analysis, and the correct implementation of these rules, plus perhaps a few of the reader’s own. But the rewards are worth it, and it is an exciting process.

The following list represents suggested time frames and cycles to use in this endeavor for each type of market participant. The first time frame or cycle listed in each group represents the next “higher level” type to use. The middle time frame given will be highlighted in bold. It represents the suggested primary time frame to use for trading or investing. The last time frame given represents the suggested “lower level” type to use to fine tune one’s optimal entry and exit point for maximum profit potential.

Buy and Hold Long-Term Investor (6+ years)

Cycle:72- or 90-year, 18-year, 4-year
Charts:Yearly, monthly, weekly – concerned with percentages.

Long Term Investor (2+ years buy and hold):

Cycle:18-year, 4-year, 50-week
Charts:Yearly, monthly, weekly

Investor (1-3 year position):

Cycle:4-year,50-week, primary
Charts:Monthly, weekly, daily

Position Trader (2 weeks – less than one year)

Cycle:50-week, primary, half-primary or major
Charts:Weekly, Daily, 30- or 60-minute

Short-Term Trader (3 days – 3 weeks, sometimes as long as 6 weeks)

Cycle:Primary, major, trading
Charts:Daily, 30- or 60-minutes, 5- or 15 minutes

Aggressive Short-Term Trader (1-4 days, sometimes longer, sometimes shorter)

Cycle: None. This speculator looks for contra-trend moves based on technical set ups, but may use Sun-Moon studies as a leading indicator.
Charts: Daily and perhaps 60-minutes, 30-minutes, 5-minute or 1-minute, and even tick charts.

Determine which of these best fits your own psychological temperament and life style. It is possible to utilize more than one of these types. It is possible to utilize all of these types for various purposes and at various times. I do. But make the effort to define which approach you are taking with each investment, with each trade. Once that is determined, apply the suggested time frames to that type of investment or trade for the best and most consistent results.

If recent stock market activity does nothing more, it shows us that volatility continues to be the name of the game when it comes to investing, as £120 billion is wiped off the value of UK shares alone in the course of four days.

Investors have traditionally employed a number of strategies such as asset allocation and diversification in an effort to reduce risk. But more recently than ever before, the big investment players such as Pension Funds, Hedge Funds and Sovereign Wealth Funds are turning to alternative investments to generate returns that are not dependent on the performance of traditional assets such as equities and bonds.

A recent report by Morningstar and Barron’s; the 2010 Alternative Investment Survey of U.S. Institutions and Financial Advisers, has revealed that institutional investors have allocated more than 25% of their assets under management to alternative investments.

Barclay Capital also recently stated that pension funds have added substantially to their farmland and commodity holdings, with institutional investors expected to hold up to $1 trillion in agricultural assets by 2015, way up from a mere $6 billion held in this asset class ten years ago.

Both institutional and private investors are hoping to generate superior returns in order to boost the performance of their portfolios without dramatically altering the over risk profile, and many see farmland and timber as ideal assets in the current economic climate.

Forestry investments generate profits from the production and sale of timber, so investment returns rely on the biological growth of trees, rather than the performance of financial assets. And with farmland, growth in demand for food, feed and fuel is pushing up the price of food, which bolsters farmland incomes and in turn makes productive land a more valuable asset, capturing capital growth.

There is most certainly an appetite for simple, transparent and tangible assets that are unlikely to depreciate as they are supported by solid long term fundamentals nod remain in high demand, and where investment performance is not dependent upon the decisions and choices of Fund Managers or economic or political news. Many investors consider that owning assets within the food, energy, water and commodity markets are likely to prove more profitable than investing in companies as demand for these essential commodities will continue to grow as the population expands at the fastest pace in history.

China recently invested $1.5 billion dollars into a farmland development project in Argentina, bringing investment capital for infrastructure, and technical expertise in large-scale irrigation, in exchange for long-term leases of farmland from the Argentine Government virtually rent free.

Swedish and American Pension Funds have recently committed hundreds of millions of dollar in investment capital to farmland purchases in order to capture inflation in the capital value of the asset, whilst also generating income streams, useful for meeting commitments in the short term to member of their schemes.

So alternative investments may be the order of the day, but barriers to entry do exist for smaller investors, and those considering such investments should seek advice form experienced Consultants.

David Garner is Partner at boutique alternative investment boutique DGC Asset Management Limited.

Download the agriculture investment and forestry investment reports at: http://www.dgcassetmanagement.com

Individually Managed Accounts (IMAs) and Separately Managed Accounts (SMAs) both offer investors a highly transparent managed share portfolio while avoiding the tax distortions that come with pooled investment vehicles such as managed funds.

However, there are some important differences between individually and separately managed accounts and while they may sound very similar, these differences can have a significant impact on investment performance, suitability, and tax effectiveness.

In General, Separately Managed Accounts are a good alternative to managed funds for many investors, while investors with $1 million or more, are likely to find the features of an IMA more compelling.

Key differences between the two types of managed accounts rests in their approach to building an investment portfolio.

SMAs are constructed with a ‘model portfolio’ where each investor receives precisely the same portfolio, based on a template created by the fund manager. IMAs however, are constructed individually for each investor, although each account will share some common holdings. These two approaches have some important differences:

* Investors in a SMA may buy stocks that have already enjoyed most of their returns, but remain in the model portfolio to avoid realising capital gains tax. IMA investors however will receive a portfolio that is assembled incrementally, as attractive opportunities arise.

* For the same reason, new investors in Separately Managed Accounts will receive a larger position in stocks that have already performed well, while IMA investors are likely to receive larger holdings in stocks the investment manager believes will perform well in future.

* IMAs also provide the ability to tailor the portfolio to the investor’s circumstances. For instance, an IMA manager may place more weight on generating franked dividends for a SMSF, while long term capital appreciation could be more valuable for an investor with a high tax rate. These differences in investment management help produce good after tax results for each investor. Since every investor in a SMA receives the same portfolio, the Separately Managed Account manager cannot factor individual considerations into their management.

* Both structures will allow the transfer an existing portfolio, with the IMA providing some additional flexibility and tax advantages. When importing an existing portfolio into a SMA, only those shares contained in the model portfolio will be retained and only to the proportion held in the model portfolio. Therefore, investors may still realise capital gains when entering an SMA. Conversely, a diligent IMA manager will adapt the existing portfolio over time and with consideration to tax events.

* For investors wishing to exclude individual stocks or sectors, an Individually Managed Account manager will hold alternative positions, while the SMA will generally hold cash in lieu of the excluded positions. This can have a significant impact on the portfolio’s overall returns.

In executing trades, SMA investors will generally receive ‘at market’ prices on their transactions, while an IMA manager may attempt to get best execution and/or exercise discretion over the timing of buys and sells.

Service levels are also different, with Separately Managed Account investors receiving a service akin to a managed fund. while Individually Managed Account investors have ongoing access to the fund manager responsible for their portfolio and will likely receive personalised reporting.

PPM

We all use timber on a daily basis, in our houses, our furniture, our floors and our roofing, and institutional investors, hedge funds and pension funds have been investing in timber as a long-term growth asset and inflation hedge for decades. However, as more investors discover the little-known fact that timber investments have generally outperformed stocks, bonds, and commodities over the long run, there are now many opportunities for the smaller investor to participate in this alternative asset class.

The demand for timber is growing in line with an ever-expanding population, as the human race multiplies in number we require more timber for construction, yet at the same time, fundamental limits to the supply of natural forests limit the amount of timber we can grow and harvest for our own use.

Deforestation has destroyed 1/5th of the world’s forests since 1950, and new global legislation is in place to protect the forests that remain as they play a vital role in carbon sequestration and the ecosystem.

This imbalance between supply and demand creates an outstanding opportunity for investors to acquire assets in short supply and profit from undeniable fundamental trends of population growth and resource scarcity.

Investment Performance
The vast majority of return on investment generated by timber is derived from the biological growth in size of the timber source, from seedling to sapling to fully fledged tree. On average, a single tree’s volume of wood will increase by between 2% and 8% every year depending on species, age and climate. On a very basic level, this gives the tree owner more timber to sell as time passes, and hence generates a greater return in the long-term.

Aside from this basic observation there is more to consider, as trees yield a greater sale price when they grow into bigger product classes. As an example, a small tree would only be suitable for paper products or biomass for fuel, where a larger tree can be harvested for sawn-timber which will fetch dramatically higher prices per tonne and can be used for products such as plywood or telephone poles.

A study by Professor John Caulfield of the University of Georgia found that biological growth counts for more than 60% of total financial returns, whilst increases in the price of timber, and capital appreciation of the land account for the remainder of returns generated from a timber plantation.

This goes to show that it is an effective strategy to lease land on which to grow timber, as well as purchase outright as only 6% of profits are derived from capital appreciation in the value of the land. This also shows that fluctuations in the price per cubic metre or tonne of timber have limited influence on the overall performance of timber investments. The majority of return is generated from the growth in the size of the tree itself.

The standard benchmark for timber is The NCREIF Timberland Index, which increased 18.4% in 2007, versus a 5.5% rise for the S&P 500. In the long-term, the Timberland Index has outperformed all major asset classes including, large-cap stocks, International equities and corporate bonds.

Whilst small-cap equities have outperformed timber in the long-term, after factoring in risk (as reflected in the Sharpe Ratio), timber has exhibited the highest risk-adjusted returns of any major asset class. When compared to the S&P 500, timber has displayed a low risk characteristic. Since its 1987 inception, the NCREIF Timberland Index has fallen in only one year: – 5.25% in 2001, at the same time, the S&P 500 has fallen four times, including -22.10% in 2002.

One of the main reasons investors, especially large institutional investors, turn to timber, is the fact that the asset displays low to zero correlation with other assets, especially those linked to financial markets. It has been demonstrated over a long period of time that adding timber to a portfolio of investments has the effect of improving overall risk-adjusted returns. This low correlation reflects
the fact that the primary driver of returns-biological growth-is unaffected by economic cycles.

Institutional Investor in Timber

In 2007, Jeremy Grantham, Chairman of Grantham Mayo and Van Otterloo, a Boston-based firm that oversees $60bn in assets, predicted the impending financial crisis, one of very few Investment Managers to do so.

At a conference in June 2007 Mr. Grantham announced that equities were overpriced to such an extent that the market was as risky as he has ever seen it. “The next few calendar years,” he warned, “look like a black hole as overpriced markets, dangerous leverage and a gigantic hedge-fund business collide with the house-building phase of the US presidential cycle, plus the contraction phase of a long interest cycle.” His prediction? He said he could see the Standard & Poor’s index falling 38% over the next two years.

He went on to say that Investors should allocate capital to timber investments as a stable and predictable asset with a low risk profile where returns are generated outside of any market. It is the only asset class in existence that has gone up in three out of the four major market collapses of the 20th century. It
should be noted that Jeremy Grantham holds 20% of his personal investment portfolio in timber assets.

Institutional investors have recognised the benefits of timber investments for some time, Pension funds such as Calpers, led the way in the 1980s, however it was the big university endowment funds such as Harvard and Yale that saw the true potential and invested heavily in a move to diversify their portfolios globally. In 2009 the Harvard Endowment Fund invested $500m in forestry and carbon credits in New Zealand.

PKA, the DKK 114bn (€15.4 bn) Danish collective pension scheme for employees in the public social and health sectors, raised its forestry investments to about €335m by the end of 2007, raising its commitment to timber from 1.5 to 2% of total assets.

ABP, the €211bn Dutch pension fund made its first timber investment in 2007 with a $60m (€41m) allocation to the Global Solidarity Forest Fund (GSFF), which will develop three sustainable forestry projects in the Republic of Mozambique, in south-eastern Africa, and Angola.

Both the £1.5bn (€2.1bn) UK Environment Agency pension fund, the £31bn Universities superannuation Scheme and the £3.6bn London Pension Fund Authority are reviewing whether to inject money into forestry investments.

European Investment Bank (EIB), the €26.3bn Ilmarinen Mutual Pension Insurance Company and seven medium-sized Finnish pension funds have all invested in timber via the Dasos Timberland Fund.

Massachusetts Pension Reserves Investment Management Board (Mass PRIM) decided to make a $500 million timber investment just three years after selling a $700 million section of its timber portfolio.

More recently there has been a spate of new timber investment by major asset managers, not least the $1 billion takeover of Canadian timber business TimberWest by two large asset management firms acting on behalf of institutional pension funds.

At the time of writing this report in December 2010, there looms the prospect of a second round of quantitative easing (QE2) by both the US Federal reserve and possibly the Bank of England too.

QE2 should help to shore up the US housing market. Construction accounts for roughly 70% of the total value of timber resources and as the US property market recovers, inflation will rise as houses increase in price once more.

One such asset is timber which has a proven history as an excellent hedge against rising prices.

The US housing market (construction accounts for roughly 70% of the total value of timber resources and QE2 should help to sure up the US housing market. As the US property market recovers, inflation will rise. As house increase in price once more.

Timber as an asset class presents unique characteristics. The performance of forestry assets is driven primarily by the natural growth rate of trees independently from the macro economy. As a tree matures its size and usefulness increases and subsequently so does the price. In a difficult economic climate timber companies have no need to discount their crops because if simply left to grow the value of the asset only increases.

This makes timber much less volatile in the long run and more resilient in difficult times compared to most other commodities as the investment is backed by the underlying real asset value of timber. Timber is recognized as an inflation hedge as trees grow in size, and therefore value each year. If inflation were 3% and your trees grow in size (value) by 5%, you have grown your wealth in real terms ahead of inflation.

As the rate of inflation increases, so to do timber prices, as well as the volume of timber you have to sell. This creates a double-buffer for investors and makes timber investment an ideal balancing tool to diversify portfolios.

There are a number of different opportunities for retails investors to participate in timber investment in various forms. In this section we will focus on direct investment within commercial timber plantations, although the reader should be aware that there are other, market-linked opportunities such as forestry funds and listed timber companies.

The basic premise of all of the investment offerings from various companies that we have researched remains relatively static,in that investors are usually invited to purchase either a lease on a plot of land within a commercial timber plantation, therefore owning cropping rights to any timber produced within their plot or woodlot. An alternative to this is where investors are offered direct ownership of a fixed number of trees.

The cost for plots varies from project to project between £5,000 (GBP) to £22,500 (GBP) depending on the size, location and species of timber being grown.

Sometimes, annual fees are required from the investor to service the costs of on-site management, and of course the occasional thinning that is always required within a commercial plantation.

With other projects, sufficient management fees for the period of time up to the first harvest are paid up-front by the vendor and held in escrow, fees for future harvests are deducted from the revenue of each preceding harvest, therefore creating an investment where no further cash input is required from the investor.

With some projects the land is leased by the forestry company and investors enjoy a sub-lease, with others the land is owned outright by the forestry business and investors have a direct lease and the land held in trust in favour of investors until their lease expires, this mitigates the risk of the forestry business ceasing to trade in the future and the investor left with a sub-lease with a business that no longer exists.

Download your free guide to timber investments and forestry investments at http://www.dgcassetmanagement.com

If you’ve chosen to manage your own money you’ve taken on one of the most important tasks which will ever befall you in life. Apart from the love of our families, and perhaps our careers, the next most important thing is how we manage our money. That is, whether that little bit you’ve set aside grows, stagnates, or worse, whether it shrivels and dies. This will depend on the quality of the decisions you make now and into the future.

Of course if we manage our money better, then perhaps we’ll be in a position to shorten our careers, or not have to rely solely on them to produce our income allowing us to spend more time with our families. I certainly know what I’d rather be doing…working 9-to-5 or playing with my kids…

Yet unfortunately most people do not put anywhere near as much time, effort or consideration into their investing as they do into their families and careers. Too many adopt a “She’ll be right mate” approach with their investing. It takes a very distant back seat to the rest of their life, yet in so many ways it’s just as important as forging a successful career. Get your investing right and there’ll be plenty more to leave to your loved ones when you finally check out!

In my seminars and workshops I’ll often push people on their investing approach and try to get to the heart of just how much time and effort they’re actually putting into their investing. The results are uncannily consistent: Not enough! Most investors simply have no comprehension on the work required to be successful in the markets. They truly believe that they have a sound and credible investing plan but in actual fact their methodology falls far short of one.

“What I do is find blue chip stocks with a good story and hold them for the long run. The market goes up in the long run, how hard can it be?” This has shown to be an extremely faulty plan (or not really one at all) over the last few years as markets have melted down.

Blue chip stocks have shown to be no more reliable or safer than their more speculative counterparts and indeed, many have simply vanished. There’s far more to successful investing than buying so called blue chip stocks and hoping for the best.

Unfortunately most investors can be described as ‘hobby’ investors. They’re part-timers. They don’t put the same time, effort, consideration and professionalism normally reserved for their careers as they do into their investing.

Professional career investors however will without fail possess a well thought out, researched, tested and documented approach. This is more commonly referred to as a “trading plan”. It makes sense that every successful individual or business achieved that success through excellent planning and execution of a well thought out plan – and certainly not by luck. Investing is, and should be no different. Luck has nothing to do with it.

Why is it then that so many investors come into this game with no plan whatsoever, or a plan of attack which can only be described as “flimsy”? They’re simply hoping to get lucky!

I see far more investors who are not achieving their full potential, are not even aware of what this is, than those who are – hands down. I’m not sure that there’s any way to sugar coat this – but most investors I meet are lazy and complacent. Unfortunately for them, they just don’t realise how lazy and complacent they actually are!

Most truly believe that they’re doing a bang-up job. Then I point out that the goal is not to just make money, but to beat the market. Sure it’s great to make a 10% return over the course of a year. But what if the market went up 20%? If this is the case then you’ve made money, but lost significant opportunity. You would have been better off by simply giving your money to an index fund manager, not having any stress, not putting in any effort, and just matching the market.

Most investors I talk to realise that what they thought was a good performance is actually costing them thousands and thousands in missed opportunity! A dollar not earned today because of laziness and complacency is going to cost you $6.72 in spendable capital in 20 years at a compound rate of 10% per annum. That might not sound like much, but extrapolate it out over every investing dollar you’ve flittered away over years and you’ll get some idea of just how important it is to get your investing right today.

If every successful individual and company achieved such success through meticulous planning and execution, why do so many investors put their hard earned money at risk in the market without the same application? Can you afford not to have a trading plan? Can you afford to be lazy and complacent and treat your investing like a hobby? Are you going to have a well defined, researched, tested and proven investing plan or are you going to leave it to chance?

The major part of being professional is executing a well documented, researched, tested and proven investing plan. Unfortunately however, not only do many not have such a plan, they overestimate the amount of effort they’re applying to their investing. Rather than treating their investing like a profession, it’s relegated to ‘hobby’ status.

I’m going to use an analogy to illustrate this concept. It’s one I’ve been using for quite a while at my workshops to prove the point of just how hard and how much time and effort is required to be truly successful in the markets. You’ll understand what I mean in a second, but funnily enough this analogy used to work well until quite recently. It’s now the source of great amusement to my students!

I’m a keen weekend warrior golfer. I say warrior because you can often find me conquering the shrubs and bushes at a local golf course near you on a Saturday morning. No shrub is too thick, and no forest too impenetrable in my quest to find my ball after a wayward tee shot.

Sure, I like golf, but I’d hardly call it my profession. It will only at best be a hobby for me. I’ve got precious little time to practice my game and therefore most of my practice occurs in actual game-time when I really should be reaping the rewards of my efforts during the week. My lack of time in seeking golfing perfection is of course a big issue, but apart from my near phone number handicap, I would have to say that my biggest handicap is probably my lack of talent. I really don’t have much of it when it comes to yielding a club…

I’d like to say that my excuse for why I’m so lousy at golf is that I wasn’t born with the innate genius of Tiger Woods (you might be getting some idea of the mirth this analogy now causes in my workshops!).

However, one could argue whether Tiger was born with his talent and that’s why he’s so good, or whether it was an acquired ability? We are of course talking about Tiger’s golfing prowess and no other innate ability to score (ok, that’s the first and last joke I’ll make about that!).

How did Tiger get so good? Was he born with it or did he work really hard to acquire his talent? Well, I think his talent has more to do with the fact that he started playing golf as soon as he could walk and hold a club. He had an excellent coach and mentor in his father, he has worked almost religiously on his game seeking out the best professionals to show him where he’s going right and going wrong. Then there’s the practice. Tiger’s a bit of a hero of mine (golfing only) and I’ve seen a few documentaries on him. I’ve seen him practise rain, hail or shine for 8 hours a day. He’ll chip 300 balls out of a bunker, step one metre back, and chip another 300 balls, and so on.

I can only conclude that the secret to Tiger’s success isn’t actually a secret at all: It’s hard bloody work! Time spent practicing, which gives you experience, which gives you confidence, which gives you…you guessed it…talent! Who would have thought it would be so easy (hard!)?

It’s not enough to say that practice makes you perfect however. That’s just something our teachers told us at school to make us feel better about sucking at whatever it was we were doing. It’s more accurate to say that perfect practice makes for perfect application.

You see, there’s a big difference between any old practice and perfect practice. Anyone can grab a set of golf clubs and bash away at 300 balls in a bunker, take a step back and do it again, and again, and again until the cows come home. Believe me, I have done this in the past and it certainly hasn’t made me a Tiger Woods.

Every shot tiger takes, both in practice and in a tournament situation, is recorded and studied. Not just by Tiger, but also those who he’s employed to coach him. Nothing gets taken for granted, and nothing gets missed. By constantly having an action, feedback, and adjustment loop, comes improvement. Continue this and you could improve to the point where you turn your hobby into a profession.

This is really the difference between me and Tiger. I don’t have a golfing coach so I have no idea that I’m doing wrong. Even if I did, because I don’t have an experienced coach I have no idea how to fix it. In my defence however, I really have no intention to quit my day job and start playing golf for a living. I’m never going to have enough drive and discipline to devote the time, resources, and importantly money required to invest in getting myself to that level. If I contribute none of these things then I should not be surprised that my hobby stays just that – something which gives me pleasure from time to time, but which ultimately costs me money.

What’s this got to do with our investing? Well clearly there are plenty of traits which Tiger applies to his golf to achieve his returns that we need to bring to our investing approach.

Are we going to treat our investing like a profession and put in the appropriate time and effort and apply this with sufficient passion and discipline? Or are we going to be a ‘weekend warrior investor’ and treat what we do with our money as a hobby? Certainly the two approaches are likely to generate very different results.

Let’s bring this back to your investing. I’ll say your investing because I certainly don’t treat my investing like I treat my golf. You see, apart from the cheque Australian Stock Report send me for writing this column and presenting at their Workshops, my investing is what pays the bills. I simply can’t afford to take this for granted. If I want to succeed, that is to beat the markets and grow my wealth in such a way that I rely far less heavily on other forms of income, which then helps me spend more time doing what I enjoy the most – spending time with my family (not golf), then I must be professional in my investing approach. It’s simply too important’ not to be. My investing simply can’t be a hobby if I want the results I seek…

This means that I must bring all of the traits to my investing which Tiger employs for his golf. Discipline to commit the necessary time to do my analysis and research. To create a well researched and robust trading plan. To implement this plan religiously and through ongoing feedback and response to improve it. I must take the time to make all of this happen and not be so arrogant that I ignore help from those who have gone before me and have themselves achieved the success I desire. I’ve got to take this seriously.

Now my question to you is: “How seriously are you taking your investing?” Is it a hobby? Are you one of far too many “punters” I talk to about their investments who say things like “Yes, I have a few stocks…yes I think they’re going ok…” Whose approach is most often one of “Oh, yes, well I read the financial section of the paper and a couple of financial news websites and try to pick blue chip stocks; then I just stick them in the bottom drawer and hold on.” When pushed on the time they’ve spent developing their approach, the answer is invariably: “Oh, yes, I keep an eye on things.”

Remember what I said before about my lack of time to practice, and that I end up doing my practice in game-time on the run? Does that resemble your investing? Do you feel that you’re learning on the job? Or should you be learning and honing your skills before you put your hard earned money at risk in the markets?

If you feel like you’re feeling your way as you go, then it sounds more like someone talking about a hobby than a serious business! There’s far too much to chance! Where is the discipline? Where’s the perfect practice? Where is the relentless application and drive to improve, succeed, and exceed?

Let me make one thing very clear here. If you treat your investing like a hobby it will no doubt give you some fleeting pleasure from time to time, like my golf, but also like my golf it is going to cost you money. Whether that be upfront in the form of dismal losses during a bear market, or whether that be from underperforming the index in a bull market – it’s going to cost you.

So how do you ‘get good’ at investing? Take a leaf out of Tiger’s book. A coach is a good place to start, an investing coach in this case. Someone who knows the rules of the game who can make objective decisions as to where you’re going right and wrong – and on how you can continuously improve.

It’s not enough to say: “I’ll just bash away at it until I get it! I’m ok – I don’t need your help I can figure this out myself…” Remember what we said: It’s not practice which makes perfect, rather, it’s perfect practice which makes perfect. If you have no idea what the correct approach is in the first place, it could take you many years and a small fortune before you figure it out.

Real professionals spend many years and the same small fortune at university studying to achieve their qualifications. They seek out knowledge, structured, researched and proven knowledge. They aren’t so arrogant to say that they will figure it out themselves. Imagine if a brain surgeon said “Don’t worry I’ve read a few books on cracking heads and it’s been a hobby of mine for ages now – I think I’ve got the hang of it so get on the table!” Why should investing be any different? Get some help, go to investing university!

This is where our Workshops come in. In these workshops my colleagues and I get to the heart of what makes you tick as an investor and how we can make you a better one. More importantly, we will give you a number of tried and tested systems and processes to go through before, during, and after each and every investment you make to improve your consistency and results. Keep in mind however that whilst we can show you exactly when and where to enter an investment, we can’t give you the discipline and passion to follow such a plan! That’s up to you.

We all want the benefits of improved investment performance. The rewards of such improvement could be lifestyle changing. However, are you prepared to put in the hard work to achieve these rewards? Most investors aren’t. Your biggest impediment to becoming a better investor is simply getting started, to committing to your improvement by becoming more professional in your approach. The hard work begins now.

About the Author

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As a Socially Responsible Investment manager the most common question we hear from potential clients is “and adviser told me that socially responsible investing isn’t profitable” versus non-screened portfolio management. In general the adviser providing the dogmatic opinion does not offer any foundation for their opinion but this is their chance to influence the potential client especially if they cannot offer an Socially Responsible Investing (SRI) option for the investor. Unless you have a few arrows of your own in your quiver you may be quite likely shrug your shoulders and resign yourself to an non-screened portfolio versus a clean portfolio.

Probably due to the fact that I’m over 50 now with a repellent view of hyperbole and unsubstantiated opinions I have been uncomfortable with opposite view as well: socially responsible investing improves rate of return. It has been my view based upon empirical experience of managing Socially Responsible portfolios for 20 years that social responsibility is not a significant determinant of investment performance. Socially Responsible Investing is a highly subjective practice where investors can have divergent opinions on industries and companies. There is not unified screening standard amongst the ethical investing industry, each firm or fund makes their own decisions on screening criteria. While some funds screen for only 3 or 4 issues there are other funds that screen over a dozen.

Practitioners of ethical investing may draw attention that investors always assume a given level of risk with any equity investment but that the risk premium associated with SRI is less. Case in point the risks associated with Tobacco, Asbestos or BP and the Gulf oil disaster. However in my 20 years involved with socially responsible investing, screening stringency is often a matter of interpretation as BP was considered Best of the Lot for many years for funds that desired petrochemical exposure.

Let’s take a look at some of the academic studies that have touched upon the issue of the factors of Socially Responsible Investment performance:

* Moskowitz Award winner, John Guerard, Jr., director of quantitative research at Vantage Global Advisers, examined the returns of Vantage’s 1,300 stock non-screened stock universe and a 950 screened universe (The screens eliminated companies that failed to pass alcohol, gambling, tobacco, environmental, military, and nuclear power). He found “that there is no significant difference between the average monthly returns of the screened and non-screened universes during the 1987-1994 period. The “un-screened 1,300 stock universe produced a 1.068 percent average monthly return during the January 1987-December 1994 period, such that a $1.00 investment grew to $2.77. A corresponding investment in the socially-screened universe would have grown to $2.74, representing a 1.057 percent average monthly return. There is no statistically significant difference in the respective returns series, and more important, there is no economically meaningful difference in the return differential.”

Guerard’s conclusions are reinforced by other works:

* “Socially Responsible Investment: Is it profitable” Dhrymes, Columbia University July 1997 June 1998.Dyrymes concluded that: “that by and large the Concerns and Strengths of the KLD index of social responsibility are not consistently significant in determining annual rates of return.”

* Socially Responsible Investment Screening Strong Empirical Evidence For Actively Managed Value Portfolios. June 2001, revised December 2001 Stone, Guerard, Gultekin, Adams.”No Significant Cost” means no statistically significant difference in risk adjusted return”. In addition, they surmise that “the conclusion of no significant cost/benefit is not just a long term average. It has remarkable short term consistency!”

In my opinion this report presents a balanced view in that they concluded that the during the time of the study 1984-1997 the stock market rewarded the growth oriented style and that the performance of SRI investments could become “brittle” if markets were to become risk averse and adopt a more Value oriented style……….a remarkably accurate presumption!

Could the performance of SRI funds which have exceeded or lagged their respective benchmarks be in part due to size (average capitalization from micro cap to large cap) and style (Value or Growth)?

Fama and French of Dartmouth University examined the annual rate of return and beta (volatility) of an non-screened universe of Growth vs. Value from 1928 to 2009 by dividing stocks into ten deciles (groups) based on book-to-market value, rebalanced annually and found that Value had the lower risk while Growth had the higher risk. In addition, they found that the highest book -to-market stocks exceeded the return of the lowest book-to-market by 21% to 8% on average. Stock valuation was as significant factor in the Fama and French study where the cheaper the equity valuation the better the return.

Market Cap size was important in the Fama and French study as well (1992). Market cap size showed a significant edge to small and micro cap equities on a monthly basis. *Monthly returns for the smallest 10% of equities were 1.47% versus 0.89% for the largest decile.

It is our contention that there are attributes that could account for performance to equities other than social profiles and that concurrently a portfolio of socially screened equities with the highest book-to-value ratios could exceed comparative benchmarks largely due to valuation metrics and capitalization size. In a case of pure cherry picking the monthly rate of return smallest market cap and lowest book value to market price was 1.63% versus.93% monthly for largest market cap and highest book value to market price.

I tested this theory using data supplied by the Social Investment Forum and Russell Index regarding the 10 year average rate of return for socially responsible mutual funds versus their respective benchmarks trends do emerge.

Data as of June 30, 2010

Benchmarks

* Russell Mid Cap Value Index was the top 10 year performer +7.55%.
* Russell Mid Cap Growth Index returned -1.99%.
* Russell 2000 Value returned +7.48%
* Russell 2000 Growth Index returned -.92%

Equity Large Cap performance (information provided by SIF)

* 4 mutual funds show positive 10-year average annual rates of return:
Calvert Social Investment Equity +0.14% (Growth)
Neuberger Berman Socially Responsive +3.18% (Value)
Walden Social Equity +1.46% (Value)

Parnassus Equity Income +4.65% (Value)

Equity Small Cap performance

* 2 mutual funds from one mutual fund company showed a positive 10-year rate of return.
Ariel Appreciation +6.16% (Value)

Ariel Fund +5.62% (Value)

Disclaimer: While the sample size of SRI fund performance is very small. I gleaned data from only the profitable SRI funds for the last 10 years. The SIF forum does not show fund performance information for funds that have closed, merged or liquidated. It would be a safe presumption IMO that funds that no longer exist were weak performers since money will flock to where it’s treated best. Plus, hedge fund performance data was not available on the SIF site.

The results do fall in line with substantial academic works (Fama and French, Lakonishok) and it is possible that SRI performance should be viewed thru the lens of Value/Growth and Market Cap size.

A logical question that must be asked upon reading this might be: “If small market cap and low valuations are the sweet spot for investing, then why are there so few funds or managers focusing on this strategy?” Not to be obvious… ok, well lets be obvious: The small cap / low price to BV tends to be the focus of many private portfolio managers since our small size allows us the dexterity to invest in companies that are simply too small for billion dollar mutual funds. Successful funds tend to outgrow the size/valuation strategy espoused by Graham as assets become larger and the investment selection becomes narrower. But this topic should best be explored at a later date.

No holdings mentioned.

Brad Pappas
President of Rocky Mountain Humane Investing
Allenspark, Colorado
303-747-0500
http://www.greeninvestment.com
copyright Rocky Mountain Humane Investing, Corp 2010

Here’s an interesting question… where are “Emerging Markets” emerging from and into what?

But before we answer that, what are they? “Emerging Markets” refers to countries in the world which have a less developed infrastructure. They tend to be those that are achieving economic growth, but are not as mature as the developed world.

Emerging Market Groupings

To illustrate this it is worth pointing out how Emerging Markets are often grouped together for investment purposes. While it is always possible to invest in an individual country if you know what you are doing, it is more common to group them.

For example:

The “BRIC” countries include Brazil, Russia, India and China
“Asia Pacific excluding Japan” means South East Asian countries like Indonesia, Singapore, China, South Korea, and so on
“Emerging Europe” includes Russia and emerging Baltic countries like Ukraine, Latvia, Romania

Growth and Risk

Recent investment performance in Emerging Markets has been better in many cases than in the developed world. However, these markets are politically and economically more volatile than their developed counterparts, and so investments are subject to higher levels of risk.

The opportunity for growth comes from aspects like the greater investment in infrastructure (roads, water supply, etc.), availability of land and natural resources, and a growing “consumer society” wanting to improve their standards of living.

The risks come from things like bureaucracy which – along with corruption in some cases – hinders smooth development. Human rights records can act as a drag on development, while political instability and international friction can also dissuade investors. Economic experience in managing aspects like inflation is also less developed, although it could be said that banking systems are more stable than in the “developed” world since they have not developed the convoluted products and procedures which caused the credit crisis in 2008!

All in all, Emerging Markets are increasingly significant for investors, and there are plenty of opportunities to invest when appropriate, both in equities of various types, and in bonds (fixed interest issues by governments and companies).

So Should I Invest?

The answer will depend on your objectives, your attitude to risk, and on the balance of your portfolio.

If you are looking for income, then Emerging Markets is unlikely to be the best place to find it. While a high proportion of companies remain in the early stages of their development they need their capital for growth and have not established the stability necessary to pay a regular dividend.

But for growth investors it’s another story. There is much more potential for growth than in the developed world, as I mentioned. But there’s no doubt it may be a rougher ride getting it. Levels of volatility are undoubtedly higher – but by selecting a well-managed fund or an appropriate index to track, the risk associated with individual companies or countries can be spread.

As with any investment, time is what counts, but particularly so with Emerging Markets. If you:

Are willing to invest for the long term
Are willing and able to wait for periods of under-performance to pass
Are looking for growth but don’t mind seeing some short term losses
Already have other investments providing diversification

…then Emerging Markets could be for you.

About the Author

Prime Time Financial is a trading style of Keystone Financial Ltd which is authorised and regulated by the Financial Services Authority.