Investment Articles

As part of the continual research that we do on the subject of investing, we have noticed a rising trend in financial advisers and the general public becoming more aware of passive and tracker funds.

We have been involved with this style of investing for many years now, and although it is very plain to us that it (in our opinion) is the most robust and academically proven route to investing one’s capital (as opposed to investing in alternatives, such as ‘active’ funds), it has taken some time to become more mainstream.

Now, however, there is much more coverage in the press about this way of investing, and Richard Saunders, Chief Executive of the Investment Managers Association commented recently that passive funds had experienced a 12% rise in the value of the amount of money being invested in them in 2011 as compared to 2010.

Some of the media coverage included ‘This is Money:

“Investors ditch expensive fund managers for trackers. Despite the vast amounts of money still being thrown at active fund managers, the average UK fund has been beaten over five years by ones which blindly follow the FTSE All Share.”

IFP

Then there was the meeting of the North East branch of the Institute of Financial Planning (IFP) Ray & I attended. There were some good speakers, including Tim Hale, author of ‘Smarter Investing’, whom we have met many times before.

Tim is excellent at pointing out the merits of passive funds and presented to us an example of how hard it is for an active fund to beat a passive fund on average, over time and after costs.

Remember, an active fund aims to beat the market by holding the right shares (and will often trade shares on a regular basis to try and achieve its objective).

A passive fund simply buys the market, and trades very little as it is based on a ‘buy & hold’ strategy.

Tim put a slide up that had 353 dots on it, with a 40 year time period. Each dot was an active fund, and he then clicked the button to see how many of these funds either survived this period (you don’t close a successful fund) or gave a return which could be proved to be performing above average.

Out of 353 dots, only 3 remained!

This IFP day was the day after Ray and I had been on our bi annual trip to London to attend the Dimensional Educational Seminar. This is always well attended and has a high quality of guest speakers from around the world.

One of the speakers was Amit Goyal, a Professor of the Swiss Finance Institute at the University of Lausanne. Amit is an unusual guy, as he is soaked in data but manages to make it interesting!

He is passionate about making known the truths he finds, and this particular talk was on the performance of pension funds using active fund managers.

He used thousands of data sets to show his findings, but the easiest thing to remember was simple. He said imagine there are a hundred active fund managers, and they flip a coin with, say, heads being a performance above average.

We would expect 50% of them being right. So let’s take 50 managers doing the same the next year. If we use the 50% figure, we now have 25 who have performed above average.

I think you get the drift here and what would typically happen year three and four years etc.!

Cutting to the chase, he summarised by saying that “active money management fails to fulfil its promise”.

Others would disagree we hasten to point out, but we feel that the evidence is conclusive in favour of passive and index funds to give you the best chance of investment success.

The Financial Tips Bottom Line

Be careful where you decide where to invest your money. It’s vital that you do (or have someone do on your behalf) comprehensive research so that you know you are investing in the right types of funds, assets and tax structures.

ACTION POINT

How often do you review your investments?

Have some of these been sold to you a while ago and not reviewed since?

Are your funds active funds? If so, how are they performing?

Graeme Urwin is a fee based Financial Planner with Rutherford Wilkinson ltd, and helps UK Resident Doctors and Dentists plan to achieve their financial objectives. Just visit http://www.medicaldentalfs.com where you can request your free retirement planning guide.

Rutherford Wilkinson ltd is authorised and regulated by the Financial Services Authority.

The $32 billion Harvard University Endowment Fund, which generated a return of 21.4% in the fiscal year 2011, has 23% of its investments held in real-assets, which according the CEO of Harvard Management Company; Jane Mendillo, has been a significant contributor to the fund outperforming its benchmark over the last decade by 270 basis points per year, adding roughly $15 billion of value versus what would have been earned by a more traditional portfolio. The University of Notre Dame also holds a significant proportion of its portfolio in real-assets (17.5%), and delivered a return of 21.5% in 2011. The Yale University Endowment Fund delivered a return of 21.9% in 2011, and holds 29% of its portfolio in real-assets, including real estate and natural resources.

This article seeks to review the investment performance of a range of real-assets, compare that performance to the performance of UK equities, and establish the effect of real-assets on the performance of investment portfolios. In particular, this report focuses on the investment performance and impact of farmland, forestry, gold and fine wine. The following analysis suggests that the low correlation of real-assets with other asset classes means that such investments, whilst potentially illiquid, offer an opportunity to reduce risk and volatility whilst also carrying significant potential to generate superior returns.

The following chart demonstrates the compound annual growth rate associated with a range of asset classes over a range of timeframes assuming a single investment made at the beginning of each measured period and ending at the end of 2011. In the case of the IPD UK Forestry Index and IPD Rural investment Index, data was only available until the end of 2010, however anecdotal evidence suggests that performance throughout 2011 has continued at a similar pace and therefore we feel this still offers a true and fair comparison with the equity indices.

Compound Annual Growth Rate (CAGR)

FTSE 100

Gold
UK Farmland
UK Forestry
US Farmland
US Forestry
Fine Wine

FTSE All Share

Cash

5 year

-2.2%
19.4%
12.0%
17.7%
11.9%
4.7%
10.7%
-2.4%
3.8%

10 year
0.7%
18.7%
10.0%
10.4%
14.7%
7.5%
11.7%
1.3%
4.1%
15 year
6.2%
9.9%
-
-
11.9%
7.2%
-
2.4%
4.4%
20 year
6.2%
7.6%
-
6.3%
11.0%
10.1%
-
4.5%
4.8%

This chart tells us that, broadly speaking, real-assets have outperformed UK equity indices and cash over every period considered. Interestingly, equities is the only asset class examined that generates a financial loss over any given period, indicating a higher degree of volatility than its real-asset counterparts. The timing of this analysis plays some part in forming that conclusion due the impact of the recent financial crisis being included in the 5-year performance data. It is likely then that holding real-asset investment alternatives such as farmland, forestry investments, gold and fine wine throughout a range of timelines will have improved portfolio performance without dramatically altering – and in some cases improving – the overall risk profile.

It should be noted that, in the case of the FTSE 100 and FTSE All Share Indices, these numbers offer only a broad view of the performance of an investment in an index-linked investment vehicle, and do not take into account the upside and downside potential of managing a basket of equities and relying to an extent on picking specific stocks in the hope of ‘beating the market’. Nor does it take into account dividend income which could be re-invested, effectively compounding returns and losses. Investment Managers and Investors might feel they are able to outperform the Index through careful stock-picking and active trading/management, although many studies have shown that, over the long-term, professionally managed equities perform only marginally better than the Index in general, and Investors remain exposed to the likelihood or otherwise that individual investment managers will perform consistently throughout the entire term of an investment.

In this report we have compared the investment performance of a range of asset classes including UK equities, farmland, forestry, fine wine and gold bullion. We have also analysed the effect of portfolio diversification through reducing equity exposure and acquiring real-assets. This report has shown:

Real-assets may contribute substantially to traditional stock portfolios
Real-assets have outperformed UK equities by some considerable margin over every timeframe measured
Exposure to real-assets adds meaningful risk reduction, especially during periods of underperformance or volatility in traditional financial assets

It is clear then that diversification achieved through reducing equity exposure and allocating capital to real-assets has, in the cases reviewed in the this report, improved the overall performance of investment portfolios and reduced risk (considered as volatility) between 2001 and 2011, effectively optimising portfolio performance.

One issue with this basic analysis would be a lack of access to investable projects or assets that give smaller Investors direct exposure to the fundamental characteristics that drive returns in the real asset space. Often, farms and woodlands are too large and expensive for single Investors to purchase, and the specific expertise required to improve, develop and operate those assets is also expensive and hard to come by. It is therefore difficult for Investors to allocate smaller sums of capital to these assets outside of restrictive and often expensive and opaque collective funds. Whilst some funds do offer limited access to certain assets, the structure of such arrangements often hamper asset selection, development and management to such an extent as to deliver much smaller returns than direct investments, as revenue is often absorbed into the cost of the structure and on-going management.

Thios article is an excerpt from a report by David Garner is Partner, Investment Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors. To download the full report, please visit the DGC Asset Management website.

This article addresses some of the risks associated with real-asset investment alternatives in general.

As with any potential transaction, all investments carry risk, and in the case of alternatives those risks are often very specific to the asset class, here we address some of the general risks associated with moveable and immoveable properties considered as alternative investments. This risk-set can be broadly defined and categorised as:

Sector Risk
Location Risk
Asset Specific Risk
Counterparty Risk

Sector Specific Risk

As is the case with traditional financial investments, hard-assets carry risks specific to their sector. For example, in the case of agricultural land, Investors must be aware that a variety of exogenous variables can affect the investment performance of the property. Weather, commodity prices, the cost of farming, and agricultural inputs all factor in the revenue potential and profit margins of a farm. As farmland values are dictated primarily by the income producing potential of the asset, poor on-farm performance can adversely affect capital values. The same can be said for gold; during period of growth in equity markets, gold values may fall as confident investors sell their gold and buy into equities in order to capture returns from raising markets. Subsequently gold values may fall as a result. In the case of timber properties, poor house building figures result in a fall in demand for construction timber, and in these circumstances Investor may not be able to secure the price they require for their timber, and may ultimately leave their trees to continue to grow throughout the downturn, choosing instead to harvest when prices are more buoyant and capturing the extra physical growth that has occurred in the interim.

Location Risk

In many cases, especially in the example of real-estate related investments, Investors may choose to acquire assets in countries other than their own domicile. Asset values in emerging markets are often lower, along with the price of labour, and demand in those markets might also be higher, so acquiring assets that form party of the emerging market supply chain is often a strategy to capture superior returns. Whilst man overseas locations offer security of ownership and a transparent business environment, any overseas investment carries risks specific to the country of operation, and developing economies often carry a much greater risk of political interference or security of ownership issues. This extra risk must be factored into the due diligence process, and the potential returns on offer weighed against this inherent risk to capital.

Asset Specific Risk

When acquiring a tangible asset, it is imperative that the investor has access to the requisite skill-set in order to properly identify any issues with the asset itself. This kind of due diligence is essential in order to establish value of money, and avoid costly investments into otherwise useless assets. In the case real estate based investment alternatives, there may be issue with title, access, planning or even financial issue like outstanding tax bills. In the case of niche property like farmland or forestry, there may be specific issues relating to soil quality or water supply which may ultimately cause the property to be less productive and profitable. In the case of other niche sectors like fine wine or collectibles, very specific experience is required in order to identify genuine investment opportunities, and Investors without access to quality, experienced advice may end up purchasing valueless assets for unscrupulous sellers out to make a quick buck.

Counterparty Risk

When investing in niche products, Investor will usually require the services of a professional to advise on the transaction, but also to operate or manage the assets as is the case with real estate or other assets that require ‘trading’ in order to capitalise on opportunities and minimise risk. In these cases, the investor is exposed to the professional capabilities and honesty of their partners, be they forest managers, fine wine investment managers or collectibles experts. Poor advice at the point of investment and bad or incapable on-going management can ultimately destroy the investment potential of any asset. Proper due diligence is required in order to establish the track record of all partners in their respective fields.

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

It’s been a tough time for investors lately with the world’s major sharemarkets struggling to produce any meaningful capital gain over the past five years.

The disappointment, though, goes deeper: since the start of this century the US sharemarket, measured by the S&P 500 Index, has fallen by 13 per cent, and that’s before taking into account the erosion in value caused by inflation over that time.

In contrast to shares, world bonds have performed spectacularly well (up over 100 per cent) since 2000. The yawning gap in returns between bonds and shares doesn’t depend on the starting point being 2000 either; you have to use more than two decades worth of (US) data before you can show that shares have delivered higher returns than bonds.

It’s perhaps not surprising then that investors have shifted some of their funds away from shares and into bonds. According to data from over 40 countries compiled by the Association of US Investment Companies, investors have reduced their allocation to shares from almost 50 per cent at the end of 2006, to 39 per cent by the end of September 2011, and upped their allocation to bonds and money market investments.

In making the shift, of course, they have contributed to the downward pressure on shares prices and helped push up bonds.

There are at least three reasons behind many of world’s savers shifting from shares to bonds over the past five or more years:

The obvious one is that bonds have simply delivered better returns than shares – in hindsight the shift in funds has been a no-brainer. But could bonds turn from being a no-brainer to being a genuinely stupid investment over the next 10 years?

Another compelling reason for the shift to bonds is simply a flight to safety. Bonds traditionally offer much greater security over the capital value of an investor’s funds in exchange for a lower return than is the case for shares. Given the huge uncertainty that has dogged financial markets for much of the past five years it’s small wonder that investors have withdrawn to the relative safety of bonds. As the turmoil in financial markets fades investors may be inclined to take on more risk and nudge their way back into shares.

A third reason for the shift to bonds may be more fundamental. The demographic bulge in the number of people hitting retirement is likely to see a sustained shift to more conservative investment mandates. As this large age cohort retires their focus will be on the security of their capital rather than the returns they can get from that capital. If the financial crisis has taught us anything it is that returns that look too good to be true, too often are. For New Zealanders that message was repeated loudly by the collapse of finance companies that had lured many retired folk to invest in dubious debentures by offering unsustainably high interest rates.

The first two reasons above rely heavily on hindsight, something that investors find very difficult to shrug off. Investors are told time and again that over the long run shares will produce higher returns than bonds; the basic rationale being that shares carry more risk and therefore investors seek higher returns.

Well, as we’ve seen that has not been the case for the past decade or more, which raises the question: how long is the long term? For a 65-year-old, 10 years may be all the time he’s got left, whereas a 25-year-old can afford to hang on for long-term relative returns to prevail – shares outperforming bonds.

Interestingly, a major KiwiSaver provider has argued that too many Kiwi savers will miss out on investment returns by spending the rest of their working life in the conservative funds they have been defaulted to. The argument rests on these conservative funds returning less than more aggressive share-oriented funds over the longer term.

While past returns are not necessarily a good guide to future returns, the experience of the past two decades surely tell not to make sweeping assumptions about future relative returns. KiwiSaver members who have allowed themselves to be allocated to relatively conservative default funds have done pretty well over the past four years and it would be foolhardy for the Government, or a KiwiSaver provider for that matter, to somehow impose their conviction about future relative returns upon lethargic KiwiSaver members, or indeed presume to know what’s best for individual investors.

Bond yields are historically very low in most, though certainly not all, developed economies. The scope for them to go lower and thus keep delivering the significant capital gains they have done over the past two decades or so is getting pretty slim. Furthermore, if the liquidity central banks have been pumping into their economies finally generates economic lift-off, higher inflation is likely to follow, and that would dent future bond returns. Essentially central banks are trying to engineer an economic recovery by lowering the returns bond investors get in favour of higher returns for businesses taking on debt to expand their business or leverage their existing business – either way cheaper credit should translate into higher share returns eventually.

It would be a pity to see investors once again driven by hindsight to desert an asset class (in this case shares) as it passes through the bottom of its returns cycle and plump for bonds as they pass through the peak of their cycle. The shift back to shares delivering higher returns than bonds will happen – if only someone would tell us when!

Gareth Morgan Investments is an Investment Management company servicing clients who want personal and transparent management of their investments. We manage investment portfolios for individuals and institutions, and we are a KiwiSaver and Superannuation scheme provider.

Visit us at: Gareth Morgan Investments

The European sovereign debt crisis has continued to hog the attention of global markets, with little sign of immediate resolution. The latest development in the drama has been a Europe-wide plan to move to a more centralised approach to setting national budgets in the region. This would involve European governments having to stay under certain deficit and debt limits or face fines for breaching them. It was also agreed that the International Monetary Fund (IMF) will play a greater role in helping out financially troubled countries in the region. The hope is that these changes will be enough to give investors confidence to buy the bonds of Eurozone countries, particularly those with high debt levels such as Italy and Spain.

The problem is that changes to the European Union constitution are required. This in turn will require ratification by the parliaments of individual European countries. Britain has said from the start that it will not be part of the latest proposed deal because it is detrimental to the competitiveness of its financial sector. And although the other 26 European nations have given their initial approval to the deal, the fear is that some of them will be unable to ratify it.

In the meantime the financial state of the European banking system has deteriorated substantially. In response to bank pressures, the European Central Bank (ECB) and the US Federal Reserve have pumped an extraordinary amount of emergency short-term funding into the European financial system. So far this has had only limited effect on bank funding costs and credit pressures. However, one side-effect of the ECB actions has been to support European bond markets through the back door. Banks are taking advantage of the cheap short-term funding available at the central bank and then buying European government bonds with much higher yields, thereby making sizeable margins.

Despite ECB efforts so far, many investors and commentators are calling for a “big bazooka” – aggressive ECB buying of Italian and Spanish government bonds. This would lower the interest rates Italy and Spain pay on their debt even further, making the debt easier to service. It would help support the value of those bonds, helping to protect the capital of European banks. But Germany, and the ECB itself, is vehemently opposed to such action. Their fear is that lowering the interest rates on European sovereign debt will take pressure off governments to undertake the reforms required to get their finances on a truly sustainable footing.

So the crisis stumbles on. My view is that the situation will muddle along until such time as markets have sufficient confidence that Eurozone members are on the road to consummating a European fiscal accord. This could be around March/April next year. In the meantime the ECB will continue to provide backdoor support for sovereign bond markets, although this may become more direct once the accord has been ratified by a critical number of European countries. Europe is heading for recession next year as a consequence of the contraction in bank credit and the uncertainty stalking the financial system.

There remains a small but significant risk that the crisis could deteriorate to the extent that the European banking system begins to crumble – some banks either go bust or have to be taken over by their governments. In this case the ECB, IMF and national governments, in cooperation with other central banks around the world, would intervene massively to support banks. Under this scenario a break-up of the Eurozone and sovereign debt defaults would create havoc in financial markets. Global growth would certainly suffer under such an outcome.

On a positive note, it is now clear that the US is no longer heading for recession. In fact, indicators over the past few months suggest the US economy is gradually building momentum and is likely to reach annual growth of 3-3.5% by the end of this year. And although China’s economy has slowed to around 9% annual growth, inflation has abated, which gives the Chinese authorities room to free up access to credit to stimulate activity. These developments will blunt the negative influence of Europe on global activity.

Europe’s woes will continue to emphasise the risks of excessive debt whether that be government, business or household debt. New Zealand government debt is relatively low, but rising as we continue to run significant budget deficits. New Zealand households are still carrying a high level of debt primarily backed by property. This is the age of deleveraging or debt reduction; we ignore the message at our peril.

Gareth Morgan Investments is an Investment Management company servicing clients who want personal and transparent management of their investments. We manage investment portfolios for individuals and institutions, and we are a KiwiSaver and Superannuation scheme provider.

Visit us at: Gareth Morgan Investments

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

After discussing Differences between Savings and Investments, we will further discuss Investments to see what important factors an Individual Investor must keep in mind before making actual Investment decisions. From First and Seconds Lesson on investment, we have darted down certain points which classify investments from savings, and have noted few factors there that an individual investor must keep in mind to make wise investments, or even, to make investments at all or not.

This Lesson will cover in detail, factors and checks that are or should be backbone of investment decisions.

1. Avoid Hasty and Un-Planned Decisions. In a volatile market and financio-economical situation like present, it has been observed that investors are making rapid investment decisions without involving much planning and analysis. Investors, out of fear and/or lust factor, seem to have ignored and put aside their long term financial goals and all that long planning they had done in a normal market situation. This kind of behaviour must be avoided as it may, and mostly does, add to the already piling up losses. You financial plans may be revived, trimmed and modified but should not be completely ignored as you have had put some hard work and thinking while making those financial plans and setting your financial goals.

2. Draw or Re-Draw a Personal Financial Road Map. As discussed previously in my post on Having a Plan before Writing a Business Plan, we discussed how important it is to know and analyze one’s personal financial position before making any kind of financial decisions. We stressed there that an investor(which in that case was for a proprietor) should first thoroughly analyze his current personal financial position, keeping in mind his future plans regarding his personal life, future major expenses, future earning options i.e. both expected amount and timings. One should have enough cushion for one’s near and far future personal plans, and then see how one can set aside to invest into a new investment)

If you are already very much vulnerable to a financial crisis, based on your current financial condition and future expectations, you should avoid the idea of risking your finances even more by even thinking of a new investment.

3. Knowledge, Expertise and Skills related to Investment. It is always advisable to invest in something you have yourself knowledge and expertise of, instead of completely relying on Investment Managers(if you are going to hire one). If you think you have keen interest in an investment and it is not very technical to handle, you can even yourself manage your investment and save costs. But again it is more advisable to at least have some guidance from one. Having knowledge and expertise of a particular investment class will enable you to make better decisions and look for more innovative and modern ways of investments. So even if you don’t have know how and you trust a particular investment management company, before investing do detailed research and try to get as much as knowledge as possible of the subject, which in this case is an investment.

4. Asses you Risk Tolerance Capacity. Every investment involves some sort of risk, as this is something that differentiates Savings from Investment. If you are investing in stocks, bonds, real estate–there is definitely risk involved. As compared to depositing in Secured Banks. The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long time horizon, you are likely to make more money by carefully investing in asset categories with greater risk, like stocks or bonds, rather than restricting your investments to assets with less risk, like cash equivalents. On the other hand, investing solely in cash investments may be appropriate for short-term financial goals. The principal concern for individuals investing in cash equivalents is inflation risk, which is the risk that inflation will outpace and erode returns over time.

5. Timing of Investment. Based on your Financial Position and your long term or short term financial goals, you should assess if this is a right time for you, financially, to make an investment decision. Jumping into an investment decision just for the sake of it can destroy your hard-earned earnings.

Moreover, you should also consider the timings of the economic cycle. You would need to check whether it is the start, mid or assumed end of a financio-economic cycle as you cannot make investment decisions in isolation from the current market conditions.

Muhammad Khurram Shahzad is a Chief Accountant and a Business Advisor in one of the rapidly expanding IT solution firms in MENA region. He writes on different investment and finance related topics in blogs, articles and other forums.

http://www.financialadviceme.blogspot.com

One year investment bonds can be used to produce a long term capital growth or to generate an income. These bonds are a good way of saving money because they have a fixed rate annually, and the access can be restricted for that period. Before I think of buying the bond, the first thing I would consider is security and whether I can be paid off the bond before maturity date.

Money grows and good returns are produced at the end of the year. To get the investment bond I must pay a minimum deposit and a fixed rate for one year. There is guaranteed returns and the interest is paid annually or monthly. In case I get an emergency, the bank can lend me some of the money although I will have to pay a small charge fee. The money is secure since it is protected and managed by professional investment managers. When compared with stock, the bond does not get much press thus, a better alternative method of investing. If I buy the bonds from the government or municipal bonds, I will enjoy the tax benefits that are quite attractive. It easy to get these investment bonds in the banks or over the internet, and they are commission free.

The best thing is to buy and hold on the bond investment until it matures because I will get paid exactly what I expected. One year investment bonds are safe and highly predictable. I would prefer to buy the bond directly from the government because if I buy through a broker I must pay a commission fee.

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There are many people out there looking to scam people. Therefore it is always important to keep an eye out to make sure it doesn’t happen to you, whether it is protecting against a computer virus or making sure you aren’t the victim to an investment scam.

Everyone wants to make a quick buck if they can, and some use this opportunity to offer investments to people offering quick or easy money. It is therefore very important to be sure of an investment scheme’s credentials before investing your hard earned money.

There are certain signs you should look out for. Any scheme that guarantees a big return is one to be suspicious of. A guaranteed return just isn’t possible as no investment is a certain success.

It is important to fully understand any investment product you are entering into. If you don’t understand then ask. A genuine investment manager will be happy to answer any questions, no matter how silly they may seem to experienced investors; don’t be worried about sounding like you don’t know what you are talking about. If they seem to get agitated or lose confidence in their own answers when questioned, it is probably a bad sign. Some will try to make things seem confusing so you don’t question them. A lack of information is a sign of a scam. Anything you are unsure of, ask.

Some scammers employ high pressure tactics to rush you into a decision. Avoid this at all costs. If you are unsure take your time, and say you will get back to them if you must. If they say it has to be now or never then tell them you are not interested.

It is crucial that you know what you are investing in. If an investment scheme claims to have a positive track record then make sure there is evidence to support this. It is a good idea to contact other investors who have used it in the past. Do some other research as well, for example look online. If they have been successful and people have benefited you may well find information about this. Similarly, if they have scammed people they are likely to have commented about it on blogs or forums. It is also wise to research schemes of a similar nature. For one thing, if it is a scam they may have changed the name or changed certain aspects to try to avoid detection. Most schemes will have something similar through another investment company, whether genuine or not. If you are using an investment company or partaking in investment trusts then make sure the company is registered.

Always urge on the side of caution. If in any doubt at all don’t risk your money. You should never rush into a decision. And if the investment company is trying to force you into rushing then they probably can’t be trusted.

It may sound obvious, but use common sense. If your gut feeling says this may not be trustworthy, walk away, and don’t deal with someone who does not seem professional.

Andrew Marshall (c)

Witan Investment Trusts offer private investors a portfolio of global equities managed by experienced investment managers.

As part of my litigation practice, I represent investors harmed by the misconduct of their stockbroker, investment advisor, or financial planner. Some of these cases can be brought in court; most are required to be arbitrated before the Financial Industry Regulatory Authority (FINRA). In either venue, however, many of these cases have common themes, which teach important lessons about investing.

Wall Street Doesn’t Have a Crystal Ball

The financial industry spends millions of dollars convincing the investing public that it can predict with some accuracy the future price movements stocks. We all know that predicting the future is impossible, but when Wall Street breaks out its technical charts, graphs, and its highly paid analysts discussing “P/E ratios,” “EBIDTA,” “relative strength,” “quantitative analysis,” “momentum plays,” “valuation,” “trading strategies,” “market timing” and the like, it sounds as if they have discovered a window on the future. But the reality is that price movements of stocks are unpredictable and random because stock prices react to news, which by definition is unpredictable and random. The resignation or indictment of a CEO, a product recall, an “earnings disappointment,” the failure of a new product to generate significant sales, or an international crisis all will affect stock prices. These types of events are rarely anticipated and occur randomly. Therefore, contrary to what Wall Street’s very effective marketing would have you believe, those who “beat the market” in the short term do so because of luck, not skill. Academic Research has shown that there is a very low probability — less than 3% — that any one broker, money manager, or investment newsletter can pick investments that consistently outperform benchmark market averages (such as the S&P 500) over long periods of time (10 years or more). Those odds are about the same as the odds of throwing “snake eyes” at a craps table in Vegas. What is the probability that with the money you have to invest today, you can identify the lucky broker, financial advisor, or mutual fund who will consistently roll snake eyes and beat the market for the next 10 or 20 years? Very slight.

Lesson learned: Avoid actively managed investments; stock picking and market timing are losers games.

One Size Doesn’t Fit All.

When you shop for clothes or shoes, there are a variety of sizes and styles because each of us is physically different, and each of us has our own fashion style (or lack of style). Investing choices should also be “tailored” to fit you as an individual. Just as a tailor or shoe salesman measures you before determining what clothes or shoes will fit, a conscientious advisor will similarly “measure” you to determine what types of investments are suitable for you, and how those investments should be allocated in your portfolio to meet your needs, goals and risk tolerance. The advisor should make inquiries to determine your investing time horizon, short and long term liquidity needs, income and savings rate, net worth, tax bracket, and investment experience and knowledge.

Most importantly, the advisor needs to understand what level of risk gives you discomfort. Can you tolerate a decline of 20% in your portfolio without panicking, or do you need to construct a portfolio which, based on historical data, is likely to fluctuate up or down only 5% per year? As a general rule of thumb, more aggressive, risk tolerant investors should be more heavily weighted in small capitalization “value” equities, while conservative, risk adverse investors should be more concentrated in bonds and large capitalization “Blue Chip” securities.

An advisor who takes the time to understand your needs and risk tolerance will recommend diversifying and allocating assets amongst various types of investments consistent with your goals and risk profile. Studies show that over 90% of your investment returns depend on how your assets are allocated among different investment classes, while only about 2% is due to the specific stocks, bonds and other investments you choose to buy.

Lesson learned: An advisor should spend the time to learn your particular circumstances, and tailor investments to fit your own risk tolerance profile. Run, don’t walk, from any advisor who tries to sell you something without first learning about you and your risk tolerance, who has the same solution for everyone, or who recommends putting all your assets into a single type of investment.

Wage War on Fees, Expenses and Commissions.

Over long periods of time (10-20 years), well diversified portfolios have returned approximately 9% per year. Fees, expenses and commissions, imposed year after year, substantially reduce the long-term net investment return. The average expense ratio for actively managed mutual funds is approximately 1.5%. Similar or higher charges are assessed in “managed accounts” or “wrap accounts” where the investor is charged a fixed percentage of the portfolio rather than commissions on each trade. Because of the miracle of compounding, even a small difference in expenses charged against your investments can make a significant difference in the final long term investment results. For example, the final value of an initial $100,000 equity portfolio earning on average 9% a year for 10 years with 1.25% in annual fees and expenses will be $208,754.58. That same portfolio, with identical returns, but with 2% in annual expenses, will be worth $193,439.835, or $15,323.73 less. Additional fees, commissions, and expenses, by themselves, can make it difficult to “beat the market.” As we have seen, there is a high probability that an advisor cannot select investments that beat the market, and the probability of market underperformance is necessarily increased when the account is subject to excessive fees, commissions, and expenses.

Lesson learned: Keep the fees and expenses charged to your portfolio as low as possible. Avoid advisors who are paid on commission.

Don’t Chase Last Year’s or Last Month’s Winners

Mutual funds, Wall Street firms, and financial newsletters love to tout their recent successes. Investors flock to the fund, firm, newsletter, or investment category with the highest recent returns. But what happened in the past is a poor predictor of what will occur in the future. One study suggests that only 14% of the top performing investment managers for a particular year will be among the top performing managers the following year. The same historical reality that applies to stock picking applies to recent “market beating” firms and mutual funds — the fund or firm that did well last year is not likely to repeat that success the next year, and highly unlikely to consistently outpace its peers for long periods.

Lesson learned: Don’t chase recent winners.

Be Leery of Investment “Products” Wall Street loves to sell “investment products.” These come in a variety of forms, including limited partnerships, investment trusts, variable annuities, variable life insurance, mortgage backed securities, and others. Some of these products cobble together investment and insurance concepts in a single package, to be sold as something that will supposedly cure one or another investment risk, or provide a benefit, such as life insurance or a guaranteed return. Often, these products pay the highest commissions to brokers and insurance agents. When I see the phrase “investment product,” my expectation is that I will see an investment loaded with fees and expenses, and which is often too complicated for the average investor to understand. These products are suitable for some people, but are often too costly or complicated to be appropriate for most investors.

Lesson learned: Be leery of “investment products.” Look carefully at the fees and expenses for such products, and if the investment is very complicated, ask yourself whether you should risk your hard-earned money in something you don’t understand.

Make Sure Your Money Lasts as Long as You Do.

In retirement, many baby boomers suddenly will have access to significant lump sums of money, accumulated through savings, pensions, IRA’s, and 401k’s. There is a temptation to spend those assets freely, without considering that those funds may have to last 20, 30 years or more. It is critical for the investor to structure their retirement investments, and any withdrawals from retirement funds, so as not to outlive their money. As a rule of thumb, a withdrawal rate of 4% or less, adjusted for inflation, will increase the chance that there will not be a shortfall. Of course, each investor must consider their life expectancy, the composition of their portfolio, any other sources of funds (such as Social Security or company pensions), and their spending habits.

Lesson learned: The higher the withdrawal rate from your retirement assets, the greater the risk you will outlive your money.

Avoid All the Noise and Invest in Index Funds.

An index fund seeks to match the returns of a specified benchmark by buying representative amounts of each stock in the index, such as the S&P 500 or the Wilshire 5000. Other index funds focus a particular industry, or a particular geographic area, such as the telecommunications or health care sectors, or the leading publicly traded companies of South America or Japan. There are also index funds that track corporate government bond indexes. These funds don’t try to “beat the market,” they “meet the market,” by investing in the securities comprising the benchmark index. As seen, only a small percentage of active money managers beat the market over the long term. That being so, having an investment that “meets the market” year after year is, based on historical data, statistically more likely to provide superior long term returns than active money management trying to “beat the market.” Much of the superior performance of index funds is due to their low expenses, which average.25%, or about 1/5 of the expenses charged by actively managed mutual funds. Additionally, most index funds necessarily provide diversification (e.g., owning the 500 companies in the S&P 500, or the 5000 companies in the Wilshire 5000), and are tax efficient, since there is no active manager trading for short capital gains.

Lesson Learned: Allocate your investments among a variety of national and international equity and bond index funds. A 60/40 portfolio (60% diversified equities, 40% diversified bonds and cash) is generally considered to be a well diversified balanced portfolio of moderate risk. Those seeking more risk should consider increasing their exposure to equities, while those desiring less risk should increase their bond and cash balances. The particular percentages suitable for you must be based on upon your particular risk tolerance, goals, and financial needs.

Robert C. Port is a partner with the Atlanta law firm of Cohen, Goldstein, Port & Gottlieb, LLP, where he practices business and securities litigation. He has a particular emphasis on representing investors harmed by the misconduct of their stockbroker, investment advisor, or insurance agent. Mr. Port has an AV Rating by Martindale Hubbell Law Directory, and has been selected as a “Georgia Super Lawyer” in the practice areas of Business Litigation and Securities Litigation by Atlanta Magazine.