Income Growth

Income growth is the key to successfully managing an income stream that meets your daily needs.

Too much emphasis on a static asset allocation that ignores income allocation is bound to fail.

Traditional asset allocation promoted by major wirehouses and certain financial planners is based on historical rates of return or more accurately total rates of return.

Retirees need income that grows. They don’t need to speculate with guesses about the future direction of major asset classes.

In a low-rate environment, retirees need to look beyond a single asset class to meet their retirement income needs.

Alternative assets, foreign currencies, equities, real assets and fixed income – is the only strategy that will ensure capital preservation, income generation and inflation protection.

By using income asset allocation across the five asset classes, retirees can receive income that preserves their capital by providing long-term growth in income and high yields relative to more traditional retiree asset classes such as bank deposits.

A focus on generating sustainable income growth through a multi-asset approach will better meet the longevity risk challenge that all baby boomer retirees face.

John Kimber

Currencies as an Investment Strategy??

Don’t get the wrong idea that recent volatility in all markets means you should be doing nothing to deal with your investments.

Certainly volatility is indicating fear about the current outlook for equities.

Bonds don’t look too good either as interest rates rise.

Can we really be confident about rising earnings beating consensus forecasts?

For the time, being in cash is always attractive for part of your portfolio. (Better to make nothing than lose hard won gains elsewhere) .

We don’t believe the TV commentators who tell us that money has to go into equities because it cant go into bonds.

Interest rates are very low and asset prices are very high.

The answer, in part, is a very much overlooked asset class.

Currencies provide diversification, yield and an offsetting impact to pressure on US company earnings as a result of a rising US Dollar.

Home bias is so evident in many portfolios.

Currencies Are Driving Investment Markets

The only place that investors have really made money in the past year or two has been in picking the currency in which they have invested and keeping the money in cash.

It surprises us that very few advisers or funds managers actively use currencies as an investment strategy. Or that TV commentators are unaware that professional investors actively use currencies to make money.

Take the Australian Dollar. Two years ago one US Dollar bought one Australian Dollar ( approx). Then the US Dollar started climbing. One US Dollar now buys 1.40 Australian.

Australian investors in US Dollars have made about 40 per cent on their money providing they kept it all in cash and earned nothing in US Dollars.

By comparison, US investors in Australian Dollars have lost 40 per cent over the same period ( or made 40 per cent if they went short).

But what happens now ? We reckon it will be about two years before commodities related currencies like the Australian Dollar the Canadian Dollar and the Brazilian Real recover.

Meanwhile, anyone planning an overseas holiday knows just how cheap it is now to travel by comparison with a few years ago.

The same goes for investment.

Currencies As An Investment Strategy

Lets not throw the baby out with the bathwater. Currencies are risky and do require a several year time horizon. We love yield which will always partly mitigate capital losses as a result of volatility and over a longer period of time can eliminate it.

Do we think that you can make 40 per cent again on Australian Dollars ? Yes, it is certainly possible but we have no idea when. And meanwhile the US Dollar could continue climbing when rates are raised which will make it even tougher to beat earnings forecasts.

Meanwhile, you can still get at least two per cent on Australian fixed interest AAA rated and at least a five per cent yield on top rated banks and industrial stocks down under.

If you wish there are plenty of Exchange Traded Funds that will achieve the same result and are quoted in US Dollars and listed on a US exchange.

So you are paid to wait and maybe spend some of the money on a trip downunder.

As usual the most important decision is the asset allocation decision which is very specific to your circumstances, goals and objectives.

The bottom line.. Get ready to buy cheap foreign currencies and keep the money in AAA rated foreign interest bearing securities.

John Kimber

Woman and Investing

Single women are unlikely to close the ‘retirement gap’ even with a lifetime of employer contributions, meaning many will not enjoy a comfortable retirement.

Women still struggle to fund their retirement.

Millennials especially are no longer aspiring to own their own home and the unwritten and unstated rule is that someone else will eventually take care of increasing life spans.

Many young females will not achieve a comfortable retirement even after a lifetime of employer support.

Whatever the reason a single woman’s retirement income is expected to be 20 per cent less than a single males with an average income of $50,000.

The most effective way to bridge the gap is to start saving early and often.

Fees need to be lowered and investment made more efficient.

Women need to consolidate all their accounts and they should measure their employer’s fund against an index benchmark.

Women need to ensure they are invested in the right options.

Investing in growth assets before and during retirement is important.

Funds need to be be concerned more with enhancing retirement returns, and less about sequencing risk – the latter can be handled by shifting money into cash at the right time and not by changing the overall asset allocation of the fund.

Women will want overseas trips healthcare accommodation and lifestyle. None of this will be provided by someone else and no one will wave a magic wand in 20 years to make it happen. Women should not be relying on a mysterious solution .. The answer is simple to save and invest efficiently particularly if you are renting.

John Kimber

HOW WELL IS YOUR MONEY PERFORMING FOR YOU?

INVESTMENT PERFORMANCE

The operation was a success but the patient died”.

We don’t like the usual answer about investment per performance which is to use an index (like the S&P 500) as a benchmark to see how well or badly the fund has done.

Investment results must be quite specific for an individual’s needs. There is no point in losing money and explaining that we have outperformed.

It is the medical equivalent of “the operation was a success but the patient died.”

Benchmarks are often used to generate fees and to prove that a lousy performance is actually not that lousy.

Every investor would like to do better in absolute terms, by comparison with last year and in relation to any peer group.

Everyone wants more and without too much risk.

Wants are unlimited, resources are limited and investment management is the path chosen to maximize returns from a given amount of capital.

But we first need to know where we are going and what we expect for ourselves. Not having an objective reveals EITHER a lack of self esteem OR that you are 14 years old.

OBJECTIVES AND GOALS

Financial services would be a great profession if only we did not have any clients

It may come as a surprise to some investors to learn that many fund managers really would rather not deal with them.

The vast majority of financial services providers have one objective, which is to generate fees from client accounts by providing a product which is sold.

When we are shopping for any product, at the supermarket or elsewhere, it is always cheaper and better to shop with a list and not to buy on impulse.

Therefore, the first and most important step is to define a specific objective that fits the investors needs and wants at a specific time now or in the future.

An investment objective is where we want to be. A goal is the speed with which we get there.

Along the way there are plenty of back seat drivers and some of our own making, called fear and greed.

The best way to ignore a back seat driver is to have a route to the objective. Without a route any road will get you there.

The objective should be quite specific, personal and directly relevant to the owner of the capital.

For some investors this may mean keeping 100 per cent of their money in cash and earning little or no return.

Your goals and objectives have little in common with a benchmark manufactured by someone who does not know you from a bar of soap.

$120 BILLION SAYS BENCHMARKS ARE NOT MUCH USE

The Australian Sovereign Wealth Fund “The Future Fund” ($120 Billion Aust Dlrs) ignores benchmarks. You can read more about their activities below.

However, they are very clear on their objectives for which they are responsible.

By comparison, too often the financial services industry ignores the specific result required by the individual and uses a series of benchmarks designed
not for the individual but for the benefit of the service provider. Often benchmarks or indexes are created for the specific purpose of creating a product which
can be sold and where the manager is able to “outperform”.

For example, an equally weighted portfolio may be created to outperform a market capitalization weighted portfolio after an index is created to track an equally weighted portfolio.

There are dozens of examples of indexes being created so that portfolios can be created for investment.

In other words, the tail often wags the dog and the specific needs of the investor are ignored.

The industry has created “hedge funds” for the specific purpose of getting around benchmarks and where the investment of client funds is not constrained by benchmarks (except for the purpose of collecting fees).

Target date funds are another way of getting around the tricky problem of explaining why the future will always be better than present.

Benchmark funds, hedge funds, and target date funds may all be on our shopping list but none of them are any use unless we first know our objectives and goals.

Speaking at the Association of Superannuation Funds of Australia (ASFA) Investment Interchange in Sydney yesterday, the Director of the Future Fund, Mr Neal, said “The technology we’re using to turn savings into investment return is pretty outdated,” and the industry is still doing things the same way we were doing them a long time ago.

He said there is a ‘peer group’ mentality of institutional investors which results from investors in Australian retirement accounts being typically unengaged.

The Future Fund has a unique approach to investment of funds which avoid the “silo” effect that occurs elsewhere.

First, only one of the board members had direct investment experience before joining the board of the Future Fund.

“The rest are all successful corporate people and they didn’t really have a ‘this is the way it’s done’ [attitude],” he said.

According to Mr Neal, when the Future Fund was founded in 2006 and the investment committee began discussing possible investment constraints, the board responded by saying: “Why put any on yourself?”

As a result, the Future Fund’s performance is not measured by a benchmark, he said – although the investment committee must report to the board monthly.

“That means if we’re doing a bad job [the board] know we’re doing a bad job,” Mr Neal said.

“[The absence of a] benchmark just completely frees us up to go and build the right portfolio, and explain to the board why it’s the right portfolio,” he said.

THEREFORE The real answer to any question about investment performance, is not the traditional benchmarks the industry observes but what is going to work for you.

John Kimber

Buy LO Sell HI

Buying LO means not buying HI but it also carries with it the expectation that low priced stocks will rise in value.

It may also be that a stock that has already risen may rise further in value.

In both cases we are reminded of our economics texts and JM Keynes who described the stock market as a beauty contest where value is judged by a panel which is the investing public.

“It is not a case of choosing those faces that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligence’s to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” (Keynes, General Theory of Employment, Interest and Money, 1936).

This means that people price the markets not on fundamental value such as earnings or dividends, but rather on what they think everyone else thinks the value is, or what everybody else would predict the average value to be.

A public test conducted on Planet Money tested the Keynesian theory by having its listeners select the cutest of three animal videos. The listeners were broken into two groups.

The first group selected the animal they thought was cutest.

The second group selected the one they thought most people would think was the cutest.

Fifty percent of the first group selected a video with a kitten. Seventy-six percent of the second group selected the same video.

This result is entirely consistent with Keynes’s theory.

And in terms of the stock market it means that investors are likely to pay far more for a cute kitten video than it is really worth because they believe that others will pay more.

How Does Investor Opinion Work in Practice ?

Everyone loves Apples because everyone thinks everyone else loves Apples. The market thinks interest rates will rise because it thinks everyone else thinks interest rates will rise.

No one likes gold because the market thinks that everyone thinks the US Dollar will keep rising. And so on. It is always comfortable to be with the crowd.

Sentiment is reflected by technicians in the relationship between the 50 day and 200 day moving averages. When sentiment starts rising the 50 day crosses the 200 day upwards. When sentiment declines the 50 day crosses below the 200 day moving average downwards.

In a way it is a bit like falling in love and the sorry realisation later that expectations have not been met. That is called buying HI and selling LO.

We believe that in the long run sentiment will ALWAYS prove to be fickle and that the most certain way to ensure success in the markets is to practice “value at a fair price”.

That is to only own investments that are specific to our individual needs that fit with out asset allocation and what we need in our portfolio.

In other words ignore what others think is pretty and stick with what is suitable. This may include expectations about future earnings but make sure they are our own expectations not what we think others may think.

So What is Cheap Now?

Having recently watched the new movie “ The Reluctant Fundamentalist” ( about a very bright Muslim who remains reluctant to accept fundamental valuations in his career on Wall St and equally reluctant to accept Muslim Fundamentalism) we understand that financial assets that appear cheap right now may remain cheap for a lot longer. There is no guarantee that a cheap asset will increase in value. However we can be much more certain that it will not decline in value further than an asset which is very expensive.

Commodities

The Commodities Research Bureau Index is at its lowest since the GFC.

All agricultural commodities, as measured by the Powershares DB Agriculture Fund DBA, are at their lowest since the GFC . There are two ETFs which we think are cheap based on a recovery in agricultural prices, VEGI and MOO, both of which have large holdings in Monsanto which is well down from its recent highs.

Oil

We think it is the Saudis and the Pentagon ( the quickest way to crush Russia and ISIS is to starve them of money for oil) who are behind the massive drop in oil prices which are now at their lowest level, inflation adjusted, for many many years. We would not be surprised to learn that it is actually the Saudis who are behind the massive increase in oil storage in the US. Low oil prices benefit the refiners which is why we have seen stocks like Tesoro, and Valero, up sharply in price since oil prices started dropping. The best ETF which is well undervalued on forward earnings is Powershares Dynamic Oil and Energy, ticker symbol PXE. It has a large holding in Valero, and although it holds many of the producers, is trading on a 50 pct lower multiple on consensus forward earnings.

Neither food nor oil are on the radar for most investors just yet which means they are not being judged in the current beauty contest.

John Kimber

Hello World!

This is our first attempt at joining the wonderful world of blogging. We will be posting thoughts and links to our favorite articles along with our own personalized views on what we believe to be relevant information on all things Investing….especially ETF investing…..First blog soon to follow.