portfolio construction – part deux

windows and doors, gold taps and plasma tv’s

Last month, predictions for 2007 plus the general idea of portfolio construction was the topic and in subsequent newsletters and mailings I intend to cover each of my preferred “foundations and roof” funds.
Just as a reminder - It is my belief that an investment portfolio is a bit like a house. Specifically, when you build a house you do not put the roof on first, you start with the foundations and the walls and you try to make those as solid as possible before you go on and add luxuries like roofing, doors, windows and plasma TV’s.
This month, since it is still the start of the year I thought we should look at some of the areas identified in the January newsletter that we would consider as being significant growth areas for 2007 before it is too late.
All the following can be accessed through your portfolio bond (PPB) or our new online nominee service.
The following is in part made possible by input from The Sovereign Society, Hugh Hendry of Eclectica, Forsyth Partners, Scott Campbell at MitonOptimal, and Castlestone Management
As always, if you want to invest in any of the following funds or ETF’s, let me know. An ETF, by the way is an exchange traded fund which is similar to a collective investment fund except that it trades at net asset value (NAV)- with no initial charge – on a stock exchange and can be bought and sold in the same way as any listed security.
Japanese Small Cap Stocks
Japan still remains a bargain and it has some of the world’s most dynamic smaller companies trading at a big discount following a poor 2006.
As measured by the Tokyo second section index, Japanese smaller companies include over 500 domestic issues. Since January 2006, the index has plunged 23% in Yen terms and 22% in US Dollars. Coupled with the fact that Yen could be the stronger currency in Dollar/Yen for 2007, this could be the year for this market.
Buy the ETF – Street Tracks Russell/Nomura Small-Cap Japan up to $56.25, (currently at $52.27)
Buy the fund – JP Morgan JF Small Cap Class A Fund
Gold, Silver
I first told you to buy Gold at $420, today it is $645. Honestly?, I finally followed my own advice and bought at $620. But will it go higher from here?
Experts predict the previous all time high for Gold of $850 to be exceeded in 2007. The trend for Gold’s continued rise remains in place. Typically these moves are in a 13 to 15 year cycle, and we are now only in the sixth year of the cycle.
Silver has outperformed the other three precious metals and should continue to do so in 2007, experts predict it heading for $20 per ounce.
Palladium and Platinum; the latter is probably going to have the least gains of the four but Palladium is significantly undervalued.
Buy the ETF – Lyxor Gold Bullion Securities, Lyxor Precious Metals  - and iShares Silver Trust
Buy the fund – Aliquot Gold Bullion and Aliquot Precious Metals
Timber
Combination of clean-green and soft commodity underperformance make this sector attractive but notoriously hard to find any way to buy in through an actual listed or collective investment vehicle.
Plum Creek Timber is an S&P listed real estate investment trust (REIT) with a market cap of US$7 billion. The REIT owns more than 8 million acres and also produces lumber, plywood and medium density fiberboard in 10 downstream manufacturing facilities in the Northwest US.
With a Dividend yield of 4%, a 20% discount to management NAV valuation and a long depressed commodity price this appears to be an excellent opportunity.
Buy the REIT – Plum Creek Timber Company
Asian Emerging Markets
Apart form the obvious India, China, Russia which I have been pushing now for eons via FMG’s fabulous Rising 3 Fund, concentration appears to be focusing on some of the other areas in the region that are perhaps less high profile
The worst performing market in Asia is about to turn the corner in 2007. The best global values now lie in Taiwan with her manufacturing prowess – technology. Windows Vista is finally available to all and is likely to spawn a boom in new PC sales which means chips.
Buy the ETF – iShares MSCI Taiwan Index
European Large Caps Stocks
Expected to outperform and far less volatile than anything above.
Buy the ETF – iShares DJ Euro STOXX 50 or iShares DJ Euro STOXX Growth
Oil
I thought seriously about buying Oil at $42 last week, today it is $45 and Jim Rogers, “Mr. Commodity” says he still sees $100 per barrel after a “correction” - he just does not know when that correction will happen. Hugh Hendry says that although prices have now reached his lower band area as defined by their “mean reverting system” whatever that is, he is still not a buyer because just as prices can enjoy substantial premiums to their mean so prices can overreact to the downside.
Correction coming?
IF you feel the correction coming we have a long list of Reverse Index Certificates from Commerzbank available on most major indices.
As always, if you want to invest in any of the following funds or ETF’s, let me know. An ETF, by the way is an exchange traded fund which is similar to a collective investment fund except that it trades at net asset value (NAV)- with no initial charge – on a stock exchange and can be bought and sold in the same way as any listed security.

Investment Predictions for 2007

That is a brave title, don’t you think?

I have spent a lot of time over the last few weeks reading newsletters, watching Bloomberg and CNBC and listening to fund managers trying to give us the hot picks for 2007. Interesting stuff.

Portolio Construction

Before we get into that though a word on portfolio construction. It is my belief that an investment portfolio is a bit like a house. Specifically, when you build a house you do not put the roof on first, you start with the foundations and the walls and you try to make those as solid as possible before you go on and add luxuries like roofing, doors, windows and plasma TV’s.

In an investment portfolio context then, the foundations are your low volatility, steady-eddie returns products and the roofing would be balanced managed funds and then the windows and doors might be long-only equity funds, perhaps even single country stuff and then the plasma TV and gold-plated bathroom fittings are your direct equity and derivative investments. I think that makes my point without being too specific and boring.

Back to the real world then as in my experience I have found that it is generally only the wealthy amongst us who feel that there is value in wealth preservation techniques such as placing the majority of your investment assets in safer, plodding type investments and only investing in the higher risk areas (if at all) for a very small percentage of the portfolio.

True to say that what actually happens is that investors who perceive themselves as not having sufficient capital will always take the higher risk route because they feel that is the only way to get where they want to be. Fine if you are 25 but a recipe for disaster if you are 40 plus and let’s face it, how many 25 year olds do you know that even consider investing for the future?

At the end of this, then I will give a a simple standard portfolio construction of my own.

For investors building capital by investing in regular savings plans these rules are applied quite differently but I think most of those that have these through me already understand that.

Consensus View for 2007

2006, let’s start there. The first half of the year, particularly May and June were not bright and did not bode well but in the second half the big picture turned very positive and we ended up the year with the FTSE up 11% or so and Sterling gaining 14% on the Dollar. The Dow hit 12,000 and rose every month from July 2006 ending up almost 16%. The MSCI World Index was up 1over 17% and emerging markets up around 26% with the leaders being Brazil, Russia, India and China with the latter up a staggering 46%. Eastern Europe continues to defy being up over 40% again

Signs are there for another correction early on in 2007 but generally the bulls are out in droves claiming that rises across the board are inevitable and that the Fed is not going to change rates either way until at least the second half of 2007, some reckon not at all for the whole year.

Dollar weakness is generally expected to continue so investing in dollar denominated funds which in turn invest in non-US Dollar assets should continue to be a good move for investors.

The biggest bear I know of is still quite bullish on emerging markets, particularly Chiona and Lang Yiu of Atlantis was on CNBC yesterday giving a very convincing argument for continued investment in China related securities through the HK markets but then she would say that, would’nt she since her fund invests in that market.

So, where are we going to invest for growth in 2007? Bear in mind that as part of a balanced portfolio, the basic “foundations and roof” components do not really ever change that much although the percentage allocations and actual products used will vary depending on age, currency and a number of other factors. The following are your “non-essential accessories” but where we look for the growth.

• Japan, particularly Japanese Small Caps
• Asian Emerging Markets particularly China and India
• Gold and Silver - also Palladium
• European equities, particularly large caps
• Japanese Yen, Pound Sterling, Euro and Aussie Dollar

Also expect market volatility so at long last those hedge funds and CTA’s might actually start producing results.

Model Portfolio - these are my personal picks but there will be other funds within the same asset classes also applicable.

Foundations and Roof

• Assured Fund
• Absolute Return Fund
• Defined Returns Fund
• GAA ‘Q’ Fund
• Glanmore Property
• Lakeshore I, II and III
• Miton Global
• Miton Extra Income
• Platinum Turnberry

Windows and Doors

• Aberdeen India
• AHL Currency
• Aliquot Commodity Fund
• Aliquot Gold Bullion/Aliquot Precious Metals
• Atlantis China Fortune
• Castlestone Protective Equity - Emerging Markets
• China Everbright Dragon Fund
• Eclectica
• FMG Rising 3
• Forsyth Global Commodity
• HSBC BRIC Markets equity
• HSBC China
• HSBC Japanese Equity
• India Advantage Fund
• Man AHL Diversified
• Platinum Global Dividend

Plasma TV, Gold-plated taps

• CFL
• IQS
• FMG MIddle East and North Africa

Another good piece on the merits of allocating to Commodities – and why an actively managed approach to Commodities investments makes sense.
 Mark