Go east for growth
June 29th, 2010
As expected at the half year mark 2010 is proving to be a difficult year of low returns. Equity investors have had to go far from home to earn a modest return. All those who backed Europe for recovery have lost around 10% of their clients’ money. The recoveries there have been slow at best, and the Euro crisis has weakened the currency. People who stayed in the UK for their equity investment have so far got nothing to show for their money. The collapse of BP has added to the poor growth rate and disappointing returns.
On the other side of the world the Asian economies have accelerated well out of the Credit Crunch slump. Returns of 6- 9% on equities have been possible for the half year as India and China have hovered around 10% growth and as Hong Kong, Singapore and other centres have benefitted from their work. Currency appreciation has been an important prop to these gains, as the Chinese market has fallen in response to monetary tightening.
Investors in the USA have made money through the appreciation of the dollar, gains which are coming under pressure following the UK Coalition’s budget which is leading to firmer sterling.
We have been cautious and balanced all year so far. We have run big positions in corporate bonds, which have offered the 6% annual interest by way of return, outperforming European and UK equity. Property exposure has also been more fruitful than Western equity. US property has been the star performer, with currency gains adding to the gains in REIT prices. Asian property has also offered a reasonable positive return.
We hear on the grapevine that competitors are spreading false rumours about us. We learn that we apparently operate like a hedge fund, which comes as news to us. We avoid all borrowing and gearing, the concentration of risk and charge modest fees, which is the opposite of hedge fund practice. Another has alleged that we take big risks by investing too much in emerging markets and Asian equity. This has been a good way to make money over the past two years, but we have always kept the exposure under prudent limits. Typically we have around 25% of a portfolio in Asian and emerging market equity. That’s enough to give positive returns, but not enough to constitute a dangerous risk. Keeping 50% of your client’s money in European and UK equity, on the other hand, has proved to be an unhelpful strategy for the last three years. Investors should not ignore risks just because they are close to home.
