Cruising at +10% above the capital markets

Our Model Portfolios - still cruising at a high altitude to the markets

latest update October 14, 2010

MODEL PORTFOLIOS SWITCHED TO A SAFETY FIRST PORTFOLIO ON SEPTEMBER 6th, 2010.  We chose bond funds and money markets.  The strategy was to benefit from expected market turbulence and a rush to safety - when the markets correct. - As we saw the rally continues. What should be clear to every investor now is that this rally is running on the back of liquidity only, and not real demand and supply functions.  

Graciously, our arch-conservative strategy worked nonetheless, as many bond funds rallied in tandem.AND the SGD continues to outperform against just about every notable currency. By switching to safety the maximum gain portfolios missed amounts to about 4.5% (high risk profile), less than 3% for the balanced portfolio.  

There is an extra page on this blog dedicated to the updates on the models. Unless you have a portfolio with me, these models mean little to you, - although you might take note that we continue to outperform our benchmarks, like MSCI World, MSCI Asia-Pacific,etc. by a double digit margin since inception in October 2009, just a year ago.  
THE NEXT MARKET UPDATE WILL FOLLOW ON THE WEEKEND.

Rally Warriors - still hitting hard
While the battle for supremacy in the markets continues, allow me to ponder on what investment tools actually did capture the recent gains, and which ones did not. As I stated in my last blog update, winning is NOT about simple stock market movements, it is about the strategy in effectively harnessing the benefits on offer.

First up the SGD:  another recent announcement of money tightening in Singapore gave another boost to our currency.

SGD gain 2.5%

Staying with SGD - would have provided a gain from a USD perspective. But it is a mixed bag when viewed against the global resource currencies, AUD, CAD, REAL, or the Norwegian Krone. The € is probably the exception, as it rose almost 5% against the SGD over the four weeks or so. But - nothing really underpins this advance.  More likely it is going to turn in the short term and retrace the gains completely.

Clearly, the theme of global resources and commodities of all kinds feed the current frenzy. The sector was up almost 7%, but funds lagged the actual price gains, which is "normal" during sharp and short term moves.

Top gains in global resources =7.5%

Our gracious platforms don't offer a SGD graph for USD denominated funds so the chart compares on the right "apples with oranges", i.e. SGD and USD denominated funds in one.  Taking into account that the Latin American fund is in USD, the 10% top performance needs to be discounted by about 2.5% to show the return for SGD investors. 

China was supposed to have done well, with the Hang Seng above 23,000.  This is how the funds fared:
Only the last few trading days saw a real upturn.  Till then, the advance was roughly in line with the STI.
It is nice to see some laggards back as top performers (Henderson Horizon China). 

TOP GAINS in China = 5%

Other winners were fringe economies in Asia, in particular Indonesia, Thailand, Philippines, and - India (India=not so fringe of course). The trend outlook is certainly more volatile in recent days. An exposure to such markets in globally oriented portfolios is often less than 10%. 

Average gain for Asian single country = 4.5%

Oh, Europe did well, - NOT.  It is only the rise in currency that gave the funds the extra boost.  The Euro rose from 1.74 to 1.82, a gain of roughly 5%. What does the fund return show? A little under 4%! Hardly worth the effort.

It takes only a quick look at the losers for this one month period to see that the current rally is founded on little else but liquidity, and the dominating commodities play.  The rest of the valuations are blown away by huge currency swings. Luckily for my investors, sitting patiently on the sidelines and on SGD, it turned to our advantage. 
Here are the losers.

Defensive stocks like utilities or defensive regions like Malaysia did not perform well. For single countries in Asia, Korea and Japan funds had the toughest of times, while US stocks suffered from a falling dollar. 

in summary

the last four weeks did not turn out quite as I had anticipated. Still, actual portfolio returns are not to be scoffed at.  

The most prolific theme driving valuations are global resources where we see the largest gains. Other than that, we record short term gains almost exclusively in large caps and fringe markets (an odd - though not uncommon - combination at the end of a cycle), while "defensives" lagged, as is normal during such rallies. 


Finally, the fact that we now have an almost 100% correlated rise in valuations in ALL asset classes, commodities, equities, bonds, coupled with huge volatile swings in currency looks to me like the ideal precursor for - a crash! Soon more.


Then again, the expectation of the casual observer of the capital markets are not reflecting the reality on the ground. Hopefully the above put it into a better perspective.