Friday, 19 June 2015

Where are the returns in a low interest rate world?

Where are the returns in a low interest rate world?

Global central banks are cutting interest rates and devaluing their currencies at the fastest pace we have seen since 2009. Global equity markets have benefitted from this increase of liquidity, highlighted by the performance of European stock markets since the announcement of the European Central Bank’s Quantitative Easing programme in January, which officially kicked off at the beginning of March this year.

Low interest rates help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses. They support and encourage economic growth by increasing the supply of money but this leaves individuals holding cash in sizeable amounts left behind as inflation slowly eats away at the value of the money in the account. This has left many investors and retirees especially looking for new ideas to generate returns. In the current environment predictable income in the form investing in large cap, defensive, blue chip, dividend paying stocks should be the focus of every investor as interest rates fall and currency values plummet.

As the Euro slides closer to parity to the US Dollar and global currencies like the Australian Dollar and Canadian Dollar fall in value, the ramifications on global corporate balance sheets will soon take centre stage. On top of already increasing volatility across financial markets, I believe the only way to shield ones investment portfolio is through investing in defensive strategies that enhance returns through predictable income.

Some of the Equity High Yield Income Funds or dividend paying stocks are a sound investment opportunity that fits the current investment climate. On top of receiving capital growth from large cap, developed market stocks, the funds benefit from dividend income from the underlying equities with the aim of smoothing returns as markets move.

Finding quality income in the form of stocks that pay stable and high dividends should be a priority for investors. Finding stocks or funds producing 4%-6% target per annum for dividend income is not that difficult. Try looking at some well-known stocks like: GlaxoSmithKline, Sydney Airport, Verizon, Zurich Insurance, Duke Energy, American Electric and AT&T. My preference is usually developed market countries focusing on Westerns Europe, The United States, The United Kingdom and Australia, although good opportunities do exist in the Emerging Markets.

While no one is able to “judge the directions of markets” accurately over a short time and assuming equities will broadly be the same price or higher in the long run; then income from dividends will provide the added return for investors. In today’s world investors need funds that are fully transparent, do no use leverage, are easy to understand, offer real liquidity and provide consistent returns.

If 2015 has taught us anything so far it is that global interest rates are only headed in one direction as global central banks try to fight of deflation and spur growth. This will undoubtedly push investors into global equity markets as we have seen in the United States since 2009.

A buy strategy focusing on blue chip, developed market, dividend paying stocks should be the main focal point within any investment portfolio in order to provide stable and predictable income over the uncertainty of market returns in increasingly volatile times.

When blending the equity income funds with a solid base of lower risk assets such as bonds and alternatives like property, overall portfolio returns should be consistent to provide a valid alternative to cash in the bank. We favour a 40/60 split between equities/bonds for clients who have a balanced approach to risk. Where clients look for more or less risk simply increase / decrease these ratios accordingly. When in doubt always seek professional advice.

Thursday, 4 June 2015

The basics of Value Investing

The basics of Value Investing

Billionaire investor Warren Buffett claims much of his success is due to his love of value investing. Unlike some investment strategies, value investing is pretty simple. If you have common sense, patience, money to invest and the willingness to do some reading and basic math’s you can become a value investor. Here are five fundamental concepts you'll need to understand before getting started.

Value Investing Fundamental No. 1: Companies Have Intrinsic Value
The basic concept behind value investing is so simple that you might already do it on a regular basis; If you know the true value of something you can save a lot of money if you only buy things when they're on sale.

Say you buy a new TV. Whether it's on sale or whether it's at full price, you're getting the same TV. Stocks are the same way: the company's stock price can change even when the company's intrinsic value is the same. Stocks, like TVs, go through periods of higher and lower demand. These fluctuations change prices but not what you buy.

Many shoppers would argue that it makes no sense to pay full price for a TV as they are often on sale. Stocks work the same way. Unlike TVs, stocks will not be on sale at predictable times and their sale prices won't be advertised. You can get stocks at bargain prices that other investors will be oblivious to by doing some detective work. 

Value Investing Fundamental No. 2: Always Have a Margin of Safety
Buying stocks at bargain prices gives you a better chance at earning a profit later when you sell them. It also makes you less likely to lose money if the stock doesn't perform as you hope. This principle is key to successful value investing. Unlike speculative stocks whose price can plummet, it is less probable that value stocks will continue to experience price declines.

Benjamin Graham, the father of value investing, only bought stocks when they were priced at two-thirds or less of their intrinsic value. This was the margin of safety that he felt was necessary to earn the best returns while minimizing investment downside.
Value Investing Fundamental No. 3: The Efficient-Market Hypothesis Is Wrong
Value investors don't believe in the efficient-market hypothesis, which says that stock prices already take all information about a company into account. Value investors believe that sometimes stocks are underpriced or overpriced. For example, a stock might be underpriced because the economy is performing poorly, investors are panicking or the sector is performing badly.

Value Investing Fundamental No. 4: Successful Investors Don't Follow the Herd
Value investors possess many characteristics of contrarians - they don't follow the herd. Not only do they reject the efficient-market hypothesis, but when everyone else is buying, they're often selling or standing back. When everyone else is selling, they're buying or holding.

Value investors only care about a stock's intrinsic value. They think about buying a stock for what it actually is - a percentage of ownership in a company. They want to own companies that they know have sound principles and sound financials, regardless of what everyone else is saying or doing.

Value Investing Fundamental No. 5: Investing Requires Diligence and Patience
Value investing is a long-term strategy - it does not provide instant gratification. You can't expect to buy a stock for €66 on Tuesday and sell it for €100 on Thursday. In fact, you may have to wait years before your stock investments pay off. A buy and hold strategy combined with waiting for the right time to buy a stock you have identified is key to value investing.