Emerging markets have been out of fashion of late, driven largely by current account deficits, capital outflows and a credit squeeze in China.emerging-markets-BRIC-MINT

This brief post will highlight and reinforce the fundamentals which make the emerging markets a compelling long-term investment.

1. They are home to 85% of world’s population
2. They constitute 50% of world GDP and contribute to 75% of worlds GDP growth.
3. Comprise of mainly a young and dynamic population – between 29 and 59.
4. Has a natural resource advantage, for example its home to 90% of the world’s proven oil reserves.
5. Rise of a consumer society, fueled by the expanding middle class and higher incomes.

However, these countries only account for 15% of the world’s stock market. Roger Bootle, economist and author believes that sophisticated investors will gain exposure to the emerging markets through good-quality western companies with large operations in the developing economies.

This strategy allows you to take advantage of western standards of corporate governance, attitudes to dividends and political stability – combined with a share of the emerging market growth story.

Source: Fidelity Worldwide Investment

Valuation: Based on forward times earnings they currently trade at a weighty 30% discount relative to developed markets. Every veteran will be aware of the fact that the lower the initial valuation, the greater the long-run returns – this is called the value effect. And, its worth remembering that Emerging economies grow at twice the rate of developed countries, which should translate into better investor returns.


Why select investment funds over shares?

Diversification – By diversifying your investments, you are reducing your risk. An investor spreads risk across asset classes (property, shares, cash and bonds), sectors and countries.

Lower cost – Buy a diversified portfolio without incurring numerous commission charges.

Professional management – fund managers possess specialized expertise, each stock can be carefully researched.

Convenience – Researching individual shares and constantly eying the stock market is time consuming.

This is why I believe investment funds should form the majority equity portion of a portfolio.

Investment Funds worth considering

City of London Investment Trust

Objective: provide long-term growth in income and capital.

Conservatively managed, it invests principally in large blue-chip and medium companies listed on London Stock Exchange. Its biased towards large-caps.

Record: Longest record of raising dividends among investment trusts, increased for 47 consecutive years since 1966. Achieved unbroken dividend growth by retaining income from good years in revenue reserve to bolster dividends during difficult years.

Appreciated over 140% since 2009 and yields just under 4%.

Fee: 0.44%, no performance fee

Market Cap: £1.2 Billion, 76% invested in UK blue chip companies.

Net Gearing: 8%

Portfolio Manager: Job Curtis managed the trust since 1991.

Incorporated in 1891, the company is a constituent of the FTSE 250 Index. Managed by Henderson Global Investors.

This fund is included as one of Investor Chronicles top 100 investment funds and ‘whichinvestmenttrusts’ buy list.

The City of London Investment Trust (CTY:LSE) website.

Bankers investment Trust

Objective: generate maximum returns through a global, well-diversified portfolio.

Aims to also deliver divided growth in excess of Retail Price Index.

Record: Increased dividends for 47 consecutive years. It possesses ample revenue reserves to support dividend growth when required during difficult years.

Dividend yield presently 2.5%. Revenues Reserves: 32m as of October 2013. Dividends paid were 15.1m, therefore 2x dividend cover.

Capital appreciation of 120% over five years.

Manager: Alex Crooke, managed Bankers Investment Trust since 2003. Worked at Henderson since 1994. He’s a value based investor.

Has degree in astrophysics from Manchester University.

He uses shares in London to play international themes, as most of their revenue derives from abroad. Nearly 45% of portfolio is focused on UK shares.

Fee: 0.45% year, again one of the lowest in the industry

Market Cap: £680 million.

Incorporated in 1888, its constituent of FTSE 250 index.

The Bankers Investment Trust website.

Lowland Investment Trust

Objective: Achieve higher-than-average return through both capital growth and income over long-term.  They have up to 50% invested in FTSE 100 companies for stability and income, with a greater bias towards small and medium UK companies for their greater growth potential.

Gearing: Presently 13%. This fund is slightly more aggressively geared than its counterparts. Gearing is capped at 30% of fund.

Revenue reserves were £8.5 million as of 30 September 2013.

Fund launched in 1963, managed by James Henderson since 1990.

Fee: 0.59%. There is a performance fee, capped at 0.75%.

Market Cap: £391 Million

Record: 2.5% dividend yield and revenue reserves are £8.5 million.

Dividends: Grown its dividend for 19 of 20 years.

Grew by 300% over five years. Because capital growth has outstripped income growth in other portfolio, the dividend yield has fallen to 2.5%. They believe investing in high quality blue-chip stocks is an crowded trade, preferring instead to funds focus on smaller companies to yield better value.

Manager – James Henderson from Henderson Global Investors.. His is very much a pragmatic bottom-up style investor, focusing on individual companies rather than sectors, countries or the macroeconomic outlook. He’s run the fund for over 20 years and managed investment trusts for over 25 years.

Portfolio turnover – A turnover of 20% per year, and on average he holds stocks for five years.

This fund is included as one of Investor Chronicles top 100 investment funds and ‘whichinvestmenttrusts’ buy list.

Lowland is also highly commended in the Moneywise magazine UK growth and income category. And Moneywise also awarded ‘Henderson Global Investors‘, which manages the above three trusts as the ‘Investment Trust Group of the Year in the 2014’.

Finsbury growth and income trust

Objective: Invest in predominantly UK quoted shares to achieve income and capital growth. Up to 20% of portfolio can be invested in overseas stocks.

He runs a very concentrated portfolio, comprising of around 30 stocks.

Manager: Portfolio run by Nick Train of Lindsell train investment management since 2000. Nick Train and his business partner Michael Lindsell established ‘lindsell Train’ to offer pooled investments for UK, Global and Japanese equity. The company is majority owned (73%) by the two founders. This allows them to maintain the integrity of the business principles on which the firm was founded –

  • To run client capital as we would run our own
  • To align our interests with those of our clients
  • To take the long view on investment performance and business development

Skin in the Game – According to their annual report for the year ending 30 September 2015, Nick Train holds a total of 522,616 shares in the Company. At today’s prices, this is more than £3m. Finding fund managers with a significant stake in their fund ensures the interests of the people managing your money are aligned with your own.

His approach is based on that of Warren Buffett’s and involves building a concentrated portfolio of “quality” companies that have strong brands and/or powerful market franchises.

Their ‘portfolio has a heavy emphasis on branded consumer goods and services (Diageo, Unilever, Kraft, AG Barr), media (Pearson, Sage) and financial services (Fidessa, Schroders, Rathbones, Hargreaves Lansdown’.

Record: Dividend yield 2%. Capital growth of above 200% over 10 years and 160% dividend growth over the same period.

Fee: 0.85%, total expense ratio capped at 1.25%.

Market Cap: £605 million

This fund is included as one of Investor Chronicles top 100 investment funds and ‘whichinvestmenttrusts‘ buy list.

MFM Slater income fund

Objective: From their website: ‘To produce an attractive and increasing level of income in addition to seeking long term capital growth. The Fund will invest in shares of high yielding companies with growing profits and strong cash flows across the market capitalization spectrum’

This is an open ended investment company. They run a relatively concentrated portfolio of between 50 and 70 stocks.

He invests across the market capitalization spectrum, holding a balanced mix of small, medium and large companies. His portfolio generally comprises of three types of income yielding companies – growth businesses, cyclicals and stalwarts.

Record: Yields over 3.6%. Outperformed IMA UK Equity Income benchmark last year. The funds up 33.6% while the benchmark appreciated by 23%. Since inception the fund is up by more than 65%.

Manager: Mark Slater co-founded ‘Slater Investments Limited’ with Ralph Baber in 1994 to manage UK equities. He’s previously worked as a journalist at analyst PLC and Investor Chronicles.

Alignment of interest – Mark Slater of Slater Investments told Telegraph Money that he had invested 97pc of his personal pension in his three funds, Slater Growth, Income and Recovery.

And Slaters investment team have invested significant amounts of personal assets in their funds, ensuring their interests are inextricably aligned with the clients.

Fee: 1.0% annual charge

Fund size: £65 million.

Launched in the second half of 2011.

Source: Slater Investments.

Fund Smith Equity Fund

Objective: to achieve long-term capital growth via a portfolio of global shares. Invests in a concentrated portfolio of between 20 and 30 stocks globally.

The fund does not adopt short-term trading strategies and does not invest in derivatives.

Manager: Terry Smith, he launched the fund in November 2010. In his plain speaking style he said he would give “fat and complacent” fund management industry a bloody nose”.

He said up the fund because he believed Investors “continued to suffer from punitive fee structures, over-complexity, over-trading, fund proliferation, closet indexing and over-diversification.”

In his no nonsense style, he says ‘buy companies that can be run like an idiot, because in the end most are’

Furthermore he puts his money where his mouth is, he’s invested more than £50 million of his own money in the fund – he eats his cooking.

Regarding investors who wish to time the market, he says there are two types: ‘those who can’t do it and those who don’t know they can’t do it’

Fee: no performance fees, just annual cost of 1.1%

His secret ingredients: run a concentrated portfolio in well established companies and hold them indefinitely while minimizing trading. His fund has one of the lowest turnovers in the industry.

This fund is included as one of Investor Chronicles top 100 investment funds.

Fund manager Terry Smith presentation.

More information at : Fundsmith.com

Royal London UK Equity Income

Objective: To achieve a combination of income and some capital growth.

It’s a core equity income fund which invests solely in high yielding UK stocks, with a particular emphasis on companies generating significant free cash flow to fund sustainable dividend payments.

The fund manager runs a high conviction stock portfolio and the risk profile reflects this. The fund has a larger than average weighing to mid-cap stocks (more than 40%).

He expects to hold between 40-60 stocks within the fund, although he presently has 72 holdings.

The fund was launched in 1984.

Manager: Martin Cholwill since 2005. Prior to joining RLAM he spent 21 years working for AXA Investment Managers. He has degree in Mathematics from Durham University.

Record: The fund has consistently outperformed its benchmark, growing by more than 120% over 10 years.

Skin in the game – When asked how much he had invested in the fund, he responded “I would rather not state a specific figure but the overwhelming majority of my investments are in the fund.”

Dividend: A 3.36% dividend yield (as of 28 Feb 2014), pays quarterly dividends.

Fund Size: £1.2bn

Trustee: HSBC

Charge: At HL, net annual charge is 0.62%

Citywire awards Martin Cholwill a triple AAA rating.

The Royal London UK Equity Income Fund Factsheet.

CF Woodford Equity Income Fund

Objective: Under his new investment boutique ‘Woodford Funds’, his aim is to offer investors capital growth and a growing income stream, paid quarterly. This is considered a core UK equity income fund, although it has the flexibility to invest 20% of the portfolio overseas.

Approach: His focus is on the long term – they don’t know what will happen tomorrow but they do know what drives markets over time. They are  prepared to go against market consensus to deliver superior long-term returns, an approach that has served them well in the past.

The fund is defensively positioned with a heavy weighting towards pharmaceutical and tobacco stocks. Woodford is still avoiding banks, believing the process of ‘post-crisis balance sheet repair still has a long way to go’.

In addition he’s also concerned about ‘fine inflation’, where the worlds banks are still facing increasingly onerous fines for past wrongdoings.

Dividend Yield: 4.00%, its objective is to produce an income 10% higher than the FTSE All Share Index.

Size: £4.695 Million

Performance: Since the launch in 02/06/2014 the fund has gained 11%, beating the benchmark (FTSE All Share Index).

Cost: Total Expense Ratio: 0.75%

Manager: Neil Woodford is one of the most prominent and experienced investment managers within the industry with a successful track record at Invesco perpetual.

His success stems from his ability to avoid short-term trends and fabs (i.e dotcom bubble) and invest in predictable industries such as the pharmaceutical and tobacco sectors.

This fund is included on the Hargreaves Lansdown Wealth 150, the Charles Stanley Foundation Fundlist, and Investor Chronicle Top 100 Funds. This is their selection of the best investment funds.

Additional information: Woodford Funds provides incisive analysis and commentary through their blog.

Alignment of interest – Neil Woodford  is reported to have his entire pension invested in the fund

Vanguard FTSE UK Equity Income Index Accumulation (GBP)

Objective: To track the performance of the FTSE UK Equity Income Index as closely as possible. This FTSE index is made up of the highest dividend paying shares in the FTSE 350, is reviewed semi-annually and is based on forecasted dividend yields.

Capitalization weighting: 82% of the companies are large caps.

This fund gives investors access to high yielding UK stocks in a low cost passively managed fund.

Charge: Although technically this fund has no initial charge it is subject to Stamp Duty Reserve Tax (SDRT) and is deducted from the initial investment as a 0.4% charge. Ongoing charge at Hargreaves Lansdown is 0.22%.

Inception: Launched by the Vanguard Group in June 2009.

Size: £774 Million

Dividend Yield: 4.2%

Performance: 77% total return over five years.

Manager – European Equity Index Team.

Vanguard FTSE Developed World ex-UK Equity Index Accumulation (GBP) (2016 update addition)

Objective: The Vanguard FTSE Developed World ex-U.K.Equity Index Fund seeks to track the performance of the FTSE Developed ex-U.K. Index.

The Index is comprised of large and mid-cap stocks providing coverage of developed markets around the world, excluding the U.K.

Charge: 0.15% per annum

Dividend Yield: 1.69% as of 30 June 2016.

Size: £2,338 million, the fund was launched in June 2009.

Performance: More than 110% over five years.

Trustee: State Street Trustees Limited

Fund characteristics – Comprises 1,967 stocks, 33.4 Billion median market cap and 19.6 price to earnings ratio.

Top countries exposure (30 June 2016) : US 62.7% , Japan 9.8%, France 3.6%, Switzerland 3.6% and Germany 3.4%.

Vanguard FTSE Developed World ex-UK Equity Index factsheet.

This fund is the top holding of the ‘Vanguard LifeStrategy 40% Equity’ and the ‘Vanguard LifeStrategy 60% Equity’ funds.

Fixed Income Funds

Royal London Corporate Bond Trust

Objective: To maximize investment return (predominantly income with some capital growth) over the medium to long term from a portfolio comprising mainly of corporate fixed interest securities. This is a conservatively-managed fund, predominantly invested in higher-quality, investment grade corporate bonds

The fund was launched in 1991.

Morningstar allocates this fund a gold star analyst rating and Bestinvest a five star rating.

Manager: Jonathan Platt and Sajiv Vaid both have a mornigstar triple AAA rating.

Managed by Royal London Asset Management.

Performance: Appreciated by 30% over three years (total return).

Income yield (underlying): 4.3%, paid quartely.

Size: £491m

Trustee: HSBC

Its included in HL wealth 150.

New City High Yield Fund (NCYF)

Objective: ‘To provide investors with a high dividend yield and the potential for capital growth by investing mainly in high yielding fixed interest securities’

Managed by Ian Francis since Nov 2007, he’s supported by the New City Investment Management team. NCIM is a trading name of CQS asset management.

Ian Francis holds 99,894 shares, at 64p price is £64,000.

Fund was incorporated in January 2007, Jersey.

Gearing: 107% (100 = no gearing) as of 30 January 2014. As of 2013 annual report, the company had 12m borrowings from HSBC Bank.

Revenue Reserves: as of 30 June 2013 are £12.5m. Revenues reserves are dividend income retained, allowing the company to dip into this pot during less fruitful years.

Size: £169m, trades at plus 4.5% premium.

Yield: Estimated 6.6%, increased on average 2.5% every year since inception (2007)

Total dividend paid: £9.1m as of 30 June 2013

Return: Appreciated by nearly 30% over three years.

Cost: Total Expense Ratio (TER) is 1.25%.

This fund is included as one of Investor Chronicles top 100 investment funds. Also included in John Barons Investment Trust portfolio at investor chronicles magazine.

This Fund won the Money Observer Trust Awards in 2013.

Update: Their Interim Report – 31 December 2014.

All performance data is based on total return.

Recommended Reads –

Why investors should pick managers with ‘skin in the game’, by Stephen Foley.

How much money managers put into their own funds, by Richard Evans.

What is an Stocks and Shares ISA

An ‘Individual Savings Account’ is a tax-efficient shelterpiggybank. Savings and investment made into an ISA are completely shielded from the taxman. The main advantage is that you don’t need to declare these investments on your tax returns and you can make free withdrawals whenever you require.

From the 1st of July 2014, the cash ISA and the Stocks & Shares ISA were merged into a new ‘Super ISA’ with a tax free allowance of £15,000.

Update: The ISA allowance for the 2015/2016 tax year is £15,240 and the annual Isa allowance will rise to £20,000 from April, 2017.

Capital Gains tax-free allowance

The ‘annual exempt amount’ allows you to make a certain sum before you pay capital gains tax.

Update: The amount for the 2015/2016 tax year is £11,100.

Capital Gains Tax (CGT)

18% for lower rate taxpayers and 28% for those in the higher rate tax band.

Updated: From April 2016, the higher rate of CGT will be cut from 28% to 20% and the basic rate from 18% to 10%. However, the old higher rates will still apply to gains made on the sale of residential investment properties (second home or buy-to-let property) and carried interest (profits made by executives in private equity investment firms).

Source: HM Revenue and Customs

Dividend income tax

From 6 April, 2016 – Investors will have a new ‘tax-free dividend allowance’ of £5,000 a year.

Dividend income above this amount will be taxed at 7.5% for basic-rate taxpayers.

Higher-rate taxpayers dividend income will be taxed at 32.5%.

And additional-rate taxpayers will pay 38.1%.

Income Tax rate

The income tax free allowance for the 2015-2016 is £10,600, rising to £11,000 in 2016 and £11,500 in 2017.

For the 2015-2016 tax year:

The basic rate income tax: 20% from £0 to £31,785 (income after the tax-free allowance)

Higher rate tax rate: 40% from £31,786 to £150,000 (income after the tax-free allowance)

45% over £150,001.

Source: HM Revenue and Customs

Premium Bonds

Premium Bonds are a popular savings product issued by the UK’s ‘National Savings And Investments – NS&I’, a state-owned savings bank.

The government pays interest on the bonds of 1.35%. But instead of the interest being paid into individual accounts, it is paid into a prize fund from which a monthly lottery distributes tax-free prizes.

Prizes can range from £25, up to £1,000,000.

The total cap on premium bonds will rise from the current £30,000 to £40,000 in June 2014. It will then jump again to £50,000 in 2015.

Furthermore the number of £1 million prizes will be doubled from one to two a month. These changes will take place in 2014 August.

As a caveat, the prize fund remains unchanged at £50 million per month. This means that for more people to win the additional 1 million pound prize, thousands of people won’t win the £25 or £50 prizes.

The current interest rate on premium bonds is 1.3%. This means that for every £1000 invested, you would expect to win £13. Because the minimum prize is £25, some people will win larger prizes while others win nothing.



What is an Annuity?

Your pension pot can be used to purchase a secure, regular income from your insurance company, this is an annuity. The insurance company are then responsible for paying you an income for the rest of your life.

Once an annuity has been purchased, there is no going back. Following the 2014 budget, there will be no compulsion the buy an annuity.

What is SIPP?

A self-invested personal pension is a tax-efficient personal pension scheme which allows individuals to select and manage their own investments. Its a ‘DIY’ pension scheme that gives you the freedom to determine how your retirement savings are invested.

Investments inside a SIPP are free of capital gains and income tax.

The annual contribution is capped at £40,000 and the lifetime allowance is £1.25m

Personal savings contributions into a SIPP receive tax relief of up to 45%. For example If you invest £8000 in a SIPP, the government automatically adds £2000 basic tax relief, increasing the total contribution to £10,000.

From the age of 55, up to 25% of your pension fund can be withdrawn tax free. The reminder is usually converted into a annuity.

Income drawdown

Income drawdown pension allows you to take income from your pension pot while the funds remains invested.

You can choose how much pension you want to be paid each year within certain limits.

There are two forms of drawdown pension: capped drawdown and flexible drawdown

Workplace Pension

A workplace pension is a method of saving for your retirement that’s arranged by your employer. They are also referred to as ‘occupational’ or ‘work-based pensions’.

Each payday, a portion of your pay is put into the pension scheme automatically. Your employers and government (through tax-relief) will also put money into your pension scheme.

Pension Automatic Enrolment

This new law means that every employer must automatically enrol workers into a workplace pension scheme if they:

– Are aged between 22 and State Pension age

– Earn more than £10,000 a year

– Work in the UK

More information about workplace pensions and specifically ‘automatic enrollment’ introduced in October 2012 – https://www.gov.uk/workplace-pensions

His key predictions:

1. US economy will grow close to 4%.

The reasoning being that the US budget battles is over and the central bank has virtually guaranteed to keep rates at zero.

The knock-on effect of this will be higher global inflation expectations.

2. Stock market rally likely to continue.

His reasoning: equity valuations at or just above long-term averages, companies are awash with cash leaving scope for further gains. Although a repeat of stellar gains of 2013 is unlikely.

3. European crisis will morph into political crisis.

He believes victories for fringe nationalist parties will panic Germany into allowing a more expansionary monetary and fiscal stance. The result: a weaker euro and recovery in the southern European economies in the second half of this year.

4. Japanese growth will disappoint.

The trigger: increase in consumption tax in April will produce a fiscal tightening of 2% of economic output. A further caveat is that when they first introduced the 5% sales tax in 1997, it tipped the economy into deflation.

Deflation (declining prices) is bad because it increases the real burden of debts. Debtors will then cut spending to meet the increased debt burden. And expectations of lower prices decreases willingness to borrow and spend. The resulting depressed demand increases unemployment exerting a downward pressure on wages.

The end result: Japanese economy will likely fall back into recession in the second quarter and the stock market will tumble. The authorities will try to offset this by ramping up monetary policy stimulus with the side effect of a weakening yen.

5. Emerging markets might mark a comeback.

These countries he believes will have more to gain from stronger growth and healthier macroeconomic fundamentals.

Although he says countries with large current account deficits such as Turkey will underperform.

These are plausible and audacious predictions, I shall hold him to account when I re-read this post in December.

The purpose of investing: To grow wealth over time.Gold Coins and plant isolated on white background

Why shares? It’s the preferred ‘financial instrument’ because its proven time again to be the best long-term investment – outperforming bonds (loan stock), property, cash deposits etc

Two components of return in shares:

-Annual income (dividends paid out of profits, usually distributed twice yearly)

-Capital growth (appreciation in the value of shares)

Shares or investment funds? I remain committed to the belief that the best way for the average investor to gain exposure to the stockmarket is through a pooled investment. This is a diversified portfolio looked after by a professional fund manager, where the money is spread across companies, sectors and countries.

Advantages –

Investors with a small sum to invest can gain exposure to the stock market through a stake in a well diversified fund.

Diversification reduces risk and ‘economics of scale’ in share dealing/admin reduces costs.

Moreover, investors take advantage of professional management.

Attractions of an Equity Income Fund

An equity income fund manager searches for companies paying attractive and growing dividends. The beauty of this philosophy is that it goes back to the basic principles of investing – that you receive a share of the profits companies choose to distribute as dividends.

Dividends can be reinvested to compound returns – buying more shares with your dividends and in turn receive even more dividends. It’s a tried and tested way to build wealth.

In addition, recurring dividends provide first-class compensation while you wait for the market to appreciate. You can therefore spend less time trying to second guess the economy, and less time concerning yourself with roller-coaster ride of the stock market.

Folly of Market Timing

Peter Hargreaves, co-founder of Hargreaves Lansdown, one of the UK’s largest fund supermarkets highlights the folly of this flawed strategy.

He describes it as a utopian philosophy for inaction. People who endeavor to time the market always believe the market will go lower when it has bottomed and never invest. Plus when the market turns a corner, they believe it has risen too far and so refuse to invest again.

The result – perpetual inaction or being sucked in at an expensive price.

These are the financial predictions for 2014 of four Journalist and economist I hold in high esteem and whose analysis I pay keen attention to:

Linda Yueh Chief Business Correspondent of the BBC. She made her 2014 predictions here.

Financial Times long-view investment writer and former head of the flagship Lex columns , John Authers.

George Magnus, Author and Economist. His analysis is contrarian, original and insightful.

Finally, Economist and journalist for the Reuters news agency Anatole Kaletsky.

Linda Yueh Predictions

-There will be no reverberations across global markets following the Feds ‘Taper’, which will most likely finish by the end of next year.

-Emerging markets (particularly the ‘Fragile Five’ – Brazil, India, Indonesia, South Africa and Turkey) have had ample time to prepare and adjust their economies accordingly for the inevitable end of cheap money.

-Furthermore, the ‘fragile five’ have elections next year, these will all proceed smoothly.

What won’t happen

She also predicted what won’t happen in 2014:

-No return to normal growth rates, small chance of a sustainable self-sustaining recovery.

-Income rising strongly, more likely stagnation

-A substantial fall in youth unemployment

Finally, she believes China is the place to watch. Their main legislative agenda will be set out in March, there are growing concerns over how they will address the sharp rise in debt and the ‘shadow banking system’.

Federal Reserve’s Programme of quantitative easing

Information about QE can be found here.

Outgoing Chairman Ben Bernanke will Taper QE next month from $85bn per month to $75bn. They are keen to reiterate that bond buying is not on a ‘preset course’, meaning tapers are contingent on employment and inflation levels.

As a reminder, the target of zero short-term rates will stay in force until unemployment touches 6.5%, this is expected to happen until the end of 2014. The federal Reserve also kept to the door open to keeping rates at virtually zero ‘well past the time’ unemployment falls below 6.5%.

Meaning and the signal of this move: The era of easy money is coming to an end, but their commitment will almost guarantees near zero rates until the end of next year.

Bond market prediction

The secular bond market is coming to an end, in the US a large upward adjustment in long-term interest rates has most likely already happened, they doubled from 1.5% to 3% this year.

Anatole Kaletsky from Reuters highlights that an acceleration in the economy will likely hurt fixed-interest securities which in turn will create headwinds for property and equity prices. However, he points out that history shows that during economic upturns, the benefit to share valuations from a strong economy and earnings growth more than outweighs pressures from rising long-term rates.

Wall Street

US stock market – now the world’s most expensive market (S&P 500 trades at 20 times earnings, in comparison the dotcom peak was 34).

Europe and Asia on the other hand are priced for stagnation and will most likely outperform Wall Street.

Anatole believes Wall street is already priced for growth, as the market is a discounting mechanism, I am avoiding this market next year.

UK Stock market prediction

Shares in the FTSE 100 index has on averaged delivered 7% a year since Victorian times, an inflation beating return of 9% this year looks reasonable.

Interestingly, the solid performance is against the backdrop of a strong pound, as the majority of earnings stem from abroad, this has hampered export growth.

As for valuation, the FTSE 100 trades at around 15 times earnings, while CAPE (cyclically adjusted price to earnings ratio) is 15, in other words it is fairly priced.

My view: The current economic backdrop looks positive, valuations in Europe and Asia are attractive and the prospective returns on rival asset classes look abysmal. All told, I believe this creates a compelling long-term case for stocks.

Tom and David Gardner co-founded the Motley Fool, a multimedia firm created with the purpose of investinghelping the world invest better.

They are frequent commentators, astute investors and financial educators. Their insightful commentary is articulated beautifully and succinctly, in this post I’m going to briefly summarize their best bits.

Tom and David Gardners Time Horizon

They embrace the idea that you’re investing in businesses. Therefore the actual movement of the stock price should come secondary.

Peter Lynch ‘Although its easy to forget sometimes, a share is a not a lottery ticket… its part-ownership of a business’.

Moreover their timeframe is a little longer than Wall Street, that of the professional community.

They look for shares that will perform well over a three to five year investment horizon. Metaphor they use – ‘you are fishing in a different stock pond to the rest of the professional community, and in fact its a stock pond, and in my opinion few fisherman have their poles in that particular pond’

Furthermore, they embrace the stakeholder model of investing. Rather than rigorously focus on earnings (which are important), they look to the culture of that organization, how they serve their customer, what is it like to work there, what is the performance of the business over a long period for its stakeholders?

Does this company make the world a better place?

Accountability and performance

He says we all have a ‘finite store of energy’ or ‘attention units’, ask where will you allocate these over day, week, month etc.

In the investing world: David Gardner ‘You will do best as an investor if you don’t trade very often’, this indeed is echoed by the frequent warning ‘trading is hazardous to your wealth’.

All of their stock picks are monitored and scored. Strongly believes in transparency as it’s the ‘first seed you have to plant to show that you’re a accountable and competent person’.

He believes we should be evolving continuously over time, ask yourself, what are you growing into?

In business world, companies which get complacent with their business models and are not willing to embrace and adjust to change will fail – HMV

To be adaptable and nimble, you need to be open to new ideas and viewpoints.

Tom and David Gardner on Mistakes

Too much complexity? we should delight in it as you go deeper into a subject. Life would otherwise be boring.

But the only way you develop is by getting your boat out there in the water and learning.

You learn by doing. Sitting on the sidelines denies yourself the opportunity to make mistakes, which are the best ways we learn in life.

Each mistake contains a rich trove of information, they contains a powerful lessons and you should therefore make more of them (the ones that don’t severely damage you).

David Gardner life’s lesson

It’s natural human tendency to fear what we don’t know. We have two options, first don’t go there. Or go ahead and do it, for people who are intellectually curious and believe life is an adventure.

Used to do a radio show. His advice on doing radio, someone said ‘lead a more interesting life and just talk about it’.

It wasn’t about trying to be really good on camera, if you do interesting things in life, you have more to talk about.

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