Understanding Good Investment Strategies

Is it Champagne or Cider?

As always with information, it is how we use it that is important. We see from the various analysis of Generali International Global Managed Fund that "Thumbprint" views are rarely what they seem at first glance. Assuming the day before the anniversary date whereby each of the investment formats(IE. Monthly quarterly etc) are approximately the same we find that the AUC varies very little, between $2.99 and $3.00USD per unit owned.

 On the 27th August 2004 the bid price per unit was $3.54 (As listed by Standard and Poor’s fund valuation index). Therefore over the four years the fund against the AUC cost, increased 18% in total.  This fund is predominately invested within US Equities, Bonds and cash deposits and mirrors in general terms the performance of corporate America. The main indices in the US have seen a 12% drop in value from their highs of earlier this year, mainly because investor confidence has been affected, by the uncertainties caused by Iraq, the impact of high oil prices, terror acts at major events and the presidential election etc. Historically between the last US party conference and one hundred days after the inauguration date of the next President, IE Mid April 2005 US markets normally rally between 7%-12%.

A prudent investor, with fund selections across low to mid high volatility would seek from this managed fund over a ten year plus period, a realistic average CAG ( Compound Annual Growth) of between 6% and 8%. For a medium low volatility Fund ( rating 2) since its inception in 1995 its CAG to 1^st August 04 is 6.6%. These to the untutored investor’s eye may seem modest but from the information above a considerable amount of optimism on it’s future performance can be deduced.

 The generally held overview of the US in the beginning of the last quarter 2004 is still somewhat cautious, however most analyst see the underlying economy growing at a steady modest to average pace. The outlook regarding the political outcome of the Presidential election is less consensual, yet whether Bush is re-elected or Kerry wins, for a variety of complicated reasons, each side agrees that if the US can get through the inaugural ceremony without a major Terrorist attack, then the present, circa $8-10USD “Murphy premium” priced into each barrel of oil will gradually decrease and see its value return to the $30-$35US levels. Whatever administration will have tenure, a four year window of opportunity will open to address both domestic and foreign problems. Markets will generally anticipate a positive move and buy forward, subsequently we should expect an increase in unit price.

 The CAG of a fund is a pretty accurate overview of economical reality and gives us an indicator of future performances, during the four years of our analysis it has under-performed against its CAG, therefore we can expect that shortfall to be corrected in the foreseeable future, notwithstanding political events. We shall in future call this the FEM ( Fundamental Economical Mean).

 As medium to long term investors, the occasional scandals, wars, political variables, terrorist attacks, natural tragedies and other events we human beings are cursed to experience, rarely to anticipate, we must bear with fortitude and patience, until their effects have passed. I believe, without much argument, that we would assess the last three years as combining the repercussion of some of the above events. We believe these events have further negatively affected the performance of the Fund and expect that to be corrected in the near future.

 At some time in the future, solution to the myriad of problems, both political and economical will begin to be addressed and part of the general cycle of economics will prevail.

 If we attempt to conservatively price these positive realignments into the future value of the fund then we would anticipate a future value, based on the CAG to reach $4.12USD within two years, therefore the accumulated funds to date with an AUC of $3USD will experience a 37% increase in actual value and this requires only, an average of 8% compound growth of the fund each year. This would relate against previous annual achievements to a medium to low high performance of the fund.

 In summary, many factors need to be assessed when reviewing a fund, in truth as space is limited the overview above is very simplistic, however, it was intended, not as a master class dissertation in economics or portfolio management, but as a simple exercise to enable an investor to understand something of the mechanical, financial and general process of simple mathematics and how time rather than timing is king.

 NOTE: This type of rating 2 fund is used within the portfolio spread of funds selected by clients at the outset of an accumulation investment programme and sometimes as part of a Capital Investment strategy. Equally it can play an important role in a long term accumulation programme during its last four of five years, to receive and protect gains achieved via more aggressive funds, as per the conservative nature of its investment philosophy.

 Capital Investors need this type of fund to provide that part of a portfolio which is geared to medium and long term balanced growth. The possible opportunity discussed above, offers them a chance to achieve a higher return over the next two years which this type of fund over a much longer period would be unlikely to sustain.

The analysis of Generali International Global Managed Fund above, reflects the performance of a medium low (rating 2) volatility fund, during four years of an extended “Bear” market. If we select a few of the other popular funds, which have been incorporated into diversified portfolio’s, with higher volatility rating, we find some interesting differences than those revealed above.

Another medium low fund, but this time invested in Global equities has had an exceptional few years. Originally named Investec Privatization Fund, through amalgamation it was incorporated with similar funds and renamed Investec  Global Strategic Fund A. The following chart, analysing the year to June 04 demonstrates more clearly how different, periodic investment methods, creates more distinctive AUC., especially when a fund has experienced an excellent continual growth throughout the year.

 INVESTEC GLOBAL STRATEGIC VALUE USD FUND.  

 Another fund analysis, this time JP Morgan US Technology Fund ( Below)which also had a good year, would seem to reinforce certain facts.

 JP MORGAN US TECHNOLOGY FUND

 Both the above, one year Fund analysis would seem to indicate that those whom invested annually had an exception year when compared against the others. As we discussed in other sections, it is time rather than timing, which prevails over the years.  If we use the 6^th July as the anniversary date for this example, we find that the value of the units on that day were $59.65USD and $5.55USD for the Investec and JPMorgan  Funds, respectively. The annual investor’s Average Unit Costs would therefore change from

$44.40USD and $4.15USD to a total holding as follows….

Depending on the investor’s overall portfolio strategy, coupled to the prevailing view as to future performances of the fund, or indeed whether a fund within the same specific or related sector to match portfolio diversification requirements, offers a better opportunity, will decide whether to add or divert the second payment.

If we use JP Morgan Tech Fund as it’s the easier analysis. Technology is the sector which creates the innovation, which helps to drive the job growth and subsequently the economy. With a diverse portfolio, Technology Funds has a place over the long term. This fund during the “Dot.com” bubble period of 1999/00 had a unit high of $53.56USD. It fell to a low of $2.99USD. In the middle of 2002 we felt that it offered long term possibilities and began offering this fund as one of the aggressive stocks within possible portfolios.  We still believe it offers long term possibilities and although we look to a value of $10 to $12USD rather than $30 or $40USD, over the years, if it forms part of a diversified programme, then the $12,000USD invested to date would accrue a value if and when it hit $10USD a unit  of $28,915USD if the investment had started in June 02 then the $24,000 over the two years would have accrued 5847.23 units at and AUC of $4.10USD in July 04 it would have gained 30.56%. Should it reach $10.00USD unit value the accrued amount would achieve $58,472USD. 

Putting it all together

The above fund examples demonstrate quite clearly, the mechanism and the variables of long term Capital accumulation programmes. The most common mistake made by investors is to look at a fund that has performed well over two or three years and invest or divert existing  funds at its high, then when it falls back to is normal CAG range, sell or transfer into another fund, thereby incurring a loss. Some investors perpetually experience this negative “roller coaster ride”, reacting to incomplete data or more often trying to “Time the markets”, which seasoned professionals rarely get right in the majority of cases. 

Although, we stress that length of time rather than timing is the key for medium to long term investing success, this does not mean that some knowledge and perception of the future…The events that effect the growth and recession of economies and markets…Are not desirable or important. We believe they are. Never the less, it is within the broad stroke parameters rather than the detail, coupled to commonsense, where most investors will obtain long term success. If we analyse the Dow Jones Index over the last 10 years we see, that notwithstanding  the events of the last four years that the index shows a 270% increase in value(Sept 04) . At its height in the beginning of 2000 during a five year period, near to 400%.

10 Year Dow Jones Performance Chart

One would assume that a ten year view would provide adequate information to base certain judgments, yet this period saw one of the most sustained growth periods that the world has experienced in modern times. If we look at the index over three decades we see just how dynamic it was.

30 Year Dow Jones Performance Chart

We see from the 30 year chart that since the end of President Regans first term 1984/85 that the value has soared. Through Bush senior and the Clinton years, notwithstanding wars, terrorist acts and scandals and recessions, that modern markets, create growth. Interestingly, Funds over the same period have generally out performed the indexes they selectively invest into.

The premise therefore is that economies grow, that although no country or sector has yet found the magic formula to break the boom and bust cycles, never the less, the nature of the human race predominately moves forward and up. Cycles are generally becoming less severe, yet they still exist. As we have mentioned before, many factors can affect markets however, if we leave aside, wars, oil prices and other negative influences the US still expects to see annualised growth of 3% over the coming few years, which  pragmatically  speaking is quite remarkable given the present condition.

Therefore, good investors decides their mid to long term strategies based on current conditions and more importantly whether they believe a country, region or sector type will either grow or contract, either view, provides considerable possibilities.

 Next: Capital Appreciation