Monday, June 30, 2008

Monthly Review - June 2008

From a financial perspective, June was the worst month I have experienced since I started keeping monthly records in January 2007. If I had been keeping monthly records for longer, I suspect I would have had to go back several years to find a month in which I had lost as much money.

As a group, my mark to market investments all fell in value by meaningful amounts with the sole exception of my relatively small exposure to commodities. Adverse currency movements amplified the losses.

Here are the details:

1. my actively managed funds all fell. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam. The loss on the Vietnam fund is now approaching 50% of the capital invested. It is unlikely that I will invest in another fund that effectively locks me in for several years;

2. my equity ETFs also fell. I currently have exposure to Hong Kong and India

3. my residual equity portfolio fell;

4. my commodity investments showed very marginal appreciation with a gain on my commodities fund slightly outweighing small declines in my Nickel and Lean Hogs ETCs;.

5. my properties are all fully rented and tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). Although some of the reductions in interest rates have been slightly reversed with the rise in HIBOR, the cash flows remain positive;

6. currency movements were adverse (the USD recovered some of its losses) and amplified the losses on investment. Currency movements have played a major role in determining the returns on my investments over the last 6-12 months. For the most part I have been a beneficiary of a falling USD. This month was one of the few months in recent times when the currency movement has been adverse.

To put the losses into context, the total mark to market write down was the equivalent of about 7 months of gross income from my Hong Kong rental properties. It is also worth mentioning that many of the investments continue to be held at well above cost. However, this is small comfort when I consider that I could have taken some quite good profits or cut my losses with at least some of them over the last six months.

There were no investments made this month. My income was in line with expectations this month. My spending was on the low side. The resulting savings helped to offset the effects of the losses on my investments. The end result was a decrease in net worth of 1.2% for the month. The year to date increase is 6.2%.

Looking forward, it has been several months since I made any investments and my cash holding has been building up. With inflation running at 5.4% officially and deposit rates still at close to zero, cash is depreciating quite rapidly and finding suitable investments is something of an imperative.

Wednesday, June 25, 2008

World Wealth Report

The 2008 edition of the Cap Gemini Merrill Lynch World Wealth Report has been released. As usual the report made interesting, although slightly predictable, reading.

Among the highlights:

1. The number of HNWIs passed the 10 million mark for the first time (up 6% to 10.1 million).

2. Global HNWI wealth increased 9.4% to $40.7 trillion.

3. The average wealth of HNWIs reached $4 million for the first time.

4. India, China and Brazil had the fastest growing populations of HNWIs. Emerging markets continued to show higher rates of growth in HNWI populations than developed markets.

5. The US still has the highest number of HNWIs (3.3 million).

6. The population of UHNWIs increased to 103,300.

7. HNWIs asset allocation showed a material shift to more conservative investments with cash, deposits and fixed income making up 44% of assets (from 35% in 2006) with substantial reductions in real estate and alternative investments. Equities remained the largest asset class (33%) There was also a rotation away from investments in North America.

The section on "passion investments" made interesting reading and supports the thesis of Robert Frank's Richistan .


High Net Worth Individuals (HNWIs) hold at least US$1 million in financial assets, excluding collectibles, consumables, consumer durables and primary residences.

Utra-High Net Worth Individuals (Ultra-HNWIs) hold at least US$30 million in financial assets, excluding collectibles, consumables, consumer durables and primary residences.

Monday, June 23, 2008

Hedging inflation - not speculating on commodities

There has been a considerable amount of commentary (mostly by politicians trying to blame the free market and others for their incompetence) about how speculators are contributing to the increases in the prices of many commodities and the resulting effects of inflation. This is largely nonsense. Certainly, speculators play a role in driving up prices just like any other demand factor does. However, there are much larger factors at work:

1. rising end-user demand. The world's economy is still growing and the demand for raw materials will increase with such growth (although not necessarily on a linear basis);

2. market distortion. Many countries heavily subsidise the prices of raw materials and key consumer goods. In some cases this is defensible - in some countries subsidies (or similar) on foods are very necessary to prevent starvation. In some cases subsidies are indefensible on both economic and environmental grounds. Fuel subsidies that prevail in many emerging markets are the worst example. They stimulate demand at a time when the world desperately needs to consume fewer hydrocarbons for both economic and environmental reasons. As much as it goes against my belief in the free market, the case for (higher) user taxes on hydrocarbon products is pretty overwhelming.

As to the calls for speculation in commodities to be regulated in some manner, this is totally unjustified. Not only is it an erosion of free market principles, but any measures which are likely to be introduced will (most likely) prevent consumers from taking one of the few steps available to them to hedge against the impact of rises in commodity prices on their standard of living.

The proposition is simple. Rising prices of essential commodities are an expense which most households cannot avoid paying and can only take limited steps to reduce. Investing in the underlying commodities (e.g. through an ETC or a commodity based ETF) is a simple and effective means of providing a hedge against the impact of rising commodity prices. The gains on the hedge instrument would offset to at least some degree the increased living expenses.

As a side note, there is plenty of academic commentary on the benefits that speculators bring to a market. Attempting to regulate speculators out of the market is likely to be detrimental to the markets as a whole.

Tuesday, June 10, 2008

Millionaire density by country

Barclays Wealth released an interesting report on concentrations of millionaire households. It was the 5th report in a series and, like the earlier reports, made for interesting reading.

Among the data included is the density of millionaire households in various countries expressed as the percentage of all households in each country as a percentage of total households. The top 10 countries were:

1. Hong Kong (26.4%)
2. Singapore (23.3%)
3. Switzerland 22.3%
4. Denmark (17.9%)
5. Britain (15.5%)
6. Ireland (14.8%)
7. United States (14.7%)
8. Australia (11.9%)
9. Italy (11.8%)
10. France (11.7%)

The report also makes a number of forecasts regarding wealth creation for the next 10 years. In terms of total millionaire household populations, it should be no surprise that China, India and Russia are all expected to show significant growth in the creation of high net worth households. While the US and Japan are expected to retain their places as the two countries with the highest total wealth held by the domestic sectors, China and India are both expected to join the top 10 countries by 2017.

The report makes a number of observations on trends in matters ranging from asset allocation, comparisons between household wealth and GDP and other matters.

Sunday, June 01, 2008

Failed quest to simplify my life

Back in January I stated that one of my objectives for 2008 was to simplify my life by reducing the amount of time I spent on administering my investments . While I have managed to move some payments (inwards and outwards) on to autopay I still have quite a few payments which I have to make manually (including several which require me to write cheques each month). The principal problem areas are:

1. building managers who refuse to allow autopay (even though it is in their interest to do so);

2. government rates and government rent. Autopay is not available for these;

3. distrust of the service provider. I have heard enough horror stories of service providers who continue to debit their former customers' accounts months after the service is terminated to be very careful about signing up to direct debit arrangements;

4. too many investments and too many non-investment related expenses which require non-automated payment by me.

I am currently taking a good hard look at my investments with a view to selling some of the smaller ones to reduce the administration work. I suppose I could take a positive view - my finances have reached the stage where my time has become an increasingly material consideration when making investment decisions.