Wednesday, 21 August 2013

FG Portfolio Change: Adjusting for Volatility

Today we initiated some changes in the FG portfolio which are explained below.

Sell First State Global Emerging Market Leaders and Baring ASEAN Frontiers

These sales have been made as part of a tactical asset allocation decision. With Fed tapering still a major issue and sentiment towards Emerging Markets not improving there is a likelihood for a further fall should the Fed signal tapering in September or October. The current P/B of many EM countries is very attractive and long term investors could see strong upside. Our tactical decision is to wait for further volatility before buying back in at hopefully cheaper prices.

Increase Ignis UK Absolute Return Government Bond

Our base case is for developed bond yields (Treasuries, Gilts and bunds) to continue to rise. There is a knock on effect for all fixed income which is priced off these government bonds. The Ignis fund’s strategy allows it to make money from these rising yields, which we find very attractive. At the same time it provides diversification to our equity holdings, helping to smooth volatility within our portfolio.

Increase 3x Short Euro Long USD

The Euro and Sterling have shown remarkable strength against the USD over recent weeks, making the entry point for this top-up very appealing. Should Bernanke signal tapering, then we are likely to see the USD strengthen. With Draghi keen to keep policy very accommodative in the Eurozone we think this should lead to a weakening of the Euro against USD. Another benefit of this trade is the protection against a tail risk of the German elections. If Merkel does not get back in there will be question marks over the Eurozone and this will likely lead to a weakening of the currency, helping this trade. With all currencies they need to be monitored very closely. From these levels we can see short term upside of 15%-25% as this is a leveraged trade, and we will evaluate along the way.

Friday, 2 August 2013

The Launch of the Fund Gurus Portfolio

We have launched a concentrated portfolio of 10 holdings (fund of funds) with an unconstrained mandate.  Follow us as we explain changes as and when we do them, actively managing market sentiment and looking ahead to what asset classes we think will deliver the top returns.

Sunday, 21 July 2013

Apologies for the inactivity...

We will hopefully will be returning in the not too distant future.

However for the meantime, read some of our other articles in which we carrying out in depth equity analysis.

Saturday, 4 May 2013

Whoever Holds The Power, Holds The Key

Many investors are looking for the next big technology company like Apple, Google or ARM. However it is hard to know where to start.  Most of the companies that have risen to the top started from a very low price and took years to develop and evolve into the companies they are today.  So what will be next big thing?

Energy has been and will continue to be major driver in the world.  Oil and Gas rule currently, however as the world demands cleaner and more efficient energy, we seek the next step forward.  Within many products, portable power sources (batteries) play an important role and as other areas of technology develops, be it microchips or processors, the power source will be the key to whether things can develop further.  Phones have been gradually increasing in size over the past few years, from small flip phones through to 5 inch touch screen phones.   The new Samsung Galaxy S4 can last about day during heavy use, but this phone has one of the biggest batteries for a phone to date.  The faster processors require more power, but now things have come to a head.        

At the moment most small devices such as smart phones and mp3 players use Lithium Ion batteries, however these have reached the optimum capacity.  Graphite is used to store the lithium ions in the anode of the battery, however since reaching capacity you are limited to the power output.  Whilst increasing size will increase the total number of ions, a sacrifice will have to be made for weight and size of the products.  This is clearly not a solution, however a vast sum of money has been put into researching alternative storage materials for the lithium ions.  Currently, Silicon is leading the way as it offers the best prospect for ion storage.  But with a number of issues surrounding charging the silicon based battery, composites will have to be developed.  The hopeful result would be between a 30-50% increase in battery life to the current ones, offering a significant boost in processor development. 

Whilst we are still some time off having the finalized product available, technology continues to be a fundamental driver in the evolution of mankind, and funds investing in this can offer long term prospect for returns.

Whilst a lot of the technologies for new battery sources are in development stage, tech funds cover a broad range of companies.  Newly floated companies or those that develop this technology will attract huge demand and be sure to be a quick inclusion in technology funds.
Those investing in technology funds or specific companies would have had a fairly poor couple of months.  Whilst some of the big names, Apple have sold off on slowing growth concerns it presents an excellent buying in opportunity for the long haul.  AXA Framlington Global Tech fund has  great spread of companies and would be sure to capture fundamental technological developments over the long term.

Tuesday, 23 April 2013

Large Cap Oil Companies Limited to Mergers and Acquisitions for Growth?

There is a worrying trend for the large cap oil companies as existing reserves deplete, more look to M&A instead of exploration as it costs almost half to purchase the assets rather than develop them from the exploration stage.

Read more: Exxon Mobil: Is M&A The Only Way to Grow?

Monday, 22 April 2013

Has the Market Priced Crude Oil Correctly?

Currently the futures market is in backwardation (lower prices over the long term), read why I think the market may be wrong and how it presents an interesting buying opportunity.

Crude Oil: Has the Market Priced it Correctly?

Sunday, 21 April 2013

Apple: A Contrarian Investor's Dream Stock?

It has been a turbulent time for Apple investors as the share price fell from highs of $705 last year to close at $390 on Friday.  With their Q2 results to be released on Tuesday, it may be a brave call to jump in before, however for the contrarian investor is this the perfect opportunity?

Why has the share price fallen?

The stock has fallen 45% since its high in less than twelve months on fears that their flagship products; the iPhone and iPad are losing market share demand of the ever more competitive market.   
A number of companies who supply Apple parts have announced slowing sales which have spooked investors.  Cirrus Logic (CRUS) which supplies analogue and audio chips for the iPhone and iPad announced good earnings, however ended the year with over $20m in inventory reserves which suggests slowing demand for Apple’s products.  

The last five years have seen Apple in its mass growth phase, and it is difficult to quantify earnings potential and product demand until market saturation has been met.   The latest announcement from Cirrus Logic highlights just this, whilst they had a great year, they may have overestimated continued demand for Apple products.

The IDC recently released data for their Quarterly PC Tracker and revealed preliminary estimates had Apple ship 1.4m units, a 7.5% decline since 2012.  They noted that this decline may have been due to a steep rise in competition for the iPad.  With more competitors producing cheaper products, market share has been eroded.

Will Earnings Suffer?

Whilst Apple has been relatively reserved about pipeline products their current ones do a great job in hooking people for their next models.  In 2011, UBS carried out some research into retention rates for the iPhone; this was a whopping 89% with its nearest competitor at 39%.  Whilst we are a couple of years down the line, previous earnings have supported the results.  The 2013 Q1 results showed a record haul for iPhone sales of 47.8m units compared to 37m a year before, iPads also followed suit selling 22.9m compared to 15.4m the year earlier.

Although Apple looks to have more competition against Samsung and Microsoft the projected earnings for this year don’t look to suffer that much as a result.

First quarter in 2013 saw record revenue at $54bn, however gross margin had decreased somewhat from the year before.

The fall in the share price has been attributable to very little hard facts and mostly on speculation. Whilst many have been worried over the reducing gross margin, this may have be down to cyclical factors used in product development.  With the earnings looking to remain solid for 2013, contrarian investors will be licking their lips as the stock remains out of favour falling below $400 a share. 

Earnings per share looks to remain flat for 2013 which will not come as a surprise to many because the gross margin looks to decrease somewhat from 2012.  Capital equipment expenditure ahead of the iPhone 5 release may have been the cause for this gross margin decrease and has the potential to rise again once the iPhone 5S is released as modifications to hardware are likely to be minimal. 

Using Apple’s lower end estimates they are looking to grow revenue and net profit for 2013.  The current share price, just based on earnings is very low and factoring in the vast amount of cash on their balance sheet, $150bn, the company looks even more attractive.   Looking at Google Inc (GOOG) a company with similar merit, they have a P/E of 24.3 compared to Apple’s 8.7 (without $150bn cash)!

What is next for Apple?

Pipeline products are fundamental in this fast paced technology sector, and the company has been relatively quiet about what is to come.  They have hinted at a cheaper iPhone which should help snatch up some of the market share against the cheaper competitors and a new iPad release.   It is likely there are more products on the development line which are sure to draw in a huge amount of revenue, however it is hard to pin point release dates.

China Mobile is one of the world’s largest mobile networks without direct access to the iPhone and this may be about to change as they look to invest $30bn in the new 4G network that will support it.  Much time has been spent in generating a relationship with the company and this summer may see Apple gain further exposure to the Chinese market.

One thing is certain, the ever growing cash level that dwarfs Apple’s competitors provides potential for some significant developments.  There are a number of uses for this cash that will be beneficial to the share price such as research and development, M&A, share buy backs or increased dividends. 

The share price has fallen back to levels seen towards the end of 2011 and it is unlikely earnings are going to do the same.  The market is pricing in a dramatic fall in earnings for 2013 and subsequent years (almost 50%) and do not take into account new product releases. 

Out of 55 broker recommendations, 80% rate this stock as a buy with a mean price estimate of $602.  

Apple is a prime example of what contrarian investor’s look for; stocks that are out of favour with earnings and balance sheet strength.   I agree with the brokers and at $390 Apple shares are a steal.

Monday, 15 April 2013

Monetary Easing - How will it all end?

The first round of quantitative easing was implemented by Japan back in the early 2000s as they embarked on ending years of deflation.  With interest rates at near zero they aimed to provide excess liquidity to banks in order to promote private lending and spur consumers to spend rather than save.  The bulk of the operation was involved in purchasing government debt in order to increase its targeted current account balance.  This policy was lifted 5 years later and there was little evidence to suggest much of an effect.  The excess liquidity had provided little impact as both borrowing rates and JGB yields were close to zero making the net effect minimal.

A few years passed before QE reared its head again, and this time in a much greater scale.  The financial crisis in 2008 saw central banks around the world embark on trying to rescue the global economy from recession.  The United States, Europe and UK commenced QE after interest rates were dropped to near zero.  Both the UK and US used a similar method of QE, buying government debt and mortgage backed securities to stimulate growth.  Europe used a slightly different approach, whereby they used a repurchase agreement via their Long Term Refinancing Operations (LTRO).  The ECB bought government debt mainly off banking institutions with the intention for these to be repurchased at a later date.  This enabled banks to have more liquid cash on their balance sheets to help during the financial crisis.  Being relatively successful, the first round of LTRO repayments have been made and more which is an encouraging sign banks have stabilized and resurrected their toxic balance sheets.
The UK has done £375bn worth of QE since 2008 and with the economy still in a fragile state this could be increased.  The US has done over $2.3tn worth so far and as they continue with monthly purchases of $85bn the total figure will be approaching almost $4tn globally towards the end of this year.
Japan’s new Prime Minister, Shinzo Abe, has vowed to get their economy back on track once more and combined with the new governor Haruhiko Kuroda they have established an extremely aggressive monetary easing policy which has flooded the economy once more with liquidity.  However this time it is different, previously it has been focused just on monetary easing through quantitative easing.  Now Abe is combining fiscal and monetary policy to achieve targets.  His three arrow strategy is as follows:
  1. Monetary Easing - They have committed to $75bn worth of QE per month in order to achieve inflation target of 2% and GDP growth of 2%.
  2. Deficit financed budget filled with public sector and infrastructure spending
  3. Structural reforms to achieve growth through sthe timulating private sector.
As mentioned Japan was the first economy to undertake quantitative easing, however this new more aggressive approach combining structural and fiscal reform may just be what it takes to have a significant impact.

So does QE work?

Well central bankers would argue yes, it's achieved a lower borrowing rate, provided liquidity to banking institutions and supported businesses through this.  However, whilst it may have stopped the economy from being in a worse situation five years ago, the long term effects may be very detrimental.

What has happened?

Aggressive monetary easing has acted as a ballast to most asset classes.  As they are mainly purchasing government debt, it has driven prices to record highs, and yields to the floor.  Equity markets are another one that has benefited from this support as borrowing costs are maintained at a low level providing easing debt financing.   Gold is another one that has benefited as an inflation hedge, many would argue QE leads to inflation over the long term (see below). 

So what happens next?  

Many would argue, pumping all this money into the system will lead to inflation as the money supply has increased.  More money in the system means the value of the currency goes down and prices rise.  However, this is not the case, since 2008 we saw a slight rise in global inflation however it has now returned to fairly subdued levels with little sign of moving.  The reason why this money may not lead to inflation is down to the implementation of QE.  Governments have been purchasing debt which is predominately owned by banks, pension funds and insurance companies for purposes of liability matching.  As such these are all end game holders, whereby they would hold the debt to maturity.  When the government buys the bonds off these investors, the cash will be maintained and used to purchase another type of liability matching security, namely bonds.  The end result is the velocity of money remains very low and does not filter down through the economy being spent by various parties.  What has actually been happening is the vast monetary easing has slowly been depreciating the developed nation currencies and like Japan recently been exporting low prices around the world, bringing with it deflationary pressures. 

In past experiences, deflation has been present during times of QE, Japan has experienced this for over a decade and has not provided enough of a push to shift this trend.

As the US economy picks up, I am concerned with the detrimental impact to all asset classes when QE stops.  A number of FED committee members have expressed their hawkish (higher interest rates) views, and this is a cause for concern.  They do not want to continue with $85bn a month any longer than is necessary and this could essentially pull the rug from underneath everyone’s foot sending bonds especially spiralling from record high's.

A few words of caution here, but it is evident things are coming to a head, and I expect the end of this year will present some interesting opportunities for global markets.

The implications of Gold's sharp sell off

The dramatic fall in gold price has continued on Monday, with the price passing below $1,400 and heading as low as $1,390. Many investors, particularly retail investors, are often slow to react and it could be that Friday and Monday morning's sell off were just the start and we see further selling this week.

Short selling of gold, which has passed through various support lines, is also likely to increase and just adds further fuel to the flames, which are currently sending gold into meltdown! So what does all this mean for the wider world? Well obviously holders of gold bullion are going to be hit hard, with prices down over 10% from Friday. Gold mining stocks are also likely to be hit very hard, as many are a leveraged play on the gold price, and we have witnessed this today with many gold stocks down double digits already. The logic for gold miners falling in value is fairly basic; the price of the good they are selling falls, and assuming costs stay the same their margins are therefore eroded and so profits are likely to fall, all in all making the stock less attractive on various valuation techniques.

The question is just how low can gold go? Has it been oversold and is now a buying opportunity? Well this is probably the hardest question in investing. Equities and bonds can often be quantifiable, with companies have earnings (or predicted earnings) and cost structures that allow investors to generally determine fair value. Gold however, has no real economic value and so determining what price is fair value is very hard, and this is why, I suspect, gold will continue to fall further as sentiment is particularly important with the precious metal.

Factors driving the price back up are also harder to work out. Recent events such as Japanese Quantitative Easing, or North Korea tensions have historically been supportive of gold, but not of late, which does raise the question has gold lost its shine?