I have an excellent guaranteed (by Westpac Bank – one of Australia's largest banks) trading fund managed by ED & F Mann and issued by Ord Minnett of Australia (owned by Chase Manhattan) coming out in October which your readers are sure to find attractive. In the meantime, my own portfolio programme as below:
I have a positive defensive view of the overheated international share markets which leads to a strategy I'm using for my own clients.
Most readers of the e-club are aware that the American and European stockmarkets are vastly over-priced at the moment.
When comparing the different measurements like price/earnings, price/dividends and price/book value we find the markets over-priced more than double their historical valuations and much, much more over-valued than they were before the crashes of 1973, 1987 and even 1929. I also feel that Asia and the Emerging Markets are at risk again as most of the structural problems that caused the Asian crisis two years ago are still there. Therefore, I think it logical to conclude that risks in most of the world's stockmarkets are far too high right now for any rational investor.
However, it is possible to make a lot of money in a falling market – and again when the market recovers – given the right strategy. The three-step strategy we employ for our clients through our CDIS Portfolio Programme is as follows:
- We hold 40-50% in cash, half in Australian dollars and half in New Zealand dollars (I feel the US dollar is overvalued as well). It is our intention to hold this cash for safety until the market corrects and then to use most of it to take advantage of the resulting stockmarket recovery.
- We hold approximately 25% in international, Australian and New Zealand bonds. There is generally a flight to quality when stockmarkets crash which usually leads to demand for bonds, pushing bond values up. We also believe that interest rate rises that have been taking place virtually all around the globe are near their peaks. Most analysts predict one or two small interest rate increases during 2000 in most Western countries (including Japan) but these rises have largely been built into current bond prices. Therefore, we anticipate the bond market returns will be positive over the next year or so in addition to the bond profits we would expect resulting from a stockmarket crash. We are currently using Bankers Trust Australia, Credit Suisse London and Grosvenor Financial New Zealand to manage our bond portfolio.
- We have approximately 25% of our funds in a trading fund managed by Global Asset Management (GAM) in London. The particular fund we use is subcontracted out to between 10 and 15 other trading fund managers. Trading funds use derivatives which tend to perform well when markets develop a trend, either up or down, so I would expect superlative performance from this fund when the market crashes.
This three step strategy is very low risk yet it has the possibility to do exceptionally well in a crash. After the crash we will slowly re-enter the international stockmarkets through a wide variety of fund managers and capitalise on the tremendous returns usually associated with a stockmarket recovery. It is our intention to hold 40-75% of our portfolios in international stockmarkets (including exposure to emerging markets) once the crash is behind us.
Our Charles Drace Investment Services (CDIS) Portfolio Programme has five investment options suitable for short, medium and long term investors as well as an option for speculators (we'll put this into position only after a crash