TO ALL OUR CLIENTS, COLLEAGUES AND PROVIDERS.

WE WISH YOU AND YOUR FAMILY AND LOVED ONES A VERY MERRY CHRISTMAS.

BEST WISHES

YELLOW CAPITAL

 My purpose today is to leave you with some hopefully constructive ideas to mull over the holiday season. Most of all I want to give you what I believe will be a compelling recap of the rationale for direct, unlevered farmland investments in Canada.   — READ MORE

Are we experiencing the makings of a monetary collapse and a crack up boom, please click on the link to read the article on Hyperinflation, Money Demand and the Crack up boom from the Austrian School of Economics.

http://mises.org/daily/4016

Towards the end of last week rumours grew that the ECB was planning to lend money to the IMF which would then bail out troubled countries. Such a move would bypass rules which prevent the ECB from buying sovereign debt directly. However, there are bound to be objections to the plan, specifically from Germany and the Bundesbank. So for now, traders and investors are keeping a close eye on the euro.

At some point the printing press will need to work overtime, and impending inflation is the effect. Basic economics increase supply, demand drops and so with it the price.

You see, I believe investing is business. It is not about scientific formulae or statistical maths. Its about understanding business and adopting a business like approach to determining the economic value of the investment and deciding with rational thought on the merits of risking capital to it.

— READ MORE

http://www.youtube.com/watch?v=GnbuNkPNzcE&feature=youtu.be

Which? slams 8.8% commission bank advisers

16 November 2011 8:11 am | By Steve Tolley

Which? has slammed bank and building society advisers after 32 out of 37 gave poor investment advice to its mystery shoppers.

The consumer group has urged investors to see an IFA for financial advice.

Researchers carried out the mystery shopping exercise between August and October. They found that just five of the 37 tied high-street advisers gave good advice while four out of six IFAs offered good advice.

Which? assessed the quality of advice according to whether advisers disclosed their status as tied advisers, explained the Financial Services Compensation Scheme, carried out a thorough fact-find, clearly established the customer’s attitude to investment risk, discussed tax issues and fully explained the product being recommen-ded and its fees and charges.

Clydesdale and Yorkshire Banks failed on all four visits while Co-operative and Britannia advisers passed one of three visits.Five out of seven advisers at the firms, who were all employed by Axa, recommended an Axa investment bond that pays 8.8 per cent commission. They told shoppers that the advice was free, despite it being worth £4,400 in commission.

Skipton Building Society, Yorkshire Building Society, Royal Bank of Scotland Group and Lloyds Banking Group advisers also failed to give good advice on all four visits. HSBC advisers passed two of three visits but Which? says the third adviser was one of the poorest, explaining complex investment options using lots of jargon.

A NatWest adviser told a Which researcher: “let’s face it, the major banks aren’t going to go under,” and handed them a leaflet about compensation, saying: “you don’t have to read this”.

Four out of six IFAs tested were up-front about their independent status and charges and gave suitable advice. The other two incorrectly assessed the shopper’s risk profile and so recommended unsuitable products.

Which? executive director Richard Lloyd says: “Our investigation shows that the high street is not the best place to go for investment advice. If in doubt consumers should always talk to an IFA.”

Derbyshire Booth Financial Management managing director Greg Heath says: “This shows a lack of professionalism and IFAs are often left to clear up the mess.”

http://www.thesouthafrican.com/business/the-graft-is-greener-haydn-ellwood.htm

— READ MORE

Intro to Asset Allocation Myth 

Over a short series of articles we are looking at ways in which you can build robust client investment portfolios in an efficient and profitable way.  Along the way we shall be questioning some commonly held beliefs – many of which may have been indoctrinated into us by parties with a possible vested interest.  This week we look at understanding what you need to bolt together to make good funds into a good portfolio

 What makes a good portfolio?

 For retail clients it would be one which provides returns which match or exceed expectations over time and allows them to sleep at night along the way.

 Apparently, 90% of a fund’s return is due to its asset allocation – or so the popular mis-quote goes.

 In 1986 Gary Brinson and his colleagues studied the quarterly returns of 91 large US pension funds between 1974 and 1983 to see if the variability in the funds’ returns over time was related to their long term asset allocations.  It was a simple comparison between being invested in theUSstockmarket versus investment in cash, which concluded that 90% of a fund’s variability of return was due to its long term asset allocation.  The Ibbotson Associates study by Paul Kaplan in 2000 showed, however, that this was more “a case of a rising tide lifting all boats”, rather than a comprehensive asset allocation study, and that the outcome simply measured the one question asked, which was –

 How much of the variability of returns across time is explained by policy – ie how much of a fund’s ups and downs do its policy benchmarks explain?

 The other two questions asked by Ibbotson/Kaplan were –

 How much of the variation in returns among funds is explained by differences in policy – ie how much of the difference between two funds’ performance is a result of their policy difference?

 And

 What portion of the return level is explained by policy return – ie what is the ratio of the policy benchmark return to the fund’s actual return?

 Most people seem to have assumed that Brinson’s study answered the second question – which is what investors really want to know (note: policy refers to the normal long term strategic asset allocation throughout this article).

 “Unfortunately, the Brinson et al. studies are often misinterpreted and the results applied to questions that the studies never intended to answer.  For example, an analyst might want to know how important asset allocation is in explaining the variation of performance among funds.  Because the Brinson studies did not address this question, the analyst can neither look to them to find the answer nor fault them for not answering it correctly.”

 The Ibbotson/Kaplan study found that, “To answer the question of how much of the variation in returns among funds is explained by policy differences, we compared each fund return with each other fund’s return.  We carried out a cross-sectional regression of compound annual total returns for the entire period on compound annual policy returns for the entire period.  The R² statistic of this regression showed that for the mutual funds studied, 40 percent of the return difference was explained by policy and for the pension fund sample, the result was 35 percent.”…

 “The mutual fund result shows that, because policy explains only 40 percent of the variation of returns across funds, the remaining 60 percent is explained by other factors, such as asset-class timing, style within asset classes, security selection and fees.  For pension funds, the variation of returns among funds that was not explained by policy was ascribable to the same factors and to manager selection.”

 Paraphrasing the outcome of the studies, it revealed that many of the US pension fund managers in the original study did not actively manage their portfolios, so their funds tended to drift up and down with the tide of investment returns, whereas active fund managers achieved far less dependent returns, as established by the Ibbotson/Kaplan study, which were only about 35%-40% dependent on their longer term asset allocation policy for their investment returns.  The later study then went on to establish the relationship between the level of investment activity within the funds and their correlation with asset class returns (having already established, incidentally, that less than 47% of the top 5% of funds’ variability of returns was due to policy) and found that, “At x=1, the cross-sectional R2 is our original result, 40 percent.  If the funds had been half as active (x=0.5), the R² would have been much higher, 81 percent.  On the other hand, if the funds had been one-and-a-half times as active (x=1.5), the R² would have been only 14 percent.  Thus, this approach shows how the degree of active management affects the cross-sectional R².”

 It doesn’t get much clearer than that – the more active the fund the less dependent its returns are on long term asset allocation!

 These studies were actually a criticism of passive investment policy and yet have somehow been twisted to be used as a raison d’être by index funds, while it was the closet index trackers causing the problem in the first place.  Sample returns from the Ibbotson/Kaplan study included the following, which shows that asset allocation had little to do with the actual returns achieved in these instances:-

 Also, consider this; the original Brinson study covered 1974-1983, the Ibbotson studies covered April 1988–March 1998.  With “holding periods” falling to all time lows in recent years do you think managers are more or less active now than then?  And remember – 1974 was about the freakiest year in living investment history!

If funds are now about one-and-a-half times as active as they were then, should we now say just 14% of an active fund’s return is due to its asset allocation – so we won’t be using asset allocation theory to bolt our portfolios together, then!