Portfolio Construction - Part 5

Over the past century and a quarter the real earnings of companies in the S&P index have grown at only 1.5 percent a year, which is less than the economy as a whole. This is because it is always underweight in new and dynamic companies. Over the past twenty five years real earnings have grown at an annual rate of 3 percent. Even more recently, it has gone up to an annual growth of 25 percent. This is since the most recent trough and will not last.
On past experience, it is far more likely to turn negative. If we have to gaze into our crystal ball so as to figure out when that may happen, we have to recognise that the buoyancy of corporate profitability is just one of several extraordinary features of the world economy.
Here are a few others: dynamic and now widely shared growth; low real interest rates on risk-free securities; low inflation-risk and credit-risk premiums and so low nominal interest rates; huge current account “imbalances”; and low inflation, in spite of big rises in prices of commodities, especially oil.
This combination explains many of the phenomena in financial markets. Borrowing by private equity funds to buy corporate assets is just one. Some of what we see is also surprising. This is particularly true of the association of rapid global economic growth and high profitability with low real interest rates and little concern about inflation. A world such as this is one in which one would have expected high real interest rates and worries about inflation, not the opposite.
So what is going on? Several answers emerge: monetary policy credibility, the great achievement of central banks over the past quarter of a century; globalisation of world markets in goods, services and capital; the incorporation of China into the world economy; the almost fixed Chinese exchange rate and consequent downward pressure on US Dollar prices of manufacturers; the shift of world income to two groups of high savers - the east Asians and, more recently, the oil exporters, and the consequent emergence of a huge savings surplus in these countries; the role of governments as accumulators of US dollar liabilities, especially treasury bonds; the role of the US as borrower and spender of last resort; and the rapid growth of US productivity. All this together has generated the conditions for stable economic growth. But how long will the happy times last? The dangers ahead look big:
* One is that markets will overreach themselves, so generating a destabilising correction.
* Another is a reduction in excess savings outside the US and a tightening of world interest rates.
* Another is a slowdown in US productivity growth. Yet another is a shift in global monetary conditions that threatens the soaring profitability of the US financial sector.
* But the biggest risk is that the end of the US property boom will persuade US households to tighten their belts at last, thereby ending the US role as the world’s big spender before the big savers are prepared to spend in turn.
The bottom line is that we can be confident that profit growth will not continue at recent rates. Sometimes people get perplexed: if the (US) economy has slowed so much through to Q1 2007, why are corporate earnings still so strong? This is because although real GDP growth has slowed down quite significantly over the last twelve months, the major equity markets, such as the S&P 500, continue to register strong growth in company revenues and earnings.
This is down to how things are measured and shows that there are fundamental issues that are also at work. To begin with, GDP is normally measured in real (volume) terms, but economy-wide headline inflation of near 3% must be added to calculate revenue growth. Secondly, the S&P 500 has a different industry mix that has seen higher growth than the economy as a whole. Third, revenues from US companies’ international operations have been growing rapidly, but these are excluded from GDP.
For the moment, the out-performance of S&P revenues versus economic growth should continue, even after adjusting for inflation. However, we believe that the industry mix of US growth could become less favourable for the equity market over the next few months. Nevertheless, a continued strong global growth environment and a weakening US dollar should help international sales to remain robust and offset a less friendly composition of US growth.
It is vital to have access to all investable asset classes within your portfolio. The equity ‘obsessives’ meanwhile will no doubt be spending their time and energy trying to come up with new measures to justify whatever prices stocks trade for ahead of the big looming fall (who else remembers the attempt to supplant P/E ratios with peg ratios around the turn of the millennium in an attempt to take the focus from how expensive shares had become?).
I can’t stress enough that the way forward is alpha management through the five asset classes (six if you include commodities), allocation, equity protected funds, intelligent stock-picking - we’re ready for the worst that could happen, what probably should happen and the best possible outcomes too. Every portfolio ought to be.
Goldilocks is alive and well in the minds of those analysts who view weak growth numbers as forward indicators that inflation is under control and similarly see signs of inflation as confirmation that growth will remain strong. This seems to be a deliberately perverse way of avoiding the very real dangers that:
1) The inflation genie is now inescapably out of the bottle due to fundamental structuring changes in the global economy (China now has sufficient wealth to generate domestic inflation which means that it can no longer offer deflation as one of its main exports)
2) The debt burden in economies like the US, UK, Spain, Ireland and Australia will choke any potential ability for growth and lead to slowdown/recession for these economies and the global economy as a whole.
To be continued…

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]@mbmg-international.com.com

Snap Shots: by Harry Flashman

Going Glam

What is the most popular photographic subject of all time? Hands up all of you who said “girls”. Correct again! And that includes you, doesn’t it! Actually there have been more books written about “How to Photograph Girls” than any other photographic texts. What’s more, photographers have been snapping girls since we first managed to record blurry images on Daguerre’s sensitized glass plates.
However, unless you are careful, you will end up with shots that are far from glamorous, and are disappointing for both the subject and the cameraman. The answer lies in following some simple rules which will make your lady look glam, and you will want enlargements of the very ‘professional’ result.
Let’s start with the basic pose. The first rule with all amateur models is to get your subject to relax. (Note I refer in this article to amateur models. Professional ones know which poses to adopt, and which poses make them look the best. That is why professional models are professionals - and expensive!)
Now, if your favorite lady is standing rigidly to attention in front of the camera, I can guarantee that the end result will not be pleasing. When photographing Thai people in particular, it is even more important to get them relaxed and happy, as they tend to “stand to attention” with arms held straight at their sides, looking as if they are on army parade. The other favorite position is to place thumb and forefinger under the chin, which does not look glamorous, but rather looks faintly ridiculous, and the reason for this escapes me.
I have found that it helps to have an album of different poses cut from magazines, adverts etc and show this to your subject. When the sitter knows what “look” you are trying to achieve, it makes it easier all round.
The pose to avoid at all costs is the subject straight on to the camera. This is unfortunately the commonest pose - but it is the worst as far as looking attractive is concerned.
Here’s what to do to get over this problem. Simply. Sit your lady in a chair, and then turn it 45 degrees away from the straight ahead position. Now ask her to slowly turn her head and look at the end of your camera’s lens. Now you look through your viewfinder - see? It looks better already, doesn’t it!
Now ask her to gently raise the shoulder closest to the camera and smile. Guess what? You are starting to get a glamorous image.
Now get her to slightly bend the neck to move her chin down towards the body, so that she has to look slightly upwards with her eyes at the camera. This makes the eyes look large and enticing.
That basic pose can be modified by turning to the left as well as to the right, shoulders up or down, open mouthed smile or shy grin. Each shot will have a different look.
For these sort of portraits you do need to make the subject’s head fill the viewfinder. Keep the top of the hair just inside the top edge of the viewing area and the lower edge should just keep the shoulders in the frame. In other words, walk in close. The best lens for this is around 135 mm, if you have a choice. This focal length is even known as a ‘portrait’ lens.
Lighting is the next important factor in producing that romantic glamor portrait. The trick here is to use gentle, soft lighting to avoid harsh and unflattering shadows. One super little trick to take shadows away from under the chin, nose and eyes is to open out a newspaper and place it in the sitter’s lap. The reflected light will gently lessen the dark shadows.
Another trick used by the professional glamour photographers is to “back light” the subject and then reflect light back into the face with gold foil reflectors. The gold imparts a very “warm” and flattering color to the skin. The reflector will also be picked up as small highlights in the eyes, which gives sparkle and an “alive” feeling to the portrait.

Modern Medicine: by Dr. Iain Corness, Consultant

Will I fracture my hip?

One of the greatest problems affecting us all as we get older is falling and fracturing a hip. Despite all the advances in surgical techniques, anybody with a fractured neck of the femur (the thigh bone where it fits into the hip joint) will end up with a prosthetic ball and socket joint. Even with minimally invasive surgery, it is still a major operation, and as such has “risks” and a prolonged post-operative phase, complete with rehabilitation and training on how to walk again.
The reason that the elderly have this problem is through the bone becoming less dense, and therefore more brittle. This condition is called osteoporosis. Osteoporosis involves a gradual loss of calcium, which causes the bones to become thinner, more fragile and more likely to break.
There are many people who are ‘at risk’ of osteoporosis, including:
Post-menopausal women and not taking estrogen.
A personal or maternal history of hip fracture or smoking.
Post-menopausal woman who are tall (over 1.7 meters) or very thin.
Males with clinical conditions associated with bone loss.
Anyone taking medications that are known to cause bone loss, including corticosteroids such as Prednisone, various anti-seizure medications such as Dilantin and certain barbiturates, or high-dose thyroid replacement drugs.
People with type 1 (formerly called juvenile or insulin-dependent) diabetes, liver disease, kidney disease or a family history of osteoporosis.
People with thyroid conditions, such as hyperthyroidism or parathyroid condition, such as hyperparathyroidism.
Those who have experienced a fracture after only mild trauma.
People with X-Ray evidence of vertebral fracture or other signs of osteoporosis.
That list above seems to cover just about everyone, so how can you find out whether you have already experienced calcium loss and osteoporosis? This can be demonstrated very simply by Bone Density Scanning.
Bone density scanning, also called dual-energy X-Ray absorptiometry (DXA or DEXA) or bone densitometry, is an enhanced form of X-Ray technology that is used to measure bone density loss. DEXA is today’s established standard for measuring bone mineral density (BMD).
To attempt to prove to myself that I am still a strapping young lad, I had the procedure carried out this week at the Bangkok Hospital Pattaya, on their new DEXA scanner. Like all X-Ray based procedures, it is painless and non-invasive, and should be thought of as having a ‘mini’ X-Ray as the amount of radiation used is extremely small - less than one-tenth the dose of a standard chest X-Ray.
The procedure involves wearing a gown, in place of your normal outer clothing, and lying on a clinical examination table that has an arm over you to receive the X-Rays generated under the table. The arm moves with a whirring noise, just to let you know that something is happening. The technicians will also position your legs, so that they can get the best X-Ray exposure of the lumbar spine and hips. The whole procedure takes around 10 minutes and then it is just a case of waiting for the results.
So what can you do to attempt to prevent osteoporosis? According to one researcher’s findings and published in the Medical Journal of Australia, lifestyle approaches, such as increasing calcium intake and weight-bearing exercise, as well as avoidance of excess alcohol and tobacco use, are recommended, even though the evidence for anti-fracture efficacy of each, or a combination of these approaches, is lacking. Vitamin D deficiency is common in elderly people who are housebound or institutionalized, and vitamin D replacement should be considered in these individuals. Hip protectors should be considered in elderly people at risk of falls, but adherence to wearing these is very limited.
However, if the result shows that you already do have osteoporosis, and are therefore “at risk”, what then? Well, there are treatments that are available, and most of them are expensive. It is not a simple matter of drinking two bottles of high calcium milk, I am afraid. Calcium metabolism is very complex, and getting it from the belly to the bones is not easy.
For post-menopausal women, consider estrogen as a preventive. For everyone, exercise should be continued as it helps build up bone mass. And if you want to know if you are at risk, consider a DEXA scan.

Learn to Live to Learn: with Andrew Watson

Driven by ideology

Here’s a question to ponder, perhaps to apoplexy; if ideology drives the choice of model in an international curriculum, then whose ideology is reflected in this choice and whose ideology ought to it be? Is it simply the ideology of a ‘dominant’ group, or does the curriculum model evolve from a consideration of multiple ideologies, if that is possible?
Thompson (Hayden et al, 2001) proposes a model for international education where both experiential learning and instructional learning have a part to play, but one which is characterized more by the former. This model is essentially based on ‘Progressive’ philosophy and is also to a certain degree, utilitarian.
To me, living and working in a developing country in South East Asia, the term ‘international’ is synonymous with dominant western influences. Nonetheless, there must be universals or human commonalties (Boyer, 1994 in Ross) across cultures that can be defined in planning a curriculum model that are independent of the value associations one has with the term ‘international’. A ‘global’ curriculum makes ‘allowances’ to integrate with the local culture. Is it possible, and would it work, to design a model that works the other way around, where there exists an authentic balance between the global and the local?
The International Baccalaureate Organization (IBO) aims to develop “inquiring, knowledgeable and caring young people who help to create a better and more peaceful world through intercultural understanding and respect.” But for who is their “better world” envisaged and why lay the burden of creating peace on an “understanding and respect of cultures?”
Hargreaves (1994) talks about the principles of social equity, social justice, excellence, partnership, care for others and global awareness as being essential aims for education and perhaps if these tenets were central to educational planning and design, then a better and more peaceful world might arrive for all and not just a privileged minority of the global population?
It is possible to find oneself going in circles of good intentions, decreasing and increasing with political whim. So, perhaps it is time to revisit ‘Rationalism’ and openly, unapologetically and quite deliberately manufacture a ‘way of thinking’. But hold on, isn’t that happening already?
For instance, take the subject of ‘religious’ education. Religion is part of the sociological fabric of mankind. Critics maintain that religious education can only be seen as ‘genuine education’ when it takes the form of introducing young people to the important part that religion has played in human development. Objections lie in the imposition of religious values on young people when the imposition is sought as a means of control.
But surely better to have some grounding in values that have evolved over thousands of years of shared human experience, than try and ‘redefine’ the wheel, or indeed, the circle, which is after all, the shortest distance back to the same point? Students do not need to experience faith in order to heed the lessons of religious education. If a school is delivering education consistent with the message of spiritual belief, then lessons need not need to be taught as absolute truths. After all, there may be aspects of ethical absolutism, which are prevalent in cultural belief systems, religious or not.
From personal observation, I’d say that delivering any cultural belief system as an absolute truth is inconsistent with ethical education. But show me an education system which cannot be considered indoctrination! Consider the Western Humanist Imperialist Oriented IGCSE or GCE ‘O’ level History syllabus. Where, for instance, is a critical examination of “Britain in Ireland”?
If a return to rationalism allows the ‘dominant’ cultural or political group (read ‘dictator’) to impose their definition of absolute values, then the question of what those values are remains. For example, “international” thinking impacts on international schools and is dominated by western views. Digging deeper, how do curriculum models reflect ideology? I worked in one school which consciously changed from a “Perennialist” approach (where the curriculum is subject centred) to a “Progressivist” model (which places emphasis on “how to think” and not “what to think”) when it adopted “Inquiry Based Learning”. The teacher moved from being the centre of the education process, in the role of knowledge provider, to the periphery as ‘knowledge facilitator’. The Geography, History and English curricula were integrated as Social Studies. Text books went out the window (metaphorically speaking) and much time and money was invested in making and purchasing new resources. Topics were driven by questions, some generated by the students themselves, which helped the students feel part of the process.
Interestingly, ‘Progressivism’ is accused of ignoring social issues but in this school, school experiences included raising awareness and encouraging strong commitment to social projects. One of our Social Studies ‘standards’ dealt directly with how students could ‘make a difference’ to their community. Consequently, when Grade 4 studied ‘Water’ the project included raising money to buy water bins for a nearby shanty town. You might argue that classroom practice not fitting neatly into one specific curriculum model is fairly typical, but perhaps it should? Because what happens if you’re in a school when you’re dealing with huge variables in standards of teaching and learning, with no appraisal or accountability?
Well, what can happen (and I’ve seen this as well) is that vacuums of ignorance and apathy are created, where teachers turn up ten minutes late for lessons, students are denied access to facilities and resources they have paid for and excuses are invented for maintaining a culture of unaccountability, summed up by a Head teacher who claimed in preposterous defence of his incompetence that “90% of classroom observation is done outside the classroom!” Laugh? I nearly became a surrealist!
Andrew Watson is a Management Consultant for Garden International Schools in Thailand. andreww@ gardenrayong.com
All proceeds from this column are donated to the Esther Benjamins Trust. www.ebtrust .org.uk email: info@ebtrust .org.uk
Next week: Talking Heads