Portfolio Construction - Part 10

One issue that we expect to see more and more of is that of ‘flight to quality’. As we have seen in our review of the property market, there has been too much complacency about risk during the benign conditions created by the liquidity surfeit of the last few years. This applies equally at a personal level. The greatest criticism that you could perhaps throw at MBMG during the last few years is that we’ve possibly missed out on some speculative opportunities because of our insistence that you can’t just bet the farm on whatever happens to be the latest trend irrespective of whether or not there are other good reasons to do so.
Our view has always been that international investors enjoy many attractive financial advantages. However, it is important that these are combined with the finest professional service to ensure that money can grow securely under expert supervision. We therefore insist on using high quality product providers, such as Friends Provident International (FPI) and Generali International who are amongst the world’s leading and longest established international investment companies.
We generally prefer regulated reliable jurisdictions, such as the Isle of Man, where the Island’s financial supervision legislation ensures the protection of policyholders’ interests, the quality of management and professional expertise. The Isle of Man is universally recognised as a premier location for international business. It has an enviable reputation for political and economic stability, security and protection. The Island is awarded the highest Sovereign Credit Rating “AAA” from Standard and Poor’s (1) and “AAA” from Moody’s (1). Additionally, the Isle of Man has the International Investment magazine’s “Best International Financial Services Centre” (2) for the sixth year in a row. It has also been recognised by the Financial Times publication, The Banker, when it was named European Winner of its Financial Centres of the Future 2005 in November (3). These have proven the strength of the Island in pursuing its political, economic, legal and social strategies.
Tynwald, the oldest Parliament in the world in continuous existence, signifies the Island’s political stability. The Isle of Man is an internally self-governing dependent territory of the British Crown.
The Isle of Man has enjoyed 21 years of unbroken economic growth at around 5% per annum (4). The GDP of Isle of Man is 113% of the UK (5) and it has virtually full employment and low inflation. Furthermore, the Island introduced a new unified, general zero rate of corporate income tax in 2006. This beneficial tax regime provides a highly-competitive edge in the international markets. The pro-business government positively supports and encourages the development of the Island’s financial services sector.
To ensure the protection of the policyholders’ interests, a statutory offshore policyholder protection scheme is operated on the Island. The Life Assurance (Compensation of Policyholders) Regulations 1991 protects investors with Isle of Man-based insurance companies to levels at least equal to that available in other financial jurisdictions worldwide. The scheme protects the investors in the event of an Isle of Man-based insurance company being unable to satisfy its claims. The scheme pays up to 90% of the liability of the insurer.
Fast facts - Capital Douglas, Population 76,315, Size 52 kilometres long and 22 kilometres wide. Location The centre of the Irish Sea - 50 km from Ireland and 50 km from the UK. Parliament Tynwald, National Day 5 July, Languages English and Manx Gaelic. (Source: Isle of Man Government website <www.gov.im>)
Whatever the situation, it’s always best exploited by doing things the right way!
A couple of very interesting pieces by the always thought-provoking Tim Price of UBP recently focused on the nature of portfolio construction, based on studies by Barclays, ABN and the London Business School and using data from 1900 to the present day. These both concluded that the use if derivatives to reduce risk comes with an unacceptably high cost if used indiscriminately and that like any other investment methodology, these are tools that are only valuable if used actively and appropriately. A strict ‘safety first’ policy constructed entirely around a blanket use of derivatives, in other words, destroys return at least as much as it controls risk.
We’re big believers in using derivatives but as one more option in the portfolio allocator’s toolkit rather than as a one-horse strategy in itself. The most prudent, not to say ultimately successful, policy is our core belief to pursue a balanced portfolio of multiple assets. As Tim Price says, “When it comes to proof positive of the successful multi-disciplinary approach to asset allocation, one need look no further than the Yale university endowment under the stewardship of David Swensen. In his 21 years of managing the endowment, it has generated 16.3% compound annual growth. Citing this two-decade investment record, Yale acknowledges the support of strong capital market returns but also the contribution of “disciplined and diversified asset allocation policies.
“The portfolio’s ‘Absolute Return’ components comprise hedge funds - the second largest asset class component after real assets. The deviation from recent historical preferences is striking: in 1986, 75% of the endowment was allocated to US stocks, bonds and cash. US equity now accounts for just 11.6%, and fixed income - in entirety - for just 3.8%. Private equity and ‘real assets’ (energy, timber and real estate) combined account for nearly half the portfolio. Diehard sceptics of the value generated by supposedly ‘alternative’ investment management techniques - particularly those sceptical at the apparent fee burden of hedge funds and private equity funds - can assess Yale’s net portfolio returns ... the evidence on the part of a diverse multi-asset portfolio to offer both downside protection and decent risk-adjusted returns, a la Yale, looks increasingly compelling.”
To be continued…
(1) Standard and Poor’s and Moody’s are independent ratings agencies, who assess the financial strength of financial centres.
(2) International Investment Magazine is the UK’s leading offshore publication, published by Incisive Media. (www.isleofmanfinance.com)
(3) Financial Times, The Banker. (www.isleofman finance.com)
(4) Source: Isle of Man Government website. (www. gov.im/iomfinance/limits)
(5) Source: Isle of Man Government website. (www. gov.im/iomfinance/limits)

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

Golden Dream Pigeon exposed

In my time I have bought and sold many cameras, including Nikon, Hasselblad, Voigtlander, Cambo and Minolta. There was also one I threw away, called a Golden Dream Pigeon. I threw it away, not because it didn’t work, but because it took lousy photographs. It had also cost 90 baht, including the film, so I was not losing much!
What I learned from my Golden Dream Pigeon was simply the old adage - you get what you pay for! Unfortunately, all of us fall into the trap of the tight fist. Why spend big baht when a much cheaper article will surely do the same job just as well. I rationalized Golden Dream Pigeon’s purchase in this way but I did not think that it could be quite as dreadful as it actually was!
As justification you tell yourself that all you are paying for is the “name” plus very expensive packaging with the high ticket items. Unfortunately, in photography, you pay for more than the “name”. You are paying for that other ingredient called Photographic Quality.
The interesting feature about photography is that the measure of excellence is always the end result. In other words, the photo says it all. A clear, sharp and well exposed shot shows the lab did a good job in printing, the film was top quality, the camera set at the correct exposure, the lens let the light rays through without distortion and the image was focussed correctly.
So let’s look at some of these basic factors. First, let’s deal with the camera. What is often not realized is that the principle function of the camera body is really just to record the image and be able to alter the shutter speed and aperture required for correct exposure. It’s still just like a Box Brownie - but smaller with built-in goodies.
The cost of the camera body today depends on the degree of sophistication in its built-in features. Electronic multi-pattern metering, motor driven film advance, auto rewinding, DX coding to set the film speed automatically, different exposure modes, smart cards and memory stick replaceable electronic gadgetry, LED viewfinder displays, dedicated flash electronic circuitry and ergonomics in design all add to the cost. None of the above were available in the Golden Dream Pigeon, by the way.
Next item is the lens. The equipment necessary for the super sharp snap is the super sharp lens. The sad fact is that no matter how good or expensive your camera body, whether you use film or are digital, you will only get lousy pictures if you use a lousy lens. A good lens is just as important as a good camera body.
If excellence is your pursuit, look at good quality “fast” (f 2.8 or better) fixed focal length lenses from the same manufacturer as your good quality camera body. Sure, you can get a “bargain” at some camera shops (and Duty Free outlets) who will sell you a Nagasaki 28 - 3000 zoom for your new Nikon or Canon or whatever. Certainly it will be cheaper outfit than a Nikon lens on a Nikon camera - but in saving a few baht you just lost out on excellence.
Now let’s look at some very simple fixes for some common problems. Blurry photographs can be fixed by selecting shutter speeds of 1/125th second or faster. Hold the camera with two hands. None of this one handed technique, waving one-two-three fingers with the other hand as a count-down.
There are six simple steps on the road to improvement:
1. Take more shots. Some may fail, but one will be good.
2. Move in closer. Many shots fail by being too distant.
3. Keep it simple. Photos are far more effective with one subject and no background clutter.
4. Specialize. Take pictures of one subject, say boats or trees, until it is mastered.
5. Read books on the subject. Kodak “How to ...” books are instructive and easy to follow.
6. Edit your own work by constantly sorting through your photos and discarding the failed shots. Be ruthless! And remember just “why” the shot failed.

Modern Medicine: by Dr. Iain Corness, Consultant

Back pains - a common problem

Back pain is one of the commonest orthopedic problems, and the often used terms such as lumbago, sciatica and slipped disc get bandied about at the dinner table. However, an acute bad back is not the sort of condition that you want to chat about over desserts. The condition can be crippling and not “cute” in any way.
The real reason you get a bad back is because our forefathers decided we looked better walking on our hind legs instead of all four. Just like a horse, the bones of our spines lock together nicely when we are on all fours, and weight can be carried easily on our backs. However, when we stand up and try and lift, it all goes pear-shaped from there. The spine was not designed to carry loads, or pick up loads, in the vertical position.
So let’s look at this “slipped disc” problem. First thing - discs do not “slip”. They do not shoot out of the spaces between the vertebrae (the tower of cotton reels that makes up your spine) and produce pain that way. The disc actually stays exactly where it is, but the center of the disc (called the nucleus) pops out through the edge of the disc and hits the nerve root. When this happens you have a very painful condition, as anyone who has had a disc prolapse (our fancy name for the “popping out” bit) will tell you. Think of the pain when the dentist starts drilling close to the tiny nerve in your teeth. Well, this is a large nerve! When the nucleus of the disc hits the sciatic nerve, this produces the condition known as Sciatica - an acute searing pain which can run from the buttocks, down the legs, even all the way through to the toes.
Unfortunately, just to make diagnosis a little difficult (if it were all so easy why would we go to Medical School for six years!) you can get sciatica from other reasons as well as prolapsing discs. It may just be soft tissue swelling from strain of the ligaments between the discs, or it could even be a form of arthritis. Another complicating fact is that a strain may only produce enough tissue swelling in around 12 hours after the heavy lifting, so you go to bed OK and wake the next morning incapacitated.
To accurately work out just what is happening requires bringing in those specialist doctors who can carry out extremely intricate forms of X-Rays called CT Scans, Spiral CT’s or MRI that will sort out whether it is a disc prolapse, arthritis or a soft tissue problem. The equipment to do these procedures costs millions of baht, and the expertise to use them takes years of practice and experience. This is one reason why some of these investigations can be expensive.
After the definitive diagnosis of your back condition has been made, then appropriate treatment can be instituted. The forms of treatment can be just simply rest and some analgesics (pain killers), physiotherapy, operative intervention (and we can even slip in artificial discs these days) or anti-inflammatories and traction.
Now perhaps you can see why it is important to find the real cause for your aching back. The treatment for some causes can be totally the wrong form of therapy for some of the other causes. Can you now see the danger of ‘self diagnosis’ here? Beware!
So what do you do when you get a bad back? Rest and paracetamol is a safe way to begin. If it settles quickly, then just be a little careful with lifting and twisting for a couple of weeks and get on with your life as normal. If, however, you are still in trouble after a couple of days rest, then it is time to see your doctor and get that definitive diagnosis. You have been warned!

Learn to Live to Learn: with Andrew Watson

In apple crates beneath the stars

Betwixt the competing undulations of Galilee’s tallest peak Mount Merom to the south and the yellow ochre of Lebanon to the north, moored like a great vessel, lay Kibbutz Yir’on. Since the first morning of my arrival, I had been filling my lungs with air of such vital freshness that every waking hour was utter joy. Anticipation came with the first blue light of a new day as still dizzy with sleep, we piled on to tractor pulled trailers and trundled across crusted furrows to apple orchards pregnant with fruit. Apples hung glinting in the semi-darkness like a thousand deep green moons. We alighted and huddled together, a sharp morning chill nudging us into proper consciousness.

Sharona
I was in love; truly, madly, deeply, absurdly, utterly, completely. Even though I knew that the girl who had swept me into state of permanent rhapsody would not be in the orchards that day, nothing could prevent me convincing myself otherwise. So as I moved up and down the channels on a frankly preposterous picking machine, which allowed me to lift myself high above the treetops, I scanned the orchard for any sign of the divine form that had so captured my soul. Blue shirts and shorts were still silhouettes, moving between the boughs with silent stealth. There was no chance of her being among them, but I played with my heart nonetheless, hoping that the rising dawn might reveal her dancing tresses.
More than once, my heart got the better of me and almost persuaded me she was there, sending shivers of excitement from the tips of my toes to the tip of my tongue - I nearly called out - but halted at the last moment and broke instead into impulsive laughter and the happiest, freest smile in the world. My friends above and below swung around and stared at this madman who dared crack open sweet silence. I threw my head back and stared upwards. Night’s last stars were fading into cobalt, twinkling their approval at my happy condition. Towards the east, blues were moving into pale green, thence through the spectrum to a brilliant cadmium orange, primrose yellow and finally a fan of white gold. “Don’t worry,” I heard a voice say, “He’s in love!”
I swear that for the entirety of two glorious months, by day there wasn’t a cloud in that velvet sky and by some magical imposition, every night a full moon shared in the wonder of our union. Each evening, we would meet clandestinely and scale apple crates piled fifty feet high and talk of the future; our future. Every second seemed to stretch. Time was of no consequence. We felt no fatigue.
Shapes rising from the steep rounded slopes of Merom took on the form of theatrical figures, as black as Prussian blue against the sky’s cerulean curtain. Theirs was a secret, eternal narrative that only we, encased in our citrus citadel, were privy too. In this furtive, magical world, we spoke the same language as a billion stars. Their patterns painted a picture of a life together and a fiesta of a thousand heavenly fireworks lit the way as they blazed a trail into infinity. Two paths had become one road. Our destinies were joined and there was nothing we could do about. Helpless star-crossed lovers, we had willingly, deliriously, become part of eternity.
Savouring every scent and sensation, silence was a willing companion to whispered words. We drifted in and out of dreams, in a state of perfect contentment. When I allowed my head to loll sideways away from heaven, I beheld someone equally celestial. I looked into those deep, dark, smiling eyes and had to draw a deep breath, love requited, unable to comprehend how human form could be rendered so immaculate. When she fell asleep, I caressed her silkened cheek and pushed my hand through her hair. I kissed her softly on her lips and felt a wisp of breath stroke my very being. Clasped in loving purity through the night we lay, until out of the darkness stirrings could be heard around us and the starting of a reluctant tractor engine signalled the imminent birth of another day.
A few kilometres to the north, it wasn’t nearly so pretty. Ariel Sharon’s bullish charge to Beirut was gathering unseemly pace, crushing anything that stood in its thuggish way. A few years later, I became good friends with people on both sides who had experienced this carnage first hand. It is sobering indeed, to think that the same sun and moon I had worshiped for their benevolence had been partners in lighting the way to other people’s abominable destruction. I wondered whether reconciling such a despicable paradox necessitated reappraising my unrestrained romantic intoxication. But why should something so beautiful be tarnished by something so malevolent? Why should the murder of innocents diminish something pure and good? I wrestled with this question for many months, trying to understand the distorted shapes of the reality around me. The iniquity of the rampage into Lebanon seemed so terribly incompatible with the absolute calm of my soul and the complete joy in my heart. What could be done? How was I to make sense of this? It seemed a hopeless business.
The answer came to me through the silence of the night on the eve of my last day on the Kibbutz; never be ashamed of loving unconditionally. On the contrary. Of all the weaponry being let loose across the border, blackening skies and souls alike, nothing was as powerful as love, yet this great weapon lay untouched, redundant, forgotten. I realised that to believe in the power of love requires great courage, great loyalty and great faith, strength of character, fortitude and compassion. This war was for cowards, their misdirected hubris bringing only misery and death. It would have been harder for the protagonists to find love in their hearts but this proved beyond them. When I looked into their eyes, I saw nothing. Nothing at all.
Next week: The longest day