Portfolio Construction - Part 13

It shouldn’t be finding a good stock or a good fund and holding it ad infinitum because what was good in the 1990s isn’t necessarily the best investment in 2007 (what was good in 2006 is unlikely to be the best investment in 2007). In fact there’d be something wrong if it was.
A while ago we touched on some people not always grasping this point. However, this isn’t their fault. As Tim Price recently suggested, Wall Street seems to spend more time on marketing/brainwashing than on portfolio considerations. No wonder that clients think that the only decision is whether to hold mid-cap growth or large-cap value. If this is what BlackRock Merrill Lynch spend millions of dollars each year telling them; inevitably that has some impact.
An extension of this ‘hot fund’ approach is a raft of advertisements, recommendations and endorsements of funds that are simply unsuitable. A good example of this is Brandeaux’s Ground Rent Income Fund. Despite being launched in 1996 and promoted throughout that time via the investment advisor marketplace, this excellent fund remains extremely small (just Stg 200 million). In the latest 12 months returns have been 10.47% and average returns since launch have been 9.97% per annum. The Fund focuses on ownership of Ground Rents and well-located residential properties which have Reversionary Value and secure income. A main objective is to deliver consistent annualised positive returns of 8% to 10% while maintaining a profile of low volatility performance. This fund has less correlation to overall property markets and to economic cycles than many of Brandeaux’s other range of property funds that are available. While the fund is well-managed and is well diversified over a large number of properties and occupants, its performance is, however, affected by occupancy levels and bad debt rates.
Relative to other UK property funds, there has been a certain stability about ground rent funds over the last few years. For low risk investors requiring income this has made them more suitable than other property funds and during that time we have used ground rent funds for exactly that purpose as a small part of a balanced income portfolio.
For portfolios that seek higher levels of capital growth, they have really only been suitable as short term hiding places during the various dislocations that have taken place during the equity markets in this period. That outlook is unchanged right now - they should be considered for lower risk income producing portfolios.
However, we’re no longer holding ground rent in any of our portfolios because the risk of increasing vacancy rates and higher default rates at the upcoming stage of the economic cycle poses a risk that is relatively too high for a low risk investment. The fund remains an excellent fund within its sector but any advisor who unquestioningly thinks that this sector offers good enough risk/reward opportunities for his clients in the current environment should be asking a few more questions about the suitability of the fund for prevailing conditions.
This is a specialist fund - we’ve looked recently at only how totally open investment architecture can be sufficiently adaptive and impartial to prevail in all economic conditions. A fund that can only invest in UK ground rents is about as closed in its focus as it is possible to be. However good a job that Ms. Brandeaux and her managers do, they are constrained by the sector. There will come again a time to buy this sector and in all probability this fund but not now.
The main investment focus of many investment portfolios has, quite rightly, been the protracted rally that has now managed to sustain since 2003. By any measure this feels as though it’s getting long in the tooth and it seems to have been around for even longer than Cliff Richard. Active portfolio managers have for some time been preparing their exit strategies from the equity markets (time to get out for at least the short term) and looking at the alternatives.
The level of bond market interest and activity is perhaps indicated by the increased level of transactions in treasury futures. It would seem that the institutional inventors who make most use of the futures and derivative markets are looking at these contracts as a way to achieve diversification of risk and increased portfolio returns.
The trading of treasury futures (the most-actively traded derivative contracts on the Chicago Board of Trade) is on the rise; a record 60.5 million contracts changed hands in February, the equivalent of $6.62 trillion of Treasuries (in March, 60 million contracts traded); This is still some way short of the $9.57 trillion of physical bonds traded in the same period on Wall Street by the majors. However, futures trading volume has more than doubled in the five years ended in February. At the current rate of increase futures trading will surpass the trading volume for cash securities during 2008.
Treasury futures contracts, which were introduced by the Chicago Board of Trade in 1977, are transactions effected today which require buyers and sellers to receive or deliver securities on a specific future date. In other words, a ‘guess’ as of today of what the price will be next month or next quarter. If you think that the price will go up more than the market is quoting, you simply buy a future and if you’re right you pocket the extra. In the meantime the cost of the contract has been a tiny fraction of the market exposure that you have achieved leaving you the vast majority of the contract value to invest right now in other areas. Similarly, derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities or linked to specific events such as changes in interest rates or the weather.
Interestingly the contracts are finding plenty of eager new participants - “Fund sponsors who had in the past not allowed investment managers to use derivatives are more eager to do so,’’ according to Greg DeForrest, of Callan Associates, the second-biggest adviser to U.S. pension funds, whose 266 clients possess over $1 trillion of assets (so you’d figure that they should know).
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

Framing - inside and out

If you’ll pardon the pun, framing your photographs is an art. You can spoil a brilliant shot with lousy framing, but on the other hand you can salvage an ordinary “record” shot by brilliant framing. Now, when you put a brilliant subject and brilliant framing together, what a picture! A prize winner. And well worth hanging on the wall.
So let’s do a quick recap on factors that are important. This is in getting the original photograph that you will want to frame.
I have spoken before about the Rule of Thirds, and quickly recapping, put the subject of your photo at the intersection of thirds if you can possibly do it. In other words, one third in from either side and one third down (or up) from the top and bottom. This “off centre” approach does make for a more interesting photograph. Now that was easy, wasn’t it!
The next item to make your framing up more interesting is what we call the Frame within a Frame approach. Take a look at the first photograph with this week’s article. It says something. The building is framed by the stairwell opening, and you straight away wonder “where” this is and “what” this is. Note that the building is not dead central, so there’s the classical placement again. To get this type of shot, find the frame first and walk in close enough to get the frame within the edges of the photo itself. In other words, just position the subject within it. No magic, but you’ll get a magic shot. (By the way the shot was taken from a subway coming up from below a street.)
In the frame-up above, the subject is actually inside a frame, but there also is the situation where the frame is in the foreground and the subject is some distance away. This frame within a frame will pull your eyes deep into the photograph, giving it much extra depth.
The second photo is a classic example of the “Frame within a frame” technique when applied to distance shots. The archway on the chedi I was standing in frames the next chedi in the line. You see a repeat of this archway on the distant one. You immediately know there are more than one of these structures and by looking “through” the first arch you have given a 3D effect to a two dimensional medium.
Now, let me assure you that the chedis did not line themselves up in this order. Producing this shot required some input from the photographer! It was a case of prowling around the site and seeing what was available. This frame-up did not happen by accident, I was actively looking to produce such an effect, and in fact, attempted this shot on three occasions with other chedis before I got the one I wanted. The people in the shot give the scale to the chedis as well. As I have said many times, good photographs do not “happen” - they are made! And YOU, the photographer, make it happen.
Now there will be times when you would like to improve the shot by framing, but there is no handy archway, window or whatever. This is where you have to be even more creative. Look around for overhanging trees or ground bushes that can be used as “frames” to hide some part of the shot and thus accentuate your subject matter. A little hidden area always heightens the curiosity of the viewer, and just by doing that you have produced a better shot. It’s that easy!
The message from today’s column is not to be satisfied by just pointing your camera at the subject and going “click”. Look for ways of enhancing the photo to make it more interesting. Framing up is a good start.

Modern Medicine: by Dr. Iain Corness, Consultant

Self medication - some pitfalls

A friend came to see me the other day at the hospital. He had not been feeling well, had an initial cold and a cough for some weeks, and now his throat was very painful, with difficulty in swallowing. He had gone to the local pharmacy and bought B. 55 of some antibiotic called amoxycillin, but he had not improved. In fact, he was worse. At this point he came to see me for some advice, as he could not understand why he was not better, despite taking the antibiotic.
Now, historically, perhaps one of the greatest discoveries in medicine was the antibiotic. For countless centuries mankind (and women too!) died from bacterial diseases. Microbes that could bring armies to their knees went unchecked. Plagues decimated populations, but smarty pants that we are, we developed antibiotics and we reversed the tables. “Human beings kill millions of bacteria” could even be the headline for a newspaper!
However, it wasn’t that easy. We did develop antibiotics. They did kill bacteria. But the bacteria did not take all this lying down either. They developed new strains which became resistant to the antibiotics and started to become rampant again. We, in retaliation, developed new antibiotics and the balance of power returned to our favour. After all, the “good guys” should be the winners!
But are we? There has been a price to pay for all our “smartness” with now a plethora of pills and potions. That price is even more noticeable in countries like Thailand, where self medication is the norm. The price includes more antibiotic resistant strains of bacteria, more symptoms caused by the antibiotics themselves and an overgrowth of other organisms such as yeasts.
This reminded me of a previous time when I chanced upon a discussion in my city office. One chap had a chronic sinus condition and was raking through his desk drawer to see what “antibiotic” he had to combat this. Coming across some self prescribed amoxycillin next to the empty biros and tomato ketchup sachets, he asked me what did I think. I replied that I considered that it was probably next to useless for a chronic sinus condition, so he put them back in his desk. However, the office girl piped up that she needed some, so she would have them! Now both of them are intelligent people, but the medical training that either of them has had in pharmaceuticals, let alone clinical medicine, is one big fat zero. Yet both of them feel qualified to prescribe potent medications for themselves. This is potentially dangerous.
Coming to the sinus problem - amoxycillin, one of the earlier penicillin derivatives, is not an antibiotic which gets good tissue levels in the sinus region and by this time, most bacteria which inhabit the ear-nose-and throat have long since become resistant to amoxycillin. For my money, taking amoxycillin for his chronic sinus problem would be a waste of his money!
Now the young lady - it turned out that her symptoms were not pathological, but represented a normal situation. If she had taken the amoxycillin she would have ended up with a severe attack of “Thrush” an irritating complaint that ladies can well do without.
So in these three cases, indiscriminate antibiotics would have been a waste of money and not done the trick for two people and given the other another nasty condition as well. Perhaps now you can see why I am not altogether in favour of self medication with prescription drugs. If it were just a case of “any old antibiotic will do” then it would be different; however, antibiotic prescribing is a sensitive and difficult area of medicine.
Going back to our friend amoxycillin, adverse effects include superinfection, a nasty type of bowel disease, and liver and blood disturbances as well as interacting badly with the contraceptive pill and gout medication. Is it worth it? I don’t really think so. See your doctor instead!

Learn to Live to Learn: with Andrew Watson

A continuous and timeless human process

A lack of vision or purpose to education appears to have fuelled an increasingly fractious education reform debate across the globe, based upon the idea that it is only after we can agree on the “what” of education in relation to “who”, that we can implement the “where and how” that students learn.
In the context of the complexity of today’s labyrinthine globe, education can be seen as being about achieving academic excellence, contributing to economic growth and as a continuous and timeless human process that incorporates a vision of the future (Wragg, 1997). For many, the idea of a future characterised by “universal education” could transcend barriers, by enabling people to lead fuller and more meaningful lives in their individual capacities and simultaneously contributing as members of a society.
“Universals” would exist in values and skills as opposed to aspects of curricula. The onus would be on contributing to the development of a sense of identity and self worth in the individual, critical thinking faculties to challenge dogma, moral fibre, the ability to maximize one’s potential, social and communication skills to enable collaborative work and cultural understanding. A tall order, then? Inspiration would be required from somewhere. Enter Martin Luther King; “Education must train one for quick, resolute and effective thinking. To think incisively and to for one’s self is very difficult. A great majority of the so-called “educated people” do not think logically and scientifically. Even the press, the classroom, the platform and the pulpit in many instances, do not give us objective and unbiased truths. To save man from the morass of propaganda, in my opinion, is one of the chief aims of education. Education must enable one to sift and weigh evidence, to discern the true from the false, the real from the unreal, and the facts from the fiction. The function of education, therefore, is to teach one to think intensively and to think critically. But education which stops with efficiency may prove the greatest menace to society. The most dangerous criminal may be the man gifted with reason, but with no morals. We must remember that intelligence is not enough. Intelligence plus character - that is the goal of true education. If we are not careful, our colleges will produce a group of close-minded unscientific, illogical propagandists, consumed with immoral acts.”
I believe that it is only after we have identified the purpose of education that we can plan for it. But if we say that education should enable “people to lead fuller and more meaningful lives in their individual capacities and as contributing members of society…” can we honestly say that these ideals can be achieved using “traditional” curricula, which are essentially “content” driven, teacher controlled and exam orientated? According to Fennimore T.F. and Tinzmann M.B. (1990), “Content is divided into artificial categories that bear little relationship to how individuals use content in the world beyond school. Furthermore, students’ attitudes about subject matter and the skills and strategies they need to learn it are rarely addressed. Often, traditional curricula emphasise isolated, low-level skill, to the neglect of meaningful content and higher-order thinking, especially when dealing with lower-achieving students.”
A traditional curriculum, apparently, does not expect students to use the knowledge they have gained until they leave school. Hayden, Thompson, Walker (2002) in “International Education in Practice” note that “A traditional curriculum leads directly to a traditional approach to teaching and learning. The implementation and use of the traditional curriculum in educational systems is still observable worldwide.” The National Curriculum of England and Wales (mistakenly referred to as the “British Curriculum”) is one based on a “traditional curriculum” approach. But what does the “traditional” curriculum approach mean? With a strong influence of Piaget’s theory in the pedagogy, some of its characteristics are that students are assessed by diagnostic tests, ability levels are a part of the organization, subjects are highly directed and the teacher is oriented for whole-class performance and teaching. Latterly, external agents assess whole-school performance. Vygotsky’s theories also have explicit influence on the National Curriculum, characterised by social aspects of the learning process, emphasizing the importance of the relationship between student and student and student and teacher (Moore, 2000).
The “third dimension” introduced by Ted Wragg’s Cubic Curriculum (Wragg, 1997) revolutionised the arguably moribund English (and Welsh) educational system and introduced new ideas to the National Curriculum. Suddenly the socio-economic realities of the world outside education were accepted as integral contributing factors to educational philosophy (in the UK) and new work qualifications and techniques led to technical rather than manual work (Wragg, 1997). Bizarrely, student motivation has only recently started to be considered by theorists as the major issue in the learning process. Yet it seems so obvious to provide relevant contexts for learning, those that allow for the development of skills, knowledge, cognitive processes and conceptual structures required to participate in a community. Even in “academic” subjects, it is difficult to argue against the idea that the content of a curriculum should allow a student to develop reflective and logical skills and acquire a deeper conceptual knowledge beyond the content. I feel there is nothing wrong with content, as long as it is relevant, but students should not be overburdened. It seems necessary that the subject content and subject based skills are taught in a way which encourages transfer of concepts across domains (Nisbet J and Shucksmith J, 1986). It is developing metacognitive (self monitoring, self testing and self evaluating) learning within the content that will allow a student to develop reflective and logical skills and acquire a deeper conceptual knowledge beyond the content (Quicke, 1999). Of course, there are many who say that it is the responsibility of schools to prepare students for the workforce, an increasingly varied, multicultural, multi-ethnic workforce, which potentially doesn’t require “higher order skills” in order to function efficiently in a capitalist society.
So is there any kind of curriculum that will make everyone happy? Students, teachers, parents, community and eventually, society?
Next week: Tall Orders