Oct. 06, 2010
| | Pdf |Print

What our Members Say (October 2010)

Font Plus Minus

“You have to stick to your intended asset allocation"

Our group members discussed a wide range of topics this summer. There was a lot of attention to costs and strategy of wealth management, but actual developments, most notably in the currency market, were also discussed.

Ninotka gave a good advice on the practical matter of hedging a portfolio against currency risks.

“If you still want to hedge your exposure to the USD, then the currency forward is the simplest way. The forward rate will be the spot rate plus the differential between Europe and the USA together with fees. The fees vary according to the amount of the transaction eg. for a nominal value above $1mio, pips (one hundredths of one percent) start at single digits. Hope this helps. Regarding your portfolio, unless you are a forex trader.” (Read full post)

It is worth reading the full discussion, even if members’ opinions concerning likely exchange rate developments have not materialized so far. This is not a case of  Schadenfreude, but just proves again that currency markets predictions are highly speculative and, while it makes sense to hedge a portfolio, it is not advisable to view currencies as an asset class. For an interesting interview on this topic please read what Wall Street Critic Josh Brown said in a MyPrivateBanking Interview on currencies as an investment.

In relation to portfolio management Crossover shared his experience on the perennial question of how often an investor should re-balance a portfolio:

“You have to stick to your intended allocation and rebalance your assets if your actual allocation is changing because some assets are going up and others down. I rebalance once or twice a year. But that's about it - not a lot of work compared with the frantic buying and selling my bankers did in the past for me (which lead to a lot of dealing fees but not to better performance, on the contrary)." (Read full post)

An interesting discussion evolved around the question of  whether bonds ETFs are better than trading bonds or buying actively managed bond-funds. While some members favour an active approach, Alexarnback made two good arguments against actively trading bonds and in favour of bond ETFs.

“Firstly, fees in buying bonds are not as transparent as with equities because of market maker spread... So you probably don't really know what you pay. 2nd, academic studies show that the true cost of trading bonds (commission + spread + effect of block trading...)is dramatically impacted by size of trade. The same studies show that on average bond transaction costs drop from 75bp (for USD 10'000) to 5bp (above USD 1million) As a conclusion, if you buy a good fund, you are more than compensating for your management fee. i.e I use a fund with a TER of 10bp. In that case, the above mentioned effect only, covers for 5-7 years of management fee. Let me take the opportunity to add that S&P publishes a great bi-annual study on active managers in bonds (SPIVA). For instance, over a 5 year period, between 71 and 100% of managers underperform depending on the stategy (quality, term...)." (Read full post)

Finally, at the height of the crisis with North Korea Basel08 shared his viewpoint on this ongoing conflict and the likelihood of it impacting the stock markets. 

In my professional career I had a lot of exposure to South Korea and always have been impressed by the work ethics, efficiency and business mindset. Unlike China, investing in South Korea is not a gamble, but very rational thing to do. The huge discount of the markets is solely caused by the fear of a military conflict with North Korea. However, sad as it is, for more than 50 years soldiers have died in local border conflicts, no full-blown conflict developed. The reason is simple: first of all neither party is really interested in a war, since after all it would be a civil war. Secondly, to engage in such a war each party would need the thumbs up from their champions respectively the USA and China. And these superpowers are by no means interested in a war. So it won’t happen, The discount of the market is not justified and I would strongly recommend investing." (Read full post)

Let´s hope for both. No war and a booming economy and stock market. We thank all of our members for sharing their experiences and insights!

My Private Banking



What our Members Say (October 2010)

“You have to stick to your intended asset allocation"

  Oct. 06, 2010

Our group members discussed a wide range of topics this summer. There was a lot of attention to costs and strategy of wealth management, but actual developments, most notably in the currency market, were also discussed.

Ninotka gave a good advice on the practical matter of hedging a portfolio against currency risks.

“If you still want to hedge your exposure to the USD, then the currency forward is the simplest way. The forward rate will be the spot rate plus the differential between Europe and the USA together with fees. The fees vary according to the amount of the transaction eg. for a nominal value above $1mio, pips (one hundredths of one percent) start at single digits. Hope this helps. Regarding your portfolio, unless you are a forex trader.” (Read full post)

It is worth reading the full discussion, even if members’ opinions concerning likely exchange rate developments have not materialized so far. This is not a case of  Schadenfreude, but just proves again that currency markets predictions are highly speculative and, while it makes sense to hedge a portfolio, it is not advisable to view currencies as an asset class. For an interesting interview on this topic please read what Wall Street Critic Josh Brown said in a MyPrivateBanking Interview on currencies as an investment.

In relation to portfolio management Crossover shared his experience on the perennial question of how often an investor should re-balance a portfolio:

“You have to stick to your intended allocation and rebalance your assets if your actual allocation is changing because some assets are going up and others down. I rebalance once or twice a year. But that's about it - not a lot of work compared with the frantic buying and selling my bankers did in the past for me (which lead to a lot of dealing fees but not to better performance, on the contrary)." (Read full post)

An interesting discussion evolved around the question of  whether bonds ETFs are better than trading bonds or buying actively managed bond-funds. While some members favour an active approach, Alexarnback made two good arguments against actively trading bonds and in favour of bond ETFs.

“Firstly, fees in buying bonds are not as transparent as with equities because of market maker spread... So you probably don't really know what you pay. 2nd, academic studies show that the true cost of trading bonds (commission + spread + effect of block trading...)is dramatically impacted by size of trade. The same studies show that on average bond transaction costs drop from 75bp (for USD 10'000) to 5bp (above USD 1million) As a conclusion, if you buy a good fund, you are more than compensating for your management fee. i.e I use a fund with a TER of 10bp. In that case, the above mentioned effect only, covers for 5-7 years of management fee. Let me take the opportunity to add that S&P publishes a great bi-annual study on active managers in bonds (SPIVA). For instance, over a 5 year period, between 71 and 100% of managers underperform depending on the stategy (quality, term...)." (Read full post)

Finally, at the height of the crisis with North Korea Basel08 shared his viewpoint on this ongoing conflict and the likelihood of it impacting the stock markets. 

In my professional career I had a lot of exposure to South Korea and always have been impressed by the work ethics, efficiency and business mindset. Unlike China, investing in South Korea is not a gamble, but very rational thing to do. The huge discount of the markets is solely caused by the fear of a military conflict with North Korea. However, sad as it is, for more than 50 years soldiers have died in local border conflicts, no full-blown conflict developed. The reason is simple: first of all neither party is really interested in a war, since after all it would be a civil war. Secondly, to engage in such a war each party would need the thumbs up from their champions respectively the USA and China. And these superpowers are by no means interested in a war. So it won’t happen, The discount of the market is not justified and I would strongly recommend investing." (Read full post)

Let´s hope for both. No war and a booming economy and stock market. We thank all of our members for sharing their experiences and insights!