Market Musings August 2009

Steady progress through the mist

Another good month!

We have had a few of these this year and it was nice to see more positive movement across the board. With the general exceptions of gilts and currencies, most investments should have made money during the month, with Western markets delivering around 8-9% and the Hang Seng leading the way with nearly 12% return.

The first week or so of the month saw a continuation of the previous month's downward drift for equities and Sterling, while gilts continued their steady climb - only to suddenly turn the opposite way and the surge in stock-markets was quite pronounced for the rest of the month; most markets rising by around 12-14% over this period, once again led by the Hang Seng, which rose by nearly 20%. Putting this into perspective, this represents around a couple of years' worth of typical returns.

This is important to note, as it has been less risky to be invested than not, and the FTSE is already up by over 30% since its March low - that's three or four years' worth of fair returns. Also, the FTSE is back up to where it was 10 months ago - so, to paraphrase the situation, it has been 10 months since investors lost money on the stock market

Model Portfolios

For quite some time now we have been running some core model portfolios - just three basic models: lower, medium and higher risk. These have been assembled along "risk allocation" lines, rather than the more common "asset allocation" lines - which means that they comprise a series of funds, each with a different risk/reward profile - on a look-through basis you will often find that the end result is similar to a portfolio derived from asset allocation construction methods but the various fund managers do the switching between asset types internally, and more cost and tax-efficiently. The intention being that this saves you from having to make ongoing "complex" investment decisions; for example, instead of having to decide whether to switch out of Japanese smaller company equities, managed by fund manager X, into a European Corporate Bond fund - or was it an American Technology fund, or….? it makes switching decisions far easier for you.

In other words, running most conventional "asset allocated" portfolios has involved a continuous series of "complex" decisions. Using our "risk allocated" models, however, simply requires you to decide if you want more or less risk, so you can then adjust the percentages held in each fund accordingly. To paraphrase Clint Eastwood, "Do you feel lucky, or not?"

We have now extended and updated these models so as to offer five risk profiles - from very cautious to very aggressive - using a broader range of funds, and also with more funds used in larger portfolios than smaller ones - more on this next month.

Investment houses' market views

On a 12 month +/-5% view they have turned negative on Europe but positive on US smaller companies and remain broadly positive on Pacific (excluding Japan), Emerging Market and BRIC equities. They remain neutral on all other equities.

Their outlook on property remains negative in the UK and neutral for global property securities. They have turned negative on Gilts but remain positive on UK corporate bonds and are neutral on currencies, with a slight bias towards the US$ and Euro over Japanese Yen.

The above is not intended to imply any advice.

MDM Associates Ltd, MDM House, High Street,
Ripley, Woking, Surrey, GU23 6AN.
(All data: source: Sharescope: to 31/7/09)