Record Global Liquidity Liquidity bubble is creating a cluster of - - PDF document

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Why Managed Funds & Their Role in Asset Allocation

AIA presentation 20/10/07

By Bruce Baker BSc MBA DFP

Certified Financial Planner Director, Puzzle Financial Advice Pty Ltd, AFS licence 230050

An independently-owned financial planning business

http://www.puzzlefinancialadvice.com.au PH (07) 3371 8112

• Mission of Puzzle Financial Advice

“To be researcher & financial-advice partner to experienced investors seeking high-quality, conservative, unconflicted, soundly-researched tax planning and investment advice.”

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Record Debt Bubble

This is the scariest current risk

• This chart does NOT provide a timing indicator for any future event. Just identifies a major risk.

Risk 1. Deflationary crash

Not sustainable

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Record Global Liquidity

• Milton Friedman:

– To the extend we have excess money supply we should get inflation. – Yes, we have seen massive asset price inflation – last 12 years – Has not yet fed into consumer price inflation.

0.5 1 1.5 2 2.5 3 3.5 4 4.5 Jan-59 Jan-64 Jan-69 Jan-74 Jan-79 Jan-84 Jan-89 Jan-94 Jan-99 Jan-04 Jan-09 Real M3 increase since 1959 Real GDP growth since 1959 Source: Puzzle Financial Advice To 1/6/2007

The liquidity bubble

Risk 2. Serious inflation

Cause of last 12-years of great returns That which gives can take away Liquidity bubble is not sustainable

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Liquidity bubble is creating a cluster of bubbles

US real house prices 1890-2006 is normally steady. Reversion to the mean would be very ugly

Chart from Professor Robert Shiller – author “irrational exuberance” who was one of those to say the US had a share market bubble in late 1990s – and says that the US has a property price bubble now.

Dot Com, Large Growth in 2000 Uranium, Nickel, other base metals?, housing? Western property generally?

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Japan is at a very different stage in cycle

Japanese Nikkei 225 daily share price since 1955

5000 10000 15000 20000 25000 30000 35000 40000 45000 1- J an- 54 3 0 - D e c- 6 3 2 7- D ec - 73 2 5- D ec- 8 3 2 2 - D ec- 9 3 2 0 - D ec - 0 3

Ser ies1

P u zzle F inan cial A dvice P ty L td P ho ne (0 7) 33 71 8112

to 16/ 8/ 2007

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And Asia non-Japan

Goldman Sachs Asia non-Japan currency & asset price appreciation set for decades ahead And is China & India to do to US, what US to Europe in the last half of 1800s.

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And Asia-non-Japan drives resource super cycle for decades

• The experience of emerging Japan & Korea points towards this
• For example

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In a world of fiat currency, with central banks “printing money”, shouldn’t you be assessing your investment returns in a “real” currency like Gold?

Dow Gold Index

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What role should precious metals play?

$- $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 Jan-70 Jun-75 Dec-80 Jun-86 Nov-91 May-97 Nov-02 May-08

Gold in Aust $ - LHS Inflation adjusted Gold in A$ - LHS

Source: Puzzle Financial Advice Pty Ltd (07) 3371 8112

Gold price in A$

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Some key themes for long-term investors

• Shares

– Overweight Asia – possible bubble developing

• Managed funds

– Overweight Japan

• managed funds

– Little exposure to USA

• no broadly-held International share funds

– Resources – may develop into a bubble in this climate

• Including energy – remember peak oil + Asian demand
• managed funds (Listed & non-listed) and/or direct

– Expect high volatility in the above

• Property (including infrastructure)

– Look for Asian exposure including Japan – eg listed managed funds

• Cash

– (including Gold Bullion eg ETF) – may develop into a bubble in this climate Be prepared for periods of extreme volatility so don’t take too much risk Major economic shocks are likely over next few years www.puzzlefinancialadvice.com.au

Be prepared for periods of extreme volatility

• Major economic shocks are likely over next few years
• At some point I think we will see a deflationary crash

– When virtually everything will fall in price – Might be some years away

• And we might see very nasty inflation before that
• So go with the flow

– Deal with the risks as they emerge

• Don’t take too much risk

– wild downswings in various asset classes likely – But also inflation risk means

• it is also important to take enough of the right risks

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Mission of Puzzle Financial Advice

“To be researcher & financial-advice partner to experienced investors seeking high-quality, conservative, unconflicted, soundly-researched tax planning and investment advice.”

Salary & Wages Estate Planning Tax Super- annuation Investment Products Investment Markets

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Today’s presentation

• Quick review of basics of modern portfolio theory
• Then need to consider

– What are the current major investment risks? avoid. – Inflation outlook? Inflation/deflation both BIG risks now. – What are the 10-15 year investment opportunities? over-weight. – Risk management strategies for these times

• These determine best current asset mix (sectors)

– then seek best investment building blocks – To achieve target asset allocation

• listed or unlisted
• managed or direct.
• Some of best building blocks are managed funds

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But are all markets in the same phase of the cycle?

Which of the following, does history tell us tends to be most attractive?

Markets that have boomed over the last 26 years OR Bottoming markets after 15 years down?

• Long-cycle mood swings between overoptimism and over-pessimism