Personal Investing Where’s the Smart Money? – Top investment tips for 2004

When you were child your mother probably told you that you’d get your fingers burnt if you touched something hot. It’s much the same in today’s investment market, only this time it’s likely to be your financial adviser sounding the caution – telling you to steer away from the so-called ‘hot’ options and set your sights on well-balanced investment portfolio. Think smart – not hot; the market is always riddled with risk and full of surprises.

“Back to basics”
Cameron Watson
Head of research
ABN Amro Craigs
“The smartest option for investors will always be nicely balanced portfolio,” says Watson, who admits that it’s challenge to find really good value anywhere. “It may sound boring, but diversity is the best strategy.”
Watson’s definition of nicely balanced investment portfolio includes short-term cash deposits (less than 90 days) so when interest rates increase the money can be reinvested easily. “Also when interest rates rise, cash is the only investment option that won’t go down.”
Longer-term bonds or term deposits should also be added to the mix.
“This will lock you onto fixed rate of return just in case interest rates keep going down,” says Watson, adding that the more courageous investor may have around 50 percent of his or her portfolio in cash and fixed interest accounts, while the more conservative investor could have up to 70 percent. He strongly advises against having all your money on term deposit, where it’ll get chipped away by inflation.
Property should make up 10 to 15 percent of your portfolio, particularly in the less volatile listed commercial property market, while the balance could be split between New Zealand and overseas shares.
In terms of shares, his advice is to stick with quality.
“Companies such as Auckland Airport, Fisher & Paykel, and Port of Tauranga always perform well,” Watson says.
“They’re defensive companies, well run, with little debt, paying good dividends, and in strong competitive position.”
He also recommends investment in Australia – “where there have been some favourable tax changes, and where there’s exposure to growth out of Asia and China. China is huge economy, and it needs Australia’s minerals.”
Europe and emerging markets get the green light for share buyers as well.
Watson believes it’s time for investors to sit tight and be patient – certainly not to rush into anything. He sounds cautionary note on long-term bonds (which haven’t been performing lately in terms of interest rates); property (not worth chasing at the top of the cycle); and what he calls “mezzanine” finance companies.
“Many are questionable, and it looks like the market is ignoring the risks inherent in this sector.”

“Cash is king”
Simon Swanson
Managing director
Sovereign NZ
The smartest investment option for investors right now, according to Swanson, is cash. As he candidly points out, even during the 1930s Depression, cash still returned one percent interest.
Cash is king on both sides of the Tasman, with both markets currently offering the highest interest rates for investors out of all the OECD member countries.
Swanson’s number two pick is shares – as long as they are well-rated companies paying high dividends.
Looking ahead to 2004, Swanson is picking an imminent fall-out in the property market -“the shake will take place, especially in Australia”. He also sounds warning on capital growth stocks.
Swanson says exchange issues cause many investors to fall down. “If they have global shares, they expect global rate of return, but often get ‘pole-axed’ by exchange gains and losses,” he says. Foreign exchange returns from offshore investments can either be negative or positive – be prepared for either outcome.
Swanson seeks professional advice for his own investment strategy, and is very clear on what people should expect from such service.
“You need to focus on your adviser’s ability to understand your risk and return ‘appetite’ or preferences. Put simply, can you afford to risk the lot, and do you want guaranteed return?
“Advisers should also be appropriately qualified and demonstrate robust process for arriving at their advice,” he says.

“Work the plan”
Dr Rodger Spiller
Managing director
Money Matters
Spiller advises people to have written personal financial plan and work that plan rather than jumping from market to market. He believes that, subject to an investor’s risk tolerance, equities or shares should make up the lion’s share of long-term portfolio targeted at wealth creation.
“In your plan you need to work out and target your ‘financial independence point’– the point at which you have enough invested so your cash flow meets your desired lifestyle expenditure and other goals. Then establish strategy to most reliably reach that point.”
He advocates strategic asset allocation approach with tactical positions to add additional value. He believes there is growing confidence of cyclical global recovery led by the United States over the second half of 2003. This leads to overweighting small cap stocks as they typically outperform in the early stages of economic recovery. Other areas that should outperform in US recovery are emerging markets and commodities.
With interest rates likely to rise slowly in 2004, residential property may cool off, thinks Spiller, “and long term it’s illogical to think that the residential property sector will outperform shares”.
He encourages investors to get more comfortable with shares as superior long-term investment strategy. One indicator that the worm may be turning for embattled share markets is that the share market has just experienced its strongest quarter in four years, and the eighth best quarter since World War II.
Spiller is wary of the property market in its current state, however his advice on the gold market is to avoid it altogether. He describes it as “wilderness” asset, “which only does well in times of extreme financial stress”.

“Boutique buying benefits”
Donal Curtin
Managing director
Economics NZ Ltd
Leading the popularity stakes for investors, as Curtin sees it, are boutique fund managers. These offer the most interesting investment ideas and best performance and structured products, “which offer relatively cheap exposure to broad asset classes, and often provide downside protection as well”.
Boutique fund management companies are often established by corporate fund managers who, through choice or necessity, have gone out on their own and, as result, can perform better than the organisation they left, says Curtin.
“They no longer have to toe the corporate line and often they have their personal funds tied up in the venture, so they have to perform well.”
Structured products have experienced big run lately and are being offered by many of the major financial institutions. It’s relatively safe way of buying into the MSCI index, covering different share markets, while being typically hedged in to New Zealand dollars – and all packaged up with capital guarantee.
The only downside, as Curtin sees it, is having your money locked up for six to eight years – “they are very hard to trade before maturity”.
He believes the popularity of structured products is partly due to people’s disillusionment with fund manager performance, and many traditional providers of deposits.
Addressing the options to avoid in 2004, Curtin targets “the apparent ‘free lunch’ of high interest income and allegedly low investment risk”.
He cites the CDO (Collateralised Debt Obligations) market in particular as one to exercise caution with – describing CDOs as “shoebox of securities”, or bundle of loans, which have level of default risk hard to predict.
“CDOs are extremely difficult things to understand,” says Curtin. “Investors could end up copping more than their fair share of losses should things turn sour.”
Curtin believes many investors still live in the past, forgetting that we now live in low inflation world. Short-term interest rates run at not much

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