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From PWM Research / Sub-Advisory March 1, 2008

Exposing the closet indexers

The traditional way of analysing managers has been to measure their tracking error by looking at the volatility of the difference between a portfolio return and its benchmark index return. This works with managers who take a thematic approach to their fund. But a fund which is a pure stock picker and looks for a good company will be quite diversified by industry. In this case, their tracking error may be quite low and lead us to (wrongly) assume that they aren’t taking much active risk.

From PWM Research / Sub-Advisory February 1, 2008

Return to market volatility

Having experienced a positive market environment for both the economy and equities for some years now, the climate is starting to change. Among the biggest changes is that earnings growth is ­decelerating and financial companies are suffering the consequences. There are ­indications of a re-pricing of risk, while volatility has returned to its old levels, much more in line with long-term averages. And since not all stocks will do well, investors will seek out stock pickers who can make a difference.

From PWM Research / Sub-Advisory December 1, 2007

When knowledge is power

Recent market movements have had an unsettling effect on some money market funds, and investors found they were carrying more risk than they had assumed. To avoid nasty surprises, you need to ask the right questions of your funds at the outset. These include: is the fund a stable NAV fund? And what of its ­independent rating? Since the term money market fund has been applied to a variety of product, where MMFs are ­concerned, ­information is key, and the key to a sound investment is knowledge.

From PWM Research / Sub-Advisory November 1, 2007

Derivatives: old tips, new tricks

From exotic to the norm The march of derivative usage from niche strategies into mainstream asset management now seems inexorable. With the convergence between the absolute return focused hedge fund community and the mainstream asset management market, this increase in derivative use is mirrored by a growing sophistication in the markets that they serve.

From PWM Research / Sub-Advisory October 1, 2007

Mutual funds’ velvet revolution

New sophisticated techniques While not immediately apparent, the mutual fund industry has been undergoing a quiet transformation as the full impact of the Ucits III regulations are felt. Once the privy of the large institutional investor base and hedge fund industry, sophisticated investment management techniques are now being employed in mutual funds.

From PWM Research / Sub-Advisory September 1, 2007

Learning from behavioural finance

Expected returns versus actual returns Portfolios are built on what are believed to be carefully thought out and well-researched ideas. However, investment performance often falls short of expectation and investors are disappointed with the actual returns achieved. Is this because we invest too little too late? Have we become too attached to individual stocks? Are our portfolios not diversified enough? This gap between expectation and reality is not limited to a few individuals who may perhaps be inexperienced or fall prey to faulty information but is often widespread. This is demonstrated by the formation of ‘bubbles’ in the market – most famously in recent times in the technology sector on the back of the rise of the dot com. Investors both amateur and professional were affected by the subsequent drop – no-one is immune from less than objective decision-making.

From PWM Research / Sub-Advisory July 1, 2007

­Global Reits – is now the right time?

Direct route headaches They say that home is where the heart is. To most of us as individual investors, our homes also make up a large part of our assets. Property has long been a recognised investment vehicle and its characteristics are familiar to us. However, as an investment opportunity, its attractions have in the past diminished somewhat because, until now, the only way to reach this market has been directly i.e. through buying bricks and mortar. Direct property investment can be a difficult option for investors as it is fairly illiquid, requires significant upfront capital and can provide ongoing management headaches.

From PWM Research / Sub-Advisory June 1, 2007

What makes a good active equity manager?

Back to basics The world of equity funds is becoming increasingly diverse and offers a bewildering array of strategies. How should one best navigate this and find the most suitable fund? By not forgetting the basics! A solid starting point is ascertained by defining a risk budget. Once determined you will find that you create a narrower and more manageable universe which still offers many interesting approaches to finding outperformance in equity markets. You can thus evaluate potential returns relative to the risk budget by using measures such as the Sharpe ratio. Some active managers add value by implementing high conviction ideas. This means finding someone who thoroughly knows their stocks, the stories behind them and the ‘right’ price for each stock. A relatively concentrated portfolio of around 40-60 ideas can allow for this degree of focus and allows utilisation of the best research ideas. From a risk perspective, the investor can perhaps seek some comfort from the idea that a stock story must be very strong before it makes it into or indeed is sold out of a relatively small portfolio.

From PWM Research / Sub-Advisory May 1, 2007

Should we still consider emerging markets?

A continued upward trend? In the face of the recent market correction in developed markets, investors may well be considering tempering their attitude towards risk and diversifying away from holding investments at the higher end of the risk spectrum. But should we be so hasty? If we stick with a range of equities from different geographies and sectors are there still opportunities to be found which may deliver upside potential? As we all know, emerging markets have delivered very attractive returns in the last few years. The MSCI Emerging Markets Free (EMF) Index returned over 30 per cent in both 2005 and 2006, compared to 10 and 20 per cent respectively for the MSCI World1. Do the prospects for 2007 look as good?

From PWM Research / Sub-Advisory April 1, 2007

Making the most of private equity

Short-term fashion or sound investment? Private equity is currently under close scrutiny in the media. There are a variety of polarised views being expressed. Observers warn that the current surge of interest in private equity is causing ‘bubble amnesia’ and are cautioning investors to remember the dotcom sector of the late-1990s. They opine that there is a flood of money coming into private equity funds but too few deals to put the money to work (referred to as an ‘overhang’ – alongside lots of other intriguing jargon). From another perspective, trade unions offer sharp critiques of the industry, making allegations of short-termism and profiteering. UK workers are concerned that a move into private ownership means job losses and cuts to benefits. In the face of this controversy should the investor steer well clear?

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