COMMENT: Out of the woods after a month… or are we?

MONTHLY PORTFOLIO TRACKER

 

By John O’Donoghue

Consultant Adviser, Caratfin Ltd.

 

A month on and the medium risk portfolio has very nearly recovered fully from the recent correction, and has hit its highest ever month-end value, at $481,333, a gain of 92.5% versus the initial investment of $250,000 back in September 2003. This represents a simple average of nearly 26% per annum over 43 months, or put another way we have achieved an average growth of $12,000 per month. We are still 0.5% away from the value recorded on the 26th February, the day before the correction started following a near 9% drop in the value of the Shanghai stock exchange while we were still in our beds here in Cyprus. Then the portfolio was just short of $484,000, and in the next 9 days it dropped to just over $460,000, -$24,000, or -4.9%. I know I keep banging on in this column about the benefits of proper diversification – that is after all the purpose of the articles – but this was in fact a classic example, because by that day higher risk funds (Emerging Markets, Far East, Eastern Europe) had dropped between 7 and 11%, mainstream equities between 4 and 6%, commodities 4 – 7% and property 5 – 7%. So the portfolio did well by comparison and continues to do so: 40% of the portfolio’s funds have recovered past their end February price level, whereas the same has happened for less than 20% of the 130 funds I track on a daily basis.

The middle two weeks of March saw a steady improvement in the situation, but the doubt indicated in the headline stems from that apparent progress stuttering in the last week of month, where $3,000 was dropped from value by Thursday. That isn’t much, and was more than recovered in Friday’s trading, but I’m not convinced that all is rosy, that the correction was a blip, and that we will resume progress onward and upward. After 3 years of a pretty strong bull market it seems that all manner of financial professionals are expecting and predicting negativity, and are prepared to react violently to any bad news with sell instructions. The last month can be viewed, in fact, as self– fulfilling prophecy at work, as there was a rapid sell-off across the board in all sectors, followed up soon after by repurchase – as far as I can see – of pretty much the same instruments. In these circumstances I’m thinking we need to move to a more conservative allocation in the portfolio, as I expect continuing high volatility and more problems in the near future.

All well and good, but the events of the last month have provided confirmation of a situation that makes me quite uneasy: it seems to me that a ‘safe haven’ that will provide some growth is increasingly difficult to find. I remember in August 2004 watching as most sectors showed a worrying level of correlation with each other, and this time round it was worse, as far as I’m concerned, because Property not only correlated closely to Equity and Derivatives in turning down, but prices have shown minimal resilience since and the funds appear mired in the doldrums. As for the traditional safe haven, Gold? In a week the Merrill Lynch (sorry, now ‘Black Rock’) International Gold and General fund dropped 11.8%, and it’s now back to -2.4% from its 26 February price. Now that’s volatility! This whole situation needs more thought, and you’ll see changes next month, probably.

The low-risk portfolio had a reasonable month, but was handicapped by a 2.5% weakening of the US Dollar vs. Sterling, which defused a nice gain by the Ashmore fund. Growth is annualising at 9.0%, down from 9.3% last month, but still well within the target range.

Not the happiest of articles this time, but smile, Easter’s just round the corner! Kalo Pascha, one and all.

 

* Caratfin Ltd. is authorised by the Central Bank of Cyprus and is a member of CIFSA. Tel: 22 464190, e-mail: [email protected] and [email protected]. Website: www.caratfin.com