Record US Q1 results

The US Dow Jones Industrial Average and the S&P 500 recorded their biggest first-quarter point gains ever.

The Dow industrials rose 994 points, or 8.1%, and the S&P 500 rose 150.87 points, or 12%, during the first three months of 2012, amid signs of a strengthening U.S. economic recovery. The Nasdaq rose 486.42, or 19%, in the first quarter, narrowly missing its biggest point gain since 2000.

Careful chasing this run from here!

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Траст: доверительное управление имуществом

По британскому законодательству траст - это соглашение, по которому имущество передается в распоряжение управляющим, но владеют им и получают доход так называемые бенефициары. Объектом доверительной собственности признаётся любое имущество, как движимое, так и недвижимое.

Исключается из этих отношений лишь имущество, прямо запрещаемое законодательством страны учреждения траста, например, имущество, заложенное в банке, или являющееся объектом судебного разбирательства.

Использование траста для защиты собственности.
С помощью траста, человек перестает быть юридическим владельцем собственности, а значит, она не может быть у него отчуждена. Таким образом, в случае взимания долга по суду, развода, а также при уплате налогов, человек не отвечает за имущество, ранее переданное в траст. При этом, фактически он продолжает полностью контролировать имущество, переданное им в траст. Более того, так как траст британский, имущество, переданное в траст, сразу оказывается под защитой британского законодательства и «физически находится» в британском оффшоре. То есть, например, земля находится в Москве, а владелец – на острове Джерси.

Учредитель вправе передать своё имущество как при жизни (прижизненный траст), так и предусмотреть такую передачу после своей смерти (завещательный траст). Попечитель несёт ответственность за выполнение условий трастового соглашения и, как правило, получает широкие полномочия по управлению имуществом учредителя, но также может получить особые инструкции по распределению трастового дохода и капитала между бенефициарами при наступлении некоторых заведомо предусмотренных учредителем условий. Такие условия, как правило, включаются учредителем в так называемое письмо-пожелание (Letter of wishes), адресуемое попечителю. Учредитель также вправе предусмотреть условия замены попечителя, оговорить вопрос о передаче этого права другому лицу и т.п.

Договор доверительного управления имуществом
Договор, по которому одна сторона (учредитель управления) передает другой стороне (доверительному управляющему) на определенный срок имущество (объект доверительного управления) в доверительное управление, а доверительный управляющий обязуется осуществлять управление этим имуществом в интересах учредителя управления или указанного им лица (выгодоприобретателя)
(Гражданский кодекс Российской Федерации. Часть вторая: От 26.01.1996 №14-ФЗ.-В ред. от 06.12.2007.-Ст. 1012)

Комментарий
Передача имущества в доверительное управление не влечет перехода права собственности на него к доверительному управляющему. Осуществляя доверительное управление имуществом, доверительный управляющий вправе совершать в отношении этого имущества в соответствии с договором любые юридические и фактические действия в интересах выгодоприобретателя.

Сделки с переданным в доверительное управление имуществом доверительный управляющий совершает от своего имени, указывая при этом, что он действует в качестве такого управляющего. Это условие считается соблюденным, если при совершении действий, не требующих письменного оформления, другая сторона информирована об их совершении доверительным управляющим в этом качестве, а в письменных документах после имени или наименования доверительного управляющего сделана пометка "Д.У.".

При отсутствии указания о действии доверительного управляющего в этом качестве доверительный управляющий обязывается перед третьими лицами лично и отвечает перед ними только принадлежащим ему имуществом.

Договор доверительного управления имуществом прекращается вследствие:

• смерти гражданина, являющегося выгодоприобретателем, или ликвидации юридического лица - выгодоприобретателя, если договором не предусмотрено иное;
• отказа выгодоприобретателя от получения выгод по договору, если договором не предусмотрено иное;
• смерти гражданина, являющегося доверительным управляющим, признания его недееспособным, ограниченно дееспособным или безвестно отсутствующим, а также признания индивидуального предпринимателя несостоятельным (банкротом);
• отказа доверительного управляющего или учредителя управления от осуществления доверительного управления в связи с невозможностью для доверительного управляющего лично осуществлять доверительное управление имуществом;
• отказа учредителя управления от договора по иным причинам при условии выплаты доверительному управляющему обусловленного договором вознаграждения;
• признания несостоятельным (банкротом) гражданина-предпринимателя, являющегося учредителем управления.

При отказе одной стороны от договора доверительного управления имуществом другая сторона должна быть уведомлена об этом за три месяца до прекращения договора, если договором не предусмотрен иной срок уведомления.

При прекращении договора доверительного управления имущество, находящееся в доверительном управлении, передается учредителю управления, если договором не предусмотрено иное.
(Гражданский кодекс Российской Федерации. Часть вторая: От 26.01.1996 №14-ФЗ.-В ред. от 06.12.2007.-Ст. 1024)

Договор доверительного управления имуществом должен быть заключен в письменной форме.
Договор доверительного управления недвижимым имуществом должен быть заключен в форме, предусмотренной для договора продажи недвижимого имущества. Передача недвижимого имущества в доверительное управление подлежит государственной регистрации в том же порядке, что и переход права собственности на это имущество.

Несоблюдение формы договора доверительного управления имуществом или требования о регистрации передачи недвижимого имущества в доверительное управление влечет недействительность договора.
(Гражданский кодекс Российской Федерации. Часть вторая: От 26.01.1996 №14-ФЗ.-В ред. от 06.12.2007.-Ст. 1017)

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Precious Metals

The supply of the world’s reserve currency, the dollar, has been continuously expanded since the world economic crisis began in 2008.  Two rounds of quantitative easing and additional expansionary activities have enlarged the Federal Reserve’s balance sheet.  This monetary inflation has yet to affect officially reported inflation aggregates but commodity prices have been steadily rising since the monetary expansion began.  In addition to this commodity price inflation, there is a historical threat of broad latent inflation.  Economic history shows us that there is a delay between initial currency debasement and economy wide price inflation.  With interest rates guaranteed to remain around zero percent through 2014 and Fed officials expressing fear of price deflation, it is likely that the dollar will continue to be debased.      

As astute investors know, the future of the Eurozone is as precarious now as it was last year and the year before.  For nearly three years now we have watched as the peripheral European economies repeatedly approach insolvency only to be rescued at the last minute by Germany and France.  Each rescue package and sovereign wealth fund promises to produce stability but uncertainty inevitably returns after a few months.  In this environment, the Euro looks increasingly fragile.  Leaders of the Eurozone are realizing the extent to which the single currency has resulted in the structural problems currently troubling the union’s periphery.  The political tension over these structural and monetary problems do not seem to be subsiding but building.  The only thing that seems certain is the promise of future government bailouts via rescue packages.  These bailouts are essentially funded by monetary debasement, necessarily lowering the value of the Euro. 

In contrast to these paper currencies, which lose their value over time due to the expansionary central bank activity, gold and silver have steadily increased in value since before the crisis even began.  Backed by their own intrinsic value, these metals hold value no matter the economic climate.  As an investment class, precious metals offer investors the certainty that their investment will never fail.  There is no more certain or secure investment in the world than precious metals.  This why in times of crisis, investors seek precious metals as a safe haven asset.   

Lately, in response to both global economic uncertainty and inflationary monetary policy, precious metals have steadily been gaining value relative to paper currencies.  As previously noted, there is good reason to suspect that expansionary monetary policy will continue.  Consequently, there is also good reason to expect the long run price of gold and silver to rise.

Gold’s upward trend began following the 2008 crisis as investors sought to escape other riskier investments.  Throughout the crisis gold continued to rise, supported by its real appreciating value as new money was created to prop up the global economy.  As the global economy continues to perform poorly, investors see gold as a safe, reliable store of wealth with the potential for long run gains.  Gold has proven to be a well performing asset during times of central bank balance sheet expansion.  As a hedge against risk, there is no more secure asset.  Gold is the ultimate insurance asset.  Investors can invest in physical gold coins, bullion, shares of gold-based ETFs, and other products.  Making gold 5% to 10% of an investment portfolio can improve its overall performance and serve as a hedge against both systemic risk and inflation.     

Silver shares all of these properties of gold plus one additional factor relevant to investors.  Unlike gold, silver is an industrial commodity.   It is used in consumer electronics, solar panels, batteries, bactericides, dental alloys, and many other products.  For the last several years, global industrial demand for silver has outpaced supply.  A continuation of this trend, in addition to the continued debasement of fiat money, could provide a significant return to silver investors.  Investing in a silver ETF may be the best way to reap the benefits of the rising value of silver, as ETF shares are more liquid than physical silver.  Moreover, owning ETF shares does not require a storage premium like owning physical.

Investors interested in investing in gold or silver ETFs should conduct thorough research before investing.  Not all precious metal ETFs are the same.  These ETFs can target a variety of assets and employ numerous strategies.  Some ETFs primarily own physical gold and silver while others emphasize a futures or leveraged strategy.  Financial advisors can help interested investors find a precious metal backed ETF that fits with their personal investment goals.

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Asset Allocation: risk reduction realities!

Lets face it, asset allocation models are the heart of financial planning and investment advising. I have highlighted five major lessons we can learn from investment errors and market history in order to get allocations correct!

Mistakes can be made in all kinds of environments. The market's behavior over the 16-year period from 1987 to 2002 encompasses the extremes, stretching from two severe bear markets with a long bull market in between. This all-encompassing financial market history can provide a number of valuable asset allocation lessons.

Let's take a look at the performance of several portfolios over this time period. The table presents risk and return measures for five portfolios, which were rebalanced annually, over the period 1987 through 2002. It shows both risk and return measures to more effectively compare the portfolios.

Lesson One: Mixing bonds and stocks moderates portfolio risk.

High-grade bonds and stocks are fundamentally different assets. Bad years for bonds are sometimes good years for stocks and vice versa. During this time period, bonds lost money in three of those years, and in those same years stocks earned money. Conversely, stocks lost money in four of those years, and at the same time, bonds earned money. It is also important to note, though, that 1987 and 1994 were below-average years for both asset classes—that serves as a reminder that both asset classes can have poor years at the same time.

Lesson Two: Portfolio risk rises disproportionately slowly as stocks are added to the portfolio. Over this time period, the risk (as measured by volatility) of a 25% stock portfolio was essentially the same as the risk of the all-bonds portfolio. The additional risk of a 50% stock portfolio compared to an all-bonds portfolio is one-fourth the additional risk of an all-stocks portfolio.

Lesson Three: An all-bonds portfolio is NOT the lowest-risk portfolio. Even risk-averse investors should own some stocks. The maximum annual loss for a 25% stock portfolio was less than the maximum for the all-bonds portfolio. That's because, when interest rates rise, all bond prices move south.

Lesson Four: Portfolio returns rise disproportionately quickly as stocks are added to the portfolio. Over this time period, the 25% stock portfolio earned about 40% of the additional return on the all-stocks portfolio compared to the all-bonds portfolio. The 50% stock portfolio earned about 75% of the additional return.

Lesson Five: An often overlooked risk for the long-run investor is the risk of having a too-conservative portfolio. By focusing too much on volatility of individual assets instead of the volatility of the entire portfolio, many people often maintain a too-small stock exposure for their long-run horizon. Remember that over this time period, the 25% stock portfolio had a volatility similar to the all-bonds portfolio, but its returns were appreciably higher. And for many investors, the risk-return trade-off favors an even higher exposure to stocks.

So, let's learn from history and avoid the mistakes of others. Choose an asset allocation that suits your long-term needs based on the amount of risk you think you can withstand, and make sure you rebalance your portfolio every year to maintain a stable risk exposure.

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Hedge Fund Overview

           What is a Hedge Fund?

            Hedge funds are made up of capital pooled by multiple investors for the purpose of investing in a variety of ways.  They are generally not subject to extensive government regulation because they are private funds not sold to public or retail investors.  Hedge fund managers are usually highly experienced, accredited financial professionals and employ a myriad of advanced investment strategies to generate return.  These strategies include but are not limited to leverage, short selling, long and derivative positioning, futures, emerging markets and distressed firm investment. 

           

          Hedge funds receive aggressive personal attention from managers who usually have either a personal stake in the fund they manage or an otherwise strong financial incentive to generate high return.  Hedge funds are typically oriented toward absolute rather than relative profitability, making it possible to receive revenues during times of both a rising and falling stock market.         

Red= Dow Jones Credit Suisse Hedge Fund Index 

            Who Can Invest in a Hedge Fund?

            Legally, hedge funds are private investment partnerships limited to a specified number of investors capable of providing a relatively large initial investment.  Investors are usually required to demonstrate a high personal net worth before they are allowed to invest in a hedge fund.  Investment is relatively illiquid and open ended.  Typically, terms are structured such that investors may withdraw their money at previously specified, regular intervals.  Today, traditionally conservative pension funds and other institutional investors such as university endowments are investing in hedge funds. 

            How is a Hedge Fund Different than a Mutual Fund?

            Mutual funds, like hedge funds, are made up of a pool of funds from multiple investors.  Money market managers manage these funds and focus on stocks, corporate bonds, sovereign debt, and money market instruments.  Such a strategy is more traditional than the strategies employed by hedge fund managers.  Mutual funds allow small investors to participate in gains from investment in a diverse portfolio of stocks and bonds without having to single handedly raise the large amount of capital required to build a diverse personal investment portfolio. 

            Hedge funds are more exclusive than these publically available mutual funds and, as noted earlier, require much more initial investment than mutual funds require.  Also, hedge funds are oriented toward a more aggressive strategy.  Mutual funds do not, and are prohibited by regulation in many cases, from employing the alternative tactics that hedge funds are able to profit from. 

           

            How do hedge funds manage risk?  How risky is investing in a hedge fund?

            The term “hedge” implies the hedging of risk.  Hedge funds generally seek to reduce risk and produce adjusted return usually uncorrelated with movement in market indices.  For example, between 1993 and 2010, hedge funds were 1/3 less volatile than the S&P 500 stock index.  Fund managers are some of the most experienced financial professionals in the world and have extensive experience with risk management.  While investment in a hedge fund may be relatively illiquid, fund managers tend to keep their fund’s investments liquid.  Risk is also checked by operational due diligence on the part of investors and their personal financial advisors.  Some hedge funds are riskier than others and investors must evaluate what kind of hedge fund they wish to invest in before risking their money.   

            How are hedge funds Currently Performing?

            Generally, hedge fund performance can be difficult for the public to obtain.  However, several hedge fund indices are available and some individual hedge funds are listed (but not traded) on international stock exchanges.  Others report performance summaries to industry journals or consulting firms. 

           

           Last year was a difficult year for hedge funds, especially in the fourth quarter.  Data on 2012 returns collected so far suggests hedge fund returns are on the way back to positive.  Risk relative return, formally referred to as “alpha,” was generally positive in the first two months of 2012 for most types of hedge funds.  Improved global outlook and rallies in equity and credit markets have supported this positive hedge fund performance.  Many analysts are expecting this positive trend to continue.  These analysts point to a greater risk appetite in 2012 and strong emerging market hedge fund performance as indicators of a relatively prosperous 2012 for hedge fund investors.    

           

Red= Dow Jones Credit Suisse Hedge Fund Index Aug 2011- Feb 2012

Dark Blue= HFRI Hedge Fund Index; note stability relative to bonds and equity markets

           Why should a hedge fund be a part of my portfolio?

            Hedge funds offer the opportunity to engage in investment strategies that require both a large amount of risk exposed capital and careful attention.  By becoming a hedge fund partner, investors can gain from both pooled risk and full time monitoring of their investment.  Additionally, hedge funds can provide a private portfolio with returns regardless of fluctuations in market performance.  Adding hedge funds to a portfolio is one more way to diversify a personal portfolio and hedge risk across a variety of investment categories. 

            How can I start investing in a hedge fund?

            Interested investors should, as always, consult with a personal financial advisor before embarking upon any investment.  An advisor will help his or her client find a hedge fund that aligns with the client’s personal financial goals and then assist the client in making an initial investment.  Once a client is an investor in a hedge fund, advisors will continue to work with the client to monitor hedge fund performance and provide operational due diligence.  

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The Forex Discussion: A Basis

Over the last 10 years of meeting clients, invariably most new client meetings start with questions regarding currency trends. During these initial meetings, I always understood that the questions have very little too do with any advice regarding forex, but more to do with my analysis. I usually discuss the basic fundamental relationships involved in the macroeconomic landscape, including central bank activities. Often, this acts as a basis for the client to launch into what he or she thinks will happen in the world. Its a fun and important discussion to have with new clients, as I learn about the client's biases. This helps me understand his or her risk profile, investment time frame, rates of return expectations, and general knowledge of investments.

During later meetings forex questions often come up again. During these meetings we usually discuss trends in the EUR/USD pair, as its the main currency pair most clients are concerned with in terms of managing portfolio risk. However, there is so much more (and exciting) about forex! By the time we start discussing currencies like AUD, NZD and CAD, most clients realize they will never take a position in one of those currencies and the conversation ends pretty quickly.

As an advisor, I need to watch forex markets. Forex trading heavily influences stock and bond prices. It involves trading the largest, most liquid and highest leveraged instrument in the world. In order to establish a better basis to have more in-depth discussions with clients about currencies and their relationship with stock, bond and commodity prices, I want to share a two main pieces of information we watch on a regular (at least, quarterly) basis: currency pair correlations with the S&P 500 US equity index and currency pair trading ranges (volatility).

The accompanying table displays this data for the major currency pairs, ranking them in order of most correlated with the S&P 500. Right away, you can notice that the most liquid major currencies (EUR, JPY and USD) currently enjoy low correlation with the S&P 500 right now. On the other hand, currency pairs that contain AUD, NZD and to a lesser extent the CAD are strongly correlated with the S&P 500. These are often called the 'risk on' currencies that appreciate in value when macroeconomic optimism abounds. Understanding how 'risk on' currencies are performing relative to 'risk off' currencies is the first step determining market trends.

I watch more than just correlation levels. Clients should also if they want to diversify risk in their portfolios. Certain pairs trade in an 'orderly' fashion with each other, while others are less predictable. By knowing the 'average true range' (ATR) of the pair denominated in a single price (USD, for instance, here), I can discuss adding meaningful diversification elements to investment portfolios. According to the chart, it makes little sense to discuss the benefits of adding a EUR/CHF overlay to a portfolio, as the pair is basically tied at the hip. Discussing how the GBP, AUD and EUR will trade relative to the Japanese Yen seems worthy to discuss, as we can see from the high value of their movements in relation to each other.

Armed with this information, AVC's advisors and clients have a genuine starting point to discuss adding currency positions to investment portfolios. For many clients, a currency overlay - possibly with an active trading manager - would add to investment returns.

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Buffett on Buybacks: the logic of dollar cost averaging

Warren Buffett published his annual letter to Berkshire-Hathaway (BRK.B) shareholders in late February. In it, Buffett devoted many paragraphs to the subject of share buybacks, a topic he has opined on before. This year, he focused specifically on valuation and price performance.

Regarding valuation, here is what the Oracle of Omaha wrote:

Charlie [Warren Buffett’s partner] and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated.
We have witnessed many bouts of repurchasing that failed our second test. Sometimes, of course, infractions—even serious ones—are innocent; many CEOs never stop believing their stock is cheap. In other instances, a less benign conclusion seems warranted. It doesn’t suffice to say that repurchases are being made to offset the dilution from stock issuances or simply because a company has excess cash. Continuing shareholders are hurt unless shares are purchased below intrinsic value. The first law of capital allocation—whether the money is slated for acquisitions or share repurchases—is that what is smart at one price is dumb at another.

Regarding price performance, Buffett argued that investors are better served if a stock price doesn’t move higher when buybacks are made. Instead, he said that long-term shareholders are better served if the stock price languishes for a period of time. Using IBM as an example, Buffet explained his rationale:

If IBM’s stock price averages, say, $200 during the [next five years], the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.

If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the disappointing scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $1-1/2 billion more than if the high-price repurchase scenario had taken place.

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or through a fund, you are hurt when stocks rise. You benefit when stocks swoon.

Buffett acknowledged that his line of thinking won’t win many investors over. Behavioral scientists are documenting how hard it is for humans to pass on a certain, but smaller, reward now for a potentially bigger, but uncertain reward in the future. Yet, the math shows that the potential is there for Buffett’s approach to work.

Even if you don’t agree with Buffett’s logic immediately, understand the mathematics behind it. Its the same math that supports the idea of dollar cost averaging into long term holdings. You want to be a buyer when prices are low and expected to rise, not necessarily rising and potentially going to decline. If this is not clear still, make sure you contact us to show you how the seemingly illogical works in your favor.

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European Distressed Fund Investment

The uncertainty and volatility of the Euro zone has many investors skeptical of the potential for returns from investment in Europe.  Uncertainty about the future of the Euro has been at the forefront of investors’ concerns.  While fear about the potential for a Greek sovereign default may be exaggerated, such fear is not irrational.  The crisis in Europe has been painfully long and does not appear to be ending anytime in the near future.  Politics is almost inherently uncertain and the Euro zone’s current economic problems require political solutions both within member states and at the international level. 

All this uncertainty has led to a relative dearth of capital for financially distressed European companies.  These firms are touched by the macroeconomic precariousness of the European crisis but are operationally independent from the states in which they exist.  While investors may be rightfully dissuaded from investment in sovereign debt, they should think twice before lumping all European firms in with European governments when making investment decisions. 

As in all cases, investment decisions should be made based on firm level fundamentals rather than misleading macroeconomic aggregates.  Accordingly, investors in any economy can reap returns from investment.  One strategy is to invest in the recovery of sound, undercapitalized and undervalued European firms.  Such an investment strategy should focus on financial restructurings across several sectors in multiple countries.  The aim is to keep investments relatively liquid, thus making it easier to exit individual investments.  An appropriate time horizon for returns from European distressed fund investment is 6 to 18 months.

Since the Euro crisis began in earnest in 2009, funds following this strategy have enjoyed a return of nearly 70%.  The success of any investment fund can be attributed to careful management guided by a sound strategy.  As firms fail during economic recession, investment opportunities become available in the firms that are able to weather the crisis.  In 2012, the business cycle recession has given way to a period of sluggish growth and relative uncertainty.  The original, mid-crisis strategy is still applicable to the current climate as uncertainty about the Euro zone distorts prices and heightens volatility.  

This allows investors to exploit two major opportunities.  The first is the opportunity to purchase stock in companies at a discount relative to final recovery values.  The second is the opportunity to engage in selective short crediting where market values misprice risk.  Experienced fund managers analyze risk and return based on firm fundamentals.  This bottom up approach employed by all of the fund’s numerous specialized team members has contributed to its high return.

Past success, of course, does not promise high returns in the future.  While the fund takes precautions to minimize risk exposure, such as maintaining a high degree of liquidity and diversified leverage, investing in distressed firms in distressed countries entails risk.  Investors interested in investing in distressed European firms should consult with an experienced financial advisor about how such a strategy aligns with their personal investment plan.    

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