Four Pillars of Investment Wisdom

Markets are driven as much by emotion as they are by any real economic forces. If one looks at the recent commentary over the past 6-8 weeks, then we are in for a difficult next six months. Most of the headlines are bad, revising down forecasts and resetting expectations. This is not confined to the UK and unfortunately, the correction of May looks set to continue. There will be of course days and maybe a week where markets are perceived to be oversold and markets will jump. This adds further to the uncertainty as volatility rises.

Investors who piled into Treasuries, bunds, gilts, and Japanese bonds on concern that Europe’s sovereign-debt crisis would derail global growth are finding the securities less appealing with yields at about the lowest on record.
Commodities are heading for their worst quarter in more than a year on investors’ concern that slower growth from China to the U.S. will sap demand.
Inflation has been held off for the time being and despite some suggestions interest rates are going to rise, this does not look likely in the near term. Those hardest hit will be savers who are sitting on cash and older clients who rely on income generation as dividends fall so companies can either preserve cash or buyback shares to maintain price levels.

The correction of 2010 (May – June) has yielded some interesting results in terms of comparative performance which are highlighted on the latest fact sheets which will be available on the web shortly.

Compliance Update

For those who need their compliance files updated, now available are the accounts for 2009 for the Aria Protected Funds. If you need a copy, please do not hesitate to let us know and we will email one.

More than 100 children’s lives changed

We are delighted to confirm that through the herculean efforts of DBM and everyone’s generosity, we have raised over 20,000 GBP for SmileTrain. This should ensure we have paid for more than 100 operations which will change the children’s lives. Aria is proud to have supported the Gig in the Garden 2010; watch this space for more opportunities to improve the lives of others.

Income to 5.75% for A1 and B1

As we suggested earlier in the year, we have taken the opportunity to raise the income from 5.25% to 5.75% effective immediately. All investors in Absolute Income A1 and B1 share classes will benefit. This increase is driven in part by the success of the DRM in preserving capital values and the strength of the counter-parties of the Aria Protected Funds. This change applies to all investors in the both share classes irrespective of the date of investment; equal treatment for shareholders is paramount for the us. What do you have to do? Nothing except communicate the good news.

Double Dip?

The talk of the moment is of a potential double dip with debt contagion spreading beyond the PIGS. If this were to occur, then the growth from the East would be nowhere near enough to sustain the developed markets and we could go back to near 4500 (FTSE) in the not too distant future.

Was May’s performance a surprise? Perhaps. We are now seeing more realistic assessments of the economy, notwithstanding the PM’s talk of decades of debt. The FTSE was down by more than 6% in May; the US and Global Equities by nearly 10% and volatility is rising once again. It is no surprise in these markets that the Aria Protected Funds are down; but on average only 2% across Absolute Income, Enhanced Income, Dynamic Growth, and GEMs.

Is there any good news? For investors who need income, the Aria Protected Funds remain highly compelling. From a growth or market risk perspective, all the funds continue to show that the operation of the DRM works to effectively protect capital positions in volatile markets. The prospects for growth, however, are not what they were six months ago.

Passive is the Future

A recent FT article highlighted the growing trend for pension funds to move away from active managers towards passive for core portfolios. One important benefit which was highlighted was the attraction of passive structures which use “dynamic passive investment strategies”; it is impossible for active managers to replicate this type of risk management. Great to see the industry adopting the message which we have been banging on about for nearly three years. This trend is expected to continue and the benefits of the Aria Protected Funds’ DRM should be part of every client review.

SmileTrain Update

A big thank you to all who through their clients are contributing to the SmileTrain campaign. We only need 5m of subs this month to hit our target of 10,000GBP for this excellent and life changing charity. You can of course donate directly, just follow the link on our website or www.justgiving.com/gigingarden.

Which way now?

It is a good thing we did not come out with our usual commentary the end of April. The first week of May would have shown how tarnished our usually infallible crystal ball had become.
We are facing the threat of debt contagion, demise of the EURO and a new Government all within a month. The reaction of the markets the last week has been highly unsettling. Perhaps back to the JAWS theme a few months ago? Is it safe? How many more surprises will there be in the coming weeks and months ahead? Uncertainty remains perhaps more than people had hoped (will the FTSE test 5200? or 5000 again)? Really… who knows.

Mervyn King supposedly knows that interest rates will remain low for some years. Any small rate rises, you can be sure the banks will be unlikely to pass them on so the quest for income will remain at the forefront of basic portfolio planning. And what about growth prospects? Emerging markets have been hammered this past week; off by almost 10% and yet commodities have shown positive performance when everything else is down.

Available this month on the website will be some in depth research into what the underlying indices for the Aria Protected Funds have done in the past months and as promised previously, this will be updated more regularly to help you with client meetings.

Low Interest Rates – Higher Interest

8.25% or 5.25% net yield, take your pick (with the new tax rates this 10.50% and 16.50% for comparison purposes, as the banks say).
We continue to bang the drum about the need for reliable income levels for all risk profiles. For a low risk client, leaving the money in the bank offers the unappealing prospect of zero or negative real interest rates for the next few years. For higher risk clients, they should not be sitting on any cash (or very little) but still should have some stable elements to their core portfolio where they can afford to take some capital risk in return for above market yields. Older clients who are in drawdown, using their ISA money or their offshore bonds 5% allowance should be looking for as much yield as possible while preserving their capital. The big difference for the Aria Protected Funds is that yield is based on the investment, not on fluctuating capital values.

Certainty of income at a defined level will offer peace of mind.

Uncertainty and Volatility

The recent market fluctuations have resulted in increased volatility in the market. This can be exciting if you are a day trader or trading CFDs or for the investment banks whose margins rise in these markets. It is bad, however, for the average investors who would have seen 3-5% wiped off their investment in a week (or more for emerging markets).
All the Aria Protected Funds use mechanisms to preserve capital values. The result is that you should see lower volatility across the lifecycle of your investments. The is particularly true of the Absolute Income Protected Fund; volatility over the past two years has been below 4.5%. This compares to the lowest risk of government bonds and further justifies our risk rating of 2/10.

Help a Child Smile

We are proud of our continuing association with SmileTrain and are pleased to report that we are almost half way to our target of 10,000 (just over 4,500 to date). If you want more information about SmileTrain, see David’s justgiving site or the link from www.protected-funds.com.

Thank you to all.

Anchoring and Managing Client Expectations

In behavioural finance, one aspect of understanding how clients think is Anchoring.

Anchoring can be summarised as basing ongoing conclusion on initial fixed assumptions. The problem we all face in the UK is that we are anchored (or even framed) by the performance of the FTSE in assessing our investments. This is quite inevitable for the majority of portfolios as the concentration of UK assets dominates. However, in considering the performance of the Aria Protected Funds as a whole, it is important to remember that the Funds provide wide exposure to a range of global asset classes which are, on the whole, weakly correlated to the FTSE.

The FTSE has been one of the best performing indices the past 3-6 months. This is of course good news for the UK, property prices, and a large portion of most portfolios. However, for clients, it is important to remind them that the Aria Protected Funds have very little FTSE exposure and in assessing the performance we need to look at the underlying indices.

Absolute Income, Enhanced Income, and Dynamic Growth all have exposure to the same underlying index basket; global commodities, infrastructure, a wide range of property (or physical assets) like shopping centres, car parks, timber (in Europe, Asia, and North America), and yes, a small portion of FTSE. Commodities have had a rough ride the first Q of 2010, offsetting most of the gains of the FTSE. Infrastructure and the various property elements around the world have different drivers and therefore they have performed quite differently; North America has been the best performer the last Q; Asia and Europe have been relatively flat.

GEMs. Most commentators still are bullish on emerging markets and the recent uptick in commodity prices for metals points to increasing productivity. This is all good news. That being said, the last three months have been virtually flat for global equities and emerging markets. With respect to volatility, this is good as the lower the volatility the better the Fund can perform in rising markets. For those clients who want a piece of the action, therefore, without the potential downside risk, the GEMs fund should continue to play a role in core portfolio planning.

The prospects are good, however. Recent press suggests the recession is officially behind us all over the world and although this year looks to be less than sparkling, we should continue to see improvements in all markets.

For clients? They simply need reminding of the market risk elements of these funds. Where they are receiving income, then this is a bonus. For those looking for growth, the prospects are good as long as we remember to reinforce the rationale and benefits of diversification.

Aria Supports Changes Proposed by RDR

In case you missed it, buried in the 01/04 Policy Statement on adviser charging, the regulator says colours including ivory, black, grey, and white could help avoid customer “confusion” about the status of the adviser they are dealing with. Restricted advisers should wear mostly red to “warn” consumers of their limited market reach while multi-tied practitioners – who will also be called ‘restricted’ from 1 January 2013 – should “mix and match”.
The FSA says if it presses ahead with the rule it may conduct mystery shopping exercises to ensure advisers are complying.
Guidance on clothing may be necessary, the regulator adds, because it remains unconvinced restricted advisers will properly disclose their limitations to potential clients.
Aria Protected Funds will be launching a clothing line to support these proposals with DBM as chief stylist.

Additional Forthcoming Research Notes

To assist in further Managing Client Expectations, we will be re-introducing regular research notes on the underlying indices for all the funds. We recognise the difficulty in keeping up with these varied indices; we do and we will be providing this information to you on a more regular basis. Keep an eye on your inbox.

Oh, and by the way, the RDR article was for an April 1 notice so you can draw your own conclusions!

SmileTrain and Gig in the Garden Update

Last month we announced our sponsorship for Sweden’s answer to Glastonbury. Tickets are selling fast.

More importantly, with your continuing support, we are pleased that our donation for March (based on gross sales) will pay for 25 cleft palate operations through Smile Train.

Anyone wishing to contribute additionally can do so through JustGiving (look up Barclay-Miller).

Aria Enhanced Income Fund — Now Open

Aria Enhanced Income Fund is based on the successful Aria Absolute Income Protected Fund. The Fund combines a passive investment strategy with fully secured and collateralised risk management, in addition, the yield of the fund is enhanced by up to 50% leverage. The Fund provides a minimum guaranteed yield of 8.25% per annum. If the yield is reinvested over the initial period to March 2015, this would equate to an AER of c. 8.6% per annum (net). All income is distributed net of all charges and tax including withholding. There is no explicit capital protection level set but using the Dynamic Risk Mechanism, the worst case scenario should equate to a total return of 98% over the initial 5 year initial period.

Enhanced Income Fund Factsheet http://www.protected-funds.com/sif/docs/Enhanced%20Income%20Factsheet.pdf

Market Update

2010 has started with no less certainty than 2009 ended. The last three months have been quite flat across most asset classes. There are many who fear that we are on the verge of a big shock; the UK’s growth is overestimated and with a hung parliament possible the prospects for continued UK growth are poor. Gold may rise again and interest rates are starting to creep up. The recent increase in US short term rates has reintroduced the question raised some months ago. What happens when QE stops and the banks have to raise capital by selling their existing equity and bond holdings?
Interestingly, the FTSE has been one of the better performing asset classes. The return to near 5500 has been welcome but the danger, as echoed in the trades the past week, is that this is unlikely to continue. The good news is that many investors’ portfolios (which are overweight UK equities) have seen some positive performance. All commentators suggest that this is exactly the right time to be spreading your asset allocations wider. Clients will have seen some better recent results. Therefore, now is the time to review and reposition assets; it is better than leaving too many eggs in the UK basket.

Danger signs for Life Settlements

Recently, the FSA has warned about life settlements; the one asset class that has brought down more companies (Keydata of course but there is a litany of others) than any other. Funds have attracted a lot of money recently in the quest for “security”. The concern expressed by the FSA is quite correct. The “over reliable” performance should be more carefully scrutinised. Life settlements are based in offshore jurisdictions where compliance is less rigorous and the literature talks about guarantees (because of insurance company ratings). Be wary. This has nothing to do with the likelihood of payout. Redemptions can be met from inflows (at the current moment) but once the dam breaks, with no secondary market for these illiquid assets, that is when historically, the trouble really starts.

Product-driven Regulation and Compliance Risk

The Luxembourg regulatory regime is product-driven. The CSSF considers every fund launched under a specific set of rules to ensure the fund meets its guidelines for appropriateness. The Aria Protected Funds are no different. The FSA does not operate this way. The FSA does not read and comment or approve every fund launched in the UK although there are rumours that this is proposed. This is an important point to consider in dealing with Luxembourg funds.
In our discussions with distribution groups, we have been told of a number of issues which have come up in the compliance checking of files. Most firms do not have any problem with significant allocations to the Aria Protected Funds. The issue that is often highlighted to us is the completeness of the files. Our word of advice is to make sure that in Fact Finds there is enough information about the other aspects of clients’ wealth to justify the higher allocations (say 40% and above) to the Aria Protected Funds.
We are constantly updating our templates for Reasons Why Letters and have independent research commissioned on the Aria Protected Funds which can be used to reduce your compliance risk. Just ask us.
If you need any specific information, other than that found on the website or in our previous white papers, just ask.

Gig in the Garden and Smile Train

We are delighted to sponsor this year’s Gig in the Garden; Sweden’s answer to Glastonbury and according to the Swedish press, the coolest outdoor festival in Sweden.
We are not only sponsoring the beer tent at the festival but from now until the end of June, we will be donating 5bps from all investments in the Aria Protected Funds directly to Smile Train.
Anyone wishing to contribute can do so through JustGiving (look up Barclay-Miller) or check out the link for ticket details.

Gig in the Garden, 2010 http://www.gigingarden.com

January has come as a bit of a shock to most experts. Most markets fell between 5 -10%.  Last summer’s optimism has not carried into this year and perhaps the flat Q4 may just mean that we are not out of the water yet.  The cessation of Quantitative Easing in the UK will mean that liquidity will be harder to come by.  If the banks have to raise capital elsewhere; selling off business or liquidating assets this will mean the markets may be in for a rough ride over the next 3 or 4 months.

Generally, It is interesting to watch the commentary about things like gold and emerging markets as two ends of the risk spectrum.  The enduring enthusiasm for gold to reach 1500 or more has quieted slightly (which is good) but emerging markets are taking longer than expected to come out of recession (which is bad).  House prices in the UK are looking good but inflation is rising.  The net result of all of this is  that we still believe interest rate rises are on the near term horizon and 2010 will remain a tough year (we would love to be wrong).  However, remember, you cannot time the market so it is better to be in and be certain than try to outguess the tempermental markets.

The feeling in the markets about shorting gilts and equities indicates that the risk on the downside, even for government debt, is much higher than the potential upside in the developed markets.

New Solution for trustees, charities, and pension funds

Trustees have a difficult job.  Trustees of smaller funds (say less than £50m)  do not get the expertise or attention from professional trustees.  The opportunity for advisers is significant.  The new FSA approved fund offers a unique combination of comfort (FSA) and certainty (income yield of 5.4% net per annum) and might just be the key for you to unlock these larger pools of money.

ISAs

ISA season is upon us.  For those doing campaigns, the new FSA regulated Absolute Income Protected Fund is ideal.  Recently launched (and recently FSA approval), ISA application forms (and other important documents) can be found at http://www.protected-funds.com/documents.php

CGT Confirmation

Confirmation from HMRC that the returns of all funds for 2007/2008 are subject to CGT.  Going forward this should ensure we retain favourable tax treatment for all funds.

Do your Homework

Just to make sure you  are reading this to the end.   There is no substitution for doing your homework.  However, to make your life easier,  if you want independent research commissioned from AKG or PAN Associates on the management company or the fund (respectively), let us know.  Given the FSAs view on file checking, these would be ideal to pad out your own research on the funds.  For copies of either, let us know.