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By Jade Hemeon
National Post
FP Investing, “Advisor Post”
Monday, January 03, 2005
Just as few forecasters predicted the degree of strength of commodities like oil and coal in 2004 and the weakness of the U.S. dollar, prepare for inevitable surprises in 2005.
As advisors meet with many of their clients during the next couple of months, it will be helpful to be armed with information on investment trends and strategies.
Adrian Mastracci, investment counsel at Vancouver’s
‘fee-only’ KCM Wealth Management, says, "In any given year, you don't know where the winning markets will be, and it's important to diversify, rather than being reactive and chasing things that are hot."
While predictions vary, many economic forecasters view the U.S. dollar as under more downward pressure. Gavin Graham, vice-president and director of investments, is expecting the U.S. dollar to continue to weaken over the course of the year, although he says it may be a bit oversold and could see some strength early in the year. If the greenback does continue to slide, U.S. inflation and interest rates may perk up as a result, and the effects could spill over into Canada. Bond investors will have a difficult time in a rising rate environment and North American equity markets would likely not do as well as last year, which saw respectable gains on U.S. and Canadian markets, although the declining U.S. dollar decimated U.S. market gains for Canadian investors.
"Corporate bonds and income trusts can help balance portfolio returns and are non-correlated to traditional stock indices," Mr. Graham says. "International markets apart from the U.S., such as Asian and Europe, also look attractive. We are not recommending U.S. investments, as any gains could be wiped out by an appreciating loonie."
He cautions that income trusts and the mutual funds that invest in them must be chosen carefully after a few years of big gains.
"Income trusts offer an upfront yield that's paid in cash, paid monthly, and in a highly tax effective fashion," Mr. Graham says. "I would be cautious on power and utility trusts, which are interest-sensitive, and stick to business, real estate and resource-related trusts."
Many forecasters warn Chinese growth and the related resource commodities boom that stimulated the Canadian stock market last year may cool down. But others see these intertwined trends extending well beyond the typical cycle and for several years more -- albeit with some stumbles along the way. Jim Rogers, a New-York-based investment guru, author and one of the co-founders of the granddaddy of hedge funds, the Quantum Fund, has recently written a book advising people to hop on the commodities investment bandwagon, and predicts the bull could run another 15 years.
"It's simply supply and demand," he said. "Mines deplete, and there's been little investment in new capacity in recent years. Oil fields don't run forever, and there have been no major new discoveries."
Mr. Rogers described the United States as the "biggest debtor nation in the world," and predicted China will be the global powerhouse of this century.
"There could be a hard landing in the next while, but when the headlines are saying there's turmoil in China, pick up the phone and buy all the China you can get with one hand, and buy commodities with the other," he said. "Don't panic, get involved."
The downside is that many industries are vulnerable to the negative effects of higher energy and raw materials costs. Airlines, auto manufacturers and their suppliers, chemical companies and consumers products makers will see their profits fall if they can't pass on price increases.
Just as few forecasters predicted the degree of strength of commodities like oil and coal in 2004 and the weakness of the U.S. dollar, 2005 will also hold surprises. Many advisors protect against unpredictability by taking a balanced approach in portfolios, allocating assets to key categories such as global and U.S. equities and Canadian fixed income based on a client's risk tolerance, and then rebalancing regularly as market fluctuations push the original allocations out of whack. A client with a 10% allocation to emerging markets for example, would have been loading up during the past several years when markets were down, and sitting pretty to enjoy last year's comeback.
"In any given year, you don't know where the winning markets will be, and it's important to diversify, rather than being reactive and chasing things that are hot," says Adrian Mastracci, investment counsel at KCM Wealth Management Inc. in Vancouver.
Darren Coleman, an investment advisor, says hedge funds can be a useful addition to a balanced portfolio in unpredictable times, as they can employ "short" strategies that benefit from declining prices in specific securities, commodities or market indexes. Unlike regular mutual funds, hedge fund returns aren't necessarily tied to the direction of traditional markets, and a small slice can reduce volatility in an overall portfolio. The key is selecting a competent manager with a respectable track record, and to understand the hedge fund's volatility pattern and history in down markets.
"You need a skill set as an advisor to understand the various alternative strategies employed by hedge fund managers, and when and how they work," Mr. Coleman says. "Advisors who know their stuff in the hedge fund arena will be able to add tremendous value for clients."
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