A Solid Year
By Yiannis G. Mostrous
ATHENS, Greece–2006 was a good year for the SRI Portfolio, which outperformed its benchmarks.
Please note that this is a long-only Portfolio. I imposed this restriction in order to fairly compare performance against benchmarks, and all major market indexes are also long only. Though quarterly results aren’t my main concern, the end of the year offers an opportunity to assess performance since inception.
Since its inception 15 February 2006 through the end of the year, the Portfolio was up 24.7 percent, while our benchmark–the Morgan Stanley Capital International All Country World Index Total Return (MSCI World Index), which includes gross dividends–was up 17.4 percent. The S&P 500 was up 12.7 percent, including dividends, during the same time frame.
Source: Bloomberg, SRI
Two of the three permanent hedges–US Treasury bonds via the iShares Lehman 7-10 Year Treasury Fund, recommended in early March (see SRI, 8 March 2006, Hedge Your Bets), and gold bullion, recommended in late March (see SRI, 29 March 2006, Right You Are…)–also made respectable contributions. The former was up 4.5 percent, while the latter was up 10.7 percent.
I initiated the bond hedge at a time when many pundits were busily justifying their views as to why the 10-year US Treasury yield was about to rise to 6 percent and beyond in 2006, a target first revealed at the beginning of the year.
But bonds didn’t collapse, a fact that should have come as no surprise to SRI readers. Furthermore, bonds proved a good hedge instrument, holding its own during uncertainty this past year.
Source: Bloomberg
Given my long-held bullish view on gold, a word on the metal is warranted.
It’s becoming increasingly obvious that the majority of investors remain uncertain as to what will be the final outcome of the Federal Reserve’s moves and the probable 2007 slowdown of the US economy. The debate between deflationists and inflationists remains animated.
I anticipate an eventual deflationary outcome (i.e., a deleveraging of the consumer). Yet the only hedge able to cover both is gold.
Gold has been the object of ardor and the target of scorn throughout the centuries but has never been refused as means of payment. The reason is that gold has no substitutes.
And given the demand for gold we’ve seen during the past three years (from central bank buying to new gold exchanges and liberalization of trade around the world), gold has become the world’s fourth currency. In today’s world of massive deficit spending and financial imbalances, expect demand for gold to continue to increase.
I first recommended gold as a hedge three years ago (while overseeing a portfolio for another advisory with three colleagues), and the metal remains the ultimate bulwark; gold will rise much higher, easily surpassing previous highs by the end of the decade. I strongly recommend gold as a hedge position for long-only portfolios.
The third permanent hedge position, Consumer Discretionary SPDR, was recommended very recently and hasn’t yet had time to make a visible contribution. This is a leveraged hedging short to a long-only Asia overweight portfolio and should be viewed as such. Outright shorting could be extremely dangerous at this juncture (although if done right, it can produce solid results).
Pay attention to the hedges and see them as what they are: protection for the rough patches. I anticipate that global markets will experience greater volatility and therefore larger corrections in 2007, but protecting your portfolio is always a good idea.
A Look Ahead
It seems only yesterday that people around the world were finding eccentric ways to celebrate the new millennium. As we’ve passed the midpoint of the new millennium’s first decade, investors continue to ignore the fact that developing economies around the world continue to gradually assume global economic growth leadership.
I expect this substantial change will continue–along with necessary booms and busts along the way–for a long time.
The developed economies are still the most-important ones for the stability of the global economic and financial system, but real growth will only be found in emerging economies. And going forward, the serious ones will be able to institutionalize themselves and increasingly become a more-substantial force in the global economy. Investors who are able to identify and understand the above dynamic will come out on top as the story unfolds.
At the dawn of 2007 Asia, Japan, Old Europe and Russia are still my favorite markets, as you can deduce based on the composition of the SRI Portfolio. The Portfolio remains concentrated in domestic-oriented companies (particularly when it comes to Asia and Japan), while most of the remaining recommendations stand to benefit from the global economic changes discussed above.
ATHENS, Greece–2006 was a good year for the SRI Portfolio, which outperformed its benchmarks.
Please note that this is a long-only Portfolio. I imposed this restriction in order to fairly compare performance against benchmarks, and all major market indexes are also long only. Though quarterly results aren’t my main concern, the end of the year offers an opportunity to assess performance since inception.
Since its inception 15 February 2006 through the end of the year, the Portfolio was up 24.7 percent, while our benchmark–the Morgan Stanley Capital International All Country World Index Total Return (MSCI World Index), which includes gross dividends–was up 17.4 percent. The S&P 500 was up 12.7 percent, including dividends, during the same time frame.
Source: Bloomberg, SRI
Two of the three permanent hedges–US Treasury bonds via the iShares Lehman 7-10 Year Treasury Fund, recommended in early March (see SRI, 8 March 2006, Hedge Your Bets), and gold bullion, recommended in late March (see SRI, 29 March 2006, Right You Are…)–also made respectable contributions. The former was up 4.5 percent, while the latter was up 10.7 percent.
I initiated the bond hedge at a time when many pundits were busily justifying their views as to why the 10-year US Treasury yield was about to rise to 6 percent and beyond in 2006, a target first revealed at the beginning of the year.
But bonds didn’t collapse, a fact that should have come as no surprise to SRI readers. Furthermore, bonds proved a good hedge instrument, holding its own during uncertainty this past year.
Source: Bloomberg
Given my long-held bullish view on gold, a word on the metal is warranted.
It’s becoming increasingly obvious that the majority of investors remain uncertain as to what will be the final outcome of the Federal Reserve’s moves and the probable 2007 slowdown of the US economy. The debate between deflationists and inflationists remains animated.
I anticipate an eventual deflationary outcome (i.e., a deleveraging of the consumer). Yet the only hedge able to cover both is gold.
Gold has been the object of ardor and the target of scorn throughout the centuries but has never been refused as means of payment. The reason is that gold has no substitutes.
And given the demand for gold we’ve seen during the past three years (from central bank buying to new gold exchanges and liberalization of trade around the world), gold has become the world’s fourth currency. In today’s world of massive deficit spending and financial imbalances, expect demand for gold to continue to increase.
I first recommended gold as a hedge three years ago (while overseeing a portfolio for another advisory with three colleagues), and the metal remains the ultimate bulwark; gold will rise much higher, easily surpassing previous highs by the end of the decade. I strongly recommend gold as a hedge position for long-only portfolios.
The third permanent hedge position, Consumer Discretionary SPDR, was recommended very recently and hasn’t yet had time to make a visible contribution. This is a leveraged hedging short to a long-only Asia overweight portfolio and should be viewed as such. Outright shorting could be extremely dangerous at this juncture (although if done right, it can produce solid results).
Pay attention to the hedges and see them as what they are: protection for the rough patches. I anticipate that global markets will experience greater volatility and therefore larger corrections in 2007, but protecting your portfolio is always a good idea.
A Look Ahead
It seems only yesterday that people around the world were finding eccentric ways to celebrate the new millennium. As we’ve passed the midpoint of the new millennium’s first decade, investors continue to ignore the fact that developing economies around the world continue to gradually assume global economic growth leadership.
I expect this substantial change will continue–along with necessary booms and busts along the way–for a long time.
The developed economies are still the most-important ones for the stability of the global economic and financial system, but real growth will only be found in emerging economies. And going forward, the serious ones will be able to institutionalize themselves and increasingly become a more-substantial force in the global economy. Investors who are able to identify and understand the above dynamic will come out on top as the story unfolds.
At the dawn of 2007 Asia, Japan, Old Europe and Russia are still my favorite markets, as you can deduce based on the composition of the SRI Portfolio. The Portfolio remains concentrated in domestic-oriented companies (particularly when it comes to Asia and Japan), while most of the remaining recommendations stand to benefit from the global economic changes discussed above.