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Jun 30 2021
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Investing Without Borders

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Click here for the introduction to our “Investing in the Post-Covid Era” series of materials.

With the recent turmoil in global equity market, we look at the essential skill for achieving strong investment returns.

The dramatic fluctuation in global equity markets of the past 18 months have caused many people to reconsider their investment strategies. We hope that one of the outcomes will be that investors will be less complacent.

To be a good international investment manager one should be a generalist, not a specialist.  Contrary to what investment professionals may say, we believe that strong investment returns are founded on a few simple concepts.  In the mid-1990’s, Daniel Brosseau, a co-founder of Letko, Brosseau and Associates, outlined these concepts to industry peers in a presentation title. “Investing Without Borders’. The analogy is simple and clear and as relevant today as it was a decades or so ago.  Of course some of the company names will seem outdated but the concept remains as robust as ever and of course the global economy is more intricate and intertwined as ever.

Imagine a dinner menu with a fixed menu and an à la carte menu (see Table 1 below). As an investor, you can choose the fixed menu of country allocations, such as the US, Europe, Japan or Asia. We prefer the à la carte menu by which we look at the world from an industry perspective and select a favourite dish in each country.

Imagine another list (see Table 2) which portfolio managers might choose from, from the Dow Jones index and a list of auto producers.

The greater your knowledge, the higher the probability of success

Everything we have learnt from a business and economic point of view tells us it is much easier to deal with and analyze Manager B’s list because it is comprised of companies in the same industry. One can examine competitive position, cost structures, profit margins, capacity growth, etc. Even international questions such as the impact of currency swings, interest rates and duties can be analyzed more easily from the industrial perspective using Manager B’s list.

Analyzing Manager A’s list is more difficult. Comparing IBM or McDonalds to Nike is not easy. What you can say or conclude is limited. However, if you compare GM to Honda or BMW, things become clearer. It is more natural to compare GM to Toyota than to Walt Disney.

In order to shop in a very large store with excellent products, prices and variety, it follows that one has to go to the global store but how does one increase the probability of achieving superior investment results in a world without borders?

Getting it Right

The greater your knowledge, the higher the probability of success.  But a little knowledge may be damaging and too much knowledge can hurt as you may end up focusing on the details to the detriment of the larger picture.

The Valuation Model

The valuation model and the quality of the analysis and judgment are very important in order to be able to properly interpret the facts. The better and more rigorous the analysis, the higher the probability of being right.  This is usually improved by looking at a variety of situations.

Amplitude of Valuation Distortions

The greater the valuation distortions are, the greater the odds of being right.   A corollary of this is that the wider the population of investment candidates to choose from, the greater the probability of finding undervalued securities.

When you widen your analysis, you increase the investment candidates and the environment in which they operate.  As knowledge increases, the quality of analysis should also improve. As you increase your population of companies, the chance of finding cheap stocks increases.  Thus, the probability of making right decisions increases.  Superior investment returns are attained by the consistency of making the right investment decisions.

People often say that to invest in Europe, one needs a European manager.   It should be noted that to do quality analysis and observe valuation distortions, the manager’s location is unimportant.

You may retort that some people have better sources of facts.  Clearly, the investor or portfolio manager who plays golf with a senior executive of General Motors may have an edge over the one who does not.  However, in today’s world, we believe that those benefits are eroding, due to the quantity and speed with which information is now made available

The question we hope to raise through this article is whether the allocation decision is best made with a top-down approach, that is to say, an approach which distributes funds between world markets periodically, or, by an ongoing analysis of industries and companies which compares valuations and opportunities on a global basis.

Table 1:

Fixed Menu A la Carte
US S&P 500 Chemicals Semi-conductors Forest Products
Japan Nikkei 225 Metals Airlines Auto
U.K. FTSE 100 Media Retail Oil & Gas
Germany Dax Telcom Mining Food Processing
France CAC 40 Healthcare Pipelines Software

Table 2:

Manager A Manager B
Dow Jones Companies 10 International Auto Companies
Microsoft McDonalds Corp Toyota Motor Renault SA
Boeing Co Nike Ford Motor General Motors
Pfizer General Motors Fiat Chrysler Volvo AG
Coco-Cola Co Walt Disney Honda Motors Scania
Cisco Systems Procter & Gamble BMW Hyundai

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Jun 16 2021
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Vintage Wine Market Update – June, 2021

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The international wine market is  quite different from how it looked 10 years ago.  While Bordeaux used to be the dominant growing region, its trade share by value is now just  slightly more than 35%, according to Liv-ex.   That the market continues to broaden is a positive thing for wine lovers across the world, offering them a chance to discover great bottles to enjoy.

Furthermore, a broader wine market is also an important factor to take into consideration when building a wine investment portfolio.   A well diverse collection of wines is a key to wealth preservation.

Liv-ex reports that the Fine Wine index 100 is now close to the highs reached in June 2011.  The index 100 is the industry benchmark, including the price movement of the 100 most sought-after fine wines in the secondary market.   Over the past 12 months, the Index 100 has steadily climbed despite many hurdles along the way, such as Brexit, COVID-19, US tariffs and stock market fluctuations.

As of the first week of June, Liv-ex index Champagne 50 is showing the best performance with a year-over-year gain of 13.2%, followed closely by the Burgundy 150 index’s 9.9% increase.

Bordeaux 2020 and the En primeur campaign

The verdict is out:  the 2020 vintage is definitively part of a trilogy of excellent vintages along with 2019 and 2018.    Wine critics also agree that it is an irregular vintage.  The well-established rivalry between left bank and right bank, Merlot versus Cabernet Sauvignon seems to be going full swing right now, with some wine professionals stating that the Merlot grape is showing better than the Cabernet.

However, the more reserved wine critics seem to think that it is not so clear-cut and that both left and right banks have produced outstanding wines.    The key factor is the soil composition and the well-known concept of “terroir”.   In other words, the capacity that some estates have to cope with difficult climatic growing seasons due to the quality of their land and having the financial resources available to do what is necessary in the vineyard.

In comparison with the 2019 vintage, there has been a slight increase In prices, of between 5 to 10%,

The world of auctions

As Christie’s summarizes it: “Asian buyers continue to drive global demand”.   With a sell-through rate of 88% and half of the lots selling above their high estimates, the May week-long series of auctions in Hong Kong was certainly considered a success.   On May 20th, 98% of the wines offered were sold for a total of US$5.9 million.   Three magnums of DRC Romanée Conti 2004 were sold for US$129,359.

Still in Hong Kong in May, Sotheby’s sold 99% of its lots for a total of close to US$16.5 million. The star of the show was a unique lot of 6 bottles of Vosne Romanée Cros Parantoux 1989 from the famous Henri Jayer, which sold for over US$386,000.

The possibility of following the auction and bidding online has been greatly beneficial to the auction houses.   It opened the door to a much younger crowd of buyers around the world and Asia in particular.

Bordeaux is back

The wine-making style for the 2020 vintage is more in line with classical Bordeaux – producing wines that are less extracted, with lower levels of alcohol and softer maceration.  Freshness is a recurring adjective in tasting notes.  According to many wine critics, the 2020 vintage is a continuity of what has been happening for the past few years.

In terms of trade, Bordeaux wines are back in demand.  The suspension of US tariffs, a succession of excellent vintages with a superb but relatively under-priced 2019 vintage are contributing to a renewal of interest.   Famous brands such as Lafite Rothschild are currently very popular on the secondary market.

Burgundy 2019:  an overview

Is the 2019 vintage in Burgundy an extraordinary one?   It would seem to be the case according to merchants and wine critics who agree that quality is present across the board from regional and village appellations to the most sought-after Grand Cru wines.  Balanced wines are present for both reds and whites, with great aromatic expression and fine but powerful tannins.

For most wine professionals, this is a unique vintage of superb quality with great aging potential.   The down side of this vintage is the quantity. Frost in springtime and a long dry summer contributed to a rather smallish production.

In conclusion, the general quality of the vintage 2019 offers the opportunity to buy wonderful white and red wines from less well-known and less expensive appellations.   A chance for everyone to taste the magic of great Burgundy.

 

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May 27 2021
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Spreading Your Risk

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Click here for the introduction to our “Investing in the Post-Covid Era” series of materials.

Portfolio diversification will help protect your investments and increase returns on these investments.

Portfolio diversification is the spreading of risk by investing in several asset categories (equity, bonds, cash, real estate or precious metals) or several industries or several different markets. How does diversification help reduce your investment risk?

How Diversification Reduces Risk

Let us suppose that your portfolio consists of one stock. What is your risk? There is the broad risk that comes from the general economy, such as the business cycle, interest rates, the inflation rate and exchange rates. Then there are the specific risks which come from the company’s financial position, internal policies, marketing efforts, etc. These latter risks are specific to that company and not to other companies in the economy. By adding another company with a different business, you reduce your portfolio risk as long as the firm-specific influences on the two stocks differ.

Now assume that your portfolio consists of an airline company and a computer company as an example. When oil prices rise, airplane fuel price increase, which in turn lowers the airline’s profit margins. At the same time, computer chip prices may be declining, improving the margins of computer manufactures. The two effects offset one another, stabilizing the portfolio’s returns.

A client’s equity position can be spread over many sectors of the economy including industrials (chemicals and auto manufacturers), financials (banks and insurance companies), energy (oil and natural gas producers), forest products (newsprint and market pulp), transportation (airlines), retailing, health-care, and communications.

By adding more stocks with different characteristics, one can lower the risk by spreading it over many equity positions. However, you cannot eliminate risk. No amount of diversification can reduce an investor’s risk to zero. When all risk is related to a specific company, the diversification can reduce risk to very low levels. The remaining risk is market risk which is non-diversifiable. Any claims of a ‘riskless’ investment should be treated as dubious. Although there exist complex quantitative techniques that are designed to hedge against risk, they can never eliminate it.

As a Hong Kong-based investor, you should consider diversifying internationally since both the stock market and the local economy are heavily geared to real estate. It is impossible to diversify into a broad range of industries so one should look abroad. International diversifications can improve portfolio performance.

The value of the whole Hong Kong Stock Exchange is approximately US$6 trillion of which only half is open to investors. An adjustment must be made for corporate cross-holding, legally restricted shares, large private holdings, etc. Although this may appear a large sum, it is small when compared to the world’s major equity markets. The US and Chinese markets have a combined value of approximately US$60 trillion, Hong Kong represents only 10 per cent of these two markets. The other Asian equity markets, other than Japan, are even smaller, in comparison.

Diversifying Internationally

There are many possible approaches and many different views on how to diversify internationally. Some of the steps you should consider are the selection of currencies, industries, companies, countries and securities.

You could choose a mutual fund which covers the countries and currencies you wish and the fund will select a diverse portfolio of securities for you. A private banker or broker with an international firm can provide you with research materials to back up any suggestions that they may have. Some discretionary fund managers specialize in providing international diversification in equities and fixed income.

Conclusion

Diversification helps to reduce investment risk and to increase returns for your investments. Just remember that you have to keep your initial investment objectives in mind when choosing a method that works best for you.

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Apr 27 2021
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Due Diligence

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Click here for the introduction to our “Investing in the Post-Covid Era” series of materials.

When it comes to selecting a firm to handle your investments, it pays to do your homework

When selecting an investment firm, there are a few factors you should keep in mind.  Regardless of who recommended a prospective investment adviser, you must conduct your own due diligence.  You know your investment objectives best and you are the one who will have to live with the decision.

The toughest part is knowing what questions to ask.  First, let’s touch on some important rules of thumb.  You should understand the risks and the expected returns of the investments you choose.  Just as important, is understanding how the investment firm’s employees are compensated.  You should have clear expectations on how your investments will be monitored, including the quality of the statements and how often are investment review meetings held.  You should know how fees are charged.   Are they fixed or based on assets?   Are they based on commissions?   Are there any hidden fees?

Tips for Choosing a Firm

Big is not always better.  Sometimes smaller firms can do a much better job at meeting clients’ objectives.   Imagine you are shopping in a popular area.  You are in a hurry to finish.  It is easy to move around when you are by yourself.  However, if you are amongst a dozen people linking arms, it will be impossible to move faster than the crowd.  In fact, you become the crowd.

There is no uniform standard of service and expertise that clients can expect to receive.  However, any company or person who deals in securities or commodity futures, or gives investment advice in Hong Kong, must be registered with the Securities and Futures Commission (SFC).

You should meet the management and ask about staff turnover.  This can affect you in many ways.  If the person you deal with regularly change over, you will have to build up another relationship.  If a fund manager leaves, future performance may not be the same as in the past.  If administrative personnel change, will you still receive your statements as usual?

How the firm is remunerated from your business is extremely important, as is knowing how your account officer or broker is paid.  Are their interests closely aligned with yours?  Are they paid a fixed fee on assets managed?  Are they paid commissions?  Are they paid by investment performance?  Although your statements may not show commission fees, you may nevertheless be paying them.

Client service is important.  Ask to be shown sample statements.   Are statements clear and comprehensible so that they facilitate monitoring your investments?  How often are statements provided?   How accessible is your adviser to respond to your questions and address your concerns?   Are you invited to educational seminars?

Does the firm have related services, such as dealing with overseas mortgages or trusts?  Will this be important for you in the future?

Choosing your Account Manager

Your account manager will be the person with whom you have the most contact.  What experience does he or she have that is relevant to your situation?  What sort of professional training does your account manager have?  What is his or her investment philosophy?  Is it consistent with the firm’s?

Do you think you will be able to build a long-term relationship with your account manager?

Monitoring your Adviser

Once you have determined your investment objectives and chosen an adviser to help you meet those objectives, you must manage the relationship and monitor your investments.  The key to a successful relationship is regular and effective communication.  It is the investor’s responsibility to update the adviser regarding any changes in investment objectives and circumstances.  In turn, it is the adviser’s responsibility to regularly report on how well the stated objectives are being met.

One way to ensure poor investment returns is to change investment advisers frequently by running after the short-term star performers.  However, you might consider changing your adviser if they are unable to manage your investments according to your objectives, there is a high turnover of key personnel, there are changes in the level of service, there are changes in investment style, or changes in trading activity.

At the end of the day, it is your money that is being invested and usually it is your future that you are planning.  Therefore, investment decisions should not be rushed.  You should do a fair amount of research.  Ask a lot of questions. Investment professional want you as a client, so don’t forget that you are in the driver’s seat.

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Mar 31 2021
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Making the Right Choice

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Click here for the introduction to our “Investing in the Post-Covid Era” series of materials.

Choosing the right investment advisor is crucial. ChapmanCraig offers some advice

Once you have established your investment goals, you will find it much easier to choose the investment professional best suited to meet your objectives. It is not relevant whether it is local or foreign, as long as your needs are met with the quality of service you wish.  However, given the variety of investment advisors and products available, how does one choose?

Types of Financial Advisors

Banks

Choosing the right investment advisor is crucial. ChapmanCraig offers some advice

Once you have established your investment goals, you will find it much easier to choose the investment professional best suited to meet your objectives. It is not relevant whether it is local or foreign, as long as your needs are met with the quality of service you wish.  However, given the variety of investment advisors and products available, how does one choose?

Brokers

Brokers advise and make investment recommendations.  Upon your consent, they execute transactions on your behalf.  It is a shared responsibility; they do not manage your assets.  Generally, brokers or investment banks with private client departments charge commissions on transactions or ‘spreads’ on over-the-counter transactions.  Working with a broker is best for people who have the time, the interest and the knowledge to trade themselves.   Brokerage fees are set by exchanges in some cases and deregulated in others.   Your broker should be able to tell you the relevant commission rates.

Mutual Funds

These funds offer investors the advantage of diversification and professional management.  A mutual fund is operated by an investment company or a bank.  It raises money from shareholders or unit-holders and invests it in stocks, bonds, options, commodities, money-market securities and various other assets.

There are ‘open-end” and ‘closed-end’ funds.  ‘Open-end’ funds are the most common.  Open-end unit-holders buy the shares at net asset value and can redeem them at pre-determined times, usually daily, at the prevailing market price.  ‘Closed -end’ funds issue a limited number of shares, which are then traded on a stock exchange.

Mutual funds may be a good place to start investment programs because they require lower minimum investments (HK$10,000-80,000).  However, they can be extremely costly when associated fees are considered.

Discretionary Investment Management

Here, an investor determines the investment objectives under which the account will operate and an investment manager is given the authority to develop and implement the investment strategy in order to reach those objectives.  This category provides diversification and professional management like mutual funds, but it is more tailor-made to each individual’s objectives.

Fees for discretionary managers are lower than those for most mutual funds.  They generally charge an annual management fee with the rate decreasing as assets increase and sometimes a performance fee.  Unlike mutual funds, the investor actually owns the securities in their investment portfolio and they can be sold at any time.  The minimum investment in this category ranges from HK $2-10 million.

Hedge Fund and Commodity-trading Advisors

Here, an investor determines the investment objectives under which the account will operate and an investment manager is given the authority to develop and implement the investment strategy in order to reach those objectives.  This category provides diversification and professional management like mutual funds, but it is more tailor-made to each individual’s objectives.

Fees for discretionary managers are lower than those for most mutual funds.  They generally charge an annual management fee with the rate decreasing as assets increase and sometimes a performance fee.  Unlike mutual funds, the investor actually owns the securities in their investment portfolio and they can be sold at any time.  The minimum investment in this category ranges from HK $2-10 million.

 

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Feb 26 2021
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Investing Basics

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Click here for the introduction to our “Investing in the Post-Covid Era” series of materials.

What are your financial goals when investing your money?

The most appropriate questions to ask yourself when considering your personal investment options are ‘what is the purpose of this capital?’ and ‘what are my investment objectives?’   This may appear obvious and logical, but in reality, most people start not with an assessment of their financial goals, but instead by considering specific investments – putting the cart before the horse.

If you were planning a holiday, would your first priority be the type of aircraft in which you would like to fly?  Most certainly not.  You would likely consider whether it is a family holiday, a sightseeing holiday, a skiing or beach holiday, then narrow down your options, considering specific destinations, departure dates, length of stay, etc.  You probably would not know anything about the airplane until you were on board.

In fact, most people spend more time planning their holidays than their personal investments.  They choose holidays that reflect their specific interests, and may take different types of holidays depending on what interests are paramount at a given time.

Yet when people consider their investments, they usually seek to satisfy one objective only: to make a lot of money in a short period of time.  This is not appropriate.  You most likely have a variety of financial objectives which you should set out in an investment statement.  This statement can help you in the planning process to achieve your financial goals.

Have you just sold a business and wish to invest the proceeds in order to have sufficient after-tax income to provide for current living expenses?  Do you wish to make provisions for your children and grandchildren?  Are you planning for an early retirement at a certain standard of living?  Are you looking to fund a special project?   The more clearly you define your objectives at the outset, the easier it will be to implement an investment plan.

The most important subjects to be addressed are: risk, returns, liquidity, time horizon, legal structure and taxes.

Risk

Risk must be approached from two perspectives: emotional and financial.  From an emotional viewpoint, you must determine your tolerance for volatility, typically thought of as the variation in the value of an investment over time.

Will you be able to sleep well when the value of your investment drops 15 per cent in a few days?  Most people like volatility when it earns them profits, but not when they suffer losses.

From a financial perspective, risk can simply be defined as not having money when you need it or want it. Can you risk losing your investment capital?   On the other hand, another risk that many people do not recognise is inflation.  Leaving money in a bank account may be risky if inflation erodes the value of your assets and income flows.

Returns

What rate of return will allow your investments to grow to your required level?  Is it realistic and achievable?  The MSCI World index has had a compounded annual growth rate of 9.9% over the ten years to December 2020; it would be unrealistic to expect, for example, 25% returns over a long period.

Investors often overlook the impact of compound returns on growth.  Gains compounded, that is to say reinvested over many years, improve your investment returns exponentially.

Too often, investors seek to time individual investments, that is “buying low and selling high”.  Even though gains in financial markets come in concentrated periods, they are difficult to time consistently so as to maximise gains.  Thus, it is better to focus on an average annual return over three to five years rather than shorter periods of a year or months.

Liquidity

How quickly can your investment be converted into cash?  Bank deposits are more liquid than a real estate investment.  It may be important for you to have the ability to liquidate assets quickly to meet other financial obligations.

Time Horizon

When will the capital, or part of the capital be needed?  This helps determine what asset allocation is best suited to you.  Asset allocation is simply a determination of what proportion of your investments are held in different asset classes, such as cash, bonds, equity and real estate.  You may have more than one time horizon.  For example, in five years you may wish to buy a home, and 15 years later you may wish to live on the after-tax income generated through your investments.

Legal Structure and Taxes

Where your objective is to provide for future generations or where you want your investments to be confidential, you may wish to consider establishing a trust. If you have concerns about social and political uncertainties and the desire to minimise overall tax exposure, investing via a corporation in a tax haven is a possible option.  Establishing a trust and an offshore corporation for your investment can be complementary. By first determining your investment goals, you will be better prepared to make available legal structures serve your purposes.

Statement of Objectives

Putting this all together into a statement of investment objectives will help you to formulate an investment plan, to choose an investment adviser and even to guide you to the investment vehicles best suited for you.  You can develop your own statement of objectives on one or two pages and review it from time to time.  It will prove to be a valuable tool to help you achieve better investment returns.

Formulating a Plan

Once you have determined your investment objectives, you can begin to formulate your investment plan. If you already have investments, you can compare how well your current investments match your objectives. You are now in a better position to choose the right investment professional (private banker, broker/dealer, discretionary fund manager) for your personal needs. Just as your holiday plans change over the years so will your investment objectives.  Remember that fine tuning investment goals is a dynamic process which will change as your objectives change at different stages of your life.

A simple illustration will demonstrate how the process works. Let us examine possible changes in objectives that will occur in a couple now in their early 30s and then during their late 40s or early 50s. Personal characteristics such as risk tolerance will probably remain the same.

In the first stage, objectives may be heavily weighted towards capital appreciation as the investors have sufficient income to support their family and a 10 to 15-year time horizon for their investment goals. This would dictate that a greater proportion of their assets be allocated to diversified portfolio of stocks than to bonds and cash.

In their late 40s, they will likely shift their asset allocation more toward fixed income investments in the currency of the country where they will be setting up a second home.  They will be better able to take advantage of the capital markets at that time because they will have the flexibility to alter their investments over a longer period to meet their new objectives, the mandate for their investment advisor will become much clearer.

In the longer term, when the investors reach their mid-50s, they may wish to have the financial ability to spend part of the year in another country where their children are attending university or working; to purchase a home, cars and golf club memberships there; and to travel extensively to Europe while only working part of the year.

With these clear objectives in mind, they will be able to better determine how their assets should be invested to provide them with the capital required to set up a second home as well as the capital base necessary to generate the after-tax annual income required to meet their living expenses,  such as the cost of maintaining two homes, travel and university costs.

Conclusion

There is no guarantee for achieving financial success.  However, establishing clear investment goals before you begin to invest, makes it more likely that you will be successful.

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Feb 26 2021
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Investing in the Post-Covid Era

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This year our firm is celebrating its 25th anniversary. Between the mid-1990’s and now much has changed — digital transformations, technological advances, shifts of global economic and political power, effects of globalization on all societies, as well as the current COVID-19 pandemic. Despite the many dramatic and stark changes, the principles and fundamentals of wealth management remain not only intact but as important and relevant than ever.

More than 20 years ago, we wrote a series of articles for publications addressed to accounting and legal professionals. Our aim was to help educate high-level professionals, some of whom did not have time to manage their own personal investments and financial planning and therefore lacked practical knowledge. Others may have worked with an advisor but did not fully understand what their advisors did nor how their investments were managed.

Two recent experiences led us to update these articles, with an eye to investing in the post-COVID era. First, we met a handful of people who were recently divorced or had sold their businesses and now have to look after their personal finances, investments and financial planning on their own. Second, many of our clients have children, who are now young adults, and who would benefit from a basic financial/investment education because one day they will inherit significant wealth requiring proper management.

This series of articles address the basics of financial planning and investments, with topics ranging from how to choose the right financial advisor, to the impact of currency fluctuations and understanding how your investments are actually held (e.g., who is the custodian). Another series will focus more on estate planning, with topics ranging from wills related issues, how you hold your assets, tax planning and protecting assets from various risks.

We look forward to sharing the insights we have gained over the years working with our clients and their families.

We started our business by assisting clients to diversify their investment assets globally; but over the years we evolved into a multi-family office providing financial planning for senior professionals and entrepreneurs having sold their businesses. Our services include assisting with asset allocation decisions and referring clients to appropriate specialist advisors such as tax and estate planning professionals and health insurance consultants. For some clients, we also offer a general, independent assessment of investment opportunities that they are considering.

Nov 30 2020
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Vintage Wine Market Update November, 2020

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With the end of 2020 just around the corner, what can be said about the fine wine market’s performance this year?

It is surprising that in spite of a global pandemic, Brexit and trade wars, the vintage wine market not only remained stable but offered small positive returns.   From a low point in May, the Liv-ex Fine Wine 100 Index continued its upward trend until the time of writing.

Despite the disruption of traditional distribution channels, such as high-end restaurants globally, there was in fact a significant increase of liquidity on major on-line trading platforms such as Liv-ex, as well as a broadening of the overall fine wine market with more wines from different regions being traded.  During the months of lock-down and COVID-related restrictions, wine merchants and auction houses dramatically improved their online services in order to satisfy their clients’ requirements.

Bordeaux first-growths such as Lafite, Mouton, and Haut-Brion showed strong activity due to renewed interest from Asian investors.   Historically, vintage wine has been viewed as not only a recession-proof asset, but also as one with lower volatility, and it is attracting  younger market participants in greater numbers.   Due to these recent trends, world renown brands of Bordeaux top growths offer comfort and more certainty.

 Focus on Champagne

Over the past 10 years, the Liv-ex Champagne Index has risen by about 80%.  Demand for vintage Champagne from top producers is the main reason for stronger prices.  Just like other major wine regions, Champagne is, above anything else, a question of brand names, with  Moet and Chandon, Dom Perignon, Salon, Krug and Louis Roederer being the leaders. Exceptional vintages of their top products continue to offer interesting investment opportunities.

Let’s look at Salon Le Mesnil for example.  This champagne is only made in exceptional years (only 37 vintages produced since 1911) and is kept for a minimum of 10 years in the cellars before release.   If the harvest is not up to their high standards, the grapes are sold to a sister company, either Delamotte or Laurent Perrier.   This, combined with a relatively low production (60,000 bottles), make Salon Le Menil a true investment grade champagne.  Over the past 5 years, the 3 best performing vintages have offered a return of 150% of the period or about 20% per annum.

 Bordeaux and Burgundy – the 2020 vintage

2020 will be known primarily for being the earliest harvest in recent history.  The harvest started roughly 10 days earlier than usual in both Bordeaux and Burgundy.

The “100-day” rule, which refers to the number of days from the initial flowering of the vines in the spring up till harvest, does not seem to apply any more.   In the past, this rule of thumb traditionally allowed winemakers to organize their work schedule and plan their summer holidays.    However, due to warmer weather, 90 days now seem to be the norm.

In Burgundy,  the 2020 vintage looks very promising for both reds and whites.   An abundance of freshness and minerality for the chardonnay and a beautiful acidity for the pinot noir.

For Bordeaux, 2020 is looking like another good to very good vintage, depending on the appellation.   That said, it has been a complicated year for winegrowers.  It appears to be a vintage that will vary not only from appellation to appellation but also depending on technical choices made by the wine properties such as how and when to treat for strong cases of mildew.   It is too early to tell which winery or wine area will come out on top, but it seems that red wines are looking better than whites at this stage.

One thing is certain – the 2020 harvest will go down in history, not only because of the COVID pandemic, but also as a climatically difficult vintage.  The savoir-faire of winemakers will make a critical difference.

 The Auction World

Contrary to expectations at the beginning of the pandemic, the global sanitary crisis has had little impact on auction sales.  2020 will be considered an excellent year for wine auction sales.

Sotheby’s Mid-year Market Report covering the first six months of 2020 is proof that technology has become a crucial element in selling vintage wine.  During this period, out of the USD 45 million global wine and spirit sales, USD 24 million was sold online.  Over 1,000 bidders from 40 countries joined the 17 online auctions.   Fifty percent of the first-time bidders were between 20-30 years old and about a third of Sotheby’s clients are millennials.   Asia continues to be the dominate player in vintage wine auctions.   In Hong Kong, during early summer, Sotheby’s held its first live auction since the start of the COVID pandemic and  achieved the 3rd highest-valued wine sales held in Asia, at approximately HKD 180 million.

The major autumn auctions will be held much later than usual and we look forward to see those results in due course.

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Jun 15 2020
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Vintage Wine Market Update June, 2020

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COVID-19 and Trade Wars

So far the fine wine market has shown some resilience compared to global equity and commodity markets.  Looking back at the GFC in 07/08 when the Liv-ex 100 fell more than 30%, the impact of COVID-19 and associated negative effects do not seem to have been fully experienced yet in the fine wine market.   Although various Liv-ex indices have been down 1-4% year-to-date, a weaker pound sterling has helped stabilize the market but has not led to a boost in volume.

The current pandemic and global economic slowdown might have more important negative consequences on both demand and supply in the longer term.  Disruption of traditional distribution channels such as top-end restaurants could lead collectors and restaurant owners to sell parts of their collections or stocks to compensate for lack of income.  This would put downward pressure on prices, with varying extent of the effect felt by different wine regions, appellations, vintages and also depending on the rarity of the wines.

Another important factor affecting the fine wine market is the repercussions of the trade wars between China, the US and Europe.  Higher tariffs applied to French wines by the US, for example, has had a negative impact on French wine exports across the board and has contributed to increased sales of top Italian wines in the US market.  The political situation in China, and Hong Kong in particular, has led to a decrease in demand for high-end wines.   Bordeaux wines have been especially affected.

Focus on Italy

Interest in Italian wines continues to be on the rise.   In 2019, the Liv-ex Italy 100 index was the best performing amongst all Liv-ex indices with a +3% gain, whereas the Liv-ex Bordeaux 500 was -3.6%.   It is also important to note that Italy is the third most actively traded wine region on Liv-ex, behind Bordeaux and  Burgundy and before Champagne, Rhone and Rest of World.   Super Tuscans such as Sassicaia, Ornellaia and Tignanello are not new on the wine scene and over the past few years have acquired investment grade status.   Meanwhile, wines from another important region, Piedmont, are catching up and are among the best performing on Liv-ex.   Top Barolo and Barbaresco wines from producers like Giacomo Conterno and Bruno Gisacosa are fetching prices doubles those of the Super Tuscans.   Reds wines from Piedmont are made uniquely from Nebbiolo, a demanding varietal and indigenous to Piedmont.   It is a late ripening grape with high levels of tannins and acidity giving them long aging potential.  Undoubtedly, the increased interest and demand for quality Italian wines is not a fad.

Bordeaux 2019 – A Very Unusual En Primeur Campaign

The verdict is out: the 2019 Bordeaux vintage is very good to excellent.  Red wines from both left and right banks look fairly classic in style and the dry whites are judged to be excellent as well.   The “en primeur” campaign usually starts in April with hordes of wine journalists and the trade flocking to Bordeaux for the new vintage tastings.  Of course this year, due to travel restrictions, this did not happen and the tasting were done in isolation with samples sent directly to the press or merchants.   Zoom interviews and tastings, as odd as it may seem, became the norm, for this year anyway. Releases just began in the past week with Chateau Pontet Canet 2019 opening the grand ball of the Grands Cru releases.  So far, it seems that Bordeaux is finally getting wiser and listening to the market.  2019 prices are down 15-30% compared to 2018 despite the high quality vintage as we pointed out earlier.  Cos d’Estournel 2019 is 24% lower than last year although it received scores of 98/99 points.   Palmer 2019 is 33% cheaper and even Chateau Lafite is showing reason with first release priced at  €394, a 16% discount from last year.   However, it is too early to tell whether these price-sensitive release prices will assure success for this year’s campaign.

The Auction World

Spring is usually a busy time for the major auction houses.   Things are different this year with bidding done online.  This new approach seems to have worked well with results showing a high numbers of lots sold and prices in the middle to high estimates for the most sought after wines.  Eyes are now on Sotheby’s and Christie’s first live auctions since COVID-19.  Sotheby’s have scheduled June 18 for New York and July 5-7 for Hong Kong, whereas Christie’s is slated to hold theirs on July 12  and July 28 in Hong Kong and London respectively.

 

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Feb 28 2020
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Impact of Dividends

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The equity components of our client’s portfolios are currently enjoying dividend yields (gross) above 3%.   There are large variations in yield within the portfolios, with some companies paying dividends that yield over 6% and some not paying a dividend at all.

Dividends have provided a significant component of total returns over the long-term. Some studies show that over the very long term, dividends have contributed more than half of the total returns for broad equity portfolios.

Given the importance of dividends to the total return of a balanced portfolio, we thought it useful to provide a brief overview of dividends and how dividends can function as an important signaling device.

Explanation

Dividends are payments made by companies to their shareholders from their current or retained earnings and usually on a regular basis. A company’s ability to pay steadily increasing dividends is seen as a sign of financial and operational strength and stability.  Large, mature, profitable companies with solid cash flows typically pay dividends as part of their capital policy.  However, high-growth companies often do not pay dividends because they believe cash generated from their operations is better used to invest in their business, driving continued growth.

Companies capable of generating an attractive return on equity are more likely to generate more value for shareholders over time by investing in organic growth, rather than returning that cash to shareholders who then need to find other attractive investment opportunities.

Most managements are careful to increase dividends only when they are confident those new levels can be maintained. If a company with a history of steady dividend payments suddenly cuts its dividend, even if to pursue growth initiatives, the market will likely interpret this as suggesting the company’s financial health is deteriorating.

There are three metrics which are commonly used to describe, or assess, the sustainability of a company’s dividend policy:

Dividend yield is calculated as the annual dividends paid per share divided by the current share price. It measures the amount of income received in proportion to the share price over a one-year period – either the last twelve months, or the current fiscal year typically.

Dividend coverage ratio is calculated by dividing a relevant earnings metric by the dividends paid to shareholders.  It measures the sufficiency of earnings (or a related measure such as distributable cash from operations) to cover expected dividend payments.  A higher ratio suggests that the Company can maintain dividends even if earnings were to suffer, while if the ratio is under 1x, the dividends are being paid out of earnings earned from prior years (or increased borrowing), and may be not sustainable.  This ratio is more often considered when dealing with structures that are required to or historically pay out most of their earnings in dividends, such as REITs, MLPs or lower-rated companies with modest earnings growth.

Payout Ratio is essentially the reciprocal of the above, and reflects that percentage of earnings that are being paid out to shareholders as dividends.  Mature companies are often paying out more than 50% of their earnings as dividends.

Dividends are a key metric in some valuation methodologies, although that is a bit complicated for this discussion.

Investing in stocks with an attractive dividend yield provides both income and supports the possibility of future capital gains. Dividend-paying stocks often offer more stable returns and demonstrate a lower than average market risk (or lower Beta), in part because large, mature companies with attractive dividends typically have solid balance sheets and steady cash flows.

But there are limits to this. Managements are not likely to deliberately set a dividend that results in a yield higher than 5 – 6%. When you see dividend yields higher than that, it is more likely that the share price has declined since the dividend payments were set and management wants to maintain dividends so as not to signal weakness.  Therefore, very high yields are often seen as flagging deteriorating underlying financial conditions with the likelihood of a dividend cut in the offing.

During the current economic recovery, companies (particularly those in North America) have materially increased the amount of capital returned to shareholders by purchasing their own shares in the market. While capital is actually returned only to those shareholders selling to the company, the total number of shares outstanding are reduced, providing the remaining shareholders with a slightly higher participation in future earnings and cash distributions.

Companies and commentators sometimes combine the amount spent on share buybacks with that paid out as dividends, to describe a total shareholder return yield. While this clearly overstates their equivalence, and we caution clients not to make that comparison, share purchases send many of the same positive signals as do sequentially higher dividend payments and will be discussed in a separate posting.

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