Foreign exchange trading
Bringing international shares into your portfolio is now easier than ever - knowing which ones to go after is still the trick. By Peter Freeman.
Investors looking to maximise returns usually include an exposure to international shares in their portfolios. Perhaps the easiest (though not always the best) method is to invest in Australian-based international share funds.
By far the biggest of these - the $9.5bn Platinum International Fund - has delivered solid, if unspectacular, returns. Over the past seven years, for example, it has generated just over 11% a year. Unfortunately, the long-term performance of most of its rivals has been much more disappointing - the bulk of international funds with a seven-year track record have generated negative returns, in part due to the losses suffered in the dotcom bust.
Given this, investors prepared to take more control over their investments may be better off investing directly. The latest alternative for direct share investors is a line-up of eight international exchange-traded funds that have just been listed on the Australian Stock Exchange.
Robert Francis, head of EasyForex ( www.easyforex.com.au), Australia's leading online currency trading group, says it has been a heady time for currency speculators large and small.
"Many people don't realise just how accessible currency trading is - it's possible to start trading with as little as $25," he says. This can give you a heavily geared exposure to a currency position worth $2500 and you stand to make a very big percentage gain if you bet right. Equally, of course, even a small miscalculation can result in you losing your money.
While local currency trading for individual investors is dominated by just a few groups, including offshore firms MG Forex ( www.mgforex.com) and Oanda ( www.oanda.com), the growth of trading in another highly speculative investment product, contracts for difference, suggests currency trading may soon attract more interest. Francis says the big retail banks are likely to start offering currency trading. Macquarie Bank could do the same, a possibility that has been boosted by its acquisition earlier this year of online foreign exchange firm OzForex.
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Self managed super funds
Self managed super funds
If you want to manage your own fund, make sure you have at least $200,000 in assets. By Michael Laurence.
Fears that many self-managed super funds are operating without enough capital for financial viability could be fading fast. The numbers of DIY funds with high asset values are growing dramatically, according to a survey of 2100 funds by Investment Trends.
Over the past 18 months, the proportion of DIY funds with more than $2m in assets has quadrupled, while those valued from $1m to $2m have had the second-highest growth. The proportion with asset values below $250,000, around 35% of all funds, is falling sharply.
Mark Johnston, principal of Investment Trends, attributes the fall in low-balance funds to repeated warnings from professional advisers and the Australian Securities & Investments Commission that a fund needs at least $200,000 in assets to bring its expenses to at least equal to many of the large funds. The Tax Office warns that low-value funds may not have enough money for adequate investment diversification.
Chris Malkin, principal-in-charge of superannuation services for WHK Horwath, cautions clients with assets he considers insufficient to warrant setting up a fund: "As a rule of thumb you can't argue against a minimum size of $250,000, but so much depends on each situation including a client's objectives. A self- managed fund can be ideal for intensive savings from a low initial balance because the money can't be touched until retirement.
"I am very cautious about scaring people off from taking responsibility for their own finances with a self-managed fund." He encourages clients to seek investment advice.
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How to Protect Your Portfolio
We asked investment managers to share their favorite techniques for safeguarding clients' portfolios against a bear market
- Lessons from the '87 Crash
- How to Protect Your Portfolio
- Sectors: Tracking the Bear's '87 Rampage
- Sizing Up the Next Crash
- Flashback: How the Bull Crashed Into Reality
Once burned, twice shy. Even though the major stock indexes are trading at record highs and concerns about a possible credit crunch-led recession have abated slightly, many of today's investors have vivid memories of the market meltdown of 20 years ago. No surprise, then, that one feature distinguishing the current stock market from the one that crashed in October, 1987, is evidence of more caution among investors.
It wasn't that way back when Gordon Gekko of Wall Street was telling investors that "Greed is good." Twenty years ago, traders in thrall to the possibilities of making money by exploiting the differentials between stock index futures and the underlying stock indexes were buying and selling without covering themselves with an opposing transaction, a strategy that would have afforded them some protection when their bets went sour.
Today, they're much more likely to put safeguards in place to hedge against downside risks. Since 1987, the average daily trading volume of options has more than tripled, with index options in particular seeing growth in volume, open interest, and liquidity.
More Players, More Protective Tools
The primary difference between today's index futures market and that of 20 years ago is that there's now a much larger pool of participants, including hedge funds, creating a more diverse and liquid market, says Scott Warren, managing director of equity products at the Chicago Mercantile Exchange, which specializes in index futures. Circuit breakers in the futures, cash, and options markets that temporarily halt trading after a drop of a certain percentage also limit the magnitude of bearish events, he says.
In addition to the market's much greater ability to absorb large buy and sell orders of stocks and options, there's also a much better understanding of the strengths and limitations of protection strategies, says Jim Bitman, senior instructor at the Chicago Board of Options Exchange's Options Institute. "People still remember 2001 and 2002 a little bit, so they're probably trying to take some protective measures," and leaving more money on the sidelines, says Jody Team, president of Team Financial Strategies in Lewisville, Tex.
To protect clients' portfolios, money managers are using a host of sophisticated hedging tools intended to offset risk to their core stock holdings. One such tool: inverse index funds. These so-called bear funds are designed to move in the opposite direction of the index to which they are benchmarked, such as the Standard & Poor's 500-stock index.
Inverse Index Investing
The inverse index mutual funds at Rydex Investments don't short the indexes themselves. Instead, they use derivatives such as index futures, which can be traded and rolled over into later periods more cheaply than shorting the stocks themselves, says Jim King, director of portfolio management at Rydex. They're still at risk of losing money, but they can't lose any more than they put into the fund, King says. Investors are "long" the fund, while the fund takes the short positions, but the returns are the same as if clients were actually short the index. "It's up to us to keep the fund from losing more money than it has," he says.
Inverse funds can be especially useful in retirement accounts, where investors don't otherwise have options to short the market. Among the 11 inverse funds that Rydex manages are a few that give shareholders twice the leverage to the underlying index. The Inverse S&P 500 2x Strategy, for instance, gives investors twice as much return for each percentage move down in the S&P 500, but it also generates double the loss for any uptick in the index.
A Little Leverage Goes a Long Way
One reason for the popularity of these extra-leveraged bets, also known as ultra funds, is that they give investors the same amount of exposure as the regular fund, with a commitment of only half the money. But because they're twice as risky, King says Rydex tries to make sure customers understand the implications and prefers they work with financial advisers instead of buying directly from Rydex.
Of course, leverage has to be used wisely. The use of stock index futures accelerated selling pressure in the 1987 crash, but King says that was primarily a result of the way they were used, as opposed to a fundamental flaw in the instruments themselves. "It all comes down to the degree of leverage," he says. "Our funds are leveraged at most 2 to 1. A person using index futures could get leverage approaching 10 to 1 if he wanted to. That's where folks get into trouble. They take on a lot of leverage, where even a small move in the market can wipe out their position."