Financial navigation: where do we go from here?

Paul Michael Jenkins, Senior Investment Advisor with Bateman and Company Ltd begins a series of articles focusing on investment trends for the difficult year ahead.

The year of 2008 is unprecedented in what was the most tumultuous financial period since the great depression of the thirties. Many investors had their portfolios obliterated by collapsing hedge funds, fraud, and the fall of firms that were once great financial giants.

This first decade of the new millennium witnessed extremes in terms of the financial markets. In the words of Charles Dickens, it has been “the best of times and worst of times”, and unfortunately we are in the latter part of the fore mentioned quote.

What many individuals do not like to address is the certainty of volatility.

Catastrophes do occur. Whether they are brought on by war, lack of regulation, hubris or greed; history has taught us the most unthinkable events can and will happen. What most investors are experiencing may be unthinkable in the last seventy years, yet the probability of a severe financial depression is completely plausible if we widen our parameters to say two or three hundred years.

Most asset managers have correctly attempted to consolidate, strategise and look for a disciplined and orderly manner to restate their investment mandate for 2009. Sharp lesson from this past year and optimism of a new chief and commander of the United States has most individuals realising a need to move forward with a disciplined plan to secure net-worth, confidence and peace of mind.

Smart money: where is it going?
The tone of Wall St. and Bay St. (Toronto) is tepid, at best. Speaking to one institutional Wall Street banker he simply said, “those who know… KNOW”. This was completely in reference to pessimism about 2009 as an investment year.

Among institutional investors there exists a clear and evident disdain of US treasuries and the US dollar. Many believe that the US economy will slide further into a lengthened depression. And the bail-out package, if approved, will do little but fuel inflation and devalue the already struggling US dollar.

A clear alternative to the suffering currency is gold. Precious metals are touted as a hedge for investors who are fearful of inflation and challenge actions of central banks. Despite outperforming most commodities of late, gold bullion has not reached its anticipated heights that would have been commensurate with the financial crisis that exploded across the globe.

Equity analysts have considered a number of factors driving bullion to new heights and many institutional sales persons support the bullish thesis. Factors in the past year which have driven up the price of gold include:

Collapse of Fannie (FNM-NYSE) and Freddie (FRE-NYSE) & downfall of housing market (USA)
Loss of Bear Stearns, Lehman Brothers and Merrill Lynch
Treasury bonds paying close to zero percent.
Wars world wide (GAZA)
Bankruptcy of Iceland
Massive government infusions.
Collapse of ‘Big three’ automakers
50 billion dollar ‘Ponzi’ swindle (credibility issues)

A perspective exists that there is an ‘insurance’-like quality of bullion. What most insurance policies do is maintain owners’ wealth during incidents of instability or crisis. This is exactly what gold has accomplished in 2008, as it is one of the few asset classes that has maintained its value and is poised to be an accretive investment in 2009.

The Investment mandate of 2009
An investment mandate is a like a mission statement of your overall investment portfolio. It includes objectives, suggested benchmarks and addresses the unique needs of each individual’s portfolio. Asset managers have a fiduciary responsibility to review and enforce the principles of each investment mandate.

For the current year, investors should take a realistic look at their portfolio, identify areas of overexposure, and make necessary changes. Credibility of selected investments has found a new place in the forefront of all money managers and individuals. What exactly do you know about the fund or investment programme you are involved with? Are your personal mandate objectives being met by the fund? Are you aware of fees involved? All these questions regarding credibility and accountability are paramount. As the Madoff debacle has raised the bar in terms of validity, due diligence and compliance.

The wisdom of history informs us that there are asset classes that your mandate should consider. Consumer staples, precious metals and assets from other countries as well as currencies (Canadian dollar, Australian Dollar) are interesting candidates for a wise exodus from US based portfolio.

However one chooses to construct his or her investments, intelligently addressing needs and thorough review of investment programmes and funds are essential for disciplined growth of the portfolio.

Investor sentiment is down, but not out. Opportunities do exist. We must challenge ourselves to a methodical and logical approach in evaluating personal assets, and 2009 could be a positive re-building year.

Paul Michael Jenkins is a senior investment advisor with Bateman & Co. All investment recommendations should be reviewed by your investment professional. The opinions expressed here are those of Mr. Paul Michael Jenkins and do not reflect the overall opinion of Bateman & Co., or this publication.


Paul Michael Jenkins