The other strategy that's always profitable
Ordinarily headlines like that either result in the regulators feeling your collar, or you suffer the approbrium of a national newspapers’ editorial. So we set this out with care, but also with some excitement.
There is strategy which we have argued is the only one that is consistently successful for long term investors, that is buying high yielding shares, or the equity income funds which invest into them.
The “other strategy” seldom receives any publicity. Yet it is ideal for those who:
- have over-large sums on deposit,
- are attracted to the potential of the stock market,
- but don’t wish to put your capital at undue risk
- and in our experience it has never failed a client
When we began employing this strategy in the late 1980s, some more astute investors were concerned about the madness in property markets (commercial and residential), were chastened by the recent Crash in 1987, wanted their capital secure, yet understood the stark long term attractions of stock market investment.
The rates on guaranteed income bonds were very attractive in those far off days, with a guaranteed capital value at maturity, and a fixed income which could be taken monthly. The monthly income was in turn invested into one or two of these emerging market funds. When the bond matured it was rolled over into another one, and the monthly investment was undisturbed.
Conveniently it was about this time that the first emerging markets investment trust was launched (by Mark Mobius and Templeton), plus one or two more focussed funds, for example investing into Latin America or Hong Kong, and these were ideal for this strategy.
We observed over time that for prolonged periods (of years) these high risk funds went sideways and down, followed by periods of 1-3 years when they exploded upwards, doubling and trebling in value - it was this pattern which produced a clear point in time when profits were there to be harvested in the accumulated pot of monthly savings.
One of the beauties of this automated strategy was that until the point when the value exploded upwards little judgement was required. The longer the market went sideways and down the better, as more and more units were purchased, at cheaper and cheaper levels.
A doubling in the value of the fund was a minimum target, at which point we would start taking profits. These profits could be re-invested once the funds fell away again, or could be used to top-up the guaranteed income bond at the next maturity.
This strategy has not just been consistently profitable, but it is very satisfying from the perspective of adviser and client, in the knowledge that the capital value was secure at all times. We have used this with clients for over 20 years and it has never failed (though there can be no guarantees going forward), and the key elements to its success have been:
- use surplus capital (not some for which you will have a specific need at some time)
- invest this capital somewhere relatively secure, and with predictable monthly interest
automatically re-invest the interest from this capital every month
- re-invest into a high risk/high reward fund
- patience (the point of maximum return from the monthly savings is unknown, so don’t be in a hurry)
Now there is an interesting opportunity to finesse this approach, for two reasons:
Firstly, while Western stock markets hit new lows in March 2009, most Asia and emerging markets did not, showing significant relative strength, and confirming our long held view that investors must progressively increase weightings in these areas, at the expense of investing into the stock markets of the over-indebted Western economies. The next decade, probably this century, will be dominated by the growing significance of Asia on the world stage, with China and India in the vanguard.
Secondly, although the interest rates on guaranteed income bonds are quite low, the 2008 Crash has created some remarkable opportunities for those wanting high and regular income, in particular from corporate bonds.
Recommendation
Obviously this comes in two parts: where you invest your capital, and how you re-invest the interest.
We used to utilise guaranteed income bonds to generate the income, but the opportunity now is in corporate bonds, and in particular we are interested in a fund which prioritises paying a regular monthly income, where it tries to keep the payout steady. For example, we would recommend Henderson New Star Extra High Yield Bond yields 8.5% net based on the most recent payouts.
Depending on how much you wished to invest and your attitude to risk we would probably also recommend one or two other funds to sit alongside this one. Be wary of trying to pick your own funds based on the yields quoted in the press and online
sources - these are historic numbers, calculated on a variety of bases, and are very often mis-leading.
Such funds also have some capital growth potential in addition, though this would only be icing on the cake. Of course in no case is the capital guaranteed. To add a degree of security we can include holdings in our “stop-loss alert” service, and we contact you if the capital value falls by 5%.
This is about investing regularly, for a long period, into a fund with high reward potential. Focussed emerging market funds fit the bill, for example investing into China or Latin America. But India is our undoubted favourite on the timescale we are considering here. We look at India in more detail in the next section and recommend Jupiter India.
(Taken from TopFunds Guide July 2009)