Networth

Last year is barely over and we are already in a bull market. Equities had their best single week in five years. Is this a harbinger of things to come? Is your portfolio adequately structured so that you can respond to the opportunities and difficulties that lie ahead this year? There are many key attributes that all investors will be wise to take account of when they decide on how to allocate their assets _ not just your investment portfolio but your entire net worth as an expat.

There are a variety of opinions about which investments will perform well in 2013. After a mixed 2012, where various investors had different degrees of success, what is the outlook for 2013? What opportunities should you be exploring?

Global wealth managers had varying degrees of success in 2012, which is no different from any other year.

The trick, as always, lies in selecting the winners and, as ever, there were some surprises among them.

One was a European special situations fund, which certainly outperformed with capital returns in excess of 20% for the year. An Asian income fund also performed well. Asian equities are generally accepted as being poised for the future but income-based funds are a little unusual because capital growth is currently the flavour in Asia.

Some selected small-cap funds (23% gain) and a special situation fund (34%) also performed well in the UK sector. Bonds also featured and returns were surprisingly good compared to the sector average.

The worst performing investment fund, which invested in gold mining companies, declined by 43% in 2012. Of the worst 10, seven were invested in equities of companies in the gold, natural resources and energy sectors. Perhaps that tells us something about the sectors. If you look back to the beginning of the year, the outlook for these sectors was positive.

In contrast, the best performing fund for the year was a UK all-companies fund that produced a stunning 44%. This fund had a great deal of banks and finance company shares in its portfolio. Compared with the mining sector at the beginning of last year, banks had a rather gloomy outlook, and yet at the end of the year they all rallied. Of the 10 best performing global investment funds, seven were in UK equities. Yet the FTSE 100 index only rose by 3.47% in 2012.

These statistics simply tell us that, although there are often strong signs that materialise in equities, things can change quickly and equities continue to be volatile. Yet many expat investors actually feel that specific individual equities are balanced or even cautious. Much is simply the interpretation of an attitude rather than factual evaluation of the real risks.

Within your assets do you have liquidity? This is essential because you never know when you may need cash. If you have sufficient liquidity in your portfolio that is good, but one key factor is to ensure that it remains available and liquid. It is all too easy to get bogged down with a larger picture of investments and neglect the liquidity for your rainy-day fund.

Is your portfolio sufficiently flexible to be diverse and allow you to quickly change parts from one asset class to another? Can you sell equities and buy bonds, or vice versa, in a relatively short time? Do you have sufficient diversity in your investment allocations allowing you to use a mixture of different asset classes?

One common theme in many forecasts for 2013 is that bonds are in a bubble that will burst at some point in the not-too-distant future. While we have seen bonds grow well in the past few years, with equities currently on a bull run, the bond bubble could well be real.

Many global investment managers look at two indicators to gauge the next move in equities. First the equity risk premium (ERP), in layman's terms, measures the value of equities over their base. When the measure is very low this indicates to managers that they should reduce their exposure to equities. When this measure increases equities are considered to be good value. The current ERP value is high.

Next is the Chicago Board Options Exchange Volatility Index (VIX), also known as the fear factor index. When the VIX is low, the indicators are that equity markets will be less volatile. In 2008 the VIX reached 70, foreshadowing the massive crash that occurred later in the year. Currently the VIX is at around 15 which is considered very low (see Net Worth Aug 7, 2011, "Into the unknown"). Thus the pointers are currently good for equity purchases.

One further pointer investment managers consider is the price/earnings (P/E) ratio of individual companies. Currently there are many equities trading at very low P/E ratios, indicating that the shares are at bargain prices.

So, are indicators saying that equities will remain good buys in the near future? Things can change very rapidly and you need to remember that equities are a volatile asset class. That does not mean that you should ignore this class. Constant care are and caution are required.

Are you a property fan? It is essential that any investment portfolio include property. This could be of the "physical" or "funded" type. Many believe that property is simply buying a dwelling to live in or to let to tenants. That is not so, and if you have that idea you are rather short-sighted. These days there are a number of different ways in which you can invest in property in a diverse and inexpensive way.

From mutual funds investing in commercial buildings and diverse residential units to Real Estate Investment Trusts (REITs), there are many collective investments available. These also include the classic student accommodation area. You can actually buy your own individual student accommodation units within the high-yielding, purpose-built complexes in the UK and Europe (see Net Worth, Feb 15, 2012, "Property: An essential portfolio element").

In addition your property assets, you can be diversified further into the direct ownership of freehold properties from which you benefit from a steady income from annual ground rents; ownership of self-storage units; part ownership of shopping malls in Canada; and US housing units. All of these choices give you income options and are ideal for assets as part of a portfolio generating ongoing long term income.

There is an exhibition in Bangkok in late January, the Post Today Investment Expo 2013, which will have all these options in one place.

Here you can compare for yourself and discuss the various options with providers to identify if any are for you. This will enable you to make direct comparisons and create your own diverse property portfolio under one roof.

We shall continue the discussion of 2013 investment possibilities next week.

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Andrew Wood has been an expat in Asia for 33 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to enquiriesthailand@fsplatinum.com.