GS Portfolios - A New Concept

Sat, 22 Aug 2009 13:47:02 +0800

As many will be aware, due to the fall out from the financial crisis we took the opportunity to review our strategies across our 3 core portfolios and decided to move away from the “fund of fund” approach and adopt a direct market access strategy. The continued aftermath of the crisis has made moving to the new strategies far more onerous than at any previous time, however all three funds are now live and trading.

The three new strategies are not replacements for the old portfolios, they are completely different in their approach and execution, we have much greater confidence in their ability to capture gains going forwards whilst also maintaining a high degree of risk control. You will see the distinctive difference in the strategies outlined below and on the the PDF’s available for download.

All three strategies work on a principal of direct market access with no 3rd party funds involved. In other words we have immediate liquidity and transparency with all the necessary risk controls at our disposal. The three concepts use the same research and analysis but trade in differing timescales and strategies. High Frequency takes a daily to week view, Dynamic one week to a month and Low Frequency up to 3 months.

Introduction
Chief Investment Officer, Stewart Slater, and Investment Director, Oliver Barber, are the investment advisers to GS Investments (GSI), which is authorised and regulated in Guernsey, and manage GSI’s three main proprietary
strategies:-

1. the GS Low Volatility Strategy (managed by Stewart Slater)
2. the GS Dynamic Strategy (managed by Stewart Slater)
the GS High Frequency Fund (managed by Oliver Barber)

With research providers in all major markets and market sectors, and direct access to over 60 of the world’s leading securities exchanges, Stewart and Oliver focus GSI’s investment process on fundamental research and absolute returns.

Absolute Returns
Conventional fund management is based on buying and holding assets that the manager thinks will rise in value over time – so-called long-only investment strategies. Performance is generally measured against target benchmarks or indices in markets, which may be in negative territory at any given time or over a long period of time. So, rather perversely, a conventional buy and hold strategy can be presented as being market competitive, when it is in fact making substantial losses for investors often over considerable periods of time.

Seeking positive returns in all market conditions is known as making “absolute returns”, and utilizes advanced trading techniques such as “short selling”, which move in and out of markets and asset classes as circumstances demand, and can profit in falling markets in a way that traditional “buy and hold”, “long” only fund management approaches cannot. If, for example, we believe that shares in Company A are likely to fall, we can borrow this share from an institution that owns it in one of its “long-only” funds, and then sell it in the market. If the share price of Company A falls, then we re-purchase the share at the new lower price and return it to this institutional share lender. In this case, the profit will be the difference between the higher price at which the share was sold, and the lower price at which it was re-purchased and returned to its original owner.

By using short selling as a key part of the investment process, GSI is able to make money when markets decline and thus provide stable positive returns to clients, no matter how challenging the investment climate.

GS Low Volatility Strategy
Focusing on the preservation of capital, the Low Volatility Strategy is designed to reduce risk, while making solid and stable investment returns in often volatile markets.
Risk in investments is usually divided into two types:

Market risk
Specific risk

When a share is bought, the market risk of owning shares generally is taken on as well as the specific risk of owning an individual share in a particular company. The Low Volatility Strategy uses an approach called “pairs trading” to reduce market risk. When we buy an in-vestment, we also borrow and sell “short” an equal amount of a similar investment. By “pairing” investments in this way, the overall risk of the position can be reduced by effectively canceling out market exposure. As the asset bought outperforms the asset sold, a profit is made, and with substantially lower risk.

Low Volatility focuses on 2 types of trades.

Where there is confidence in the overall direction of the market, an asset can be bought, which is highly exposed to the expected market trend, and this can be “paired” with an asset that is less exposed to this trend. By doing this, profit is made from the outperformance of the first asset as the trend builds, but with substantially lower risk than if the asset was owned on its own.
Where certain assets such as gold and silver, or oil and gas, have a well defined relationship, it is quite possible to profit from trades known as “mean reversion” investments. Where and when these relationships break down, it is possible, by using sophisticated statistical analysis, to identify when any relationship has reached extreme levels, and has a high probability of reverting to its historical correlation.

Again, by “pairing” these investments, the risk of such a trade can be substantially reduced. The Low Volatility Strategy aims to return 8 -10% per annum, regardless of market conditions.

Low Volatility Fact Sheet

GS Dynamic Strategy
Designed to reflect GSI’s belief that volatile markets offer opportunities as well as risks if the correct techniques are used, the GS Dynamic Strategy seeks absolute returns by taking long and short positions in a range of market environments and conditions, while profiting from trading in both positive and negative markets.

GSI’s in-house research capability is bolstered by carefully selected external analytical partners ranging from global investment banks to private boutiques. GSI forms a view of the global economic and investment environment, based on a risk-reward analysis of what is really happening rather than the usual “herd mentality” of traditional market consensus and momentum tracking utilized by most investors and traditional fund managers.

Using our extensive investment experience, we use this analysis to identify the investments, which will be most exposed to the developing trends we see, and from a range of over 60 markets globally, we choose the most favourable instruments and time to implement the idea.

Unafraid to be contrarian, the GS Dynamic Strategy will often take positions which seem at odds to market consensus, when our analysis tells us that it is in the best interests of our clients. Constantly mindful of the need to preserve capital, GSI continually monitors data and indicators globally seeking to identify potential threats and opportunities early, and positions the portfolio accordingly. Equally, all positions are subject to ongoing analysis to identify potential problems early and take the appropriate action.

The GS Dynamic Portfolio aims to provide returns of 12 - 15% per annum.

Dynamic Fact Sheet

GS High Frequency Strategy
GS High Frequency Fund is an absolute return investment strategy which focuses on predicting the movement of a range of assets including FX, agricultural and energy commodities, precious metals and US/UK equity futures.

The term High Frequency relates to the dynamic nature of the strategy, with multiple positions being taken on different markets in different time-zones, 24 hours a day, ensuring fast and efficient access to a diverse range of
opportunities across the globe.

The strategy seeks to profit from both upward and downward price trends by taking market positions according to economic forecasting and technical trading indicators. The program makes use of automatic profit-stop and stop-loss technology in order to seek returns even in range-bound market conditions while restricting the associated risk.

The fund also seeks to take advantage of unusual price movements by accumulating assets that have moved below their usual levels of deviation from the trend, or by selling assets that have moved above their usual levels of deviation from the trend. This gives both short-term and long-term trading potential and has led to a lower level of volatility being experienced by shareholders in the initial launch of the fund.

GS High Frequency Fund aims to perform independently of traditional forms of investment, providing inherent diversification benefits to both retail and institutional investors and aims to provide returns of 20%+ per annum.

High Frequency Fund Fact Sheet

Stewart Slater Podcast - Looking At Defensive Markets

Wed, 19 Aug 2009 17:12:08 +0800

Stewart Slater, CIO at GS Wealth Singapore, thinks the MSCI Asia Pacific index will pull back further, and the Shanghai Composite Index might also go through further correction as investors are taking money out. But he is overweight on consumer stocks in China as consumption is holding up. And he is looking at defensive markets like Malaysia. Click on the play button to hear Stewart’s thoughts.

For a full list of Stewart’s podcasts on BFM Radio, please click the image below:-

Why Stocks Will Fall In September

Sun, 16 Aug 2009 13:59:48 +0800

Share prices in London and Wall Street head higher almost daily. Whatever the news, investors put an upbeat spin on it. So the stock market rally since March’s lows has taken on a life of its own.

That’s fine while it lasts. But as we’ve seen over the last two years markets can turn very fast.

Here are five reasons why I think shares are about to drop...

There are too many bulls

In the US there’s a weekly poll of stock newsletter writers called the Investors Intelligence survey. This has a great track record as a gauge of investor sentiment. The latest reading shows the lowest level of gloom since the market peaked in October 2007, coupled with the highest level of optimism since January 2008 – just before markets plunged. What’s more, says the FT, another survey of individual investors’ optimism is near its highest point in over a year.

These are classic signals to contrarians like us that prices are about to crack. As David Rosenberg of Glusken Sheff puts it: “it’s highly unlikely that 90% of the economic community can be right on the same thing at the same time”.

Investors are acting like lemmings

The FT also points out that American long-term mutual funds - which are similar to UK unit trusts - have just seen a net cash inflow for the 20th successive week.

So playing the stock market is becoming a one-way bet. US ‘short interest’ – a measure of how many investors expect falling prices - in S&P 500 shares recently fell to its lowest level since February, says Bloomberg. That points to a surge in optimism. And another measure, the Chicago Board Options Exchange equity put/call ratio - which gauges speculative interest and climbs as shares fall - is near multi-month lows.

These are yet more signs that most investors are gambling on the market rising. And that creates the contrarian’s second sign of a market top.

Trading volumes are thin

“In a normal breakout you get rising volume”, says Tony Cherniawski at Practical Investors. He reckons recent share price rises have actually been driven by many investors literally being caught short – having sold stock they don’t own as a bet on prices falling, they’ve had to close out their bets by rushing back into the market to buy the same shares back. This stampede has forced shares higher.

But that effect won’t last. When it ends, prices will drop back.

Company profits are still weak

In recent results releases companies have focused on “underlying” profits – which often strip out inconvenient one-off losses. But this masks the true earnings picture. The reality is that US second-quarter profits were 20% lower than a year ago, says Bob Janjuah at RBS.

Worse, “stock analysts continue to promote corporate earnings lies”, says Bloomberg’s David Pauly, “their earnings estimates often ignore huge expenditures that can’t help but affect a company’s health”. It means that many shares are nothing like as cheap as they first appear.

And even where profits have been better than expected, that’s been due to aggressive cost cutting – laying-off large chunks of the workforce is common - not genuine growth. Meanwhile sales – the crucial “top” line - at S&P companies are down more than 10%. So the next round of earnings will serve up some nasty shocks.

Dividends are under attack

We’re about to face another wave of dividend downgrades on this side of the Atlantic.

Payouts made by 700 of the top London-quoted companies dipped 9% in 2009’s first half, says Capita. Meanwhile, listed companies have raised almost twice as much by selling new shares as they’ve paid in dividends. And this year’s second half will be worse. Capita sees an even bigger payout purge which will up the full-year drop to 13%.

This is a double worry - dividend payments are a key sign of firms’ future confidence. Lower payouts also hint at smaller-than-expected future profits. And that’s bad news for share prices.

When will stocks fall?

The rally could continue for a while yet. But my evidence all points to stock markets falling over coming weeks – maybe sharply. Janjuah certainly agrees. As “Britain’s Uber-bear”, says the Telegraph’s Ambrose Evans-Pritchard, “he was one of the few analysts to speak out early about the dangerous excesses of the credit bubble”. He then warned last summer that “a very nasty period is soon to be upon us” just before Lehman Brothers and AIG imploded.

Janjuah reckons the current rally will continue through most of August. But markets will then reach a September ‘tipping zone’. That’s when key gauges such as business equipment spending, profits, incomes and jobs show there won’t be the ‘V’ shaped recovery – and hence immediate economic rebound – “that’s now fully priced into markets”.

He sees global stock markets falling back to their March lows, if not lower, with the S&P 500 index plunging to the mid-500s. If the FTSE 100, currently 4,750, moves in line, it would slump towards 2,500.

As he puts it: “the last two Augusts proved pivotal turning points: August 2007 was when everyone wanted to believe policy makers had seen off the credit disaster at the pass. August 2008 was the calm before the utter collapse” in the autumn - “3rd time lucky, anyone?”

Source: FT

Time to Buy Gold?

Sat, 15 Aug 2009 15:21:54 +0800

Many of my existing clients will know I have been a long term admirer of holding gold in a portfolio. Below is an excellent article in this weeks Money Morning from Dominic Frisby, one of several from analysts over the last week predicting a major upturn in price and a push through that $1,000 level :-

Regular readers will know I have been looking for an ‘entry point’, a good time to buy gold sometime in the summer. Yet, except for a momentary blip a fortnight ago, there has been no sell-off of any great note. Gold continues to range-trade between about $970 per ounce on the upside and $910 on the down.

But as I suggested earlier in the week it seems a rally of sorts is starting in the US dollar, so we should get a corresponding drop in gold priced in dollars.

And, if stock markets turn down from here, we can expect gold and gold shares to follow, at least at first.

If you don’t already own some gold or gold shares, I really would take advantage of any dips you might see in the coming few weeks, because, longer-term, a number of indicators are suggesting gold could be getting ready for a big move. Let me explain...

This first chart shows the gold price this year and, beneath, the seasonal pattern of gold over the last 37 years. Seasonal trading strategies don’t always work, but this year gold has followed its annual pattern. The black arrows show the year’s major highs and the red arrows the major lows. Except for January, all have come pretty much on cue. Quite amazing.

If the seasonal pattern continues to play out, we can expect significantly higher prices by year-end, with an October sell-off en route.

Is $1000 the new $700?

Many will remember the big move in gold from about $430 to $730 an ounce between August 2005 and May 2006. There then followed a frustrating sixteen-month period, which began with a violent correction that took gold back to the point it had broken out from. Gold then edged its way up, making higher lows and repeatedly trying and failing to break through $700. It made four attempts and couldn’t get past $680. The fourth attempt was the least convincing of all.

Then, suddenly, in September 2007, it burst through on a dramatic, multi-month up-move that took it to $1,030 by the following March.

The post-big-move corrective pattern then repeated itself. First we had the dramatic correction where gold made its way back to its breakout points. The first was at $850, then, in last year’s stock market crash, it fell to its initial break-out point at $680. Since then it has edged higher, making consistently higher lows.

But it hasn’t broken out to new highs. In fact, it has re-tested $1,000 some four times now – just as it did at $700 - and last week’s rally, which couldn’t even pass $970, was the least convincing of all.

If this pattern continues it means a major, multi-month move - which will propel the price beyond $1,000 - is coming. You want to make sure you’ve booked your seat on the rocket, either though gold or an associated share such as an exchange traded fund (LSE:PHGP for example). Yes, somebody might get a seat a little bit cheaper, but better this than not having a seat at all.

Many technical analysts look for so-called “fractal patterns” – basically these are recurring patterns in stock charts - which they then use to predict future price movements. The technique doesn’t always work, but it has a surprising success rate. The advantage is you know pretty quickly when you are wrong, so you can place tight ‘stop losses’ to minimize your risk of losing money.

The share price pattern that points to a gold surge

Ross Clark of Institutional Advisers is for me one of the best technical analysts around. He notes that the pattern gold has been making as it consolidates in the 16 months since its high of spring 2008, and repeatedly fails to break through $1,000, is remarkably similar to the US Dow Jones Industrial Average – Wall Street’s bellwether share index - in the 16 years between 1966 and 1982, as it repeatedly failed to break through $1,000.

The Dow eventually went to 14,000. I am not saying gold will go to $14,000, or anything like, and if it’s to go anywhere significant the breakout point must hold on any subsequent retest, just as the Dow did. But don’t underestimate how high the yellow metal and its miners could rise.

For now be careful

There are three things that make me very cautious in the short term.

The first is that a continued rally in the US dollar will knock gold. The second is the widespread bullishness amongst commentators. We need some kind of a sucker punch. And the third is the positioning of professional traders on the Comex futures exchange. Large traders have a sizeable ‘long’ position while commercial traders have a similarly sized ‘short’ stance, i.e. they have sold gold they don’t own. Together, this isn’t usually indicative of a gold price low, and suggests gold is going to be hit, as I explained last week in Money Morning: Gold looks ripe for a fall – so get ready to buy in.

The dollar gold price could easily be taken down $100 from here, so be careful. But also make sure not to miss out on gold’s next big move.

Exane Oil Note 8% Return

Fri, 14 Aug 2009 15:28:24 +0800

The Oil price is something we have been tracking and indeed trading throughout the year in our Dynamic Portfolio. Clients have also been able to access ETF’s that tracks the spot price both long and short via ETF Securities leveraged and non leveraged funds.
Exane, who are part of BNP Bank have recently launched their 1-year USD Booster Certificate Crude Oil Note which offers investors an 8% return over 12 months should the underlying perform with an option to redeem each quarter if the 8% return has been met. In the event none of the three quarterly early redemption happened, at maturity the Booster certificate combines an attractive 200% upside exposure to the performance of the underlying with a 15% downside protection before both principal and return become at risk.

Key Advantages:-

Short and simple: The product has a short maturity (12 month only) and is easy to understand
Daily Liquidity
Early Redemption opportunities: with easy-to-achieve condition to meet, in order to get 8% coupon
15% downside protection at maturity: 100% + 8% return guaranteed as long as the underlying does not fall below its protection level
High participation rate at maturity: 200% participation on the underlying performance with unlimited upside
Secondary Market: Exane provides a daily secondary market with a 1% maximum bid-ask spread under normal market conditions
Live prices: Bloomberg EXSC / Reuters EXANEDERIV

For the fund fact sheet please click below or for any additional info, please drop me a note.

Exane 1-year USD Booster Certificate Crude Oil Note PDF