Diversification and expansion of product line-up

The Works Applications Group is committed to helping its clients improve return on their IT investment by providing ERP software packages and related services.

Our future business development will be driven by the following four-pronged medium-term strategies:

1. Diversification and expansion of product line-up
2. Expansion of scope of services offered by the Group
3. Expansion of customer base
4. Overseas business development – beyond Japan to overseas markets

Of the above four strategies, priority will be given to the first and the second strategies, namely diversification and expansion of product line-up and expansion of scope of services, in order to secure focused application of management resources.

The third and fourth strategies will be mainly based on an inorganic approach through investment in, M&A of, or business tie-up with companies that have promising products or services in new areas.

Portfolio Diversification Strategies: Don’t Let One Country Dominate Your Investment Portfolio

The 2006 Winter Olympic Games in Torino, Italy may not have quite the suspense and viewer appeal of some past Olympics. But one thing they share in common with all Olympic games: patriotism – unbridled fervor for one’s home country.

I can still remember the chants of “USA! USA!” ringing in my ears as I watched the U.S.’s amateur hockey team upset the “unbeatable” hockey juggernaut from the USSR.

Such patriotic zeal can be fun – even exhilarating – when cheering on countrymen and women in athletic events. But many people unknowingly carry that same patriotic bent into their investing portfolio. And that can result in missing out on portfolio diversification strategies that include some the world’s strongest – and most profitable – markets.

Investing Outside the Good Old USA

Many portfolios carry only U.S.-based stocks and indexes. And this is understandable. Those are the investments that we understand best. But we ignore the rest of the world at our own peril when it comes to diversifying our portfolio.

The U.S. markets are superlative in many ways – the biggest, the busiest and among the most transparent in the world. But when it comes to performance, the U.S. markets have been laggards, not leaders. Take a look at the chart below that compares the relative performance of stocks representing different companies:

In the last 12 months, the S&P 500 Index (a proxy for the U.S. stock markets) was up about 6%. After monster growth in 2003, the China Fund (NYSE: CHN) is only up 3% for the last 12 months.

But while China and U.S. stocks have been experiencing low growth, other markets have been booming. Germany, Japan and Canada are up between 23% and 38% percent for the most recent 12 months. During the same period, Brazil and India have been up 87% and 90% respectively!

Though not shown in the relative performance chart above, a little extra research reveals that of the seven countries represented above, three of them have exceeded their year-2000 highs (Canada by a little, and India and Brazil by a lot!).

Portfolio Diversification Strategies and Ancient Eastern Philosophy…

“When Testing the Depth Of the Water, Don’t Use Both Feet…”

The opportunities that spring up every year in some new foreign market might make you want to toss your whole portfolio into foreign markets. But bear in mind that these markets are very volatile. And they do go down as well as up. For example:

    * In the first five months of 2004, the China Fund lost 50% of its value.
    * In 13 months spanning 2001 and 2002, the Canada Index lost 60% of its value.
    * From March of 2000 to October of 2003, the German index dropped 73%.

Almost every portfolio could benefit from some geographic diversification strategies. But putting too much weight in country-based funds, indexes or iShares can also introduce more volatility than you’d like to your portfolio.

Two Prudent Diversification Strategies for Your Portfolio

As much as possible, you might want to use the following two diversification strategies when broadening your portfoli

    * Spread your risk geographically. Don’t just invest in countries from Asia Pacific or in European countries, or South American or North American countries. Try to add something from all the major economic regions. A lower volatility alternative might be to use regional funds or indexes that spread their investments across a whole region.
    * Diversify among momentum- and value-based countries. India and Brazil have been on strong upward moves for more than two years. But only picking countries that have had long uptrends sets you up for getting in at or near the top. Momentum plays are very useful and should be part of a diversified strategy. But they should be balanced by a couple of value plays such as investing in China, which has had a strong pullback during all of 2005.

Conclusion: Minimize risk by giving yourself some geographic diversity in your portfolio strategies.

Great trading,

D.R.

Today’s Trader’s U Tips & Tricks

    * If you like momentum plays like the India Fund and the Brazil Index have been over the last couple of years, you have to take a look at Alex Green’s Momentum Alert trading service. Alex is a sharp analyst whom I have known for several years. I personally looked at almost every one of his picks for 2005, and I know he was bringing big positive returns for his subscribers. Learn more about the Momentum Alert and catch a risk-free look at his latest newsletter here.
    * If you haven’t taken advantage of Investment U’s free reports, now is the time to check them out. One worth some extra attention is: Stock Market Investment Advice: The 2 Most Profitable Secrets of the World’s Greatest Investors. You’ll get the two secrets shared by more than 99% of the world’s best investors – the key to letting you squeeze every cent of profit from your winners, and get out with your profits intact.

Precious metals and fixed income

Precious metals

We started the year with holdings in SLV, an exchange traded commodity fund for silver. In 2008 we bought gold and silver to in a bid to diversify our assets to reduce our portfolio risk. This diversification strategy did not help us as the price of precious metals fell together with stocks and commodities in 2008. I sold off our gold positions in May 2009 when I had a chance to get out at break even but decided to keep our silver position because at that time I was still undecided whether inflation or deflation would be a problem in the next few years. As precious metals are supposed to be the ultimate hedge for inflation, I thought we should still hold small position in this asset class while I continued my research on inflation vs. deflation. The more I understood about this topic, the more convinced I became that there is little risk of inflation in the near future and deflation was the bigger threat so I decided to sell our silver investments in October 2009 at a small loss. The price of gold and silver was still going up at the time as many big investors including some very clever fund managers like John Paulson and George Soros were piling into gold. However, I trusted my own research and once I was convinced of the threat of deflation, I adjusted our asset allocation accordingly.

It looks like the consensus for deflation is growing and in recent weeks there are many headline stories like these in the financial news:

Aug 2, 2010 – Big investors wary of deflation risk
Aug 4, 2010 – Defending yourself against deflation
Aug 4, 2010 – With deflation looming, even the top guys are flummoxed right now

If you are confused about how to invest if there is deflation, you are not alone – even the top investors are flummoxed right now! Most of us who are born after the Great Depression will have no idea what to do to prepare for deflation because inflation is something we have lived with all of our lives. If you want to learn more about deflation, I would highly recommend you learn from deflation experts like Robert Prechter who wrote about it in his best selling book Conquer the Crash which was first published in 2002. This book was republished with updates in 2009 and it gives a very detailed case for deflation and tells you how to protect yourself and maybe even profit from deflation. Do also read Deflation: First Step, Understand It, a recent article published by Elliott Wave International, Prechter’s investment advisory company.

With deflation, cash and cash equivalents are the best investments because cash becomes more valuable when prices of assets fall. Quality bonds are the best types of investments for deflation and US treasury bonds is one of the recommended investments. Investment advisers from the deflation camp like Gary Shilling and Yves Lamoureux have been advising their clients to buy the 30 year treasury bonds. David Rosenberg has been advising his clients to buy quality corporate bonds. Recently, Bill Gross who runs PIMCO’s $US239 billion Total Return Fund increased his allocation to treasuries to about 51 per cent of the portfolio, up from less than 33 per cent at the end of March 2010.

Treasury bonds

With some fear and trepidation, I proceeded to make our first investment in US treasury bonds last year. Even though my research tells me this is the right investment, the thought of buying bonds from a country with trillions of dollars of debt was still a little uncomfortable for me. Based on simple logic, it is hard to imagine why something like bonds that can be freely created from thin air can be more valuable than tangible assets like gold or property, but once you understand what causes deflation, you will understand why they can.

As usual, I looked to get our exposure to bonds through Exchange Traded Funds. In August 2009, I bought some shares in IEF, a US 7-10 year bond ETF together with protective put options, just in case. The bond yield for 10 year bonds was just over 3 percent at the time. The bond market remained pretty flat for a while but when the US stock market started to fall sharply in April 2010, bond ETFs shot up in price as investors rushed into bonds as part of the flight to safety. By June 30, we managed to get an unrealised gain of nearly 7 percent on our IEF position, giving us a total annual return of ten percent. Our bond investments have outperformed our Australian term deposit investments even though the interest rates for the term deposits were a lot higher.