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Too alternative for Aunt Agatha?

So, here we are, Christmas at last. The last chance I have to share with you my view of the investment scene before we all become immersed in turkey, mince pies and wrapping paper. My next column after this will be in 2007. How should I mark the ending of the old year, I wonder? A time to look back, perhaps? Overall, I am inclined to the belief that looking forward is the best way to go and enough has crossed my desk for me to start to make judgements on the outlook for the next 12 months.

Glancing back at last week’s column, I find myself to be in customary cautious mode. At the time, I was collecting my thoughts for the enlightenment of financial advisers around the country. I confess I had not learned that Fidelity’s legendary Anthony Bolton had also apparently turned bearish. Not that I am bearish, mind you, merely cautious. In my book, any sustained market rise that continues over several years demands a setback of some description, if only to allow valuation criteria to catch up with events.

But here we have a dilemma. Shares, by and large, do not look too expensive – in the developed markets, that is. However, emerging markets are another matter altogether. India saw a setback earlier this month as a consequence of central bank tightening. But even after what was a significant fall in just a few days, the Bombay Stock Exchange’s Sensex index still stood at a price/earnings multiple of over 24 times and a yield of little more than 1 per cent and it was still up by more than 40 per cent on the year. So much for the derisking of portfolios in the spring.

At the moment, I believe it is wiser to pay attention to valuation levels and not allow oneself to be sucked in to markets where a rush for the exit could deliver serious financial damage. The unexpected lies just around the corner and seasoned investors will endeavour to sit out the next shock by holding assets able to pay their way.

A yield of 1 per cent in a market that is as potentially volatile as India does not sound like value to me, despite the growth numbers. I can only assume that it is the money flowing into all those Bric funds that is maintaining the momentum.

Yet looking at the various predictions for the year ahead, it is hard to find anyone with a bearish outlook. When the crowd agrees to the extent they do at present, it is time to look for where the dangers might lie.

In support of the optimists, the risks do not appear to be overly large at present. While US economic growth is obviously slowing, the way in which the Far East continues to drive ahead gives cause for comfort on the global scene. Anyway, a suspension of monetary tightening will also be of help. The bulls are not without their supportive arguments.

Interestingly, much of the more esoteric research that finds its way on to my desk is biased heavily towards the lesser developed markets. Hedge fund operators are beginning to put out some quite interesting material aimed, one assumes, at demonstrating how they can add value by exploiting anomalies in areas that are still under-researched.

An arbitrage opportunity between the New Zealand and Indonesian currencies is just one example of the type of trade being promoted. I wonder whether Aunt Agatha is ready yet for such a sophisticated approach to portfolio diversification?

When assessing the outpourings of the various investment houses, it is important to remember that turkeys do not generally vote for Christmas. Examples of fund managers recommending the sale of their own particular piece of the investment universe are rare. True, Brian Ashford-Russell did draw attention to the extravagant – and unsustainable, in his view – ratings accorded to technology stocks in the dying days of the dotcom boom but such an occurrence is the exception, rather than the rule.

The truth is that these days we have a positive cornucopia of choice among asset classes, so the ability to remain fully invested, while being less expose to a major setback in markets, is now a real option.

If there are fund managers, such as Anthony Bolton, who are prepared also to derisk their portfolio, then you do not even have to be that clever in your approach. Diversification remains the key, however, and avoiding expensive sub-asset classes is no more than common sense.

Brian Tora (brian.tora@centaur.co.uk) is principal of The Tora Partnership

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