Portfolio strategies for equity investments

with NOEL HARTY

Wednesday, January 07, 2015    

We have all been told as investors at some point in time that equity investments outperform fixed-income investments over the long term. Whilst this remains true, the recent short-term performance of the stock market makes this old adage hard to believe.

Investors have always found it hard to make investment decisions when they are in equity positions that are on the upside in the short term. At what point do I sell my equity holdings? Do I sell all or do I sell some? If I sell a part of my equity holdings, do I buy more equities? These are all questions that investors ask when faced with equity positions that have gone up above the initial purchase cost.

There is one simple answer to all these questions: Any decision made must be in line with the initial and in some cases the revised portfolio objective.

At the onset, a portfolio allocation would have been determined by the investor. This portfolio allocation would remain in place until there is some change in the investor’s circumstance that requires rebalancing the portfolio. A significant upside in equity positions in the short term can also trigger the need for immediate portfolio rebalancing. This is where a decision has to be made based on the portfolio objective.

At the initial stage of setting up the equity portion of the portfolio or at the point of buying individual stock, the investor will decide whether or not they want to set a price target for that particular stock.

The price target is the point at which, if achieved, the investor would exit the position so that a comfortable return is realised. There is no set method for determining a price target since this is usually based on individual risk tolerance. Price targets are subjective. At any point in time financial analysts will have differing price targets for a particular stock.

Although dividends are not guaranteed, there are stocks that pay dividends consistently and have dividend yields sometimes in excess of bonds with similar rating. Adding dividend stocks to the equity component of a portfolio will ease the pressure of decision-making when there is a short-term upside in the stock.

In this case, the investor could easily sell the stock for the short-term capital gains or hold on to the stock for the continued benefit of the dividend payments. Again, it is critical that these decisions be made with the current portfolio objective in mind.

An investor who wants income over time from the portfolio would more than likely hold on to the stock, whilst an investor with a more aggressive risk tolerance would seek to sell a part or all of the holdings in the particular stock.

Investors can use current trends to dictate which stocks to buy initially, and whether or not in a short-term upside they sell these stocks. For example, companies that continue to display innovation in technology are more likely to survive based on current trends.

What are your thoughts on the future of electric cars? The answer to that question will determine whether an investor holding a stock like Tesla (TSLA) sells in a short-term upside. Investors who believe that there is no future in electric cars would sell if indeed they did find themselves holding the stock, whilst investors who believe that there is some future for this innovation will continue to hold the stock.

There are a number of listed companies that are making a big difference in our way of life. The way we communicate has changed significantly over the last decade with the implementation of social media by companies like Facebook (FB) and LinkedIn Corp (LNKD). So has the way we shop, with the introduction of Amazon (AMZN) and now Alibaba (BABA).

The way we watch television, with the introduction of Netflix (NFLX) has also changed.

Whilst this is not a comprehensive list, there are many investors who held on to these stocks in times of significant short-term upside because they believe that these are companies with solid fundamentals that have made and will continue to make a significant impact in the way we live and do things.

The point cannot be stressed enough that there is no “one size fits all” in setting up an investment portfolio. Investment decisions must be made in line with an investment objective and an assessed tolerance for risk.

– Noel Harty is a branch manager at Stocks & Securities Ltd

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Portfolio strategies for equity investments

DBJ to facilitate venture capital and private equity transactions

The Development Bank of  Jamaica (DBJ) is implementing initiatives aimed at facilitating venture capital and private equity transactions.                 

They will be undertaken with technical assistance from the Inter-American Development Bank (IDB).  
According to Julian Robinson, Minister of  State for Technology, the initiatives include the establishment of  an appropriate legal and regulatory framework.
A Private Equity and Venture Capital Association will also be established.

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DBJ to facilitate venture capital and private equity transactions

Proven looks to close two private equity deals

PROVEN Investments Limited (PIL) expects to complete two additional private equity deals before year-end.

The firm made the announcement amid reporting solid first-quarter results for the period ending June 30, 2013, with a 25 per cent increase in consolidated net revenue to US$2.6 million, and a 22 per cent improvement in net profit to US$1.03 million for the period compared with the same three months last year.Johann Heaven, the senior vice-president of investments at Proven, said that the investment company’s focus is now on diversifying its revenue streams and building on its private equity portfolio.“These deals will fit nicely in the portfolio and we expect them to provide an above-average return to our shareholders. Our preferred avenue for investment is through mezzanine debt, which is a hybrid of debt and equity financing,” Heaven said.“This financing is in the form of debt capital, where we have the rights to convert to an ownership or equity interest in the company, if we so choose in the future,” he continued.“We are targeting companies that have a solid track record in their industry with an established reputation and product, history of profitability and viable expansion plans for the business. We are seeing numerous opportunities right now and the deal flow has increased considerably over the past few months.”Heaven said that Proven Wealth Limited (PWL) has been growing its off-balance sheet business steadily and has been performing well. The acquisition of the broker dealer licence by PWL last November has already begun to bear fruit, he said, as the company executes on its objective of listing companies on both the Junior and Main market of the Jamaica Stock Exchange.PWL successfully raised US$2 million in preference shares for a major corporate during the quarter and will be listing these shares on the Jamaica Stock Exchange before the end of the calendar year, Heaven said.Asset Management Company Limited (AMCL) during the quarter contributed US$160,000 in net revenue to the Proven Group. The company, which offers consumer, personal, student and micro-business loans, saw further growth in its loan portfolio since the start of the financial year as it continues to expand its product offerings and reach through marketing and other initiatives. AMCL has been aggressive in the retail loan space and is seeing the rewards of its efforts with a doubling of the portfolio in just one year.A major project planned for Proven REIT Limited, of which PIL is majority owner with an 85 per cent stake, is scheduled to kick off before the end of the year. Proven REIT Limited provided net rental income of US$6,853 for the quarter under review. Though minute in the context of total revenue, they are in the process of evaluating other properties and expect that this subsidiary will have a very profitable year.PIL reported that its bottom line benefited from robust gains in securities trading and foreign exchange translation during the quarter. Increases in securities trading climbed to US$1.04 million from US$376,000 a year earlier, on the heels of the continued rebound in global asset prices. PIL saw a more than six-fold increase in its foreign exchange translation gains to US$388,000 due to positive movements in their foreign exchange positions. HEAVEN… These deals will fit nicely in the portfolio and we expect them to provide an above-average return to our shareholders

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Proven looks to close two private equity deals

Bonds for equity investors

The fixed income asset class has a fairly widespread reputation for being conservative and less rewarding than other asset classes. Fixed income instruments usually rank above equity in the capital structure of a corporation, and as such, have a higher claim on a company’s assets in the event of bankruptcy.

As such, fixed income assets usually have lower yields since there is slightly less risk. However, many different types of fixed income instruments have been created and issued which can appeal to traditional equity investors who crave higher returns but slightly less risk.This week, we take a closer look at hybrids — fixed income instruments with features of both debt and equity. These instruments are most commonly issued by large financial institutions across the globe, and they form part of their tier 1 or tier 2 capital base. The capital base of a financial institution, from an accounting standpoint, is classified as equity. However, this “equity” ranks above common or even preferred equity.Let’s take a look at the features that hybrids share with debt and equity. For example, they pay a fixed or floating coupon at pre-established intervals. However, the issuer usually maintains the right to suspend this payment. Similarly, hybrids can have a maturity date, but this date is usually very far into the future, for example, 30 or 40 years. Maturity dates far out into the future and the ability to suspend interest or principal payments are some of the common “equity like” features of hybrids. Hybrids also have another very important feature; they usually contain an embedded conversion option, which allows the issuer to convert the principal of your investment into common equity in very specific circumstances. These circumstances usually describe severe financial difficulty which threatens their ability to meet their minimum capital requirements. To compensate investors for these risks, the issuing institutions usually pay a relatively attractive coupon rate.These types of instruments also display more price volatility than other plain vanilla bonds, and can provide more opportunity for capital gain. Capital gain is an important source of return for the active equity investor. Bonds can also provide generous returns through price appreciation. The price of a bond can rise and fall, just like a stock. However, the issuer has effectively guaranteed you repayment at 100 cents on the dollar. However, during the life of the fixed income instrument, many factors can cause the price to rise or fall. Much like equities, these notes are affected by the company’s financial or strategic market position, general news, and changes in the macro or micro economic landscape. It is also important to note that bonds are not only for low interest rate environments. Fixed income instruments can be structured to take advantage of rising interest rate volatility and higher interest rates. In sum, the fixed income asset class is versatile and can still provide very attractive returns for relatively lower levels of risk than equities.Another important premise here is that investors do not have to compromise the creditworthiness of their investments in order to attain higher returns. There are many different types of structures that can be tailored to the different risk appetites investors. These types of instruments allow an investor to preserve the high credit quality of their investments, by taking on other risks that do not threaten the principal of their investment.Marian Ross is Assistant Vice President – Business Development with Sterling Asset Management Ltd. Sterling provides medium to long term financial advice and instruments in US and other world market currencies to the corporate, individual and institutional investor.Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.com.jm

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Bonds for equity investors