Immunising portfolios against Covid-19 and other Black Swans

[DarkHorse]

While it's good to have a thread about the economic impact of the Coronavirus on the NZ economy, I think it's at least equally valuable to discuss ideas on hedging investments, so as to protect or even enhance our investment returns should the worst case scenario eventuate.

Interesting to read about Beijing propping up Chinese markets https://www.ccn.com/are-overstimulated-stocks-ignoring-coronavirus-risks/ (a bit tabloid but still useful)

I stole the name from this post on an Australian site, which is a good starting point for discussion
https://www.livewiremarkets.com/wires/global-problems-global-solutions

[peat]

i have long bond positions and I did manage to sell out of some silver that I'd purchased lower. So , traditional hedging measures still apply I think.
ON some thread there were bear ETF's for the ASX mentioned. So you could use those or short an index. Or take out some puts

[DarkHorse]

Cheers Peat. I've only invested in shares and property up til now. What do you suggest in the way of easy to access bond funds (esp unhedged USD)?

[SBQ]

Have moved my funds overseas. Not sticking around for the NZD to plummet under 0.60
Forget about bonds or interest bearing cash deposits - if this COVID19 is going to keep spreading, central banks WILL lower rates. I keep hearing the Labour Gov't splashing out more and more $ out to beneficiaries and social programs - but no mention on the IRD impact of tax revenue? If our NZ economy is going in the sewer, so will the tax take, and so will the NZ gov't be forced to borrow more 'external funds' which ultimately, will negatively impact the NZD currency.

[GTM 3442]

Have moved my funds overseas. Not sticking around for the NZD to plummet under 0.60
Forget about bonds or interest bearing cash deposits - if this COVID19 is going to keep spreading, central banks WILL lower rates. I keep hearing the Labour Gov't splashing out more and more $ out to beneficiaries and social programs - but no mention on the IRD impact of tax revenue? If our NZ economy is going in the sewer, so will the tax take, and so will the NZ gov't be forced to borrow more 'external funds' which ultimately, will negatively impact the NZD currency.


That's interesting.

The only two reasons I can think of for "physically" moving money from one country to another is (a) you don't trust the institutions in the "from" country or (b) the investment you want to make is not available in the "from" country.

But don't underestimate bonds. A couple of my bond funds have returned me 13% over the past year, and are currently in quite pleasing uptrends. But I suspect we may have different objectives - and timeframes!

[Joshuatree]

We have bought some $US too and fixed some money for 4 and 5 months. The rates are ahead of inflation and protected from this rollercoaster mkt that has arrived.

[SBQ]

That's interesting.

The only two reasons I can think of for "physically" moving money from one country to another is (a) you don't trust the institutions in the "from" country or (b) the investment you want to make is not available in the "from" country.

But don't underestimate bonds. A couple of my bond funds have returned me 13% over the past year, and are currently in quite pleasing uptrends. But I suspect we may have different objectives - and timeframes!

The primary reason for investing abroad is to minimise tax. Can't physically move funds outside of NZ in large amount un-noticed and large cash amounts would be a problem depositing it in any bank ; all major brokerage firms don't accept direct cash deposits anyways.

Point A): Trust is not the issue but I do have a problem with 'institutions' in NZ charging obscene fees (managing / account balance fees, etc).

Point B): NZ represents many 0.3% of the global investment field - That figure alone presents a diversification issue unless you believe NZ is the centre of the world for investments. The NZ tax laws appear to slate it that way (vastly discriminating between NZ vs foreign investments).

Bonds have their place... but in Warren Buffet's books (and he's getting near 90 years old), don't waste your time unless you're the person that can name the terms of the bond rate with warrants and options. Being taxed up to 33% on interest income vs tax free capital gain? I also understand the general rule that at retirement, elderly age, the change of investment class from equities to interest bearing investments should be done. Myself, I don't subscribe to that thought but instead if I want a return on my investment, I would sell a bit of my shares to lock in capital gains ; and only on years that I would want that income. Not all people in retirement age expect a fixed interest income as once it's paid... they're stuck with it? This also applies to dividends. I don't want to be stuck with excessive amount of dividends paid year after year when I would have no plans to spend it.

[GTM 3442]

Ah yes, tax. It's not my strong point - which means it's something I tend to forget about.

Your thoughts on bonds are interesting. I can see that we view them quite differently, especially with regard to income vs liquidity. I'll have to spend some time going over what you wrote.

Now out of idle curiosity, who are these "institutions". From my experience, New Zealand is one of the cheaper places in the world to own financial assets. Can you help me out here?

[SBQ]

Ah yes, tax. It's not my strong point - which means it's something I tend to forget about.

Your thoughts on bonds are interesting. I can see that we view them quite differently, especially with regard to income vs liquidity. I'll have to spend some time going over what you wrote.

Now out of idle curiosity, who are these "institutions". From my experience, New Zealand is one of the cheaper places in the world to own financial assets. Can you help me out here?

Yes not only tax on the individual level but also the tax at the company level.

In Finance grade school, our prof told us corporations have 3 main ways to raise capital. 1) Issue more shares 2) borrow cash from the bank & 3) issue bonds. All have issues. ie A reason why Buffet isn't a big fan of owning junk bonds? Because from the point of view from the company, bond issues are a last resort if major or private banks refuse to lend. Have a think about this. Just query why your local banks only lend mortgages on residential properties instead of lending to small businesses? If there are no buyers of bonds, then usually as a last resort, the corporation issues more shares which has a negative impact to existing shareholders (called dilution).

re NZ investing: I have not come across any NZ broker that are competitive to US brokers in terms of commission trades and account management fees. Many US brokers have gone commission free trades and rely making $ off margin accounts. In NZ, Macquires, Craigs, etc have very high brokerage fees when you look to buy overseas shares. On top of this as an example, there's a local Christchurch firm Jarden that charges like a 1% account management fee per year (correct me if i'm wrong but last year I saw one of their presentations and they spoke of such administration fees when they were canvassing new clients). Also they were only interested in clients with +$500K in wealth to invest with them. I assume that would be no different to various Kiwi Saver Funds that charge similar fees. Ie. US Vanguard ETF 0.08% vs using a NZ managed fund to buy the exact same Vanguard ETF but they charge 0.8% per year (they say it's to cover tax compliance FIF / documentation etc.)

Anyways.. today we've seen the true impact of what COVID19 can do with the share market. A near 1,200 pt drop for the DOW is significant. I hope you all are buying.

[ratkin]

Have moved my funds overseas. Not sticking around for the NZD to plummet under 0.60
Forget about bonds or interest bearing cash deposits - if this COVID19 is going to keep spreading, central banks WILL lower rates. I keep hearing the Labour Gov't splashing out more and more $ out to beneficiaries and social programs - but no mention on the IRD impact of tax revenue? If our NZ economy is going in the sewer, so will the tax take, and so will the NZ gov't be forced to borrow more 'external funds' which ultimately, will negatively impact the NZD currency.

Is this not the same for every other country though?

[GTM 3442]

Yes not only tax on the individual level but also the tax at the company level.

In Finance grade school, our prof told us corporations have 3 main ways to raise capital. 1) Issue more shares 2) borrow cash from the bank & 3) issue bonds. All have issues. ie A reason why Buffet isn't a big fan of owning junk bonds? Because from the point of view from the company, bond issues are a last resort if major or private banks refuse to lend. Have a think about this. Just query why your local banks only lend mortgages on residential properties instead of lending to small businesses? If there are no buyers of bonds, then usually as a last resort, the corporation issues more shares which has a negative impact to existing shareholders (called dilution).

re NZ investing: I have not come across any NZ broker that are competitive to US brokers in terms of commission trades and account management fees. Many US brokers have gone commission free trades and rely making $ off margin accounts. In NZ, Macquires, Craigs, etc have very high brokerage fees when you look to buy overseas shares. On top of this as an example, there's a local Christchurch firm Jarden that charges like a 1% account management fee per year (correct me if i'm wrong but last year I saw one of their presentations and they spoke of such administration fees when they were canvassing new clients). Also they were only interested in clients with +$500K in wealth to invest with them. I assume that would be no different to various Kiwi Saver Funds that charge similar fees. Ie. US Vanguard ETF 0.08% vs using a NZ managed fund to buy the exact same Vanguard ETF but they charge 0.8% per year (they say it's to cover tax compliance FIF / documentation etc.)

Anyways.. today we've seen the true impact of what COVID19 can do with the share market. A near 1,200 pt drop for the DOW is significant. I hope you all are buying.

Indeed. Companies do diversify their source of funds, with equity, bank funding, and bonds.

"Just query why your local banks only lend mortgages on residential properties instead of lending to small businesses?"
Banks do lend to small businesses, but they want security for the loan, and for many if not most small businesses, the only security that is available is either a personal guarantee or a mortgage over (residential) property - usually the small business-owner's house. I suspect that this is simply a result of the retail banks making most of their money from residential property loans, and having little understanding of anything else.

"A reason why Buffet isn't a big fan of owning junk bonds?"
I'm not a fan of junk bonds either. After all, what would it take for an Apple to turn into a Blackberry for example? I run a portfolio of directly held New Zealand bonds, bought at time of issue, to be held to maturity, average credit rating of A. The income goes to fund other investments - bond income provided the funding to buy into the 2013/2014 New Zealand electricity company floats.

". . . a local Christchurch firm Jarden. . .
They're actually a diversified national financial services company, ex First NZ Capital ex Credit Suisse/First Boston. Last time I talked to them (2015?), the 1% annual account management fee came down to well under 0.5%. I suspect that it depends on what you want from them.

Out of idle curiosity, when I own shares and bonds in New Zealand, these are held at the registry in my name, without any third party custodial arrangements. Is this the case in the US/Canada, or are shareholdings/bonds held by the broker - with or without DIMS?

"Bonds have their place... but in Warren Buffet's books (and he's getting near 90 years old), don't waste your time unless you're the person that can name the terms of the bond rate with warrants and options
Can you explain what this actually means? The "warrants/options" makes no sense to me in the context of holding individual bonds.

Thanks for the posts, I'm learning a lot.

[Crypto Crude]

Hedging investment number #1... not even debatable...
The Dow Jones just had the biggest fall OF ALL TIME and crypto is booming... every coin in the top 70 is up...
:cool:
.^sc

[Joshuatree]

Yes as i expected youve been salivating at the spread of this virus and i indeed could smell the anticipation on your breath.

[Crypto Crude]

If crypto doesn't have your attention now then yah might aswell sink your own battle ship... turn a Kamakazi on yourself and just sink that pup....
:cool:
.^sc

[Crypto Crude]

Joshuaaatreeeeeee
Timbbbbeerrrrrrrrr...
Is that why they call you mr tree....
:t_up:
.^sc

[SBQ]

Indeed. Companies do diversify their source of funds, with equity, bank funding, and bonds.

"Just query why your local banks only lend mortgages on residential properties instead of lending to small businesses?"
Banks do lend to small businesses, but they want security for the loan, and for many if not most small businesses, the only security that is available is either a personal guarantee or a mortgage over (residential) property - usually the small business-owner's house. I suspect that this is simply a result of the retail banks making most of their money from residential property loans, and having little understanding of anything else.


"A reason why Buffet isn't a big fan of owning junk bonds?"
I'm not a fan of junk bonds either. After all, what would it take for an Apple to turn into a Blackberry for example? I run a portfolio of directly held New Zealand bonds, bought at time of issue, to be held to maturity, average credit rating of A. The income goes to fund other investments - bond income provided the funding to buy into the 2013/2014 New Zealand electricity company floats.

". . . a local Christchurch firm Jarden. . .
They're actually a diversified national financial services company, ex First NZ Capital ex Credit Suisse/First Boston. Last time I talked to them (2015?), the 1% annual account management fee came down to well under 0.5%. I suspect that it depends on what you want from them.

Out of idle curiosity, when I own shares and bonds in New Zealand, these are held at the registry in my name, without any third party custodial arrangements. Is this the case in the US/Canada, or are shareholdings/bonds held by the broker - with or without DIMS?

"Bonds have their place... but in Warren Buffet's books (and he's getting near 90 years old), don't waste your time unless you're the person that can name the terms of the bond rate with warrants and options
Can you explain what this actually means? The "warrants/options" makes no sense to me in the context of holding individual bonds.

Thanks for the posts, I'm learning a lot.

There was a time when banks didn't require the kind of collateral like putting up your own house to get a loan for a small business venture. Nowadays, the banks are really only interested in lending on residential housing with a simple process of just having 20% down and just the backs of your day to day job showing how much income you made a year (or over 3 years).

In the US / Can, the broker is held responsible for keeping records for their clients. Such as shares they own, taxation slips, tax sharing with the IRS/CRA, and more importantly, dividends received are 'AUTOMATICALLY' funded into their account. Ironically, no one that I know would prefer a listed company to issue cheques to their shareholders (that's so 1980s) yet, it seems in NZ, there's a wide range of companies that still issue cheques, despite how the retail banks like Kiwi Saver are ending cheque processing. For US/Can, the argument isn't about the shareholder wanting to "choose where they can deposit their dividend cheque payments". The issue is about keeping tax compliances and the broker needs clear records of the ins & outs on the account.

The GFC in 2008, many banks went bankrupt in the US and Goldman Sac was in a jam needing serious $ (for which at that moment, the US gov't had no talks of bail outs yet..). They approached to Buffet and they made a deal:

https://qz.com/67052/heres-how-warren-buffett-made-3-1-billion-on-his-crisis-era-bet-on-goldman-sachs/

"1) $5 billion worth of “perpetual” preferred shares. While technically a share of stock, preferred shares are a bit more like a bond. They’re slightly safer than “common” shares, because—should anything like a bankruptcy happen—preferred shareholders stand in front of common shareholders in the line to get their share of the proceeds from the garage sale of the liquidated company. They also typically pay a dividend. Goldman agreed to pay a 10% dividend on those preferred shares to Buffett, which cost Goldman about $500 million a year."

2) Warrants for 43.5 million additional shares. Warrants are similar to options. In this case they were the legal right to buy a stock at a particular price, which for Buffett was $115 per share. The deadline for exercising these warrants was Oct. 1, 2013.

How much did Buffett make on the deal?

and in return:

"So, all in, Buffett made about $1.75 billion in cash and about $1.35 billion in stock, or roughly $3.1 billion on the Goldman investment. That’s about a 62% return on a five-year investment. Not too shabby."


Buffet named the terms at a time when there was no one else that willing to lend $. The compelling issue is for the NZ investor, you're not going to see such deals going around in NZ. I mean that's not how NZ fund managers work on or part of their scope (but in Buffet's case, the deals are all for his Berkshire Hathaway shareholders). When a company gets in a jam or heading to bankruptcy.. generally in NZ terms, they go through a slow death as their share price goes to zero. This is not to say companies in the US don't go to zero but usually there's a long process of disclosures before that happens.

[GTM 3442]

OK, from what I can make of that, in Canada/US the brokers act as the record-keeper and it's the broker's name that's on the share register - they are effectively acting as custodians - whereas in New Zealand it's up to the individual investor to keep their own records for the instruments they own in their own name .


Unless the New Zealand investor has succumbed to the "lure of the platform", where the instruments are legally owned by the broker/institution, but beneficially owned by the individual, who pays various account-keeping fees for the privilege.


Platforms suck, but are slowly becoming inescapable, as we stagger ever more deeply into the ineffectual, poorly-designed, poorly-implemented morass that is AML/compliance.


From what you say, Warren Buffet provided a whole bunch of capital when nobody else would, and so was able to set the terms, providing the capital in the way which gave him with the best return. That bit I understand, and in the happy event that you or I ever find ourselves in the same position, I'll bet that we'll do the same.

Thanks again