ECAM Investment Strategy

Over the past several months a number of new subscribers have joined the ECAM community.  In addition, I have had numerous emails from current subscribers who have queried the methodology I use to invest in my Provident Fund.

In an effort to update information to new subscribers (as well as refresh the memories of long time subscribers) I would like to go over my overall investment thesis on how to best utilize the Provident Fund (or any pension fund scheme for those subscribers who are not Emirates employees).

Normally I do not delve into excessive discussions on economic theory but due to the importance of the current economic phase we are within I feel it is important to provide some basic theory to allow you to understand the investment environment we are dealing with when factoring our investment decisions.


Cyclical Overview:

In a Capitalist economic system there are various cycles that tend to occur on a recurring basis.  Most are familiar with the shorter-term periods of expansion and contraction that define a typical "business cycle" but most are not familiar with a much longer-term cycle associated with the "debt cycle".

I have written about his longer term cycle previously so will not dwell upon it again (for further information Google "Kondratieff Cycle" or "Debt Super Cycle" for an overview).  While various writers will attempt to take credit for having discovered this cycle, it is the work of Nikolai Kondratieff that 1st identified this cycle as being pervasive in Capitalism (for which he was eventually imprisoned and executed).

Broadly speaking, Capitalist economies go through periods of expansion associated with the accumulation of debt within the system.  However, at some point the debt becomes so overwhelming that it severely compromises the integrity and functionality of Capitalism.  This accumulation of debt eventually results in the requirement for a "debt reset" whereby excess debt is expunged from the system.

Kondratieff referred to the various phases of expansion and decline in terms of seasons:  Spring-Summer-Fall-Winter.  The Winter phase is the one whereby debt is "reset" by way of a period of deflation/depression.  We are currently in the Winter phase.

Historically the Winter period lasts 15-20 years.  Within this deflationary period, there still can be economic advances associated with the normal business cycle, but the over-riding "gravitational pull" of the debt deflation results in substandard rates of economic expansion during economic advances and amplified rates of decline during economic declines.


Current Cycle:

There are various opinions on when the current Debt Deflation/Winter cycle began.  It is my thesis the Kondratieff Winter began in 2000 at the height of the Dot Com boom.  It is clear to me the speculative excesses within our Capitalist system reached its apogee in 2000 and it is only due to the irresponsible interference conducted by Alan "Bubbles" Greenspan of the U.S. Federal Reserve that the economic reset we were required to undergo was postponed by his inflation of the housing bubble in the U.S.  As such, a "natural" debt cycle top was extended/prolonged into 2007 by way of his exceedingly low interest rate policy and the lax lending standards adopted in the U.S. from 2000-2006, leading to the housing boom.

Others believe the current cycle began in late 2007 with the end of the Housing boom and the decline in Europe.  While I do not believe the argument has merit, should this ultimately have been the "debt top" it only puts forth the recovery period further into our future.

Assuming the cycle top began in 2000, theoretically based upon history we should expect 15-20 years of deflationary decline (taking us to 2015-2020).

As mentioned previous, regardless of the current "Winter Season" which could last to 2020, we will still experience our normal Capitalist business cycle.  As such, we still go through periods of expansion and periods of recession.  However, due to "debt gravity" reset experienced during the "Winter Season" the expansions are substandard (going counter-trend to the overall debt deflation) and the recessions are accentuated (going with the trend of overall debt deflation).


Secular vs. Cyclical Stock Markets:

Stock Market advances/declines tend to follow the cyclical business cycle and longer term economic cycles.  As such, it is important to identify where we are at in the shorter term market cycle (Cyclical) as well as the longer term market cycle (Secular).

My thesis is we entered a long term SECULAR bear market in 2000 in line with the Kondratieff Winter.  As such, the overwhelming trend is one of a bear market decline until 2015-2020.  However, within that secular bear market, we can experience counter-trend periods of market advance known as CYCLICAL bull markets.  The periods 2003-2007 and 2009-Present are such periods.  They are periods whereby stock markets advance counter to the overriding negative market influences present.

Just as described previous, cyclical bull market advances (within a secular bear market) tend to be substandard whereas cyclical bear market declines (within a secular bear market) tend to be violent and excessive.

Given the above, obviously it is easy to understand why I have been prudent and careful with my Provident Fund during the current "cyclical" bull market advance within the "secular" bear market decline.


Pension Fund Investments:

Of all the methods to invest, pension funds tend to be the most difficult.  Generally most pension funds (of which the EK fund is included) tend to offer limited investment vehicles, limited switching options and excessive time delays to change investment positions.  As such, they are a poor conduit in which to invest capital given the other options available to investors.  Unfortunately for many (including Emirates employees) they are a mandated part of the employment contract we are required to participate within.  As such, we are essentially left to attempt to manage a substandard investment option.

Given the above, my strategy for investing within the pension fund is as follows:

1)  NEVER USE THE "C" ACCOUNT (Additional Voluntary Contributions) if you have the option to invest in alternative investments yourself or with a good advisor who can provide you a quality service at a a reasonable rate (more on that below).

2)  Always use a fully invested equity position as your "default position" unless there is a reason to do so otherwise.  Over time only equities offer the capital appreciation required to exceed the pace of inflation.

3)  As per (2), only have a full equity position when the market environment is conducive to allowing such an aggressive position.  The period up to 2000 allowed such positioning given the overall cycle we were within; the current cycle precludes such a position except in exceptional circumstances.

Given my above "rules", this is the methodology I utilize to invest within my contractually required pension fund:


A)  Ongoing Monthly Required Contributions (A + B)

-100% of my ongoing mandated monthly contributions are invested 100% into equities irrespective of current cycles, market valuations or technical indicators.  These allocations NEVER change.

This approach is commonly known as "dollar cost averaging".  Given on a daily/weekly/monthly basis one never knows exactly when a market is over/under valued relative to it's short term fundamentals, this approach allows you to purchase equal small equity portions irrespective of current market conditions.

During market declines you are purchasing larger blocks of shares monthly due to the market being "on sale"; during market advances you will purchase lesser numbers of shares as the market has advanced.  However, given the overall propensity for markets to advance approximately 70-75% of the time, a systematic investment approach such as this allows you to accumulate shares at below trend prices during short term declines.


B)  Strategic Equity Positions:

-the overall allocation I place in equity balances is dependent upon current cycles, market technicals and valuations.

When the market is "cheap" and appears to be entering a new uptrend (with me sitting in cash with excessive market pessimism) I want to be aggressive adding to equity positions.  When the market is "expensive" and appears to be entering a new downtrend (with me being almost fully invested and excessive market optimism) I want to be aggressively selling my equity positions and moving to cash.

This "strategic" market allocation involves moving large percentages of my portfolio into either equities or cash dependent upon the preceding explanation.  This in no way changes my monthly contribution strategy described in (A) above.


Investment Advisors

I have been extensively involved in investment for well over 30 years.  In that time I have seen the best and the worst in "Investment Advisors".  I hope to provide a little insight into the "industry".

Most investment advisors you will speak with are nothing more than commissioned sales people with limited investment experience.  The industry is built upon a sales force who push a fund/ a commodity/ a platform/ a system/ for which, in exchange, they receive a direct commission.  In my experience I have found more than 90%+ have limited knowledge of the underlying economic conditions or market conditions they profess to deal within while attempting to sell their product or services.  They are told to sell the product; they try to sell you the product.  Nothing more/nothing less.  Their livelihood is based upon what they can sell; not what they will deliver.

It is understood the average investor has limited time (given their "day job"), interest (to most these subjects could be perceived as extremely "dry") or ability (sometimes these subjects can be extremely complex).  As such, the industry has evolved over the past 50 years to offer unlimited amounts of poor advice and guidance.

In trying to use the services of an investment advisor there are many considerations but here are some tips that might help:


1)  Cold calls/Cold emails: (non-solicited phone calls/emails from advisory firms you have not contacted directly for information):

AVOID/AVOID/AVOID.  These are what we refer to in the industry as "boiler room" operations which purchase your telephone number/email address from a third party supplier and go after you as a "client".  You are a mark; they are salesman/women.  There is no "investment advice" in anything they offer.  Run away/hang up.


2)  Investment/Relative Return Advisors:

It depends upon the structure of the firm you are dealing with.  Most tend to be "investment advisory services" who will attempt to sell you a fund(s) for which they receive a commission.  Some have some form of in-house "market overview" service to back up their sales push into specific funds based upon some form of fundamental and/or technical analysis.

There is nothing inherently wrong with this sort of company as they are attempting to provide you the best fund they believe you should be in (based upon their analysis).  However, be aware the "best fund(s) they believe you should be in" will at times also align with their "best sales commission to keep the client in these funds" strategy.

A common feature of these types of advisors is they only receive a commission as long as you are invested in their funds.  As such, while they will give you the appearance of looking out for your best interests, they will have a vested interest in keeping you within those funds irrespective of current (or potential future) market conditions.  They will never advise you go be in cash as they do not collect a commission when you are in cash.

They are referred to in the industry as "Relative Return" managers.  They will set a benchmark (for example the S&P 500 index) and they will design a portfolio to attempt to at least match the performance of the benchmark (and hopefully outperform the benchmark).  For this they will expect a ongoing monthly fee.

This is all great and under the terms of "Relative Performance" should the benchmark return {+X%} and your portfolio return {+X + y%} your manager will point to his/her outperformance to justify his/her fee.  However, if the benchmark returns {-X%} and your portfolio returns {-X + y%} your manager will still point to his/her outperformance to justify his/her fee.

Example:

-Yearly benchmark return:  +10%
-Portfolio return:  +11%
*Portfolio outperformance:  +1%

-Yearly benchmark return:  -20%

-Portfolio return:  -19%

*Portfolio outperformance:  +1%

In the 1st instance, the portfolio outperformed the benchmark by 1% and you made 11%.  In the 2nd instance, the portfolio outperformed the benchmark by 1% but you LOST 19%.

The relative performance manager would call this a "success" as he outperformed his benchmark (and expect to receive his fee accordingly) but you still lost 19%!

3)  Absolute Return Managers:

An Absolute Return manager is one whereby the only thing that counts is "money in the bank".  They will charge you a base rate (which covers their administration, trading and professional fees) and an additional incentive fee for "absolute performance".  This performance is not measured against a benchmark; it is literally "money in the bank" based upon the excess return they made for your account.

This type of manager is typically a hedge fund with a typical fee of 2% annually for ongoing research, trading, administration costs and 20% of the excess "absolute performance" they put into your account.

Normally this type of fund is only available to "Accredited Investors" defined as:

1. an individual whose net worth, or joint net worth with the person's spouse, exceeds $2 million at the time of the purchase, or has assets under management of $1 million excluding the value of their primary residence;
2. a person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

As you can see, this is a fairly limited "club" who can normally participate in this sort of investment manager.

If you find an investment advisor that delivers consistent returns at an industry standard fee over time "absolute return" performance should outperform "relative return" performance.

Bottom Line:

-the current market environment is the most challenging in 60 years

-we are in for an additional 10+ years of poor market performance

-pension fund systematic monthly contributions over time return the best overall returns

-strategic movements into cash preserve investment capital during market declines

-be smart when selecting an investment advisor

[edit]