CORRECTION OR DOUBLE-DIP?

In our last newsletter we said we couldn't count on the July rally being sustained. Indeed we have seen a significant fall in global stocks as fear of a double-dip recession in the US spooks the markets. Both the employment situation and the shaky housing market in the US are adding to the gloom. This past week both equities and commodities have taken a dive, the only bright spot being gold, a sign again of investor nervousness. Bond yields have fallen to extreme lows which means they offer a poor prospect for returns but on the other hand they do offer a degree of comfort and security and should continue to form an important part of a balanced portfolio. If your portfolio includes Harmony or Iveagh funds you will have a fair proportion of the fund in bonds.

Savings plans will probably see the biggest dips in valuations when markets fall but this must be seen as a positive for the long term as current contributions will be buying in effectively at a discount. Gains should be consolidated in the latter stages of the plans; this is when they should be closely monitored. If the opportunity to consolidate gains during the later years has been missed the plan should not be encashed on maturity but should be held until such time as markets are high again.

WHAT ALTERNATIVE INVESTMENTS ARE THERE?

The last decade was one which untypically saw major markets returning a loss over the 10 years. This has negatively impacted the long term plans of investors throughout the world. Those relying on income from large cash deposits have fared no better. At one time retirees could count on a livable income of 3% to 5% on a large accumulated sum in the bank. Now that base interest rates in USD, GBP and EURO are close to zero an investment in cash, other than for the purpose of liquidity and short term reserves, is no longer a viable option. Even real estate investments have proved disastrous for those who overstretched themselves.

So where to turn now? Giving up is not the answer! The basic asset classes must continue to be a mixture of cash, bonds and equities. The latter will certainly bounce back in time unless the capitalist system collapses. So we must persevere with our savings plans and building blocks in core asset classes. But we need to look 'outside the box' to capture growth in areas perhaps not considered in the past. One which we have embraced successfully in recent years is commodities, including energy and precious metals. Investors who have diversified into these areas have generally done better than those who have stuck to the basic asset classes. Forestry is another but we will need to see how recent investments pan out in the longer term.

A NEW OPTION - LITIGATION FUNDING

Right now a new opportunity has arisen for retail investors. It may be a short-lived one for them since this particular asset class has previously been funded by institutional investors and hedge funds. Currently the latter cannot supply sufficient funds; hence there is an opportunity for the small investor. What we are looking at are potentially thousands of cases where legal action is not pursued due to lack of funds or fear of losing. Many of these cases are nevertheless identified as almost certainly winnable and lawyers would take them up on a no-win no-fee basis if they had sufficient funds. This is where litigation funding steps in.

Basically the fund that offers loans to law firms identifies winnable cases and lends money accordingly. It then collects a share in the winnings. The plaintiff may not win as much as he would have by suing directly but on the other hand does not have to risk a cent of his own money. Since only strong cases are accepted the defending company or organisation agrees to settle out of court in the majority of cases once it knows there are unlimited funds to fight the case.

We currently have an opportunity to fund a tranche of a large sum being raised by Argentum Litigation Investments Ltd. There are two options for investors, one involves taking a percentage of winnings with some guarantees, the other offers participation in the main fund via structured notes which pay a quarterly income and are backed by an insurance company that pays out if the case is lost, another insurance company that steps in if the first insurance fails to pay for any reason and a third that pays out should the defending party be unable to pay. While we would normally be skeptical at an investment that offers such high returns these guarantees, plus the British legal fraternity environment and the oversight of the FSA provide a high degree of comfort. The main features of the notes are as follows:

OPTION B - STRUCTURED NOTES
100% principal protection
Three insurance products to protect investment
Linked to the performance of the Fund
Minimum investment - £10.000 over 2 years
A total of 15% interest per annum comprising of
- 10% per annum paid quarterly
- 10% paid on maturity
20% case win bonus on the monies invested in that case - paid on completion of the case

You will note that the currency is GBP but the returns should be sufficient to interest investors in other base currencies who would like some diversification. There is a deadline of September 3 so we are arranging short seminars in Bangkok, Phuket and Jakarta in the next few days. Please contact us without delay if you would like to be included or if you would just like more information. If you live outside the three locations we can e-mail all the information and prospectus to you.

Bear in mind this is an 'outside the box' investment and should be considered only by experienced investors as a complement to their existing investments.