BritCham & PPi Co-host Investing Outside the Box Seminars

Britcham and PPI seminar PPI Indonesia in association with BritCham recently hosted two seminars in Jakarta. The theme was 'Investing Outside the Box', a subject of considerable interest in view of the lackluster performance of stock markets over the past decade and the poor return on cash deposits. A report cannot match the dynamics of the lively presentations but for those who missed them the following is a synopsis.


Alex Traub, Director, Business Development Asia, Castlestone Management Ltd. showed how traditional markets had underperformed in the past decade. In fact, the S&P 500 was at a lower level now than it was in 1998. At the same time, emerging markets had flourished, particularly the 'BRIC' countries, Brazil, Russia, India and China. The term 'BRIC' had been coined by Jim O'Neill of Goldman Sachs. The same person has now identified the next group of emerging countries as the 'Next 11'. They include Bangladesh, Egypt, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey, Vietnam and yes, Indonesia. Eyebrows might well be raised by the choice of some of these countries but they have all been identified as having the potential to grow as fast as the BRIC countries. The new fund that has been established by Castlestone to invest in these countries recognizes that they are not all at the same stage of development and that some have issues that would warrant caution at this point in time. To address the inequalities the fund is able to allocate different weightings to the countries.


The same speaker then addressed the importance of investing in real assets as protection against the debasement of paper money by the US and other countries through 'quantative easing', the euphemism for printing money. As more and more money is printed the more and more important it becomes to invest in 'real assets.' Gold is the perfect example of an asset that cannot be debased by printing more of it. The question was asked as to whether gold could still rise further having touched $1,400 an ounce. The response was that so long as paper money was being created the value was likely to continue rising. Castlestone's latest projections are for gold to rise to $1,600 an ounce by end-2011 and $2,000 by end-2012. Gold is still much cheaper in real terms than it was during its last peak in January 1980. A reversal could occur in the future if interest rates were to rise significantly but even then it could be seen as a hedge against inflation. The story is similar in respect of other precious metals, particularly platinum which is used extensively in the oil, auto and computer industries.


Malcolm Scorer, Director of Aequus Management Ltd., described three funds that had been established to support some highly specialized forestry products. One of the key products is Agarwood, a resin found only in the Aquilaria tree that grows in South-East Asia. It develops naturally, but only in around 1% of the species of tree. Farmers used to cut down whole forests just to find the few trees containing the highly prized resin, which is used in religious ceremonies, the pharmaceutical industry and fields such as aromatherapy. Now however, scientists have discovered a means of injecting the trees so that every single one develops the resin. Investors in one of the funds are actually purchasing trees that have already been inoculated and which will be ready for harvesting in three years. Other products available through the funds include a type of plant that produces a form of sweetener that is as effective as sugar but without some of the negative properties of sugar. One such plantation can be found in Bali. With all the diverse forestry products concerned an effort is made to protect the environment, prevent the destruction of forests and provide jobs and benefits for local communities. As well as producing projected returns in excess of 15% per annum. The United Nations has estimated that the demand for agricultural and forestry products in 2030 will be around 60% higher than in 2002, driven by population growth, increasing living standards and rising demand for biofuels. Climate change is likely to drive more capital into agriculture and forestry.


While not a 'real asset' in the sense of gold or forestry products, litigation funding has become a growing industry in the UK following a recent change in the law and a surge in demand by law firms. Chris Keats of Orion Litigation Intermediaries described how the market has grown and how litigation funding works. The market is huge, an estimated US$300 billion per annum worldwide. In the UK and other countries that follow the British legal system thousands of cases never reach court, not because the case is not strong enough, nor for the fear of losing or the reputational risk but due to the cost barrier. For years, large companies have taken advantage of their financial clout by making it near impossible for smaller parties to seek justice. With the advent of litigation funders the disadvantaged parties now have a real chance to take on the big boys on a more level playing field.

The way it works is that if a law firm feels a case has at least an 80% chance of winning it will submit the case to the litigation funder who in turn will have it scrutinized by a team of legal experts. If the latter consider the case highly winnable they will then submit it to an insurance company who, if they accept the case, will provide 'After The Event' insurance which will cover all the costs of the investor in the event the case is lost. So heads you win, tails you get your money back! Not a bad investment. But there are occasions when, as with all insurers, they may find grounds to refuse to pay out. In this case, because it is rare, another insurer will cover the costs and will also do so should the defending party be unable to pay the awarded damages. This type of investment can offer returns as high as 15% per annum with the added luxury of 'win bonuses' for every case won.


Absolutely not, since there is still an underlying principle that high returns have got to reflect higher risk. Yet the risks in many cases are mitigated by layers of protection. Where emerging markets are concerned, as corporate governance improves, the risk is now much lower than a few years back. In fact the financial crisis of 2008 showed us that it was the developed countries that had become more risky than the emerging ones. And there is not much risk where real assets are concerned, although there is liquidity risk with real estate. We should still be keeping healthy balances in the bank, even at current low interest rates, and we should continue to build up pensions and savings in the traditional way. But there is strong justification, once these are in place, to venture 'outside the box' and take advantage of some of the more exotic asset classes to add to the diversity of our investments.