Our content this month are as follows:-

• Portfolio Construction
• In the News
• Useful services
• Books we have read
• Quotes of the month

Why small and value?

When constructing client portfolios, at least 50% of the equity portion of the portfolio is committed to small companies and value companies. The simple reason for including these securities is that they have vastly superior performance when compared to the main market.

The discovery of these two "dimensions" of stock returns can be attributed to Kenneth French and Eugene Fama, who published their research in March 1995 in The Journal of Finance under the title, "Size and Book to Market Factors in Earnings and Returns." Their work built upon that done by the originators of Modern Portfolio Theory and small and value investing is treated as the gold standard of investment by advisers in the US and Australia and, to a very small extent, the UK.

The difference in returns can be staggering; for example if we consider the growth of £1 invested in the UK stock market (as represented by the UK All Share index) from January 1956 to December 2008, £1 would have grown to £363, a compound annual return of 11.8%. £1 invested in Small companies over the same period would have grown to £1,663, a compound annual return of 15%. The story is similar for Value companies, with the same £1 growing to £2,182, a compound annual return of 15.6%. (Data for small and value companies provided by Dimensional Fund Advisors and London Business School).

Sometimes clients ask us why not devote the entire portfolio to small and value companies and the reason is that these securities are much more volatile than large growth shares and also they do have periods of underperformance. Making up all of your portfolio with such securities would be a real rollercoaster ride. They should definitely be included however, particularly as the history of smart investing invariably demonstrates it is important to be a "value" investor.

One of the benefits of working with Dimensional is that Kenneth French and Eugene Fama are advisers to the company and this means that Dimensional can construct their funds in ways that reflect the findings of the research, rather than trying to build proxies that may capture some of the premium.

To add to the woes of the private banks, this month the newspapers have been full of the activities of Sir Keith Mills (the air miles pioneer) in relation to AIG. The brief background is that many clients of the private banks (particularly Barclays, Coutts and UBS) were encouraged to invest in AIG’s "Enhanced" Bond, perceiving it to be something like a bank deposit account, it is alleged. They were disabused of this notion when the credit crunch crisis resulted in defaults within the fund with the consequence that many investors find their money locked in or have to face a penalty in order to withdraw it.

The FSA have been persuaded to open an investigation into this matter and many private bank salesmen will be taking a keen interest in the outcome.

There was an interesting article in Money Week, week ending 24thJuly, headlined "Trusting "experts" is a costly mistake". It contained the following advice: -

Do not follow gurus

It explains that we do not always know the reasons why gurus are buying or selling and that they often undertake their best deals in secret.

Do not follow the newspapers

While there are probably a million reasons for this one, they quote a study from the Insead Business School, which rank stocks by how often and prominently there were mentioned over the decade ending in 2002 in four prestigious US newspapers, the Wall Street Journal, the New York Times, the Washington Post and USA Today. They found that around 25% of stocks never got mentioned, a few were mentioned hundreds of times and the average stock was mentioned 12 times a year.

Those that were never mentioned beat the frequently mentioned by 3% per annum compound and in the area of small companies with limited analyst coverage the premium went up to between 8% and 12% per annum compound. The reason - stocks covered in newspapers tend to be the most popular and tipped and you will be buying them when everybody else is; like so much else in newspapers they are yesterday's news.

Do not follow analysts either

According to David Dreman, author of "Contrarian Investment Strategies: the Next Generation", he analysed 1500 US stocks from 1971 to 1996 and found that analyst top tips actually underperformed the market 75% of the time.

Analyst tips are about as useful as horoscopes, as they are full of assumptions on future earnings, cash flows and profits, as well as using discounting rates that are plucked out of the air. Despite this fund management groups employ armies of them at a huge cost (which investors in actively managed funds pay).

The magazine recommends that we all do our own research and then fills the rest of its pages with tips from the experts it has roundly castigated. We prefer to rely upon rigorous, peer-reviewed, evidence-based research (much of it from Nobel prizewinners) which has stood the test of time and will continue to do so.

Promote with Quality

S R Merchandise Limited specialises in the manufacture and sale of promotional products. Whilst SR is a newly formed family business, its managing director Stuart Clarke has many years commercial experience.

In any downturn it is important to promote your company, and by providing customers with high quality personalised products, your business will keep its identity in front of prospective customers and ultimately this could improve your opportunities in the market place.

Using your artwork, logo etc we can design and supply customised badges, key rings, cuff links, magnets, calendars, or any other promotional products, which have a high perceived value.

By working closely with the client, our in house designers led by Richard are able to create personalised merchandise to customer’s individual requirements. Using state of the art design software, we can reproduce a client’s usual type face, logo etc, or if requested totally change the appearance and aspect for a more unusual and unique look.

Badges are proven as an effective and currently trendy method of getting a message across. Ideal for fund raising campaigns, seminars, trade shows, special events, or corporate promotions. Clients holding a special event may be interested in the ‘Event Day Badge’, designed for the event itself, intended as souvenirs.

Name badges provide an ideal opportunity to present your company image in a smart way. Badges for attendees, employees, company identity, logo or any combinations can also be produced.

By choosing SR your business will benefit from quality products at value for money prices.

For any enquiries, please contact us at

Email - sr.merchandise@yahoo.co.uk
Phone - 07761100428

This month we are recommending "The Survivors Club" by Ben Sherwood

Something of a departure from our usual economics and Finance recommendations, reading this book could save your life in an emergency. It chronicles the stories of people who have survived against outrageous odds and in situations where survival would seem impossible. It will give you a heightened awareness of the value of the airline safety procedures and how important it could be to pay attention! Included in the book are the Magic Numbers of staying alive, taken from RAF training procedures - 3 seconds without spirit and hope, 3 minutes without air, 3 hours without shelter in extreme conditions, 3 days without water, 3 weeks without food and 3 months without companionship or love.

If you buy the book you can take a test at www.thesurvivorsclub.org, which will calculate your "survivor IQ" - you do need to buy the book as you need a code from the dust jacket.

It is available from good bookstores and Amazon, but if you have any difficulty finding it please contact vickie@indexwm.co.uk.

"Try not to become a man of success but a man of value."
Albert Einstein

"Our main business is not to see what lies dimly at a distance, but to do what lies clearly at hand.”
Thomas Carlyle