Somewhat pejoratively it has been called lazy investing by some. The growth, no the proliferation, of Exchange Traded Funds (ETFs) over the past decade has been quite astonishing. Invented in California in the early 1990’s and only introduced to the UK a decade ago, we have seen these financial mushrooms grow from zero to shortly in excess of 3000 different funds. However, if you are unfamiliar with these financial animals I had better explain. ETFs are essentially index trackers that trade as shares. So for example, you could just buy a FTSE 100 or an S&P500 index tracker either as a fund, run by people like Vanguard, or an ETF run by people like iShares or Deutsche Bank at a very low cost.

These investment structures at their best are wonderfully simple. They are cost effective and very precise investments as they just track the index of whichever asset class is selected.  As a result these have been very popular initially in the US and are now spreading rapidly around the world. So the rather patronising term of ‘lazy’ would imply that the more enthusiastic investment managers would be applying all their skills and expertise to selecting individual stocks rather than just betting on the index. Well quite right too and some active fund managers can  – but the truth is, and the facts show, that most of them can’t – and even if they on occasion do beat the index, even fewer can do it consistently. It’s not necessarily that they may be poor managers (and some are) but the costs racked up in the process mean that they have to gain significant returns just to reach their benchmarks. So these index investments do work.

So it is worth noting that probably the world’s most famous stock picker Warren Buffett advises….

“Most investors, both institutional and individual, will find that the best way to own common stocks (‘shares’) is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals.” Warren Buffett – Berkshire Hathaway Annual Report 1996.

I find it usually unwise to go against a man with such a track record.

This huge expansion in the range of ETFs has led to the situation that if there is an index somewhere in the world, then there is a very good chance that there is an ETF related to it. This has now meant that virtually all the asset classes can be covered by these low cost and easily tradable structures, such that entire portfolios can be constructed. In days gone by this has been the preserve of the institutional world, but now these can be accessed by the retail market and provide the great boon of lower costs with the vital discipline of ongoing and broad asset allocation.

However, as ever, not everything is necessarily so perfect. Not all ETFs are the same. Some have tax implications which you will need to know about (reporting status), others may have variable rates of tracking error (how much they deviate from the index itself) and of course you will always need to consider the question of due diligence on the counter party – so you know who really has your money and assets. Additionally there is a basic difference between those ETFs that track an actual index by actually owning it and others that create synthetic swap based structures which will do the same. Confused? Understandably!

These ETFs and Trackers can be very effective for all of us with our portfolios, but eyes wide open please. Research evaluation and professional advice is needed here first.

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Sino Nippon relations are deteriorating. Despite attempts at political gestures to try and build a more trusting relationship, there are historical enmities which wily politicians will happily play on for their own ends. Much of this dates back to the War and the lack of any real apology or acceptance for crimes committed, so whether it was about the ‘Rape of Nanjing’, or the historical omissions in class books, there are many examples of such friction.

The latest observation has come in the East China Sea and the disputes over some tiny islands called the Senkaku by the Japanese, and the Diaoyu by the Chinese. This of course all relates to the potential for oil in the area, and although in 2008 both sides agreed to turn this patch of sea into a ‘sea of peace, co-operation and friendship’ and to jointly exploit the potential resources, things are turning sour again.  The arrest by the Japanese of the crew of a Chinese fishing boat has all the possibilities of enraging nationalists on both sides. Calls for demonstrations in China make both sides nervous – the Chinese authorities are always worried about demonstrations of any kind which might lead to just encourage others to act in a similar fashion on other more domestic and sensitive subjects.

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And finally………. reports of some strange goings on in Fort Lauderdale, Florida. Now when you bury someone, you normally want and expect them to stay there, and certainly not reappear again either physically or in any other manifestation. So there was some surprise when a dead body did reappear recently. The authorities suspected foul play when the body of a North Carolina man surfaced near a South Florida beach.

However, it turned out that 48-year-old Scott Lasky had in fact sadly died from a terminal disease a few days before. A fisherman had spotted the body about four miles offshore. Sheriff’s deputies solved the mystery after finding Lasky’s obituary. Authorities said his family placed his body on dry ice, loaded him in a van and drove from Hickory, N.C., to Florida to honour his dying wish. Relatives boarded a boat and bid Lasky what they thought was their final goodbye – but all did not go to plan. They all saw the body sink graciously beneath the waves to what was expected to be his final resting place – until his body resurfaced.

According to the authorities sea burials are perfectly legal but certain rules must be followed. The body has to sink to the bottom rapidly and permanently – yes that would seem to be a fairly fundamental requirement you would think.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited