page 1 Prerequisite Capital Management Pty Ltd (ABN 27 141 060 933) is an Authorised Representative of AIW Dealer Services Pty Ltd (ABN 59 153 322 420), AFSL 414256. www.prerequisite.com.au 7 th Oct 2015 // Quarterly Client BRIEFING Dear Valued Client, – A Global Regime Change? – Regime (definition): ‘a system or ordered way of doing things’. Global money flows, or capital flows, have a tendency to settle into ‘regimes’ or a settled order of things for multi-year (sometimes multi-decade) periods. Each ‘regime’ tends to have a particular set of investments that do really well, and they will continue to do well whilst-ever the ‘regime’ remains intact. When a regime changes, however, those investments that typically did well during the regime will tend to reverse and do quite poorly as the old regime falls away and a new regime is established (with new investments to do well). The old- regime investments have usually been taken to extremes that could never have been sustained unless the ‘regime’ of capital flows underpinning it was able to be sustained. But one of the surer precepts of global capital flows is that as sure as day follows night, capital that flows into a country must one day flow out of a country (or be destroyed and written-off). Such a multi-decade regime-shift is what we believe we are potentially witnessing today. Institute of International Finance: “We now expect that net capital flows to emerging markets in 2015 will be negative for the first time since 1988.” ...as reported in The Guardian, 2 nd October 2015. General Information: This document has been prepared for the general information of clients only and as such does not constitute direct or specific advice to anyone. Should you require more information, please contact your Prerequisite Advisor. Past performance is not necessarily indicative of future performance. See page 5 for Portfolio Results The red line falling below zero indicates Net Capital Outflows
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Prerequisite Capital Management Pty Ltd (ABN 27 141 060 933) is an Authorised
Prerequisite Capital Management Pty Ltd ABN 27 141 060 933, is an Authorised Representative of AIW Dealer Services Pty Ltd ABN 59 153 322 420, an Australian Financial Services Licensee with its registered office at Level 1, 155 Baroona Road Rosalie Qld 4064
www.prerequisite.com.au
Literally $trillions have flowed into the Emerging Markets over the last few
decades, with one of the central dynamics being the rise of China. (For a multi-
decade understanding of China, we recommend you review our analysis published
April 2015 found here: www.prerequisite.com.au/research)
Here is an updated chart from our last Quarterly Client BRIEFING, showing
rolling 9 month expansion (or contraction if negative reading) in China’s total
foreign assets at their central bank – further indicating a multi-decade reversal of
capital flow dynamics...
When we step back to take a broader perspective, we can see that even the
cyclical regime of the last 7 years is unwinding. Just in the last 12 months we’ve
witnessed the following events which collectively give rise to the probability that
we’ve seen an ‘inflection point’ and therefore a decisive regime shift.
Falling oil & commodities
Strengthening USD
Collapsing USD-pegs and Emerging market instability
Escalating credit spreads
Increasing volatility across all asset classes
Falling equity participation measures ‘breadth’ across most major developed market economies
Collapsing Chinese share-market and renewed Yuan devaluations
Reversal of Chinese FX reserve accumulation
Escalating geopolitical instability with generally ‘competitive’ dynamics (rather than cooperative) defining major country interactions.
Etc The above suggests the reflationary ‘asset-bid & global search for yield’
liquidity regime that has defined the 2009 to 2014 periods is likely beginning
Prerequisite Capital Management Pty Ltd ABN 27 141 060 933, is an Authorised Representative of AIW Dealer Services Pty Ltd ABN 59 153 322 420, an Australian Financial Services Licensee with its registered office at Level 1, 155 Baroona Road Rosalie Qld 4064
www.prerequisite.com.au
When it comes to the US share market, the increased volatility over the last
three months appears to have been presaged by an array of dynamics that may
suggest further volatility is highly likely. Two of the symptomatic dynamics are
presented here:
(1) A decisive shift in monetary policy perceptions (& a shift in liquidity) –
as symptomatically evidenced by changes in Fed Fund COT Commercial
net positioning...
(2) A break-down in the relative out-performance of the ‘buyback’
narrative, suggesting another one of the share market’s big supports of the
last 7 years is being taken away...
S&P 500 (US Share Market)
Commercial Net Positioning
in Fed Funds Futures...
S&P 500 (US Share Market)
Proxy of Share ‘Buyback’ Narrative
(Ratio of Buyback ETF to S&P500... a rising line means
that ‘buybacks’ are generally being rewarded by the
market, a falling line means that they are being punished)
page 4
Prerequisite Capital Management Pty Ltd ABN 27 141 060 933, is an Authorised Representative of AIW Dealer Services Pty Ltd ABN 59 153 322 420, an Australian Financial Services Licensee with its registered office at Level 1, 155 Baroona Road Rosalie Qld 4064
www.prerequisite.com.au
All of the above paints a picture that we are witnessing both a multi-decade
regime change in global capital flows AND a cyclical shift in liquidity dynamics.
What does this all mean for our PCM Portfolios?
In one word, it means ‘opportunity’.
Already with this increased volatility over the last three months we have seen
the Australian Share market fall by -6.40% (S&P/ASX 200 total return)... whilst
during the same timeframe our two portfolios, PCM Core & PCM Strategic
Opportunities, have risen by +1.08% and +5.34% respectively.
Although we have relatively high cash levels at the moment in both portfolios,
the changes occurring in worldwide currency, bond, commodity and equity markets
are presenting us with an awesome array of investment opportunities that we look
forward to investing in throughout the seasons to come.
As such, we have a veritable ‘shopping list’ of investments we are patiently
monitoring, waiting for the conditions and trends to ripen such that we can
decisively re-allocate away from cash.
“Patience is power. Patience is not an absence of action; rather it is timing;
it waits on the right time to act, for the right principles and in the right way.” ...Fulton J. Sheen (1895-1969)
Every 5 to 10 years, economies tend to go through their cycles, and on the
downswing when capital flows are decisively re-organised (old regimes are shifting
into new regimes) if you can retain your money and portfolios broadly intact –
having cash and liquidity when others don’t – inevitably you are well positioned as
the economic reorganisation unfolds to be able to buy high quality assets and
investments at great valuations, positioning yourself brilliantly for the next upswing
in the cycle.
It is into these sorts of ‘reorganisation’ conditions that we believe the
probabilities suggest we are continuing into – and as such our portfolios are quite
defensively positioned – but as volatility is increasing in the world, our shopping list
of potentially high-quality investments is growing.
We most definitely live in interesting times.
On the next page we provide our PCM Investment Portfolio results to date.
We appreciate that not everyone will look at some of the data and graphs
presented and recognise the fullness of the context, risks and opportunities of what
they are portraying. Should you wish to have Darren walk you through any of this
presentation or have any questions about this report, your portfolios, or your
financial situation generally, please feel free to give Darren Brind a call (0498 671
505) or email, [email protected]. Additionally, feel free to pass on this
report to friends and family who might appreciate another perspective.
PCM Portfolios on Linear (growth of a typical $500,000 account)
CORE Portfolio
Strategic OpportunitiesPortfolio
PCM 60/40 Portfolio (60% Core,40% Strategic)
S&P/ASX 200 (Total Return)
Daily, Since inception to 30th September 2015
-3.0%
-1.0%
1.0%
3.0%
Au
g-1
3
Sep
-13
Oct
-13
No
v-1
3
Dec
-13
Jan
-14
Feb
-14
Mar
-14
Ap
r-1
4
May
-14
Jun
-14
Jul-
14
Au
g-1
4
Sep
-14
Oct
-14
No
v-1
4
Dec
-14
Jan
-15
Feb
-15
Mar
-15
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Sep
-15
Monthly Return Profile: PCM 60/40 Portfolio
% Positive Months: 81%
To 30th September 2015 - Net of Investment Management Fees -- Inception date from 31st July 2013 for comparative purposes. Correlation to Beta to Average % Positive
Past performance is no guarantee of future returns. Different accounts may produce better or worse results due to different individual account fee structures or security compositions. Prerequisite Capital Management Pty Ltd ABN 27 141 060 933, is an Authorised Representative of AIW Dealer Services Pty Ltd. ABN 59 153 322 420, an Australian Financial Services Licensee with its registered office at Level 1, 155 Baroona Road Rosalie Qld 4064
A
B
= A – B
The degree to which returns are related to the Share Market – i.e. a correlation of 1.00 means returns will move in lock-step with
equities, -1.00 means it moves in an opposite manner (so if shares
go up the returns will go down), close to 0.00 means that there is no
relationship between returns and the direction of the share market.
Prerequisite Capital Management Pty Ltd ABN 27 141 060 933, is an Authorised Representative of AIW Dealer Services Pty Ltd ABN 59 153 322 420, an Australian Financial Services Licensee with its registered office at Level 1, 155 Baroona Road Rosalie Qld 4064
www.prerequisite.com.au
ABOUT PCM >> Results-driven investing for Australian Families & Individuals...
We designed these portfolios for OUR own family & friends, we think you will like them too...
PCM manages several portfolios well suited for Australian Investors within their
Superannuation Funds (either SMSF or retail).
The PCM Portfolios are designed for those seeking to preserve capital and
generate respectable returns, irrespective of the ups and downs the economy
over any rolling two year period, well above term deposit interest rates.
TAKE LESS RISK: Take less risk than a typical share market investment
portfolio (greater asset class diversification, lower volatility and greater holdings
of cash)
CONSERVATIVE INVESTMENTS: PCM’s Portfolios use no debt/leverage, do
not use derivatives, and do not sell short securities.
LIQUID & SIMPLE: PCM’s Portfolios only using big, boring, liquid exchange
traded investments (so it’s easy for you to convert some or all or your portfolio
to cash in a timely manner if you wanted to)
INCENTIVE ALIGNED: PCM designed these portfolios first and foremost as an
investment solution for our own family and friends. As a result, our own family
and friends will be invested just like you will be, meaning that at PCM we really
do ‘eat our own cooking’.
FULL ACCESS TO YOUR INVESTMENTS AT ALL TIMES: Totally transparent
portfolios held in your name, whereby you can login online to view your holdings
and their latest valuations 24 hours a day.
DIRECT SECURITIES: PCM does not touch your money, but it is safeguarded
by a platform with a responsible entity (ASIC regulated & licensed) and your
investments are held transparently in your name by an independent Custodian
(that is also regulated & licensed by ASIC).
EASY & AUTOMATED ADMIN: your accountant will love you come tax time as
your portfolios have simple yet comprehensive reporting capabilities.
SUPERANNUATION FRIENDLY: Whether you have as little as $25,000 in your
personal superannuation account, or whether you have a substantial nest egg
in a SMSF; PCM’s portfolios can be tailored to your circumstances.
Alternatively, if you have money outside of super (like savings or a windfall from
a property or business sale), PCM’s portfolios are highly useful to help
compound your savings at a higher return than many other portfolio
management services.
ACTIVE: Active common-sense investment management decisions directed by
PCM to help make sure your investment portfolio is well-positioned throughout
the different stages in the cycle across various asset classes that may include:
Shares, Bonds, Cash, Precious Metals, Commodities, Currencies, REITS and
the like.
PCM manages investment portfolios, provides research and is a trusted advisor
within a variety of contexts. We serve private individuals, financial advisors,
companies and professional investment managers in order to help them achieve
better investment results within a dynamically evolving world.
PCM is privately owned by four Australian families with a combined 77 years’
experience within the investment and financial services industry.
“I would highly recommend the team at PCM to anyone who is seeking professional financial advice and peace of mind
around their investments and financial future.
Their “All-Weather” approach to investing is what you would expect of an adviser focussed on results and outcomes for
both me and my family. It is reassuring to know that they stand completely behind what they do, and that their
own family and friends are invested in similar ways that I am.
It is rare to find a team so committed to the principles of transparency, integrity and discretion – in all my years I have yet
to come across a team as passionate (and as family orientated) as those at PCM.” …D.Raisin, Business Owner, QLD
page 8
Prerequisite Capital Management Pty Ltd ABN 27 141 060 933, is an Authorised Representative of AIW Dealer Services Pty Ltd ABN 59 153 322 420, an Australian Financial Services Licensee with its registered office at Level 1, 155 Baroona Road Rosalie Qld 4064