Time to re-allocate asset portfolio

By Neville Bennett

Friday 5th March 2004

The end of the first quarter and the coincidence of a high dollar and low interest rates makes this an appropriate time to review portfolios.

Recently I wrote about diversifying into Chinese assets (NBR, Feb 20) and have followed this up in conversations with my broker, Chris Kerry, of Forsyth Barr. He has been researching other opportunities and his pick is JP Morgan Fleming Asset Management, which returned 70% last year. This was not a flash in the pan as Fleming has returned 120% over three years. In this case an asset management fee of about 5% is justified.

If one thinks more laterally, China provides more than an opportunity to invest in equity. It has an insatiable demand for raw materials and this has helped fuel a tremendous surge in commodities.

Funds invested in metals enjoyed a 21% increase in the last quarter, according to Standard & Poor's. Chinese demand for copper, nickel and other metals has been great but it had been helped by low inventory in the northern hemisphere generally. Fuel has also done well with the spot price for oil regularly hitting $US36/bbl.

Normally, an expansion of demand would motivate suppliers and after more investment an upsurge in output would occur. This fuels a cycle. Eventually there is a greater supply of goods and prices decline.

To some extent this has been happening globally. Prices are high in commodities because demand was low in the past few years. Oil was $US15 a barrel, gold $US250/oz. Producers lowered output, using only their most profitable units.

Equally important, they cut their exploration budgets. Now the price cycle has responded, exploration is picking up.

This raises an important point. The supply situation could be dampened and therefore the price cycle could be extended. This means high prices will be a feature for some time.

It therefore makes sense to allocate more resources to commodities. There are huge opportunities in equities (for example, a lot of the Australian top shares) and through funds. One previously mentioned here is Oppenheimer, which has returned over 10% for many years. US dollar assets will not be cheaper for many years.

Another route is through hedge funds, which I will cover in a future article.

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