| Dear Ladies and Gentlemen I received a few mails on my very provocative statement that house pets, farming and children produce an enormous amount of greenhouse gases. I was provocative on purpose. It was my intention to trigger some reactions. I received two mails on the indirect financing of (nuclear) weapons via government bonds. It seemed most of my readers were never really looking at it that way. Fact is that you will never know what a government is doing with the money you pass on to them when subscribing to one of their bonds. They may buy weapons or build a children’s hospital with it – it is entirely up to them. I generally receive several mails per month from readers asking me how they should invest their money to achieve the best possible results. As always, I can’t tell you and I am not allowed to give any advice to you just like that, but I am happy to elaborate quickly on what I think seems a decent strategy to still get some yield in a negative yield environment. You know, Ladies and Gentlemen, my goal always is to receive cashflow with limited volatility. Some of my readers already know about my investment style. My investment style is real asset based and enjoys a rather large equity portion. However, the equity portion is limited to equities of companies producing positive net free cashflows and I like rebalancing the position in my clients’ portfolios from time to time. This means I define a “normal” weighting, i.e. around 5% for any equity position in a portfolio and harvest the dividends or capital reductions the underlying company shares with its investors. If the price of an equities-position appreciates over time and thus the weighting within the client’s portfolio goes up, I will start cutting back the position down to its initial 5% weighting. If, however, the price of an investment goes down and I can’t find any dramatic change in the strategic and/or earnings perspective and the company still produces positive net free cashflows, I harvest the cashflows and increase the position until it reaches its intended weighting of 5%. The result of this strategy is astonishing. Volatility decreases massively and performance increases. When markets are moving up, we only capture a part of the positive performance, because we like to keep a large cash position at hand. But when markets are going down, we usually only lose a fraction of what the market loses. It is during the down moves that we generate alpha. You can have a look at the monthly development of one of our portfolios on our website. https://www.incrementum.li/en/wealth-management/ It still needs the “right” equities and this is probably the most difficult part. Please let me know about your investment style and please share your investment experiences with me and my readers, but please don’t forget (instead of hitting the reply button) to send your messages to: smk@incrementum.li Many thanks, indeed! And now, Ladies and Gentlemen I wish you a great day and weekend. Kind regards,Stefan M. Kremeth Wealth Management Incrementum AG |
Autor: Dr. Stefan M. Kremeth
Environmental, Social and Governance (ESG) friendly (Part one)
Dear Ladies and Gentlemen
In last week’s part one on ESG investing, I shared some very basic information on ESG investments. Today I would like to point out some of the difficulties one faces when investing in ESG-friendly products. However, the short format of my weekly mail will not allow me to go into the topic very deep, but I am convinced I will make you reflect.
Let me start with an interesting and somewhat extreme example. Just imagine you were running a portfolio with an ESG-friendly touch and now just imagine for risk (volatility) reasons you were holding government bonds. No problem you may think, and most investors wouldn’t even think a second about that part of the portfolio. But it strikes me that even though most investment managers who offer ESG-friendly strategies would never invest in a weapons producing company, they are happy to give loans to countries spending enormous amounts of money on weapons of all sorts and sometimes even nuclear devices.
Ladies and Gentlemen, by buying government bonds and/or treasuries of the United States of America, Israel, the U.K., China, India, Pakistan, etc. investors are supporting the financing of weapons of mass destruction. The average investor does not think badly about it, I even think the average investor would not think about this at all and yet by buying government bonds and/or treasuries, investors are providing loans to governments, which the respective governments may use to buy and/or build weapons of mass destruction.
This is why I am of the opinion that if so called ESG-friendly products contain government bonds and/or treasuries and/or gilts or whatever one wants to call such papers, no truly ESG-friendly investor should touch such products.
You see my point, right? When investing in ESG-friendly products you have to be careful because sometimes you do not get what you expect. On the other hand the run on ESG-friendly products is important these days, especially as regulation forces investment managers in that direction. Trouble is, realistically there are simply not enough truly ESG-friendly investments available and therefore investment banks and financial product designers must become “creative”.
Anyhow, there is one more thing I want to add. Today everyone is fixed on CO2 emissions even if “greenhouse gases” in general are a much more important factor than CO2 emissions only. By now just about everyone should appreciate the fact that it is greenhouse gases we have to look at because greenhouse gases (GHGs) are absorbing infrared radiation and cause the so-called greenhouse effect. As you may know GHGs are both natural gases, such as carbon dioxide, water vapor, methane, and nitrous oxide, as well as human-made gases, including chloro- and hydro-fluorocarbons. Yet, it is very easy to blame a diesel car taxi driver for polluting our cities but let’s face it keeping for example a house pet for the sheer pleasure of keeping a house pet is probably even worse. According to the Humane Society of the United States, there are 86.4 million cats and 78.2 million dogs in homes around the U.S.. Just imagine, the enormous amount of greenhouse gases the global population of house pets is producing directly and indirectly.
Now tell me, why is the media not tackling this issue, why are they so concerned about fossil carburates but do not seem to be considering house pets, or children, farming, etc? I would almost assume, because you cannot win elections by telling the electorate to put to sleep their house pets and to stop reproducing, i.e. stop having children. It is much easier finding one weak opponent – today it’s the diesel car producers and drivers – and bang on their heads until everyone believes that producing diesel cars is the worst thing that ever happened to humanity.
What drives me crazy is that large masses of people can be irritated and thus manipulated so easily.
Ladies and Gentlemen, I urge you to ask questions, always. Do not just believe what the media and politicians want you to believe. The first ones have only one interest, to catch your attention for as long as possible, like this they can charge higher rates for adds and thus earn more money, the later ones only interest is either to be elected or to be re-elected. This is it! They don’t care about you, they either want your attention to make money or your vote to get power and make money.
As always, I encourage you to send me your feedback and/or questions but please don’t forget (instead of hitting the reply button) to send your messages to:
smk@incrementum.li
Many thanks, indeed!
And now, Ladies and Gentlemen I wish you a great day and weekend.
Kind regards,
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Environmental, Social and Governance friendly (Part one)
Dear Ladies and Gentlemen
Once every few weeks I receive messages by readers that ask me about Environmental, Social and Governance (ESG) friendly investments. I think it is about time to take up this topic.
This week, in part one, I would like to share some basic information and explain some of the terminology used in connection with ESG friendly investments. Next week I would like to offer my point of view on the difficulties arising when trying to choose ESG friendly investments.
Let’s start with ESG. ESG stands for Environmental, Social and Governance and defines certain standards used to screen investments. You may have read or heard of the following terms, like SRI and/or CSR. SRI (Socially Responsible Investments). SRI basically covers as the name would suggest the field of socially responsible investing and looks for investments that are considered socially conscious because of the nature of the business the company conducts, while CSR (Corporate Social Responsibility) is a business model that may help companies be socially somewhat accountable to it its stakeholders and the general public.
When looking for an investment, one my come across the terms of “Impact Investing” and/or “Green Fund”. Impact investing aims to generate specific beneficial social or environmental effects in addition to financial gains and green funds should invest only in sustainable or socially conscious companies, avoiding the rest of the investment universe.
When looking at ESG investments, statistics on CO2 (carbon dioxide) emission are probably one of the most common denominators used to explain negative environmental effects. However, I prefer statistical data on so called “greenhouse gases” as such statistics offer a wider, more complete picture. The most commonly known greenhouse gases are water vapor, carbon dioxide, methane, nitrous oxide and ozone.
Ladies and Gentlemen the above basics are needed for my next weekly, which I promise will be somewhat more spicy.
As always, I encourage you to send me your feedback and/or questions but please don’t forget (instead of hitting the reply button) to send your messages to:
Many thanks, indeed!
And now, Ladies and Gentlemen I wish you a great day and weekend.
Kind regards,
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Low inflation is going to stay for some time! Readers feedback
Dear Ladies and Gentlemen
My last weekly mail on Japanese conditions in global government bond markets triggered a few messages by readers. Unfortunately the format of my weekly mail doesn’t allow me to publish all of the answers in full length but as
Anton added his
You know, Ladies and Gentlemen, I am seriously troubled when other people’s ideas become “religion” and whenever this is the case, I think we need to be careful. Anton made an interesting statement in this respect. He mentioned that this is why he valued “so dearly the Enlightenment as a philosophical, theological and scientific movement because it liberated our civilisation from dogmatic thinking…now and again our society falls back into that rigid form of looking at things, but that’s the echo of the cyclical nature of human history…perhaps the future is brighter.” What a statement, I sure like that one and hope for my remaining life span to be long enough to live that bright future!
Last but not least I wanted to share a short statement by Robert, who pointed out to me an important fact in respect to the cash-flow strategies I am so fond of. Fact is that depending on where you are domiciled, cash-flows stemming from investments in financial assets are taxed in different ways and sometimes even in a „prohibitive manner“ and thus taxes most probably will have a more or less negative impact on the strategy as such. This is certainly true. However, as I cannot possibly know all the different tax laws, I hope for your understanding.
As always, I encourage you to send me your feedback and/or questions but please don’t forget (instead of hitting the reply button) to send your messages
Many thanks, indeed!
And now, Ladies and Gentlemen I wish you a great day and weekend.
Kind regards,
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Japanese conditions – low inflation is going to stay for some time!
Dear Ladies and Gentlemen
Japanese conditions in global government bond markets are more and more likely. But what does it mean for our investors with reference currency Euro or Swiss Francs, if Germany’s 10-year government bond yields 0% or almost 0%, Switzerland’s 10-year government bond even yields -0.75%. What does it mean, if central banks own large portions of their countries’ government bonds (the Bank of Japan owns 49% of Japanese government bonds, the European Central Bank owns 20% of European government bonds and the U.S. Federal Reserve System owns 13% of U.S. government bonds)?
The answer is not so trivial and since we do not have any long-lasting experience in this, we cannot really know where the situation is heading. One thing is certain though, as long as central banks are buying government bonds in the primary (direct at source) or secondary (at exchanges) markets at current or even increased rate, government bond markets will not become free markets (free in an economic sense) but stay manipulated. Manipulated may be a strong word for one or the other of you and I am not judging, but let’s face it if in any market of any product in the world one single buyer buys all the “leftovers” there will never be a fair price defined by offer and demand for that very product. In the case of government bonds one would assume that a country as over-indebted as Japan would have to pay much higher interest rates to sell their government bonds to investors than for example Germany a country running on a much, much lower debt to GDP ratio than Japan, only that this is not the case. The reason for this is central bank intervention.
Personally I believe Japan is indicating a direction in this respect as Japan is somewhat running ahead of us sitting here in Europe. Japan is running on low or ultra-low interest rates for decades already and Japan is in a situation of constantly increasing government debt levels that have reached roughly 250% of GDP. What we can learn from Japan and what we can expect to experience in Europe including Switzerland (at least partially and maybe to some lesser extent) is the following:
- Debt to GDP ratios will rise.
- Interest rates will stay low due to central bank interaction.
- Government spending discipline is not going to increase.
- Government bond markets stay manipulated by central bank interaction.
- Government bond markets’ liquidity problem is going to stay due to central bank interaction.
- Inflation will stay low.
- Central bank status quo for decades.
This list is by all means not complete. But it shows why I believe there will not be either a quick fix or hyper-inflation anywhere soon.
Therefore, ask yourself if you really want to invest your money following an unlikely scenario? Because maybe it makes sense to invest in cashflow returning strategies and keep some precious metals for the ultimate worst-case scenario, no?
What is your opinion?
As always, I encourage you to send me your feedback and/or questions but please don’t forget (instead of hitting the reply button) to send your messages to:
Many thanks, indeed!
And now, Ladies and Gentlemen I wish you a great day and weekend.
Kind regards,
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
A simple calculation
Dear Ladies and Gentlemen
If you belong to the people who pay their bills primarily in Swiss Francs and/or Euros you belong to a rather large cohort of a few hundred million people living most probably somewhere on the European continent.
Today, I would like to show you with a simple calculation why I prefer equities over bonds.
If you keep your money as liquid and as safe as possible in a bank savings-account (hopefully with a bank offering some sort of government guarantee or at least a bank not getting involved in investment banking and/or corporate debt) or you have it invested in Swiss and/or German government bonds, you, Ladies and Gentlemen, will most probably receive 0% interest. Maybe you will even have to pay a small interest for depositing your money at the bank or for investing it in government bonds of short maturity and in any case, you will have to pay some small banking fees here and there on a regular basis.
This means, in the case of you wanting to invest your money in a Swiss and/or German government bond for 10 years because of its relatively low volatility, you will have to accept 0% interest or in other words no income whatsoever from such an investment and even worse, you will actually lose small bits and pieces of your money (fees) over the entire 10-year period. This truly means that at the end of a 10-year period you have less money than when you started and in real money terms, which means adjusted to purchasing power, you may have lost 10% – 20% due to inflation over that period.
To me this seems not a very attractive investment.
On the other hand, if you invest your money over 10 years in some solid listed company that pays regular annual dividends of 4.5%, thanks to the effect of compounding you will receive some 50% return over the same period. True, you will most probably have to accept higher volatility, but doesn’t the proposed return deliver an incentive high enough to accept such volatility?
Ladies and Gentlemen, to me it does!
Now, I know this is a very simplified calculation but both examples are real and possible in today’s market environment. Solid company delivering 4.5% dividend yield on one side and 0% 10-year government bond on the other side.
Think about it!
As always, I encourage you to send me your feedback and/or questions but please don’t forget (instead of hitting the reply button) to send your messages to:
Many thanks, indeed!
And now, Ladies and Gentlemen I wish you a great day and weekend.
Kind regards,
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
What’s next?
Dear Ladies and Gentlemen
I receive a fair number of messages asking about my view on the markets. As my regular readers all know, I still cannot foresee the future although I am trying hard but so far, I was totally unsuccessful.
However, if we take the core messages of my recent weekly mails about long-term investing into considerations and also what Mr. Andy Haeberli, Profond’s CIO, mentioned in last week’s interview, then – at least for me – there is not much room for investments outside the “real asset” bracket.
To make money with easy to understand, straight forward fixed income strategies seems difficult with current low interest rates. Either you accept elevated currency- or counterparty risks or you will not find decent yields on your fixed income investments. When it comes to real assets you may will have to accept higher volatility – as in equities and/or precious metals – but you get higher returns in the long run.
You may know, that we offer a cashflow based mandate for our private clients and while we cannot diversify those portfolio’s entire volatility away, we receive very decent cash returns on invested capital and interestingly enough, at least half of the companies whose equities we hold in those mandates, just announced dividend increases.
Now, Ladies and Gentlemen, what I want to say with this is, that if you are willing and capable of accepting volatility in your portfolio, you may appreciate rather stable cashflows on your invested capital and this should not to be neglected because the effect of compounding interests will help you to increase those cashflows even more (in theory exponentially) over time.
While I don’t know where markets or single investments are heading, I am confident that by following a strict investment process in seeking and harvesting positive cashflows, you may not get rich over night, but you will be able to steadily increase your capital over time.
There is no magic in this and crashes may occur at any moment. However most solid global companies keep paying stable dividends even during stock exchange crashes. This means if you do not have to sell a solid investment during a stock market crash and if you are patient enough to wait until stock markets recover, your loss potential is most probably going to be limited. However, it all comes down to picking the right stocks and this is hard work and involves a lot of research and number crunching.
As always, I encourage you to send me your feedback and/or questions but please don’t forget (instead of hitting the reply button) to send your messages to:
smk@incrementum.li
Many thanks, indeed!
And now, Ladies and Gentlemen I wish you a great day and weekend.
Kind regards,
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Interview with Mr. Andreas Haeberli, CIO of Profond
Dear Ladies and Gentlemen
As announced two weeks ago I was able to interview Mr. Andreas Haeberli, CIO of Profond Collective Foundation. Please find my questions with Andy’s answers for your convenience:
1) What is Profond’s investment goal?
We want to offer sustainably high benefits to our policy holders. When we invest, we therefore focus primarily on real values, i.e. equities and real estate. These asset classes enable us to generate above-average returns in the long term. With optimal diversification, we take risk parameters and financial stability into account.
2) What is your investment horizon?
Pension fund assets are invested over a very long period of around 60 years (40 years of gainful employment and around 20 years of pension entitlement). As a result, short- and medium-term financial markets fluctuations balance each other out well. Therefore, we are not influenced by short-term movements and short-term events in financial markets. We do not engage in any tactical investments or hedges. However, we generally hedge foreign currency risks for nominal values, real estate and infrastructure investments.
2) Where do you see the biggest challenge for a Swiss based pension fund manager today?
The current low level of interest rates presents major challenges to investors. Bonds are traded with a maturity yield of zero and negative interest must be paid on cash holdings. This leads to ever lower investment returns on investment funds. This low compound interest effect has a noticeable negative effect on fixed income investments in the long run.
3) hat are your favourite investments and why?
Long term, equities yield higher returns than bonds. This is shown, among other things, by a much-quoted study by Pictet. That is why we focus on equities and not on bonds. We also invest an above-average proportion in real estate. They are not directly dependent on stock market fluctuations and diversify our overall portfolio well. We also benefit from regular income (rental income). Thanks to these asset classes, we achieve a cash flow return of around 2.5% on the overall portfolio.
4) Are you working with consultants and if, why and if not, why not?
On a case-by-case basis, we draw on the knowledge of advisors in the selection of asset managers. We also call in pension fund experts for certain tasks.
5) How are you investing your private money?
Basically, my private investment activity does not differ from my professional one. The only difference is that I invest a small part of my personal wealh on a short-term basis.
Many thanks, Andy, for your time and the insight!
As always, I encourage you to send me your feedback and/or questions but please don’t forget (instead of hitting the reply button) to send your messages to:
Many thanks, indeed!
And now, Ladies and Gentlemen I wish you a great day and weekend.
Kind regards,
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Sociocultural issues meet economics
Dear Ladies and Gentlemen
Did you follow my advice and spend every morning 30 to 60 seconds thinking about something positive? If so, what was the effect?
Now, last week I gave you an insight into some of my global sociocultural points of view and proposed to publish an interview with a pension fund manager for this week. The interview was conducted but the time schedule was a bit aggressive and I am not quite ready to publish the interview yet. Hopefully by the end of next week I will be and may deliver on my promise.
I have been receiving very thoughtful and interesting feedback to my last weekly mail and thus today, would like to pick the feedback of two of my readers and share Masha’s and Anton’s thoughts with you.
When thinking of current global economic policies, Masha has a picture in her mind. It is the picture of a curved (concave and convex) mirror. The sort of thing you would see in amusement parks. When you stand in front of it, reality gets distorted. I quite like that metaphor and I totally see her point, only that instead of the mirror we have some of today’s media channels and research reports by banks and brokers.
Anton’s feedback was touching on three points.
Firstly on his statement that uninterrupted growth is not possible, something I would easily agree to, second he cited a quote by Hannah Arendt: „Politics is the professional representation of vested interests”, again I can’t really argue against that one and thirdly he mentioned that we cannot borrow our way to prosperity (how I love that one!) but rather that prosperity requires sacrifices – more specifically, to get something of value tomorrow (including a better life overall) we need to give up something today (time, sleep, money, etc.). This last statement is so true and the ones who know me well, will know that I have a serious problem with today’s culture of “instant gratification”. It just doesn’t work. I always use the same metaphor. If a farmer wants vegetables, he needs to prepare the grounds, saw the seeds and only after a while will see the first signs of germinating plants.
Same is obviously true for investments. People who expect return without giving the investment time to develop, shouldn’t really invest, at least that is what I think.
As always, I encourage you to send me your feedback but please don’t forget (instead of hitting the reply button) to send your messages to:
Many thanks, indeed!
And now, Ladies and Gentlemen I wish you a great day and weekend.
Kind regards,
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Who hinders growth, hinders prosperity
Dear Ladies and Gentlemen
Long-term investing seen from a slightly different angle that was what my last weekly was all about. I received many questions for pension fund investment pros and am happy that my friend Andy Haeberli, Profond’s CIO, one of Switzerland’s largest collective foundations, agreed to be interviewed by me. I will hopefully be able to do the interview next week and publish it in my next edition of “Stefan’s weekly”.
Today I would like to have a look at what politics can do to help their people to prosper. I am a firm believer of the vision that politicians should primarily act in the public’s interest, however I do get the impression that some of them are primarily acting in their own interest.
First of all I determine that 10 years after the great financial crisis the global economy doesn’t look all that bad. No matter what you hear or see, it is a fact that GDP in most countries is higher and unemployment lower than before the great financial crisis. Total debt on the other side went up massively but so far did not hit economies with high inflation rates as foreseen wrongly by so many (including me).
During and after the great financial crisis, governments and central banks across the globe worked together and made it possible that we didn’t fall into a deep, deep recession followed by hyper-inflation. I believe one of the success factors was the common vision of implementing concentrated and collective action to prevent worse.
What changed in the last roughly two to years? There is this feeling of negativity and that sound of negativity and you know what? I don’t like that sound of negativity! This is the sound of populists to the right and of populists to the left and it can’t be expected to lead to anything positive! Some of those people would like to bring back “the good old days”, why? Because these were the days when children died of influenza or days of no cancer treatment or days of wars in Europe or days of countries without voting rights for women or days of exclusion of minorities, days of apartheid, days of no central heating, etc, this can’t be the goal.
Anyway, I believe that weak politicians take weak decisions and I believe that protectionism represents a risk to global economic prosperity and I believe that we have to settle for cultural and socio-economic adaptation, because not even the most powerful governments and/or central banks can perform well in a socio-economic vacuum and I believe our political leaders and also the general public need to start immediately to detoxify the current public political discourse. This is important because this negativity hinders growth and thus prosperity. It is our responsibility to elect the political leaders that can do the job.
What is your opinion?
Ladies and Gentlemen, please try one thing for yourself and please let me know if it did have an effect on you. Please spend every morning right after getting up 30 to 60 seconds thinking about something positive or about various positive things. As always, I encourage you to send me your feedback but please don’t forget (instead of hitting the reply button) to send your messages to:
Many thanks, indeed!
And now, Ladies and Gentlemen I wish you a great day and weekend.
Kind regards,
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG