Interview with Philip Goldsmith

What have you learnt about local investors? Having visited Malta a number of times over the last year and talked to many investment professionals, it appears to me that the majority of investor’s portfolio are heavily biased towards bonds. It is not unusual to find a portfolio of a Maltese investor holding as much as 80 % in bonds and 20% in equities. To someone like me who has been involved in the investment business in the UK and overseas since 1969 this surprised me greatly.   Why did it surprise you? In Britain or the US , for example, a typical portfolio would contain around 70% in equities and only 30% in bonds. This is not a new phenomenon and has been accepted wisdom for many years. Of course this is a major contrast in investment styles and I am not talking about pensioners or people looking for regular income. Over the long term, equities have outperformed bonds in the major developed markets by a large margin. As can be seen in graph No1 (which is based on UK bond and equity markets) there have been bear markets where equities fall back sometimes dramatically as is the case between 2000 and 2003. However, even after these stock market falls, a value of GBP100 in equities is worth 67% more than the same GBP100 invested in bonds assuming dividends have been reinvested and adjusted for inflation. That is after the worst fall in equities over the last 25 years.   People in Malta think that bonds are a safer investment than equities, what do you think about that? There is a misconception here in Malta which unfortunately many investors discovered to their cost that all bonds are a safe investment. Investors who invested in Argentinean bonds have discovered that this is not so. It must be said that good quality bonds tend to fluctuate less in terms of prices when compared to higher yielding bonds it must be remembered that there is risk in all types of investments and the best way of avoiding risks is investing in a broad spread of equities and bonds. The best way of doing this is to invest not directly in either individual bonds or equities but to seek diversification into actively managed global equity and bond funds, run by reputable fund managers. You mentioned a portfolio mix of 70% /30% in favour of equities? Can you elaborate? As can be seen by the second graph when you mix a portfolio of equities and bonds on a 70% equity 30% bond basis, you smooth out the returns and still get a substantially better return than that of a 30% equities and 70% bond mix. It must be remembered that historical returns are not a prediction of the future and nobody can predict with certainty future outcomes. What we can say is that over the last 25 years, the period covered by these graphs, interest rates have dropped dramatically from a high of 17% to a low of 3.5% at the end of last year. They have now started to rise and the large capital gains that have been made from bonds over that period are likely to have dried up. On the other hand, equity prices have fallen considerably from their peak in 2000. Corporate balance sheets seem to be regaining health. Price to Earnings (P/E) ratios are looking attractive and world economy is gathering steam. Therefore it would seem a reasonable time to re balance one’s portfolio to being weighted more towards equities and away from bonds. Should investors continually re-balance between equities and bonds? It is my firmly held opinion that if you are a medium to long term investor, having a large proportion of equities relative to bonds will pay off. The key however, is to avoid panicking and selling when markets fall. History has shown us that in general, provided that you invest when markets are at reasonable level as measured by P/E ratios and show some patience you will be rewarded. The best way or re balancing one’s portfolio is not to attempt to do it yourself but rather seek professional advice. This interview does not intend to give investment advice and the contents therein should not be construed as such. Readers are encouraged to seek professional advice regarding their personal financial situation .