Category Archives: Investing

Sovereign Wealth Funds: Building intergenerational equity

Image source: institutionalinvestor.com
Image source: institutionalinvestor.com

 

It was in the early 1950s when the Kuwait Investment Authority established the world’s first sovereign wealth fund (SWF) as a way for the Gulf state to diversify its investments, anchored largely by its excess revenues from oil. With its primary role as a practical solution for a nation with a budgetary surplus, it has been later on adapted and created by other resource-rich and export-orientated sovereignties.

SWF is a resource that helps stabilize a country’s economy. In definition, it is a government-owned fund allotted in investing into various financial assets for two main purposes: to gather savings for the country’s future generation, and the diversification of their total income base.  This is a more practical approach in order to take advantage of a nation’s excess money, funneling it into investments than just letting it stay idle in the central bank.

Sovereign wealth funds are classified depending on how they are financed: commodity and non-commodity.  Commodity SWFs are primarily created by revenue surpluses from exporting major commodities such as oil, metallic ores, and diamonds; the latter, meanwhile, is usually funded by an excess of foreign currency reserves from current account surpluses.

Many countries establish SWF and are motivated by different economic and political circumstances. One example is how the United Arab Emirates create a huge part of their funds from their oil exports. Because of this, they need a reliable solution to protect the surplus reserves from oil-based risks and this is where SWF does its work—allowing the country to sustain or even accumulate more profits.

In the age of globalization, SWFs have been proven to contribute in developing assets in need of a substantial capital.  Because of its unique characteristics and its long-term benefits, countries around the world can create a brighter economic future for their citizens and the generations to come.

Fundamentals: The mechanisms of the futures market

In the capital market, a trader has several options and investing opportunities in which he can foray into, depending which ones suit his needs, goals, risk profile, and personal preferences best. One of these is the futures market. Basically, buyers and sellers create and finalize agreements by entering into futures contracts. It is stated within the contract how much goods will be paid for and its date of delivery.  As The Balance defines it, a future contract is “an agreement between a buyer and seller of the contract that some asset—such as a commodity, currency or index—will be bought or sold for a specific price and quantity, on a specific day, in the future (expiration date).”

 

Futures-Contract

Image source: marketbusinessnews.com

 

As an example, let’s consider Ben and Marcus. Ben is a fisherman while Marcus is a fish vendor. They have entered into a contract wherein Ben has to sell Marcus 100 tunas at $1 per head for the next fishing season. Ben is trying to secure a future selling price, while Marcus on the other hand is trying to establish a fixed buying price. If the price of tuna increases to $2 the next day, then Marcus would have profited since the buying price is already fixed. Ben on the other hand would have incurred a loss since he can’t sell his products at the adjusted market price. These fluctuations are then calculated and monitored daily until an agreed upon date. If the next fishing season arrives and the price of the commodities hasn’t changed, then Ben would have lost $100 while Marcus would have made $100.

 

Futures-Contract2

Image source: entrepreneur.com

 

One economic importance of the futures market is price discovery. Because of its highly competitive nature, it becomes an important factor in determining the prices based on the present and future estimated supply and demand. It is also important in reducing risks when making purchases since the buying price can’t be changed even if the market price has increased (or decreased) significantly. Prices are fixed however the market moves.

 

To know more about futures contracts, trading, or the investment industry in general, consult with any of LOM Financial’s investment advisors.

Wallet in the cloud: The rise of the Bitcoin cryptocurrency

The United States has the dollar, Japan has the yen, while the Internet has Bitcoin. It is a computer program that acts as a unit of account or payment system that only exists in the digital world. Therefore, it is not minted from metal or printed on paper, which is always the case for real currencies. Its monetary value is completely virtual.

 

Bitcoin is the very first example of a growing trend known as cryptocurrency. During its infancy (c. 2008), there were a lot of negative speculations about it, including its authenticity as an acceptable monetary unit. However, nearly a decade since its creation, it has become a popular way to ‘buy’ goods or services. In fact, for the first time since its birth, the value of 1 Bitcoin has already eclipsed that of an ounce of gold.

 

Coin 1

Image source: coindesk.com

 

Bitcoins are basically ‘rewards,’ derived mainly by winning in a competition in which users—also known as miners—offer their computing power to verify business deals into the blockchain, which is a ledger or database that record all bitcoin transactions. As of February 2015, bitcoin is accepted as a payment method by over 100,000 merchants and vendors worldwide.

 

Early this month, the Internet currency was able to gain 3 percent, while the precious metal fell down by 1.3 percent. Looking at the progress data of both assets from a year ago, Bitcoin was able to nearly triple its value, while gold practically stayed at the same level. Both of them are alternative assets, though it is important to note that they aren’t usually traded in correlation.

 

Coin 2

Image source: bitcoin.org

 

Gold is practically the “gold” standard of all alternative assets. Investors usually use it as a hedge against potential losses from traditional assets such as stocks or real estate. That is why Bitcoin overtaking the valuable metal is notable since some predicted that the former would replace the latter as the preferred alternative asset. One can only speculate as to what could happen if ever the SEC approves of its listing.

 

Despite its remarkable rise in recent years, bitcoin is yet to truly prove itself as a viable and safe asset to be used in numerous transactions or even as a good addition to one’s investment portfolio. It cannot also be commoditized, unlike precious metals or crude oil. As such, bitcoin prices will tremendously suffer if the SEC does not approve a bitcoin ETF. Serious investors and investment managers will have to make extensive research before they can consider the virtual asset as something they could venture in.

Expatriates and their investment portfolio: Adding mutual funds into the mix

Investing in a variety of assets and securities, such as stocks and bonds, need not be complex and excruciating. For international investors, most especially, there are unlimited opportunities to grow their wealth base. The advent of Big Data and cloud technology has made investing in key markets around the world even more plausible and easier. Regardless of where you are in the world, you can always have the chance to tap into emerging financial powerhouses and safely diversify your portfolio with utmost security, confidence, and convenience.

mutual fund etf investing

Image source: thestar.com

Pooled funds, such as mutual funds, are among the easiest investment machines to own. In this type of investment, clients ‘pool’ their money together to form a large capital. This fund is then managed by an experienced, fully licensed professional manager who will do all the work (market monitoring, choosing which stocks to buy, etc.) on behalf of the investors in exchange of a small management fee. Mutual funds can be composed of pure stocks (equities), fixed income assets (bonds), or a combination of both (balanced).

Professional Management
Mutual funds do not require investors to have extensive market knowledge as they can delegate the specific investment decisions to a portfolio manager or a team of managers. Investors are provided with the services of an experienced professional who work with top-notch research firms, industry experts, and economic analysts to come up with the most prudent and sound financial decisions commensurate to the fund’s objectives.

Diversification
Mutual funds help mitigate risks by automatically distributing investors’ money across a wide range of assets, industries, and companies. In investing, diversification is one of the fundamental principles necessary to maximize returns and avoid significant losses. The adage “do not put all eggs in one basket,’ applies accurately on this type of fund. It also allows for a more cost-effective strategy than directly owning individual stocks or bonds.

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Image source: benzinga.com

Innovative infrastructure
Excellent online technology infrastructure, such as that of LOM Financial Management Services, is critical to making these transactions seamless and meaningful. IT systems and networking structure used by most mutual fund companies are state-of-the-art, secure, and easily navigable.

Convenience and Liquidity
Buying a mutual fund can be as easy as setting up a savings account from the bank. Cost-efficient and time-saving, it is an ideal investment option for those who lack the time to comprehensively study and monitor the market. Initial investments are relatively low while additional capital will entirely depend on how much the investor would want to deposit. They can also buy or sell their shares anytime they want. Best of all, investors are free to pursue their personal dreams and career aspirations while their money work hard for them.

For more information about mutual funds and how you can invest in them, follow this LINK.