Property valuation

I was shocked again today to see how quickly some UK property prices are rising, particularly around the London area.

Whilst its only around 3 months since i last reviewed and increased the value i record my rental property in my personal finances, checking local valuations again today showed another material increase. The valuations appear to be genuine too, with a neighbouring (and almost identical) property just being sold for around 18% above the value i was holding mine at.

I have therefore decided to add an extra 5% to my property value in my assets and net worth calculations. While this still keeps it around 10% below 'the market', it does reflect the recent increases and allows a margin of error for some fluctuations going forward.

I am also keeping a close eye on potential capital gains tax changes which may determine whether i continue to hold or sell this property.  Whilst it is tempting to sell now and realise a large tax free gain, my cash balances are already too large a proportion of total assets and the rental yield is double what i can earn on cash.

Asset allocation update

One of my first posts back in November 2012 contained a breakdown of my asset allocation between property, pension funds, cash and directly held investments.  As we're about a year on from this i thought i'd share an update.

Property 40% (was 52% in Nov 2012)
Whilst the value of my property has actually increased over the last year, its proportion of my overall asset base has decreased mainly as a result of good income, a strong savings rate and a few one off gains.  Going forward this will probably continue to decline unless i make any new property purchases.

Pensions 15% (was 15%)
The value of my pension funds have grown steadily and in line with my overall net worth growth, due to regular monthly contributions by myself and my employer.  This proportion is likely to stay fairly stable going forward unless there are any major market rallies or falls.

Direct Investments 10% (was 4%)
I've significantly increased the size of my investment portfolio over the last year, primarily in high dividend ETFs.  I'm expecting to continue to steadily grow this proportion going forward.

Cash 35% (was 29%)
Despite growing my investment portfolio throughout the year, cash balances have continued to rise due to high income and savings. Whilst i'd like to manage this percentage down, it is likely to be a slow and steady change unless any individually large investment opportunities (eg property) arise.

Cash update

Back in April i provided a summary of my approach to managing cash balances. I view this very much as a continual work in progress and i'm always making small changes as competitive savings rates come and go.

I've made a number of changes in the past couple of weeks, largely in response to a couple of accounts maturing and some other rates being reduced.  In summary, these have been to move cash from maturing accounts into new longer tenor fixed term accounts, increasing the average maturity profile of my cash balances.

These can be summarised below:

April 2013:

	On demand	<3mths	<1yr	<2yrs	>2yrs		Total
% of cash	49%	19%	3%	23%	6%		100%
% of assets	18%	7%	1%	8%	2%		36%

July 2013:

	On demand	<3mths	<1yr	<2yrs	>2yrs		Total
% of cash	46%	3%	7%	36%	8%		100%
% of assets	16%	1%	2%	13%	3%		35%

The net result is an increase in yield from around 2% to 2.3%, with minimal impact on the amount of cash instantly accessible. I've also given more certainty to the yield, locking in fixed rates on the assumption that the Fed, BoE and ECB are unlikely to raise interest rates for another year or so. Whilst this does introduce some opportunity cost or re-investment risk, i'm prepared to take this on to obtain a higher yield in the short term.

Cash profile

I've spent a lot of time over the past few weeks organising and managing my cash balances.  As the balance has grown to a significant proportion of my total assets (currently around 36%) and isn't likely to reduce significantly in the short term, i consider it important to manage this as closely as i would manage my other investments.

There are a number of parameters i consider in managing my cash.  These include:

Security:
My preference is to use reputable financial institutions, with balances covered by deposit guarantee schemes.  The only exception i have made to this is a relatively small experimental placement in a peer to peer lending site, which offers a much greater return for the increased risk to capital.

Accessibility:
The ease of transferring funds in and out of accounts.  This is important being an expat with funds in different locations.  My preference is to do as much as possible online.  I also need to be aware of the terms and conditions of existing and new accounts, which can differ by country and institution.

Maturity:
This is a balance between funds being available on demand or after a fixed term, based on when i would like the ability to access the cash.  The current maturity profile of my cash balances is summarised below:

	On demand	<3mths	<1yr	<2yrs	>2yrs		Total
% of cash	49%	19%	3%	23%	6%		100%
% of assets	18%	7%	1%	8%	2%		36%

I am currently keeping a significant amount of cash in instant access accounts should better investment opportunities arise.  I'm generally keeping new time deposits to a maximum of 2 years given the current low rate environment, as there is little advantage to locking in low rates for excessive time periods.

Currency/Country:
Again, this requires more active management as an expat.  I generally limit myself to placing cash in countries that i either currently live, have lived in the past or am likely to live in the future, in order to minimise my global tax footprint.  In terms of currencies, this is primarily based on currencies that i have active cashflows in, or the currency of the country where the funds are placed.   I generally do not make speculative investments in currencies, apart from the occasional RMB time deposit which has recently offered the opportunity for both enhanced yield and capital appreciation.

Yield:
This is generally a trade-off with the other parameters, with higher rates often available on longer term fixed rate deposits or in certain currencies.  Following some recent maintenance and a few new accounts, my average yield on cash is up to around 2%.  I have been trying to minimise cash held in HKD given (a) the extremely low interest rates available, and (b) my positive HKD cash flow generation from employment.

Expecting a few one-offs

March is likely to be a fairly unique month for my finances, with a couple of one-off cash inflows expected.

Firstly i expect some time around the middle of the month to receive a share of some family inheritance. Whilst only representing a few months expenses, it will add to my cash reserves and would be readily available for investment.

Towards the end of the month i should also receive a lump sum related to my employment. Again, this will be in the form of cash and therefore readily available for investment.

I expect the combination of these to push me well in excess of 30% of my assets held in cash, much higher than my 20% medium term target.

My initial thoughts are to hold a reasonable proportion in easily accessible accounts both for emergencies and to be ready for investment opportunities.  However, given the size of my buffer and positive monthly savings rate, i'll probably tie some of it up in time deposits to get a better return. I may also add to my holidays/luxuries budget for the year.

Whilst its a nice dilemma to have, i really do need to give some more thought to how best to manage my cash reserves, and in particular finding a balance between ease of access and maximising return.

My thoughts on asset classes (4: Others)

I won't try to cover everything here, just a few of the more obvious choices for now.

Commodities:
I'm generally not a big fan of investing in commodities. The markets seem more volatile and don't offer income, and to me just feel more speculative or short term in nature. However, i wouldn't rule them out if i have a strong feeling on valuation.  In particular, i personally find it easier to think about the inherent value in energies and metals as opposed to food products etc, and often keep an eye on the price of oil which as a finite resource that most people depend on, i expect will increase in the long run.

Recently i've also been paying more attention to gold (including buying a small amount). This is primarily a result of QE, debt and inflation which i expect to weaken the USD over time.  I also keep an eye on silver, which has a lot more commercial uses than gold but is also a lot more volatile.

Bonds:
Apart from some corporate debt, the general lack of yield puts me off at the moment. Saying that i'll probably return to these over the coming years.  For now, if i can get higher yield on cash without the credit risk, i'll probably take that.  If not, i may allocate a small percentage of assets to higher yielding bonds.

My thoughts on asset classes (3: Equities)

This is probably the asset class i've had the least experience or success with, although history suggests its a good long term way of building wealth.

I've been passively holding equities in pension funds for the past 8 years, but haven't been particularly active in the markets other than that, apart from a few short-term speculative positions.  The advantages are fairly clear, with both capital gains & yields available that have the potential to exceed anything possible in bonds or cash. The downsides include volatility, the risk of corporate failures or under-performance, and given the volatility of the last decade, the need for a strong stomach and cool head.

I think managing a portfolio of directly held individual equities takes a lot of time & research to do well. This is why ETFs appeal to me, offering diversification and market targeting, with relatively low costs.  I have recently started building positions in a few different ETFs.  

Similarly to property, i also view equities as a good means of protection against inflation, and a potential source of income in retirement.  I expect Property & Equities to form the basis of the my investment plans for the coming years.

My thoughts on asset classes (2: Property)

Based on my experiences to date, i'm quite positive about the benefits of property as an investment. The main benefits i see are:
- The potential for generating both yield and capital gains.
- The ability to protect against general inflation.  I would normally expect the value of property and/or rents to rise in an inflationary environment, although i'm sure there are many examples where this hasn't been the case.
- Protecting against future property price rises (if you have the need to buy a home in the future). Getting on the property ladder early can help manage a future risk that values might spike up when a future purchase is desired.
 However, there are also some downsides:
- High transaction costs, such as taxes, agency/legal fees
- High entry price. Generally a large financial commitment is needed, with accompanying debt.
- The risks of vacancy, problem tenants, or maintenance costs.

For me, similar to any other investment, the decision to invest in property would ultimately come down to price, value and research.  Priorities would be to minimise the chance of vacancy (sensible location & rent levels), and  aim for positive cash flows, with rental yields exceeding financing costs. The HK property market isn't particularly attractive at the moment with high valuations, low yields & recent government cooling measures including high purchase taxes.  I may consider investments in the future though.

My thoughts on asset classes (1: Cash)

I wanted to summarise my thoughts & experiences on the asset classes i generally invest in or actively  consider. I'll start with Cash, and work through the others in separate posts.

In years gone by, i've viewed cash as a risk free source of generating income, through interest.  I remember  having access to 5-6% savings accounts, and not really spending too much time thinking about alternative investments due to the easy return this offered.  Those days are long gone now, and my opinions have changed a lot in the last year in particular.  I now generally view cash as a backstop, or buffer to protect me against any unforseen expenses, or loss of earnings.

However, in a low interest rate environment, this buffer comes at a cost, being both an opportunity cost of not investing in products offering a better return, but of greater concern to me is the cost of inflation, and its ability to erode the value of cash over time.

Whilst i try to find what yield exists in the market for savings accounts, it is difficult to generate above inflation returns at the moment, without jeopardising the effectiveness of the safety net cash is held for. As such, my current view is to hold enough cash to conservatively cover any potential emergencies, but to not leave excess funds idle & uninvested. A priority for the coming year will be to better manage the proportion of my assets left in cash.

My asset allocation

This is a breakdown of my current asset allocation:

Property 52% - a previous home now rented out. I've been lucky to have minimal vacancy and a good regular rental yield for the past couple of years.

Pensions 15% - a couple of defined contribution pension funds, being contributed to monthly by myself and my employer.  The asset allocation within the funds is probably around 90% global equities, 10% bonds.  This is one area i know i need to analyse further, having not paid much attention to it over the past few years.

Direct Investments 4% - after a couple of years away from the stock market, i've recently purchased some exchange traded funds, along with a small amount of gold (of the paper variety).  I'll go into more details on what i'm holding and why in a seperate post.

Cash 29% - i'm holding way too much of my resources in cash.  Whilst i like to think i've done a good job in finding what cash yield still exists in the markets, i'm barely keeping up with inflation. I'm looking to start managing this percentage down.