Q&A with CMMB Securities

Q. The advertising by finance houses used to suggest that because they did well last year, you can be sure of good returns today. But recently I see them adding in fine print that past performance is no guarantee of future returns. Why the turn around?
Brian, Penal

A: There is an unchangeable law in finance, which is that there is absolutely no guarantee about the results of an investment. Therefore, it was always the case that past performance is no predictor of the future. No matter what anyone tells you there is no way that you can predict the future with 100% accuracy. It is possible companies may feel strongly about their plans for expansion and growth and the language used may sound over-confident, but as we say in Trinidad and Tobago, that must be taken with a grain of salt. It is doubtful that a company would intentionally try to mislead investors about their plans, but sometimes one must know how to weigh the certainty of information. The fact that you are seeing disclaimers about the performance of investments more often than before is due to a greater sense of awareness among investment professionals about the need to represent their opinions with the greatest objectivity possible.

Over the past five years or so more and more investment practitioners are updating their skills and educating themselves, and are now more sophisticated about their duties and responsibilities to clients. There have been cases in the United States where investment advisers have been sued because clients invested their money in instruments about which they had little or no understanding and in other cases there were significant misconceptions about the risk dynamics of the instrument. In the US the courts have now created legal precedents, which mandate that portfolio managers must now exercise a greater degree of care with clients. In fact the relationship is defined as a fiduciary one, which is a relationship where the duty to the client is even greater than that of an agent to his principal. The law in the United States has been steadily evolving to protect the interest of clients. It is happening slowly, but surely in Trinidad and Tobago.

Q. Is there anything to be gained from checking several stockbrokers before setting up my portfolio?
Krishna, Valsayn

A: Definitely. It is good to shop around to different stockbrokers to get different perspectives on the outlook for shares. This is due to the fact that there may be variances in projections on a share from one broker to another. Therefore talking to more than one would allow you to determine where consensus does exist. In this way the consensus prediction would have a higher probability of being realised and so it enhances the possibility of high returns on funds invested, and more importantly, minimises the risk of losses from shares depreciating in value. However, while getting research from more than one broker would help in constructing the most optimal portfolio, the commissions for buying and selling shares should not vary from one broker to another as they are fixed by law. The commission structure is 1.5% on the first $50, 000, 1.25% on the second $50, 000 and then 1.0% on any amount thereafter. There is also a stock exchange fee, which works out to approximately 0.1% of the dollar value invested. There is also stamp duty, which is nominal. Therefore the all-in commission cost for a transaction less than $50, 000 would be 1.6% of the value invested. For example if you invest $1, 000 in the market the commission payable would be $16.

Q. What does asset allocation mean?
Carolyn, Penal

A: When a portfolio manager tells you to determine your asset allocation this refers to the split of your portfolio between the two main asset classes, fixed income and equities. This division between the two classes would be dependent on a number of factors. These are return objectives, risk tolerance, time horizon (the amount of time you want to hold the investment), liquidity constraints (ease of access to funds invested) and tax bracket. The higher the return objective the greater is the allocation towards equities. However, the lower the risk tolerance the lower is the allocation towards equities. The longer the time horizon the higher is the allocation towards equities, while the greater the level of liquidity constraints the greater would be the allocation towards fixed income securities. A decision would also have to be taken given all the other factors, which instrumentation gives the greatest degree of tax-efficiency. Some portfolio managers have sophisticated software which can take all these factors into consideration all at once constructing the portfolio mix which is suitable to a client’s unique needs and circumstances. Talk to your broker about ways to develop a portfolio that best suits your needs.

Questions can be sent to PO Box 1830, Wrightson Road, Port-of-Spain
email: cmmbsecurities@mycmmb.com