Q&A with CMMB Securities

Q. With real estate prices rocketing and not looking like they’ll be dipping anytime soon, I’m thinking about pulling some money out of the investments I have in the stock market and putting it into property. Would that be a good move right now?

Daniel, St. Joseph

A:  Currently, the stock market is trending upwards and expected to continue to do so in the short-term given the low interest rate environment, high liquidity and the announcement of good corporate earnings from companies such as RBTT and Republic. Therefore, now may not be the best time to withdraw from the stock market. If your investment horizon in greater than six months or one year, investment in real estate may be a good alternative to maximising your returns. However, there are some factors to bear in mind.

Firstly, real estate is considered to be a long-term investment, so if you will be needing any of that money in the short term this may not be the best alternative for you. Secondly, real estate investment requires a large capital outlay which some investors cannot afford unless they invest directly through a property fund. Thirdly, whilst property prices are soaring, there is the risk of creating a price bubble which eventually bursts. Therefore, it is advisable to stay in the stock market in the short-term, however property investment can be a good alternative in the long-term.

Q. I’ve been thinking about investing in some stocks cross-listed in the Jamaican and local stock exchanges, but have been told that sometimes it takes longer to get your money on cross-listed stocks. Is this true?

Nandini, St. Augustine

A: The time period for receiving the proceeds from the sale of shares cross-listed on the local Stock Exchange is the same as the time it takes to sell local stocks i.e. five business days after execution of the sale or what is referred as T +5. However, if you want to buy shares in companies that are not listed locally (i.e. not cross-listed) say, for example, a company in Barbados, and you sell stocks on the Barbados Stock Exchange, the time it takes to receive the proceeds outside of that country can extend significantly over five days. The major reason why this occurs is that countries like Barbados have foreign exchange controls. These restrictions normally lead to protracted delays arising from compliance with various regulations.

Q. Your column has often dealt with various aspects of risk, but what is risk-adjusted return?

Kris, San Fernando

A: Many of us are familiar with commonly reported returns on investments that normally take into account the ending value of the investment in relation to the beginning value. Investors use these reported returns to make their investment decisions and make evaluations on which investments provide higher returns. However, investors who rely only on returns to pick an investment, usually in a mutual fund, may not be prepared for the wild ride ahead since total return numbers alone give little indication of a fund’s level of risk. Such an investor would check out the risk-adjusted returns to make sure they are in line with the level of risk he/she is prepared to tolerate before making a choice. Risk-adjusted returns were developed to help investors gauge how much return they receive per unit of risk. In this context, risk refers to the volatility of returns, or the upside and downside swings in performance.

Generally, both volatility (i.e. the level of risk) and return are combined in one measure that permits you to rank various funds in order of risk-adjusted returns. There are various methods to measure a fund’s risk-adjusted return. Most use standard deviation (a measure of dispersion of returns around the mean) while others use beta (or sensitivity of the fund’s return compared to a benchmark such as the Trinidad and Tobago Stock Exchange Composite Index).