Asset Allocation Update: Bullish on Commodities, Bearish on Yen and Treasuries

Investment Policy Committee Newsletter
December 22nd, 2008

The market continues to be full of uncertainty rather than risk that can be priced. The uncertainty will remain present while the likelihood of future events are indefinite or incalculable. Risk will become quantifiable when future events occur with measurable probability. We believe this will happen in 2009. This has caused us to make the following strategic forecast:

Commodity Markets

We believe that commodities are poised for a rally and have generally bottomed out. Low inventory levels and mining capacity reductions could cause a supply squeeze and result in higher prices if economic activity or confidence picks up even slightly. We are therefore increasing our commodity allocation moderately from 4.0% to 5.0% but are keenly watching for any signs of a rebound. We do not share the same view for gold at its current level.

Fixed Income

We believe that the recent “Bull Market” in bonds will come to an end in 2009. Across the U.S. Treasury curve, yields are lower than they have been in the past 50 years. When current market risks become quantifiable, this bubble should deflate (i.e. yields will rise) causing a drastic sell off in the bond market. The worst performing sector is likely to be government bonds as the flight to quality dissipates at the same time governments worldwide will be forced to issue an enormous amount of debt to pay for the bailout plans that have been announced. We are also recommending shortening duration and employing absolute return fixed income strategies. We are therefore decreasing our target allocation for bonds by 1.0%.

Performance Review

In our last Investment Policy Committee (IPC) meeting on November 26th, we allocated an additional 3% to equities and 2% to commodities by reducing hedge fund exposure by 4.5% and cash by 0.5%. Between then and our most recent meeting on December 22nd, the MSCI World USD equity index increased approximately 3.4% although the Dow was down 1.5%. During the same period, precious metals gained around 4.4% on average, industrial metals fell 15.6%, and energy commodities were down nearly 21%. We also allocated an additional 1.0% each to Euros and Sterling by reducing Yen exposure by 2%. Since our last meeting, the Yen gained 6.0%, the Euro climbed 8.4%, and Sterling dropped 3.1% against the dollar.

Recommended Global Allocations

 

Asset Class Currencies
Equities 56.0% US Dollar 61.0%
Bonds 24.0% -1.0% Euro 18.0%
Hedge Fund 10.0% JPN Yen 8.0%
Commodities 5.0% +1.0% Swiss Francs 4.0%
Cash 5.0% UK Sterling 4.0%
      Dollar Bloc 5.0%

These recommendations are targets and do not represent specific trade ideas. Not suitable for all investors.

For further information call LOM Asset Management Limited or your local Investment Advisor. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.