The Investment Process

Merlea Investments promotes the accepted investment process that seeks low risk (low volatility) and high relative returns by diversifying clients' investments between the four core assets. These core assets of property, interest bearing deposits, cash and direct shares, form the underlying investments within the managed funds in which Merlea Investments specialises.

Additional performance and security is then sought through accessing some of these assets internationally. In this way the movements of the different assets stabilise each other, while the exposure to world wide opportunities in growth assets can gain additional returns.

As a general rule, no one of these core assets is excluded at any particular time. All four have been recommended to be held even if in varying amounts.

By tailoring the mixture of assets to each client and their specific situation, and by regular reviews, rebalancing of the portfolio using the process described above can deliver very worthwhile investment returns to clients.

Its Past Performance

Historic evidence points to the overwhelming success of the investment process described above in providing a measure of security whilst achieving worthwhile returns.

As we know however, times continually change, and the move towards a global economy and a global village through the incredible speed of the world wide communication network, and the abandonment of financial controls between different countries, may have diminished some of the benefits of the process.

In considering the impact of the world wide devaluation of shares in 1987, we also then noted the similarly wide spread devaluation of property that occurred from 1989 to 1993.

In February 1994 the US bond market led the whole world into a devaluation of long term interest bearing deposits which was unprecedented in its uniformity.  The bond markets of different countries increased interest rates with no consideration given as to at what point that specific economy was in its cycle, an event which, like the 1987 share declines and early 1990's property slumps, saw the world act as one market.

1994 also saw an unusual situation where, led by the fall in bond markets world wide, equities generally, and even property, performed in a disappointing fashion over the whole calendar year.

While the traditional investment process seeks to avoid future forecasting by maintaining an exposure to each of the core asset types at all times, an alternative process does exist.

Primary based on the view that 80% of our returns will come from being in the right asset mix regardless of fund manager and specialist stock picking.

Secondly, is a nominated return needs to be established so that the asset mix reflects the mix that will generate the return in the easiest method (e.g. if an investor requires a 7% return, the cash will give us 5% - 80% of the funds will be in cash).

The advantage to the investor is that we can now measure a result that is not based against an index.  We can also measure the downside, so the investor is aware of the expected negative performance of their portfolio. By concentrating the attention on the asset mix the client has agreed to an expected return or loss.

Benchmark Aims

Asset weighting Up-side Down-side
Low 9% return -3%
Moderate 12% return -6%
High 15% returm -7%
Anytime 2% higher than cash rate -1%

Benchmark is the accumulation of growth and income but ignores tax consequences. It does allow for a 2% transaction fee.

Economic data and asset weighting details determine the yield of the 10 year bond and also cash rates. Asset modelling is designed to achieve these rates the simplest way (e.g. as rates rise to 9% (low risk model is to achieve 9%) we would stay in cash/fixed interest). (As rates reduce other asset classes would be purchased).

The advantage of this system is that by knowing what we want to achieve means we can measure our performance.

The entire modelling process is based on measuring the risk against the 10 year bond which is the risk free rate of return. For us to deviate to gain a higher rate of return we need to be able to measure risk versus reward.

A Market Cycle

Our modelling is designed to give a constant return allowing for the excess positive/negatives in the market.

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Our system uses economic fundamentals, statistical data combined with an enormous data base, and specifically designed software, to generate simple graphs that can tell you at a glance the implied trend of your investments performance. It can be used to indicate a time during which an investment will underperform the benchmark (interest bearing cash investments) and therefore indicate a sale and reinvestment to cash.

Conversely, it can indicate that a buying opportunity is evolving through an asset seemingly increasing in value, so that cash can be better applied to owning that investment rather than accepting the cash rate.

The actions generated from our system are indicated as follows.

Guide to Terms

SA Stand Alone No action
SB Start Buying Buy 30% of recommended amount
ACC Accumulate Buy 60% of recommended amount or buy only 30% if a 'SB' has already been done
BUY Buy Buy Full Parcel Recommended or balance remaining from SB
TSP Take Some Profit Sell 30% of existing holding
TAP Take All Profit Sell 50% of existing holding (sell only 20% if a TSP has already been done)
FFL Further Falls Likely You decide whether to sell or hold
SELL Sell All Sell All Holdings

In most cases, recommendations are only triggered if the parcel (value of trade) is $1,500 or more.

This is the specific investment process that we would follow when implementing & monitoring your investment portfolio. For example, if an 'Accumulate' action came up on one of your recommended stocks, we would recommend to purchase 60% of that investment at that particular time. We would then only purchase more of that particular stock when a full 'Buy' action came up.

If a profit signal came up on a stock you had in your portfolio, providing you had made 20% profit, we would recommend to sell part of your investment at that time.