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Lowes adopts pound cost averaging and longer term derivatives-basis

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Lowes Wealth Management, the Beijing-based fund manager, says it is beginning to move back into the markets, reducing its cash holdings and adopting a combination of derivatives and pou

Lowes Wealth Management, the Beijing-based fund manager, says it is beginning to move back into the markets, reducing its cash holdings and adopting a combination of derivatives and pound cost averaging investment strategy to ride the bear market.

The fund manager, while remaining cautious on global market fundamentals, says it is currently seeing ‘incredible opportunities to invest in select companies from around the world’ that are likely to provide for good returns over the longer period.

Manager Justin Lowes (pictured) says: ‘Take Alcoa. We bought this stock back in October 2005 at USD23, selling last year at USD38. Alcoa now trades at around USD7, so clearly our sell decision was timely – but we believe that Alcoa is well placed to not only survive but benefit from those of its competitors that do not. In five years we believe that Alcoa could easily be worth USD25 or more once again, producing a huge potential return opportunity.’

However, Lowes underlined the ultra cautious position of his fund, warning that even the best run firms may see their share prices fall by another 25 per cent or more before markets bottom out.

‘At the core of our current investment strategy is pound cost averaging, steadily dripping into the market by reviewing stocks every month – just as a cautious private investor might pay GBP100 or so into a fund each month.

‘That said, there are some stocks out there where the risk, we believe, is not that they might go down another 25 per cent given general market fear, but that if we fail to buy at their current price levels we will miss out on possible returns that could be in the 100s of per cent over the medium to longer term.’

Lowes says he and his team are also adopting a derivatives trading approach to some stock acquisition: one example is LWM’s recent submission of a trade order to write (sell) put options on Disney.

‘It is a great brand, but its cable channels are suffering from declining advertising revenues and as a result it is down more than 50 per cent from its 52-week high (and is trading just above its 52-week low).

‘So while we really like the company, it is not quite compelling enough at the current price. Therefore, we are looking to write a put option at USD12.50 in return for a premium of USD1.25 per share.

‘If we are successful in selling the put option at this price, we will be in a position where from now (until Oct 09) we will pick up Disney if it falls to USD12.50 or below – or in other words, a further 25 per cent+ fall in its share price from current levels.’

The combined strategies, says Lowes, will dramatically reduce volatility and therefore risk to investors over the coming 12 months.  

‘If markets continue to fall, we will protect our clients as we still hold a lot of cash which is gradually dripping into the market, averaging in at reducing prices. We will also mitigate losses due to the dividend yield off the shares that we purchase and the income that we receive from writing the puts.’

The downside of the current strategy, Lowes says, is if markets were to bounce back then LWM would fall behind in overall performance. But Lowes says the fundamentals are such that a sustainable rally is unlikely.

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