Postcards from Thailand

In Britain I thought of banking as pretty much a commodity; there was little to choose between the high street banks. When I worked in Japan a few years ago I was surprised to encounter cash machines which could receive deposits, handled coins as well as notes, and allowed one to pay one’s bills. Ah, the wily Japanese.

My first impression of banking in Thailand was that it was primitive. Most accounts are passbook based and there are no monthly statements. Few people have chequebooks. And for foreigners debit and credit cards are very difficult to obtain. Even then, banks often demand a deposit of 100% or 200% of the credit card limit as security. (In fairness to the banks, in the past they’ve been badly hit by foreigners running up large debts then leaving the country.)

Online banking is a mixed bag. I can’t have internet access to my Krung Thai bank accounts – only Thai nationals can have that. The Bank of Ayudhya system is badly designed and parts of it (such as “set up a favourite account for transfers” plain just don’t work. And the transaction retention period is poor (though not as pathetic as Barclays in the UK, which keeps only a month’s worth of transactions online). On the other hand, there’s no stupid electronic card reader required to access your account and make transfers. (How, exactly, is a card reader a great security device when all the card readers in the UK are functionally the same? If a criminal has your card and your PIN then his/her not having your card reader isn’t going to protect your hard earned cash.) Rather, the Thai banks rely on something much closer to Thai people’s heart: the mobile ‘phone. Every time I make a transfer a security code is sent to my mobile ‘phone which needs to be entered on the website within a few minutes to complete the transaction.

My main Thai bank shows no interest in me. Even though I maintain a high balance and have had a few very large transactions passing through (car, house) they have never tried to offer me any additional services. I don’t even get a free calendar at New Year, and have never been offered a free bank-branded umbrella or patriotic flags to put outside my abode. So, when I saw that Bangkok Bank on its website was offering accounts to foreigners – even those visiting on holiday – including a Visa debit card I thought I’d give it a shot.

At the branch, the first reaction was “can’t do”, followed by “come back with a Thai person” when I persisted. However, when I showed them some material printed from their website they eventually relented. In the end the process was fairly painless.

So far I’m pretty happy. It saves the hassle of finding an ATM and withdrawing cash – particularly for larger transactions. And there were a couple of nice surprises: transferring money from an existing account to my new account was instantaneous. (Is the delay in the UK still three working days?) And now, every time I log on to my new account or a transaction takes place I get an email and/or text message (user’s choice). I think the UK banking system could learn something from the Thai banks.

Something else the UK banks could learn about is “interest”. I was rather taken aback to see a line on my December statement of “Interest and Tax Deducted” – zero pounds zero pence. It seems that some time ago Nationwide stopped paying interest on its current accounts – not that they actually did anything to bring this to people’s attention as far as I know. In contrast my Thai accounts pay 0.625% per annum – hardly earth-shattering, but better than nothing.

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Now I no longer work I depend upon my investments to sustain my lifestyle. True, in 16 years’ time I’ll be entitled to a state pension, though that date may well disappear into the future like a herd of wildebeest charging across the plain off into the sunset. And anyway, the value, even today, would be pretty minuscule. Who knows what it will be worth when I eventually receive it? So, the long and the short of it is that I depend upon the performance of my investments. That means I spend a lot of time thinking about them, and I’ve learned a few lessons along the way.

The key to performance isn’t choosing the right stocks or when to invest (so-called “market timing”). It’s asset allocation. When I was younger, this was easy. Equities returned, on average, about 12% a year over the longer term, bonds about half that. That made it easy: put all the money in equities and sit tight. Asian equities and emerging markets perform better than the more mature markets of Europe and the US, so put a fair chunk of the money into them.

When I moved to Thailand my strategy shifted. The conventional wisdom was that one needed to diversify. The logic was (put simplistically), bonds and equity prices tend to move in opposite directions in a given market situation, so by investing in both bonds and equities, if the equity markets are hit badly your bond investments will cushion the blow, and vice versa.

Of course, the key word here is “tend”. Market performance over the last few years has shown this tendency to be rather elusive.

Retail investors who want to diversify can buy “ready made” packages of bonds and equities, managed by expert fund managers, where the risk is managed for you. One group of such funds is known as “Cautious Managed” (a sector defined by the Investment Management Association). As you might imagine from the name, these funds are skilfully run so that you never lose money, and you see a steady but modest, gradual increase in your wealth … NOT! Here’s the average performance for that sector over the last five years (income reinvested):

So, over five years you’ll have seen your wealth increased by a measly 14.5% – less than 3% per annum – and that’s assuming that you’ve reinvested all your income. Of course, these are average figures. A few funds have done a little bit better. Many have done a lot worse and lost the investors a lot of money. (Of course, the fund managers continue to be paid their high salaries for their amazing expertise, and their employers continue to raking in the management fees from the hapless investors.)

Unfair! you might cry. The last five years have been very bad for the markets. True. Let’s look at the last ten years:

42.3% over ten years is hardly impressive. Is it possible to do better? The answer is “yes”. Have a look at the following graph. It shows the performance of the Ruffer Total Return fund (blue line) over the last five years compared with the Cautious Managed sector (red line).

Nice steady growth. 55.0% over five years. No major dips. Looks pretty good.

But perhaps Ruffer just got lucky. Surely they couldn’t replicate the performance in other markets? But yes they could.

In the Pacific (the green line) they had pretty similar performance (61.9% over five years), whilst in Europe (the yellow line) they did even better (109.9% over the period).

These aren’t fancy funds using derivatives or taking short positions. They’re traditional, long-only funds investing in bonds and equities.

So, what’s the difference? The experts at Ruffer study the economy and shift between asset classes according to what they predict for the economy. If they think equities will perform better than bonds, they move more of the money they manage into equities. If they think that bonds will outperform equities, they shift to bonds. And if they think both will suck over the coming months they sell the bonds and shares and hold on to the cash.

Of course, in theory, this is exactly what all the cautious managed sector fund managers should be doing – but they (with lamentably few exceptions) just aren’t doing it right. Frankly, investors should be up in arms about the poor performance of their funds in this and similar sectors.

Unfortunately, the Ruffer funds aren’t available on the major platforms such as Fidelity Fundsnetwork and Cofunds, nor are similar funds such as Iveagh Wealth, so most investors don’t have access to them and are stuck with the mediocre offerings from the major fund managers.

But it didn’t set out when writing this post to extol Ruffer. Rather I wanted to show that the usual model as touted by investment magazines and financial advisors along the lines of “put 60% of your investments in equities, 25% in bonds and 15% in property” just doesn’t cut the mustard. Allocation across asset classes needs to be cyclical, and needs to be done right, for superior long term returns.

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When I moved to Thailand the exchange rate was around 75 Baht to the pound. What’s happened to Sterling since then? The following graph is based upon the last six years’ interbank exchange rates.

So, the pound’s value has dropped from 75 Baht to around 47 Baht. In other words, it’s lost 37% of its value. This hasn’t been a stepwise change, but rather a gradual but ceaseless errosion of worth. Let’s add a trendline to the graph, just to be sure.

Yup, that looks pretty linear.

Now let’s zoom out and extrapolate.

It’s official. You read it here first. By 2021 – in just ten years’ time – the pound will be worthless.

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