Riding the Global Credit Crunch and Commodities Boom

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Monday, February 11th 2008, 4:32PM

Credit markets crunched
The credit crunch that set in from mid 2007 owes its origin to sub-prime mortgages offered to US borrowers who failed to meet standard bank lending criteria. Soaring default rates on these non-prime mortgages have fed through into so-called 'structured products' that were mass manufactured to securitize those mortgages: collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), bank 'conduits' and special investment vehicles (SIVs).

Structured products were sold worldwide, exporting US sub-prime mortgage default risk to foreign investors. The sub-prime debacle has since imposed severe and continuing devaluation strains on these exotic, illiquid kinds of fixed interest securities.

Knock-on effects have forced banks to raise loan interest rates and tighten lending criteria, triggering a credit crunch that is expected to persist for an extended period. One result has been an additional increase to already high residential mortgage interest rates in New Zealand. However, not all is doom and gloom for fixed interest investments.

The TOWER Extended Markets Fund – Asset allocation: fixed interest
This fund offers an opportunity to benefit from higher bond yield spreads caused by the credit crunch. It invests in emerging market sovereign debt and US high-yield corporate bonds (but not in structured products). After dipping briefly during the initial shock , fund performance has since weathered the onset of the crunch well.

The fund is actively managed by PIMCO, one of the world's largest bond managers, whose expertise in fixed interest analysis enables it to pick-and-choose skillfully from the current buyers' market for good quality higher-yielding bonds. Its assets are traded on open, liquid exchanges and marked to market (valued off actual daily trading prices). TOWER Extended Markets Fund cumulative monthly performance (gross) through the credit crunch period.

Commodities a-booming
News media are filled with stories about the global commodity bull market. Getting most attention at present are oil, petrol, gold, and agricultural commodities. A weak US dollar is boosting prices on top of relentless increase in world demand for energy, metals, and agricultural commodities. The agricultural commodity boom is underpinned by rising demand from China, India and other emerging markets for imported food, the negative effects of climate change on growing conditions, and conversion of grains and sugar into biofuels to help curb greenhouse gas emissions. Commodities are receiving standard inclusion as an asset class in their own right within prudently diversified investment portfolios. For example, the New Zealand Superannuation Fund recently confirmed a 5% strategic asset allocation to commodities.

The Tower Global Commodity Fund – Asset allocation: alternative investments
This fund represents a straightforward way for New Zealand investors to diversify their portfolios into the commodity asset class. It includes the 19 most important commodities (based on world production value (US dollars) and future market liquidity). The table below shows these commodities classified by sectors.

The Tower Extended Markets Fund and the Tower Global Commodity Fund are portfolio investment entities designed for pooling individuals' investments on wrap platforms and custodial services. Both funds are accessible through New Zealand's two largest wrap providers. For further information on these funds or to obtain an investment statement contact Michael Coote at (09) 302 1068 or michael.coote@tower.co.nz, or visit www.tower.co.nz

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