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This is a financial promotion for First State Diversified Growth Fund for professional clients only in the EEA and elsewhere where lawful. Investing involves certain risks including:

The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.

  • Currency risk: changes in exchange rates will affect the value of assets which are denominated in other currencies.
  • Emerging market risk: emerging markets may not provide the same level of investor protection as a developed market; they may involve a higher risk than investing in developed markets.
  • Derivative risk: the use of derivatives may result in large price fluctuations and gains or losses that are greater than an investment in the underlying asset.
  • Credit risk: the issuers of bonds or similar investments may not pay income or repay capital when due.
  • Interest rate risk: interest rates affect the value of investments; if rates go up, the value of investments fall and vice versa.

Reference to specific securities or companies (if any) are included to explain the investment strategy and should not be construed as investment advice, or a recommendation to invest in any of those companies.

For a full description of the terms of investment and the risks please see the prospectus and Key Investor Information Document.

If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice.

Global Financial Crisis Part 1 liquidity, please

This is article 3 of our 5-part ‘Expecting the Unexpected’ series. If you enjoy reading this article, don't miss the other four in the series by clicking the links on the right hand side of this page.

• A systemic crisis begins, borne out of the US housing market

• All risk assets are affected during this time: July ‘07 to July ‘08

• Lesson learned: Liquidity can become extremely tight, affecting asset prices

As far as financial disasters go, The Global Financial Crisis (GFC) of 2007 / 2008 has reserved its place in history as the one that nearly broke the financial system, working its way deep into the real economy, creating global mass unemployment and affecting the lives of millions of people. For investors, regulators, governments, ratings agencies, bankers and central bankers, it was an important lesson in the complexities of risk and the knock-on effect of its mismanagement, as well as the fragilities created by bingeing on debt.

For Andrew Harman, of the First State Diversified Growth Fund, the events of the GFC have also provided the opportunity to examine the impact of such severe asset price shocks across his portfolio today, enabling him to better prepare it for any twists and turns future markets may bring. This approach, he believes, makes the fund particularly attractive for those looking for capital preservation as well as capital growth.

It was 2006 when toxic assets started to burn a hole in the balance sheets of banks around the globe, but in the preceding years the ‘Great Moderation’ – years of low interest rates and stable growth – had set the scene, encouraging debt to balloon and risk-taking to thrive. Why so much cheap money swilled around is open to debate: some point to vast savings in Asia; others, central bankers anchoring rates too low. Whatever the reason, it encouraged investors to seek out better risk adjusted returns and spurred massive demand for questionable financial assets. European banks, booming since the creation of the euro, were amongst some of the biggest buyers.

One asset proved particularly popular: the collateralised debt obligation (CDO). These were attractive because of the manner they sliced-up risk, creating tranches of varying quality to meet the appetites of different financial institutions. The problem was they only work if the loans packaged inside them are uncorrelated; mortgages from different cities within the US housing market, which filled many of the CDOs, were not. But all of this was not to be unearthed while the housing market was rising.

Try our DGF Navigator for a transparent view of our asset allocation decisions since the launch of our Fund.

Mortgage lenders then started doling out subprime mortgages to keep the CDO engine generating fat profits, but banks had lost sight of their risk. The housing market turned. As defaults spilled over into the supposedly safer tranches, the CDOs that banks had loaded themselves up with became worthless, and they were forced to record enormous mark-to-market losses on their balance sheets . With regulators having failed to ensure proper capital buffers, liquidity - and trust - evaporated overnight.

It was the summer of 2007 when the crisis reached its ‘active’ phase. The sheer size of the systemic issue started to become apparent to investors ranging from big financial institutions to insurers to pension funds to hedge funds. As a widespread credit crunch set in, so did fears of a global recession and even depression and markets reacted with extreme risk-off repositioning, blowing out credit spreads and dropping equity markets worldwide.

A key feature of markets during this year was the impossible trading of less liquid assets: trust had evaporated alongside liquidity, probably best demonstrated in the widening of the LIBOR spread. Rebalancing portfolios or reducing positions was extremely painful with assets being sold at a fraction of their former worth.

Rapturously evident during this time was that safe havens were only to be found in the most liquid of assets, particularly in the more defensive currencies such as the Swiss Franc, Japanese Yen and US Dollar; as well sovereign bonds such as US Treasuries or UK Gilts. All of these strengthened in value during this time.

For these reasons having an allocation to cash-like short-term government bonds in the portfolio provides the opportunity to dynamically capture market opportunities. US Dollar exposure has also been increased more recently as a highly liquid currency, looking attractive as stronger fundamentals feed through with a combination of a better macroeconomic outlook and higher interest rates relative to other markets. These liquid positions serve to protect against extreme market falls in the event of a crisis.

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The next article will explore the next phase of the crisis and further lessons learnt.

See our full list of ‘Expecting the Unexpected’ articles below:


Important Information

This document has been prepared for informational purposes only and is only intended to provide a summary of the subject matter covered and does not purport to be comprehensive. The views expressed are the views of the writer at the time of issue and may change over time. It does not constitute investment advice and/or a recommendation and should not be used as the basis of any investment decision. This document is not an offer document and does not constitute an offer or invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy, or completeness of the information. We do not accept any liability whatsoever for any loss arising directly or indirectly from any use of this information.

References to “we” or “us” are references to First State Investments.

In the UK, issued by First State Investments (UK) Limited which is authorised and regulated by the Financial Conduct Authority (registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB number 2294743. Outside the UK within the EEA, this document is issued by First State Investments International Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registered number 122512). Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB number SCO79063.

Certain funds referred to in this document are identified as sub-funds of First State Investments ICVC, an open ended investment company registered in England and Wales (“OEIC”). Further information is contained in the Prospectus and Key Investor Information Documents of the OEIC which are available free of charge by writing to: Client Services, First State Investments (UK) Limited, Finsbury Circus House, Finsbury Circus, London, EC2M 7EB or by telephoning 0800 587 4141 between 9am and 5pm Monday to Friday or by visiting www.firststateinvestments.com. Telephone calls may be recorded. The distribution or purchase of shares in the funds, or entering into an investment agreement with First State Investments may be restricted in certain jurisdictions.

Representative and Paying Agent in Switzerland: The representative and paying agent in Switzerland is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. Place where the relevant documentation may be obtained: The prospectus, key investor information documents (KIIDs), the instrument of incorporation as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland.

First State Investments (UK) Limited and First State Investments International Limited are part of Colonial First State Asset Management (“CFSGAM”) which is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments elsewhere. The Commonwealth Bank of Australia (“Bank”) and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of the Bank or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

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