Scott Francis has published an article in today's edition of Alan Kohler's Eureka Report which breaks down the effects of the recent interest rate rise for investors.  It looks at the impact on mortgage holders, shareholders, investors with margin loans and investors holding  cash and fixed interest investments in their portfolios.  Click here to be taken to the article.

There was an interesting article in today's (7th November 2007) Australian newspaper.

It looked at the collapse of a gold trading scheme - the Gold Link Income Plus fund.  The fund had traded in gold derivatives, and the article reported that the trading had taken a position on gold prices falling.  Of course, gold prices have surged lately and the fund lost much of the money.

The key person behind the fund - Mr Kovac's - was paid fees for managing the fund to a private company.  Over the last 16 months he was paid $9.7 million while the fund lost more than $100 million.

Investors are likely to lose around 80 cents for every dollar that they have invested.

A question that this begs is, does gold have a place in investment portfolios?

My opinion is that it does not.

Firstly, I continue to focus on investments that produce an ongoing stream of real earnings for investors - whether they be cash assets, fixed interest assets, real estate assets or shares (part ownership of a company).

Secondly, the historical returns from gold have not been that good.  Over the past 50 years (1957 to 2007) gold has risen in value from US$43 to US$808 (source Global Financial Data).  Sound impressive?  That's a return of spot on 6% a year.  Remember there are no income, interest, rent or dividends - all an investor receives is the increase in value of 6% a year.  And that is a terrible return over that period of time - particularly given the volatility of gold prices.  Not so long ago gold was trading at less than $300.

For all the arguments about gold I really can't see any justification for its place in a portfolio.

Cheers

Scott Francis

As financial planners who recommend the use of Dimensional funds we have access to regular articles written by Jim Parker, a Regional Director at Dimensional Funds Australia.  In his most recent article Jim looks at the rise of the Australian dollar and looked back at what analysts were predicting at the beginning of the year.

Jim reports that according to a Reuters poll of currency analysts with the major domestic and international banks conducted in January, it was predicted that the Australian dollar would be around 78 cents by July and 76 cents by early 2008.  The current exchange rate of the Australia dollar places it at 22% above these levels.

This finding yet again shows the failure of forecasting.  These analysts are paid to make these forecasts but more often than not they get it wrong and not just by a small margin.

Some current predictions see the $A reaching parity with the $US.  Given the recent history of predictions would you feel comfortable relying on their predictions?

The clear lesson to be learnt is that nobody really knows how exchange rates nor equity markets will be into the future.  Trying to make or follow predictions is fraught with pitfalls.

Regards,

Scott Keefer

My wife and I are hoping to return to Jakarta over Christmas and are scouring the cheap online travel websites to source the best deal possible.  Many of you will have seen the recent commencement of flights by Air Asia from Coolangatta to Kuala Lumpur.  I checked out the deals and became really excited at finding their cheap airfares.  However as I began to dig deeper it soon became clear that these fares did not include meals or baggage costs.  (At least they did include airport taxes in their headline fares.)  Fair enough I guess because they had a tiered baggage charge depending on how much luggage you checked in - $7 for 1-15kg, $42 for 16-20kg, $77 for 21-25kg and so forth.  Meals were $7 per meal.  Adding the baggage and meal charges soon led to the fares becoming very similar to fares offered by other airlines.

This scenario is analogous with the way managed funds quote their performance.  Some will state their performance gross of fees, similar to how airlines quote their fares without including airport taxes.  However, most now do take fees out giving a fuller picture of the actual performance.

Unfortunately, very few funds give performance results after tax.  Really this is what the investor wants to know.  How much of the investment returns will actually make their way back into the investor's hip pocket.  I guess this is like Air Asia not quoting prices with baggage or meal charges included.  Both do not really get a full picture of the end result for investors or travellers.

Like managed funds, Air Asia will most likely say they do not do this because not all passengers will need to access baggage services and therefore will not incur this cost similar to the managed fund world with investors on 0% marginal tax rates.  The trick for investors is to make sure they get a full picture of the tax liabilities they are likely to incur on their funds.  It can make a huge difference to what you actually receive.

The two fund providers that we prefer - Dimensional Fund Advisors and Vanguard both give investors and prospective investors performance details after tax covering all of the different marginal tax rates.  They both have good reason in doing do as they use investment strategies that try to reduce turnover and the realisation of gains as income for investors.  We believe this is another part of the story that makes these funds the basis of a successful investment outcome.

Please drop us a line if you would like to know more about the impact of tax on fund performance.

Regards,

Scott Keefer

Scott Francis has published an article in Alan Kohler's Eureka Report entitled - 'Shot in the dark'.  In this article Scott looks at the usefulness or otherwise of stock recommendations made to investors.  He particularly looks at two studies highlighting that broker recommendations underperformed.  Click here to be taken to the article.

I have to point out some bias in this blog up front.  I hate 'white collar' crime.  I think that it is often understated - however whether you take money from people through straight theft, or through so called 'white collar crime', it has the same impact on the victims.

Consider the crooks selling fake investment schemes.  The impact that has on their victims is no different to theft - and the perpertrators of such theft should be dealt with harshley.

So to today's announcement that Richard Pratt has only been dealt a fine for price fixing in the cardboard market.

As consumers, we all use carboard.  From pizza's to new computers each of us was impacted by the price fixing between Visi and Amcor.  Let's try and put a figure on this.  The Australian cardboard market has two basic players, and is worth about $2 billion a year.  Let's assume that the price fixing ran for three years - although it almost certainly ran for longer.  If the price fixing allowed them to overcharge by 5%, that means that Visi and Amcor would be benefiting to the tune of $100 million a year in extra revenue - or $300 million over three years.  That is $15 for every man woman and child in Australia.  So what were the total fines for this price fixing? - $38 million. 

Amcor and Visi have fixed prices, stolen $300 million from Australian consumers and businesses and been fined less than $38 million.  Good work if you can get it.

(PS - there is a $700 million class action against Visi and Amcor for damages, so our $300 million estimate even looks a bit conservative).

The latest edition of The Financial Fortnight That Was has been emailed to subscribers.  This edition looks at the role of exchange rates in investment decisions.  If you would like to receive this free email service go to the Sign Up page found on our website.

Please read on for the latest market news for the fortnight concluding Monday 29th October.

Another policy announced this week should provided some benefits to pensioners, self funded retirees, people with disabilities and their carers.  The Liberal Party have announced the following details:

• An increase as of March 2008 in the Utilities Allowance paid to those in receipt of income support to meet basic household bills like power and gas from $107.20 to $500 a year for a single and $500 for a couple.
• Utilities allowance extended to Carer Payment recipients and Disability Support Pensioners.
• Seniors Concession Allowance to be increased to $500 from June 2008.  This will particularly benefit self funded retirees who do not receive the Age Pension.

Regards,

Scott Keefer

As promised in our blog last week, we intend to provide details of policies announced during the election that affect financial planning strategies for the future.  Last Friday the Australian Labor Party announced their tax plans for the future.  The details of their plan are as follows:

In 2008-09

• Low Income Tax free threshold due to the Low Income Tax Offset to rise from $11,000 to $14,000.
• Start of the 30% threshold to increase from $30,001 to $34,001.
• Start of the 40% threshold to increase to $80,001.
• Start of the 45% threshold to increase to $180,001 (as promised in the budget in May).

In 2009-10

• Low Income Tax free threshold due to the Low Income Tax Offset to rise from $14,000 to $15,000.
• Start of the 30% threshold to increase from $34,001 to $35,001.

• Second top marginal rate to be cut from 40% to 38%.

From July 1, 2010

• Low Income Tax free threshold due to the Low Income Tax Offset to rise from $15,000 to $16,000.
• Start of the 30% threshold to increase from $35,001 to $37,001.
• Second top marginal rate to be cut from 38% to 37%.

The major difference from the Liberal Party policy is that the top marginal tax rate for those earning more than $180,000 will not be reduced from 45% to 42% over 2009 - 2011.

The Labor policy also announced  an Education Tax Refund to be funded by not reducing the top marginal tax rate.  All families who receive Family Tax Benefit (Part A) will be eligible for:

·                     A 50 % refund every year for up to $750 of education expenses for each child attending primary school (maximum $375 per child, per year).

·                     A 50 % refund every year for up to $1,500 of education expenses for each child attending secondary school (maximum $750 per child, per year).

Families would submit their application for this refund as part of their annual tax return.

Regards,

Scott Keefer

The Australian Bureau of Statistics (ABS) today released the September quarter Consumer Price Index data.  These statistics attempt to measure the inflation in prices in the economy.  The results show that the cost of the basket of goods used to measure price levels in the Australian economy has risen by 0.7% for the quarter and 1.9% for the year.  These are known as the Headline figures.

Breaking down this data, the ABS recorded the following significant movements in prices for the quarter.

Increases:

• fruit (+9.6%),
• vegetables (+7.9%),
• deposit and loan facilities (+2.2%),
• rents (+1.6%),
• other financial services (+2.3%),
• house purchase (+1.0%),
• electricity (+4.3%),
• overseas holiday travel and accommodation (+4.2%),
• property rates and charges (+4.5%),
• water and sewerage (+5.5%),
• domestic holiday travel and accommodation (+1.8%) and
• other motoring charges (+2.6%)

Decreases:

• child care (-33.4%), - as a result of the change in eligibility criteria for Child Care Tax Rebates
• automotive fuel (-3.7%),
• pharmaceuticals (-4.5%),
• audio, visual and computing equipment (-2.5%) and
• furniture (-1.5%)

However, the Reserve Bank of Australia's separate Consumer Price Measure, referred to as the core figures, showed inflation for the quarter at 0.9% and 2.9% for the year.  The Reserve Bank will look carefully at this data in deciding whether to raise, or lower, interest rates at the next board meeting on Melbourne Cup day - Tuesday 6th November.  With inflation at the higher end of the 2 to 3% rate targeted by the Reserve Bank many forecasters are predicting a lifting of the official interest rate.  This is clearly shown by the futures market who have priced in a 75% chance of a 0.25% increase to 6.75%.

There is bound to be a deal of nervousness when the decision is announced at 9.30am on Wednesday 7th.

Regards,

Scott Keefer

(To be taken to the Australian Bureau of Statistics data click here)