In today's podcast, Scott Keefer looks at recent comments made by Warren Buffett to a group of 150 Wharton business students.

In the podcast Scott looks at the advice Buffett, arguably the world's most successful investor, has for investors.  In particular it suggests that non-professional investors should use index funds and buy into these over time.  Not to try to time markets or pick individual stock winners.  Buffett concludes his comments by stating that the only way an investor can get killed is by high fees or trying to outsmart the market.

Please click the following link to be taken to this podcast - Buffett's Latest Advice.

The latest edition of our fortnightly email newsletter has been sent to subscribers.  If you would like to be added to the mailing list please click the following link to be taken to the sign up page - The Financial Fortnight That Was Sign Up Page.

The financial topic discussed this fortnight was the importance of scientific research.  The latest edition also contained the following Market Update:

Market News

Market Indices

Since our previous edition, Australian and global sharemarkets have experienced mixed movements over the past fortnight.  The S&P ASX200 Index has fallen 3.38% from the 4^th to the 18^th of April.  It is now down 12.94% from the same time last year and down 14.36% for the calendar year (2008) so far.  The MSCI World - ex Australia, a measure of the global market, has risen 1.29% over the same period.  The index is down 9.47% from the same time last year and down 7.52% for the calendar year so far.

Emerging markets have also experienced positive movement with the MSCI Emerging Markets Index rising 2.38% since the 4^th of April.  It is up 14.95% from the same time last year but down 6.68% for the calendar year so far.

Property trusts have lost some of the upward momentum since the 4^th of April with the S&P ASX 200 A-Reit Index (formerly known as the Property Trust Index) falling by 4.35%.  The index is down 32.25% from the same time last year and also down 20.99% for the calendar year so far..  The S&P/Citigroup Global Real Estate Investment Trust (REIT) Index, a measure of the global property market, has fallen 0.40% over the same period.  It is down 19.74% from the same time last year but now only down 0.48% for the calendar year so far.

Exchange Rates

As of 4pm the 18^th of April, the value of the Australian dollar had risen since the 4^th of April with the Aussie dollar up 2.93% against the US Dollar at .9384.   It is up 12.21% from the same time last year and up 6.64% for the calendar year so far.  Since April 4^th the Aussie has risen 2.47% against the Trade Weighted Index now at 70.5.  This puts it up by 4.14% since the same time last year and up 2.62% for the calendar year so far.  (The Trade Weighted Index measures The Australian dollar against a basket of foreign currencies.)

General News

Since our last edition the Australian Bureau of Statistics has released the latest employment data with the unemployment rate rising to 4.1% in March.  Participation rates have remained stable at 65.2% with employment growing by 14,800 over the month.  The ABS has also released that Australia's population has risen to 21,097,100 by the end of September 2007, an increase of 1.5% over the year.

Regards,

Scott Keefer

Our approach to building investment portfolios is based on scientific / academic research.  We believe this is crucial as this research has stood up to the rigours of a peer review process, whereby the research is assessed for its quality before being published.  This scrutiny works to ensure that the research can be relied upon when making important investment decisions.

To help provide an insight into our approach, we have set out the core research that we use.  Many of the papers on which we base our philosophy are freely available on the internet so we have also provided links to these materials for those who are interested in delving deeper.

Please take a look at our newly developed set of web pages - Our Research Based Approach.  If you have any comments or thoughts do not hesitate to get in contact.

Kind regards,

Scott Keefer

In today's podcast, Scott Francis looks at the topic of longevity risk.  He refelects that as we all are tending to live longer it is a risk that needs to be seriously considered.

In the podcast Scott looks at the strategies that need to be considered - having a greater exposure to higher volatility - higher expected returns assets, focusing on the income that is being produced by investments and the use of the superannuation environment providing tax free investment earnings in pension mode and tax free pension payments after the age of 60.

Please click the following link to be taken to this podcast - Planning for Longevity Risk.

This morning I received my regular email update highlighting the feature articles in this month's edition of the AFR (Australian Financial Review) Smart Investor.  I was particularly drawn to an article written by Tony Featherstone which was marketed as follows:

"Even when markets are falling, there are always companies that are a law unto themselves. Tony Featherstone uncovers six stocks with the competitive advantages to survive a crisis."

The six stocks highlighted in the article included Brambles (BXB).  For those of you who have been closely watching the movements in the market, you will be aware that Brambles fell more than 10% on Friday.  To be fair, at the time of writing this blog BXB has gained 1.56% but even this is less than the market averages for what has been a strong start to the trading week.  The ASX 200 was up 2.68% at the same time.

For the year so far to Friday, Brambles is down 26.22% (including dividend) while the ASX200 is down only 14.36%.

In defence of the article, at its conclusion it does suggest a buy and hold approach and it may well be that Brambles picks up and is a winner in the longer term.  However, if you bought the stock on Thursday you may have some doubts.

The real issue for me is that this example highlights the difficulty (and danger) in trying to forecast and pick winning markets yet alone winning stocks within those markets.

A well diversified, buy and hold strategy stacks up a whole lot better.

Regards,

Scott Keefer

During their Wednesday evening program Channel 9's Brisbane Extra presented a segment on the MBF merge with BUPA. The program provided viewers an analysis of the decision that needs to be made by current MBF members who have a right to vote on the merger plan. Scott Francis was interviewed for the program to provide some brief analysis of the financial implications of the decision.

For a copy of the transcript of the program please click on the following link to the Nine's Brisbane Extra website - MBF Merge.

In his latest article written for Alan Kohler's Eureka Report, Scott looks at how some fund managers are classifying hedge funds within the defensive allocation of a portfolio.

He looks at the two main arguments for making this classification and concludes that hedge funds do not belong in the defensive allocation of a fund or portfolio.

Click on the following link to read Scott's article - Prickly Hedges

In the lead up to the end of financial year, we are starting to see a few media stories providing advice on how to prepare for the end of the "income tax" year.  At the same time we continue to see reports about the negative returns on equity markets with the red ink being pulled out of the drawer for the first time in a number of years for managed funds, including superannuation.

My guess is that many investors will be thinking that there will not be any nasty tax issues in their managed fund portfolios due to the negative performance figures being reported on websites and statements.  They might actually be hoping for some tax losses from these funds to write off against their other forms of income.  Unfortunately, the bottom line returns of managed funds hide the real story.

Many of the major managed fund providers report ongoing performance figures through their websites outlining the capital growth of the fund along with the distributions that have been paid out to unit holders.  Unfortunately not all providers provide this breakdown throughout the year and some have yet to provide the data up to the end of the March quarter 2008.  The broadest set of data available is up to the end of February 2008.  This sample is far from representative but provides anecdotal evidence of what is going on in terms of managed fund returns and distributions.

The dividend yield across the ASX200 at the end of February was 4.3%.  If we use this as a proxy assume the best case scenario that all of this dividend yield is fully franked and is received by investors on the 30% marginal tax bracket, this part of the distribution quoted above would be received free from tax.

By implication, this means that the remaining part of the distribution is a capital gain that has been realised by these funds.  If we again assume the best case scenario that these capital gains are from assets held for greater than 12 months, and thus receive the 50% discount on capital gains, this would leave the following level of distributions to be taxed at an investor's marginal tax rate:

Only MLC Vanguard Australian Shares Index (an Index fund) would not be passing on any (or very little) taxable distributions to investors.  It is interesting to note that this is the only index fund amongst the list.

In all likelihood, the MLC Vanguard Australian Shares Index would be passing on some taxable distributions as well but it would be significantly less compared to the other funds.

If we take this analysis to next level and reduce total returns by the tax on the taxable distributions (assuming a marginal tax rate of 31.5%) it provides the following data

An already disappointing investment result just became that bit worse.  It is really this after tax return that is most important to investors as it provides the return that is actually going into (or in this case out of) their pockets.

The same type of analysis is relevant to the superannuation environment; however the impact is not as great due the maximum 15% tax rate for income produced within a superannuation fund.

At this point some may be saying hang on, what about the capital loss (negative growth) that has been reported by the funds.  Unless investors sell their units held in the fund on or before the 30^th of June, these losses would not be realised and therefore not be able to be claimed as a write-off for tax purposes.

I openly admit this is a fairly simplistic approach to the data, but definitely provides some anecdotal evidence of the impact of an active approach to investing in terms of tax consequences.

Regards,

Scott Keefer