Back on the 26th of July Scott Francis joined Warren Boland on his "Weekends with Warren" segment on ABC radio.  We have eventually caught up and posted Scott's notes from this segment on our website.

In the segment, Scott looked at the topic investing for income.  He commented that "In really volatile times like these, investors often don't think about the income that their investments are paying to them.  Whether it be property, shares, cash of fixed interest, they often focus too much on the price of the investments.  However income can be a great investment benefit, and is actually more important in some ways to investors."

Scott went on to look at the strategy of focusing on income when planning a portfolio.  Click on the following link to be taken to a summary of the segment - Investing for Income - ABC radio segment.

Our page on The Reality of How Investment Marks Work has been updated to reflect more current data up to the end of June 2008. 

This page provides a concise summary of some points that investors should be considering particularly in the difficult investment market conditions we are experiencing at present.  It is well worth a read.

Regards,
Scott Keefer

The more I read from Shane Oliver, the more I become impressed with his balanced assessment of the current economic and investment conditions.  Over the weekend I read an article of his published in the Australasian Investment Review, a freely available online publication - Super Returns: Don't Be Greedy.

In the article Mr Oliver provides an analysis of the medium term return potential in investment markets.  He begins by commenting that recent returns from 2003 to 2007 were well above sustainable levels.  This is an opinion that we also subscribe to.   He goes on to look at indicative return expectations for the medium term using some simple models.

From these models he provides the following projected returns:

Oliver confesses that there are some drawbacks with the models particularly in terms of dividend yields but overall he is comfortable with the results.

Based on his data, investors with a reasonably balanced portfolio would be looking at 5.5% real returns (after the impact of inflation) over the medium term.

This figure is very consistent with the figure we use for projections for our clients regarding likely investment returns.  (We also consider a draw down rate of 5% in real terms as sustainable in retirement.)

The key message for me from Shane Oliver's analysis is that we all need to be realistic about the returns we should expect from our investment portfolios.  We would all love these returns to be higher, and maybe we will see a strong bounce back over the next few years.  However we need to be prepared that throughout history growth asset investment markets have tended to provide returns of 5 to 6% above inflation.  If you plan using these expectations and develop your portfolio so as to avoid the erosion of returns through high fees and heavy trading strategies you are much less likely to end up disappointed with your investment experience.

Take a look at our Building Portfolios page for more information on our approach to building investment portfolios.

Regards,

Scott Keefer

In his latest article written for Alan Kohler's Eureka Report, Scott looks at Centrebet's introduction of betting on interest rate outcomes and parallels this with investors using derivatives markets.

Click on the following link to read Scott's analysis - Rate cut the short-priced favourite.

In his latest article written for Alan Kohler's Eureka Report, Scott looks at whether it is really worth borrowing to invest in share markets.

Scott concludes that "Borrowing to invest remains a legitimate way of increasing the expected return of a portfolio, offering investors tax benefits, but these higher returns come at the cost of significantly increased portfolio volatility. Investors should be aware of this cost, the bias the financial services industry has toward borrowing to invest and the power of the simpler strategy of investing regularly over time in growth assets while building a passive income stream. They should consider all this before deciding whether the risk of borrowing to invest suits their situation. "

Click on the following link to read Scott's analysis - Is share gearing worth it?.

Now that the Beijing Olympics is done and dusted we wanted to put an economic spin on the results.

You may have become aware of the Sunrise program's (Channel Seven) Adjusted Medal Tally comparing Australia's results to the USA based on a per capita basis.  The results were very flattering to Australia.

We took this approach a step further and analysed the results of all the countries who won medals at the Olympics comparing the number of medals with the country's GDP from 2007 measured in US dollars.  The GDP data was taken from the International Monetary Fund's World Economic Outlook database - www.imf.org/external/pubs/ft/weo/2008/01/weodata/index.aspx

The top 10 countries on this basis were:

Other notable ranks were:

If we only were to look at gold medal winners the top ten were:

and

This just puts another perspective on the Olympic results.  I wouldn't be advising using the tables as a source of picking the best performing share markets for the next year.  Zimbabwe is not somewhere I would be throwing cash at the moment.  It might just be worth keeping an eye out though, as going on the record of forecasters this table could be as useful as some of the more classical methods of forecasting.

One definite use of the data is that it will hopefully quieten down a few of our friendly poms who, according to my sister living in London, are pretty happy with themselves given the success of the UK in the Olympics. (I think unbearable was her term!!)

Not so good when conversing with our friends from across the ditch in New Zealand who yet again seem to have been able to fight above their weight!!

I hope those who are interested in the Olympics have enjoyed the past two weeks and let's hope the euphoria is contagious for our share markets!

Good luck to our Paralympians!!

Regards,

Scott Keefer

Feedback from users of our website has recommended that we provide links to other relevant financial media commentary.  You may have noticed that we have linked to relevant commentary from sources like Fundadvice.com, Vanguard commentary, Dimensional Fund Advisors commentary, articles from the Australian newspaper and the Australian Financial Review to name a few.

Today I have read a blog Pride, predictions and a falling dollar written by Robin Bowerman, Principal and Head of Retail at Vanguard.  It highlights the impacts of the recent fall in the value of the Australian dollar in terms of foreign currencies. i.e. the exchange rate.

As with all movements in financial markets there are winners and losers.  The losers at the moment are those individuals and businesses who are importing goods or who are planning on travelling overseas either temporarily or permanently, assuming you do not have other currency to support this travel.

The winners are businesses who are exporting goods (based on variable price contracts) and investors who are investing in un-hedged international investments.

Let's first have a look at the impact of currency movements on investors who invest in international investments.

Back in April 2001, the Australian dollar was being exchanged for 48 US cents.  I was well aware of this as I had just re-located to Indonesia and was being paid in US dollars.  I was pretty happy with the exchange rate as every US dollar I saved resulted in 2 Australian dollars reaching my accounts back in Australia.  When I left Indonesia in December 2003, the exchange rate had risen to 1 Australian dollar buying 73 US cents.  One US dollar of saving would result in $1.36 reaching my Australian accounts.  The exchange rate eventually rose to 97 cents in mid July.  This equates to a 102% rise since April 2001.

If you had hedged your international investments in Australian dollars over the past 7 years you would be well ahead of those who had left their international investments un-hedged.  Let's use a simple mathematical example to show why this is the case.

Say you had invested $1,000 Australian dollars into a US dollar investment back in April 2003, you would have been able to buy 480 US$1 dollar units.  Let's assume that these units rose to a value of US$2 by mid July 2008, you would now have an investment of US$960.  At an exchange rate of 97 US cents to the Australian dollar, if you had redeemed this investment you would have received back $931.20 in Australian dollars.  Your investment had actually fallen in Australian dollar terms by $68.20.  An alternative would have been to hedge this investment against movements in the exchange rate.   Basically, hedging takes out the impact of currency movements and transaltes returns on the underlying investments back into the home currency.  If you had invested the $1,000 into a US investment hedged back to the Australian dollar, you would have received $2,000 back in your hand (assuming that it cost nothing to hedge).  I know which option I would have preferred.

Of course now that the Aussie dollar has fallen over 10% in recent weeks the opposite result is evident.

Before you go screaming out and selling hedged international investments to buy un-hedged international investments, spare a moment of reflection.  As Robin Bowerman points out, currency risk is another risk in the marketplace and as with other levels of risk it is very difficult to predict the movement of this risk (i.e. the movement of the currency).  The exchange rate could quite easily swing back around and reach parity with the US dollar, something that has been predicted to occur.

If you have a long term outlook, as Bowerman points out, the impact of currency seems to be negligible.  Actually there is a small cost involved with hedging so some might say, as do we at A Clear Direction, that you are better off leaving international investments un-hedged.  Other reasons for coming to this conclusion are the tax ineffectiveness of hedging and the international investments become more closely correlated to the Australian market and as a result provide less diversification for your overall investment portfolio. 

One last comment though, an area of international investing we do favour a hedged approach is in international property.  If you are expecting significant flows of income back from an investment, like property has provided, it may well be worth considering a hedged position to be more certain about the income flows back into portfolios.

It will be interesting to see where the Aussie dollar ends up.