About 3 years ago - mid 2004 - there was a brave forecast circulating in the media by economists BIS Shrapnel, which forecast interest reserve bank interest rates to hit 8%.  This would have made mortgage borrowing rates somewhere around 9.5%.  Pretty scary stuff. 

Here is the exact text from a Melbourne Age article dated the 14th of August 2004, from the article entitled 'Interest Rates - How High Will They Go':

'On the bear side is BIS Shrapnel, which is forecasting interest rates to peak by late 2006, with the Reserve Bank's cash rates hitting about 8 per cent. That's an extra 3 1/4 percentage points, or $550 a month, on a $225,000 home loan.'

Not suprisingly this report led to various doom and gloom forecasts for property prices - if interest rates were going to rise that far, then property prices would have to fall sharply.  (Or as a mate of mine says, property prices don't fall, they just consolidate).

Not long after this BIS changed their forecast, as mentioned by Australia's best financial commentator in this expert from the Sydney Morning Herald about 12 months later.

Alan Kohler, Sydney Morning Herald, 28 September 2005

The other item in the news this week was BIS Shrapnel's prediction of 6.5 per cent interest rates next year because of rising inflation. This firm had previously forecast interest rates of 9 per cent next year, so it was interesting that the media reporting of its latest report did not say: "BIS Shrapnel cuts rate forecast."

And now I see that BIS have jumped back onto the media forecasting wagon again, and are forecasting 22% growth in Brisbane property prices over the next three years - a much happier situation than previous forecasts would suggest.  The interest rates forecast to go with this is a 1/4 of a percent rise by September this year, and then interest rates on hold.

The bottom line is this.  Economic variables are tough to forecast - just look at BIS Shrapnel - in 2004 they tried to forecast 2 years ahead and missed by a lot, in 2005 they tried to forecast again and were out by half a percent.  Finally, having predicted in 2004 higher interest rates which would have had a negative impact on the property market, in 2007 they predict above average property growth in Brisbane.

Now, if you can just chop and change forecasts at a whim, I have an idea.  Why can't you have more than one forecast on the go at any one time?  So I am going to have a go at this forecasting game, and predict that over the next 12 months:

• Australian Shares will be down by 5%
• Australian Shares will return 0%
• Australian Shares will return 5%
• Australian Shares will return 10%
• Australian Shares will return 15%
• Australian Shares wil return 20%
• Australian Shares will return 25%

It's a slightly different tact, but who else out there is guarateed of being able to point to the correct forecast in 12 months time!

Cheers

Scott Francis

With the rush to get money into superannuation this financial year, there is only two weeks until we move into the brave new world of a simpler superannuation system.

The basics of the new superannuation system will be that:

You can make 'tax effective' contributions to superannuation of up to $50,000 a year.  These contributions include your 9% compulsory employer contributions and any salary sacrifice contributions.

You can put in additional contributions of your own money (personal contributions) of up to $150,000 a year or $450,000, which will bring forward three years of contributions into one.

The investment earnings in a superannuation account will be taxed at a maximum of 15% - lower than investment earnings in a company structure, or for most people if the investments were held in their own name.

After the age of 60 you can withdraw superannuation tax free - either as a lump sum or as an ongoing income stream which has minimum withdrawals of 4% up to the age of 65 and 5% betweeen 65 and 75.  There is no maximum withdrawal.

Of course, this is just the rough outline.  Make sure you get further details about your situation before acting on anything.  However, this will be a simpler superannuation system, and is worth knowing about to get the maximum 'bang' for your buck.

Cheers

Scott Francis

I am currently visiting my wife's family in Jakarta, Indonesia.  Jakarta is a fascinating country with great diversity across all areas of society.  Even though the Australia government does not recommend visiting Indonesia due to security concerns, it is well worth a look and quite safe from my perspective.

Being in Jakarta has reminded me of the Emerging Markets phenomenon (Indonesia is generally accepted as one of these markets.)  The term is used to describe business and investment activity in industrialising or emerging regions of the world.  From an economics perspective, these economies are said to be in a transitional phase between developing and developed status.  They are countries that have begun to open up their economies to the world.  The classification of emerging markets is not an exact science and as such there is not a definitive list of countries included in this definition.  However, to put some names to these economies, the top 4 markets are generally referred to as the BRIC economies - Brazil, Russia, India and China.  If you have had any exposure to the international financial media you would quickly identify that these are some of the fastest growing economies in the world - 2006 growth results quoted by the International Monetary Fund saw all four with strong performances - Brazil (3.7%), Russia (6.7%), India (9.2%), China (10.7%).  (Indonesia saw 5.5% growth.)  Stock market returns reflected these conditions.  MSCI Indexes saw the following returns in local currency terms - Brazil (28.46%), Russia (52.11%), India (46.47%), and China (78.67%) all experiencing strong growth.  (Indonesia saw 55.02% growth.)

In comparison, returns in Australia (18.28%) and the US (13.18%) were more modest.

The same MSCI indexes place returns so far this year to 31st May: (in terms of the local currency)

You would have to admit that the recent results are pretty impressive.

However, as with all major investment markets, to capture these returns there is a trade-off between risk and return.  The greater the risk, the greater the expected return.  Emerging Markets are no different and have experienced significant downturns.  Consider the Asian and South American monetary crisis in the late 1990s and early 2000s.  These economies also have some regulatory issues that need to be considered before investing, for instance the strict monetary and political controls in China and regulatory issues in Russia.

So what is our stance on investing in Emerging Markets?

We invest in Emerging Markets to provide an extra risk premium for our investors.  Investing in Emerging Markets also provides an extra level of diversification with our investment portfolios to smooth out volatility.  We invest in these markets by using an index style approach.  Not picking winners (or losers) but holding a wide spread of investments across emerging markets.  This keeps the cost of investing low.  Our preferred fund, Dimensional Emerging Markets Trust, holds shares in companies listed in Argentina, Brazil, Chile, Czech Republic, Hungary, India, Indonesia, Israel, Malaysia, Mexico, Philippines, Poland, South Africa, South Korea, Taiwan, Thailand, and Turkey.  (You will note that it does not hold assets in China or Russia mainly due to the regulatory controls in place in those countries.)  In a standard portfolio, an investor would have an exposure of about 5.5% of their growth assets in emerging markets.

I encourage you to have a closer look at investing in Emerging Markets.  To find out more about our investment philosophy please have a look at our web page on Building Portfolios.

It is always good to get some positive feedback supporting your way of thinking.  Some good news came our way via the comments of David Murray, the chairman of the 50 billion dollar Future Fund.  He talked up the value of holding index style investments within his 50 billion dollar investment fund and adding to this some extra risk premium (he used the term alpha risk) to achieve strong long term results.

We employ index funds as the basis of all of our portfolios for clients.  They are cheap, effective and backed up by research suggesting active managers perform worse on average.  To this core we access extra risk premiums, and therefore returns, by investing in value and small companies through an index style approach.  (We also recommend investing in emerging markets in the international share arena.)  This is a similar, but not exactly the same, method as David Murray suggests the Future Fund will employ.

If the managers of 50 billion dollars with a long term perspective think this is the best approach - what about you?

For more details about our investment philosophy take a look at our webpage - Building Portfolios.

Regards,

Scott Keefer

The last 7 years has been a dismal time for the returns from Global Shares (international shares).  Many investors that I am seeing are so frustrated that they are happy to call the 7 years a trend, and be done with these as investments althogether.

Which I think would be dangerous.

The poor performance in global shares has generally not been a sign that global investment markets have produces disasterous investment returns, rather that the Australian dollar has risen to 20 year highs at around 85 cents. 

Take for instance the Vanguard index funds.  These funds just hold all the investments that make up the global sharemarket index.  The interesting thing is Vanguard have both a currency hedged version, and a currency unhedged version.

The version that takes out currency movements has returned nearly 7% a year over the past 5 years (to the end of April 2007).  The version that exposes the portfolio to currency movements has returned -1.3% a year over the same period.  The difference of about 8% a year has been the strengthening in the Australian dollar.

So where to from here?  There seems no long term reason to think that global sharemarket returns will trail Australian sharemarket returns, so for the sake of diversification we carefully use global sharemarket returns in our portfolios.

Cheers

Scott Francis

As the end of the financial year approaches everyone starts focussing on tax.  The financial media is no different.  In today's edition of The Age, an article entitled Tax Slug hidden highlighted the importance of tax issues when considering the choice of investment funds.  It reports that many managed funds choose not to report their after tax returns and they have good reasons in not doing so (for them, not for the investor) as their end returns would get knocked around and not look so rosy.  Unfortunately for the investor, it is the after tax returns that are most important as this highlights what they actually will get in their pockets after fees and taxes.

Two major issues affect the tax effectiveness of managed funds - the franking level of the portfolio and the amount of 'churn'. (i.e. how much trading a fund is doing)

Franking level relates to when companies, that have already paid company tax on their profits, can provide their shareholders with franking credits on their dividends.  This means that the shareholders do not have to pay tax on these dividends.  The more franking credits, the better the scenario for investors.

The more that a managed fund buys and sells shares generally the lower is its tax efficiency because as the fund sells shares it realises capital gains and tax is payable by investors on those capital gains.  Another negative aspect of portfolio churn is the increased level of transaction costs that are incurred when buying and selling rather than holding on to assets.

The article in The Age highlights the performance of Vanguard in reducing the tax consequences of its funds as they use an index style approach which focuses on buying and holding portfolios based on the market (index) rather than actively picking shares.

We use Vanguard funds in the portfolios we develop for our clients along with Dimensional funds.  Both have a similar index or index style approach where they reduce the tax consequences for investors and in doing so produce excellent returns not just before tax but after tax also.  If you would like to know more about these fund managers take a look at their websites: http://www.vanguard.com.au/ and http://www.dimensional.com.au/ .

Regards,

Scott Keefer

I have just received an e-mail from a colleague about the collapse of Australian Capital Reserve (ACR).  This is a company that provided the promise of high investment yields on an income basis.  Their advertising said that 'They knocked other investment returns for six'.  (The theme of the add was a cricketing one). 

The underlying investments of ACR were loans to related parties for the purpose of propery construction.  Just like Fincorp.  Just like Westpoint.  They all collapsed too.

ACR looks to have taken about $300 million of investors money down the drain with it.  This is a disgrace - and must be so shattering for those investors who are hurt.

It's time to stop mucking around.  Do not invest your money in funds that use the money to on-lend for property construction schemes or to related parties.  It does not work.  Read my Eureka Report article here for further information.

And stay away from these 'Investments of Wealth Destruction'.

Cheers

Scott Francis

I am pretty confident that most people in Australian society reflect on the cost of living at some point in time if not every day.  A cost that is hidden away from us is the cost of investing in superannuation.  We don't generally have access to the money until we are well into our 50s and the costs are not coming out of pocket directly.  However cost will impact the end result come retirement and should be a priority for people when setting up and monitoring their superannuation accounts.

The Australian newspaper has published today a piece highlighting that super funds are pushing up their fees. It reports that the "average member of an Australian company's default super fund is paying 1.44 % of their balance, or $748 a year, in fees and charges, up from 1.33 % last year".

Some might think a 0.11% increase is nothing.  The table below highlights the impact of such an increase on a $50,000 portfolio over the relevant time frames assuming you received 13% returns before fees.

Fees of course are not the only story.  Having a super fund that offers an excellent investment philosophy, good quality insurance and excellent service is also important.

At A Clear Direction Financial Planning all four aspects are important when we discuss with our clients their superannuation needs.  However we believe that ensuring you have a low fee fund is crucial.

To put our money where our mouth is, the fees for a balanced style superannuation fund (70% growth assets) based on our investment philosophy would have fees of 1.44% at a balance of $75,000 held in the fund.  This percentage fee then reduces to 1.41% at $100,000 of investments.  On top of this clients receive ongoing personal financial planning and advice.

Regards,

Scott Keefer

The front page of the Australian's business section for today led with the article 'Super Stars Widen Earnings Gap'.  The article highlighted the performance of top performing super funds and suggested the gap between the best and worst funds was significant.

I think the report again highlights that holders of superannuation should be checking the performance of their funds.  In times of strong growth it is easy to slip into the trap of thinking your fund is doing well by just looking at the numbers.  Is the fund doing as well as it could or should be?

We always like to check the performance of the investments we recommend against those that are reported as doing well.  The three top Balanced funds (over the past 10 months) mentioned in the article were the Catholic Super, Telstra Super and Legg Mason Super funds.  The following table suggests that our 'Portfolio Plus' portfolios are right up there with the best over 1, 3 and 5 years as of 30 April 2007.  (All returns are quoted net of fees.)

It should be clearly noted that past performance is no prediction of future performance.  We are confident that our approach to building investment portfolios (including superannuation) will continue to match it with the best.

The Financial Planning Association of Australia (www.fpa.asn.au) yesterday released results of a study finding that over 70% of Australians have experienced financial difficulty at some point in their lives.  The most common problems were:

• Not understanding superannuation (39%)
• Being able to afford the home they want (35%)
• Meeting major unexpected expenses (30%)
• Regular expenses and the cost of living (24%)
• Meeting the cost of education (22%)
• Credit card debt (17%)
• Paying large bills (11%)

The study also found that 90% of people who have had a financial planner have benefited from the experience.

How can we help?

At A Clear Direction Financial Planning we are keen to work with all people no matter where they are on the financial continuum.  We have structured our fees to make sure that we are affordable at all levels as we want to continue a relationship with clients from the initial stages of wealth accumulation right through to planning for, and living in retirement.

If you want to reduce the chance or amount of financial pain you have to experience please give us a call.

Regards,

Scott Keefer