Today Scott has published an article in Alan Kohler's Eureka Report which looks at property options.  Scott conducted first hand research by attending a promotion put on by apromoter of an 'education' seminar about property options.  Click here to find out what Scott discovered.

An article in the Wealth Section of today's Australian caught my eye.  The article was written by Don Stammer, a well respected economic commentator.

The article made 10 year predictions for various investment market returns.

His 10 year prediction for returns from Australian shares was 10% a year.  This was based on the current income of 3.5% and growth in income of 6.5% - a total return of 10%.  He says that dividends tend to increase at the rate of GDP (gross domestic product), which he forecasts to be 6.5%.

Listed property is currently paying average income of 5.5%.  He notes that the income from listed property trusts grow at a trend rate of around 4.5% annually.  This gives a total return of 10% annually.

Don Stammer also forecasts returns of 10% a year from international shares, and notes that emerging countries should outperform this.  His forecast for inflation is 3% a year.

This 10% forecast is exactly the same as the forecast that I get using research from respected academic Jeremey Seigel.  He suggest that the long run return from sharemarkets is 7% above inflation.  If inflation runs at 3%, then this will be a total return of 10%.  To achieve this he says that sharemarkets should be on a PE ratio of about 14 to 15 - where they are now.

10% returns from growth assets is lower than they have been historically - although the inflation forecast is lower as well.

Cheers

Scott

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 here to be taken to the sign up page.

Within the latest edition was the following Market Update:

The Australian Securities and Investments Commission have released a report on reverse mortgages today - All we have is this house - that "captures the experiences of home-owners".  The report identified a number of factors that have the potential of hindering sound and informed decision making and thus increase the risk of future problems for those who choose to access a reverse mortgage.  These factors include:

• The complex nature of these products and the dissimilarity with other credit products,
• Difficulties faced budgeting for the long-term with access to a large amount of credit,
• Reluctance to consider the risk of declining health in the future and the impact of this on financial needs, and
• Children encouraging older parents to take out a reverse mortgage to be used for the benefit of these children, in inappropriate circumstances

The key points from the report seem to be that people considering the use of a reverse mortgage should be careful doing so and seek expert advice before stepping into this realm.

At A Clear Direction we would be very hesitant in recommending the use of a reverse mortgage to our clients and would only consider it under very specific circumstances.

Regards,

Scott Keefer

I like to get news feeds delivered to my email inbox from a range of sources.  Amongst today's emails was an interesting article from InvestorDaily written by Madeleine Collins.  In her article, Madeleine reported that data available to her suggested that financial planners working for three out of Australia's four big banks (Commonwealth - Colonial First State, NAB - MLC, Westpac - BT) are channelling more clients into the bank's own superannuation products.  These financial planners might have good reason for making these decisions because they have better knowledge of the products and because of this believe these products will provide superior performance into the future.

However, as an investor there must be a nagging question whether planners linked with the major banks actually believe their recommendations are superior or whether it is in their own self interest or the interest of their employer for this to occur.

We believe firms like ours provide investors with greater peace of mind.  We are not owned by any other financial organisation and therefore have no ulterior motive to recommend certain products (apart from cost and performance).  We also are keen to highlight that we do not accept commissions.  We in fact do receive a trailing commission from a Macquarie Cash Management Trust held within Macquarie's Investment Manager portfolio administration service but we rebate these amounts in full back into client accounts every quarter.

If this is the peace of mind you are looking for drop us a line.

Regards,
Scott Keefer

Over the weekend I had the pleasure of sitting in a coffee shop in the Harbour Town Shopping Complex on the Gold Coast while my wife busily saved me hundreds of dollars!!!  The next best part of the afternoon was the chance to read the papers in more detail than I often allow myself.  During my reading I came across a small article in The Australian's business section - 'LICs struggle to run with the bull'. The contents of the article supported the comments in a recent article written by learned colleague - Why L-I-Cs can be D-U-Ds.

The article in the Australian suggested that share price of about 80% of the LICs on the ASX underperformed the All Ordinaries index in the past 3 years.  The article reported comments from Argo Investments chief executive, head of one of the two biggest LICs, who suggested that the resources boom was the explanation for the under-performance.  He commented that LICs generally went underweight in resource stocks because they were highly speculative and did not pay high dividends.

The article reminded me again about the importance of a whole of market approach to investing.  With a whole of market index style fund you don't have to explain away why your portfolio performed below the market return, the return that we believe an investor deserves.  Nor do you have to 'time' the market i.e. decide when do you buy and sell what's hot?.  If you read other articles on our website you will soon come to the conclusion that both activities - stock picking and market timing - do not lead to above market returns in the long run, quite the contrary.

Have a great week,
Scott Keefer

Last week in his Eureka Report editorial Alan Kohler called for a full-scale government enquiry into the financial planning industry.  In today's edition of the same publication Scott Francis has responded with his own suggestion as tohow the industry could be improved.  Please click here to be taken to Scott's article.

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 here to be taken to the sign up page.

Within the latest edition was the following Market Update:

Regards,
Scott Keefer

Every fortnight Scott Francis joins Warren Boland during his Saturday morning program on ABC local radio - Brisbane.  During his last visit Scott discussed with Warren issue relating to international investments.  Scott also provided the ABC with a supporting article that they have placed on their website.  A copy of this material is also available on our website.  Please click here to be taken to this material.

Regards,

Scott Keefer

An article in today's Australian Financial Review informs that ALDI will be the first out of the major supermarket players to introduce unit pricing in their supermarkets.  This means they will display the price of all products in a price per unit measure - either 100 grams, one kilogram or 1 litre units in conjunction with the retail or checkout price.

Won't it be great not having to calculate whether the cost for a 400g tin is the same as a 325g tin of the same product.  I'm sure many of us have been there doing the calculations standing in the middle of the aisle.  (Maybe I am just stingy!!!)  This should make comparisons of products a whole lot easier for consumers.

It would also be nice if the financial services industry could simplify the presentation of fees to investors rather than the mix of alternatives at present

-        entry fees or not

-        asset based fees or flat fees

-        performance based fees or not

-        trailing commissions or not

This is not to mention the inconsistencies in the reporting of asset classes within managed style investments and superannuation funds.  For example are investments in hedge fund related activities reported as an investment in defensive or growth assets?

Then there are the inconsistencies in reporting performance.  Is the data reported as before or after fees, before or after tax.

A level playing field would make it a whole lot easier for investors to choose the type and style of investment that best meets their needs.

Have a great weekend,

Scott Keefer

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).