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Financial Happenings Blog
Sunday, June 29 2008

In the latest edition of Sound Investing podcast, published by, Paul, Tom and Don share their insights into a range of topics including hedge funds, emerging markets and the importance of staying calm.  They also interviewed Bob Deere, Dimensional's Investment Director and Senior Portfolio Manager.


One warning, the radio show is 51 minutes in length and will suck up 23MB of download.  If this is not an issue for you I highly recommend you take a look at the latest podcast - Sound Investing - June 27, 2008


For those who have limited time and/or download capability the following is a brief summary of the material covered:


Hedge Funds

The key question to ask is do you understand how they work and the internal risk involved with the strategy.  They looked at a particular example where a hedge fund set up by Nobel Laureates lost 4.6 billion dollars for their investors.


Bob Deere - Dimensional's Investment Director and Senior Portfolio Manager

Bob discussed the main advantages of the Dimensional approach - low level of transactions and transaction costs, very highly diversified portfolios, portfolios are tilted to the dimensions of risk which provide slightly higher returns.  He also discussed the definition of a value stock as being a low price relative to something. E.g. earnings, cash flow, adjusted book value.  Bob also explained why he thought Dimensional funds are better structured than ETFs to capture the dimensions of risk and return particularly in the more exotic parts of the market where the higher returns can be found.


Frontier / Emerging Markets

Paul, Tom & Don looked at he recent performance of frontier markets with some performing strongly like the Bangladesh and Bulgaria markets while others have gone poorly like Vietnam and China.  The key to investing in this area of the world is to be extremely well diversified.  Just like individual stocks can "blow up", so too individual national markets can blow up.  However, emerging markets as a whole are likely to have the highest returns over the next 20+ years. The reason why - they are riskier investments.



Scott Keefer

Posted by: Scott Keefer AT 07:36 pm   |  Permalink   |  Email
Sunday, June 29 2008

Robin Bowerman, Principal and Head of Retail at Vanguard, has written a recent article for Vanguard's Smart Investing e-newsletter - Playing defence: can it work in tough markets.  In the article Bowerman refers to a Vanguard study looking at whether investors would be better off using economic / market signals to move portfolios into a more defensive asset allocation ahead of market downturns.  This is extremely relevant to those who have asked themselves whether they should have moved more of their portfolios into cash and fixed interest earlier in the year.


The article firstly concluded that economic or market signals were not necessarily good predictors of future downturns.  However, if the signals were used, the end results were at best a small out-performance against continuing to hold your assets.  The authors of the Vanguard study concluded that the excess results were not statistically different from zero.  So basically the conclusion was that investors would be no better off trying to move their portfolio into a more defensive position.


Bowerman suggests that a better strategy is to incorporate defensive assets into a portfolio.


An interesting article well worth a read.



Scott Keefer

Posted by: Scott Keefer AT 06:55 am   |  Permalink   |  Email
Wednesday, June 25 2008

Each week the Eureka Report publish the best letter to the editor for the week along with a reply from the author.  In this week's Eureka Report the letter was directed at Scott's recent article - Credit crunch's silver lining.

The letter questioned whether "the high rates offered by online bank accounts offered by BankWest and Rabobank and term deposits offer returns far in excess of index funds at present and show attractive and better than share returns, at least for the next year or maybe more?"

In his reply Scott pointed out that BankWest and Rabobank were both owned by overseas banks and in his conservative style noted that this might see investors holding more"institutional risk" compared to similar investments held with an Australian owned bank.

Scott also reminded readers of the difficulty of predicting future movements in share markets and knowing whether cash style investments will indeed provide better returns compared to index funds.

Click on the following link to be taken to the letter and Scott's reply - Reply to letter of the week.

Posted by: AT 09:02 pm   |  Permalink   |  Email
Tuesday, June 24 2008

Users of our website, through our User Voice feedback forum, have requested that we regularly update the graphs outlining the performance of the Dimensional trusts that we use in building portfolios for clients.  In response to this feedback we have updated these graphs to reflect performance up to the end of May 2008.

The graphs show positive returns in the Australian market over May with the small and value premium kicking in nicely.  Returns from the global funds were basically flat for the month except for the Global Small Company Trust which saw some positive movement.

Overall, the graphs continue to clearly show the existence of the risk premiums (small, value and emerging markets) that the research tells us should exist.  Please click on the following link to be taken to the graphs - Dimensional Fund Performance Graphs.

For anyone new to our website, it is important to point out that we build investment portfolios for clients based on the best available academic research.  Take a look at our Building Portfolios page for more details.  In our view, this research compels us to use the three factor model developed by Fama and French.  In Australia, the most effective method of investing using this model is through trusts implemented by Dimensional Fund Advisors (  We do not receive any form of commission or payment from Dimensional for using their trusts.  We use them because they provide the returns clients are entitled to from share markets.

However, academic theory is nothing if it can not be implemented and provide the returns that are promised by the research.  Therefore, we like to provide the historical returns of the funds that we use to build investment portfolios.

Please let us know if you have any feedback regarding these graphs by using the Request for More Information form to the right or via our User Voice feedback forum.

Scott Keefer

Posted by: Scott Keefer AT 09:03 pm   |  Permalink   |  Email
Tuesday, June 24 2008

We receive regular commentary from Weston Wellington in his "Down to the Wire" postings on Dimensional's secured site. Weston is a Vice President of Dimensional Fund Advisors in the US.  His latest offering "How Not to Retire Rich" provides a stark example of how stock picking is not the best way to go.  Please find following Weston's comments:


The most recent copy of Fortune landed on our desk last week with an eye-catching cover?a prosperous-looking couple gazing serenely across sunlit ocean waters from what appeared to be the deck of an expensive yacht (presumably their yacht). Although the ambiance of comfortable wealth suggested by the photo seemed clear enough, Fortune editors took no chances?the typeface for the "Retire Rich" cover headline was so large that abundant future wealth appeared to be not just a possibility but a foregone conclusion.


Inside this annual Retirement Guide issue, readers could find advice on housing bargains (try Las Vegas, Miami, or Phoenix); second career possibilities (executive matchmaker, animal rescue squad member, alpaca rancher); and where to obtain the best "executive" physical exam (Johns Hopkins, the Mayo Clinic). Of course, no self-respecting retirement guide is complete without investment recommendations, and Fortune suggested forty stocks - eight from each of five separate categories: "growth and income," "bargain growth," "deep value," "small wonders," and "foreign value." According to the article, the Fortune 40 portfolios were introduced in 2002 and have outperformed the S&P 500® Index by a significant margin (annualized return of 15% vs. 11%), although the precise time period was not specified.


Fortune has published an annual Retirement Guide issue for many years, and it seems plausible that the introduction of the Fortune 40 strategy in 2002 was at least partly motivated by the erratic performance of stock recommendations in prior years. The retirement issue appearing in mid 1999, for example, followed a more concentrated approach and suggested only ten stocks. Relying on both outside experts and in-house quantitative analysis, Fortune at that time assembled a collection of firms "with the size, stability, and earnings power to carry investors through whatever the market throws their way in the decades to come."


Although Fortune undoubtedly worked hard to select companies with "the right business plan and the right management," time has not been kind to most of their recommendations. Nine of the ten stocks have underperformed the S&P 500® Index, including two whose shares have been declared worthless in bankruptcy court. Between Fortune's quoting date of July 13, 1999 and Friday, June 13, 2008, the Fortune 10 stocks fell 46.1%, on average, while the S&P 500® Index (price-only) declined 2.4%.


The table below presents the basis for Fortune's recommendations in 1999 along with a summary of more recent events:


Stock Price Change
July 13, 1999-June 13, 2008
Adjusted for Splits and Spinoffs

American International Group



THEN: "A diverse product mix and big international presence should enable this insurance giant to grow earnings consistently into the next decade. . . . AIG has maintained a 15% annual growth rate over the past two decades and shows no sign of slowing down."

NOW: Maurice "Hank" Greenberg, AIG's iron-willed chief executive, transformed an obscure property-casualty insurer into a global colossus over a 37-year period. But when threatened with a corporate indictment from New York state attorney general Eliot Spitzer on charges of improper accounting, AIG directors pressured Greenberg to step down. His successor was overwhelmed with efforts to repair the damage and deal with mounting credit-related problems. He, too, stepped down in early June 2008, a month after the firm announced a record $7.8 billion first-quarter loss.


Bristol-Myers Squibb



THEN: "Over the next few years, drugs and other health care stocks should benefit, as millions of baby-boomers head into their 50s and 60s, requiring new treatments for everything from high cholesterol to hypertension to diabetes. . . . With existing drugs selling briskly and a slew of potential blockbusters in the pipeline, Bristol is a smart prescription for long-term investors."

NOW: Company researchers have struggled to come up with major new drugs; and Plavix, the firm's biggest-selling product, is under attack by low-cost generics. In addition, after years of controversy over allegations of improper accounting and weak corporate governance, the chief executive stepped down in September 2006. The spinoff of successful orthopedic device maker Zimmer Holdings (ZMH) has been one of the few bright spots in a discouraging period for shareholders.


Cisco Systems



THEN: "The king of networking should continue to thrive, thanks to the explosive growth of the internet and rising demand for its communications products. . . . Revenue growth is actually accelerating, and profits the next year could easily come in well above expectations."

NOW: Cisco has continued to grow at an impressive rate - earnings per share increased 19% per year for the eight-year period ending 2007 - but perhaps not as explosively as investors expected.


Ford Motor



THEN: "A flurry of acquisitions has given Ford a nice stable of high-margin luxury brands, including Lincoln, Volvo, Jaguar, and Aston-Martin. . . . Its profit margin is improving, its production processes are more nimble, and cash flow is strong. Besides, at a P/E of 9.5, it's a good value."

NOW: In recent years, Ford has dismissed thousand of workers, closed plants, sold the Aston-Martin and money-losing Jaguar divisions, and eliminated the shareholder dividend. This year, sales of bread-and-butter products such as the F-150 pickup (the best-selling vehicle in the US for many years) have slumped sharply as buyers worry about rising fuel costs. Weakened by $15 billion in accumulated losses over the previous two years, Ford is in a race against time as it struggles, with limited resources, to refocus its product line to emphasize more fuel-efficient models.


Home Depot



THEN: "Home Depot has changed the way Americans fix their houses. . . . It already dominates the home improvement market, and it expects to double the number of stores it operates by 2002."

NOW: Competitors such as Lowe's Companies have out-hustled Home Depot in many regions, and sales growth has stalled. A top executive recruited from General Electric to turn things around has come and gone, and the recent slump in housing sales and remodeling activity has further tarnished the outlook.


International Business Machines



THEN: "Once assigned to the investment graveyard, Big Blue has staged a remarkable comeback?yet remains one of the most affordable tech plays available. . . .In the internet wars, IBM is an arms supplier."

NOW: Steady growth in consulting and services has kept IBM moving ahead, and the shares have done well relative to other large cap technology firms.


Johnson & Johnson



THEN: "Looking for a play on the graying of the baby boom? It's hard to imagine a better bet than J&J, which sells everything from Motrin and Mylanta to prescription drugs."

NOW: Johnson & Johnson has been one of the best-performing major health care stocks over the past nine years, a time of falling share prices for industry giants such as Amgen, Bristol-Myers, Eli Lilly, Merck, Pfizer, Schering Plough, and Wyeth.


MCI WorldCom



THEN: "When it comes to the fast-growing telecom sector of the technology revolution, it's hard to find a better bet than MCI WorldCom. . . . Powered by surging revenue growth from its internet unit, as well as strong international operations, MCI WorldCom is one of the fastest-growing big caps around."

NOW: With 20 million customers and 80,000 employees, the WorldCom bankruptcy filing in July 2002 was the largest in US history. Former CEO Bernard Ebbers was convicted in March 2005 of participating in a massive accounting fraud. Renamed MCI Inc., the firm emerged from bankruptcy in April 2004 and was later acquired by Verizon Communications.


Tyco International



THEN: "Strategic acquisitions have helped propel earnings up an average of 30% a year. But CEO Dennis Koslowski is picky: he turns down nine out of ten deals."

NOW: At its peak in late 2001, Tyco was among the twenty largest firms in the US as ranked by market value. The shares fell precipitously in early 2002 amid allegations of questionable accounting practices, prompting Kozlowski's resignation in June. He and former chief financial officer Mark Swartz were later convicted of grand larceny and securities fraud and were sentenced to lengthy prison terms.


UAL Corp.



THEN: "Can an airline be a growth stock? This one can, thanks to a strong domestic hub network and signs of recovery in Asia. . . . All the airlines are inexpensive right now and this one is particularly cheap."

NOW: UAL filed for bankruptcy in early December 2002 after accumulated losses of $3.8 billion in less than two years. United planes continued to fly while the firm reorganized, and the airline emerged from bankruptcy in February 2006. UAL stockholders lost their entire investment.


Our motivation in writing this column is not to skewer the stock-picking skills of Fortune editors. Many of these stocks were also recommended by some of the world's most prominent analysts and money managers. Fortune editors in 1999 were well aware that many investors were fixated on internet stocks and emphasized the importance of holding a diversified list of proven companies. Considering the widespread conviction at the time that growth stocks in general and technology stocks in particular were destined to outperform for the indefinite future, Fortune's choices, drawn from a wide array of industries, looked quite sensible. But time and time again, market participants are blindsided by unexpected events. Even today, it's difficult to find fault with the reasoning behind the various recommendations.


Judging by their most recent advice, Fortune editors appear to have recognized that even a carefully researched portfolio of ten stocks is still very risky. (We have not run the numbers, but a list of "Ten Stocks to Last the Decade" appearing in the 2000 Retirement Guide issue included stinkers such as Enron, Broadcom, and Nortel Networks, and therefore appears to have fared even worse.) They should be applauded for recommending a more diversified approach such as the Fortune 40. But why stop with this limited number when there are thousands to buy? As Dartmouth professor and Dimensional director Ken French has observed, "Diversification is the closest thing to a free lunch. You might as well eat a lot of it."1


Especially if you aim to retire rich.

This material may refer to mutual funds offered by Dimensional Fund Advisors. These mutual funds are only available in the United States of America. Nothing in this material is an offer or solicitation to invest in these mutual funds or any other financial products or securities. All figures in this material are in US dollars unless otherwise stated.

1. Kenneth R. French is director, consultant and head of investment policy at Dimensional Fund Advisors.


Berenson, Alex. "Tyco's Embattled Chief Calls It Quits." New York Times, June 3, 2002.

Carey, Susan, and Mitchell Pacelle. "UAL Files for Creditor Protection." Wall Street Journal, December 9, 2002.

Glater, Jonathan D. "With Shares Battered, A.I.G. Ousts Leader." New York Times, June 16, 2008.

Grynbaum, Michael M. "Bad Investments and a $7.8 Billion Loss at A.I.G." New York Times, May 9, 2008.

Harris, Gardiner. "Will the Pain Ever Let Up at Bristol-Myers?" New York Times, May 18, 2003.

La Monica, Paul R., and Katie Bener. "The Fortune 40 Best Stocks to Retire On." Fortune, June 23, 2008.

Latour, Almar. "Ebbers Is Convicted in Massive Fraud." New York Times, March 16, 2005.

Morse, Dan. "Home Depot Is Struggling to Adjust to New Blueprint." Wall Street Journal, January 17, 2003.

Reuters. "GM, Auto Shares Tumble as Outlook Darkens." New York Times, June 18, 2008.

Rynecki, David. "Ten Stocks to Last the Decade." Fortune, August 14, 2000.

Saul, Stephanie. "Drug Maker Fires Chief of Five Years." New York Times, September 13, 2006.

Schwartz, Nelson D., and Julie Creswell. "Stocks to Grow With." Fortune, August 16, 1999.

Yahoo! Inc. Yahoo! Finance. In, accessed June 17, 2008.

Young, Shawn. "MCI to Emerge from Bankruptcy." Wall Street Journal, April 20, 2004.

Posted by: Scott Keefer AT 07:03 pm   |  Permalink   |  Email
Monday, June 23 2008

You might have expected that the headline of the Weekend Australian Financial Review's lead article would have put a shiver down the spines of financial advisors like ourselves - "Spotlight on Financial Planners - High Price for Advice".  To be frank, I was a touch hesitant at first in reading the article but on reflection found that there were a range of comments made in the article that highlighted in a positive light the services of some financial advisors.  I wanted to address a few of these points.


1) The key problem is that financial planners have been paid in trail commissions from fund managers and not their clients.


Trailing commissions are payments by fund managers to financial planners for directing the planner's clients to invest in the fund - basically a reward to financial planners for using their product.  The article quotes a study from the Industry Superannuation Network (ISN) that suggests four fifths of people believed commissions compromised independent financial advice.  (Of course the ISN have their own bias in that their super funds do not pay commissions to advisors)


There is some truth to this argument.  We are clear in acknowledging on our website and when communicating to current and prospective clients that we do not accept commissions from fund managers.  There is actually a cash fund in our recommended portfolio for non super and pension clients that requires us to receive a commission.  Every three months we return this commission to client accounts in full.


The reason for taking this stance is that we do not want to even be accused of providing clients with advice that is biased in any way.


That being said, we actually believe there are some grounds where financial planners using a trailing commission fee model can provide a really great service for clients, particularly those with smaller funds to invest, as long as they are not encouraged to recommend particular investment because of the commission.  Commissions can make financial advice affordable.


The key point, as mentioned in the article, is that the investments / products that are recommended are done so with the client's best interests in mind.


2) There is a confusion amongst investors about payments that are received by financial advisors.


This is for us the key issue.  A financial advisor must be providing clients with all of the information about payments they are making, or the product that they are using is making to advisors.  Clearly showing the dollar value of these fees along with the percentage fee is really crucial.


A fee that is very rarely mentioned is what are called volume rebates.


Volume rebates are where a financial product provider "rewards" a financial advisor for directing their clients to a particular product or service by providing them a volume rebate.  The level of the rebate increases as the amount of funds directed to the product provider increases.


We utilise an administration service for clients.  Our group of financial advisory firms receives a significant rebate from the service because of the large amount of assets which are invested with the service.  A financial advisor has three basic choices here, keep the rebate for themselves or pass it back to clients, or a combination of the two.  We choose to pass the rebate back in full to our clients and in doing so significantly reduce the administration service fee by almost half.


3) Are asset based fee models the same as trail commissions?


There is a clear distinction between the two.  A financial advisor using a trailing commission fee model is being paid for recommending particular investments whereas an assets under management fee model advisor is being paid based on the total amount of assets the client wants managed by them.  The second are free to recommend investments they prefer for clients without being biased by commissions from a particular product.


The article suggests that another problem with trailing commissions or asset based fees is that investors do not understand how the payments grow over the years.  This is a fair point.  The usual reason for seeking advice in the first place is to grow your level of investments.  Under a trailing commission or asset based fee arrangement, the dollar amount of fees grows as the value of the investment grows.


The asset based fee model is sound as long as fees are capped, i.e, they do not grow without limit.  We place a $4,400 cap (GST inclusive) on our client portfolios.  This means that no client will ever pay us more than $4,400 (less GST) per annum.  Thereby clients can be absolutely sure of the outer limits of the fees that are payable to the advisor.


4) Getting out of a relationship with a financial advisor is difficult


The article also implies that under the commission fee structure, clients can stop having an ongoing relationship with an advisor but continue to pay the trailing commission fees.  This is a problem with trailing commissions.  Advisors set clients up into particular investments and can do nothing ever again while still receive ongoing payments into their accounts.


We are open with our clients that they can choose to cease ongoing advice whenever they want to.  From that point onwards no more advisor fees will be paid into our account.


We also do not charge upfront fees for this very reason.  We do not want to place barriers in the way of clients to get in or get out of our advisory services.  Payment of an upfront or annual fee paid once per year can make clients feel like they have to keep using the service to get their money's worth.  We feel it is much healthier for clients to know that they can move to another financial advisor should they feel the need.


Concluding remarks


The article particularly targets financial planners that use trailing commissions on the basis that this type of fee structure causes planners to be biased in their choice of investments and thereby not working in their client's best interests.


There is some validity in this argument - take the Westpoint disaster as an example.  However, investors should not be put off looking for good quality, unbiased advice because of this.  Look for a financial advisor who can clearly identify the costs involved with their advice and who are not biased because of their fee structure or because of who "owns" them.



Scott Keefer

Posted by: Scott Keefer AT 01:44 am   |  Permalink   |  Email
Sunday, June 22 2008

In his latest article written for Alan Kohler's Eureka Report, Scott looks at Suncorp's convertible prefernce share offering.

He looks at the upside yield assessment while also clearly stating the potential risks.  Scott concludes that the offering is well worth considering with the rewards on offer reasonable compensation for the underlying risk.

Click on the following link to read Scott's article - Suncorp offering with a bonus.

Posted by: AT 06:09 am   |  Permalink   |  Email
Saturday, June 21 2008

A client of ours has referred to us an excellent website from the US - .  The site is published by Merriman Berkman Next, a registered investment advisor based in Seattle.  After only listening to their most recent podcast published on the 20th June I am already a big fan.  The podcast is a weekly radio program hosted by Tom Cock, Paul Merriman and Don McDonald and actually broadcast on a number of US radio stations.  The presenters are entertaining and keep the discussion flowing nicely while providing really useful general investment advice.  Listeners do need to be careful in that the show is obviously very USA centric but much of the commentary is totally relevant to Australia.  Click on the following link to listen to the most recent podcast - Sound Investing Radio Show


Apart from the weekly podcasts, the website also includes a question & answer page based on questions posed by visitors of the site or listeners to their radio show.  There is also a page covering a range of articles.


One particular article on the website that took my immediate attention was "Ten ways to crash proof your investments."  The article briefly set out 10 strategies to avoid permanent losses and crash-proof your portfolio:


1.                   Diversify among many shares

2.                   Diversify across many sectors

3.                   Spread your portfolio across asset classes

4.                   Spread your investments geographically

5.                   Include fixed interest securities

6.                   Consider using a mechanical defensive strategy to limit the size of losses and if you do this be disciplined but don't get into market timing

7.                   Avoid paying unnecessary expenses

8.                   Avoid paying unnecessary taxes

9.                   Don't panic

10.               Don't think you can avoid all risk


We would fully subscribe to all of these strategies except point 6.  We believe it is very difficult, and dangerous, to time markets even using a mechanical method.  A mechanical method is to implement a process whereby you invest in an asset when it is rising and switch to cash when it is falling.  The risk with this method is when assets are falling in price and then being out of the market after an asset turns up again in price. We prefer to recommend holding assets and continue regularly investing over time (often referred to as dollar cost averaging).


That being said the article provides a snapshot of the type of quality commentary being provided on the website.  Well worth a look.



Scott Keefer

Posted by: Scott Keefer AT 11:37 pm   |  Permalink   |  Email
Thursday, June 19 2008

In his latest article written for Alan Kohler's Eureka Report, Scott looks at how to analyse the value or otherwise of term deposit offerings.

He looks at the nuts and bolts of investing in term deposits including credit quality, interest rates, institutional risk and diversification and tax considerations.

Click on the following link to read Scott's article - Credit crunch's silver lining.

Posted by: AT 08:33 am   |  Permalink   |  Email
Wednesday, June 18 2008

Two pieces of reading came to my attention over the past week that both give some prudent insights into why it pays for investors to get "good quality" financial advice.  The first was an article in the Australian's Wealth supplement that is published every Wednesday.  The lead story for this week started with the following phrase:


"Investors who use qualified financial planners tend to have a lower casualty rate"


In his article, Tony Kaye quotes some research commissioned by he Financial Planning Association of Australia.  As you would expect, otherwise the FPA wouldn't have released the findings, the study found that investors who use financial planners have been receiving much lower rates of margin calls (only 5%) compared to those who do not utilise a financial planner.  This is a good result given the carnage on the markets especially in February.  A 2nd point from the article was that something like 95% of all investors using the services of a financial planner feel in better control of their finances and they feel much better prepared for retirement.  Both suggesting the raltionship is extremely valuable.


A third statistic quoted by the FPA suggested that 77% of Australians who use financial planners are more likely to sit tight and ride out the current volatility than those who don't.  Some may think that this statistic is not as flattering as it might suggest that financial planners are just sitting on their hands doing nothing.


Well, in fact, sitting and doing nothing is a pretty good strategy during tough times and this brings me to the 2nd piece of information I have looked at this week - the Quantitative Analysis of Investor Behaviour 2008.  This publication is produced by Dalbar and is based on US data.  Each year these studies are consistently finding that investors are not achieving the returns they deserve from the share market.  The latest results look at the past 20 years of returns up to the 31st December, 2007.  What it finds is that the average equity fund investor has achieved an annualised return of just 4.48% underperforming the S&P500 by more than 7% and only beating inflation by 1.44%.


So why is this happening?


A conclusion made by Dalbar is that the reason behind the discrepancy lies in investors frequently timing their investments and redemptions unsuccessfully.  It concludes that this poor timing is worse during market declines.  Basically what they are saying is that many investors are buying at high prices, selling at low prices and in the process destroying value.


A financial planner worth their salt will be able to "coach" their clients into understanding the reality of how markets work and keep them calm both in times of downturn as well as booms.  Keeping them to the strategy that will see them do much better over the long term rather than trying to time markets.


Is it time you found such a financial advisor?



Scott Keefer

Posted by: Scott Keefer AT 11:01 pm   |  Permalink   |  Email
Wednesday, June 18 2008

The latest edition of our fortnightly email newsletter was sent to subscribers on the 17th of June.  This edition looked at income distributions from managed funds, provided a summary of the movements in markets over the past fortnight and looked at Warren Buffett's bet with a Fund of Hedge Funds manager.  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 latest edition also contained the following Market Update:

Market Indices

Since our previous edition, Australian and global sharemarkets along with listed property have all experienced negative movements.  The S&P ASX200 Index has fallen 4.89% from the 30th May to the 13th of June.  It is now down 12.98% from the same time last year and down 15.17% for the calendar year (2008) so far.  The MSCI World - ex Australia, a measure of the global market, has fallen 3.43% over the same period.  The index is down 12.67% from the same time last year and down 9.17% for the calendar year so far.


Emerging markets have also experienced negative movement with the MSCI Emerging Markets Index falling 6.43% since the 30th of May.  It is up 7.11% from the same time last year but down 9.85% for the calendar year so far.


Property trusts have also fallen since the 30th of May with the S&P ASX 200 A-Reit Index (formerly known as the Property Trust Index) falling by 6.52%.  The index is down 38.36% from the same time last year and also down 28.59% 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 4.16% over the same period.  It is down 20.47% from the same time last year and down 6.24% for the calendar year so far.


Exchange Rates

As of 4pm the 13th of June, the value of the Australian dollar has fallen against major benchmarks for the fortnight.  It has fallen against the US Dollar since the 30th of May by 1.64% at .9402.   It is up 11.77% from the same time last year and up 6.65% for the calendar year so far.  Since May30th the Aussie has also fallen 0.69% against the Trade Weighted Index now at 72.3.  This puts it up by5.39% since the same time last year and up 5.24% 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 RBA board has decided to keep official interest rtes at 7.25%.  In the brief statement released with the announcement of the decision the RBA suggested that they believe inflation is likely to remain relatively high but it should decline over time provided demand evolves as expected.  Therefore the current stance on monetary policy remains appropriate for the time being.


Statistics coming out of the Australian Bureau of Statistics over the past fortnight have seen the official unemployment rate remaining steady at 4.3% as of the end of May.  However, the participation rate fell to 65.2% and employment fell by 19,700 jobs.  The ABS has also released their latest estimation of Australia's population suggesting it has grown to 21,181,000, a rise of 1.7% for 2007.  Finally, they have also released the latest economic growth figures up to the end of the March quarter with the economy growing by 0.6% in the March quarter and a total of 3.6% through the year ending 31st March 2008.

Posted by: Scott Keefer AT 10:58 pm   |  Permalink   |  Email
Monday, June 16 2008

In today's podcast, Scott Keefer looks at the looming end of financial year distributions to be made to investors by managed funds.  He highlights the tax ineffectiveness of many of these distributions.

Please click the following link to be taken to this podcast - The problem of distributions from actively managed funds.

A transcriptof the podcast follows:

Welcome to the latest edition of Monday's Money Minute.  Today's topic turns our attention to the looming end of financial year income distributions by managed funds.  It will still see many of these funds making significant income distributions to unit holders.  You may think that this does not make a great deal of sense given the tough share market conditions we have experienced so far this year.  Unfortunately, these funds still have taxable gains that have been made throughout the year which need to be passed on to investors. 


Managed funds provide two types of returns to their investors.  The first is when the managed fund increases in value. This is a great way for an investor to receive their return, as there is no tax paid on this growth in unit price until they sell. This effectively defers the tax payable on this growth.


The second way that an investor receives a return is through distributions. This is a much less tax-effective way of receiving a return as the distribution is taxable. Some of this is likely to be fully franked income, probably the first 4% of a distribution in the current market environment, with the rest of the income being a distribution of 'realised capital gains'.


What this means is that over the course of the year the managed fund has been trading some of its shares, and has made a profit on the sale of some shares, a realised capital gain, and has had to pass those capital gains on to investors to be taxed.


That is why for taxable investors and superannuation funds it is much better to receive a small income distribution and a large increase in the managed fund unit price rather than the other way around.


Even non-taxable investors (people on a 0% tax rate or superannuation funds in pension mode) should be interested in the level of the distribution, as a high level of distributions is a sign of a high level of trading within the fund - which is expensive and generally ineffective.


I scanned the web this morning looking at some of the well known managed funds managed by some of our major Australian financial institutions.  Across the board you can see that it has been a difficult time for fund managers with all returns negative for the year to the end of March 2008 (as an aside the returns to the end of May are slightly better but all still in negative territory).  


Unfortunately the funds are passing on taxable distributions.  For instance the BT Australian Share Fund's return as at 31st March was made up of negative growth of 18% with 12% of distributions for the year.  If we use 4% as a proxy for fully franked dividends this equates to an 8% capital gain return on which an investor will pay tax.  The Colonial First State Australian Share Fund has negative growth of 23% and distributions of 12%, the AXA Australian Equity Growth fund had negative growth of 26% and distributions of 18%.


Unfortunately what this means is that if investors do not realise the negative growth, i.e. they continue to hold the investment through to the 30th June, their investment will have gone backwards plus they will have some nasty tax liabilities to face in their tax returns from these funds creating an even worse performance.  They won't be able to offset the capital losses that have not yet been realised.


Another little poison in this distribution tail is that many of the capital gains will be for assets that have been held for less than 12 months and therefore the 50% capital gains tax discount does not apply with all of these gains taxable at your marginal tax rate.


This tax ineffectiveness of actively managed funds is another reason why we see that actively managed funds don't work for investors.  It is much more efficient to hold funds which trade significantly less and therefore are not realising capital gains, such as passively held investments like index funds. It is then up to the investors to decide when or if any capital gains exposure is to be realised.  For some who hold these investments in superannuation they could defer this until retirement when they could organise these capital gains to be cultivated free from capital gains tax.


Have a great week.


Scott Keefer

Posted by: Scott Keefer AT 06:26 pm   |  Permalink   |  Email
Sunday, June 15 2008

Over the weekend we have included two new features on our website.

The first provides users with the ability to send a link to family, friends or colleagues of a particular page on the website.  On the right hand margin of each page you can find a "Send page to a friend" link.  By clicking on this link and adding your email details and the details of the recipient you can send them a simple link to the relevant page.

The second feature allows users to provide feedback on the usefulness (or otherwise) of our website.  In the right hand corner of every page of our site there is a dark blue "feedback" button.  By clicking on this button, users have the ability of submitting an idea as to how our site can be improved, voting on ideas that other users have proposed or emailing a specific comment.

By submitting an idea, you enable other users to view your idea and add their vote if they think it is worthwhile.  By casting your vote you are telling us whether you think the ideas are worthy and which ideas should be implemented first.  Where possible, the ideas which receive the greatest amount of votes will be actioned first.

You will also be able to view the current top user suggestions towards the bottom of the left margin on each page of our website.  Click on the "Cast your votes" link to vote for the best alternatives.

Clicking on either option will take you to our User Voice website - - where all the details of the ideas can be found.

We are committed to building  the very best financial services website and we can only achieve that with your help so please take up the opportunity to provide us with your feedback!!

Many thanks,
Scott Keefer

Posted by: Scott Keefer AT 08:13 pm   |  Permalink   |  Email
Sunday, June 15 2008

Most of the financial press over the last few days has concentrated on the sharp fall in share value of Babcock & Brown Limited (BNB) and its related entities.  Much of the commentary has turned to the underlying strategies of the B&B model and the huge levels of debt involved.  Some blame has been placed at the feet of those nasty hedge funds and short selling but it would appear, as has been the case with the other major casualties so far this year, that the real story is about the level of debt being carried by the organisation and in Babcock's case the debt involved with the entities from which it draws its impressive fees.


The fall in shareholder value is a intersting point of discussion, especially for holders of these investments, but of greater interest to us has been how the expert advisers - the financial analysts - prepared their clients for and protectedthem against the fall of B&B share prices.  We took a look at the analyst recommendations provided by E*Trade, a well known online trading provider, as of the 13th of June (Friday). To our astonishment (not really) we found that of the eight analyst opinions, 1 was a strong buy, 3 were moderate buys and 4 held hold opinions.  The analysts included - UBS, Credit Suisse, Merrill Lynch, Deutsche Bank, Wilson HTM, Baillieu Stockbroking, Citigroup and ABN Amro.  Overall a fairly positive view of Babcock.  If you were an investor and subscribed to this analysis you would most probably still be invested.  BNB has fallen from $11.16 at close of trade on the 6th of June and was valued at $5.25 at close of trade on the 13th, a 53% fall in value.


What this points out is that the experts, with all their research efforts, and capabilities, have not been able to predict this significant collapse in shareholder value.  It provides more anecdotal evidence of the failure of an active investment approach based on supposed expert advice.


For more details on why and how an active approach to investing is not a good strategy take a look at two pages on our website - Active Managers Underperform and Our Research Based Approach - Active Fund Managers Underperform.



Scott Keefer

Posted by: Scott Keefer AT 07:38 pm   |  Permalink   |  Email
Monday, June 09 2008

The Fortune magazine's website, based in the US, has published an article discussing a recent wager between Warren Buffet and a fund of hedge funds manager - Protégé Partners LLC - Buffett's big bet.


The actual bet is phrased:


"Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses."


Protégé has placed its bet on five funds of hedge funds, specifically the averaged returns that those vehicles deliver net of all fees, costs and expenses.  Buffet on the other hand has bet on the returns from Vanguard's low-cost S&P 500 index fund.


The arguments for each are nicely summarised on the Long Bets site - Bet 362 -


Buffet's argument is predictable:


"A lot of very smart people set out to do better than average in securities markets. Call them active investors.

Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe 'the active investors' must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.

Costs skyrocket when large annual fees, large performance fees, and active trading costs are all added to the active investor's equation. Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested.

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds


In reply, Protégé agrees with Buffet's premise that "active management in a narrowly defined universe like the S & P 500 is destined to underperform market indexes.  That is a well-established fact in the context of traditional long-only investment management."  However they go on to suggest "Funds of funds with the ability to sort the wheat from the chaff will earn returns that amply compensate for the extra layer of fees their clients pay".


Not that we will be betting on the outcome, but if we were we would be putting our cash on Buffet's S&P 500 index strategy.  Buffet has both runs on the board in terms of his own investment success and is well backed up by scientific research.  Take a look at our website page outlining our research based approach if you would like to know more.


We look forward to commenting on the outcome in January 2018!!



Scott Keefer

Posted by: Scott Keefer AT 07:00 pm   |  Permalink   |  Email
Thursday, June 05 2008

The 2nd article in Wednesday's Australian Financial Review Portfolio Liftout that was of interest provided advice to readers about seeking advice from the right planner - Take counsel, wiser the better.


In terms of our business, it provided a neat summary of some of the offerings of other financial planning firms but more importantly for those who are seeking to find the right financial planner it provided a range of alternatives and benchmarks to consider.


An early suggestion from the authors that I wanted to address is the proposition that "few planners want to deal with people who have less than $20,000 to invest".  At A Clear Direction we are keen to work with clients across the whole spectrum.  We are equally excited to work with wealth accumulators, those just starting their climb to financial independence, as we are with working with those who have reached the peak and are enjoying the view!!  We structure our business to ensure that we appropriately look after all clients


(Let me jump off my soap box and get back to the topic.)


The article outlines a range of financial advice offerings from an accountant, a financial services firm owned by major financial institutions, a stock broking firm, an independent planning firm, a private bank, a firm who services members of the industry and public sector superannuation funds and a major retail bank financial planner.


So what were the differences?


The major differences tended to be around what type of clients were targeted by each group including the type of advice they were mainly giving and how each was remunerated.  It was also clear to see the investment preference of each of the options.  The following table provides a brief summary of these 3 criteria.




Owned by a major financial institution

Stock broking firm


Private Bank

Industry & Public Super Planner

Major Retail


Target Market

More than $200k to invest

Business professionals & business owners


Earn more than $200k

$1m to invest

More than $1m to invest


Investing for the medium to long term

People over 55 years with between $400-800k to invest

Min $5m to invest

Members of these super funds, particularly blue collar workers


Mainly $400-500k

Existing bank customers


Retirees or baby boomers


Av - $200-300k to invest






financial planning &



estate planning

tax & debt structures


Listed investments

Works with legal and accounting advisers



Structure of investments

Estate planning

Asset protection

Employee equity schemes



Wealth accumulators



Managed Funds



Centrelink benefits




Products offered by parent institution

Direct share ownership

Outsources to fund managers

Shares, property and private equity

Industry super fund

Largely their own products


0.5% of assets under management including trailing commissions + hourly fee for accounting & tax advice


(Higher for smaller investors)

Min $5k up to $30k


$4k for SOA


+ costs for implementation

Assets under management at 1 - 1.5%


Assets under management at 1% up to $500k


0.8% on $500k-$1m


0.5% on $1-2m

Min $50k based on 1% of funds


0.75% for more than $30m invested

Fee for service


$220 per hour


Full plan typically $2,200

Fin Plan fee - $330-$5k


Ongoing service capped at $5k per year


There are obviously some clear differences between the alternatives including some clear biases in terms of investment preferences.


So how do we summarise ourselves on these three issues?


Target Market

Our target market is anyone who can see the benefit of investing according to our scientifically based investment approach with as little as a couple of thousand of dollars to invest or millions.


Focus of Advice

We cover the full range of financial advice services focussing first on strategy and structural issues before turning our attention to investment advice.  Our passion is having ongoing relationships with clients in assisting them to build and maintain highly effective investment portfolios within and outside of superannuation.


One area that we do refer clients to other sources is with regards personal insurances.  We see this as a very specialist area of advice.  However we continue to work closely with our preferred insurance advisor to make sure clients are being well looked after.



We realise that the costs of advice and investment management is extremely important.  We have built our business to minimise unnecessary costs without compromising the service any client of a financial services firm should expect.  This allows us to offer a very competitive fee structure.


Our fees are capped at $4,400 per annum with the most any client will pay is 0.55% on funds under management.  This fee reduces for clients with more than $500,000 of assets under management.  We generally do not charge upfront fees unless requested by clients.


Apologies for what might seem a bit of a sales pitch but we are certain that we have an approach that is valid for anyone looking for relevant financial and investment advice.


Please be in contact if you would like to know more.


Have a great weekend.



Scott Keefer

Posted by: Scott Keefer AT 08:58 pm   |  Permalink   |  Email
Thursday, June 05 2008

The latest edition of our fortnightly email newsletter was sent to subscribers on the 3rd of June.  This edition looked at franking credits, provided a summary of the movements in markets over the past fortnight and looked at the golden rules of investing.  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 latest edition also contained the following Market Update:

Market Indices

Since our previous edition, Australian and global sharemarkets have both experienced negative movements.  The S&P ASX200 Index has fallen 4.66% from the 16th to the 30th of May.  It is now down 9.43% from the same time last year and down 10.81% for the calendar year (2008) so far.  The MSCI World - ex Australia, a measure of the global market, has fallen 1.81% over the same period.  The index is down 10.45% from the same time last year and down 5.95% for the calendar year so far.


Emerging markets have also experienced negative movement with the MSCI Emerging Markets Index falling 2.83% since the 16th of May.  It is up 16.68% from the same time last year but down 3.66% for the calendar year so far.


Property trusts have also fallen since the 16th of May with the S&P ASX 200 A-Reit Index (formerly known as the Property Trust Index) falling by 5.19%.  The index is down 33.36% from the same time last year and also down 23.61% 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 3.19% over the same period.  It is down 20.20% from the same time last year and down 2.17% for the calendar year so far.


Exchange Rates

As of 4pm the 30th of May, the value of the Australian dollar has risen against major benchmarks for the fortnight.  It has risen against the US Dollar since the 16th of May being up 1.16% at .9559.   It is up 16.74% from the same time last year and up 8.43% for the calendar year so far.  Since May16th the Aussie has also risen 0.83% against the Trade Weighted Index now at 72.8.  This puts it up by9.31% since the same time last year and up 5.97% 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 a range of interesting data.  For the month of April, retail trade figures have reduced by 0.2%.  This was worse than analyst expectations of a 0.2% rise.


They have also released the latest business indicator data up to the end of March 2008 with a 2.2% increase in company gross operating profits for the first quarter of 2008 compared to the December 2007 quarter and up 7% over the year.  News reports suggest that economists were expecting gross operating profits to rise by 1.0 per cent in the quarter.

Posted by: Scott Keefer AT 05:49 pm   |  Permalink   |  Email
Thursday, June 05 2008

Wednesday's Australian Financial Review Portfolio Liftout was badged as "A Guide to Good Advice".  It provided some interesting reading of which I want to comment on two articles over the next few days of blogs.


The first looked at 10 questions to ask when choosing a financial planner.  I thought it would be a good exercise for us to answer these questions and be right up front with any potential or even current clients.  So here goes.


1.                   Can I see your Financial Services Guide?


The article highlights that providing an FSG is a legal requirement.


Our FSG is available to clients during their first meeting together with us.  If we are unable to meet face to face we will provide a copy with our first mail out of information.


2.         How long have you been a financial planner?


The article suggests the more experience the better.


Our principal financial planner, Scott Francis has been working in the industry for over 5 years.  I have been working in the industry for 1 ½ years and worked with Scott in planning the business.  We meet together with clients where possible and always work together on each client's strategy to ensure we are providing the most applicable guidance and advice.


3.         What do you specialise in?


The article suggests that you look for a financial planner that is suited to your particular circumstances.


We cover all areas of the financial planning process from wealth accumulators to retirees.  From initial financial planning strategy to the placement and monitoring of investments.  One area that we do refer clients to other sources is with regards personal insurances.  We see this as a very specialised area.  However we continue to work closely with our preferred insurance advisor to make sure clients are being well looked after.


4.         What kinds of clients do you mostly see?


The article suggests that you should find out about the types of people a planner advises and that they are in tune with your lifestyle.


We have a wide range of clients ranging from university students to professionals, people in their twenties to people well into retirement, people living in all states and territories (except the Northern Territory but we want to rectify this!).  We have clients that require planning for wealth accumulation, tax, income distribution, retirement, estate and social security needs.


5.         How do you charge for your services?


The article suggests that a planner should be able to provide an estimate of the cost of advice and options for paying.  It is a legal requirement to let a client know all the costs and sources of potential income.


We are upfront with the potential costs likely to be incurred by clients.  Our website contains a clear description of our fee for service model - Portfolio Management Service & Fees.


Some key points:

-          any initial meeting is free of cost - this gives potential clients a chance to see whether we are the planners they want to engage with in the future without costing them a cent,

-          we do not accept commissions from financial products or any other provider.  There is one cash account that we use for clients that passes on a commission.  We rebate this in full back to clients every quarter, even if the amount is less than $1.  It is extremely important to us that we are independent from any actual or potential bias,

-          the maximum annual cost for any client is $4,400 (including GST), the equivalent of 20 hours of work.

-          we base our fees on funds under advice, the maximum fee that we charge is 0.55% of funds under management.  This percentage fee reduces to 0.2% for every dollar over $500,000 on which we manage for clients.

-          There are definitely no entry or exit fees involved with any strategy we recommend to clients apart from the normal brokerage / transaction costs involved with buying and selling assets


6.         Will I receive written advice?


The article confirms that by law a financial planner must provide a written statement of advice if personal financial advice has been given.


We provide such Statements of Advice (SOAs)


7.         How often will you review my advice and what will it cost?


The article suggests that every plan needs to be reviewed.


There are three main levels of review that we perform for clients:

LEVEL 1:  Regular portfolio reviews - this includes:

  • A comprehensive face-to-face or conference call review of your entire financial situation at the end of each year.
  • Individualised portfolio reviews throughout the year

These portfolio reviews are generally about keeping you on track, and checking your progress over time.  For instance we will be complete a review based on income by August after the major income payments have been received in portfolios.


LEVEL 2:  Contact from time to time - we recognise that financial questions pop up all through the year, and you are always free to get in touch to discuss this.  There is no extra cost involved with this contact.


LEVEL 3:  Portfolio Maintenance - we regularly review and monitor your portfolio, and take responsibility for administration issues such as cash transfers, asset allocation, pension payments and regular investments.  Not just every 3 or 6 months but as issues arise.


8.         How will any issues with the planner's strategy be resolved?


The article suggests that you should be asking your planner at the beginning of the relationship what happens if you choose not to follow their advice and what happens when you want to terminate.


We generally do not charge initial up front planning fees as we see this as a possible impediment for clients should they wish to exit our service at a later date.  i.e. sometimes when you pay for something up front you feel like you have to get your money's worth.  It also means that there is no initial cost for providing the advice so if a client does not want to follow through there is no cost.


9.         Who authorises you to give advice and are you licensed?


The article suggests that you should check who owns the financial planning business as this may influence the advice that they can or do give.  For instance, financial planning firms owned by major financial institutions will be more likely to recommend the products of this institution, also known as ownership bias.


Our business is privately owned by Scott Francis and myself.  We have no ownership biases.  Our business is licensed through FYG Planners, a group of 20 or so like minded financial planning practices.  Scott is an authorised representative of FYG (No. 283723) and FYG is a registered Australian Financial Services Licensee (No. 224543) I am also in the process of registering to become an authorized representative of FYG.


10.       How does the planner keep up to date with everything?


The article suggests that it is important to hear how a planner keeps abreast of issues in the industry.


Both Scott Francis and I are tertiary trained.  Scott has a Masters of Financial Planning, Masters of Commerce and MBA and is studying towards a Phd at the University of Queensland.  I have a Masters of Financial Planning and Bachelor of Commerce and plan to undertake further studies in Finance in the near future.


We both undertake regular professional development through attending seminars, completing professional development modules offered by Kaplan and keeping abreast of media.  We convey this knowledge to clients through regular contact including research notes and publication of our Quarterly Directions Newsletter.


I hope this provides a clear response to the 10 suggested questions outlined by the AFR article.  If you would like to discuss any point in more detail please be in contact.



Scott Keefer

Posted by: Scott Keefer AT 07:51 am   |  Permalink   |  Email
Monday, June 02 2008

In his latest article written for Alan Kohler's Eureka Report, Scott looks at the new Macquarie MQ Gateway investment product.

He looks at the three main components of the product - a swap, a put option and a deposit - and concludes that the product is very complex and not one he would be recommending.

Click on the following link to read Scott's article - Gateway: Enter with caution

Posted by: AT 06:53 am   |  Permalink   |  Email
Sunday, June 01 2008

In today's podcast, Scott Keefer outlines what investors should be looking at when determining changes to their superannuation fund.

He suggests that the key factors are asset allocation, fees, insurance coverage and quality and investment philosophy.

Please click the following link to be taken to this podcast - Time to check your super fund.

Posted by: Scott Keefer AT 09:13 pm   |  Permalink   |  Email
Sunday, June 01 2008

It's that time of the year when everyone should be checking their superannuation affairs - is your asset allocation what it should be?, what are the fees?, do you have the right level of insurance coverage? and what are the actual investments within the fund?


The Australian Financial Review clearly believes it's that time with their lead story over the weekend - Time to Sack Your Super Manager? The article, written by Barrie Dunstan, highlights that many superannuation investors will be looking at negative returns for the first time since 2002.  It has been a fantastic run of returns since then but the history of how share markets have performed tells us that there was going to have to be a break in the run at some point and it seems 2007-08 has been that break.  Some fund managers may have fluked timing when this pull back was going to occur but the research suggests that very few active investors can accurately time markets.  As a consequence, there really should be no surprises with the rotten share market performance since November both here and overseas.  However, I guess many superannuation investors are not actively involved in the investment world and it may not immediately translate to them that the falls in share market values being reported in newspapers and on television will actually mean a fall in superannuation returns.


So what should a superannuation investor do when they get their next statement or log on to their account via the web for the first time in a while?


Our first suggestion is that you should check your asset allocation.  If your portfolio has fallen and you are uncomfortable with this fall it may be that you are better suited to a more defensive asset allocation - more cash and fixed interest (term deposit) style investments and less share investments.  However, you also need to keep in mind the long term nature of investments in superannuation.  It is a very long term investment, for many not just until retirement but well into retirement and even continuing on after your death.  Not until you actually draw down from superannuation do you start realising any losses in your portfolio.  The reality of how markets work tells us that share markets will bounce back with growth assets averaging around 6 to 7% above inflation (9 to 10% at current levels of inflation.)  So be careful not to react in a knee jerk fashion and reduce growth asset exposure before weighing up the long tem nature of the investment.  The key determinant should really be how much you need to have invested once you finish your income earning capabilities so as to draw an income to sustain your cost of living.


Unfortunately, understanding the asset allocation of your superannuation fund is not necessarily a simple task.  A little trap that angers us is the misuse of "alternative" assets within the supposed defensive allocation of some fund managers.  Many of these alternatives involve a lot more risk compared to investing in cash or traditional fixed interest securities such as government and corporate bonds.  If you know that alternative asset strategies are being used it would be worth finding out more details from your superannuation fund.


Once you have dealt with the asset allocation of your fund, next step is to consider the fees that are being charged.  Check the administration fees and investment management fees on the account.  Unfortunately this does not provide the whole story.  The AFR article provided a really interesting summary of the "sneaky trailing commissions" on a range of super funds provided to them by Super Ratings ranging from Nil to 0.66%.  At least these come out of the investment management and administration fees that you are paying.  A greater problem for some are the hidden hedge fund fees particularly from what are known as the Fund of Hedge Funds found in many superannuation investments.  The AFR article provided an example whereby a gross return of 20% is whittled down to 11.7% in the hands of the investor.  The total fees being 8.3% of which only 2.3% would be typically disclosed.  i.e. 6 of the 8.3% of fees remain undisclosed.


This example suggests you should be checking with your superannuation provider as to whether there are any hidden fees that are not being disclosed, especially if you know, or suspect, that hedge funds are being used within a fund.  A bit of a clue to this is the use of the term alternative asset class in the listing of asset allocation.


A third matter to consider is the amount and quality of insurance coverage you are paying for through your fund.  This is a relatively complex issue beyond the scope of this blog but put simply, if your personal situation has changed over the year through increased / decreased levels of debt or other family / personal changes than it is worth considering whether your insurance coverage is still appropriate.


The final issue is consideration of returns.  We believe that care should be taken not to solely base a decision on changing a superannuation account on investment returns.  You can't do much about past returns and research suggests that they are not a good indicator of future returns as fund manager performance does not persist.


More important is to base your decision on whether the funds are being invested for the future taking into account the reality of how markets work.  Take a look at our pages on Building Investment Portfolios and Our Research Based Approach for more details on this topic.  The same fundamentals are applicable to superannuation investments.


In conclusion, now is a good time to be re-thinking your superannuation investment keeping in mind asset allocation, fees, insurance coverage and investment philosophy of your current fund and any alternative fund.


Scott Keefer

Posted by: Scott Keefer AT 08:21 pm   |  Permalink   |  Email
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