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 Financial Happenings Blog 
Thursday, January 29 2009

A recent enquiry was received by me asking the following:

 

I am soon to reach Age Pension age.  I intend to keep working for a few more years.

Should I apply for the Pension Bonus Scheme?

 

The Pension Bonus Scheme was introduced 1st July 1998.  It was introduced as an encouragement for those of age pension age to continue working and put off claiming the age pension for a period of at least 1 year.  If you do so and you are eligible to claim the age pension at a later date, you will receive a lump sum benefit for not claiming the pension.

 

How much is this lump sum benefit?

 

The amount of bonus you get depends on:

  the amount of basic Age Pension you are entitled to when you eventually claim

  the length of time you have been an accruing member of the Pension Bonus Scheme, and

  whether you were single or partnered during the time you deferred your Age Pension.

 

You must be an accruing member for at least one year to be paid a bonus. A maximum of five years accruing membership can be taken into account when working out your bonus. Work after 75 years of age cannot be included.

 

If you are entitled to a part-rate Age Pension, you may be entitled to a part-rate bonus. For example, if you receive 75 per cent of the basic rate of Age Pension when you retire, your bonus will be 75 per cent of the amounts in the following table.

 

Maximum amounts of bonus payable (accurate as at April 2008) where the maximum rate of Age Pension is granted

Number of bonus years

For a single
person

For partnered people (each)

1

$1 336.40

$1 116.40

2

$5 345.50

$4 465.70

3

$12 027.40

$10 047.80

4

$21 382.10

$17 862.70

5

$33 409.50

$27 910.50

 

The relationship between the initial pension rate and the amount of bonus means; members will generally benefit by claiming their pension and bonus after employment income ceases.

 

The bonus you get is a multiple of 9.4 per cent of your basic Age Pension rate for each accruing bonus period.

 

Example of how the Pension Bonus is calculated

Glen registered for the Pension Bonus Scheme on 3 March 2003 at 65 years of age. He was self-employed and worked an average of 35 hours a week until he retired on 2 March 2008, accruing five full bonus years.

 

Glen is single and has never given away any income or assets. He claimed Age Pension and the Pension Bonus on 1 April 2008 within 13 weeks of his retirement.

 

Glen has other income and assets. After the income and assets tests are applied, he receives 56 per cent of the maximum rate of basic Age Pension or $7,961.40 (after rounding). His bonus is calculated as follows - 56% of the full 5 year bonus lump sum for a single person of $33,409.50.

 

This gives Glen a total bonus of $18 709.30 (after rounding).

 

For some, you may be better off claiming the Age pension immediately rather than deferring in order t receive the pension bonus at a later date.  Particularly, if the pension payments you would receive if you claimed the pension immediately are greater than the pension bonus you would receive at the time you intend to claim it then you may well be better off claiming the pension immediately.

 

This decision would depend on a range of issues including your current level of income and assets, the amount of income you need in retirement, taxation, superannuation and health and lifestyle issues.

 

If you think you will be well placed to receive the Pension bonus then Centrelink recommend that you register as soon as possible.  To register for the Pension Bonus you need to visit your local Centrelink office or by phoning 13 2300.

 

You do not need to be eligible for the age pension at time of registration, the pension bonus is calculated based on your age pension when you apply to receive the age pension for the first time. Most likely this will be when you fully retire from work and your income from working will be minimal.

 

For more information please take a look at the Centrelink website -

http://www.centrelink.gov.au/internet/internet.nsf/payments/pension_bonus.htm

Regards,
Scott Keefer

Posted by: Scott Keefer AT 07:00 pm   |  Permalink   |  Email
Wednesday, January 28 2009
In the current climate of downward pressure on interest rates the attractiveness of holding cash is fast losing its luster.  Last edition we looked at the benefit of Australian shares and the income they produce over time and the compelling argument behind continuing to hold those investments in portfolios.  Unfortunately the down side of growth assets such as Australian shares is that their asset price is volatile over the short to medium term.  2008 has provided a stark reminder of this.  So it does continue to make sense to hold defensive assets like cash and fixed interest to smooth out this volatility and also to provide assets that can be drawn down on if required knowing that you will not be drawing down on these assets at low prices.

 

But is there a better alternative to cash in the present climate that still provides a low volatility exposure?

 

The answer to this question is yes, if managed well, through using fixed interest investments.  To first provide some anecdotal evidence, the high quality fixed interest trust we suggest to clients has returned 2.82% over the past 3 months to the end of December 2008 as compared to 1.69% for a relevant cash index - UBS Warburg 90-Day Bank Bill Index.

 

Why this is so goes to the rules of how fixed interest investments, commonly referred to as bonds, are priced.  In times of falling interest rates, bond prices should rise all else being equal.  This is because holders of the bond are promised a fixed rate of return for providing that debt to the government or a company.  As interest rates in the economy fall, the rate receivable on these bonds become more attractive, therefore prices adjust to reflect this attractiveness and returns improve.

 

This is a very simple explanation and more detail should be considered before jumping into fixed interest investments.

 

The following is an extract from our book - A Clear Direction - Your Guide to Being a Successful CEO of Your Life which we hope provides more detail around the topic of holding fixed interest.

 

Fixed interest securities are traditionally loans made by investors to governments or companies.  These types of securities represent a loan to the issuer usually in return for periodic fixed interest payments.  These payments continue until the security is redeemed by the issuer at maturity or earlier if called.  Under law, holders of debt have the first call on the income and assets of a company.  Specifically interest payments have priority over any dividend payments to shareholders.  As a consequence such investments are generally viewed as less risky than equity investments because holders must be paid first before any returns are paid to shareholders.  However, fixed interest securities are not risk-free and may carry many different kinds of risk.  As a result these investments are riskier than holding cash.

 

We would therefore expect, over time, that the expected returns on fixed interest securities would be less than returns to owners of shares in a company but more than simply leaving cash in the bank.

 

Use of these types of securities sounds simple.  However there is much more to the story.

 

Rather than include the whole chapter within this blog we have included a copy on our website: Fixed Interest Investments

 

Regards,

Scott Keefer

Posted by: Scott Keefer AT 07:09 pm   |  Permalink   |  Email
Tuesday, January 27 2009

The latest edition of our fortnightly email newsletter for 2009 has been sent to subscribers. 

In this edition we:

  • consider the use of fixed interest investments in a portfolio,
  • take a look at 2009 School Costs as a guide to planning for future education costs for your children,
  • provide a summary of the movements in markets over the past fortnight including 3, 5 and 10 year return history,
  • look at 10 tips on avoiding investment fraud,
  • provide a link to some useful videos on You Tube,
  • provide a link to Scott's latest Eureka Report article,
  • welcome back the Monday's Money Minute Podcasts, and
  • look at a case study involving the Pension Bonus Scheme.

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 following is the market news section for the latest newsletter:

 

ASX P/E Ratio and Dividend Yields

 

The P/E ratio is a common broad indicator of the price of shares.  It is a calculation of the price of shares compared to expected earnings.   A higher ratio indicates that share prices are more expensive.  The historical P/E ratio for the ASX has been between 14 & 15.  The dividend yield is the calculation of dividend payments divided by the market capitalisation of the company or index.  The historical average in Australia is around 4%.

 

As of January 20th the P/E ratio for the S&P/ASX 200 was 8.74.  The dividend yield was 6.44%.


Volatility Index (VIX)

 

Another index we are keeping an eye on in the USA is the CBOE Volatility Index.  This index purports to be a key measure of market expectations of near term volatility conveyed by the S&P 500 share index.  The higher the level of index, the higher are expectations for volatility in the S&P 500 index.  For more information on how the VIX is calculated please take a look at  - www.cboe.com/micro/vix/introduction.aspx

 

As at the 23rd of January the index closed at a level of 47.27.  This is significantly down from the 80.1 level it had reached at its peak but slightly up from the levelreported last fortnight.

 

Market Indices

 

This year I have tabulated the index results and included extra time frames for returns.

 

 

Since last ed.

Since Start of 2009

1 Year

3 Year

5 Year

10 Year

Australian Shares

 

 

 

 

 

 

S&P - ASX 200

-10.52%

-10.20%

-38.24%

-11.44%

0.05%

NA *

International Shares

 

 

 

 

 

 

MSCI World - Ex Australia

-8.24%

-8.09%

-35.60%

-11.87%

-2.85%

-1.65%

MSCI Emerging Markets

-8.81%

-6.92%

-40.83%

-5.83%

5.31%

10.36%

Property

 

 

 

 

 

 

S&P - ASX 200 REIT

-15.03%

-10.95%

-52.66%

-24.68%

-12.14%

NA *

S&P/Citigroup Global REIT - Ex Australia - World - AUD

-2.51%

-7.26%

-30.11%

-12.37%

1.32%

5.79%

Currency

 

 

 

 

 

 

US Exchange Rate

-7.81%

-5.92%

-24.54%

-4.73%

-3.46%

0.19%

Trade Weighted Index

-5.94%

-3.24%

-19.58%

-5.28%

-3.80%

-0.27%

 * - Data unavailable as ASX 200 only commenced on 31st March 2000
Posted by: Scott Keefer AT 07:04 pm   |  Permalink   |  Email
Tuesday, January 27 2009

I am pleased to announce that the Monday's Money Minute podcasts are back for 2009.  I look forward to sharing insights with listeners over the coming year relating to financial planning and investment strategy.

The first topic for the year relates to the proposed changes to the income test used to assess eligibility for a range of government offsets and benefits.

These changes will have some significant impacts for those using salary sacrifice strategies and also those who may be accessing the Commonwealth Seniors Health Card.  For more information please listen to the podcast - Watch out for the new federal government income tests.

Posted by: Scott Keefer AT 01:07 am   |  Permalink   |  Email
Monday, January 26 2009

From July 1, 2009, the federal government is planning to put in place changes to the income test applicable to a range of government assistance programs.  These changes may be quite significant depending on your circumstances.

The changes will see the following included in certain income tests:

  • Voluntary salary sacrifice superannuation contributions.
  • Net financial investment losses (negative gearing deductions).
  • Adjusted fringe benefits.

Under these proposed changes these amounts will be included in the income test for the:

  • Government superannuation co-contribution.
  • Pensioner and senior Australians tax offset.
  • Mature age worker tax offset.
  • Spouse superannuation contributions tax offset.
  • Baby bonus.
  • Childcare benefit.
  • Child support.
  • Family tax benefit (FTB) parts A & B

In particular, those using salary sacrifice contributions to provide greater access to these offsets and benefits, may have to revisit this strategy in light of the changes.

Information from the government also suggests that all income stream and lump sum payments from a taxed super fund would be counted as income for the purpose of assessing eligibility for the Commonwealth Seniors Health Card (CSHC) - whether or not the benefit comprises a tax-free component or is otherwise non-assessable.

This would mean that those of age pension age who are accessing their superannuation assets to draw a tax free income stream will be affected by this change.  Under current laws, this tax free income stream is not included as part of assessable income for the CSHC income test.  Those who use a transition to retirement income stream strategy will be hit twice as from the 1st of July not only will the pension stream be assessed but so will voluntary salary sacrifice contributions into superannuation.

Including the tax free income stream as assessable income along with voluntary salary sacrifice contributions may well tip some self funded retirees, or those who continue to work passed age pension age, over the cut-off threshold and cause them to be ineligible for the CSHC.

If you wanted more information on the proposed changes please refer to the consultation paper found on the Federal Government's Treasury website - http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1438 and the Commonwealth Seniors Health Care Fact Sheet found on the government's Department of Families, Housing, Community Services and Indigenous Affairs website - http://www.facsia.gov.au/internet/facsinternet.nsf/seniors/cshc_changes.htm

Regards,
Scott Keefer

Posted by: Scott Keefer AT 10:19 pm   |  Permalink   |  Email
Saturday, January 24 2009

Unfortunately investment fraud is most certainly a risk for investors to consider when setting up and maintaining investment portfolios.  The Madoff affair in the USA has caused waves throughout the world.  In Australia, some might say that even though the Storm Financial saga was not about fraud, misleading behaviour might have been at play. (This looks set to be tested in the courts.)  So how do investors protect themselves from getting caught out by fraud or misleading behaviour?

I am a candidate in the Chartered Financial Analyst (CFA) program.  As part of this I get access to some very useful resources that I hope to share with my clients and users of this website.  One of the latest publications from the CFA Institute looks at 10 tips on avoiding investment fraud and this was written in response to the Bernard Madoff Hedge fund Ponzi scheme in the USA. (for the original article - http://www.cfainstitute.org/aboutus/press/release/09releases/20090121_01.html)

Here are the 10 tips and a response to how our approach rates on each tip:

1.      Understand clearly the investment strategy - our philosophy and the philosophy of the fund managers we favour is clearly set out and publicly available - www.acleardirection.com.au/building_portfolios, www.dfaau.com, www.vanguard.com.au, www.ssga.com/australia.

2.       Match investment strategy to reported performance - The old saying rings true, "if it sounds too good to be true it probably is".  The index based approach we use to build client portfolios is transparent.  For example, if you hold an ASX200 Index Fund you know pretty much exactly the underlying companies you are invested in and returns should be very similar to the widely reported returns of the ASX200.

3.      Watch for e-mail solicitations and Internet fraud - our firm nor the fund managers we favour do not send out unsolicited communication.

4.       Be wary of "sure things," quick returns, and special access - Our philosophy is anything but these things.  The only "sure thing" we are offering clients is that their returns will be very close to index returns less a small amount for fees with some upside from investing in the small, value and emerging markets areas within asset allocations.

5.       Understand what, if any, regulatory oversight exists - In Australia, financial advisers and managed funds are regulated by ASIC or APRA (for superannuation funds).  We have not yet seen the failure of a managed investment scheme through fraud in Australia.  All the funds we use have annual reports publicly available on their websites along with external audit reports.

6.      Assess the operational risk and infrastructure - It is important that an investment firm has separate, independent operations for asset management, trading, and custody to provide checks and balances against fraud.  The funds we utilise have these checks and balances.

7.       Ask about independent audits and who performs them - the three fund managers we use for client portfolios have their annual reports along with audit reports publicly available on their websites.

8.       Assess the personnel - Our credentials are clearly set out on this website.  In terms of the fund managers we suggest, the index approach to investing takes a lot of this risk off the table because you as an investor are now investing in the whole of the market not just a couple of companies.  Dimensional (DFA) add a few more touches to their investments through incorporation of the 3 factor model and investments in emerging markets.  They clearly set out the personnel on their investment committees in their PDS and on their website and also highlight the links back to the world renowned scholars, including Nobel prize winners for economics on who's research they base their approach to investing.

9.       Perform a background check - you are able to perform a check of my authorised representative status along with the financial services license of the fund managers we suggest clients use at www.asic.gov.au

10. Limit your exposure - Our approach is that we suggest clients hold a really well diversified portfolio in terms of what they are invested in.  This is a key reason why index style investing works.

On point 10, some ask the question - is it safe to have a large part of our investments with one fund manager such as Dimensional?

Our response is that in Australia, given the strong regulation by ASIC along with the structure of the investment trusts through using trustees and further supported by the transparent nature of the investments i.e. index style funds where you have a really good understanding of what the underlying investments, we are really confident that the need to diversify between fund managers is small.

Of course, these tips cannot guarantee that you will avoid investment fraud but they will increase the likelihood that you will make smart choices. Also, by asking the right questions and arming yourself with relevant information, you become one of the informed investors who are more difficult prey for scam artists.

Regards,
Scott Keefer

About CFA Institute

CFA Institute is the global association for investment professionals. It administers the CFA and CIPM curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has 100,000 members, who include the world's 86,700 CFA charterholders, in 133 countries and territories, as well as 136 affiliated professional societies in 57 countries and territories. More information may be found at www.cfainstitute.org.

Posted by: Scott Keefer AT 02:24 am   |  Permalink   |  Email
Tuesday, January 20 2009

The Access Economics report published yesterday paints a reasonably bleak picture of what's in store for the economy in 2009.  However, not all commentators / analysts / experts have come to the same conclusion.

An expert I like to keep an eye on is Jeremy Siegel, a Professor of Finance at the Wharton School of the University of Pennsylvania.  He is also well known for his research into long-term stock and bond returns, as published in his best selling book Stocks for the Long Run.  A profile of Professor Siegel can be found at Yahoo Finance.

Professor Siegel writes a regular commentary piece for Yahoo Finance.  His latest piece - 2009: A Much Better Year - provides quite an optmistic outlook for the year ahead.  He, like other commentators, is hesitant about making an outright prediction as he has been badly burnt by previous attempts, but his suggestion about 20% or higher returns for the year is something to contemplate.

Do we believe that his forecast will be correct?

It is difficult to say.  What we do know is that there are a range of viewpoints about the year ahead.  Some absolute doomsday predictions while others in present conditions seem overly optimistic.  For me this suggests that nobody really knows for sure.  The best strategy therefore is to keep to your long term plan. Don't go selling out of growth asset positions.  If you can afford to be buying regularly over time through dollar cost averaging or value averaging over the next few years then this is well worth consideration to protect against buying today and seeing the market fall further over future days and months.

Regards,
Scott Keefer

Posted by: Scott Keefer AT 01:11 am   |  Permalink   |  Email
Saturday, January 17 2009

Saturday's Courier Mail included a piece on the collapse of Storm Financial and the impact on their clients - Storm Financial's name a clue to what lay ahead.  Scott Francis was quoted a number of times in the article:

----------

Financial planner Scott Francis said the Storm plan of borrowing huge sums to invest in index funds relied on an ever-rising stock market.

Now that global markets have tanked, around 3000 of the company's clients have been left exposed.

About 10 per cent of these clients owe more than the value of their portfolios and are $20 million in the hole.

Mr Francis said that the company employed a "one-size-fits-all" strategy for investment, so that young workers and those nearing retirement would have the same plan regardless of their circumstances or goals.

"Investors sought advice on their financial situation and Storm Financial advised them to borrow heavily," Mr Francis said.

"It appears that it didn't seem to matter if they were retired, close to retirement or had little income.

"The answer was the same: get your hands on some debt, gear it up further using an aggressive margin loan facility and then wait for the share market to work its magic.

"What's wrong here?

"It's not the products, it's not even the structure of the investment.

"The problem is bad advice ... It seems to me that there was no way the average Storm Financial investor would be able to navigate a steep share market downturn."

Adding to the misery, Mr Francis criticised Storm for charging excessive entry fees of up to 6.6 per cent and then 1.14 per cent annually.

----------

Please click on the following link to be taken to a copy of the article - Storm Financial's name a clue to what lay ahead.

Posted by: AT 02:31 am   |  Permalink   |  Email
Thursday, January 15 2009

In his latest article written for Alan Kohler's Eureka Report, Scott looks at the fund of funds structure.  He highlights the high cost concern with these style of funds providing an example of one fund with the following levels of fees:

1. The brokerage fees when underlying shares are bought or sold (paid to the stockbroker).
2. The fees of the actual fund managers.
3. The fees charged by BT to act as the "multi manager".
4. The fees of the independent investment consultant.
5. The fees to the custodians who hold the actual assets for investors.
6. The commission to the financial adviser (the Product Disclosure Statement says it is an ongoing commission of up to 0.6%).

Click on the following link to read Scott's thoughts - Funds structure in big trouble

Posted by: AT 01:05 am   |  Permalink   |  Email
Tuesday, January 13 2009

The first edition of our fortnightly email newsletter for 2009 has been sent to subscribers on Tuesday 13th January. 

In this edition we:

  • consider the benefit of Australian share income over time,
  • take a look at the ASX 200 contituent list,
  • provide a summary of the movements in markets over the past fortnight including 3, 5 and 10 year return history,
  • look at whether the beginning of 2009 is the time to be considering a more conservative superannuation investment allocation,
  • introduce a new online forum - The Fama/French Forum,
  • provide links to Scott's latest Eureka Report article, and
  • update the 3 Factor Model in Action graphs to the end of December 2008.

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 following is the market news section for the latest newsletter:

 

ASX P/E Ratio and Dividend Yields

 

The P/E ratio is a common broad indicator of the price of shares.  It is a calculation of the price of shares compared to expected earnings.   A higher ratio indicates that share prices are more expensive.  The historical P/E ratio for the ASX has been between 14 & 15.  The dividend yield is the calculation of dividend payments divided by the market capitalisation of the company or index.  The historical average in Australia is around 4%.

 

As of January 6th the P/E ratio for the S&P/ASX 200 was 8.76.  The dividend yield was 6.28%.


Volatility Index (VIX)

 

Another index we are keeping an eye on in the USA is the CBOE Volatility Index.  This index purports to be a key measure of market expectations of near term volatility conveyed by the S&P 500 share index.  The higher the level of index, the higher are expectations for volatility in the S&P 500 index.  For more information on how the VIX is calculated please take a look at  - www.cboe.com/micro/vix/introduction.aspx

 

As at the 12th of January the index closed at a level of 45.84.  This is significantly down from the 80.1 level it had reached at its peak.

 

Market Indices

 

This year we have tabulated the index results and included extra time frames for returns.

 

 

Since last ed.

Since Start of 2009

1 Year

3 Year

5 Year

10 Year

Australian Shares

 

 

 

 

 

 

S&P - ASX 200

7.04%

0.36%

-38.63%

-8.22%

2.50%

NA *

International Shares

 

 

 

 

 

 

MSCI World - Ex Australia

6.02%

0.16%

-35.87%

-9.99%

-0.80%

-0.80%

MSCI Emerging Markets

10.41%

2.08%

-43.69%

-2.92%

7.52%

11.38%

Property

 

 

 

 

 

 

S&P - ASX 200 REIT

3.79%

4.80%

-51.63%

-21.16%

-8.94%

NA *

S&P/Citigroup Global REIT - Ex Australia - World - AUD

-1.02%

-4.87%

-22.80%

-11.65%

2.05%

5.97%

Currency

 

 

 

 

 

 

US Exchange Rate

9.77%

2.05%

-19.85%

-2.09%

-1.82%

1.09%

Trade Weighted Index

6.32%

2.88%

-16.37%

-3.32%

-2.52%

0.54%

 * - Data unavailable as ASX 200 only commenced on 31st March 2000
 
General News

 

Since our previous edition, The Australian Bureau of Statistic has released the latest employment data to the end of November 2008.  The figures show that seasonally adjusted unemployment had grown to 4.4% over the month due to a decrease in part time employment of 24,400 yet there was also a rise in full time employment of 8,800.

Posted by: Scott Keefer AT 06:00 pm   |  Permalink   |  Email
Monday, January 12 2009

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 December 2008.

 

Commentary:

 

The graphs show slight growth in monthly returns over December for the Australian Small & Value segments of the market along with Emerging Markets in the global arena.  The Australian Large Company return for December (as measured by the ASX 200) was flat with Global Small, Global Value and Global Large companies (as measured by the MSCI World Ex Australia Index) retreating in value.

 

Over the long run, the graphs continue to clearly show the existence of the risk premiums (small, value and emerging markets) that the research tells us should exist:

 

Australian Share Trusts - 7 Year returns

 

 

7 Yr Return

to Dec 2008

Premium over ASX 200

Accumulation Index

ASX 200 Accumulation Index

8.36%

-

Dimensional Australian Value Trust

11.55%

3.19%

Dimensional Australian Small Company Trust

12.82%

3.46%

 

International Share Trusts - 7 Year returns

 

 

7 Yr Return

to Dec 2008

Premium over MSCI World (ex Australia) Index

MSCI World (ex Australia) Index

-2.04%

-

Dimensional Global Value Trust

0.60%

2.64%

Dimensional Global Small Company Trust

2.42%

4.46%

Dimensional Emerging Markets Trust

9.71%

11.75%

NB - These premiums are higher than what we would expect going forward.

 

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 and Our Research Based Approach pages 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 (www.dimensional.com.au).  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.

 

Regards,

Scott Keefer

Posted by: Scott Keefer AT 11:24 pm   |  Permalink   |  Email
Thursday, January 08 2009

This was the headline of an article posted on the Wall Street Journal website on the 4th of January.  The article posed this question:

During a market comeback, is it best to be invested in actively managed funds that aim to beat their benchmarks? Or is it better to stick to index funds that simply rise with the tides?

The article provided insights from a range of US analysts.  Click on the following link to be taken to the article - Active or Index Funds for '09?

Lets start with the argument against indexing.

Some investors argue that by investing in a fund that mirrors an index you are holding not only the fastest-rising sectors but also the laggards. An active manager may be able to avoid the low performers and use cash to nimbly pick up shares of companies that are growing ahead of the market.

Unfortunately the evidence is against this theory.  Take a look at our Active Fund Managers Underperform page on our website.

Unfortunately the evidence presented in the paper suggests that such an approach is risky because in the recoveries from the past three bear markets, index funds have come out ahead of managed funds on average, according to data from researchers Lipper Inc. and Morningstar. 

Over the 12-month period following the most recent bear market in the USA that ended in March 2002, less than 30% of actively managed funds beat their benchmarks, according to Morningstar.

Another interesting statistic included in the article was that "actively managed funds certainly didn't shine versus index funds last year, with some 58% of actively managed U.S. stock funds failing to beat their benchmark indexes in 2008, according to Morningstar."

Our approach at A Clear Direction is that we firstly do not know whether there will be a rebound in markets in 2009.  We certaintly hope so but we (along with all other commentators and experts) have no skill or ability to make this prediction.  Rather, we continue to build investment portfolios for clients taking into account the risk that markets may fall further but also based on the historical data that shows that market will rebound some time in the future as they have done so in the past.

We do this not by picking active managers or trying to time entry into and out of the market but by using index funds based using the 3 factor model of how markets work.  If you wanted to know more about this approach please take a look at our Building Portfolios and Research Based Approach  pages on our website.

My answer then to the initial question - Index funds for 2009 and beyond!!

Regards,
Scott Keefer

Posted by: Scott Keefer AT 07:00 pm   |  Permalink   |  Email
Wednesday, January 07 2009

Our Building Portfolios page sets out philosophy towards building investment portfolios for clients.  At the core of this philosophy is the 3 Factor model.

Academic researchers in the USA have identified two sources of additional return beyond just the average market return (the index return).  This research was conducted and published in the early 1990's by University of Chicago Professors Eugene Fama and Kenneth French, and their results are known as the ?3 Factor Model' of investing.  Importantly, Fama and French's research has been consistently repeated in markets around the world and shows that two factors - company size and value (or company health) are sources of above market average returns.

        The Company Size effect identified that small company shares have higher expected returns than large company shares.  This is not entirely new to Fama and French's research, it had been proposed for some time.  An example of a small company would be the Bank of Queensland - much smaller than the Commonwealth Bank which is amongst the 5 biggest companies listed on the Australian stock exchange.

 

        The Value Effect identifies that financially pressured or out of favour ?value' companies have higher expected returns than healthy and popular companies.  This does not seem to make sense at first glance.  One way to think about it is this, when a company is out of favour or under financial pressure everyone sells their shares.  The price of the company falls, and it is only once it has fallen a long way that people become interested in buying it again - only once they are attracted to the company by the higher expected returns that come about because its share price has fallen so far.


These same professors who developed this model have been sponsored by Dimensional to create an online forum.  The website offers a venue for them to share their ideas and perspectives with Dimensional investors, affiliated professionals, and the general public. The professors will use the forum to comment on financial topics, highlight current research, answer frequently asked questions, and point viewers to information sources they find engaging.

I really encourage you to take a look at this new website by clicking on the following link - Fama/French Forum and also to keep track of the ongoing discussions that occur there by subscribing to the RSS feed.

Regards,

Scott Keefer

Posted by: Scott Keefer AT 08:57 pm   |  Permalink   |  Email
Tuesday, January 06 2009

Before closing the office for the holiday season break, we sent out a final piece of communication to our clients with a report we completed looking at Australian share income as compared to income received from cash over time.

Over time there are two benefits that we hope to receive from investing in shares.  The first is that we hope that the shares we own will go up in value over the long term.  As a statement of the blindingly obvious, this has not been happening in the short term.  The second benefit that we hope to receive from owning shares goes to the ?first principles' of what shares are.  Investing in shares means that we become a part owner of a company.  That company earns some income, and each year a portion (on average about 60% to 70%) of that income is paid out to investors in the form of dividend.

The simplest analogy is to think of owning shares somewhat like owning an investment property.  Over the long term you hope/expect that the property goes up in value - however you also receive income from that property in the form of the rent that the tenant pays. Over time the rental income will tend to increase - just as over time the dividends paid by shares tend to increase.

This report looks at the reliability and quality of income paid by shares over long periods of time.  The results of the report are quite compelling and clearly show the benefit of owning shares as opposed to cash in terms of the income produced over the long term.

We have now uploaded this report on to our website and encourage you to take a look - The Benefit of Australian Share Income Over Time.

Regards,
Scott Keefer

 

Posted by: Scott Keefer AT 07:32 pm   |  Permalink   |  Email
Monday, January 05 2009

Jim Parker, Regional Director of Dimensional Funds Australia (DFA) has posted his first Outside the Flags commentary for 2009.  The article looks at the performance of hedge funds in 2008.  In it he warns us of looking for an investment quick fix in response to the difficult year just passed.

Instead he recommends that you you might consider an alternative approach:

"one that makes no promises other than ensuring your portfolio gains reliable and efficient exposure to asset classes worldwide.

This approach recognises that markets are inherently unpredictable and that risk and return are related. Your best chance of harvesting the gains on offer is to remain disciplined in a diversified portfolio built around the known dimensions of risk.

To be sure, the premiums to be gained from taking on that risk are not always there, which is why they are called risk factors. But you are more likely to have a successful investment experience with this approach than you are by placing faith in those that promise you the world.

It's a New Year's resolution worth keeping."

I have included a copy of Jim's thoughts for your consideration:

A Resolution Worth Keeping

When the calendar turns over to a new year, we often find ourselves making pledges to ourselves?whether it be getting into shape, spending more time with our families or quitting all those things that aren't good for us.

Aware of this seasonal desire for renewal and reinvention, particularly after a year of such momentous volatility, a large part of the investment industry is busy marketing financial New Year resolutions.

For distraught investors looking for a fresh start, these slickly advertised promises to "armour-guard" portfolios, quarantine retirement savings and make money in down markets can seem awfully tempting.

But it's at these times that we need to remind ourselves that our search for investment quick fixes can leave us vulnerable to the persuasions of those who make promises they know they have no chance of keeping.

Just look at the performance of hedge funds in the past year. These highly speculative and complex investment vehicles promised to deliver positive returns in any market and charged very fat fees for doing so.

But rising correlations between asset classes this past year have combined with the magnifying effects of leverage to leave many hedge funds struggling to keep their promises and struggling to stay in business.

According to Hedge Fund Research1, hedge fund liquidations were up by 70 per cent in the third quarter of 2008, with a record 344 funds closing. And this was before the impact of the scandal involving alleged Ponzi scheme operator Bernard Madoff, to whom some funds of hedge funds had a large exposure.2

As one analyst observed, the global financial crisis may merely have confirmed what many suspected: that the "alpha" that many hedge funds were charging all that money for was just "beta", or the ordinary market return.

Their promises of delivering positive returns by diversifying into illiquid and opaque alternative asset classes are looking a little tatty as well. Hedge funds delivered their worst-ever losses of just under 18 per cent in the 11 months through November, according to Hedge Fund Research.3

So what's the answer as your review your returns of 2008? Firstly, be wary of any marketer of an investment solution that promises to "beat" the market or puts your money at the mercy of their own forecasts.

Secondly, ask yourself whether you understand what you are investing in. It is difficult to judge your risk exposure and level of diversification when your fund refuses to disclose its activities beyond the most basic requirements.

Thirdly, even if the hedge fund managers really are highly skilled, consider who really reaps the rewards from their arcane activities. Is it you as the end investor or the managers themselves?

Lastly, before you make any rash decisions, you might consider an alternative approach?one that makes no promises other than ensuring your portfolio gains reliable and efficient exposure to asset classes worldwide.

This approach recognises that markets are inherently unpredictable and that risk and return are related. Your best chance of harvesting the gains on offer is to remain disciplined in a diversified portfolio built around the known dimensions of risk.

To be sure, the premiums to be gained from taking on that risk are not always there, which is why they are called risk factors. But you are more likely to have a successful investment experience with this approach than you are by placing faith in those that promise you the world.

It's a New Year's resolution worth keeping.


1'Hedge Funds Face Bleak Future', The Sunday Telegraph, Dec 21, 2008

2'Broad Probe into Hedge Fund', The Wall Street Journal, Dec 26, 2008

3'Hedge Funds Return to Roots as Alpha Claim Refuted', Reuters, Dec 19, 2008

Posted by: AT 07:57 pm   |  Permalink   |  Email
Monday, January 05 2009

Welcome to our first blog entry for 2009.  I am looking forward to what I hope will be a much less gloomy year than that just passed.  (Sorry to be a touch cautious with my use of words here but much better this than having egg all over my face later)  For me personally the omens are good, January 25th is the start of the year of the Ox according to the Chinese calendar.  I was born in the year of he Ox so I hope this makes 2009 a great year for me and more importantly for my clients!!

 

The first topic for the new calendar year I wanted to address was whether the start of a new year was a good time to reconsider your superannuation investment choice.  An article published in the Sydney Morning Herald on Saturday included data from a report compiled by Sweeney Research based on the responses of 1,000 super fund members aged over 45 years with balances over $50,000.  The data showed that 38% had changed asset allocations within their super funds last year, with 79% of those moving into more conservative options.  (i.e. 30% of those surveyed)

 

So if you have not already, should you be considering this same alternative?

 

Sounds like a simple question but the answer is far from simple.  As with most financial decisions, consideration needs to be had of your own personal situation.  This should include thinking through:

 

  • Your goals leading up to full retirement, e.g.
    • do you want to (and have the possibility to) work part time in the lead up?
    • can you be making extra contributions into superannuation or are there other needs that need to be addressed first?
  • The time until your planned retirement,
    • generally speaking the longer the timeframe, the more suitable it is to be less conservative with your investment choice
  • Your income needs in retirement,
    • what income do you hope to be living off?
  • The possibility of receiving Centrelink benefits in retirement
  • Your expected life expectancy (or put another way, how long you need to be drawing an income from your superannuation assets)
    • reaching retirement is not the end game
  • Whether you have goals of passing on assets to younger generations or charity
    • do you want a lump sum to be able to be passed on to your children or grandchildren or used to support charitable organisations?
  • Your tolerance to volatility in investment markets
    • how comfortable are you seeing your portfolio fall by 10%, 20%, 30%, 40%, 50%

 

Some suggest a further question to consider is what you (or your final advisor) think will happen to investment returns in the year, 3 years, 5 years etc ahead.  Our approach is that this is not a helpful question to be asking as there is no evidence that even the experts can predict or forecast what is going to happen in the near term.  If you wanted an insight into the empirical evidence behind this assertion please take a look at our Research Based Approach pages on our site.

 

Instead, a better question to ask is what the probabilities of different investment returns are over relevant timeframes given historical data.

 

Your answer to the investment choice question should therefore be dependant on all of these considerations and not your gut feeling about future market prospects.

 

If after careful consideration you think it is worth moving towards a more conservative investment allocation, the next step is to consider how best to achieve this.

 

The easiest way would be to simply sell down growth assets (shares & property trusts) or switch to a more conservative option (Balanced to Conservative or Growth to Balanced).  Unfortunately this involves selling these growth assets at what we might consider low prices and in doing so locking in the losses achieved through 2008.  If history is anything to go by, growth asset values should rebound.  It will not happen overnight but if history is anything to go by it should occur over time.

 

A better alternative might be to direct all future contributions and income payments from your investments into a cash alternative and by doing so build up a more conservative allocation over time without realising losses on those depressed growth assets.

 

If you wanted to discuss your options in more detail please do not hesitate to get in contact.  We offer a free, no obligations, initial consultation and are happy and keen to discuss alternatives.

 

Wishing you a great 2009.  Go the year of the Ox!!

 

Regards,

Scott Keefer

Posted by: Scott Keefer AT 05:18 am   |  Permalink   |  Email
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