Skip to main content
rss feedour twitterour facebook page linkdin

Financial Happenings Blog
Tuesday, June 30 2009
In a recent article published in Alan Kohler's Eureka Report, financial education consultant Scott Francis looks at where investors can turn if they feel like they have received bad advice.

He sets out the following steps:
  • Set out a written complaint to your financial services provider (eg, your financial planner) and see if it can be resolved at that point.
  • Ask for a copy of the financial service provider's complaints process, and lodge a formal complaint.
  • Make a complaint with the external complaints scheme - usually the Financial Ombudsman Service.

  • Before you take any action, be clear on who the complaint is against, the basis of the complaint, and the damage that this has caused you (the financial figure).

    To take a look at the full article please click on the following link - Who can I complain to?
    Posted by: AT 05:52 pm   |  Permalink   |  Email
    Thursday, June 18 2009

    For those interested in the theories behind how markets work, Dimensional's Weston Wellington has posted his latest commentary piece looking at the topic of the efficient markets.  Weston focuses on the writings of Justin Fox who criticises the theory.  Unfortunately Fox cannot identify where investors are exploiting this lack of market efficiency.  His conclusion is that investors are best served by employing a buy and hold strategy.  Weston's full commentary is set out below.

    Scott Keefer

    Over six years ago, Fortune writer Justin Fox wrote an article titled, "Is the Market Rational?" Much of the article focused on the intellectual rivalry between two Chicago professors?Eugene Fama and Richard Thaler?and Fox made no secret which of the two he found more persuasive. The next generation of finance professors, he said, were "ripping Fama's teachings to shreds," and market efficiency as an organizing principle was being shouldered aside by something called "behavioral finance." In this view, irrational investors make systematic judgment errors that produce predictable patterns in stock prices. Fox noted approvingly that the Nobel Prize in economics had been awarded the previous month to a Princeton psychology professor in recognition of his work on behavioral biases and suggested it was possible for investors with sufficient "contrarian gumption" to outperform the market by exploiting such biases. But he doubted most of his readers would be successful in this effort, due to their own propensity to make mistakes. His conclusion for investors? "That's easy," he wrote. "Buy and hold. Diversify. Put your money in index funds. Pay attention to the one thing you can control?costs?and keep them as low as possible."

    Fox has been hard at work since that time; the article has mushroomed into a 328-page book and the title is no longer a question but an assertion: The Myth of the Rational Market. The book has much to recommend it?a wide-ranging survey of the battle of ideas among financial economists over the last century, with an enormous cast of characters. Readers of Peter Bernstein's Capital Ideas will find themselves covering familiar ground, but there is enough new material to make it worthwhile. Fox's breezy style is effective in distilling complicated ideas into digestible portions, and his colorful sketches help maintain our interest in a dry, statistics-laden topic. Social critic Thorstein Veblen, for example, is a "crotchety philanderer." Yale economist Irving Fisher is a prohibitionist and health-food advocate. Milton Friedman finds the early research on efficient portfolio design similar to his work during World War II on the statistical properties of artillery shell fragmentation.

    Financial economics as a distinct field of inquiry has grown from humble beginnings in the 1950s to a major field of study, and Fox takes the reader on a long journey in his effort to find a comprehensive explanation for the mystery of markets and rational behavior. Perhaps too long. One knotty problem leads to another; and even with greatly condensed versions of all the various issues, the progress is slow. Only those with considerable intellectual curiosity are likely to make it all the way through the discussions of random walks, asset pricing puzzles, expected utility theory, fractals, futures contracts, game theory, organizational behavior, corporate governance, central bank policy, derivatives, behavioral biases, and on and on.

    There is so much ground to cover that some intriguing questions are left barely explored. After pointing out the flaws of the efficient market hypothesis using the CAPM model of expected returns, Fox quickly dismisses the alternative Fama/French multifactor approach as "clunky" and moves on. The value premium, in his view, is attributable primarily to investor irrationality. This is certainly one interpretation, but a more nuanced view deserves attention as well. Chicago Ph.D. and hedge fund manager Cliff Asness has pointed out that despite the extensive literature on the issue, an explanation for the value premium remains a "gigantic, subtle, and still unsettled academic debate."

    For those hoping to find some concrete suggestions for improving their investment results, the book is apt to be disappointing. Fox finds little evidence of success among professional money managers in exploiting the inefficiencies he believes are so clearly evident. He has some kind words for academics who have set up money management firms to apply research on behavioral biases to generate superior returns, but he cites no evidence of their success, perhaps because their results are generally well explained by the standard asset pricing models he is so quick to condemn.

    Fox appears frustrated that the evidence of market irrationality appears so clear but the evidence of investor success in exploiting these mistakes is so thin. His brief message to investors toward the end of the book carries an air of resignation?all the effort devoted to identifying flaws in the rational market model doesn't appear to offer hope of a superior approach. Almost as an afterthought, his practical advice to investors includes the following suggestions:

    • "If you have money to invest, the only sensible place to start is with the assumption that the market is smarter than you are. You don't have to stop there. But if you do come up with an idea for beating the market, you need a model that explains why everybody else isn't already doing the same thing you are."
    • "If you're picking somebody else to manage your money, the chances of finding a market-beating path are even harder."

    Bottom line: Ideal way to bone up on financial economics if you want to sound like a know-it-all. But it's unlikely to change anyone's mind with regard to the optimal investment strategy.

    Asness, Clifford. "The Value of Fundamental Indexing." Institutional Investor, October 19, 2006.
    Bernstein, Peter. Capital Ideas: The Improbable Origins of Modern Wall Street. Hoboken, NJ: Wiley, 2005.
    Fox, Justin. "Is the Market Rational?" Fortune, December 3, 2002.
    Fox, Justin. The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street. New York: HarperBusiness, 2009.

    Posted by: AT 06:00 pm   |  Permalink   |  Email
    Wednesday, June 17 2009

    The latest video uploaded to the Fama & French Forum looks at the issue of identifying superior managers.  This is what the big financial companies are telling us every day through their advertising - that they have the expertise to set the course for your financial assets.  As Ken French explains, there may actually be superior investment managers out there, the trouble is how do we identify them before not after their period of out-performance?

    The conclusion is that if you want to be certain that you will achieve better than average returns you need to employ an index based approach where the fees, transaction costs and capital gains implications are lower.  I encourage you to take a look at the video - Identifying superior managers.

    Scott Keefer

    Posted by: Scott Keefer AT 06:43 pm   |  Permalink   |  Email
    Tuesday, June 16 2009
    The latest edition of our email newsletter has been sent to subscribers.

    In this edition we:
    • discuss the topic of unlisted assets and suggest investors carefully check the nature of any unlisted assets before switching into this asset class,
    • look at S&P's latest World by Numbers publication,
    • summarise the movements in markets since the last edition including 3, 5 and 10 year return history,
    • encourage readers to switch off or turn doen the financial media they are listening to,
    • provide a link to Scott Francis' latest Eureka Report articles,
    • link to recent videos uploaded to the Fama & French Forum,
    • provide evidence of the three factor model in action, and
    • provide links to podcasts recently uploaded to the website.

    Click on the following link to have a look at the full newsletter - Financial Fortnight That Was - 16th June 2009.


    The market update section is set out below:


    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 June 9th the P/E ratio for the S&P/ASX 200 was 10.78.  The dividend yield was 5.26%.

    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  -


    The latest close for the index was at a level of 30.81.  This is slightly higher than the 12 month low of 26.57 but well off the 12 month high of  80.74.


    Market Indices



    Since last ed.

    Since Start of 2009

    1 Year

    3 Year

    5 Year

    10 Year

    Australian Shares







    S&P - ASX 200






    NA *

    International Shares







    MSCI World - Ex Australia







    MSCI Emerging Markets














    S&P - ASX 200 REIT






    NA *

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














    US Exchange Rate







    Trade Weighted Index







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


    General News
    The following major economic parameters have been announced since the previous edition:
    • Unemployment now at 5.7% (predicted to rise to 8.25% in Federal budget)
    • Economic growth of 0.4% in the March quarter 2009 and 0.4% for the year.
    • RBA left official interest rates at 3.0% in the June board meeting.
    • Westpac-Melbourne Institue consumer confidence index has risen to 100.1 in June, a 12.7% rise.
    • NAB business confidence index moved from minus 14 to minus 2.


    Scott Keefer

    Posted by: Scott Keefer AT 06:00 pm   |  Permalink   |  Email
    Monday, June 15 2009

    The latest edition of our Monday's Money Minute podcasts has been uploaded to our website - The Hidden Risks of Industry Funds .

    A transcript of the podcast follows:

    In this week's edition of Monday's Money Minute I want to address an article published in the latest edition of Choice magazine.  The article is titled "Rebuilding your super" and provides some really useful advice about switching to safer options, reducing the impact of the downturn, looking at whether to stay with the balanced fund option of your fund, discussing what are the options going forward and what to do for those nearing retirement.

    One part of the article which I was a bit surprised but pleased to see was a discussion of the hidden risks of industry funds.  Over the past few years it has been hard to miss the strong marketing push by industry super funds focussing on the issues of low costs, non-profit structure, and no commissions to advisers.  All of these are great and good reasons for basing your decision on which super fund to choose.  Another element of the recent marketing campaign has been the out-performance of these style of super funds compared to retail funds offered by profit-driven organisations.  Because in the end this is what it comes down to, which fund is going to provide the best return after fees.  Up until the most recent data, industry funds have led the pack.  But as the Choice article reports, the public need to be careful before jumping across to an industry super fund in the chase for better returns.  The reason for this is the potential problem surrounding unlisted assets.  The following is the particular section of the article relating to unlisted assets:



    Are the returns reported by not-for-profit industry funds really as strong as we're led to believe?


    When Chant West consultants looked at the performance of "growth" funds, which have between 61%-80% in property and shares, it found industry funds reported 6% higher returns than retail funds in 2008. One theory, which is now being examined by the regulator APRA, is that the rosy returns could be propped up by industry funds' heavy investment in direct property, unlisted infrastructure and private equity.


    As unlisted property is valued every three months at best, industry funds' 2008 figures may not reflect the full extent of the commercial property market's slump. In contrast, retail funds invest in property trusts listed on the Australian Securities Exchange - the value of trusts changes every day (although the trusts' underlying property investments are less regularly appraised).


    Industry Fund Services, a group representing the industry funds, defends the figures, claiming listed property trusts tend to be more highly leveraged (they borrow more) with an additional layer of fees. "Often their investors have sought to sell their holding, further pushing the price down," says a spokesman. "That's not the case with unlisted property, where several industry funds group together to buy a property for a long term."


    Others, including Stephen Bartholomeusz from Business Spectator have commented on the looming problem - see A Super Discrepancy and it is one I think superannuation members should be fully aware.  As the article suggests, unlisted assets may have held up better through 2008 but to say that there was very little downward movement in prices would seem to be extremely optimistic.


    The greatest concern is for those considering jumping into an industry fund as depending on their choice they face purchasing units which have inflated prices for these unlisted assets.  Therefore if you have experienced the tough conditions of 2008 and the beginning of 2009 through using listed assets and now decide to make the move to a fund which holds a large amount of unlisted assets you face experiencing worse than average returns compared to what you would experience from staying with the listed assets.


    Please don't take this as a criticism of all industry super funds.  There are a number of industry funds which are low cost plus do not provide large exposures to unlisted assets or at least give you the choice if you do not want that exposure.  The key point is to take care if you are thinking about moving to another super fund.  Make sure you research the underlying investment approach so that you protect against jumping out of the frying pan and in to the fire.



    Scott Keefer

    Posted by: Scott Keefer AT 09:38 pm   |  Permalink   |  Email
    Thursday, June 11 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 May 2009.




    The graphs show strong monthly returns over the month for most of the asset classes especially in the Australian Small Company and Emerging Markets allocations.  Global Small Companies and the MSCI World ex Australia indexes were relatively flat for the month.


    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 May 2009

    Premium over ASX 200

    Accumulation Index

    ASX 200 Accumulation Index



    Dimensional Australian Value Trust



    Dimensional Australian Small Company Trust




    International Share Trusts - 7 Year returns



    7 Yr Return

    to May 2009

    Premium over MSCI World (ex Australia) Index

    MSCI World (ex Australia) Index



    Dimensional Global Value Trust



    Dimensional Global Small Company Trust



    Dimensional Emerging Markets Trust



    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 (  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 06:53 pm   |  Permalink   |  Email
    Thursday, June 11 2009

    Professors Fama & French published academic research in 1992 which forms the core of this firm's philosophy towards investing. The details of their paper can be found on our website - The Three Factor Model.


    Earlier this year, in conjunction with Dimensional Fund Advisors, the professors started an online forum through which they could discuss a range of important and interesting investment topics.


    This month they have included a series of items looking at the problems with an active investment approach.  The first two are video pieces for those who prefer to take in information visually.


    More sellers than buyers? - Ken French discusses why share prices fall and links it to expectations about future cash flows and the expected return on an investment including changes in perceived risk with investing in a particular investment or the market as a whole.


    Is this a good time for active investing? - Ken French is interviewed about whether now is a good time to take an active management approach.  His response is that it comes down to a mathematical exercise regarding fees.  At every instant in time the average active investor will underperform an index based approach because they are paying more fees to do so.


    Why active investing is a negative sum gain - In a written piece Eugene Fama & Ken French look at the arithmetic of active management as set out by William Sharpe in 1991 setting out the same argument as raised by Ken French in the previous video.


    All are well worth a look.  If you would like more information about what we see as the aacademic research that underpins a sound approach to investing please take a look at our Research Based Approach pages on our site.



    Scott Keefer

    Posted by: Scott Keefer AT 06:06 pm   |  Permalink   |  Email
    Wednesday, June 10 2009

    Over the past few days i have noticed a couple of articles suggesting that some major Industry super funds are moving to passive investment approaches and managers to look after core components of their investments.  Yesterday is was Local Government Super, today AustralianSuper - AustralianSuper Saves $4m.

    A quick reminder, passive investing is opposite to the predominant active investment approach taken by most fund managers and individual investors.  Rather than picking which company or industry sector is going to outperform going forward, passive investors invest in the entire market usually value weighted.  i.e. larger companies like BHP on the ASX200 index making up a larger proportion.  Basically the market is telling the investor in what to invest and what is a fair price.

    Why are industry super funds doing this?

    As the linked article points out, a primary reason is to limit costs.  With a passive investment approach you do not need to spend huge amounts of money researching companies, rather you let the market do the research for you.  You are also buying and selling much less often thus reducing trading costs.  Thirdly, because you are trading less, you are realising capital gains less often and therefore you are receiving more cost effective returns.

    So if industry super funds are using a passive strategy, should you?

    This firm's investment philosophy and approach answers most definitely.  The decision is not only about reducing costs.  The end goal is to get the best possible return from a particular asset class.  I will leave our Building Portfolios page of our website to set these out why passive investing makes sense.

    Scott Keefer

    Posted by: Scott Keefer AT 12:17 am   |  Permalink   |  Email
    Monday, June 01 2009
    In his latest article published in Alan Kohler's Eureka Report, financial education consultant Scott Francis looks at managed agricultural investment schemes, attention to which has been drawn since the collapse of Australia's two biggest schemes - Great Southern & Timbercorp..
    Scott concludes that on balance, the lack of performance history, the lack of liquidity and the concentration of risk means investors should be very cautious about investing in any remaining schemes

    To take a look at the full article please click on the following link - Danger lurks in MIS badlands.
    Posted by: AT 09:02 pm   |  Permalink   |  Email
    Request for Information 
    If you have questions, or would like more information, please go to our Contact page and leave your name and contact information.