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Financial Happenings Blog
Friday, August 28 2009

Scott Keefer has recently asked for input by Fiona Harris,  contributor to the Morningstar online information site.  The topic Fiona was looking at was investment strategies for a delayed retirement.  The following is a copy of  the article.  To view the original please click on the link - Investment Strategies for a Delayed Retirement.

Delaying retirement calls for a back to basics approach to investing and a shift in attitude and expectations.
Financial advisers are telling clients to delay retirement and change their thinking when they say the global financial crisis (GFC) has robbed them of their retirement dreams.

"Clients are definitely reconsidering options to be more certain that they have sufficient assets to sustain the cost of living they require," A Clear Direction Financial Planning principal financial adviser Scott Keefer says.

"A lot of clients are playing it year by year, but we do have clients [delaying retirement]," HLB Mann Judd partner Michael Hutton says.

A survey recently conducted by Mercer of 519 working Australians aged 40-65 reveals just how many people are facing the retirement age dilemma.

Some 42 per cent of the survey's participants said they will have to delay their retirement as a result of the downturn. This number jumped to 60 per cent for those aged over 60.

In practical terms, this means working longer.  About 33 per cent of respondents said they could have to work up to four years longer. Meanwhile, 19 per cent said the impact of the downturn could mean an extra six years in the workforce.

"That's a fairly significant change to lifestyle," Ascent Private Wealth principal Gordon Thoms says. "That's a big change to have to work for another four years."

So is this possible? Can a pre-retiree get their retirement back on track in four to six years?

"Four to six years is an OK horizon," HLB Mann Judd Sydney partner Michael Hutton says. "Particularly if you're not drawing on assets plus you're putting money back and investment markets are behaving themselves."

Hutton calls it the "triple whammy" effect - but in a good way. He says by working longer, investors can save extra money. Also, they will need less money in retirement because it will be shorter. Finally, investment markets are on the way up, so investors can capitalise on the upswing.

Thoms agrees that a four to six year time horizon presents a good opportunity.

"Four to six years is plenty of time if you are invested in good quality assets."

The key is having a long-term investment strategy, investing in quality assets, achieving good diversification and not paying too much for this diversification. It's pretty straight forward really.

"It's not the most riveting story," Thoms says.

Making the money back

While financial planners interviewed were optimistic about investors' chances of recouping their losses by delaying retirement, the two wild cards are the amount that has been lost and how the investment portfolio is structured.

According to Keefer, the key factor is the value of assets an investor has lost.

"Let's say it is a balanced investor [with] 70 per cent growth assets and 30 per cent defensive assets whereby they have lost 18 per cent over the past 21 months (Nov 2007 - July 2009).  So $500,000 at the top of the market has now become $410,000.  But the other aspect to remember is that unless the portfolio has been rebalanced they now probably have a 40/60 portfolio with $240,000 of growth assets," Keefer says.

He says if the long term average return from the growth assets was consistently achieved of 6 per cent above inflation or 9 per cent per annum, it would take about four years for the $240,000 of growth assets to grow to $340,000.

Add inflation to the equation and it would take six years.

"If the investor re-balanced so that they went back to their original 30 per cent defensive, 70 per cent growth asset allocation they would have $287,000 of growth assets," Keefer says. "If we experienced the long term average returns from growth assets the time period would be a little bit less."

Stick to your strategy

As long as your investment strategy was sound in the first place, it is important to stick to it.

This may be hard advice to swallow, when in the eyes of many investors, their portfolio has not delivered.

"I have not had anyone change strategies because of the downturn in markets however clients have understandably questioned the suitability of the approach," Keefer says.

"The trouble with changing is that by switching alternatives now they risk jumping from the frying pan into the fire."

Investors are also being tempted by other performing asset classes and products such as capital guaranteed products which suit many investors sentiment for wealth preservation. 

Further, at the moment a lot of asset classes and products are being pronounced as making comebacks. Many seem that way because of the lows they are coming from, so it is a time to be cautious.

But the word from the experts is to keep it simple.

"Avoid complex investments," Hutton warns. "Where things have fallen off the rails, that's where the wealth was really destroyed."

He says the only investor who might consider straying from their strategy or adding another type of investment into their investment mix are those who want to be more aggressive to try and boost returns.

This would be suitable for someone who is relatively young, who has a relatively solid income stream, which is comfortable with market volatility and doesn't need to touch their money for 10 years, Hutton says.

But by working longer, this could also enable you to take on more risk.

"If they are able to continue to work this might actually allow them to take on a little more risk with their investments to hopefully get better performance and rebuild the paper losses,' Keefer says.

"If continuing to work is not an option, a careful consideration of the risk of seeing further losses in their account needs to be had and an appropriate asset allocation chosen."

Generally speaking, the more tolerant an investor is in experiencing volatility in growth asset prices, and the greater ability they have to work past their planned retirement age, the more growth assets they should hold Keefer says.

Also, the more stretched they are to meet the level of assets they require to draw the desired level of income, the more growth assets they could consider.

"I would suggest they have a slight tilt towards higher income yielding investments such as Australian shares but with a broad diversification across asset classes to protect against volatility in one particular asset class," Keefer says.

Retirement is not an end date

"We don't see retirement age as being a drop dead date," Hutton says. Rather, it is more like the start date of a 20-25 year portfolio.

"Some people see retirement as being a conservative investment portfolio," Hutton says. "But now that the government has crunched the amount you can put into super, we are talking to people about being more aggressive with their super."

Thoms says as long as you are drawing down in pension phase and are drawing minimum pension payments, there is still the opportunity to accumulate post-retirement.

"People will still be invested in growth strategies beyond the age of 60," he says. "We would argue that if people can sensibly accumulate prior to retirement and if they can be invested in an allocated pension, people can retire and still get their money back."

Surviving with less

Keefer says a rule of thumb in assessing how much income is required to sustain the desired lifestyle, is at least 70-75 per cent of the pre-retirement cost of living needs.

"The Age Pension provides a safety net as a level of protection but many would hope to live on more than the Age Pension in retirement.," Keefer says.

Further, a couple less than $891,500 in assets outside of their home, can also qualify for a part pension, meaning they will need to drawdown less from their allocated pension account or eat into the capital value of their assets.

One tip Keefer says to be sure your financial assets do not expire before you do, is to draw on just the income generated by assets to avoid eating into the capital value of the assets. 

"I use a 5 per cent draw down rate as a basic rule of thumb.  So if a client requires a $50,000 annual income in retirement they will need to have $1 million in assets to sustain that draw down."

Keefer says another alternative could be to move into a lifetime guarantee product whereby a provider will take a retiree's assets and provide a guaranteed income to the retiree. But this strategy does have its drawbacks.

"Unfortunately putting one of these options in place now may be locking in to an arrangement at below average rates of return and therefore below average levels of income based on the amount of assets contributed."

Posted by: AT 09:09 pm   |  Permalink   |  Email
Wednesday, August 26 2009

In a recent article published in the Eureka Report, financial education consultant Scott Francis takes a look at the phenonemon of "index hugging" that seems to be employed by the large managed funds.

In particular Scott looks at the top 10 holdings of each of these funds along with their daily percentage proce movements over the month of July.  Both suggest that the funds chosen provide a very similar result as that provided by the index.  Unfortunately this index hugging approach comes at the cost of active fund manager fees meaning the investor is paying too much for what they are getting.

To take a look at the full article please click on the following link - Active funds' dark secret

Posted by: AT 08:01 pm   |  Permalink   |  Email
Monday, August 24 2009

The difficult market conditions experienced since late 2007 have prompted a vigorous debate over the validity of one of the major models in finance - the Efficient Market Hypothesis.  Scanning through our website it should become pretty clear on which side of the debate our investment philosophy sits.  We think that markets are efficient enough so that it is extremely difficult to consistently benefit from trading on any anomalies that might be found in prices.  This is part of the tapestry that leads us to using an index based approach to investing. (See our Research Based Approach pages for more detail)

Jim Parker from Dimensional has added his own commentary on the debate which I would like to include for your contemplation.  As always if you have any questions or thoughts please do not hesitate to email them through.

August 2009
Efficient Markets and All That

Are markets efficient? This question is creating extraordinary heat among some of the world's most celebrated economists right now in the wake of the global financial crisis. So what are ordinary investors to make of all this?

The debate has lit up the pages of The Economist magazine as finance professors from the world's leading universities descend from their ivory towers to fire off complex theorems at 30 paces.

Even Queen Elizabeth has become involved, asking economists in Britain for an explanation about why none of these supposed experts appeared to see the crisis coming. Their reply was that there had been a "collective failure of imagination" among members of the profession.

It's certainly a gripping argument and makes for great copy. But blaming the turmoil of the past year on the theory of market efficiency and the economists who formed those theories is a bit like blaming geologists for earthquakes.

A bit more on that in a moment ? but first let's take a look at the efficient markets hypothesis. This is a model of how markets behave. It was developed back in the 1960s and essentially says that in an efficient market, prices of securities will reflect all publicly available information.

Prices are always changing, because new information is always coming into the market. When news does happen, prices quickly adjust to reflect it.

So, for example, if there's bad news on the economy, share prices tend to take a hit as investors collectively downgrade their expectations for future profits.

Think back to when Lehman Bros went bust last year. Investors at that time were worried that a complete collapse in the financial system was imminent, generating the threat of a second Great Depression. When things didn't turn out as bad as people expected, risk appetites revived again.

According to Professor Eugene Fama of the University of Chicago Booth School of Business ? and the man widely considered to be the father of the efficient market hypothesis ? none of this is inconsistent with the idea of markets as an efficient mechanism.

"The market can only know what is knowable," Fama said in a recent interview (available here on the Fama/French forum). "It can't resolve uncertainties that are unresolvable. So when there is a large amount of economic uncertainty out there, there's going to be a large amount of volatility in prices. And that's what we've been through. As far as I'm concerned, that's exactly what you'd expect an efficient market to look like."

The implication of all this is that unless investors have a crystal ball or inside information, it's very, very hard for them to do better than a competitive market. When they do, it's usually more down to luck than their own skill.

In recent years, a challenge to the efficient markets idea has come from behavioural finance theory. This says markets make mistakes because people are irrational. So greed takes over during the good times and bubbles develop. Conversely, fear takes hold in the bad and markets are oversold.

But even the behavioural school agrees with the efficient markets advocates about the practical end point for investors. Whether prices are right or wrong, the best approach is to give up the illusion that you know better than the market and to hold a diversified portfolio built according to your own lifestyle goals and tolerance for risk.

In a recent article in the Financial Times, Professor Richard Thaler, a leading light of the behavioural school, said that in some respects the financial crisis had strengthened the efficient markets hypothesis. While markets could make mistakes, he said, it was still impossible to profit from how they were wrong.

"Lunches are still not free," Thaler wrote. "Shorting internet stocks or Las Vegas real estate two years before the peak was a good recipe for bankruptcy, and no one has yet found a way to predict the end of a bubble."

There are some outstanding questions around the efficient markets hypothesis ? even Fama admits that. Insider trading is one. The 'momentum effect' ?: where stocks that have performed significantly better or worse than the market over a period of time tend to persist in that direction ? is another. A third is the pattern of stock returns around earnings announcements.

But Fama points out that it is still very difficult to make money out of these apparent anomalies, because the amount of trading you would need to do to exploit these effects would wipe out any gains.

"You have to realise that market efficiency is a model," Fama says. "If it were the truth, we would call it the truth. But it's a model, which means it's a simplification of the world. It does a good job of almost everything, but there are some things it doesn't do a good job on. But they are few and far between. And for practical investment purposes, markets are efficient for pretty much everybody."

In other words, the efficient markets hypothesis is not perfect. Even the man who fathered the idea admits that. And while its biggest opponents go much further than that, they still say it's pretty hard to beat the market without taking on more risk than the market offers.

Uncertainty will always be present. The market can't account for that. It can only know what is knowable. And this is why we diversify.

So the takeaway for most people from this fascinating debate is that it is still best to work on the assumption that prices are a fair reflection of the information that's out there at any point in time.

Their next decision is how much risk they want to assume and to ensure they diversify away avoidable risks ? like holding too few securities, betting on countries or industries and following market forecasts.

It's the same old story - but the right one for most of us.

Posted by: AT 06:11 pm   |  Permalink   |  Email
Sunday, August 16 2009

In a recent article published in Alan Kohler's Eureka Report, financial education consultant Scott Francis takes a look at the recent performance of the MTAA superannuation fund.  For 2008-09 the fund has returned minus 24.6% much worse than the 13% fall for balanced funds in general over the same timeframe.

In particular Scott looks at the investment approach undertaken by MTAA and questions its use of the term "balanced superannuation fund".  At the centre of the discussion is the use of "high-yield debt, unlisted property, infrastructure, private equity and natural resources" within the fund.

To take a look at the full article please click on the following link - Why MTAA's wheels fell off

Posted by: AT 07:42 pm   |  Permalink   |  Email
Tuesday, August 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.
Over the past two months they have added to the series of vidoes found at the forum.  They are well worth a look.
Dollar Cost Averaging - Does it make sense to dollar cost average? It depends. Standard financial analysis says dollar cost averaging is suboptimal. If you focus on only your investment outcome, investing a lump sum immediately lets you construct the best portfolio you can today; slowing the process with dollar cost averaging just keeps you in something other than your best portfolio until you are done. Behavioral finance provides a different perspective. Because of the difference between the way people react to errors of omission and errors of commission, dollar cost averaging may give investors a better expected investment experience. 
Did diversification fail when we needed it most? - Investors may doubt the usefulness of diversification after the recent market decline. Ken French explains that diversification cannot reduce the volatility of the overall market, but it is still important because it reduces the risk associated with individual firms or asset classes. Ken also discusses the perception that correlations between assets rise when market volatility is high.

Should stockholders sit this one out? - The answer depends on why stockholders want to leave the market. During the financial crisis, some investors discovered that their tolerance for risk is lower than they thought, so it might make sense for them to permanently reduce their exposure to equities. Investors who wish to avoid the price impact of the recession, however, are probably too late. Today's stock prices already reflect the anticipated effects of the slowdown, as well as any effects the recession has on expected future returns. 
All are well worth a look.  If you would like more information about what we see as the academic research that underpins a sound approach to investing please take a look at our Research Based Approach pages on our site.

Posted by: Scott Keefer AT 03:47 am   |  Permalink   |  Email
Tuesday, August 11 2009

A new client couple have recently sought advice on structuring their investment and superannuation portfolios.  They were able to make a lump sum contribution into super and then roll this over into their pension portfolio.  The common instinctive response would be to agree with this approach as you would be moving assets from an environment where you would be taxed at marginal tax rates into an environment where all income earned by those assets would be received tax free.

This is particularly pertinent for some as they hold shares and / or managed funds which are sitting on capital losses.  To transfer assets from your own name into a superannuation / pension account is deemed to be a change of ownership and thus a capital gains event.  Transferring these assets into superannuation and then pension mode whle they are sitting on capital losses may therefore be be a worthwhile move.

However, there are also higher levels of fees payable once in super pension mode so there are extra costs that need to be weighed up and if there are no tax benefits from making this move you might actually be worse off.

A key in making the decison is the Senior Australians Tax Offset (SATO).

How does SATO work?
The government provides senior Australians with a tax rebate.  For the 2008-09 year it is $1,602 for each member of a couple.
Seniors are also eligible for the Low Income Tax Offset (LITO) of $1,200.
So basically what this means is that seniors can each earn up to $24,680 per annum (2008-09) each and not pay any tax or lose any franking credit benefits. (For a single the amount would be $28,867)
The Low Income Tax Offset is rising to $1,350 for the current year (2009-10) and $1,500 for 2010-11.  If SATO remains at $1,602 then the maximum amount of taxable income you can each earn before paying any tax will be:
2009-10 - $25,680
2010-11 - $26,680

Implications of SATO

The  implication of this is that seniors relying on their assets to produce their retirement income can earn up to $25,680 of income in the current financial year before paying any tax.  Therefore you can hold assets outside of a superannuation pension that earn this level of income before you would lose anything from not transferring these assets into super and then pension mode.

If we estimated that the average income being produced by a portfolio was 5% this could see you holding up to as much as $500,000 of assets per person before having any tax to pay.

What about franking credits?

The couple I spoke to thought they were not paying any tax as they always received a tax refund from the government.  However, care needs to be taken that you are not losing some of the benefits of the franking credits that are receivable from owning shares.

Let's use an example.  Say you were paid dividend income of $25,000 in a financial year and all of those dividends were fully franked.  When it came time to declaring your income you would actually have $25,000 of income plus $12,700 of franking credits.  Your taxable income would be $37,700.  What would happen is that you would lose some of those franking credits in tax.  So rather than receiving the full $12,700 of franking credits as a refund from the ATO you would lose around $1,900 in tax.

If held within a superannuation pension you would receive back all of the franking credits in full.

Capital Gains Tax

This simple explanation does not factor in capital gains tax implications.   If you thought you would sell some of your investments before they were passed on to your estate, and through doing so realise a capital gain then you would need to leave some room to move to allow you to have some capital gains each year and still not pay any tax.

Concluding Comments

The exact breakdown of how much you could ideally hold in investments outside of super is particular to each individual or couple and should take into account likely income to be produced by these assets and investment philosophy, in particular whether you think you will be realising capital gains through retirement years.

Posted by: AT 03:40 am   |  Permalink   |  Email
Sunday, August 09 2009

The latest edition of our Monday's Money Minute podcasts has been uploaded to our website - Quick look at small companies.

A transcript of the podcast follows:

My colleague, Scott Francis published an article in Friday's edition of Alan Kohler's Eureka Report where he looked at the suitability of including an investment in small companies within an investment portfolio.


As Scott's article points out, the ASX Small Ordinaries Index has provided strong returns since the beginning of March this year.  Well ahead of the top 100 companies on the index.  However, 2008 was not such a rosy picture with this area of the market providing a return much worse than large companies.


This recent performance provides insight into how to view small companies and how to use such exposures in an investment portfolio.  It is a story of risk.  Smaller companies are viewed to be riskier investments with greater probability of failure but also greater flexibility to grow in good times.  To invest in a riskier asset class investors should expect a higher return for taking on that risk.


In today's podcast I wanted to add some extra details to Scott's article by particularly looking at how this firm's approach to accessing small company exposure has performed over time.

A Clear Direction utilise Dimensional's Australian Small Company and Global Small Company Trusts to access this asset class.  These trusts commenced in late 2000 so I have looked at the data since the Australian Small Company Trust commenced in November 2000 up until the end of June 2009.


The following table summarises the results



3 months


1 Year

3 Years

5 Years


Nov 2000

Dim Aust Small Comp Trust







S&P ASX 100 Accum Index







S&P ASX Small Ord Index














Dim Global Small Comp Trust







MSCI World ex Aust Index








These results show that the Dimensional Australian Small Company Trust has performed in line with the S&P ASX Small Ordinaries Index over the past 6 months.  Beating the top 100 companies by over 14%.  However for the year the trust lagged the top 100 by over 5% but performed 4% bettercompared to the Small Ords index.  Since inception in 2000, the trust has provided a premium of 1.8% over the large 100 (after fees).  Over that period the Small Ord Index actually under-performed the large 100 companies.


Globally, the Dimensional Global Small Company Trust has provided a premium over the MSCI World ex Australia Index for every time period except for the 3 year returns.  The premium since November 2000 has been over 6%.


The results seem to support the proposition that a small company exposure can provide a premium compared to the large companies on an index.  Dimensional's trusts have achieved this.  However, a point to note is that the premium is not always present and there are periods where small companies have under-performed and strongly so.  At A Clear Direction this is another reason why we still include large company index exposure - to provide asset class diversification and smooth out portfolio volatility.  For clients who want to take on more risk and by doing so seek higher returns we can tilt portfolios towards a greater holding of small companies (as well as value companies and Emerging Markets).  For those who want less volatility within their growth asset exposure we can tilt away from small companies.


If you have any questions or comments please do not hesitate to be in contact.


Have a great week.



Scott Keefer

Posted by: Scott Keefer AT 06:00 pm   |  Permalink   |  Email
Saturday, August 08 2009

In a recent article published in Alan Kohler's Eureka Report, financial education consultant Scott Francis takes a look at the recent performance of the small cap segment of the Australian share market.

The recent returns have been strong with the ASX Small Ordinaries Index outperforming the ASX100 by 18% over the course of 2009 to the 4th of August.  However, 2008 provided a stark reminder that investing in small companies is not a risk free proposition.  The Small ordinaries Index underperformed the ASX100 by 16%.

Scott concludes that there is still general support for the idea that small companies have a higher expected return than large companies, and certainly the strong returns from small companies in the Australian stockmarket over this calendar year provide some support for this thinking.

To take a look at the full article please click on the following link - Can small caps stay ahead?

Posted by: AT 08:29 pm   |  Permalink   |  Email
Wednesday, August 05 2009
The latest edition of our email newsletter has been sent to subscribers this afternoon.

In this edition we:
  • revisit the ongoing debate between index and active management approaches to investing,

  • look at Dalbar's Quantitative Analysis of Investor Behaviour study,

  • summarise the movements in markets since the last edition including 3, 5 and 10 year return history,

  • look at reasons why you should and should not change your financial adviser,

  • provide a link to Scott Francis' latest Eureka Report articles,

  • link to recent videos uploaded to the Fama & French Forum,

  • discuss how much senior Australians can afford to hold outside of their superannuation pension thanks to the Snior Australians Tax Offset, and

  • provide evidence of the three factor model in action.

Click on the following link to have a look at the full newsletter - Financial Fortnight That Was - 6th August 2009.

Scott Keefer

Posted by: Scott Keefer AT 11:51 pm   |  Permalink   |  Email
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