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Financial Happenings Blog
Tuesday, April 26 2011
Today we have emailed out the latest edition of our free email newsletter to subscribers.  In this edition we:

- provide a perspective on disasters,
- look at the recent Super Ratings data,
- update major investment market performance,
- outline recent additions to the online blog,
- look at an article from the archive - Heavyweight contest - whether to pay off the mortgage or salary sacrifice more into super,
- outline recently published Eureka Report articles,
- provide a link to a great online superannuation resource - Super Guide, and
- provide updated evidence of the three factor model in action.

To view a copy of the newsletter please click on the following link - Clear Directions April edition

To sign up to receive the newsletter directly into your inbox follow this link -
Sign up for Clear Directions
Posted by: AT 06:30 am   |  Permalink   |  Email
Sunday, April 17 2011

The Dimensional graphs page has been updated to also include periodic performance data for  the previous 1 month, 3 months, 6 months, 1 year, 3 years, 5 years and 10 years.  We hope that this data provides more detail to allow a comparison with other investments.  Now that we have more than 10 years of actual performance data available we have chosen to show 10 year growth of wealth graphs and average performance bar charts.


The graphs show a strong 9 months of returns for all asset classes.  However the charts do not necessarily reflect this for international shares as the Australian dollar has also risen by over 22% over the same 9 month period.

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 - 10 Year returns


10 Yr Return

to March 2011

Premium over ASX 200

Accumulation Index

ASX 200 Accumulation Index



Dimensional Australian Value Trust



Dimensional Australian Small Company Trust



International Share Trusts - 10 Year returns


10 Yr Return

to March 2011

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 numbers are annualised returns for the 10 year period.

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: AT 09:45 am   |  Permalink   |  Email
Sunday, April 17 2011

State Street Global Advisors have released 3 new Exchange Traded Funds (ETFs).   The SPDR S&P/ASX Small ordinaries Fund is most of interest to this firm as we believe that allocating some of a client’s Australian share exposure (and international share for that matter) to small companies.

This ETF will comprise of shares in the S&P/ASX300 Index but excluding those in the S&P/ASX 100 index.  More information regarding the index can be found at Standard & Poors.

The theory behind the use of small companies is that they are riskier prospects (as compared to larger companies) and thus for investors to invest in them they require a high expected return.  Thus there should be a risk premium from investing in this style of companies over time.

Smaller companies also have a greater probability of struggling and can easily lose everything along the way so if you are going to invest in small companies a well diversified exposure would seem to make good sense.

The SPDR S&P/ASX Small ordinaries Fund seems to tick both boxes, focussed on small companies and well diversified through an index approach.

The following table sets out returns to the end of March 2011 for the Small Ordinaries Index, ASX200 Index and our preferred Australian Small Companies investment – Dimensional’s Australian Small Company Trust.


3 mth

6 mth

1 Yr

3 Yr

5 Yr

7 Yr

10 Yr

S&P/ASX Small ordinaries Index








S&P/ASX 200 Index








Dimensional Australian Small Company Trust








Unfortunately I am not sure that using the S&P/ASX Small Ordinaries index as the benchmark digs deep enough into small company territory to provide a significantly different outcome to investing in the standard ASX200 index.  1.09% over 10 years is ok but taken into account a 0.5% MER for using the ETF as opposed to a 0.29% MER for an ASX200 ETF and the advantage is still there but not substantial.

On the other hand our preferred Australian small company investment has provided a strong premium (except for the last 3 months) over both indices.  Please note that the Dimensional returns are after Dimensional fees but there would be extra administration service and possibly adviser fees to hold the fund.

Why such a difference?

The key difference is that Dimensional looks at companies past the top 300 (by market capitalisation) companies listed on the ASX.  As at the 31st of December there were 437 securities.  Dimensional will look at companies with a $50 million market capitalisation or greater.  This sees the able to invest in companies much smaller than the 300th sized company on the index.  As a point of interest the smallest company currently held in the SPDR/ ASX Small Ordinaries ETF is Berkeley Resources with a market cap of $135.6 million (not including options).

Will small companies always out-perform large companies?

The 3 month returns clearly show that the premium will not always be there from investing in smaller companies.  If it was there would be no extra risk and if there is no extra risk you shouldn’t expect to achieve better returns than large companies.

Concluding Comments

We definitely believe it is in an investor’s interests to invest in Australian small companies as part of a well diversified long term portfolio.  The SPDR S&P/ASX Small Ordinaries Fund is one way to gain that exposure but not this firm’s chosen approach.



Posted by: AT 07:42 am   |  Permalink   |  Email
Sunday, April 17 2011
Scott Francis continues to write for Alan Kohler's Eureka Report and provides access to these articles to users of A Clear Direction's website.  Scott's articles for 2011 have now been uploaded to the site:

Allowing managed fund unit holders to vote at company AGMs
There is still no reliable system for predicting market lows and highs
BHP's Buyback
Origin's capital raising should be a template for the market
Whether to DRP or not should be a case by case, period by period decision

Posted by: AT 12:38 am   |  Permalink   |  Email
Thursday, April 14 2011

The latest DALBAR annual study (2011) into investor behaviour in the United States reminds us of the less than optimal outcomes generated by investor behaviour.  The study looks at the inflows and outflows of cash from managed funds in the US and through this analysis identifies the actual returns being generated by investors as opposed to the index return.

This years report indicated that for the past 20 years to the end of December 2010 the equity investor achieved a return of 3.83% per annum whilst the market provided a return of 9.14%.  This shows that investors gave up 5.31% per annum.

T%he story was similar for fixed income investors with them earning 1.01% per annum over the same 20 year period whilst the index return a much healthier 6.89%.

The study also looked at retention rates, the period of time that investors held on to particular investments, with this rate lengthening slightly in 2010 but still only 3.27 years.  The writers conclude this is less than optimal.

The conclusion from the writers of the report is that investor behaviour is the key cause of the sub-optimal performance.

The study should remind us of the danger of trying to jump in and out of investments.  Most investors get this timing wrong.

I believe a better approach is to hold on to investments for the long term but build in protection to your portfolio by holding significant amounts of defensive assets (cash & high quality fixed interest) where appropriate.


Posted by: AT 08:14 am   |  Permalink   |  Email
Sunday, April 10 2011
Back in March, Standard & Poor's published the latest Standard & Poor's Indices Versus Active Funds Scorecard (SPIVA) for Australia for the period ending 31st December 2010.  The scorecard again showed the failure of active fund managers (on average) to beat the underlying index for Australian, international, fixed income and A-REIT managers.  The only sector to perform better than the index (on average) was small cap managers.

The following is taken directly from the media release:
  • Over the five-year period, a majority of active funds (across most of the peer groups in this study) have failed to beat their respective benchmarks. With the exception of active Australian small-cap equity funds, more than 60% of all active funds underperformed relative to their benchmarks over a five-year period. The results are mixed for shorter time periods studied in this SPIVA� Scorecard.
  • The S&P/ASX 200 Accumulation Index has outperformed active Australian equity funds over every time period studied. The S&P/ASX 200 Accumulation Index has outperformed approximately 71% of active Australian Equity General Funds over the last 5 years, increasing to approximately 81% over the last year. In spite of this result, Australian Equity funds enjoy the 2nd highest survivorship rate, relative to other peer groups, over periods of a minimum of one year.
  • A large majority of active Australian equity small-cap funds have beaten the S&P/ASX Small Ordinaries Index across most of the time periods studied. Over 70% of Australian equity small-cap funds beat the S&P/ASX Small Ordinaries Index over a five-year period. However a similar majority underperformed relative to the benchmark over the last quarter.
  • The percentage of active international equity funds that failed to beat the MSCI World ex Australia Index is generally consistent across all periods studied in this report. At least 60% of active international equity funds underperformed relative to the benchmark over every time horizon. Over a five-year period, the index has outperformed approximately 74% of actively managed international equity funds.
  • A majority of Australian Bond funds have underperformed relative to the UBS Composite Bond Index across all time periods. At least 80% of active Australian Bond funds have failed to beat the benchmark over periods of three years or more. Correspondingly, this peer group suffered the lowest survivorship rate of the same period.
Our approach at A Clear Direction has to base portfolios on large index exposures and build around these exposures to small and value companies and Emerging markets all with an index-like approach.

The one area of out-performance by active managers has been in the small cap asset class.  The trust that we use to gain this exposure for clients, Dimensional's Australian Small Company Trust, has also beaten the S&P Small Ordinaries Accumulation index over all time periods with the 5 year result realising a 4.27% better annualised result after fees.  The average active manager achieved a 2.45% better return.

This research conducted by S&P provides further evidence that an approach to building investment portfolios based around low cost and extremely well diversified indices with exposures to small and value companies and Emerging Markets will provide clients with a favourable investment experience.


Posted by: AT 08:54 pm   |  Permalink   |  Email
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