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Financial Happenings Blog
Monday, November 26 2012

In his latest Outside the Flag article Jim Parker, Dimensional Fund Advisors, looks at the depressing demise of the Ross Asset Management investment business in New Zealand.  The firm has gone into receivership after reporting returns of 25% a year since 2012.

Jim provides 5 key lessons for investors:
1) Be skeptical with any scheme promising consistently positive returne;
2) Any investment based on a few stocks or a fe sectore is extremely risky;
3) Never undertake an investment without first receiving independent advice and better still;
4) Don't build an investment based on a manager's supposed ability to predict the future;
5) Rather, build it on a clear investment philosophy, a transparent investment process, an approach based on evidence rather than forecasts or intuition and a consistent application with proper safeguards for investors.

These are important lessons from what has been a terrible result for the hundreds of investors involved.

You can find Jim's full article following.



November 26, 2012
The Too Good to Be True Test

Vice President

Some myths die hard. One is the notion that there are people who can pick winning investments year after year without ever losing money.

Take boutique New Zealand investment business Ross Asset Management (RAM), which has gone into receivership owing clients hundreds of millions of dollars.

New Zealand's Serious Fraud Office has launched an investigation into RAM, whose Wellington offices were raided by regulators in November following complaints from investors that they were unable to get their money out.

RAM was headed by financial advisor David Ross and worked out of a small office with just two support staff.

Some 900 individual investors were attracted by the group's reported returns, which receivers PricewaterhouseCoopers estimated at 25 per cent a year since the year 2000.

Yet while Ross claimed to be holding investments worth nearly half a billion dollars on behalf of clients, PwC found records of just $10 million. The whereabouts of the rest is unclear. While not making any direct claims of fraud, both PWC and the Financial Markets Authority have said RAM had "characteristics of a Ponzi scheme".

Under such a scheme, a manager reports false and inflated returns and pays out these false returns to investors from contributions made by new investors. The problem with such schemes is managers have to keep reporting high returns, even if they are false, to attract new money in order to meet withdrawals.

Certainly Ross appeared to have convinced a sufficient number of people to keep money coming in. One client was quoted saying that Ross "seemed to know everything about what was going on in the market" and had a "fantastic" track record.1

This supposed track record was based on a strong bias towards small, high-risk mining stocks, very concentrated portfolios, the lack of any audit record and the reliance on a single individual with no back-up expertise.

The investment performance of RAM's funds was reported without any independent verification or audit. There was no independent custodian. As well, receivers found no record of broker transaction statements, no record of portfolio valuations, no broker contract notes and no registry records.

Just to put RAM's losses into perspective, assuming investors in the RAM funds lose everything, the total loss in proportion to the size of the New Zealand economy will be about twice that of the Bernie Madoff Ponzi fraud in the US.

While the upshot of all this is a depressing one - hundreds of people look to have lost their life savings – it nevertheless provides a number of key lessons for investors everywhere.

Firstly, one should be sceptical about any scheme that promises consistently positive returns – well above the market – year after year. Not even Warren Buffett has managed to beat the US S&P-500 these past three years.2

Risk and return are related. So it is possible to outperform the market, but not without accepting more risk. Besides, if you were consistently able to generate 25-30% returns, why would you share your insights with anyone else? You wouldn't need to.

Secondly, any investment based on a few stocks or a couple of sectors – like RAM claimed to be doing – means taking on unnecessary risk. That's a gamble, not an investment. By contrast, diversification allows you to capture broad market forces while reducing the uncompensated risk associated with individual securities or sectors.

Thirdly, you should never under-take an investment without first receiving independent advice from a fiduciary paid by you to do due diligence on the opportunity and to tailor a strategy to your needs, not based on what they have to sell. In the case of RAM, Ross was both providing the advice and investing the money. And he was doing so without an independent custodian. That should have rung alarm bells somewhere.

Finally, it is not a good idea to make an investment based on the supposed ability of an individual to forecast the future. Aside from the fact that there is no evidence that anyone can do so with any consistency, it means the success of your investment is a highly-correlated to an individual's expertise or integrity.

A better idea is to insist on a clear investment philosophy, a transparent investment process, an approach based on evidence rather than forecasts or intuition and a consistent application with proper safeguards for investors.

No-one can guarantee a positive return every year. But you can be sure that a structured approach based on the principles of modern finance and the efficacy of capital markets will add value with higher reliability and confidence than one based on instinct and prophecy.

1. 'Amazing Returns Lured Investors', The Dominion Post, Nov 17, 2012.

2. 'Buffet Trails S&P-500 for Third Straight Year', Bloomberg, May 3, 2012

Posted by: AT 02:37 am   |  Permalink   |  Email
Wednesday, November 21 2012
I have recently written in a blog about a problem I have with unitised "big bucket" super funds in pension phase - the way they force you to sell down growth assets at times that might not be ideal to do so.

Scott Francis in his recent Eureka Report - Feeling the pension pinch - thrashes this issue out in greater detail.

The solution is to build a distinct cash hub from where pension payments can be drawn and interest and income can be paid into, supported by a significant defensive fixed interest component.

An investor should never be forced to sell growth assets to pay pension payments at the wrong time.

Posted by: AT 07:22 am   |  Permalink   |  Email
Wednesday, November 21 2012
Scott Francis in his latest Eureka Report article calls on managed funds to provide after-tax return data to assist investors making accurate comparisons between funds - Tax shroud keeps investors in dark .

A Clear Direction also supports this call and are confident that it would show that the investment approaches applied by the firm stack up even better when using after-tax return data due to the minimal trading and limited distribution of capital gains paid out by our chosen investment managers.


Posted by: AT 06:00 am   |  Permalink   |  Email
Thursday, November 15 2012
In my weekly scan of the internet I came across a really interesting summary of Investors’ 10 Most Common Behavioral Biases.

The article was a summary of a piece published in the Washington Post by Barry Ritholz, a columnist for the paper.

The importance of having an awareness and knowledge of these biases is to help protect yourself from making poor decisions that you will live to regret.  In a nutshell they include:

Confirmation Bias
– the act of coming to a conclusion first and then looking for evidence to support that conclusion.

Optimism Bias
– having over confidence in our own judgment above the judgment of others.

Loss Aversion
– losses hurt more than the joy of the same amount of gains.

Self-Serving Bias
– the good that happens is our doing, when things go against us it is the fault of someone else.

The Planning Fallacy
– the tendency to underestimate the time, costs, and risks of future actions but at the same time overestimate the benefits.

Choice Paralysis
– too many choices lead us to doing nothing.

– the tendency to follow others.

We Prefer Stories to Analysis
– including the tendency to look backwards and create patterns to fit events and then constructing a story that explains what happened along with what caused it to happen.

Recency Bias
– the tendency to extrapolate recent events into the future indefinitely.

The Bias Blind-Spot
– the tendency not to take into account these biases when making decisions.

(NB - The link to the original article provides more in depth discussion of each bias along with links to further details.)

We can either trust ourselves to take into account these behavioural biases before making financial (including investment) decisions or we can look to professional help from financial advisers, accountants etc to provide a sounding board.

A good adviser can talk through the pros and cons from hopefully an unbiased viewpoint.  This might mean you still go through with your plan but it will have been put through and benefitted from a rigorous analysis along the way.

The decisions financial advisers counsel against making are often (if not more) important than the proactive advice they provide.



Posted by: AT 05:30 pm   |  Permalink   |  Email
Monday, November 12 2012
The latest ASFA Retirement Standard has been published looking at the period ending 30th September 2012.

The latest figures suggest:

A modest lifestyle for a single person will cost $22,539 per annum
A comfortable lifestyle for a single person will cost $41,090 per annum

A modest lifestyle for a couple will cost $32,511 per annum
A comfortable lifestyle for a single person will cost $56,236 per annum

An interesting aspect to consider is the level of increase or inflation in these levels from one year to the next.

The increases for the past year have been:

A modest lifestyle for a single person - 2.65%
A comfortable lifestyle for a single person - 1.68%

A modest lifestyle for a couple - 2.34%
A comfortable lifestyle for a single person - 1.66%

The official Australian Bureau of Statistics data for Consumer Price Inflation (CPI) for the period ending the 30th of September 2012 saw prices increase by 2.0%.

The Retirement Standard data suggests that prices are rising faster than CPI for those living a modest lifestyle whilst those living more comfortably seeing prices rise less.

The ABS data suggests as much with two of the largest rises in prices over the past 12 months being in the area of health and housing (including electiricty & gas).

How to apply this data?

The cost of living in retirement differes from one household to the next but the retirement standard provides a useful benchmark to test your level of planned and real expenditure in retirement.

The other major use is to get a sense of rising costs in retirement and to plan accordingly?

How to plan to protect against inflation in retirement?

Unfortunately the firt major lesson is that investing all of your income producing assets in cash is unlikely to successfully fight inflation through 20 to 40 years of retirement.  We all need to build in other asset classes that will help fight inflation.  We believe a major component of these assets for Australians are dividending yielding company shares along with carefully structure fixed interest (bond) investments.

If you would like to knowmore about our approach please be in contact.

Posted by: Scott Keefer AT 06:51 pm   |  Permalink   |  Email
Wednesday, November 07 2012
Spending a lot of time in Indonesia I read the local papers, talk to local business owners and managers and sit in places like Starbucks watching what is going on.  The economy is growing strongly with a lot of that growth coming from investment in the resource industry but also strengthening internal consumption via a growing middle class.  The malls are full, cars are selling strongly and a growing prosperity is easy to identify.

(NB There is still extreme levels of poverty but the signs are positive.)

This runs counter to the outlook we get from major news and media outlets suggesting the world economy is a basket case.  No doubt there are major problems to be dealt with but the news is not all bad.

Jim Parketr in his latest Outside the Flags article, reproduced below, looks at some interesting data about the two major economies in the Asian and emerging market economies of the world.  he points to a similarly positive outlook.  Well worth a read.


November 5, 2012
Go East Young Man
Vice President

The financial crisis and subsequent developed world recession have overshadowed changes in the developing world that have implications for investors everywhere.

These changes–detailed in a landmark new Australian government report on Asia's economic rise–reveal an historic transformation which has shifted the axis of global economic activity and which is creating a huge new middle class.

The report is full of eye-popping statistics. For instance, in the past 20 years, China and India have almost tripled their share of the global economy and increased their absolute economic size almost six times over.

By 2025, the region as a whole is projected by official forecasters to account for almost half the world's economic output.

Asia's Rising Share of World Output
Asia's Rising Share of World Output

Source: Conference Board. GDP is adjusted for purchasing power parity (2011 prices).


The macro-economic statistics are matched by equally arresting micro-economic detail. Between 2000 and 2006, for instance, around one million people were lifted out of poverty every week in East Asia alone. Japan, South Korea, Singapore and, more recently, China and India, doubled their incomes within a decade.

Growing productivity and expanding wealth are leading to improvements in education, housing, infrastructure and governance. The demographic dividend from rapid population growth and more skilled workforces has been rising savings rates.

But this isn't just an economic phenomenon. Lives are being changed for the better. In Indonesia, for instance, the report says children born today can expect to live to their late 60s on average, compared to just 45 in 1960.

What does all this mean for investors? It means a reality check for those downcast over media talk of the global economy coming to a standstill, of growth being a thing of the past and of innovation and progress stalling.

The downbeat mood might be understandable for those living in Europe or North America, but those of us in the Asia Pacific living in the neighbourhood of this massive transformation can still see plenty of cause for hope.

Rising prosperity and living standards in the world's most populous region mean rising business opportunities. Expanding businesses need increasing amounts of financial capital, raw materials and human capital.

With open markets and the free-flow of information around the world, this means opportunities for diversified investors everywhere, not just in Asia, to share in the wealth created via this transformation.

By early next decade, the combined output of China and India is expected to exceed the entire output of the established Group of Seven industrialised nations – the US, Japan, Germany, France, the United Kingdom, Italy and Canada.

"Asia will not just be the most populous region in the world. Asia will be the biggest economic zone, the biggest consumption zone and the home to the majority of the world's middle class," the Australian government report concludes.

"While the shape of the Asian century is not set in stone, there are good reasons to be optimistic. Even if there are economic cycles, as is likely, they will occur around a trend of rising income."

This might be an Asian story, but it is a global change for the better and one we can all share in as investors. It's a story worth keeping in mind when you are bombarded with the bad news from Europe and the US every day.

Posted by: Scott Keefer AT 02:00 pm   |  Permalink   |  Email
Friday, November 02 2012

I follow the Humble Savers twitter feed to keep abreast of what is being discussed about financial planning services.  A recent article – Financial Adviser Fees – the Cold Hard Facts - puts into question the fees being charged on investment portfolios suggesting that ongoing fees for a $200,000 investment portfolio could be 2.55% of the value of a portfolio with establishment fees of  $4,500.

I don’t doubt that this is a reasonably common fee structure in the market place but not all advisers are charging so extravagantly.

So what are the fees at A Clear Direction?

I have looked at an all share based portfolio.

Establishment fees would be in the order of :

 Plan Fee - $1,100  (may be more if there are other complex aspects to consider)

Investment fund buy/sell spread - $275

Administration Service transaction costs - $105

Total - $1,480

This is $3,000 less than the article suggests you might be paying.

Ongoing adviser fees would be in the order of: 

Adviser Fees - $1,100   (0.55%)

Investment fund fees - $750   (0.37%)

Administration Service fees - $525   (0.26%)

Total - $2,375   (1.19%)

These are less than half of the proposed fees in the Humble Savers article.

We at A Clear Direction are totally conscious of the fact that higher fees burden the long term returns promised by portfolios and have worked hard to drive down the costs of doing business through removing unnecessary administrative costs of doing business, providing a sophisticated investment approach which realises keeping costs low is important and sourcing high quality administrative services at the lowest cost available for clients.

The costs to set up, administer, monitor and review an investment portfolio does not have to be outrageous and can allow you to focus on what’s important in your own life rather than having to worry about your financial planning.


Posted by: Scott Keefer AT 07:00 am   |  Permalink   |  Email
Thursday, November 01 2012
I realise this is a bit of a strange title but I came across a fascinating article in the Wall street Journal which I had to share – Can you trust your stockjobber?. 

Researchers led by financial historian Larry Neal of the University of Illinois have replicated all the holdings and trades in the Bank of England, the East India Co. and the United East India Co., the Royal African Co., the Hudson’s Bay Co., the Million Bank and the South Sea Co. –the dominant companies at the birth of British capital markets three centuries ago.

The share registries survive, so the scholars were able to match virtually every investment with the person who held it – encompassing 5,813 investors during the 1690s and 23,723 by the end of the period.

These people included everyone from dukes and other aristocrats to “stockjobbers,” or brokers, along with merchants, apothecaries, glassmakers, drapers and goldsmiths – and up to 27% of them were women.

The researches concluded that investors were:

  • underdiversified, with 86% of them owning shares in only a single stock;
  • chased performance, with rising prices leading to higher trading volume;
  • underperformed the market as a whole, earning lower returns and incurring higher risk.

Women appeared to be more conservative than men.

The WSJ article then goes on to compare those investors with investors today suggesting there is very little difference as investors today:

  • underdiversify, holding an average of only three stocks;
  • chase performance, with rising prices leading to higher trading volume;
  • underperform the market as a whole, earning lower returns and incurring higher risk.

A lot has changed in the world over 300 years but human nature has not.  Smart investors can learn from the errors of history to better structure investment portfolios today:

  • be well diversified;
  • don’t chase performance rather invest in asset classes that haven’t been doing so well lately;
  • avoid an active management approach to investing.


Posted by: Scott Keefer AT 03:00 pm   |  Permalink   |  Email
Thursday, November 01 2012
Vanguard have recently released their Economic & Market Update for the 3rd quarter of 2012.  The introduction to the report read:

Economic growth slowed across most major global economies in the September quarter. The most concerning slowdown was observed in emerging markets, and in particular China, where lower domestic and foreign demand is depressing growth.

The announcement that China will be spending over USD 150 billion on infrastructure projects to stimulate economic growth was received positively by the markets. However, this has been greeted with some scepticism as some of these projects are already under way and the other projects, already in the pipeline, were being fast tracked.

The report provides some useful charts depicting the performance of asset classes over the quarter and year and breaking the Australian performance down into sectors. Charts also cover the level of safe haven bond yields along with a look at the Australian yiled curve.

Well worth a read.

Posted by: Scott Keefer AT 07:30 am   |  Permalink   |  Email
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