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Financial Happenings Blog
Thursday, March 13 2008

My apologies for the rather brash heading but I hope that it will get some attention.  With the current volatility and consequential nervousness in financial markets, now is an opportunity to see who is 'swimming naked' in the investment world.  The stress in a number of Australian listed entities would clearly show this -  ABC, Allco, Centro, City Pacific & MFS to name a few.  If you had heavy exposures to these companies the market downturn will look all the more depressing.  These companies are clearly in trouble and have not provided good value for share holders.


Similarly, the performance of managed funds are also more clearly in the spotlight at present.  The past 5 or more years of stella performance on the Australian share market has most probably created a level of complacency amongst the average retail investor.  Getting regular double digit returns leaves an investor pretty happy with life and not so likely to look around to compare performance.  Now that we have moved into "red territory" that complacency is being given a jolt.


This comparison might at first seem difficult as many of the big name managed funds are what we like to refer to as index huggers.  They have so many funds under advice that they almost are forced to invest in the same proportions as the index.  Therefore their performance is very similar.  However, the fees of managed funds are a clear method of discerning between funds.


In negative territory, the impact of fees becomes much clearer.  Rather than taking the cap of excellent returns to provide pretty good returns for investors, fees, during periods of negative performance, work to push performance further into the red.


An article written by John Collett in Wednesday's SMH highlights the importance of fees.  It provides a comparison of a fund with a 2% fee level to one with a 0.75% fee.  Assuming similar returns of 8% p.a. and starting with an initial investment of $50,000, the difference in end value would be $10,841 over 10 years, or 22% of the initial investment.  I know which option I would prefer.


So what should an investor be looking for?


  • Investors should be looking for a good quality investment approach, with low costs. (including trading costs and tax consequences)  Sounds simple but is not necessarily the case.  This is where a good financial advisor earns her or his keep.  They should be recommending such funds.  That's why it is important to try to find an advisor who is independent and is not recommending products based on the commission he will receive back!!

  • Some might say, that if you are going to switch investments, now might be an ideal time with capital gains tax payable not as significant given the recent fall in values.  A word of caution - care has to be taken that you are not "out of the market" for long in case the market turns strongly upward.  Again, a financial adviser worth their salt will ensure that this is what happens.


Scott Keefer

Posted by: Scott Keefer AT 06:41 pm   |  Permalink   |  Email
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