Financial Happenings Blog
Tuesday, January 18 2011
Today Mercer have released details of their 2010 fund manager scorecard. The results are not good reading for active managers. The median fund, of the 100 surveyed, under-performed the ASX300 by 0.6%. The ASX300 return for the year was 1.9%.
As a point of comparison, the Australian Core Equity Trust we use for clients returned 3.56% for the year.
Care needs to be taken in looking at one year data to provide any useful insight into investment performance. However, the data provides more anecdotal evidence of the extra risk involved with active management.
Regards,
Scott Keefer
Monday, January 17 2011
The following link to a summary put together by Colonial First State provides very useful information for those who have been affected by the Queensland floods - Government Assistance for Queensland Flood Victims. The summary includes the relevant Centrelink phone numbers and websites.
Regards,
Scott Keefer
Friday, December 31 2010
One method of analysing the success or otherwise of an active fund manager is to look at their past performance history. You would think that if a fund manager has done well in the past it will continue to do so going forward. Unfortunately the evidence of persistent out-performance is very weak and can be explained by the laws of probability as luck rather than skill.
A famous example of when strong historical performance has not turned out well for investors is the Legg Mason Capital Management Value Trust. For 15 years in a row to the end of 2005 the trust, managed by Bill Miller, out-performed the S&P 500 index in the US. (Fund Manager Beats S&P for 15th year in a row ) You would think with this kind of track record your money would be well invested in this trust. Unfortunately the last few years have not panned out so well. In 2010, up to the 22nd of December the trust returned 7.08% compared to the S&P return of 15.14%. This result put the fund in the worst 10% of its category (Large-blend) for the 4th year out of the past 5. For the past 15 years, taking in 10 of those 15 consecutive years of out-performance to 2005, the fund has provided a 0.27% premium over the S&P 500 with a great deal more volatility. (Down in the dumps again)
You can do the maths on this, if you had of invested in the fund later into its record run, the index would be beating you. If you had started invested in late 2005 you would be well behind.
This example provides anecdotal evidence of when following historical performance does not work. We believe this is just more evidence to show the benefit of steering clear of the active fund manager / stock picker approach and rather focus on building a portfolio targeting particular asset classes in a low cost way according to fundamentals developed through scientific research.
Regards,
Scott Keefer
Wednesday, December 29 2010
Earlier this month ASIC launched an online calculator to assist mortgage holders work out whether it is in their interest to switch loans - Mortgage Switch Calculator
ASIC also suggest 4 steps to switching a home loan on their website - Switching Home Loans
Both resources are well worth a look for those considering moving to a new provider.
Regards,
Scott Keefer
Wednesday, December 29 2010
The Australian Securities and Investment Commission (ASIC) last week released a findings report on the access to financial advice in Australia. The report was compelling reading for us in the industry but also provided some discussion points for those tossing up whether to seek financial advice. ASIC Access to Financial Advice Report
The report made the following key findings:
- Cost of advice: A significant gap exists between what consumers are prepared to pay for financial advice and how much it costs industry to provide advice.
- Scale of advice provided: Many Australians, particularly those who have never previously accessed financial advice, want piece-by-piece simple advice rather than holistic advice. Many advice providers still provide holistic advice as the default option.
- Consumer perceptions that advice is out of their reach: Evidence suggests some people do not seek financial advice because they feel their financial circumstances do not warrant advice.
- Consumer mistrust of financial planners: A lack of trust in financial planners to provide unbiased, professional advice limits the number of consumers who seek advice and the value they place on financial advice.
- Access to general advice and information: The provision of general advice or factual information is less extensive than it could and should be. For many consumers general advice and factual information may be sufficient to meet their current advice needs.
- Financial literacy: Gaps in financial literacy, especially among certain demographics and in relation to certain financial topics, limits some consumers’ engagement with financial matters and so stops them from seeking advice.
Since opening our doors in 2006, we have been working at addressing the issues raised by ASIC through:
- Implementing a flexible fee structure with ongoing fees 1/2 of the average financial advice fee charged in the industry and minimal establishment fees.
- Flexible advice offerings depending on client needs with a free initial consultation often being sufficient for many who knock on our door.
- Through lower fee levels, making our services accessible to a much wider segment of clients.
- Implementing a firm independent of product bias by not accepting commission payments nor ownership bias.
- Providing a source of general advice through this no cost general advice website and our email newsletter service.
If you are interested in taking the first step to access great quality financial advice please get in contact for an initial consultation.
Regards,
Scott Keefer
Sunday, December 19 2010
A recent study conducted by Morningstar in the US shows that low cost investment funds beat higher cost investment funds. The report found that "for every single time period and data point tested, low cost funds beat high cost funds."
We always need to urge caution as historical returns are not good predictors of future performance, but these findings from Morningstar, who themselves run a service trying to rate and pick the best funds for investors, are pretty compelling. This is just another piece of evidence to suggest that targeting a low cost investment vehicle focussing on what academic research tells us should provide above average performance makes good sense.
For those who are interested in the finer details of the study you can find them at - How Expense Rations and Star Ratings Predict Success - but you will need to sign up for Morningstar's free access service.
Regards,
Scott Keefer
Thursday, November 25 2010
Bond returns have been strong over the past two years. The investment we suggest clients use has returned 11.03% over the 12 months to the end of October and an annual return of 10.07% over the past two years. This is a strong return from a defensive investment only invested in AA or higher rated government and corporate bonds. When you consider that the expected return from the riskier equity asset classes is somewhere between 10 & 11% per annum a fair question to be asking is why bother with those volatile asset classes and rather stick with bonds?
To provide an answer to this question you need to have an understanding of how bonds work and the underlying risks. Vanguard have published a simple discussion in an article on their website - Evaluating Bond Risk. The article explains that the historically low interest rate environment in the world economy has driven bond prices up and yields down. These prices rises have been reflected in bond returns. As the global economy continues to improve and interest rates move upwards we should start to see a reversal of the recent phenomenon of low yields and high prices. This highlights that there are risks involved with bond investments especially with long term bonds as prices are likely to fall. Bond returns are likely to experience a less prosperous period at some point in the future.
The article highlights why we believe it is important to keep bond investments focused on high quality and lower time to maturity bonds in order for this exposure to provide a slightly better return than cash over the long term but with very much reduced levels of volatility compared to equities. This is exactly how we choose our fixed interest / bond investments for clients. The recent returns have been great but we should expect them to fall back to somewhere about 1 or 2% above the cash rate over the long term.
To get the growth clients need to fight inflation and build wealth there remains a place for a diversified portfolio of equities.
To find out more about our approach please take a look at our Building Portfolios page on the website.
Regards,
Scott Keefer
Sunday, November 14 2010
Scott Francis in his latest Eureka Report article questions whether fixed interest bond investments deliver a significant advantage over cash and term deposits.
He concludes that there is not a great deal of difference but the Australian bond index slightly wins out.
The conclusion Scott makes is that there is room for all three - cash, term deposits & fixed interest - in a well diversified portfolio and really the bigger question is how much of these assets combined should you hold in a portfolio compared to more volatile equities.
Please click through to be taken to Scott's article - Why invest in bonds?
Sunday, November 07 2010
The Fairfax newspapers ran an article - Sharp end of the stick - on Saturday highlighting fees being charged by financial advisers. Since A Clear Direction Financial Planning was born in 2006, the mandate of the firm has been to provide clients with cost effective access to the best available portfolio investment solutions. From the beginning we have avoided receiving commissions of any type and if we had to receive those commissions we have rebated them back in full.
The Fairfax article suggested some benchmarks for the fees being charged by advisers in the new era of commission free investing. We thought it was an ideal time to see how this firm stacks up against those benchmarks for a $100,000 portfolio.
Administration Service Fees
Article - 0.80%
Our preferred service - 0.34%
Investment Manager Fees
Article - 0.80%
Our preferred investments - 0.40%
Adviser Fees
Article - 1.00%
Our fees - 0.55%
Totals
Article - 2.60%
Our fees - 1.29%
A few points to note, our preferred arrangement is to negotiate a flat annual fee with clients. For clients with smaller balances this annual fee is prohibitive so we apply an asset based fee of 0.55% for starters. We also try to get clients to manage their own cash where possible and do not charge an asset based fee on that amount.
Cost is definitely not the only consideration when choosing a financial adviser, far from it but it is an important aspect. We are confident that we offer a really cost effective portfolio solution for clients who are looking for this type of service.
Regards,
Scott
Monday, November 01 2010
Scott Francis in his latest Eureka Report article reminds readers of the importance of franking credits for Australian residents but highlights the potential traps from employing a dividend stripping approach. For further details please take a look at the full article - Dividends, oh dividends!
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