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Monday's Money Minute Podcasts Every Monday we will be publishing a 2 to 4 minute audio podcast about current financial issues. Click on the link for the relevant podcast to listen to the commentary.
Monday, June 15 2009
The latest edition of our Monday's Money Minute podcasts has been uploaded to our website - The Hidden Risks of Industry Funds . A transcript of the podcast follows: One part of the article which I was a bit surprised but pleased to see was a discussion of the hidden risks of industry funds. Over the past few years it has been hard to miss the strong marketing push by industry super funds focussing on the issues of low costs, non-profit structure, and no commissions to advisers. All of these are great and good reasons for basing your decision on which super fund to choose. Another element of the recent marketing campaign has been the out-performance of these style of super funds compared to retail funds offered by profit-driven organisations. Because in the end this is what it comes down to, which fund is going to provide the best return after fees. Up until the most recent data, industry funds have led the pack. But as the Choice article reports, the public need to be careful before jumping across to an industry super fund in the chase for better returns. The reason for this is the potential problem surrounding unlisted assets. The following is the particular section of the article relating to unlisted assets:
THE HIDDEN RISKS OF INDUSTRY FUNDS Are the returns reported by not-for-profit industry funds really as strong as we're led to believe?
When Chant West consultants looked at the performance of "growth" funds, which have between 61%-80% in property and shares, it found industry funds reported 6% higher returns than retail funds in 2008. One theory, which is now being examined by the regulator APRA, is that the rosy returns could be propped up by industry funds' heavy investment in direct property, unlisted infrastructure and private equity.
As unlisted property is valued every three months at best, industry funds' 2008 figures may not reflect the full extent of the commercial property market's slump. In contrast, retail funds invest in property trusts listed on the Australian Securities Exchange - the value of trusts changes every day (although the trusts' underlying property investments are less regularly appraised).
Industry Fund Services, a group representing the industry funds, defends the figures, claiming listed property trusts tend to be more highly leveraged (they borrow more) with an additional layer of fees. "Often their investors have sought to sell their holding, further pushing the price down," says a spokesman. "That's not the case with unlisted property, where several industry funds group together to buy a property for a long term."
Others, including Stephen Bartholomeusz from Business Spectator have commented on the looming problem - see A Super Discrepancy and it is one I think superannuation members should be fully aware. As the article suggests, unlisted assets may have held up better through 2008 but to say that there was very little downward movement in prices would seem to be extremely optimistic.
The greatest concern is for those considering jumping into an industry fund as depending on their choice they face purchasing units which have inflated prices for these unlisted assets. Therefore if you have experienced the tough conditions of 2008 and the beginning of 2009 through using listed assets and now decide to make the move to a fund which holds a large amount of unlisted assets you face experiencing worse than average returns compared to what you would experience from staying with the listed assets.
Please don't take this as a criticism of all industry super funds. There are a number of industry funds which are low cost plus do not provide large exposures to unlisted assets or at least give you the choice if you do not want that exposure. The key point is to take care if you are thinking about moving to another super fund. Make sure you research the underlying investment approach so that you protect against jumping out of the frying pan and in to the fire.
Regards, Scott Keefer Sunday, May 31 2009
The latest podcast has been uploaded onto the website - 3 Factor Model Welcome to the latest edition of Monday's Money Minute. In today's edition I want to provide a quick review of the three factor model which is the approach this firm uses to assist clients structure their Australian and international share exposures.
Research published by professors Fama & French in the 1990s suggested that on top of the expected higher returns, compared to risk free assets, from investing in shares there were two other areas of the equity market that seemed to provide even slightly higher returns over the long term. Namely investing in - small companies and - value style companies
The key reason behind this outcome becomes clearer through an understanding of risk for investors. Investors expect higher returns for investing in riskier investments otherwise they would not bother. Investing in companies on the share market is a risky activity. Companies don't tend to smoothly grow over time and some end up failing leaving their investors with very little from an initial investment.
Therefore, to invest in companies investors need to expect to get a better return than from plonking their savings in a much more secure cash account. If you look at share market returns at the end of a really sharp fall like we have experienced to the beginning of March this year, this principle (and our definition of long term) is put to the test. However, over the very long term, most would agree with the assertion that investing in shares has provided a better outcome compared to investing in risk free assets such as cash and government bonds.
Smaller companies are riskier options compared to large well established companies and therefore investors in this area of the market expect a higher return going forward. Because they are riskier, this higher return is not always achieved. This is what makes it a risk - the lack of certainty.
Value companies, as defined in Fama & French's research as those companies where their book assets seem to have been undervalued by the market, as identified through using a Book to Market ratio, also hold more risk for an investor as compared to investing in companies the market are more positive about.
Fama & French's research suggested that investors could look to achieve 2 to 3 % better returns from investing in these small and value areas of the market.
So how have these areas performed over 2008?
For the 12 months to the end of December 2008, we saw that:
So small companies performed a lot worse and value companies slightly better.
Internationally:
Here, the opposite to the Australia market was experienced, value underperformed and small performed in line.
2008 clearly showed that the premiums can not be relied upon to consistently be there each and every period of time. It is all about risk and uncertainty.
So what has happened since the beginning of 2009?
2009 so far has been a much better year for the factors especially Australian small.
What about longer term results?
For the 7 years the end of April 2009:
Part of the risk/reward story in international markets I have left out until now is the Emerging Markets story. The story here is that investing in developing countries like China, India, Brazil is a riskier proposition due to a range of political and economic factors. However the expected return should also be higher but more volatile. The recent results for this area of the market have highlighted these points:
Concluding Comments
In conclusion, structuring investments to add exposure to small, value and emerging market companies is not a free ride as we saw through 2008. For those who build investment portfolios with a long term focus utilising an index style approach, the benefits will come not only from the risk story but also from diversification benefits.
If you would like to find out more about this firm's approach to structuring portfolios please take a look at our Building Portfolios page on our website or get in contact via email.
Regards, Scott Keefer Monday, May 25 2009
The latest podcast has been uploaded onto the website - Taking Stock - What Should Investors Do Now? In this edition of our podcasts I wanted to provide a simple update on the movement of markets so far in 2009 and then turn listeners attention to considering what their response should be to the current climate.
To the end of last week - 22nd May - we have seen the following performance in share asset classes:
· Australian shares are now up 1% for the year, up 20% since the bottom reached in early March · Australian listed property still down 26% for the year but up 17% since the bottom. · International listed property is also still down 19% for the year but up 16% since the bottom. · International shares up 2.5% for the year and up over 30% since the bottom. · Emerging Markets are now up 27% for the year so far, up 38% since early March.
As I always profess - as my family and closest friends can confirm - I have no idea whether markets will continue this projection in the short term. There is still potential for "icebergs" to create more havoc such as the downgrading of the UK's or even the US credit rating. Let's hope the global economy can avoid these icebergs but we should be prepared for this.
So What Should Investors Do Now?
For clients and regular visitors to A Clear Direction's website you will be well aware that I currently favour the use of Dimensional Fund Advisor investments within portfolios.
Last Friday, Dimensional have uploaded to their public website a really useful series of online presentations done by Weston Wellington, Vice President of Dimensional in the United States. The series is titled - What Should Investors Do Now?
The presentations are 68 minutes in total length but well worth sitting through. Weston covers Dimensional's approach to managing money under adverse business conditions, looks at how recessions affect share prices, explains why many did not see the problems in share markets coming, compares the recent downturn with previous downturns, considers whether government intervention is a threat to capitalism and concludes by suggesting what investors should do now.
Summarising the concluding comments:
These are very general rules of thumb that hold some merit. However each individual's approach will be more complex given individual circumstances, risk tolerance and goals. If you wanted to spend time discussing your individual response to the current economic and investment climate please do not hesitate to be in contact.
Scott Keefer Tuesday, February 24 2009
The latest podcast has been uploaded onto the website and looks at long term investment and economic trands as reported in the Australian Financial Review on the 14th of February. The following table is referred to in the podcast. Long Term Investment and Economic Trends (Decade average yearly returns)
Source: Australian Financial Review 14/15 Feb 2009 and AMP
For more information please listen to the podcast - Long Term Investment and EconomicTrends.
Regards, Scott Keefer Tuesday, February 10 2009
The latest podacast has been uploaded onto the website and looks at the dilemma with continuing to sit tight in cash now that the Reserve Bank of Australia has cut interest rates by a further 1% last week. For more information please listen to the podcast - Sitting Tight in Cash Dilemma. A transcript of the podcast can also be found on our Financial Happenings Blog. Monday, January 26 2009
I am pleased to announce that the Monday's Money Minute podcasts are back for 2009. I look forward to sharing insights with listeners over the coming year relating to financial planning and investment strategy. Wednesday, July 09 2008
In today's podcast, Scott Keefer looks at the fundamental consideration behind the decision - will the investment provide returns above the effective cost of loaning the money. Please click the following link to be taken to this podcast - Is it time to be considering borrowing to invest? Monday, June 16 2008
In today's podcast, Scott Keefer looks at the looming end of financial year distributions to be made to investors by managed funds. He highlights the tax ineffectiveness of many of these distributions. Please click the following link to be taken to this podcast - The problem of distributions from actively managed funds. Sunday, June 01 2008
In today's podcast, Scott Keefer outlines what investors should be looking at when determining changes to their superannuation fund. He suggests that the key factors are asset allocation, fees, insurance coverage and quality and investment philosophy. Please click the following link to be taken to this podcast - Time to check your super fund. Sunday, May 25 2008
In today's podcast, Scott Keefer outlines some of the competing arguments for and against commission payments to financial advisers and looks at the much larger issue of ownership bias. He suggests that the ideal approach for investors is to find an adviser who is free from both ownership and commission bias. Please click the following link to be taken to this podcast - The Problem of Ownership and Commission Bias.     |