Tuesday 13th January 2009
The Financial Fortnight That Was
In This Issue
Quote for Consideration
Financial Topic Demystified - The Benefit of Australian Share income Over Time
Fascinating Financial Fact - S&P ASX 200 Constituent List
Market News
Is the beginning of 2009 the time to change to a more conservative superannuation investment allocation?
Other Website of Interest - Fama/French Forum
Eureka Report articles
3 Factor Model in Action - Updated Dimensional Trust Performance Graphs
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Greetings! 
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We hope that this email finds you well and you have had an enjoyable festive season and New Year.

Welcome to the first edition of The Financial Fortnight That Was for 2009.

In this edition we:

  • consider the benefit of Australian share income over time,
  • take a look at the ASX 200 contituent list,
  • provide a summary of the movements in markets over the past fortnight including 3, 5 and 10 year return history,
  • look at whether the beginning of 2009 is the time to be considering a more conservative superannuation investment allocation,
  • introduce a new online forum - The Fama/French Forum,
  • provide links to Scott's latest Eureka Report article, and
  • update the 3 Factor Model in Action graphs to the end of December 2008.
Enjoy the read!!

A Quote for Consideration 

"Why does indexing outmaneuver the best minds on Wall Street?  Paradoxically, it is because the best and brightest in the financial community have made the stock market very efficient.  When information arises about individual stocks or the market as a whole, it gets reflected in stock prices without delay, making one stock as reasonably priced as another.  Active managers who frequently shift from security to security actually detract from performance [compared to an index fund] by incurring transaction costs."

Burton G. Malkiel
Chemical Bank Chairman's Professor of Economics, Princeton University,
The Wall Street Journal
 
Financial Topic Demystified 
The Benefit of Australian Share Income Over Time
 

The beginning of a new calendar year provides a perfect opportunity to reflect on your financial prospects going forward and to re-visit your financial planning and investment strategies.  One of the key questions to be asking yourself is what do you hope to achieve from your investments.  For most the answer will come back to being able o provide a passive income stream which will allow you sustain the standard of living to which you aspire.  This might well be when you reach a stage of retirement from full time work or it could be to allow you to take time off to study or travel.

 

Whatever your goals and aspirations going forward, the provision of a passive income stream being produced by your investments is a key reason for investing.

 

Late last year, December 2008, we prepared a report for our clients looking at the benefit of Australian share income over time. The purpose of the report was to look at the reliability and quality of income produced by Australian shares over time and in doing so show the benefit of investing in Australian shares as a major part of an investment portfolio.

 

Over time there are two benefits that we hope to receive from investing in shares.  The first is that we hope that the shares we own will go up in value over the long term.  As a statement of the blindingly obvious, this has not been happening in the short term.  The second benefit that we hope to receive from owning shares goes to the 'first principles' of what shares are.  Investing in shares means that we become a part owner of a company.  That company earns some income, and each year a portion (on average about 60% to 70%) of that income is paid out to investors in the form of dividend.

 

The simplest analogy is to think of owning shares somewhat like owning an investment property.  Over the long term you hope/expect that the property goes up in value - however you also receive income from that property in the form of the rent that the tenant pays. Over time the rental income will tend to increase - just as over time the dividends paid by shares tend to increase.

 

Rather than include the whole report within this email we have included a copy on our website: The Benefit of Australian Share Income Over Time


 

Fascinating Financial Fact

S&P ASX 200 Constituent List


The term ASX 200 Index is often used as a key benchmark for Australian investors.  Many have some understanding about this index such as it contains the 200 largest companies listed on the Australian Securities Exchange (ASX) and these are weighted according to the market capitalization of each company (number of shares multiplied by share price).  Many would also know that the largest company in the index is BHP followed by the big four banks, Telstra and Woolworths.

 

However, not many of us have a clear understanding of the actual breakdown of the investments within the index.

 

State Street Global Advisors provide a publicly available daily update of the constituents within their ASX 200 Exchange Traded Fund which provides a really useful breakdown of the weighting of each company within the index.  For those who wanted a more in depth understanding of exactly which companies are included in the index and what percentage of the index these companies make up this web page is really useful - State Street Global Advisors - ASX 200 constituent list

 

Out of interest, the top 10 holdings and their weightings within the ASX 200 (as of the close of trade 12th January) are listed below:

 

BHP                               13.3%

Westpac                        6.07%

Commonwealth Bank      5.08%

National Australia Bank   5.03%

Telstra                          4.90%

Woolworths                   4.14%

ANZ bank                       4.03%

QBE                              3.25%

Westfield                       3.11%

CSL                               2.52%

 
Market News
 

ASX P/E Ratio and Dividend Yields

 

The P/E ratio is a common broad indicator of the price of shares.  It is a calculation of the price of shares compared to expected earnings.   A higher ratio indicates that share prices are more expensive.  The historical P/E ratio for the ASX has been between 14 & 15.  The dividend yield is the calculation of dividend payments divided by the market capitalisation of the company or index.  The historical average in Australia is around 4%.

 

As of January 6th the P/E ratio for the S&P/ASX 200 was 8.76.  The dividend yield was 6.28%.


Volatility Index (VIX)

 

Another index we are keeping an eye on in the USA is the CBOE Volatility Index.  This index purports to be a key measure of market expectations of near term volatility conveyed by the S&P 500 share index.  The higher the level of index, the higher are expectations for volatility in the S&P 500 index.  For more information on how the VIX is calculated please take a look at  - www.cboe.com/micro/vix/introduction.aspx

 

As at the 12th of January the index closed at a level of 45.84.  This is significantly down from the 80.1 level it had reached at its peak.

 

Market Indices

 

This year I have tabulated the index results and included extra time frames for returns.

 

 

Since last ed.

Since Start of 2009

1 Year

3 Year

5 Year

10 Year

Australian Shares

 

 

 

 

 

 

S&P - ASX 200

7.04%

0.36%

-38.63%

-8.22%

2.50%

NA *

International Shares

 

 

 

 

 

 

MSCI World - Ex Australia

6.02%

0.16%

-35.87%

-9.99%

-0.80%

-0.80%

MSCI Emerging Markets

10.41%

2.08%

-43.69%

-2.92%

7.52%

11.38%

Property

 

 

 

 

 

 

S&P - ASX 200 REIT

3.79%

4.80%

-51.63%

-21.16%

-8.94%

NA *

S&P/Citigroup Global REIT - Ex Australia - World - AUD

-1.02%

-4.87%

-22.80%

-11.65%

2.05%

5.97%

Currency

 

 

 

 

 

 

US Exchange Rate

9.77%

2.05%

-19.85%

-2.09%

-1.82%

1.09%

Trade Weighted Index

6.32%

2.88%

-16.37%

-3.32%

-2.52%

0.54%

 * - Data unavailable as ASX 200 only commenced on 31st March 2000
 
General News

 

Since our previous edition, The Australian Bureau of Statistic has released the latest employment data to the end of November 2008.  The figures show that seasonally adjusted unemployment had grown to 4.4% over the month due to a decrease in part time employment of 24,400 yet there was also a rise in full time employment of 8,800.


 
Is the beginning of 2009 the time to change to a more conservative superannuation investment allocation?
Scott's Financial Happenings Blog - Posted Monday 05 January
 

Welcome to our first blog entry for 2009.  I am looking forward to what I hope will be a much less gloomy year than that just passed.  (Sorry to be a touch cautious with my use of words here but much better this than having egg all over my face later)  For me personally the omens are good, January 25th is the start of the year of the Ox according to the Chinese calendar.  I was born in the year of he Ox so I hope this makes 2009 a great year for me and more importantly for my clients!!
 
The first topic for the new calendar year I wanted to address was whether the start of a new year was a good time to reconsider your superannuation investment choice.  An article published in the Sydney Morning Herald on Saturday included data from a report compiled by Sweeney Research based on the responses of 1,000 super fund members aged over 45 years with balances over $50,000.  The data showed that 38% had changed asset allocations within their super funds last year, with 79% of those moving into more conservative options.  (i.e. 30% of those surveyed)
 
So if you have not already, should you be considering this same alternative?
 
To read the remainder of this blog please click here - link to blog 

 

Regards,
Scott Keefer

Other blogs over the past fortnight have included:

 
Other Website of Interest
Fama/French Forum
 

Our Building Portfolios page sets out philosophy towards building investment portfolios for clients.  At the core of this philosophy is the 3 Factor model.

Academic researchers in the USA have identified two sources of additional return beyond just the average market return (the index return).  This research was conducted and published in the early 1990's by University of Chicago Professors Eugene Fama and Kenneth French, and their results are known as the '3 Factor Model' of investing.  Importantly, Fama and French's research has been consistently repeated in markets around the world and shows that two factors - company size and value (or company health) are sources of above market average returns.

 

        The Company Size effect identified that small company shares have higher expected returns than large company shares.  This is not entirely new to Fama and French's research, it had been proposed for some time.  An example of a small company would be the Bank of Queensland - much smaller than the Commonwealth Bank which is amongst the 5 biggest companies listed on the Australian stock exchange.

 

         The Value Effect identifies that financially pressured or out of favour 'value' companies have higher expected returns than healthy and popular companies.  This does not seem to make sense at first glance.  One way to think about it is this, when a company is out of favour or under financial pressure everyone sells their shares.  The price of the company falls, and it is only once it has fallen a long way that people become interested in buying it again - only once they are attracted to the company by the higher expected returns that come about because its share price has fallen so far.

 

These same professors who developed this model have been sponsored by Dimensional to create an online forum.  The website offers a venue for them to share their ideas and perspectives with Dimensional investors, affiliated professionals, and the general public. The professors will use the forum to comment on financial topics, highlight current research, answer frequently asked questions, and point viewers to information sources they find engaging.

 

I really encourage you to take a look at this new website by clicking on the following link - Fama/French Forum and also to keep track of the ongoing discussions that occur there by subscribing to the RSS feed.

 
Eureka Report Articles

Since our last edition Scott Francis has contributed another two articles to Alan Kohler's Eureka Report.  Click on the link below to be taken to this item:
 

12th December - A fatally flawed model - Storm Financial grew quickly with its high gearing model, but has been hit hard by the share market fall.

 

22nd December - Storm's doomed model - At its core the Storm Financial model relied on an ever-rising share market. Its crisis has wounded the advice industry as well as clients.


 
3 Factor Model in Action
Updated Dimensional Trust Performance Graphs
 
Since our last edition we have updated the Dimensional Fund Performance Graphs page on our website.  The graphs show the performance of the Dimensional trusts that we use to build investment portfolios for our clients.  They have been updated to contain data up until the end of December 2008.
 
Commentary:
 
The graphs show slight growth in monthly returns over December for the Australian Small & Value segments of the market along with Emerging Markets in the global arena.  The Australian Large Company return for December (as measured by the ASX 200) was flat with Global Small, Global Value and Global Large companies (as measured by the MSCI World Ex Australia Index) retreating in value.
 
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
7 Year Returns to December 2008 (Premium over ASX 200
Accumulation Index in brackets)
ASX 200 Accumulation Index 8.36%
Dimensional Australian Value Trust 11.55% (3.19%)
Dimensional Australian Small Company Trust 12.82% (3.46%)
 
International Share Trusts
7 Year returns to December 2008 (Premium over MSCI World (ex Australia) Index in brackets)
MSCI World (ex Australia) Index -2.04%
Dimensional Global Value Trust 0.60% (2.64%)
Dimensional Global Small Company Trust 2.42% (4.46%)
Dimensional Emerging Markets Trust 9.71% (11.75%)
 
NB - These global premiums are higher than what we would expect going forward.


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 (www.dimensional.com.au).  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.
 
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We hope you have enjoyed reading the latest edition.  If you have any comments or suggestions for future topics please do not hesitate to get in contact.
 
Have a great fortnight!
 
Cheers,
The Two Scotts
 

The Financial Fortnight is a publication of A Clear Direction Financial Planning.  It contains general financial advice.  Readers should check this advice with a professional financial adviser before acting on any of the material contained in this email.

Scott Francis & Scott Keefer
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