The Financial Fortnight That Was - Tuesday 16th June 2009

It has been great to see investment markets continue to rise over recent weeks, but who knows what lies around the corner. The best we can do is to learn from the fundamentals of how markets work, develop portfolios accordingly and try to miss the avoidable hazards along the way.

In this edition we:

discuss the topic of unlisted assets and suggest investors carefully check the nature of any unlisted assets before switching into this asset class,
look at S&P's latest World by Numbers publication,
summarise the movements in markets since the last edition including 3, 5 and 10 year return history,
encourage readers to switch off or turn doen the financial media they are listening to,
provide a link to Scott Francis' latest Eureka Report articles,
link to recent videos uploaded to the Fama & French Forum,
provide evidence of the three factor model in action, and
provide links to podcasts recently uploaded to the website.

Enjoy the read!!

A Quote for Consideration

"... skepticism about past returns is crucial. The truth is, much as you may wish you could know which funds will be hot, you can't -- and neither can the legions of advisers and publications that claim they can. That's why building a portfolio around index funds isn't really settling for average. It's just refusing to believe in magic."
Bethany McLean
"The Skeptic's Guide to Mutual Funds," Fortune Magazine,March 15, 1999.

Financial Topic Demystified
Unlisted Assets

Over the past few months, a fair bit of financial media commentary has surrounded the issue of unlisted assets. In this week's podcast I address the issue as raised in Choice magazine's June edition. So what are unlisted assets and how should investors treat them in a portfolio.

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Unlisted assets include assets such as property, hedge funds, private equity and infrastructure. These are different to listed assets like shares and property trusts which are bought and sold on stock exchanges every day. Another way they are defined is "appraisal based" assets whereby the holding value is determined by appraisal of asset values as compared to having the assets included in listed entities which are valued by the market every day.

The issues surrounding unlisted assets are how effective and efficient are the valuation methods used to value these assets and whether they should be included as growth or defensive assets in terms of the industry wide approach of defining investment choices within superannuation.

Please listen to the latest Monday's Money Minute podcast or read the transcript for more information about the risks involved with investing in unlisted assets - The Hidden Risks of Industry Funds.

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So what is our firm's approach?

Unlisted or appraisal based assets such as direct property, unlisted infrastructure, private equity and hedge funds are expected to perform differently to their listed alternatives. This in itself would suggest they are worthy of inclusion in portfolios as they reduce the correlation between investments in a portfolio and in doing so should smooth out volatility.

Unfortunately the problem becomes which ones to invest in? You cannot easily get an index style or even well diversified allocation and therefore are exposed to choosing an investment that may fail or under-perform. These investments are also not very transparent in terms of valuations and for these reasons we do not as yet include these assets in portfolios for clients.

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Fascinating Financial Fact

Standard & Poor's World by Numbers - April Report

Each month Standard & Poor's publish their World by Numbers report. The most recent report includes data up to the end of April 2009. It provides some interesting reading about which markets in the world have experienced the strongest bounce since early March and also how they compare over a 12 month period. The following table provides a snapshot of some of the important countries for Australia:

It is interesting to see how fast the emerging markets of Indonesia, India & China have shot away however over 12 months they lag the US & Japanese markets. For me, another example of the importance of diversification.

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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 June 9th the P/E ratio for the S&P/ASX 200 was 10.78. The dividend yield was 5.26%.

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

The latest close for the index was at a level of 30.81. This is slightly higher than the 12 month low of 26.57 but well off the 12 month high of 80.74.

Market Indices

	Since last ed.	Since Start of 2009	1 Year	3 Year	5 Year	10 Year
Australian Shares
S&P - ASX 200	7.99%	9.13%	-23.78%	-6.48%	3.22%	NA *
International Shares
MSCI World - Ex Australia	5.66%	8.34%	-26.94%	-6.48%	0.23%	-0.76%
MSCI Emerging Markets	5.29%	34.47%	-20.03%	8.23%	15.53%	11.25%
Property
S&P - ASX 200 REIT	16.90%	-13.59%	-49.17%	-27.04%	-13.70%	NA *
S&P/Citigroup Global REIT - Ex Australia - World - AUD	4.34%	-15.72%	-32.08%	-17.88%	-3.05%	4.77%
Currency
US Exchange Rate	4.71%	17.54%	-13.18%	3.01%	3.25%	2.07%
Trade Weighted Index	4.66%	17.09%	-9.64%	1.46%	1.77%	1.04%

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

General News

The following major economic parameters have been announced since the previous edition:

Unemployment now at 5.7% (predicted to rise to 8.25% in Federal budget)
Economic growth of 0.4% in the March quarter 2009 and 0.4% for the year.
RBA left official interest rates at 3.0% in the June board meeting.
Westpac-Melbourne Institue consumer confidence index has risen to 100.1 in June, a 12.7% rise.
NAB business confidence index moved from minus 14 to minus 2.

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Why it might be good to switch off the financial media you are listening to

Scott's Financial Happenings Blog - Posted Tuesday 26 June

Jim Parker, a Regional Director from Dimensional Fund Advisors always has interesting insights into the world of journalism stemming from the many years spent working in the industry. He has posted another item on DFA's website today which provides more ammunition as to why we should try turning off, or at least down, the financial media commentary we are listening to. (Don't switch off from my blog or website though!!!)

If you would like to read the full blog and Jim's article please follow this link - Why it might be good to switch off the financial media you are listening to

Regards,
Scott Keefer

Other blogs since the last edition have included:

28th May
The Importance of Being Idle

10th June
Industry super funds move to passive investment

11th June
Why share markets fall and is this a good time for active investing?

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Eureka Report Articles

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

29 May - Dangers lurk in MIS badlands - Investors should tread warily on MIS schemes, characterised by a lack of information, data and success.

Click here to be forwarded to all of Scott's Eureka Report articles

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Other resource of interest - Fama & French forum videos

Professors Fama & French published academic research in 1992 which forms the core of this firm's philosophy towards investing. The details of their paper can be found on our website - The Three Factor Model.

Earlier this year, in conjunction with Dimensional Fund Advisors, the professors started an online forum through which they could discuss a range of important and interesting investment topics.

This month they have included a series of items looking at the problems with an active investment approach. The first two are video pieces for those who prefer to take in information visually.

More sellers than buyers? - Ken French discusses why share prices fall and links it to expectations about future cash flows and the expected return on an investment including changes in perceived risk with investing in a particular investment or the market as a whole.

Is this a good time for active investing? - Ken French is interviewed about whether now is a good time to take an active management approach. His response is that it comes down to a mathematical exercise regarding fees. At every instant in time the average active investor will underperform an index based approach because they are paying more fees to do so.

Why active investing is a negative sum gain - In a written piece Eugene Fama & Ken French look at the arithmetic of active management as set out by William Sharpe in 1991 setting out the same argument as raised by Ken French in the previous video.

All are well worth a look. If you would like more information about what we see as the academic research that underpins a sound approach to investing please take a look at our Research Based Approach pages on our site.

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Three Factor Model in Action
Dimensional Fund Performance Graphs updated to the end of May 2009

Since our last edition we have updated the Dimensional Fund Performance Graphs page on our website. The graphs show the performance of the Dimensional funds that we use to build investment portfolios for our clients. They have been updated to contain data up until the end of May 2009.

Commentary:

The graphs show strong monthly returns over the month for most of the asset classes especially in the Australian Small Company and Emerging Markets allocations. Global Small Companies and the MSCI World ex Australia indexes were relatively flat for the month.

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:

	7 Yr Return to May 2009	Premium over ASX 200 Accumulation Index
ASX 200 Accumulation Index	8.57%	-
Dimensional Australian Value Trust	11.24%	2.67%
Dimensional Australian Small Company Trust	12.90%	4.33%

International Share Trusts - 7 Year returns:

	7 Yr Return to May 2009	Premium over MSCI World (ex Australia) Index
MSCI World (ex Australia) Index	-1.27%	-
Dimensional Global Value Trust	0.67%	1.94%
Dimensional Global Small Company Trust	2.17%	3.44%
Dimensional Emerging Markets Trust	11.30%	12.57%

NB - These premiums are higher than what we would expect going forward.

Please click on the following link to be taken to the graphs - Dimensional Fund Performance Graphs.

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.dfaau.com). 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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Monday's Money Minute Podcasts

In the latest podcasts Scott Keefer looks at the 3 Factor Model and the hidden risks of industry funds.

8th June - 3 Factor Model

15th June - The hidden risks of industry funds

Click here to be directed to the Monday's Money Minute Podcast page of our website

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Requesting feedback

We encourage subscribers to ask questions or make comments either directly by sending an email to our email address: [email protected] or by engaging with our feedback site:

Financial Fortnight Feedback Forum

After clicking on the link you will be taken to our Financial Fortnight User Voice page. On that page you will be able to provide suggestions or vote on suggestions that have been made by other subscribers. By submitting an idea, you enable other users to view your idea and add their vote if they think it is worthwhile. By casting your vote you are telling us whether you think the ideas are worthy and which ideas should be implemented first.

We welcome your feedback.

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I 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,

Scott Keefer

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 Keefer

1 Park Road - PO Box 1688

Milton QLD 4064

(07) 3876 6223

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