Wednesday 31st March 2010
Clear Directions - the email newsletter of A Clear Direction Financial Planning
In This Issue
Quote for Consideration
Financial Topic - Our Research Based Approach
Fascinating Financial Fact - The Rule of 72
Market News
Index managers win over the long term
Website of Interest - SMSF Trustee Education
Eureka Report articles
From the Archives - The Case for Family Trusts
Three Factor Model in Action

Forward this issue to a Friend

Follow scottkeefer on Twitter
Quick Links
 
How can we improve our emails?
We value your input.
 
Click on the following link to be taken to be taken to our feedback forum. 
 
Provide a suggestion or cast your vote towards suggestions made by other subscribers.
 
Financial Fortnight emails feedback forum
 
Greetings!  
Top 
Welcome to the latest edition of A Clear Direction's email newsletter.
After early 2010 jitters, investment markets have steadied through the back end of February and throughout March.  However there remains significant threats to the global economy, not to mention potential tax law changes here in Australia in coming years, making the task of short term investing fraught with dangers.  It is easy to get swept up in the fear or euphoria that is prominent at a point in time and as a consequence make rash investment decisions.

At A Clear Direction our approach is all about the building of portfolios for the longer term.  In this edition we want to take readers back to the research document we have developed to support the way we see the investment world - Our Research Based Approach.

Also in this edition we:
  • explain the Rule of 72,
  • update major investment market performance,
  • outline recent additions to the online blog,
  • provide a link to Scott Francis' latest Eureka Report articles,
  • revisit the archives to look at the benefits of Family Trusts,
  • provide a link to a new resource for self managed super fund trustees, and
  • provide evidence of the three factor model in action.
We are also pleased to announce that A Clear Direction has moved locations and is now based in the Brisbane CBD:

Level 24, AMP Place
10 Eagle Street
Brisbane QLD 4000
 
Ph: (07) 3379 6068
 
This change also provides us with office locations throughout major cities in Australia.  If these new arrangements are more convenient for you and you are interested in discussing your financial situation with us in more detail please do not hesitate to be in contact.
 
Finally, we would like to wish readers a safe and enjoyable Easter period and as always, enjoy the read!

A Quote for Consideration 

"These results add up to perhaps the most important investment lesson of all that can be drawn from this week's market anniversaries: Predicting turns in the market is incredibly difficult to do consistently well. That means that, if your investment strategy going forward is dependent on your anticipating major market turning points, your chances of success are extremely low."

Mark Hulbert, "Fools R Us", MarketWatch, March 10, 2010
 
Financial Topic - Our Research Based Approach
 
I think everyone would agree that the most important rule for all investors, no matter what  your personal philosophy, is that you have a plan based on evidence and you stick to that plan unless you find conclusive data to suggest otherwise.

It's those investors with no plan, running on fear and greed that tend to get caught out by the markets and achieve below average returns as reported by such studies as Dalbar's Quantitative Analysis of Investor Behavior.

For those who have followed this firm's philosophy, you will realise that our investment approach is built on scientific, peer reviewed research coming out of Australian and international universities.

This research reminds us of the following key aspects:
  • Asset allocation is the number one determinant of investment performance
  • No investor or professional fund manager can consistently gain a reliable advantage over all other market participants
  • Active fund managers under-perform
  • Diversification reduces portfolio volatility
  • Premiums can be gained from investing in riskier parts of share markets - namely small and value companies - the 3 Factor Model
  • The Australian tax system provides a benefit to Australian investors investing in Australian companies
  • Higher fees lead to poorer performance
 
Putting all of this together brings us to the position of building robust investment portfolios as set out on the Building Portfolios page of our website.
 
What Does This All Mean for Investors?

To take the unnecessary stress out of investment decision making, consider applying an investment approach based on timeless scientific research into investing and most importantly beware relying on the latest trends and fads.
Fascinating Financial Fact

The Rule of 72

This simple rule helps us to quickly estimate the time that it will take to double an investment. What you do is divide 72 by the return you expect to earn each year or other period of time.  This will provide you with the number of years that it will take to double your investment.

For example, if our expected return was 9% per annum, it should take 8 years (72 / 9)  to double our initial investment.

Return to Top

Market News
The purpose for including this section in the newsletter is not to provide a tool to decide in what to invest but rather as a guide to what has been happening recently on markets.

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 March 23rd the P/E ratio for the S&P/ASX 200 was 17.84.  The dividend yield was 3.35%.

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 close for the VIX at the end of February was a level of 19.5.  This is slightly higher than the 12 month closing low of 17.55 but well off the 12 month closing high of  52.65.  (The latest close on the 30th of March was 17.13) 
 
Market Indices
 
 
  February 3 Month 1 Year 3 Year 5 Year 10 Year
Australian Shares            
S&P - ASX 200 (accum)
2.16%
-0.56%
44.70%
-3.20%
6.68%
8.35%
International Shares            
MSCI World - Ex Australia (hedged)
1.96%
2.06%
46.90%
-7.26%
1.26%
-0.81%
MSCI World - Ex Australia (unhedged)
0.06%
1.28%
9.68%
-10.43%
-0.93%
-3.48%
MSCI Emerging Markets (hedged)
-0.15%
-0.52%
64.74%
4.36%
12.73%
9.46%
MSCI Emerging Markets (unhedged)
-0.39%
0.68%
36.71%
-0.52%
9.65%
4.95%
Property            
S&P - REIT (accum)
1.46%
1.87%
40.57%
-23.91%
-7.18%
NA
S&P/Citigroup Global REIT - Ex Australia - World (hedged)
3.45%
5.69%
76.19%
-15.02%
1.33%
11.02%
S&P/Citigroup Global REIT - Ex Australia - World (unhedged)
2.14%
5.66%
30.04%
-18.31%
-0.99%
7.26%
Currency            
AUS - US Exchange Rate
-0.11%
-3.04%
37.88%
4.14%
2.40%
3.78%
Trade Weighted Index
0.37%
-0.67%
26.66%
2.43%
1.51%
2.45%
 
General News
 
The following major economic data has been announced since the previous edition:
  • The RBA lifted official interest rates by 0.25% in March.
  • Business confidence and conditions rose in February.
  • Consumer sentiment fell in February.
  • Unemployment rose slightly in February.
Index managers win over the long term
Scott's Financial Happenings Blog - Posted Monday 01 March
 
I hate to sound like a broken record but some more data has been recently published by Standard & Poor which provides evidence that an index based approach to investing will serve you well.


S & P have started to publish a bi-annual report looking at the investment performance of active managers as opposed to the benchmark S&P ASX200 and MSCI World ex Australia indices - Standard & Poor's Index Versus Active Funds Scorecard - Australia Year End 2009.  Their second report has been published this week and provides the following conclusions:

  • Over a five-year period ending December 2009, respective benchmark indices have outperformed the majority of active funds across the different peer groups covered by the SPIVA Scorecard. In contrast for the 2009 calendar year comparative analysis of the annual returns shows that a majority of active funds have outperformed their benchmark across most peer groups.
  • The S&P/ASX 200 Accumulation Index has outperformed 63% of active Australian equity funds over a five-year time horizon. Data over one year and three years shows an equal split between active funds underperforming and outperforming the index.
  • A majority of active Australian equity small-cap funds have outperformed the S&P/ASX Small Ordinaries Index across all time horizons. Most notably, 73% of active small-cap funds outperformed the benchmark index over a three-year period.
  • The MSCI World ex Australia Index has outperformed 69% of actively managed international equity funds in the last five years. However, the index has outperformed only 24% of actively managed international equity funds over the last year.
There is some cause to cheer for active managers as the results suggest that 2009 was a much better year on average compared to the index.  However the 5 year results still show that more than 63% of active funds under-performed over that period.  That suggests that the performance from 2005 to 2008 must have been particularly poor.

There has also been some cause to cheer for small company funds showing a strong record over 5 years.

Five years is still not a very long window but you would expect that over even longer periods active managers perform even worse.  The latest report is even further evidence that an active approach to investing increases the probability that you will perform worse than the average investor return - i.e. the index.

A Clear Direction's approach is to use index funds as they base and add to that small and value exposures.  Over the 5 years these exposures have provided after fee premiums of:

Australian small company exposure                     1.44%
Australian value exposure                                   0.87%

Over 7 years these premiums are even greater.

The results suggest the approach we are employing is positioning client portfolios well above the returns being provided by active managers.


Regards,
Scott Keefer

Other blogs since the last edition have included:
 
Website of Interest -
Self-Managed Superannuation Funds - Trustee Education


For those readers who are self managed super fund trustees or are considering this  alternative the following online education program is well worth a look.  The Self Managed Superannuation Fund Trustee Education Program has been released by the Joint Accounting Bodies. The Joint Accounting Bodies consist of CPA Australia, the Institute of Chartered Accountants in Australia, and the National Institute of Accountants. This service has been provided free to members and trustees of self-managed superannuation funds.

This program is designed to educate trustees of SMSFs throughout Australia. It is designed according to the Australian Taxation Office's Trustee Declaration form to assist trustees in understanding their role and responsibilities.

Throughout this program, each element of the Trustee Declaration will be addressed. It will provide the key messages, key terms, legal jargon and present possible scenarios that trustees may encounter during their decision making processes as a trustee of a SMSF.

At the completion of this program, trustees will be able to understand:

  • their roles and responsibilities within a SMSF
  • the investment restrictions imposed on trustees of a SMSF
  • the rules and limitations surrounding contributions and benefit payments within a SMSF
  • the administration involved with a SMSF

At the conclusion of the training program, on successful completion of a small quiz, a certificate of attainment will be provided.

Click on the following link to be taken to the site - http://www.smsftrustee.com
Eureka Report Articles

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

10 February -  Australia's biggest losers - As investors paid active fund managers at Australia's biggest financial institutions to beat the market, they couldn't keep up.
 
24 February
Who'd want to be a millionaire? - Investment and pension income for retirees with smaller savings means they are only marginally worse off than those with seven-figure sums.
 
24 March - New paths to home ownership - As houses become harder to afford, buyers should consider new strategies to secure them.

From the Archives
The Case for Family Trusts
 
PORTFOLIO POINT: Investing through a family trust gives people the flexibility, unlike superannuation, of accessing money before they reach a certain age.
 
Three Factor Model in Action 
Dimensional Fund Performance Graphs updated to the end of February 2010
 
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 February 2010.
 
Commentary:
 
The graphs show a flat month for all asset classes.
 
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 Feb2010

Premium over ASX 200

Accumulation Index

ASX 200 Accumulation Index

15.58%

-

Dimensional Australian Value Trust

18.80%

3.22%

Dimensional Australian Small Company Trust

22.41%

6.83%

 
International Share Trusts - 7 Year returns:
 

 

7 Yr Return

to Feb 2010

Premium over MSCI World (ex Australia) Index

MSCI World (ex Australia) Index

3.64%

-

Dimensional Global Value Trust

6.80%

3.16%

Dimensional Global Small Company Trust

7.91%

4.27%

Dimensional Emerging Markets Trust

17.94%

14.30%


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.
 
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:

 

Clear Directions 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. 
 
We hope you have enjoyed reading this latest edition of Clear Directions.  If you have any comments or suggestions for future topics please do not hesitate to get in contact.
 
Have a great month!
 
Cheers,
Scott Keefer
 

Clear Directions 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
Level 24, AMP Place
10 Eagle Street
Brisbane QLD 4000
(07) 3379 6068

A Clear Direction Financial Planning is an Authorised Representative (No. 329574)

of FYG Planners Pty Ltd ABN 55 094 972 540

Australian Financial Services Licensee (No. 224543)

Registered Office: Level 1, 10 Wilson Street Burnie Tas 7320