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Greetings!
Welcome to the latest edition of A Clear Direction's email newsletter.
Monday's government announcement about the banning of commissions has the industry in a spin but as outlined in our featured blog commentary in today's edition we think it is good news for the investor. We also provide insight into how we think the government could go further to improve the advice Australians are receiving from advisers in the From the Archives section - Planners you could trust.
Another issue concerning some investors is the possibility of high levels of inflation in years to come. Our main article this edition considers the possible options to protect against inflation eating into your portfolio.
Also in this edition we:
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outline the make up of the MSCI World and Emerging Markets indices, update major investment market performance,
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outline recent additions to the online blog,
- provide links to the ATO's super essentials website, ASFA's new Super Guru site and Vanguard's volatility chart updated to the end of March 2010, and
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provide evidence of the three factor model in action.
Please also be reminded 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.
Enjoy the read!
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A Quote for Consideration
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Financial Topic - Managing Inflation Risk
Since late 2008 governments around the world
have been plowing billions of dollars into the global economy to keep economies
growing and workers employed. Many economists and investors have
been concerned about how this will impact inflation in years to come. For the investor this has raised the issue of
how to manage investments to keep inflation from eating away too much of investment
returns.
In this edition we have included a
discussion of how we think investors should look to manage inflation risk. This article explores two basic ways to address
inflation uncertainty and highlights asset groups that may prove useful.
As you consider strategies, remember the
difference between expected and unexpected inflation. Asset prices already
reflect the market's expectations about future inflation, given all available
information. Inflation may turn out to be worse than expected, and this risk of
unexpected inflation is what some investors may want to manage.
Please click on the following link to be taken to the article - Managing Inflation Risk
How do we implement these strategies for our clients?
We build diversified portfolios with exposure to growth style share investments to fight inflation over the longer term and combine these investments with short maturity fixed income investments that are regularly being rolled over to higher interest opportunities which will be important should inflation start to rise unexpectedly. At present we are not directly suggesting clients invest into inflation linked bonds but they remain on the agenda for consideration.
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Fascinating Financial Fact
MSCI Indices
Two indices commonly used as benchmarks for Australians investing overseas are the MSCI World ex Australia and MSCI Emerging Market indices. But what are these indices actually made up of?
MSCI Barra clearly define the countries that make up these indices as follows:
The MSCI World Index is a free float-adjusted market capitalization
weighted index that is designed to measure the equity market performance of
developed markets. As of June 2007 the MSCI World Index consisted of the
following 23 developed market country indices: Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy,
Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, the United Kingdom, and the United States. (The MSCI World ex Australia index removes Australian equity exposure.)
The MSCI Emerging Markets Index is a free float-adjusted market
capitalization index that is designed to measure equity market performance of
emerging markets. As of June 2009 the MSCI Emerging Markets Index
consisted of the following 22 emerging market country indices: Brazil, Chile,
China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel,
Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey.
The next question is what percentage of the index relates to a particular country?
MSCI Barra publish a 113 page document outlining the approach they take to building indices. but keep the exact constituents of their indices closer to their chest. Vanguard's International Share Index Fund provides a good guide of the percentages allocated to particular regions. As at the 31st of March:
- 56.4% to North America
- 21.1% to Europe ex UK
- 10.0% UK
- 10.6% Japan
- 1.9% Pacific ex Japan
In terms of emerging markets, Vanguard's Emerging Markets Trust was made up of
- 55.5% Asia
- 23.4% Latin America
- 10.4% Europe
- 7.7% Africa
- 3.0% Middle East
So if you are investing in international index funds this is likely the current allocation of your investments.
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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 April 13th the P/E ratio for the S&P/ASX 200 was 18.17. The
dividend
yield was 3.29%.
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 March was a level of 17.59. This is almost equivalent to the 12 month closing low of 17.55 but well off the 12 month closing high of 52.65. (The latest close on the 26th of April was 17.47)
Market Indices
| | March
| 3 Month | 1 Year | 3 Year | 5 Year | 10 Year | | Australian Shares | | | | | | | | S&P - ASX 200 (accum) |
5.75%
|
1.36% |
41.71% |
-2.45% |
8.07% |
8.90% | | International Shares | | | | | | | | MSCI World - Ex Australia (hedged) |
6.61% |
4.89% |
47.26% |
-5.73% |
2.76% |
-0.75% | | MSCI World - Ex Australia (unhedged) |
3.68% |
1.13% |
15.25% |
-9.07% |
-0.35% |
-3.89% | | MSCI Emerging Markets (hedged) |
6.24% |
1.64% |
58.41% |
5.34% |
15.21% |
10.09% | | MSCI Emerging Markets (unhedged) |
5.44% |
0.26% |
36.84% |
0.71% |
11.71% |
5.41% | | Property | | | | | | | | S&P - REIT (accum) |
-0.05% |
-1.51% |
40.55% |
-22.83% |
-6.95% |
3.65% | | S&P/Citigroup Global REIT - Ex Australia - World (hedged) |
8.13% |
7.32% |
84.12% |
-12.69% |
3.22% |
11.52% | | S&P/Citigroup Global REIT - Ex Australia - World (unhedged) |
5.15% |
3.88% |
42.73% |
-16.20% |
-0.17% |
7.32% | | Currency | | | | | | | | AUS - US Exchange Rate |
2.92% |
2.12% |
33.26% |
4.31% |
3.48% |
4.23% | | Trade Weighted Index |
3.23% |
2.87% |
24.91% |
2.85% |
2.36% |
3.05% |
General News
The following major economic data has been announced since the previous edition:
- The RBA lifted official interest rates by 0.25% in April.
- Business confidence and conditions rose in March.
- Consumer sentiment fell slightly in April.
- Unemployment remained steady in April.
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Banning commissions - a step in the right direction
Scott's Financial Happenings Blog - Posted Tuesday 27 April
Anyone who read a newspaper yesterday
could not have missed the headlines - Tough rules for finance
advisers, A better deal for investors, Commission ban to shake up
financial planning. It would be easy to jump to the conclusion
that the only stakeholder to lose out in the changes announced by
Minister Bowen were financial planners.
I can say categorically that there are numerous financial advisers who
are very happy with the steps taken by the federal government
commencing July 2012, me being one of them. The banning of commissions
removes another potential black mark held against the financial advice
industry - the perception that advisers are here to "flog" financial
products rather than provide independent advice relating to the specific
needs of each individual client. That said, I think there are many
advisers who actually use a commission based payment model that do act
in client best interests but as long as they are paid directly by the
product provider this independence is put into question. With this
change there can now be much less doubt about this.
The change I also like is the removal of asset based fees on geared
investments. This targets the strategy where an adviser will recommend a
client borrow money to invest in the market and not only take a
percentage fee on the initial investment but also on the loaned funds. The conflict of interest here is pretty clear and has now been removed
somewhat by these proposed changes.
One concern with the planned change is that advisers will now resort to
charging fees at a much higher level compared to the commissions they
were receiving and in doing so block access to good financial advice for
those with smaller amounts of income and assets. Time will tell
whether this is actually the case but I can assure you that there will
be many firms, like A Clear Direction, working hard to create financial
advice solutions for interested parties across the spectrum of wealth
accumulators to retirees and high net wealth investors.
We at A Clear Direction are excited about the planned changes to the
financial advice industry and believe we are already well placed for
these changes as we do not accept commissions. (NB We are required to
receive commissions from some cash investments used by clients but
rebate these back in full to clients each quarter.)
Regards,
Scott Keefer
Other blogs since the last edition have included:
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Websites of Interest
Australian Tax Office - Superannuation Essentials
We sometimes hear comments that it is very difficult to get information out of the ATO or their website. We have come across one are of their site which provides some useful straightforward information about Australia's superannuation system. The following page is well worth a look - Individuals superannuation essentials
ASFA - Super Guru site
The Association of Superannuation Funds of
Australia have today launched a new site - Super
Guru . Since 2005 Super Guru was incorporated as part of the ASFA
site but has now been expanded and set aside as a stand alone website.
The site has been designed to designed to help people engage with their
super more - either by asking questions of their funds, or of the
people advising them with their self managed fund.
The initial site contains a range of general information about the
superannuation system and then drills down into more specific areas such
as detailed budgets in retirement and self managed superannuation fund
issues.
The site is well worth a look if you are wanting to get up to speed with
the workings of Australia's superannuation system.
Vanguard's Volatility Chart - updated to the end of March 2010
Vanguard have updated their Volatility Chart for the Australian share market for the period ending 31st March 2010. The chart shows that the Australian share market has recovered significantly after the 48.3% fall from November 2007 to March 2009. The chart also shows there is still a fair way to go to reach the highs of 2007 and move beyond those highs. We should all be reminded of the last recovery after a fall of more than 40% which bottomed in late 2007. It took 63 months to regain the high point of 1987.
Sure the circumstances of 1987 were quite different from those now but it does provide a timely reminder that we should not expect for markets to continue to bound forward to reach the highs of late 2007 any time soon. But we should be confident that the market will get there at some point in the future if history is any guide.
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From the Archives
Planners you could trust PORTFOLIO POINT: A new designation of Professional Wealth
Adviser, whose independence was verified by Government, could improve
consumer confidence.
(NB - some of the points raised in this article written in 2007 have now been addressed by the government but there remains room for further improvement.)
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Three Factor Model in Action
Dimensional Fund Performance Graphs updated to the end of March 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 March 2010. Commentary:
The graphs show a strong month of returns 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:
|
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7 Yr Return
to March 2010 |
Premium over ASX 200
Accumulation Index | |
ASX 200 Accumulation Index |
15.19% |
- | |
Dimensional Australian Value Trust |
18.31% |
3.12% | |
Dimensional Australian Small Company Trust |
21.55% |
6.36% |
International Share Trusts - 7 Year returns:
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|
7 Yr Return
to March 2010 |
Premium over MSCI World (ex Australia) Index | |
MSCI World (ex Australia) Index |
4.41% |
- | |
Dimensional Global Value Trust |
8.07% |
3.66% | |
Dimensional Global Small Company Trust |
9.20% |
4.79% | |
Dimensional Emerging Markets Trust |
19.40% |
14.99% |
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: financialfortnight@acleardirection.com.au 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.
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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. |
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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 | |
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