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Greetings!
Welcome to the latest edition of A Clear Direction's email newsletter.
The continued volatility across investment markets provides us all with a difficult climate to make investment decisions. Especially if you take an active approach to investing.
It is little wonder that many are considering whether they are better off managing their own superannuation assets through a self managed superannuation fund. In this edition we look at the pros and cons of heading down this path.
Also in this edition we:
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take a look at the latest SPIVA report on fund management performance, update major investment market performance,
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outline recent additions to the online blog, - look at an article from the archives - Shares or cash - look to the long term,
outline recently published Eureka Report articles, 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 being able to meet in your state's capital city is 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 to organise a free no obligation initial consultation.
Enjoy the read!
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A Quote for Consideration
"Properly measured,
the average actively managed dollar must underperform the average passively
managed dollar, net of costs. Empirical analyses that appear to refute this
principle are guilty of improper measurement."
William F. Sharpe,
Nobel Laureate in Economics, 1990
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Financial Topic - Is a Self Managed Super Fund the way to go?
The past few years has put an
extra bright spotlight on the performance of superannuation funds. It is no surprise that many Australians are
turning to Self Managed Superannuation Funds (SMSF) as a solution to what they
perceive to be the poor performance of superannuation. In this piece we look at whether a self
managed superannuation fund is right for you.
The three key benefits of setting
up your own self managed superannuation fund are:
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Control
- you are able to dictate how your superannuation assets are managed including a
broader range of possible investment choices including using debt in some
cases.
- In particular, the major difference is the
ability to invest in property directly along with investing in some more
obscure assets such as artwork.
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Cost
- in some cases, the costs of running a SMSF can be significantly less than
handing over responsibility to someone else.
- This benefit really depends on how you set up
your fund and who you use for external support - Accountant, investment
manager, financial adviser etc
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Scale
- combining assets with up to 3 others can help drive efficiencies.
The possible downsides of setting
up your own SMSF are:
- Responsibility
- you can outsource the trustee responsibilities to a corporate body but this
corporate entity tends still to have you as the key operator. The responsibility involves making sure you
are invested in allowable investments and fulfil all of the administrative
requirements.
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Time
- you can outsource the management of the fund but this tends to eat into the
potential cost benefits. Therefore the
most efficient funds tend to be those that are managed by the trustees
themselves.
The general rule of thumb, as
stated by the ATO, is that you should initially have $200,000 of assets to
establish your own fund. This is based
on the assumption that the ongoing costs to run the fund will be approximately
$2,000 per annum (1% of $200,000). (There
are options that are cheaper than this which would be worth investigating if
heading down this path.) We have also seen
some SMSFs paying a lot more than this when you throw in investment manager
fees and adviser fees.
The core approach we take with
clients (unless they have reasons for turning to a SMSF) is to instead suggest
a self directed approach where the fund allows you to choose your investments
across a range of cash, term deposits, fixed interest, direct equities and
hybrid investments and over 300 investment funds including our preferred index
style options.
The administration fee based on a
$200,000 holding for a portfolio invested 70% in growth assets would be
approximately 0.40% or $795 per annum.
On top of this are then investment fees and adviser fees but all
accounting fees are handled by the administration service. If you held two $100,000 accounts the administration
fee would be 0.444% or $880 across the two funds. We think this provides a very competitive alternative
if costs is the key consideration.
Putting this all together, for us
the key points are therefore these:
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Are
there assets you want to invest into through super that are not available to
you otherwise?
- The key items here are direct property, artwork
or other physical investments that would not be available otherwise.
- Keep in mind that you can invest into direct
equities and a whole range of investment funds through what we refer to as self
directed funds.
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Can
you keep costs lower through a SMSF compared to other available trustee
services?
- We have seen a number of clients where the fees
they are paying to keep their SMSF running are much more expensive compared to
self directed options.
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Are
you interested in controlling the buying and selling of investments?
- The more interested you are in tracking and
choosing all of your superannuation investments, the more beneficial it would
be to leans towards using a SMSF.
-
Do
you have (or want to spend) the time to take on the trustee responsibilities
involved with having your own SMSF?
- For some this is right up their alley. The time does not need to be too onerous but
this really depends on the investment approach you take. It is important to investigate the possible
time needed before heading down this path.
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Do
you have others who you would be comfortable to work with to administer your
own fund?
- The ability to work with family members or
business partners to administer and manage your superannuation assets may
provide greater efficiencies and flexibility.
We could go in to a lot more
detail but hopefully this provides a simple guide to help you consider whether
it is the right option for you.
Some useful websites to look for
more information:
As with all financial decisions,
the decision really depends on your own personal circumstances. Just because someone else is or isn't doing
it is not the best approach to make the decision. |
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Fascinating Financial Fact
Standard & Poor's Index Versus Active Funds Scorecard
The latest semi-annual Standard & Poor's scorecards for Australia has been published and does not provide any better news for active fund managers.
The key findings were:
- For the 5 years to the end of June, more than 60% of all active funds underperformed relative to their benchmarks.
- The S&P ASX200 has outperformed approximately 65% of active Australian equity funds over the 5 years. (72% over the past 12 months)
- 70% of Australian equity small-cap funds out-performed the S&P ASX200 Small Ordinaries (Our preferred Dimensional Small Company Trust beat this index by 4.40% over the 5 year period.)
- Over a 5 year period the MSCI World ex Australia index has outperformed more than 77% of actively managed funds. (57% over the past year.)
- The S&P ASX 200 A-REIT index has outperformed more than 62% of active A-REIT funds over the past 5 years. (Outperforming 88% of active funds over the past year.)
Yet again the evidence clearly shows that active managers fail to outperform. To read the full report please click on the following link - SPIVA scorecard. Return to Top |
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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 August 24th the trailing P/E ratio for the S&P/ASX 200 was 16.74 . The
dividend
yield was 4.07%. These levels suggest the market is at reasonable valuations however the forward looking ratios still suggest the market is below long term average valuations.
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 July was a level of 23.5. (Its most recent close was 20.87.) The 12 month closing low was 15.58 with the 12 month closing high of 45.79. Even though levels have risen of late they are nowhere near the 12 month high.
Market Indices
| | March
| 3 Month | 1 Year | 3 Year | 5 Year | 10 Year | | Australian Shares | | | | | | | | S&P - ASX 200 (accum) |
4.47%
|
-5.87% |
10.14% |
-5.84% |
4.90% |
7.62% | | International Shares | | | | | | | | MSCI World - Ex Australia (hedged) |
5.80% |
-6.19% |
10.37% |
-8.48% |
0.18% |
-0.92% | | MSCI World - Ex Australia (unhedged) |
0.47% |
-3.16% |
1.73% |
-9.94% |
-2.32% |
-4.07% | | MSCI Emerging Markets (hedged) |
6.24% |
0.24% |
16.11%
|
-0.22% |
12.78% |
11.57% | | MSCI Emerging Markets (unhedged) |
1.08% |
0.90% |
10.03% |
-3.42% |
9.08% |
6.58% | | Property | | | | | | | | S&P - REIT (accum) |
1.02% |
-3.91% |
18.76% |
-22.28% |
-8.27% |
2.79% | | S&P/Citigroup Global REIT - Ex Australia - World (hedged) |
9.02% |
-0.89% |
39.40% |
-6.29% |
-0.14% |
9.78% | | S&P/Citigroup Global REIT - Ex Australia - World (unhedged) |
3.09% |
2.45% |
27.52% |
-7.98% |
-3.24% |
5.37% | | Currency | | | | | | | | AUS - US Exchange Rate |
5.43% |
-3.38% |
8.51% |
1.58% |
3.42% |
4.44% | | Trade Weighted Index |
3.12% |
-4.28% |
5.63% |
0.29% |
1.54% |
2.79% |
General News
The following major economic data has been announced since the previous edition:
- The RBA kept official interest rates on hold at 4.50% in August.
- Business confidence and conditions fell in July.
- Consumer sentiment climbed in July.
- Unemployment increased slightly in July to 5.3% nationally.
- The Consumer Price Index has risen at an annual rate of 3.1% as at the end of June.
- The Pensioner & Beneficiary Living Cost Index has risen at an annual rate of 3.8% as at the end of June.
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Active investors struggle to time the market
Scott's Financial Happenings Blog - Posted 24 August
An article published on Financial Standard
today highlighted research contained in the CMC Markets Share Trader
Insight Survey that showed investors had difficulty timing market entry
and exit in the 6 months to July 2010.
These results were based on the flow of cash which tended to flow into
equities when the market was at its peak and flow out when the market
was at a trough. The exact opposite to what an investor should be
doing. This actually comes as no surprise. Each year we keep an eye on the Quantitative Analysis of Investor Behavior reportpublished by Dalbar Inc. This report looks at investor performance in
the USA based on fund flows. The report has consistently found that
over the long term, investors have achieved a much lower return compared
to the relevant benchmark for an asset class. The latest report
,looking at the period up to the end of December 2009, found that over
the previous 20 years investors have achieved a combined average return
of 3.17% per annum from investing in US equities whereas the S&P500
over the same period has provided a return of 8.20% per annum. i.e.
investors on average have under-performed at the rate of 5.03% per
annum. The reason for this under-performance can be put simply down as
investors poorly timing entry and exit from the market, i.e. buying high
and selling low. The Dalbar report this year did contain some good news. Average
investor returns for the one year were 32.20% compared to the S&P
500's 26.45%. Maybe investors in the US are now much better at getting in and out of the market. Somehow I doubt it. The CMC Markets Share Trader Investor Survey provides timely reminder
that an active approach to timing markets is extremely difficult. At A Clear Direction we think that a much better way is to build
structured portfolios for the long term and avoid the pitfalls of trying
to time the market. Regards, Scott Keefer
Other blogs since the last edition have included:
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From the Archives
Shares or cash? Look to the long term
Historically, the Australian share investments have had a premium of better than 6% over a simple investment in a cash account. |
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: 28 April - Reforms won't stop the shonks- Proposed
reforms on financial advice are a step in the right direction, but
would still leave investors vulnerable to being caught up in another
Storm Financial. 5 May - Reforms and your super - Three key changes from the Henry tax review will influence investors' strategies. 12 May - Time to tweak your portfolio- Last night's budget offered investors plenty of ways to fine-tune their strategies. 24 May - Housing's fast track is getting faster - Easing restrictions on the first-home saver's account makes it a flexible wealth-creation strategy. 2 June - Don't be starstruck - The 'star system' used to rate managed funds is not necessarily the safest guide for investors.
9 June - 10 costly tax mistakes - The clock is ticking to the end of the financial year. Here are 10 of the most common mistakes and how to avoid them. 23 June - Help your kids buy a house (faster) - Contributing
$1000 to a First Home Saver Account before June 30 will attract a
government co-contribution and set your children on the path to home
ownership. 30 June - 7 ways to hit the new year running - Not all wealth creation strategies are created equally, as the following exercise shows.
13 August - Would it kill you to own fewer shares - Cutting your exposure to the stockmarket would have little effect on overall returns, and might let you sleep easier.
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Three Factor Model in Action
Dimensional Fund Performance Graphs updated to the end of July 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 July 2010. Commentary:
The graphs show a strong month of returns for all asset classes however the premiums over the past 3 months have fallen in line with historical averages..
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 July 2010 |
Premium over ASX 200
Accumulation Index | |
ASX 200 Accumulation Index |
11.25% |
- | |
Dimensional Australian Value Trust |
13.32% |
2.07% | |
Dimensional Australian Small Company Trust |
14.39% |
3.14% |
International Share Trusts - 7 Year returns:
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7 Yr Return
to July 2010 |
Premium over MSCI World (ex Australia) Index | |
MSCI World (ex Australia) Index |
1.47% |
- | |
Dimensional Global Value Trust |
3.48% |
2.01% | |
Dimensional Global Small Company Trust |
4.12% |
2.65% | |
Dimensional Emerging Markets Trust |
14.53% |
13.06% |
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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Clear Directions Feedback Forum
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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.
Until next time!
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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