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2018 September Quarter review

Economic Overview

Economic growth and earnings data remained robust during Q3, and this ultimately overshadowed simmering concerns around the escalating US-China trade war. The US initially targeted $34 billion of Chinese products with a 25% tariff in early July, while monetary policy tightened in the US. Markets were mostly positive in developed countries, but there was significant volatility in some emerging markets. Commodities struggled against a strengthening US dollar, while energy continued to rise with the prospect of sanctions on Iran.

In the US, ongoing growth and strong employment figures allowed the Federal Reserve to increase the federal funds rate by 25 basis points. The committee also dropped its long-standing description of monetary policy as “accommodative”, reaffirming an outlook for ongoing hikes in 2019. Data released in September showed wages to be growing at the fastest rate since 2009, while industrial activity indicators show little impact from the trade wars.

Fiduciary Financial Advice Australia.

In the EU, fears over trade impact on Europe were calmed following a meeting in July between US President Trump and EU President Juncker. From this came an agreement to work towards zero tariffs on non-auto industrial goods, while new car tariffs were put on hold. Growth for the second quarter was revised up to 0.4% quarter-on-quarter, compared to the initial estimate of 0.3%.

In the UK fears for the economy were reflected in the value of the pound, which resumed its downward trajectory over the period. However, the outlook for the domestic economy improved, as growth recovered from the slow first quarter, prompting the Bank of England (BoE) to increase interest rates by 25 basis points.

In Asia, Japanese company profits continued to improve. Economic growth rebounded strongly from the short-term weakness seen in Q1 and corporate sentiment remained relatively firm given the tightness in the labour market and the uncertain global outlook. Meanwhile, Chinese macroeconomic data disappointed as they retaliated against US trade tariffs. Authorities announced a range of targeted economic support measures, including fiscal stimulus and credit easing. The central bank also re-introduced macro prudential measures to stabilise the renminbi.

In Australia, it was much the same as Q2, as the Reserve Bank continued to hold the cash rate, while house prices continued to fall as tighten lending conditions influenced mortgage lending and real estate, particularly in Sydney.

Market Overview

Asset Class Returns

The following outlines the returns across the various asset classes to the 30th September 2018.

Fiduciary Financial Advice Australia.

Global equities gained in Q3, primarily due to US market strength. Political uncertainty and trade concerns weighed in other regions. US equities significantly outperformed other major markets. Economic growth and earnings data remained extremely robust, ultimately overshadowing concerns surrounding the escalating US-China trade war. The US equity bull market became the longest in history on August 22.

Eurozone equity gains were modest with the MSCI EMU index returning 0.4%. Energy and industrials were the leaders. Financials made a good contribution despite weakness in the banking sector amid concerns over exposure to emerging markets as well as worries over the Italian budget.

The UK’s FTSE All-Share fell 0.8% over the period. The Bank of England increased base rates and sterling fell in response to political noise around Brexit. Any slowdown in global growth and trade tends to have an outsized impact on emerging markets and emerging market exposed areas of the UK stock market, including financials and miners, performed poorly as a consequence.

Although trade tensions continued to escalate during the quarter, the Japanese stock market ended September above its recent range to show a total return of 5.9% for the quarter.

Emerging markets equities lost value in what was a volatile third quarter, with US dollar strength and the US-China trade dispute weighing on risk appetite. The MSCI Emerging Markets index decreased in value and underperformed the MSCI World.  By contrast, Thailand recorded a strong gain and was the best performing index, with energy stocks among the strongest names. Mexico outperformed as the market rallied following general elections and an agreement with the US on NAFTA renegotiation.

Fiduciary Financial Advice Australia.

Australia’s performance was relatively good across the quarter given the attention focused on some of the ASX’s largest companies. The banking royal commission has been felt acutely by shareholders of Australia’s big four banks throughout 2018, though there was a mild recovery between the end of Q2 and the beginning of Q3.

Strava Theft

Finally, not exactly related to investing or finances, however a story on why it’s always important to be aware of what you’re sharing online or with anyone who may call you fishing for information.

If haven’t heard of Strava, it’s a fitness network that allows you to track your cycling, running or swimming activities using GPS data. The users can upload the data from their activities, which includes distance traveled, pace, speed and elevation, along with heart rate. This allows the users to track and compare their data with that of other users. If you’re someone who is training alone it may provide an useful way to challenge yourself in your training. There are also challenges built into the system.

Of course whenever there’s data available, some nefarious party is liable to make something of it. At least that’s what UK cyclist Adam Jones thinks.

An Essex man who had £12,500 worth of bikes stolen from his home has warned cyclists to be careful of what they post on social media. Adam Jones believes thieves may try and identify riders who record fast times on Strava segments and he expressed regret that he had not been more cautious regarding the information he shared online.

It may be a leap to suggest he was targeted because he was posting fast times, but it seems he hadn’t been as vigilant with his privacy as he should. People often link accounts and for the determined thief, it’s likely a small effort to case out Strava, Facebook or Instagram and find a person with a picture of their expensive bike and then find out where they live. As for Strava, what can they say, but suggest users be more aware of what they’re sharing on social media.

“Strava hasn’t seen any verified cases of bicycle theft related to our platform. However, we encourage all of our members to be aware of what they share on all types of social media. Our platform has a suite of tools to help control what you share, including privacy zones, which will hide the start and end points of your activity if they fall within the zone.”

Of course this is nothing new, thieves have in the past used Facebook or the classifieds to hunt down things they wanted to steal, it’s always best not to leave a trail of breadcrumbs and make it easier for them.

Any information can be dangerous in the wrong hands, be careful what you’re putting out there!

With thanks to Schroders & DFA Australia

This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

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What is Balanced?

In a recent article in Professional Planner John Peterson of Peterson Research Institue lined up the performance of Australian Super’s actively managed balanced fund and compared it to Australian Super’s lower cost indexed diversified fund to make the case that active management is the true gold standard.

Something ignored, possibly to achieve the exact conclusion reached, was the difference in asset allocation between the two funds. The active and better performing fund had a very aggressive portfolio mix with almost 85% growth assets. The index diversified fund had just under 70%.

No shock that a more aggressive portfolio mix would outperform a less aggressive peer, regardless of active or passive. That aside, it was during the research that we noticed how far the balanced fund in Australian super had lurched into growth assets.

Ask the average person and they’d probably assume a balanced portfolio was split half and half between growth and defensive assets. In the financial world, there’s a little more flexibility in the definition. Using 60-70% growth assets and 40-30% defensive assets as the definition. However, 85% in growth was a level we’d never seen before.

And it wasn’t uncommon. When super returns were released for the 2017/18 financial year last month Hostplus was sitting at the top of the pack. When their Chief Investment Officer was interviewed by The Australian, he spoke of the Hostplus asset allocation:

It has a zero allocation to cash and a 2 per cent allocation to fixed interest that it would also soon move to zero, Mr Sicilia said.

This would mean Hostplus is running with 100% growth assets. No other way of stating it – 100% growth assets is not a balanced fund. We’ll credit adviser, Marshall Brentnall, who got back on this issue quicker than we did for a good definition on this:

The traditional view, and in my view the correct one, is that defensive assets should be limited to cash and fixed income, such as bonds and debt. There should be no reference to property, infrastructure or private equity as these are assets that will grow in value over time.

Go over to UniSuper, and by the diagram below it shows they’re defining asset classes along these traditional lines. Cash and fixed interest are defensive, while property shares and alternatives are growth. Alternatives are infrastructure and private equity, both generally being unlisted.

Yet at Hostplus things seem a little more flexible.

Possibly defining why they’re aiming to have zero cash and fixed interest in their ‘balanced’ fund. They’re squeezing out the genuinely defensive assets, to replace them with their own definition of defensive. Doing this allows them to reap the rewards of being the top performing ‘balanced’ fund. Being the top performer comes with inbuilt media coverage throughout the next year.

Wall to wall media attention and plaudits aren’t a bad thing when you’re trying to attract more members to your fund. And it’s not like journalists are going to spell this stuff out. They’re more interested in a straight returns table without taking account of the asset allocation underneath.

As Mr Brentnall further noted, if property, infrastructure and private equity were classified as growth assets across the board, only 3 of this year’s top 10 performing superfunds could be considered balanced using a criterion of 60-76% growth assets.

The returns are great, but there are implications here. There has been talk of setting up a top performers list at initial superfund signup. People would choose from a list of funds an independent panel determine to be the best options available. There’s also the bigger issue members are also taking on substantially more risk without understanding they’re doing it.

But they’re in the balanced fund, right? What could be safer than that?

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

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2018 June Quarter Review

Economic Overview

Global economic data proved resilient during Q2 though it was offset by renewed geopolitical tensions. Equity markets were volatile, but mostly positive, while the potential for a trade war between the US and China turned into a reality, while the Trump administration withdrawing from the Iran nuclear accord contributed to higher energy prices.

In the US, consumer confidence remained strong with retail sales data suggesting a consumption rebound after a softer Q1. The unemployment rate also reached an 18-year low of 3.8%, accompanied by robust wage growth. The Federal Reserve raised the target rate for Fed Funds by 0.25% and marginally increased its 2018 forecasts for growth and inflation.

The positive US economic data was balanced by moves from the Trump administration to impose tariffs on Chinese imports and withdraw from the Iran nuclear accord. In combination, these steps amounted to a more combative trade posture from the US, driving oil prices higher, and weighing on longer-term growth expectations.

In the eurozone the quarter was marked by the return of political risk. Markets feared Italy may need fresh elections following an inconclusive outcome in March, with concerns this would become a referendum on Italy’s membership of the euro. However, a governing coalition was eventually formed between populist parties. Spain also saw a change of government, although this was largely greeted with calm, while German Chancellor Angela Merkel clashed with sister party the CSU over immigration.

Economic data from the eurozone pointed to steady growth but at a slower pace than last year. GDP growth for the first quarter was down to 0.4%. The European Central Bank (ECB) announced that it expects to end its quantitative easing programme in December 2018. The ECB added that interest rates will remain at current levels through the summer of 2019.

In the UK the Sterling performed poorly after the Bank of England backed away from a much-anticipated rate rise (in contrast to an increasingly hawkish US Fed). This followed with a flow of disappointing macroeconomic data, which culminated in the Bank reducing its 2018 growth forecasts – it is now expecting the UK economy to expand by 1.4% this year, versus 1.8% previously.

In Japan, economic indicators pointed towards a recovery from the GDP decline seen in the first quarter. Data released at the end of June provided some positive surprises with industrial production and inflation data for Tokyo both ahead of expectations. The strength of the labour market is nothing new, but a decline in Japanese unemployment to 2.2% was viewed as positive for inflationary expectations.

Asia ex Japan saw positive developments with regards to peace on the Korean peninsula. An Inter-Korea Summit saw leaders from the South and North pledge to agree a formal end to the war between the two sides. US President Trump subsequently met with North Korean leader Kim Jong-un in Singapore in June. In China, the central bank cut the reserve ratio requirement for banks by a total of 1.25% over the quarter to encourage lending and support growth

In Australia, the Reserve Bank continued to hold the cash rate at 1.5% as macroprudential policy and the spectre of the banking Royal Commission continued to influence mortgage lending and real estate market.

The Bloomberg Commodities index posted a slightly positive return in Q2. Crude oil prices continued to rally, with President Trump’s decision to withdraw the US from the Iran nuclear accord, despite OPEC announcing plans to boost supply. The industrial metals index registered a small gain. Nickel (+11.9%) and aluminium (+8.4%) were firmly up while zinc (-11.5%) and iron ore (-1.7%) lost value.

Market Overview

Asset Class Returns

The following outlines the returns across the various asset classes to 30th June 2018.

Global equities made gains in a volatile quarter, as resilient economic and earnings data vied with an unsettling geopolitical backdrop to establish the market’s direction. Bond markets struggled despite risk aversion escalating late in the quarter.

US equities advanced in Q2, with positive earnings momentum and supportive economic data ultimately overcoming US-China trade concerns Over the quarter, energy, consumer discretionary and technology stocks performed well, while a rotation into more traditionally defensive areas supported real estate and utilities.

Eurozone equities posted positive returns in the second quarter. Top performing sectors included energy, information technology and healthcare. Financials were the main laggards, posting a negative return; Italian banks struggled amid political uncertainty. Auto stocks fell with intensifying trade concerns as US President Trump threatened tariffs on imported vehicles.

UK equities bounced back as international investors reduced their underweight in the country, albeit sentiment towards the UK remains extremely negative. Prior to the period under review, the UK’s unpopularity with international investors had hit levels not seen since the global financial crisis.

While Japan eeked out a 1.1% gain for the quarter the rest of Asia was firmly down in Q2 with global trade concerns serving to increase risk aversion. The MSCI Asia ex Japan Index generated a negative return and underperformed the MSCI World.

Emerging market equities recorded a sharp fall in Q2 with US dollar strength a significant headwind. Escalation in global trade tensions also contributed to risk aversion as US-China trade talks failed to deliver a sustainable agreement. Meanwhile the US moved to extend steel and aluminium tariffs to the EU, Canada and Mexico, resulting in the announcement of retaliatory measures. The MSCI Emerging Markets Index recorded a negative return and underperformed the MSCI World.

Australia was one of the best performing developed markets, despite weakness in heavyweight financial stocks and Telstra. Energy was one of the standout sectors locally and globally, supported by healthcare, consumer staples and IT. In developed markets, listed property was also a notable positive performer.

With thanks to Schroders & DFA Australia

This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

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Moneyball Investing

moneyball and value investing

I watched this film again recently and it made me think about the similarities with our investment philosophy.  In case you missed it, Moneyball was a 2003 book by Michael Lewis (later a 2011 film starring Brad Pitt) following the Oakland Athletics baseball team.  The team had the third lowest player payroll in US baseball, but general manager Billy Beane attempted to overcome this through using analytics and evidence based strategies to find undervalued players and compete with larger teams.

Despite losing star players, Oakland’s 2002 season was famous for besting their previous season, going on a 20 game winning streak and having the second best winning percentage in the league. A winning percentage only bettered by the New York Yankees who spent three times more on player salaries than Oakland.

How does this relate to investing?  The concept of finding players who are undervalued by the market isn’t so different to tilting a portfolio to incorporate value companies that are out of favour with the market for some reason.  The end goal is a better return through increasing risk, but using historically compensated risk, to achieve that better return.

There are three givens when it comes to compensated risk factors.  These givens are all based on academic research.

First, the market itself. Shares are riskier than bonds so they offer higher expected returns.

Second, small companies have higher expected returns than large companies because they are more of an unknown quantity.  Think an established star player vs a first year player.  Superstars tend to perform according to their pay packed so there may not be much upside.  For the first year player, expectations are low, so the pay is low, but they may provide a significant upside.

Finally, value companies offer higher expected returns than large and successful companies because they are out of favour with the market for some reason. In this instance you might think of a player recovering from a long term injury, maybe one with offield issues or just misused by a previous team. For value companies, they may have been poorly managed, missed guidance or have been going through a restructure meaning their shareprice has been dented, but their potential remains.

In Oakland’s case, GM Billy Beane found certain important statistics were underutilised in baseball and the players who ranked highly in those statistics were often undervalued and not well regarded in the league. This meant Beane could build a high performing, albeit unfashionable team, within Oakland’s salary constraints.

On the back of the book and the film, Billy Beane became a much more widely known figure and his and his team’s methods attracted a lot more scrutiny. Oakland hasn’t performed as well since, so some assumed it was a fad and a flash in the pan. Not the case. Essentially Oakland was pulled back to the pack because many other teams began incorporating the same statistical analysis into their team building.

So long term in baseball it becomes harder to find value and outperform the market. In contrast when investing, the outperformance from value generally appears over the longer term – if an investor maintains discipline.

As the following chart shows with Australian and Global value returns vs their respective benchmarks since 2000. To note, the red lines represent Australian and Global value funds while the blue lines represent their respective Australian and Global market benchmarks.

moneyball and value investing

Now you don’t build your whole portfolio on value funds because value premiums are not always available.  Sometimes yearly returns will fall behind market returns and value funds also come with higher volatility. However, as part of a diversified portfolio a tilt to value can help increase overall return.

In baseball the increasing use of statistics and research has meant a change from scouting and recruiting players based on intuition by scouts and managers.  Much as statistical analysis has contributed to less guess work when investing.

As Billy Beane notes when comparing baseball’s changes to the investment industry, “thirty years ago, stockbrokers used to buy stock strictly by feel. Let’s put it this way: Anyone in the game with a 401(k) has a choice. They can choose a fund manager who manages their retirement by gut instinct, or one who chooses by research and analysis. I know which way I’d choose.”

Wise words.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

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2018 March Quarter Review

Economic Overview

Global economic data remained encouraging during Q1, though after a long period of relative calm and upward movement volatility again reared its head in equity markets. While towards the end of the quarter the potential for trade wars heated up.

In the US, economic data continued to be supportive. US business confidence reached a multi-decade high in March. GDP for Q4 2017 was revised upwards to show growth of 2.9%, and while industrial activity slowed – as measured by the ISM manufacturing index – it continued to indicate expansion.

The US Federal Reserve raised rates by 25 basis points in March, from 1.5% to 1.75%. It did not, however, alter its overall rate projection of three hikes for 2018. This announcement quelled some concerns, but escalating US-China trade sanctions precipitated a renewed bout of turbulence in March.

In the eurozone, GDP growth for Q4 2017 was confirmed at 0.6% quarter-on-quarter and unemployment stable at 8.6% in January 2018. However, forward-looking surveys painted a picture of slower growth. The composite purchasing managers’ index (PMI) hit a 14-month low in March and annual inflation was 1.1% in February, below the European Central Bank’s (ECB) target. ECB chairman Mario Draghi noted interest rates would not rise until the end of the quantitative easing program.

While UK economic growth remained sluggish, in its February inflation report the Bank of England nudged up its growth forecast for 2018, from 1.7% to 1.8%. There was further progress with Brexit negotiations, with an initial agreement struck on the terms of a transition period for after the UK formally exits the EU.

The Japanese economy experienced a soft patch in Q1 2018 with many indicators of production and consumption slightly slipping. The most pervasive influence came from the switch in US policy towards increased protectionism. Investors were also taken by surprise by a sudden change in stance of players engaged in discussions on North Korea’s nuclear ambitions.

In Australia, the Reserve Bank left its own benchmark cash rate unchanged for a record equalling 18th consecutive meeting at 1.5%, pointing to strengthening economic growth alongside continued low inflation.

The Bloomberg Commodities index turned negative in Q1. Weakness came from industrial metals amid global trade tensions. While copper was particularly weak, down 8.3%, energy again recorded solid gains. Brent crude continued to rally amid confidence OPEC would maintain production cuts throughout 2018.

Market Overview

Asset Class Returns

The following outlines the returns across the various asset classes to the 31th March 2018.

It was a mixed first quarter for global equity markets in 2018, with an upsurge in volatility from the very low levels of 2017 a major talking point.

US equities began 2018 strongly, buoyed by ongoing strength in economic data, robust earnings and the confirmation of a major tax reform package. However, the latter part of the quarter saw a marked increase in volatility. Investors first digested the destabilising potential of an elevated US inflation reading and the possibility that the Federal Reserve (Fed) may need to become more proactive in raising interest rates in order to keep upward price pressures under control.

Eurozone equities delivered negative returns in the first quarter, with the bulk of the declines coming in March. Markets began the year on a firmer footing but worries about the path of US interest rates and the outlook for global trade led to declines for the period overall. Sentiment towards UK equities was poor as the FTSE All-Share fell 6.9%. Overseas buyers shunned the market amid ongoing political uncertainty and a weak outlook for economic growth.

After a strong start to the year, Japanese equities followed a similar pattern to other global markets and ended the quarter 4.7% lower. The heightened uncertainty resulted in a stronger yen against major currencies. Corporate results to December 2017 showed very positive trends.

Emerging markets equities registered a positive return in the first quarter, despite a rise in market volatility stemming from tensions over global trade. The MSCI Emerging Markets Index recorded a positive return and outperformed the MSCI World and although Chinese equities were volatile towards the end of the quarter, given rising trade tensions with the US, the market recorded a positive return and outperformed.

Australia was dragged down by its heavyweight banking sector as the potential impact of the Banking Royal Commission began to weigh. In sectoral terms, the other big losers on the Australian market were telecommunications stocks, utilities, REITs and energy.

The China Hustle

If there’s one constant about money, it’s that someone is always wanting to take it from you. As disheartening as that statement is, the quicker investors learn it, and understand who they can and can’t trust, the more secure their financial prospects will become.

Bringing us to the latest financial fraud documentary, The China Hustle.

In the aftermath of the 2008 financial crisis a lot of investors in the US were looking to quickly recoup their losses. At the same time, many Chinese companies were looking to trade on US stock markets, but couldn’t do so directly. Some lower tier US investment banks got involved to help facilitate Chinese companies to list in the US through a backdoor using dormant companies that still had a stock market listing.

Hundreds of Chinese companies found their way onto US markets this way and some big money was being made as share prices surged. Until one US businessman, working in China, decided to investigate a Chinese paper company on behalf of his father who wanted to invest in it.

Orient Paper claimed to be doing $100 million in annual revenue. When the businessman arrived at their factory, he found a run-down operation completely incapable of doing the kind of revenues suggested, nor supporting the company’s market valuation.

It was a complete fraud and many of these Chinese backdoor listings were complete frauds.

And in a story as old as time, the only protection investors had, was the belief in their head that regulators exist to protect them – so no protection at all. The investment banks doing the backdoor listings were also putting buy recommendations on the companies and the unsophisticated individual investor, seduced by potentially high returns, were left holding the bag when the frauds were uncovered.

As one interviewee said, “you’re buying lottery tickets”. And when it comes to individual stocks, Chinese or not, that’s often the case.

In Australia 26 Chinese based companies currently trade on the ASX, only 5 are currently trading above their initial listing price. The ASX has rejected another 21 Chinese companies from listing on the ASX over the past two years.

The China Hustle is available on Netflix.

 

With thanks to DFA Australia for charts.

This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

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Is the 24 Hour News Cycle Important?

Recently the New York Times profiled a man named Erik Hagerman. A former corporate executive, Mr Hagerman is an average man who lives alone in rural United States. So why was the New York Times so interested in him?

Turns out he’s deliberately ignored the news since 8 November 2016 – the day Donald Trump was elected president. As you might imagine, Mr Hagerman is from the left or progressive side of politics and this is a personal response or silent protest against the election of Donald Trump.

While Mr Hagerman’s story has attracted ridicule from Donald Trump supporters, it’s those on his own political side who’ve heaped on the most scorn. The overriding theme being he’s an out of touch fool with no sense of social responsibility.

Yet Mr Hagerman might be on to something. With news constantly available and no more than a swipe away, too much time can be spent agonising over the latest political or financial titbit that we have absolutely no control over.

Does the latest Trump Whitehouse hiring or firing really matter or affect our daily lives? Does the latest market moving Trump tweet really matter? Especially if the inevitable next day clarification by Trump, or a member of his administration, returns markets to their previous place.

Not that it’s just a news blackout, this point in the story notes how he deals with his finances.

As for money, a financial adviser in San Francisco manages his investments. Mr. Hagerman says he throws away the quarterly updates without reviewing them.

No doubt his financial adviser appreciates his client’s lack of interest in the short term returns, but interest or lack of interest, the outcome is the same. Things don’t change just because they’re given more attention. With an investment portfolio in place someone’s future financial destination will always be the same, whether they check that portfolio monthly or every second year.

Looking back on a financial journey, that becomes even more obvious, as the following chart shows.

Had you invested $100,000 into a 30/70 portfolio (30% cash, bonds/70% equities, listed real estate) in March 2006 it would have grown to $204,149 by February 2018. How you felt about your portfolio, investing in general (and your adviser) throughout that timeframe, may have varied though – depending on how often you checked your balance.

The chart shows monthly movements (jagged line) vs biyearly movements (smooth line) in the same portfolio. Imagine both intervals as check-in points by the portfolio owner. The monthly check-in suffers many falls along the journey, while the biyearly check-in is decidedly free of turbulence.

The month on month check-ins reveal a portfolio consistently in the red during 2008/09, when the financial crisis was in full swing. The biyearly wasn’t checked again until 2010, when it was back in positive territory – so nothing to worry about, right?

The message? The happenings of those 12 years are largely irrelevant. No matter how many things the media told us to worry about, or what information we filled our heads with, it wouldn’t have changed the outcome. The end result for this portfolio would always be the same.

Agonising over the minutia? Pointless. We’ve got lives to lead. Take it from our subject.

“I had been paying attention to the news for decades,” Mr. Hagerman said. “And I never did anything with it.”

“I’m emotionally healthier than I’ve ever felt.”

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

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2017 Year in Review

Economic Overview

Once again, the investment strategy of maintaining discipline and holding for the long term won out over reacting to media forecasts and predictions from hyperventilating partisans. In January 2017 CNBC suggested Wall Street was the most bearish they’d been in 12 years, as it turned out, the global economy continued to strengthen as share markets posted solid returns on low volatility.

In Q4, defeats in US Senate contests struck fear into Republicans about 2018 mid-term elections and they quickly agreed to the long talked about Trump tax reform bill. Markets rallied with big tax cuts ahead for corporations. US employment data remained strong, but was distorted by the effects of hurricane season.

As was widely anticipated, the US Federal Reserve lifted interest rates by 25 basis points in December. The Fed also raised its growth forecasts for 2018 to 2.5% from 2.1%.

 

In the Eurozone, data showed the economy continuing to recover. The unemployment rate fell to 8.8% in October, the lowest rate since January 2009. In October, the European Central Bank announced that quantitative easing would be extended to September 2018 but that the pace of purchases would be reduced from €60 billion per month currently to €30 billion.

Despite a sluggish economy, the Bank of England’s (BoE) monetary policy committee raised interest rates for the first time since November 2007, from a record low of 0.25% back to 0.50%. Annual consumer price index inflation reached 3.1% in November, breaching the BoE’s upper target.

The Bank of Japan’s quarterly Tankan survey recorded the strongest sentiment among large manufacturing companies for more than 11 years. Despite slightly disappointing economic numbers seen in November, virtually all the data released in December exceeded expectations. The Japanese unemployment rate declined to 2.7%, a new low for this cycle, while the number of people employed extended the rising trend seen throughout 2017.

In December, the Reserve Bank of Australia (RBA) said the local economy was growing around its trend rate of 3%, with employment and investment strengthening. Activity was being supported by low interest rates and public investment in infrastructure. The RBA said one continuing source of uncertainty, however, was the outlook for household spending, with income growth slow and household debt levels remaining high.

The Bloomberg Commodities index pushed ahead +4.7% in Q4, underpinned by a rally in industrial metals and energy. Nickel (+22%) and copper (+12%) and iron ore (+12%) posted the strongest gains as Chinese demand remained firm. In the energy sector, Brent crude surged +18.2%, driven by an agreement among OPEC, and non-member countries such as Russia, to extend production cuts throughout 2018.

Market Overview

Asset Class Returns

The following outlines the returns across the various asset classes to the 31st December 2017.

Emerging markets led to gains in global equity markets, their best year since coming out of the global financial crisis. The MSCI Emerging Markets index returned more than 27% over the year, its best performance since 2009. China was one of the top performers, jumping almost 40%.

Developed markets also delivered 20%+ returns for the year. Among the developed markets, using the MSCI World Index (IMI) as a proxy, the overall gain for the year was a bit over 13% in AUD terms. All 23 members posted positive returns, ranging from more than 40% in Austria to just under 3% in Israel.

In the US, the benchmark S&P-500’s near 22% return in local currency terms was its best calendar year since 2013 and placed 2017 in the top third of best performing calendar years in the index’s history. In New Zealand, the NZ50 index registered a sixth consecutive year of gains, hitting record highs.

Australia’s benchmark ASX300 gained over 12% in 2017 on a total return basis. Its sixth consecutive year of gains and bringing it to its highest levels in nearly a decade. The best performing sectors for the year were health care, information technology and energy. Telecommunications services was the only sector with negative returns, although this was heavily impacted by the poor performance of Telstra.

Despite the improvement in the global economy, wage growth and core inflation remained very low in many countries.

THE YEAR IN NEWS

The chart below highlights some of the year’s major news events in context of broad MSCI World Index market performance. These headlines are not offered to explain market returns but to show that investors should view daily events from a longer-term perspective and avoid making investment decisions based solely on the news.

The takeout from 2017, and something that remains consistent every year, is that it makes more sense to employ an investment approach based on diversification and discipline than one based on making predictions and timing markets. The first approach requires only your patience, the second approach requires that you not only accurately forecast future events, but also anticipate how markets will react to those events.

The 2017 Fake News Awards

2017 was the year that truly highlighted the importance of ignoring the media when it comes to your finances. The reaction to Donald Trump being elected President prompted all manner of hysterical forecasts and pearl clutching by those opposing him. Something that also occurred when Barack Obama was elected in late 2008.

To highlight the phenomenon of ‘searching for’ or ‘catering to’ negative Trump stories, the more left leaning MSNBC cable network posted a 50% increase in total viewers during 2017 as they almost wholly focused on Trump, his administration and any calamities or scandals that would titillate those desperate to hear about them. Again, a strategy that worked to boost the viewership of the right leaning Fox News after the election of Barack Obama.

In Trump’s case though, the media interest was almost unprecedented, possibly due to his fame, his behaviour or just because he seemed an anomaly in the political environment. Keenly aware, Trump and the Republican Party obviously wanted to capitalise on the failed forecasts of doom and with their 2017 Fake News Awards.

At number 1 was prominent economist Paul Krugman who, during the immediate downward market plunge in reaction to Trump’s election, said: “It really does look like ‘President Donald Trump’ and markets are plunging… If the question is when markets will recover, a first-pass answer is never.”

Krugman also predicted Trump’s election would bring about “a global recession with no end in sight.”

Krugman is a Nobel Prize Winner in economics and a columnist at the New York Times. His reach is far and wide, so these statements were incredibly irresponsible. In the aftermath of an unrelenting run on US and global equity markets Krugman has now suggested Trump can’t take any credit. This is something that we’re happy to partially agree with, as there was a recovery well underway and investors should always be prepared to look past politics when investing. However, the Trump tax cuts did add fuel to the equity fire.

Yet Krugman was happy to pin an equity market crash upon Trump ahead of time. And if Krugman wants to play that game, Trump’s either responsible or he’s not. He can’t only be responsible for any potential downside. This highlights how irrational things become when partisan politics intersects with financial market returns.

Who knows how many on Krugman’s side of the political spectrum he led astray because they let his forecasts hijack their investment process. Not that this is restricted to one side of politics, there were many who believed the only way to survive the Obama years was through collecting gold and canned food.

During Obama’s term, gold’s returns were dwarfed by US equity returns, while that canned food is now out of date.

In other words, set aside the politics when it comes to money.

With thanks to DFA Australia.

This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

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Clear Air is Nice but Don’t Forget the Turbulence

In case you needed a reminder – the sharemarket does go down. It’s worth remembering this in a year which has so far been something of a rarity.

Earlier in the year we highlighted the media and their incessant hectoring about an imminent correction. With nothing much happening in the markets they fell into the need to talk about the potential for something to happen. Gifting generous column space to fund managers and investment talking heads convinced of their relevance.

Six months on and their predicted correction still hasn’t arrived. We’ve even been deprived of any pull back of over 5%.

This is the year to date chart of the ASX All Ordinaries. While it still looks choppy, the movements have been within a tight area. After a few minor ups and downs earlier in the year the ASX has been boxed in a 150-point range since mid-May, leaving us currently up 1% for the year.

Best Investment Advice Tasmania

In fact, it’s been a bit of a weird one everywhere. Despite Trump’s tweets and the chubby fellow in North Korea shooting his missiles, volatility has evaporated in many major markets, particularly the US.

To highlight this, between 2007 and 2016 the average annual number of trading days on the S&P 500 with a greater than 1% movement was 77. The highest was 139 days in 2008 during the financial crisis and the equal lowest came in 2013 and 2014 which each had 41 days.

In 2017 there have only been 6 trading days with a movement greater than 1% on the S&P 500.

What does this mean? Nothing, but it’s a new experience for many people because, as shown, financial markets are normally much more volatile than this. For the newer investors, it’s important they don’t get too comfortable with the lack of volatility.

If you like, we could equate investing in equities to flying a plane. If you were a learner pilot you might assume turbulence didn’t exist and your flying hours during 2017 wouldn’t be giving you the best indication of what you might confront in the air.

For the seasoned pilots, you can happily cruise along in the clear air while remembering, despite the patch of calm, turbulence can strike at any time.

It may be next week, next month or next year. No one knows, but understanding it still happens will make an investing journey more palatable. As shown below, the last time we had an intra year decline lower than 5% was back in 2004. As shown right at the end, our biggest pullback this year was 4.7%.

Best Investment Advice Tasmania

It’s not normal, but you can never accuse financial markets of being predictable.

It’s why you need to expect and accept volatility, maintain a diversified portfolio, rebalance that portfolio when appropriate and invest long term in what has consistently offered rewards.

Time tested strategies that make the day to day somewhat irrelevant.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

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2017 June Quarter Review

Economic Overview

Political uncertainty remained a feature in the June quarter as President Trump dismissed FBI director James Comey and French and UK elections were held. In the EU, risk eventually retreated as the Centrist and Pro-EU candidate Emmanuel Macron won a convincing victory in the French elections.

In the UK things weren’t quite as clear, with the snap election anticipated to strengthen the Conservative majority before Brexit negotiations, ended by eroding their majority. While commentary from Bank of England Governor Mark Carney and his EU peer Mario Draghi appeared to signal the days of stimulus were numbered and tighter monetary policy was ahead.

In the US, the Federal Reserve looked through disappointing inflation figures to increase interest rates by 0.25%, while also detailing plans to reduce its balance sheet. Despite the rate move, the US dollar struggled due to the lack of movement within the Trump administration and other major developed economies signalling tighter monetary policy.

The Bank of Japan offered the most upbeat assessment of the Japanese economy in years which was backed by strong corporate results, however the spectre of North Korea appeared to constrain any euphoria. In the rest of Asia, Chinese data improved during the quarter with Hong Kong following suit, while a new President in South Korea signalled a potentially reinvigorated economy and corporate governance reforms.

Commodities were a drag during the quarter as Brent crude fell 9.3% and iron ore stockpiles built in China. OPEC extended production cuts, but the market was hoping for those cuts to be increased and when this didn’t eventuate the weakness in oil persisted. Meanwhile US oil production continued to rise further tempering oil strength as the US moved into summer driving season.

Back in Australia, the biggest news of the quarter was a $6.2 billion levy on the big four banks and Macquarie Group.

Market Overview

Asset Class Returns
The following outlines the returns across the various asset classes to the 30th June 2017.

Shares in developed and emerging markets delivered strong performances during the quarter, with Australia backing the positive trend. Emerging markets were the star with overall unhedged returns of more than 5.6%, while in developed markets outside Australia the returns were 3.6%.

Australia was alone among developed markets in posting a negative return for the quarter at -1.54%. The Australian market was weighed down by weakness in banking due to the government’s announced bank levy, though telcos, energy, consumer staples and real estate investment trusts also played their part.

Despite the lack of concrete movement on reform in the US, equities continued to push ahead with a strong corporate earnings season. Similarly, in Europe and the UK, corporate earnings helped underpin positive equity returns.

In Asia, China pushed higher on investor optimism following a solid earnings season in blue chip stocks and the landmark decision by index provider MSCI to include Chinese A-Shares in its range of benchmark indices.

Finally, the old whipping boy Greece was the strongest market index as the country reached agreement with Eurozone creditors for the release of an 8.5 billion loan tranche. 

Why Starting an SMSF To Buy Property is a Great Idea

Starting a Self-Managed Super Fund is quite an exciting prospect. No longer will an investor be constrained by the shackles of their tired superfund, an SMSF is an open road with untold freedoms ahead, but how to get started on that road? Luckily there are many eager experts out there ready to liberate investors from the boring returns of their banal old super funds and guide them into the riches of buying property within their SMSF.

Let’s say you and your partner are both in your early fifties, have maybe spent 30 years working and have managed to (between both of you) accrue $250,000 in super.

You may be with an industry super fund, maybe retail, maybe you have a financial planner, but for argument’s sake, let’s say the super fund costs are around 1% per annum or less. Let’s say it’s $2,000 to keep the maths easy. You also have an accountant who charges you $200 to do your taxes each year. Your “net worth” so to speak, to the finance industry is $2,200.

But $2,200 doesn’t feed many hungry mouths. It certainly doesn’t contribute significantly to support an assortment of professionals who can help with your SMSF and find you the perfect property. Nor does it contribute to the black hole of state government coffers or pay thousands in interest to keep bank CEOs happy.

To help all these people out, instead of paying your fees annually you could front load most of them and pay them up front so everyone can benefit now rather than having to wait for you to pay fees each year.

This is why it’s a great idea to set up an SMSF and buy a property.

Take that $250,000 from your super funds and set up an SMSF with your partner, you can then buy a brand new $700,000 apartment with a $500,000 loan (allowing $50,000 for stamp duty and expenses).

Upfront fees. $1,000 to $3,300 to your accountant. Legals? $1,000 to $3,000. Stamp Duty: $30,000 to $40,000 depending upon the state. Bank Valuation and other fees $500-1,500. Sales commissions are officially paid for by the vendor, not you. But all that means is that the sales commissions on your new apartment are embedded in the price. Add another $10,000 to $30,000.

Plus, now you have an annual $2,000 to $3,000 in accountants’ fees. And at 4.5% investor interest rates you are in for $22,500 in interest payments. You’re probably also now paying a financial planner to sign off on your strategy. At 1% that’s another $2,500.

With gross rental yields around 4%, you get income of $28,000 per year. Then you pay strata, insurance, rates, letting fees etc which means you are probably losing a few thousand each year.

Thankfully negative gearing gets you a discount. Oh. That’s right, an SMSF only pays 15% tax, which means there are almost no negative gearing benefits.

So let’s go through the maths:

Leaving your $250,000 in your boring old super fund:

Creating an SMSF to buy a $700,000 property:

Sure, you will wipe out close to 25% of your entire savings in upfront fees alone. And your annual fees are at least double what they were, maybe triple. But just look at the list of people who will benefit from your new SMSF: accountants, lawyers, governments, real estate agents and banks.

That’s a lot of marketing and lobbying power – to convince you to put your super into property via an SMSF, and to lobby the government to keep the changes that allow you to borrow in your SMSF despite ongoing warnings and objections from independent observers.

So you can see now see why setting up an SMSF to buy property is such a great idea

Well maybe not for you, but for everyone else in the game it makes perfect sense!
Credit: macrobusiness.com.au

With thanks to DFA Australia.

This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

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Ready for a Stock Tip

Read any good stock tips on the internet lately? If you listen to our advice, hopefully not!

We’ve long pointed out the dangers of buying individual companies because of a lack of diversification and heightened risk, among other reasons. Now there’s another confirmed danger for anyone getting stock tips from internet sites and online newsletters – the tip writer may be a paid spruiker.

Last month the US Securities and Exchange Commission filed fraud charges against 27 individuals and entities that were engaging in paid stock promotion without disclosing that fact.

Essentially a listed company would hire a stock promotor or communications firm to generate publicity for their stock – with the end intention of increasing the price. Those hired would write overly positive articles about the company and have them published as reasoned analysis on various community based investment sites like Seeking Alpha. However, some managed to find their way onto more recognisable sites like Forbes.

Now to understand the duplicity at play here, one person was found to be operating under nine different pseudonyms. Why? It’s psychological. One person positive on a company is nothing compared to nine people saying a company’s share price is about to hit the roof. The guilty party also gave those nine people backstories to increase their authenticity, claiming one was “an analyst and fund manager with almost 20 years of investment experience.”

A timely reminder that on the internet anyone can be a lawyer, doctor, fund manager or commercial airline pilot – or all those people at once!

How does this relate to Australia?

Australia doesn’t have a shortage of stock promotion websites or email tip sheets. It also has a prominent stock trading forum that is listed on the ASX. All are geared to the spec end of the market.

The stock promotion websites while clearly not transparent, are obvious in their intent – they wouldn’t exist without companies paying for promotion. Why? If a company’s share price is pushed higher they can raise capital at more favourable terms.

The stock trading forum, while great entertainment, is wholly anonymous with administrators unable to deal with the one person acting as nine problem. In the age of VPNs or Virtual Private Networks the same person can sign into 9 different accounts from nine different locations without arousing suspicion of the website administrators. Again, the intent is to whip other less aware users into a frenzy to buy shares they own so the price rises and they sell with a profit – it’s called a pump and dump.

While we’ve long pointed out the folly of stock pickers because they can’t predict the future, at the bottom end of the market they can become self-fulfilling. With smaller market caps the email tip sheets and membership websites have the ability to move shareprices on their own.

This is the 2017 shareprice chart of a small resources company listed on the ASX.

At the start of the year a tip sheet put a buy recommendation on the company. This was after the price of metal the company was looking to mine had steadily increased in price during the second half of 2016. Even better, in the first two months of 2017 the metal price increased over 50% as shown below. The company’s shareprice moved upward with the metal price.

But by the end of February the tip sheet gave the call to sell, saying the metal was overvalued and it was time to take profits. As seen by the two charts, the metal price is slightly ahead of where it was at the end of February, while the company’s share price lost more than 50% of its value and is back below where it was tipped as a buy.

It doesn’t take a cynic to believe those behind the recommendations bought and sold the company’s shares before making the same recommendations to their membership base. And the 23% fall in the share price and highest trading volume of the year following their sell call was clearly triggered by their membership base selling.

Little has changed with the company, but emotion can breed contagion. Other shareholders unaware of why the shareprice was falling likely became spooked and sold out themselves. Driving the shareprice even lower.

What’s the takeaway here? Individual shares are always risky. While promoted shares and recommendations on shares are doubly risky. You never know who is behind them and what their intentions are.

It’s why a portfolio should be invested across multiple funds, asset classes and jurisdictions. No one can pump and dump a diversified portfolio.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

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