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 30^th 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.}

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.}

In the US, economic data continued to be supportive. Non-farm payrolls were robust and activity indicators buoyant. Manufacturing purchasing managers’ index (PMI) increased and the consumer confidence index rose to its highest level in 16 years.

Reflecting the improving outlook for growth and inflation the Federal Reserve increased rates by 0.25% in March. Optimism over Donald Trump’s plans to cut taxes, boost infrastructure and reduce the regulatory burden, however, the failure to pass changes to healthcare legislation raised doubts over Trump’s ability to implement some of his policies.

In the Eurozone, the period started on a weak note, with negative returns in January, but sharemarkets picked up as the quarter progressed. Economic data released during the period was largely positive. Leading indicators showed gains with the flash composite purchasing managers’ index reaching a near six- year high of 56.7 in March. Inflation, as measured by the consumer price index, picked up to 2.0% in February, albeit slipping back to 1.5% in March.

The Bank of England upgraded its 2017 UK GDP growth projection (from 1.4% to 2.0%) due to stronger-than-expected consumer spending following the “leave” decision in the EU referendum.

After weakening at the end of 2016, the Japanese yen appreciated gradually in the past three months. From Japan’s perspective, the main political event was the meeting between Prime Minister Abe and President Trump which was surprisingly cordial despite the previous US rhetoric around trade and Japan’s foreign exchange policy.

In China, better-than-expected data and a stabilizing yuan led to improved sentiment among investors. Ongoing restrictions on the property market and a tightening on capital outflows also saw liquidity diverted into equities.

Energy was a commodity laggard. Crude oil fell 6% over the quarter amid doubts over the sustainability of an OPEC-led output deal. Oil producers Norway and Russia were the worst performing developed and emerging markets respectively.

Market Overview

Asset Class Returns
_{The following outlines the returns across the various asset classes to the 31^th March 2017.}

Global equity markets delivered mostly positive returns, led by emerging markets. The Australian market was a top performer, with healthcare companies being a standout with consumer staples following. However, a stronger Australian dollar trimmed gains from other developed markets for unhedged investors.

US equities performed well as the S&P 500 advanced 6.1%, Information technology was the top-performing sector, followed by consumer discretionary and healthcare.

The quarterly earnings season was a positive one for European equities, with many firms reporting double digit earnings growth and confident outlooks for 2017. The information technology sector was the top performer, followed by utilities and industrials.

The Japanese sharemarket traded in a tight range throughout the quarter, registering a total return of just 0.6%. In China, stocks gained strongly and had their best first quarter in over 10 years, driven on by continued positive news for the world’s second-largest economy.

The emerging markets posted strong gains, with US dollar weakness providing a tailwind for returns. Real Estate Investment Trusts experienced negative returns for a second consecutive quarter, although this came after several years of strong gains.

Buffett’s Bet Poised to Pay Off

Midway through the quarter Warren Buffett released Berkshire Hathaway’s annual letter to shareholders. Most notable was Buffett highlighting his now million-dollar charitable bet with an asset manager that no investment pro could select at least five hedge funds to keep pace with an S&P 500 index fund over ten years.

Buffett publicly offered the wager back in 2006. However, in an industry where active managers base their performance on beating indices such as S&P 500, only one man, Ted Seides of Protégé Partners, stepped up to take Buffett’s challenge.

Seides picked five funds (which would not be publicly disclosed) and their performance would be averaged and then compared against Buffett’s choice of Vanguard’s S&P 500 index fund.

After nine years the results haven’t been good for the hedge funds.

The average return of the hedge funds over the past nine years was 2.2% per annum meaning $1 million invested would have gained $220,000. In contrast the inexpensive index fund Buffett chose returned 7.1% pa, which is a ballpark return for US or Australian sharemarkets over longer periods of time. The gain on $1 million invested would have been $854,000.

You’ll note, if this performance is consistent in the final year of the bet, Buffett’s investment will double in ten years, while the hedge funds will have just kept ahead of US inflation.

Buffett said of the hedge fund managers:

I’m certain that in almost all cases the managers at both levels were honest and intelligent people. But the results for their investors were dismal – really dismal. And, alas, the huge fixed fees charged by all of the funds and funds-of-funds involved – fees that were totally unwarranted by performance – were such that their managers were showered with compensation over the nine years that have passed.

And he noted why it’s hard to find a successful active manager who will be worth their fees:

Further complicating the search for the rare high-fee manager who is worth his or her pay is the fact that some investment professionals, just as some amateurs, will be lucky over short periods. If 1,000 managers make a market prediction at the beginning of a year, it’s very likely that the calls of at least one will be correct for nine consecutive years. Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet. But there would remain a difference: The lucky monkey would not find people standing in line to invest with him.

We would note if it came down to a monkey or an active investment manager, there’s no guarantee of exceptional performance from either, but the monkey’s fees will be much more reasonable.

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.}

The major news event was Donald Trump’s US presidential election win. The Republican outsider defeated Democrat Hilary Clinton on a platform that tapped into voter anger at “insider” politics and the effects of globalisation.

Similar sentiments also fuelled the mid-year vote by Britons to leave the European Union, again a largely unheralded result that led to the resignation of Conservative Prime Minister David Cameron.

Despite these potentially destabilising events, equity markets rallied through the second half of the year – the UK FTSE-100 index reaching record highs in October and the major US indices hitting a succession of historic highs later in the year. This was a stark contrast from January & February when the focus was on China’s economy and bottom dwelling oil and commodity prices.

The steady US economic recovery, falling jobless rate and uncertainty over the Trump administration’s policies were cited by the US Federal Reserve in December when it raised its benchmark interest rate after a year-long pause.

GDP growth in China, meanwhile, hit a 25-year low of 6.7%. The government supported the economy with spending on infrastructure, though international bodies such as the IMF and OECD expressed concern at rising levels of debt.

Growth in the EU area also remained subdued, despite continuing accommodative monetary policy. The European Central Bank expressed concern about potential knock-on effects of Brexit to the EU and of the Trump presidency to populist movements in Europe.

In Australia, the hangover from the end of the mining investment boom lingered. In only the fourth such occurrence since the 1991 recession GDP shrank in the September quarter as businesses, consumers and government all cut spending.

The RBA cut interest rates twice in 2016, but also expressed concern at the effect of low rates on housing prices and household debt. Banks were urged to strengthen lending standards.

Market Overview

Asset Class Returns

The following outlines the returns across the various asset classes to the 31^th December 2016.

After the January rout, share market sentiment began to shift from mid-February and bar a brief sell-off after the UK vote in late June, the overall trend was higher. Global GDP growth slowly picked up, while commodities bounced as supply eased and investment pulled back.

Internationally, the US equity market was one of the best performers over the year, alongside those of commodity producing economies such as Canada and Norway. Energy and materials sectors were among the top gainers.

A similar pattern was evident in emerging markets, with energy and materials topping annual sector tables and commodity producers such as Russia (oil) and Brazil (iron ore) the best performing countries. India and China were largely flat over the year.

Locally, the Australian and New Zealand share markets were among the best performers in the developed world. The Australian market rose by nearly 12%, led by resource stocks. The NZ market hit record highs in August, before retracing, though ended up nearly 9% over the year, its seventh annual gain in eight years.

Value stocks were strong performers on the Australian market, while there was a more modest premium from small cap stocks over the year. Australian and international fixed interest finished stronger over the year, although both were punished in the final quarter as US Treasuries sold off after the Trump victory.

THE YEAR IN NEWS
The chart below highlights some of the year’s major news events in context of broad Australian 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 performance of markets in 2016 underscored once again the dangers of basing one’s investment strategy on the news cycle or of acting on opinions and forecasts of media and market pundits. It also highlighted the importance of investors diversifying across different assets and different countries, while staying disciplined within the plan designed for them.

The Australian’s Top Picks

Every December The Australian newspaper has an end of year feature offering its top 100 financial picks for the year ahead. They generally comprise shares, managed funds, mortgages, credit cards and other financial products.

For the past three years, we’ve followed the share picking section of the list with interest – knowing that for the most part, while they will have some success, share pickers usually fail to beat the market, especially over the long term.

In 2013 The Australian’s 66 share picks offered 31 winners and 35 losers, they combined to provide a 8.86% loss. The wider ASX (price only) returned 14.76%.

In 2014 The Australian’s 65 share picks offered 22 winners and 42 losers and 1 neutral return, they combined to provide an 8.21% loss. The wider ASX (po) returned 0.66%

In 2015 The Australian’s 53 offered 20 winners and 33 losers, however they combined to provide a 13% return – an anomaly that came down to the 724% return of Bellamy’s Organic. We know how that winner eventually turned out – one of the bigger disasters of 2016. The wider ASX (po) returned a 0.82% loss.

In 2016 The Australian hit one out of the park – 35 winners and 25 losers for an overall return of 20.67% against the wider ASX (po) return of 7.01%.

On the surface the share pickers vs the market now looks to be a 50/50 proposition after four years, even if The Australian’s losers outnumber the winners, but if we compare the full returns across those 4 years it becomes a different story.

The ASX (price only) has an average annual return of 5.40% against the 4.15% from The Australian’s picks. And if you started with $10,000, the market would be on $12,260 vs $11,406 for The Australian.

But while picking shares is a common thing, few people invest solely in the ASX index. They do invest in diversified portfolios though. Adding an actual portfolio into the mix makes this comparison more realistic.

In this instance, we’ll add a portfolio with 70% growth assets (local, international shares and listed real estate) and 30% defensive assets (local, international fixed interest and cash).

As you can see the difference is stark. A diversified portfolio has delivered an 11.52% annual return since 2013 and grown to $15,407. The Australian trails both the portfolio and the ASX. Not only is the portfolio more diversified, it’s enjoyed the benefits of higher returns from international shares, fixed interest and listed real estate to improve its return.

While we’re happy to congratulate The Australian on their past two years, their outperformance can be attributed to one company’s performance in 2015 and two companies in 2016. Does that sound like good judgement or good luck?

The diversified portfolio’s return can be attributed to thousands of companies, bond funds and real estate trusts spread throughout many of the world’s economies.

What would you rather be relying on?

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.

Well here we are again. After the Brexit vote earlier in the year we’ve again witnessed a public vote having a real-time impact on financial markets. The US voting to elect Donald Trump as President.

Markets spent the last week before the election reacting to polling numbers. Firstly, there was a sell off when Trump moved back into contention, but in the final two days a surge to Clinton pushed up equities, commodities and the Australian dollar.

When reality set in, markets around the world tumbled. The initial fallout in US market futures was slightly worse than during the Brexit vote, but that’s to be expected given the vote wasn’t on the periphery of the US, it was the US – the world’s largest economy.

Trump taking the lead during the vote count proceeded to knock more than 5% off the S&P 500 futures in the space of four hours, with the ASX falling in sympathy. However, 16 hours later, with Trump as the President-elect, the S&P 500 was higher than it was when a Clinton victory seemed assured.

This market whiplash once again underlines why we continue to preach the gospel of staying disciplined when investing – never make a short-term decision about a long-term portfolio.

When something unexpected like this happens it’s always best to ignore your investments. Markets always gyrate when a shock comes. It may be for hours, days or maybe weeks. Never buy into a boom, never sell into a storm. If you have a balanced portfolio then your bonds will soar as your stocks fall, mitigating the impact.

So why the sell off and why the turnaround?

As we said after Brexit – financial markets love certainty and they hate uncertainty. Clinton was certain and Trump was not which explains part of it, but the selloff also appears to signal gamblers at play.

The financial market surge before the election likely signalled many people were gambling on Clinton being a sure thing. When it went the wrong way, the selloff started as they looked to unwind their positions before they would be seriously in the red.

The recovery was set when Trump took to the stage to claim victory in a calm and measured manner. No longer was anyone being locked up, “we owe this woman”, Trump said, “our deep gratitude. She has worked so hard for our nation.”

Not that markets care about Clinton, but Trump soothed fears that the world was ending and enemies would be hunted. He started to speak like a politician. Markets like that.

They then digested the possibility of investment stimulus and tax cuts. They liked those too.

Finally, remember this: the media pundits and columnists who were wrong about everything for the past two years, will be the same ones lining up to tell you what they think will happen next.

Ignore them. The only certainty from here is uncertainty.

Same as always.