Tag Archives: SMSFundamentals

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SMSFundamentals: An Alternative For The Capped-Out

SMSFundamentals is an ongoing feature series dedicated to providing SMSF trustees with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

For an introduction and story archive please visit FNArena's SMSFundamentals website.

By Richard Atkinson, Head of IFA and Product Relationships, Austock Life

Capped-out super accumulators look for alternatives now Senate passes superannuation reforms.
Can Imputation Bonds help fill the gap?

The superannuation reforms have now passed the Senate and will be in place from July 2017.

Post July 2017 high income/high net worth clients and indeed some before then who have already triggered their bring forward contributions, will look for alternative, tax efficient and flexible structures to invest in. 

Like superannuation, Imputation Bonds are a tax-paid investment structure.  Unlike superannuation, funds within an Imputation Bond are totally accessible at any time, the bond itself can be transferred to another owner without tax and mimic, though improve upon, many features of superannuation.

Imputation Bonds provide flexibility, liquidity and are also the next best tax structure after superannuation for higher net worth clients. 

Key Imputation Bond benefits and features include:

  • Market-leading investment menu  covering all investment sectors, including; Australian equities, international equities and fixed interest fund managers, plus infrastructure, property, index funds, cash and Term Deposit funds available.
  • Annuity-like withdrawal streams
  • Effective tax rates average between 21 -30% on earnings
  • Full 30% tax offset on withdrawals under 10 years
  • No Tax File Number requirements 
  • No tax reporting (unless withdrawal made in first 10 years)
  • Nil tax on withdrawals post 10 years
  • Tax effective and certain  estate planning - Bond nominations bypass the estate and probate
  • Legislatively stable when compared to superannuation.

Richard Atkinson,
Head of IFA and Product Relationships
Austock Life


Distributed by Chris Hocking Strategies

About Austock Life

Austock Life is a leading and specialist issuer of insurance bonds investments. Its flagship Imputation Bond (including ChildBuilder) offers a master fund-like menu of over 33 Investment Options constructed under an insurance bond “tax-paid” and “tax-free” distributing structure.

Austock Life is an APRA supervised life insurance company established in December 2002. 

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SMSFundamentals: When Should You Open Your Own SMSF?

SMSFundamentals is an ongoing feature series dedicated to providing SMSF trustees with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

For an introduction and story archive please visit FNArena's SMSFundamentals website.


When is it a viable option to open your own SMSF?

By Andrew Zbik, senior financial planner, Omniwealth

- The viability of self-managed superannuation funds has changed

- ATO has reported that the median balance of assets in an SMSF is $602,629

- So, when is it a viable option to open your own SMSF?

Starting your own self-managed superannuation fund (SMSF) has been a hot topic for over a decade now. 

In my time as a Financial Planner, I am observing that the age of clients seeking to open their own SMSF is becoming lower. Of all the new SMSF’s established in the last quarter, 29.8% had members between the age of 35 to 44 and 32.5% had members between the ages of 45 to 54.

The ATO has reported that the median balance of assets in an SMSF is $602,629.

ASIC has been very clear that they believe establishing a SMSF with a balance below $200,000 is not in the members or clients’ best interests.

A couple in their early 40’s with a combined balance of $600,000 who wish to establish a SMSF and pursue a high growth investment portfolio are likely to pay $2,500 for accounting and audit fees plus additional investment management costs (say 0.73%) totalling approximately $6,880. If this same money was invested in an industry superannuation fund high growth option the fees would be approximately $4,458 for administration and investment costs. If the couple take on all management responsibility of the SMSF and do not outsource the portfolio management to a professional, then the SMSF may be cheaper to operate not factoring the time and risk of managing all of your own money. 

If you are considering establishing your own SMSF to invest your superannuation monies in an identical investment strategy as your industry or retail fund, it really does not make sense to open a self-managed superannuation fund. 

So, when is it a viable option to open your own SMSF? My answer to clients is when the SMSF option provides investment choices and strategic options that normal industry or retail funds cannot provide. 

For example:

-        Using your superannuation to borrow money and purchase an investment property.

-        Using your superannuation fund to facilitate a member loan or limited recourse borrowing arrangement.

-        Using your superannuation to purchase business real property which a company you own or operate will lease the premises for the purpose of conducting business.

-        Where you can demonstrate that the ongoing administration and investment management fees of a SMSF are less than an industry or retail super fund. 

-        To purchase shares in a private company (there are very strict rules on how this can take place).

An SMSF may be a great structure to help facilitate the growth of your superannuation balance. It is important that you are confident that the time and cost of establishing and maintaining a SMSF can provide clear benefits that cannot be achieved from using an industry or retail superannuation fund.


What is Omniwealth?

Omniwealth is a leading non-aligned Australian wealth advisory group. Our mission is to change the way people are financially advised in Australia.

By having Accounting, Business Advisory, Financial Planning, Legal, Property and Mortgage and Finance together under the one roof, we are able to provide clients with our holistic approach to advising them.

The benefit of having all of these services in-house is that our team of experts work together with you making sure that your goals and objectives have the best chance of coming to fruition.

Distributed by Chris Hocking Strategies

In preparing any advice in this article, Omniwealth has not taken into account any particular persons’ objectives, financial situation or needs. You should, before acting on this information, consider the appropriateness of this information having regard to your personal objectives, financial situation or needs. We recommend investors obtain financial advice specific to their situation before making any financial, investment or insurance decision.

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SMSFundamentals: The Price Of Financial Advice

Do investors believe financial advice is actually worth the cost? A survey conducted by State Street Global Advisors has produced some interesting results.

SMSFundamentals is an ongoing feature series dedicated to providing SMSF trustees with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

For an introduction and story archive please visit FNArena's SMSFundamentals website.

The Price Of Financial Advice

More than half of US financial advisers claim their clients fully understand the fees and commissioned being charged to provide financial advice. Only one third of US individual investors claim to fully understand the fees and commissions being charged.

This disparity is testament to the difficult relationship that exists between investors and advisors. These are US figures but the same theme is true in Australia. Many an investor has been upset to discover in recent years that the returns they thought they might be making from their financial investments had been completely eroded by commissions taken by their advisor, and even more shocked to learn that kickbacks available to advisors were often the only incentive behind investment recommendations.

To a great extent, these experiences have driven the rapid rise in self-managed super funds in Australia. The industry, both funds managers and investment advisors, have been forced to clean up their act both through their own loss of business, and through stricter regulatory controls. The same has been true in the US on the regulatory front. Yet still only one third of investors fully understand what they’re being charged.

State Street Global Investors recently surveyed US investors to ascertain, through various questions, the answer to three general questions: What do today’s investors really think when it comes to the topic of financial advice? Do they feel financial advisory services are worth the price? How are their ideas about financial advisors affecting their investment behaviour?

The goal of the exercise is to give financial advisers an objective understanding of how investors feel about this important topic and provide them with the tools they need to gain investors’ trust and loyalty.

Australian advisors and investors would no doubt also be interested in the results.

The survey can be read at this link.

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SMSFundamentals: Loan vs Gift: The Right Way To Help Out Your Kids

By Brian Hor, Special Counsel, Superannuation & Estate Planning, SUPERCentral

Loan vs Gift – the right way to help out your kids

Much better option is to only provide monies to the children by way of loan

We all know that life’s pretty expensive living in Australia these days – especially if you have a hankering for buying residential real estate in a capital city. Plus, if you are “lucky” enough to get into the real estate market, that usually means that you’ve signed yourself up for an enormous mortgage for the rest of your natural life.

Then there’s the expenses of raising a family, not the least of which is private school fees, which annually compete with the mortgage for the title of the major financial commitment of the year.

Now, baby boomers have long been derided for “hogging” the real estate markets and preventing the next generation from getting a chance to claim their own little bit of dirt.

Anyhow, whether it’s out of parental love, or just sheer guilt, baby boomer (and other generation) parents are often keen to give their children a financial helping hand in life. This “monetary love” is often in the form of providing a hefty deposit for a home, helping with regular mortgage payments in hard times once the home has been acquired, or helping out with private school fees (especially if one parent takes time off work to focus on child-raising, reducing the obligatory dual income family to a single income prospect).

Should they give the money to their child or children by way of a gift or a loan?

Hmmm, you might ask yourself. Certainly giving money as a gift is easiest and “cleanest”, and from the parent’s point of view it’s certainly a more magnanimous gesture that they can make to their child than granting them a loan (which has “strings attached” and seems a bit uncaring, since their child will no doubt be thinking “hey I’m your own flesh and blood, why can’t you just give it to me Mum / Dad?”). Plus, they’re going to get it anyway after you die, aren’t they?

STOP and consider these issues first:

According to the Australian Bureau of Statistics, there were 121,197 marriages registered and 46,498 divorces granted in Australia in 2014. If we assume (rightly or wrongly, but probably more rightly) that this proportion is reasonably stable over a number of years, this translates to saying that around 38% of marriages in Australia end in divorce. That’s a better than 1 in 3 chance that, if you give money to your child

  1. as a gift and they are married, their marriage may fail and that money forms part of the “matrimonial property” that the couple will fight over in the divorce proceedings.
  2. What if the child runs a business? Again according to the Australian Bureau of Statistics, more than 60 percent of small businesses cease operating within the first three years of starting. So a much better than even chance that your generous gift to your business entrepreneur child will end up in the hands of his or her creditors within 3 years.
  3. Let’s not forget that once the money is given, it’s gone. If a parent has been just a bit too generous, they may have not left enough for themselves for a comfortable (or even adequate) retirement. Remember what happened to King Lear.

Much better option is to only provide monies to the children by way of loan

No, the much better option is to only provide monies to the children by way of loan (and especially if the loan is significant, under arm’s length documentation signed by all parties – including children’s spouses – and secured by way of registered mortgage over real estate) for a host of reasons.

Where the parent is in the position of a secured creditor, then in the event that their child becomes the subject of a divorce or relationship breakdown, or succumbs to business failure and bankruptcy, the amount of the loan (plus any agreed interest) has to be repaid to the parent first before the child’s outgoing ex-spouse or their unsecured business creditors get a look in.

The fact that the money is given to the child by way of a loan (and particularly if as a secured loan) means that the child hopefully would be encouraged to treat their parent with respect, including assisting with their care when they are old and frail.

If it later transpires that the parent falls upon hard times but the child is doing okay, then the parent can ask for the loan or part of it to be repaid.

Finally, if the parent feels that they really don’t intend to ever ask for the money back, they can simply forgive the loan on their death via their Will (or even better, set up a Testamentary Discretionary Trust for the child under their Will and give the ownership of the loan to that child’s trust as part of their inheritance in order to continue the protection of the loan amount for the benefit of the child and their own family).

Shakespeare may well have said “neither borrower nor lender be”, but he wasn’t a very good estate planner.

Brian Hor
Special Counsel
Superannuation & Estate Planning


Content included in this article is not by association the view of FNArena (see our disclaimer).

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SMSFundamentals: SMSFs Increasingly Attracted To SMAs

SMSFundamentals is an ongoing feature series dedicated to providing SMSFs (smurfs) with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

For an introduction and story archive please visit FNArena's SMSFundamentals section on the website.

By Greg Peel

Do you understand how interest rates work, what effect inflation has on your investments and what diversification of risky assets actually means? If you're reading this on the FNArena website then we might assume the answer is yes, although you may feel a little unclear about some technicalities. But a survey conducted by the University of Sydney Business School has found that less than half of all Australians can answer basic questions on these topics.

Yet everyone has super. And many are in or approaching retirement.

"What we see is that people who have poor skills in this area are much less likely to have prepared for their retirement," said Professor Susan Thorpe of the Business School. "They are likely to have found these decisions difficult and alienating and they don't want to think about it. People are dealing with increasingly complex decisions sometimes involving very large sums of money without understanding the basics such as compound interest. By any objective measure many lack vital financial skills".

Professor Thorpe was recently appointed to an OECD research committee on financial literacy. The OECD was prompted into action on this matter in the wake of the GFC, which demonstrated the negative effects of "low levels of financial literacy for society at large, financial markets and households". As a result, financial literacy has become a long-term policy priority in many countries.

ASIC is funding financial literacy programs in Australia.

Of course even those investors with reasonable financial literacy are still eager to retain the services of a financial adviser, whose job it is to lead the anxious through the minefield that is the investment markets. Global asset manager Legg Mason has conducted some research into just what investors across the globe are looking for from their adviser.

Unsurprisingly, investors in most countries nominate "performance" as the greatest benefit of working with a financial advisor. Indeed, 59% globally saw investment returns as the primary reason to seek professional advice. But funnily enough, not so Australians.

Of the Australian investors surveyed, the same percentage - 59% - nominated "creating a formal plan with their adviser to achieve their goals" as their most valued aspect of professional financial advice. Good old Aussies, eh? We don't need to become tall poppies, we just want to feel at ease with the world.

"Australians are less focused on tracking the annual performance of the investments their adviser recommends as a measure of success," said Legg Mason's Global Head of Distribution marketing, Matt Schiffman, after the survey results were released. "For Australian investors, the experience of using an adviser is more about developing a long-term plan for financial independence."

"As more Australians reach retirement, they are thinking about planning for a comfortable lifestyle 20 or 30 years into the future and how an adviser can help them get there."

We may not be obsessed with riches but we are a bunch of pessimists, the survey found. Globally, 75% of respondents believe they will be able to maintain their current lifestyle later in life but in Australia, that figure is only half. Advisers do have a key role to play in helping investors feel more comfortable in their financial goals, Schiffman concludes.

Digging further into the survey results for Australia specifically, we might also conclude that we're a bit nervous about this whole investment game, and really we would rather if someone could just take the anxiety out of our hands. Some 46% of investors nominated "avoiding costly mistakes" as another reason to seek professional advice and 43% cited "having someone to manage their entire portfolio".

Which is probably why a report released by private wealth manager JBWere and research firm Investment Trends notes that Australian financial advisers are using SMAs for client investments at highest ever recorded levels.

To understand exactly what a separately managed account, or SMA, is, we might first consider the two extremes of superannuation investment.

At one extreme we have the totally passive option of putting all your super into whatever super fund your employer directs your obligation into, or, post retirement, whatever known-brand or television-advertised fund that you recognise. That super fund manager will invest your money and, periodically, let you know how your returns are going, but will not tell you what that fund's investment portfolio consists of, lest you feel the urge to argue.

At the other extreme, you make all the investment decisions by yourself – maybe with a financial adviser on board, but at the end of the day your portfolio is one you have individually chosen. Cleary the whole point of Self-Managed Super Funds is to have this freedom, but with freedom comes an awful lot of work in choosing which stocks you'd like to own, for example, and then monitoring their performance and periodically adjusting the portfolio.

In between is an SMA. In Australia, your standard SMA is to date limited to stock market investment, and involves someone else with a level of experience and expertise beyond your own selecting a portfolio of stocks and then "managing" that portfolio, post initial selection, by selling and buying and adjusting and introducing new stocks while taking others out. I have put the word "managing" in inverted commas because it is not incumbent upon said manager to actually be invested his or herself. SMAs are most often based around "model" portfolios.

Those model portfolios will not simply be market-tracking, as you can get that from any common or garden fund manager. Nor will they necessarily mimic that which is available as exchange-traded funds (ETF) such as "high yield" or "small caps". Those portfolios will be more individual, offering a balance of risk/return that may suit certain investors, such as super investors.

Importantly, while the SMA investor is committed to accepting the model portfolio as is, the constituents of that portfolio are published for all to see. If an investor is sufficiently happy with said portfolio, he or she can invest a chosen amount into the SMA and walk away to leave the model portfolio manager to make the decisions and the manager's sponsoring broking house to carry out the trades and provide performance updates. At any time the investor can exit the investment if so desired. Typically a small management fee is charged, which accommodates broking and administration costs, and in some cases, but not always, a performance fee may also be taken by the manager.

The sudden surge in popularity is nevertheless not being driven by direct investor demand, but by financial advisor demand. As the super self-management industry grows, and investors increasingly look to tailor their investments to predetermined goals, the burden on advisers grows. If an adviser has to select, monitor and manage individual portfolios for all individual clients, the level of time and effort involved in each case is prohibitive.

However if the advisor can match a client's investment goals with an existing SMA, then that advisor can pass on the onerous workload to the SMA manager.

"A growing number of clients are seeking the transparency of investing directly in shares," noted Andrew Tracy, Executive Director and Manager of Financial Intermediaries at JBWere, "so for advisers this means monitoring individual stock activity and issuing statements of advice for multiple clients on a daily basis, all of which is not scalable as the business grows.

"SMAs provide an efficient solution for advisers with these types of clients, allowing them to outsource the day-to-day management aspects of maintaining an equity portfolio while maintaining the transparency and simplicity that clients value in direct share investments."

Advisers have found SMAs particularly useful for SMSFs. The survey found 51% of advisers believe SMAs were more appropriate for SMSF clients than investing directly in equities. The most beneficial aspects of SMAs, in the opinion of surveyed advisers, are the ability to see what the underlying portfolio is actually made up of (46%), the reduced administrative burden vis a vis direct share investment (45%), and the efficient access SMAs provide to professional funds managers.

For those still in the workforce, SMAs remove the obligation to spend time and anxious energy after hours closely monitoring an investment portfolio. For those now retired, SMAs offer a chance to actually enjoy retirement. Shifting the responsibility of client investments onto SMAs is not a cop-out for advisers, as the transparency and flexibility of direct share investment is maintained.

Despite record SMA growth in Australia, it is still early days. The survey found 40% of advisers do not use SMAs simply because they do not know enough about them. Another 20% would like to use SMAs but found they were not available on investment platforms.

"Availability on platform remains a key issue that SMA providers are working through as an industry," said Mr Tracy. "We've made significant progress on this in the past year, with eleven platforms adding SMAs to their offering, allowing 25% of planners to now have access to SMA's on their primary platform. We expect adviser take-up to continue to improve during 2015 as a result.

"There is also a broader opportunity for SMA providers here around education – it's clear that advisers view SMAs as an extremely valuable tool in client portfolios once they understand their benefits and begin to use them regularly. The challenge for providers is to keep up that process of education, both to planners and Australian investors as a whole."

Those advisers who have come to appreciate the benefits of SMAs would like to see the SMA pool expanded. Lower entry point funds for smaller investors would be helpful, as would SMA diversification beyond Australian equities and into international equities, fixed income and hybrid products and multi-asset accounts.

"With the growth of SMSFs and an increasing cohort of investors demanding control, simplicity and transparency when it comes to their investment portfolio, we believe the time is right for SMAs to experience significant growth in the coming years," said Mr Tracy.


FNArena manages an "All-Weather" model portfolio available as an SMA on the Praemium platform.

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SMSFundamentals: SMSF Trustees Becoming Younger And Richer And Looking Offshore

SMSFundamentals is an ongoing feature series dedicated to providing SMSFs with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

For an introduction and story archive please visit FNArena's SMSFundamentals website.

By Greg Peel

The number of Australian self-managed super funds (SMSF) has continued to grow, according to the latest data provided by the Australian Tax Office. Research house CoreData notes the number of SMSFs has passed the half million mark while the total number of trustees of those funds now exceed one million. Most notable in the data is a sudden growth in popularity of SMSFs among younger investors, beyond those in or nearing retirement.

In the nine months to March 2014, 62.1% of new SMSFs were established by Australians in the 34-54 year age bracket, compared to only 36.6% up to July last year. Even the 25-34 bracket saw an increase to 11.1% of new trustees compared to 4.0% last year. As a result, those nearing or already in retirement fell as proportion of new trustees, with those 54-64 dropping to 20.7% from 32.2% and those over 64 dropping to 4.7% from 25.9%.

CoreData does not offer any possible explanation for this quite remarkable and sudden surge in popularity of self-managing one’s super among Australians still in the “growth” phase of their retirement investment rather than those at or nearing the “income” phase. We might posit, however, that SMSF growth in general has gained pace since the GFC as investment across diversified asset classes has become more accessible through the growth of listed property, infrastructure and other funds and the exponential growth of exchange-traded funds across a range of asset classes, as well as receiving a boost from bank competition for term deposits. And SMSF services – platforms, accounting and advice – have also grown rapidly.

Perhaps Mum and Dad have been sufficiently satisfied with the results over this time they have advised their children to follow suit.

Money might have something to do with it, given the ATO data also indicate new SMSF trustees are richer. The data reveal 20.5% of new entrants earn $100-200k compared to 14.4% last July. But this statistic is a little counterintuitive, as one might expect the growth of SMSFs and related products and services would render self-management more accessible to those on lower incomes over time, as compared to earlier times when SMSFs were considered the preserve of the wealthy.

But then if you’ve got more to throw around, best to start looking to keeping it in the future.

It’s not all about the rich nevertheless. That 20.5% of new entrants on $100-200k represents 2333 new trustees, yet there was also an increase of 1161 earning $80-100k, 1764 earning $60-80k and 1775 earning $40-60k, highlighting the fact SMSFs are now potentially suitable for even earners of an average wage.

Despite the swing towards younger new entrants to SMSF investing, the legacy older bias means wealth preservation and secure yield remain strong overall themes. As at March SMSFs were holding 32.1% in stocks, 28.0% in cash and 12.2% in non-residential real estate.

Australians have long been insular with regard their investment diversity and have shunned offshore opportunities, but that is quietly changing. Once again such a shift may be put down to greater accessibility through tailored products (such as ETFs) and currency-hedged products as well as availability of information and marketing from offshore sources. CoreData notes that as at March, growth of investment in offshore residential property hit 3.0%, in non-residential 2.2%, in offshore equities 2.6% and in offshore managed investments 2.7%. Each of these numbers exceeds the overall average growth of SMSF investments last quarter of 2.0%.

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FNArena Book Review: The Wealth Code 2.0

By Rudi Filapek-Vandyck, Editor FNArena

It only takes a few paragraphs to realise what the true aim is of US-based financial planner and educator, Jason Vanclef: this author wants to challenge your financial beliefs. Readers better get ready to be shaken and surprised.

Of course, in my world Vanclef immediately receives one big tick of approval, as I firmly believe most people inside the financial services sector would be well-served by doing a little more thinking and more questioning of the general beliefs that are so dominant in this industry. Are equities truly the long term outperformers as Wall Street firms promote them to be? Is this the time to feel safe in government bonds? Are liquid assets by default better than illiquid alternatives?

The answer to all these questions, and many more inside the book, is: of course not! Vanclef noticeably enjoys picking apart the general "truths" that more often than not result in bad investment decisions. Post 2008, many investors are regretting the fact they hadn't been better informed prior to the GFC hitting their retirement plans. The Wealth Code 2.0. How the Rich Stay Rich in Good Times and Bad is an attempt to provide shell-shocked investors and shaken financial planners with a guide as to how it can all be done much safer and better.

Vanclef comes across as a self-motivated, savvy expert on retirement planning and investment portfolios. Understandably, his suggestions and ideas are USA-centric, but the underlying themes are universal and easily transferable to Australia or wherever else across the globe. This is not about selling financial software or investment products, his quest is about challenging general beliefs that are being sold and promoted throughout the industry, without giving it all much thought, really. This leads to many retirees ending up with major disappointment when old age and retirement finally arrive.

Probably the most interesting take-away from this book is Vanclef's Wealth Code under which investment assets are categorised alongside three key elements: High Potential Return, Capital Preservation and Liquidity. In Vanclef's words: investors can at all times have two out of three of these characteristics, but never all three. This then leads to the inevitable conclusion that successful retirement planning is all about spreading one's portfolio across a diversified range of assets. These assets, argues Vanclef, should be characterised according to their key characteristics: is it High Return Potential with Capital Preservation? Or are we talking Liquidity with High Risk Return?

True portfolio diversification alongside these basic principles works, says Vanclef, and he uses numerous happy clients and real life examples in the book as his (obvious) reference points. The meltdown in equities and commodities in 2008 should not by definition have ruined investors' retirement plans, the book argues successfully, and the same applies to the prospect of rising bond yields in developed countries.

Vanclef does not advocate investors should use his book as their new bible, sack their financial planner and do it all by themselves. Education and knowledge are powerful instruments. This book will broaden investors' minds and at the very least assist them with finding better professional support. Planning for retirement becomes a whole lot easier if one knows where to search and what questions to ask.

I agree with the author, a lot of his base insights and recommendations come down to genuine old fashioned common sense, but the mere fact that books like this are still the exception, instead of the widespread norm, indicates how remotely common sense and financial services still operate from each other in today's reality. Highly recommended for investors not afraid to part with the ordinary and make bold changes to their belief-system.

The Wealth Code 2.0. How the Rich Stay Rich in Good Times and Bad by Jason Vanclef. Publisher John Wiley and Sons. 282 pages. According to information provided by the publisher, critics in the US have already labeled it the first true guide for investing in the "New Normal" era. One other description that caught my eye: the indispensable financial survival guide for the 21st century. This is the second edition.

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SMSFundamentals: Growth And Yield In Direct Industrial Property Investment

SMSFundamentals is an ongoing feature series dedicated to providing SMSFs (smurfs) with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

For an introduction and story archive please visit FNArena's SMSFundamentals website.

This article was first published exclusively for FNArena subscribers on March 21 and is now open for general readership.

By Greg Peel

[Note: Unless otherwise stated, all tables are courtesy of Charter Hall Research]

Asset Class Performance

When assessing the performance of asset classes for longer term investment, comparisons will invariably use a stock index as the proxy for "equities". In the case of Australian equities, the benchmark is usually the ASX 200, and to be meaningful the accumulated index (including dividend yield) is used. While there is no real alternative to using such a benchmark as the proxy, few longer term investors will actually hold "the ASX 200" but rather will hold some individually selected portfolio of stocks. The ASX 200 is heavily weighted to only seven of two hundred stocks -- two big diversified miners, four big banks, and one big telco. If an investor does not hold a weighting of all these seven stocks in their own portfolio, immediately the ASX 200 index becomes a poor proxy for "equities" performance.

This is very much the case at present. The most recent leg of the wobbly four-year rally off GFC lows has been driven by solid yield-paying stocks, such as the aforementioned banks and telco, while the big miners have well and truly been left behind. Holding the right stocks in your portfolio over this period would have thus provided a much better "equity" performance than the ASX 200, and considerably better than holding the wrong stocks. We could go further and suggest a portfolio that over the right period of time has held all of the "right" stocks in weightings greater than the ASX 200 (such as some of the more spectacular mining services stocks, or the online classified stocks for example) then as a SMSF you'd already be thumbing through brochures for luxury yachts.

Such a performance would no doubt have involved a fair bit of portfolio management, and not so much "set and forget". Not all SMSFs whish to be, or feel experienced enough to be, so active an investor. The great number are content to hold a passive "balanced" portfolio on the assumption that, over time, diversification will provide a solid risk/reward balance, and on the assumption that there's better things in life to do in employment/retirement than watch the stock markets all day. On that basis, the ASX 200 is still the best proxy to use for “equity” performance comparison.

Having said that, now observe this rather interesting table:

Here we see an x-axis of 15-year compound return for various asset classes, and a y-axis of the long term volatility of those returns. Return is obviously important, but volatility of return is also very important. Consider, for example, that your stock portfolio held all the 30 Dow Jones Industrial Average stocks in 2007 and still does in 2013. Ignoring a couple of constituent changes in that time, your net result over the period is flat (plus dividends) given the Dow is now back at its 2007 highs. Not a bad result for a GFC. But if you’d sold in late 2008 in panic, and were looking to perhaps buy back in 2013? Volatility of returns is very important with regards to investor psychology. It is also fundamental when one considers that an elder brother who reached retirement and cashed in his super in late 2006, and a brother two-years younger who did the same in 2008, would now be the Prince and the Pauper.

There are ostensibly four asset classes marked on the above table, although for reasons which will become clearer later, the table highlights industrial property as a subset of general Australian property. The other three are Australian government bonds, listed Australian real estate investment trusts (A-REITs), and “equities”, as benchmarked by the ASX 200. The higher up the x-axis the greater the compound return on that asset over 15 years. The further right on the y-axis the greater the volatility of those returns. With a dive of 50% from 2007-09 and a subsequent partial rebound, the ASX 200 is clearly the most volatile.

This table shows clearly that direct investment in property has provided not only the least volatile returns over 15 years, but also the highest returns at around 10%. One usually expects a trade-off of return against volatility, albeit if your 15-year period includes a stock market crash of the magnitude we have recently seen, the figures will be distorted.

Also quite notable is A-REITs have proven a disappointment on both counts, suggesting direct property has been the “best” investment over 15 years and listed property funds have been the “worst”. Seems strange, until you consider A-REITs can be sold in panic with the flick of a keyboard, just like shares, and property can’t be, and that the fall in A-REIT prices beginning late 2007 was greater than that of general shares through to 2009 given excessive gearing.

Now, it is important to note at this point that over 15 years, the make-up of the ASX 200 has changed several times and some stocks have bitten the dust. The figures here for A-REITs does not include those that went under after 2007, and there were several. Direct property doesn’t “go under”, but direct property investment funds and syndicates have certainly done so in the period. The above table cannot be taken as gospel, but rather as a best proxy comparison.

If we narrow down the return comparison from 15 years to the period September 2007, just before the then Credit Crunch sent A-REITs spiralling, to the end of last year, another picture emerges. We might call this "the GFC period":

Fixed interest is clearly the winner, reflecting extensive RBA interest rate cuts over the period. From here, the scope for further cuts is limited and the scope for rate hikes is increasing. Despite a decent rally of late, equities are still under water. And despite an even more pronounced rally of late, the damage done to A-REITs in the period was just too severe. Direct property again stands out.

The table further highlights the relative risk/reward benefits of a direct property allocation in any longer term investment portfolio. Let’s look at another one:

Leaving aside for now the volatile equity and A-REIT classes, we see here a comparison of returns over a decade of prime property investment against bonds (5-year), the SMSF's favoured post-GFC investment of bank term deposits (3-year), and the RBA cash rate. Term deposits have clearly been a cracker of an investment for SMSFs, post-GFC, but returns are now waning, particularly following last year’s RBA cuts. By contrast, direct property has largely sailed on through.

Direct Property Investment

Direct property investment can loosely take three forms: your residence, a separate residential or a commercial property which you let, or an investment in a direct property investment syndicate or managed fund.

In the case of your residence, this only becomes an “investment” for yourself, other than your children, if your intention is to one day sell the family home and trade down to something else. Usually we would exclude your residence under the label of “investment property”. As far as direct brick & mortar investment is concerned, investments here might range from one flat to a block of flats, or a factory or warehouse and anything beyond, depending on your means. For those on lesser means, tapping into the returns on offer from property investment in larger residential or commercial assets means becoming an investor in units of a syndicate or fund. Syndicates, again, are usually for the more wealthy, so let’s cut our discussion down to direct property funds.

A comprehensive explanation of direct property funds is available by sourcing an FNArena article from 2011, Unlisted Property Trust Investment.

The important feature of direct property fund investment is, as indicated by the tables and graphs above, a steady return over time. Most direct funds involve investment over several years, which would suit an SMSF anyway, but investors are not locked in and can exit at any time. Direct funds are nevertheless unlisted, so cannot be traded on a secondary market as can REITs.

A steady return does not necessarily imply no risk, but rewards do not come without some level of risk. A lack of secondary trading market is one reason volatility of returns is reduced in unlisted funds which, as we have seen, is not the case for shares, and not the case for listed REITs which are effectively traded as shares. High-yield shares and REITs have provided a fabulous trading opportunity over the last year or so but only because they were so knocked down in the first place. All REITs suffered sell-offs beginning in 2007 which sent their listed valuations down to below, and in some cases well below, the net tangible asset (NTA) value of the properties in that REIT's portfolio. Impressive rallies for favoured REITs in recent times is largely a reflection of that gap back to NTA value being closed, now that the GFC dust has settled somewhat.

REITs have mostly now returned to more benign yield levels, thus limiting the scope for further sharp rallies in valuation. Offshore funding for banks is now returning to more benign levels of cost, reducing the pressure on Australian banks to compete for deposits. On low RBA cash rates, bank term deposit rates have begun to wane. Fixed interest investments such as bonds have largely run their course on increased valuation, given limited scope for further RBA cuts.

The share market, on the other hand, might just be looking good. But the rally-back to date has mostly been driven by high-yield stocks, the valuations for which are now becoming stretched. If the ASX 200 is to continue upward, a switch out of defensive yield and into cyclical risk is inevitable. Yield-seekers may thus be looking at capital underperformance ahead.

All the while Australian total superannuation fund assets are growing, not just in absolute terms but also as a percentage of Australia’s GDP:

If we consider a "default" domestic super fund portfolio to be weighted as in the following table, we can conclude that there is likely a growing demand for direct property fund investment:

From June 2002 to June 2012, the assets of Australian super funds grew by an average compound rate of 10.46% as the Australian GDP grew by 3.07%. “With an approximate 10% allocation to property that is looking to be increased by a number funds, prime quality [assets] may become increasingly difficult to attain should superannuation funds continue to post comparable growth rates from this exceptionally large $1.46trn asset base”, suggests property fund manager Charter Hall ((CHC)),

SMSFs thus looking to find an alternative to bank deposits and/or an overweight to defensive yield stocks to drive portfolio growth in a more risk tolerant market would be well served by considering direct property investment as a proportion of a balanced portfolio. Investors already holding defensives or REITs on high entry yields will continue to enjoy such yields, but those yet to enter are now running into yield compression.

Yield compression occurs when the price of the underlying asset rises against the same value of dividend/coupon, ensuring a lesser annual yield on investment. High yield Australian stocks and REITs have all seen substantial price rises recently and government bond prices are reaching the last hurrah of what has effectively been a thirty-year rally from the bad old days of double digit interest rates.

While commercial property held by REITs and unlisted property funds is sourced from the same pool of assets, REITs have been able to rally sharply in price in recent times for the simple reason REIT prices were so knocked down post 2007. Yield compression could not kick in until prices closed the value gap to NTA, but the compression is now occurring. Unlisted funds could not come under attack from panicked investors, hence yields on unlisted funds have remained relatively more stable over the GFC period.

As the demand for investment property grows through weight of funds under management and lack of attractive investment alternatives, the greater will be yield compression ahead for unlisted property funds.

The Argument For Industrial Property

Commercial property funds are divided into three classes: retail, office and industrial. Clearly all relative sectors of the Australian economy have suffered as a result of the GFC, through consumer deleveraging, loss of jobs in the services industries, and the decline of the Australian manufacturing sector. The strength of the economy post-GFC has been dominated by mining and energy development.

Spending in mining has begun to peak and spending in energy will peak in the next two-three years. While progress has been slow, the focus of the economy is now shifting away from the resource sector and back to “non-mining” sectors through easier monetary policy from the RBA and a slow return to risk appetite in the global economy. Retail spending has begun to pick up. Service industries have begun to re-employ. While the manufacturing sector in Australia may never recover from what is now a structural shift in the value of the currency, manufacturing is only one sub-sector of that which we call “industrial”. The following table shows total return by property asset class in 2012. As we can see, industrial returns were only just pipped by office returns:

Despite the strongest 2012 result, office returns began to soften towards the end of the year. On the other hand, the take-up of industrial premises improved towards the end of the year. A recent survey by JP Morgan found the bulk of fund managers expecting industrial to be the top sector over 2013. Historically, industrial rentals have a strong relationship with the performance of the share market. With a strong result in 2012 (ASX 200 rising 14%), an uplift in industrial rental growth appears likely, suggests Charter Hall.

The mining and energy industries may be at or near peak development spend, but this simply means the resource sector will now transition from a period of strong growth to strong production. Rental growth on properties within all three classes across Australia was a feature of 2012, but the stand-out state capital was Perth. Oversupply meant Brisbane did not perform quite so well, but supply has since decreased notably, suggests Charter Hall.

Property rentals in the high population states of NSW and Victoria have underperformed rentals in the “emerging” states over the past decade, yet institutional investors have remained steadfastly overweight industrial property in NSW in particular over the period. Old habits are hard to break. Indeed, Charter Hall points out that the industrial weighting to NSW is almost double that warranted by the weighting of the NSW economy within the Australian economy.

In short, if we assume an ongoing softening of global fear, improvement in the global economy, and a return to risk appetite, the Australian non-mining economy should also start improving to fill the gap left by the decline in the mining economy. The RBA believes the early signs are positive, and hence has not decided to cut interest rates in 2013 so far.

At this stage of the cycle fund managers expect the industrial property sector will offer greater growth potential ahead than retail or office. Overweight investment in the legacy states of NSW and Victoria suggests fund managers will be looking to diversify their property portfolios into the other growing states.

While investors may be put off by a longstanding association of manufacturing with “industrial”, manufacturing is only one sub-sector under the “industrial” banner. The slow decline of manufacturing is being rapidly now offset, for example, by the rise in the sub-sector of “logistics”.  The demand for distribution centres and other logistics-related property is being driven by the rise in on-line commerce.

Charter Hall is one property fund manager offering unlisted direct property investment funds. There are many others. The successful subscription of Charter Hall’s direct industrial fund DIF 1 in 2011 has led the manager to open for investment DIF 2 with an equity raising period closing end-2014 and a funds target of $200m. DIF 2 will target an average 8% per annum distribution yield with a total rate of return on the fund over seven years of 12%.  Minimum retail investment is $10,000.

To date DIF 2 has acquired two properties – the Australia Post Distribution Centre in Melbourne and the Coles Distribution Centre in Perth, with a nod to logistics and diversification into WA.

For more information, readers are advised to contact Charter Hall.

Technical limitations

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article 3 months old

Gold – Safety Blanket or Quilting Essential?

SMSFundamentals is an ongoing feature series dedicated to providing SMSFs (smurfs) with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

For an introduction and story archive please visit FNArena's SMSFundamentals website.

By Adrian Ash, BullionVault

The patchwork quilt of diversification looks awful smart. It's more than pretty with gold in it, too...

INVESTMENT experts keep telling us two things.

One, you must diversify your savings. Nothing works for ever. Two, your annual returns are set to be miserable, because there's no return to the out-sized gains of the 1980s and '90s. The last 10 years prove that.

Now, we don't doubt Point 1. Not even people buying gold in 2001 could in fact see the future (though we might tell you different tomorrow). That second claim needs a closer look, however.

US Assets, US Dollars: Total Annual Returns (before expenses & tax)

Source: BullionVault via CRB, LBMA, NAREIT, NYU Stern, St.Louis Fed

REITS = FTSE Real Estate Investment Trusts
S&P = S&P 500 equity index
CCI = CRB Continuous Commodity Index
Corp = Barclays Aggregate US Bond Index
Trsy = 10-year US Treasury bonds
Cash = 3-month Treasury bills

The idea is simple enough. Our patchwork quilt above looks a lot like the more famous Callan Periodic Table (well, famous to finance nerds and investing professionals). It compares the annual returns on a selection of assets. In the case of the Callan Table, those assets are mostly stock-market indices, split into emerging markets vs. Europe vs. a range of thinly sliced US segments (Russell 2000 Growth anybody?).

But while that's useful, perhaps, for equity-fund investing, there are lots of other things which both private savers and the professional investors supposed to be working for them also buy. What about commodities, real estate, gold, cash or T-bonds?

Now, as you can, and just like the people Callan say – as well as more finely-sliced examples, such as Frank Holmes at US Funds ranking the different tradable commodities – "The Table highlights the uncertainty inherent in all capital markets.

"Rankings change every year."

There are broad patterns over time, however. No asset class makes #1 for more than two years running, for instance, not in the 35 years of data we've crunched. (More on the full table next week.) Most recently, and with the calls for a gold bear market in 2013 growing louder each day, it's also notable that:

- Gold has been the #1 asset only once. It placed in the top 3 performers in eight out of the last 10 years;
- Real Estate Investment Trusts, if averaged, were the #1 asset class in 3 of the last 10 years. They made the top 3 seven times, but slumped to worst position twice;
- Cash has now lagged inflation 4 years running for US savers.

The upshot? Going forwards, no idea. But looking at that "poor returns ahead" warning, it only gains credence from the past decade if you ignore gold. Which is of course what most packaged-finance promoters do. They might well ignore real estate and commodities as well.

Investing money evenly split however between US equities, investment-grade corporate bonds, Treasuries, cash, gold, commodities and real estate would have returned 6.5% per year on average, over and above inflation, since the start of 2003. Even if you'd avoided miserable gold all through the 1980s and '90s, you would still have made only 5.4% per year during those go-go decades.

Including an even allocation to gold investment, in fact, the last decade's returns stand very nearly two full percentage points better than the average real return since 1977 (again, pre-tax but post-inflation, and excluding trading costs). At 4.6% per annum, that 35-year average also sneaks ahead of the average return if you had avoided gold too, at 4.4%.

"Gold is the equivalent of a financial teddy bear," as one UK fund manager never tires of saying. And saying – and again. People cling to it, in short, for emotional support instead of rational reasons. Yet the patchwork quilt of a diversified portfolio is no mere safety blanket. And it's warmer still if you add gold to your color scheme.

Re-published with permission.

BullionVault is the world's largest physical bullion market online, where buyers and sellers meet 24/7. A member of professional trade body the London Bullion Market Association (LBMA), BullionVault is recommended by gold market development organization the World Gold Council. In 2009, BullionVault won the UK's prestigious Queen's Award for Enterprise Innovation. Some $2.5 billion of gold and silver changed hands on BullionVault in 2011.

All views expressed are the author's, not FNArena's (see our disclaimer).

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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Technical limitations

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article 3 months old

SMSFundamentals: Nobody Knows

SMSFundamentals is an ongoing feature series dedicated to providing SMSFs (smurfs) with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

For an introduction and story archive please visit FNArena's SMSFundamentals website.

"Economists, like royal children, are not punished for their errors."
- James Buchan.

We lost another client last week. This makes a grand total of two clients who have left us over the past year, not because we lost them money, but because apparently we didn’t make them enough. Since the rate at which we are attracting brand new clients is comfortably outpacing the rate at which we lose relatively new clients, this shouldn't be an immediate cause for concern either for us or for our clients, but it is a little galling nonetheless. We take some pains to try and communicate our philosophy and process on a regular basis, but such communications for some clients are evidently insufficiently compelling when set against a bull market in common stocks and other risk assets. The market's going up ! And what have you guys done for me lately ?

There are only a handful of truly great books on investing out there, and the late Peter L. Bernstein's 'Against The Gods' is one of them. 'Against The Gods' is, effectively, a biography of risk. We first chanced upon it, if memory serves, in late 1999, when the dotcom insanity was still in full swing. Our then employer, Merrill Lynch Private Banking, had just handed every employee a copy of Glassman and Hassett's 'Dow 36,000'. Guess which book is better. But time moves on. We also moved on, and Merrill Lynch ended up blowing itself up and being merged via a shotgun wedding with Bank of America. Sic transit gloria mundi. (This isn't a rant against Merrill Lynch in isolation. They may not have been a good company, but they were in good company. Even Goldman Sachs blew itself up, and unlike Lehman Brothers was only rescued by the Federal Reserve rather mysteriously allowing it to convert into a bank – which it wasn't and isn't – and suckle directly from the Fed teat. Think about that emergency rescue the next time you see reference to “talent” at Goldman Sachs. Talent for sharp-elbowed self-preservation, perhaps. But we digress.)

'Against The Gods' is worth reading in its entirety, but as anyone who has been subject to our investment pitch will testify, we are fond of highlighting one specific quotation therein. Daniel Bernoulli (1700-1782) was a Swiss mathematician and true 'Renaissance man' who has a good claim to be the world's first behavioural economist. Bernoulli once said that if you are managing money for wealthy people,

"The practical utility of any gain in portfolio value inversely relates to the size of the portfolio."

In plainer English, if you are managing money for wealthy people, just don't lose it. Wealthy people, like everybody else, like to make a decent return, but they don't need to take outlandish risks since they're already wealthy. So the requirement to make a "decent" return is mitigated by the likely regret at eroding a meaningful capital base. In other words, capital preservation – albeit in real terms to have any genuine value – trumps aggressive capital growth.

This may hold for all investors, but we think it has almost universal application to the wealthy. Why jeopardise the entire pot if the pot is already meaningfully large ? This provokes another question, at least in our mind, namely what do we mean by risk ? Unlike the regulator, which defines risk as whatever it is worried about on any given day, or as what IFAs are selling most successfully, or as price volatility, we use a very specific primary definition of risk: the risk of permanent loss of capital.

So our investment practice is quite deliberately not focused on capital growth in isolation, but on capital preservation and growth thereafter, along the same basis that the long run is nothing more than a sequence of short runs, and if we can manage to preserve clients' capital tolerably well in the short runs, that aggregation of short run capital preservation and modest (occasionally high) growth will end up outperforming a sequence of aggressive capital gains with all the attendant substantial drawdowns.

How we divide the portfolio pie is probably atypical relative to most of our peers (we certainly hope so). We consciously try not to make overly subjective asset allocation calls. This is because, unlike most of our peers, we recognise that we cannot predict the future. What we do know is that a portfolio with meaningful allocations to four genuinely discrete asset types has a good chance of delivering superior risk-adjusted returns over a portfolio that is essentially split between stocks and bonds. Analyst and strategist Dylan Grice wrote about a very similar construct, the 'cockroach' portfolio, just before Christmas.

The 'cockroach' portfolio is named after one of nature's survivors. The cockroach has survived three of the world's five mass extinctions and is virtually indestructible. How, then, would a cockroach go about constructing a portfolio with the same robustness ? Since the cockroach also cannot predict the future, it simply tries to hedge against as many risks as possible. Dylan's cockroach therefore ends up with a very simple but remarkably robust asset allocation, consisting of:

- 25% cash
- 25% government bonds
- 25% equities
- 25% gold.

Cash is a hedge against overconfidence on the part of the cockroach-as-asset-manager (this category probably contains legions of real world examples). Government bonds are a hedge against deflation (admittedly assuming a "normal" bond market environment, which sadly we objectively do not have). Equities are a claim against the presumed real growth of the economy. Gold is a hedge against people like Ben Bernanke.

And the 'cockroach' portfolio is amazingly robust. Since 1971, the cockroach's portfolio would have generated annual real returns of +5%. That is pretty saucy set against a portfolio of 100% equities (+5.5%) and 100% bonds (+4%). But that is only the start of it.
How would the cockroach's portfolio have fared during moments of massive, actual crisis ? Again, the cockroach fares very well during market crashes with his naïve multi-asset strategy:

During the 1970s, the cockroach had a far smoother ride than 100% equity or bond investors, as the chart above shows. Good job we're not in an environment like the 70s, with banking failures, a debt crisis, stagflation and widespread political drift..

But taken in the round, the cockroach enjoyed (will enjoy ?) extremely attractive overall returns with a fraction of the risks incurred by his racier peers.

Please note, you do not need to be a cockroach to benefit from the 'cockroach' portfolio. Our own take on Dylan's cockroach is a little different, but the similarities outweigh the differences. The percentages vary, but we remain committed to four discrete asset classes too:

- Objectively high quality credit
- Attractively valued equities
- Uncorrelated funds, specifically systematic trend-followers
- Real assets, notably the monetary metals, gold and silver.

How has our own version of the 'cockroach' portfolio fared during the vicissitudes of the last four years ?

This is admittedly within a fund, but unlike most funds, the fund in question is designed to accommodate clients' life savings. Compare the drawdowns, for example. Evidently other funds out there will have generated superior returns – but at what risk ?

We think that this four-factor model has huge advantages over the traditional, more subjective model that most wealth managers use, which is heavily dependent upon entirely subjective market timing and also heavily dependent on a largely binary decision between equity ("good", now) and bonds ("bad"). The four-factor model is a great protection against asset manager hubris and overconfidence.

These are dark times for many asset managers. We doubt if we're alone in struggling to retain some clients in the face of yet another 'risk on' spasm in the financial markets. Investors have very short memories. The same investors who wanted out of stocks in 2008 because the world seemed to be hurtling towards an end are now the ones wanting back in when barely any of the problems facing the world in 2008 have been resolved, and when most have deteriorated markedly, and the ones that have been seemingly resolved have only reached that stage due to extraordinary inflationary monetary stimulus ($6 trillion or so in base money creation just waiting on bank balance sheets to morph into real price inflation ?).

Admittedly, there is no real correlation between stock market returns and economic growth, so the fact that the western economies have now gone conclusively ex-growth is not an automatic reason to shun stocks. But the fact that global credit market debt stands, according to Kyle Bass, at some 340% or so of global GDP – a level never reached before in world history – has to be cause for concern. Our thesis remains that the western economies now require constant economic growth purely to service that mountain of debts. The growth won't happen, so the debt service now won't happen either. Someone is going to get shafted. We just don't want it to be us.

Perhaps our recently departed clients know something we don't. They may well thrive out of their newly raised allocations (one presumes) to equity risk. Nobody knows. But we're still content to play our long game of capital preservation – come what may – with a paranoiac's attitude to risk. And those two words – Nobody knows – should be sellotaped to everybody's computer screen or TV screen or mobile phone screen for the duration of this long emergency. We don't know either what happens, in debt markets or currency markets or stock markets or the economy, so we're resigned to making our own modest subjective allocations to each of those four core asset classes, and within them then only working with either (subjectively) the best managers we can find, or the most attractively valued instruments we can find. Uncertainty's a bitch. But certainty, in this financial environment, is even more absurd.

Tim Price
Director of Investment
PFP Wealth Management
28th January 2013. Follow me on twitter: timfprice
Email: tim.price@pfpg.co.uk Homepage: http://www.pfpg.co.uk
Weblog: http://thepriceofeverything.typepad.com Bloomberg homepage: PFPG

Re-published with permission. All views expressed are the author's and not by association FNArena's.

Important Note:
PFP has made this document available for your general information. You are encouraged to seek advice before acting on the information, either from your usual adviser or ourselves. We have taken all reasonable steps to ensure the content is correct at the time of publication, but may have condensed the source material. Any views expressed or interpretations given are those of the author. Please note that PFP is not responsible for the contents or reliability of any websites or blogs and linking to them should not be considered as an endorsement of any kind. We have no control over the availability of linked pages. © PFP Group - no part of this document may be reproduced without the express permission of PFP. PFP Wealth Management is authorised and regulated by the Financial Services Authority, registered number 473710. Ref 1004/13/JB 280113.

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