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HEWISON Financial news, our views AND other issues Issue 42 ~ January 2013

Understanding the terms we use Self-Managed Superannuation Fund (SMSF) A superannuation fund managed by one person or a small team of individuals. They are regulated by the Australian Taxation Office (ATO) and have to meet numerous regulatory criteria. Life and Total and Permanent Disability Insurance (TPD) Pays a lump sum amount if you are unable to work due to a disablement which is deemed total and permanent, and you are unable to work again. This benefit can be used to cover your mortgage repayments, pay for medical expenses that have arisen as a result of your injury, and provide ongoing financial support for your family. Definition of ‘Fiscal Cliff ’ A combination of expiring tax cuts and across-the-board government spending cuts scheduled to become effective Dec. 31, 2012. The idea behind the fiscal cliff was that if the Federal Government allowed these two events to proceed as planned, they would have a detrimental effect on an already shaky economy, perhaps sending it back into an official recession as it cut household incomes, increased unemployment rates and undermined consumer and investor confidence. At the same time, it was predicted that going over the fiscal cliff would significantly reduce the federal budget deficit. ECB European Central Bank; event control block (IBM); England and Wales Cricket Board, the governing body for the sport in England and Wales. Investment Strategy An investor’s plan of attack to guide their investment decisions based on individual goals, risk tolerance and future needs for capital. The components of most investment strategies include asset allocation, buy and sell guidelines, and risk guidelines.

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uarterly • Economic update • From the CEO’s Desk • The best blogs of 2012

• HPW 5th annual trivia night 2012 - What a success! • Hewison investment forums kick off in February 2013

Economic Update The year ahead. A year in review. Image by Kym McLeod

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hroughout 2012 there were many themes threatening to derail global and local growth but despite these threats, 2012 actually turned out to be a good year for investors with the market posting gains of around 13% (at the time of writing).

Key themes in 2012 As usual, Europe featured heavily in the news, especially in the first half of the year, but the European Central Bank’s (ECB) offer to buy bonds from troubled countries reduced the threat of another major financial crisis. In the US, the Federal Reserve vowed to keep interest rates at around zero per cent with its ongoing quantitative easing strategy (printing money). While growth in the US was subdued over 2012 there were signs of a housing recovery in the latter part of the year. Closer to home we had to deal with the predicted end of the mining boom, falling commodity prices and weaker activity in nonmining industries. The Reserve Bank of Australia (RBA) cut rates aggressively throughout the year to a low of 3 per cent which is the same level rates were at in the midst of the Global Financial Crisis.

Outlook for 2013 At the time of writing, the US Fiscal Cliff is dominating the media. Fiscal Cliff is the term used to describe the combination of expiring tax cuts and new spending cuts due to come into effect in the US at the start of 2013. It is feared that the Fiscal Cliff will send the US economy into recession, and while there is no doubt this is a real concern, we expect US politicians to eventually come to their senses

with an 11th hour deal that will stave off any real trouble, allowing the country to continue on the road back to recovery. Once again, the European Debt Crisis will feature heavily in the media with a likelihood that Spain will need to apply for assistance during the early part of the year. While this event will no doubt cause some volatility in the market we are confident that the ECB will keep the Euro zone ticking along. China looks to continue on its chosen path of lower, but higher quality growth. During 2012 China flagged its intention to focus on growth from its citizens (consumers) rather than obtaining growth via imports from the rest of the world. We expect this theme to continue during 2013 with China achieving growth of around 7.5 per cent. While these figures aren’t as strong as the double digit growth we have seen in recent years, we think this is a more sustainable and prudent strategy. In Australia, we expect to see interest rates fall further in the New Year as the RBA tries to stimulate the non-mining sector of the economy. While falling interest rates are good news for home-owners with a mortgage, they can be the opposite for self-funded retirees invested primarily in cash. Falling rates are also a good sign for the share market. Sooner or later investors will begin to realise that cash returns of 2 – 3 per cent do not stack up against the effects of inflation and that there is a real need to invest in growth assets (shares and property) for the longer term. We continue to monitor the global and local economy and take steps to ensure client portfolios are strongly positioned for 2013 and beyond.


From the CEO’s Desk

The Best Blogs of 2012 lation Update

SMSF Tr ustee Aler t – Legis

gust 2012

Chris Morcom - 17th Au

ing the asset is in a “Declaration of Trust” stat SF members by the SM fact held on behalf of the l advice to execute lega k see trustees. You should such a document. ? ask you ly, uirement to value super ular What is reg Trustees may find the req e is somewhat onerous, Regulation 4.09, fund assets at market valu According to the new SIS ring assets that are not par ticularly when conside it means at least annually. The Australian Tax nge your investment listed on a stock exchange. Any decisions made to cha guidelines to assist ed a minutes of Office (ATO) has publish strategy must be noted via ially the ATO will ent Ess . to tter de endments ma trustees in this ma meeting, and relevant am d by trustees if it is accept the valuation provide the fund’s investments. provided. The valuation in line with the guidance s trustees to: The legislation also require that suppor ts the value e must also have evidenc ; ers mb me d the fun on objective and - Consider insurance for used, and it must be based e; and, suppor table information. - Value assets at market valu te ara sep d fun at market value each the of ts Trustees must value assets - Keep all money and asse ) purposes. Other corporate trustee year for financial reporting from any assets they (or the valuation of assets times that require market hold per sonally. ance, and include tegy review should be are set out in the ATO guid The regular investment stra ween the fund and bet . ur ner using a financial plan when transactions occ straightforward for those income stream is an en tion wh nda and me , on a recom related par ties When the trustees sign off benefit is paid. stment por tfolio to its commenced or a lump sum to rebalance a SMSF inve trustees must would be evidence of There are times when the target asset allocation, this other times a at but er, valu use a qualified a review. son who has specific SMSFs may not feel market valuation by a per While many members of in a par ticular area is ability insurance, it is experience or knowledge they need Life or Total Dis the case of real estate, in le, give SMSF trustees to sufficient - for examp now the responsibility of suffice. . Such consideration an agent’s valuation would consideration to this matter a by ed in records of enc inta evid be Overall, trustees must ma and decision making should ays seek advice. alw bt dou valuations, and if in minutes of meeting. guidance provided by obvious, but is If you are interested in the The last point may seem e issu the r side at: con it we the ATO, you can find par ticularly per tinent when ividual trustees ind two If ty. per pro .gov.au/superfunds/content. l rea of using http://www.ato ty per pro ent stm inve an 8213.htm&pc=001/149/ of a SMSF purchase aspx?doc=/content/0032 individuals two the of es mfp=001/149&st=& nam 50& the is their SMSF, it 030/003/003&mnu=491 the of n ntio me no ith ncial planner. that appear on the title…w cy=, or speak to your fina be useful to execute can it es cas h suc In SF. SM

n Fund (SMSF) Self-Managed Superannuatio d to review their Trustees are now require stment strategy regular ly. superannuation fund inve John Hewison

Looking back on 2012, what important lessons have we learnt? Clearly, the tried and tested rules of investment markets and managing investments have once again been shown to be sound and successful. In particular – • Stick to your strategy and have the courage to make portfolio re-balance decisions when all around you are running to cash. • Investment markets always go through cycles and no, it is not “different this time” • Manage for outcomes – cash flow, taxation efficiency, capital growth potential. • Manage time horizons, that is, don’t get sucked into short-termism. • Don’t do your investment decision making from the daily newspaper. • Don’t let your personal investment strategies get confused with market noise – different agendas; different outcomes • Quality assets will always regain their true market value. • Get good objective based, un-conflicted advice from qualified professionals We talk about these rules constantly, but now we can legitimately say we have proof. Yes the markets have been depressed but there has always been opportunity – quality assets at bargain prices and attractive income. All of our clients have retained their portfolio income. Most of our clients have pretty much regained their pre 2007 portfolio value in a market that is still 30% under-valued. Price to earnings ratios (PEs) and dividend yields show this to be the case. The big investment question for 2013 will be – “How to sustain living income needs in a historically low interest rate market”. The answer to this question is that it should have been done constantly and - not when the horse has effectively bolted. There are still opportunities in the market – but one needs to look beyond bank deposits. I take this opportunity to wish all our clients, colleagues and friends a joyful Christmas period and a safe and prosperous New Year.

They told me it was stormy outside,

Andrew Hewison - 24th September

2012

In other words, persistent financial com mentary pointing to a faltering Australian economy and the lingering storm clouds from the Euro pean crisis continue to hamper the confidenc e of many investors. So why then has the Aust ralian sharemarket gained 11% since 1 Janua ry 2012? I must say it has been a pleasure contactin g some of my clients recently to tell that their portfolios had increased by between 10-15% year to date. “REALLY?” has been the common respo nse… Continuing on from Glenn Fairbairn’s article blog post last week, where he discussed the recent overselling of resource stocks, namely RIO & BHP, I was very interested to hear during the week that Rio Tinto maintains a cost to prod uce iron ore at $50 per tonne. They are the chea pest producer in the world, closely followed by BHP. As Glenn stated, with a softening iron ore price, higher cost producers will fall away leavin g RIO &

but I just got burnt! BHP to pick up the slack. So why did ever ybody sell them?

Buying behavior based on emotion is what controls investment markets. The abilit y of an investor to ignore the noise around them and invest based on fundamentals will dete rmine their long term success. Either that or just listen to their Adviser! The sharemarket is an efficient beast. It has the ability to price in influential factors, such as a “faltering economy” around 12-18 mon ths before it actually happens. This may in fact be a reason why, although it seems we have a stagnant economy, the sharemarket has already looked past this and is factoring in the sunny skies ahead. In closing, don’t stay indoors just beca use the same people are telling you it’s raining outside. Summer is on the way, in fact, it’s been summer for a while now…


Staying the course to reap the reward

John Hewison - 18th December 2011

The market volatility over the past 12 months or so has been a nightmare for investors – and not too comforting for advisers either. We have seen mountains of cash accumulate in bank accounts and violent fluctuations in share prices in almost total defiance of fundamental performan ce values. As usual, in times of market turmoil, we hear about ‘new world’ predictions and that historically proven fundamentals of investment valua tion and performance have all changed and we have entered a new paradigm. Well I beg to differ. We are hearing ‘long-term buy and hold doesn’t work anymore’, but buying and holding without portfolio rebalancing had never worked. By the same token, quality assets will always reco ver their value – so in essence, long term investing is alive and well. We have had notions that the European Economic Union is going to collapse, the European banks are going to collapse and contagion will spread around the globe . Well no, that’s not quite the case either! The EEU and its members (apar t from the UK) has made it abundantly clear via several initiatives that they are committed to the EEU, the Euro and they committed to doing whatever it takes to fix the

?

Is the Mining Boom over

s - overcoming market fear

systemic fiscal problems in the region. But it is going to take a long time and making knee jerk reactions to the rumours and innuendo on a daily basis is absurd. How the shor t sellers and hedge fund managers must be loving all this scrum ptious volatility. Anyone would start to wonder how much influence they are having on the markets themselves? In any event, what does this mean for investors and how should they react? Should they sell out and invest in cash? Given the falling interest rate environment and yield s only barely beyond inflation, why not just dig a hole in the back yard and bury it? What we need to do is get back to the basics of investment valuation101. Take real estate for example, it is value d on a combination of capitalisation of rent and growth prospects based on location, improvem ent etc. So if the real estate market has a shor t term slump in value do you run out and sell your residence? I don’t think so. Shares are primarily valued on the ratio of profit to the share value – price to earnings ratio or PE.

All companies are valued this way, both private and publicly listed. Of cour se there can be other influences but let’s stick to the basics. With so many top quality Australian ‘blue chip’ companies trading at historically low PE ratios and generating extraordinary dividend yields, why wou ld investors not jump at the chance to bolst er their income and wait for the gains to be made from market recovery? The markets will reco ver; it’s just a matter of when. What prevents many people from sticki ng to these basic principles is fear - fear of the unknown, fear of sensationalist press and fear of losing their money. However, let’s be realists, is BHP, RIO or CBA going to go brok e? I don’t think so! Is your prime real estate going to become worthless overnight? I highly doubt it! It’s important in these times that inves tors stick to the fundamental basics of investment evaluation; stick to the principles and disciplines of portfolio rebalancing; ignore the illogical preacher s of doom; and reap the rewards - income in the shor t term and capital gain in the long term.

wing China have What impact will a slo ure ens to rd gua safe a as they tighten the reigns on mining stocks? ss over the past few sn’t overheat. In fact many doe y There has been a lot of pre nom eco the indicators. The S&P/ m is over. Australian Sharemarkets are leading ina’s growth Ch in n dow slow the weeks that the mining boo experts view that tracks the ASX 200 Materials index e been enjoying strong ary policies resources companies hav d thing given the expansion goo a as miners has fallen jor ma of our k of e bac 0’s on the performanc 2010 and 2011. in growth since the early 200 ed ent lem the index has imp fact in par ticular China. 25% over the past year. In exactly is a at wh emerging Asian economies, to as n high in May 2008. stio its que from the This raises fallen a staggering 47% P GD s ina’ Ch ans Is the par ty now over? me fallen 37% from its hard landing? For some it Our biggest miner BHP has eks ago after ng we falli of ple ans me cou it a ed ers alat oth to esc The hype falling below 7% and heights in 2008. and Energy, Martin the Minister for Resources o. zer ow mining boom is bel m, of the mining boo There is no doubt that the ny other sector s Ferguson, declared the end ma like tor an that the par ty sec me ces sn’t ic our doe mp res The P Billiton’s Oly slowing, but this in the red soa es pric following the shelving of BH ty odi mm ce companies. moves in cycles. Co is over for Australian resour Australia. This prompted and 1990’s 0’s 198 Dam expansion in South the in led P and RIO are still stal n BH 1970’s and the to respond that the Australia’s largest miners investing from Prime Minister Julia Gillard ers duc billions of dollars pro ting d era age gen our , er which disc issue being wheth extremely profitable in up t hea to boom is not over, with the ted ounced annual profit in new projects. Things star in cash. BHP recently ann n atio ialis ustr ind we can make it last. the by en this figure was down the early 2000’s driv at $17.2 billion. Although duct (GDP) numbers Pro stic me Do ss Gro s are still a ver y y ina’ Ch of China. on the previous year, the ing over the past 6 have showed signs of slow e? y. profitable compan So where to from her a fall in commodity 12 months. This has led to ing. This om. Our top miners slow is r ina ove Ch t d tha nge bt plu dou Smart investors buy in glo price has There is no lian prices. The iron ore spot stra Au tor. lower than they sec ntly ing from $120 to below are now trading significa will affect the Australian min the past few weeks falling on acti t re are cer tain risks den pru The . ing up ago tak ore spot price was were a year or two miners such as BHP are ry $90. In early 2011 the iron ent however diversified jects with high that must be considered, by cutting back on new pro t tha around $180. s ject pro ortant clog in a existing mining stocks are an imp costs and concentrating on forget that China is to m gs see thin , ple slow peo ver ons term volatility within we rt diti Ho con diversified por tfolio. Sho remain ver y profitable. As ary levels. China’s GDP are We . ers ver blue chip miners min we Ho ller still growing at extraordin e. sma sibl any sector is pos orted at will get tougher for the rep was 2 201 e Jun ving ing mo end e experienced similar for the year in the industr y such as BHP and RIO hav likely to see consolidation 3.7% or 2.3% lia’s stra Au to ady this alre s are mp ject stors who remained with pro 7.5%. Co cycles in the past and inve forward. The bigger miners rse in Europe with many wo ch mu . is ion It . dat US over the long term soli ed the con ard for e will benefit from this s. patient have been rew plac ber in num P GD e ativ neg countries recording with excellent returns. n of the Chinese dow slow lled tro con a s Perhap makers want, as economy is what the policy

ber 2012 Nathan Lear - 9th Septem


HPW 5th Annual Trivia Night 2012 - What a Success!

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ur annual fundraising trivia night was held on the 18th October and this year we gladly supported the Sacred Heart Mission in St Kilda again for their tireless aid to the homeless and those living in poverty. The Sacred Heart Mission in St Kilda was established in 1982 and today provides around 600 people every day of the year with breakfast and a three course lunch. It also provides clothing, emergency relief, accommodation and companionship to the disadvantaged. Staff and volunteers play an integral part in the Mission’s day to day functions.

This year, after an overwhelming response for tickets to the Trivia Night, we had to look for a larger venue at the very last minute. After some panic and mad dashes around venues all over South Melbourne and St Kilda, we were very lucky to book the Esplanade Hotel’s Gershwin Room. Many thanks go to the Espy’s owner Paul for his generosity in donating the room for the night and their events manager Loredana for all her help with arrangements. The night turned out to be a huge success and we raised an amazing $6,000. Our best so far. Sharon Torney, Manager, Fundraising and Communications at the Sacred Heart Mission

was delighted with our donation and confirmed that it equates to funding their meals program for three days, or more than 1500 people for breakfast and 3 course lunch. Our MC for the night Martin, from The Quiz King made sure everyone got involved and it was great to see so many keen volunteers for the dance off and karaoke contest. There were great prizes on offer in our raffle and auction at the end of the night. Congratulations to the winning table from Nicholas O’Donohue, who once again showed us their excellent trivia skills. We all look forward to another great night next year.

Hewison Investment Forums Kickoff in February 2013

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n 2012 we launched the Hewison Private Wealth Investment Forum Series. It kicked off in March at the ANZ Pavilion in the State Arts Centre where Market Optimist, Clifford Bennett, spoke to a packed audience.

We continued the series back at the Hewison offices in a number of intimate 1 hour sessions with a mixture of Hewison speakers and special guests.

Dr Stammer was described in the Australian Financial Review as “one of the doyens of economics in Australia.” Until 2001 Don was Director, Investment Strategy, Deutsche Bank Australia. Don has enjoyed a long and distinguished career as an economist. A brilliant communicator, Dr Stammer has a rare ability to make economics come alive for his audience and has received innumerable accolades for his highly accessible, meaningful, and entertaining presentations. In 2013, quarterly investor forums will be held back at 102 Albert Road in our office. The dates of these are as follows:

2013 will see more of the same… On February 26, back at the ANZ Pavilion, we will welcome independent Economist, Dr Don Stammer to the microphone to provide his take on the world and the year ahead for Australia.

Level 4, 102 Albert Road, South Melbourne VIC 3205 P (03) 9682 1900 | F (03) 9682 5999 info@hewison.com.au | www.hewison.com.au

• Tuesday 18th June • Tuesday 10th September • Tuesday 19th November The information contained in this publication is general in nature and not intended as personal advice. Please obtain advice from your financial planner before acting upon this information.

Hewison Quarterly - Issue 42 - January 2013  

Hewison Quarterly - Issue 42 - January 2013