Hewison Quarterly - September 2011

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HEWISON Financial news, our views AND other issues Issue 37 ~ September 2011

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uarterly THIS ISSUE • Economic & market update • From the CEO’s Desk • Long Term Investing

• Principles for successful SMSFs • Hewison live website launches • Save the date

Understanding the terms we use Consumer Price Index (C.P.I) Measures the national inflation rate. The index is measured quarterly (December, March, June and September quarters) and reflects changes in prices (up or down) of a fixed “basket” or list of goods and services. Austerity Measures An official action taken by a government in order to reduce the amount of money that it spends or the amount that people spend. Default The failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment. Borrowers may default when they are unable to make the required payment or are unwilling to honour the debt. Salary Sacrifice Rather than paying income tax on salary and receiving what is left as an income, a person can contribute part of their pre-tax salary to their superannuation fund where the most tax they pay is 15%.

Economic & market update Story by Simon Curtain Private Client Adviser Image by Billy Alexander

Europe Fears of a Greek default continue to plague the market. It seems that every other day there is a bad news story emanating from Greece, which in turn drives European, and world markets lower. Greece has advised that it intends to persevere with the planned austerity measures and has already put in place a number of new taxes to raise revenue and reduce its budget deficit. It remains to be seen if this will be enough. The market is pricing in a high chance of a Greek default. The question remains as to whether or not a default, if it occurs, will be orderly or disorderly. While an orderly default would result in Greek debt repayments being pushed back decades, a disorderly default could mean that much of this debt is never repaid. This would have serious flow on effects to other members of the European Union as they hold large exposures to Greek debt. While some of the larger European Economies have provided support for Greece there is still a long way to go before this issue is resolved.

America America continues to struggle through the current economic climate. The country is holding around US$14 Trillion of public debt and President Obama has revealed a number of plans to get their debt level under control. President Obama plans to stimulate jobs

through a series of targeted tax cuts and incentives and has appealed to his parliamentary colleagues to bury their differences and support the package for the good of the country. While there is little doubt that the US will emerge from the current situation, as in Europe, there is still a lot of work to be done in the years ahead.

Asia While Europe and America are struggling, the Asian continent continues to prosper with solid economic growth across the board. Inflationary pressures still persist, in particular food price inflation, but Asian Central Banks are well equipped to tackle the situation and are not afraid to raise interest rates to keep a lid on inflation.

Australia Australia’s unemployment rate increased slightly to 5.1 per cent in August. The Reserve Bank of Australia (RBA) is keeping a close eye on the unemployment rate, as well as the inflation rate, which is currently hovering around the 3 per cent mark. Both of these indicators point to an interest rate cut in the coming months. While some sectors of the economy would welcome a rate cut (manufacturing, retail, households) the RBA are mindful of keeping the resource boom under control. We are of the view that rates will remain on hold into the New Year.


From the CEO’s Desk

Long term investing

John Hewison

It is easy for one to get distracted by all the market “noise” surrounding economic issues in Europe and the USA. All this politically driven economic debate following on from the market driven GFC is hard to take and frustrates the orderly recovery of the business sector and economies generally. Having been in this business for over 25 years, I have to admit that it can be difficult at times to retain focus on the core issues and faith with the philosophies and strategies that have been proven to be successful for over a century of market experience. Even we have to remind ourselves sometimes of the principles of sound investment – buy quality assets that are fundamentally undervalued and diligently re-balance portfolios. Logic says that this philosophy is virtually fool-proof. But when we are constantly pounded by negative news, you start to question the philosophy. These days, more often than usual, we discuss strategies and philosophies and question their validity; we attend conferences and seminars on investment planning and management and debate the merits of alternative philosophies and we continually test our theories. Without exception we keep coming back to our core beliefs as being the most appropriate, the most likely to succeed and the least risky in the longer term than the alternatives. It is sometimes difficult to convince people to invest in turbulent markets and we fully appreciate and understand that instinct. But as we often observe, it is almost as hard as convincing people to sell down when markets are booming – another dominant investor instinct. However, it is interesting to note that the majority of our long term clients, who have been through market corrections before, have little trouble understanding the logic of buying quality assets at cheap prices. We remain resolved to looking through the noise and to concentrate on our client’s short, medium and long term best interests – that is our role.

Story by Chris Morcom Director/Private Client Adviser Image by Svilen Milev

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the current annual dividend payable on those holdings. The table presumes dividends are not re-invested.

he extreme volatility in sharemarkets over the past few months, and indeed the past four years, has made it difficult for investors to remain focused on the importance of taking a long term approach to their investments. One of the reasons we invest into an asset like shares is to protect money and its purchasing power against the effects of inflation over time. Based on the Consumer Price Index (CPI) over the past 15 years, to maintain the purchasing power of $100,000 in June 1996, you would need approximately $150,000 today. This was actually a low inflation period where the average CPI increase was 2.7% per annum; where as the six years of 1986 to 1992 saw inflation averaging 7.65% per annum! Investing in shares provides protection in two ways; through the increase in the value of your assets over time via share price movement, and the gradual increase of income provided via dividend increases. One could be forgiven for thinking the former is the more important, however the value of a growing income stream should not be underestimated.

Irrespective of the volatility in share prices over the past four years, the current dividends paid by the companies below looks very attractive when compared to the original investment made. Now consider the top line showing the “safe” return from a term deposit. The term deposit investment dollar value will not change between 15 years ago and now, and so the current rate of income on original investment is likewise low. Considering that $10,000 fifteen years ago would be worth only $6,709 today, the term deposit investor has actually lost out when inflation is taken into account. While some investors today are questioning the value of investing in shares, another question might be ‘can you afford not to invest in shares?’. The long term income stream provided by this asset class, when used in a diverse portfolio of assets, can assist investors in protecting the real value of their capital and provide an ever growing income to meet expenditure.

The table below shows the value of $10,000 invested in various shares 15 years ago, and also Units*

Value in 2011

Gross Income in 2011

Income Return on original investment

Term Deposit

-

$10,000

$565

5.7%

Aust Found Inv Co

5,181

$20,829

$1,554

15.5%

ANZ Bank

1,486

$29,421

$2,972

29.7%

Argo Investments

3,937

$19,724

$1,462

14.6%

BHP Billiton

1,361

$52,014

$1,904

19.0%

Commonwealth Bank

881

$40,159

$4,027

40.3%

Computershare

28,409

$213,636

$10,000

100.0%

Milton Corporation

1,605

$22,472

$1,857

18.6%

National Aust Bank

806

$18,435

$1,934

19.3%

QBE Insurance

1,217

$15,839

$1,658

16.6%

Rio Tinto

599

$42,725

$1,061

10.6%

Toll Holdings

40,000

$179,600

$14,286

142.9%

Westpac Bank

1,563

$31,125

$3,394

33.9%

Wesfarmers

1,527

$46,916

$4,363

43.6%

Woolworths

3,571

$87,964

$6,224

62.2%

* Units have been adjusted for bonus issues and share splits


Principles for successful SMSFs S Story by John Hewison CEO/Private Client Adviser

uperannuation is often referred to as “an investment” and superannuation fund performance characterises it this way. Superannuation is not an investment, it is a tax structure which contains investments. The SelfManaged Super Fund (SMSF) is an area in which we have specialised since the late 1980’s. The basic benefits of operating an SMSF are seen as being flexibility and control over investments, but there are a number of basic principles that we believe are vitally important to the successful operation of an SMSF.

• Strategic planning

• Estate Planning

Major importance needs to be focused on strategic planning and the gains that can be derived. Strategies include Transition to Retirement (TTR) using salary sacrifice offset by pension payments, transfer of assets in-specie as contributions in lieu of cash transfers, superannuation splitting and gearing in super to name just a few. Strategy management is a key driver to maximising returns from SMSFs.

Some of these are:

In theory, Account Based Pensions are designed to progressively reduce capital and that is the way in which managed pension funds work. We take the view that SMSFs ought to adopt a strategy that establishes a reliable income stream that is capable of providing the income required to satisfy the desired income stream. By doing this, the fund capital should grow over time which in turn should also grow the relative income amount to index to CPI increases. But most importantly, during time of market turmoil as we have recently experienced, it enables the retention of assets which will eventually ride out the storm and retain the member’s asset base.

It is not readily appreciated that superannuation funds do not form part of the members’ estates. This is because superannuation funds are a trust structure and their assets are controlled by the trustees on behalf of the members that is, the asset ownership is in the name of the trust structure. It is therefore necessary for SMSFs to have specific measures in place like reversionary pensions and/or binding death agreements or nominations to ensure that members’ estate planning requirements are carried out. There are distinct advantages that SMSFs have in this regard subject to active strategic planning initiatives.

• Direct investment Using managed investment structures within a SMSF structure defeats the purpose and the basic benefits of investment control and flexibility, capital gains control, cost minimisation and cash flow management.

• Active investment management It is important to have a formulated asset allocation and investment strategy based on the achievement of quantifiable outcomes like income need and future capital requirements. One of the great advantages of a SMSF is that trustees can manage their portfolios for the absolute benefit of the members based on their specific objectives. Trustees are in a position to react quickly to market conditions and re-balance portfolios back to strategic asset allocations.

• Cash flow management

SMSFs can be powerful structures if actively managed and some basic strategic principles are effectively employed.

Hewison Live website launches - investor news centre with a difference now available to all clients This month marks the launch of a new and improved section of the Hewison Private Wealth website, Hewison Live. In today’s complex financial environment, it’s more important than ever for investors to be financially savvy and understand the market’s dips and dives as well as the opportunities to build wealth. Hewison Live is an investor news centre designed for our clients to directly access the latest financial news, views and investment insights, including videos, blogs, articles and more – all through one central resource hub. The site replaces the former News and Views section of our site, is much easier to navigate, and there are a number of new features that we hope you’ll find useful, such as the ability to

share information with friends and family at the click of a button.

- Expert advice and opinions shared through the video vault

Whether you are improving your financial knowledge or just keeping up to date, we hope you find this a truly valuable resource.

- A free Q&A service to provide greater access to our advisers who will answer all your queries, no matter how small or complex, and;

Through Hewison Live you will now have easy access to:

- An enhanced media room with recent articles and press releases provided for your perusal.

- The expertise of our advisers through weekly blog contributions

We look forward to helping you keep up with the complex world of investing as your financial future is our priority.

- Daily news aggregated from a variety of Australian news sources in real time - A term and definitions feature for understanding tricky financial terms - An e-magazine style Hewison Quarterly to allow for easy online reading

Please visit and explore the new Hewison Live site which is located on the Hewison Private Wealth website: www.hewison.com.au. For more information or any queries about this new addition please contact: Clare Kerber on 03 9682 1900 or email clare@hewison.com.au


Lisa joins our team Hewisons welcomes Lisa Munro to our Private Client Account Managers team. Lisa comes to us from Merrill Lynch and prior to that she was living and working in Singapore for Cadbury Schweppes.

Jenny Keov is engaged Jenny’s partner Dan popped the question while they were over in Malaysia earlier this year. They went to Kampung Kuantan to see the fireflies and he proposed on the gondola in the middle of the river. Congratulations to Jenny and Daniel.

Save the date! Next Investor Insights Seminar: Maximising your SMSF Wednesday 9th November 2011 The theme of our next free information evening will focus on how to make your Self Managed Super Fund work harder for you. This session is aimed at investors who have a medium level of investment knowledge and would like to know more about opportunities to maximise retirement income. In this session our advisers will specifically provide insight on: - SMSF pension strategies and; - Borrowing in super opportunities

Hewison baby boom

Our Investor Insights Seminars are always very popular and reach full capacity so please register your interest as early as possible with Clare Kerber. Contact Clare on: 03 9682 1900 or email clare@hewison.com.au to reserve your seats. We invite you to bring along friends or relatives who may benefit from the information in this session. If you have specific questions you’d like answered in this session, please send them in advance to clare@hewison.com.au and we will endeavour to address these on the night.

Sarah Bowers welcomed her 2nd son Harry Francis Bowers born 20th July 2011 weighing 6lb 13oz.

Simon & Sarah Curtain welcomed a 2nd daughter Adele Curtain who was born on the 21st May 2011 and weighed 7lb 4oz.

Denise and Ben Poole welcomed a 2nd son, Ethan, who was born on the 22nd September 2011 and weighed 8lbs 15oz.

Here’s a minute of

Q&A

Hewison Private Wealth is now on twitter For the latest financial news updates and insights follow us on Twitter @HewisonTweets.

Melissa Campbell

Private Client Manager a) Where were you born? Canberra

i) Where did you work previously? Dorma, an automatic door company

b) Where did you go to school? Brentwood Secondary College

j) Who/what do you admire most? My mum

c) What do you do for fun? Dance & make costumes

k) Who are 4 people in the world you would most like to invite for dinner? 1. Gene Kelly 2. Gypsy Rose Lee 3. Dita von Teese 4. Dirty Martini (they are real people, I promise you!)

d) What is your favourite book? Jane Eyre e) What is your favourite music? Eclectic taste, anything great to dance to f) What is your favourite food? Berries, Saganaki with lots of lemon g) What is your favourite movie? Singing in the Rain h) How long have you been at Hewisons? Nearly 2 years

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

l) What are your hobbies? Dancing and sewing m) What is it you enjoy most about your role at Hewisons? Client contact and the wide variety of tasks

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.


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