HEWISON Financial news, our views AND other issues Issue 39 ~ April 2012
Q
uarterly • Economic update • From the CEO’s Desk • Bank Shares vs. Term Deposits • Investment focus
• LIC Trading at a Discount to Market Price • Glenn Celebrates 10 Years with Hewison • New Client Reporting System Launch
Understanding the terms we use Carbon Tax The carbon tax is an environmental tax levied on the carbon content of fuels. It is a form of carbon pricing. Carbon is present in every hydrocarbon fuel (coal, petroleum and natural gas) and is released as carbon dioxide (CO2) when burnt. In contrast, noncombustion energy sources - wind, sunlight, hydropower and nuclear — do not convert hydrocarbons to CO2. CO2 is a heattrapping “greenhouse” gas and scientists have pointed to the potential effects on the climate system of releasing greenhouse gases (GHGs) into the atmosphere. Since GHG emissions caused by the combustion of fossil fuels are closely related to the carbon content of the respective fuels, a tax on these emissions can be levied by taxing the carbon content of fossil fuels at any point in the product cycle of the fuel. Sovereign Risk The risk that a foreign central bank will alter its foreign-exchange regulations, thereby significantly reducing or completely nulling the value of foreign-exchange contracts. Net Tangible Assets Calculated as the total assets of a company, minus any intangible assets such as goodwill, patents and trademarks, less all liabilities and the par value of preferred stock. Also known as “net asset value” or “book value”. What is the mining tax? The mining tax is best known as the resource super profits tax, or RSPT. It is designed to replace the confusing array of royalties that mining companies presently pay to the states. Any profit made by mining companies that is above 6% of their capital investment would be taxed at 30%, and all royalties presently paid to the states would be rebated.
Economic update Story by Simon Curtain DIRECTOR/PRIVATE CLIENT ADVISER
As expected, economic headlines in the first few months of 2012 have been dominated by Greece and the European Debt Crisis. In February, Greece rushed through a number of austerity measures to secure a second bailout package of EU130 billion. The package also included a write down of around 50 per cent on Greek bonds held by private investors. The aim of this second package is to reduce Greece’s debt as a percentage of Gross Domestic Product (GDP) to around 120 per cent, which is considered to be manageable over the longer term. While the world, and in particular Europe, have gone to great lengths to avoid a Greek ‘default’, one has to wonder how losses of 50 per cent on Greek bonds does not equate to a default of sorts anyway. While some have been predicting that a Greek default could spell the end of the Euro zone, at the recent Hewison Investment Seminar, Clifford Bennett, Chief Economist of the White Crane Group, suggested that Europe will hold together and that the Euro will remain a strong currency. Closer to home, during the past quarter there has been much speculation on the direction of interest rates. After two rate cuts late last year, rates have been on hold at 4.25 per cent. The Reserve Bank of Australia (RBA) is quoted
Image by Nick Benjaminsz
as saying that “the economy would have to weaken materially to prompt a further cut.” While the RBA has noted recent weakness in the retail and manufacturing sectors they believe that the underperformance of these sectors is being balanced by the strength of the mining sector. All this points to rates remaining on hold for the foreseeable future. Employment in Australia remains strong with the unemployment rate sitting at around 5.2 per cent. On a world scale our unemployment rate is enviable, with unemployment of around 8.3 per cent in the US, 8.7 per cent in the UK and 9.3 per cent across the European Union. Over in Asia there has been news on how China will manage a slowdown in growth over the short to medium term. China recently announced that it would be targeting growth of 7.5 per cent over 2012, down from growth of 9.2 per cent last year. The challenge for China over the coming years will be in developing its economy to rely less on foreign demand of exports and instead increase domestic demand for its own goods and services. Over time we expect China to mature into a consumption-based economy as it hastily catches up to the standard of living and lifestyles of its Western counterparts.
From the CEO’s Desk
John Hewison
As 2012 gets underway we have seen the smoke blow over the Europe debt contagion story, the US post impressive recovery figures and markets steadily moving upward. Nearly every commentator worth listening to has become more positive and the last corporate reporting season saw further profit increases in most sectors. The US Dow Jones Index has pushed through the 13,000 point resistance level and is headed for an all-time high. Yet, here we see the ASX 200 languishing at around 35% below its previous high. You may well ask ‘why?’ as we constantly hear the ‘lucky country’ is doing very nicely – economically speaking. The messages we’re getting is that Australia is seen as having high sovereign risk due to a general lack of talent on both sides of politics, a weak Treasury bereft of policy initiative plus the feared impact of the looming Carbon and Mining tax. Added to that, Australia’s productivity level is the lowest it has been since the 1970’s – an issue that has to be addressed quickly if we are to realise our great potential on the world economic stage. So to put it into perspective, corporate Australia is doing pretty well with low debt levels and profits generally at higher levels than pre-GFC, but there are certainly some sectors that continue to struggle. The expected future lowering of interest rates by the Reserve Bank will give the economy a further boost. Statistically speaking, our share market is significantly undervalued and our property markets are starting to look fair value. All we really need is some certainty and confidence and strong leadership to encourage investment both locally and internationally. At Hewison Private Wealth, our stance has been to remain committed to our strategic portfolio re-balance philosophy with an emphasis on strong underpinning of investment income. As things progress we become more and more confident that this has paid off handsomely as our clients enjoy strong cash flow returns, despite the lack of capital growth. As market values ‘normalise’, capital growth will recover as it always does.
Story by Glenn Fairbairn, Director/Private Client Adviser Image by kodi printer
Bank Shares vs.
Term Deposits The Global Financial Crisis (GFC) and the most recent European Sovereign Debt crisis has tested the resolve of many investors and created a lot of uncertainty and anxiety. This uncertainty has resulted in investors being fearful of share investment and subsequently holding the majority of their assets in cash. Remarkably, Australians are currently sitting on cash of around $1.7 trillion, an increase of 10% over the past 12 months. Considering that share markets globally have been extremely volatile over this period, many may view this as the right strategy. However, with global interest rates at historic lows, the return on cash has fallen considerably. Given that the reduction in share values since October 2007 far outpaced the reduction in earnings, the dividend yield of many shares has CHART 1 90 Day Term Deposit
Gross Dividend Yield
CBA
5.3%
9.5%
NAB
5.3%
10.4%
Westpac
5.3%
9.1%
ANZ
5.3%
10.8%
Bank
risen considerably. This has resulted in a widening gap between cash returns and share dividends. If we consider bank shares, that have traditionally paid strong dividends, it is clear from Chart 1 that they are currently providing a far superior income return than their corresponding term deposits. In most cases the dividend return is almost double. The major difference between these investments is that the value of bank shares can change on a day to day basis, whereas the value of a term deposit is fixed. However, if you take the view that banks will survive and that their shares are likely to be worth more in future than what they are today, does their value today, tomorrow or even next year really matter? Capital losses on shares are only realised upon sale, therefore daily prices of a share mean very little when implementing a buy and hold strategy. Unfortunately investors tend to get too carried away with the short term ‘paper value’ of investments without concentrating on the actual cash flow, which is the true return on investment. As a result of an obsession with short term performance, which has never been the true philosophy of share investment, many are sacrificing a significant amount of income and the potential for capital growth over the long term.
With LIC’S Trading at a Discount to Market Price,
is this a Good Investment? Story by Nathan Lear, Director/Private Client Adviser
If someone told you that you could purchase shares in a company worth $1 for 90 cents, would you take up the offer? On the surface it sounds like an attractive investment proposition, paying less for something than it is actually worth. Several of Australia’s leading Listed Investment Companies (LIC’s) are providing such an investment opportunity, trading at discounts to their Net Tangible Assets (NTA). What is a LIC? LIC’s provide exposure to a diversified portfolio of investments. Unlike managed funds, LIC’s are listed and therefore trade on an exchange such as the Australian Stock Exchange (ASX). As LIC’s trade on a stock exchange, their price will vary according to the normal market forces of supply and demand. Unlike a managed fund, a LIC is not at the mercy of other investors who may request redemptions and withdraw their funds from the portfolio. Rather, LIC investors can buy or sell shares on the stock exchange in the same manner as any other listed company.
As can be seen in Table 1, the leading Australian LIC’s, AFI, ARG and MLT are trading at discounts to their NTA, between a range of 7% to 10%. CTN is trading at a significant discount of around 22% to its NTA. This creates an environment where investors can purchase shares in these companies for less than they are actually worth. You may ask - Why do LIC’s trade at a discount or premium to what they are actually worth? Surely they are only worth what someone is prepared to pay for them? Yes that is correct, however there are many forces at work that drive the price of these shares. Below are some of the main reasons LIC’s trade at discounts or premiums to their NTA: • Supply and demand • Market perception of future earnings potential • Perception of management • Popularity of the structure AFI – Share Price to NTA History
Net Tangible Assets The NTA refers to the total value of underlying investments held by the portfolio. Given the nature of a LIC, its share price will not always trade in line with its NTA. This creates an environment where LIC’s can trade at a discount or premium to their share price, or put simply, at times the LIC is worth more or less than what you are actually paying for it. Some Examples Below are some examples showing how several of the major LIC’s are currently trading relative to their NTA: TABLE 1
LIC Australian Foundation Investment Company
Code
Close Price (20/03/12)
source: www.afi.com.au
NTA
Discount
AFI
$4.15
$4.48
-7.37%
Argo Investments Limited
ARG
$5.12
$5.59
-8.41%
Milton Corporation Limited
MLT
$14.85
$16.51
-10.05%
Contango MicroCap
CTN
$1.14
$1.45
-21.89%
New Client Reporting System LAUNCH
Over the past 10 years, AFI has traded at a premium as high as 15%, to a discount as low as 10% to its share price. Are LIC’s good value? The leading LIC’s, AFI, ARG and MLT are all trading near a 10% discount to their share prices. Therefore you are presented with the opportunity to purchase a basket of securities at a 10% discount compared to what they are worth. A sound investment decision indeed, especially if you take a view that the market is undervalued.
In response to our client feedback, Hewison Private Wealth is excited to announce the impending launch of a vastly improved online portal for our clients to view portfolios. “Our mission of constant innovation to ensure we stay at the forefront of client service delivery was behind the system upgrade” said Simon Curtain, project manager of the system upgrade. He added “We pride ourselves on responding to our clients ever changing needs to ensure we stay ahead of our competitors”. Special features of the site include: • • • •
View graphs of portfolio values over time View historical performance Track specific investments Update contact details
More information on the portal will be sent direct to clients over the coming weeks.
Jenny Keov Marries Daniel Palmer Following Chinese tradition, Daniel and Jenny began their big day with a tea ceremony at Jenny’s parent’s home. From there, the ceremony attended by family and friends was held at the Fitzroy Gardens at the “Temple of the Winds” under a picture perfect sky, followed by the reception at Moonlight Receptions. The couple used various locations to capture their memorable day. We congratulate Jenny and Daniel and wish them a lifetime of health and happiness.
GOLF DAY Hewison Private Wealth recently held its second annual company golf day. Long Island Golf Club once again played host, and as usual was fantastic. Conditions were somewhat of a challenge with high winds, but the sun shone all afternoon and made for a thoroughly enjoyable day for all who attended. Congratulations to the winning team, Lyndon Cocking, Bill Kingwell, John Boyd, …. and John Hewison (contrary to popular belief, it was not rigged) and thank you to all those who made the day such a success.
Client Seminar At our recent Hewison Investment Seminar, Clifford Bennett, Chief Economist of the White Crane Group, gave his thoughts and opinions on the global economy and factors driving change around the world. Check out Clifford’s presentation on our website at www.hewison.com.au/live/video_vault
Glenn Celebrates 10 years with Hewison
Here’s a minute of
Q&A Lisa Munro
Private Client Account Manager a) Where were you born? Melbourne
i) Where did you work previously? Merrill Lynch
b) Where did you go to school? Cobram
j) Who/what do you admire most? Nelson Mandela
c) What do you do for fun? Catch up with Friends
k) Who are 4 people in the world you would most like to invite for dinner? 1. Adele 2. Richard Branson 3. Dalai Lama 4. Prince Harry
d) What is your favourite book? Shantaram e) What is your favourite music? Adele - live at the Royal Albert Hall f) What is your favourite food? Thai g) What is your favourite movie? Four Weddings and a Funeral h) How long have you been at Hewisons? 10 months
l) What are your hobbies? Pilates, Hiking & Golf
In May 2012 Glenn Fairbairn celebrates his 10th anniversary since joining the firm. Glenn joined us during the final year of his Business (Economics and Finance) degree and has since developed into an experienced and trusted Private Client Adviser. Glenn is married to Danica and has two children. He is a shareholder and Director of Hewison Private Wealth and a valued member of our team. Congratulations Glenn.
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
m) What is it you enjoy most about your role at Hewisons? Drinks on Friday! 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.