Hewison Quarterly April 2014

HEWISON Financial news, our views AND other issues Issue 47 ~ April 2014

Understanding the terms we use Tapering A gradual winding down of central bank activities used to improve the conditions for economic growth. Tapering activities are primarily aimed at interest rates and investor expectations of what those rates will be in the future. These can include conventional central bank activities, such as adjusting the discount rate or reserve requirements, or more unconventional approaches such as quantitative easing (QE).

Blue Chip A nationally recognized, well-established and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, culminating in a long record of stable and reliable growth.

Writing Down Reducing the book value of an asset because it is overvalued compared to the market value. A write-down typically occurs on a company’s financial statement, when the carrying value of the asset can no longer be justified as fair value and the likelihood of receiving the cost (book value) is questionable at best.

Reporting Season A period when many large companies declare their dividends.

Non-concessional Contributions Contributions made from your aftertax income. These may include personal contributions, spouse contributions and child contributions. Contributions tax is not deducted from these contributions when they are invested into a super fund, nor are they taxed when they are withdrawn, because tax has already been paid.

These contributions count towards your non-concessional cap.

Q

uarterly • Reporting Season Wrap • From the MD’s Desk • Economic Update • Commercial Property 2014

• Superannuation Contribution Limit Changes • FoFA Best Interests Duty

Reporting Season Wrap Story by Nathan Lear, DIRECTOR/PRIVATE CLIENT ADVISER Image by Zsuzsanna Kilian

T

he February reporting season was a positive one for the Australian share market. Not only did many companies report strong results, forward expectations were also very positive.

Key themes were a massive turnaround from the resource giants BHP and Rio Tinto, with both posting excellent results. The major banks also continued their strong performance.

The bottom line is that Australian companies are in good shape. In previous years, with the economy coming out of the GFC, a major focus of companies has been cost cutting. But now, as companies continue to grow, we are seeing strong increases in revenue and profit.

The table below shows the percentage Net Profit after Tax (NPAT) increase/decrease of some of Australia’s leading companies that many Hewison clients have exposure to: Most of Australia’s quality blue chip stocks have rewarded investors that remained patient with COMPANY

NPAT

ANZ Bank

13%

BHP Billiton

31%

Commonwealth Bank

14%

National Australia Bank

7%

Origin Energy

5%

QBE Insurance

-132%

Rio Tinto

10%

Telstra

10%

Wesfarmers

11%

Woodside Petroleum

-17%

Woolworths

15%

them during the GFC. However, it has not been smooth sailing for all companies.

QBE insurance, while making a cash profit of $761 million, reported a net loss of -$242 million. The reason for this was the company’s write down of several underperforming assets to the tune of around $1 billion. This was management’s way of clearing the decks. The market responded positively, with QBE’s share price sharply higher the trading day immediately following the result.

Woodside Petroleum, while reporting a decrease in NPAT from the previous year, posted their second highest result in the company’s history with NPAT of US$1.75 billion.

The result was down on the previous year due to impairments. The previous year’s result also benefited from the sale of a major asset.

The outlook for 2014 remains positive, however for share prices to continue to rise we will need to continue to see earnings growth. This means that stock selection is as important as ever. In order to succeed in the current environment it is important to have a disciplined strategy and stick to it.

From the MD’s Desk

John Hewison

We don’t talk about the development work that goes on behind the scenes which enables us to deliver value and quality of service in a timely manner. However, it is a key part of what we do on a daily basis.

It wasn’t long ago that clients were satisfied with receiving printed reports, 4 weeks after the quarter end. We now provide online access, with asset values updated 3 times daily and cash accounts balanced every day.

We have a number of new initiatives underway which will speed up data interface and transaction processing, to further improve access to information for our client and accountant colleagues. More speed, more efficiency and more information at no extra cost.

The development of our own internal software systems was probably the greatest investment we made as a business back in the late 1980s. This has enabled us to stay at the leading edge of technological development, resulting in an ability to deliver more at a lower cost. Termed vertical integration, we can control the entire advice-to-delivery process internally, without employing outside contractors.

Systems development is costly. However, in the final analysis it delivers extraordinary service delivery outcomes with ultimate cost efficiencies to our clients.

Of course, systems don’t replace people, but they enable our excellent people to concentrate on delivering personal service to our clients – and that’s the bottom line.

Over the years we have seen replacing personal service with on-line solutions and moving service personnel to off-shore call centres. Just recently we have seen a reversal of these trends with companies like Telstra bringing their service centres back to Australia and the re-emphasis on face to face attention like the banks.This clearly indicates that the auto on-line trend had gone too far and maybe we will now see a return to balance.

I must say that I am an on-line sort of a guy – but if things go wrong I want to talk to someone who can help me.

There has been talk over the years about the provision of on-line financial advice. Our job is all about personal relationships. On-line access to information and efficiencies gained through technology are one thing, but you can never replace the value of the personal relationship with a computer terminal.

Economic Update

Story by Simon Curtain, Director/Private Client Adviser

The Australian share market is essentially flat so far this calendar year, however the route has been bumpy. It started the year around 5,300 points and then dipped 5% in February only to reclaim all of this and more in March, hitting a new year-year high above 5,400 points. The market has since resettled around 5,300 points.

could, over time, see increases in bond returns and interest rates in the US.

So why did the market dip in February?

What can we expect for the rest of this year?

The United States is currently printing money (quantitative easing) to boost economic growth.

Earlier this year, the US Federal Reserve decided the economy is ready to ‘stand on its own two feet’ and signalled it will begin scaling back (or tapering) its quantitative easing strategy. As usual, equity markets over-reacted to this news and the market dropped accordingly in February.

While overreaction in the share market is quite normal, it does demonstrate how share markets can be volatile over short timeframes. However, when approached with the long term in mind, they can provide solid growth and a reliable income stream.

What impact will tapering have?

The U.S. has the world’s largest economy.

As such, investors see it as somewhat of a safe haven for money and investments. However, with US rates at an all-time low, there is not adequate incentive to invest in US Bonds. Investors have instead directed money to other countries where they can obtain a more competitive rate on their funds.

The decision to begin tapering is a clear sign that the US economy is improving– which in turn

With the prospect of increasing interest rates, the US has again become an attractive investment. As a result, we have seen large amounts of money withdrawn from countries around the world and deposited back to the US.

Hewison’s outlook for the rest of 2014 can be summarised as follows: • The tapering of the Federal Reserve’s quantitative easing is now clearly outlined and largely priced into equity markets. Underlying fundamentals such as company earnings will now drive markets, rather than hearsay over whether or not the Federal Reserve will ease further • Economic growth in the US will pick up, driving US share markets and the US dollar higher • Emerging markets and currencies will be volatile, as cash moves back into the US seeking a higher and more stable return • Interest rates in Australia are likely to remain on hold this year or move even lower, to promote a rebalancing of the economy away from resources to other sectors such as education and in-bound tourism.

We continue to monitor the global landscape and identify opportunities, while keeping our clients’ long term goals and objectives at the centre of our business practice.

Commercial Property in 2014 Story by Glenn Fairbairn, Director/Private Client Adviser

After several years of challenging market conditions, three things emerged as trends for commercial property in 2013: 1. The increasing appeal of property as an income investment 2. Solid Australian economic fundamentals 3. Strong institutional interest.

The general outlook for the three major commercial property sectors is as follows: Office Property Improving economic conditions, increasing business confidence and lack of new supply should support the office market going forward.

Investor demand for office property has improved as a result of low interest rates and stronger equity markets.

Retail Property Although retail property has faced a lot of headwinds, some positive signs have emerged.

A recent upswing in business and consumer confidence is an excellent leading indicator. In the immediate term however, with ongoing

economic uncertainty, we have a relatively cautious view of this sector.

Industrial Property The incentive for higher rates of income has led many investors to Industrial Property which has been a strong performer over the last few years. The supply of new industrial property is generally offsetting demand, with the result being that rents have remained relatively steady.

In our view commercial property remains an attractive long term investment and a core component of any diversified portfolio.

When considering an appropriate property investment for our clients our non-negotiables are generally: • Inner city location; • Quality tenants; • Long term leases; • Well maintained building; • Low levels of gearing; • Appropriately considered exit plan.

Superannuation Contribution Limit Changes Story by CHRIS MORCOM, Director/Private Client Adviser

The Australian Tax Office (ATO) recently published some welcome and long awaited news for those accumulating money in superannuation.

New superannuation contributions limits were announced and will apply from 1 July this year.

The table adjacent provides a summary of the new limits, which have been increased for the first time due to indexation.

CONTRIBUTION TYPE

CONCESSIONAL

Age under 49*

$30,000 per annum

Age 49 or more*

$35,000 per annum

* The age cut-off is as at 30 June of the previous financial year. So for the 2014/15 financial year, age for the above limits is as at 30 June 2014.

make contributions to superannuation.

Prior to such action, I suggest you contact your adviser for advice relevant to your particular situation.

The main difference to previous years is the increase in the Non-Concessional Contribution limit. For those considering depositing large amounts of their own money into superannuation, there may be some benefit in delaying triggering the ‘bring forward’ rule until after 30 June this year.

New Penalty Regime for SelfManaged Super Fund Trustees

If you are considering such a strategy, you should be careful to ensure you continue to meet the age and work tests that allow you to

At the time of writing, new legislation has passed both houses of parliament providing the ATO extra powers when it comes to the regulation of SMSF Trustees. The new powers allow the ATO to levy penalties on the trustees of SMSFs for non-compliance with regulation.

The penalties are payable by the trustees, and cannot be reimbursed by the fund.

NONCONCESSIONAL $180,000 per annum, or $540,000 under the 3 year bring forward rule

Interestingly, if a SMSF has two or more individuals as trustee then any penalty applied would be levied on each individual. However, if a SMSF had a company as trustee then only one penalty is levied on the trustee. This is yet another reason for SMSFs members to consider using a company as trustee of their fund.

Our clients who have a SMSF can enjoy added peace of mind knowing that we are ensuring your fund meets its compliance obligations at all times.

FoFA Best Interests Duty Story by John Hewison, managing Director

The government had announced that it intended to remove the “Best Interests Duty” and grant exclusion for “general advice” commissions from amendments to the Future of Financial Services (FoFA) legislation, soon to be introduced into parliament.

Assistant Treasurer Arthur Sinodinos argued the current requirements contained within the Corporations Law - as specified by the Financial Services Reform Act (FSR) and under Common Law obligations - are sufficient in providing a “Best Interest” obligation by a licensed financial adviser.

Since then, Mr Sinodinos has stepped down as Assistant Treasurer with Finance Minister Mathias Cormann taking responsibility for FoFA. He has since frozen the introduction of FoFA pending further discussion with the stakeholders.

We at HPW are completely independent of any investment source and act solely on behalf of our clients for which we charge a fee for services provided. This is because we believe this is the only acceptable basis for the provision of dependable, non-conflicted financial advice. We have actively campaigned on these issues for decades.

The “General Advice” commission exemption applies to non-advice based financial product sales, like corporate superannuation schemes and bank products. However, if this in itself is not bad enough, it effectively opens the door for commission arrangements that will no doubt be abused.

The “Best Interest” duty (or Fiduciary duty) applies to all professions and basically means that the adviser must put the client interest before anything else and be completely free

of any conflicts of interest. The FSR and Common Law provisions call for advice that is appropriate to the client’s circumstances and proper disclosure of any conflicts of interest.

There is a distinct difference in meaning of the two requirements.

The reality is that any adviser that is employed and rewarded by a financial product “manufacturer” cannot satisfy the “Best Interests” duty. The conflict exists no matter how you dress it up. We take the view that the “Best Interest” duty must be retained and if that means a de-linking of the advice and product entities of the financial institutions concerned with legitimate independence of the advice function, then so be it.

The reality is that the old “licensee and agent” model is broken. It is time for serious restructure.

Jenny Palmers new Cake Business “Cakes

by Jenny”

@ Hewisons

Jenny left Hewisons pursue and grow her “Cakes by Jenny” business. Her cakes are amazing as you can see. If you have any enquires her contacts details are:

Sadly we said farewell to two of our Relationship Managers, Sera Vera and Jenny Palmer. Both Jenny and Sera have left us to start their own business and we wish them every success with their new endeavours.

Staff Changes

Contact details: cakesbyjennymelbourne@gmail.com

We would also like to introduce you to Stephanie Eckert and Sarah Bowers who join our team as Relationship Managers. Sarah Bowers returns after 2 years of maternity leave, and Stephanie comes to us from ANZ. Welcome to the team ladies.

cakes by jenny

Sarah

Denise is back from maternity leave Relationship Manager Denise Poole left us back in September 2013 to have her third baby, William, who was born in October.

Welcome back Denise, we are delighted to have you back.

Stephanie

Hewison Private Wealth Investor Insight Series for 2014 We kicked off the year in February with our first forum featuring Managing Director, John Hewison presenting “Top 10 Investment Do’s and Don’ts”

a great opportunity to mingle with other Hewison clients and our Advisers. If you would like to register your interest, please email Clare Kerber clare@hewison.com.au

We will be running more Investor Insight Series events throughout the year. These are Date

Topic

Speaker

Venue

Tuesday 13th May

Aged Care Update

Chris Morcom

@ Hewison Private Wealth 4/102 Albert Road SOUTH MELBOURNE

Tuesday 12th August

TBA

Simon Curtain and Andrew Hewison

@ Hewison Private Wealth 4/102 Albert Road SOUTH MELBOURNE

11th February 2014

TBA

Nathan Lear and Glenn Fairbairn

@ Hewison Private Wealth 4/102 Albert Road SOUTH MELBOURNE

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

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.