2008: The Year that Broke All the Rules!

December 19th, 2008  |  Posted in Announcements

December Update from Peter Spann, CEO Freeman Fox

As 2008 draws to a close, you like me, and like the entire world are probably breathing a sigh of relief: we've been through an indescribably difficult period (by all historical standards) and fatigue has set in for many investors. 

We've been working with our clients to make sure you are fully informed to the best of our ability, and to ensure that your portfolios are best positioned to weather this financial crisis. 

There now seems to be a small measure of welcome stability in the markets in the lead up to the holiday season often referred to as the 'Santa Market'.

I know personally the kind of pain you've been going through with your investments: I've invested heavily in almost every fund I've recommended, but I have confidence that, as long as we stay vigilant and carefully adjust our strategy we will see this through and in the long term be much better off.

The good news is that even though they are down, most of our investments including Structured Products and our Generator, Emergent and Maximiser (GEMs) funds have outperformed their benchmarks.

In the last year the rules as we know them were completely thrown out the window.

Household names like Lehman Brothers and Merrill Lynch disappeared or were consumed and Governments the world over contributed billions to sure up their economies and the companies that contributed to them.   World economies have slowed to almost a standstill and most would now agree it's pointless arguing over the technicalities of the 'recession' word because for all intents and purposes the US, UK, most of Europe and Japan are skating on thin ice. 

Australia certainly hasn't escaped the turmoil.  The share market halved from its peak and the share prices of some blue chip companies fell to levels unimaginable at the beginning of the year.  Well run companies like Woolworths, QBE, Westfield and Telstra all suffered although nowhere near as much as the companies whose business strategies were based on gearing. 

Looking forward, the first half of 2009 in particular will be tough.  Businesses will struggle to maintain earnings and will be under pressure to cut costs, especially in the first half of next year.  Unfortunately, as is the way with such things, those who do so quickly will probably be rewarded by the market for taking positive action.  Our own company, Freeman Fox has not been immune, being forced to say goodbye to some great team members this year due to economic circumstances and that is very sad.  We have restructured to ensure that we can maintain our service levels whilst still trimming costs.

What has amazed me this year is the contrast between some former team who have been wonderful, understanding of the situation and leave the business 110% contributors and great friends and those who have been spiteful and vitriolic. It's been a tough time for everybody in the company but those of you who are in business will understand.  I wish all our current and former team members the very best and hope in my heart of hearts they will go on to great success in their lives with happiness in their hearts. 

Many other companies have laid off or are preparing to lay off staff, are cutting back on development, new projects and trimming expenses. 

The biggest headwind to the market recovering next year will be the hard to get a grip on 'sentiment' - both business and consumer.  Business sentiment is at recession type levels and despite government handouts in the billions consumers have stopped spending even though they are benefiting from lower interest rates, lower fuel costs and the federal government's $10.4 Billion spending package. 

The worst part of it for all, however, is the brutal way market conditions have savaged what otherwise would have been considered reasonably conservative investment portfolios.

I haven't been immune, and I'm sure neither have you. Clients following the Freeman Fox strategies have fared better than most, but that's cold comfort indeed when you're staring losses in the face and worrying about ongoing servicing commitments.

And I truly get that - I get that it's tough.  I listen to our advisers and I have listened to our clients.  We'll keep listening too and adjusting the strategy as best we can.  And I get it because I have had my skates on adjusting my portfolio too. 

But there is good news in all of this gloom!

It is highly unlikely global share markets will end up lower at the end of 2009 than where they started and if you have been investing, even a little, I hope that's good news for you.   There are now some extremely good companies selling cheaply, and most companies use these downturns as a way to trim the fat, get back into gear and find ways to do things faster, better and more efficiently - and that's good news for profits in the medium to long term. 

As always financial markets will lead the real economy.  If share markets rise you can expect the economy to follow. 

And many smart companies will use this time to consolidate their positions against competitors, grow by acquisition and merger and will come out of this in substantially better shape.  Less competition means it is easier to break through the clutter with marketing messages and make sales.  This all bodes well. 

The 'Big Issues'...

Gearing

Many clients have been hit hard this year through gearing. 

It is critical to remember our advice for all clients on gearing is directly related to your risk profile.  An adviser can only recommend based on the information they have and it's important that you make sure we have up to date information on your feeling about risk.  There is an old (if somewhat derogatory) saying in this industry that 'a client always has a high risk profile until they start losing money'.  But if we have on file that you understand the risk of gearing and are comfortable with it almost inevitably some form of gearing was suggested to our clients because of the positive benefits of gearing in a rising market.   It is critical that you get your risk profile with your adviser well known especially if that may have changed given the current circumstances so we are giving you accurate advice.

Also it is important to keep in mind that conservative for a client who has a broad risk profile will be considerably different for one who is risk adverse.  50% gearing may have been very conservative for somebody with a high risk profile but scary for somebody with a low risk profile.  That's why it is so important to keep us up to date.

At the moment our blanket advice is that margin lending for equity market related investments (shares, managed funds, etc) should be close to or at zero.  Volatility is the enemy of margin lending and although things have settled down somewhat I do not believe we have seen the end of volatility.  That means we should be ultra-careful with gearing at the moment. 

It is also important to remember that if you have your margin lending with anybody apart from Leveraged Equities or if you do not have us listed with Leveraged Equities as your adviser we will not be aware of your gearing levels and you will need to be doubly proactive in seeking our advice.  This also means we may not have contacted you about gearing - if this is the case please contact your adviser urgently.  Margin calls can be very stressful so it is useful to have discussions about what to do prior to getting one rather than having to decide in a rush at the last moment.  This issue of gearing, I think has been the single most burning issue we have had to deal with this year and hopefully we have been there to guide you through.  Please keep in regular touch with us about this - it is very important that we work together.

We have always taken what we believe to be a conservative approach to gearing. We believe we have contacted all clients about their margin lending so if you have margin lending with us and haven't heard from us please contact us urgently.

Structured Products

These are of concern for a number of clients.

Interestingly compared to the broader market they have actually performed very well.  Most are down between 15% and 25%, a few are actually performing quite well, and when you consider the Australian share market has been down over 40% this is actually out performance.

We understand that of particular concern to most clients are the two income oriented products MEEIF and GEEIF.  We are paying close attention to all these investments and working with the investment managers to come up with a solution to the current issues in the funds. 

I can assure you 110% that these investments are 'top of mind' for us, and we will be back to you before the end of the first quarter (March 31st) so there is plenty of time for you to consider your options before the end of the financial year.  Our advice at the moment is simply to hold these investments until we conclude our talks with Macquarie and the other investment managers.  The positive news is that because of threshold management these investments are unlikely to go down any further regardless of what the market does so generally it would be wise to hold.  However if you have any concerns or need to discuss your personal circumstances please call us, as we are happy to help. 

This Christmas, take a big deep breath, close your charting software, and just stay calm!

This year's rollercoaster ride really reminds me of one of the most important principles of successful investing: no matter how savvy you might be as an investor, you will never make all the right calls all the time... ever! The best you can hope for is to make good decisions most of the time. That's why a long term strategy is the best way to get ahead.

And as your advisors, we'll always encourage you to stick with your long-term strategy.

When it comes to decisions to invest or exit, manage interest rates or time industry sectors, all you can deal with is the best information you have at the time. It's only with hindsight that we've learned differently about our markets from what we could envisage 12mths ago.

So this holiday season, I want to remind you that now more than ever you should believe in your long-term investment strategy, stay calm and stick to your strategy. I'd much rather give you a Christmas present of the XAO trading at 6800, but leaving omnipotence and omniscience to a higher power, the best I can wish for you is sound principles and superior thinking.

And most of all you've got to remember that in 10 years time what you have today will, in all probability, be worth substantially more and this crisis will mean as much as the '87 or '73 one does today - ancient history.  Then we can celebrate together. 

Below you'll see a brief summary of the 8 core principles of the Freeman Fox Investment Strategy. Our team will be in touch regularly over the coming months to make sure you're managing any major concerns, reviewing your strategy and making the best decisions you can with the information available.

Ultimately, now is the time to take a break for a couple of months and see what happens. Pick up a few bargains where you can (like many investors did with the JPMorgan ASX20), and we'll keep you up to date with what we see happening in the world investment markets.

I am reminded very much that life goes on.  No matter what your background there are many reasons to celebrate - many reasons to be grateful.  Every day above ground is a damn fine day! 

May you and yours enjoy your time together and I look forward to talking with you again next year. 

So until next year then, we wish you a very happy holiday season and a less volatile New Year.

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Freeman Fox's 8 Key Principles of Wealth Creation

1. Follow the money
   Invest in a similar way to the world's wealthy - take advantage of a tailwind but buy when investments are cheap for the long term.

2. Invest for the long term (10+ years)
   Invest for 10+ years and you can enjoy the benefits of Compounding

3. Set up your PIP
   Add to your investment regularly through a Personal Investment Plan (PIP) and reach your goals faster.

4. Growth first then Income
   Real wealth is built from growth investing

5. Manage Risk
   Build risk management into your strategy and never break your own rules

6. 'Best of breed' Automation
   Invest in the best of their kind - asset class, industry sector, investment strategy and fund managers

7. Apply leverage where sensible
   When the time is right consider leveraging your investing in line with your risk profile

8. Supercharge superannuation
   Take advantage of the opportunities available to you to make the most of your nest egg

We'll be in touch regularly in the coming months to review each of these Investment Principles and what it means to you. In the meantime, do your own 'quick check' of this criteria and review your current investment strategy against these important principles.