While you have been resting, recovering, volunteering, revolting, searing or swimming...

February 16th, 2011  |  Posted in Investments

By Peter Spann

With so much going on around Australian and the world (holidays, floods, cyclones, fires, revolutions, and so on) you may not have a noticed a few very significant things happening in the world of investment...

1. The All Ordinaries is over 5000
2. The Accelerator Fund distributed 19.74% in the 12 months to Jan 2011 – that’s an average of 1.65% per month. [1]
   
3. China just became the world’s No. 2 economy

Déjà Vu as the Australian Share Market hits the “magic number” of 5000 points

You have to look back to this time last year to see when the All Ordinaries index hit 5000 and the outcome of that was pretty scary with the market falling to 4283 by May and then to 4246 in July.

So the wires are rampant at the moment with commentators having opinions – and equally are divided as to what direction the market is likely to go. 

5000 really is a significant psychological number for the market.  On the way up (March – Sept 2006), it paused there before rocking up to record highs.  On the way down (July-Sept 2008) it also paused there before continuing its plummet to the bottom.  In Oct 2009 it tried to get there but didn’t make it, in Jan 2010 it ran out of puff just shy at around 4950, before finally making the mark in April 2010.

So the mere fact that it has made it this far again is significant because it shows confidence in the markets and the underlying businesses that make up the index. 

But of course the big question is “where to from here?”  

Bears are pointing the continuing stagnation in the US economy (although the Dow Jones continues its relentless march onwards and upwards), balance of trade issues, and world unrest. 

But there is a lot of positive sentiment in the market as well... Perhaps the greatest we’ve seen for some time. 

Despite significant localised impact from cyclones, floods, fires and so on the Australian economy is still robust with money pouring in to our high interest rate environment and investors lining up to find positions in resources. 

Peter Switzer an author, publisher, media baron and 20 year veteran of financial markets said “I think stocks are the place to be in 2011". [2]

The case builds when you consider that we are reaching this critical point during reporting season here in Australia and most forecasters are saying positive things about company profits. 

Last year companies that generally had positive surprises were pushed up quickly but then receded as expectations settled down and companies that had negative surprises were sold down quickly only to recover later (as long as the negatives were not deal-breakers).

The resource companies are doing well despite significant interruptions in Qld due to floods and cyclone and continue to rise.  Banks and financials are also pushing the index higher.

My view is one of cautious optimism

Generally after positive runs of this nature a pause or correction is in the offering.  We also have the middle of the year doldrums coming up – there is an old adage “sell in May and go away” that often plays itself out, but it is also year three of Obama’s term and surprisingly the US market often gets a boost in the 3rd year of a President’s term. 

For those of you already invested you should be positive.  You’ve had good gains and regardless of what happens now in the short term, the real action starts from here. 

Continue adding regularly to your position no matter what happens – the key to long term success in the market is regular investing.  If the stock goes higher you gain, if the stock goes lower you are buying more for your money.  The same is true for managed funds as they rise and fall with the market. 

If you are not in the share market you should take another look.  2011 might well be a good year to dip your toe back in.

Accelerator returns spot on target

And speaking of taking another look, many investors have started coming into the Accelerator Fund recently as a full year’s results are reported.

For the year ending January 2011 the fund had distributed 19.74%. [3]

That’s an average of 1.65% per month³.  (All figures are net after fees). 

The average investment in the fund is $87,000 so that means investors averaged a yield of $1,431.15 per month or $17,173.80 for the year³.

In terms of capital the overall return from the fund was 2.73% closing matching its benchmark index³.

(Since inception the Accelerator Fund has distributed 20.79%p.a. on average and has produced an overall return of 2.73% - again in line with the index)³.

In other words the Fund is performing exactly to expectations. 

Because it invests in blue chip shares we expect the capital value of the fund to rise and fall in line with the market and it has done that, but significantly the fund continues to pay monthly distributions in cash to investors. 

Now that the fund has a track record maybe you’d like to take another look?  Click here for more information on Accelerator.

Interestingly we are about to change the fund’s name – so look out for its rebranding in March.

The Dragon continues to breathe fire

After holding its position as the World’s No.2 economy for 42 years Japan has slipped behind China for the first time.

During the past 30 years China's economy has changed from a centrally planned system that was largely closed to international trade to a more market-oriented system that has a rapidly growing private sector.

China continues to experience soaring growth, expansion in industrial production and exports.  Australia has been a big winner in China’s ascendancy as the country has continued to buy our resources as the building blocks of a fast industrialising and urbanising nation.  Iron ore, coal and copper is being shipped to the orient as quickly as we can dig it out of the ground. 

China is now Australia’s largest export market and we are expected to ship $50.6billion in iron ore there this year. [4]

And the rise has been nothing short of extraordinary.  In 1990, China’s economy was equal to 7% of the US economy.  It is now equal to 40%. [5]

China avoided the worst of the GFC that engulfed the US and Europe through a gigantic stimulus package, relaxed monetary policy and generous bank lending. 

And there is extraordinary future potential as well.  China’s GDP per capita is only 16% of the US.  If even a fraction of the population rise to similar production as the US the growth will be beyond imagination. 

The Gross Domestic Product (GDP) in China expanded 9.80 percent in the fourth quarter of 2010 over the same quarter last year. From 1989 until 2010, China's average quarterly GDP Growth was 9.31 percent reaching an historical high of 14.20 percent in December of 1992 and a record low of 3.80 percent in December of 1990. [6] 

The rest of (developing) Asia is determined not to be left behind either.  South Korea, Taiwan, Vietnam and Malaysia are all going through massive growth. 

These markets are volatile and growth in their economies doesn’t always translate into straight line market growth but for those of you who want to spice up a small portion of your portfolio considering an investment in the Excela Emergent Fund may give you exposure to the emerging markets opportunity.  Click here to find out more.

Scary Stuff   

In the height of the floods and cyclones I dug out my corporate insurance policy and despite paying massive premiums (over $50k a year), much to my dismay I discovered that we were not covered for flood (of any kind) or tidal surge (which was potentially a big issue with the cyclone). 

This is really scary stuff considering that here in Brisbane some of Qld’s most prestigious firms were locked out of their AA Premium Grade buildings for weeks and colleagues faced 100% losses in their office space.   

Recently we have been reviewing our clients needs for their life and income protection insurance and many of them have received equally as big, if not bigger shocks when they realised that their policies were inadequate or indeed they weren’t covered at all. 

As much as we don’t like to face it sometimes insurance is a critical part of wealth creation and estate planning and all responsible people with debt and a family (and that’s just about everyone these days) MUST pay attention to this. 

As a free service the team at Freeman Fox are happy to conduct a review with you.  Click here to find out more or book your consultation or call on 1800 000 369.

Picking property tough going

A lot of people are finding picking the property market tough going at the moment with prices, sales and rents all choppy and highly dependent on location and its very important you do your home work. 

The fact is even though people pretend they invest using objective criteria research shows people still invest in property emotionally.

I can assure you now is not the time for that.

The property market has changed dramatically in the last five years and the fall out of that will not be known for some time.

People have realised that property does not automatically and continuously go up and that rents fluctuate just as much interest rates do.

It’s not as simple any more just to buy, hold and hope.  You’ve got to pick the right property in the right location, with the right financing and tenant options.

For the first time regional locations in stable resource areas are offering genuine opportunities for growth that were not present ten years ago. 

And there are more and more people out there wanting to steer you in a direction that is their own way. 

Tread cautiously is all I have to say.  Residential investment property is not the gold mine it once was.

Super Outcome, Super Savings

My team has recently been busy implementing tax effective Self Managed Super Fund (SMSF) advice to many Freeman Fox clients.

One client who initially baulked at the cost of a Plan fee of $980- has now had her Buy Write direct equities portfolio restructured into a SMSF saving her tens of thousands of dollars a year.

With the introduction of Freeman Fox SMSF administration and our in-house SMSF Accountant we are well placed to provide this type of advice.

Review your strategy

If you are not careful you’ll wake up one day and realise the market has boomed and left you behind.

Call your Freeman Fox Adviser on 1800 000 369 to book your own review.

Happy investing.

Peter Spann

 

[1] Investments can rise or fall.  Past performance is not necessarily a reliable indicator of future performance.  In capital terms the overall return of the fund was 2.73% closely matching its benchmark index.

Important Information

Peter Spann is a representative of Excela Equities Ltd (ABN 17 010 763 041) and Freeman Fox Pty Ltd (ABN 47 062 481 378), holders of an Australian Financial Services licences (AFSLN 246510 and 220622 respectively).  This general advice is provided by Freeman Fox Pty Ltd. It does not take into account your investment objectives, financial situation, or needs. You should consider the appropriateness of this advice having regard to these matters, and read the relevant Product Disclosure Statements (PDS) before making any decision to invest.

Percentage yield was calculated using the distribution amount against the average balance of the fund for that month.  Investments can go up and down. Past performance is not necessarily indicative of future performance. To fully understand the potential returns and risks associated with the investment please refer to the PDS.

Fundhost Limited ABN 69 092 517 087 AFSL 233 045 (“Fundhost”) as the Responsible Entity is the issuer of the Excela Australian Equity Income Accelerator Fund™ ("Accelerator") ARSN 139 641 946 and the Emergent Fund ARSN 130 553 747. Excela Funds Management Pty Limited ABN 25 124 028 244 (“Excela”) is the Investment Manager for Accelerator and the Emergent Fund. Excela is a Corporate Authorised Representative of Excela Equities Ltd which is the holder of an Australian Financial Services Licence (246510) and a Market Participant of the Australian Securities Exchange (“ASX”).

Returns from a leveraged investment are more volatile than returns from the same investment which are not leveraged. The greater the level of gearing the greater the potential for both significant investment gains and losses. If you are thinking about borrowing to invest we recommend you seek professional financial advice.

Information contained in this update is obtained from various sources. The changing character of markets requires constant analysis and may result in changes. Past performance is not a reliable indicator of future performance. All investments contain an element of risk. Actual performance will be different and returns are not guaranteed. While information in this update is given in good faith and is believed to be reliable and accurate, Freeman Fox gives no warranty as to the reliability of accuracy of the information, nor accepts responsibility for any errors or omissions of third parties. Opinions expressed are subject to change.
 
If you require assistance in relation to your personal investment situation please contact a representative of Freeman Fox Pty Ltd on 1800 000 369. For a copy of our Financial Services Guide, please go to http://www.freemanfox.com.au.