Portfolio. Watch. Small packages

Transcription

1 Portfolio Watch Quarterly newsletter for Portfolio Watch clients Summer 2005 Small packages It may be true that good things do come in small packages as boutique funds become increasingly popular with investors. Many of these small funds are outperforming some of the mainstream fund managers, making them a very desirable investment. Contents Small packages 1 Enhancing performance 2 Buy, sell or hold 2 Buy list 2 New opportunities 3 Estate planning and second marriages 3 Portfolio construction 4 Investment market review 5 Ask Bridges: Stockbroking 6 Centrelink rate update 6 A super gift for kids 7 Oil prices 7 Q&A: Reverse mortgages 8 Boutique funds are usually established by experienced investment managers who have left large institutions to set up their own fund management business. The managers often own and run the business and have small investment teams of one or two analysts. The investment managers typically invest a significant proportion of their net wealth in the fund. Investors view this alignment of interests positively. Limiting funds under management enables the boutiques to be more nimble than the larger funds. They can move money between investments quickly and efficiently. For larger managers, moving between investments can be difficult and costly. They generally have to move slowly to avoid any negative impact on share prices. Boutique funds usually charge a performance fee to compensate the manager for limiting funds under management, but these fees also provide a greater incentive for the fund managers to provide superior returns for investors. Unlike most of their mainstream cousins, boutique funds can exercise cash discretion. This means they can retain a larger amount of funds in cash, which allows them to preserve capital and control risk during adverse conditions. It also gives them the ability to react swiftly to take advantage of market movements. Portfolios are generally benchmark unaware, which means investment returns for boutique funds can sometimes vary significantly from the returns of mainstream funds and investors need to be prepared for these variations. As with any sound investment strategy, diversification is key. It is generally sensible to blend a boutique fund with at least one additional Australian share fund, boutique or mainstream. Talk to your Bridges financial planner about boutique funds in your investment portfolio. Bridges. ASX Participant. AFSL Number

2 2 Buy, sell or hold Have you ever wondered why your Bridges financial planner recommends particular investments and not others? Enhancing performance It has been another busy and productive year for Bridges. We have grown to have over 160 financial planners and 52 offices and we advise clients on investments worth over $6.2 billion. We are really pleased to be able to introduce three boutique funds that will enhance clients investment performance and we look forward to announcing more investment opportunities soon. Another new service that we now provide to clients is business succession planning. If you own a business, your Bridges financial planner can help you identify your succession planning objectives and work with you to ensure the smooth and successful transition of your business. On behalf of everyone at Bridges I would like to thank you for your continued support during I wish you and your families a very happy festive season and new year and we look forward to helping you with your financial planning needs in Alex Hutchison Chief Executive Officer Every Bridges financial planner is supported by our in-house team of experienced investment professionals, who are on the lookout for good investment opportunities for Bridges clients. The Bridges Research Team is in regular contact with your Bridges financial planner, providing updates on investment markets. They create the Bridges recommended buy list, which consists of shares, listed property trusts, hybrids and managed funds. The buy list is updated as new opportunities emerge or downgrades occur. An example of the buy list is below. Some stocks on the buy list may not meet your individual or portfolio objectives, so not every client will hold the entire buy list. A stock removed from the buy list is not an automatic sell. ABB Grain Limited ANZ Bank BHP Century Australia Investments Challenger Infrastructure Fund Coca Cola Amatil CSL Fosters Group Henderson Group PLC National Australia Bank Most of the time it will remain a hold, simply because we have found a more interesting opportunity elsewhere. We also suggest sells to your Bridges financial planner, which may come about because of new information or over-evaluations. Your planner will relate this to your personal position. Before any investment is approved it is thoroughly investigated by the Research team. Once selected, investments are kept under review. Bridges focus is on long-term investing and we do not recommend speculative stocks or special trading opportunities. We also seek out investments that provide dividends because many Bridges clients want a steady income. You can obtain information about the Bridges recommended buy list from your Bridges financial planner. Buy list as at 31 October 2005 News Corporation Premium Investors Program Maintenance Publishing & Broadcasting QBE Insurance Group SFE Corporation Suncorp TABCORP Transurban

3 3 New opportunities Bridges is always on the lookout for new investment opportunities for clients. An opportunity has recently arisen that allows Bridges to improve the way we invest clients money. This opportunity includes the introduction of three new boutique funds that were previously only available to investors with substantial amounts of money to invest. Hayberry Australian Shares Fund The specialist Australian shares fund manager, Hayberry, is owned and operated by its staff. The key people at Hayberry have a wealth of industry experience. Former head of equities at Bankers Trust, Rohan Headley, established Hayberry three years ago. He is joined by Victor Gomez, a former investment strategist at Platinum Capital. Manifest Australian Equity Fund Manifest is a small, three man team lead by Gerard Eakin, the former head of equities at Rothschilds. Global Pure Alpha Fund Another fund that Bridges has never offered to clients before is the large US fund manager, Bridgewater. Bridgewater is a top down investor. This means that Bridgewater allocates funds across sectors global bond, equity, currency and commodity markets seeking the overall best value, instead of picking particular stocks. More new opportunities to come Bridges is also proposing to introduce a new international property fund, which will complement the existing domestic property funds. Talk to your Bridges financial planner if you would like more information about any of these exciting new investment opportunities. Estate planning and second marriages Second marriages present some of the most complex and controversial estate planning challenges for Australian couples. They can create legal problems that may affect many generations. Children from previous marriages and the new relationship, coupled with the assets brought into a relationship by both partners, can potentially make estate planning very difficult. Grandparents are just as susceptible, especially if they have not reviewed their wishes following the divorce or marriage of an adult child. Part of their estate may end up being bequeathed to their child s former spouse. It is important for couples who have been married before to seek the advice of an estate planning expert to deal with the potential issues. If you would like to speak with someone about updating your Will, your Bridges financial planner can arrange a meeting for you with an estate planning specialist from Australian Executor Trustees Limited.

4 4 Portfolio construction To complement the new investment opportunities that are now available to Bridges clients, we have prepared an example of how investment portfolios may change. The table below shows a typical portfolio and a new portfolio containing our new range of funds. The main difference between the old and new model portfolios is the increased level of diversification with the inclusion of the new investment options. The aim is to give investors a smoother ride than their existing portfolios. The new model portfolio includes: 1. New boutique funds, which replace traditional Australian share funds 3. A new top down tactical asset allocation fund by Bridgewater that introduces big picture investing across markets, rather than focusing on individual stocks 4. Exposure to international as well as domestic property funds. Talk to your Bridges financial planner about how these new investment opportunities may be incorporated into your investment portfolio. 2. Greater diversification in international investments, while retaining a defensive bias in international shares Old model portfolio Weighting New model portfolio Weighting Australian Existing 35% Hayberry Australia Shares Fund 10% shares Australian Manifest Australian Equity Fund 10% share fund Challenger Select Australian Share Fund 10% International Existing 10% Platinum 3% shares international Global Long/Short 3% share fund Global Value Investors 3% International International 10% Schroders Australian Equity Income Fund 5% bonds Securities Fund Australian Challenger High 20% Challenger High Yield Fund 10% bonds Yield Fund Hedge funds AllWeather Fund 10% Bridgewater Global Pure Alpha Fund 10% Property Property Income 15% Property Income Plus Fund 10% Plus Fund International Property Fund 10% Cash Cash 10% Cash 5% Total 100% 100%

5 5 Investment market review Quarter ended 31 October Australian shares Listed property trusts Oct 04 Dec 04 Feb 05 Apr 05 Jun 05 Aug 05 Oct Oct 04 Dec 04 Feb 05 Apr 05 Jun 05 Aug 05 Oct 05 Source: IRESS S&P/ASX 200 The local market rallied hard from late July until the end of September, hitting new all-time highs. October saw the market pull back owing to concerns that interest rates will increase due to inflation and weaker international markets. Source: IRESS S&P ASX 200 Property Accumulation Index The property trust sector was mixed, though it did manage to hit new highs in September. In October the sector pulled back with the broader market and a rally in bond yields International shares Fixed interest and cash Oct 04 Dec 04 Feb 05 Apr 05 Jun 05 Aug 05 Oct Oct 04 Dec 04 Feb 05 Apr 05 Jun 05 Aug 05 Oct 05 Dow Jones (left) FTSE 100 (right) 90 Day Bank Bill Source: IRESS Source: IRESS The US market was weaker during the quarter due to concerns that the Federal Reserve will have to continue to raise interest rates due to inflation. Japan was one of the best performing markets, up nearly 14% from the previous quarter. Domestic cash rates settled around 5.65% pa, with no change in official interest rates. Bond yields were volatile but rallied toward the end of the quarter on inflation concerns.

6 6 Ask Bridges: Stockbroking Question: Why should I buy or sell shares through Bridges when online share trading is much cheaper? Answer: Fees charged by an online stockbroking firm can vary depending on the level of service and investment advice provided and the online broker s dealing requirements. Bridges financial planners are highly qualified and can give you investment advice based on recommendations provided by Bridges inhouse Research Team. Our Research Team can also issue general advice on corporate action issues as they occur, helping you to make an informed and timely investment decision. A designated trading representative reviews every order received from Bridges financial planners. The same cannot be said for online brokers, who process and execute orders without conducting any review and usually provide little or no advice. Clients using an online broker may qualify for a discount as long as they meet certain criteria, such as linking an account to a cash management account. At Bridges, you re not required to have linked accounts, nor are there any other pre-requisites to trade shares. However, we do encourage the use of CHESS (Clearing House Electronic Subregister System) which allows a stockbroker to sponsor your shareholdings. Your shares are held electronically and any movements to or from your holdings are controlled by your CHESS sponsor, which makes settling, tracking and managing your share portfolio much easier. To help make share transacting as simple as possible, we also encourage the use of direct credit and debit banking. Our guest columnist is Bruce Ritchie, Bridges Stockbroking Manager. You can submit your questions for consideration in future newsletters by writing to or calling your financial planner, who will pass them on to the editor of Portfolio Watch newsletter. Centrelink rate update From 20 September 2005, the maximum Age Pension rates increased for singles to $ per fortnight and for each member of a pensioner couple to $ per fortnight. These rates also apply to other pension payments made by Centrelink and the Department of Veterans Affairs. The level of assets a person can have before they lose entitlement to the pension also increased. There were marginal increases in fees and charges for those in aged care hostels and nursing homes. Visit the Bridges website at where you can see the latest Centrelink rates in the Tools to help you plan section.

7 7 A super gift for kids Have you considered gifting money to a child so that they can contribute it to superannuation? A child who contributes $1,000 to super may see it accumulate to approximately $13,765 in 45 years time, at an average annual earnings rate of 6% pa net of fees and taxes. This equates to $3,640 in today s dollars if inflation remains at an average of 3% pa. The power of compounding has more than tripled the money without an extra dollar having been contributed. Even better, if the child receives income from eligible employment they may receive the Government co-contribution of up to $1,500 paid into their super fund. The total of $2,500 could accumulate to approximately $34,412 in 45 years time at the 6% pa earning rate, or $9,100 in today s dollars. A co-contribution is available once every financial year, subject to eligibility. To receive the full co-contribution, each year the person must: Contribute $1,000 to super Receive a minimum of 10% of their total income from genuine employment, but not exceeding $28,000 Satisfy other conditions, such as being an Australian resident. Under current rules, any person under 65 may contribute to super and there is no work test to satisfy. The downside to this strategy is that any money in super will generally not be accessible until age 60. Talk to your Bridges financial planner for more information about making a super gift to your kids. Oil prices The price of oil Oil prices have been steadily rising since mid 2004, recently reaching record levels. The price of oil is determined by supply and demand. If supply is greater than demand then the price remains lower. But if demand is greater than supply, then the price will rise. This is the case at the moment, with demand for oil, particularly from India, China and the US, outweighing the supply. The future It is predicted that oil prices will remain high, as demand for oil from China and India will probably continue to increase. Some forecasters speculate that we may have hit Hubert s peak. The Hubert s peak theory is named after the geologist who predicted that oil and gas production would reach its peak and then quickly taper off as reserves dry up. The Organization of the Petroleum Exporting Countries (OPEC) producers have not been able to increase capacity of the production of oil to meet the increase in demand.

8 Our offices Adelaide Albury Armidale Ballarat Batemans Bay Bathurst Bendigo Bowral Brisbane Brisbane North Quay Canberra Castle Hill Chatswood Coffs Harbour Darwin Dubbo Essendon Geelong Gold Coast Gosford Griffith Homebush Honeysuckle Hurstville Launceston Laurieton Lismore Maitland Maroochydore Melbourne Menai Miranda Newcastle Norwood Nowra Parramatta George St Parramatta McNamara North Parramatta Parramatta PCU Penrith Perth Port Macquarie South Tweed St Leonards Sydney St Martins Tower Toowoomba Townsville Wagga Wagga Whyalla Wodonga Wollongong Wollongong Figtree Head Office Q&A: Reverse mortgages A reverse mortgage is a loan made available from credit providers to retirees who own their home outright and may need some extra funds to live on. It allows older people to borrow money against their home without having to make repayments until they die or sell the property, depending upon the terms of the mortgage documentation. We discussed the benefits and risks of reverse mortgages in the Spring 2004 edition of Portfolio Watch. Here, we look at other issues you should consider before committing to this type of loan. Q. Can you be evicted if the value of the equity in your home is less than the outstanding loan? A. A majority of providers in Australia have a no negative equity guarantee, which ensures that you can remain in your home if your equity goes into the red. Q. What should you consider before borrowing through a reverse mortgage? A. Should you downsize rather than borrow? Would family members be happy with your decision? Would it be easier to obtain the funds from elsewhere, such as taking a lump sum payment from your allocated pension? If you are receiving less than the maximum rate of or no Age Pension, you may be able to top up your Centrelink entitlement through Centrelink s Pension Loans Scheme. The interest rate is usually lower than that in a reverse mortgage. Q. Can the loan be drawn down over a period of time rather than in a lump sum? A. Periodic payments are less likely to affect your Centrelink entitlements, but not all providers offer that option. Q. Can you use the proceeds from a reverse mortgage for investment? A. Yes, and if the investments are income-producing, you should be able to claim a tax deduction for the interest on the loan. However, you will need much higher rates of return from the investment because there will be tax payable on the investment income and the interest rate on the loan is usually 1.5% more than residential mortgage rates. Before making any decisions about a reverse mortgage, talk to your Bridges financial planner about your options. 8 Important Note This is general advice only. It is not possible, when preparing Portfolio Watch, to take into account individual clients investment objectives, circumstances and needs. Before acting on any information or advice contained, expressly or implicitly, in Portfolio Watch you should consult an Authorised Representative of Bridges Financial Services Pty Limited ( Bridges ), AFSL Number No part of Portfolio Watch may be reproduced without the written consent of Bridges in each case. Bridges, its directors, employees or any associate are not liable for any loss or damage arising as a result of any reliance placed on the contents of Portfolio Watch. To the extent permitted by law all such liability is excluded. Investors will need to contact their financial planner regarding financial products outlined in this newsletter. The Hayberry Australian Share Fund, Manifest Australian Equity Fund and Global Pure Alpha Fund are issued by Questor Financial Services Limited. You should consider the relevant Product Disclosure Statement available from Bridges before investing in any of these products. (BRIHO1147)