When we invest in the share market we like to see our shares increase in value – obviously – but when the market isn’t performing well instead of joining everyone in the doom and gloom, don't forget about dividend income.

In Australia, unlike many other countries, we are fortunate that most of our companies pay an excellent rate of dividend. These usually include credits for tax paid by the company, referred to as “imputation” or “franking” credits. As an example of the benefit, if you deposit your money in one of our major banks’ online savings accounts you will probably receive an interest rate of around 3% per annum. And these rates will follow the movement of interest rates.

If you buy shares in that bank you are likely to receive a dividend in the region of 5-7% per annum. It is even better if the dividend is fully franked, as this would be equivalent to a pre-tax rate of 7-9% per annum. And when a market downturn causes share market prices to fall, most companies continue to pay a steady dividend.

Not all Australian shares are fully franked or have as high a yield as the example above. However, if you look at the average dividend yield for the All Ordinaries Index it is in the region of 4% with an average franking rate of 80%. This can give you a pre-tax return of some 5%.

The moral to this story is when planning your share portfolio don’t focus entirely on the growth aspect – remember the dividends.

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

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While interest rates remain at historically low levels in many parts of the world, including Australia, thousands of mortgage holders have enjoyed lower repayments; but interest rate movements mean different things to different people.

Aside from mortgages, low interest rates have a much broader application—they also flow through into personal and investment loans, credit cards and various types of business financing. On the flip side, investors have seen returns on interest-bearing bank accounts and term deposits follow suit and understandably do not celebrate with every rate cut.

Across the economy generally, a low interest rate environment often goes hand-in-hand with slower economic growth, uncertain job prospects and lower asset prices.

So, depending on which category you fit into, here are a few implications worth considering in your approach to dealing with interest rates:

• Homeowners: With variable rates remaining low do you use this as an opportunity to build a buffer against rates when they eventually turn around? Or are there other more pressing items that your spare cash could be directed towards, such as credit cards or a car loan? Another issue to consider is your future housing preference. If you would like to renovate or upgrade your home, is now a good time to do this with prices generally stable and tradesmen more likely to return your phone calls? 
• Investors: Whether your preference is shares, property or another asset class, this may be a good time to consider starting a long-term growth strategy. Given that dividend yields and rents may have changed in the past couple of years, it's worth another look to determine if potential investments are likely to be positively or negatively geared.
• Business owners: Overdrafts, car leasing and other business loans may need a good review. In particular, any strategy to reduce your debt should be revisited. You could take advantage of lower interest offers with another lender, but make sure you balance the potential savings against any costs associated with moving your business to a new bank.
• Deposit holders: Dwindling returns on cash may make you feel like there would be little difference if you put it under the mattress. There's bound to be plenty of apparent alternatives to give your returns a boost but it's critical to read the fine print and understand what you're investing in. The adage of higher returns meaning higher risk holds true, so first make sure your ability to manage that risk is properly addressed.

Interest rates will not stay this low forever – and this will be good for some and not others. Now is a great time to think about how you can use the current situation to your advantage. 
Call (02) 4926 2300 or email us. 

To discuss current interest rates and you can take advantage of the current low rates, please call our team of accountants and financial planners at Leenane Templeton. 

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The 2015 investment landscape could resemble the plot of The Hunger Games, where investors face a changing and unexpected environment that requires multiple talents and smarts to emerge victorious. Expectations for 2015 are for global share market returns of 5 – 10 per cent, but there could be some volatility ahead.

At the beginning of 2015, global cash rates were close to zero and bond rates both internationally and in Australia were close to multi-decade lows. The Australian share market delivered flat returns over 2014 (a price return of just +1 per cent), and at the beginning of 2015, stood at levels which were no higher than 2006. With patchy global economic growth and with Australia in particular facing a painful adjustment phase as the resources boom winds down, there’s no shortage of challenges to tackle.

What will it take to ‘win’ in 2015?

1. Be prepared to adapt quickly to changing market conditions

“May the odds be ever in your favour” is the popular catchcry from The Hunger Games, highlighting the element of chance. This saying may provide little comfort, but a lot can be done to tilt opportunities in your favour.

However, the range of likely returns around those forecasts (the ‘standard deviation of return’) is large: plus or minus 20 per cent for shares, versus a wellbehaved plus or minus 5 per cent for high-yield debt.

2. If you choose freedom, you must accept the risk

Your risk profile is important in determining whether you are able to access wellvalued assets that may take time to pay off, or whether you need to be more prudent with your investment choices.

As we move further into 2015, we observe stretched global share valuations, a US Federal Reserve system preparing for higher official interest rates, pressure in commodity markets in some emerging economies and a continued winding down of the resources boom that has underwritten the Australian economy for so many years. Be mindful of the investment risks you take and maintain a long-term perspective of your goals and risk tolerance.

3. You may need to search further to gain returns

In 2015, the local Australian economy will have to deal with weaker commodity prices and collapsing resource capital spending – problems potentially compounded by a downturn in the housing cycle. Investors looking to gain exposure to economies that are in a more dynamic phase of the economic cycle will therefore need to consider markets in the Asia-Pacific region, within the Northern Hemisphere developed world, and in the emerging world more generally.

4. Be alert for opportunities

In an environment where nothing is as it seems, the lead character in The Hunger Games, Katniss, remains on guard to access valuable supplies. Likewise, given the unpredictable investment landscape, one of the lessons of 2014 was to stay diversified across a full range of asset classes. We expect more of the same unpredictability in 2015. In this environment, active management becomes especially important – investors must have wide-ranging sources of opportunities, an eye for making timely decisions and a nimble process.

The bottom line: believe that adversity offers an opportunity to do your best.

Even if the financial markets resemble The Hunger Games in 2015, it’s possible for investors to weather twists and turns by having a diversified investment mix and making wise choices based on their long-term goals.

Source: Russell

Call (020 4926 2300 or email us. 
For more information on the outlook for investment markets, speak to your financial planner.

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What are hedge funds?

The RBA says the term ‘hedge fund’ is typically applied to “managed funds that use a wider range of financial instruments and investment strategies than traditional managed funds, including the use of short selling and derivatives to create leverage, with the aim of generating positive returns regardless of overall market performance(2).

In other words, hedge funds aim to ‘hedge’ or manage the risks of a volatile market by using a variety of investment strategies.

Myth no.1 – hedge funds are only for the very wealthy

This may have been true in the past, but these days, investors can access hedge funds with as little as $20,000.

Myth no. 2 – hedge funds are risky

Most hedge funds are active managers of investment risk with defensive strategies in place.

An index fund, perceived by some as a ‘safe’ option, is at the mercy of the volatility of the market it tracks; susceptible to fluctuations which aren’t actively managed. However, a market neutral hedge fund targets a positive rate of return regardless of the return the market, which means the risk is actively monitored, positions are hedged and exposure to the market limited as required.

Some hedge funds are purely focused on preserving capital (ie. your original investment), so making strong returns over the short term is not their primary focus. Other hedge funds only trade when opportunities arise and have clear investment guidelines which act as a framework for their investment decisions – such as exposure limits, risk management frameworks, stop loss levels, etc.

Before you select a hedge fund, undertake your due diligence – people and processes are critical, as is a robust framework for managing risk.

Myth no. 3 – hedge funds have exorbitant fees

The typical hedge fund fee structure in Australia is 1.5% management fee and 20% performance fee. At fi rst glance, this appears to be high when compared to long-only domestic managers. To see true value for money, however, you need to focus on returns not just fees. If you’re paying very low fees but the fund is not performing, this is a false economy.

Performance fees are only payable when the fund outperforms the benchmark, meaning investors pay for the manager’s skills and expertise when they’re getting a good return on their investment.

Myth no. 4 – hedge funds are illiquid

In Australia, redemption restrictions and high withdrawal fees are rare. There are a number of retail hedge fund managers in Australia who price their fund daily and most have a straightforward redemption process with relatively low withdrawal minimums ($10,000).

Myth no. 5 – hedge funds are unregulated and lack transparency

In Australia, hedge funds are as tightly regulated by ASIC who have recently introduced changes to reporting and increased investment process transparency, which will further improve the current status quo.
Transparency and openness around investment processes, internal governance and compliance controls is critical when assessing hedge fund managers.

Conclusion

Hedge funds play a unique role when teamed with a portfolio of more traditional investment products. They can reduce volatility and increase returns. Next time you’re creating a personalised portfolio, consider adding a hedge fund to the mix. Speak to our friendly Financial Planning Team today.

1 http://www.basispoint.com.au/hedge-fund-directory/
2 http://www.rba.gov.au/publications/fsr/2004/sep/pdf/0904-2.pdf
Source: Bennelong Funds Management, August 2013

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The world has changed immeasurably in the past 30 years. The next three decades seem likely to yield even more drama as significant themes exert their influence on a more connected world.

Change is upon us. Investors must either embrace change or risk missing out on some of the biggest investment themes in a generation. But what are the investment implications? This article discusses how investors can position themselves.

Remember, though, that making predictions is fraught. It is virtual guesswork to say what level the Dow Jones Industrial Average will be in five years time. However, when it comes to the big, secular themes that are influencing economies and financial markets, there is more scope to be forthright and more reason for investors to take action.

Most of the themes that appear set to be prominent in the 21st century – the rise of the east, growing consumption and urbanisation in emerging markets, the changing demographics and ageing of the world population, the challenge of feeding and powering the world, technological and climate change, the rise of Africa – are visible and investible, or will be soon enough.

Attaching relative weights to a group of highly interconnected themes is tricky, however. Intuitively, the epochal power-shift from west to east and the emergence of China and India must surely be given most weight. It is the underlying dominant theme which recurs, or acts as a catalyst, in many of the others.

Beyond this, it becomes more difficult to attach weightings. Is finding a solution to our energy needs more important than alleviating pressure over food and water? In truth, they are related, not least because bio-fuels are
reducing the amount of arable land for food.

This is where technological progress is crucial. Encouragement can be taken from the fact that every time the world has pushed up against resource limits in the past, mankind has overcome the situation. This time is different. This time we have even more brains from around the world, tackling the problems in energy, food and water, providing incremental advances and occasional step-changes that sum over time to extraordinary technological progress. It is technological progress that powers economic growth over the very long run.

Seven things for investors to consider

Here then are seven key things long term investors might want to consider if they want to tap into the rewards on offer from the 21st century investment themes:

1. Invest more in emerging markets, beware of home bias. Investors need to ensure they have enough exposure to emerging markets but many remain under-invested for two reasons. First, although allocations have picked up from negligible levels, they still do not reflect the significant and growing share of global GDP attributable to these economies. The other is that investors tend to be over-exposed to their home markets.

2. Take a long term view. Investors must step back from the occasional hyperbole that crops up about emerging market bubbles and remember that the long term outlook is compelling. There will be blips, on an upward sloping curve, but they should not stop investors. Remember that industrialising economies such as China can sustain much faster annual growth rates as they are emerging from a low base.

3. Include frontier markets such as those in Africa. Incredible as the growth of China is, don’t just bet on one emerging country. An allocation to emerging markets should include a range of economies at various stages of development. If you have China covered, then consider frontier markets in sub-Saharan Africa, for example, which have vast mineral wealth and huge consumption potential. Or Indonesia, Nigeria, Mexico, and Turkey. These countries have large populations and fast growing economies and are mooted as next big things.

4. Invest in real assets. Some economists argue that we are entering an inflationary age. Moderate inflation is not bad for equity markets. But, some doom mongers are predicting a worse outcome due to the alleged inflationary effects of central bank asset buying programs combined with higher commodity prices (particularly food and energy). It seems sensible for investors to include inflation protection, such as inflation linked bonds, in their portfolios. However, other economists are more sanguine, given spare capacity in western economies. Meanwhile, emerging economies are in the midst of an urbanising age; one that requires infrastructure build and raw materials. An optimal strategy, therefore, may be to remain in equities but tilt the bias of investments towards real assets whose prices rise with inflation. By investing in companies that have pricing power such as miners of industrial and precious metals, investors can participate in corporate growth and generally beat inflation. Given constraints on supply, these companies tend to benefit disproportionately from higher global growth.

5. Remember to add food and water. Fertiliser and agricultural companies stand to benefit from growing demand for food and changing diets in developing countries. Similarly, companies that build desalination and water management infrastructure and that can provide access to clean water should have full order books as demand for water intensifies across the world.

6. Consider consumption. As emerging economies grow and become wealthier, the global middle class will expand rapidly and consumption will soar, particularly in the discretionary segment where branding is key. Beneficiaries will be based in western and emerging markets.

7. Do not ignore pharmaceuticals. Pharmaceuticals have been overlooked even though their industry outlook appears bright. A massive expansion in middle class consumer populations in emerging markets, combined with people living longer, particularly in developed economies, paints a rosy picture for global healthcare spending. There is scope for the best generic and branded names to benefit.

Important information Investments in small and emerging markets can be more volatile than in more developed markets. Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment.

Always speak with your financial planner when making investment decisions.

Source: Fidelity Australia, June 2011

Provided by Leenane Templeton Chartered Accountants and Leenane Templeton Wealth Management Pty Ltd.

Newcastle Financial Planning

Helping Investors

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