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International equities have been a recent disappointment to Australian investors. Relatively speaking, Australian equites have performed significantly better due to a range of factors such as the local market’s limited exposure to IT (post the tech bust), the strength of our economy, the steady rise of the Australian dollar against the greenback and a preference for the ‘safety’ of a known market compared to more tumultuous overseas investment battlegrounds.

“In addition, macro concerns such as the European debt crisis, spiraling US debt levels, rising raw materials and energy costs as well as the confluence of socio-political events such as the Japan earthquake and the Middle East turmoil have added to investors’ worries,” adds Brent Puff from American Century Investments.

But there are signs that international equities are coming back into favour thanks, in part, to some of the reasons why investors have recently stayed away from them.

Lonsec Senior Investment Consultant Lukasz de Pourbaix says institutional investors in particular have shown greater interest in the sector thanks to improving fundamentals in the US market. “A lot of companies have undertaken cost-cutting measures with top line earnings expected to improve,” he says. “Future growth expectations and valuations are reasonable.”

Advisers, de Pourbaix notes, need a little more convincing. “I wouldn’t say they’re increasingly allocating to the sector,” he says. “For planners and investors getting into the market post the tech bubble, their experience has been that Australian equities have outperformed.”

It might not be too long, however, before more advisers start capitalising on the opportunities international equity exposure can bring. BT Financial Group Chief Investment Officer Piers Bolger believes a decline in the allocation to global equities has stabilised because of the “advent of hedged global equity products that have allowed advisers to better position client portfolios”.

He agrees with de Pourbaix that an ever-improving outlook for the global economy is restoring confidence. “This should assist global corporate earnings, with the potential for higher earnings relative to Australian corporates,” Bolger says.

Valuations for high-quality international companies also add to the compelling case for international equities. Tim Meggitt, Zurich Investments Head of Key Accounts and Research, notes, "We’re beginning to see further increases in exposure to global equity markets across a range of clients’ portfolios as they begin to understand the strong valuations that they can source from most of the larger economies."

The high Aussie dollar, once a deterrent for international equity exposure, is now working in its favour, giving internationally-positioned investors more purchasing power. Should the dollar dip (and as Meggitt says “it’s unlikely the Australian dollar will perform as strongly as it has in recent times against the US dollar”), unhedged investors will receive a boost. Adds Bolger, “The return for local investors may also be higher if the Australian dollar depreciates somewhat over time.”

A word of warning, though, from Bolger, focus on the fundamentals not just the “buying opportunity”. He says “The issue is what negatives are there that will impact on the return of the underlying investments?

“However, if the broader macro outlook continues to improve and both developed and emerging markets move higher, combined with a weaker Australian dollar from its current levels, global equity returns for investors could be higher relative to other investments.”

A little good news from overseas markets will do a lot of good for the sector, according to de Pourbaix, “There are still issues in Europe and the US in terms of debt but if you have a period where the macro environment stabilises combined with solid returns, there will be more interest in international equities.”

For Puff, corporate earnings will be the “linchpin” to the sustainability of stock market gains. “We remain constructive on future earnings growth although we are watching the impact of rising costs on earnings. To date, most companies have been very successful in addressing higher input costs in various ways such as increasing prices outright to offsets via productivity improvements,” he says.

“Finally, stock market valuations have not risen to extreme levels and continue to appear inexpensive relative to historical trends and to global bonds. We remain comfortable with the prospects of international equities over the medium to long term.”

 

Note: Advice contained in this articler is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at June 2011.

 

What should you expect from a Value Manager?

  • Resilience in falling markets
  • Reasonable capital growth in rising markets
  • Consistent dividend income
  • Low volatility
  • Tax effective

Master of the market shares his success secrets
Anton Tagliaferro has risen to the top by sticking to the basics
The Australian: Business - 22 June 2011
IML Investment Director, Anton Tagliaferro was featured in The Australian, the article has been re-published below:

It was 1998 and the Australian investment community was in the grip of the tech boom. An emerging fund manager named Anton Tagliaferro, who was ready to make his mark on Australia’s funds management industry, had just established his own firm, Investors Mutual. But unlike most fund managers, a young Tagliaferro was unconvinced about the tech-boom hype and instead stuck with traditional companies that had a performance history. The decision would be costly because his performance took a hit and the period until 2000 became one of the darkest of his professional career. He describes that tumultuous period, which is documented in the book Masters of the Market, as “one of the worst things I’ve had to live through in my professional career”. Tagliaferro even doubted if his business would survive. “I just didn’t know what to do,” he says in the book. “I had just set up a business. We only had $300 million under management and our clients were really unhappy. I had people pulling money out because our returns were bad.” It was during this period that Tagliaferro bought an annual pass to the Sydney Aquarium. “I used to go down there at lunchtime and stare at the fish in the big tanks and think maybe my time was up,” he says But the tide turned. The tech sector collapsed in 2000 and Tagliaferro was among the few fund managers to emerge unscathed. Two years later, IML was awarded the fund manager of the year for Australian equities by MoneyManagement, and today, Tagliaferro is considered one of the greatest in Australia’s funds management industry.

But it’s a description that does not sit easily with him. “There are lots of good people in the industry,” he says. “I think that I’ve been fortunate that I’ve always had a very conservative investment policy at a time when there have been speculative bubbles in place. Wilson Asset Management founder Geoff Wilson, who co-wrote Masters of the Market, says Tagliaferro has been a “phenomenal success story”. “He’s grown a business from nothing to $3.5 billion (in funds under management) in 13 years.” Tagliaferro is equally known for this straight-shooting style and is not afraid to tell company directors or politicians like it is.
Paradice Investment Management founder David Paradice says Tagliaferro has been influential in the funds management industry and his “strong views” have changed the outcomes for a lot of companies. “He doesn’t suffer fools lightly; I think that’s a very good quality,” Paradice says.

Tagliaferro takes the view that shareholders are the owners of the company and management is there to work for shareholders. “I know a lot of fund managers take the view that if they don’t like what’s going on, they just quit the register and sell,” he says. “We take the view that we are the owners of the company, so if the company is fundamentally a good company and it’s just a matter of changing or influencing the direction of management, we’ll do what we can to achieve that.”

As the topic turns to the shape of corporate Australia, there is no mincing of words. “I think the environment is fairly tough at the moment,” Tagliaferro says. “There’re all sorts of pressures on companies apart from the currency being where it is, interest rates going up (and) clearly a government . . . whose policies are not often that economically transparent but seem to be more politically driven like the carbon tax. There are no free kicks anymore for companies; they have to really earn their living now.”
He is equally blunt about the carbon tax. “For Australia to go it alone on a carbon tax is a little bit naive,” he says. “It is . . . making it very disadvantageous for many of our companies to operate when you are putting things on like carbon taxes which don’t exist overseas.
“When you consider Australia only consumes something like around 80 million tonnes of coal a year and China consumes over 3 billion tonnes of coal, it seems a little bit ludicrous to be worried about changing the world’s temperature or whatever we are trying to do when we are such a small part of the global environmental problem.”

Tagliaferro also sees “major risks” to the Australian economy. “The currency, where it is, is making it very tough for many industries,” he says. “Interest rates: you could argue that the RBA has already pushed them up too far. “Politically we have all these different decisions being made, which sometimes seem to be more politically motivated than economically rational.”
He says unless we are careful, “we could be going into a downturn in Australia”.

Tagliaferro says in the past two years, IML has positioned its portfolio away from cyclical stocks. “We haven’t got any discretionary retailers like JB Hi-Fi or Harvey Norman,” he says.

“We don’t own any very cyclical manufacturing stocks like Bluescope Steel; we’ve stayed away more or less from media companies like Fairfax and Ten Network. We have really tried to focus on companies that we think can continue to grow and deliver and do reasonably well in what is a fairly . . . difficult environment for corporates.”

How often have you seen a company make a record profit announcement, only to see their share price decline that day.  This happens as the markets had factored in a better result than was released, and that higher forecast was already built into the price.

Conversely investors often see share prices rise when companies announce bad news as the news was not as bad as had been built into the share price.

While this may seem counter intuitive to many, the fact is that financial markets are anticipatory by nature.  In other words, what is built into share prices takes into account information that is known as well factoring in forecasts of events expected to happen.

With this point in mind we look to the current pricing of share markets and ask why are they so cheap, when company earnings are rising?

The chart below tracks the average Price to Earnings Multiple (PE multiple) over many years to demonstrate whether the share market is cheap or expensive compared to history.  A PE multiple is simply how many times company earnings, investors are prepared to pay for a company.  Generally the higher the multiple, the higher the price of the company or market.

For example a company earns $1-00 per share, and its share price is $12, therefore the Price Earnings multiple of 12, but if the share price rose to $15 while earnings remained the same, the Price Earnings multiple would be 15.

 

 

What this chart shows is that the share market appears to have already anticipated the uncertainties in the world economy listed above by discounting the price earnings multiple it is willing to pay for companies (and in doing so reducing share prices)

Price earnings multiples are now trading at well below long term averages.

The key point is that markets seem to be already priced for many uncertainties in the global economy.  Investors need to ask whether the market is pricing in too much bad news as they were in early 2009.  If it turns out that markets are factoring in worse news than actually happens, investors could see share prices rise as a result of the market increasing PE multiples.

In the long term company earnings drive returns for investors in share markets, but in the shorter term numerous other factors impact share prices.

 

In the lead up to the Global Financial Crisis, we did not invest in Listed Property Trusts or Unlisted Property Trusts.

With the significant realignment in these property markets we now are seeing value of investing in Commercial Property markets.

This article focuses on the Office market within the Commercial Property sector.

2010 saw the following occur in the Office market:
• CBD Office vacancy rates peaked at 8.3% and are now trending down
• Capital values increased by around 5%
• There was tangible evidence of increased demand for space
• Prime Gross Effective Rents increased by 1.4%

Below is a chart supplied to us by Charter Hall Property group which outlines forecasts for CBD Office property in each of the major markets in the coming years. These forecasts are based on demand assumptions for space, compared to known additional supply of property that is in the pipeline.

This chart is showing that it is anticipated that over and above the income received by investors, capital values are forecast to rise on average by around 20% from 2011 – 2014 in the CDB Office sector.

When considering a commercial property investment we normally would recommend investors seek the following in a property investment trust vehicle:

- Vehicle should have High Quality Tenants of well known companies with strong brand names in a strong financial position. The property vehicle should not overly focus on one tenant.
- Consider the Average Lease Expiry (referred to as ALE) – this is the average term that tenants have to run before their lease is up for renegotiation. A longer ALE should result in a higher income certainty for the investment vehicle
- Level of Gearing – we would normally start to become uncomfortable with a property investment with more than 50% gearing
- Investment vehicle should contain a number of properties in different locations, rather than relying on either one area, or worse still one property.

IMPORTANT INFORMATION: Any advice contained in this article is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement

For people who are self employed or persons with substantial taxable income personal deductible contributions are a way of tax deductible contributions to superannuation reducing your taxable income leaving more after tax money for investment.

What is the strategy?

Making personal deductible contributions reduces a person’s taxable income because the contribution is claimed as a tax deduction.

The contribution is taxed at just 15% which may be less than the tax paid if taken as taxable income. This means more after-tax money is available for investment, which increases a person’s overall retirement benefits.

Who is suited to this strategy and why?

This strategy is suitable for individuals who are:

  • primarily self-employed as a sole trader
  • under age 65 and who have not been employed in the income year the contribution is made, or
  • employed, but the income earned from employment is less than 10% of their total income.

The benefits of making personal deductible contributions are:

  • personal income tax is reduced
  • retirement savings are increased, and
  • small business owners can diversify their wealth outside of their business.

 

How the strategy works?

Individuals who are eligible to make personal deductible contributions into superannuation can claim a tax deduction equal to the amount of contribution.

The tax deduction reduces the person’s taxable income thereby reducing income tax.

Personal deductible contributions are taxed at 15% upon entry into super. This means the individual making the contribution will ultimately pay tax at 15% on the contributed amount instead of at their marginal rate.

Notice of Deductibility

To be eligible to claim a deduction for contributions to super, an individual must lodge a Notice of Deductibility form with their superannuation fund by the earlier of:

  • the date the individual lodges their tax return for that financial year, or
  • the end of the following financial year.

The form must be lodged prior to commencing a pension, rolling the contribution over to another fund or withdrawing the contribution.

Example

Kate is age 40. She runs her own mining engineering consultancy business as a sole trader, earning $185,000 per annum.

Kate’s financial adviser has recommended she contribute $20,000 into her superannuation fund as a personal deductible contribution.

Kate is aware that she won’t be able to access the contribution until she meets a condition of release, but she is interested in building up her retirement savings in a tax-effective manner.

 

The following table shows that Kate has created a tax saving of $5,100 as a result of implementing the strategy. Her cash flow has reduced by $11,900 but she has saved $17,000 for retirement.

 

Cash Flow BeforeStrategy AfterStrategy
Gross salary $185,000 $185,000
Less personal deductible contributions $0 $20,000
Taxable income $185,000 $165,000
Tax on taxable income* $59,575 $51,475
After-tax income $125,425 $113,525
Superannuation
Personal deductible contributions $0 $20,000
Less contributions tax $0 $3,000
Increase to super $0 $17,000
Net Package $125,425 $130,525

* 2010/11 financial year. Includes relevant tax offsets and the 1.5% Medicare levy.

Risks and implications

  • Making personal deductible contributions to superannuation reduces a person’s cash flow.
  • Contributions to superannuation are preserved until a ‘condition of release’ is met.
  • Personal deductible contributions count towards a person’s concessional contribution cap, as do SG contributions and salary sacrificed contributions. Contributions in excess of the concessional contribution cap are taxed at 46.5% and count towards the non-concessional contribution cap.
  • Reducing taxable income too low can result in more tax being paid as the 15% contributions tax paid on deductible contributions may be higher than the individual’s marginal tax rate.
  • Individuals who have worked through the year must be certain that they satisfy the 10% rule prior to making the deductible contribution.
  • Changes in legislation may reduce the flexibility or benefits that superannuation currently enjoys.

Note: Advice contained in this flyer is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at May 2011.

Further information on Deductible Super Contributions can be found on our YouTube site which can be accessed via the website below:

Website:  www.gemcapital.com.au

 

or to arrange a no-cost, no-obligation first consultation, please contact the office on 08 8273 3222.

 

Blog Website:  www.investmentadviceadelaide.com

In the lead up to the Global Financial Crisis, we did not invest in Listed Property Trusts or Unlisted Property Trusts.

With the significant realignment in these property markets we now are seeing value of investing in Commercial Property markets.

This article focuses on the Office market within the Commercial Property sector.

2010 saw the following occur in the Office market:

  • CBD Office vacancy rates peaked at 8.3% and are now trending down
  • Capital values increased by around 5%
  • There was tangible evidence of increased demand for space
  • Prime Gross Effective Rents increased by 1.4%

Below is a chart supplied to us by Charter Hall Property group which outlines forecasts for CBD Office property in each of the major markets in the coming years.  These forecasts are based on demand assumptions for space, compared to known additional supply of property that is in the pipeline.

This chart is showing that it is anticipated that over and above the income received by investors, capital values are forecast to rise on average by around 20% from 2011 – 2014 in the CDB Office sector.

When considering a commercial property investment we normally would recommend investors seek the following in a property investment trust vehicle:

  • Vehicle should have High Quality Tenants of well known companies with strong brand names in a strong financial position.  The property vehicle should not overly focus on one tenant.
  • Consider the Average Lease Expiry (referred to as ALE) – this is the average term that tenants have to run before their lease is up for renegotiation.  A longer ALE should result in a higher income certainty for the investment vehicle
  • Level of Gearing – we would normally start to become uncomfortable with a property investment with more than 50% gearing
  • Investment vehicle should contain a number of properties in different locations, rather than relying on either one area, or worse still one property.

IMPORTANT INFORMATION:  Any advice contained in this article is general advice only and does not take into consideration the reader’s personal circumstances.  Any reference to the reader’s actual circumstances is coincidental.  To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.  When considering a financial product please consider the Product Disclosure Statement

Monday, 30 May 2011 11:56

Australian Property Bubble?

(Aust Financial Review 26th May 2011)

According to the Organisation for Economic Co-operation and Development, the ratio of house prices to incomes is 34% above its long term average and the ratio of house prices to rents is 50% above its long term average, both being at the top end of OECD countries.

Also, the 2011 Demographia International Housing Affordability Survey shows that in Australia the median multiple of house prices to annual household income is double that of the US.

AMP economist Shane Oliver points out that in Los Angeles the median house price is $345,600 in Sydney it is $US$634,300.  In Austin, in oil rich Texas, the median price is $189,100, in Perth it is $480,000.

 

 

 

Thursday, 26 May 2011 10:40

Uncertain Housing Market

(Aust Financial Review 25th May 2011)

Australia’s housing market looks very expensive with prices running at around 25% higher than the long-term average.  Further gains will be limited by the high debt levels borrowers have taken on to buy property.

It means they are vulnerable if anything goes wrong.  With this in mind the veiled threats by the Reserve Bank of Australia to raise interest rates must send a shudder through some investors.

A recent run of soft consumer data shows that confidence levels are already low in most households, so any move by the RBA will hit hard.  According to AMP Capital Investors, so far this year prices are down 2%.

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