March 2014 Review Comments
Written by Tony Gray   
Thursday, 17 April 2014 10:29
Markets markets markets…

These covering letters typically focus on our view of what is happening with the various asset classes and sometimes individual assets within each sector.  The comments may not be directly relevant, depending upon your investment approach – but outline our viewpoint when considering if a conservative, neutral or growth stance is warranted.  It is also worth noting that there are risks with adopting any view.  For example, adopting an overly cautious stance at this stage may result in underperformance if Australian and international sharemarkets continue to generate higher than ‘normal’ returns.  At the same time, the downside risks to a cautiously positioned portfolio are lower than that of an aggressive portfolio.

Only the future will prove us right or wrong – but we do try to articulate our world view and the rationale behind recommendations so you have an appreciation of the risks of any course of action.

Right now it seems to me that ‘growth’ assets have generated strong returns since 2009 and while valuations are not ridiculous, the return potential is lower and risk levels higher than ‘normal’.  To gain some idea of what is ‘normal’ bear in mind that the real (after inflation) 100 year return from Australian shares (this stat is a couple of years old now) is something in the order of 7% p.a.  This includes dividend payments.  This was enough to rank Australia as the best performing stockmarket over that period (i.e. higher than international shares, which varied quite widely between countries).

In some respects, assuming a long-term 7% p.a. total return from Australian shares might place us as too optimistic (there’s that crystal ball problem again) – but let us hope!

Another phenomenon that is observable over time is that it is rare for the best returning asset class in any particular year to remain the best performer consecutively.  My observation of typical returns from the sharemarket would be that one year in three could be well above average, another as average to slightly above and another as below average to negative.  We’re due for a below average or negative return.

In normal circumstances, if growth assets are on the high side, then allocating some funds to bonds (as distinct from deposits) would be natural.  However, one reason growth assets have performed well is not due to rising rents or profits, but due to artificially low interest rates.  The mere return to a neutral interest rate setting for the United States over the coming years should theoretically result in lower valuations for growth assets.  The other consequence is that the value of existing bonds will fall – and hence they do not represent as defensive an approach as traditionally considered.

Perhaps the best description of where we are at today can be found in history.  Twenty years ago in Australia we experienced a period where interest rates rose, bond values fell, property trust prices fell and Australian and international shares fell.  The outcome over a circa 10 month period was for negative returns of about 10%.  What were known as Capital Stable funds back then experienced losses and that name subsequently fell out of favour.

Planning planning planning…

Separate from investment markets, there are a range of planning matters that may or may not be relevant for you.  These are best covered on a one-to-one basis, but some examples of areas of focus at present include the following:

Self Managed Super Funds (SMSFs)

New rules are being introduced on electronic messages relating to super fund contributions.  There are a range of solutions, but the simplest appears to be using a service linked to the accounting software used by whichever group generates your annual tax return.  There are some exceptions for SMSF members who work in their own business.

ATO Penalties – the tax office now have more scope to apply penalties for a range of SMSF contraventions.  An example is late lodgement of tax returns.  Late lodgement also increases the likelihood of an ATO audit and the attendant costs and inconvenience.

A reminder that investment strategies need to be updated at least annually and also the insurance position of members considered.  We normally discuss this during reviews, but for those where we advise only in relation to investments you need to ensure this task occurs.

With most funds having completed tax returns, we are now involved in confirming pension payments and contribution details for the current and 2014/15 financial year.


Contribution levels have changed and are changing further.  Those aged 59 or older on 1 July 2013 can make a concessional contribute up to $35,000 (up from $25,000).  From 1 July 2014 the standard contribution limit rises to $30,000 for those under 59 and this also means the non-concessional limit will be rising to $180,000 (from $150,000 this year).

Estate Planning

If your position or intentions have changed, then please raise this as a topic to discuss.  We have been assisting with a number of more complex than normal situations lately.

Please contact me with any questions about your investment portfolio or any planning queries.

Best wishes

A.W. (Tony) Gray BCom, LLB, Dip FP, GDipAppFin, CFP, FFin
Principal, TG Financial

Please treat the above comments as General Advice or general information, with no action to occur until we have considered with reference to your financial position, needs and goals.

Last Updated on Thursday, 17 April 2014 10:44

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