August 2014 Review & Comments
Written by Tony Gray   
Thursday, 11 September 2014 13:24

Portfolio Positioning

Reporting season in Australia did not throw up too many surprises – positive or negative.  We do however have more certainty as to the cash-flow, balance sheet and profitability of listed assets and this does help when deciding upon assets to buy, hold or sell.

It seems to me that companies that are successfully generating growth overseas deserve a price premium and offer a diversification benefit (away from Australia).  Many of these are in the mid-sized company space.

With respect to international markets, during August I sat in on a Platinum Asset Management teleconference and also spoke to the lead manager for the Acorn Asia Small Cap Fund.

It was interesting that despite the media focus on the real estate slowdown in China that both managers were quite positive on the Chinese sharemarket and consumer spending growth.  Indeed Kerr Neilson’s view is that the long running bear market in Chinese shares has ended.  By comparison, Platinum feel the US bull market in shares is mature and that smaller US companies are expensive – and they hold short positions in that sector.

Asian exposure in the lead Platinum International Fund is now at a 20 year (all-time) high.  We’re happy to agree with Platinum’s viewpoint and this is reflected in some of our exchange traded fund and managed fund selections in the international space.

In the early days of September it seems to us that we have entered a ‘risk off’ phase (i.e. markets are falling).  This is no surprise as stocks trade ex-dividend it is normal to see some price weakness.  It is also healthy as there are plenty of uncertainties that markets were seemingly ignoring (world war three in the middle east, Ukraine/Russia, changes to the US interest rate cycle, falling iron ore and coal prices linked China demand, banking inquiry outcome due shortly for Australian banks, Australian economic risks and so on…).

With opportunity reserves already in place for most portfolios, we are hoping that weaker markets will present more investment specific opportunities.

Clients who have used option strategies in the past (or presently use options as part of the current approach)- we have recently begun putting in place some low cost index hedges to partially protect the downside – allowing a higher than otherwise allocation to shares to remain in place for the total return potential.

Managed Funds

Whilst our focus is on directly held assets that provide greater certainty of cash-flow and taxation outcomes, we do make use of managed funds where we feel specific value is added - and where investor experience and/or involvement suggests that the diversification provided by a managed fund offers the better course.

Despite this involving some fund manager fees, the focus should be on after-fee returns.  My observation is that there is little point in paying an active manager fee for an approach that hugs an index (that could be achieved via a lower cost exchange traded fund - ETF).  On the other hand, there are active managers across all asset classes that demonstrate after fee return and characteristics that make them more attractive than a lower cost ETF.

One ‘problem’ when it comes to fund manager reporting in portfolios is that simply looking at the cost and value columns can be misleading.  Take the following example:

Fund purchase value (2013/2014):


1 July 2014 profit distribution (some income + some realised capital gain):


Re-invested in additional units – cost base becomes:


Current Value:


What appears to be a current loss of $300 is in fact a $2,000 gain.

If distributions are not reinvested, then the same distortion arises, as you need to assess the current value plus income received against the original investment.

We don’t have this issue with listed assets – the cost base remains unchanged and the dividend is paid into the bank account.

Ultimately the total value of the portfolio captures all income and capital gain and a comparison against previous reports helps with this.  A reminder that most portfolios may also be accessed on-line (contact the office if you require assistance).

As always, please contact me with any questions about your portfolio or planning queries.

Best wishes


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

Principal, TG Financial


Please note that I will be taking leave from the 25th of September to the 10th of October inclusive.  The office will be the first point of contact ideally, but I will be in the country and messages may be left on my mobile (0419 728 517) – although it will be switched off or be out of range for part of the time.  Similarly, I will check emails periodically – but don’t plan to spend too much time on the computer (hint).

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 Monday, 20 October 2014 08:39

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