Monthly Newsletter - March 2011

Editors Note

This edition includes an inspirational quote, a funny picture, a market commentary with the main index returns during February 2011 and a feature article. I encourage you to make comments.

Global Equity markets were positive over February despite giving back some of the months earlier gains due to concerns over political unrest in the Middle East and North Africa and rising commodities prices. Australian shares were also positive in February.

Inspirational Quote

When one door closes, another opens. But we often look so regretfully upon the closed door that we don't see the one that has opened for us.

Alexander Graham Bell (Inventor of the telephone)

Funny Picture

Learning to cook? Perhaps this flowchart may help you. 

Market Commentary  

Global Equity markets were positive over February despite giving back some of the months earlier gains due to concerns over political unrest in the Middle East and North Africa and rising commodities prices. Markets moved higher on the back of a favourable macroeconomic environment in the US and Europe, increased liquidity due to quantitative easing in the US and greater M&A activity. Global and Domestic Bonds posted positive returns.

Performance scorecard to 28 February 2011 

Indexes used: Cash: UBS Australian Bank Bill Index, Diversified fixed interest: UBS Australian Composite Bond Index, Australian shares: S&P/ASX 300 Accumulation Index, Property: UBS Global Real Estate Investors Index (hedged in Australian dollars), International shares (hedged): MSCI World Accumulation Index (hedged in Australian dollars) and International shares: MSCI World ex Australia Accumulation Index.

Significant developments over the month were: 

• Domestic economic data highlights: Unemployment rate at 5.0% for February and Q4 real GDP growing 0.7% qoq and 2.7% yoy. The RBA left official interest rates on hold at 4.75% in February and March, stating that “the currently restrictive stance of monetary policy remained appropriate in view of the general macroeconomic outlook.”

• US and Euro economic data continued to indicate that the world’s two largest economies were expanding. In the US, February saw 192,000 jobs created to lower the unemployment rate to 8.9%, down from 9.4% in December 2010.

• In China, national accounts data for the December quarter showed the Chinese economy was continuing to expand at a rapid pace, with estimates of quarterly annualised growth exceeding 12%. Chinese authorities announced further tightening measures. Interest rates were tightened by 25bps to 6.06% and the Reserve Requirement Ratio (RRR) was lifted to reduce liquidity and lending.

• Tensions in the Middle East saw the oil price rise a strong 5.3% to finish at US$97.00/bbl. Gold gained 6.2% to US$1,415.05/oz.

Australian Shares

Australian shares were again positive in February after the local market overcame concerns in the Middle East and higher oil prices to focus on the positives from the reporting season. The S&P/ASX 300 returned +2.3% for the month.

Large cap stocks (+2.5%) outperformed their Mid cap (+2.3%) and Small cap (+1.3%) counterparts for the second month in succession. Unsurprisingly given the rise in the oil price, Energy (+3.6%) stocks made a strong positive contribution, Materials (+3.7%) also performed strongly. Conversely, Healthcare (-3.2%) stocks made the strongest negative contribution.

Strong sector performance saw a number of resource companies dominate the positive contributors list, headed by BHP (+4.4%). Wesfarmers (-2.4%) was the largest negative contributor over the month.

Overseas Shares

In local currency terms, the MSCI World ex Aus index returned +2.9%. Due to the appreciation of the A$, the return for unhedged Australian investors was eroded to +1.3%. The month of February saw Value stocks (+1.2%) outperform Growth stocks (+1.0%) in A$ terms, based on the S&P Developed ex-Australia Large Medium Cap Value and Growth indices.

In the US, the S&P 500 Composite Index returned +3.4%, the Dow Jones Industrial Index +3.2% and the NASDAQ Composite Index +3.2%, in local currency terms. In Europe, the FTSE 100 (UK) returned +2.6%, the DAX 30 (Germany) +2.8% and the CAC 40 (France) +2.6% in local currency terms. In Asia, the Chinese Shanghai Composite Index returned +4.1%, Hong Kong’s Hang Seng -0.5%, India’s BSE 100 Index -3.2% and the TOPIX (Japan) +4.6% again in local currency terms.

Emerging markets returned -3.0% over the month in A$ terms.

Property

Domestic listed property trusts (A-REITs) returned +3.3% for the month. Global Listed Property (FTSE EPRA/NAREIT Global Hedged Index) returned +2.7% during February.

Fixed Interest

The UBS Australia Composite Bond Index returned +0.4% for the month. The Citigroup World Government Bond (ex-Australia) and the Barclays Capital Global Aggregate Bond Index returned +0.3% and +0.4%, over the month respectively.

Currency

The A$ appreciated over February. The local currency rose 2.1% against the US Dollar, 2.1% against the Yen, 0.6% against the Pound Sterling, 1.4% against the Euro and 2.0% on a trade-weighted basis.

The Market Commentary has been sourced from Mercer (Australia) Pty Ltd.

Feature Article - Take Control Of Your Future With A Self Managed Super Fund

A Self Managed Super Fund (SMSF) can provide effective tax and social security benefits. Here we examine the pros and cons of managing your own super fund.

Examining the benefits

Probably one of the key reasons you might opt for an SMSF is that it puts you in charge – it gives you the control and flexibility to make investment decisions. And your fund has more flexible investment options than those available through a traditional super fund, such as being able to buy direct property.

You also manage the fund’s tax liability (such as contribution and investment tax), which means you can use share dividend imputation credits and deductible items such as insurance costs to offset liabilities.

Another key benefit is retirement and estate planning. Your fund can offer pension options such as allocated and pre-retirement pensions. Taking this a step further, you can link into estate planning, setting up your fund to enable you to pass assets down to other family members either inside or outside the fund.

The trust deed

Your fund’s trust deed is an important document as it generally dictates what you can and can’t do within your fund.

A well-structured SMSF trust deed should allow for all types of super contributions to be made into the fund – employer, personal, self-employed, spouse etc. It should allow flexibility with your retirement planning strategy and have the flexibility to pay all types of pensions allowed under the new super regime. It should also be able to
handle members’ requests for passing assets to beneficiaries if they die.

As your fund can only operate under the rules you’ve set in the trust deed, it’s important to update the trust deed periodically to ensure members don’t miss out on strategic opportunities that may occasionally arise when superannuation laws change.

Your investment objective and strategy

The investment objectives of your fund will ultimately be to provide members with an income stream in retirement. Here’s an example:

“To achieve an absolute investment return (net of taxes, fees and other costs) in the range of 8-10% per annum over rolling 5-year periods. This rate is envisaged to comfortably secure members’ benefits and meet their retirement income objectives.”

Once you’re sure about your objectives, you need to set an investment strategy that will help you achieve them – and then implement the strategy you’ve chosen. You’ll need to keep a clear record of the strategy and review it regularly to make sure your chosen investments are meeting your fund’s objectives.

Disadvantages

An SMSF can be quite costly to set up and time-consuming to run. You’re responsible for ensuring your fund is complying under the government’s legislation. Even if you decide to outsource administration, you are legally responsible for the way your fund is run.

The Australian Tax Office closely monitors all SMSFs to ensure they comply with the rules at all times. And penalties for breaching the super rules can be severe: depending on the type of breach, you could face a gaol term.

The above article has been sourced from Investment Solutions prepared by Securitor Financial Group Ltd.

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Important Information

The above information provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The above information doesn’t take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser.