MAY 2005
INVESTMENT PRODUCTS NEWS
Welcome to our first newsletter for 2005. As we approach the end of the financial
year, our own stock market has retraced from record highs whilst the major overseas
markets are still quite volatile. A correction in the equities markets may be underway,
which should take some of the “heat” out of the markets and restore valuations to
more reasonable levels.
In this edition we ask the question: Is now the right time to reweight your portfolio
more towards international equity trusts? We review SCM’s new international fund
managers, update you on superannuation changes, some health and lifestyle issues
and some new property and income related products in the marketplace.
James Tsiolis
Managing Director
Contents:
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Market Review
International Equities Update and Strategies
Lifestyle and Health – Holistic Portfolio Planning
Superannuation Changes – Good News
Managed Funds Update
Important Reading
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Market Review
The graph over the page illustrates the returns from all major asset classes over the
12 months to the end of March 2005. The Australian equity market as measured by
the S&P/ASX 300 Accumulation Index returned 25.4% and the Listed Property Trust
sector as measured by the S&P/ASX 300 Property Accumulation Index returned 20%
for the 12-month period to the end of March 2005.
The international equity investments as measured by the MSCI World (ex-Australia)
in Australian dollars returned 8.8%. Despite the concerns about rising interest rates
the fixed interest market as defined by the UBS Composite Bond Index returned
4.8%.
IS IT TIME TO SHIFT YOUR PORTFOLIO EXPOSURE
FROM AUSTRALIAN EQUITIES… TO INCLUDE SOME
INTERNATIONAL EQUITIES?
The Australian sharemarket as measured by the S&P/ASX 300 Accumulation Index
has returned 25.4% over the last 12 months. The diagram below compares the return
of the Australian sharemarket against the major global sharemarkets. This includes,
the CAC 40 (France), FTSE 100 (UK), DAX 30 (Germany), Nikkei 225 (Japan), S& P
500 and Dow Jones (US), Hang Seng (Hong Kong) and NASDAQ (US technology).
The chart on the following page compares the return of these major sharemarkets
over different time periods and interestingly only the Australian sharemarket has a
positive return over all time periods. That is, over 12 months, 3 years, 5 years and 10
years the Australian equity market has returned positively. Many of the other major
equity markets have negative returns over some time periods.
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If you had invested in the Nikkei 225 (Japan) over the last 10 years you would have
received a return of approximately –3% p.a. On the other hand, if you had invested in
the Australian equity market over the same period of time you would have received a
return over 10% p.a. However, all markets follow cycles and over long time periods
international equities (i.e. the global markets as measured by the MSCI World
excluding Australia index) have outperformed Australian equities. It is only a matter
of time when the cycle will turn against Australia.
The chart below shows the significant difference in return between the Australian
equity market (yellow) and the international equity market as expressed by the MSCI
World (ex-Australia) in Australian dollars in the last few years.
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The chart above highlights how the international equity markets outperformed the
Australian equity market between 1997 and early 2000. This was a result of the
significant increase in the valuations of technology related securities and the
Australian market does not have a large technology sector. However, since 2003 the
Australian equity market has significantly outperformed the international equity
markets and a major reason for this outperformance has been the rise in commodity
prices. The local sharemarket has a significant exposure to the resource sector and
has resulted in the local market performing strongly.
When the commodity price rally begins to slow the local sharemarket should begin to
trade more evenly and result in the international equity markets performing better
relative to the local market.
The real value of investing internationally is that world markets behave differently to
our own giving true diversification benefits, i.e. lower portfolio volatility and higher
returns over the long-term.
SCM’s Optimal Choice International Equity Fund
For investors looking for exposure to the global sharemarkets without being tied
down to a particular manager, SCM offers a multi-manager fund which it calls the
Optimal Choice International Equity Fund. This retail managed fund offering active
portfolio management and monitoring of managers, dynamic foreign currency
hedging (to suit different market and economic conditions) has no entry or exit fees,
and you can invest in the fund for as little as $10,000 initially.
During December 2004, SCM launched the (wholesale) SCM Absolute Return
International Equity Fund. This wholesale fund will now be the vehicle through which
the Optimal Choice International Equity retail fund will invest and it allows us to
introduce a new range of international equity managers, many of which are new to
the Australian marketplace. The new managers have been selected after extensive
research by SCM’s investment team. This research included frequent overseas trips
to Europe and the USA to visit the fund managers short listed for selection.
The portfolio is constructed according to a “risk budget” that estimates the risk (i.e.
volatility) in the MSCI World (Ex-Aust) Index, and then SCM builds the appropriate
portfolio of underlying managers to take the appropriate amount of risk. There are
various risk controls in place around the exposure of the total portfolio to the major
sharemarkets as well as the different market capitalisation (or size) of the listed
companies in which the managers invest.
The Optimal Choice International Equity Fund now has a new investment
objective - to deliver an absolute rate of return of 10% p.a. over rolling three
year periods. This means that its return objective is no longer to outperform the
MSCI World (ex-Australia) Index; it is just to achieve a return of 10% p.a. over the
medium term (without reference to “the index”). This may be a very important shift in
investment strategy going forward, particularly if the MSCI index produces low or
negative returns in the next few years.
The first new manager introduced to the SCM fund is Polaris Capital Management, a
boutique manager based in Boston. They have been operating for 10 years and
currently have almost $1 billion under management. Polaris has a “value” style bias
and has a global investment mandate.
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The SCM Absolute Return International Equity (wholesale) fund has also invested in
sector and regional specialist managers TCW Pluris based in New York, LSV Asset
Management and Driehaus Capital Management based in Chicago, as well as
Gardner Lewis and Turner Investment Partners based in Philadelphia. Both
Driehaus and Gardner Lewis are specialist Long/Short equities managers. SCM
employs an active “manage the manager” approach, to monitor performance and
change underperforming managers if and when required.
Why invest in a multi-manager fund with a number
of specialist managers rather than a diversified fund
with one manager?
To take advantage of specialist funds you need to have the ability to conduct portfolio
construction and continuous monitoring and rebalancing of the asset mix within the
portfolio. Managers that invest in one sector (for example, Australian equities) on
balance perform better than diversified managers as a result of focusing their
expertise on one asset class. No matter what field of endeavour, concentrated effort
in the one area pays off. Generally, managers of diversified funds are unlikely to
deliver competitive performance in each sector.
NO MATTER WHAT THE FIELD OF ENDEAVOUR, CONCENTRATED
EFFORT IN ONE AREA PAYS OFF!
To take advantage of specialist funds you need to have the time and ability to
continuously monitor and rebalance the asset mix within the portfolio. Rather than
simply investing in a stand-alone managed fund or direct equities (this is not an
investment strategy) a professionally managed and administered investment may be
a superior option.
WHAT SORT OF INVESTOR ARE YOU?
□ Conservative
□ Moderately Conservative
□ Balanced
□ Moderately Aggressive
□ Aggressive
An Individual
At Strategic Capital Management Ltd we understand that all our clients are
individuals. That’s why we tailor investment portfolios to suit your specific needs.
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Our background is investment advice to large institutions and superannuation funds,
which demand nothing less than an individual approach to investment. We’re now
making the same sort of expertise available to individual investors like you.
We start off by asking you a lot about yourself, your attitudes, your objectives and
your resources. This enables us to develop solutions which specifically target YOUR
financial goals.
We develop an individual investment profile for you. We set performance and
volatility targets to suit you, not some preconceived “one size fits all” investment mix.
Our team of highly experienced investment analysts then go to work to find the
optimum mix of investments, filtering through the universe of investment offerings
and fund managers to create your unique portfolio.
So the next time an adviser asks you what type of investor you are, tell them
you’re an individual – and come talk to us.
Ask about our regular investment seminars. For more information, or to
reserve a seat, please call Paul Connelley at SCM on (02) 9264 9989.
SEMINAR:
24 MAY 2005 - Tax Effective Investment and Superannuation Strategies
MFS OPTIMISER ONE
– a limited investment opportunity!
MFS Limited is an active property and fixed income fund manager listed on the ASX
with funds under management in excess of $2 billion. The new MFS Optimiser One
fund is a hybrid property/ income fund that aims to outperform the S&P/ASX
300 Property Accumulation Index, before fees, on a rolling annual basis.
MFS Optimiser One is a fund of funds in that Smith Barney Citigroup Australia Pty
Ltd has been engaged as the adviser for the investments in listed securities. The
fund is designed to provide you with exposure to a mix of property related
investments that will suit investors looking for:
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Exposure to both listed and unlisted property assets and related securities. The
balance between listed and unlisted property securities will vary over time
depending on liquidity requirements, risk control and the portfolio mix.
A cash distribution of 9.6% p.a. guaranteed for the period up to 30 June 2006
with regular quarterly distributions that are potentially tax advantaged.
Capital growth over the medium to long-term and willing to accept a level of
volatility with a medium to high level of risk.
A defined investment term being a closed fund with a five year investment
horizon.
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5% discount on the prevailing unit price when distributions are reinvested (this is
the only way additional money can be invested in the fund after the 31 May 2005
closing date).
Minimum investment of $5,000 with a limited redemption facility (up to 20% of
your holding) on a half-yearly basis after 1 July 2007. A redemption fee of 4%
applies to amounts withdrawn prior to maturity.
We believe this new fund offers investors looking for a higher income yield an
attractive opportunity and will assist investors to diversify their existing property
sector exposure. The fund currently has $24.7 million in assets and will close to
new investors on 15 July 2005.
Investments can only be accepted when accompanied by an application form from
the MFS Optimiser One Product Disclosure Statement (PDS). If you would like a
copy of the PDS please call us on (02) 9285 1324, or 1800 221 715 if you are
calling from outside the Sydney metropolitan area.
LIFESTYLE AND HEALTH
A HOLISTIC APPROACH TO FINANCIAL PLANNING
SHOULD INCLUDE APPROPRIATE PORTFOLIO
CONSTRUCTION, HEALTH AND WELLBEING
The overall objective of portfolio construction is to design investment portfolios that
have a specific risk tolerance which reflects a client's individual investment
objectives. Consideration of business risk and diversification at an asset class level is
needed combined with how this can be melded with the emotional and physical well
being of a client.
In previous IP News (Sep 2001) we have elaborated on the construction of a portfolio
based on sector funds which specialise in managing certain types of securities such
as small companies, technology stocks, international equities (global, country and
region specific) property securities and so on. This compares with diversified funds
which invest over a range of asset such as Australian and International shares,
Property (Listed and/or Direct), Fixed Interest and Cash.
Once you have quantified the risk tolerance you are then able to construct your
portfolio. Understanding your risk tolerance is more than running out of money during
retirement. A misunderstanding of risk often leads to a portfolio strategy (asset mix)
that has an inappropriate investment time horizon which can lead to an early sale of
an asset before it has fully reached its potential.
Regardless of the investment environment, a holistic approach to financial planning is
the best way to ensure that financial, emotional and physical needs of the client are
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taken into account in constructing a portfolio that is appropriate to your risk profile.
Furthermore, the financial planner should have access to a wide range of investment
options and managers that are independently researched to ensure objectivity plus
take into account the clients health profile and family support structures.
Medical research has linked stress on a continual basis with many diseases of the
Western world such as high blood pressure, stomach ulcers, some heart conditions,
skin disorders and sleeping problems. By assessing your financial risk profile to
create optimal returns you will not only reduce your physical stress symptoms, you
will add to the enjoyment of your chosen lifestyle and possibly add years to your life.
Flexibility of strategy and on-going portfolio management are paramount. An
individual should have the ability to alter their strategy as their lifestyle requirements
change through time. With the assistance of your investment planner you can fine
tune your asset mix when your circumstances change and adapt your portfolio to any
changes in economic conditions, your lifestyle or your health and well-being.
If you would like SCM to review your portfolio requirements, at no charge for the
initial consultation, please call Investment Products and we can refer you to a
licensed financial planner.
SUPERANUATION CHOICE FROM JULY 1, 2005
Employees under federal awards, non-award employees, and certain State industrial
awards, certified agreements or Australian workplace agreements will be able to
nominate the superannuation fund of their choice to their employer for contributions
of the Superannuation Guarantee amounts, currently at 9% of their salary or wages.
The Federal Government estimates that about 4.8 million employees will be affected
by choice. Investment Products customers are already pro-active in managing their
finances and this extra flexibility in superannuation will enable our clients to take
more control of their retirement finances.
Investment Products is well placed to help you avoid misleading sales tactics; high
commissions; high entry, exit, on-going management fees and especially minimise
the cost of switching funds. We can assist you in consolidating your super into one
fund if you have several at present.
We recommend you do your homework thoroughly or seek professional advice on
the range of possibilities taking into account your age, risk profile and investment
time horizon. For example a Retirement Savings Fund (Capital Guaranteed) will not
adequately prepare you for retirement over the long term due to low comparative
growth.
There is now $625 billion invested in Superannuation. It is one of the most efficient
ways to invest your savings with super funds paying only 15% tax (maximum) on
their earnings and effectively only 10% capital gains tax.
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FEDERAL GOVERNMENT WILL CONTRIBUTE $1.50 FOR
EVERY $1.00 YOU CONTRIBUTE IN SUPERANNUATION IN
THE IMPROVED CO-CONTRIBUTION SCHEME
Through the Super Co-contribution Scheme, you could be eligible to receive an extra
$1,500 in your super fund each year. All you need to do is make a personal after tax
(or undeducted) contribution on top of the mandatory 9% Superannuation Guarantee
contributions your employer makes on your behalf and then lodge a tax return for the
financial year in which you make your contribution.
However, this benefit is only available for tax payers with earnings (i.e. assessable
income and reportable fringe benefits) less than $28,000 p.a. For those with earnings
in excess of $28,000 p.a., the government co-contribution reduces by 5c per $1 of
earnings, phasing out as your earnings reach $58,000 p.a. These thresholds will be
indexed each year from 1 July 2007.
Call us if you wish to consolidate your super balances or take advantage of the
improved Co-Contribution Scheme. Or call us if you need a referral to an adviser.
MANAGED FUNDS UPDATE
EQUITY FUNDS
Australian Unity - Acorn Capital Wholesale Microcap Trust
This fund primarily invests in “microcap securities” which are defined as those listed
companies that lie outside the largest 250 companies on the ASX.
 Improves diversification in a balanced portfolio.
 The Fund aims to exploit the mis-pricing that arises from the information gap
about microcaps and to identify potential for long-term growth.
 Investment return of 38.9% p.a. for the 2 year period ending 28 Feb 2005,
outperforming its benchmark index by 5.3% p.a.
 Minimum initial investment is only $1,000.
Equity Trustees - EQT SGH Absolute Return Trust
This absolute return fund aims to achieve strong medium to long-term capital growth
in a portfolio of listed companies in Australia and New Zealand. By investing in a
diversified portfolio of listed companies, cash, derivatives, unit trusts and new
company floats (IPO’s) the fund aims to outperform its benchmark over rolling 3 year
and 5 year periods.
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In a neutral position the fund will hold 60% within ASX100 Stocks, 15% within
small companies stocks and 25% in cash.
It also seeks to partially protect the portfolio against significant negative
moves in the markets using a combination of futures, options and cash.
Taking advantage of mis-pricing opportunities by short selling shares.
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Investment return for the 3 year period ending 31 March 2005 was 17.2%
p.a., which included income distributions of 4.7% p.a., exceeding its
benchmark by 7.6% p.a.
Minimum initial investment is only $5,000.
PROPERTY FUNDS
Australian Unity Property Income Fund
This hybrid property fund is suitable for investors seeking a property investment that
is highly liquid, strongly income biased with a relatively high exposure to direct
property to reduce the short-term volatility associated with listed property securities.
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Allocation as at 31 March 2005: Direct Property 51.4%; Listed Property
37.5%; Cash 11.1% (Qld., NSW, Vic, and SA).
Diversified across the following sectors: Retail (46%), Industrial (41%) and
Healthcare (13%).
Investment return over 5 years to December 2004 for the wholesale fund was
9.43% p.a. income plus 0.88% p.a. growth.
Retail units now available through a new PDS (Minimum initial investment
amount only $1,000).
Quarterly income distributions. PIR rating: A+
Macarthur Cook Industrial Property Trust
This fund is an open ended industrial direct property trust with assets diversified
across four states in Australia.
 Forecast distribution return for the period to 30 June 2006 is 9.1% p.a.
 Income forecast for the period to 30 June 2006 is over 60% tax advantaged.
 8 industrial properties located in NSW, Vic, Qld and WA.
 Fund gearing (Debt/Total Assets) is currently 60%.
 The fund has been rated by the following research firms:
ASSIRT
Lonsec
3 Stars - Investment Grade
Recommended (Report Available for clients)
Macquarie Property Income Fund
The Macquarie Property Income Fund is an unlisted property securities fund that
employs a unique gearing strategy to enhance after tax income potential by providing
a higher tax deferred income distribution. The gearing level will vary between 0% and
50% depending on prevailing market conditions. “The gearing strategy is the most
developed and disciplined of the geared funds we have reviewed.” Zenith Research
Report, June 2003.
This fund will seek a high level of after tax income and moderate capital growth over
time.
 Uses gearing to invest in a diversified portfolio of Listed Property Securities.
 A simple low cost way to gear property that is also available to super funds.
 The Manager has formulated a hedging strategy to help protect investors
against adverse movements in interest rates.
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Total return of 44.3% and income distribution of 13.06% for 12months to
February 28, 2005.
Minimum initial investment $10,000 (Minimum a/c balance $5,000) and ready
access to funds usually within 3 days, if you need to withdraw your money.
Multiplex Development and Opportunity Fund
An unlisted property trust with exposure to a range of property development projects
at various levels of completion and in different sectors such as commercial,
residential, industrial and tourism. The manager aims to achieve a pre-tax return of
15% p.a. net of fees and expenses. The fund:
 Provides investors with exposure to a range of property projects at various
stages of the development cycle such as the World Square redevelopment
(Sydney) and the heritage-listed Raffles Hotel (Perth).
 Includes other forms of direct and indirect property investments.
 Predominantly within Australia (Sydney) but may include the UK and NZ.
 An 8% income guarantee (net of management fees) until 30 June 2008.
 Income distributions are paid quarterly. Minimum investment is $10,000.
 Return for the year ending 31 December 2004 was 23.28% p.a.
INCOME FUNDS
MFS Premium Income Fund
This Fund seeks to provide investors with an attractive monthly income that is
consistent and above average cash fund returns by investing in: Mortgage Securities (where the maximum amount of the loan is less than
66.7% of the property value), currently 83% of the fund’s assets.
 Property Securities 6%; Property Linked Income Producing Assets 8%; Cash
and Fixed Interest Investments currently 3% of fund assets.
 Units in any Managed Investment Scheme; Promissory Notes; Bonds; Direct
Real Property and not more than 15% of the Fund’s assets in loans.
 The current rates of return and fixed terms on offer are:
7.0% for 6 months
8.5% for 12 months
9.0% for 24 months.
HOW DO YOU CONTACT US?
New and existing clients wishing to contact the investment desk for information on
any of the products and services available should call 02 9264 9989 or 1800 221 715
(outside of the Sydney metropolitan area). We would greatly appreciate your
feedback on any of the articles in this edition of the Investment Products newsletter
or on areas of interest you would like to see us cover in the future.
Our other contact details are:
Investment Products Reply Paid 2834, Sydney NSW 2001;
Level 23, 1 Market Street, Sydney NSW 2000. Fax: 02 9264 9889
Email: [email protected] Website: www.investmentproducts.com.au
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IMPORTANT READING
Optimal Choice Pty Limited (ACN 095 037 988), trading as Investment Products and holder of
Australian Financial Services Licence No. 247169, has prepared this document for the
general information of investors. As no account has been taken of the investment objectives,
financial situation and needs of any particular person, it does not represent advice specific to
any particular person. Investors must decide whether the information contained in this
document, including any recommendations whether express or implied, are appropriate in
light of their specific investment objectives, financial situation and needs. Investors should
consider seeking professional investment advice before making an investment decision.
Before making an investment in any product covered in this report you should review the
relevant Product Disclosure Statement carefully.
Optimal Choice Pty Ltd is wholly owned by Strategic Capital Management Limited (ACN 092
936 902). Strategic Capital Management Ltd (‘SCM’) holds Australian Financial Services
Licence No. 245580 and is the responsible entity of the Optimal Choice Funds, including the
Optimal Choice International Equity Fund. SCM is remunerated by way of a responsible entity
fee. The responsible entity fee for the International Equity Fund is 1.68% p.a. Optimal Choice
Pty Ltd may also receive commissions from financial products featured in this newsletter.
Optimal Choice Pty Ltd makes no warranty as to the accuracy, reliability or completeness of
any information contained herein. Except to the extent that any liability under any law cannot
be excluded, no liability for any loss or damage which may be suffered by any person, directly
or indirectly, through relying upon any information or statement in this document or any
attachments is accepted by Optimal Choice Pty Ltd, its directors, employees or agents,
whether that loss or damage is caused by any fault or negligence on their part or otherwise.
Optimal Choice Pty Ltd does not guarantee the repayment of capital or the investment
performance of any financial product covered in this report.
Past investment performance is no guarantee to future performance.
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