ASIA, Higher Risk! Higher Returns?

This quarter we feature two leading Asia investment opportunities providing investors with examples of how to invest in Asian markets.

With elections coming up in the US and Australia, investment markets in these countries are expected to do nothing too exciting in the near future. Europe continues to be uninspiring for those looking for strong returns at the more high risk end of their portfolios.

Even with China’s recent managed slow down Asia is enticing in its promise of greater opportunities, untapped markets and year on year strong economic growth. Japan is again on investor’s radars as it emerges from a decade of near zero growth recording 3.2% GDP growth for the 2004 fiscal year.

There are a number of ways to gain exposure to the Asian growth storey. Investors can invest in companies on the ASX with significant investment or exposure to Asia. Two good examples of his would be Rio Tinto and Singtel.

Investors can also invest directly into Asian stock markets but this provides little or no legal protection in Australia.

A safer way to access stocks listed in Asian markets is through a managed fund registered in Australia and governed by Australian laws. The Aberdeen Asian Opportunities Fund provides exposure to Asia excluding Japan while the Platinum Japan fund invests solely in that market. Both funds are managed by experienced investment teams yet both are very different in the way they are managed.

Aberdeen Asian
Opportunities Fund
Aberdeen is a UK based investment house with long standing experience in the management of Asian equities (over $12.9 billion of funds managed in the Asian region).

The fund is new, having only been launched in Australia in October 2003. Already a number of research houses have rated the fund with a AA rating from Standard & Poors, an Approved rating from 360, and a Buy rating from InvestorWeb.

The investment team of 14 managers who are based in Singapore and Bangkok, have been operating together for over 10 years with only one departure in that time. The fund management methodology has been operating for over 10 years with consistent above benchmark performance.

Aberdeen are bottom up stock pickers. This means they build the portfolio by focusing more on the unique qualities of particular companies relying less on broader macro economic criteria. Their first stage of stock selection is a quality filtering process that assesses such things as quality of the management team, level of recurring company earnings and strength of business franchise. They then conduct more detailed quantitative analysis. This method is quite unique in that most managers use a quantitative analysis to first identify a universe of possibilities. They visit the company and never invest in a company where they have not met with management.

Platinum Japan Fund
Platinum is an Australian based fund manager specialising in international equities, managing over $12.8 billion. The company was established on 21 February 1994 by a team of former BT managers lead by renowned investment guru Kerr Neilson. The manager is well rated by a wide number of research houses. The Japan fund has been given a 5 star rating by ASSIRT and Morningstar and an A rating by Van Eyk.

They are a value style manager seeking out companies that are undervalued through a bottom up stock selection process. One unique aspect of their style is their willingness to short sell. This means that in addition to stocks they hold which they regard as undervalued they may short sell stocks they regard as overvalued. When correctly judged this strategy enables the fund to benefit from falling and rising share prices. While this style brings greater diversification to a portfolio it does carry a higher level of risk.

The fund has earned 45% over the 12 months to June 2004 beating the MSCI sector average by 5%. Average returns over 5 years are 17.2% p.a. compared to the MSCI Japan average of -2.7% p.a. for the period.

Investors can consider these funds as a way of gaining broad access to Asian markets using regional investment specialists while enjoying the protection of the Australian regulatory regime.

Andrew Condell

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Fund Choice "Buckley's Choice" for some

Super fund choice has finally arrived after 7 years in the wilderness. Applying from 1 July 2005, employees will be able to direct their employer to contribute to a super fund of their choice.

Financial Keys applauds this development. We consider the benefits far outweigh the negatives. In this article we will summarise the key issues surrounding this change

Fund Choice v’s Investment Choice
Many employees these days have a wide range of investment choices available within their employer nominated super fund. Fund choice, on the other hand deals with the choice of superannuation funds rather than the underlying investment options.

Reasons to Exercise Choice
For those who do not want to use a nominated employer fund they can now choose their own fund. There are a number of reasons they may wish to exercise this choice:-

• If employer fund offers a poor choice of options.
• Portability – wanting a super fund that different employers can
  contribute to.
• Higher fees in the employer super fund – This is uncommon as group solutions are usually cheaper than individual funds.
• Need for tailored advice.
• Wanting to establish a DIY super fund.
• Wanting to buy shares/property in their super fund.

Reasons to Remain with the Employer Fund

• Lower fees based on large group buying power.
• Often free or discounted financial advice.
• Cheaper life insurance premiums.
• Automatic acceptance limits for life insurance – no medicals or underwriting.
• Where the employer fund offers a wide range of investment choices available.
• Portability – on leaving, an employer your benefit moves to individual account and can receive contributions for any employer.
• Option to keep insurance on change of employer.
  Most employer funds provide these features.

How to Make a Decision
Make sure you have the facts. Don’t be smooth talked by sales people. Key areas for consideration are:-

• Have a good reason for moving. Don’t be led.
• Compare the range of investment choices. You may not need 50 choices but ensure you have enough choices for your needs.
• Compare fees. Get all the details, entry or exit fees if any, management fees, adviser fees. Make sure you get value for your money.
• Compare the insurance arrangements including premium rates, automatic acceptance limits and underwriting requirements. Also compare definitions for Total and Permanent Disablement and Salary Continuance.
• Compare service levels, access to information and assistance. Some of the cheapest options have no support or service offerings.
• Consider your advice options. Good advice should lead to sound investment outcomes.

The Risks
The advent of choice has again brought to light the fee debate in the market place. ASIC and the Australian Consumers Association have both warned against unscrupulous advisers leading employees out of cost effective employer solutions to more expensive individual or DIY solutions. The Australian Institute of Superannuation Trustees sees Fund Choice as “more of a danger than an opportunity”.

In addition to the costs question the dangers they refer to include the possibility of poor investment choices leading to loss of funds or poor returns.

Employees are often unaware of the high degree of scrutiny that many employers bring to the fund selection process, a level of scrutiny that many employees are unskilled or unwilling to make.

The Benefits
While choice brings risks most people like to take their own risks and make their own choices. This means they can find the solution that best suits them. For most the employer nominated fund will be the option they choose, but it is good to know that the choice of an alternative exists.

Fund choice means those employees trapped in poor employer fund options can opt out. Those that want to build share portfolios in their super fund can do so. It makes the whole scenario more interesting and dynamic.

The key to long term success is to make informed choices. We consider the role of Financial Planners is to assist employees make those choices, to help them decipher the many considerations in exercising choice and to tailor solutions and portfolios that are suited to their long term objectives. Financial Keys advises on employer and individual superannuation arrangements. We also provide DIY fund establishment and administration solutions.

Andrew Condell


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MARKET Commentary

The global economy has continued to grow strongly over the past quarter with the US and Japan in particular, showing very strong economic data.

This continued growth, despite high oil prices, provided market participants with renewed confidence and has sent share markets higher.
Attention has been focused on the US Federal Reserve and its policy meeting. The resulting 0.25% rise in official short-term interest rates to 1.25%, had little impact as it was widely anticipated.

In Japan, continued increase in business confidence (measured by the Tankan survey), combined with increased exports and consumer spending is seeing the Japanese economy expand.

Elsewhere in Asia, the Chinese economy appears to be slowing down from its recent break-neck speed which is seen as a positive sign, not least by the Chinese authorities. Other Asian markets grew strongly with the exception of Korea and Taiwan.

Continental Europe may be benefiting from global economic growth however other than Germany, the growth doesn’t appear to be significant. As we have previously mentioned, Europe continues to be hampered by structural constraints which will take many years to fully unravel.

In Australia, the All Ordinaries continues to grow, recently reaching a record high of 3565.3. The strength of the Australian economy due to strong exports, consumer and business investment spending, combined with global (particularly regional) economic growth are helping to drive the market. The rise in interest rates appears to have cooled the local housing market somewhat however the Reserve Bank is keeping an eye on this, credit growth and of course inflation.

Unemployment has continued its downward trend reaching 5.5%, a 23 year low. The recent Federal budget was good news for families and above average income taxpayers. These carrots are obviously an incentive for the next federal election.

Brendan Gallagher

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Who: Arthur Hoffman
Age: 35
Family: Married, 2 children
Resides: Paddington, Sydney
Occupation: General Manager with an airline in Sydney. Responsible for strategy and IT for Holidays division of the airline

What is your experience of investing?
I’ve made some direct investments in shares in the past with an acceptable result. Thus far I have not invested in real estate. I am afraid I missed out in the property boom. This is the first time I engaged a financial planner and constructed a portfolio.

How would you rate yourself in terms of knowledge of investments?
Good knowledge of the available options, and there are plenty to chose from. I have a fair knowledge of managed funds. I typically look at a combination of economic drivers of the market and individual fund performance and parameters to make investment decision.

What financial press do you read/watch?
AFR, Economist, Internet sites such as BBC Finance, Macquarie Bank, and some European financial/investment sites

Worst Investment decision you ever made?
Not to get involved in property a few years ago, which most of my friends did!!

Best investment decision you ever made?
To allocate some “play money” to invest in individual shares. Good fun and so far a good return; pursuing a model of responding to emotional reactions in share market that create big up and down swings.

Why did you seek a financial planner?
To get expert advice on investments and tax, and for access to funds and a good platform, in this case Macquarie Wrap.

How did the financial planning process make a difference to you?
I found that it was a very rigorous process with a balanced approach to taking risk. It also ensured that income was generated in a tax effective way.

What have you learnt?
To take risk but in a controlled and balanced manner. I’ve also learnt the process in structuring a good personal investment model for investments that suit my requirements.

What advice do you have for people who are making their new financial year resolutions?
1. Make informed decisions around investments
2. Dare to take some risk, but do it in a controlled manner
3. Seek advice from an expert, especially if they also have skin in the game, they are worth it!

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