The Financial Keys investment process has delivered strong returns to clients for the 2006 year - significantly outperforming benchmark returns.

The following table lists a selection of preferred funds used by Financial Keys to construct our model portfolios throughout the year. Performance of the funds is shown compared to the respective index performance. We are pleased to report all but three of the eighteen investments listed performed at or above the index performance for the year. Six of the funds outperformed by more than 5%.

The highest outperforming fund was the Colonial First State Global Resources Fund with a performance of 59.4%. The worst underperforming fund was the IOOF/Perennial Wholesale Value Shares Trust which still managed a performance of 20.0%.

We were happy with the performance of the IOOF fund as it is a “Value” style manager offering a more defensive approach in what has been a strong growth market. It has performed significantly better than other value managers during this period and produced a very good absolute return.

The Financial Keys research process is continuous and robust. We are always looking for better investment offerings and we continuously test and check that funds in our preferred list continue, in our view, to be the best on offer. We meet with and conduct regular reviews of investment managers. This process is supported with comprehensive research from many sources including van Eyk, Lonsec - both leading research houses; Macquarie Equities and Goldman Sachs J B Were Equities.

As a smaller boutique Dealer group we are able to act quickly to follow our convictions and implement changes to our model portfolios. We are not influenced by ownership connections or other biases in making our selections.

Andrew Condell

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With the Reserve Bank raising rates in May by 0.25%, and another 0.25% in August, many of our clients with home loans are probably wondering what they can do to help ease the pressure.

In our last newsletter, we outlined the pros and cons of fixed interest rates. Normally you can elect to switch all or part of your existing variable rate loans into a fixed rate loan to help protect you from future rate rises for a specific period (eg 3 years).

Unfortunately the fixed rates available from lenders have already moved up approximately 0.25% (although this varies from lender to lender), so whether a 3 year rate of around 7.20% is still attractive just depends on your personal outlook for variable rates from here on. Historically, this is still a low rate, just not quite as low as it was a couple of months ago!

What else can you do?

In reviewing clients loans we often find there are areas where savings can be achieved.
For example clients:

• May need a review of their loan and investment structures to ensure they have an optimal configuration;
• May not need all the features of their current loan, and could easily switch to a cheaper basic loan either with the same lender or elsewhere;
• May not be utilising possible features such as an offset account or a line of credit where they can deposit wages and other income to effectively reduce their interest costs;
• Are simply not aware of the competitive loan packages available, and have previously considered the whole refinance idea too daunting. Our role at Financial Keys is to seek out a more cost effective solution and to handle your paperwork to ensure a refinance is as easy as possible;
• Have money sitting in other accounts which could be better utilised sitting in their home loan reducing their interest costs;
• May need to consolidate their loans;
• May benefit from a shift to an interest only loan.

If you are concerned about your home loan rates, and want to ensure you are minimising your interest cost, please call us on 02 92 333 888.

No deposit home loans (also known as 100% home loans) are becoming more common, not to mention cheaper than they have been in the past. Primarily targeted at first home buyers, they allow you to borrow up to 100% of the purchase price of a property. They are great for those who want a property now and don’t want to have to save a deposit, or for those who find it difficult to save, despite having an income that could support a home loan. They are also attractive to investors wanting to maximise the negative gearing tax benefit.

Increasing competition in this market has meant that 100% loans are now available at the same rates as standard loans, but there are a number of other factors that need to be kept in mind:

• Some lenders still want to see some form of savings over at least a 6 month period. This used to be a minimum of 5% of the purchase price, but is usually now only 3%. Some lenders don’t require any savings history at all!
• You still need to have funds to pay the other costs involved in a purchase such as:

1. Mortgage insurance (this is a one-off upfront fee, and can cost up to 3% of the loan amount)
2. Application and settlement fee
3. Conveyancing costs
4. Transfer and mortgage stamp duty

• First home buyers have the $7,000 government grant to help with these costs, and may also receive stamp duty concessions depending on the price of the property.

The maximum loan amount will be less than for a standard loan. For the truly “deposit-challenged”, stand-alone loans up to 106% of the purchase price are available. As you would expect, the interest rate is higher, as well as the set-up and exit fees. And be warned, loans offering 110%+ are on their way! We would caution against such loans without a careful consideration of affordability and future cashflows.

Of course, if you are in the fortunate position of having family that can provide a guarantee (usually parents, but siblings can also be considered), then you may be able to avoid needing one of these high percentage loans altogether and saving significantly on your fees. More discussion on that subject in our next newsletter.

Matthew Carpenter


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The past quarter was a reminder to investors who had been enjoying surging investment returns, that sharemarkets can at times experience volatility.

The US sharemarket has reacted to signs of a slowing economy, higher energy costs and an unstable geopolitical environment with increased volatility.

The US economy continues to show signs of slowing down. After 17 consecutive rate increases by the US Federal Reserve and a large increase in energy costs, the US economy - in particular the US consumer, appears to be slowing. Consumer spending is decelerating; retail employment is contracting and there is a cooling in the housing market.

There were indications that the US Federal Reserve may now move to a neutral position satisfied that increases over the last two years are having the desired result.

But while the US economy is slowing, elsewhere in the world growth continues, especially Europe and Asia. European business surveys have been very positive and consumer spending is increasing. These are both good signs for European economic growth over the coming months.

Japan’s recovery continues. Unemployment has fallen to 4% (down from 5.5% in 2002), the residential housing market is picking up and export growth is strong.

China also continues to enjoy strong economic growth. Central authorities have recently put in place measures to curb overheating in areas such as lending and property.

In Australia, the Reserve Bank (RBA) continues to increase interest rates in response to inflationary pressures. Increased costs of fuel, fruit and housing are pushing inflationary figures above the RBA 2-3% target range and increased interest rates are expected to slow consumer spending and consumer credit.

Despite rising energy and labour costs, Australian companies are reporting strong profits, especially in the resource and energy sectors. This earnings growth has pulled the market through recent volatility. The outlook for further earnings growth will depend on the flow on effect of rising fuel costs, global growth and inflation.

Brendan Gallagher

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Many people find themselves lost when they receive an inheritance as they are worried about how to make the right decisions. For many people it is an emotional and difficult time so making objective financial decisions can be hard.

Importantly you should take your time. A considered, planned approach is likely to yield the best results.

Inheritances can come in different forms. You may receive cash, shares, real estate or other property. You may inherit a property that you share with others. You may have an emotional attachment to some items which need to be considered. You may wish to quarantine some of the inheritance for a particular charity or for your children’s education or future.

Clearly there are many things to consider when evaluating the best course of action; not least of which are the tax consequences. It is important to seek advice from your financial adviser to ensure you get the best tax outcomes. You may also need to see a solicitor particularly if there is no will or the will is disputed. Here are some of the more common things to consider.

Property
The tax consequences of inheriting a property depend upon a number of factors. For example when was the property acquired by the deceased and was the property used as the sole and principal residence or not.

Any property other than the principal residence will accrue capital gains tax after the date of death. This means even the holiday home will accrue tax. The principal residence remains exempt if it is sold within 12 months or if you establish it as your sole and principal residence.

If the property was acquired by the deceased after the start of CGT, 19 September, 1985, it may already have a CGT liability attached to it which passes on to you. If it is a pre CGT asset then CGT starts to accrue from the date of death.

Shares and Other Assets
Inheriting shares and other assets can also have CGT implications. As with property it is important to be aware of the CGT liability that may exist when you inherit shares and other assets as this can affect what you intend to do with these assets.

Testamentary Trust
The inheritance may pass to a testamentary trust for the benefit of a number of beneficiaries. This can provide ongoing tax advantages depending on the circumstances of the beneficiaries. It’s also a suitable vehicle to use for an education fund or as a future fund for your children. The composition of the investment portfolio will need to take into consideration the requirements of the trust including the need for income, capital and the underlying risk profile of the beneficiaries.

How to Allocate Your Inheritance
Once you are comfortable that you are aware of any tax issues associated with your inheritance it is time to evaluate what to do with it. Some options include:-

1. Spend The Money
Upgrading your car, taking a holiday or in some other way spending the inheritance funds on yourself or your family is an obvious option. This is an opportunity to indulge yourself in some way. It is important to set aside what amount of the inheritance you are happy to spend and then stick to it. Without some sort of plan, it is easy to wind up with all of the money spent and nothing to show for it.

2. Reduce Your Debts
Many people have large debts and this could be a good opportunity to reduce their levels. Start first with non-deductible debt that incurs large interest payments such as credit cards and personal loans. Next, consider allocating some funds to your home mortgage.

3. Invest
This is a great opportunity to invest some of the inheritance for the long term. The investment portfolio could be used for future expenditure items such as kids’ education, house upgrade, retirement, etc. When considering an investment portfolio it is important to have an idea how long you intend to invest it for.

4. Contribute to Superannuation
Putting some money aside for your retirement maybe worthwhile at this time, depending on your individual circumstances. The compounding effect of long term investments in superannuation is a powerful argument for allocating some of your funds towards super.

5. Make a gift.
Be sure to consider the tax deductibility.

6. Combination of the above
A combination of the options above is often the most practical solution. The exact make up of the allocation will depend upon your current financial circumstances - your current income, debts, tax bracket etc. It will also depend on what your goals and wishes are.

If you are considering what the best financial solution is for you, speak with a financial adviser.

Brendan Gallagher

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