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Active Investment Success Relies on Finding a Top Personal “Trainer” to do the Heavy Lifting

A mate recently cancelled his gym membership at a popular city health club, citing lack of motivation, high monthly fees and a general malaise about “just not getting results’’.

Out of interest, I asked him what his training regime looked like.

A brisk walk on the treadmill, he confessed, followed by a quick sauna and an obligatory large iced-coffee (with cream and ice-cream) in the club lounge afterwards.

Those stubborn kilos are still hanging on for dear life.

Comparisons can be drawn between my friend’s story and the heated – often hysterical – active versus passive investment debate dominating financial news headlines in recent months.

Proponents of active investment, quite rightly, argue for its superior ability to outperform the market over the long-term, with astute investor-led analysis and individual market research informing which stocks to include in any given portfolio. But active management is far more than just stock picking and here lies the often unseen value. Active management utilises all the tools available to achieve a tailored outcome for investors; asset allocation that considers the return you need at the risk you can live with, dynamic management to help avoid downside risk and ‘smooth’ the ride, precise factor exposures and even tax strategy – there is no one right way to invest for everyone. Each investor has a unique set of goals, real-world constraints and risk preferences.

This is contrary to passive investing, which follows the index, relies on trends and is often based on exchange-traded funds.

The Australian market is dominated by two sectors – banks and resources. And the top 20 Australian-listed companies account for 47% ($804 billion) of ASX200, leaving the remaining 180 stocks to make-up the remaining $900 billion.

The inherent risk with a passive Australian shares strategy tracking the S&P/ASX 200 Index is that it will overweight companies that have gone up in price and, therefore, have greater representation in the Index. So, when they fall, the portfolio hangs on for the ride from the peak to the trough – with painful consequences for total returns.

The bottom line is – markets are cyclical, what is winning today could lose tomorrow.

A philosophy that rewards past performance at the expense of future prediction isn’t an intelligent, strategic approach to creating wealth.

Also, it’s important to understand the distinction between cost and value. There is no disputing that passive strategies typically have lower fees and have done a good job of beating ‘average active managers’ (their term not ours). The key word here is average – an average manager will probably deliver average results. Our advice is to only use an excellent active manager – one who has the runs on the board, with a disciplined and robust process that is bigger than any key individual and will endure beyond the current group of people.

Find an active manager who reports their fees. Transparency is king when it comes to trust and building strong long-term relationships.

Warren Buffett once put it simply.

I just advise looking at as many things as possible and you will find some bargains. And when you find them you have to act, Buffet said.

The world isn’t going to tell you about great deals, you have to find them yourself and that takes a fair amount of time.”

The prevailing truth is that price doesn’t dictate a great company. Good investors must do proper due diligence in determining whether, firstly, they’ve found a great company and, secondly, if it’s a great company at a great price i.e. it can be a great company but the price might already reflect that in which case it is not a bargain.

There are no shortcuts. This takes thousands of hours of quantitative research, face-to-face meetings, stress testing analogies and scrutinising their balance sheets, and ongoing monitoring.

That’s the beauty of astute, wise and experienced (‘above average’) managers, they invest their time, energy, experience and the muscle to do the heavy lifting for their clients and the results speak for themselves.

Here at FinSec building sustained long-term wealth for people is at the core of ‘why we do what we do’. And, although no investment manager can ever promise they will always beat the market (if they do, run in the opposite direction) long-term wealth is only achieved with a smart, strategic and transparent investment policy and an in-house investment committee accountable to it.

It’s an approach any ‘above average’ manager should be able to prove and is best illustrated by an example of our own performance plotted below.  (Blue line is the index compared with FinSec’s performance represented by the red balls).

 


* FinSec Partners performance compared with index June 2010 – July 2017

Which brings me back to my mate.

Him not shedding his winter weight, of course, wasn’t the gym’s fault.

He just didn’t have the right training schedule and he could have done with the disciplined, rigorous support of a qualified and experienced personal trainer who knew how to get the best out of him to enable him to achieve his goals.

SMSFs gear up for advice

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Advised self-managed superannuation fund (SMSF) trustees are more confident about achieving their desired retirement income than non-trustees, according to research commissioned by nabtrade and the SMSF Association.

The research says about 53% of SMSF trustees are more likely to be receiving financial advice than non-trustees (about 30%). Illustrating the value of financial advice, about 72% of advised trustees are confident of being on track to achieve their desired retirement income as opposed to 66% of non-trustees.

According to the Intimate with Self-Managed Superannuation report, there is a continued move by trustees from the “do-it myself” culture to a “help me do it” approach. NAB head of SMSF solutions Gemma Dale said SMSF trustees taking an active role in managing their savings helps ensure continued confidence.

“As we’ve seen over the last decade, SMSFs are not a flash in the pan. As these preliminary findings show, SMSF trustees continue to show a preference for direct investment and are looking for prudent ways to manage risk in uncertain times,” Dale said.

“While Australian shares and cash continue to dominate portfolios, low interest rates are driving interest in asset classes outside of cash, such as fixed interest and international shares.”

SMSF Association chief executive Andrea Slattery said another interesting finding was the focus on risk by those trustees who understand their SMSF investment strategy.

“The most commonly cited factors in developing the strategy are the overall risk of the portfolio (65.8%), diversification of the fund’s investments (63.4%), and the risk of the fund’s investments (61.6%),” Slattery said.

“The prevailing attitude of de-risking is evident among trustees who allocate at least 10 per cent of their SMSF to cash, the asset class that is universally perceived as less risky.”

The research was conducted between November and December 2014 with 468 SMSF trustees and 532 APRA fund members surveyed.

Article first appeared in the Financial Standard, Monday 13th July 2015
http://www.financialstandard.com.au/news/view/51382122

Knowledge and Clarity: Changes to Inactive bank accounts

On 18 March 2015, the Assistant Treasurer the Hon. Josh Frydenberg announced that the Government will increase the time frame for which bank accounts and life insurance policies must be inactive before their proceeds are transferred to ASIC.

The period will be increased to 7 years from the current period of 3 years, reversing the legislation of the former Government.

The proposed change will take effect from 31 December 2015, and will require legislative amendments to the Banking Act 1959 and the Life Insurance Act 1995.

Children’s bank accounts

Children’s bank accounts will be exempt from the legislative requirements to transfer to ASIC, in recognition of the long term nature of these accounts.

Privacy and security

The Government will also make changes to protect the privacy of individuals that have had the proceeds of inactive accounts transferred to ASIC, to address concerns around identity theft.

Currently ASIC is required to publish an online Unclaimed Money Gazette with detailed personal information, including name, last known address and the amount of money unclaimed.

The Government will remove the requirement for ASIC to publish this and will restrict Freedom of Information (FOI) requests to an individual’s own details.

Australia’s Apathy

There is currently around $700 million in lost bank accounts and life insurance policies held with ASIC. Information on unclaimed bank accounts can be found on the MoneySmart website.

In addition Australia has 6 million lost or ATO held super accounts totalling approx. $18 billion. More information can be found on the ATO website or by visiting Super Seeker .
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The Conversation: Superannuation and Tax

The Abbott government’s tax discussion paper released earlier this month, has thrown open the doors to a broad ranging debate on tax reform. One of the central themes is of course superannuation, can we expect to see it’s earnings kept tax free when the budgetary pressures created by an ageing population are considered? (Spending on the age pension is due to rise from the current 2.9 per cent of GDP to 3.6 per cent or approx. 180 billion dollars in 2054-55, source Intergenerational Report 2015). According to Joe Hockey “it will be difficult”.

The issue; the tax free nature of retirement incomes from super, have been labelled by many as unfair and nothing but a “tax cut for the rich”. We can only hope that the term “rich” is used with perspective and geared more towards the 475 Australians (out of 24 million) with superannuation account balances exceeding $10 million and not the masses in the middle who, in the past, were told to save for retirement, and accordingly did so responsibly and prudently.

The majority of Australians desire a superannuation system that is sustainable and equitable, but exactly how this is achieved promises to be a hot topic leading into the May Budget. The current system is complex and there is room for improvement but before the lobbyists and ‘experts’ dive in with their proposed reforms, perhaps as a nation we should first understand what it is we are trying to achieve – Is super  intended to replace, complement or improve upon the age pension? It is difficult to have the answer when we cannot agree on the question!

Following are some of the biggest myths cited when it comes to superannuation tax concessions – a little clarity, so you can join the conversation with confidence.


MYTH: Superannuation is not helping reduce the government’s spending on the Age Pension

FACT: Super saves the government $7 billion in Age Pension expenditure annually, and these savings will only increase as the system matures

Superannuation is boosting incomes and providing a lifestyle in retirement that is better than that which can be sustained on the Age Pension alone. Around 32 per cent of those aged 65 in 2013 were fully self-funded in retirement, up from 22 per cent in 2000. This number is projected to rise to 40 per cent by 2023.


MYTH: Superannuation tax concessions cost the budget $30 billion annually – more than the total spending on the Age Pension

FACT: The actual cost of tax concessions is around $16 billion a year

Tax concessions applied to superannuation concessional contributions are not significantly skewed towards high-income earners, and, in fact, support the bulk of the working community to save for their retirement. The Association of Superannuation Funds of Australia (ASFA) analysis of data from 2011/12 found that around 75 per cent of the tax concessions applied to contributions went to those paying either of the (then) middle income marginal tax rates of 30 per cent or 38 per cent: those earning between $37,000 and $180,000 a year.


MYTH: The most important tax concessions received by high-income earners relate to superannuation

FACT: High-income earners get the most benefit from concessional capital gains tax treatment, negative gearing and exemptions for the family home

The bulk of the wealth of high-net-worth individuals is in the form of shareholdings or property, both residential investment properties and commercial real estate. Around $360 billion is held in superannuation by those with more than $1 million in super. This is just over 20 per cent of the $1.6 trillion investable assets held by high-net-worth individuals.

For most high-net-worth individuals, tax arrangements relating to capital gains, negative gearing and the family home are likely to have more impact on the achievement and maintenance of wealth than superannuation tax concessions.


MYTH: Only high-income earners make salary sacrifice contributions

FACT: Many middle-income individuals make salary sacrifice contributions

Only around 35 per cent of employees with incomes above $150,000 a year make salary sacrifice contributions. Around 85 per cent of salary sacrifice contributions relate to employees with incomes below $150,000 a year. Over half a million Australians earning between $40,000 and $80,000 a year make salary sacrifice contributions.


MYTH: Most people take a lump sum from their super when they retire, spend it all on a big holiday or to pay off debt, then end up on the Age Pension

FACT: The majority of superannuation assets end up in income stream products when people retire

There is no evidence that the majority of retirees are using their super to pay off debt or using a lump sum to fund the purchase of boats, cars and overseas trips before going on the full Age Pension.

The vast majority of Australians are very sensible with their retirement savings. The great bulk of larger balances are retained in the superannuation system in order to generate ongoing income in retirement. In 2012/13, around $45 billion in superannuation assets were invested in phased drawdown income-stream products, compared to just $8 billion taken as lump sums.


MYTH: Compulsory superannuation has not increased household or national savings

FACT: National and household savings have been substantially lifted by compulsory super

The household savings rate has increased by around five percentage points from five per cent in 1992, when compulsory superannuation was first introduced, to around ten per cent in 2013/14.


MYTH: Government funds spent on superannuation tax concessions would be better directed at helping other areas of the economy

FACT: Superannuation provides broad economic benefits that are the foundation for growth and prosperity

Superannuation plays, and will continue to play, an important role in providing the foundations for economic activity and prosperity. It currently lifts household savings by around 2 percentage points of GDP or nearly $40 billion a year and, with the increase in the compulsory Superannuation Guarantee from 9.5 per cent to 12 per cent, this is expected to rise to 2.5 percentage points of GDP. Higher levels of domestic savings reduce the cost of capital in Australia, increasing investment by Australian businesses, which drives stronger economic growth.


MYTH: Private superannuation savings could be confiscated and that process has already started

FACT: Superannuation entitlements and account balances are strongly protected by law including constitutional requirements that property can only be acquired on just terms

No political party in Australia has a policy that would involve the nationalisation of superannuation savings


Myths and Facts Source: The Association of Superannuation Funds of Australia (ASFA)

 

Changes to Centrelink assessments mean less age pension!

 

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Concessionally assessed, deeming provisions… unless you are a trained financial expert, determining how the changes to Centrelink assessment rules will affect your individual circumstances can be confusing. The good news is, it doesn’t have to be and there are a number of ways to minimise the impact. This particular legislation however, does come with a deadline (January 1, 2015) so it is critical that you seek advice regarding your options sooner rather than later.

The changes: The rules in regards to how your pension is assessed for Centrelink entitlements changes on January 1, 2015. These changes became law on 31st March, 2014. Going forward, normal Centrelink deeming rules will now be applied to superannuation account-based income streams. Currently these income streams are concessionally assessed for Centrelink purposes, which results in higher entitlements. According to the rules, indefinite grandfathering will apply to any superannuation pensions that are in place by January 1, 2015.

Who will be affected?

  • Retirees who change their superannuation product on or after January 1st, 2015 will be subject to the new deeming rules.
  • Retirees who choose to commute their superannuation pension on or after January 1st, 2015 will be subject to the new deeming rules.
  • Anyone looking to claim or getting close to qualifying for a pension, needs to do so before January 1st, 2015. If they are not receiving the pension by this time their super pension will be subject to the new deeming rules.

How will it affect you?

Currently, retirees whose Centrelink entitlements are affected by the income test, may choose to optimise their entitlements by investing in non-deemed investments, such as an account-based pension. An investment into an account-based pension entitles you with a non-assessable amount to reduce your chosen income payment. This often results in a much lower income assessment and, therefore, a potentially higher Centrelink entitlement.

From January 1st, 2015 new account- based superannuation pensions (started on or after this date), will be subject to deeming (applied when assessing a person’s eligibility against the Age Pension Income Test). This investment will be treated for example like a share or term deposit and may no longer be ‘income test friendly’.
This may result in a much higher income assessment and, therefore, a potentially lower Centrelink entitlement.
Those who may be most affected by the new deeming rules are individuals with additional income sources such as Government superannuation pensions (including pensions from overseas).

What to do:

The new rules will have a number of implications for many Australian’s and their retirement strategies. A good financial planner will be able to provide clarity around the issues and show you a range of likely outcomes. The important thing is to seek advice and plan now!

Finding lost super

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Have you lost $3,000?

That’s the average balance of a lost or ATO-held super account in Australia.

If you’ve changed jobs, done casual or part-time work, moved house or changed your name, then you could be one of the many Australians who have some lost or ATO-held super waiting to be found.

What is lost super?

Your super account will generally be considered ‘lost’ if:

  • No contributions or rollovers have been added to your super account in the last year and either your super fund never had an address for you, or mail sent to you by your super fund has been returned unclaimed,How can you find it?
  • or for employer default super plans, no contributions or rollovers have been added to your super account in the last five years.
If your super account is considered lost it could be transferred to the ATO if:
  • your account balance is less than $2000, or
  • your super fund is unable to identify you as the owner of the account based on the information reasonably available to them.

Your super could also be transferred to the ATO in certain other circumstances.

The ATO could also be holding other super amounts for you:such as Super Guarantee amounts paid to them by a previous employer or Government Co-contributions or Low Income Super Contributions paid by the government.

How can you find it?

Speak with your financial adviser today. A good advice firm will have an integrated service that will easily track and consolidate your super for you.

Another way to find your lost super is through the ATO SuperSeeker service, all you’ll need is your tax file number.

The Story Part 2: Federal Budget 2014/15 – what does it mean for you?

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On Wednesday we brought you ‘The Story’, a budget summary outlining the key proposals from Treasurer Joe Hockey’ s 2014-15 budget.
Now the dust has begun to settle we bring you ‘The Story Part 2’ – What does it mean for you? How could the Budget proposals change the way you live, work and pay for services on a practical day-to-day level?

Here’s a round-up of what the 2014-15 Federal Budget could mean for your family finances.

As always, if you have questions relating to your personal circumstances, we encourage you to contact us by email, or phone and we can discuss the changes in greater detail.

But don’t forget, the proposals may change as the legislation passes through parliament.

1. SUPERANNUATION

1.1 Superannuation Guarantee (SG) rate – Change to increase schedule
Proposed effective date 1 July 2014

The Government will change the schedule for increasing the SG rate. SG contributions are the compulsory super contributions made by employers into the super accounts of eligible employees. The current SG rate is 9.25%. The SG rate will increase from 9.25% to 9.5% from 1 July 2014 as currently legislated. The rate will remain at 9.5% until 30 June 2018 and then increase by 0.5% each year until it reaches 12% in 2022-23 as per the following table:

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The Demographic Necessity of Change

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It would seem our own Andrew Creaser and Joe Hockey may be preaching from the same page – that is, the demographic necessity of change to ensure a sustainable Australia.
Andrew, along with many others has long questioned the quality of life Australians can expect if we don’t address the fact (based on current trends), that we are facing a longevity crisis.

Treasurer Joe Hockey’s recent comments regarding changes that must be made to a system “designed in the 20th century, to ensure it is sustainable in the 21st century” have sparked heated debate, but his message for a re-design “to manage the fact, and celebrate the fact, that we’re all living longer and we want to maintain a good quality of life along the way”, is a valid one.

Given the complexity of the issue and the emotive nature of the debate we’re glad that others more knowledgeable than ourselves are charged with solving the problem – our advice, the best path is to take control of what you can (understand your finances and be clear about your options),  aim for financial independence.

The following AFR article, although weighing in on the political intent of Hockey’s remarks also provides an insight into the problem at large – some food for thought!

Click here to read AFR article, Budget pain to hit all: Hockey 

Super is changing – what this means for you

Superannuation is changing – so if you are contributing to your super or even have a dormant super balance, now is a great time to think about your super savings.
The Government Stronger Super changes are designed to make super simpler and more transparent, and to help you maximise your retirement income.

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What is MySuper?
Referred to as a ‘default’ investment option – MySuper is a simple super offering that will become your new investment option if you haven’t actively chosen where you want to invest your super savings. From 1 January 2014, MySuper will replace all existing default investment options.

Does everyone go into MySuper?
No. If you’ve actively selected an investment option in your super account you won’t be affected and your contributions won’t go to MySuper. However from 1 January 2014, if you haven’t selected an investment option, or told your fund that you want to remain in your plan’s current default investment option, your contributions will automatically be directed to the new MySuper investment option.

Reviewing your choices
It’s a great time to review your choices and select investment options that best suit your needs. As your preferences, financial situation and long term goals change, you can adjust your investment strategy and investment mix to meet your changing needs.
Or, if you prefer someone else to be the expert, seek professional financial advice from a FinSec Partners adviser.

Key dates for those who have not made an investment decision

From mid November 2013
If you haven’t made an investment choice, you should receive a letter from your super fund to explain what MySuper is and how you are affected. It may also include a form if you decide you want to make an investment direction.

From 1 January 2014
Your contributions can no longer be received into your previous default investment option.
Contributions will be directed to a MySuper offer – unless you filled in a form to choose another option.

Before 1 July 2017
If you haven’t provided an investment direction, your existing investment balances will be transferred to a MySuper offer before 1 July 2017. This is known as ‘MySuper transition’.

More information: To find out about superannuation strategies please give us a call.