Whether we are talking about commercial activities, government, leisure pursuits or just day-to-day living the use of jargon is very evident. That is, specialised language concerned with a particular subject. The financial services sector abounds with terminology relevant to its activities and products and it can help the user of these services to sometimes simply go back to basics to make sure everyone understands what is meant by certain words or terms.

An oft-used phrase is “managed fund”. The product providers keenly push the potential benefits of their managed funds. For instance: easy diversification; expert money management; invest for income, growth or both; convenient regular savings plan. These benefits are fine, however, this marketing stuff does not explain how a managed fund works. Let’s lift the lid on the operation of managed funds and make sure we understand what is going on.

There are a variety of different styles and tax structures for managed funds. In later articles we will cover how entitlement to income and capital growth from the investments are handled, how superannuation funds and insurance bonds differ from managed funds that distribute their taxable income to investors, explain the differences between unlisted and listed managed funds and also how “active” funds contrast with “passive” funds. For now, let’s focus on plain vanilla unlisted managed funds where the investor is responsible for any tax on investment earnings.

These managed funds operate as unit trusts, a well-established and cunningly effective way of dealing with pools of money for collective investment where new participants in the pool can easily join and departing participants can be paid out without disrupting things for the other participants. The participants in these structures are called “unitholders”.
When a new unitholder joins (or an existing unitholder invests more money in the pool) new units are issued by the fund manager. When an existing unitholder leaves, their units are redeemed by the fund manager. So, new units could be issued and existing units redeemed every day impacting the number of units on issue. The price at which new units are issued or existing units redeemed is where the effectiveness of this structure comes in.

The fund manager would value the investments held in the collective pool, typically every day where prices are readily available. These investments could include cash deposits, interest-bearing securities and listed shares. Physical properties are valued less frequently. So, the total value of the collective investment pool is calculated (let’s say this is $100,000,000) then the number of units on issue is sourced (let’s say this is 25,000,000 units). Dividing the value of the pool by the number of units on issue gives the worth of each unit (in this example $4-00 per unit). If no new units were issued nor existing units redeemed and the underlying value of the investments in the pool increased the next day to $100,500,000 then each of the 25,000,000 units would have an underlying value of $4-02. In practice the numbers would not be neat and round as shown here.

So, if new units are to be issued the underlying worth of each unit might be $4-00; many unit trusts would charge a small premium for issuing new units, so the actual issue price might be $4-01. A new investment of $25,000 would receive 6,234 units at $4-01 each. If existing units are to be redeemed the underlying worth of each unit would also be $4-00; many unit trusts charge a small amount for redeeming existing units, so the actual redemption price might be $3-99. A redemption of 5,000 units would receive proceeds of $19,950 at $3-99 each unit. The “buy/sell” difference between the issue price, redemption price and unit price is retained by the fund and is designed to avoid continuing unitholders being negatively impacted by transaction costs incurred when new units are issued or existing units redeemed.

So, unit trusts are a simple and effective way to administer pools of investments where new participants can join and existing participants leave with minimum fuss.

Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. Before acting on anything in this article you should consider its appropriateness to you, having regard to your objectives, financial situation and needs. If you would like more tailored advice, please contact us today. One of our friendly advisers would be delighted to speak with you.

We all knew it was coming; how many 80 something-year-olds are still working full time? Even still, when Bob announced his retirement it was a surprise. The general feel in the office was that of sadness, but also excitement for Bob. He has worked so hard his whole life and now he is finally retiring and can enjoy life.

Once the date was set and plans put into motion regarding his replacement, I was tasked with writing a “little something” regarding Bob’s departure and the Rookie replacement. To say I have procrastinated is an understatement; need help with scanning, sure I’ve got time for that. Ran out of milk, don’t worry I’ll go get it, wouldn’t want a coffee riot on our hands.  The truth is it’s very difficult to convey in words how much Bob means to the company. He has been working for this organisation for over a decade and him leaving feels like the ending of an era.

In every way, Bob is a true gentleman. He is so generous with his time and knowledge; always willing to lend a hand to the lost little lambs (such as myself) that approach his desk. There doesn’t seem to be anything that can ruffle his feathers; he’s seen and done it all. Bob has such an ease and calmness about him that will be sorely missed.

Bob and his wife Brenda have plans to move to a little unit in Wellington Point. It will be quite an adjustment considering they currently own a farm on the outskirts of town.  But from what I’ve been told, Bobs did his homework and the retirement village has a reputable Water Aerobics instructor. He is also looking forward to dominating the green in Lawn Bowls.

I’m quite excited about the opportunity I’ve been given and the new role I’m stepping into. I think the thing I’m looking forward to the most is the afternoon naps when it all just gets a bit too much. Although, I’ve been told that when Bob does it, it’s endearing. However, if I try to have a sneaky kip on the job, no one will hesitate to kick my chair and wake me up.

In all seriousness, I don’t think anybody could ever replace Bob, but I will do my best to fill the very big shoes I’ve been left with.

Jodie Thompson is an integral part of administrative and the daily behind the scenes operations at The Investment Collective. 

Having just welcomed our second child into the world and with the new financial year upon us, it has certainly been a time of reflection about new beginnings and what lies ahead for the future. The seemingly endless routine of getting up during the night and changing nappies, dream feeds and rocking your precious little ones back to sleep gives you an abundance of time (where most normal people are actually sleeping) to think and reflect on where you are and what you want to achieve.

Being a first-time parent was daunting enough and came with all sorts of challenges my wife and I were still adapting our lives around before finding out we were expecting our second child. Having our second child so close together came as a totally unexpected, yet welcome surprise. But what had we gotten ourselves into having two daughters under the magical age of two?

Like all parents, I imagine that we want the very best for our children that we can possibly provide. However, having someone completely and utterly dependent upon you to tend to their every need, was one of the most daunting aspects of Fatherhood for me personally, yet it was also something that I embraced. Being the sole income earner supporting our little family only highlighted the importance of ensuring we had adequate insurance coverage in place to ensure our family would not be financially burdened in the event of anything happening to either parent.

The birth of both children will forever be etched into my memory as some of the greatest experiences of my life. Hearing their first cries as they entered the world will be sounds that I will never forget. Holding them both for the first time and seeing how tiny and fragile they were is also something that will stay with me forever.

The age difference between our girls is 17 months. I was an only child growing up and my wife has a twin sister, so she always knew the benefit of having a sibling growing up and it was something she wanted for our first child. With the closeness in age of our girls, here’s hoping they will be lifelong friends, with a few heated disagreements thrown in along the way.

With all the sleepless nights and challenges that come from being a new father, the rewards certainly far outweigh any of the negatives. Seeing them learn new skills each and every day and interact with each other brings a smile to my face whenever I think about them. It is funny as human beings, we tend to forget or block out the bad memories of all the sleep deprivation and only remember all the good memories.

Having become a father has made me appreciate all the sacrifices my own parents have made for me in order to allow me the best opportunities possible. I look forward to making many sacrifices for my own children to ensure that the cycle can continue.

I’ve been a financial adviser for about 17 years, and have met with quite literally hundreds of clients. I’ve always found it fascinating to learn how people think and act in respect of their wealth. The conversations I have with clients tend to have common themes.

The financial planning process itself is pretty straightforward. At the initial meeting, I aim to understand the client; their current situation, objectives and preferences. After all, it’s all about them. Thereafter, I prepare recommendations in respect of appropriate strategies, structures and investments that will help increase the chances of them achieving their objectives.

As such, for me, it’s the interaction with clients that I find interesting. Listening to a client, and confirming back to them my understanding of their objectives and preferences is, of course, paramount in this process. This process can be straightforward or lengthy, as many clients are unclear as to exactly what their objectives are, and what they may need to do in order to achieve them.

My discussions with clients often come down to the same following points:

1. Spend less than you earn
2. Invest surplus income in quality assets that generate income
3. Review your investment portfolio on a regular basis
4. Structure your financial affairs as simply as possible, but no simpler
5. And when it comes to the investments themselves:
   • I don’t, and can’t, promise to ‘shoot out the lights’ on investment returns (Quite frankly, if I could do that on a consistent long term basis I wouldn’t need a day job!)
   • Risk, or the volatility in the value of your investments, always, ALWAYS, equals return
   • A risk is not necessarily a bad thing or something to be avoided (If you avoid all risk that the value of your investments would decline, all you’d be left with are bank deposits paying 1.75% per year.

So don’t avoid all risks, however, make sure that you understand the risks and receive an appropriate level of compensation for assuming them.

My aim is always to place my client in a position from which to make an informed decision. The decision is always theirs to make. I’m simply looking to provide constructive input to assist them.

If you would like to learn more about our services, please contact us today. One of our friendly advisers would be delighted to speak with you.

Two years ago Analysts/Consulting Owen Evans presented a seminar for clients entitled Fun with Vertical Fiscal imbalances.  A core message was that Australian Governments had effectively no clue as to the extent revenues would fall as a result of the mining boom, and that we were in for a lengthy period of declining living standards.  The response, Owen said, was that government would increasingly be confined to short terms and instability would become the norm.  Let’s look at some facts that have emerged since then.

By a relatively large majority, UK voters elected via referendum to leave the EU. This was clearly a surprise to most commentators and markets, with Sterling and global equities markets getting thrashed on the day, the PM announcing his resignation (to take place by October) and roughly half the Labour Party front bench resigning. Watching it live was like watching lemmings jump into the sea below, a feeling exacerbated when the most interesting commentator turned out to be Lindsay Lohan.  Here are a few observations:

The short-term economic implications for the UK and Europe are clearly negative. The longer-term implications are also negative but may not be overtly visible. One must presume that global GDP growth falls very slightly over the next two years because of this. One also must conclude that interest rates are likely to stay lower for longer; and,

The direct impact on Australia and Australian listed companies is likely to be imperceptible. But there may be a small bias in favour of domestic-related businesses as opposed to exporters and interest rate sensitive stocks.  There is certainly no reason to think that Brexit will hasten a global economic recovery and for that reason, there is no rush to return to investing in mining and resources related industries.

The Brexit debacle was immediately followed by Australian voters demonstrating a significant swing toward a union leader from a Government roundly rejected by voters in 2013.  Preferring heart over head, Australia will probably end up with a hung parliament and a Senate controlled by individuals who variously want to ban live cattle exports (thereby effectively killing the NT economy), subsidise Tasmanian electricity generation and reintroduce financial transactions taxes, reintroduce tariffs that will increase the price of goods for everyone, and based on petitions of just 200,000 people, introduce rolling referendums to decide laws.  If you think that is kooky, consider that by the end of the year a boorish reality TV star could be the next US President;

These seemingly outcomes are both seemingly bizarre and based on a well-honed ignorance of what matters.

Western prosperity since 1946 has been based to a large degree on growth in trade, personal freedom and mobility, and increasing economic integration. The days of having three different electricity outlet types in the UK and 35 in Europe have been coming to an end. Brexit is a vote against trade, against mobility and against integration. In effect, 17m Britons voted for an immediate pay cut.  It seems unlikely that they would have done that, if they understood the impact.  The fact that two of the main proponents of Brexit have now stood down, suggests a total lack of belief in the BS they were peddling.

First, this is an unexpected outcome and following issues with US polling during the primaries it calls into question the capacity of western leaders to understand what exactly it is their constituents want or expect from Government.  Instead of making and delivering on policy Governments are deliberately pandering to interest groups/issues, because:

1. there is no point in trying to convince rusted-on supporters and;
2. because of the mistrust and pressures linked to a decline in living standards, we are living in a time where people are relying on their feelings for guidance, rather than education or logic.
3. Add to this the internet which is enabling democracy by popular engagement, with the consequence that many people have plenty to say, but not much knowledge about what they are saying.
4. Across the west we have an ageing population increasingly fearful of the impact of immigration.  It is borne of a nationalistic fervour and a desire to build barriers against all manner of perceived threats (but immigration in particular). 

A basic tenet of economics is that what is good for the population is not necessarily good for the individual.  Combined with the inability to measure voting intentions accurately combined with a willingness to vote against perceived self-interest (even if it is the general interest) suggests that unusual political outcomes may have become standard.  As a result of these factors, the gridlock that hampers decision making in many Governments is set to become more serious.

As we have said countless times in Client newsletters, we have entered a time of extended volatility and uncertainty and we are experienced in managing that.  This experience is critical when the main alternative to investing in markets is to put your money in the bank.  Interest rates of below 2 percent are about a third of the income generating capacity of most of the portfolios we build.  The choice to put your money in the bank ensures you lock in very low-interest rates, and that you are eating into an increased amount of your savings, just for day to day expenses.

In terms of the market outlook, Brexit will likely see markets unstable for a while.  But they were already unstable, and the portfolios we have built for clients have shown good results in withstanding that.  As we have said in Client newsletters, interest rates are unlikely to increase anytime soon, and in general that is good for the portfolios we build.

Given the trade advantages of the EU, we will be amazed if the long term outcome is not that the UK struck a deal with the EU such that most if not all of the primary economic advantages were retained, but that the UK exerted more control over its borders.  In this context, its worth noting that Norway subscribes to almost all of the EU rules, thereby retaining trade benefits, but without being a member (of course, it gets no say on how those rules are formed).

Overall, our view is that we are in for a very long period of sub-trend global growth and this will continue to result in global economic and social instability.  For many years there will be no free kicks and the rewards will go to those who can look beyond the emotion.  We believe that is the most valuable service that we can offer clients.

Originally published in our July 2016 newsletter, read more recent newsletters here.