To help answer these questions here is an extract from Bina Brown of AFR.

Property investors looking for ways to turbo charge their retirement savings are focusing on do-it-yourself superannuation funds. Borrowing money to buy property has long been a favourite strategy among investors. Factors that make it preferable include tax benefits through negative gearing and the fact you can usually see and touch what you own.

Rules introduced in September 2007 to legitimise listed security warrants mean borrowing is now permitted by a super fund if the borrowing is structured as an instalment warrant.

Traditionally, an instalment warrant was a marketed investment product that enabled the investor to acquire an asset, normally listed securities. The investor paid an initial instalment and borrowed money to fund the remaining amount required to acquire the asset. The borrowing was repaid by the investor making further instalment payments.

The September 2007 changes to the superannuation laws mean that, provided certain requirements are strictly met, super funds can invest in some instalment warrants or enter into similarly structured and complying arrangements involving borrowing money to acquire an asset that the fund is not otherwise prohibited from acquiring; and the asset acquired is held on trust so that the fund receives a beneficial interest in the asset.

A property purchased within a DIY fund does not count towards the concessional contributions.

While any additional instalments made to the super fund to help pay off the debt do count as contributions, cash flow generated by the property to pay down the debt does not. The new contribution caps make it close enough to impossible for the baby boomer generation in particular to finish paying off their home and the kids’ education and then start saving for their own retirement, yet superannuation is still the government’s preferred retirement solutions.

Many people will see that they have to leverage up their super fund to get more assets to grow. If they have $200,000 in super and there is a $500,000 property out there, it can be a very good way to leverage up their super.

At present, DIY funds can invest in direct property, farms, artworks and other collectables as long as certain rules are followed.

There are no hard and fast rules as to how much is needed to start a DIY fund but industry convention is there should be a minimum of $200,000 to justify the administration and investment costs.

A requirement that any leveraged property bought by a superannuation fund must be held in a security trust, something that should be set up by a solicitor  – will further add to the costs, as will any additional advice.

A big attraction of the strategy is the ability for super fund members to increase their assets within the tax efficient environment of superannuation without the need for additional contributions.

Compared with investment in property outside super, purchasing property and other assets via a DIY fund could deliver tax savings in excess of 20 per cent.

The two greatest tax savings emanate from the interest on the investment loan used to purchase the property being tax deductible to the fund and offsetting income tax within the fund, and selling the property when the SMSF moves into the pension phase.

SMSF superannuants can salary sacrifice into their SMSFs and will only be taxed at a rate of 15 per cent. This is lower than the average marginal tax rate of 30 per cent and significantly lower than the highest marginal tax rate of 45 per cent. These tax savings can be used to reduce the loan balance at a quicker rate. By reducing the loan, SMSF superannuants will pay less interest.

When DIY fund members reach 55 (for those born before July 1960) and start a pension or income stream from their super fund, any earnings from the fund become tax free.

If the property is sold after the pension commences no capital gains tax is payable on the profits and the rental income is no longer taxable.

A further restriction placed on DIY funds intending to borrow is that the loan must be a non-recourse loan.

If the borrower fails to make a repayment, then the lender has the access to only the asset associated with the loan and no other within the superannuation fund or yourself.

Because it is a non-recourse loan the lender will generally use more conservative loan-to-valuation ratios than they would on a property held outside of superannuation (around 70%).

That may require a higher cash outlay by the superannuation fund. The interest rate charged is also likely to be above standard home loan rates.

While there is no restriction on the proportion of a fund which can be invested in property, it would not be advisable for a fund to hold all its investments in property.

The underlying asset must be an asset the superannuation fund could acquire directly, subject to the normal in-house asset rules and acquisition from related-party rules, he says.

Essentially these rules mean an investment property already owned by one of the fund trustees cannot just be transferred into a super fund.

Furthermore, any property which is purchased by the fund cannot be used by any of the trustees or their relatives.

The exception to these rules is where “business real property” is owned by a DIY fund.

Issues such as what impact a property will have on the asset allocation within a fund and how is the debt going to be funded all need to be addressed.

The cash flow to repay the debt may come from additional contributions or rent collected from the property.

The in-house assets rule restricts the proportion of the fund which can be invested in, lent to, or leased to a related party to no more than 5 per cent of the market value of the fund’s assets.

Documentation needs to include a loan agreement between the lender and the superannuation fund, documentation to establish a special type of trust to hold the property – known as a bare trust – documents relating to the purchase of the property and relevant minutes to recognise the transaction.

Depending on who the loan is through, the loan terms may vary. A loan through a bank will be limited to their terms.

The advantage of buying residential property through a self-managed super fund

Bina Brown of The Weekend Australian Financial Review discusses how purchasing through a fund is worth the sacrifice. Ross, 48, is an electrician who earns a gross salary of $70,000 plus 9 per cent super that he has in an industry fund. He has paid off his house and has $150,000 in savings in his own name.

Worried that he will struggle to live comfortably in retirement, he hears that purchasing property via a DIY fund using an instalment warrant can help him build up his retirement nest egg. He starts a DIY fund. He could rollover his industry super fund but decides to leave it where it is as the $150,000 is enough of a balance to purchase a property.

 He sets about looking for an ideal investment property, finally settling for a house in a new suburb on Melbourne’s fringe. The house costs $500,000 so he borrows $350,000 via his fund using an instalment warrant. Martin Murden, director of Partners Superannuation Services, says the advantage of Ross borrowing through his super fund (as opposed to buying through his own name) is that repayments from a super fund can be increased through the use of salary sacrifice contributions.

After 10 years, assuming there is capital growth of 4 per cent a year, the value of the property will have increased from $500,000 to $740,000. But there is still an outstanding loan of $193,275 assuming the interest rate was 7.5 per cent per annum over the 10-year period. This is less than if Ross had purchased the property in his own name.

Because Ross has been salary sacrificing, the tax on contributions is 15 per cent where as outside super; he would have had to pay tax plus the Medicare levy of 31.5 per cent. After reaching preservation age (55 for anyone born prior to June 30, 1960, rising to 60 for those born after June 30, 1964), Ross could either retire and start a super pension or keep working and start a transition to retirement income stream.

If he does either of these before selling the property, the tax rate on the capital gains will fall to 0 per cent, providing a tax saving of $24,000.

Ross decides to sell, leaving him with $546,847 in his SMSF.

So as a Financial Adviser I felt this would be a good chance to show the power of inflation on money and the effect of compound interest or in this case compound inflation. As we all know, the value of $100 today is not the same as $100 in 1980. What would it be worth now if inflation had been 3.5% for the past 30 years? It would be worth $280.68 !

If you invested the same $100 with a 7% return it would grow to $761.22  

So this illustrates clearly that if you can invest (and not touch) your money it will grow substantially over time. HOWEVER inflation and the cost of living grow over time too, so make sure your investments are earnings significantly more than inflation.

If you want to find out what your investments could be worth contact us

Box Office Hits, Adjusted for Inflation
Avatar might be the highest grossing film of all time, but ticket prices are also at an all-time high. Adjusted for inflation, Avatar is only #26, just behind Grease, Mary Poppins, and Snow White.

Some amazing numbers when you take the time to consider how this impacts on your business. So why do family business owners enable this to happen when our reserach shows overwhlemingly that having plans in place adds substantially to your overall business value?

Maybe it is time to work with your trusted advisors NOW to ensure that you achieve your optimal outcome both financially and emotionally.

GEN X advisers can help with the financial side along with your Accountant for structural advice. A business coach is also an essential ingredient in the mix to get your business fit and ready for succession as it can be a long road that sometimes feels more like a roller coaster ride!

If you are interested in finding out how business coaching can play a part in your overall business planning contact Tim Ryan from Shirlaws, who is based in Newcastle.

ARIES
Australian Shares
The Australian share market still provides a good medium term investment opportunity. Over the past year, companies have taken the opportunity to cut costs and wind back debt levels, which should support profit growth as the economy recovers.

TAURUS
Emerging Markets
Likely to be the key driver of any global economic recovery. It is anticipated that countries like China, India and Indonesia will record strong economic growth in 2010 and beyond.

GEMINI
Developed Markets
Developed economies like the US, Japan and Europe are likely to record positive growth in 2010 after contracting over the past 18 months. To date these countries’ share markets have underperformed developing or emerging markets, and with a return to growth, the company profit outlook should improve and attract investor inflows.

CANCER
Australian Resources Sector
Strong demand out of China for iron ore, coal, energy and base metals looks set to lead to rising prices in 2010 as miners reach full production. China is now Australia’s largest export destination and with economic growth of around 9% expected next year, the outlook for this sector still looks bright.

LEO
Australian Banking Sector
The top four Australian banks are rated among the safest in the world. With domestic economic growth set to strengthen, bad debts are set to improve and banks should be able to boost profit levels and keep paying out attractive dividends.

VIRGO
Listed Property Trusts
This sector was one of the underperformers during the global financial crisis as it went through a radical rework period reducing debt levels, setting realistic expectations and selling offshore and non-core assets. Now, property trust structures are looking healthier and with the outlook for the Australian economy positive, some growth is expected in this sector.

LIBRA
Global Listed Infrastructure
This sector looks attractive with demand for assets such as airports, ports, toll roads and energy pipelines rising and prices usually guaranteed to rise in line with inflations. With a large amount of infrastructure spending to take place globally, the level of investment opportunities in this sector should increase.

SCORPIO
Australian Residential Housing Exposure
Australia is not building enough houses to match demand due to our rising population. With record house prices in all capital cities (except Perth), a supply response will come eventually and with it higher demand for building materials, land and construction activity.

SAGITTARIUS
Cash
Official cash interest rates are rising in Australia and will continue to do so in 2010, as will mortgage and deposit rates.

CAPRICORN
Inflation Linked Bonds
With Federal Government debt rising, the government has started to issue inflation linked bonds, the first since 2003. These provide investors with a fixed coupon (interest) payment (usually around 3%) and then compensate the investor on top of this for the rate of inflation (currently 1.5%). With the Australian economic outlook positive, inflation is expected to be on the rise over coming years, and inflation linked bonds offer a form of inflation protection.

AQUARIUS
Australian Top 10
The top 10 tips for Australian equities are as follows: BHP Billiton Limited, Telstra Corporation Limited, Woolworths Limited, Prime Infrastructure Group, Tabcorp Holdings Limited, Servcorp Limited, Asciano Group, Geodynamics Limited, Brickworks Limited, and Entek Energy Limited.  From  Financial Review Weekend Edition

PISCES
China
Despite Chinese authorities looking to put the brakes on its economy, we should not forget potential growth for the Chinese economy, given the still relatively low productivity levels; it is thought to be around 8%. China’s share market valuations have been broadly in line with its average level since the mid-1990s. 2010 could be viewed as buying opportunities for risk assets within the larger global market upswing.

SO… there we have it!   There are many opportunities – it is just a matter of getting the right advice for you and being comfortable with it.   Contact us to find out more 

These horoscopes were done with the assistance of:

Colonial First State: “January 2010 Investor Review”
Colin Whitehead: Fat Prophets
Jamie Nemtsas: The Investing Times
Kristian Dibble: Rivkin Report
Elio D’Amato: Lincoln Indicators
Steve Johnston: Intelligent Investor

Whilst enjoying my family holiday in Newcastle I came across the following article that helps to explain the 2 most common styles as well as an insight as to how they perform at various times in the Economic Clock   …… http://genxadvisers.com.au/economic-time-clock/

AXA’s Chief Investment Officer Mark Dutton looks at how the two main contrasting  ‘styles’ of investing – growth and value – are positioned for the next phase of the recovery

To read the article Click  https://adviser.axa.com.au/idc/groups/public/documents/system/axa_006019.pdf

• (Reuters) – Chinese industrial output growth in November jumped to its strongest since June 2007, underlining the economy’s brisk recovery from the global downturn in response to massive fiscal and monetary stimulus. Consumer price inflation also turned positive in November in year-on-year terms after nine straight months in negative territory.

KEY POINTS:
– Industrial output up 19.2 pct vs forecast 18.0 pct
– Urban FAI (ytd) up 32.1 pct vs forecast 33.0 pct
– Retail sales up 15.8 pct vs forecast 16.5 pct
– CPI +0.6 pct vs forecast +0.4 pct
– PPI -2.1 pct vs forecast -2.3 pct
– New yuan loans 294.8 bln yuan vs forecast 280 bln yuan
– M2 money supply up 29.7 pct vs forecast 29.0 pct

COMMENTARY
 
BRIAN JACKSON, economist – Royal Bank of Canada in Hong Kong says;

“The increase in money supply growth caused by the surge in bank lending earlier this year is now starting to show up in the inflation data. Overcapacity in key industrial sectors such as steel and cement will help to restrain broader price pressures, but this will have only a limited role in curbing price rises for goods and services that the average Chinese consumer purchases. Higher housing costs and food prices are already having an impact on Chinese households, and any further increase in inflation in the months ahead will likely put increasing pressure on Beijing to start tightening policy.”

BACKGROUND

•  After 7.7 percent GDP growth in the first three quarters, the government is sure of hitting its politically symbolic target of 8 percent full-year growth given the low base of comparison in the fourth quarter of 2008.
• Economists are forecasting even stronger growth next year because of investment projects already in the pipeline, as part of the government’s 4 trillion yuan stimulus package and the huge volume of loans issued this year. 
• The government said this week that it would stick to its proactive fiscal policy and appropriately loose monetary policy next year, but also said it would strictly control new investments as a way of keeping growth and inflation in check. 
• It has also signalled that it will focus in 2010 on structural reforms to make growth more sustainable, for example by introducing more competition in services and strengthening the social safety net.
• Economists differ on how quickly the government will start to withdraw the stimulus it has injected. Few expect it to act aggressively as long as inflation is subdued and exports are still falling year on year.

Reporting by Alan Wheatley, Aileen Wang, Zhang Shengnan, Simon Rabinovitch and Michael Wei; editing by Ken Wills

WORDS don’t come easy

 The Key Words of 2009!

As a Newcastle financial advisor I often get asked my opinion on various “buzz” words that people hear in the press.

Here are some key words that summarise what the big investment issues of 2009 were, as well as some of www.perennial.net.au. thoughts on what may unfold in 2010.

Globalisation
November saw the 20 year anniversary of the fall of the Berlin Wall, reflective of a much more aligned world today than it was in the past. If 2008 showed us how quickly financial markets could spiral downwards in a globalised world, 2009 reminded us that the same can be the case on the way back up. In 2010, continuing currency fluctuations and the enduring issues of an artificially low Chinese Remimbi could see volatility and massive carry-trade flows.

The rise of  China continues, with its economy on target to become the world’s second biggest economy, overtaking Japan as early as 2011. On the other hand, the US economy and government finances could be described as “damaged goods” over the next few years (alongside Japan and the UK). The world looks to Obama to get serious about reducing government indebtedness to avoid the US in 2020 not looking like Argentina in the 1980s.

Stimulus 
In a very good year, the world economy can grow at around 5%. According to estimates from the Bank of International Settlements, governments took 5% of the world’s total economy (or one year’s growth) and ploughed it back into the economy in the form of various stimulus programs. Stimulus packages appear to have worked as Keynes would have predicted; propping up a fragile (and in many parts of the world still fragile) economy. The stimulus will likely begin to be unwound in 2010, as economies hopefully normalise and private investment starts to increase. The world has never seen such massive stimulus, let alone such a withdrawal program. As government supported liquidity is taken away, a properly functioning financial system will need to take over for growth to continue. So far so good, but there is still a long way to go.

Bubble 
The subprime bubble, caused by massive buying of US treasuries by the East and finally emerging in US Property (helped along by some creative investment bankers) is not a one off event. Other bubbles are likely to occur in the future, with the RBA particularly concerned about residential housing. There is a lot of talk (but not much action yet) around central banks targeting asset price bubbles, typically in real estate and stockmarkets, alongside their mandates, which typically revolve around inflation and full employment.

Bounce
High quality, sustainable equity and credit investments worked well in 2009. Investors who stayed the course were rewarded for their patience, with Australian equities bouncing nearly 50% from their March 2009 lows. I see the big question for 2010 centring around valuations. On the equity front, the solid forecast bounce in earnings per share in FY2011 appears to justify current valuations.  

Leverage
Excessive leverage can kill your wealth. Individuals, corporates, governments and, lately, even quasi-government organisations like Dubai World can attest to this statement. Unfortunately, the greed part of human nature has a very short memory. Gearing a portfolio, say, five times increases/decreases returns by 500%. However, interest payments still have to be made and some investments can be frustratingly illiquid, just as you want to close out your position. There is arguably a place for sensible leverage at the right time in the cycle and it will be interesting to watch the margin lending books to see just how quickly the GFC becomes a distant memory to investors.

Liquidity
When markets are stressed, liquidity can be crucial both at a macro and micro level, with many investors still locked into illiquid funds or “capital guaranteed” structures, effectively cash, for several years. From a retail investor’s point of view, the key ongoing issue is ensuring their lifestyle cash-flow needs are invested in liquid structures.

Timing
It became patently clear in 2009 that most people did not see the GFC coming. Even Warren Buffett’s Berkshire Hathaway did not escape. Whilst there are several famous stories of a tiny number of hedge funds that really profited from the GFC (such as one of John Paulson’s funds that managed to return 600% in 2007), it became clear that sensible diversification became even more important. Good old fashioned long duration government debt played its defensive role well during the GFC.

Trust
We have all heard about fear and greed driving markets, but 2009 reminded us that “trust” can be a big factor. The failure of Lehman Brothers was, in many ways, a breakdown in trust, as distinct from fear. It was only when governments started printing money in an effort to rebuild trust in the financial system that there were some early signs of recovery.

Firstly, what standard of living do you want in retirement and secondly, what choices are you making now to obtain this.

It all starts with actually articulating what it is that is important to you about your retirement, Dustin said.

Here is an interesting article published 24/11/2009 By Emma Thelwell, ninemsn Money

” Australians have saved enough money to last just three or four years into retirement, risking poverty in their old age, new research has shown.

AMP has called on the government to raise the super guarantee (SG) from 9 percent to 12 percent, after revealing that the average Australian is working less hours and living longer, but saving less money for retirement.

Craig Meller, of AMP financial services, said it was a critical issue that needs to be managed.

“Australians have very high retirement expectations but we are not saving enough to even afford a comfortable retirement let alone one that meets our expectations,” he said.

By boosting the SG to 12 percent of annual earnings, the average superannuation balance could increase by a quarter.

With 85 percent of men and 92 percent of women now expected to live 20 years beyond the retirement age of 65, Mr Meller said the nation needs to raise the issue with policy makers.

Australians have cut back the amount of work they do, with almost six in 10 men leaving the workforce before the age of 65, AMP’s report revealed.

Meanwhile, around 30 percent of Australians work part-time – up from just 10 percent in 1966.

The proportion of men working part-time has more than doubled over the last 20 years.

However, men have higher average earnings and total incomes than women in all age ranges, with average annual earnings of $40,000 – almost double the average for women at $21,400.

Dr Simon Kelly, a professor at Canberra University and author of the AMP.NATSEM Income and Wealth report, said for women the time out of the workforce for childbirth and raising kids has hit their savings hard.

“We found a significant gender gap in personal savings and superannuation for women. Women…only have half the super of their male counterparts,” he said.

“Baby boomer women are particularly behind their male counterparts. Men aged 55 to 64 have on average $130,900 in superannuation, while women of the same age have less than half that amount, an average of $60,700.”

AMP’s research found that the savings of those retirees currently aged 65 and over – an average of $107,500 for men and $81,600 for women – are only enough to last three years for women and four years for men. Those that retire on average earnings would need $40,475 each, per year, for a comfortable retirement, according to AMP.

Every time the dollar increases in value against the US dollar and other major currencies, Australian exports become more expensive for customers and less competitive in global markets.

Once known as the Aussie battler, the dollar has risen over 50 per cent in the past year from lows of US60c, and is heading towards parity with the greenback.

Driving the gains are the wide interest rate differential from Australia to the rest of the world, the general decline in the value of the US dollar and the strength of commodity prices, because about 70 per cent of Australia’s exports are commodity-related.

In economics this is called the resources curse — you have a strong currency because of demand for your resources, but that makes it harder for businesses to compete globally.

 Enjoy this article by Mark Dutton, Chief Investment Officer – Australia & NZ, AXA

A bumpy ride

The $A has been through a bumpy ride over the past 18 months. After reaching a high of US97.48c in June last year, the $A fell to as low as US61.01c in November 2008, before turning and soaring to a high of US93.38c in November this year – that’s a 53 per cent increase within 12 months.

This fall and subsequent rise has been the sharpest reversal in the $A since it was floated in 1983, and has raised the possibility that the $A may reach parity with the $US in the near future.

The $A is rising strongly relative to all major currencies, not just the $US. According to the Reserve Bank of Australia’s (RBA) Trade Weighted Index, which measures the $A against the average of our trading partners, the $A increased by 40 per cent over the same period.The rise was 40 per cent against the Pound Sterling, 46 per cent against the Japanese Yen and even 26 per cent against the relatively strong Euro.

What’s driving the $A? 

The short-term influences on $A currency movements can vary rapidly, but are typically a mixture of four key factors: interest rate differentials with other economies; economic and employment growth; inflation, and the strength of commodity prices.

At present, all of these drivers are aligned for the Australian economy, creating considerable positive momentum for the $A. In particular, stronger than expected economic recovery and early signs of inflationary pressures point to further increases in Australian interest rates, well before other economies begin their rate rises.

The rise in commodity prices is largely being fuelled by strong growth in China, which shows no signs of abating in the near term.

How much higher is the $A likely to go?

Parity with the $US cannot be ruled out, but no trend lasts forever, especially when markets still need to revert to a more stable, equilibrium state. An official rate of close to zero in the US is abnormal and cannot be sustained over the longer term. When growth re-emerges in the US and rates begin to increase, the $A may come under some downward pressure.

What is fair value?

Determining the ‘correct’ value of a company share is difficult enough, but a currency has no absolute value. It represents an exchange rate relative to other currencies. Over long periods of time, the comparative buying power of currencies, measured by Purchase Power Parity (PPP), is a guide to fair value. Conventional models of PPP indicate that the $A has less room to move.

What this means for investors

The RBA recently indicated that the rise in the $A is in line with economic fundamentals, and is showing no interest in intervening. In contrast, the central banks of other resource based economies such as Canada and New Zealand have flagged their rising currency as a potential concern and may take actions to limit further gains. 

The $A ranks in the top 10 most actively traded currencies in the world. It generally trades freely, without intervention and is therefore able to act as a stabiliser as relative demand changes. This means that large swings in the value of the $A can be expected to be an ongoing feature.

Generally speaking, a rising $A benefits importers and disadvantages exporters, but it is too simplistic to extend this logic to company earnings. Many Australian companies have developed sophisticated approaches to managing currency risks and some have natural offsets in their cost and revenue structures.

Returns to Australian investors in overseas asset portfolios are clearly impacted by currency  changes. An increasing $A reduces the value of unhedged offshore investments, which has been the case for many portfolios since March this year.

On the flip side, the falling $A helped cushion some of the losses during the Global Financial Crisis (GFC). From October 2007 through to March 2009, the fall in the global sharemarket was not nearly as severe in $A terms compared to local currency.

Over the longer term, exposure to international sharemarkets and different currencies provides diversification benefits and this can help smooth out the ride.

November 2009