Monthly Report – May 2017
Did we talk ourselves into it? The downturn that has been prophesised appears to have happened in May, with the Australian share market (ASX200) dipping from 5924 points at April 28th to 5725 points at May 31st - a 3.4% correction driven primarily by concerns about bank profits and adjustments to commodities prices. At the same time, US markets lifted 1.1%, Japanese markets lifted 2.5% and even European markets lifted 0.6%.
Is the proposed 0.6% bank levy responsible for the Australian malaise? Highly unlikely I would suggest. In the same vein, neither are the recent terrorist attacks here and overseas, nor is Brexit and the UK election, and neither is the Trump impact. Individually, they have very little effect, but added to together, can start to wilt investors' enthusiasm.
Much more likely is the realisation that, just as the rest of the world is finally picking up economically, we Australians are still looking a bit fragile economically. Our switch from a mining investment boom, to a housing construction boom has meant we set a new world record for 26 years without a recession, but its left the pricing of many of our assets, such as housing, at all-time highs, and that now looks potentially expensive to the eyes of the rest of the world. That's not to say that we should expect prices to crash, it just means that overseas investors may see better value investing in other markets first. Whilst our dollar has held up so far, any big downturns in the dollar would confirm that view, and suggest a reversion to us selecting mainly unhedged international assets. But not yet!
However, with some uncertainty around currency, we are going to make a small addition to our range of fixed interest funds. You might recall that one of the underlying principles we have used to boost returns from our funds has been to have some exposure to smaller companies, and small countries. We have previously applied that principle to share market funds, but we have not applied that to fixed interest funds until now.
On the CFS First Choice platform, we have been following a Franklin Templeton fund for quite some time now - The Franklin Templeton Multisector Bond fund. This fund is quite different to more vanilla funds we currently use in the fixed interest space, in that it uses larger exposures to small country bonds and should provide a great diversifying alternative to the more mainstream bond investments made in the other funds. It focuses mainly on overseas bonds rather than Australian based options. It has recently had a big boost from some currency decisions, but the underlying fixed interest choices have done well and are the main reason for our decision to incorporate this fund. The manager has the discretion as to whether to use currency hedging or not, depending on the underlying economics of the country issuing the bonds or fixed interest investment. Given the comments above about whether our dollar will or won't change, I feel there is some real value to be gained from granting a deeply experienced international funds manager some flexibility in this space. Whilst this fund is slightly more aggressive than our existing fixed interest funds, and is slightly more expensive (0.57% p.a. more.), we will be limiting its use to 5% of portfolio value to ensure the overall strength and effective of our portfolios are enhanced through this diversification.
We will use this fund by drawing funds from the CFS Diversified Fixed Interest Fund, whilst retaining the CFS Target Return Income Fund, the Schroders Credit Securities Fund and the CFS Cash fund in the "Income" components of the portfolios. I have attached information on this new fund, and the manager. Note that a 0.2% Buy/Sell fee applies to any switches - that is $20 per every $10,000 switched.
For those that wish to switch immediately, please let myself, Sharon or Kate know by email or phone, and we will prepare the correct version of the forms for signing (i.e. super, pension or investment). There is, however, no urgency behind this change, and you can comfortably wait until your next review to discuss this change should you wish.
In the meantime, for those that want to know where we get our monthly market numbers from - here is one of my sources of truth;
This single page gives you more information that you'll ever need about markets, the economy, the state of our banks, lending and virtually every other measure you might care to wonder about from time to time. My key items are F1, F7, F8 and F11. Happy exploring!