Wednesday, August 26, 2009

When is a good time to invest?

by Robin Bowerman

The worst must be over. Investing is back on the acceptable list of dinner party conversation topics.

A few short months ago bringing up almost anything to do with investing – super or sharemarkets in particular – was a real party conversation stopper. People would quietly move away to start up a conversation about something more interesting – anything was more interesting than super.

But it’s back. At this point the behavioral finance academics are all nodding sagely and reminding us that our emotional drivers should not be underestimated – losses hurt both our portfolios and our egos. Denial arrives and people stop looking – and talking - about it.

Then along comes a 40% rally on the Australian market since early March and suddenly its OK to be talking shares and super again.

Hindsight is a wonderful thing but it would have been really insightful to have surveyed a group of investors back in early March and asked them whether they thought it was a good time to invest...

...Who couldn’t make a fortune with the benefit of hindsight.


Wednesday, August 12, 2009

Fama on Market Efficiency in a Volatile Market

Widely cited as the father of the efficient market hypothesis and one of its strongest advocates, Professor Eugene Fama examines his groundbreaking idea in the context of the 2008 and 2009 markets. He outlines the benefits and limitations of efficient markets for everyday investors and is interviewed by the Chairman of Dimensional Fund Advisors in Europe, David Salisbury.

The Seven Faces of Advice

Jim Parker, Regional Director, DFA Australia Limited

The global financial crisis and a series of recent scandals have turned a critical light on much of the investment industry and led to public questions about the role and value of financial advisors.

Against the backdrop of the worst market downturn in decades, many advisors report that they have struggled to enunciate their value proposition.

For those whose perceived their value to their clients as an ability to deliver positive investment returns year after year, irrespective of the state of markets, this existential crisis is understandable.

And for those who sell their expertise as consistently accurate forecasters, the self-doubts may have been even more corrosive.

But there is another group who understand that the value they bring is not dependent on the state of markets. Indeed, their value can be even more evident when markets are down and fear is running high.

The best of these advisors play multiple and nuanced roles with their clients, depending on the stage of the relationship, and are amply rewarded for the manifest skills they bring to the table.

While some may quibble over the exact characterisation, broadly these functions break down to seven important roles that evolve over time:

  1. The expert: Now, more than ever, investors need advisors who can provide client-centred expertise in assessing the state of their finances and developing risk-aware strategies to help them meet their goals.
  2. The independent voice: The global financial turmoil of the past two years has demonstrated the value of an independent and objective voice in a world full of product pushers and salespeople.
  3. The listener: The emotions triggered by financial upheaval are real. A good advisor will listen to client's fears, tease out the issues driving those feelings and provide practical long-term answers.
  4. The teacher: Getting clients beyond the fear-and-flight phase often is just a matter of teaching them about risk and return, the power of diversification, the importance of asset allocation and the virtue of discipline.
  5. The architect: Once these lessons are understood, the advisor becomes an architect, helping clients to build a long-term wealth management strategy that caters to their own risk appetites and lifetime goals.
  6. The coach: Even when the strategy is in place, doubts and fears will inevitably arise in the client's mind. The advisor at this point becomes a coach, reinforcing first principles and keeping the client on track.
  7. The guardian: Beyond these early experiences is a long-term role for the advisor as a kind of lighthouse keeper or guardian, scanning the horizon for issues that may affect the client and keeping them informed.

These are the seven faces of advice and, when properly applied, become testimony to the fact that the value of a good financial advisor extends well beyond the writing of a simple financial plan.

A prospective client may first seek out an advisor purely because of their role as an expert. But once those credentials are established, the main value of the advisor in the client's eyes may be their role as an independent voice.

Knowing the advisor is truly independent — and not a product salesperson — leads the client to trust the advisor as a listener or sounding board, as someone to whom they can unburden their greatest fears.

From this point, the listener can become the teacher, the architect, the coach and ultimately the guardian. These are all valuable roles in their own right and none is dependent on forces outside the control of the advisor, such as the state of the investment markets.

However you characterise these various roles, good financial advice ultimately is defined by the patient building of a long-term relationship founded on the values of trust and independence and knowledge and the recognition of our common humanity.

Now, how can you put a price on that?

Sunday, August 02, 2009

Super Contentious - Super Fund Investment Performance

Robin Bowerman

Wednesday, July 15, 2009 FROM WWW.NEWS.COM.AU

Few issues are more controversial in super than how super fund investment performance is reported and discussions about which factors drive fund performance.

Consider the position of the Australian Prudential Regulation Authority (APRA) regarding fund performance. It finds itself at the epicentre of a debate that still has considerable distance to travel before some form of industry consensus is reached and even further before clarity from an investor’s perspective can be achieved.

Long-serving deputy chairman of APRA Ross Jones has publically described one of the regulator’s functions as being a “disinterested reporter” of statistical information that is “in most cases non-contentious”.

But then adds Jones somewhat poignantly: “The main exception to the ‘non-contentious’ point … arises in our superannuation publications, most notably those sections of the publications which reveal relative return differences between funds entrusted to not-for-profit and retail trustees.”

There are two central causes behind the latest burst of contention around APRA regarding super fund performance. First, there is its imminent reporting of individual fund or trustee performance. And then there is the release last week of a “working paper” covering why some types of funds outperform others in the view of two APRA researchers.

Within the next six weeks or so, APRA will publish for the first time a performance table showing the return on assets achieved by individual super funds or trustees. To date, it has only reported the return on assets of fund sectors (divided into retail, industry, public-sector and corporate funds with $50 million-plus in assets).

APRA’s first fund-level performance figures will cover the five years to June 30, 2008.

The regulator’s most recent Insight publication includes its overview of super fund performance during the 2007 and 2008 calendar years, and an explanation of why the new performance league table is being produced. (See

In short, APRA believes that its revamped approach will enable fund members to compare fund performance in a more informed way.

Specialist superannuation researchers SuperRatings, Chant West and SelectingSuper already provide performance figures at fund level with the after-tax, after-fee returns divided into the most-common portfolio types (typically high-growth growth, balanced or default and conservative). And often the most accessible information gives the returns of the top-10 performers over various periods.

If the debate over investment performance wasn’t hot enough, two APRA researchers Wilson Sy and Kevin Liu last week presented a research working paper Investment performance ranking of superannuation firms, which truly stoked the fire along. The paper carries the clear rider that the views and analysis are those of the authors and do not necessarily reflect those of APRA. (See

The paper is an interesting, technical review of various methodologies for assessing fund performance and risk. It looks at the issue clearly from the perspective of a member of an institutional-style super fund, however for trustees of their own self-managed super fund it provides an interesting summary of a broad range of industry research.

The challenge the researchers have set themselves is to come up with a “new and more reliable way for individual investors to make investment selections for their retirement savings”.

No small undertaking and one that they believe requires quarterly asset allocation data of the total super fund. The key difference with this approach is that rather than rank the individual funds or portfolios they are looking to compare the performance of the management firm or its composite portfolios. So the focus is more on the effectiveness and governance of the organisation rather than an individual fund or portfolio.

In their working paper, Sy and Liu also raise a number of issues based on five years of annual data (from 2002 to 2006) for 115 super funds.

  • The average firm under-performed its net benchmark by 0.9% and the net under performance of the average firm appears more pronounced in down markets.
  • Higher operational costs of super funds “correlated significantly” with lower investment performance. In other words costs matter and in investing the more you pay as an investor the less you get once all fees and taxes are deducted.
  • Super funds can “reduce their overall operation costs by negotiating lower fees with service providers … Or, the pension firms [super funds] can avoid paying high active management fees by using passive management for a larger proportion of its assets”.
  • Asset allocation is a major driver of investment performance
  • High ranking performance does not appear to persist over the long term

The researchers are proposing the development of a new measure – risk adjusted value added (RAVA) – as a result of their analysis with the aim of helping investors make better informed fund selection decisions.

To achieve that APRA will need to collect quarterly asset allocation so it will be interesting to see if that is indeed a future development for APRA’s performance table that was championed by the former Minister for Superannuation, Nick Sherry.

The role of regulator is an often thankless task so credit is due for confronting and contributing to the debate – even if this does not prove to be the final solution.
If investors end up with simple, transparent measure that help make better choices about which super fund is right for them the entire industry will be a winner.

* Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia. To receive this column by email each week go to and register with Smart Investing.