Taking a bet on analysts' stock tips

John Collett

April 30, 2011

Track records ... investor newsletters are a difficult game. Photo: Nicolas Walker

Many self-directed investors rely on the stock tips and advice offered by investor newsletters. But there is no real way to gauge which one has the best strike rate, writes John Collett.

Investor appetite for share tips is growing strongly, spurred by the flight to DIY super. Many self-directed investors rely on the stock tips and advice offered by investor newsletters.

But how good are their recommendations?

While the performance of fund managers is easily established by looking at independently audited performance data, the same is not true for these analysts.

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Only a few have their performance audited. And to complicate things further, all use different methods to measure their success rates. Of the leading players, only Fat Prophets has its numbers independently audited by an accountant.

''Nothing hums like a paper portfolio,'' says Ben Griffiths, co-founder of Eley Griffiths Group, a small-companies manager. ''When the dollar is alive, it's not as easy.''

Demand is growing for these services, particularly from the swelling ranks of DIY super fund trustees looking for advice on how to make money in the sharemarket.

Whereas 10 years ago the newsletters offered a printed publication with recommendations of stocks once or twice a week, these days, the subscribers can access the advice any time as they are updated almost daily.

Investors pay up to $900 a year for their flagship, web-based reports; more when the newsletter is bundled with specialist reports such as mining and small companies.

Fat Prophets has 20,000 subscribers. More than 13,000 of those are based in Australia, with the rest in Britain, where it has a London office, and a small number in the US. In 2005, Fat Prophets had about 7000 subscribers in Australia.

Angus Geddes, who co-founded Fat Prophets in 2000, says a big part of the growth in his business has been the rise of DIY super funds.

''We also attract a lot of people who are disgruntled with the big broking houses,'' he says.

In recent years, Fat Prophets has added a share brokering service and a funds management arm to its stock-tipping services.

Huntley's Your Money Weekly, started by Ian Huntley in 1973, has a loyal following, many of whom are DIY fund trustees and small-business owners. Morningstar bought Huntley's business in 2006.

The head of retail at Morningstar, Paul Easton, says: ''Subscribers are high-net-worth individuals who like to take control of their finances.''

Strike rate

When it comes to the tipsters' track records, it is difficult to make meaningful comparisons - some account for a portion of the costs of investing and others do not.

The Rivkin Report says its recommendations have produced an average annual return of 13.2 per cent against a total return (including dividends) from Australian shares of 9 per cent between mid-1998 and the end of 2010. While the cost of brokerage is deducted from the ''estimated'' return, the performance is not independently audited.

Intelligent Investor's stated return between May 2001 and December 31 last year - a total of 521 recommendations - is 8.9 per cent, compared with the market's return of 8.4 per cent.

Huntley's main model portfolio for the 20 years to the end of last year produced an average annual return of 11.9 per cent, compared with the market return of 11.2 per cent.

Fat Prophets says its recommendations have produced an average annual return of 24.6 per cent, compared with the All Ordinaries Accumulation Index of 8.2 per cent between October 2000 and the end of last year. The numbers for last year have not yet been audited - but they will be.

''It [auditing] is expensive to do but you have to do it, particularly if you use it in advertising,'' Geddes says.

Fat Prophets was pulled up by the regulator in 2002 after using potentially misleading performance figures in its advertising and was required to engage an independent expert to devise a methodology for measuring performance.

Whether the numbers are audited or not, the performance of the tipsters on all their recommendations may not mean that much, since investors could not possibly trade on every one of the tipsters' choices.

Model portfolios

To help subscribers replicate their recommendations in their own portfolios, the tipsters have ''model'' portfolios.

The model portfolio contains a limited number of the newsletter's best stock ideas and is constructed to be balanced between the various industry sectors of the sharemarket.

Each stock holding will be ''weighted''. Stocks they favour most will make up more of the portfolio. The performance of the model portfolio is published to the tipsters' subscribers.

The performance of the Rivkin model portfolio, for example, accounts for the cost of brokerage, interest on the cash balance and franking credits.

''Model portfolios provide a transparent method of reporting our performance and provide valuable advice as to capital allocation,'' says the chief executive of the Rivkin Report, Kristian Dibble.

Tipsters say their services are as much about giving their subscribers advice on what to do when shares they own are the subject of a takeover offer or a buyback from the company as they are about giving tips on stocks.

Dibble says the Rivkin Report's advice to buy BHP Billiton shares in the expectation of a buyback would have made about 26 per cent on the trade. ''It's an example of an event-driven trade,'' Dibble says.

Despite not having a single standard on measuring their performance, Griffiths says the tipsters generally do a good job.

They provide investor education and go into the smaller stocks that normally don't get much attention. However, their market timing on when you should be buying stocks is often less than ideal, he says.

''But the private investor could do far worse than have a copy of the tip sheet like Huntley's at the ready,'' Griffiths says.

Best calls

Fat Prophets' Angus Geddes says their best call was on gold in 2001, when it was at $US258 an ounce. It is now about $US1500. Their view on gold led to a number of gold stock recommendations.

One was Red Back Mining, which Fat Profits recommended in 2003 at between 30¢ to 40¢ a share. The Perth-based miner floated in late 1996 as a junior explorer. The share price of the company rose and the company was taken over last year by a Canadian-listed miner.

Other good calls include Oil Search and uranium miner Extract Resources.

One of Huntley's best calls was its "speculative buy" recommendation on Australian-listed copper miner Equinox Minerals in 2005 at about $1 a share. Huntley analysts recognised the risks facing the company in developing its copper interests in Zambia but liked the fundamentals.

Since Huntley's initial call, the company has been the subject of merger proposals, which helped lift its share price. Equinox is currently under a takeover offer, with its shares trading at more than $8.

Intelligent Investor's two best calls were Cochlear, which makes hearing implants, and ARB Corporation, which makes four-wheel-drive accessories.

The tipster first recommended Cochlear at $6.30 in 1998. Intelligent Investor stuck to its positive view on Cochlear even when its share price dipped in 2004, recommending the dip as a buying opportunity. Cochlear shares are now trading at more than $80.

Intelligent Investor first put a long-term buy recommendation on ARB Corporation in 2004 at about $3.50. It again recommended subscribers buy in 2006. The shares are now trading at more than $8.

Both companies have paid good dividends over that time.

 http://www.smh.com.au/money/investing/taking-a-bet-on-analysts-stock-tips-20110429-1e13s.html#ixzz1MT82Vxq4

Bonds teach stocks a thing or two

David Potts

April 24, 2011

Tortoise and hare...there's a lot to be said for the slow but steady approach offered by bonds when it comes to investing.

Once the poor relation of the investment world, 'steady-as-she goes' bonds continue to lay down a solid track record.

Time heals all wounds but it still hasn't fixed the sharemarket.

In any of the past five years you would have done better with an online bank deposit than in the average share.

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Go back 10 years, so you get the benefit of the biggest bull run ever in the sharemarket, and the picture should be different.

Only it isn't. It's neck and neck between shares and, of all things, government bonds.

In fact, at the low point of the financial crisis, bonds had done better than shares for the previous 20 years.

Roger Bridges, who as head of fixed income at Tyndall Investment Management runs a bond fund, says: ''I was telling everyone here that maybe our fund is the growth asset now.''

Fiddling with the starting or finish year, you can manipulate the returns to put the sharemarket in a better light but the point is, bonds aren't just a poor relation.

They're where you go when everything else goes wrong. Or rather, they're protection before everything goes wrong.

Financial planners see bonds, which are less volatile and make investing less of a punt, as insurance against the sharemarket.

Whatever happens, a gilt-edge bond will always pay and you're guaranteed to get your money back.

Providing a decent return is also true of fixed-income securities generally - that is, anything that pays a set interest rate and gives you your money back at the end.

Oh, so they're glorified term deposits then?

Not quite. The difference is you can get in or out of bonds whenever you want.

But there's a more subtle and, when the crunch comes, critical difference with government and bank-issued bonds and chasing the best cash return. They aren't punting on either the China boom going forever or the US economy hitting its stride in the near future. That's what an investment in the sharemarket boils down to but it's also true of cash.

One is chasing growth in its own right and the other high interest rates, which are a side effect of it.

To put it another way, super funds or any other portfolio that is made up of shares and cash is a one-way bet on economic growth. As the GFC showed, that can't always be counted on.

''They're betting everything on the favourite and not covering themselves,'' Bridges says.

Still, there's a reason that most avoid bonds. Put it this way - the fact that they've been doing better than shares says a lot more about the sharemarket.

Yields on government bonds range from about 5.10 per cent for three years to 5.5 per cent for 10 years. But the banks have finally realised there's a yield gap here and are offering something better.

The Commonwealth Bank was the first to issue a retail bond last year. It pays a fixed 1.05 per cent above the variable 90-day bank-bill rate, which works out at just under 6 per cent.

Since the top term-deposit rate is 7.15 per cent for five years offered by Rabobank, that doesn't look crash hot.

The market agrees, having marked the $100 five-year bonds (ASX code CBAHA) down to about $99, which bumps the yield up to just over 6 per cent if you buy at that price.

The Bendigo and Adelaide Bank has topped that, offering an extra 1.4 per cent above the bank-bill rate, a yield of about 6.3 per cent for a three-year bond.

Unlike the CBA's, though, it's trading in the market (code BENHA) at a premium so the yield is slightly lower for newcomers. Um, trading may be too strong a word.

The bond goes for weeks without a single trade but at least the buy quote is above the $100 issue price. Since both have a floating rather than a fixed rate, they protect you against a Reserve Bank rise.

The higher rates go, the more they pay. That should also protect from rising inflation, which food and petrol prices suggest is starting to stir.

Incidentally, the government also has an inflation-protecting bond. The Treasury-indexed bond adjusts the face value every quarter by the rise in the consumer price index.

Only institutions can bid but you can pick one up in the market through a fixed-interest dealer or broker.

The only trouble is that while it protects you against inflation, it doesn't do much else. The interest rate is paltry - on the latest series issued last week it was just 2.5 per cent.

Frankly, if you're worried about inflation then you'd be better off in something offering high interest.

After all the CBA or Bendigo bonds are tied to the 90-day bank-bill yield, itself based on the official cash rate. If inflation goes up, so will the cash rate as the Reserve combats it.

The banks have other fixed-income securities linked to the bill rate as well, which are riskier but in return pay more. Income securities are one. These were a fad for a while in the early noughties but all came to grief.

Yet that's what makes the few survivors attractive - their prices have been marked down so far from their $100 face value that the yield is pushed up.

Or to put it another way, a dollar paid in interest on a $90 investment is a better return than on $100.

A curiosity is they're supposed to last forever, like the mad bunny in the battery ad on television. There's no maturity date on which you're promised your money back. So the only way out is by selling them on the market (they're listed on the ASX).

The four left were issued by Bendigo and Adelaide Bank, Macquarie, NAB and Suncorp. ''We like the NAB income securities, which, priced about $82, give a running yield of 7.5 per cent,'' says a director of FIIG Securities, Brad Newcombe.

''If interest rates go up, you get leverage to the bank-bill rate that will also go up.''

And because of the Basel III changes to bank liquidity rules, he predicts they'll be restructured ''and that would be the kicker for an increase in the price''.

For an even higher yield, ANZ, CBA and Westpac have converting preference shares, one of a group of securities known as hybrids because they're not quite bonds but they aren't shares either.

Truth be told, though, they're closer to shares. After all, the reason their post-tax yield is higher is that the ''interest'' they pay is fully franked and so comes with a 30 per cent tax credit.

And if that doesn't reveal their true nature, try this. At maturity they typically convert into shares of the mother stock with the bonus of a small discount.

The most popular bank hybrids are the CBA's series of Perls. Each differs slightly from the other and you can still buy the last three in the market, all below their $200 issue price.

The bank redeemed Perls II two years ago for cash on the so-called rollover (as distinct from maturity) date.

Because series III and IV are trading below their $200 face value, you'd be looking at a capital gain of about $15 and $5 respectively when the bank redeems it.

That's an income of about 6 per cent fully franked plus an eventual capital gain of a further 7.5 per cent for the IIIs and another 2.5 per cent for the IVs.

Perls V are trading at a premium and little wonder, since the margin above the bank-bill rate is a hefty 3.4 per cent and so the yield is 8.3 per cent fully franked if you subscribed originally, or just under 5 per cent if you were to buy them now, which probably wouldn't be a good idea.

But wait, there's more. When the bank hybrids convert into shares there's a bonus discount of 1 per cent or 2 per cent.

ANZ has two series of converting preference shares (ANZPA and ANZPB), with margins of 3.1 per cent and 2.5 per cent respectively. Both trade at a premium that brings their annual yield to about 8 per cent fully franked, taking into account the bonus at conversion time.

Remember: the yield on bank hybrids can change every quarter - though it's unlikely to drop in the foreseeable future - when they also pay dividends.

An exception is Macquarie's MQCPA, which has two years left to run paying a fixed 11.1 per cent and isn't franked.

Still, that works out at an annual 10.3 per cent for two years based on its last traded price, which is a lot better than you'll get from a term deposit.

Because they trade on the ASX their price can drop, too, a fate that has befallen all those issued earlier than last year.

It just takes one bank to break ranks with a new issue offering a better return to mark down the prices of everything that's come before it.

Taking a safe punt

The heat seems to be coming out of the term-deposit war between the banks.

If you're hoarding cash because you don't trust the sharemarket, don't have enough for a property and think bonds are lame, there is an alternative. Rather than go the whole hog into the sharemarket, you can dip your toe in and still be assured of a decent return.

So-called step-up securities trading on the ASX are returning close to double digits. These convert to shares in the mother stock on a certain date, or are extended with a higher interest rate.

Australand Assets (AAZPB) pays 4.8 per cent above the 90-day bank-bill rate, which has been hovering around 4.9 per cent, or 10 per cent since you can pick them up for $95 despite their face value of $100.

Or there's Multiplex Sites (MXUPA) with interest at 3.9 per cent above the bill rate but because they're trading well below their face value "there's a 20 per cent upside'', so long as they're redeemed, says a director of FIIG Securities, Brad Newcombe.

Another well-regarded step-up security is Goodman PLUS, which has also been heavily marked down by the market, so boosting its yield. Its step-up date is March 2013, when it will be either swapped for its $100 face value or the interest rate will be increased. In the meantime, there's an 8.5 per cent yield based on its last price of $80.

"When investing in fixed income, a combination of government bonds, semi-government bonds, high-quality corporate bonds and some listed subordinated hybrids is prudent,'' says the head of investment strategy and consulting at UBS Wealth Management, George Boubouras. ''Even an aggressive investor should not hold more than 25 per cent of their fixed-income weighting in listed, subordinated hybrids."

He recommends conservative investors, such as those whose super is paying a pension, should have 40 per cent of their investments in domestic fixed income.

For moderate investors it would be 15 per cent and for aggressive ones 10 per cent. Mortgage funds were once a popular outlet for finding a good fixed income. Not any more. The chief executive of Hewison Private Wealth, financial planner John Hewison, won't touch them.

"Remember Estate Mortgage?'' he says. ''People see them as being like a bank account but they're long-term securities and have a propensity to be frozen. We like to have absolute control over a property and secured by a first mortgage."

 http://www.smh.com.au/money/investing/bonds-teach-stocks-a-thing-or-two-20110423-1ds10.html#ixzz1MT6RDmte

Tortoise versus Hare

Investing in Retirement

Stability back in fashion

Lesley Parker

April 20, 2011

Balancing act...investors are advised that a diverse portfolio is important to achieve an adequate income in retirement.

Three years after the peak of the global financial crisis, retirees and pre-retirees remain wary, saying they would rather have peace of mind than chase high returns, according to new research.

In a survey late last year, researcher Investment Trends asked 1000 retirees and pre-retirees what they thought was most important in a retirement investment product and they overwhelmingly valued stability over high returns.

The five features the respondents ranked most highly were tax effectiveness (which was rated as essential, very important or important by 91 per cent of those surveyed); easy access to their money (87 per cent); a product that was easy to understand (86 per cent); stable returns (86 per cent) and protection against market falls (77 per cent).

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''These results turn established wisdom on its head, with stable returns proving much more important than higher returns or lower costs,'' says the chief operating officer of Investment Trends, Tim Cobb. ''That may reflect investors' experiences during the GFC, with many experiencing large and unpredictable fluctuations in their retirement savings.''

ANNUITIES AND GUARANTEES

Cobb says the results indicate it might be ''time for investors and advisers to take another look at annuities and some of the innovative new retirement income products which offer protection against market falls''.

Annuity-style products, with their contracted rates of return, have been a hard sell for many years and especially while the sharemarket offered double-digit returns.

However, anyone who watches television will have seen how Challenger's ad campaign taps into the anxiety retirees are feeling by promoting ''safe, reliable retirement income'' from its annuity products.

With these products, you make an initial investment in return for agreed income payments over a contracted period. The rate of return is fixed at the outset and doesn't fall if markets go down - but it doesn't rise if markets go up, either.

Then there are ''capital-protected'' products. AXA's North product, for instance, offers an optional ''protected retirement guarantee'' feature that locks in guaranteed income.

Advisers say clients, particularly retirees, are more wary because of the GFC but their advice to them is not to give up on risk - market risk - only to take on other forms of risk, such as the danger that inflation will erode the value of their retirement savings.

An HLB Mann Judd financial adviser, Chris Hogan, says that while most of his older clients are more risk-averse, ''they still recognise that growth assets are an essential component of their investment portfolios''.

NO FREE LUNCH

A financial adviser and director of Multiforte Financial Services, Kate McCallum, who also finds retirees in particular are more risk-aware, says ''it comes down to the practical challenge of how to protect capital while achieving the return they want''.

She gets the occasional inquiry from a client about annuity or capital-protected products ''but we're not fans of protected products as they're very expensive and we believe a well-constructed portfolio that's managed - not set-and-forget - can be a better option''.''I suppose the key message here is: there's no free lunch,'' McCallum says.

''There's a cost of having the capital protection and the certainty and this needs to be evaluated for each client [with regard to] their comfort level with volatility and their return requirements.''

Hogan says he doesn't see much interest in annuities and capital-protected products, either. ''Our view is that we don't need to get too tricky with innovative products,'' he says. ''Protection is available simply and cheaply through holding term deposits, uncomplicated fixed-interest funds and cash'', as part of a diversified portfolio.

He, too, notes that capital protection typically comes at a cost. ''For an annuity, the cost is lack of liquidity,'' he says, with your capital sum locked up for a set period.

People also need to compare the return being offered on an annuity with term deposits, which currently have quite high interest rates.

''For other structured products with capital protection built in, the underlying fees can be very high,'' he says. ''We generally don't think the cost is worth it.''

(In a recent relaunch of the North platform, AXA - well aware of criticisms concerning cost - cut its standard administration fees, halving the rate for smaller account sizes from about 0.9 per cent to 0.4 per cent.)

McCallum notes that with many capital-protected products there's a set period for the protection to work. ''If you have to break the set term, there are usually hefty penalties associated with that.''

DIVERSIFICATION IS BEST

The head of retail for Australian Unity Investments, Cameron Dickman, says those who keep their money in cash aren't necessarily working towards their ultimate goal of having a retirement income that lasts as long as they do.

While keeping a significant proportion of retirement savings in cash options such as term deposits minimises market risk, ''it exposes investors to a number of other risks, including inflation risk, income risk and opportunity risk'', he says.

Inflation risk is the risk that capital locked up in non-growth assets, such as term deposits, will have less value at the end of, say, a two-, three- or five-year term.

Opportunity risk is the risk that you'll miss out on better returns and capital growth from opportunities that might become available while your money is locked up.

Perhaps the biggest risk at the moment is income risk, Dickman says.

A stable, regular income will become a priority for the baby boomers now starting to enter retirement but they won't get that from a term deposit for which interest is often paid at the end of the term, he says.

''Retirees, in particular, need to … find a balance between their desire for low-risk investments and their need for returns that will generate ongoing income in their retirement,'' Dickman says. ''It comes back to the value of taking a balanced approach through a diversified portfolio and understanding that different investments offer different benefits, returns and risks.''

Key points

• Retirees are more interested in stable returns than high returns or low costs.
• Capital-protected and annuity products tap into this concern.
• But advisers say the cost of such products has to be weighed against the promised peace of mind.
• They warn that being in cash to avoid market risk means you take on other risks, such as inflation.
• Diversification is the best protection, they say.

 http://www.smh.com.au/money/investing/stability-back-in-fashion-20110419-1dlzl.html#ixzz1MT4O7Zax

Dollar hits global gains

May 11, 2011

Downside of strong dollar...global shares produced an average annual return of minus 4 per cent in the past decade.

Blame the terrible returns on international shares during the past decade on the Australian dollar. There was a dramatic dip in the value of the Australian dollar in 2008 and into early 2009, when sentiment about world economic growth was at its gloomiest, but otherwise it's been on a steady rise during those 10 years.

Most people access international shares through managed funds that allow the currency effects to flow through to investors.

The dollar's rise has more than sliced away the gains on overseas sharemarkets, leaving investors in the red.

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During the 10 years to the end of March this year, international shares have produced an average annual return of minus 4 per cent.

With losses compounding during such a long time, the original sum invested 10 years ago would be worth about half today, after accounting for inflation.

But the same portfolio, hedged or protected from exchange-rate fluctuations, has produced an average annual return of about 3 per cent during the same period. The difference between hedged and unhedged is 7 percentage points each year.

Investors could be excused for thinking they had invested in a foreign exchange fund rather than an international share fund.

About half the typical portfolio will be invested in US-listed shares, as the US makes up about half of capitalisation of developed-word sharemarkets. That means the US dollar is the currency exchange rate with the biggest impact on the returns of the unhedged portfolio of international shares. A decade ago, one Australian dollar was buying about US50¢. Last week it was buying more than $US1.10.

After 10 years of losses, many investors will be wondering what they should do now. Assuming they still want the diversification benefits of global shares, should they switch to a fund that removes the currency effects on their returns? During the next few years you would think the Australian dollar will stay high because of the resources boom keeping commodities prices high and Australian interest rates relatively high. Given the Australian dollar is so highly valued now, if there was to be a change in the value of our dollar, it is much more likely to be down than up.

If that is right, there may be nothing to gain from being in an international shares fund that removes the currency risk. There may be more to gain from leaving the international shares exposure unhedged to benefit from any dips in the value of the Australian dollar.

Another approach may be to include more exposure to emerging markets. The typical global shares fund has only a small exposure to emerging markets. But shares listed in China and India and other emerging countries are likely to keep doing well. Perhaps the best option is to consider managers who actively manage the currency risk, have a decent exposure to emerging markets and are not afraid to invest differently to their peers. This approach is more likely to be found among, but not limited to, boutique fund managers who specialise in managing global shares funds.

http://www.smh.com.au/money/super-and-funds/dollar-hits-global-gains-20110510-1eg2y.html