There are many theories about why most active fund managers fail to consistently outperform their benchmarks. It takes many years of study and market experience to become a portfolio manager, but good results are often elusive. One theory is that there are so many skillful managers pricing shares that the market is relatively efficient and tough to beat.
Research by Hendrik Bessembinder of Arizona State University shows active management and stock selection is really difficult. He found that most stocks listed in the US since 1926 delivered lifetime negative returns relative to one-month US Treasury bills. Only 4% of companies (represented by the blue box below), or about 1,000 out of a total data base of over 25,000, produced half the returns of the entire market.
The grey space of the outer box represents the vast majority of companies that generated no returns, with 12% delisting at an average of 2.5% of their listing price. It's more common to invest in losers than winners, especially when competing against other talented analysts.
It's even more difficult to value a loss-making startup that has a good idea gaining traction. We take a close look at Raiz Invest, the former Acorns Australia, both as a micro investing platform and a company recently listed on the ASX. What's it worth? Take a guess.
Banks compete aggressively in many products, such as housing loans, but bank retail FX rates have always been pathetic. As I write this, the wholesale AUD/USD is 0.7419 and the retail rate from a major bank is 0.71. So A$100 buys US$71 at a branch instead of US$74, a difference of over 4% and a costly start to a holiday. Matthew Hayja uncovers the choices for a better deal.
The $1.6 million pension cap opens a number of financial planning choices, and Graeme Colleyand Emma Partenza explain how to contribute for a spouse with lower balances. Julie Steedalso shows how disability insurance works, something we all hope we don't need but might.
Longevity? 120 years is just the start
Few retirees know how long their money needs to last, and the doubt causes many to live frugally. Adam Curtis examines the dilemma that sequencing and longevity risks create.
In the King James Bible, 2 Kings 25:27, the King of Babylon releases the King of Judah ...
"And set his throne above the throne of the kings that were with him in Babylon;
And changed his prison garments:
And he did eat bread continually before him all the days of his life.
And his allowance was a continual allowance given him of the king, a daily rate for every day, all the days of his life."
Average life expectancy in biblical times was less than 40 years, so the cost of this promise was probably not great. But in a presentation last year, Hamish Douglass of Magellan said that medical advances would allow people to live to 500. What about 1,000 years? While scientists do not unanimously support the claims of Ori Eyal, it's thought-provoking for how long retirement may last some time in the future.
Also looking into the future, the White Paper from MFS Investment Management is 'Dawn of the Urban Epoch', with the consequences for investing in an increasingly urbanised world.
ASIC on property spruikers for SMSFs
ASIC is watching SMSF service providers closely. The regulator recently found 90% of advice given to SMSFs was non-compliant and 30% risked disadvantaging the client. There was also a focus on 'one-stop shops' for the purchase of geared property through SMSFs, with groups of agents, lenders, brokers, developers and financial advisers all working together, even when a property was not suitable. So we reprise my article published in 2013 where I attended one of these spruiking seminars, when I was shocked by what happened. It's taken five years to 'crack down'.
A reminder that some new super regulations came in last week, including topping up unused $25,000 concessional limits over the following five years for super balances less than $500,000, and the new downsizing rules for people over 65 to make a non-concessional contribution.
Mark your diaries for 6 August 2018. The Financial Services Royal Commission has asked 30 superannuation funds to make a director available to give evidence. More sweaty palms.
Graham Hand, Managing Editor
Edition 262 | 13 Jul 2018 | Editorial | Newsletter