All Ords Report 24 August 2017

Recent research released by Investment Trends indicates that Self-Managed Super Fund (SMSF) trustees are now focussed on growing their retirement savings, but are they well equipped to do the job?

The data indicates that 57,000 trustees are now opting for a more aggressive approach to their investments, compared to just 37,000 in the prior year.

Also, it’s important to note that on balance, in each of the past four years, the number of SMSFs have increased by around 20,000, which demonstrates that more Australians are wanting control of how and where their super money is invested.

The fact that a greater number of trustees are choosing a more aggressive approach with their investments is not necessarily raising a red flag, however, trustees need to ensure that they operate their superfunds in accordance with the legislation and have the knowledge to properly manage the risks when making investment decisions.

The concern is that SMSF trustees are still not required to be properly educated in the areas in which they invest super fund capital. Therefore, I believe that many trustees do not fully understand the risks, particularly when it comes to shares.

In my opinion, something needs to change before we see another GFC-like event. Human nature being what it is, I believe that those who are uneducated in how to buy and sell shares will eventually be caught in the rush, believing that they are equipped to make the necessary decisions when many are not. For the uneducated, the hardest decision to make is when to sell.

How do I know this? My source comes from talking to thousands of people. Most tell me they know when to buy a share but very few know when to sell. However, the issues are broader than most having no or little knowledge about how to make a good decision to sell.

I spoke with a lady yesterday who was using a broker to select stocks for her. She mentioned that he made lots of recommendations to buy and but none to sell. One of the shares in her portfolio had fallen by around 35 per cent.

I asked her how was her risk being managed and why had she agreed to buy this particular share?

To allow her to remain anonymous, let’s call her Liz. Liz said she had questioned the recommendation by the broker but he indicated that the company was a turn-around story.

I looked at the chart and explained what I could see. She was completely surprised to learn that the price of the share had been falling when he recommended it to her and it indicated that price was likely to continue to fall. I explained that if a share is falling in value like this, it means that the big institutions are not buying, so why would you risk your capital by investing in it?

All the gains made on a few shares had been eroded by this one investment. I’ve seen companies like this fall to almost nothing. This is where someone’s opinion, and not having the knowledge to understand the risks, can be very costly.

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Liz admitted she was completely in the dark. She believed that the broker would tell her when to sell, but the reality is that brokers make recommendations and receive commissions from transactions. As the clients decide whether or not to take up the recommendations, he’s not responsible, nor are brokers usually qualified to manage the risk on the investments. The reality is that he may have very little knowledge to do this as he’s a broker, not a risk manager, so it is important to understand the difference. Sadly, so many people mistakenly run their portfolios this way.

What do we expect in the market?

Amazingly, the Australian market continues to trade in the sideways range that began in June 2017. The positive news is that last week market activity pushed the All Ordinaries Index (XAO) above 5840 points to 5852.7 points before it fell away towards the end of the week, as intra-day traders closed positions.

In a previous report, I mentioned that the market must trade strongly above this level to confirm the next rise will commence in the current quarter. Therefore, I’m still waiting for this move to occur.

The Hang Seng (HSI) has pushed strongly higher over the past few months and therefore I had expected our market to follow during the current quarter. That said, until the Australian share market falls below the current sideways range (5705 points) the potential to push higher exists.

The XAO will be the last of the major indices to make its ascent. While time is running out for a low to occur, if the next move is lower the fall is likely to be short and sharp, prior to the next rise occurring.

Reporting season in Australia is more than halfway through and analysts are focussed on 2018 earnings estimates. Interestingly, this time last year the overall earnings estimates for the Australian share market were downgraded. Given this, you are wise to take this into account before making a judgement about how positive company estimates for next year appear. Banks, Utilities and Materials have delivered steady results.

Global news

US reporting season is almost over, with more than 90 per cent of S&P 500 companies having reported. Statistics from Thomson Reuters indicate that around 74 per cent of companies exceeded earnings estimates and around 70 per cent have beaten revenue expectations. These figures exceed historical averages, which indicate that US companies are performing well.

The total solar eclipse this week in the US is a once in a century event, which couldn’t be more timely, given that it has provided a good distraction from political tensions between the US and North Korea. People came out in droves in the US, having purchased special glasses, to safely witness the two minute spectacle. Quite a windfall for the company supplying the glasses!

Dale Gillham is Chief Analyst at Wealth Within