Investment Strategies

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					                                   Autumn Edition 2007

Investment Strategies

Economic & market commentary
Can the carry trade carry on?
Complying pension window closing
Product review - MSF Water Fund
Welcome to the re-launched Investment
Strategies Newsletter.
As you may be aware, it was our intention to move to a national newsletter
going forward. However due to a variety of reasons, the major one being
restrictions within the Corporations Act, we have decided to continue
with our current format but give it a new look.

The approaching financial year’s end and new financial year represents one
of the largest changes to the superannuation and retirement system since
it was introduced. We have devoted significant space within our previous
newsletters to the opportunities that these changes represent and I encourage
anyone that has not reviewed their position in light of these very generous
concessions to do so before 30 June.

The recent volatility we have seen in Australian and world stock markets
has proved to be a timely reminder that markets will behave erratically
and that long term investing requires discipline in both rising and falling
markets. This is probably best summed up by the Oracle of Omaha, Warren
Buffet, who once defined investing as ‘The transfer of wealth from the
impatient to the patient’.

Daniel Minihan
Associate Director - Wealth Management

Economic & market commentary
Global economy

U.S. Federal Reserve Bank officials      of the Euro zone economy. In spite
were somewhat confounded in March        of this economic robustness, at the
with a raft of mismatched economic       March monetary policy meeting the
data painting a confusing picture.       ECB raised interest rates by 0.25%
There was continued strength in the      to 3.75%, the seventh increase since
employment market and persistent         December 2005, although this was
inflationary pressures. These were       widely anticipated.
then counterbalanced by a slump
in investment spending and rising        The emergence of China as a large
mortgage delinquencies emanating         player in the foreign currency markets
from the sub-prime housing sector.       was highlighted by the Central Bank
In a speech to Congress in late          governor of China, Zhou Xiaochuan,
February, Federal Reserve Chairman       who advised that as a result of its
Bernanke forecast the economy            growing trade surplus, China has
to grow 2.5% to 3% this year             the largest foreign exchange reserves
and 2.75% to 3% in 2008.                 of any country in the world. As a
                                         result, in March they announced
In Europe, the ECB’s economists raised   the establishment of a new body to
their GDP forecasts for this year by     manage a portion of these US $1,000
0.3% to 2.5% and increased next          billion-plus holdings.
year’s forecast by 0.1% to 2.4%,
signalling a belief that European        Recent events involving the so called
demand will remain stronger than         ‘Axis of Evil’ with the capture of British
the estimated potential growth rate      Marines by Iran, the worsening
situation in Iraq and the failure of         Most overseas markets held ground
North Korea to meet its latest nuclear       over the quarter, which is a pleasing
deadline, continue to provide                result given the 9% fall in Shanghai
instability to the geopolitical situation.   in February that led to larger falls
This, coupled with reports of closer         around the world.
collusion between Iran and North
Korea on missile development, adds           Outlook
further complications to a delicate state
of affairs.                                  Last quarter we noted that a correction
                                             in the markets was coming, which
With the U.S. Presidential election          arrived in February. The fact that
now only 18 months away, candidates’         this was recouped by the end of
policies on these three issues will not      the quarter indicates that it was
only shape the election, but perhaps         more likely a pause, rather than the
also the landscape of both the Middle        correction we have been looking
East and the Korean peninsula.               for. With the continued strength
                                             in Australian and Global economies,
Domestic economy                             such a correction could be some
                                             time in coming. Tensions in Iran
Australia’s economy grew twice as            and the Middle East still appear to
fast as forecast in the final quarter        be the potential catalyst for such a
of last year as consumers and                correction and should be monitored.
companies increased their spending
despite the worst drought in over
a century making a severe dent in
agricultural exports.
                                             Can the carry trade
The Australian dollar broke through
                                             carry on?
the 80c barrier and reached its
highest levels in 10 years, with some        With the appreciation in the Japanese
predicting it could reach parity with        Yen and a view that monetary
the U.S. if the resource boom is             policy will be tightened over the
sustained.                                   coming years, there has been much
                                             discussion lately about the Yen carry
Record global commodity prices
                                             trade and the implications it will have
continued to stimulate investment
                                             on financial markets. Before we delve
and employment in mining and
                                             into this subject let us first discuss
infrastructure projects, causing a
                                             exactly how the ‘carry trade’ works.
positive flow on effect on construction
and consumer spending. This is               Put simply, it is a strategy whereby
particularly the case in WA, which           an investor borrows money in one
is experiencing a sustained property         currency (Yen) and then converts
boom never seen before.                      this to another where it invests at
                                             a higher rate than which the monies
Investment markets                           have been borrowed at. For example,
                                             let’s say an investor borrows 1,000
Australian shares performed well
                                             Yen from a Japanese bank, converts
over the March quarter, showing
                                             the funds into Australian dollars
resilience against the sell-off in late
                                             and invests into a term deposit for
February which saw over 6.5%
                                             the equivalent amount. Let’s assume
wiped off the value of the market.
                                             that the deposit pays 5.8% and the
Movements were:                              Japanese interest rate is set at 0%.
                                             The investor stands to make a profit
S&P 500 (U.S.A.)                0.18%        of 5.8% (5.8% - 0%), as long as
                                             the exchange rate does not change.
FTSE 100 (U.K.)                 1.40%
MSCI Asia (Ex Japan)            0.81%        If a leverage factor of say 10:1 were
Nikkei 225 (Japan)              0.36%        used for the borrowings (which is not
                                             uncommon), then the profit will be
ASX 200 (Aus.)                  2.80%        magnified 10 times to 58%.
The size of the carry trade market             However many believe that this
is quite astonishing at an estimated           year marks the beginning of an
$335 billion which is bigger than the          unwinding of this carry trade and
Australian economy. The February               that it will pose a significant threat to
sell off in markets triggered a 4%             financial markets. While some analysts
one week rise in the Yen as some               such as Howard Simons from Bianco
investors bought the currency to               Research in Chicago, believe that “the
repay their positions, which is of no          unwind, if its starts to occur, is not
surprise as this type of movement              going to be a one week occurrence
has been seen before.                          but rather over a long period”, others
                                               disagree believing the impact may be
During the Asian Financial Crisis in           quicker. Patrick Fearon, an economist
1998 the Yen jumped 20% in two                 with A.G. Edwards & Sons, noted
months. But more astoundingly                  that “even if the Bank of Japan (BOJ)
12% of this occurred in 72 hours,              holds rates steady—as it is widely
as investors rushed to buy Yen in              expected to do —a rise in the Yen
order to repay their carry trade               itself could spark a self sustaining
borrowings. In order to convert to             unwinding of the carry trade”. But
Yen, investors needed to firstly sell          will the Bank of Japan actually hold
down the assets they owned and                 rates steady? Takashi Miyachi, a
then convert the local currency                senior currency dealer in Tokyo at
to Yen. The follow on effect of                Mizuho Corporate Bank Ltd, is not
falling stock markets, asset prices            so sure.
and currencies was one of the key
contributors to the crisis.                    Miyachi noted on April 19 that
                                               “there have been some rumours
One of the key determinants in the             that the BOJ will raise rates in May,
carry trade is the rate spread between         especially among foreigners”. This
Japan and the country that the                 is despite Governor Toshihiko Fukui
investment is made. Currently this             and his policy board colleagues voting
spread is still relatively healthy             unanimously to hold the key overnight
with the interest rates in Japan               lending rate at 0.5 percent on April
around 0.5% compared to 6.25%                  10. Although it should be said that
in Australia, 5.25% in the U.S. and            Fukui did note that spending among
 3.75% in Europe (refer to economic            Japanese households rose in the first
  commentary). On the basis of this            two months of 2007 after declining
    spread, some argue that the carry          every month last year, which is a key
     trade will continue allowing an           factor in interest rate policy.
      orderly exit of Yen positions over
        the coming years, should Japan         So what does this mean for world
         raise rates.                          markets? Jonathan Allum, a strategist
                                               at broker KBC, believes the fallout
           Further support is lent to          is “potentially endless”. It could lead
             this argument as evidenced        to the serial collapse of speculative
              by the quick recovery of         bubbles all over the world, including
                the ‘trade’ in the wake        high-yielding and second-tier
                  of the Asian Financial       currencies, trophy real estate, high-
                    Crisis. Whilst there was   yielding bonds, art and possibly even
                     a short term rush to      gold. This is more likely a dooms day
                      buy Yen and repay        scenario and the more likely result
                       loans during this       would be a gradual unwinding of
                         period, after the     positions as Japanese interest rates
                         dust had settled,     are normalised with those of other
                         many investors        major economies.
                     re-borrowed but
          rather than investing into           However if the doom sayers are
speculative markets looked for more            right, there could be quite a carry
stable and less volatile investments,          on indeed.
at least initially.
Complying pension                         effectively increased the amount of
                                          assets an individual can have whilst
                                                                                        The two major changes to
                                                                                        superannuation that will
window closing                            still being entitled to a pension, by
                                                                                        impact complying income
                                          reducing the taper rate reducing
                                          from $3 to $1.50 for every $1,000             streams are the abolition
Prior to the sweeping superannuation      over the minimum assets threshold.
changes of last May, complying income     The table below shows the impact              of RBLs on 1 July and the
streams were an effective investment      that this change will have.                   removal of the 50% assets
for many individuals that provided
a variety of benefits. These benefits
                                          This change to the thresholds                 test exemption on 20
                                          means that people who previously
included:                                                                               September 2007.
                                          were ineligible for the pension may
• Access to the higher Pension            now be eligible. In addition, those
   Reasonable Benefits Limit (“RBL”)      that may have needed to make a
                                          large investment into a complying
• 50% exemption on the Pension
                                          pension may now need to reconsider
   Assets Test
                                          their options given the increase in
• Depending on the product, a fixed       thresholds.
   pension payable over a fixed period
   or a person’s life expectancy.         It should also be noted that it is not just
                                          the pension income that is received
The two major changes to super-           when there is a pension entitlement.
annuation that will impact complying      For those who qualify for the age
income streams are the abolition of       pension, they also receive a Common-
RBLs on 1 July and the removal of         wealth Government Health Care
the 50% assets test exemption on 20       card which provides access to medical
September 2007. For some individuals      and pharmaceutical benefits at heavily
the opportunity exists between now        reduced rates. As a person gets older
and 20 September to commence a            and potential medical costs increase,
complying income stream that will         this can be a significant benefit.
potentially increase the level of
pension that is received.                 As noted above the benefits of
                                          investing into a complying pension
However the key disadvantage of           need to be weighed up against the
using a complying pension is that         loss of access to capital. In recent
it removes the pensioner’s access to      times, the most popular type of
their capital. The appropriateness of     complying pension has been a relatively
locking up capital for the remainder      new product called a Term Allocated
of a person’s life (or life expectancy)   Pension, commonly known as a TAP.
needs to be carefully weighed up
against the benefits of Government        A TAP differs to previous complying
pension entitlements, as once             pensions in that whilst a pensioner
commenced the monies cannot               does not have access to the capital
be accessed by the individual.            during their lifetime, upon their demise
                                          any remaining balance was paid out
In addition to the removal of the 50%     to their dependants or estate.
assets test exemption for complying
pensions, the Government has

                                      Minimum        Maximum           Maximum
                                                     (Current)         (20 Sept.)

 Single homeowners                    161,500        334,250           507,000
 Single non-homeowners                278,500        451,250           624,000
 Couple homeowners                    229,000        516,500           803,000
 Couple non-homeowners                346,000        633,500           920,250
In addition, pension payments vary      However, it is through this work that
each year depending on the balance      we believe this product represents an
of the account at the beginning of      excellent opportunity to invest into a
each year allowing a pensioner to       unique product that has the potential
access the growth in their account      to capitalise on growing demand for
balance, rather than losing it to the   water and the resources that support it.
life company.
                                        The objective of the fund is to generate
The superannuation simplification       capital growth for investors through
program has made the TAPs redundant     the creation of an internationally
in the long term, but between now       diversified water fund. The fund
and 20 September, it could be a         portfolio will include investments
useful tool to help those who want      with global water fund managers
access to Government benefits to        and direct investments in the
structure their personal affairs for    securities of water related companies.
maximum effect.                         The fund’s responsible entity and
                                        manager is MFS Aqua Managers
                                        (wholly owned subsidiary of MFS
The MFS Water                           Group Limited).
Fund                                    The MFS Water Fund will initially
                                        invest funds with fund managers in
Our product review this quarter         Europe and the USA who specialise
has a different aspect to our normal    in the global water sector. The Water
reviews in that we are reviewing        Fund will invest in funds managed
a product that Moore Stephens has       by these fund managers and may
been involved in developing. As such,   also utilise separately managed
we disclose up front that we act as     accounts. MFS Aqua have identified
advisers to the Fund Manager and        and conducted due diligence on
generate fees from the due diligence    twelve fund managers who specialise
and taxation advice that we provide     in water related assets. MFS Aqua will
to them.                                construct a portfolio of investments
aimed at maximising the capital return to investors while providing
diversification geographically, by industry and by investment strategy.

The MFS Water Fund is positioning itself to take advantage of the major
shifts in the perception of water. The valuation of water is creating investment
opportunities for businesses operating in the global water sector and water
markets are beginning to emerge in sophisticated investment environments.
This is leading to more market based supply and demand mechanics and
investment opportunities are growing at an unprecedented rate.

Access to managed funds specialising in water assets is generally restricted
to institutional and high net wealth investors. MFS Water Fund gives retail
investors the opportunity to invest in this new and growing sector.

Fund type                  Open ended.

Fund suitability           Suitable for investors seeking capital growth, exposure
                           to water related investment, absolute returns and a
                           3-5 year investment horizon.

Minimum investment         $10,000 and then in increments of $1,000.

Denomination               Australian dollars.

Borrowing                  Only for hedging currency risk.

Redemptions                From 31 March 2008.

Risk                       The fund should be considered a speculative investment
                           and therefore is high risk.

If you would like to attend an information session on this fund please contact
Carolyn Sottosanti on 9614-4444 or
daniel minihan                                                     Carolyn sottosanti
B.Bus C.a. F Fin aFPa                                              Pa to Wealth management
associate director                                       
                                                                   moore stePhens ConsultinG
tara jones                                                         (melB) Pty ltd GdipFinPlan F Fin
                                                                   aBn 34 006 341 386
senior Consultant                                        level 14, 607 Bourke street
                                                                   melbourne viC 3000
john BarBour
                                                                   tel: +61 3 9614 4444
                                                                   Fax: +61 3 9629 5716
senior Consultant
                                                                   australian Financial services licence 236556
joshua davis
                                                                   Principal member of the FinanCial

                                                                   PlanninG assoCiation of australia.

imPortant: the information contained here in is prepared on the understanding that it neither represents nor is
intended to represent advice or that moore stephens Consulting (melb) Pty ltd, moore stephens melbourne Pty
ltd or moore stephens Charted accountants is engaged in rendering legal or professional advice. the information
is of a general nature only and has been provided without taking into account your objectives, financial situation or
needs. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether
the information is appropriate in light of your particular needs and circumstances.

an independent member of moore stephens international limited – members in principal cities throughout the world

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