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									                                                                                                                                      Spring 2010

                                           Live well. Sleep well.                                                  First Samuel is a boutique wealth


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Jargon                                        Two choices: “Make a killing” in shares.
Buster!                                       Or “Live well. Sleep well”
                                              by Anthony Starkins, Founder & Director
Tax benefit
A modest fiscal advantage                      For many investors, the lure of “making a
                                              killing” on the stock market is the essence
reluctantly and belatedly                                                                               For many investors, the lure
                                              of wealth management.
endowed upon an investor
by the Tax Office.                              Wrong. That is a sure way to lose money.                  of “making a killing” on the
                                              The current nervous market times are, sadly,
                                              causing investors to reconsider the value of
                                                                                                         stock market is the essence
Yield                                         investing in shares. Perhaps because they                     of wealth management.
                                              cannot see how they can “make a killing”
In medieval times, a cry of                   or even a good capital gain.
surrender. In modern times                                                                         4. In what will possibly be a lower capital
                                              If they do so, they have forgotten the reason
that piecemeal sum that                       why they invested in shares in the first place.
                                                                                                      growth outlook in the next few years
a company surrenders to                                                                               (well, lower than that which we have
                                              Or maybe they have invested in the wrong                recently experienced) the benefit of a
shareholders after it has paid
                                              type of shares.                                         steady and growing income stream to
undeserved bonuses to its                                                                             augment lower capital growth is obvious.
                                              Remembering that shares provide the
senior executives and directors.                                                                   5. Tax benefits. Many income streams, such as
                                              opportunity for both income and capital
                                              growth – let me explain.                                dividends, provide franked income. That is,
Investment                                                                                            simply, the government pays you back for
                                              Importance of sustainable                               the company tax the company has already
flexibility                                                                                            paid on your stream of income. Interest on
                                              and growing dividends                                   bank deposits are unfranked.
The ability to have one’s                     There are six reasons why you should invest          6. High income with a capital growth option.
investments contorted by an                   in income producing investments.                        Shares are now (generally) offering yields
accountant so as to produce                   1. In the long-term, the value of an investment         higher than those available from cash or
the optimal taxation                              today is the “net present value” of its future      term deposits. So you have the comfort
outcome.                                          income stream. Any capital gain a stock             of a steady and attractive income stream.
                                                  makes is derived from its expected future           And, there’s more: the upside of the capital
                                                  dividend stream.                                    growth of the shares.
“Making a killing”                                Logically, the higher the dividends and the         This is especially true when the P/E of stocks
The way every speculator                          growth in those dividends the higher will be        is so low – that is to say, the shares are cheap.
                                                  the share price.
describes what he is doing
in a share market boom.                           Of course, short term price moves will           So, do I just invest in high
                                                  often occur because of changes in sentiment      yielding investments?
Whether he is making a                            or non-fundamental factors. But, as recent
killing or not.                                   events have shown, it is folly to have those     No. It is not just a question of investing
                                                  factors as the basis for long-term investing.    in companies that have a high current
                                                                                                   dividend yield.
                                              2. High income gives you investment flexibility.
Sustainable                                       With the income you have the choice as to        There are two major factors to consider:
What every child believes                         what you do with it. You can spend it (!),
the source of his/her pocket                      reinvest in the same stocks or invest in         Increasing income
                                                  other stocks.                                    Firstly, the income must be increasing. That is,
money is.
                                                  It is this flexibility that allows you not to     the profits of the company must be increasing
                                                  sell your investments in down markets to         so that the dividends are increasing. This is
                                                  meet obligations.                                one of the problems with so-called fixed
                                              3. You have the benefit of the compounding            income investments. The income is fine,
                                                  effect of the dividends. So, during the GFC,     but it doesn’t grow.
IMPORTANT NOTICE
Any advice contained in this newsletter           as we at First Samuel invest for income, we      So what you find is that inflation erodes your
is of a general nature only and has been          were able to use the investment income to        income and your capital. Assume inflation at
prepared without taking into account              reinvest back into the market.                   3%. A $100 investment earning, say 6% over
your personal objectives, financial                                                                 10 years is always going to pay $6 p.a. income.
situation or needs. Because of that,              This enhanced our long term investment
before acting on any advice in this               return by almost 1% p.a.                         But, here’s the rub. Not only does each $6
newsletter, you should consider whether                                                            income buy 3% less each year, after 10 years
it is appropriate for you having regard                                                            the original $100 will now be worth just $73.
to your objectives, financial situation
and needs. Further, we recommend you
seek personal financial advice before                                                                                                ...continued on page 4
acting on any advice in this newsletter.
                                                                                                                    www.firstsamuel.com.au
2 l First Hand l Spring 2010 Edition




Estate planning: Don’t risk your wishes not being fulfilled
by Duro Rudic, Senior Client Strategist

Too many people waste their wealth because
of poor estate planning, or they put off
estate planning until it’s too late. Is this you?               Estate planning is ensuring that your wishes about your
The risks of poor estate planning include:                       wealth are met as to (a) who receives what; (b) in what
                                                                          proportion, and (c) under what circumstances.


So why accumulate wealth, or be
                                                                                    Wills                                             Superannuation
meticulous in its gathering, if your wishes                                 Testamentar Trusts
are not going to be fulfilled or your wealth                                           Curr
diminished because of poor planning?
                                                                                                                                                           e
More than a Will
                                                                                                         Estate Planning
Estate planning is ensuring that your wishes
about your wealth are met as to (a) who                                  Powers of Attorney                                      Other Considerations
receives what; (b) in what proportion, and
                                                                                                     A                                            Trusts
(c) under what circumstances.
                                                                                                     A
But just preparing a Will is not enough;                                                             A
estate planning is much more.
It encompasses a collection of risk
management strategies employed to
mitigate potential risks when a person
dies or is unable to deal with their assets,                 to beneficiaries that may be, for example,                 Superannuation Assets
e.g. as a result of incapacity or illness.                   in a disharmonious relationship,
                                                             professionally employed or a business                     A Will cannot dictate how your super
For high worth individuals this is not a                                                                               benefits are distributed when you die.
matter of buying a do-it-yourself-kit on                     owner subject to a higher risk of legal
the internet.                                                liability, being sued or made bankrupt,                   Many super funds offer members the option
                                                             or a beneficiary incapable of or                           to complete a Death Benefit Nomination,
The adjacent diagram highlights some of the                  inexperienced in managing money.                          which may be ‘binding’ or ‘non-binding’ on
matters you should consider in developing                                                                              the trustee of the fund, as to how they wish
your estate plan. Each aspect cannot be                                                                                to distribute their benefits.
discussed in this limited space, but its
                                                             Non-Estate Assets
inclusion serves to illustrate the connection                It is important to understand that some of                In this regard, a self-managed super fund
between decisions you need to make.                          your assets will not form part of your estate             may offer greater flexibility and certainty
                                                             and hence cannot be distributed by a Will.                compared to a retail/industry super fund
                                                             For example, superannuation assets and                    (some only offer Non-Binding Death
Powers of Attorney                                           wealth in a discretionary family trust or a               Benefit Nominations). This means that
A Power of Attorney (POA) conveys authority                  private company are not directly owned by                 you decide the disposition of assets, not
to another person to act on your behalf, in a                you, but by separate legal entities.                      the fund trustee.
specific or wide-ranging capacity, e.g. to sign
documents, manage your money, authorise                                                                                Super benefits will pass tax free to a
or decline medical treatment. An Enduring                    Discretionary Family                                      class of people called ‘dependents’ which
POA will continue to have force even if you                  Trust Assets                                              includes a spouse/de facto, a child under 18
lose mental capacity.                                                                                                  or a person financially dependent on you,
                                                             A Will cannot dictate how the assets of your              or with whom you have an interdependent
                                                             family trust are distributed when you die.                relationship. Any other beneficiary will be
Wills                                                        You do not personally own the assets                      liable for tax on a super death benefit3.
Your Will is typically the primary document                  within a discretionary family trust even
that reflects your wishes, and the complexity
and flexibility conveyed in this document
                                                             though you may have contributed all of the                Review
                                                             assets1. Distributions from a trust (capital/             You should review your estate plans every
may need to cater for the different needs                    income) are at the trustee’s discretion. So
and circumstances of your beneficiaries, e.g.                                                                           3 years and during periods of material
                                                             the control over the assets is via the trustee,           change in your circumstances.
are you better to bequeath assets directly
                                                             but ultimately exercised by the Appointor2
to a beneficiary or to create a Testamentary                                                                            Your First Samuel Private Client Advisor
Trust for that beneficiary?                                   (who appoints the trustees).
                                                                                                                       can assist you in integrating your estate
                                                             The trust deed governing the trust                        planning wishes into your overall wealth
Testamentary Trusts                                          will normally contain provisions for a                    management strategy and work with your
                                                             successor(s) to an Appointor who dies or                  legal advisor to ensure that your estate
A Testamentary Trust (TT) is a trust
                                                             loses capacity, so that the exercise of control           planning arrangements are not undertaken
established via a person’s Will upon
                                                             over the trust assets can be transferred.                 in isolation.
death. A TT can offer asset protection


1   With the exception of (a) any undistributed entitlements or beneficiary loan account balance in your name – this value will form part of your estate,
    as too will (b) the value of your shareholding in a private company.
2   The Appointer can hire/fire the trustee without reason.
3   Different taxation treatment applies on super death benefits depending on whether the super fund is a ‘taxed’ or ‘untaxed’ fund.

www.firstsamuel.com.au
                                                                                                                                                     3




US “double-dip”: What, me worry?
by Dennison Hambling, Chief Investment Officer

When taxi drivers start to speak of a               Context                                            We expect this to continue throughout
“double-dip” you know it’s time to worry                                                               this year and this will no doubt disconcert
about something else.                               Now, to put some context into what I               the markets somewhat.
                                                    believe is an erroneous focus on the US,
A double dip recession is when GDP growth           it is worth considering the following              However, when the Chinese feel that
of a country slides back into negative after a      (please understand this is all hypothetical):      they have rebalanced their economy once
quarter or two of positive growth. That is,                                                            more (and, at worst, growth might slow to
there are two recessions in quick succession.       1. What if: US GDP falls by 6%?                    ~5-6% p.a. as seen in the GFC), they will
                                                    ...if China maintains its current growth           look to again step up their moves towards
Or, put another way, the recovery is                                                                   strong development.
“W-shaped”.                                         rate then world economic growth would be
                                                    flat. That is the world can survive a 6% fall       This is most likely sometime in 2011.
So, in view of the current paranoia around US       is US GDP (a very bad recession) provided          They have plenty of financial firepower
GDP and recessions/ depressions/ contagions         China maintains it current growth rate.            and a GDP per person of only US$6,600.
/double dips I thought it would be interesting
to provide some context and hopefully               Or for every 1% GDP fall in the US, China
                                                    must grow 1.6% to compensate on a global           Non OECD: marginal growth
reduce some of the angst you may have.
                                                    basis. And, at its worst, China grew at 6%         impact significant
                                                    during the GFC.                                    The importance of the developing world
The world economy
                                                                                                       (here defined as Non OECD) has risen
The world economy is worth about 70                 2. What if: Europe & US GDP falls                  dramatically in just the past ten years.
trillion US dollars. The US economy is 20%          by 1%?
of the world, and the EU is just a little bigger.                                                      In this time, the world has averaged a
                                                    …China must grow at above 3.3% to keep             growth rate of 4% p.a. However, the Non
The Top 20 countries make up about                  world economic growth positive. Or, put
77% of Global GDP.                                  another way, both the US and Europe must
                                                    fall by more than 3% currently to offset
China is now clearly country #2,                                                                         OECD Members
                                                    China’s current growth rate and create a
ahead of Japan and India.                                                                                1.0
                                                    global recession.
Germany and the UK come after India,
                                                    3. It’s not only about China                         0.8
but fall into the agglomeration of Europe
and hence are not shown separately in               …it’s about BRIC.                                    0.6
the chart.                                          If the Brazil, Russia, India and China               0.4
France is just ahead of Brazil. Then there is a     economies (BRIC) (25% of World GDP)
large gap to Italy, and then a string of others.    grew an average of 5% p.a. (currently very           0.2
Australia comes in at #18, just behind              conservative), the rest of the world could see
                                                                                                         0.0
Turkey and Iran.                                    GDP declines of nearly 2% per year, and we                   2000        2010         2030
                                                    would still have a flat global economy.
                                                    The point is that we must keep our gaze                    Non OECD Members
                                                    firmly on China (and other BRIC economies),                 OECD Members
                                                    not the US, in order to understand what the
   China is now the 2nd largest                     future holds for us (and the rest of the planet)
   country by GDP                                   in an economic sense.                              OECD members have grown at an average
                                                                                                       of 6.1% p.a. versus the OECD member
                                                    Although the news and reality from the             average of just 2.3% p.a.
                                 Europe – 21%
                                                    US (and some of Europe) is most likely
                                 U.S. – 20%                                                            What this means is that over the past ten
                                                    to remain depressing for a long time, it
                                 China – 13%                                                           years Non OECD countries have been
                                                    need not matter to us provided the BRIC
                                 Japan – 6%                                                            responsible for 69% of the world’s total
                                                    economies continue to develop further.
                                 India – 5%                                                            economic growth. This is a huge figure and
                                 Russia – 3%                                                           one that is likely to rise into the next decade.
                                 Brazil – 3%
                                                    But, speaking of China
                                 Others – 29%       At this stage we see the Chinese economy’s         Western world not as important
                                                    growth slowing down from very fast
                                                    (stimulus induced) growth rates to a more          With the significant global growth rates
                                                    measured ~8% p.a.                                  experienced for several years prior to
                                                                                                       the GFC it is natural to assume that with
                                                                                                       the decline in the relative US economic
  If you enjoy reading our thoughts each quarter in “First Hand” then please consider reading          importance the world will suffer a major
  our weekly email “Wry & Dry”. Wry & Dry is a weekly review of wealth management                      economic disappointment.
  matters, through a cynical eye.                                                                      However, the previous analysis clearly
  Wry & Dry was born at the start of the Global Financial Crisis as a means of keeping our             shows that the western world has not been
  clients apprised of how the GFC was affecting them.                                                   as important to growth in the past decade
  It had a strong re-assurance emphasis and focus on long-term investment outcomes.                    as you would probably have thought or
                                                                                                       been led to believe.
  Over that time, and as the markets have recovered, it has evolved to reflect the sort of weekly
  communication on wealth management matters that our clients wish to read. As such, we feel           The logical follow on from this statement
  it would be an interesting read for anyone considering becoming a First Samuel client.               is that the western world is likely to
                                                                                                       become less relevant economically as
  All you need to do to receive “Wry & Dry” is provide your email address in one of two ways:
                                                                                                       we move through this next decade.

      sretallick@firstsamuel.com.au

                                                                                                                   www.firstsamuel.com.au
4 l First Hand l Spring 2010 Edition



Two choices: “Make a killing” in               Spring Twilight Seminars
shares. Or “Live well. Sleep well”
                                               We often hear from our clients that they        Our hospitality will commence at 6pm,
...continued from page 1
                                               have friends and colleagues (not First          with presentations from 6.30pm by our
                                               Samuel clients!) who have not received an       investment and strategy experts. Formal
Dividend sustainability                        adequate wealth management service since        conclusion will be around 7.30pm.
Secondly, sustainability of dividends          the start of the GFC.                           Please ask them to contact Susanne Retallick
is important. In this regard the size or       In response to these concerns we have           on 8610 9222 or sretallick@firstsamuel.
reputation of a company amounts to little.     arranged two Spring Twilight Seminars           com.au to reserve their place and obtain
For example, the myth that Australian          for people who should consider changing         further details. We would also welcome you
banks always pay high or “good”                to First Samuel. The details are below.         accompanying your colleagues and friends.
dividends is, indeed, a myth, as was           If you have friends or colleagues who you       We would value a response as soon as
shown during the GFC. Then, their              believe are not happy with their current        convenient, but in any case at least two
dividends declined by up to 25%.               wealth management adviser or industry super     weeks prior to the Seminar you wish to
And this was compounded by the banks           fund, and who could (should?) be interested     attend. If the dates do not suit, Susanne
issuing more shares, thus diluting the         in considering First Samuel, then please draw   will be happy to arrange a time for us to
existing dividends per share.                  their attention to this opportunity.            separately meet your friends or colleagues.
Often times there are a lot better
companies in which to obtain strong
and increasing dividends.                        Fenix Restaurant, Kew                             Tuesday, 19th October
Banks are only okay when loan growth is
increasing and bad debts are low.                Quaff Restaurant, Toorak                           Wednesday, 20th October
During the global financial crisis the
dividends paid by the companies on the
ASX declined by about 16%. Whereas those
that we owned increased by about 13%.
                                               CIO Conversations (clients only)
This was no accident. By actively seeking      We will once again be holding roundtable        6pm at one of the venues below. Dennison
companies that have growing and                dinners for all our clients to allow them to    Hambling will begin his presentation at
sustainable dividends we were, and are, able   discuss their investments with our Chief        6.30pm with a formal close at 7.30pm.
to add considerable value for our clients.     Investment Officer. Similar to the previous      We shall be sending invitations in the next
                                               CIO Conversations, please join us from          few weeks.
Summary
For sustainable long-term growth,
there is considerable merit in focussing         TBA, Sydney                                       TBA, October
on investments that provide good and
increasing dividends.                            Deco Restaurant, Camberwell                       Monday, 8th November
Then you will get the benefit of both good        Quaff Restaurant, Toorak                           Tuesday, 9th November
income and also long-term capital growth.
                                                 Vivace Restaurant, Brighton                       Wednesday, 10th November
And so to “live well and sleep well.”
                                                 Morning Star Estate, Mt Eliza                     Tuesday, 23rd November



You may not be fully aware of                  Recent additional services:
the breadth of services we offer.               Insurance advice: we have now obtained authorisation from ASIC to provide
Information of these services can              our clients with advice regarding their life insurance arrangements.
always be found on our website.
                                               Margin loans: as required by recent changes to regulations, our licence has
You also may not be aware of the               been extended to allow us to continue to provide advice regarding margin loans.
number of Associates we have.
                                               Separately Managed Accounts (SMA): for those soon to be clients with
So here is our team.                           a smaller but growing investment sum.

                                                                                                       We look forward to
                                                                                                     discussing these, plus
                                                                                                  our many other services,
                                                                                                  with you at either one of
                                                                                                   our upcoming events or
                                                                                                  via a telephone or email
                                                                                                             conversation.



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