By Tim Hewson
19 December 2008
The recent 1 per cent Official Cash Rate (OCR) cut by the Reserve Bank of Australia (RBA) to just 4.25 per cent, backs up the theory that the RBA feels the Global Financial Crisis's (GFC) impact will bring on a global recession, the true affects of which will soon be felt here.
Having previously indicated that September's OCR reduction of 1 per cent was not setting precedence for further cuts of the same magnitude, the RBA have rapidly changed tact and are now doing whatever they can to stop Australia also being sucked into the global recession vacuum.
The recent RBA move represents the fourth consecutive interest rate cut in as many months after seven years without a single decrease.
The OCR has also been cut from it highest level in almost 12 years, and after 12 consecutive increases, to its lowest level since the conclusion of the tech-wreck seven years ago.
In fact in the past four months, we've witnessed the complete eradication of every rate hike accumulated in the past five and a half years.
So how deep is it?
In his recent RBA Monetary Policy Statement, Governor Glenn Stevens provided a very clear indication of just how bad things are when he stated that the 'financial market sentiment remains fragile,' and the 'likelihood of below-trend growth in the global economy was likely to result in a prolonged period of economic activity,' (a global recession).
As a result, the backwash from the GFC now forced the RBA 'to take monetary policy to an expansionary setting,' in a very definitive manner.
The Australian Bureau of Statistics (ABS) recently released the Gross Domestic Product (GDP) figures for September 2008 and reported growth of only 0.2 per cent. Seasonally adjusted, the economy only grew at a rate of 0.1 per cent and a disappointing 1.9 per cent for the year.
According to RBA figures, GDP growth has basically halved over the course of 2008 and most economists now expect it will worsen over 2009.
The Executive Summary from the International Monetary Fund's (IMF) World Economic Report states that the global economy is firmly entrenched within 'the most dangerous financial shock in mature financial markets since the 1930's'.
And although many economists have moved on from Great Depression comparisons due to global Government intervention, there is no doubt the magnitude in which the world economy decelerated severely damaged the very infrastructure of US and European banking and financial systems.
And as a result global market confidence has shifted to the point that it will likely change the way banks fundamentally operate, Governments intervene and people invest for the next decade.
Managing expectations
GFC aside, one of the past year's most interesting impacts has been the very visible impact on investor psyche.
Often renowned for buying high and selling low, it is a well-researched fact that investors generally get emotionally caught up in the emotion of market rise and falls.
A recent Investment Trends and Endgame Communications survey conducted during the GFC's height concluded that Australian investors are likely to DIY when it comes to equities and managed funds.
Often disenchanted with financial advisors during times of crisis and volatility, investors seek out more efficient, cost-effective saving methods in an attempt to improve returns.
In a recent DIY Investor study, conducted by RaboPlus and Celcius Research, the major issues around managed fund investments included a perceived lack of control and transparency, plus additional fund manager fees.
Having recently been slaughtered by the markets, 30 percent of respondents generally feel that by simply researching stocks on the Internet and in newspapers, they will make better judgements than the professionals who live and breath this stuff daily.
More importantly, these investors honestly believe they can beat the market.
The Investment Trends research also found that whilst a further third of those surveyed currently use a financial advisor, a staggering 74 per cent admitted that friends and family often influence their financial decision making process.
After digging a little deeper, it appears a lot of these figures can easily be linked to the degree of communication investors feel they receive from fund managers.
Of the investors who felt they were receiving enough information, only 5 per cent suggested they were reportedly considering switching investments.
By contrast, 36 per cent of investors who felt they were not receiving enough information were considering switching their investment.
Pleasingly, 75 per cent of all respondents confirmed they were continuing to take a long-term view on their investment portfolio, despite interim volatility and the GFC impact.
Further figures show that 52 per cent of Self Managed Superannuation Fund (SMSF) trustees were actively seeking value in the market, whilst roughly 70 per cent believed the economic downturn is close to its cyclical bottom.
Do you want the good or the bad news?
The bad news is that recent GDP figures, as well as RBA and Government statements and their actions, indicate that the Australian economy is about to get significantly worse - and stay there for most (if not all) of 2009.
The good news is that investors now have even more reason to revisit their long-term investment objectives and consider alternative investment options.
And the most likely beneficiary of the once bitten, twice-shy DIY investor will likely be the fund manager.
In terms of fund mangers their immediate appeal is obviously diversification and allowing the investor to easily avoid the pitfalls of poor stock picking and market timing. For more on defensive investing in volatile markets read April's Positive Interest article, 'The smart way to invest in a bear market.'
The benefits of investing in managed funds are many, but to put them into the context of the current market environment, or for those that believe we are close to the bottom of the market cycle, managed funds can offer many important opportunities for both the novice and the professional investor:
Diversification: Diversify and minimise risk. Managed funds basically provide investors with the ability to spread their portfolio across a broad range of asset classes, fund managers, investment strategies, markets, geographic locations and currencies as well as stocks. Ultimately, by diversifying their portfolio, investors will be able to mitigate the impact of a single under-performing asset, plus pick a fund or range of funds that best suit their risk appetite.
Economies of scale: The pooling of investable funds generally allow the fund manager to buy assets that would be unattainable to an individual investor - such as an office block - whilst lessening the cost of buying and selling. Pooling also provides exposure to a broader range of assets.
Access to global markets: Since Australia's Stock Market represents roughly only 3 per cent of the global market, accessing investment options beyond our borders provides a far wider set of opportunities.
Currency and risk management: Having a professional fund manager implement a currency and risk management overlay on a portfolio relates to the costs and administration often involved in hedging global investments in multiple currencies. The importance of an effective currency and risk management strategy has been vitally important over the past twelve months as the global market has ridden a rampant wave of ups and downs on an almost daily basis.
Professional management: Managed funds are not quite a set and forget strategy, but you are outsourcing the day-to-day decision making and implementation to global teams that do this for a living, not just a past time. Most good fund managers also have skin in the game (their own money invested) and also follow strict investment guides and objectives dictating what they can and can't do with a particular fund. The more accurately a fund manager manages their portfolio in line with their stated objective, the easier it is to select fund managers and funds from a level playing field. Ultimately, the lower the tracking error (movement away from their benchmark objective), the better.
Administration: The painstaking role of having to make, track, settle and confirm, plus buy and sell trades can often mean that investors easily lose focus of what's important. By handing over these responsibilities investors can save time and money and enjoy an increased degree of comfort knowing that when they actually find the right investments, they can be certain they won't miss out on the opportunity because of settlement errors, mistaken trade quotes, pricing or any other mishaps.
Regular investments: Most managed funds also let investors make smaller and more regular investments that help them avoid the pitfalls of market timing. More importantly, this investment approach also allows investors to more easily traverse the ups and downs of even the most volatile markets by potentially reducing the costs of investing and improving returns.
Finally, to anyone fortunate enough to be taking time off over the holiday season, make sure you spend a quantum in solace, and away from the persecution of the GFC - just to keep your sanity in check.
At the very least, ease up on the psyche, take care and take a load off over the holiday season. And if you haven't already, consider outsourcing the investment decision making and management processes to professionals.
It's less tiresome, time consuming and stressful than going it alone - and ultimately it can save you money. Most importantly, it allows you to focus on the most important things in life...like opening your Christmas presents!
Until next year, happy investing!
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