The BFG Report

Welcome to the Spring Edition of the BFG Report.

BFG Launches New Website !

This quarter marks the launch of our new website.

Our website address remains the same www.bfg.net.au with new added features such as:

  • A fresh easy to navigate format
  • Is mobile device friendly
  • Latest News – video, media and newsletters
  • Resources including easy to use tools and calculators

As before, our website provides the access point to My Portfolio – your online avenue to your investment portfolio.

As always, we welcome any questions and your feedback via mail@bfg2.webstage.com.au

Do You Know….What Indexation Is ?

To understand what indexation is, it’s best to first illustrate why it is necessary.

Over time, the cost of goods and services generally increases — this is called inflation. Consider a person receiving a social security benefit such as the age pension. Imagine if the age pension stayed the same but the prices of goods and services increased over time; the buying power of the age pension reduces — in other words, it buys less. Instead, the maximum amount of the age pension is increased twice yearly to keep up with inflation and to enable pensioners to buy the same amount of goods and services each year.

The percentage increase is based on legislated criteria. One such criterion is the increase in the consumer price index (CPI). The CPI is based on the price of a basket of goods and services. As the price of the basket of goods and services increases so does the CPI value. Put simply, indexation is the process of increasing the value in line with inflation (which can be measured by the CPI) and helps to preserve the value. Another example of indexation is the increase in an employee’s salary each year, so that the purchasing power of that salary does not reduce.

Other commonly used indexation measures

AWOTE — the figure for average weekly ordinary time earnings is produced by the Australian Bureau of Statistics and is used to update a number of superannuation and taxation thresholds.

PBLCI — Pensioner and beneficiary living cost index which is also considered when indexing age pensions. One thing to remember is that the concept of indexation explained above has nothing to do with ‘index funds’.

An index fund is a style of investment portfolio construction that seeks to replicate the performance of certain market indices — such as the S&P/ASX 200 index that tracks the performance of the top 200 ASX listed companies.

Investment Market Review – Quarter Ending 31 July 2013

AssetIndex1 year return
%
5 year return % paComments
Australian shares

 

S&P/ASX 300 Accumulation index23.184.76Delivering a -1.9% return over the quarter, the market’s weakness was driven by investors’ concern that the US Federal Reserve is nearing its decision to start removing its economic stimulus measures. Resources shares were also volatile amid concerns about Chinese growth. Generally, defensive sectors underperformed the cyclical industrial sectors as investors switched to the oversold industrials in anticipation a rate cut.
Listed property trusts

 

S&P/ASX 300 A-REIT index (property)16.631.17The listed property index was one of the worst performing sectors over the quarter. Typically, the sector’s dividend yield is measured relative to the Australian 10-year bond yield, which increased to 3.7% pa over the quarter. This made the 5.5% dividend yield (return) of the A-REIT sector less attractive in comparison, causing some investors to sell.
International shares

 

MSCI World accumulation index (AUD)46.165.87Over the quarter, international shares returned 19.7% in Australian dollar terms, driven mainly by the weakness of the Australian dollar. In June, fears of a tapering of quantitative easing led to increased volatility and generally a negative month for international shares. In July, however, shares rose, driven by better than expected growth in the US during the second quarter and stronger than expected results in the US and Europe.
Fixed interest and cashUBS Warburg Comp. Bond All Maturities index3.277.63Fixed interest (bonds) delivered a negative return over the quarter, as comments from the Federal Reserve Chairman, Ben Bernanke, about a tapering of quantitative easing resulted in markets re-pricing the sector to account for potentially higher rates going forward.
 CashUBS Bank Bill index (interest rate earned on short term to maturity of approx 45 days) 3.24 4.38Cash continued to provide a marginally positive real return over the quarter, despite a 0.25 % rate cut in May. The market is pricing in further cuts to the cash rate. If inflation is at the midpoint of the RBA’s 2-3% band, inflation adjusted cash returns could turn negative.

 

High Yielding Internet Savings Accounts

Financial Institution                        Interest Rate             

Rabo Direct                                         4.76% p.a.

Rams Saver                                         4.51% p.a.

ING Savings Maximiser                      4.50% p.a.

Citibank Online Saver                        4.40% p.a.

ANZ Online Saver                               4.10% p.a.

Westpac Reward Saver                      4.01% p.a.

Rates sourced from RateCity.com.au and are subject to conditions and change.

Rates are correct as at 30/08/2013.