Insights – Autumn 2015


A recent research study comparing the strength of the Australian dollar with the prices Australian businesses charge for their goods and services revealed a fascinating pattern caused by the dollar’s turbulent travels over the last few years.

The Business Expectations Survey released by Dun & Bradstreet in January 2015 shows that our weakening currency appears to be contributing to higher input costs for Australian businesses. These higher costs are being reflected in the prices their customers are paying. So, as the Australian dollar drops against the US dollar, the majority of Australian firms expect to increase their prices.

This indicates potential future issues for firms that compete locally with operators from other territories. If Australian businesses have to lift their prices thanks to a falling dollar, it makes them less competitive in the market.

Dollar’s drop impacts business

Such pressure most strongly affects those businesses that rely on imported goods and services. In the Business Expectations Survey, a not-inconsiderable 21% of businesses surveyed said the Australian dollar’s value is the issue that will influence their operations the most, while 23% expected a positive impact from the dollar’s current levels and 25% expected a negative impact.

Pricing of goods and services is just one of many effects of the changing value of the Australian dollar in an increasingly global business environment. Another was identified in an article from The Australian newspaper in early January, titled ‘Australian dollar fall helps offset plunging commodity prices’. The tumbling Australian dollar was actually timely for the domestic economy, the article claimed, as it partly made up for the steep downturn in commodity prices (iron ore and crude oil prices, the article says, fell by 50% last year and coal fell by 28%) and helped to mitigate a potential spike in inflation.

Interestingly, the dollar’s rise and fall does not only flag specific issues that individual investors need to watch out for in terms of asset classes and industries, it also brings into focus questions about risk and return. After all, if a high dollar offers a certain industry, category or asset class less perceived risk, then surely a low dollar has the opposite effect.

How to analyse your risk profile

Even before considering the changes in risk patterns caused by a fluctuating dollar, investors should develop a detailed understanding of their own risk profile. This is not a set-andforget exercise that only needs to be carried out once. Risk appetites and profiles constantly change throughout an individual’s different life stages.

So what questions need to be asked to come to an understanding of your own risk profile?

First of all, in finding a definitive answer investors should seek professional guidance from their financial adviser. But in order to develop a better understanding on your own, begin with questions around stage of life.

How many years do you have left in the market before retirement, or are you retired already? Do you have time to ride out the various ups and downs of the money markets? Are you investing for the short or long term?

Stage of life questions will also answer other risk-based queries around whether you have dependants, what types of expenses you see in your future (school fees, international travel etc), what income you make now and what your future earning potential may be, and whether you foresee any breaks in your career.

What is your investing experience?

The types and levels of investing you have done before, the investments you saw your parents become involved with, and the results of your past investments all influence your level of comfort with particular asset classes and levels of risk.

For instance, if you dove headlong into US shares a month before the GFC struck, then you may understandably be a little shy about dipping your toe into that pool again. And if your parents invested successfully in property then you are likely to have greater comfort with property as a result.

Today’s investment decisions should not be driven by yesterday’s results or experiences, but many of the world’s most respected financial experts, including Warren Buffett and Peter Lynch, argue that it pays to invest in what you know.

The trick in analysing your risk profile is to recognise which past experiences are pertinent and useful, and which are simply emotional memories that deserve to be erased or reset.

Are you comfortable on a roller coaster?

One of the great benefits of property ownership is that it is very difficult to check the value of a piece of real estate on a daily basis. If you could, you might find that you are regularly surprised and concerned.

How comfortable are you with the ups and downs that are so visible on the sharemarket, for instance? Are you willing to witness your investment shrinking in value over the short term in exchange for the potential to make greater gains over the long term? Or would you prefer to always see growth, albeit at a possibly slower rate?

There is no right or wrong when it comes to levels of risk aversion. There is no better or worse option. There is only your unique and personal take based on your current situation.

What are your goals?

Finally, what are your retirement goals, or your other reasons for investing? Are you hoping for a retirement that is currently beyond your means, or something more simple? How much will you need on an annual basis to make your desired lifestyle a reality?

And don’t forget shorter-term plans and expenses, whether it be a house, an overseas trip, a car or private school education for the children. They all have an effect on your choice of investment and the levels of risk that come with it.

What has it all got to do with the Australian dollar?

The rise or fall of the Australian dollar, or its rate of movement in general, puts various investment options into new categories in terms of risk and return (see ‘Winners and losers’ box below). It is important that these changes are recognised and understood by individual investors so they can ensure their portfolio is following its intended strategic path.

With such dramatic changes in the value of the dollar in recent months, and as you move into new life stages and therefore change risk profiles, consider discussing with your financial adviser whether you need to re-balance your portfolio.

Winners and losers

Most businesses can find both positives and negatives in the Australian dollar falling against foreign currencies. Banks, for instance, may benefit when they raise money from international markets but might also suffer thanks to a lower number of offshore investors. Manufacturers that export product can sell at a more competitive rate but may face higher costs for the resources required in the production process. Here is some food for thought:

  • Potential to benefit from a low Australian dollar
  • US shares that are not hedged back to the Australian dollar
  • Australian businesses with major US operations
  • Exporters
  • General retailers
  • Tourism
  • Agriculture export
  • Resources
  • Universities and other educational institutions that attract international student interest.

Potential to benefit from a high Australian dollar

  • Importers
  • Retailers specialising in imported goods
  • Retailers specialising in white goods and electronics
  • Businesses and assets that generate Australian domestic income only
  • Australian real estate firms
  • Property investors (low interest rates).


Knowing exactly what needs to be considered before getting your asset allocation right inside (or outside!) a Self-Managed Super Fund (SMSF) is not just a smart move in terms of obeying strict SMSF regulations. It is also a fantastic exercise in developing a broader investment discipline.

No matter your age, gender, risk profile, objective or income, for every investor there is a single golden rule–diversify. It is a truth universally acknowledged that a diversified investment portfolio is likely a safer one, as it will potentially weather storms in a more balanced fashion than a portfolio that is heavy with one specific asset or asset class.

Members of SMSFs are required by regulation to consider the diversification of their fund’s portfolio. The law insists that SMSF members put in place an investment strategy that considers diversification (among other factors) and review it on a regular basis. Then members must ensure their fund’s asset mix matches their investment strategy document.

But what should this consideration involve before such a document is written? How does an SMSF member, or anybody with an interest in the responsible and reasoned diversification of their portfolio, ensure they are asking the right questions of their own risk appetites and resulting asset class percentages?

Figure out your perfect asset mix

Each SMSF member or investor will have different reasons for diversifying. For some it will be for greater chances of balancing risk and return in turbulent markets. For others it will be to take advantage of opportunities in various geographical locations. Some will diversify because of the varying time requirements of particular asset classes, holding some asset classes for longer than others and constantly re-balancing.

How do you figure out your own risk profile? Seek professional advice for an in-depth analysis, but it has a great deal to do with your stage of life, and therefore how much time you can afford to wait out the various ups and downs of the market. It also involves other considerations. How much do you have to invest and how regularly? How do you feel about seeing your portfolio fluctuating in value? What are your individual tax circumstances?

Essential SMSF considerations

Regulations specific to SMSFs outline the fact that you must show consideration to five essential points before writing your investment strategy. These are:

  1. Consider the risk and likely return from the fund’s investments taking into account the member’s needs and circumstances.
  2. Consider the solvency of your fund. In other words, can it afford to pay benefits to members when required, and pay its own bills such as auditing, accounting and legal?
  3. Analyse the role and level of diversification in your fund. What is its purpose? What are the risks if there is inadequate diversification?
  4. Analyse the level of liquidity of the fund’s assets, and the role and purpose of this liquidity.
  5. Is there insurance for members within the fund? You must be able to prove that you have at least considered whether the fund should hold insurance for SMSF members.

What asset classes can I consider?

In the world of Australian SMSFs, cash and shares are the front runners, with both typically making up around 30% each of an average fund’s total assets.1 Property, including commercial and residential, takes third place with an average of less than 20% of each fund’s value.

There are several other asset classes that can be considered for ownership within SMSFs, and it is a good idea to seek professional advice on exactly what is and is not allowed. Listed property trusts, foreign property and managed funds tend to be accepted. Artworks, precious metals and vintage cars etc may also be allowed, but professional advice should be sought before purchase. More complicated financial vehicles such as warrants and derivatives also require special advice.

Interestingly, in certain situations if you currently own your business’s commercial property, then the SMSF can buy the property from you under a Limited Recourse Borrowing Arrangement at market value, then you rent it back from the fund. This may mean lower tax on rental income and eventual capital gains tax on sale, compared with holding the property outside of super.

Don’t fall foul of laws

There are many very specific rules and regulations for assets held within an SMSF. For instance, if an investment benefits you at all now, instead of after retirement, then it is unlikely to be allowed in your SMSF. Please seek professional advice as penalties can be serious. Don’t just assume you can make your holiday house a part of your SMSF.

Examples where you may breach superannuation investment rules include:

  • Expensive artworks that are held as an investment inside your SMSF cannot be kept hanging on your walls at home, but instead must be stored in a reputable art storage facility and must also be insured.
  • Staying in an investment property, or allowing friends or relatives to stay in the property, is also a big no-no if that property is held within an SMSF.
  • Market value must be paid for everything held within an SMSF, meaning all transactions must occur at arm’s length. You can’t make a purchase from a family member at mate’s rates. If it is difficult to avoid such a clash, please seek professional advice.



An economic update from Colonial First State Glboall Asset Management

What have been the major economic events of the past few months?

1 United States

The Federal Open Market Committee of the US Federal Reserve Board (the Fed) met on 27–28 January 2015 and maintained steady policy guidance. They also highlighted the growing strengths of the US economy and described the pace of economic growth as ‘solid’, rather than ‘moderate’.

On the US labour market, the Fed also upgraded its view, stating the labour market is now ‘strong’, as opposed to its previous description of ‘solid’. Labour market data also shows the improvement. Over 2014, 2.952 million jobs were added, which is the highest annual increase since 1999. As at January 2015 the unemployment rate was 5.7%.

2 United Kingdom and Europe

The Bank of England (BoE) left policy unchanged at its 8 January 2015 meeting, as expected. The Bank Rate was unchanged at 0.5% and the stock of asset purchases remained at £375 billion. The BoE is concerned for the outlook given recent falls in inflation, with the headline inflation rising at 0.5% for the 12 months to December 2014, down from 1% in November 2014. In particular the Bank is concerned this low inflation rate will find itself entrenched in wages and the economy.

In Europe, the European Central Bank (ECB) meeting on 22 January 2015 announced an expanded asset purchase program as widely expected. This expanded asset purchase program will encompass the existing purchase programs for asset-backed securities and covered bonds. Under this expanded program, the combined monthly purchases of public and private sector securities will amount to €60 billion, in terms of new money it should include around €50 billion of sovereign bond purchases each month.

Three days after the ECB announcement, Greece elected a new government led by the far-left Syriza party, who won 149 seats out of a 300 seat Parliament, just falling short of an outright majority. Leader Alex Tsipras formed a coalition with the Independent Greek party to form government, with Tsipras sworn in as Prime Minister.

The new Greek government is currently attempting to renegotiate its bailout program and seek debt relief in an attempt to improve both its budget and economic outlook. Volatility in financial markets, particularly European markets will increase during this negotiation process.

3 Japan and China

In Japan, the Bank of Japan’s policy board convened on 21 January 2015 and left its qualitative and quantitative easing program at an annual increase of ¥80 trillion to its monetary base.

Meanwhile in China, quarter four 2014 GDP data showed a growth of 1.5% in the three months to 31 December 2014 and 7.3% over the 12 months to December 2014 and continues to indicate a controlled slowdown of growth. The ongoing property downturn is being offset by an improvement in the services sector, particularly financial services.

4  Australia

On the home front, the Australian dollar continued its weakness in January 2015, falling to US$0.7766, from US$0.8172 in December 2014. This is a fall of 5.0%, its lowest level since May 2009. Expectations of a rate cut by the Reserve Bank of Australia (RBA) accelerated in January and this was validated in early February. The Australian dollar has now fallen 11.3% over 12 months. Over the month of January 2015, the Australian dollar rose against the Euro (+1.9%), fell against the sterling (-1.7%) and yen (-6.8%).

Commodity prices fell sharply again in December 2014, with the oil price, again, leading the falls. However, the gold price continued to rise, up 8.3% to US$1284 an ounce. Finally, Australian shares performed well in January 2015, with the S&P/ASX 200 Accumulation Index adding 3.3%.


We are always available to discuss any questions or concerns you may have.


This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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