Connections Spring 2011

Welcome to the Spring 2011 edition of Connections

Life Goes On There is no doubting that the last couple of years have been difficult for many individuals and businesses, in particular those facing the continuing effects of the economic downturn. As we now enter the 2nd quarter of 2011 there are signs of improvement albeit at a very slow rate. I know that unfortunately, 2011 will bring further challenges but as Robert Frost once said “In three words I can sum up everything I have learned about Life – It goes on”

At CMCC Financial Solutions we will continue to go on and assist you, our most valued clients with loyalty, efficiency and professionalism. We believe that now more than ever you should be sitting down with your Trusted Financial Advisor to review your existing financial arrangements.

In this edition of Connections we are introducing our “House View” for 2011 in relation to investment planning. We have put together a mix of assets classes for the investor with a Cautious, a Balanced or an Adventurous attitude to investment risk. Should you wish to learn more about these funds, please contact the office to make an appointment.

We are pleased to announce that Lorna Egan has recently joined our sales team as a Financial Advisor. Lorna brings with her a wealth of experience in all aspects of Financial Planning and can be contacted on 086 3880298 or at [email protected]

This is our 4th edition of Connections and I would like to thank those of you who have given us invaluable feedback in relation to the topics covered over the past couple of years. This feedback helps us shape our newsletter and please keep it coming to [email protected].

Finally, enjoy the break over the Easter Holidays and here’s hoping for a little sunshine!

Conor Murray

ConnectionsSpring 2011

2 CMCC Financial Solutions

InveStMent RevIewby Conor Murray

Although it is useful in these pages to focus on where the markets are at a point in time, it is important that every now and then we take a step back and think about how our funds are performing in the longer term. They are, after all, long term funds – they are designed to provide a good balance of risk and reward for money that investors want to put away for the long term. For instance, take a typical non guaranteed managed fund where many investors invested in the last decade. There is no point in talking about any positive returns in 2010 and 2009 without acknowledging the falls in 2008 and 2007.

You are very likely aware that most managed funds suffered a peak-to-trough fall of approximately 40% in the period from the collapse of Lehmans to the bottom of the market in March 2009. that figure casts a long shadow over the performance of any fund but doesn’t tell the full story of how managed funds have performed for investors over the term of their investments. If we break the last 10 years into three, the following picture emerges.

1. Those who invested in the period January 2001 to December 2004 and remain invested;

these investors suffered the full brunt of the market collapse. However, none of these investors were down on their original investment at the end of 2010. On average they are up somewhere in the region of 12%.

2. Those who invested between January 2005 and July 2008 and remain invested.

these investors are still currently down on their investments. the worst affected were those who invested in May 2007 and they are currently down by around 20%. On average those who invested in this period are down approximately 10%.

3. Those who invested since July 2008 and remain invested.

Again, all of these investors are up on their investments. In fact those who invested after March 2009 did very well indeed.

In short, there is no doubt that the last decade was a very difficult one for investors. this was the first decade in many where risk dominated reward. It is vital we learn from this decade. Unprotected funds can provide excellent returns for investors but they need to be able to withstand periods of extreme volatility.

Outlook

Although it can be difficult to lift our heads out of our domestic economic problems, investment funds are driven by the global economy and the outlook is on balance, positive. As always, risks abound. In particular, pressures on the euro are well documented. equally, there are concerns how the US will fare when monetary support comes to an end.

On the other side, fears of a double dip recession in the US are fading. In Germany, confidence levels are very strong. worldwide, corporates are for the most part managing costs very well and keeping a close eye on debt.

this is the nature of investment. the risk and rewards go hand in hand. the wide range of funds available today allows investors choose the mix that they are most comfortable with. with all of the funds available the best risk management is time.

Although it can be difficult to lift our heads out of our domestic economic problems, investment funds are driven by the global economy and the outlook is on balance, positive.

Conor Murray

CMCC FInAnCIAL SOLUtIOnS – 2011 HOUSe vIew When building an Investment Portfolio it is helpful to know how correlated the funds you chose are. To get a smoother return on a Portfolio, it is normally recommended that you diversify your investment across a range of asset classes which have their ups and downs at different times. (i.e. uncorrelated assets)

Different fund mixes will have lower and higher volatilities depending on the correlation of the funds together and the volatility of the funds individually. Combining different funds we have put together some sample asset mixes for those with either a Cautious, Balanced or Adventurous attitude to investment risk.

the Future is always an uncertain place. However, we believe that where care and knowledge are used to select the right mix of assets in a portfolio, these portfolios will survive and thrive in the ups and downs of the market in the future. As always, reviewing your Investment Portfolio regularly with one of our Financial Advisor’s is vital.

3CMCC Financial Solutions

Assets

Annualised volatility:

6.639%

CMCC Stable Strategy

50%

14.5%

18.5%

6.5%

8.5%

2%

Protected Equity

Fixed Interest/Bonds

Equities

Currency

Absolute Return

Cash

50%

14.5%

18.5%

6.5%

8.5%

2%

Protected Equity


Equities

Currency

Absolute Return

Cash

50%

14.5%

18.5%

6.5%

8.5%

2%

Protected Equity


Equities

Currency

Absolute Return

Cash

Assets

Assets

Protected Equity


Cash

Equities

Emerging Market Equities

Currency

Absolute Return

Property

50%

3.5%

1.5%

24%

5%

6.5%

3.5%

6%

Protected Equity


Cash

Equities


Currency

Absolute Return

Property

50%

3.5%

1.5%

24%

5%

6.5%

3.5%

6%

Protected Equity


Cash

Equities


Currency

Absolute Return

Property

50%

3.5%

1.5%

24%

5%

6.5%

3.5%

6%


8.361%

CMCC Growth Strategy


9.477%

CMCC Opportunity Strategy

Protected Equity

Cash

Equities


Currency

50%

1.5%

26.5%

10.0%

12.0%

Protected Equity

Cash

Equities


Currency

50%

1.5%

26.5%

10.0%

12.0%

Protected Equity

Cash

Equities


Currency

50%

1.5%

26.5%

10.0%

12.0%

Protected Equity


Cash

Equities


Currency

Absolute Return

Property

50%

3.5%

1.5%

24%

5%

6.5%

3.5%

6%

Protected Equity


Cash

Equities


Currency

Absolute Return

Property

50%

3.5%

1.5%

24%

5%

6.5%

3.5%

6%Protected Equity


Cash

Equities


Currency

Absolute Return

Property

50%

3.5%

1.5%

24%

5%

6.5%

3.5%

6%

Protected Equity


Cash

Equities


Currency

Absolute Return

Property

50%

3.5%

1.5%

24%

5%

6.5%

3.5%

6%

Warning: Past performance is not a reliable guide to future performance. Warning: The value of your investment may go down as well as up. Warning: Funds may be affected by changes in currency exchange rates.

*Also called a Risk Measure Annualised volatility calculated from period 08/04/2008 - 08/04/2011 *Source MoneyMatevolatility measures the change in the value of an investment over time when compared to a market average. the greater the volatility of an investment, the more risky it is in the short term.

Investing for a long period of time can help to smooth out the effect of swings in the value of an investment.

MOneY SAveD IS MOneY eARneD? by Mary Fitzpatrick

There is a lot of truth in the well known saying “Money saved is money earned” and people should be encouraged to save from an early stage. The terms “savings” and “investing” are often used interchangeably as if they were all but synonymous. The fact is they are quite different! Getting a hold of the difference between saving and investing is the key to managing your money more effectively.

In modern times Irish people have been keen savers, more so than their counterparts in the UK or America. Indeed, Ireland’s average household savings have been increasing over the past year or more as people have reigned in their spending and investment habits. Ireland’s savings ratio soared in the 18 months to mid-2009 as a consequence of rising unemployment, the dire fiscal position and the loss of household wealth. In this period savings as a percentage of household’s net income jumped from a confidence-induced low of 2.3% back in 2007 to circa 12%.

the economic uncertainty of the past two years has encouraged people to save. But that’s not the only reason. the banks were obliged to offer exceptionally attractive deposit rates designed to sweep up valuable capital to bolster shattered balance sheets.

But much of the fair wind has now gone out of deposit rates and, if anything, they will continue to fall as nAMA begins to ease the pressure on the balance sheets of our main financial institutions.

Mary Fitzpatrick


Getting a hold of the difference between saving and investing is the key to managing your money more effectively.


Savings Explained

Saving is storing money safely, such as in a bank, credit union or with say An Post, for short-term needs such as upcoming expenses or emergencies.

when saving money, the primary emphasis is on the principal rather than return potential. typically, you are sacrificing the potential that your money may grow strongly for a relatively low return and reasonably easy access to your funds. the appealing feature of saving money is that you are given certain guarantees such as the fact that you’re balance will never go below the principle and that you will get a steady, predictable interest rate. the downside is that your interest return may not keep pace with inflation and you may find that in real terms your funds have actually been eroded over time.

Investing Explained

Implicit in investment, on the other hand, is that you take a risk with a portion of your money for what you hope will ultimately be a much better return than you could hope from savings.

Investments are longer-term in nature and are tailored to meet your chunkier financial needs into the future, say for educating the children, trading up into a better house or just so as to make life that bit more comfortable as you mature. the attraction of buying into an investment is that you have the chance to make a decent return that is well ahead of inflation, albeit with some risk. However, without some risk there can be no reward! Investing is the key to meeting your long-term financial goals.

everybody should ideally have a portion of their free money assets in savings for, as we’ve pointed out, short-term needs. the balance should be invested.

A little knowledge can be a dangerous thing and this is the problem with direct investment in either shares or property. Investment can be more easily made through diverse pooled insurance funds. For one, you are transferring the management to professional fund managers. And, second, you are limiting your exposure by pooling your investment with hundreds of like-minded people in a big fund with a much wider asset spread.

Stock markets have bounced from their 2008 low points but are still a long way shy of 2007 peak levels. those caught badly as stocks tumbled amid the financial crisis

may still be wary about committing new money to the market. However, the reality is that the big damage in terms of valuations appear to have been done by this stage with the result that today’s market levels present the perfect buying opportunity with medium to long-term perspective in mind. the stock market is cyclical and that’s something you should never forget!

Pooled funds are typically spread over three broad categories: unit-linked funds or unit trusts, with-profit bonds and tracker bonds. Currency is quite a specialised area best left to the experts to choose and manage. Many pooled funds take a diverse approach, investing in equities, bonds, cash, property and currencies, and this is arguably the best means individual investors have of getting exposure. whatever direction your investment desires go, you need to be well advised before buying equities or property. talk to us today to discuss our range of investment products.


tO BUY OR nOt tO BUY, tHAt IS tHe qUeStIOn… by Stephen Cox

The latest ESRI Permanent TSB House Price Index shows that the average house price has declined by 38% from the peak at the end of 2006.

the figure refers to the average nationwide decline and some commentators speculate that the decrease is much higher than this, with a 50% fall in some areas of the country, such as Dublin. It is important to remember that the Irish psyche is one of a home owner. Unlike some of our european counterparts who are more accustomed to renting for the whole of their lives, approximately 80% of homes in Ireland are owner occupied.

In the last four years a huge number of people have held off on purchasing a property. Most of these are in the 25-35 age bracket, and they will decide to enter into the market over the next few years regardless of house prices. In 2006 over 204,000 mortgages were drawn down; this fell to 27,666 in 2010: a massive decrease.

the decrease in lending can be attributed to a number of issues including demand, the fall in property prices and the lack of credit available to those wishing to buy. Lenders have changed their criteria significantly and some lenders are no longer lending. there are two or three institutions who are looking favourable on strong applications.

Sherry Fitzgerald, who recently conducted their own study, have stated that they believe the number of vacant properties across Ireland is close to 90,000 (new and second hand units). It is however extremely important that the reality of the situation is publicised and that buyers can gauge the supply levels in the market in order to interpret when to buy. Supply / demand and house prices are not the only issue when you are purchasing a property. Affordability is key, taking into account future rate increases, and looking at house prices in relation to the average industrial wage provides a good indication of affordability.

In 2006, house prices peaked and were approximately 10.39 times nationwide and 14.28 times in Dublin more than the average industrial wage. In 2010 we have seen a return to 1998 multiples with house prices nationwide at 5.58 times and in Dublin 6.71 times the average industrial wage.

this is a significant change in the market and does indicate that houses are once again affordable and that now is a good time for those who are financially secure to look at their options in relation to buying.

Stephen Cox

Affordability is key, taking into account future rate increases, and looking at house prices in relation to the average industrial wage provides a good indication of affordability.

FIRSt tIMe BUYeRS MORtGAGe InteReSt ReLIeF by Lorna Egan

It was recently announced that the Government has extended valuable mortgage interest relief for first time buyers until the end of the year.

First time buyers now make up the majority of those taking out home loans, and scrapping mortgage relief early would act as a disincentive to them. the maximum amount of relief available is €31,500 (for a couple) over a 7 year period.

there is a ceiling of €10,000 per person and relief is applied at 25% for years 1 & 2, 22.5% for years 3, 4 & 5 and at 20% for years 6 & 7.

the majority of First time Buyers use this relief to cover important insurance / assurances i.e. protection (both life and income), buildings and/or contents insurance.

the removal of First time Buyers relief will have a huge impact on purchasers monthly cash flow.


Lorna Egan

Assumes First time Buyers paying mortgage interest of €10,000. Monthly interest relief in this case amounts to €208.33 (based on a calendar year).

Assumes non First time Buyers paying mortgage interest of €10,000. Monthly interest relief in this case amounts to €37.50 (based on a calendar year).

Example 1

Example 2

CMCC Financial Solutions is regulated by the Central Bank of Ireland.

As a result of the enormous ongoing change in the area of retirement provisions in recent times, it is now more important than ever to take personalised advice regarding the provision of adequate income in retirement. For example, the recent Finance Act introduced changes to the tax treatment of pension plans both with regard to contributions and with regard to maturities.

In addition, the opening up of additional retirement options to members of Defined Contribution (DC) pension schemes means that members of these schemes now need individually tailored advice – not only as retirement approaches, but also from the first day they join the scheme.

Issues for Consideration

the following are the issues that all pension scheme members should consider in order to ensure they are maximising tax efficiency in advance of retirement:

• Maximising your contributions for 2010 before relief for 2010 is lost forever, by back dating personal contributions made before the 31st October 2011.

the new earnings cap of €115,000 applies to contributions backdated to 2010 but employees will be entitled to PRSI and Health Levy relief and can seek a refund of this

• Reviewing your existing personal contributions to ensure you do not exceed maximum contribution limits for tax relief, unless you wish to carry relief forward to future years

• Reviewing the current accrued value of your pension benefits as at the 7th December 2009 in light of the new Standard Fund threshold (SFt) and, if necessary, applying for a Personal Fund threshold (PFt) before the 7th of June 2011

• Reviewing any pension–backed mortgage arrangement you have in place

• Replacing the after tax equivalent of existing pension contributions that are no longer tax efficient (e.g. exceed contribution limits/earning cap) with contributions to savings plans

employees in pensionable employment need to specifically consider the tax efficiency of their Additional voluntary Contributions (AvCs) including PRSA AvCs. For those in DC schemes that are likely to opt for the A(M)RF/taxable cash options, where 25% of their fund will be tax-free (up to €200,000) funding

through AvCs is likely to be tax efficient. For those in Defined Benefit (DB) schemes who can fund for additional tax-free cash, such as those in the Public Sector, funding for additional tax-free cash through AvCs (Additional voluntary Contributions) is likely to be tax efficient. For everybody else, funding additional retirement income through AvCs may not be tax efficient as the income is likely to be taxed at a higher rate than the rate at which relief has been received. However, over longer terms the tax exempt growth in the fund may help the tax efficiency of the AvCs.

The Need for Advice

Although they may not be quite as attractive from a tax efficiency perspective as in the past, pension plans and schemes should continue to be the main basis for the provision of an adequate income in retirement. Provided the plans/schemes are put in place on a correct footing, in general they continue to be the most tax efficient way to save for retirement. However, putting them in place on a correct footing is the important point and this is where the need for ongoing proper advice from an independent broker is required.

we would be delighted to hear from you to discuss any aspect of your Retirement Planning.

FInAnCe ACt 2010 AnD It’S IMPLICAtIOnS FOR RetIReMent PLAnnInG by Conor Carey


To Book an appoinTmenT

COntACt

Website: www.cmcc.ie Email: [email protected]

Dublin Office: Arena House, Arena Road Sandyford, Dublin 18. tel: + 353 1 2130733

Galway Office: 2 the Friary, Main StreetHeadford, Co. Galway.tel: + 353 93 34033

Conor Carey

Documents

Connections Spring 2011