HEWisoN UaRtERLy• Economic update• From the CEo’s desk• the golden rules of investment• investment focus

• Chris morcom makes the master Class

• New appointment• HPW appointed “FPa

Professional Practice”

While 2011 was meant to be a year of consolidating growth, it instead turned out to be a year of disasters, both natural and financial. disasters in New Zealand, Japan’s earthquake, tsunami and nuclear meltdown, middle East and North africa uprisings, the Us debt Ceiling and the European debt Crisis negatively affected markets here and around the world.

in australia, economic growth was hampered by the January floods, and cautious household spending resulted in a weaker retail industry. While the housing market slumped, the mining boom continued strongly, lending credence to australia’s two-speed economy. the Reserve Bank of australia cut interest rates twice in a bid to improve the economy and partly in response to Global economic threats, mainly from Europe.

So what is the outlook for 2012? We expect that Europe will continue to dominate the headlines, at least for the first half of the year, as they try and find a solution to the debt Crisis. While there is no silver bullet to end the Crisis, if European leaders can get their act together and hash out a viable course of action then world markets can turn their attention elsewhere and leave Europe to slowly rebuild and consolidate over the coming years.

in the Us, we think that the Us Economy will continue to plod along. Unemployment is currently 8.6 per cent but the downward trend in jobless claims is encouraging. While there may be concerns of a double-dip recession in the latter half of the year, strong signals from the corporate sector should keep Us growth positive. We do not expect too many policy changes to come out of the Us this year as President Barack obama will not want to rock the boat with Presidential elections due in November.

China experienced a slowdown in 2011 as its largest trading partners; consumers in the Us and Europe, slowed spending in response to local economic factors. the Chinese Government is intent on protecting growth and has a number of policy measures at its disposal (e.g. easing interest rates) to keep inflation under control and growth steady over 2012.

in australia, fundamentally speaking, our economy is in great shape but, as always, external factors will continue to weigh on the market. We expect the Reserve Bank to keep a close eye on economic growth and to cut interest rates if growth looks to be slowing, even if this results in a rise in inflation over the shorter term.

Understanding the terms we use

Q

Economic update

PE Ratioor Price to Earnings Ratio. the number of times a company’s earnings per share is covered by the share price. it is commonly used to measure how attractive a share is to investors. the lower the ratio relative to the average of the sharemarket, the lower the (market’s) profit growth expectations. Calculated by: market price of shares / Earnings per share = P/E Ratio.

Return on Equity (ROE)in analysing shares as investments, return on equity is calculated to show the return the company has made for shareholders on their investment. shareholders’ equity normally excludes intangible assets such as goodwill, and is calculated by deducting total liabilities and intangibles from total assets.

Payout Ratiothe percentage of earnings paid to shareholders in dividends.

VolatilityThe fluctuation at which share prices move up and down. it also means the possibility of a short term change in the value of an investment, positive or negative, due to market fluctuations. Volatility does not mean a loss or gain of capital.

Two Speed Economya term used to describe disparity between the performance of mining-related sectors and the states where these are concentrated, while the rest of the country is being impacted by lower performance due to factors such as a decline in manufacturing and record fuel prices.

Financial news, our views anD other issues

issue 38 ~ January 2012

story by simon curtain Director/Private client aDviser image by griszka niewiaDomski

as we enter 2012, the general atmosphere is one of growing optimism as world economic indicators are turning positive and it is almost as if there is a feeling of “thank goodness 2011 is over and now we can start afresh”. there is no doubt that the focus will remain on Europe, but there is a firm resolve by the Euro Zone that they will do what it takes to correct their woes over time. as those plans are locked in, that will certainly encourage a more positive focus on fundamental values, rather than worrying about the unknown and suggestions of impending doom.

at Hewison we are in the process of implementing a number of initiatives that came out of our october staff Conference. this will take our client service delivery to another level in respect to personalised attention and communications.

the FPa annual Conference in November was attended by all six of our senior advisers and was very interesting without being revolutionary from a technical perspective. the key issue was the forthcoming introduction of the Government’s “Future of Financial advice” reform initiatives which clearly is a huge issue for many financial advisory firms. We are simply amazed that the financial services industry is so poorly prepared to transition from commissions and kick-backs, to a world of non-conflicted advice and remuneration when the writing has been on the wall for over a decade.

We are all pretty excited about 2012. it has been a long haul for us all – our clients in particular. But we think the issues of world debt management and economic recovery are on the mend and australia’s strong position should begin to reflect on investment markets. the eventual outcome will be a return to true asset values and extremely strong income flows. There is no question the wait has been long and tough, but commitment to the mission will be rewarded.

i take this opportunity to wish everybody a Happy New year.

From the CEo’s desk

JoHn HeWiSon

at times of severe market fluctuation, investors lose sight of the basic rules of successful investment that have been

proven time and time again over the past century. When markets boom, everyone is a buyer and when markets plummet, everyone is a seller – all the strategic planning disappears and emotion takes over; these are the illogical factors of “fear and greed” which can prove to be extremely damaging to the long-term investor.

it’s all very well to suggest that, when markets start to fall investors should sell out and move to cash, then buy back in when market values are at their cheapest. That’s fine in theory, but no-one really knows when markets are going to fall, and no-one really knows when markets are going to recover. all that is certain is that at times markets will fall but they will always recover and go on to exceed their former values.

We thought it timely to re-visit the golden rules of intelligent and informed investment which, we would argue, are ultimately successful and virtually fail safe.

Rule 1: Set your strategy and stick to itall investment should be based on a strategic plan. that plan should take numerous factors into account looking at short and long term objectives. the notion that investors should become overweight in cash or growth investments according to an emotional reaction to market fluctuations is in direct contrast to the basis of intelligent investment – buy low and sell high.

Rule 2: Don’t speculate; always invest in quality assetsspeculation is tantamount to gambling, but in investment terms “if it sounds too good to be true it probably is”. Quality assets will always reflect their fundamental value or, in times of market turmoil, will always regain their fundamental value when markets normalise.

Rule 3: employ disciplined portfolio re-balanceonce an investment strategy has been designed to achieve specific objectives, it is imperative that portfolios are regularly re-balanced back to the original strategic parameters. this effectively means that when markets fall, it is the time to buy quality assets at discount prices.

We have recently seen media articles pronouncing the end of the “buy and hold” theory - that is buy quality assets and never sell them. We would clarify by saying that “buy and hold” is appropriate in respect to retaining quality assets but that does not mean that investors should not sell quality assets to keep them in proportion to other assets as part of the re-balance process. this effectively locks in profits from relative out-performance.

Rule 4: Focus on return fundamentalsinvestments have two types of earning characteristics – income and growth. income relates to short term performance and growth relates to long term performance. at times when markets fall in value, it does not necessarily mean that income falls proportionately.

A look at short term history• investors who sold out of the share market

in 2007-08 missed out on 34% recovery in 2009. investors who re-balanced in 2007-08 purchased quality assets at bargain prices.

• interest rates have been at historical low levels since 2008. Investors who fled to cash made poor income returns and no growth. investors who re-balanced retained dividend rates and purchased very attractive income streams through under-valued assets.

With market recovery imminent, those who have held their nerve and focused on the fundamentals, have already been rewarded with attractive income rates and are set to reap the benefit of further market recovery.

StoRy by JoHn HeWiSon Ceo image by marcin Jochimczyk

the golden rules of investment

Hewison Private Wealth senior Client adviser & director Chris morcom has once again made the Financial Review smart investor master Class for Financial Planning in 2012. Entrants are required to complete an arduous multiple choice exam with the top 50 qualifiers included in the Master Class.

Not only did Chris make the top 50, in 2012 he placed in the top 10 entrants around the country. Within Hewison Private Wealth, Chris is recognised for his extensive technical knowledge and this result is testament to Chris’s pursuit to excellence. We congratulate Chris on this achievement.

Chris morcom makes the master Class for 3rd straight year

investment FocusStoRy by AnDReW HeWiSon DiReCtoR/PRiVAte CLient ADViSeR

Qbe insurance group • QBE is one of the best managed

insurance groups in the global general insurance and reinsurance industry.

• a growth strategy based on the combination of organic growth and insightful acquisitions has and should deliver well above average growth in earnings and dividends.

bhP • The world´s largest diversified resources

company has a balanced portfolio of world class, long life assets, and a full suite of conventional energy products well located to service asia.

• Production covers major commodities including petroleum, alumina, copper, gold, iron ore, coking coal, energy coal, nickel, and diamonds. Diversification lends comfort from a sovereign and commodity risk perspective.

commonwealth bank • CBa has a powerful retail and business

banking franchise in australia and New Zealand.

• the branch network and the universally recognised brand are significant competitive advantages and the loan book is mostly conservatively managed.

• the bank has consistently grown shareholder wealth in favourable economies.

Hewison Private Wealth constructs direct investment portfolios for the long term. this allows us to see through the short term volatility which many investors have become accustomed to over the past four years. the australian market is at close to historic lows with the worst case scenarios in Europe being priced in. We believe this has unearthed some rare long term investment opportunities.

We will always recommend investments based on their fundamentals. those being: a track record of strong management; simple businesses to understand; low gearing; healthy dividend history but with a conservative earnings payout ratio, and below average price to earnings ratios (P/E). although not suitable for everyone, any advice should always be sorted prior to investing. our research indicates that based on the above fundamentals the following companies are well positioned to outperform over the coming years:

share price range: $13 - $14

share price high: $35.19 (october 2007)

gross yield: 9.6%

annual 10 yr return: 10.8%

P/e: 10.4%

share price range: $36 - $39

share price high: $49.55 (april 2011)

gross yield: 5.1%

annual 10 yr return: 15.5%

P/e: 6.8%

share price range: $48 - $52

share price high: $61.65 (november 2007)

gross yield: 9.9%

annual 10 yr return: 10.2%

P/e: 10.9%

We are pleased to announce that simon Curtain CFP and Nathan Lear CFP have both become share-holders and appointed as directors of Hewison Private Wealth. Both have been with HPW for around 5 years having had previous industry experience in advising and superannuation.

They have both completed their post graduate qualifications and a masters in applied Finance whilst progressing through HPWs internal mentoring program. Both simon and Nathan have become extremely capable and experienced senior Private Client advisers and in addition, simon has responsibility for technical it programming and leading our on-line reporting capability whilst Nathan is responsible for the firm’s investment research.

New appointments

Nicky Rabone

admiNistRatioN assistaNt

a) Where were you born? New Zealand

b) Where did you go to school? altona High school

c) What do you do for fun? dancing & socialising

d) What is your favourite book? Gone with the Wind

e) What is your favourite music? dance

f) What is your favourite food? thai and italian

g) What is your favourite movie? Breakfast at tiffany’s

h) How long have you been at Hewisons? 15 months

i) Where did you work previously? Gunn & mcConville Pharmacy

j) Who/what do you admire most? my mum

k) Who are 4 people in the world you would most like to invite for dinner? 1. Kate middleton 2. adam sandler 3. taylor Lautner 4. sonny Bill Williams

l) What are your hobbies? Reading, shopping & Going to the movies

m) What is it you enjoy most about your role at Hewisons? i like the variety that the role offers

The information contained in this publication is general in nature and not intended as personal advice. Please obtain advice from

your financial planner before acting upon this information.

HPW appointed “FPa Professional Practice”as part of its transition to a pure professional association, the Financial Planning association of australia (FPa) has restricted its membership to appropriately qualified individual practitioners and has abandoned Principal (or Corporate) membership.

the FPa has introduced a non-membership designation of “FPA Professional Practice” for financial planning practices that support the FPa’s Professional Practice standards and Code of Ethics. to qualify for this prestigious designation, the Practice must have at least 50% of its practitioners holding the CERtiFiEd FiNaNCiaL PLaNNER (CFP) designation with the balance studying toward achieving this standard.

With all of our practitioners holding the CFP designation and as a long term supporter of the FPa’s professional practice standards, we are proud to announce that HPW was one of the first practices in Australia to be appointed as a FPa Professional Practice.

We had our 4th annual trivia Night on the 13th october to raise funds for the sacred Heart mission in st Kilda. this organisation helps the homeless and disadvantaged by providing the necessities including housing, food and healthcare.

Once again, the night was filled with fun and laughter and as always it was great to see everyone have so much fun. Rosanna, Bridget and Effie were delighted to present a cheque for $3,600 to sharon torney, manager of Fundraising at the sacred Heart mission on 22nd November. sharon kindly took the girls through the centre and gave them an inspiring insight into all of the services they provide and the amazing and tireless work being done there by the staff and volunteers.

For the latest financial news updates and insights follow us on twitter @Hewisontweets.

HPW 4tH aNNUaL tRiVia NiGHt

Hewison Private Wealth is now on twitter

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PROFESSIONAL PRACTICE.........................................................................................................FINANCIAL PLANNING ASSOCIATION of AUSTRALIA