Professional Investment Services

Insights into Successful Investing - Find Hidden Value - Part 2

Hunting for gems

Companies and their shares are living things. They have a past, a present, and (hopefully) a future. In many ways they control their own destiny - how they manage their staff, their operations, their capital. Where they invest their capital, how much they borrow, how they price, market and distribute their products and services are all decisions that can be controlled.

But performance is also affected by events outside their control - the weather, geopolitics, legislation, technology, fashion and the economy.

Smart investors consider all of these factors before they buy or sell a share. They understand that the secret to success is knowing if the price of the company on any given day reflects all these factors. In other words - is the company worth what you are paying for it?

The franchise

The "franchise" is what makes each business unique. To understand the quality of a franchise, fund managers assess the outlook for the sector the company is in and then look at the company's competitive position within the sector. They want to know:

•  The nature of the industry - How fierce is competition, how fast is the industry growing, how does the industry stack up compared to international counterparts?

•  Cost position - Where does a company's cost structure place it in the industry?

•  What is the company's product positioning - Do its brands give it power to charge a premium? Or is it competing on price?

•  Risks - Could new technology, products or regulations affect the business?

Management

Fund managers also place great importance on management. First, they want to know how well the company manages its operations - production, distribution, marketing, sales, etc. They also want to know how it manages its capital - when, how and at what rate it borrows, how it returns profits to shareholders, where it invests, how it manages its cash.

Risks

Each company faces different risks. A miner like BHP-Billiton faces currency risks every day. Pharmaceutical companies like Pfizer live with the risk that a competitor finds a better drug for treating arthritis. Fund managers also look at a company's financial risks - risks that all companies share. Can the company cover its debt and other costs? Are its earnings predictable or do they vary from year to year, season to season, or product launch to product launch?

What business are you in?

After gaining an understanding of the management, franchise and risks of a particular business, an experienced investor should be able to tell what really drives a business. This is not as easy as it sounds.

In reality much of an insurer's profit comes from how well they invest their "float" - the flow of premiums from policyholders that they have yet to pay out in claims. Insurance company profits are often driven more by the performance of their share fund than their exposure to a recent natural disaster.

Source: BT Financial Group - Extract from "Ten Investing Truths"

Things to Consider When Changing Investments

From time-to-time we all find the need to change our investments. This may arise because a particular investment no longer suits our purpose or has not performed in the manner we would have expected, or we may no longer be eligible to hold investments through a particular structure such as superannuation. In this article, we will look at some of the consequences that may arise from changing investments.

Taxation

If we hold investments in a managed fund such as a unit trust that was acquired after 19 September 1985, the disposal of units in the trust will result in a capital gain or capital loss depending on the movement in the unit price since the investment was first placed. For example, if we purchased units in an Australian equities unit trust in 1999 for $1.50 per unit, and we sell those units today for $2.25, then a $0.75 capital gain has arisen which may be taxable.

Even where the unit trust investment has underperformed over a period of time, the disposal of the investment may still give rise to a capital gains tax liability.

Fees and charges

Some investments may include a fee that is deducted from a payment when an investment is redeemed. Such fees often take the form of a deferred entry fee. That is, when the investment was originally placed no entry or investment fee was payable but if the investment is redeemed within a defined time period, an exit or withdrawal fee may be payable.

Some older investments have withdrawal fees of up to 10 years, whilst between 1 and 5 years seems to be the norm today.

By deferring the withdrawal of an investment for a short period of time may eliminate the need to pay a withdrawal fee.

It is worth understanding the conditions of the investments you hold so as not to inadvertently pay fees that may otherwise be avoided.

Insurance cover

With the introduction of "portability of superannuation" and "member choice", superannuation arrangements have become more flexible. For many people, particularly members' of employer sponsored superannuation funds, automatic life insurance cover has been a feature of their superannuation fund membership.

If a person with life insurance cover through super were to change funds, they may loose the right to valuable insurance protection. In the event that their health has deteriorated since taking out the original insurance, they may find themselves in a predicament whereby they can not replace the life insurance they previously held, or have to pay more for an equivalent level of cover.

When changing investments, there are a number of important issues that need to be considered in addition to just the investment performance of the fund in question.

Source: Professional Investment Services