Professional Investment Services

Insights into Successful Investing - Find Hidden Value

Your returns will be higher, and your risk lower, if you invest in companies that are selling for less than they are worth.

Hidden gems are every investor's dream. Legendary US investor Peter Lynch dubbed these investments "ten baggers", that is shares that grow from small companies into market heavyweights and increase in value tenfold, or more.

Let's look at a few examples:

•  Giant US retailer Walmart was founded in 1962. A thousand dollars invested in Walmart in 1970 would now be worth more than $5 million dollars.

•  A thousand dollars invested in Microsoft on the day of its sharemarket listing on 13 March 1986, would be worth $250,000, a 33.8% annual return (as at 1March 2005).

•  Hearing implant company, Cochlear was listed in Australia on 4 December 1995. Invest a thousand dollars on listing and your holding would now be worth $10,300, a 28.7% annual return (as at 1 March 2005).

The question is, how do you find them? If it was easy, everyone would be doing it. The problem with hidden gems is that they have their own risks. For every Cochlear, there are hundreds of Compass Airlines.

As the name suggests, hidden gems are hard to find. While every major broking house analyses the BHP-Billitons and Westfields of the world, many smaller companies are under researched. That means you have to do a lot of the research yourself (or rely on a fund manager to do it for you).

That's why finding hidden gems may be a job for the experts who run managed funds. Managed funds have greater research resources, more analysts, better investment technology and more experience.

Another kind of hidden gem

that is often hidden from view. Even large, well-established companies have periods where their share price wallows . It is because of poor recent performance, turmoil amongst senior management or because economic factors are acting against the company.

During these periods, the market may pay too much attention to the headlines and not enough to the underlying value of the business. If the price moves below this value a smart investor can take advantage of this weakness.

If you (or your fund manager) have the research resources, patience and discipline to buy shares when their prices are falling, you may be well rewarded as the share price moves up towards fair value.

The second part of Insights into Successful investing - "Find Hidden Value" will appear in the next issue of Timely Tips.

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

A Reward From the Government For Working Longer

In the last issue of Timely Tips, we made reference to the Mature Age Worker Tax Offset (MAWTO) that is available to Australian workers over the age of 55. In view of the number of enquiries we received in respect of the MAWTO, we have addressed it in more detail.

The MAWTO was introduced effective from the 2004/05 financial year and is available to all taxpayers who receive "net income from working" and are over 55 years of age by 30 June in the relevant year.

"Net income from working" includes assessable income from personal exertion (including personal services income), assessable business income, assessable farm management withdrawal amounts, and reportable fringe benefits. Tax deductible expenses arising from deriving personal services income or business income are deducted to arrive at the net income.

The maximum MAWTO of $500, is available to qualifying individuals who, for the current 2005/06 financial year, have "net income from working" of between $10,000 and $53,000. The MAWTO phases in at 5% from the first dollar of assessable income earned and begins to phase out once income exceeds $53,000. The MAWTO reduces to $0 once income exceeds $63,000.

By way of example, let's consider Paul who is 58 years of age. Paul's "net income from working" for the 2005/06 financial year is $43,500. Because Paul fits the criteria of being over 55 years of age and has an income of less than $53,000, he is entitled to the full MAWTO of $500 for the current year.

A tax offset reduces the amount of tax payable by a taxpayer on a dollar for dollar basis. Therefore a tax offset of $500 is deducted from the amount of tax otherwise payable.

Interestingly, there is no maximum age at which taxpayers with "net income from working" qualify for the MAWTO. Provided they meet the minimum age of 55 and have "net income from working" of less than $63,000, they can qualify for (at least in part) MAWTO.

In a nutshell, to be eligible to receive the MAWTO, a taxpayer must:

•  Be aged 55 or over on 30 June of the financial year;

•  Be an Australian resident for tax purposes;

•  Have received net income from working not exceeding the stated thresholds; and

•  Lodge a tax return.

Source: Peter Kelly - Professional Investment Services

Negative Gearing

Negative gearing is the process where a person borrows money to invest and the costs of the investment are greater than the income received. Effectively, at least on paper, the investment makes a loss for a period of time.

Frequently the investor may need to contribute money to the investment as the income received from the investment may not be adequate to cover the costs.

The most common investments that are negatively geared are real estate, shares and unit trusts.

By gearing into an investment the return is magnified if the total return including capital growth is greater than the interest and other ownership costs. Equally, losses are magnified if the total return is less than interest and ownership costs.

It is important that investors have adequate income to meet their loan commitments in the event there is a shortfall in income from the geared investment.

To maximise the benefits of gearing investors should have a high taxable income so they may write off their losses. Negatively geared investments are more suitable for investors on a high marginal income tax rate with surplus disposable income.

Features:

•  An effective means of wealth accumulation;

•  Purchase larger investments than would be possible if using own funds only;

•  Reduce income tax liability; and

•  Potential to achieve investment returns greater than returns that could be achieved without gearing.

But remember...

•  Disposable income usually reduced;

•  Losses magnified;

•  Costs of borrowing;

•  Market values of the underlying asset may fall causing loss in the value of the asset combined with a debt that must be repaid;

•  Income from the investments may vary and could even be nil;

•  Fees may be charged to buy and sell the underlying assets; and

•  Additional security may be called for in the event of adverse market movements.

•  Lender may request debt reduction in the event of adverse market conditions.

These investment strategies are complex and professional advice should be sought before investing. Even the most researched and best intentioned advice may still result in a loss. As with all strategies for investing negative gearing may not be suitable for your particular circumstances, especially for some retired investors.

Source: Professional Investment Services