Welcome to the February 2012 edition of Investor Insights.
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Index

1. Five Resolutions for the New Year
2. Central Banking Increasingly Challenged
3. Education Funds and the Post-graduate Student
4. Melanoma Research Update

1. Review Your Investment Strategy
With share market volatility a day-to-day occurrence now, it can’t hurt to revisit your investment strategy and make sure it’s still suitable to get you to where you want to be. And it doesn’t have to take a lot of time; it could be just as simple as picking up the phone and speaking with your adviser.

Taking the time now to review your strategy may help you get closer to the kind of retirement or lifestyle you want.

2. Pay Off Your Credit Card
Consider consolidating credit card debts into a lower interest vehicle such as apersonal loan. Even if you have only one card with a sizeable debt, refinancing to save on interest still makes good sense. Set up a regular payment to ensure that your credit card is repaid on a regular basis.

3. Review Your Insurances
A cash reserve can help you cope with unexpected expenses like fixing a leaking roof or buying a new set of tyres for your car. But would you (or your family) be able to cope financially if you were unable to work for an extended period due to illness or injury? Worse still, what if you died prematurely? Having sufficient insurance cover is a sensible risk management strategy. Before determining your insurance needs, a comprehensive analysis of your assets, liabilities and lifestyle requirements is necessary. Many people already have some form of life and income protection through their employer and/or their superannuation fund. To minimise premiums, these insurances should be reviewed before taking out any new insurance.

You should ensure you have enough life and total and permanent disability insurance to repay debts and to provide funds to maintain your dependants’ standard of living. Income protection should also be arranged to ensure that you can meet your living expenses and commitments like mortgage repayments in the event you are unable to work for an extended period of time.

Home, contents and motor vehicle insurances should also be reviewed to prevent the negative consequences of being underinsured in the event of a claim. Any home improvements or additions over the holiday season should be accounted for in your home and contents insurance policies. When establishing any new insurance cover, carefully read the policy document to check exactly what you are insured for. All policies may differ slightly between insurance providers.

4. Consolidate Your Superannuation
Like many others, you may have multiple superannuation funds. Each time you start a new job you may also join a new superannuation fund. Like anything in life, maintaining control of multiple accounts is time consuming. Ultimately many people lose track of their funds and their superannuation ends up in the Australian Tax Office’s lost or unclaimed super register. Consolidating your superannuation is a simple solution to prevent this occurrence. It can:
-  Reduce paperwork;
-  Reduce management and administration fees; and
-  Ensure your funds are invested in line with your investment strategy.
-  But before you merge your accounts, make sure you take into account any personal insurances provided by your fund.

5. Pay Less Tax
Prevent the last minute June rush. Start your tax planning now. By ensuring your investments are tax-effective, you can boost your long-term wealth.

Some common strategies include:
 -  Salary sacrificing: Involves contributing a percentage of your pre-tax salary into the concessional taxed superannuation environment to build your retirement savings;
-   Debt recycling: Reducing non-deductible debt and utilising more tax-effective, deductible debt for investing in growth assets; and
-   Gearing: Use borrowed funds to build on your investment portfolio and claim a tax deduction for interest payments
 

Source: MLC
 

The past four years have presented the greatest challenge to central banks in a generation. Indeed, not since the shift to explicit inflation targeting 20 years ago has the entire modus operandi of central bankers been questioned. And for policymakers around the world, the economic environment is every bit as challenging as the Great Depression.

In this environment, it is understandable that central bankers have taken some unprecedented steps over the past 4 years - from the Federal Reserve's implementation of quantitative easing and purchase of mortgage backed securities, to the European Central Bank's provision of an unlimited 3 year lending facility. While economic historians Carmen Reinhart and Kenneth Rogoff have shown that the current financial turmoil is not a new phenomenon, the response of central banks certainly is.

Unscathed Australia...
The Reserve Bank of Australia has come through the turmoil relatively unscathed. Unlike most developed countries, where policy rates are close to zero (and savings rates for household deposits also near zero), the RBA;s official cash rate finished 2011 at a neutral setting of 4.25 per cent. Nor has the RBA had to resort to extraordinary monetary policy measures.

And inflation targeting remains firmly in tact in Australia – with the RBA's target of underlying inflation between 2-3 per cent over the medium term. This compares to other regions where central banks have become increasingly concerned about metrics such as employment, exchange rates, and long-term interest rates. That is not to suggest no relationship between these metrics and inflation, merely that the pre-2008 era of basing monetary policy off the medium-term inflation outlook has been considerably complicated since that time, and possibly for the long term.

...although a loosening bias is taking hold
And interest rates in Australia remain in neutral territory. This is despite increasing evidence of weakness in the domestic economy, with the manufacturing (and tourism) sectors struggling under the strength of the Australian dollar, and households becoming increasingly cautious in spending and investment behaviour as an expected multi-year deleveraging cycle gets underway. With businesses struggling to increase sales and retain profitability, employment conditions have also deteriorated over recent months, with employment growth failing to keep pace with population growth and the unemployment rate rising to 5.25 per cent.

With the domestic economy slowing, concerns over capacity constraints in resource operations now on the back-burner, and revised inflation data indicating that underlying inflation – at 2.5 per cent - is comfortably within the RBA's target band, the official cash rate was lowered by 25bp in both November and December 2011 on intensifying concerns over the downside risks from global events. This saw rates move from a tight, to a neutral setting. Moreover, economists and interest rate futures markets both suggest that a further 50bp of rate cuts are likely over the next 6 months.

Breaking the nexus on monetary policy
However the benefits may not be entirely felt by households, with several factors aligning to break the nexus between monetary policy and domestic interest rates.

Indeed, the first signal of this was the decision of ANZ, in early December 2011, to announce changes to its lending rates on the second Friday of each month, up to 10 days after the policy announcement by the RBA. And the first risk is that this dampens the signal of monetary policy.

For the past 20 years, whenever the RBA decided to shift interest rates settings at its monthly Board meeting on the first Tuesday of each month, the outcome would be broadcast on the evening news that night and on the front page of newspapers the following day. Of course, this was relevant for the one third of households with a mortgage, as well as those households thinking about entering the housing market. But it was also a clear signal for businesses, from struggling home-builders deciding whether to lay off staff, or retailers deciding to hire more part-time workers.

Hence the effectiveness of monetary policy – both in terms of the magnitude of its effect and its timeliness – increased because of its impact on expectations. And this is now at risk. Mortgage holders will not only have to focus on what the RBA does, but then monitor their own bank. And the message is even less clear for businesses. Hence the 'signal' element of monetary policy is at risk of being lost.

The second risk is that the link between the RBA's policy rate and market interest rates gets disrupted. Funding costs for Australian banks have increased substantially over the past 3 months due to the European sovereign debt crisis. And hence it would be unsurprising if the Australian banks opt not to pass through the full extent of any policy rate cuts by the RBA. Of course the RBA still has plenty of room to move, and can simply continue to lower rates to achieve the desired decline in market rates that it considers necessary. However the time taken to achieve this is extended.

Finally, an increasing proportion of Australian households are opting for fixed rate mortgages. While typically a small proportion of the mortgage market in Australia, fixed rate mortgages have the disadvantage of muting the policy transmission mechanism as lower variable rates do not automatically translate to lower interest repayments. Indeed, given the standard two year fixed rate term, this can equate to some households not receiving the benefit of lower interest rates for almost 24 months following a lowering of the official cash rate. And by this time, the economic outlook may have changed substantially.

Nonetheless, Australia remains in an enviable position relative to global peers. And monetary policy is unlikely to become completely ineffective. Merely, it is possible that it will become less effective than it was prior to the financial crisis. And that this will result in a more volatile cash rate cycle in Australia.
Source: Macquarie

Education savings plans have been around for many years and have been traditionally used as a savings vehicle for young students.

Education funds have evolved to take advantage of changed investment opportunities, variations in education related expenses, as well as catering for the mature age and post-graduate student.

The Australian Tax Act changes in 2003 officially sanctioned ‘scholarship plans’, which assist students to save for education related expenses. As a result, contemporary education funds can provide for a range of expenditures including post-graduate courses and overseas study.

The investment income of an education fund is taxed at a maximum of 30%. This tax is paid by the education fund – not the nominated student – and while the earnings accrue within the fund there is no assessable income to declare in the annual tax return of the student. In addition, the fund’s tax rate may be lower due to tax credits such as franking credits and foreign tax credits from the underlying investments.

When a claim is made for education related expenses from policy earnings, the education fund can obtain a refund of tax on the expenses claimed. This produces an education tax benefit, which is passed on to the nominated student as part of an education claim.

Education claims which include the education tax benefit are treated as assessable investment income earned by the student. Education claims can utilise the adult tax-free threshold in a highly effective manner which is a major advantage of this kind of investment.

Example: Joanne, 30 year old postgraduate student
Contributions                                                 $50,000
Education benefit: 
- Accrued earnings                                          $14,000
- Education tax benefit                                       6,000
             Withdrawal                                       $20,000
             Total Balance                                                $70,000

$20,000 withdrawal for education related expenses 
*Post-tax earnings on contributions 70%           $11,200
*Plus: Education Tax Benefit 30%                      $4,800
Plus: Investor contribution                                 $4,000
Total withdrawal from plan                                $20,000
*Combined adult tax-free threshold, $16,000 for 2011–2012 financial year.

Other benefits:
- Withdrawals of investor capital for reasons other than education are also treated as tax-free refunds of capital to the investor
- No age limit of nominated student
- Investment earnings within bond do not form part of the assessable income of the nominated student
- Investment earnings are not included for eligibility for Centrelink benefits that are based on taxable income
- No minimum or regular deposit requirements
- No use-by date on accumulated earnings

Source: Lifeplan

Skin, the largest human organ, contains cells called melanocytes which produce melanin, a pigment that results in skin darkening.

Melanoma is a typically aggressive type of malignant growth, which arises due to abnormalities in the cellular structure and behaviour of melanocytes. One medical dictionary defines melanoma as a tumour ‘of high malignancy that starts in melanocytes of normal skin or moles and metastasizes rapidly and widely’.

What causes melanoma?
Several factors are thought to increase a person’s likelihood of developing melanoma, including the key risk factors listed below:

• Relatively prolonged exposure to the sun’s ultra-violet (UV) radiation, especially   when this results in sunburn;
• Having fair skin, with a tendency to suffer sunburn rather than a tan following prolonged UV exposure;
• People who already have a relatively large number of moles, or ‘atypical dysplastic naevi’;
• People previously diagnosed with a melanoma, or a non-melanoma skin cancer;
• Melanoma previously diagnosed in a parent or sibling;
• The use of tanning beds and similar devices;
• Prior exposure to cancer-causing agents including radiation sources and chemicals such as arsenic; and
• People with a compromised immune system, due to a known autoimmune deficiency (such as AIDS) or use of immune-suppressive drugs.

The impact of melanoma in Australia
According to the latest statistics published by the Australian Institute of Health and Welfare (AIHW), melanoma was the main diagnosis associated with an average of 9,951 hospital separations per annum, based on information reported by Australian hospitals from 2008-2010.

The AIHW figures are consistent with The Cancer Council’s estimated melanoma incidence rate of around 10,300 cases per annum - almost 10 per cent of all cancers diagnosed in Australia each year.

The Cancer Council also highlighted that 1,430 Australian deaths were caused by melanoma in 2008.

Summary
The latest medical and public health literature highlight the considerable disease burden of melanoma in Australian patients, their families and communities.

However, by arranging appropriate levels of death, disability and trauma cover, Australians can take tangible steps to help ensure their own ongoing financial wellbeing and that of their families and businesses, in the event of death or significant disablement arising from a diagnosis of melanoma.

Please speak to your Portfolio Managers adviser to discuss your insurance options.

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This newsletter contains general information only and does not take into account the investment objectives, personal circumstances or financial needs of any particular investor. You should therefore obtain professional financial advice before making any investment decision based on the information provided in this document. In the event that this newsletter contains information about a particular financial product, you should also obtain a Product Disclosure Statement in respect of that product prior to making any decision to acquire that product.