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30 September 2008

The recent sharp negative performance of equity markets around the world and the questionable financial viability of several companies, has many investors concerned about their own investments.

At times of such market uncertainty and negative sentiment, people often think the worst. The following information is aimed to dispel some myths and to provide an update in relation to client investments.

Is my money safe as I’ve heard that some companies might go broke?
While share investments in particular have been the hardest hit and have fallen in value recently, if you hold a diversified range of shares it is extremely unlikely that you will lose all of your investment.

Being diversified in shares can simply mean that you invest across a range of different shares rather than just in one or two.  And this is what managed funds do.

How does a managed fund work?
A managed fund, also known as a unit trust, is a vehicle that pools your money with that from a number of other investors.  These funds are then used by the fund manager to purchase assets – in the case of an Australian equity fund this is predominantly shares listed on the Australian Stock Exchange.

So I’m not investing in the company who is offering the managed fund?
Most of the time, no you’re not.  Your investment in respect to an Australian share fund, for example, is usually spread across a range of anywhere between 20 and 60 different shares.  This may include names such as BHP, Westpac, Qantas and Woolworths.

I guess it’s unlikely then that I would lose all that I’ve invested in an Australian share fund?
Yes, it is very unlikely. A fund may hold between 60 to 80 stocks and these would all need to go into bankruptcy.  This is one of the benefits of investing in a managed fund; you’ve diversified your investment across a number of different assets or companies.

What if the company offering the managed fund goes broke or into liquidation?
This does not mean that your investment in the related fund will be lost.  The assets (eg shares) held in the fund are held on trust for you as the beneficial owner.  So it is you, the investor, who holds the ownership rights to the assets via units in the fund.

The legal owner responsible for administering the fund and the assets is known as the Responsible Entity.  If the company offering the fund does go into bankruptcy the Responsible Entity can be replaced.  The fund will continue to exist along with your investment in the fund and its related assets.

Even if I’m unlikely then to lose all of my investments, they have fallen so much that it may be quite some time before they recover in value?
No one can give you guarantees about when and how quickly markets will recover.  It is interesting though to look at previous events that caused equity markets to fall and how long it took for markets to recover.  Some examples follow:

  1987 sharemarket crash in the United States when the market fell by around 30%.  It took 22 months for the Dow Jones to return to its pre crash level.
  September 11, 2001 the terrorist attack sent panic through investment markets which immediately fell in value.  It took the Australian equity markets (S&P/ASX 300 Accumulation Index) only 22 days to recover to the pre September 11 level.

Most of the funds invested in the sharemarket have a medium to long term (5 year) investment profile.  It is important to remember that this type of investment is likely to experience periods of negative returns from time to time, but over the longer term, returns have historically outperformed other asset classes.  Investment decisions should take this long term view into consideration and be made in consultation with your financial planner.

Every event and related impact on financial markets is different and so too is the time that it takes for the market to recover to pre event levels.

What if I’m just about to retire and planned on having the full amount of my investment to retire on?
Superannuation investment earnings are taxed at 15% and are not taxed if transferred into a pension account, after retirement.  On average, retirees have a life expectancy of around 20 years which is a good period of time to allow for a recovery in financial markets.  Your financial adviser can discuss the best approach for your particular situation.

The above information is general in nature and does not take into account your personal situation or needs.  Before deciding to acquire or dispose of investments, you should consider the relevant Product Disclosure Statement (PDS) and whether it is appropriate for you.  You may wish to consult a licensed financial adviser prior to making any decision in connection with your investments.  Past performance is not indicative of future performance.