Fully Franked Issue 01 2011

8/7/2019 Fully Franked Issue 01 2011

1/12

O WEEK EDITION | 21st February 2011

[email protected] RATE

4.75%WEBSITES

www.usydunit.com.au

www.unitaustralia.com

Proudly sponsored by:

2011: A NEW DECADE, A NEW LEAF

Dear reader,

I would like to give a warm welcome to new members who signed up to UNIT during

O-week. Our organisation at Sydney University is committed to providing free, current

and industry-driven information that aims to help navigate you through your trading

and investing ventures. Actions speak louder than words of course, so here I present to

you our first edition ofFully Frankedfor 2011.

With issues including European sovereign debt, US economic recovery, Chinese

monetary tightening and currency control, political instability in the Middle-East set

to dominate the international outlook, and the economic impact of the Qld floods, the

ASX-SGX merger, and the entrance of Chi-X stirring on the domestic front, 2011 will

not disappoint in bringing new lessons and excitement to those in the investing and

trading world.

Inside this edition, the UNIT team has prepared a special introduction to share trading

and investing for those among us looking to make their first pot of gold in the market

I would also like to thank our sponsors Bell Direct and YourTradingEdge (YTE) for

providing two high quality pieces- Charting Does Workby Julia Lee and A New Day by

the YTE staff.

Special thanks go to Nhi-Y Pham, publications director at UNIT Central, for her

enormous help in compiling articles and liaising with our affiliated chapters at UNSW

and UMaq.

2011 is an exciting year for UNIT at Sydney University. We have lined up speakersranging from the ASX to top brokers and hedge fund managers in the country to come

and share their insights into and from their respective fields of practice. Keep an eye

out for event updates on our website http://www.usydunit.com.au/events.

Risk comes from not knowing. Happy reading!

Justin ZuoEditor

CONTENTSCharting Does Work ........................................... 2

Julia Lee

A New Day ........................................................... 3

YourTradingEdge

Getting started on Trading and Investing...6

The UNIT team

How much is that Dollar in the Window? ........ 8

Nevin Spoljaric

Ethical Investing in Australia ........................... 10

Nhi-Y Pham

2011 EDITION 01 | 28th February 2011

All information provided in this publication is subject to the Disclaimer on page 12.

NEED A BITE-SIZE NEWSFEED FOR STUDENTS?

Only student-relevant world news, tutorials and career information.

From value investing to quant trading, weve got you covered.

Find our Twitter feed at http://twitter.com/USydUNIT


2/12

ISSUE 1 | 28th February 2011

2

CCharting Does WorkJulia Lee introduces the technical analysis toolboxTechnical analysis also

known as charting has been

used by traders in all sorts of

assets, not just in equities, forcenturies. But how can you tell if

technical analysis actually works

for the sharemarket?

Charting to track the

sharemarket is still a relatively

new area compared with

fundamental analysis. However,

recently more studies have come

to light that support the idea

that technical analysis or using

charts can outperform againstthe sharemarket.

Recent studies

One study found that there are

26 technical trading rules that

when applied correctly could

actually outperform a buy and

hold strategy. Brock, Lakonishok

and LeBaron (1992) looked at 26

technical trading rules over

almost 100 years, from 1897-

1986. They looked at the Dow

Jones Index, then evaluated a

buy and hold strategy on

particular stocks versus using

two trading methods: moving

averages and trading range

breaks. By comparing the results

of buy and hold versus these two

main technical analysis

methods, they found that the 26

technical trading rules

outperformed.

In a related study, Levich and

Thomas (1993) provided more

evidence that moving averages

produced profitable trading

signals. The data was for the

foreign exchange market for the

period 1976-1990.

And in a third study, Gradojevicand Lento (2007) looked at

different moving average

combinations: 1 day/50 day, 1

day/200 day, 5 day/150 day. The

study applied the combinations

to the S&P/TSX 300 index,

NASDAQ composite index and

Canada/US spot exchange rate.

The researchers found that

excess returns were generated

using moving averagecrossovers.

Moving averages

A moving average is the average

price over a time period. For

example, a 200 day moving

average is the average price of a

stock or index over 200 days.

This type of analysis is useful

because it generates a trend-

following mechanism.

Buy and sell signals

Generally if the price of a share

moves above the 200 day

moving average line, its a buy

signal and if it moves below, its

a sell signal. 200 days is quite a

long line on the market and its

thought of as a long-term

indicator, suitable for a traderlooking to catch long-term

trends.

If on the other hand, youre a

short-term trader looking to

trade a couple of times a month,

you would use a shorter time

frame such as 15 days to watch

moving averages.

Combining charts

You can even use two moving

averages of a shorter and a

longer time period to generate

buy and sell signals.

For example, if you chart a 1 day

and 200 day moving average,

and you see that the two lines

cross over (called a moving

average cross over) it indicates a

buy or sell signal.

A buy signal is generated when

the shorter period line (like the 1

day moving average line) moves

above the longer period line.

Conversely, a sell signal is

generated when the shorter

period line moves below the

longer period line.

The moving average crossover

tends to work well when there is

a strong uptrend or downtrend

in the sharemarket, but not

when prices are moving

sideways. The problem with a

sideways market is that it causes

whiplashing, that is buy and

sell signals appear at the same

price.

Lets have a look at an example:


3/12


3

In this example you can see the

shorter time period in black and

the longer time period moving

average in red. When the black

line moves below the red line itgenerates a sell signal.

While moving averages have

been shown to have been

effective in the past, it is not a

fool-proof system. Other

technical analysis indicators can

be combined to increase you

chances of success in the

market.

Happy trading!

Julia Leeis an equities analystand head media presenter at BellDirect. She will be the guestspeaker at UNITs first event for2011: Julia Lee Charting yourcourse to success onWednesday 09 March.

AA New DayYTE looks at six essentials for day trading successes.

At various times and for a

variety of reasons, traders from

all walks of life are lured to the

sphere of day trading. Long-

term trend followers, medium-

term active investors, futures

traders, options traders you

name the trader and the

markets they trade, and

invariably either they have had a

go at day trading or they are

giving it some consideration.

But is it for you? Will it suit your

lifestyle, personality, capital

base and trading style?

Lets look at some of the pros

and cons of day trading and

discuss why it may or may not

suit your trading vision and

goals. Despite the lure of

moving in and out of the market

quickly and producing a regular

daily or weekly income, day

trading requires a level of

commitment and discipline that

not all traders are capable of

sustaining. Whilst it will suit

some, day trading will be

completely unsuitable for

others.

Discipline and patience

Day trading requires extremely

strong self-discipline and

endless patience. The nature of

the day-trading beast requires

that you can access market

information during the times

the markets you trade are open

every day of the week. It

becomes an all-engrossing job

that requires you to constantly

interact with the market

whenever that market is trading.

This requires constant vigilance

to monitor existing open

positions and scan the market

for potential new trades. It

requires a disciplined and

structured approach and a well-

researched and well-

documented trading plan that

must be adhered to at all times.


4/12


4

You need the discipline to

execute every trade that comes

along, and, at the same time, the

patience to wait for the trades to

set up before you trigger an

entry based on your rules of

engagement. Jumping intotrades in front of your own entry

rules can have devastating

results. Watching and watching

a potential trade, you can be

lured into it early, thinking it is

just about to reach your entry

price or your entry criteria are

moments off being met. So you

jump in early, pre-empting the

trade, and then watch appalled

as the trade goes into reverseand results in a loser!

Time available and time

management

For those people day-trading

futures or share markets in their

own time zone, finding and

managing time is not too

onerous. For those attempting

to trade markets outside theirown time zone or markets that

trade 24 hours per day, the time

required becomes a burden.

Decisions have to be made

about which markets you will

trade and during what times. It

is physically impossible to trade

through the day in your own

time zone and then attempt to

sit up at night trading a global

market. You may be able to do it

for a while, but eventually sleep

deprivation, mental exhaustion

and the fact that you no longer

have a life outside trading will

destroy you mentally and

physically.

The time you have available to

day trade will be influenced by

many factors, such as other

work commitments, family and

social aspects, and travel

requirements. There is no point

even contemplating being a daytrader if your job or other

commitments dont allow you to

have access to market prices or a

computer screen throughout the

day.

Managing your time through the

day is also important. You will

have to decide the most

appropriate times of the day to

trade and when to take breaksfrom the screen. You may need

to structure your day so you can

watch the opening and closing

times of the market(s) you are

trading and a period either side

of these times when the

volatility and volume is high and

activity is intense. You may find

periods during the day when the

market is quieter. During these

periods you need to allocatetime for the other activities

associated with trading. They

may include filing and

paperwork, editing spreadsheet

information and record keeping,

reading and further research.

You will also need to allocate

time for breaks to allow you to

eat, do some exercise or even

have a rest period if you are

trading in more than one

timeframe.

Have a trading plan and use

it!

The active nature of day trading

means a trading plan is

imperative. Your trading plan

must detail every aspect of your

trading activities so that you are

never making decisions on the

fly or on the spur of the

moment. Your trading plan

needs to be well researched andwell documented before you

engage the market. It will

include all the details of every

aspect of your trading from

entry and exit rules, through

times to trade, to the ever

important money management

rules that you will employ, and

everything else.

All traders must know exactlywhat they are planning to do

and how they are planning to do

it, but these factors are

especially important for the

short-term day trader, who is

constantly interacting with the

market. Decisions need to be

made quickly and, at times,

under pressure, so it is vital that

you have every aspect covered

and know exactly what to do inthe heat of the moment. This

includes contingency plans for

when things go wrong, such as

times when trades go against

you quickly due to an

unforeseen event or

announcement, as well as when

Internet connection issues or

other computer-related events

affect your ability to trade or

close out of open positions.

Choosing the markets to

trade

In addition to choosing markets

to trade based on your time

zone, time available to trade,


5/12


5

and times that you want or are

available to trade, there are

several other considerations in

choosing markets to trade.

Perhaps the most important of

these is liquidity. As a short-

term trader it is essential thatyou are able to enter and exit

trades seamlessly. Your trade

volume should be able to be

consumed by the market with

ease and not affect price. In

essence, your trades have no

impact on the market; they just

slip in and out without causing

any disturbance to the normal

order of that markets trading

activity. There is little point intrying to trade large volume on

thinly traded shares or illiquid

futures contracts you may be

able to enter your trades

without too much fuss, but

getting out may be a problem!

Technical or fundamental?

Short-term trading is well suited

to the application of technicalanalysis. The interactions

between price, volume and time

that occur intraday, and the

resultant impact these

movements have on technical

indicators, allow them to be

applied across a variety of

timeframes. For both the highly

active tick trader to the less

active but still busy trader using

hourly bars, technical indicators

and their interactions provide

thousands of combinations

upon which short-term trading

systems can be based. The speed

with which these interactions

can occur, and the resultant

trades that then need to be

placed, mean fundamental

analysis cannot be applied.

Auto-trading

Day trading is ideally suited to

the use of mechanical trading

systems because of the speed

with which markets set up, and

then trigger, entry and exit

signals. Traders using

discretionary decision-making

techniques will have difficulty

executing trades when usingsmall timeframes. They may be

watching a market for a

potential entry point when a

certain price or indicator value

is reached. Suddenly, that point

is reached. By the time they

react and then go through the

process of executing the trade,

the market has taken off and

perhaps even reached the target

price for the trade. The trader isleft to lament what might have

been. If, however, the trade had

been programmed in via an

auto-trade function the trade

would have been entered and

exited according to the traders

rules with no need for the trader

to interact with the market.

Auto-trading is ideally suited to

markets that trade electronically

over several time zones and that

have huge liquidity. The Foreign

Exchange (FX) market and some

of the highly liquid

electronically traded equity

index futures contracts, the E-

mini S&P for example, can be

traded in this way. The traders

job becomes that of developing

or identifying systems that workand then monitoring their

performance, rather than one of

actually placing trades.

Such systems can be traded on

markets that are active 24 hours

a day without the\ trader having

to be awake. In essence, the

power of the market and of the

Internet can be harnessed to

allow us to trade around theclock whilst we get on with

doing other stuff. The vital

components, other than a

proven system, are a reliable

computer, and a fast, secure and

reliable Internet connection.

Day trading will not suit

everyone. If you think it sounds

like fun and would suit you,

then give it a go. Many onlinetrading platforms now have

demo or simulated accounts

where you can test systems and

your own ability to trade on a

short-term basis without risking

real money. If you think it all

sounds stressful and a hassle,

then stick with your current

trading style. In the end, it

comes down to personal

preference and trading style.

YourTradingEdge staff

(www YTEmagazine.com)


6/12


6

GGetting started on trading and investingThe UNIT team explains the first steps towards having your own portfolio

They say that the first step is

always the hardest - but this is

not true for shares. With the

rapid growth in number ofAustralians that own shares,

along with technological

advances in share trading

systems, opening your first

share account will often be

easier than applying for a

bank account.

However, before we get into the

specifics of how to open a share

account and trade shares, let's

just take a step back and quickly

consider how the Australian

share market operates -

although it's entirely possible (as

some of us have found out from

experience) to trade and make a

killing (or be killed) on the share

market without any knowledge

of how it works at all.

If you feel like you are ready,

then at any time flip to the last

section on how to start trading!

How do I buy Shares?

In Australia and internationally,

there are two ways an investor

can end up owning shares in a

company. The first way is to buy

shares when they are offered for

the very first time to the public

in what is known as an Initial

Public Offering (IPO) - Myer

and QR National should sound

like recent examples. In practice,

this often relates to finding and

filling out a prospectus

containing the details of the IPO

and sending a cheque to the

company.

Participating in an IPO gives youshares that are brand new - so

you are said to be a participant

in the primary securities

market. But what happens if an

investor wants to sell some

shares? Or what happens if an

investor wants to buy shares

that had its IPO years or

perhaps decades ago?

This is where the secondary

market comes in and believe it

or not you are all actually more

familiar with this market. The

secondary market is essentially

the place where the majority of

buying and selling of shares

happens, and in Australia this

occurs on the Australian

Securities Exchange (ASX).

When we say it occurs on the

ASX, it really happens

electronically on servers

operated by the ASX although

there once was a time where

people actually went to

securities exchanges to buy and

sell shares. The electronic

trading system that operates in

the ASX today is known as the

Integrated Trading System (ITS).

How does the ASX work?

As mentioned before, sometime

in the past a stock exchange

simply operated by people going

to a physical location and

trading stock certificates (titles

of ownership similar to a house

deed) for cash. The same thing

happens nowadays, only it is

now all electronic.

There are several key points

regarding how the ASX operates.Firstly, only a few select

individuals can actually "talk" to

the ASX - these special

individuals include brokers,

banks, listed companies and

other financial institutions.

While this might seem strange,

just imagine what would happen

if 21 million Australians

suddenly attempted to

communicate with the ASX - it

would go haywire! Instead, these

special individuals are funnels

through which ordinary

Australians have access to the

ASX - and these special

individuals (e.g. your broker) are

said to be your "sponsors" on

the ASX.

The second important point

relates to how transactions

really occur. Clearly, to be able

to sell a share you must first

own it (this isn't strictly true but

let's ignore some more high level

financial wizardry). But how do

we know that a particular

investor owns a specific share?

This is where ID numbers come

into play, and just to add to the

confusion, the ASX uses two

systems. For the ordinary

investor purchasing shares

through a broker (i.e. "broker

sponsored"), we have what is

known as a Holder

Identification Number (HIN).

This is essentially like a bank

account number and multiple


7/12


7

shareholdings (e.g. in BHP, ANZ

and RIO) can be linked to a

single HIN - simple, smooth,

easy.

But maybe your life is not

interesting enough and youinstead choose to directly

communicate with the company

you are buying shares in, e.g. in

an IPO situation where you do

not have a broker. Under these

scenarios, the company you

buys shares in (the "issuer" of

the shares) is said to be your

sponsor - you are then issuer

sponsored.Under this scenario,

you are issued a ShareholderRegistration Number which

unlike a HIN, is different for

each holding. For example, if an

investor owns issuer-sponsored

shares in BHP, RIO and ANZ

they would have 3 different

SRNs for each shareholding.

SRNs are confusing and are

rarely encountered by the

average broker sponsored

investor (i.e. you) - so don'tworry!

One last point regarding how

the ASX works is something

called a clearing house. Because

trades occur so fast on the ASX,

it is impracticable for there to be

a manual transfer of ownership

concerning the shares - there

has to be a system that does this

electronically. Another concern

is that the person on the other

side of the trade (i.e. the person

buying from you or selling to

you) doesn't honour their

bargain. This is known as

counterparty risk and the

solution is for a third party to

handle everything. This third

party is called the Clearing

House Electronic Subregister

System, or CHESS for short. In

terms of a simplified overview,

the buyer deposits money with

CHESS (through a broker) andthe seller registers their shares

on CHESS - and CHESS handles

the rest.

How to Open Your First Share

Trading Account

Right, now onto the fun part!

As mentioned earlier, opening

your first account with an

Australian share broker is oftenvery easy and you will typically

need only the following things:

x Some sort of ID

(passport or driver's

licence)

x Bank Account to link to

share account

x A few days for all the

paperwork to go

through

In terms of how a trading

account works, it is very similar

to a bank - you transfer money

in, you then use that money to

buy or sell shares and ultimately

you can transfer the money back

into your bank account. The

interfaces for most trading

accounts are also highly

intuitive - simple search the

ticker code of the share andpress buy or go to your portfolio

and press sell.

Some Examples of Brokers

You might be wondering how

brokers make money - well, they

typically charge a fee for every

share transaction. This might

range anywhere from $10 to $40

or more, depending on the

broker.

Some brokers include:x Bell Direct

x CMC Markets

x Minc Financial Services

x Amscot Discount

Broking

x Morrison Securities

While there are many high

quality platforms to choose

from, we would like to point out

that Bell Direct, one of UNITssponsors, has offered to provide

special deals to our members if

theysign up with the

promotional code UNIT. Bell

Direct is also one of the most

inexpensive brokers currently

operating in Australia, offering a

fast trading platform and great

research. Many other brokers

are often linked to large

financial institutions -Commsec, Australia's most

popular broker, is an offshoot of

Commonwealth Bank. Other

brokers that offer full service

including advice include Bell

Potter, Macquarie, any of the big

4 banks and many of the

investment banks.

Many students often choose to

start with a broker with low

brokerage fees simply because

they don't have enough money

to execute large trades that

justify high brokerage anyway.

Before signing up to any broker,

we encourage you to compare


8/12


8

prices and fully read all product

disclosure statements (PDSs).

Special thanks go to Murphy Xue

for his initial draft and Ajay

Balachandran for his observant

edits.

This article is only intended to

provide general information.

UNIT does not represent or

warrant that it is complete or

accurate. The information is for

education purposes only and any

financial advice should be sought

from a professional adviser. If

you are seeking advice (including

a recommendation or opinion)

about a financial product you

should consult an Australian

financial services licensee.

HHow much is that Dollar in the Window?An Introduction to Value InvestingBenjamin Atkinson answers the questions of what value investing is and how to do it.Imagine there existed a peculiar

shop that sold only one thing Aussie dollar coins. What is

most unusual about this Dollar

Shop is that every day, the price

of this product changes as

customers rush in to buy or sell

their coins. Their motives are as

varied as they are irrational;

buying because they hear dollar

coins are the next big thing, or

selling simply because

everybody else is. You, an

enterprising individual, notice

how much the price of the coin

varies, and more importantly,

realise its true value, $1. Rather

than listen to the greedy buyers

or the fearful sellers, you simply

wait until the shop sells its coins

for 80c and you buy, and when

the price moves above $1 you are

happy to sell your overpricedcoins for a nice profit.

Believe it or not, the share

market presents us with such

opportunities, and for those

with a patient disposition and a

willingness to put in the effort,

value investing may prove to be

a very effective approach tocreating wealth. Whilst it wont

always be as obvious as buying a

dollar for 80 cents, value

investing uses a simple

approach: to purchase assets

(such as shares) at prices less

than their true value. By doing

so, the investor is effectively

gaining ownership of something

that is worth more than what

they paid for it.

Value investing has been

popularised by legendary

investor Warren Buffett and his

mentor, Benjamin Graham,

author of The Intelligent

Investor, a book that is still

referred to as the bible of

investing. Graham pioneered

the margin of safety approach,where buying shares for less

than they are worth positions

the investor to gain from the

markets eventual recognition of

value in the form of increased

share prices. In extreme cases,

think Buffett, entire

undervalued businesses can be

bought to benefit from thedirect delivery of future

earnings.

In finance there is a theory

known as the Efficient Market

Hypothesis which suggests that

the presence of rational

investors, with equal access to

information and no transaction

costs, causes the markets to

rapidly react to new information

such that the price of an asset at

any given time reflects the best

estimate of its value.

Furthermore, the Capital Asset

Pricing Model (CAPM) uses

this efficient world to determine

the expected return of a

particular share by comparing

its relative riskiness to that of

the overall market. Risk in thissense is a measure of how much

the actual return has historically

deviated from the average

return. The model suggests that

investors should be

compensated for bearing more

risk by expecting a higher


9/12


9

return. But if risk is a measure of

the likelihood that returns may

deviate from the average, it is

merely measuring the past

tendency of the share price to

vary a certain magnitude both

negatively and positively.

Graham felt that investors

should not be rewarded for risk,

but for the effort put into

researching and discovering

underpriced stocks. In the value-

investing framework, risk is

instead defined as the possibility

of a permanent loss of capital.

The margin of safety is a way of

ensuring we invest only in safeopportunities, as, if we are

confident that the value of a

particular share is much higher

than its purchase price, it is far

more likely that the price will

move upwards towards its value,

minimising the risk of losses and

maximising the chance of

substantial returns.

So how do you determine the

value of a share? Whilst there is

no perfect formula, estimating

the present value of all future

cash flows is generally regarded

to be a good start. Often this is

referred to as intrinsic value

and there are many approaches

to predicting future cash flows

within a business. What this

method lacks in certainty, itgains in relevancy; by looking

forward the investor can

determine where opportunities

lie to make substantial gains,

whereas a historic price chart

may have little bearing on future

returns.

This is where the opinions of

technical analysts and value

investors diverge. Chartists

believe price patterns

continually repeat themselves,

and money can be made by

buying and selling when price

patterns indicate a trend.

However, If past history was all

there was to the game, the

richest people would be

librarians Warren Buffett.

Graham labels these traders as

speculators, adherents to the

Greater Fool Theory; the belief

that it does not matter what youpay for something, as long as

you can find somebody more

foolish who will buy from you at

a higher price. In contrast,

investors are those who instead

buy and hold their securities for

the long-term, placing value on

the ownership rights to great

businesses. They believe that a

share is more than just a

number ticking up or down; it is

a slice of a real business, and its

value is accordingly determined

by the performance of that

business. High long-term

returns within a business can

validate the presence of

consistent innovation and

capable management, but the

performance of financial

statements can often deviatefrom the performance of the

share price. Herein lies the

opportunity; if a superior

business is trading below its

value, it may be an excellent

chance to buy a slice of a great

company at a bargain price.

Financial ratios are often used to

screen the investment universe

for high quality shares. Roger

Montgomery, an Australian

investor and author of the book

Value.able, emphasizes the

importance of selecting only the

top quality businesses, indicated

by high return on equity and

low debt. Once the investor has

a short list of the best business,

they may apply valuation

techniques to further screen for

those shares that are trading at

discounts to intrinsic value. It is

a good idea to also considersome qualitative factors in

determining the potential of a

company. Philip Fisher, in his

famous book Common Stocks

and Uncommon Profits, outlines

fifteen criteria to look for when

seeking out companies with

outstanding growth prospects.

Similarly, Buffett frequently

emphasizes the importance of a

business moat; those

competitive advantages that

make a company superior. Coca-

cola is recognized worldwide,

Apple has loyal customers

willing to pay a premium for the

brand and JB Hi-Fi has set up a

low cost chain that shuts out

many competitors. All are

unique advantages that

perpetuate profitability.

Value Investing is a long-term

approach that seeks out

undervalued shares. This buy-

and-hold strategy, when applied

only to the highest quality

businesses, can provide


10/12


10

significant returns whilst

avoiding the stress and high

transaction costs that

accompany high frequency

trading and daily market timing.

By refraining from paying

inflated prices for shares, the

investor limits the possibility of

capital loss. Similarly, by

purchasing at a price that is

below value, the investor stands

to make substantial profits.

Remember:

Price is what you pay, value is

what you get Warren Buffett

Ben Atkinson is a 4th year

Commerce student studying

under the Co-op scholarship

program at the University of New

South Wales. Aside from

investing, his interests include

footy and tennis.

EEthical Investing in AustraliaNhi-Y Pham explores an alternative way to look at investing.Ethical investing refers to

investing in stocks or othersecurities which are issued by

companies which are socially

responsible. Eco-investing, a

subset of ethical investing, refers

to investing in stocks or funds

with an environmental focus.

Ethical investments have gained

popularity over the last decade

and in the aftermath of events

such as the BP oil spill, it is not

surprising that investors are

broadening their decision-

making framework to

encompass social and

environmental criteria. The aim

is to identify stocks which will

not only provide profitable

returns but to choose stocks that

can help to achieve desirable

social and environmental

outcomes.

On the ASX, there is an

Australian Cleantech Index

which is an index of ASX-listed

stocks from the clean

technology sector. It includes

over 75 companies which

operate in the renewable energy,

alternative fuels, waste andrecycling, energy efficiency and

carbon sectors.1

Beyond the stocks in the

Cleantech Index, investors who

may wish to expand their

definition of ethical investing

may conduct negative

screening, whereby they avoid

investing in stocks which areconsidered sinful or not ethical

due to their practices or lack of

standards. Investors in Australia

can also invest in managed

funds which focus on investing

in socially responsible stocks.

Alternatively, investors can

invest in the ASX-listed fund

manager, Australian Ethical

Investment Limited (AEF).

Given that the definition of

ethics varies person-by-person,

if you are considering investing

in a socially responsible fund,

1ASX (2010), Clean Technology

Sector, accessed 29/09/2010,

you should ensure that their

stock choices and standards ofethics agree with your personal

values.

One issue that ethical investors

may face is diversification if

their screening is too stringent.

For example, only about 5% of

ASX companies pass the

screening of Eco Investor,2

which identifies positiveinvestments on the premises of

environmental activity,

environmental focus and

environmental

commitment.3

Furthermore, the

majority of these companies are

micro-cap stocks which are

highly speculative. That said,

depending on the fund, there

2 Bivell, V (2010), 12 Shares Pass

Green Screen, ASX, accessed

29/09/2010,

3

Eco Investor (2010), What Eco

Investor Does, accessed

28/09/2010,http://www.ecoinvestor.com.

au/html/Eco_Investor.htm


11/12


11

remain plenty of opportunities

from which to select: for

example, the Perpetual

Wholesale Ethical SRI Fund

screens out stocks in the

alcohol, gambling and tobacco

sectors.4

A question often asked about

socially responsible investing is

whether its returns are as

comparable as choosing

investments based on traditional

criteria. Overall the Cleantech

Index increased by 43% (more

than the Small Ordinaries) in

2006/07 and outperformed theASX 200 in 2007/08 falling only

16%.5

However, in the aftermath

of the GFC, it is fair to say that

strong recovery has not been

achieved by the large clean

technology companies, with the

index falling 39% in 2008/09,

more than the ASX 200

benchmark.6

However, some of

the clean technology companiesare more for the long-term

investor than a short-term

investor.

Ultimately, even if ethical

investing is not as profitable as

other investment methods, the

advantage of ethical investing is

4Potts, D (2010), A World of

Opportunities, Sydney Morning Herald,

accessed 28/09/2010,

5OBrien, J (2010),Understanding Eco-

Investing, ASX, accessed 29/09/2010,

6

Ibid.

that you can at least rest assured

that your investment choice was

based on something more than

greed.

Successes in the

Australian retail bond

markets

In Developments in the

Australian Bond Market (Issue

4, 2010), I discussed the desire of

the government to build the

Australian retail bond market

and followed it up in Issue 5

with news of Primarys intention

to issue retail bonds. I can now

report that Primary was

successful at raising $152.3m in

retail bonds, more than the

initial issue size of $125m.7

Some say though that the retail

bond market in Australia only

truly came into being when the

Commonwealth Bank issued

$500m in five-year retail bonds

towards the end of 2010.8

The

bonds will pay 1.05% above the

90-day bank bill rate.

Young investors in particular,

should start to consider a retail

bond investment as a serious

7Lefort, Cecile, Primary Health raises

A$152.3mln in retail bonds

(27/09/2010), Reuters, accessed

6th

December 2010

8Collett, John, CBA unlocks market for

retail bonds (26/11/2010),Sydney

MorningHerald, accessed

6th

December 2010

alternative to online savings

accounts and term deposits

since the minimum amount to

invest is only $5000. Given the

success of retail bond issuance

so far, you should expect to see

more opportunities to

participate arise in the future.

Nhi-Y Pham is in her 4th year of

Commerce/Law undertaking

Honours in Finance at the

University of Sydney. She has an

interest in equities, market

microstructure and accessible

methods of investing for young

people.


12/12

O WEEK EDITION | 21st February 2011

12

DISCLAIMERThe material in this report is produced as general information only and is not intended to be advice. Readers should not act on

the basis of this information and must seek specific advice from a professional adviser before taking any action. No warranty or

guarantee is given regarding the accuracy or reliability of this report. The authors expressly disclaim all and any liability to any

person for any loss or damage arising as a result of this publication, whether whole or part of the contents of this publication. For

permission to use this report, you must accept full responsibility for any action that you take. Note also that past results are not a

reliable guide to future results. Future outcomes are unknown and investing can result in financial loss.

Interested in writing for Fully Franked?Contact the editor, attaching your CV: [email protected]

Fully Franked Issue 01 2011

Documents

Transcript of Fully Franked Issue 01 2011