10 things you must do for 2013

PORTFOLIO POINT: The last year has delivered excellent returns for many investors, despite all the economic doom and gloom. There is every prospect 2013 will be just as good, if not better.

In the end, when you get behind the hype, the fear and the endless distractions offered by the markets (and many market commentators), what matters is whether you invest successfully.

In 2013, whether you make money or not will most likely depend on your investment strategy, your ability to respond to circumstance and crucially … your asset allocation. Again next year you will read endlessly on the politics of the EU, on the signals from the Federal Reserve, on domestic dramas surrounding our own hung parliament, and very little of it will make a critical difference to your investment outcomes.

Instead, your success or otherwise as an investor will depend on the longer-term decisions you make and the work you put in to make sure those decisions deliver.

In the last 12 months I’ve read every word of every edition of Eureka Report and chaperoned our suite of writers and contributors through the editions to ensure you get the best possible value for your subscription. In attempting to summarise the outstanding messages from the Eureka team for 2013, there are 10 things you must do: Make sure you have this list ticked off before we return to investing successfully in 2013.

1. Do you have the right balance of yield and growth?

Cash rates are low at 3% and there is a wide expectation that the cycle of rate cutting may not be over yet.

As an informed investor you must seek out yield – it may be a balance of cash, term deposits, bonds, hybrid notes or, like many other investors, you might simply accept the additional risk in the stockmarket and take the excellent yields available from banks or blue-chips such as Telstra.

As we move into 2013 there is a distinct possibility that stock yields will ‘compress’ and share price growth will come back into play. This had already happened at Commonwealth Bank and Telstra. Some of our smarter investors have a strong yield portfolio with an eye now to following the yield compression trend where stock prices may lift to reflect the chase for yield … this is likely to happen to REITs and possibly utilities next year.

2. Register what has just happened on the ASX in 2012.

The overall returns to retail investors from the top-end of the sharemarket in 2012 were more than 16%. Yes, you read that right, 16% plus. How, you ask? The headlines all year were so gloomy. We seemed to be edging towards some disaster every other day.

Well, sure there was a lot of challenges but our biggest companies – namely our banks, health care companies and some outstanding blue-chips companies – produced handsome returns and were ‘bid’ up strongly by investors.

Just in case you don’t quite believe the 16% figure, here’s how it was calculated. The ASX 200 returned roughly 10% over the calendar year. Added to that, you must include dividend earnings and the average dividend yield was 5%. Then to your 15% you must add in the after-tax value of franked dividends. The final outcome for the retail investor is comfortably over 16%. There is just as much chance we could have a repeat performance in 2013.

3. Make sure you have a selection of very good small caps (and rotate them regularly).

Regular subscribers of Eureka Report will know we are very enthusiastic about small-cap stocks for several key reasons. Well-managed small companies will offer real growth opportunities. The majority of small companies are not covered by stockbroking researchers, and this presents an opportunity for the alert investor.

In the year ahead we are convinced that the cycle is now moving towards favouring even deeper examination of small caps and we’ll be expanding our suite of writers who are experts on the subject.

If you visit the Eureka Report website under ‘the Portfolio’ section you can see the small-cap shareholdings currently held by publisher Alan Kohler, Bruce Brammall and myself. At the moment these portfolios include stocks such as Clover Corporation, Decmil, Greencross, Hansen Technologies and Karoon Gas. You might use our lists as a base to begin your exploration of this exciting sector.

4. Determine your gold strategy?

You may have noticed the headline assumes you have gold … the issue is how much! Certainly we would recommend that unless you have a strong aversion to holding the yellow metal, then it should always be on your radar. Of course, there are many issues with gold and the outstanding concern is that there is no yield … but it has been an outperformer for many years.

As usual there are mixed views on gold, with some insiders – including our mining correspondent Tim Treadgold – suggesting gold may return relatively poor returns in the near future. But that argument must be weighed against the compelling logic put forward by our publisher, Alan Kohler, that if all of the world’s key currencies are engaged in currency wars (where many countries are attempting to depreciate their currencies at the same time) then the gold price should appreciate.

At Eureka Report we have little patience with the majority of listed gold companies, having watched one operational disappointment after another at major players such as Newcrest and Kingsgate. However, we are perfectly comfortable holding bullion or indeed certificates from the Perth Mint. There are also a range of gold ETFs, which offer great ease and facility for the retail investor.

5. Believe in the banks.

Yes, our bigger banks are avaricious, and they pay their executives too highly … but it’s also true they are well run. More importantly, in Australia they enjoy a uniquely privileged position with deposit guarantees and a de facto block on takeovers from the ‘four pillars strategy’. In other words, it’s an unofficial oligopoly and even if you have to suffer their arrogance as a customer at least you can benefit as a shareholder.

In 2012 the banks were stunning outperformers – three of the big four (ANZ, CBA and Westpac) returned close to 20% on price appreciation alone. NAB struggled and regionals such as Bank of Queensland also battled against bad debt problems.

As we enter 2013 there is very little to suggest that the core conditions under which our banks operate are going to change dramatically … indeed they may improve. On that basis there is every reason the banks should returns strong dividends and regular price appreciation in the months ahead. NAB is now the big four bank with the lowest p/e ratio (11.6 times) and the strongest yield (7.46%).

6. Get pragmatic about DIY fund tax concessions.

Earlier this year a series of ‘leaks’ let it be known the Gillard regime was reviewing its options around superannuation, and specifically DIY funds (the majority of ER subscribers operate DIY funds as their key investment vehicle). There were rumours Treasurer Wayne Swan would use the MYFEO (mid-year economic statement) to announce cutbacks to the super system. As it turned out, these reforms did not get announced, but since that time senior Treasury figures have made it clear they see the tax breaks in superannuation as an elitist loophole and there is every reason to fear that changes will come.

Until recently, many investors enjoyed putting large amounts of money into superannuation on a tax-effective basis. As it stands, the ‘cap’ on that amount you can put into super on a pre-tax or ‘concessional’ basis is $25,000. In this year’s Federal Budget, the Treasurer said an anticipated decision to allow exemptions to that rule (ie, that people over the age of 50 could put in twice that much) had been ‘deferred’ for two years, which would re-set the date this exemption for June 2014.

Our advice is, don’t bother waiting for that change as it may never come to pass. Instead, start to consider putting non-concessional (that is post-tax) funds into superannuation because the outstanding benefits of the superannuation tax system are there to be exploited and they may not always be so good. (Remember income in the fund is taxed at just 15%, and once you’re over 60 and on a super pension the income is entirely tax free).

7. Stay alert on the elevated position of the A$.

The elevated levels of the Australian dollar underpin many of the key factors currently characterising the Australian economy: weakness in manufacturing, high investment levels in mining etc. There is an historical argument that the Australian dollar was at similar levels against the US$ in the 1960s and it may stay high for a lot longer than we might reasonably expect.

But surely the compelling argument is that when lower commodity prices combine with a tail-off in mining investment, and our interest rates drop closer to those of the US and Europe, we should see the A$ begin to wane in the second half of the year.

Either way, the strong A$ is a key investment factor: You must angle your portfolio to reflect this feature: Have you considered US property or US blue-chips or US ETFs? It might also make a lot of sense to consider US-exposed local equities … witness the success of CSL in 2012. What’s next: James Hardie, Resmed, Westfield? Study the field.

8. Property in DIY funds.

Apart from the powerful growth of DIY funds each year in Australia, the stand-out development in the sector is the new inclusion of residential property as an asset that can be  ‘geared’ in your DIY fund. Until recently, if you wanted to purchase a residential property in your fund, you had to buy the property outright in the first place. Recent changes from the ATO have also clarified (arguably improved) what are considered “repairs and maintenance” and what is considered “improvements” that can be carried out on a residential property held within a superannuation fund.

To invest in this area you must use certain structures and lending products and, as always with property, the investment demands patience and a lot of legwork: But this is a huge change and one of the reasons underlying the growth in DIY funds.

Don’t ignore this opportunity: You have to have very good advice and you must really shop around to minimise the fees the banks are putting on this new form of investment activity. But the rewards could be lucrative because you can have tax-efficient residential property in your DIY fund.

9. Get set for an energy game changer.

The remarkable shale gas boom in the US – underpinned by controversial fracking technology – is probably the biggest economic development of 2013. It means that petrol and gas prices are dropping, and are most likely to fall further.

For the energy sector it is going to be tougher to make money in oil and gas, and it means specific difficulties for Australian oil and gas companies which had previously anticipated a lucrative export trade to Asia based on higher prices.

On the other hand, the change offers new opportunities for some energy players such as BHP, which has made an early and expensive entry into the sector.

However, the greatest impact for investors is the potential fillip lower energy prices have across the board. From a global perspective, it strengthens the US recovery and reduces that country’s reliance on the oil from the Middle East. From a local perspective, it means ultimately lower energy prices for Australian manufacturers and consumer cyclicals, a change which could enliven these two sectors that have been struggling since the GFC.

10. Standby for the positive ‘upside’ surprise.

Of course, there will be plenty to worry about 2013 but new opportunities are gathering pace: From a global perspective, there is every chance a new government in Japan will introduce a stimulus package that could ignite the Nikkei index for the first time in years. Also, any decline in the Australian dollar later in 2013 will boost returns made now in overseas markets.

Within the local market, lower rates are changing the mathematics of capital management, particularly for our larger companies. This could unleash dramatic new investment or new takeover activity in the months ahead, especially for very large companies such as BHP or Wesfarmers.

Separately, the resources and energy sector may well begin a rebound in 2013. Iron ore prices have climbed from under $90 a tonne just a few months ago to $130 in recent weeks, and these important price changes must make their mark in the months ahead.

There is also the heightened prospect that lower interest rates and a cumulative pressure to add to the national housing stock will finally unleash a home building bonanza across the nation in 2013. This is certainly part of the RBA’s plan in the coming term, and home building and materials companies are offering better prospects than they have for several years.

Overall then, 2012 was a lot better than many might have reasonably expected ... especially for sharemarket and yield-focussed investors.

In the year ahead, if you include the issues outlined above, there is every reason to believe you can have a successful and prosperous 2013. We look forward to joining you on the journey.