A STRAW HOUSE OR BRICK HOUSE? HOW SMART INVESTORS CAN BUILD A SOLID FOUNDATION FOR AN AUSSIE SHARES PORTFOLIO

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1 A STRAW HOUSE OR BRICK HOUSE? HOW SMART INVESTORS CAN BUILD A SOLID FOUNDATION FOR AN AUSSIE SHARES PORTFOLIO

2 Many Australian investors rely on Australian shares for the cornerstone of their portfolio, picking winners to add value is important to them. This paper examines how a broad-based Australian shares exposure can enhance an investor s ability to add value in this way. WE LOVE OUR SHARES Many investors like the idea of owning companies directly. And why not? Most of Australia s largest companies have done well over the past 10 years. The tax and cost benefits compared to other forms of investment make this even more appealing. Around half of SMSF Australian shares allocation is in just 10 companies. Australian investors are among the highest owners of direct shares in the world. According to the ASX s 2012 Australian Shares Ownership Study, 34% of the adult population held shares directly, and an additional 4% held them indirectly via managed funds (and that excludes super funds). This study also identified that Self Managed Superannuation Fund (SMSF) investors have an even higher ownership of shares: 52% of SMSFs. This has been consistent over the past 4 years. While there are over 2,000 companies on the ASX, the vast majority of SMSF investments have been in a handful of stocks. According to the Multiport June 2013 survey into SMSFs, they held around half of their Australian share allocation in just 10 companies. That s a big part of retirement portfolios reliant on the success of a few companies.

3 SOME IMPORTANT LESSONS An examination of some of the top Australian shares over the last 10 years reveal two interesting points that all investors should be aware of: 1. Yesterday s winners may be tomorrow s losers. No one company has consistently outperformed others. In fact, often the best performing company can end up as one of the poorest performing. Fortescue saw exceptionally strong rewards for investors in the mid 2000 s, yet three of the last five years have seen substantial declines in company value. Telstra has been another investor favourite. While recent times have been good for Telstra investors, it has been a bumpy ride over the past 10 years. 2. The market return sits between the best and worst performing companies. The ASX 200 has been a relatively more stable source of return when compared to the performance of the individual companies. Companies represented in the S&P /ASX 200 Index span a variety of sectors which are impacted differently by market events. Cyclical sectors such as consumer discretionary and materials typically do well with an improving economy, and defensive sectors such as consumer staples, healthcare and utilities generally do well in challenging economic times. By holding a portfolio with representation across companies and sectors, investors are less susceptible to a particular company or sector result. The S&P/ASX 200 Index also includes smaller capitalisation companies, such as M2 Communications and Sirtex Medical. Smaller capitalisation companies can often offer opportunities for more rapid growth than larger, better established ones. No one company has consistently outperformed others over the last 10 years. In fact, often the best performing company can end up as one of the poorest performing.

4 THE IMPACT OF A CONCENTRATED PORTFOLIO The table illustrates the top 10 stocks held by SMSFs, according to the Multiport survey. To understand the impact of holding a concentrated portfolio of shares, we have broken down their annual returns over the past 10 years, highlighting the best and worst performing company for each year. FIGURE 1: ANNUAL RETURN OF TOP 10 STOCK HELD BY SMSFS YEAR ENDING Stock CBA 16.5% 23.5% 23.2% 30.7% -23.3% 4.5% 30.9% 13.9% 8.5% 38.2% Westpac 13.8% 47.6% 22.4% 15.6% -18.0% 7.6% 10.2% 12.0% 2.2% 45.5% BHP 47.8% 47.6% 62.8% 22.9% 26.9% -17.9% 11.1% 19.0% -26.2% 3.1% ANZ 8.7% 25.1% 27.9% 13.9% -31.9% -5.5% 37.5% 7.9% 6.9% 37.1% Telstra 20.5% 7.4% -19.7% 33.8% -1.7% -13.8% 4.5% -1.9% 39.3% 38.3% NAB -5.8% 9.0% 19.9% 21.7% -31.9% -8.7% 9.6% 17.5% -1.0% 35.0% Fortescue 142.9% 468.6% 227.6% 255.8% 252.1% -68.2% 8.7% 54.8% -21.7% -37.3% Woolworths -5.7% 49.8% 25.9% 37.8% -6.8% 11.8% 6.5% 7.2% 1.5% 28.7% Wesfarmers 33.5% 46.0% -7.3% 38.4% -12.1% -31.4% 31.8% 15.9% -1.1% 38.8% Woodside 39.0% 80.7% 54.1% 7.3% 50.7% -34.1% 0.0% 0.6% -22.1% 18.8% STW SPDR S&P/ASX 200 ETF 21.1% 25.8% 23.2% 28.2% -13.6% -20.1% 12.8% 11.2% -7.1% 22.3% Best performing Worst performing Source: Multiport Survey- June 2013, Factset and SSgA. Returns based on closing prices and assumes dividends are reinvested when received. Past performance is not a guarantee of future results. Sitting with a small number of Australian stocks without making adjustments over is a bit like building a house out of straw. A portfolio could get blown over if something comes along that affects those stocks.

5 BUILDING A HOUSE OF BRICKS: KEY CONSIDERATIONS FOR A PORTFOLIO So, how do smart investors build a healthy portfolio? Every investor is unique, so this depends on many different variables: FIGURE 2: VARIABLES TO CONSIDER WHEN REVIEWING AN INVESTMENT PORTFOLIO Timeframe How long can you keep your money invested? Risk appetite How comfortable are you with losing money over short time periods? Goals Are you investing for income, growth or security? Selection Preferences How much do you want to control or outsource your selections? DIVERSIFICATION: SAFEGUARDING YOUR PORTFOLIO AGAINST ONE-TIME EVENTS The more you spread your investments around, the less susceptible you are to one-time events that could result in substantial losses. Holding a portfolio of shares certainly helps reduce this. Holding a core portfolio of Australia largest 200 companies supports this goal even further, providing a strong foundation from which to add your favourite companies around. As we can t all predict tomorrow s winners, spreading part of your investment over the Aussie share market is a great way to help you fill gaps in your portfolio. For example, investors who did not hold Westpac or Wesfarmers last financial year would have missed significant gains. We can t all predict tomorrow s winners, spreading part of your investment over the Aussie share market helps you fill gaps in your portfolio.

6 REBALANCING: HOW ASSET ALLOCATIONS CHANGE OVER TIME When holding a portfolio of direct stocks, it is easy to simply buy and hold rather than actively review and adjust your allocation on an ongoing basis. To illustrate the impact of rebalancing, we have spread a $100,000 investment made on 2003 equally over some of the top companies held by the average SMSF. Over 10 years, the portfolio would have grown to nearly $360,000. However, the asset allocation has changed dramatically over this period. The pie charts show that the investor was more exposed to the performance of the resources sector through BHP in 2008, and would now find a larger dependence on the banking sector. FIGURE 3: CHANGES IN ASSET ALLOCATION OF SMSF STOCKS % 6.7% 13.0% 14.0% CBA Westpac 26.8% 10.8% 10.7% BHP ANZ 23.7% Telstra 9.4% 12.9% 15.6% NAB 9.8% 5.8% 4.4% 5.9% 5.5% 7.9% 9.6% Woolworths Wesfarmers Woodside Allocation as at 2003 Source: Factset, SSgA Allocation as at 2008 Allocation as at 2013 If the portfolio was rebalanced at the end of each year to bring each company back to an equal investment, it would be worth $31,000 more with a total value of around $390,000 (not including tax or transaction costs). ENGAGEMENT: HOW ACTIVE AN INVESTOR ARE YOU? Understanding the type of investor you are and how active you are prepared to be in your investment decisions should have an impact on how you construct your portfolio. For those able to commit more time to managing their investments, holding a higher portion of direct shares can make sense. For those with less time or who are simply not interested in managing their investment portfolio, outsourcing a greater part of the investment decisions will be appealing.

7 STW A CORNERSTONE INVESTMENT FOR MANY INVESTORS Once upon a time, researching and monitoring the companies in the ASX was very time consuming for investors wanting to maintain a broad-based and well-balanced portfolio. Then in 2001, State Street Global Investors launched Australia s first exchange traded fund (ETF), STW SPDR S&P/ASX 200 ETF. It meant a well-tested approach to buying the ASX 200 was available in a simple trade. An investment in STW gives you an investment in the 200 companies in the S&P/ASX 200 as STW will buy each of these companies in the index. It also delivers any franking credits and dividends paid by the underlying companies. STW remains Australia s largest and longest running ETF. It is the most widely held ETF by SMSF investors: 1 in every 4 SMSF investors with an ETF holds it as a component of their investment portfolio. Diversification being broadly based, STW gives investors a sound foundation enabling them to pick winners to add value. It also provides exposures to smaller capitalisation companies and sectors not well represented in most SMSF portfolios. Rebalancing STW automatically rebalances its holdings twice a year to ensure it appropriately represents the investable opportunity set. The result is that market events such as IPOs and existing company actions are automatically incorporated. Engagement for time-poor investors who do not have the time for active trading, STW offers a well-diversified set and forget option, for active traders it can be used to express a view on the overall Australian market. An interim tool STW can be used to manage any short term cash holdings, ensuring you don t miss out on potential gains from the ASX 200 while you consider your next investment decision. As it is Australia s largest and most liquid ETF, STW trades like any of Australia s largest companies, with small bid-ask spreads and good market depth. Over the year to 31 December, STW has achieved 19.7% return. Since its inception in August 2001, it has delivered an 8.3% per annum return. It has also had a valuable role in providing income and is currently yielding over 4%, or approx. 5.5% with franking credits. THE MORAL OF THE STORY STW may not be as exciting as picking out individual stocks and continually monitoring them to rebalance your portfolio. In fact STW may just be the most boring trade you ever do. But it gives you the comfort of having some money invested across 200 of Australia s largest companies. You know you have a strong foundation from which to watch your retirement portfolio grow and to help create your happy ever after. To find out more about STW and the role it could play in your portfolio, talk to your financial adviser or visit Past performance is not a guarantee of future results.

8 STATE STREET GLOBAL ADVISORS, AUSTRALIA SERVICES LIMITED Level 17, 420 George Street Sydney, NSW FOR PUBLIC USE The information in this document is general information only and does not take into account your individual objectives, financial situation or particular needs. It should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. You should seek professional advice addressing your particular investment needs, objectives and financial circumstances before making an investment decision. The issuer of units in SPDR S&P/ASX 200 Fund (ARSN ) is State Street Global Advisors, Australia Services Limited ( SSgA, ASL ) (ABN , Australian Financial Services Licence AFSL number ). A Product Disclosure Statement ( PDS ) for units in the Fund is available at Investors should consider the PDS in deciding whether to acquire, or continue to hold, units in an ETF. An investment in a Fund does not represent a deposit with or a liability of any company in the State Street Corporation group of companies including State Street Bank and Trust Company (ABN )(AFSL ) and is subject to investment risk including possible delays in repayment and loss of income and principal invested. No company in the State Street Corporation group of companies, including State Street Global Advisors, Australia, Limited ( SSgA ) (ABN )(AFSL ), State Street Bank and Trust Company, SSgA, ASL and State Street Australia Ltd (ABN ) guarantees the performance of the Fund or the repayment of capital or any particular rate of return, or makes any representation with respect to income or other taxation consequences of any investment in a Fund. Past performance is not a guarantee of future results. Diversification does not ensure a profit or guarantee against loss. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns. SPDR is a trademark of Standard & Poor s Financial Services LLC ( S&P ) and has been licensed for use by State Street Corporation. STANDARD & POOR S, S&P, SPDR and S&P 500 have been registered in many countries as trademarks of Standard & Poor s Financial Services LLC and have been licensed for use by State Street Corporation. No financial product offered by State Street Corporation or its affiliates is sponsored, endorsed, sold or promoted by S&P or its affiliates, and S&P and its affiliates make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in such products. Further limitations and important information that could affect investors rights are described in the PDS for the applicable product. Standard & Poor s S&P Indices are trademarks of Standard & Poor s Financial Services LLC. S&P and ASX, as used in the term S&P/ASX 200, is a trademark of the Australian Securities Exchange ( ASX ) and Standard & Poor s Financial Services LLC ( S&P ) respectively, and has been licensed for use by SSgA. SPDR products are not sponsored, endorsed, sold or promoted by S&P or ASX, and neither S&P nor ASX make any representation regarding the advisability of investing in SPDR products State Street Corporation All rights reserved. IBGAP-1417 Exp Date 30 September 2014