Economic Overview

It was mostly a positive quarter for markets, with volatility across equities and fixed income being much lower compared to recent quarters.

In the US, the Federal Reserve left interest rates unchanged, but provided a more optimistic assessment of economic conditions at its July meeting, deeming that the risks in the near term had diminished.

In Europe, economic data continued to indicate lacklustre growth and low inflation. Annual inflation ticked up in September to 0.4% from 0.2% in August while GDP expanded by 0.3% in Q2, slowing from 0.6% in Q1.

In the UK, equities moved higher as the domestic political backdrop began to stabilise following the Brexit referendum vote. Equities were also supported as the Bank of England launched a series of monetary easing measures, but the British Pound was the worst performing major currency in Q3.

Chinese equities offered good gains over the quarter, with data showing GDP expanded by 6.7% year-on-year in the second quarter – in line with expectations. Share prices were supported by expectations of more easing from the Bank of China, given disappointing manufacturing and trade numbers.

In Australia, the RBA again lowered interest rates by 0.25% in August, noting that overall growth is continuing, despite a very large decline in business investment. Exports have been one bright spot, supported by the lower exchange rate.

Market Overview

Asset Class Returns

The following outlines the returns across the various asset classes to the 30th September 2016.


Global equity markets completed a quarter of solid gains, with strongly positive value and small cap premiums in most markets.

In a reversal of recent trends, mining stocks were among the best performing sectors, while REITs and highly regulated utilities were among the worst.

In country terms, New Zealand again was one of the top performing developed markets, while Australia also posted above-average returns.

Lower relative priced companies in Australia, including some of the big mining companies, were among the best performers over the quarter. Small caps also generated substantial gains over both the quarter and the year.

A similar pattern was evident in other developed markets, although small caps underperformed large in emerging markets.

On fixed interest markets, yields were stable over the quarter. Corporates outperformed government securities, delivering a positive credit premium.

On currency markets, both the Australian and New Zealand dollars made gains against the US dollar in the three months to the end of September which detracted from AUD and NZD returns for unhedged investors in foreign shares.

News headlines in the quarter were dominated by the wash-up from the Brexit vote in the UK, the narrow return of the Liberal-National Coalition in Australia’s general election, the continuing run-up to the US presidential election and speculation about the US Federal Reserve’s future actions on interest rates.


Risky Whisky to Angry Angus

You may remember earlier in the year we cautioned about Nant’s whisky buyback scheme, where investors would put down $25,000 so Nant could hold 2 barrels of whisky in their name to mature. After four years Nant would buy back the whisky for $36,007 – a return of 9.55% per year.

As we said at the time it raised several key red flags of alternative investment opportunities:

Uses the word ‘guarantee’ somewhere – check. Uses a celebrity (Matthew Hayden) to spruik their wares – check. Offers a specific return well in excess of anything you’d receive from a bank – check. No Australian Financial Services License (AFSL) when offering what is essentially a financial product – check.

Unfortunately, there are plenty of investors around Australia who don’t receive good financial advice. Consequently, throughout the year there have been stories of investors encountering resistance when trying to get their money back from or locate their barrels.

We also learned that Nant had branched out beyond whisky. They were now offering a five-year deal to invest in Angus cattle – coincidently also offering a 9.55% yearly return!

Late in the September quarter a story emerged in the media regarding some unhappy investors in this Angus cattle scheme. A couple from Melbourne had sunk $120,000 (their life savings) into buying four herds of Angus cattle – 40 cows in total. Four months into their five year investment, the couple came across media stories regarding the trouble Nant whisky investors were having. The couple then panicked about their Angus investment.

This began a frustrating attempt to find out where their cattle were located on properties in Queensland. It wasn’t long before they were engaging lawyers and the Queensland rural crime investigation squad in an attempt to get their money back.

There is quite a bit of “he said, she said” between the parties we’ll ignore, but there was a predictable resolution from the couple:

I’d say to anyone with a nest egg, that if you want to save for your kids’ future, just stick your precious, hard-earned dollars in the bank.

Which is the inevitable conclusion to what we like to call the illogical investor’s path.


The illogical investor’s first step was to invest, in this case in something they didn’t understand, possibly due to seeing glossy advertising promising a very healthy 9.55% return. They then stumbled across some news that cast their investment in a different light, leading them to then do some research about it. What they found out left them in a panic, trying to reverse their mistake. Finally, they resolved that it’s best to invest “safely” by sticking cash in the bank, with no possibility of capital growth, their capital subject to erosion by inflation while being taxed at their marginal rate.

Contrast the illogical investor’s path to the logical investor’s path.


The first thing the logical investor does is research. This can be ensuring the people they are dealing with are reputable and regulated, and those people can clearly show the investor the method behind their investment process. Only then does the logical investor take the next step of investing their money. If their investment hits a rocky path the investor already has the understanding that this is to be expected and volatility is a normal part of an investment journey. Eventually the logical investor can enjoy the reward of their investment because they’ve engaged in a process that’s historically delivered returns in line with the level of risk they were prepared to take.

Finally, back to Nant. In recent weeks ASX listed company Australian Whisky Holdings has entered into an agreement to buy Nant’s distillery business and the Nant Estate in Bothwell. Australian Whisky Holdings has opted to bypass acquiring the cattle business. No one yet knows exactly what this acquisition will mean for investors in the whisky barrel scheme.

Aren’t alternative investments exciting?

With thanks to DFA Australia.
This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

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