From the wealth management conFusion - First Samuel Limited€¦ · 6 First samuel 2014 nnual a report First samuel 2014 nnual a report 7 From wealth management chaos... 1. individual

From the wealth management conFusion

we create clarity

15th AnnuAl RepoRt to ouR Clients

june 2014

2 F i r s t s a m u e l 2 014 a n n u a l r e p o r t F i r s t s a m u e l 2 014 a n n u a l r e p o r t 3

From wealth management conFusion...

...to clarity

liVe Well. sleep Well.

IMPUTATION CREDIT

AX COST BASE

CAPITAL GAIN

BASIS POINT BENCHMARK

YIELDLIQUIDITYTAXTAX

MORTGAGE BACKED SECURITY HYBRID SECURITY

CUSTODIAN

CORPORAT

RIGHTS ISSUE

BONUS ISSUEDITDIT

CAPITAL RECONSTRUCTION

DIVIDYIYIEX DIVIDEND DATE

GEARINGCAPITAL RECOCAPITAL RECOMARGIN CALLGG

OAN TO VALUE RATIO (LVR)DD

PARI PASSUARKARKSHORT SELLING

SCHEME OF ARRANGEMENTEE

PRICE/EARNINGS RATIO (P

EARNINGS PER SHARE (EPS)LL

FUNDAMENTAL ANALYS

TECHNICAL ANALYSIS

STAPLED SECURITYNGNGPARI PPARI

INITIAL PUBLIC OFFERING (IPO)RIRI

DERIVATIVEIMIM

OFF-MARKET TRANSFERIELDIELDGS PER SHARE (EPS)GS PER SHARE (EPS)SISSI

MARKET CAPITALISATIONT SELLING SELLING

COMPLIANCEMORTGAGE BACKED SECMORTGAGE BACKED SECTRANSITION TO RETIREMENT PENSION

HYBRID SECURITYHYBRID SECURITY

SCHEME OF ARRANGEMENTSCHEME OF ARRANGEMENTLIC OFFERING (IPO)LIC OFFERING (IPO)

INTEREST RATES

CONCESSIONAL SUPERANNUATION CONTRIBUTIONSST

NON-CONCESSIONAL SUPERANNUATION CONTRIBUTIONRIGHTS ISSUERIGHTS ISSUE

DIVIDEND YIELDNUS ISSUENUS ISSUE

PERANNUATION PRESERVATION AGEDDMARKET TRANSMARKET TRANS

DDDD

COMMODITY PRICESGEARINGEARINCONCESSIONAL SUPERANNUATION CONTRIBUCONCESSIONAL SUPERANNUATION CONTRIBU

TAXABLE COMPONENTDISCOUNTED CAPITAL GAINDISCOUNTED CAPITAL GAINTE ACTIONSTE ACTIONSP/E)E

TECHNICAL ANALYSISTECHNICAL ANALYSNTEREST RATESNTEREST RATE

MACRO ECONOMICSMARGIN LOANMARGIN LOANPLACEMENTPLACEMENT

ONON

TESTAMENTARY TRUSTSBONUS ISSUEBONUS ISSUETECHNICAL ANALYSITECHNICAL ANALYSIESES

POWERS OF ATTORNEYDISCOUNTED CDISCOUNTED C

YIELDYIELDOAN TO VALUE RATIO (OAN TO VALUE RATIODDTAXABLETAXABLEDISCOUNTED CDISCOUNTED CDISCOUNTED COUNTED

FAIR VALUEECURITECURIT

FORWARD EARNINGSTATAQQ TATHYBRID SECUHYBRID SEC

BINDING DEATH BENEFIT NOMINATIONSBENCHMARKBENCHMARKPLACEMENTLACEMENTSELLINGSELLING MACRO ECONOMMACRO ECONOMPLACEMENTACEMENTLACEMENTACEMENT

HYBRIDDEBT RECYCLINGINTNT

DEDUCTIBLE DEBBB

GEARING

DISCRETIONARY TRUSTSBBONAL SUPERANNUATION CONTRIBUONAL SUPERANNUATION CONTRIBU

First samuel limited aBn 51 086 243 567 aFsln 225 405

F i r s t s a m u e l 2 014 a n n u a l r e p o r t 3

...to clarity

LIVE WELL. SLEEp WELL.

WEALTHSTRATEGY

INVESTMENTMANAGEMENT

CLIENTSERVICES

ETHICS &RELATIONSHIPS

over the next few pages we describe how we bring clarity to our clients out of the wealth management confusion. and then review some highlights of Fy-14.


...to clarityFrom wealth management compleXity...

The first step in wealth management clarity is having your long-term needs understood and having your long-term, but dynamic, strategy designed. And taking all the necessary actions along the way.

With clarity.

And it is not achieved by:• fillingoutanexhaustivequestionnaire,

the answers to which are fed into a computer and analysed by a person in a remote location and whom you will never meet

• beingbundledupintoarisk-appetite pigeon hole and having ablack-boxdetermineyourinvestments

• executingthatdinnerpartytipandchoosing Westpac instead of BHP. Or choosing Blue Sky Minerals over Plummet Airways

• havingafinancialproductsalesman push you into insurance and investment products that perhaps may suit your needs but certainly suit the salesman’s pocket

• choosingadealthatwill‘saveyouthousandsintax’.

The clariTy of science and arTThe clarity is achieved by marrying the science of your fiscal circumstances and the regulatory world with the art of understanding you and your family’s personal needs. And how those needs might change.

First Samuel marries the science and the art of wealth strategy advice to yield an individual, highly tailored service.

The science ... is not only the detail of: • income• expenses• assets• liabilities• tax• superannuation• self-managedsuperannuationfunds• familytrusts• cashflow• debt• insurances• etc...

wealth StRateGY

the wealth management regime in australia is amazingly complex, with detailed regulation covering the super-annuation system; personal, company and trust taxation; life and related insurances and estate and succession planning.all, especially super-annuation, subject to regular change.But you need clarity.


...to clarity

WeAlth stRAteGY

… but also, critically, the understanding of how they work together and how each mightinfluenceyourlong-termwealth.

And remember that regulatory changes,especiallytotaxandsuperannuation, are ever-present threats (or, rarely, opportunities). Successful wealth management is being kept abreast of any changes and adjustingyourstrategy,ifrequired.

the art ... is understanding your personal needs and your attitudes.

Assessing how you might respond to different circumstances.

And managing the sometimes sensitive issues that inevitably arise.

the outcome... is initial and ongoing advice tailored to your long-term needs. That advice may cover superannuation, gearing, restructuring,cashflowmanagementor budgeting. It might involve working with your accountant to ensure that all possible factors are considered.

The ongoing advice will be at least an annual review. And more often if your circumstancesrequire.Andwewillnot give you advice unless you need it.

And it will mean development of an Investment Program for your portfolio (or portfolios) so as to provide the guidelines for the management of each. That Investment Program will incorporate not only your investment objective, but also the asset allocation (ormixofassetsectors)forthatportfolio, any investment prohibitions, thetaxcircumstances(taxrate,carry-forward losses, etc), etc.

tax managementPart of that Investment Program will be an Investment Objective couched in termsofalong-termreturnaftertaxbenefits and after fees.

Moreover, because we know of your taxposition,guidancecanalsobegiven to the investment team on how to optimise your long-term after-taxreturn.Onlybyindividualmanagement can this be achieved.

live well. sleep well.The objective of our wealth strategy advice, and in particular the Investment Program, is to provide the cornerstone that will allow you to live well and sleep well. With clarity.


From wealth management chaos...

1. individual managementWe will establish and manage an individually registered portfolio for you. This is the only way your portfolio’staxpositionandindividualpreferences can be managed.

Managed funds can not and do not provideanyabilitytomanagetaxorindividual preferences.

2. long-term FocusWe will invest for the long-term for you. And ignore the day-to-day emotions of markets. And also ignorethe‘hotstocks’,whichareoften spectacularly successful in the short term, but often freeze without warning. We focus on the long-term fundamentals of each security.

Too often investors get spooked by the gyrations of markets or enthused by the fashion of the moment. Too often investorsthinkofgettingrichquicklyand ignore the risks of their short-term focus.

First Samuel is a patient investor.

inVestMent MAnAGeMent

the investment world is a seeming chaotic tangle of markets and economics and governments and euphoria and panic and business and companies.you need clarity. clarity in optimising the long-term, after-tax return of your investments. and considering all of your individual requirements.the clarity and success rests with five critical success factors, each of which is integral to First samuel:


...to clarity

inVestMent MAnAGeMent

3. expertiseInvestment management is a strange profession in that barriers to entry are low (any investor, regardless of ability can trade securities) but long-term success generally only comes to thosewhohavetherequiredtimeandexpertise.

Your investments will be managed with day-to-day attention (but with onlyinfrequenttransactions)byanexpertteam.

4. investing based on what mattersWe will only invest on the basis of the three investment factors that matter, regardless of the asset sector in which you invest.

income sustainability: be it dividends, interest or distributions, your securities must have a proven ability to generate income. Forexample,wedon’tlikestocksthatdon’t pay dividends (or low dividends), we don’t like trusts that may not pay a distributionnextyear.

proFit growth: for shares, i.e. the companies we invest in must be growing, and that growth mustbereflectedbygrowingdividends(not necessarily growing dividend payouts). It is profit growth that drives dividend growth, and dividend growth drives share price growth.

buy cheaply: the lower the price at which you can purchase an investment, the higher your upside. There is little point in buying a so-called blue chip if its price ishighrelativetoitsexpectedprofits.

5. diversiFicationYour portfolio will be well-diversified across a range of asset sectors (if your InvestmentProgramrequiresit)andindustry sectors.

The Australian market is highly concentrated in banks and resource stocks. We see the opportunities more broadly, not only because there are often better individual stocks but also because we wish to lower the risk of the portfolio.

Our diversified approach means that we do not rely on any one or only a few stocks to add value.

By incorporating all these factors in the investment management of your portfolios we help you to live well and sleep well. with clarity.


From wealth management clutter...

1. portFolio reportsFirst Samuel replaces the clutter of yourownspreadsheetsorofopaquebroker or fund statements with absolute clarity.

Fromtheday-to-dayfluctuationsofthe share market to the big picture, we make sure you have all the information you need to feel secure and fully informed.

day to day By10ameverymorning,sixbespokeportfolio reports are uploaded onto your Private Reporting Page on our website, accessible with a username and password. Those reports are:

Portfolio AppraisalWhat you own

PerformanceYour portfolio performance fiscal year to date

Cash LedgerYour portfolio’s bank statement fiscal year to date

TransactionsAll of your portfolio’s transactions fiscal year to date

Realised CGTCapitalgainstaxreportforyoursecurities sold fiscal year to date

Unrealised CGT CGT position of every line of stock in your portfolio

weeklyOn page two of Wry & Dry, our weekly client update, we provide investment updates, including commentary on each security transaction (when completed) as well as individual company reports.

Quarter endAftertheendofeachquarterareportwill be uploaded onto your Private Reporting Page. This report contains:

CommentaryA generic commentary on the Australianequityportionofyourportfolio

Performance chartShowing the contribution to performance fiscal year to date by the 15 best performing securities and the five poorest performing securities

Client seRViCes

the second part of our Live well. Sleep well. credo is to provide peace of mind to you, not only by your investment program, but also by the information we provide and the client service we offer.


From wealth management clutter...

...to clarity

Client seRViCes

Portfolio reportContaining four bespoke reports: Portfolio Summary; Portfolio Appraisal; Performance Report and Transaction Report

Tax invoice

year end

Flash after-tax performance reportEarly July

Annual Investment reportEarly August

Accountant’s pack & tax reportEarly October

Independent audit certificateEarly October

2. other client servicesWe do our best to ensure that our clients’ needs are met in a range of different ways.

accountantsWe work closely with our clients’ accountants, not in competition with them, to ensure the best long-term

after-taxwealthoutcome.Eachofushasexpertisetoprovidetoourclientsand we aim to ensure that nothing fallsthroughthecracksinthefloor.

bill payingWe can seamlessly pay clients accountingandtaxbills.

dedicated private client adviserWewillappointoneseniorexecutive,with a back-up, to manage your relationship with us. So you will have just one person with whom to deal.

independent audit certiFicateAn independent audit certificate for each investment portfolio for each client is provided annually.

regular paymentsWe can make regular or irregular payments, be they pension payments or otherwise.

superannuation contributions monitoringWe monitor each client’s superannuation contributions to ensure that regulatory caps are not breached and that the opportunities aremaximised.

monitoring pensionsWe monitor clients’ pensions to ensure thatallregulatoryrequirementsaremet.

transitionOnce a client appoints us, we manage all of the transition arrangements, meaning the client doesn’t need to worry about all of the paperwork and notifications.

saFe deposit boxWe store both originals and copies of important documents for our clients inabanksecuredsafedepositbox.

see page 20 for more on client service activity in Fy-14.


From commissions...

FeesThink of fees and costs. The scourge of commissions, many hidden, still abounds. In this industry some fees are disclosed, some are hidden. Some costs are disclosed, some are hidden. There are platform fees, administration fees, managed fund fees,entrancefees,exitfees,feestothird parties, etc.

You need clarity. How much are you really paying? And to whom? And for what?

First Samuel’s policy of complete transparency means there are no surprises for you.

We never pay or accept commissions, and any commissions that are unavoidably earned are passed on to you, in full, every time.

And we disclose all of the fees and costs you pay.

There is always clarity.

ethical behaviourFirst Samuel has been in business since 1999. And has succeeded because of the trust that is placed in us by our clients. We will not compromise a client’s trust in any way.

Thisisnotjustaquestionoffeetransparency, but also of the way we conduct our business.

We advise clients when there is an administration error. And we resolve anyconflictsinourclients’favour.

We provide full transparency about all client transactions and dealings.

relationshipsOur first priority is our clients. We devote considerable resources to ensure the most appropriate relationship with you.

private client adviserWe will appoint one of our specialists to manage your relationship with us. This is not about account management, but relationship depth.

If we give you wealth strategy advice, your Private Client Adviser will be your wealth strategist. Otherwise it will be another of our senior Associates.

ethiCs & RelAtionships

the wealth management world is full of concealment and want of ethics.since our founding in 1999, we have always put each client’s interests above our own. our clients’ needs are first, last and always. in everything we do.this priority is in our Dna and not imposed or wished-for by government fiat.


...to clarity

ethiCs & RelAtionships

a uniQue service

“the provision of individual, indispensible and enduring relationships that create, manage and protect wealth.”

Fy-14: a brieF reviewOver the following pages we review the wealth management highlights in each of our key service areas.

index

12 Chairman’s Letter

13 General Manager’s Report

14 Wealth Strategy

16 Investment

20 Client Services

21 Board of Directors

22 At Your Service


ChAiRMAn’s letteR

d e a r c l i e n t si am again pleased to present the annual report of First samuel, of this, our fifteenth year.we have once again provided all of our stakeholders: clients, shareholders and associates, with a year where their expectations have been exceeded.

success For clientsIt is not up to us to judge how well we are doing for you. It is your views that matter.

And so each year we ask you to assess our service performance on a variety of measures. Once again, you have given us most favourable responses in each area of our business.

In particular, the rating for our overall service, as measured by the industry standard: Net Promoter Score1, remains at a very high level (see chart).

This success is directly attributable to theskill,experienceanddedicationof our Associates. Their devotion to servingyourneedsisexemplary.

My thanks to them all.

business growthOur aim is not to grow First Samuel as quicklyaspossible,butatapacethatensuresthatexistingclients’needsarefully met.

Please see our General Manager’s Report (opposite) for details of another year of sustained growth.

But let me say that one of the benefits of our growth has been reaping the rewards of economies of scale. The Board decided to share these rewards with our clients.

And so we restructured our fee scale, part of which was to cap the fee for wealth strategy advice (instead of increasing with assets invested) and to reduce for many clients the investment management fee.

new shareholdersOur Associates provide you with an outstanding level of service. The Board believe their loyalty should be rewarded and so shares in First Samuel have been issued to a further group of Associates.

With the issue of shares last year to Dennison Hambling, our Chief Investment Officer, this continues the Company’s policy of aligning our Associates’ success with that of First Samuel.

our directorsI am blessed to serve you with a strong andexperiencedBoardofDirectors.John Bryson, Tony Greenwood, Elizabeth Parkin and Anthony Starkins are to be thanked for their dedication and contribution.

With them I am confident that we can fulfilyourexpectationsoftrust.

what does the Future hold? AsIwrite,theslumberingIraqicivilwar is now stirring and the wellspring of China seems less promising. Political events often shroud, but can also direct, economic events. Andpossiblyinfluencelonger-terminvestment outcomes.

Our role, regardless of political, economic and investment events, is to absorb the worries for you. And capture the opportunities.

And in so doing help ensure that you both live well and sleep well.

Yours sincerely,

Murray Baird

“…all oF our stakeholDers’ eXpectations eXceeDeD”

1 NetPromoterScoreisastatisticalmeasurethatreflectsaclient’swillingnesstorecommendaproductoraservice.FirstSamuel’sdataissourcedfromannual surveys of all clients, with a response rate of over 40%.

2 The‘Nextbestcompany’istheaverageofthehighestrankedcompanyineachof19industrycategories,assurveyedbyBain&Co.inDecember2012.

FIRST SAMUEL IS MORE HIGHLY REGARDED BY ITS CLIENTS THAN MOST OTHER COMPANIES IN AUSTRALIA

First Samuel

2011 2012 2013

Net

Pro

mot

er S

core

Next best company in Australia2

0

10

20

30

40

50

60

70


GeneRAl MAnAGeR’s RepoRt

d e a r c l i e n t sit is with pleasure that i present a report on the governance and operations of First samuel for the year ended 30th June 2014.

board oF directorsThe Board of Directors is responsible to the shareholders for setting the strategic direction and objectives for the Company; for monitoring its performance and for ensuring compliance with relevant regulatory requirements.

The Board delegates to me the day-to-day responsibility for the operation and administration of the Company.

The Board has also delegated limited authority to two Board Committees: Audit & Risk and Remuneration & Nominations.

managementFirstSamuelhasanexecutivemanagement team (called the Leadership Team), consisting of Dennison Hambling (Chief Investment Officer), Nikki Hill (Head of Wealth Strategy Advice), Anthony Starkins (ExecutiveDirector)andme.

shareholdingDuring the year a further group of Associates were issued with Income Shares. These shares entitle each Associate to participate in the profits of the Company.

other governance matters• Ididnotreceiveanycomplaints

from clients, nor were any client matters referred to me by the Financial Services Ombudsman.

• NomatterwasreferredtoAustralian Securities and Investments Commission under our self reporting obligations.

• Nosignificantcompensationpayments were made to clients for losses arising from administration errors.

• Nocommissionswerepaidtoanythird party and any commissions unavoidably received were paid to the relevant client.

• TheCompanymaintaineditspolicy of having zero debt.

Yours sincerely,

Joe Flinn

“steaDy growth … anD all compliance oBligations met”

STEADY GROWTH IN NUMBER OF CLIENTS

2010 2011 2012 2013 2014

Num

ber

of c

lient

s

150

160

170

180

190

200

210

220

First samuel: sustainable growth

Fy-12 Fy-13 Fy-14

number of clients 203 211 218

assets under management

$287m $330m $387m

profit growth +17% +19% +14%

successive years of profit

7 8 9

debt $0 $0 $0

client satisfaction 90%+ 90%+ 90%+

directors’ meetings Fy-14

director board audit committee remuneration & nominations

committee

eligible attended eligible attended eligible attended

murray baird 6 6 - - 2 2

elizabeth parkin 6 5 2 2 - -

John bryson 6 6 - - 2 2

antony greenwood 6 6 2 2 - -

anthony starkins 6 5 - - - -


stRAteGY

wealth strategy aDvice

d e a r c l i e n t sMany Australians prefer self-directed investments. And maintain one of the highest levels of direct share ownership in the world, along with choosing self-managed superannuation funds in increasing numbers.

However, in order to operate in our wealth management industry, a labyrinth of regulations and choices apply. If a self-directed investor takes the wrong path or misunderstands the rules, the result is often confusion, disappointment and sadly, an adverse financial result.

in order to achieve optimal financial outcomes it is increasingly necessary to engage experienced, professional experts who operate with integrity.at First samuel, we pride ourselves in assisting clients to optimise their financial position, realise their goals and gain clarity within our complex wealth management industry.

ongoing change

The last twelve months have once again, proved that our industry is subjecttochangeandcomplexity. We have seen change in areas such as:• Regulationofthefinancialservices

industry and advisers (referred to as‘FOFA’);

• Thetaxation,regulationandoperation of superannuation (including self-managed superannuation funds); and

• Thetaxsystemgenerally,

which highlights the clear need for professional help in navigating the changing landscape.

From complexity to … clarity

The essence of the clarity that we provide our clients is found in three key service aspects.

Firstly, the individual focus of the advice that we give. Everything we do istailored.Thereisno‘cookie-cutter’advice. The advice we provide is based ontheindividualanduniqueneedsofeach client.

We do this by maintaining an in-depth or‘deeptouch’relationshipwitheachof our clients and their particular circumstances.

Secondly, the advice we provide is dynamic. It is not set-and-forget advice.

Client strategies are updated in response toregulatoryand(unique)personalchange to ensure opportunities are harnessedwithinthecomplexruleswhich apply.

Thirdly, our advice is provided in an ethical framework. Our clients have primacy in all we do for them.

The outcome is clarity.

some complexity we Faced

Fiscal 2014 was a year that exemplifiedtheserviceweprovidedfor our clients.

There were many changes and the new government did not help, where the‘nosurprises’electionpolicymeant one thing to the government and something else to the rest of the industry.

In response to these changes and anticipating others, we have provided our clients with up-to-date and clear advice on the effect of these and other changes to their long-term wealth strategies.

And will continue to do so.

So that they can live well and sleep well.

Yours sincerely,

Nikki Hill


stRAteGY

som e F y-14 com pl e x i t y w e Fac e d:Some of the changes included (shown in summary form):

superannuation

• Increaseofgeneralconcessionalcontributions cap;

• Increaseofnon-concessionalcap;• Excessconcessionalcontributions

taxabolished,butexcesstaxedindividually (since 1-Jul-13);

• (Proposed)Excessnon-concessional contributions can be withdrawn, but if retained in superannuation will continue to besubjecttopenaltytax;

• Removalofthelowincomesuperannuation contribution (since 1-Jul-13);

• Superannuationguaranteeincreaseto 9.25% of salary (9.5% from 1-Jul-14);

• Superannuationguaranteeagecap(of 70) abolished (since 1-Jul-13);

• SMSFpenaltieshaveincreasedconsiderably and fines to be paid personally by trustees or directors of trustee companies;

• Removalofproposedcapon tax-freepensionearnings;

• Changestopersonalinsurancecover able to be held in superannuation; and

• SuperStream-Allsuperannuationfunds must be able (from 1-Jul-15) to receive electronic messages and payments associated with employer contributions.

general

• BudgetRepairLevyof2%forincomes over $180,000 (from 1-Jul-14);

• IncreasedMedicareLevyof.05%to fund the disability insurance scheme (from 1-Jul-14);

• FBTrateincreaseto49%(from1-Apr-15);

• An‘integrityrule’nowappliestodividend washing and franking credit trading; and

• Australianfinancialinstitutions(including First Samuel) now requiredtocollectinformationabout clients who are likely to be taxpayersintheUS,undertheUSForeignAccountTaxComplianceAct (this is messy).

c l a r i t y i n ac t i o nMany investors do not realise that the two major determinants of their wealth – their own circumstances and government regulation – change morefrequentlythantheythink. And so dynamic wealth strategy advice is essential.

Moreover, that strategy advice must, as much as possible, remove the complexityandprovideclarity.

We set out below a case study, albeit simplified, of strategy design in action.

client circumstances - summary

• Acoupleaged46and43withchildren of school age.

• Bothearnincomeatthehighestmarginaltaxrate,oneasasolepractitioner.

• Havereceivedaninheritanceworth around $2 million.

obJective

To invest the inheritance in listed Australian shares to achieve:• Tax efficiencies: the best long-term

after-taxoutcome• Flexibility: the ability to access the

investmentcapitalifrequired;and• Protection: to achieve some

creditor/predator protection.

problems

Superannuation: Access restrictions (preservation age is age 60 for each). Contribution caps would limit the amount that can be invested in superannuation.

Investment in individual names: investmentincometaxedatthehighestmarginaltaxrate(currently49%).

Investment in the sole practitioner’s name: place these investments at risk if legal action is taken against the sole practitioner.

Investment in children’s names: unearned income generated by minors issubjecttopenaltytaxrates.

strategy

Part of the inheritance is invested in superannuation (as a non-concessional,aftertaxcontribution)to capture the opportunity of the compounding effect of accumulating wealth in superannuation.

The remainder is invested in a family trust with a corporate beneficiary to provideflexibilityandtaxefficienciesfor distribution of trust income.

Trust income can be distributed principally to (and invested in) the company which will be subject to a taxratecappedat30%.

When the children reach age 18 they can also receive trust income and be subjecttotaxatadulttaxrates(andeligibleforthetaxfreethreshold).

A franked dividend income stream can be paid from the company to the couple at retirement (up to a certain level) withoutbeingsubjecttotop-uptax.

outcome

Taxpayableoninvestmentincomeis minimised, the trust investment capital can be accessed if needed and a level of asset protection achieved.

additional observations

This is a simplified summary. Other matters to consider include no 50% capital gain discount available to the company so realised gains in the trust are distributed to the couple. We further note that distributions made to the company should be invested and remain in the company until dividends are paid oradversetaximplicationsmayapply.


inVestMent

“all portFolio types eXceeDeD their Benchmarks”

d e a r c l i e n t scontextIt was a weird year. The share market rallied in the first part of the year to be up by 16% in the first four months.

That rally might have been driven by any one of at least three events:• Aninevitablesensefrominvestors

that Greece’s and Europe’s fiscal woes were not going to cause an apocalyptic end to the world

• Theelectionofafiscallyconservative government in Australia, which promised to repair the nation’s balance sheet, without surprises

• Continuinglowbankdepositrates,driving conservative cash investors toinsteadchoosehigh-yield‘safe’share investments

But then a sense of fragility came over the market, which remains at year-end.

From November to the end of June the market rose by only another 3%.

Only the strong rise in the share price of CBA (10% of the market) prevented

the market from falling over this time.

The average price move of the other big stocks (BHP, Rio, Westpac, ANZ and NAB) over that period was -2%.

Whilst the key economic indicators (inflation,unemploymentrate,economicgrowth)areokay,weexitFY-14 with consumer confidence sharply lower (after the budget) and most of the 20 Leaders (the twenty largest stocks on the ASX) being fully priced.

our stance – reduce riskAfter the strong first four months, First Samuel’s stance has been to lower the risk of clients’ share portfolios.

In other words, we have sacrificed short-term relative performance for what we believe will be portfolios that perform significantly better in the longer term.

There is also merit in recalling that our objective is not to outperform the‘market’(i.e.theAllOrdinariesAccumulationIndexorAOAI)intheshort term.

Long-term share outperformance will ensure that our clients’ CPI related objectives are met (most clients have an objective relating to CPI plus a margin,afterfeesandtaxbenefits,over rolling 5 year periods).

Historically, we have averaged about 4% above the market.

But there will be times when our short-term performance will be very different to the market as our

investments will be very different to the market. This is because we are focused on long-term outcomes.

all portFolio types perFormed well, againNotwithstanding our short-term underperformance of the share market, we comfortably outperformed in all other sectors and all client portfoliotypesinFY-14exceededtheir long-term benchmarks.

Whatisequallypleasingistheconsistency of strong performance over the last five years.

Overthenextfewpageswesetoutwith clarity the major investment decisions we took and why. And what worked and what didn’t work. The aim is both a review and to show the way in which we manage your investments.

The overall objective is for you to live well and sleep well.

I wish you a successful FY-15!

Yours sincerely,

Dennison Hambling

First samuel manages each client portfolio on an individual basis: each portfolio has its own investment program. But for convenience, we generally group client portfolios under three portfolio types that broadly represent the investment objective of each.these objectives are a performance return that is a ‘margin’ over cpi after all fees and costs and after tax benefits.importantly, the investment objective relates to the future purchasing power of the portfolio.the ‘margin’ chosen over cpi reflects the willingness of the client to accept a volatility of investment returns that is commensurate with the margin. the higher the level of volatility acceptable, the higher should be the investment return. and hence the margin over cpi should increase.


inVestMent

s e l F m a n ag e d su pe r a n n uat i o n Fu n ds It was another strong year for SMSF clients.

First Samuel manages clients’ SMSFs on an individual basis, tailoring each portfolio to individual needs.

But, for convenience, we have grouped SMSFs into Pension SMSFs (which tend to have a more conservative asset allocation) and Accumulation SMSFs.

grow th, bal anced a n d co n s e rvat i v e p o r t F o l i osFirst Samuel manages each client portfolio individually, but for convenience we group most client portfolios into three CPI-based groups: • CPI+5%(Growth)• CPI+4%(Balanced)• CPI+3%(Conservative)

The client-average asset allocation of each is shown at the base of the left hand column.

Of course, we may agree other asset allocations with clients to suit their needs.

For each major CPI group, First Samuel again comfortably outperformed the relevant objective in FY-14.

The pleasing aspect is that the long-term outcomes also comfortably exceededtheirobjectives.

Each portfolio performance is made up of the performance of the various asset sectors (i.e. Australian shares, income securities, etc) in the portfolio.

s e c to r pe r F o r m a n c e sau s t r a l i a n s h a r e s (+12.6% av e r ag e c l i e n t r e t u r n )Notwithstanding the double digit returns for the year, our active decision to lower the risk of clients’ share portfolios has meant relative under-performance of the share market in FY-14.

the context

For the last 18 months, as global deposit rates have moved lower and lower, Australian and international investors have invested in high yielding large stocks.

In Australia, this has meant that the share prices of large, high yielding companies (which includes the big four banks and Telstra) have been pushed up to prices very high in relationtotheexpectedprofitgrowthof those companies.

We decided not to change the way in which we invest just to manage short-termexpectations.

But up until mid-November, we out-performed very well in both absolute terms (the average share portfolio was then up about 18% for the fiscal year) and relative terms (3% above the market i.e. AOAI).

SMSFs: STRONG AND CONSISTENT PERFORMANCE

Accumulation phase SMSFsPension phase SMSFs

Percent per annum for periods ending 30-Jun-14; after fees and franking credits and is the asset weighted average of all like portfolios. Individual client returns will vary because of individual design reasons. Past performance does not indicate similar future performance.

1 year 5 years 10 years0%

2%

4%

6%

8%

10%

12%

PORTFOLIO ASSET ALLOCATION: CLIENT AVERAGES

Australian sharesIncome shares

International sharesProperty securities

Conservative

Balanced

Growth

0 20 40 60 80 100

AUSTRALIAN SHARES – LONG TERM OUT PERFORMANCE

All Ordinaries Acculumation IndexFirst Samuel

1 year 3 years 5 years 10 years

Average outperformance

0%

5%

10%

15%

20%

Percent per annum, before fees and after franking credits for periods to 30-Jun-14. Data is the asset weighted average of all like portfolios. Individual client returns will vary because of individual design reasons. Past performance does not indicate similar future performance.

WE MOVED TO A LESS RISKY PORTFOLIO AFTER NOVEMBER

First Samuel Jun

e-13

July-1

3

Aug-13

Sept-1

3

Oct-13

Nov-13

Dec-13Jan-1

4Fe

b-14

Mar-14Apr-1

4

May-14

June-1

4

Market

100

105

110

115

120

125

Investment performance of both First Samuel and the market is indexed to 100 as at 30-Jun-13. First Samuel is the asset weighted performance of the shares' portion of like clients' portfolios. Market is the All Ordinaries Accumulation Index.

GROWTH PORTFOLIOS: AGAIN EXCEEDING THE BENCHMARK

Objective: CPI +5%Growth portfolios


2%

4%

6%

8%

10%

BALANCED PORTFOLIOS: CONSISTENT OUTPERFORMANCE

Objective: CPI +4%Balanced portfolios


2%

4%

6%

8%

10%

12%

CONSERVATIVE PORTFOLIOS:LOWER RISK

Objective: CPI +3%Conservative portfolios


2%

4%

6%

8%

10%


inVestMent

au s t r a l i a n s h a r e s (+12.6% av e r ag e client return) cont...

move to a less risky portFolio We then became concerned at the frothiness of the market, and so took profits on a number of stocks and decided to move to a more defensive strategy and so to lower the P/E of client portfolio by buying less risky stocks.

As you can see from the chart below, clients’ portfolios were and are now very well structured compared to market.

getting right the 3 critical success FactorsThere are three critical success factors in investment success.

1. Dividend yieldTheexpecteddividendyieldofcompanies in clients’ portfolios is 6%, much higher than the market’s 4%.

2. Expected profit growth Theexpectedprofitgrowthofcompanies in clients’ portfolios averages 12% p.a., much higher than the market’s 7% p.a.

3. How cheap (P/E)The P/E (or value, or cheapness) is 9.1, compared to 15.5 for the market (our P/E of 9.1 is lower than in the worst days of the GFC).

So, client portfolios are more conservatively structured, but with strong long-term outperformance expected.

maJor investment changesFY-14 was a year when we were a little more active than usual. The move to a less risky portfolio from November meant the taking of profits of strongly performing stocks and the purchasing of more conservative companies.

Interestingly, each of the significant transactionsisanexemplificationofthe way we invest.

maJor sales

IAG – bought when cheap after adverse insurance eventsIn 2011, a number of significant insurance events occurred in a short period of time, dampening short term profitability in the insurance sector.

We decided to take advantage of the share price fall in IAG and to invest.

Over two years later we see that the share price has recovered strongly to the point of being, in our view, overvalued.

Transpacific Notes – an income security that looked like a shareWe purchased these notes because at the timetheyhadanexpectedreturnprofile like a normal share, that is, a combination of capital growth and income.

WeacquiredtheminApril2011ata significant discount ($72.62 per security, with a redemption price of $100).

So we have captured the significant capital gain and strong distributions of income.

Tassal – bought at a cheap price that got cheaper before it roseTassal (the Tasmanian based seafood company)wasaclassicexampleofwhen we bought a company (in 2010) whose share price was cheap relative to expectedfutureprofit.Andthentheshare price got cheaper before it rose.

The discipline was to stick with the company through those early lower share-price times.

We did, and it yielded handsome returns (over 20% p.a. compared to the market return over the same period of 5% p.a.).

maJor buysBefore we purchase a company we ensure that it doesn’t diminish either (a) the three critical success factors noted earlier or (b) the overall diversification of the portfolio.

Or put another way, like a footballer considered for a team, it is the value that the player adds to the team balance and success that is important, not the brilliance of the individual player.

Aveo – formerly FKP: moving to retirement village owner/ operatorOverthenextfewyearsAveowilltransform into a pure-play retirement operator. In fact, it will probably become the largest in Australia.

Our average entry price of $1.81 represents a ~35% discount to its net asset value.

Pact – newly listed packaging groupWe purchased Pact (a rigid plastics packaging company) as we assessed it to have a strong return profile, with considerably higher opportunity for profitgrowthfromexpansionintoAsia.

“all portFolio types eXceeDeD their Benchmarks” cont...

First SamuelASX 100

Yield Expectedannual profit

growth

FIRST SAMUEL'S SHARE PORTFOLIO NOW HAS A MUCH HIGHER YIELD AND EXPECTED PROFIT GROWTH THAN THE ASX 200 AND IS SIGNIFICANTLY MORE ATTRACTIVELY PRICED (I.E. LOWER P/E)

P/E0%

4%

8%

12%

16%

0

4

8

12

16


inVestMent

what worked in Fy-14Aside from those successes where we sold out (IAG, Transpacific Notes and Tassal, as previously noted, as well as BHP and Asciano), there were three other stocks where the combination of a good portfolio weight and a strong stock performance meant considerable added value:

3 Challenger Limited (+93%)The financial services company specialising in annuity products again extendeditsupwardtrend,returningsignificant value.

3 Ingenia Communities Group (+55%)Ingenia, the retirement villages’ operator had another strong year. We remain confident of its future.

3 360 Capital Group (+74%)This is the holding company for the 360 Group of Companies. It is very well managed.

what didn’t work in Fy-14Two companies significantly disappointed us, but we remain confident in the long-term outlook.

Ò Ausenco Limited (-65%)This global engineering company struggled early in the year with collateral damage from Forge’s failure, an unrelated but similar company.

We invested in a share placement but, with hindsight, we agreed a price that was too high.

We remain confident of the company’s profit outlook and hence a strong recovery in the share price.

Ò Emeco Limited (-28%)This mining services provider felt the brunt of the downturn in commodity prices.

But we see a sound company with considerable upside and hence are happy to hold.

i n com e s e cu r i t i e s (+10.1%) We had another strong year in the income securities sector (also known as‘fixedincome’),withdouble digit returns well above the market benchmark.

pro pe r t y s e cu r i t i e s (+17. 5%)Property securities are added to appropriate client portfolios to diversify risk and yet still provide sensible growth.

FY-14 was another sound year, with our investment objective met. We were also pleasedtooutperformthemarketindex.

i n t e r n at i o n a l s h a r e s (+21. 4%)International shares enjoyed another strong year, outperforming all other major asset classes.

Italy was a standout performer, but it is only the 20th largest stock market, making up less than 1% of the global index.Soitscontributionwaslessweighty.

TheperformanceoftheUS(38%ofthe world) is a significant contributor. Germany (3%), France (4%) and Japan (7%) each had stock markets that also contributed to the success of our investment in overseas share markets.

(The ASX makes up about 3% of world stockmarkets, some thrice our GDP weight). But note that the Australian dollar strengthened by about 3% over the year and so diminished returns by that amount.

INCOME SECURITIES – WELL DIVERSIFIED SUCCESS

Healthscope Notes

Australand Notes

Envestra Bond

AGL NotesPeet Notes

Primary Healthcare NotesSuncorp Convertible Prefs

AverageIAG Convertible Prefs

Suncorp NotesOrigin Energy Notes

Westpac Convertible PrefsIAG Notes

Ramsay Healthcare NotesCBA PerlsVero BondETSA Bond

Suncorp Convertible PrefsAMP Bond

Seven Group Prefs

Nufarm Notes

0% 3% 6% 9% 12% 15%

PROPERTY SECURITIES – ANOTHER SUCCESSFUL YEAR

Challenger Diversified Property

Australand Property

Cedar Woods Property

AverageCommonwealth Office Property

Sydney AirportGoodman Plus

Charter Hall RetailMirvac Bond

Dalrymple Bay BondCromwell Property

Westfield Group

Generation Healthcare

National Storage

0% 20% 40% 60%

INTERNATIONAL SHARES – A SLIGHTLY STRONGER A$ DETRACTED 3% FROM A STRONG OVERALL RETURN

IT DE AUS US FR JP HK UK CN0%

10%

20%

30%

40%

50%

2 0 F i r s t s a m u e l 2 014 a n n u a l r e p o r t F i r s t s a m u e l 2 014 a n n u a l r e p o r t 21

Client seRViCes

“…many opportunities For clients to Directly engage with us”

c l i e n t s e rv i c e sFirst samuel offers a full suite of services designed to add value for our clients.this is not only the full range of client reports and additional services detailed on pages 8 & 9, but also a range of other meetings and events that provide clients with the opportunity to better understand what we do for them.

a n n ua l w e a lt h r e v i e wan annual strategy check-up We like to meet with each client annually,ormorefrequentlyifrequired.

This meeting provides the opportunity to thoroughly review each client’s wealth strategy to ensure that the strategy continues to meet the client’s needs.

This is important because not only do client needs change over time, but legislative and regulatory changes frequentlyoccur,especiallyinvolvingsuperannuationandtax.

During FY-14 we personally met with most of our clients to review their wealth management progress.

w ry & d ry“a weekly review oF wealth management matters through a cynical eye.” We wish to ensure that our clients are regularly informed about events that affect their wealth.

Wry & Dry, emailed on Friday afternoons and also posted on our website, not only has its cynical review of the week’s events, but also a full review of investment matters, a roundup of global business news and a page of light-hearted miscellany.

During FY-14 50 editions of Wry & Dry were published.

F i r s t h a n dwealth management thought- leadershipWealth management is a serious business.

And First Samuel displays thought-leadership of the wealth management industry by articles in First Hand, our semi-annual newsletter.

Articles are focussed on wealth strategy, investment and matters of general interest.

cio con v e rsat ion d inne rsdeep investment Focus We hold CIO (Chief Investment Officer) Conversation Dinners in private dining rooms of fine restaurants located near our clients.

This allows our clients to listen to and askquestionsofourinvestmentteam.

With generally 20-25 clients attending each, they provide a pleasant and informal setting for investment reviews and analysis.

In FY-14 we held eight events in the suburbs of Melbourne, as well on the Mornington Peninsula and in Sydney, Brisbane and London.

F o ru m a n d coc k ta i l pa r t yexperts presenting to our clients In August each year we invite an interesting speaker to address our clients on matters of general interest to their wealth management.

Past presenters have included:

Saul Eslake Economist

Peter Costello Federal Treasurer

Don Stammer Economist

Li CunXin Mao’s Last Dancer

Ian Harper Economist

Clint Laurent Demographer

Avril Henry Intergenerational expert

Michael Reid Artexpert

Alan Kohler Finance Journalist

Our FY-14 guest was Norman Smorgon, who gave an amazing presentation on the history of the Smorgon family in Australia.

F i r s t s a m u e l’s c h a r i t y F ocus First Samuel is a major supporter of two of Melbourne’s leading charities:

Over 160 of our clients enjoyed Eat Street, the Melbourne food and wine fest that raises significant funds for nominated charities.

We again supported Brainwave, which provides support for families of children with brain illnesses and injury.

a r t s e r i e s monet’s gardenWe once again hosted our clients at a cocktail party and private showing of avisitingartexhibition.


BoARD oF DiReCtoRs

BoarD oF Directors

ph i loso ph yFirst samuel’s Board of Directors are in place to ensure that our legal, regulatory, fiduciary and ethical obligations are met.the directors are not in place to network or to provide sources of clients. nor to lend the weight of their names to our business.managing the wealth of others is a task of great trust.and the directors have been chosen to fulfil the trust placed in them.

m u r r ay b a i r dchairman BA, LLB, MAICD

Mr Baird is Assistant Commissioner General Counsel of the Australian Charities and Not-for-profits Commission

(ACNC). Prior to June 2012 he was in private legal practice in not-for-profit and charity law and governance. He was previously Senior Partner and leader of the Not-for-Profit group at Moores Legal, Melbourne.

Mr Baird is the Chairman and a non-ExecutiveDirectorofFirstSamuel Limited and Chairman of the Remuneration & Nominations Committee.

e l i z a b e t h pa r k i ndeputy chairmanBBus, FFin, ACA, MAICD

Miss Parkin has over 30years’experiencein corporate analysis and corporate advisory roles, working for such firms as Lander & Rogers, E.L. & C.

Baillieu and KPMG. She is a Director of Parkin Corporate and a trustee of the Northcote Trust Fund.

Miss Parkin is Deputy Chair and anon-ExecutiveDirectorofFirstSamuel Limited and Chair of the Audit & Risk Committee.

J o h n b ryso nBEng (Mech), MBA, MAICD

Mr Bryson has over 25years’experiencein the finance industry. He was anequityownerof JB Were and held various senior executiveroles

including Group General Manager. Since leaving in 2003, he has been CEO for the Helen Macpherson SmithTrust,managingapproximately$100 million of charitable funds. He is a board member of the Bionics Institute, Chair of its Investment Committee and a member of its Risk & Finance Committee.

MrBrysonisanon-ExecutiveDirector of First Samuel Limited and a member of the Remuneration & Nominations Committee.

a n to n y g r e e n woo dLLB, LLM, FAIM, MAICD

Mr Greenwood is currently a consultant to and was a partner of law firm Ashurst Australia (formerly Blake Dawson),

where he specialises in corporate law and governance. Prior to that, he was a Commissioner of the National Companies and Securities Commission (the forerunner to ASIC).

MrGreenwoodisanon-ExecutiveDirector of First Samuel Limited and member of the Audit & Risk Committee.

a nthon y s ta r k insLLB, BEc, CFA, FFin, MAICD

Prior to founding First Samuel in 1999, Anthony’s principleexperiencewas working with J.P. Morgan and Schroders for a combined 19 years.

He is a Chartered Financial Analyst, holds Bachelors’ degrees in both Laws and Economics from Monash University,hascompletedtheUniversityofOxfordAdvancedManagement Program and also the UniversityofMichiganBusinessSchool Strategic Marketing Program; is a fellow of the Financial Services Institute of Australasia and a member of the Australian Institute of Company Directors and the CFA Institute.

MrStarkinsisanExecutiveDirector of First Samuel Limited.

2 2 F i r s t s a m u e l 2 014 a n n u a l r e p o r t F i r s t s a m u e l 2 014 a n n u a l r e p o r t 2 3

FiRst sAMuel

with your current wealth management regime is it clear with whom you are dealing?

From oBscurity...

F i r s t s a m u e l 2 014 a n n u a l r e p o r t 2 3

FiRst sAMuel

nikki hill

head of wealth strategy

eMMA jeReMiejCzYkcontroller investments

& Finance

jennY FoRBes

associate client strategist

tonY RositAno

portfolio administrator

FleuR GRAVes

equities analyst

CRAiG FRAseRinvestment manager

AnthonY stARkins

executive Director

Dennison hAMBlinGchief investment

officer

AnGelA pAteRson

investment administrator

siMon DeVlin

client strategist

joe Flinngeneral manager

MeGAn GRouFskY

marketing & events assistant/ office manager

ChRis tsAtRAFilis

senior client strategist

jACk nGoclient

strategist

susAnne RetAlliCk

Business manager

with First samuel you have a cohesive team of professional experts at your service. it is clear with whom you are dealing in every aspect of our service. please read about the expertise of our associates at

www.firstsamuel.com.au

...to clarity

directors

Murray philip Baird, Chairman, Ba, llB, maicD

elizabeth henty parkin, Deputy Chair, B.Bus, FFin, aca, maicD

john Alexander Bryson, B.eng (mech), mBa, maicD

Antony Baron Greenwood, llB, llm, Faim, maicD

Anthony hamilton tom starkins, llB, B.ec, cFa, FFin, maicD

general manager

joseph Anthony Flinn, B.acc, ca

company secretary

timothy Watkinson, Watkinson Legal, llB

joseph Anthony Flinn, B.acc, ca

First samuel limited aBn 51 086 243 567 aFsln 225 405

level 11, 350 collins street, melbourne, victoria 3000

ph: +61 3 8610 9222Fax: +61 3 8610 [email protected]

www.firstsamuel.com.au

“the provision of individual, indispensable and enduring relationships that create, manage and protect wealth”

“the lord declares those who honour me i shall also honour” 1 samuel 2:30

the First samuel word mark, First samuel device mark and Wry & Dry word mark are registered trademarks of First samuel limited

counselwatkinson legal

auditorsmsi ragg weir & co

registered oFFicelevel 2, 108 power street hawthorn, victoria 3122

...anD corporate governance

From the wealth management conFusion - First Samuel Limited€¦ · 6 First samuel 2014 nnual a report First samuel 2014 nnual a report 7 From wealth management chaos... 1. individual

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