The market made its view clear at the end of last year: no more rate hikes. As the US Fed threw its tightening rhetoric into reverse, markets dramatically shifted their expectations for the next interest rate move, with a cut to the funds rate firming as a distinct possibility. As the chart below shows, the probability of a rate cut based on the pricing of December 2019 Fed futures rose to 38% in March, while the probability of a rate increase is effectively zero.

Probability of a Fed funds rate move (December 2019 meeting)


Source: Bloomberg, CME, Lonsec

All that was left was for markets to see if the Fed’s FOMC members had arrived at the party on time. This week’s meeting coincided with the release of the Fed’s updated growth and inflation forecasts, as well the notorious ‘dot plot’, which indicated where individual voting members believe the target rate should move to based on current economic data and their view of monetary policy. As expected, members’ views have changed significantly compared to the last dot plot released in December 2018, as the chart below shows.

Fed dot plot versus previous quarter


Source: Lonsec, FOMC

In particular, the majority of members believe the funds rate should remain where it is at a target range of 2.25–2.50% for the rest of 2019, compared to the previous quarter when only two members saw rates staying where they were. Looking forward to 2020, the dot plot shows the median view is for rates to again remain on hold, although most see rates rising by at least 25 basis points. Even out to 2021, there is a firmer bias towards either no change or a more modest rise.

Interestingly, though, there is nothing pointing to a rate cut, which implies there is still a disconnect between what the Fed is thinking and what markets are hoping for. Over the long run nothing much has changed, although as a famous economist once said, in the long run we’re all dead.

This article has been prepared for licensed financial advisers only. It is not intended for use by retail clients (as defined in the Corporations Act 2001) or any other persons. This information is directed to and prepared for Australian residents only. This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.

Nominees for the Lonsec Money Management Fund Manager of the Year have been announced, with the winners to be announced at the 2019 Fund Manager of the Year Awards on 16 May. Congratulations to all who have received a nomination! A full list of nominees is available below:

Australian Large Cap Equities
Platypus Australian Equities Fund
AB Managed Volatility Equities Fund
Bennelong Australian Equities Fund

Australian Small Cap Equities
Fidelity Future Leaders Fund
Eley Griffiths Group Emerging Companies Fund
Perennial Value Microcap Opportunities Trust

Long/Short Equities
Solaris Australian Equity Long Short Fund
Antipodes Global Fund
Platinum International Healthcare Fund

Responsible Investments
Alphinity Sustainable Share Fund
Pengana WHEB Sustainable Impact Fund
Australian Ethical Australian Shares Fund (Wholesale)

Global Equities
Generation Wholesale Global Share Fund
Ironbark Royal London Concentrated Global Share Fund
AB Global Equities Fund

Global Emerging Market Equities
Fidelity China Fund
Colonial First State Asian Growth Fund
Robeco Emerging Conservative Equity Fund

Australian Property Securities
Pendal Property Securities Fund
Legg Mason Martin Currie Real Income Fund
Charter Hall Maxim Property Securities Fund

Global Property Securities
Principal Global Property Securities Fund
SGH LaSalle Global Property-Rich Fund
Quay Global Real Estate Fund

Direct and Hybrid Property
Aust Unity Retail Property Fund
Aust Unity Diversified Property Fund
Charter Hall Direct Office Fund

Infrastructure Securities
Colonial First State Global Listed Infrastructure Securities Fund
Magellan Infrastructure Fund
RARE Emerging Markets Fund

Australian Fixed Income
Legg Mason Western Asset Australian Bond Fund
Macquarie Australian Fixed Interest Fund
Janus Henderson Australian Fixed Interest Fund

Global Fixed Income
Colchester Global Government Bond Fund
PIMCO Global Bond Fund
Legg Mason Western Asset Global Bond Fund

Alternative Strategies
P/E Global FX Alpha Fund
Winton Global Alpha Fund
Partners Group Global Value Fund (AUD)

Multi Asset
Cbus Industry Growth
BMO Pyrford Global Absolute Return Fund
MLC Wholesale Inflation Plus Moderate Portfolio

Retirement and Income
Pendal Monthly Income Plus Fund
Legg Mason Martin Currie Real Income Fund Class A Units
Challenger Annuities

Emerging Manager
Lennox Australian Small Companies Fund
Daintree Core Income Trust
Quay Global Real Estate Fund

Listed Investment Companies & Trusts
Australian Foundation Investment Company Limited
Mirrabooka Investments Limited
MCP Master Income Trust

Separately Managed Accounts
Quest Australian Equities Concentrated Portfolio
iShares Enhanced Strategic Growth
AB Concentrated Global Growth Equities Portfolio

ETF Provider of the Year
BetaShares
Vanguard
Van Eck 

February was another positive month for equity markets as they continued their upward trajectory, boosted by the Federal Reserve’s decision to place rate hikes on hold.
This article is intended for licensed financial advisers only and is not intended for use by retail investors.

February was another positive month for equity markets as they continued their upward trajectory, boosted by the Federal Reserve’s decision to place rate hikes on hold. But how long can markets remain placated? Despite the reprieve, key market risks remain, including a reduction in liquidity as central banks cease their quantitative easing programs, and tighter credit conditions, which have had a significant impact on those parts of the market supported by cheap debt and ample liquidity.

In uncertain market environments such as the one we find ourselves in, diversification becomes ever more critical to managing portfolio risk. Diversification across asset classes is key, but diversification across different investment strategies – such as absolute return and long-short equity strategies – is also essential.

There has been a lot of debate around whether bonds, which are traditionally seen as diversifiers to equities, can continue to deliver meaningful diversification benefits given the relatively low-yield world we are in. The chart below shows the rolling one-year correlation between global equities and global bonds. It shows that the correlation is not static: there are periods of negative correlation but also periods of significant positive correlation. Equity and bond correlations are influenced by a variety of factors. Rapid changes in real rates and inflation have tended to result in a positive correlation, an example being the ‘taper tantrum’ in 2013, which saw a surge in Treasury yields and a sell-off in equity markets. Conversely, growth shocks have tended to result in a negative correlation between equities and bonds as investors generally seek safe haven assets such as treasuries.

Equities and bonds are not always negatively correlated

Equities and bonds are not always negatively correlated
Source: Lonsec, FE
Global equity returns based on the MSCI AC World ex Australia TR Index AUD. Global bond returns based on the Bloomberg Barclays Global Aggregate TR Index AUD Hedged.

So, do bonds still have a role to play in portfolio diversification? In our view bonds continue to play a key diversification role despite the low yield environment, and indeed we have seen bonds act as a diversifier to equities in recent periods where there has been a flight to safety. However, it is important to recognise that correlations between asset classes can change, and under certain conditions they may become correlated when you don’t want them to. This is why Lonsec’s managed portfolios are constructed to provide not only asset class diversification but diversification across a range of investment manager strategies and styles, which will perform differently as market conditions change. Given the current market uncertainty, this is an essential means of managing portfolio risks and delivering superior investment performance through the market cycle.

This article has been prepared for licensed financial advisers only. It is not intended for use by retail clients (as defined in the Corporations Act 2001) or any other persons. This information is directed to and prepared for Australian residents only. This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.

Is the world a more uncertain place today than it was yesterday? And if so, how much more uncertain is it? If these questions only lead to more uncertainty, then the Atlanta Fed might have some answers. The central bank calculates two indices – one for economic policy uncertainty and one for market uncertainty – that are designed to reflect the degree of unpredictability in the world.

The first index is based on the proportion of news stories that refer to uncertainty, major policy changes, and disagreement among forecasters. The second index does something similar but relates to stories about the economy and share markets. While not exactly a hard science, both provide an indication of how much the world disagrees on what will happen next.

While the practical utility of such measures might be a little dubious (unless you enjoy staying awake at night), it’s interesting to see if our own experience of the world correlates with what the media and other commentators are saying. Of course, the challenge is in differentiating real risks and uncertainty from the feedback loop of fear – in other words, these charts should be used responsibly!

Is the world more uncertain? It depends how you look at it

Is the world more uncertain? It depends how you look at it.

Source: Atlanta Fed

So, what are these indices telling us right now? The economic policy uncertainty index for the US shot higher at the start of 2019, reaching its highest level since the start of the Global Financial Crisis. This would certainly fit with the current geopolitical climate, including the US-China trade dispute, ongoing debate on tax reform, and of course the political deadlock over congressional funding for a border wall.

Interestingly, however, the index relating to market uncertainty dropped, and historically the two series have not always moved tightly together. Does this mean markets have entered a state of delusion, or is the uncertainty surrounding geopolitics overblown?

This is the critical question for wealth managers, and one we’ll be investigating with some of Australia’s leading strategists at the upcoming Lonsec Symposium. If you’re interested in how portfolio managers and financial advisers can manage uncertainty and the risks of regulatory change, then you can’t afford to miss out.

This article is intended for licensed financial advisers only and is not intended for use by retail investors.

Equity markets have continued their recovery through February, with the S&P 500 and S&P/ASX 300 both rising 5.2% in Australian dollar terms in the first three weeks of the month. This comes on the back of January’s gains of 4.5% and 2.6% respectively. In price terms, the US index has recovered from a sharp fall in December, while the ASX has clawed back nearly all losses suffered in the final quarter of 2018.

US markets have led the comeback, buoyed by the Federal Reserve’s pivot to a more dovish stance on monetary policy after announcing that it will keep rates on hold until further notice. This was coupled with strong earnings results from companies such as Facebook (+23.5% since the start of 2019) and General Electric (+34.4%), with both beating revenue and earnings expectations and addressing investor concerns head-on. Over the last 12 months we have also seen an increase in market volatility, with risk measures such as the VIX spiking in December. But as the chart below shows, volatility eased following the Fed’s revised expectations, with the VIX dropping to a four-month low.


Source: CBOE, Bloomberg

Does this mean that we’ve seen an end to volatility? Our view is that volatility will remain at a heightened level – or, arguably, at more normal levels – over the course of 2019. While we may see a pause in rate rises in the US, we continue to believe that we are at the late stage of the cycle. The winding back of central bank liquidity support via quantitative easing, tighter access to credit, and the possible flow on effects of a slow-down in the Australian housing market, remain the key issues for investors, while shorter-term indicators such as price momentum have turned negative. Furthermore, geopolitical risks associated with the Brexit negotiations and the ongoing trade discussions between the US and China remain potential sources of volatility.

So, what does this mean for Lonsec’s managed portfolios? We are starting to see pockets of value appearing on a sector level. An example of this is within emerging markets, which sold off over 2018 and have since showed signs of stabilising. We are also seeing more investment opportunities on a stock level where the increase in market volatility is providing an opportunity to invest in quality companies at a reasonable price. However, value measures take a long-term view of the market, and assets can remain ‘cheap’ or ‘expensive’ for extended periods, hence it is also important to look at business cycle and other medium-term indicators.

We remain neutral on equities, with our main active asset allocation position being a positive tilt towards alternative assets. The outlook for markets is far from clear, and in our portfolio communications we are emphasising the need for portfolio diversification across asset classes and investment strategies. Given our view that we should continue to expect bouts of volatility, we believe that such an environment will be conducive to an active approach to investing, both at the asset allocation and security level.

This article has been prepared for licensed financial advisers only. It is not intended for use by retail clients (as defined in the Corporations Act 2001) or any other persons. This information is directed to and prepared for Australian residents only. This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.

Last year marked the ten-year anniversary since the Global Financial Crisis (GFC), and while the global economy and our financial institutions have recovered, the same cannot be said for our democratic institutions. In a post-GFC world, liberal democracies have encountered a popular revolt from disenchanted voters expressing their resentment towards the economic systems and cultures that have left them behind. The surge in right-wing populism across the world has been symptomatic of globalisation, deregulation and the financialization of the economy at the expense of the working class.

Naturally, the resultant wage stagnation and off-shoring of domestic jobs has benefited the ‘wealthy elites’ who embrace a world of open borders and an abundance of labour. However, the growing inequality divide has stoked resentment and resulted in an insurgency against the so-called elite.

The rise of right-wing populism has had far-reaching implications for global equity markets and economic growth through increased geopolitical risks and heightened volatility. The two primary beneficiaries in modern history of this populist uprising have been US President Donald Trump and the Brexit campaign. While there are a myriad of other examples which could be drawn upon, such as the right-wing coalition government in Italy or Brazil’s recently elected populist leader Jair Bolsonaro (known as the ‘Tropical Trump’), it has been the Trump presidency and the Brexit fiasco which have had the biggest implications for global markets.

Donald Trump

Although a political novice and a bombastic provocateur, Trump unexpectedly rode into the White House by leveraging the collective anxieties of his rustbelt base. Trump was able to garner the enthusiasm of energetic, anti-establishment voters by vowing to “drain the swamp” and “make America great again”. Trump successfully portrayed himself as the voice of the downtrodden, committed to his own form of populist nationalism (despite being a billionaire himself).

The primary target of Trump’s rancor has been China, and the recent trade war has shaken equity markets both at home and abroad. Trump’s key gripe with China stems from the burgeoning trade deficit, which was US $375 billion in 2017 and which he claims has resulted in the destruction of the American manufacturing industry. America has seen a return to protectionism, with tariffs applied to a wide range of Chinese products in an effort to reduce the trade gap – even if the policy might be at odds with the traditionally pro-free market Republican party.

Predictably, China responded with its own tariffs, and global equity markets have been whipsawing erratically since. Fortunately for China, the yuan depreciated significantly against the US dollar during this period, which worked to partially offset the negative impact of the tariffs. This further fanned the flames between the two countries as Trump has frequently accused the People’s Bank of China for manipulating its currency to gain a competitive economic advantage. In addition to the trade deficit, Trump has been steadfast in his demands regarding the appropriation of foreign intellectual property in China.

While concessions might be made to reduce the trade imbalance, it is unlikely that Chinese President Xi Jinping will acquiesce to Trump’s demands regarding intellectual property theft given the ambitious ‘Belt and Road’ initiative and the ‘Made in China 2025’ policies. Consequently, equity market participants eagerly await the outcome of the negotiations when the ceasefire is set to expire on 1 March 2019.

As the table below shows, the US-China trade dispute has had an undeniable impact on China’s equity market returns in calendar year 2018, with the Shanghai Shenzhen CSI 300 PR Index (RMB) falling 25.3%. Unfortunately, the concerns surrounding the trade frictions were not contained in Asia, with a contagion effect spreading across the globe, placing downward pressure on all equity markets. Thus far, it has been a war of attrition, with both sides resolute in their demands.

China’s questionable growth trajectory and the ensuing impact on their global trading partners has further compounded investor concerns. Of importance is China’s trading relationship with Australia, and given China is our largest export market, we are particularly susceptible to a slowdown in Chinese growth and consumption. Consequently, Trump’s populist policies have impacted our domestic equity market with what the pundits have termed ‘the Trump dump’, which saw the S&P/ASX 300 TR Index return a crushing -8.4% for the 2018 December quarter.

Economic ailment and a fear of the fraying of the American social fabric contributed to the formulation of a key plank of the Trump campaign: the wall. The centerpiece of Trump’s foreign policy platform with Mexico is his proposed wall on the US southern border (which Mexico will pay for, of course). However, political gridlock in Congress and the president’s unwillingness to compromise led to the longest government shutdown on record and culminated in a heavy selloff in equity markets in December 2018.

Notwithstanding Trump’s best efforts, his brand of economic nationalism is yet to bear fruit, and there has been little reprieve for the jaded working class who voted for him. While NAFTA has been renegotiated it is unclear whether the ‘wins’ match the campaign rhetoric. Moreover, the trade war is yet to reap any benefits for the forgotten manufacturing workers. Rather, it has weakened global capital markets and hurt American farmers. The wall remains stuck in the ‘swamp’ and the economic impact of the month-long government shutdown is still being tallied. Subsequently, the president has controversially declared a national emergency to release the capital to fund its construction.

Trump’s incendiary personality and Tweets aside, he has been able to successfully legislate meaningful tax reform in America and reinvigorated Regan-era trickle-down economics. Lower individual tax rates have been negotiated, however these were dwarfed by the corporate tax cuts, which were slashed from 35% to 21%. These policies have proved successful with his aspirational base while additionally providing buoyancy to one of the longest-running bull markets on record.

Brexit

The success of the Brexit vote hinged primarily on issues pertaining to sovereignty and migration, and the leaders of the ‘leave’ movement were able to successfully galvanize a support base of Eurosceptics. However, the implications for the corporate sector and the broader equity markets have been considerable. Unsurprisingly, the result of the referendum has upended the domestic share market in the UK and left global markets on tenterhooks.

The below chart illustrates the perilous position of FTSE 100 investors since the 2016 Brexit referendum, with the index significantly underperforming the broader global equity market over this period. Similarly, the value of the pound has been on a near linear downward trajectory as investors seek protection from the uncertainty surrounding the final outcome.

There has been mounting speculation as to the longer-term economic impacts that Brexit will have on the economy and businesses domiciled in the UK. Many economists have warned that leaving the European Union would reduce per-capita income levels for UK citizens while simultaneously crimping corporate sector activity. With regards to a ‘no-deal’ Brexit, the outcome could potentially be disastrous for the UK economy and corporate sector. The consensus among economists points to a likely economic contraction due to diminished foreign direct investment, additional trade barriers and reduced immigration. This could pose significant headwinds for GDP, as immigration typically boosts growth by increasing aggregate demand.

The corporate sector has similarly been thrust into turmoil, with companies restructuring their affairs in preparation for a disorderly exit. The industries most exposed will likely be those operating in highly regulated industries such as financial services and air travel, which face additional post-Brexit uncertainty. Typically, companies at risk have sought to establish subsidiaries in neighboring countries within the European Union or to redomicile their headquarters completely. Naturally, this process is expensive and will impact profit margins. For companies operating in the retail or consumer staples sectors, a corporate restructure is not a realistic option. Consequently, these companies will most likely be mired with supply chain disruptions and adverse currency movements impacting their bottom lines. More broadly, the issue of labour shortages has come to the fore, with a reduction in access to skilled labour creating a key business risk.

Brexit is likely to continue to pose an ongoing threat to the UK economy and corporate sector, and could potentially require significant adaptation and adjustment for local businesses—at material cost. Therefore, the ongoing stability and health of capital markets both domestically and abroad is directly at risk. As can be seen, nationalist sentiment heightens geopolitical risks in a globally connected world economy and turbocharges volatility, so investors beware.

Implications for portfolio construction

Trump’s policies are based on conflicting viewpoints. He is advocating for protectionism and championing the working class through a return of the American manufacturing industry—at the expense of China. At the same time, he has overhauled corporate regulations and slashed taxes, which should hardly appeal to the anxieties of frustrated voters. A similar wave of anti-globalist and nationalistic sentiment has likewise gripped the UK and propelled right-wing populism to the fore. These are not likely to be isolated incidents, and rather are representative of a global trend to renounce the political elite in favor of populists.

This article has highlighted the relationship between an upsurge in right-wing populism, and the resultant impact on global markets. The hostile rhetoric employed by populist leaders has become all too predictable, albeit successful, in galvanizing a disenfranchised support base. With the regressive left pitched against the radical right, there are no clear winners.

The reaction across stock markets has been varied, with indiscriminate selloffs often followed by relief rallies. Consequently, as we enter periods of growing political unrest and market volatility, the role of active management within a diversified portfolio becomes more critical. Times of increased volatility create mispricing opportunities for active fund managers to exploit, and can potentially deliver alpha to patient investors. As such, prudent investors should seek to capitalize on market inefficiencies during bouts of extreme volatility. As the legendary Oracle of Omaha (Warren Buffet) put it, “Be greedy when others are fearful.”

With respect to portfolio construction:

1. Challenging macroeconomic conditions provide opportunities for skilled investors. The proliferation of passive investment products has led to price distortions and programmatic trading, which during periods of heightened volatility can suffer without clear trends. However, increased volatility provides opportunities for active managers to protect capital on the downside through a range of options depending on their mandates (e.g. by increasing cash allocations or shorting). Similarly, volatility can expose mispricing that can be exploited by active managers.

2. Populism tends to be intertwined with economic rationalism which can favour small-cap stocks, as these domestically focused companies should, prima facie, perform proportionally better than larger and more globally exposed peers.

IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL 421 445 (Lonsec).

Please read the following before making any investment decision about any financial product mentioned in this document.

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.

Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

Copyright © 2019 Lonsec Research Pty Ltd, ABN 11 151 658 561, AFSL 421 445. All rights reserved. Read our Privacy Policy here.

Super members have escaped a fifth straight month of negative returns as market volatility turned in their favour over January, helping to claw back losses suffered in late 2018.

The latest data from superannuation research house SuperRatings reveals major fund categories all enjoyed strong growth in the first month of the year. The median return for the Balanced option in January 2019 was 2.5 percent, returning to members more than half of the losses suffered over the prior four months.

Members in the median Growth option enjoyed gains of 3.2 percent for the month, while those in either the median domestic or international equities option had returns of 3.4 percent and 4.5 percent respectively. The effect across all options has been to improve monthly balances after four months of declines, a particularly welcome outcome for those members approaching retirement.

Interim results only. Median Balanced Option refers to ‘Balanced’ options with exposure to growth style assets of between 60% and 76%. Approximately 60% to 70% of Australians in our major funds are invested in their fund’s default investment option, which in most cases is the balanced investment option. Returns are net of investment fees, tax and implicit asset-based administration fees.

SuperRatings Executive Director Kirby Rappell believes the latest data is a reminder that it is long-term performance that matters for super members and they should not panic in response to a few months of negative performance.

“Volatility remains the dominant trend across markets at the moment”, said Mr Rappell. “However, this time volatility has delivered gains to super members and is a reminder not to panic in response to short-term market movements.”

“A number of factors worked in members’ favour throughout January, including efforts to diffuse the ticking time bomb of a trade war between the US and China. Markets also improved with the end of the longest US government shut down on record.”

Looking forward, super members are also likely to benefit from improved conditions in February to date. In particular, bank stocks have improved as the final report of the Royal Commission failed to deliver as much pain for the sector as many feared.

Growth in $100,000 invested over 10 years to 31 January 2019

Select index

SR50 Balanced (60-76) Index
SR50 Growth (77-90) Index
SR50 Australian Shares Index
SR50 International Shares Index
SR50 Cash Index

Source: SuperRatings

Interim results only

Source: SuperRatings

Interim results

The positive performance for super funds in January has helped to boost total balances over the ten-year period ending 31 January 2019, with $100,000 invested in the median Balanced option in January 2009 now worth $213,227. The median Growth option is worth $227,393 over the same period, while $100,000 invested in domestic and international shares ten-years ago is now worth $244,722 and $245,403 respectively. Meanwhile, $100,000 invested in the median Cash option ten years ago would only be worth $130,094 today.

Top performing super funds

Release ends

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the merits of the superannuation or pension financial product(s) alone, without taking into account the objectives, financial situation or particular needs (‘financial circumstances’) of any particular person. Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances, or should seek independent financial advice on its appropriateness.

If SuperRatings advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each superannuation or pension financial product before making any decision about whether to acquire a financial product. SuperRatings’ research process relies upon the participation of the superannuation fund or product issuer(s). Should the superannuation fund or product issuer(s) no longer be an active participant in SuperRatings research process, SuperRatings reserves the right to withdraw the rating and document at any time and discontinue future coverage of the superannuation and pension financial product(s).

Copyright © 2019 SuperRatings Pty Ltd (ABN 95 100 192 283 AFSL No. 311880 (SuperRatings)).

This media release is subject to the copyright of SuperRatings. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth.), no part of this media release may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of SuperRatings. This media release may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to SuperRatings copyrighted material, applies to such third party content.

 

Labor’s proposed changes to franking credits will result in a meaningful reduction in income for zero or low tax rate retirees invested in equity funds, according to analysis by leading research house Lonsec.

The research shows that the changes would have the biggest impact on dividend focused funds and Listed Investment Companies (LICs), which generally seek to maximise the value of franking credits to boost income for investors.

The charts below show the average yield and franking benefit for dividend focused funds and LICs researched by Lonsec. For a hypothetical investor paying no tax, the average franking benefit for both product groups is 2.0% on an annual basis, while the distribution yield is around 7.5% for dividend-focused funds and 4.7% for LICs. This compares favourably to the broader Australian equity market, which currently delivers a franking benefit of 1.6% and a distribution yield of 4.3%.

Average franking benefit & distribution yield for dividend focused funds (FY14 to FY17)


Source: Lonsec

Average franking benefit & distribution yield for LICs (FY14 to FY17)


Source: Lonsec

Labor’s proposal is designed to create a broader tax mix, and the removal of dividend refunds would help address distortions such as Australia’s significant home country bias. However, an Australian zero-percent taxpayer invested in an income-focused share fund would be at risk of losing a substantial boost to their after-tax investment income if the changes are implemented.

Most at risk are products with a higher than average franking benefit such as Plato Australian Shares Income Fund, Betashares Australian Top 20 Income Maximiser Fund, Perennial Value Share for Income Trust, Djerriwarrh Investments, and Mirrabooka Investments.

The changes would abolish cash refunds of franking credits for all Australian investors other than charities, endowments and some welfare recipients. Under the proposed changes, the system of dividend imputation will not change, but investors will no longer be able to claim cash refunds on excess imputation credits.

Lonsec has seen significant growth in its Managed Accounts offering over the last 12 months, as financial advisers increasingly seek an efficient way to implement professionally managed portfolios.

This growth is set to be given a further boost with Lonsec’s Managed Account solutions to be made available via the Netwealth platform.

As managed accounts gain an increasing share of advisers’ allocations, Lonsec has sought to widen it’s service offering to accommodate this rapidly growing area.

“We are very pleased to offer Lonsec’s suite of multi-asset and retirement focused managed portfolios on Netwealth. We believe the breadth and depth of our research positions us uniquely in the marketplace to deliver exceptional outcomes for advisers and their clients,” said Lukasz de Pourbaix, Executive Director, Lonsec Investment Solutions.

Netwealth Joint Managing Director, Matt Heine said, ”Our partnership with Lonsec further increases the wide range of options available on our platform, and allows our growing adviser network and their clients access to one of Australia’s leading investment managers”.

Release ends

Earlier this month, at his first public speech for 2019, RBA Governor Phil Lowe conceded the rate outlook is now “evenly balanced”, dropping the rate tightening bias present in RBA communications throughout 2018. In its latest forecasts contained in the Statement of Monetary Policy, the RBA has also revised lower its GDP and inflation forecasts.

So what has caused this change in outlook?

Weaker global outlook
Overall, global growth was strong in 2018 with falling unemployment and above-trend economic growth in the advanced economies. In Q4 2018, a few factors weighed on the growth outlook and the financial markets, including trade tensions between the US and its trading partners, slower growth in Europe and Asia, and political risks including Brexit and rising global populism. A greater-than-expected slowdown in China especially weighs on the outlook for Australia.

Stubbornly low inflation
With an improving domestic economy and tightening labour market, the RBA had been expecting inflation to move higher to its target band of 2–3%. That has not eventuated, and underlying inflation has been around 1.75% for some time. While there has been some pickup in wages growth, it remains subdued. In addition, rent inflation and the cost of new dwelling construction have remained soft given a weaker housing market.

Falling dwelling prices and a constrained household sector
Despite an improving labour market and falling unemployment rate, Australian households remain under considerable pressure, and household consumption growth has been weaker than expected. Factors weighing on household spending include subdued wages growth, rising cost of living (utility prices and mortgage interest rates), the high rate of part-time employment and underemployment, high household indebtedness, falling consumer sentiment in recent months, and also the declining wealth effects from falling house prices and weaker equities markets.

Tighter credit conditions
While domestic financial conditions remain accommodative overall, credit conditions for housing and small business have been tighter. Banks are facing higher funding costs as well as tightening lending standards as a result of the Royal Commission.

What’s ahead?

This change in rhetoric has seen financial markets pricing in a 60% chance of a rate cut by 2019, but in our opinion the RBA is likely to remain in wait-and-see mode. While it was forced to revise down its growth forecast, GDP is still expected to grow by 2.5% in 2018-19 and 2.75% in 2019-20, which is around the long-term trend level, while the unemployment rate is expected to stabilise around 5.0%. In addition to inflation, the RBA is likely to watch:

The business sector
As mining investment and exports return to more normal levels, non-mining business sector is expected to drive growth forward. However, business conditions and confidence have been trending lower, as measured in the NAB Business Survey. There are a few headwinds facing Australian businesses, including policy uncertainties associated with the federal election, slowing growth in China, tighter lending standards, falling building approvals and peaking mining exports. Retail conditions especially have been weak for quite some time—another reflection of a constrained household sector. The upcoming federal election is likely to contain business friendly policies to stimulate the economy and investment, while large infrastructure spending is also expected to drive investment growth in the medium term.

Household sector
The household sector remains constrained. As income growth has been weak, households have been saving less of their income to maintain consumption. Wages growth is therefore needed to maintain sustained consumption growth. The RBA will watch developments in the labour market closely. Leading indicators including the NAB survey employment index and SEEK job ads have pointed to a peak in employment growth. A marked slowdown in the labour market could see the RBA start cutting rates.

Dwelling investment
As the apartment building boom passes its peak, the fall in dwelling investment will be a drag on the economy and will likely see job losses in the construction sector and related industries. The RBA forecasts dwelling construction to decline by a cumulative 10% over the next two years. Given falling house prices, new approvals for houses and units are likely to be slow to come online. While infrastructure projects can absorb some construction employment, the overall drag on the economy would be significant over the near term.

Exports
The lower AUD will likely support export growth. While 2019 export growth will be driven by the completion of several large-scale LNG projects, once they reach full capacity their contribution to overall economic growth will be reduced. Rural exports this year are also expected to be lower due in large part to the severe drought.

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