Are grocery shop owners off their trolley?

By Blog, Uncategorized

With the rise of e-commerce, you might be tempted to think that the traditional grocery shop is on the way out. But is it? While certainly facing a competitive threat, bricks and mortar grocery stores also have a couple of important advantages over the pure online retailer.

  1. Margins – grocery retailing is fundamentally a low margin business making cost control critically important. Running an online business is however typically costlier, mainly due to increased distribution costs and depreciation of the capital investment needed in IT systems and logistics.
  2. Fractionalisation of costs – physical stores tend to incur a greater proportion of fixed costs, primarily due to the rents paid. This means that brick & mortar grocers can increase their profit by more from every additional dollar of revenue generated than online grocers which incur a greater proportion of variable costs.

To help overcome these challenges a pure online grocer can of course levy an annual subscription and/or add a delivery fee, but in doing so it is likely to eliminate a pool of potential customers. Given that the delivery economics however work best if drivers spend the bulk of their time bringing groceries into homes from trucks rather than driving kilometers between homes, the loss of potential customers is clearly something best avoided.

Portfolio Update – VanEck Vectors Australian Property ETF

By Portfolio

Within the portfolio, we have the purchase of the VanEck Vectors Australian Property ETF which is listed on the ASX and trades under the code “MVA”. MVA is designed to capture the performance of the broader Australian property sector with exposure to the industrial, office, retail and residential segments.

MVA incorporates a rules-based approach to holding a diversified portfolio based on market capitalisation with a maximum weight of 10% for any one position. This enhances the liquidity of the portfolio reducing exposure the larger cap names while ensuring proper diversification is maintained.

The attraction of the VanEck Vectors Australian Property ETF is that it:

  • provides a differentiated index exposure to the Australian listed property sector, reducing the concentration risk of the large-cap names that dominate the sector.
  • under the current backdrop of “lower for longer” in terms of bond yields – historically high and regular divided provides a stable income above the rate received from fixed income and cash.
  • valuation support – the AREIT sector not only trades at a material discount to local industrial companies also impacted by the recession, but where property concerns are most acute, investors appear to be pricing in very poor outcomes.
  • low on-going costs offer good value for money for a liquid investment to the sector. 

In summary, the extended outlook for the historically low rate environment will see investors again focus on higher-yielding defensive assets as income alternatives to cash and bonds as we adapt to life post-COVID. And REITs, with strong balance sheets, reasonable valuations and generally predictable distributions are well positioned for the long-term.

If you have any questions regarding any parts of your portfolio, please do not hesitate to contact your adviser as we are always happy to help.

Portfolio Update – Ardea Real Outcome Fund

By Portfolio

Within the portfolio we have added the Ardea Real Outcome Fund. The purchase was funded by a combination of reducing cash and the existing holdings being the Janus Henderson Tactical Income Fund and the Macquarie Income Opportunities Fund, both funds primarily exposed to high grade floating rate credit.

The attraction of the Ardea Real Outcome Fund is that it:

  • Prioritises capital preservation
  • aims to outperform both cash and inflation thus maintaining real purchasing power
  • does not rely on the direction of either interest rates or credit spreads to generate returns, as it employs a pure relative value approach aiming to exploit mispricings between closely related securities; and finally
  •  has historically exhibited low correlation to equities as the portfolio specifically includes ‘risk-off’ strategies designed to profit in periods of extreme adverse market movement
  • the strategy is implemented by a very experienced team via a well-established, repeatable process. The six portfolio managers have an average of 22 years’ experience and include 3 founding members of the firm.

In the current environment, we believe the Ardea Real Outcome Fund will be an excellent complement to the existing allocations.

If you have any questions regarding any parts of your portfolio, please do not hesitate to contact your adviser as we are always happy to help.

Reporting Season Update

By Portfolio

With the August reporting season now behind us, Elston Asset Management Portfolio Manager Justin Woerner discusses the major themes that emerged, how the portfolio fared, current portfolio positioning and a brief outlook.

If you have any questions regarding the latest reporting season or any parts of your portfolio, please do not hesitate to contact your adviser as we are always happy to help.

Portfolio Update – Purchase of Amcor (ASX:AMC)

By Portfolio

Across investor accounts, we have purchased Amcor (ASX:AMC). AMC is a global packaging company with operations across Australasia, North America, Latin America, Europe and Asia. AMC offers a range of packaging products for food, beverages, pharmaceutical and other consumer products.

We are positive on the medium-term outlook for Amcor for the following reasons:

  • AMC’s earnings are very defensive with the majority of its products used in the fast-moving consumer goods and healthcare segments. In addition, it is one of the world’s largest packaging companies whose revenues are diversified by product, client, and geography.
  • Although AMC’s top-line revenue growth is at a level similar to GDP, underlying earnings growth should be quite strong through the combination of strong operating leverage and ongoing capital management (buybacks). Strong cash generation also allows for a consistent dividend.
  • The acquisition of Bemis, a global manufacturer of flexible and rigid plastic packaging for food, consumer products, medical and pharmaceutical companies, should enable AMC to capture both cost and revenue synergies over the next 3 years. It also provided scale, with AMC now the largest packing company in both the US and Europe. This will allow AMC to attract and retain clients that benefit from a global solution.

Continued focus on research and development is absolutely critical for AMC. With the focus on the removing single-use plastics and the ability to recycle goods, AMC will need to evolve its products to firstly maintain market share, and potentially generate a first-mover advantage in cost-effective responsible packaging. This is an enormous opportunity if management can execute upon it.

To fund the acquisition of AMC, we have sold Wesfarmers. Even though it is an excellent business, we believe it has benefited from a pull forward in sales due to Covid-19 and is also achieved our 3yr forward target price.

In summary, we view Amcor as a high-quality business that we have acquired at a sensible price, a combination that is not common in the current environment.

Portfolio Update – Purchase of Sydney Airport Limited (SYD)

By Portfolio

Within investor portfolios, we have bought Sydney Airport Limited (SYD). Sydney Airport Limited has the concession to operate Australia’s largest airport, Sydney’s Kingsford Smith Airport until 2097. In 2019, the airport was used by 44 million passengers and connected Sydney to more than 90 destinations around the world. Revenue is generated by aeronautical charges largely based on a per passenger basis, rent from the hotel, logistics, office & retail tenants as well as parking and ground transport fees.

We are positive on the medium-term outlook for Sydney Airport Limited for the following reasons:

  • The airport has a monopoly position for both domestic and international airline passengers in Sydney and is a key freight hub given its proximity to the city and major road networks;
  • A weaker A$ makes Australia an attractive destination for international travellers which are more profitable for the airport. The pace of travel recovery across both international and domestic segments could be quicker than we anticipate;
  • It owns some of the most productive retail space in the country underpinned by fixed escalating rental revenue streams and it’s logistics and office portfolios are almost fully let and deliver solid annual increases;
  • Expiry of the Qantas Jetbase lease on 30 June 2020 (a 30 hectare site adjacent to the domestic airport with direct access to airside areas), gives SYD full operational control of the entire airport site for the first time and offers some attractive medium-term development opportunities.

Obviously the Covid-19 pandemic and associated travel restrictions present a significant short-term headwind. We are not expecting any real improvement in activity until the 2nd half of this year, and even then anticipate that it will be gradual. Furthermore, we expect the recovery in international travel to take longer than the domestic recovery as governments have to reopen borders which will likely be a staggered process and airlines assess existing routes – a recovery to pre-crisis levels is not expected until 2022. With the reduction in passengers, we also expect that the airport will have to provide some level of rent relief to its tenants such as retailers, car hire companies and hotels. This has been factored into our forecasts, but for long term investors, the current crises provide an opportunity to acquire a critical monopoly infrastructure asset at an attractive valuation.

Portfolio Update – Purchase of Beach Energy (BPT:ASX)

By Portfolio

Across investor portfolios, we have bought Beach Energy (ASX: BPT), an oil and natural gas exploration and production company with interests in five producing basins across Australia and New Zealand. Via its interest in the Western Flank of the Cooper Basin, it is Australia’s largest onshore oil producer and supplies approximately 15% of Australian east coast domestic natural gas demand.

We are positive on the medium-term outlook for Beach for the following reasons:

· Firstly it has a strong balance sheet (net cash position), combined with growing operating cash flows, allows for self-funding of the significant investment in organic production growth at very high rates of return.

· High certainty of revenues and cash flow – Beach has limited exposure to lower domestic spot gas prices with almost all volumes contracted and by 2022, more than 70% of east coast sales are expected to be via higher-priced market offers versus current.

· Beach Energy is a well-managed low-cost producer with a diversified portfolio of quality assets and;

· Management continues to guide the market towards substantial production upside over the next 5 years and has demonstrated significant exploration and development success in allocating capital in the past.

Furthermore, at Elston Asset Management (EAM), we are focused on both value and growth when selecting businesses for investment. We believe Beach Energy meets both of these criteria with the material production and free cash flow growth over our 3 – 5-year investment horizon whilst trading at approximately 5 times this year’s EBIT we believe the business is inexpensive. In the short term, the coronavirus outbreak has clouded the outlook for global energy demand and production; this has provided a long-term opportunity to invest at a significant discount to our intrinsic value giving investors a margin for safety given obvious short-term uncertainties. EAM focus only on the top 100 companies enabling us to act decisively when market dislocation occurs, these dislocations present opportunities to invest in businesses that we understand well.

We have funded the purchase of Beach Energy from the sale of Tabcorp which we believe may take longer to turn around it’s waging business than initially anticipated.

Portfolio Update – Purchase of Treasury Wine Estates (ASX: TWE)

By Portfolio

Across investors portfolios, we have bought Treasury Wine Estates (ASX: TWE). TWE is a vertically integrated global wine company focused on growing & sourcing grapes, winemaking and marketing & sales of its expanding portfolio of brands. The business has established a global footprint operating over 13,000 hectares of vines across 127 vineyards, 17 wineries and sales networks across more than 100 countries throughout Australia & New Zealand, the Americas, Asia and Europe.

We are positive on the medium-term outlook for Treasury Wine Estates for the following reasons:

  • A growing portfolio of valuable brands, led by Penfolds, from multiple countries-of-origin enables the targeted regional premiumisation strategy based on local tastes which increase average selling prices and margins
  • Asia is a material opportunity with wine consumption significantly below developed market averages but growing solidly particularly at premium price points. China, in particular, offers substantial opportunity via a growing middle-class and underpenetrated Tier 2+ cities in terms of wine consumption
  • The shift to Luxury and Masstige segments away from the Commercial segment over recent years leaves the company less susceptible to inventory write-downs since the cheaper wines do not store as well as premium wines
  • Changes to the US distribution model that provides the opportunity to capture a portion of the distributor margin combined with the consolidation of the Commercial segment provides scope to increase profitability over time

With the aim of maintaining a style neutral exposure within the portfolio, we are constantly balancing value against growth. We think TWE offers both. Softer conditions in the USA market followed by short term concerns around the CoronaVirus and Asian based sales has seen TWE’s share price fall substantially from close to $18 down to current levels around $9. We have forecast a CoronaVirus lead pullback in revenues within our modelling however we view this as a short-term cyclical event and not structural in nature. We also note TWE’s strong balance sheet which should allow the business to withstand any earnings decline. We see the market reaction as a short term disconnect between price and value providing an opportunity to longer-term investors such as ourselves. With regards to growth, TWE maintains a robust outlook. The business has a track record of generating earnings growth and with the exception of lower earnings forecast for the current year, the business is expected to continue to achieve robust levels of earnings growth going forward.

We have funded the acquisition of TWE through selling our position in Fortescue Metals. Our main investment thesis for holding Fortescue was the narrowing of the pricing discount applied to Fortescue’s lower quality ore. This thesis has played out which combined with iron ore prices currently well above our expectations going forward means we see limited long term upside for the miner.

Are term deposits defensive?

By Uncategorized

 

At first glance the answer may seem obvious, but is it? That depends on what an investor is looking to protect against. There is no doubt that term deposits offer capital stability and given the government deposit guarantee, are virtually risk-free. So, through the lens of protecting the capital value of one’s investment, they are undoubtedly defensive.

Should the question however be framed in the context of providing income, the answer is quite different. According to data from the Reserve Bank of Australia, over the past 10 years the average rate on a 1-year retail term deposit has more than halved from 3.70% to 1.80% at the end of June 2019. For a retiree seeking a stable income stream, term deposits have not been defensive.

In contrast, the dividend yield on the S&P ASX200 Index at 4.55% (before franking credits), is broadly in-line with the average yield over the past 10 years and near the middle of the 4.0-5.0% dividend yield range. In essence, over the past decade the interest derived from term deposits has been more unpredictable, and lower, than the dividends derived from a broadly diversified portfolio of Australian companies.

This does not imply that term deposits should be avoided. They may well be justified in a diversified portfolio. Careful consideration however needs to be given to the role they are intended to serve, and the possible unintended consequences of being defensive, particularly in the context of longevity risk.

UK banks move into Virgin territory

By Blog, Portfolio

The stock in focus this month is CYBG (CYB). CYBG is a full service UK bank previously owned by NAB. After years of underperformance CYB was demerged in 2016.

It operates under the brands Clydesdale Bank, Yorkshire Bank and more recently B Brands. Despite serving nearly three million customers and having a branch network of over 200 branches and business banking centres, CYB struggled to grow its footprint nationally and has been largely confined to Scotland and the north and midlands of England.

This led to a major strategy shake-up. In June 2018 CYB purchased Virgin Money, an iconic brand with strong credit card and mass mortgage product capability in different geographical markets. The combination with CYB’s retail and SME customer base made strong strategic sense.

The complementary nature of the business means that substantial cost savings are targeted with expectations of annual net cost savings of 200 million pounds by 2022, enabling the Bank to significantly reduce their cost to income ratio.

The other exciting opportunity for management is to lever the other aspects of the Virgin group to enhance the experience for Bank customers and to begin to build an ecosystem which incorporates the other Virgin brands that UK consumers are using including Virgin Atlantic, Virgin Mobile and Virgin Media.

However, in the short term there are macro factors impacting the UK economy, specifically regarding Brexit and the political and economic uncertainty this is creating.

After talking to CYB and other UK focused firms, most businesses in the UK are in a holding pattern until this situation is resolved. With the new PM in place, this resolution, while still unknown, is closer to happening.

While any solution will probably lead to short term volatility, the long runway for the process means that authorities and policy makers are prepared to provide the support the system needs to overcome these short term issues. We therefore see this as an opportunity to purchase businesses at a good level for the longer term.

Quick Snapshot

  • CYB will change its name and branding to Virgin Money from late 2019.
  • The newly combined entity will have 9 billion pounds of deposits and 7 billion pounds of lending.
  • The flagship product, the Virgin Money personal account, will launch in the third quarter of this financial year.

Are Term Deposits Defensive?

By Blog, Uncategorized

By Leon De Wet – Elston Portfolio Manager

At first glance the answer may seem obvious, but is it? That depends on what an investor is looking to protect against. There is no doubt that term deposits offer capital stability and given the government deposit guarantee, are virtually risk-free. So, through the lens of protecting the capital value of one’s investment, they are undoubtedly defensive.

Should the question however be framed in the context of providing income, the answer is quite different. According to data from the Reserve Bank of Australia, over the past 10 years the average rate on a 1-year retail term deposit has more than halved from 3.70% to 1.80% at the end of June 2019. For a retiree seeking a stable income stream, term deposits have not been defensive.

In contrast, the dividend yield on the S&P ASX200 Index at 4.55% (before franking credits), is broadly in-line with the average yield over the past 10 years and near the middle of the 4.0-5.0% dividend yield range. In essence, over the past decade the interest derived from term deposits has been more unpredictable, and lower, than the dividends derived from a broadly diversified portfolio of Australian companies.

This does not imply that term deposits should be avoided. They may well be justified in a diversified portfolio. Careful consideration however needs to be given to the role they are intended to serve, and the possible unintended consequences of being defensive, particularly in the context of longevity risk.

Purchase of Westpac Banking Corporation

By Portfolio

Across the Australian Equity component of investor accounts we have bought Westpac Banking Corporation (WBC). Westpac Banking Corporation is Australia’s oldest banking and financial services group, with branches and operations throughout Australia, New Zealand and the near Pacific region as well as offices in key cities around the world. This purchase has been funded from the sale of Commonwealth Bank of Australia (CBA).

We are positive on the medium-term outlook for WBC for the following reasons:

  • It has a relatively low risk business mix with overweight exposure to retail banking, as represented by peer group leading impairments performance;
  • Operating expenses are being well managed and the ongoing efficiency program is delivering consistent annual savings;
  • The balance sheet is strong with ongoing organic capital generation positioning it well for expected increases in core tier 1 capital requirements. Along with its peers it is amongst the best capitalised banks in the world;
  • With bond yields low Westpac (and the banking industry generally), will continue to find support from retail investors given their attractive fully franked dividend yield.

As with all investments it is not without risks which include increased pressure on Bank margins from lower interest rates and cost pressures, exposure to the domestic housing market and ongoing regulatory scrutiny following the recent Hayne Royal Commission.

The purchase was funded from the sale of CBA. While their businesses are largely the same, there is a large valuation differential between WBC and CBA, beyond the historic premium that CBA has been afforded (with WBC at 1.5 times price to book value and CBA 2.1 times). This in conjunction with the fact that CBA has just gone ex-dividend for its FY19 final dividend, we believe WBC offers greater income and has greater valuation support over the medium term.

Download Westpac Factsheet

If you have any queries, please contact SB Wealth

Purchase of Clydesdale Bank

By Portfolio

Across clients accounts, we have bought Clydesdale Bank, the UK based full-service bank focused on consumers and small and medium-sized enterprises (SMEs).

We are positive on the medium-term outlook for CYB for the following reasons:

  • It is well positioned to grow its loan and deposit book due to structural tailwinds for UK challenger banks, reductions in its capital requirements, and its ability to source deposits at costs lower than other challenger banks;
  • The business has significant balance sheet capacity to fund growth and should be able to increase its dividend payout ratio;
  • Merger with Virgin Money in the UK we see as complementary to the existing business and product lines while also providing opportunity for further cost out and simplification benefits;
  • CYB will be completely rebranded to Virgin Money which strategically enables management to improve the mix of assets by growing market share in the higher-margin business and personal lending portfolios while maintaining market share in the more competitive UK mortgage market;
  • Strength in combination of CYB, a traditional bank with a large customer base, network and strong capital position with a mostly digital neo-bank in Virgin Money; and
  • Short term uncertainty regarding the economic implications of Brexit has created a significant discount to what we believe to be the intrinsic valuation of the business.

We have funded the purchase through the sale of Ansell. ANN is a well-run business but at current valuations we see it as close to fully valued compared with the relative value in CYB. The positive catalysts in CYB flowing from the Virgin Money (VMA) acquisition and rebrand strategy mean that we see CYB as a more attractive proposition.

As with all equity investment, CYB is not without risk. While the strategic rationale behind the VMA merger is sound, as with all mergers, there remains the risk that the value of merger synergies (e.g. economies of scale, best practice, the sharing of capabilities and opportunities) may be overestimated.

Download Clydesdale Bank Factsheet

If you have any queries, please contact SB Wealth

Purchase of Origin Energy

By Portfolio

Across client accounts we have bought Origin Energy (ORG), a vertically integrated energy company with operations including oil & gas exploration and production, power generation and retailing. This purchase has been funded from the sale of AGL.

We are positive on the medium-term outlook for ORG for the following reasons:

  • ORG owns 37.5% of APLNG, a global low-cost, long life LNG producer backed by long term contracts. Due to its position on the cost curve, it should be cash profitable throughout the economic cycle.
  • ORG also has a portfolio of strategically attractive electricity generation assets, which includes a mix of gas, modern coal and renewables. Not only does this provide generation flexibility depending on demand, but it also enables the company to divert gas between the spot gas and electricity markets to maximise value.
  • ORG has restored the strength of its balance sheet with gearing heading to the bottom of management’s target range. This combined with increased cash distributions from APLNG provides scope for a more progressive dividend policy from next financial year and may lead to other capital management initiatives in the medium term;
  • The LNG market is currently undersupplied from 2023-2025. During this period, prices are likely to increase significantly.

As with all investments it is not without risks which include being exposed to declining energy demand due to increased energy efficiency initiatives and changes in industry regulation. With its interest in APLNG there is the risk to dividends and debt reduction if oil prices fall significantly for an extended period.

As AGL has a similar business with the generation and sale of energy, it is exposed to similar risks that ORG. However, it lacks the level of vertical integration which ORG enjoys, and given the increasing cash distributions from APLNG we see more potential upside for both income and capital appreciation from ORG.

If you have any queries, please contact SB Wealth

Download Origin Energy Snapshot

Purchase of Clydesdale Bank

By Portfolio

Across investor accounts, we have bought Clydesdale Bank (CYB), the UK based full-service bank focused on consumers and small and medium-sized enterprises (SMEs). The purchase was funded via the sale of Bank of Queensland (BOQ.ASX).

We are positive on the medium-term outlook for CYB for the following reasons:

  • CYB is well positioned to grow its loan and deposit book due to structural tailwinds for UK challenger banks, reductions in its capital requirements, its ability to source deposits at costs that are in line with larger incumbents; and leveraging opportunities arising from the recent Virgin Money merger
  • The UK government is looking to increase competition in the system. They are introducing a variety of incentives to help customers switch to smaller challenger banks;
  • CYB recently gained IRB (internal ratings-based approach) accreditation significantly reducing the capital intensity of the business as it reducing the risk weighting of loans. This means going forward it requires less capital to fund growth;
  • Deposit funding costs of the existing bank are broadly in line with large incumbents and well below other challenger banks meaning CYBG should have a pricing advantage vs competitors and should also be able to improve the profitability
  • CYB has significant balance sheet capacity to fund growth and should be able to increase its dividend payout ratio

We have funded the purchase through the sale of BOQ. BOQ’s recent result highlighted the pressures that increased funding costs and competitive lending environments are having on regional banks and we expect earnings to remain under pressure in the near term. The positive catalysts in CYB flowing from the Virgin Money (VMA) acquisition mean that we see CYB as a more attractive proposition.

As with all equity investment, CYB is not without risk. While the strategic rationale behind the VMA merger is sound, as with all mergers, there remains the risk that the value of merger synergies (e.g. economies of scale, best practice, the sharing of capabilities and opportunities) may be overestimated.

For more information refer to the CYB Company Snapshot attached.

If you have any queries, please contact SB Wealth

Download Company Snapshot – Clydesdale Bank

Purchase of Pendal Group Limited

By Portfolio

Across client accounts Elston have bought Pendal Group Limited (ASX: PDL formerly BT Investment Management Limited), an Australian based fund management business with approximately $100B under management across various strategies. Pendal Group operates under two brands; Pendal in Australia and JO Hambro Capital Management (JOHCM) internationally. Pendal is a well-managed business, with a strong balance sheet and a clear growth strategy.

We are positive on the medium-term outlook for Pendal Group for the following reasons:

We are positive on the medium-term outlook for Pendal Group for the following reasons:

  • Excellent track record of developing new products and extension strategies;
  • Capital-light nature of the business means they can grow sustainably and maintain an extremely high dividend payout;
  • Longer term increase in asset values underwrites growth in FUM and revenues;
  • Demonstrated ability to attract, retain and reward investment and distribution talent;
  • Disciplined capacity management to preserve investment performance and management fee income;
  • A strong balance sheet and solid cash generation means the group is well placed to provide seed capital for the launch of new products and strategies which will help drive future growth; and
  • Excellent diversification across asset class and geography. High fixed costs do provide a barrier to deter new entrants.

As with all funds management companies’, business risks include the loss of key investment staff and sustained market weakness which both impact the level of funds under management (FUM) and hence revenue. Furthermore, revenues would be negatively impacted by a material deterioration in investment returns leading to lower performance fees as a source of revenue.

The purchase was funded from the sale of Perpetual Limited (PPT), also a funds management business. While valuation on the stock appears undemanding and the dividend yield is attractive, the combination of poor relative performance versus peers, depressed fund flows, a less diversified product offering and uncertainty over strategic direction with a new incoming CEO leads us to the view that the medium term prospects for Pendal are more positive.

If you have any queries, please contact SB Wealth

Purchase of CSR

By Portfolio

Across client accounts, we have bought CSR, the company behind some of Australia and New Zealand’s most trusted and recognised building products for construction of homes and commercial buildings. It is also a joint venture participant in the Tomago aluminium smelter located near Newcastle and generates additional earnings from its Property division which focuses on maximising financial returns by developing surplus former manufacturing sites and industrial land for sale.

We are positive on the medium-term outlook for CSR for the following reasons:

  • The longer-term drivers of housing demand remain positive;
  • The backlog of work already approved is likely to sustain activity levels over the next 12 months;
  • CSR is well positioned to invest in further growth initiatives and/or ongoing capital management
  • Earnings volatility from the aluminium business is partially mitigated by hedging;
  • The property pipeline offers the potential to realise a number of valuable opportunities; and
  • Valuation support and an attractive dividend yield should limit downside from here

As long-term investors we are prepared to tolerate the cyclicality of the company’s earnings, and accept that the stock may struggle to outperform materially over the next few months in the face of weaker residential macro data. Should credit conditions tighten substantially and/or house prices decline more than forecast, there is however the risk that CSR’s earnings profile proves less resilient than expected resulting in further share price weakness.

If you have any queries, please contact SB Wealth

Purchase of Fortescue Metals Group

By Portfolio

Across client accounts, we have bought Fortescue Metals Group (FMG). FMG is a low-cost producer of iron ore with assets located in the Pilbara region of Western Australia. In addition to its iron ore assets, FMG owns and operates its own rail and port facilities, capable of exporting more than 170 mtpa of iron ore.

We are positive on the medium-term outlook for FMG for the following reasons:

  • As one of the lowest cost producers of iron ore globally with long life, quality assets located close to key markets FMG is in a strong position to continue its strong operational performance and generate strong free cash flow through the cycle.
  • Following significant debt reduction in recent years FMG’s balance sheet is now in a strong position giving the company flexibility to invest in growth options such as exploration or other value enhancing growth projects such as Eliwana or increase shareholder returns.
  • The recent focus on pollution controls in the vital Chinese market has seen the continued decline of high cost, low quality Chinese production, which should provide medium term support for iron ore prices.
  • Ownership of key infrastructure assets such as rail, power and shipping not only provides FMG with higher control over key cost inputs but puts them in a strong position within the region.

As with all investments it is not without risks which include FMG’s exposure as a single resource producer to volatility in the iron ore price, a slowdown in the iron ore demand from its key market in China and more general risks to production common to all resource companies.

If you have any queries, please contact SB Wealth

TPG Telecom – Game of Phones

By Uncategorized

The stock in focus this month is TPG Telecom (TPM). One of the key sources of outperformance for investment managers is identifying and investing in companies exposed to positive long term thematics. In recent times, two broad investment thematics have been demographics and technological developments. One convergence of these themes is in the telecommunications industry, where the rise of the connected society and population growth have seen the demand for telecommunications, particularly data, increase dramatically. At the same time, the roll-out of the NBN has meant that the traditional dominant player in the market, Telstra, is under more pressure, as it needs to evolve its offering in the face of increasing competition.

5G is coming.

What has emerged is a battle for a place in the new landscape, with well-established telco providers including Telstra, Optus and Vodaphone competing with new emerging players, such as TPG and Vocus, while everyone is looking to deal with the market positioning of NBN Co in the fixed line space. A key weapon in this battle will be the emergence of 5G in the mobile space, not only in terms of how it can add to the current customer experience, but also as a potential NBN killer.

TPM’s recent purchase of 5G spectrum and entry into the mobile marketplace with what will be a very competitive offering, has been emblematic of the travails of share prices across the whole telco sector. Investor fears of a protracted and deep price war, combined with the impact of the NBN on fixed line margins have taken the sword to short term profitability.

However, it is important to take a longer-term perspective. The demand for fast and unlimited data is not going to reduce, and whatever the technology is that will deliver the connection that consumers and businesses require, providers of telecommunications will enjoy significant thematic tailwinds in the medium and long term, offering potential rewards for investors looking beyond the short term.

Why Operating Leverage Matters

By Uncategorized

While positive on the global growth outlook, given financial and political challenges coupled with valuations at the upper end of historic trading ranges, investors should take the time to understand the cost structures of the companies they own.

Operating leverage, which is essentially the relationship between a company’s fixed and variable costs, can make a big difference to potential profit and cash flow. Fixed costs (eg. store rents, aircraft leases, loan repayments) are not dependent on the level of output/revenue, while variable costs (eg. commissions, freight, raw materials) change as the level of output/revenue changes.

The higher a company’s fixed costs compared to its variable costs, the higher its operating leverage, which means profits grow faster than sales. But because fixed costs must be paid even when output/revenue slows, profits and cash flows will also deteriorate much more quickly, making them susceptible to slowdowns in the business or economic cycle.

Operating leverage really is a double-edged sword. While economic conditions remain buoyant, companies with high fixed cost structures (eg. airlines, online businesses, utilities) can enjoy profit growth faster than revenue. However, in an economic downturn, companies with a greater variable cost structure can cut costs more quickly to better protect profits, as revenue declines.

New (tax) year, new opportunities – five changes worth considering

By Uncategorized

It’s a new tax year – the arrival of the 2018/19 tax year brings with it many financial opportunities. Elston experts have focused on five of the best and explain how you can take advantage of them.

The arrival of the 2018/19 financial year has brought with it some potential new opportunities to consider:

1. Buying your first home?

From 1 July this year, eligible first home buyers can withdraw voluntary contributions made to their superannuation fund to purchase a first home under the First Home Super Saver Scheme (FHSSS). This applies to contributions made after 1 July 2017. The FHSSS allows eligible first home buyers to save their deposit in the concessionally taxed super environment.

2. Selling your home?

Eligible super members can make super contributions of up to $300,000 per person from the sale of their home after 1 July this year, if they are aged over 65. These contributions don’t count towards the contribution caps and can be made even if the member doesn’t meet the usual age, work and other contribution tests.

3. Eligible for a tax cut?

The tax cuts announced in this year’s Federal Budget have been legislated. The first tranche took effect on 1 July this year, providing savings of up to $530 (see table below). This extra cash could go towards paying off debt or making extra super contributions.

Source: Budget 2018-19 fact sheet, ‘Lower, fairer and simpler taxes’. The tax is calculated taking into account the low income tax offset, low and middle income tax offset and the Medicare levy (at 2 per cent).

4. Want a super deduction?

From 1 July 2017, most people (including employees for the first time) were eligible to claim personal super contributions as a tax deduction. This could reduce taxable income and give super savings a much needed boost.

5. Not likely to max out your super cap?

If super members make concessional (pre-tax) super contributions of less than the cap of $25,000 in 2018/19, they may be able to carry forward unused cap amounts, for use in a future financial year. This is worth keeping in mind, as it means members may be able to make ‘catch-up’ concessional contributions from 1 July 2019, if cashflow allows.

Need help?

At SB Wealth, we can help assess whether any of these opportunities suit you and your circumstances, and adjust your financial plans accordingly.

If you would like to discuss further, please don’t hesitate to call or email your adviser.

Purchase of Pendal Group

By Portfolio

Across the Australian equity component of client accounts, we have bought Pendal Group Limited (ASX: PDL formerly BT Investment Management Limited), an Australian based fund management business with approximately $100B under management across various strategies. Pendal Group operates under two brands; Pendal in Australia and JO Hambro Capital Management (JOHCM) internationally. Pendal is a well-managed business, with a strong balance sheet and a clear growth strategy.

We are positive on the medium-term outlook for Pendal Group for the following reasons:

  • Excellent track record of developing new products and extension strategies with good new FUM inflows;
  • Capital-light nature of the business means they can grow sustainably and maintain an extremely high dividend payout;
  • Longer term increase in asset values underwrites growth in FUM and revenues;
  • Demonstrated ability to attract, retain and reward investment and distribution talent;
  • Disciplined capacity management to preserve investment performance and management fee income;
  • A strong balance sheet and solid cash generation means the group is well placed to provide seed capital for the launch of new products and strategies which will help drive future growth; and
  • Excellent diversification across asset class and geography. High fixed costs do provide a barrier to deter new entrants.

As with all funds management companies’, business risks include the loss of key investment staff and sustained market weakness which both impact the level of funds under management (FUM) and hence revenue. Furthermore, revenues would be negatively impacted by a material deterioration in investment returns leading to lower performance fees as a source of revenue.

The purchase was funded from the sale of Janus Henderson (JHG), also a funds management business. Since initially including JHG in portfolios the company has seen significant management changes, primarily the loss of ex-Henderson staff, which raises concern around cultural integration and the potential loss of legacy Henderson fund managers especially in light of recent changes to remuneration structures.

There has also been a deterioration in performance across some of its largest offerings in Europe and the quantitative Intech franchise resulting in ongoing net outflows with no near-term catalyst evident to turn around the decline in FUM. Given these risks, the undemanding trading multiple seems justified notwithstanding the potential for further upgrades to synergy targets.

 

If you have any queries, please contact SB Wealth

SB Wealth Client Update

By Portfolio

Our goal at SB Wealth is to be the Private Wealth Management firm of choice for Ipswich and the Western Region. As we continue to grow and pursue our goal, we want to be sure we continue to deliver services that you truly value and are constantly refining the way we engage with you.

To achieve this, we have engaged a third party research firm with over 20 Years’ experience to help us better understand what is important to you. In the next few days, Confirm It Australia will contact you via email and ask you complete a short, anonymous survey which will help shape the services we provide to you.

This is so important to us and we are excited to see the results and continue working on those things that matter to you.

As a thank you for your feedback, you will have the chance to win a $500 Flight Centre voucher*.

If you have any questions regarding the survey, please contact our Client Services Manager Eloise Edwards on 07 3810 8350 or email eloise.edwards@sbwealth.com.au.

Thank you for your ongoing support and we look forward to talking with you again soon.

Sincerely
Andrew

*Please let us know if you do not wish to be part of this draw.
ere are the terms and conditions for the promotion: (Terms and Conditions)
This competition is authorised under NSW permit number LTPM/17/02245 and ACT permit number TP 17/01780.
All other states do not require a permit for the $500 Flight Centre voucher.

Purchase of Tabcorp Holdings

By Portfolio

Across the portfolios, we have bought Tabcorp Holdings (TAH), a diversified gambling entertainment group offering a diverse product range including wagering, lotteries, Keno, media and gaming services throughout Australia. This purchase has been funded from the sale of Healthscope (HSO).

We are positive on the medium-term outlook for TAH for the following reasons:

  • the Tatts merger adds a complimentary business with stable revenue and long-term exclusive licenses
  • the merger also provides opportunity for substantial synergy benefits
  • increasing lottery sales via digital channels provides scope for margin improvement
  • the combined wagering business enjoys a dominant market position and improving regulatory environment
  • the gaming services division is growing strongly, enjoys inflation-linked price increases and has excellent margins

As with all investments it is not without risks which include operating in a highly regulated industry with increasing restrictions aimed at protecting customers. The online wagering environment where corporate bookmakers have in recent years enjoyed a cost advantage is particularly competitive, and ‘synthetic lottery’ operators like Lottoland pose a threat to the monopoly position traditionally enjoyed by incumbent lottery providers – proposed regulatory changes may, however, help ease both the latter pressures going forward.

This purchase is funded from the sale of Healthscope (HSO). While we remain positive on the long-term industry fundamentals given population growth and ageing demographics, the most recent results showed that organic revenue growth remains more subdued than we had expected.  Also, the threat of regulatory changes in the wake of the pending Federal election may mean that industry pressures will remain in the short to medium term

If you have any queries, please contact SB Wealth

Purchase of Fortescue Metals Group

By Portfolio

Across client accounts, we have bought Fortescue Metals Group (FMG).  FMG is a low-cost producer of iron ore with assets located in the Pilbara region of Western Australia.  In addition to its iron ore assets, FMG owns and operates its own rail and port facilities, capable of exporting more than 170 mtpa of iron ore. This purchase has been funded from the sale of Sonic Healthcare Limited (SHL).

We are positive on the medium-term outlook for FMG for the following reasons:

  • As one of the lowest cost producers of iron ore globally with long life, quality assets located close to key markets FMG is in a strong position to continue its strong operational performance and generate strong free cash flow through the cycle
  • Following significant debt reduction in recent years FMG’s balance sheet is now in a strong position giving the company flexibility to invest in growth options such as exploration or other value enhancing growth projects such as Eliwana or increase shareholder returns.
  • The recent focus on pollution controls in the vital Chinese market has seen the continued decline of high cost, low quality Chinese production, which should provide medium term support for iron ore prices
  • Ownership of key infrastructure assets such as rail, power and shipping not only provides FMG with higher control over key cost inputs but puts them in a strong position within the region

As with all investments it is not without risks which include FMG’s exposure as a single resource producer to volatility in the iron ore price, a slowdown in the iron ore demand from its key market in China and more general risks to production common to all resource companies.

The purchase was funded from the sale of Sonic Healthcare. While their businesses remain fundamentally sound after a period of growth through acquisition, particularly offshore, it will be difficult for management to maintain the same rate of growth going forward without further acquisitions that would pressure the balance sheet, moving outside core competencies or targeting lower quality businesses.  We therefore believe FMG offers greater growth prospects over the medium term.

If you have any queries, please contact SB Wealth

Franking Matters

By Blog, Uncategorized

In a low rate environment, the income or cash flow that an investment provides is important, particularly if you rely on this income to fund your living expenses. While comparing options, you must of course consider their investment horizon and the associated capital risk of the underlying investments over this period. But equally, you must not forget the potential for that income to grow over time.

To illustrate the vastly different potential outcomes over the long term, consider the analysis below from AMP Capital, when contrasting the results in 2016 from having invested $100,000 in December 1979 in either:

i) a one-year term deposit or ii) the Australian share market.

The term deposit would still be worth $100,000 and paid roughly $2,450 in interest, while the shares would have grown to $1.12 million in value and paid $51,323 in dividends before franking credits.

Are you eligible for the franking credit rebate?

Given the dividend imputation system in Australia, which effectively allows companies to pass on a tax credit to their shareholders for tax already paid, the effective after-tax dividend income received by investors may in fact have been more than outlined above. This would certainly be the case for an SMSF investor in pension phase whose income is tax exempt, and as such can take full advantage of the franking credit rebate to supplement their income.

The proviso is that if the investor is entitled to $5,000 or more of franking credits, they must have held the shares for at least 45 days (not counting days of purchase or sale, so in effect 47 days) to be eligible to receive the refund.

Residential property: can it fund your retirement?

By Blog, Uncategorized

If your family is like many Australian families, when you get together for Christmas this year, you might find that the conversation turns to property. As a nation, we have a love affair with residential property, and booming capital city prices of late have done little to change this. We might feel good when the value of the family home goes up, but does this mean we should be relying on residential properties to fund our retirement?

There is no doubt that many people have done well by investing in the Sydney and Melbourne markets. However, capital growth does not pay the bills in retirement. It is income and cash flow that become important, when work income stops.

What does the data say?

Data provided by the Core Logic RP Data Home Value index shows that the average gross yield for capital city properties is just 3.25%. In Sydney, it is lower than the national average at 3.08%, and in Melbourne it is a paltry 2.9%.

This means that $1 million spent on a rental property in Melbourne would be expected to generate $29,000 a year. From this, investors would need to pay costs such as rates, insurances, agent’s fee, body corporate, maintenance and land taxes (depending on the state). This could easily account for $10,000 or more a year, meaning that the net yield is below 2%.

On this basis, a retiree looking to fund a comfortable lifestyle (considered to cost about $60,000 pa) would need to have over $3 million invested in property. By comparison, a $3 million investment in a diversified Australian share portfolio is expected to produce $152,700 of gross income (before any fees and charges).

Income is only part of the equation though. Surely recent capital growth in property would compensate for the low income? Residential property has performed well, although the exceptional rates of growth have been confined to small pockets of the country. Nationally, the average growth rate for the 12 months to 31 October was 6.6%.

While this is a very solid return, by comparison, the top 50 companies on the Australian Stock Exchange grew in value by 10.1%.

Is your money accessible?

While growth is good, retirees often need access to money in excess of their regular income needs. If all your money is tied up in a property, the entire property needs to be sold, as it’s not possible to sell off a bedroom. The sale of a property can also take some time and comes with significant costs. If a gain is made on the sale, there would also be capital gains tax to consider.

It pays to diversify

For many investors, a sensible investment in property can form part of a well-diversified strategy for creating wealth. But to focus only on this investment to the exclusion of all else is foolhardy. Investors need to ensure that they assess each investment on its true merits, rather than making emotional decisions.

 

Bitcoin – Bubble or a Brave New World?

By Blog, Uncategorized

In recent times, we have seen the rise of so called ‘crypto-currencies’ such as Bitcoin and Ethereum, which have put themselves forward as alternatives to traditional stores of value and currencies. As these and other crypto-currencies gain in profile and popularity and are accepted as a form of payment, it is timely to look at the methodology behind these ‘assets’ and ask – are they a fad or something more?

What is Bitcoin and how does it work?

At its core, Bitcoin is a form of decentralized digital payment system. In a traditional payment system, a clearing house, such as a central bank or financial institution, contains a centralized ledger that tracks asset movement between individuals and institutions within the financial system. Before one individual can transact with another, the assets must effectively pass through this clearing institution. With a ‘distributed ledger’, the record is held and verified by many different institutions and parties throughout the system. This eliminates the need for a central registry to record and certify asset ownership before that ownership can transfer from one party to another and ultimately enables peer-to-peer transactions using a public record, called a ‘blockchain’.

Understanding the security issues

Using blockchain technology, every transaction is verified back to its source, so for example, if A wants to transfer bitcoin to B, the transaction is presented online and represented as a ‘block’. This block is then referred to every party in the network and then compared to the ledger. If the transaction is valid, it is approved and the block is added to the chain, with the bitcoin moving from A to B. In theory, this means that B can securely transact with A, confident that they are truly the possessor of the bitcoin, without having to go through a centralized third party, such as a bank.

Another positive worth mentioning is that because of the distributed nature of the ledger, if one node gets hacked or destroyed, the rest of the nodes still contain the accurate ledger. Of course, this is only true to the extent that the network is isolated. There have been issues with security when bitcoin and other crypto-currencies have interacted with a traditional monetary system, such as exchanges.

Despite this potential weakness, these exchanges have been vital when it comes to increasing the popularity of cyber currencies. However, the vast majority of transactions remain speculative in nature, where traders are buying bitcoin in the hope of selling them at a higher price, rather than using them as a store of value. The value of bitcoin has been extremely volatile, and there’s still a long way to go before they can be considered a traditional asset.

Is there a future for cyber currency?

Notwithstanding its various shortfalls, there are a number of situations where some form of cyber currency and transactions using blockchain technology may have application. Payments in third world countries where there is a lack of a robust banking system and a dearth of cash available is one such application. In the not too distant future, cyber currencies may also provide a viable alternative for people looking for a more instantaneous international transfer of assets, compared to the current slow and expensive international payment system.

While the development and progress of these cyber currencies is interesting from a financial and technological point of view, it is still early days. There is more than a hint of a bubble around them, particularly with some of the newer ‘initial coin offerings’. This is probably best summed up by a recent new cyber currency to be offered to investors – UET, which stands for ‘Useless Ethereum Token’. On their website they state, “Is this a joke, is this a scam? No, it is real and 100% transparent – you are literally giving your money to someone on the internet and getting completely useless tokens in return!”. UET raised over $US5,000 in its first 12 hours. While this may not be a large amount on money, this kind of behavior may suggest that it is a bubble after all.

 

Retirement Planning? A Tailored Financial Plan is The Key to Success

By Blog, Uncategorized

For most Australians, the definition of retirement means different things to different people. Whereas previously to retire meant a departure from paid employment, nowadays lifestyle factors affect our work-life cycle and, for some, retirement has morphed into a combination of semi retirement, career change, lifestyle change and travel.  Whichever is the best fit for your individual circumstances, targeted retirement planning is mandatory to ensure you are able to comfortably accommodate your goals and aspirations.

A recent media release from the Australian Bureau of Statistics (March 2016) announced Australians are intending to work longer than ever before. In the survey conducted in 2014-15, 71 per cent of persons intended to retire at the age of 65 years or over, up from 66 per cent in last survey result of 2012-13 and 48 per cent in 2004-05. For those in the labour force who intended to retire, the most common factor influencing their decision was financial security.

Planning for Retirement

At Elston, we understand that financial security begins with a customised financial plan. We work with our clients to develop the right long term structure so they’re not forced to sell assets at a loss at retirement. We encourage clients to structure their wealth so they have the flexibility to work as much or as little as they like, while improving their long-term capital preservation and sustaining their living requirements for retirement.

Navigating the different options available can be challenging. How do you generate a passive income stream? Where should you invest? What are the latest changes to taxation and other regulations relating to superannuation? Our advisers offer up-to-date advice on a range of retirement planning solutions in alignment with your individual circumstances, assets and liabilities; your short and long term financial goals; and your ideal retirement plan. Some of these options include:

Self Managed Super Funds (SMSFs)

A self-managed super fund (SMSF) provides greater flexibility and control over your investments and financial future. With many Australians unsure where their superannuation is invested in traditional industry and retail funds, and many delivering average, or below average performance, the benefits of an SMSF make it an attractive component of a long term retirement plan.

SMSFs are proving to be a solid investment vehicle, with the Australian Taxation Office touting them as a viable way of saving for retirement. Indeed, an SMSF must be run for the sole purpose of providing retirement benefits for the members or their dependants. The difference between an SMSF and other types of funds is that the members of an SMSF are usually also the trustees. This means the members of the SMSF run it for their own benefit and are responsible for complying with the super and tax laws.

Superannuation Funds

With traditional super funds professional, licensed trustees are responsible for managing the fund and bear the compliance risks. While some allow control over the mix and risk level of your super investments, generally you are unable to select specific assets your super will be invested in.

If an SMSF isn’t a good fit for your current financial situation, there are many options available for leveraging and maxmising your traditional superannuation fund.  Additionally, you can make your own contributions, organise a salary sacrifice arrangement, or take advantage of eligible government superannuation co-contributions.

The right advice – the right plan

Everyone has unique goals, limitations and assets; and accessing the right financial advice is as important to your retirement plan as the structure you use. An experienced financial planner will use a ‘big picture’ approach, taking the time to discuss your personal circumstances and identify your goals, before matching you with a plan designed to actualise your retirement goals by harnessing your financial potential.

Control your wealth – control your future

Retirement dreams are never a one-size-fits-all ideology, and retirement planning is never a one-size-fits-all financial solution. Whether you dream of caravanning around Australia, spending more time with the grandchildren, cruising the world, or taking on part-time or hobby income streams, you need the financial security to embrace your dreams with confidence.

To control your wealth is to control your future. Whether it’s building wealth through an investment strategy, or tapping into the benefits of an SMSF, Elston can help you achieve financial security with a customised retirement plan.

Door Closing On Super Opportunities

By Blog, Uncategorized

“Our lives are defined by opportunities, even the ones we miss.”  – Eric Roth

For anyone who wants a comfortable retirement, 1 July 2017 is a very important date, as this is when the majority of the government’s proposed super changes are likely to come into effect.

Although it seems like super is constantly under attack, it is still the most effective way to provide for retirement. It remains a tax-free retirement option, and the only legal way to ensure you pay no tax on ‘decent’ retirement incomes.

In fact, super is so good that the government is looking to reduce how much we can use it. One way they are doing this is by reducing the contributions you can make. Among the various proposals is a significant restriction on Non Concessional Contributions (NCCs).

What are NCCs?

An NCC is an amount that is transferred into super from after-tax monies. Over the years, it has been a very effective way to move money from you own name (where it could attract tax in retirement) into super (where it can be tax-free).

Commonly, this might occur when you receive an inheritance, take a redundancy, sell a business or realise a sum from a property sale. NCCs can also be used when you transfer an existing investment (such as a share portfolio or a commercial property), into a self-managed super fund for tax purposes.

What is changing? Currently, anyone eligible can put $180,000 worth of NCCs into super each year. And if you’re under 65, you can make three years’ worth of NCCs in one hit – allowing $540,000 to be put into super. However, from 1 July 2017, these rules will be amended so that:

  • The annual limit is reduced to $100,000
  • The three year ‘bring forward’ limit is reduced to $300,000
  • Once you have $1.6m in super, you can no longer make NCCs at all.

These are significant changes that will greatly reduce your ability to move large sums into super.

Make the most of this window of opportunity now!

Thankfully, a window of opportunity still exists for you to move large sums into your super. While the current rules are still in place, it is possible for a couple to put over $1 million into super. Once the rules change, this opportunity will be lost forever. So now is the time to act.

If you fit into one or more of the following categories, you may be impacted by this rule change:

  • You are 50 plus, with super of $750,000 or more
  • You are aged 62 or older
  • You will have more than $1.3 million in super as at 30 June 2017
  • You have significant assets (like cash, shares, managed funds, properties) outside of super – which you may be better off having inside your super.

What’s the next step?

With only months until this change becomes law, urgent action may be needed before this opportunity is lost forever.

Can you afford the retirement you want?

By Blog, Uncategorized

One of the most common questions we are asked by clients planning for retirement in the next 5 or 10 years is ‘How much do I need?’ Compared to those who retired 20 or 30 years ago, future retirees need to plan for longer life expectancies and lower investment returns. In the past, investments of $1 million may have allowed for a very comfortable retirement, but this may not be enough in the future.

When addressing the cost of retirement, it’s important to consider the lifestyle you wish to lead. As a starting point, we often consider the ASFA Retirement Standard.  Under this measure, for a couple to have a ‘comfortable’ retirement, an amount of $59,236 is required ($43,184 for a single person).

Our experience at Elston, however, is that many retirees like to be more active than what’s allowed for by the ‘comfortable’ ASFA standard. For example, many retirees like to budget for an annual overseas trip, adding around $20,000 pa to the cost.  Other costs such as helping the kids, home renovations, car upgrades and health care needs should also be considered. For these active and involved retiree couples, the annual cost of retirement can easily reach $80,000 pa or more.

Does the cost of living really fall as you get older?

Experience also tells us that the cost of living doesn’t always fall that much as people age. The 2015 Intergenerational Report noted that many more Australians will now live beyond the age of 90. We are also likely to remain healthy longer, with many over 80s enjoying active lifestyles, including travel.

In fact, the ASFA calculations show that for a retired couple aged 85 years, the cost of a comfortable retirement today is only $5,000 pa less than it would be for a 65 year old couple. A similar gap applies to single retirees.

Increasingly it will be up to retirees to fund retirement themselves. While an Age Pension safety net is always likely to be there, the income it provides will be far less than the amounts above. Pension changes on 1 January 2017 will also reduce access to part pensions.

How much do you need to self fund your retirement?

The question of how much investment is needed to self fund your retirement is a difficult one. Post the Global Financial Crisis, global investment returns have been subdued. This has caused concern as to whether old rules of thumb will hold true in the future. Certainly, if recent low returns continue for an extended period, it will mean the amounts that a person needs to fund retirement will be larger.

This said, we should never base our long term assumptions for the future on the short term past. Interest rates are unlikely to stay at today’s levels forever; just as they didn’t stay at the heights they reached in the late 1980s. However, we also cannot assume that the significant growth in asset prices of the last 30 years will be repeated in the next 30.

Individual factors need to be considered

Ultimately, how much you might need will depend on a range of factors including your desired lifestyle, the legacy you want to leave, the possibility of accessing the age pension, how long you might live and your risk profile.

While it is definitely possible to live a nice life on less, many people aspire to have a retirement that is active and filled with adventure, choice and freedom. To guarantee certainty around this requires significant capital, so it’s important to set goals and start planning early.

 

The World (and $1 million) Is Not Enough

By Blog, Uncategorized

In the financial world, there are often quoted ‘rules of thumb’. A common one is: “If you own your home and have $1 million invested, you’ll be right for retirement.”

Sounds reasonable, but is it true?

We have examined the idea that an income of $60,000 for a retired couple is often considered sufficient for a comfortable lifestyle. We suggested that for those aspiring to have more, income above $80,000 was probably closer to the mark. So how much invested capital is needed to produce this? The answer to this question is a difficult one.

Post the Global Financial Crisis, investment returns have been subdued. Just take a look at the income that 5 year government bonds currently produce.

Country5 year bond yield
Australia1.61%
United States1.10%
Great Britain0.40%
Germany0.57%

So, do old rules of thumb still apply?

While other asset classes can produce better income, low returns have caused concern as to whether old rules of thumb will continue to hold true.

In the United States, there has been a rule of thumb that has stood more than 20 years. This says that a retiree can afford to draw 4% of their initial investment in the first year, increasing with inflation annually. The theory goes that if this rule is followed, the retiree’s capital is guaranteed to last at least 30 years.

This was based on a 1994 study that examined returns on a portfolio over periods going back to 1929. The assumption was that the portfolio owned 50% in US Bonds and 50% in US shares. The testing showed that even in the very worst 30 year period, the retiree would not run out of money, if they stuck with the 4% rule.

Given the low US Bond yield, some US commentators are suggesting that the 4% rule should become a 2.85% rule. This would mean a retiree with $1 million can only afford to spend $28,500 per year. It would also indicate that to reach the suggested $80,000 retirement income, a retiree might need as much as $2.8 million invested!

Should investors lower their expectations?

At SB Wealth, we don’t agree that investors should set their return expectations quite this low. It is unwise to assume that the current (extreme) situation will persist forever. Interest rates are unlikely to stay at today’s levels; just like they didn’t stay at the heights reached in the 1980s.

Typical Australian retirees often have what is referred to as a ‘balanced asset allocation’. This is made up of 30% in cash and bonds, and 70% in shares and property. In the current environment, an average gross income of 4.10% would be produced using this strategy. This is not as conservative as the 50/50 split used in the US study.

We should also consider that over the long run, the shares and property in such a portfolio should allow the income and capital to grow with inflation. With these assumptions, to have $80,000 pa indexed to inflation with money lasting 30 years, you might need at least $1.565 million. This assumes no age pension is available.

What’s your ‘magic’ number?

If we come back to our original question – is $1 million enough, the answer is – it depends. Rules of thumb make good discussion points for articles, but actually should never be used to plan a retirement. Instead, you need to consider your personal situation and goals.

Factors such as desired lifestyle, the legacy you want to leave, the possibility of accessing an age pension, how long you might live, and your comfort with investment risk, all play a big role. So, while $1 million may be plenty for some, for others it will simply not be enough.

To better understand your number, speak to our adviser today.

 

Don’t Be The Bigger Fool

By Blog, Uncategorized

By Grayden Taylor – Investment Manager

I was recently going through some old photo albums and came across some photos of myself in the 80s, sporting a classic mullet hairstyle and wearing a pink, green and yellow fluoro shirt. It immediately made me think of negative interest rates. It may seem a bit of a stretch, but there are some phenomena we get caught up in at the time, only to find ourselves looking back years later and asking, “What were we thinking?”

This tends to be the nature of financial market bubbles, with probably the quintessential example being the ‘tech bubble’ of the late 90s, where the valuation of companies bore no semblance to their future profitability. Companies with no revenues and massive expenses were trading at ridiculous prices, with analysts and market participants inventing new metrics, in a vain effort to justify what was going on.

Hindsight is a wonderful thing

After the inevitable happened and reality (and sanity) returned, those same market participants looked back, and with the benefit of hindsight, acknowledged that the price movements didn’t make sense and should never have happened. In the end, the only way people were going to profit from investing in these companies, was to sell them at a higher price to someone else prepared to pay an even more ridiculous price – in other words, to find a bigger fool.

As bubbles form and continue to gain momentum, this can be a very successful and profitable strategy, but it can be brutal on those left holding the can, when there’s no one left to pay a higher price.

While not as crazy as the tech valuations, the concept of negative interest rate policy is something we will need to look back on to understand the true impacts and consequences it has had. Negative interest rates are not completely new. In Switzerland during the 70s, negative rates were used to stop the rapid appreciation of the Swiss franc, as investors sought to avoid inflation in other parts of the world. What is new however, is the widespread occurrence of negative interest rates across Europe and in Japan, with a third of global government debt (about $7 trillion worth)1 now having negative interest rates. This means that investors are effectively paying to keep their money with the bank or to lend money to a borrower.

As a real world example, imagine if you could get a car lease at a negative finance rate. You could turn up to the dealership, drive away a brand new car, return it years later at the end of the lease and receive a payment from the car yard! I’ll take a Bentley Continental GT please, one of the convertibles! Why would they do this? Quite simply, they wouldn’t! But investors, it seems, are expecting economic stagnation, and ultimately deflation for an extended period of time.

Global growth forecast better than expected

However, while not exactly racing along, the data for global growth doesn’t really support quite such a bleak outlook. In January, the World Bank downgraded its 2016 growth forecast to 2.4%, from the previous 2.9%. Despite problems in Europe and emerging markets such as Brazil and Russia, China is still projected to grow at 6.7%2 and the US at 2%3.

So if we’re not likely to get a deflationary environment, the only thing left for buyers of bonds with negative rates to have a positive return, is for them to find a buyer for those bonds at an even more negative interest rate – a bigger fool. A period of stronger than expected global growth and an uptick in inflation, should it occur, will mean that the buyer is unlikely to appear, and we’ll see an end to the bond bubble that has grown over the past decade. Should this occur, the massive capital appreciation we’ve seen in the bond market will reverse, and we’ll get a normalisation of interest rates along the yield curve. So make sure you’ve locked in the interest rate on your Bentley – those things are expensive!

 

 

Grayden Taylor
Grayden is a member of the Investment Team at Elston and is responsible for portfolio management. His experience spans domestically and internationally in several sectors of the financial markets including equities, equity derivatives, trading and market making. Grayden worked as a market maker in bond and equity derivatives on the Sydney Futures Exchange before managing portfolio trading operations in Hong Kong and Brazil prior to working at Elston.

 

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