Outcome focused SMSFs drive greatest demand for Russell’s high dividend ETF

Russell Investments has seen a surge in demand for its High Dividend Australian Shares ETF (RDV) with the number of individual investors doubling in the past 12 months.

SMSFs have led the take-up, now accounting for a third of total investors in RDV which is designed to capture high dividend yield and provide strong capital growth – primary concerns for SMSFs nearing or in retirement with income focused investment objectives.
 
Total flows into the product grew by $50m over the year to April 2013 to $160m, with the number of individual investors invested in RDV doubling in 12 months.
 
Russell Portfolio manager, Scott Bennett, said the popularity of RDV was likely to continue to swell as investors sought products which would contribute to specific outcomes, particularly related to generating sustainable retirement income streams.
 
“The growth we’ve been witnessing in RDV is just the tip of the iceberg for investors seeking outcome oriented, investment solutions.
 
“As the baby boomer generation moves from the accumulation to retirement phase, retirement income will be their chief priority. These investors and their advisers will need to reassess investment strategies to make sure their retirement savings last the distance, and outcome focused products such as RDV will be the key to meeting these investment objectives,” Mr Bennett said.
 
RDV has demonstrated strong performance for the year to 28 February 2013, returning 30.5% net of fees and expenses. Achieving its primary objective of returning strong income, RDV was the highest yielding dividend focused ETF on the market, with an income return of 7.14% for the 12 months to 31 March 2013i.
 
Including ETFs in a multi-asset portfolio is a way to gain access to certain exposures and investment strategies at a lower cost. Following the launch of the PartnerShip Debt Management Fund by both Russell and Matrix Planning Solutions earlier this year, RDV has been included in the fund as a means of generating additional income. RDV’s income focus supports the funds’ outcome-oriented objective of generating income for individuals to help pay down their mortgage.

Index reconstitution reveals dividend and value plays 
Data released on the semi-annual reconstitution of Russell’s customised Australian equity indexes, has shown both Russell Australia High Value Index (RAHVI) and Russell Australia High Dividend Index (RAHDI) have reduced their exposure to financials in favor of energy stocks and listed property trusts.
 
The reconstitution of the indexes which form the underlying basis for Russell’s equity ETFs, RDV and RVL, involves using the latest reporting season data to rebalance the weightings of stocks according to Russell’s proprietary indexing methodology. Index construction is one of Russell’s leading capabilities in the building of multi-asset portfolios alongside capital markets insights, portfolio construction, implementation and manager research.
 
Mr Bennett said there had been less turnover of stocks held in RAHDI during the recent reconstitution – a feature of fewer income opportunities owing to the market being fairly valued and lacking earnings growth.
 
“We’ve seen turnover reduced by 35% in RAHDI this reconstitution partly because yield spreads have narrowed in recent times compared with those witnessed in the third quarter of last year. However the outlook for dividends remains positive, as companies are showing relatively strong balance sheets and with fewer growth opportunities – companies are likely to continue to increase payout ratios and may be spurred to increase buy-back activity,” he said.
 
In the value space, Mr Bennett said the reconstitution of RAHVI had shown the portfolio was trading at a substantial discount to the market.
 
“RAHVI is holding a portfolio which relative to the market is substantially cheaper, but this hasn’t occurred by sacrificing quality companies. As the market picks up on these undervalued stocks, the portfolio will be well positioned to capture growth as the stocks readjust back to fair valuations,”
 
RAHVI taps into Russell research on value premiums which shows over time passive value based strategies have typically delivered a premium of 1.5%-3% over the broad market in Australia. This research has been validated over the last 12 months with the strategy outperforming the market by close to 10%.
 
“The value strategy continues to outperform with RVL, the ETF built on RAHVI, returning 30.3% for the year to February 2013, after fees and expenses. We expect this strategy to continue to deliver over 2013 and we’re already starting to see evidence of this from the recent rebalancing,” said Mr Bennett.