Paul Moore

While the Australian market is going through some tough times at the moment, there is no clear catalyst for that to change according to Paul Moore, Chief Investment Officer and founder of boutique fund manager, PM CAPITAL.

“The September quarter showed that the market status has come to an end, and that going forward the price movements will be very different from what we have experienced over the last couple of years,” he said.

“The big movements have been commodity prices which have come off hard, and the stronger US dollar,” said Moore. “Commodity prices have been correcting since about May.”

“We see iron ore prices at the forefront of all discussions, but what most people might not realise is that it is right across the commodities spectrum; corn and wheat in the agricultural commodities have fallen 30 to 40 per cent over the last three months and towards the end of the quarter oil joined in and finally crack through $100. Oil is now its trading at about $85, off about 30 per cent from its highs.”

“We believe this is just a reflection of slowing Chinese demand,” he said.

“The falling A$ currency is showing that there is better relative value in stocks overseas and investors should be moving their equity investments offshore.”

“We still believe the A$ is overvalued by about 10 per cent relative to where commodity prices are at the moment but the timing of the next move will be more difficult,” he said.

“Any extra movement will require a movement in relative interest rates, a stronger US economy which will lead to a rates rise in the US.”

Moore warns investors about the dangers of certain investments, even if they are popular, such as investing in apartments.

“We try to remind people that an apartment has an effective yield of around one per cent after costs, if you are lucky, and  with the Australian dollar in the high eighties, you can be buying stocks offshore with strong earnings growth potential that will also benefit from any further currency depreciation.”

Moore said it has been difficult to work out what has really been going on over the last three months when the Australian equity market has been looking very fully valued.

“Our instinct is that the overall economy is flat line, it is just going sideways,” he said. “We either need the commodity impact to wash through so that it is no longer a drag, or some external stimulus from offshore.

“Valuations relative to the earnings growth and economy outlook provides a very average risk/reward, which is why we are telling investors to go offshore.”

• 

  Commodity prices on the decline

  The May trade figures showed a large deficit of $1.9bn

• Declining commodity prices and an elevated AUD over the month weighed on export receipts.
• Exports of goods and services were down by 4.6% over the month, driven by falls in iron ore and coal.
• Imports fell by 0.6% due to a big fall in capital goods, primarily as a result of the pullback in mining related capital expenditure.
• A stabilisation in export prices and below‑trend domestic demand growth should see the trade balance return to surplus over coming months.

The May trade deficit came in a lot larger than the market had been expecting.   The market consensus was looking for a small deficit of $200m {CBA (f) ‑$500m}.  The May result was the second consecutive deficit following three big monthly trade surpluses over QI.  The widening in the trade deficit from an upwardly revised $780m shortfall in April reflects a sizeable fall in goods exports and a small decline in imports.

The fall in exports over May was driven by a big decline in metal ores and minerals (‑$760m or 9%).  The plunge in the spot price of iron ore over May was not coupled with a fall in the AUD over the month.  As bulk commodity exports are priced in US dollars, the net result of a decline in prices and a flat AUD weighs on export receipts.  Other mineral fuels fell by a sizeable $352m over the month (‑13%).  Rural exports declined by a more modest 2%.  Services exports bucked the trend and were virtually unchanged over the month.  On a positive note, tourism exports are up around 8½% on year ago levels.  It looks to us like a slightly softer AUD and a pickup in the advanced economies is supporting the domestic tourism sector.  We expect this to continue over the period ahead as global growth lifts.

Imports recorded a small 0.6% decline over May.  The fall was driven by a 4% fall in capital goods imports, which continue to trend lower as the construction‑intensive part of the mining booms unwinds.  This will be a familiar theme over the year ahead.  Consumption goods imports were largely unchanged over the month.   An elevated AUD helps to contain growth in import costs and therefore receipts.  It also helps to keep a lid on tradables inflation which has lifted over the past year.    

Goods exports to China accounted for almost 38% of total goods exports over the past year and highlight both the importance of and dependence on the Chinese economy to Australia.  Resource exports to China will continue to dominate the trade story ahead.  But service exports will also be important.  Tourism is the 3rd biggest export earner at present and education is the 5th largest. The emergence of the Asian middle income consumer brings the huge potential for an acceleration in both goods and services exports.

Looking ahead, we expect to see the monthly trade balance return to surplus.  In our view, export receipts will lift due to higher volumes and a stabilisation in commodity prices.  And import growth is expected to remain soft as the decline in mining capital expenditure weighs on capital goods imports.  Consumption goods imports, on the other hand, are expected to trend higher in line with a lift in household expenditure.

From a GDP perspective, net exports made a massive contribution to QI quarterly growth of 1.4ppts.  A combination of a surge in export volumes, buoyed by some good weather, and a fall in imports underpinned the result.  The story looks like it will be a little different over QII.  We expect to see a bit of statistical payback in export volumes while import volumes are being supported by an elevated AUD.  The net effect means that net exports are unlikely to drive growth over QII.  But we do expect them to be a significant contributor to growth over H2 2014.

• The past week saw more good data out of the US and Europe, but share markets were mixed with worries about Fed tapering weighing and pushing bond yields higher globally.
• Several Fed officials have left the impression the Fed is on track to start tapering in September, but the initial move is likely to be modest with additional moves contingent on further economic improvement. Our view remains that while tapering is a potential short term threat to markets, its unlikely to derail the cyclical rally in shares as tapering will only occur in response to stronger growth and won’t signal higher interest rates.
• Although turmoil in Egypt has the potential to be a source of nervousness Egypt is not a major oil producer and only around 2% world oil consumption flows through the Suez Canal.
• In Australia, the Treasury’s Pre-Election Economic and Fiscal Outlook added nothing new to the economic and budget projections released in the Government’s economic statement two weeks ago. But it did provide another reminder of the latest budget blowout and how Australia’s public finances are in a rather unfortunate shape given the biggest boom in our history.

Major global economic events and implications

• US economic data was mostly ok.
• US economic data was mostly ok. To be sure mortgage applications remained weak on the back of rising mortgage rates and bond yields, industrial production was flat in July and manufacturing conditions slipped a bit in August according to a couple of regional business surveys. But this was more than offset by a fall in jobless claims to their lowest since October 2007, another sharp rise in home builders’ confidence, positive news on retail sales, a small rise in small business optimism and signs that inflation may be troughing in reinforcing expectations that the Fed will taper in September.
• The news out of the Eurozone was particularly good, with GDP rising 0.3% in the June quarter signalling an end to 18 months of recession. A rising trend in PMIs and business confidence points to continued recovery in the current half albeit at a soft pace. The return to growth has been led by France and Germany, but Spain and Italy are also seeing a slowing in the pace of their contractions.
• Japan’s June quarter GDP disappointed with 0.6% growth thanks largely to a detraction from inventories and weak business investment. Underling final demand was solid though, but it’s likely that further monetary stimulus to maintain downwards pressure on the Yen will be required. On this front the Bank of Japan’s balance sheet has been flat for two months now and needs to start rising again for the Yen to fall and Nikkei to rise.
• On the profit front, the US June quarter profit reporting season is now largely done with 72% surprising positively on earnings and 55% on revenues and earnings growth coming in at around 3.6% compared to expectations of 1% a month ago. In Europe, profit results are a bit more subdued with 54% better on earnings but 57% better on revenue. In Asia 60% have exceeded on earnings and 52% on revenue. Overall good but not booming.
• Indian economic data remained poor with weaker industrial production and worse than expected inflation.

Australian economic events and implications

• Australian economic data was a mixed bag with business confidence and conditions remaining weak but consumer confidence rising in August and continuing to trace out a gradual rising trend which should augur well for consumer spending. Interestingly the rise in confidence appears to reflect more cheery home owners, after the latest rate cut, and coalition voters presumably feeling happier at the prospect of a change in Government. Meanwhile wages growth remained benign in the June quarter suggesting no threat to inflation from labour costs.
• We are now about 30% through the June half profit reporting season. So far results have not been fantastic but they have not been as bad as feared which explains why the market has held up ok, nothwithstanding offshore influences. 41% of companies have exceeded expectations, which is down from the February reporting season but not bad compared to the last few years; 33% of results have been below expectations though which is well up; 68% of companies have seen their profits rise from a year ago; 65% of companies have increased their dividends from a year ago and only 9% have cut them; and there have been more positive outlook comments than negative. Reflecting the better than feared results, 55% of companies have seen their share price outperform the market on the day their results were released. Key themes remain ongoing cost control and weak revenue growth. The prospective boost to profits from the lower $A and for iron ore companies from a higher iron ore price may be helping investors look through disappointing results.

Major market moves

• Shares were mixed over the past week – down in the US on taper fears and in Japan, but up in Australia, China and most of Asia.
• Commodities rose on the back of good global growth news and oil prices helped a bit by turmoil in Egypt.
• Despite higher commodity prices the Australian dollar fell slightly.
• Bond yields were led higher as Fed taper fears intensified and as European economic data impressed.

What to watch over the next week?

• In the US, the minutes from the last Fed meeting (Wednesday) will likely be the highlight with investors searching for more clues as to when the Fed will start to taper its quantitative easing program. On the data front expect a 1% rise in existing home sales (Wednesday) but a fall in new home sales (Friday) after a surge in June, a continued gain in house prices (Thursday) and the flash Markit PMI for August (Thursday) to improve slightly.
• Preliminary August manufacturing PMIs will also be watched closely in the Eurozone (Thursday) and are expected to show a continuing trend improvement.
• The flash HSBC manufacturing conditions PMI for China will be released Thursday and is expected to show a slight improvement after falling sharply in recent months.
• In Australia, the focus is likely to be on the minutes from the RBA’s last Board meeting (Tuesday), which are expected to confirm that it retains an easing bias but that it has been weakened following the last rate cut.
• The June half Australian profit reporting season will hit its peak with 90 major companies due to report, including Amcor, Coca-Cola Amatil, BHP, QBE, Boral, Fairfax, IAG and Lend Lease. Consensus estimates for 2012-13 earnings growth have slipped to -0.5% from +12% earlier this year, so a lot of bad news is factored in. Domestically exposed cyclicals are vulnerable to further weakness. On the positive side though, ongoing cost control and the fall in the $A are likely to be supports for the profit outlook going forward, with the fall in the $A to date potentially boosting profits by around 4.5%.

Outlook for markets

• Shares are vulnerable to a near term correction after having become overbought following the rally from late June. Potential triggers include: the Fed tapering its monetary stimulus, US Government funding and debt ceiling negotiations, China and the profit reporting season in Australia. However, the broad trend in shares is likely to remain up: valuations are no longer dirt cheap but they are not expensive either; monetary conditions will remain very easy with interest rate hikes a long way off in the US and in other developed countries and interest rates still at risk of falling further in Australia; and the gradually strengthening global growth outlook points to stronger profits ahead. So by year end we see further upside in global and Australian shares.
• Sovereign bond yields still remain low and point to low medium term returns as yields gradually adjust higher in response to the improving global growth outlook.
• With commodity prices in a downtrend and the Australian economy deteriorating versus the US, it’s likely the $A will fall further. Given its overvaluation in terms of relative prices, expect the $A to fall to $US0.80.

————

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

Key points

• Share markets and related trades such as commodity prices and commodity currencies have fallen over the last two weeks, partly triggered by worries about the impact of Chinese tightening and the re-emergence of sovereign debt problems in Europe.
• However, this is likely to be a correction in an ongoing cyclical recovery in shares: the global recovery looks like it is continuing, shares are still cheap, the liquidity backdrop for shares is positive and a cashed up corporate sector is likely to lead to increased capital being returned to shareholders.

Introduction

After solid gains from early July lows into early November, shares and related trades such as commodity prices and the Australian dollar have fallen sharply, as renewed worries about sovereign debt in Europe and more pressure to tighten in China have led to renewed worries about the global growth outlook. Our assessment is that this is just another correction in an ongoing cyclical recovery in shares. This note looks at why, and what the key threats might be.

Cyclical dynamics remain positive

After the strong gains in recent months, growth trades such as shares and commodities had become overbought and due for a correction. This is what we have seen over the last week or so with worries about another round of sovereign debt problems in Europe and more tightening in China being the main triggers. This could have a bit further to run.

However, the broad cyclical back drop for growth trades such as shares and commodities remains positive.

First, shares are still cheap. Price to earnings multiples are well below long term averages. For example, the price to earnings ratio for Australian shares based on one year forward consensus earnings is 12.5 times against a long term average of 14.6 times. The grossed up dividend yield from shares at 5.3% is about the same as the 10 year bond yield meaning shares require only modest capital growth to provide a much better return than bonds. Forward price to earnings multiples on global shares are also around 12.4% times, which is well below longer term averages.

Source: Bloomberg, AMP Capital Investors

Second, there is reason to have greater confidence in the continuation of the global recovery. After falling around mid year, business conditions indicators appear to have stabilised in most major countries, with the exception of Japan. In fact, in the US, Europe and China they have turned back up after falling around mid year.

Source: Bloomberg, AMP Capital Investors

In the US, strength in the corporate sector appears to be driving a pick up in employment and capital spending, housing indicators appear to have found a floor and retail sales growth has been surprising on the upside. In Europe, strength in Germany and other northern European countries has offset weakness in debt impaired countries, Japan’s economic growth has actually surprised on the upside and China has had anything but the hard landing feared earlier this year.

Third, we are now seeing more monetary easing with another round of quantitative easing in the US (QE2) and a mini version of the same in Japan. This in turn is being transmitted into several emerging countries to the extent they have intervened to resist an appreciation of their currencies as a result of capital inflows from the US and in so doing are effectively boosting their own money supplies. Putting the criticisms of QE2 aside, a key objective of quantitative easing is to boost asset prices – as this will increase the net wealth of households and hence help consumer spending. To the extent the extra liquidity has to go somewhere, there is a good chance some of it will go into shares achieving its aims in this regard. This was certainly evident from QE1 last year.

On the liquidity front it’s also worth noting that over the last few years a wall of money has gone into bond funds. This could reverse at some time pushing up bond yields and resulting into a greater flow of funds into equities.

Source: US Investment Company Institute, AMP Capital Investors

Fourth, the corporate sector is cashed up. This is evident in surging profits at a time when business investment is coming off a low base. As a result the corporate sectors in the US and Australia are now net lenders, i.e. generating more cash than they are investing (see the next chart for Australia). This points to a further pick up in M&A activity, dividends and share buybacks going forward.

Source: Thomson Financial, AMP Capital Investors

This is clearly evident in Australia where takeover activity is building. Eg, no sooner has BHP had its Potash takeover knocked back than it is restarting share buybacks. M&A, increased dividends, share buybacks all have the same affect, i.e. putting cash into the hands of shareholders.

Finally, there are a number of cyclical dynamics which are positive for shares. The seasonal pattern in share markets is such that the next six months, i.e. November through May, is normally the strongest period for share markets reflecting the ending of tax loss selling for US mutual funds and new year optimism (see the next chart). We are also coming into the third year of the US presidential election cycle which is normally the strongest with an average annual gain of 19.4% pa since 1927.

So for all these reasons we think the cyclical recovery in shares has further to run.

Source: Thomson Financial, AMP Capital Investors

Potential threats

But what are the potential threats? There are several risks worth keeping on eye on:

• Ireland and Portugal have seen their bond yields rise to new highs and the size of the problem in Greece is still increasing, raising concerns about another European sovereign debt crisis. This is certainly a risk. However, several considerations suggest the impact may be lower than seen earlier this year as Europeans are now more aware of the dangers of delaying and backstops are in place: the European Central Bank can resume its purchases of bonds and troubled countries can tap the European Financial Stability Facility.
• In China, worries about policy tightening crunching the economy have returned after surging food prices pushed inflation up. However, t’s hard to see Chinese authorities getting too aggressive as non-food inflation is just 1.6%, economic activity indicators have cooled from earlier this year and Chinese shares remain cheap. That said, it may be a source of short term jitters.
• Bond yields in advanced countries are running well below long term sustainable levels and are at risk if some of the record capital flows of recent years reverse, perhaps in response to a run of stronger economic data, much like in 1994. The risk of this may be low now but is worth keeping an eye on next year.
• Similarly, the $US could stage a rebound on the back of stronger US data, making life tougher for US companies, commodity prices and commodity currencies like the $A. Apart from the current bounce from oversold levels, a sustained rebound in the $US looks unlikely given the additional quantitative easing in the US. It’s also possible that to the extent a stronger $US reflects stronger US and hence stronger global growth it may actually be positive for risk trades such as shares and commodity prices.
• Finally, the problems with mortgage foreclosures in the US could turn into another banking crisis. This seems unlikely but its worth watching out for any renewed leg down in US house prices and pressure on banks to repurchase mortgages from securitized trusts.

Conclusion

The latest set back in shares reminds us that the global recovery remains fragile. However, there are good reasons to believe it is just a correction in the continuing cyclical recovery that got underway in March last year.

]]>

Key points

• Share markets and related trades such as commodity prices and commodity currencies have fallen over the last two weeks, partly triggered by worries about the impact of Chinese tightening and the re-emergence of sovereign debt problems in Europe.
• However, this is likely to be a correction in an ongoing cyclical recovery in shares: the global recovery looks like it is continuing, shares are still cheap, the liquidity backdrop for shares is positive and a cashed up corporate sector is likely to lead to increased capital being returned to shareholders.

Introduction

After solid gains from early July lows into early November, shares and related trades such as commodity prices and the Australian dollar have fallen sharply, as renewed worries about sovereign debt in Europe and more pressure to tighten in China have led to renewed worries about the global growth outlook. Our assessment is that this is just another correction in an ongoing cyclical recovery in shares. This note looks at why, and what the key threats might be.

Cyclical dynamics remain positive

After the strong gains in recent months, growth trades such as shares and commodities had become overbought and due for a correction. This is what we have seen over the last week or so with worries about another round of sovereign debt problems in Europe and more tightening in China being the main triggers. This could have a bit further to run.

However, the broad cyclical back drop for growth trades such as shares and commodities remains positive.

First, shares are still cheap. Price to earnings multiples are well below long term averages. For example, the price to earnings ratio for Australian shares based on one year forward consensus earnings is 12.5 times against a long term average of 14.6 times. The grossed up dividend yield from shares at 5.3% is about the same as the 10 year bond yield meaning shares require only modest capital growth to provide a much better return than bonds. Forward price to earnings multiples on global shares are also around 12.4% times, which is well below longer term averages.

Source: Bloomberg, AMP Capital Investors

Second, there is reason to have greater confidence in the continuation of the global recovery. After falling around mid year, business conditions indicators appear to have stabilised in most major countries, with the exception of Japan. In fact, in the US, Europe and China they have turned back up after falling around mid year.

Source: Bloomberg, AMP Capital Investors

In the US, strength in the corporate sector appears to be driving a pick up in employment and capital spending, housing indicators appear to have found a floor and retail sales growth has been surprising on the upside. In Europe, strength in Germany and other northern European countries has offset weakness in debt impaired countries, Japan’s economic growth has actually surprised on the upside and China has had anything but the hard landing feared earlier this year.

Third, we are now seeing more monetary easing with another round of quantitative easing in the US (QE2) and a mini version of the same in Japan. This in turn is being transmitted into several emerging countries to the extent they have intervened to resist an appreciation of their currencies as a result of capital inflows from the US and in so doing are effectively boosting their own money supplies. Putting the criticisms of QE2 aside, a key objective of quantitative easing is to boost asset prices – as this will increase the net wealth of households and hence help consumer spending. To the extent the extra liquidity has to go somewhere, there is a good chance some of it will go into shares achieving its aims in this regard. This was certainly evident from QE1 last year.

On the liquidity front it’s also worth noting that over the last few years a wall of money has gone into bond funds. This could reverse at some time pushing up bond yields and resulting into a greater flow of funds into equities.

Source: US Investment Company Institute, AMP Capital Investors

Fourth, the corporate sector is cashed up. This is evident in surging profits at a time when business investment is coming off a low base. As a result the corporate sectors in the US and Australia are now net lenders, i.e. generating more cash than they are investing (see the next chart for Australia). This points to a further pick up in M&A activity, dividends and share buybacks going forward.

Source: Thomson Financial, AMP Capital Investors

This is clearly evident in Australia where takeover activity is building. Eg, no sooner has BHP had its Potash takeover knocked back than it is restarting share buybacks. M&A, increased dividends, share buybacks all have the same affect, i.e. putting cash into the hands of shareholders.

Finally, there are a number of cyclical dynamics which are positive for shares. The seasonal pattern in share markets is such that the next six months, i.e. November through May, is normally the strongest period for share markets reflecting the ending of tax loss selling for US mutual funds and new year optimism (see the next chart). We are also coming into the third year of the US presidential election cycle which is normally the strongest with an average annual gain of 19.4% pa since 1927.

So for all these reasons we think the cyclical recovery in shares has further to run.

Source: Thomson Financial, AMP Capital Investors

Potential threats

But what are the potential threats? There are several risks worth keeping on eye on:

• Ireland and Portugal have seen their bond yields rise to new highs and the size of the problem in Greece is still increasing, raising concerns about another European sovereign debt crisis. This is certainly a risk. However, several considerations suggest the impact may be lower than seen earlier this year as Europeans are now more aware of the dangers of delaying and backstops are in place: the European Central Bank can resume its purchases of bonds and troubled countries can tap the European Financial Stability Facility.
• In China, worries about policy tightening crunching the economy have returned after surging food prices pushed inflation up. However, t’s hard to see Chinese authorities getting too aggressive as non-food inflation is just 1.6%, economic activity indicators have cooled from earlier this year and Chinese shares remain cheap. That said, it may be a source of short term jitters.
• Bond yields in advanced countries are running well below long term sustainable levels and are at risk if some of the record capital flows of recent years reverse, perhaps in response to a run of stronger economic data, much like in 1994. The risk of this may be low now but is worth keeping an eye on next year.
• Similarly, the $US could stage a rebound on the back of stronger US data, making life tougher for US companies, commodity prices and commodity currencies like the $A. Apart from the current bounce from oversold levels, a sustained rebound in the $US looks unlikely given the additional quantitative easing in the US. It’s also possible that to the extent a stronger $US reflects stronger US and hence stronger global growth it may actually be positive for risk trades such as shares and commodity prices.
• Finally, the problems with mortgage foreclosures in the US could turn into another banking crisis. This seems unlikely but its worth watching out for any renewed leg down in US house prices and pressure on banks to repurchase mortgages from securitized trusts.

Conclusion

The latest set back in shares reminds us that the global recovery remains fragile. However, there are good reasons to believe it is just a correction in the continuing cyclical recovery that got underway in March last year.

The post Cyclical recovery in shares remains on track, albeit bumpy appeared first on AdviserVoice.

In releasing the Diversified Sector Report, Zenith Investment Analyst Graeme Miller said from an initial group of 109 Diversified products:

• 3 were rated HIGHLY RECOMMENDED and
• 22 RECOMMENDED.

The 25 Funds that were rated RECOMMENDED or above have been placed on Zenith’s Recommended List and are candidates for client model portfolios.

Of this number, 11 Funds are new additions to Zenith’s Recommended List.

Given the high threshold required to achieve a HIGHLY RECOMMENDED rating, only 2 investment managers and 3 funds have attained this rating at the completion of this sector review. These funds are:

“Additionally, this year Zenith surveyed its client advisers and sought to provide them with additional insight they in turn may utilise to address many of the questions and issues they encounter when providing wealth creation, financial and retirement strategies for their clients,” said Graeme Miller.

Specifically, the three key areas of concern were:

• Is it appropriate for investors to have a heavy ‘home-country bias’ to Australian Equities?
• Is investing in term-deposits for income a sound investment strategy?
• How does Zenith fit Emerging Markets into a strategic asset allocation?

Home Country Bias

Several industry commentators have recently pointed to Australia’s relative economic health and strong growth prospects as justification for maintaining a high weighting to Australian Shares in a diversified portfolio.

Graeme Miller responded, “Zenith however, does not agree that a having a strong homecountry bias is optimal from a risk-adjusted returns perspective. Our principal concern lies in the increasing concentration in the Australian market, which is heavily weighted in the volatile resources and financials sectors.”

Zenith contends that two key drivers of these sectors – commodity prices and household debt, are both at historically high levels, which presents risks that should be managed prudently from an overall portfolio perspective.

Term Deposits and Investing for Income

A popular strategy amongst income-focussed investors has been to invest predominately into term-deposits.

Whilst term deposits are close to ‘risk-free’ in terms of the security of the cash flow received, they can also be considered a high risk strategy for those looking to invest for income whilst maintaining their standard of living over a prolonged period of time.

“One alternative to the above approach (which Zenith advocates) is to blend a number of income sources across asset classes, maturities, and risk levels, to ensure a well diversified flow of income that incorporates some protection against inflation,” said Graeme Miller.

Emerging Markets

There has been a continued push by managers to increase their exposure to Emerging Markets, which has given rise to the issue of what International Shares benchmark is most appropriate.

Zenith believes the use of the MSCI All-Country World Index (ACWI) is much more relevant for the purposes of performance evaluation, as at present managers are able to outperform MSCI World by including Emerging Markets exposure.

Classification of Defensive Asset Classes

Within a diversified portfolio, it must be ensured that defensive allocations are truly ‘defensive’ in nature.

Graeme Miller said, “This issue is part of a broader industry problem of inconsistent naming conventions being used for managed funds.”

“In reviewing Diversified Fund offerings, Zenith obtains full underlying portfolio data, which is then reclassified according to our own internal definitions of Defensive and Growth asset classes.”

“This allows us to make more accurate comparisons between funds, and results in funds being categorised according to their Defensive/Growth asset allocation. For example, the Advance Balanced Fund is classed by Zenith as a ‘Growth’ Fund, whilst the Perennial Capital Stable Trust is classed as ‘Moderate’.”

Zenith is confident the inclusion of responses and insights to current investor issues and concerns will be well received by the national research provider’s adviser clients that it will be incorporated as a feature or addition in future Sector Survey Reports.

For further information or a copy of Zenith’s Diversified Sector Review and Report, please contact –

John Nicoll
National Sales Manager
Zenith Investment Partners Pty Ltd
Tel (Direct): +61 3 8639 1212
Email: john.nicoll@zenithpartners.com.au