With a 3% share of net flows for the quarter, this is the first time that All Star Funds, which launched in July 2007, has participated in the Plan For Life survey.  The increase in net flows from the previous quarter was 56%, placing All Star Funds in 9^th place overall, which is, according to Mulligan, “a great start”.

Mulligan believes that this reflects two key attributes:

1. The high quality of investment managers in the All Star stable, which have delivered strong performance to investors, and
2. The commitment and support of financial planners, who need to be confident in recommending investment products to their clients that the products will deliver on their value proposition.

All Star Funds was conceived to provide consistent high alpha asset management capabilities to investors which would otherwise not be available to them in the retail market.

“When we select a manager, we look for consistent out-performance, irrespective of market cycle,” said Mulligan, “for example, Greg (Matthews, portfolio manager of the All Star IAM Australian Share Fund) and his team have a long-standing track record as a top performing Australian share manager; he and some of his team have worked together for over 15 years.”

The All Star IAM Australian Share Fund has delivered in excess of 4% net above benchmark on an annualised basis since inception (performance data to end April 2011), and is ranked number one or two across most time periods in the latest Morningstar survey (Australian shares sector specialist funds, April 2011 Morningstar survey).

The Fund’s stable-mate, the All Star KFM Income Fund, has also fared well through the liquidity crisis during the GFC and recent natural disasters, according to Mulligan, “delivering a high yield and a strong dividend stream with complete liquidity”.

This Fund is managed by Kaplan Funds Management, an absolute return manager focussed on income producing strategies, which was established in 1998.

In Mulligan’s view, All Star’s success has been driven in part by its focus on supporting financial planners and also by recognising the need for Fund Managers to offer products which deliver on their promise, and so create a trusted relationship with investors and their advisers. To this end, Mulligan believes that advisers need products which deliver solid and consistent results, and deliver on their stated objectives.
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“The support planners have given, and continue to give to the All Star Funds validates our manager selection process,” said Mulligan, “as long as they’re giving us that support, I know our Funds are delivering for them and for their clients.”
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The All Star Nomura China Fund presents a risk-controlled opportunity for investment in China. It is managed by Nomura Asset Management, a conservative manager with proven expertise in this market.
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The All Star Maple-Brown Abbott Listed Property Fund provides access to a high quality listed property capability and is the first time this capability has been offered to the Australian Retail market. The strategy has been managed by Maple-Brown Abbott for over 25 years with a consistent track record of performance delivery.
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Click to download a pdf copy of Plan For Life – Marketer view

Click to download a pdf copy of Plan for Life – Adminstrator view

• Asian companies are realising the benefits of paying a dividend
• Inflation concerns exist, but the region’s companies are well placed to cope with them
• The number of Asian stocks offering both share price growth and dividend income is increasing

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“Some investors question equity income investing in Asia, pointing to value traps where capital gains are muted and yields are the biggest contributor to returns. However, we don’t see this as being the case.”
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“Across the region, fundamentals continue to support companies’ ability to pay dividends as well as offering growth, while companies’ willingness to increase pay-out ratios is increasing as more and more realise the benefits of paying a dividend,” says Pidcock.
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“The reason for Asia’s current dividend ‘sweetspot’ is that the companies which dramatically cut their capital expenditure during the global financial crisis have kept this expenditure low. We are reasonably confident about the sustainability of these dividends, as well as the prospects for dividend growth. Strong earnings growth alongside stable pay-out ratios means that continued dividend growth can be achieved,” Pidcock adds.

Inflationary pressures

One of the more common questions at the moment is whether inflation and its consequences will derail Asian growth.
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Pidcock continues, “We see inflation as a global phenomenon which has evolved ever since the world’s reserve currency, the US dollar, came off the gold standard – the 40th anniversary of which will take place this August. Asian companies are relatively well placed to cope with inflation, thanks to the strong balance sheets and low gearing levels that also make dividend payments possible. Countries across the region have been tightening monetary conditions to fight inflation, whether it is through currency appreciation, increased reserve ratios or with more traditional means such as interest rate hikes.
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“Furthermore,” he adds, “in an inflationary environment, companies are arguably more likely to return cash to shareholders as the value of holding cash is eroded by higher prices. Asia ex-Japan companies are more likely to return this cash in the form of dividends rather than share buybacks. Meanwhile, there are companies which provide a good inflation hedge in this environment; for example, the Newton Asian Income Fund has a position in Parkway Life, a real estate investment trust which invests in income-producing real estate assets such as hospitals in Singapore. The company enjoys an inflation-pegged rental formula, helping to pass on costs and grow the distributions per unit at a real rate,” says Pidcock.
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“Another concern surrounds the impact of Japan’s natural disasters on the supply chain for Asian companies, particularly within the technology sector. Globally, this is a relatively low-yielding sector but within Asia, Taiwanese companies buck the trend,” he explains.
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“Although the total impact of Japan’s natural disasters on Asian companies cannot be easily quantified, and is still unfolding, at first sight it seems to have been relatively muted. For example, companies reporting first-quarter earnings in Taiwan generally gave relatively good guidance, far from the initial expectations of meaningful disruption. Meanwhile, the outlook for dividend payments in Taiwan remains positive as the regulatory environment continues to be supportive, and a recent resolution to increase corporate income tax on retained earnings to 15%, from 10%, is likely to fuel higher cash dividends.
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“More broadly, the outlook is bright for dividends across Asia and attractive total returns can be achieved for investors seeking both income and growth. Some may worry that high dividend-yielding stocks have no growth and where yields make up the majority of returns. However, in our experience, there are plenty of quality companies across the region offering growth as well,” concludes Pidcock, “and we expect these to continue expanding in number.”

Dividends are on the rise with the average dividend across the equity market growing 6.4% over the last six months, according to recent data from Russell Investments, provider of the Russell Australia High Dividend Index (the index).

“This reporting season has shown companies are increasingly confident about their prospects and as a result are more inclined to return capital to shareholders, either via dividends or buy-backs,” said Scott Bennett, portfolio manager for Russell Investments.

The index, which forms the basis for Russell’s High Dividend Australian Shares ETF (RDV), comprises Australian blue-chip companies with a bias towards those that have a high expected dividend yield but also meet other characteristics including: a history of paying dividends; dividend growth and consistent earnings.

Russell has recently completed the semi-annual reconstitution of the index, which involves incorporating the latest reporting season data to rebalance the weightings of stocks within the index according to certain dividend and earnings factors.

Commenting on the outlook for dividends, Mr Bennett said: “The dash to dividends is likely to become an even stronger theme in the year ahead with more companies looking to return cash to shareholders, along the lines of BHP’s buy-back.”

According to Mr Bennett, dividend yields are now looking as attractive as term deposits. The average term deposit is now yielding 6.1% while the average dividend yield across the ASX is now 5.8% grossed up for franking credits, with the index yielding 7.3% grossed up for franking credits.

“The main advantage over term deposits is with Australian equities you get long term growth in dividends and also your capital,” Mr Bennett said. “The recent correction in equity markets has presented a good buying opportunity for longer term investors.”

Strong yielders

The index has seen a number of movements this half including Harvey Norman which has entered the index at a weight of 1.8%. This reflects its attractive 6.7% gross yield and solid dividend growth, although Mr Bennett says Russell index methodology has also taken into account the cyclical nature of its business.

Defensive companies such as Fosters and Coca Cola Amatil have also increased their weighting, as did the banking sector after three of the top four banks posted double digit dividend growth in the past 12 months. “The proprietary Russell index methodology does favour those companies with more defensive earnings characteristics,” Mr Bennett said.

“This half has really shown investors that dividends are on a steady growth path and as a result dividends are going to be a really competitive source of income compared to other investments,” Mr Bennett concluded.

Key points

• Australian shares have disappointingly underperformed traditional global shares over the last year on the back of monetary tightening, worries about a housing bubble, the strong $A and Chinese tightening.
• Many of these concerns should be largely factored in & we see better returns this year, but some linger so it is too early to say the relative underperformance is over.
• However, on a five year basis, the combination of higher dividends, better growth prospects, less structural constraints and franking credits for Australian based investors suggest investors should maintain a bias towards Australian shares.

Introduction

At the end of 2009 there was much optimism Australian shares would continue to outperform their counterparts in other developed countries. In particular Australia had come through the Global Financial Crisis in good shape without the structural constraints facing many other developed countries, the Australian economic outlook looked good and Australia was well keyed into high growth Asia.

However Australian shares have disappointed over the last year: returning just 1.6% in 2010 whereas global shares returned 10.4% in local currency terms. Global shares have reached new recovery highs whereas Australian shares are still below April high.

So what happened? What drove the underperformance? Is it just a short term setback in Australian shares or does it signal something more fundamental?

This note focuses on Australian shares relative to traditional global equity markets, as opposed to Asian and emerging markets where we generally expect underperformance by Australian shares.

Australia’s relative underperformance

Australia’s relative underperformance over the last year appears to reflect several factors:

• Rising interest rates at a time when interest rates were at or near zero in other developed countries and, in some instances, monetary conditions were still being eased. This led to concerns about the outlook for domestic cyclical sectors, notably retailing and housing, and bank credit growth. It also made bank term deposits look attractive compared to shares (unlike in the US where yields on term deposits are poor).
• There has also been concern internationally that Australian housing is in a bubble that is about to burst, with bad consequences for Australian banks.
• The strong Australian dollar has weighed on internationally exposed companies that don’t have a hedge in the form of high commodity prices.
• Concerns Chinese authorities will over tighten and crash the Chinese economy in an effort to beat inflation have also weighed on the Australian share market, given the degree to which many global investors now see Australia as being connected to China.
• These concerns have all been reinforced by earnings downgrades in Australia whereas earnings expectations have been upgraded globally – see next chart.

Source: Thomson Financial, AMP Capital Investors

This has all seen the price to forward earnings ratio for Australian shares fall from 15.3 times at the end of 2009 to 12.7 now, whereas that for global shares has fallen by a smaller amount (ie, from 14.1 times to 12.5 now).

In an absolute sense we see Australian shares rising this year as the global recovery continues. The PE contraction has left Australian shares reasonably attractive, profit growth locally should be solid and Australian companies have scope to re-leverage, reflecting high cash levels and low gearing – see the next chart.

Source: Reserve Bank of Australia, AMP Capital Investors

However, it is too early to say that the relative underperformance of Australian shares has run its course. Concerns about an imminent collapse in Australian house prices resulting in massive damage to Australian banks are overdone. The threat to domestic growth from the strong Australian dollar and rising interest rates should be largely factored in and in any case recent benign inflation data and the disruptive effects from the floods suggest that the RBA will be on hold out to mid year. However, concerns about Chinese, and, more generally Asian tightening may linger for a while yet. So, on balance, we see global and Australian shares having similar returns this year.

A longer term perspective

It is worth noting that despite Australian shares lacking the breadth and diversification of global shares, over the last 110 years Australian shares have had better real returns than most global share markets (Swedish shares being the exception). See the next chart.

Source: Global Financial Data, AMP Capital Investors

However, within this long run outperformance there have been lengthy periods of relative underperformance (such as in the 1970s due to relatively poor economic management in Australia) and the 1990s (the global tech boom) but also on a short term basis (say in 2003 in the first year of recovery from the tech wreck).

Source: Thomson Financial, AMP Capital Investors

While it’s too early to say the relative underperformance of the last year is over, there are several reasons to believe the longer term period of outperformance in Australian shares that started in 2000 will continue:

Firstly, Australian shares still pay higher dividend yields than mainstream global shares. The average dividend yield on Australian shares is 4% versus 2.6% for global shares. This is important because over long periods dividend payments constitute a significant component of the return an investor gets and so the higher the dividend yield the better (assuming it is not debt financed). Moreover, high dividend yields augur well for future returns, as they signal corporate confidence about future earnings and excessive retained earnings are often wasted.

Secondly, the Australian economy offers higher growth potential than the US, Europe and Japan. Australia has stronger population growth which is feeding through into much stronger labour force growth. Australian households have not seen the same deterioration in their net wealth as has occurred elsewhere, public sector debt is very low and Australia is heavily exposed to high growth Asia and strength in commodity prices. All of these considerations are likely to translate into higher growth in earnings for Australian companies over the medium term compared to earnings growth in traditional global share markets.

Reflecting the last two points, return projections (see below) based on current dividend yields and likely earnings growth tend to favour Australian shares. Over the medium term (say, five years), a good starting point to project likely returns is to add current dividend yields to likely long term nominal GDP growth as a proxy for earnings growth and hence capital gains from shares.

Australian shares with a five year pre tax return projection of 9.5% pa come out well ahead of traditional global shares with a return projection of 6.9%.

Finally, franking credits add over 1% to the post tax return from Australian shares for Australian investors. The higher dividend yield from Australian shares and franking credits mean Australian shares have a 2.9% pa return advantage over traditional global shares for Australian based investors.

Concluding comments

Australian shares have underperformed traditional global shares over the last year on the back of monetary tightening, worries about a housing bubble, the strong $A and Chinese tightening. While many of these should be largely factored in and we see better returns this year, some still linger (notably Chinese/Asian tightening) so it is too early to say that the period of relative underperformance is over.

However, on a strategic, or five year basis, the combination of higher dividends, better growth prospects, less structural constraints and franking credits for Australian based investors suggest investors should maintain a bias towards Australian shares over traditional global shares, although maybe not as big a bias as was warranted a decade ago.

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Key points

• Australian shares have disappointingly underperformed traditional global shares over the last year on the back of monetary tightening, worries about a housing bubble, the strong $A and Chinese tightening.
• Many of these concerns should be largely factored in & we see better returns this year, but some linger so it is too early to say the relative underperformance is over.
• However, on a five year basis, the combination of higher dividends, better growth prospects, less structural constraints and franking credits for Australian based investors suggest investors should maintain a bias towards Australian shares.

Introduction

At the end of 2009 there was much optimism Australian shares would continue to outperform their counterparts in other developed countries. In particular Australia had come through the Global Financial Crisis in good shape without the structural constraints facing many other developed countries, the Australian economic outlook looked good and Australia was well keyed into high growth Asia.

However Australian shares have disappointed over the last year: returning just 1.6% in 2010 whereas global shares returned 10.4% in local currency terms. Global shares have reached new recovery highs whereas Australian shares are still below April high.

So what happened? What drove the underperformance? Is it just a short term setback in Australian shares or does it signal something more fundamental?

This note focuses on Australian shares relative to traditional global equity markets, as opposed to Asian and emerging markets where we generally expect underperformance by Australian shares.

Australia’s relative underperformance

Australia’s relative underperformance over the last year appears to reflect several factors:

• Rising interest rates at a time when interest rates were at or near zero in other developed countries and, in some instances, monetary conditions were still being eased. This led to concerns about the outlook for domestic cyclical sectors, notably retailing and housing, and bank credit growth. It also made bank term deposits look attractive compared to shares (unlike in the US where yields on term deposits are poor).
• There has also been concern internationally that Australian housing is in a bubble that is about to burst, with bad consequences for Australian banks.
• The strong Australian dollar has weighed on internationally exposed companies that don’t have a hedge in the form of high commodity prices.
• Concerns Chinese authorities will over tighten and crash the Chinese economy in an effort to beat inflation have also weighed on the Australian share market, given the degree to which many global investors now see Australia as being connected to China.
• These concerns have all been reinforced by earnings downgrades in Australia whereas earnings expectations have been upgraded globally – see next chart.

Source: Thomson Financial, AMP Capital Investors

This has all seen the price to forward earnings ratio for Australian shares fall from 15.3 times at the end of 2009 to 12.7 now, whereas that for global shares has fallen by a smaller amount (ie, from 14.1 times to 12.5 now).

In an absolute sense we see Australian shares rising this year as the global recovery continues. The PE contraction has left Australian shares reasonably attractive, profit growth locally should be solid and Australian companies have scope to re-leverage, reflecting high cash levels and low gearing – see the next chart.

Source: Reserve Bank of Australia, AMP Capital Investors

However, it is too early to say that the relative underperformance of Australian shares has run its course. Concerns about an imminent collapse in Australian house prices resulting in massive damage to Australian banks are overdone. The threat to domestic growth from the strong Australian dollar and rising interest rates should be largely factored in and in any case recent benign inflation data and the disruptive effects from the floods suggest that the RBA will be on hold out to mid year. However, concerns about Chinese, and, more generally Asian tightening may linger for a while yet. So, on balance, we see global and Australian shares having similar returns this year.

A longer term perspective

It is worth noting that despite Australian shares lacking the breadth and diversification of global shares, over the last 110 years Australian shares have had better real returns than most global share markets (Swedish shares being the exception). See the next chart.

Source: Global Financial Data, AMP Capital Investors

However, within this long run outperformance there have been lengthy periods of relative underperformance (such as in the 1970s due to relatively poor economic management in Australia) and the 1990s (the global tech boom) but also on a short term basis (say in 2003 in the first year of recovery from the tech wreck).

Source: Thomson Financial, AMP Capital Investors

While it’s too early to say the relative underperformance of the last year is over, there are several reasons to believe the longer term period of outperformance in Australian shares that started in 2000 will continue:

Firstly, Australian shares still pay higher dividend yields than mainstream global shares. The average dividend yield on Australian shares is 4% versus 2.6% for global shares. This is important because over long periods dividend payments constitute a significant component of the return an investor gets and so the higher the dividend yield the better (assuming it is not debt financed). Moreover, high dividend yields augur well for future returns, as they signal corporate confidence about future earnings and excessive retained earnings are often wasted.

Secondly, the Australian economy offers higher growth potential than the US, Europe and Japan. Australia has stronger population growth which is feeding through into much stronger labour force growth. Australian households have not seen the same deterioration in their net wealth as has occurred elsewhere, public sector debt is very low and Australia is heavily exposed to high growth Asia and strength in commodity prices. All of these considerations are likely to translate into higher growth in earnings for Australian companies over the medium term compared to earnings growth in traditional global share markets.

Reflecting the last two points, return projections (see below) based on current dividend yields and likely earnings growth tend to favour Australian shares. Over the medium term (say, five years), a good starting point to project likely returns is to add current dividend yields to likely long term nominal GDP growth as a proxy for earnings growth and hence capital gains from shares.

Australian shares with a five year pre tax return projection of 9.5% pa come out well ahead of traditional global shares with a return projection of 6.9%.

Finally, franking credits add over 1% to the post tax return from Australian shares for Australian investors. The higher dividend yield from Australian shares and franking credits mean Australian shares have a 2.9% pa return advantage over traditional global shares for Australian based investors.

Concluding comments

Australian shares have underperformed traditional global shares over the last year on the back of monetary tightening, worries about a housing bubble, the strong $A and Chinese tightening. While many of these should be largely factored in and we see better returns this year, some still linger (notably Chinese/Asian tightening) so it is too early to say that the period of relative underperformance is over.

However, on a strategic, or five year basis, the combination of higher dividends, better growth prospects, less structural constraints and franking credits for Australian based investors suggest investors should maintain a bias towards Australian shares over traditional global shares, although maybe not as big a bias as was warranted a decade ago.

The post Why are Australian shares lagging? Will it continue? appeared first on AdviserVoice.

• In recent weeks investors have no doubt found it difficult to sort fact from fiction in the public discussion about company balance sheets. Some commentators have questioned whether banks are generating
  above-normal profits. Others have questioned whether some companies such as BHP Billiton are making profitable use of capital or whether a portion needs to be returned to shareholders. And still others have focussed on the sustainability of high dividend returns from companies such as Telstra.
• To provide a base for the discussion, CommSec has compiled a set of tables on various measures for the S&P/ASX50 – the 50 biggest companies on the sharemarket. The tables are generated from data available from financial research firm, Morningstar.
• In 2010 while major banks’ posted solid profits, their return on equity ratios were largely in line with the average of S&P/ASX50 companies. And their return on assets ratios were at the bottom of the pack. By contrast Telstra reported market-leading return on equity and return on capital ratios in 2010.
• Over the past decade, seven S&P/ASX50 companies had negative shareholder returns including Telstra. Shareholder returns were close to average for CBA, ANZ and Westpac but returns for NAB were below the average of S&P/ASX50 companies.
• Resource companies dominate the results of average shareholder returns over the past decade.

Click here to download this document (pdf)

Russell Investments has today launched two income-based multi-manager funds in response to increasing investor demand for income-seeking strategies.

The Russell Australian Shares Enhanced Income Fund (RASEIF), taps into the strong forecasted dividend growth in Australian shares. The second fund, the Russell Australian Bond Income Fund (RABIF) allows investors to take advantage of the attractive yields on local bonds while being invested in defensive assets.

“Companies are starting to restore dividend payments as balance sheets strengthen, and bond yields are now at relatively high levels,” said Kathy Cave, Portfolio Manager for Russell Investments. “Launching these funds was a logical step given the current market environment and the increasing desire for income from investors.”

Dividends see turnaround

“We anticipate a much more supportive environment for corporate dividends going forward following the restoration of company balance sheets and the need for companies to return idle cash to shareholders.” said Ms Cave. “As the market potentially heads into a period of lower capital growth, a greater proportion of investors’ total equity returns will be driven by dividends.”

Russell believes it is important to not only focus on current yield but also sustainable and growing dividends that are supported by strong earnings.

RASEIF provides investors with a well diversified exposure to Australian listed companies with a history of – and strong prospects for – paying higher than average dividends. It has three investment strategies managed by Ankura Capital, Perennial Value, and the Russell Australia High Dividend Shares ETF (RDV). Ankura is a quantitative manager with a strong bias to small companies; Perennial Value is a traditional stock-picker with a focus on fundamental assessments of future earnings and dividends and RDV provides a passive exposure to the Russell Australia High Dividend Index. RASEIF will be benchmarked against Russell’s innovative new index, Russell Australia High Dividend Index, which comprises 50 large cap companies and is weighted towards those securities with stronger after-tax dividend characteristics.

All about bonds

According to Russell, the local bond market is now looking particularly attractive. Australian bond yields are higher than most in the developed world and issuers are generally of a high quality.

“The Fund’s dual aims of generating stable quarterly distributions, while outperforming its benchmark would be difficult within a single manager product,” said Ms Cave. RABIF therefore uses a multi-strategy approach to provide a regular income through a portfolio of AUD denominated bonds. It is made up of two managers; Aberdeen Asset Management and Western Asset Management. The managers explicitly take into account the impact of their trading and portfolio construction on the quarterly distributions of the Fund

“In the wake of the GFC many investors are looking for something different from their fixed income portfolios. For some it is no longer as simple as wanting to outperform a broad market index; they have additional objectives such as greater stability and regularity in distributions,” said Ms Cave.

“In developing these funds we have identified market trends and harnessed them to meet the needs of our clients,” Ms Cave concluded.