Leisure spending is top financial priority for festive Aussies

Australians are prioritising spending on holidays and leisure over other longer term financial goals according to a nationwide poll from TAL. 

The research has found that the festive spirit of Australians was not dampened by any predictions of economic uncertainty in 2013, with almost three quarters of Australians (74%) rating spending on leisure as their current financial priority.  

Spending on holidays and saving for retirement were rated as the next most important financial priorities with 71% of people rating these goals as either ‘very’ or ‘quite’ important.  

The poll was conducted among 1200 Australians and asked people to rate a number of financial goals as either ‘very important’, ‘quite important’ or ‘not at all important’. 

TAL Managing Director Jim Minto said: “Most pleasingly, just over half (55%) of all people surveyed said that ensuring their life insurance provided adequate financial protection was an important financial priority at the moment. 

“These findings from our life insurance barometer project provide some interesting insights into the mood of the nation. Despite a pessimistic outlook for the economy in 2013, Australians will still celebrate the festive season with the customary focus on leisure spending. 

“But the fact that the majority of people have as a priority protecting their own and their family’s wellbeing in the event they could no longer work is a gratifying finding. Although underinsurance is still a big problem, many consumers are actively reassessing their needs to ensure they avoid the devastation an unexpected loss of income can cause through illness, accident or death.” 

Other key findings: 

• Gen X, or those aged between 35 and 49 years, were most likely to rate reviewing their life insurance as a financial priority (63% stated that this is very or quite important)
• The burden of paying for the care of dependents fell on 25 to 34 year olds with this age group most likely to consider this quite or very important (55%)
• Increasing leisure spend was most important amongst those aged under 25 years (87% rated this as very or quite important)

 Mr Minto added: “The New Year is often a time when people reign in their spending and take stock of their financial situation. With underinsurance at such high levels* we would encourage people to consider whether they have enough life insurance in case they couldn’t work again.”

Financial priorities of Australians as identified by TAL

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This group is also most likely to believe they don’t have control of their financial well-being with 50% claiming that nothing they do will make a difference.

The RaboDirect 2012 National Savings and Debt Barometer highlights that those without a long term financial plan are the most uncomfortable with their finances. It also found that of those with a long term plan, 75% said they were very comfortable with their finances.

In light of these findings, RaboDirect is calling on Australians to pull their heads out of the sand and take control of their finances. 

Speaking out at the start of Financial Planning week, spokesperson Renee Amor said:

“While we all have the opportunity to improve our financial wellbeing, our survey results clearly show that a number of us need more assistance when it comes to handling our finances. The most important step is to confront your finances head on and commit to making a positive change.

“Once you have done this, you can then take some simple steps to start improving your financial outlook. Put together a budget; ensure your money goes into a true savings account with high interest that doesn’t charge fees; set-up a regular savings plan; and speak to a professional if need be about how else you can make the most of your hard earned cash. 

“Financial Planning week is a great reminder for you look at your finances and see if there are ways you can improve your wealth. We realise that for some people dealing with your finances can be daunting and that is where calling on a professional really can help.

“For those who have been apprehensive about using a financial planner to date, this week they have the opportunity to test one out in a safe environment and with no commitment.  

“At RaboDirect we strongly believe in empowering customers through straight-talking information about products and strategies that can help them make better decisions. For that reason, we congratulate the FPA for setting up a consumer website that also provides Australians with a clearer understanding of finances in everyday language.”

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van Eyk Head of Asset Consulting Jonathan Ramsay said an analysis of top performing managers showed that fund outperformance very rarely lasted for more than a few years before it petered out, or worse, took some or all of that outperformance back by underperforming the market index. 

Since the flow of funds from investors into an outperforming manager typically grew exponentially as its level of outperformance increased, most money would flow into the fund as its performance was peaking. 

“By weight of money many investors in these funds will end up being disappointed”, Mr Ramsay said. 

The analysis was based on a list of core, style neutral Australian equity funds which had outperformed the Australian equity market by five per cent per annum at some point over the last 20 years. This was the “crème de la crème” of Australian equity funds, Mr Ramsay noted. In fact, only ten funds met that performance standard. 

The performance of these funds showed that even though their outperformance could go on for a number of years, they all either went on to have long periods of underperformance, or at best, performed in line with the market. 

Mr Ramsay said the problem with previous studies on persistency in fund performance was that they used average measures of performance or the results were highly dependent on the time horizon chosen. “We took a closer look at whether any individual managers had actually provided persistently strong outperformance or whether they had just managed to catch a market wave, a wave which inevitably subsides,” he said.

Mr Ramsay said the only way investors could reliably take advantage of a strongly performing fund was to try to predict periods of outperformance and invest before it occurred rather than chasing the chimera of past performance. 

He said fund outperformance tended to be episodic and investors needed to take into account more than how good a manager and their investment process was. “Stock-selection doesn’t happen in a vacuum and having a view about the market and the interaction between that and a manager’s investment process is very important,” Mr Ramsay said. 

He said the notable achievement of the best and most enduring funds management organisations was avoiding underperformance when markets were subdued while being able to catch the next market wave when it came along.

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Lifewise’s recent survey of 1,207 Australians has revealed Australians overwhelmingly value a work-life balance with 76% of respondents recognising it as important to them and their families. But Australians are sacrificing this work-life balance with 3 in 5 Australians (62%) working extra hours simply to fund their lifestyle. 

“As a nation we are not only hard-working but we know how to have a good time after hours. Over two thirds of Australians recognise they work overtime not just because their jobs now require it but because it provides the necessary income to fund various aspects of their lives, such as bills, lifestyle choices and education. So why do we insure our precious jewelry, our beloved cars and our health but when it comes to protecting the income that allows us to purchase all of these items do we overlook it,” says Lifewise Campaign Manager, Holly Dorber. 

If the main income earner of an average Australian household was unexpectedly unable to work due to illness or injury outside of the workplace, Lifewise found that: 

•  76% of Australians would only be able to meet their current expenses for a maximum of 6 months
• 11% would last less than a week
• 19% would only last up to a month!

While two in five (39%) of working Australians have taken out life insurance, only 23% have the safety net of income protection in place, and the majority (59%) stated that not only did they not have income insurance; they did not intend to look into it. Only 17% indicated that they were considering investing in income protection in the near future. 

“Australians are working harder than ever to fund their lifestyle, yet these findings indicate that the average Australian worker and household is not prepared for the event of income loss and would struggle if the main breadwinner lost their job”, explains Dorber. 

Three in five (60%) working Australians stated that the entire household would have to reduce their standard of living in order to cope with the income loss if the main income earner was unable to work.   Work-life balance would remain unachievable, with nearly 46% stating that they would take up a second job, and 39% would work longer hours in the current job. 

Significantly, 30% indicated that they would need to rely on government assistance in order to manage their household expenses, and 17% would have to rely on their friends and family for help. 

“It is clear that Australians value a work-life balance with 76% of respondents recognising it as important. Many are working longer hours because of both the demanding requirements of their job and to fund their lifestyle and living requirements, yet working Australians are neglecting the need to protect their income and have a financial safety net in place. Lifewise hopes that by providing some of these findings, Australians will consider the next steps in protecting their incomes”, added Dorber.

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The arrangement will outsource Qantas Super’s FX trades for active global equities and alternatives to RIS’ global trading desk for efficient execution and settlement. RIS will manage operational risk and provide Qantas Super with comprehensive performance reporting tools.

Qantas Super’s Chief Investment Officer, Andrew Spence, said the agreement demonstrates Qantas Super’s commitment to enhancing member returns while adhering to strict FX governance processes.

“Implementation efficiency is a key focus for Qantas Super as we strive to deliver the best risk-adjusted returns to our members. We have undertaken extensive due diligence to quantify the costs associated with FX trade execution and to find a solution that delivers enhanced transparency and cost efficiency. Qantas Super believes RIS will be an ideal implementation provider given their depth of resources, expertise in agency FX and commitment to transparency around FX trading costs,” Mr. Spence said.

Ian Battye, Managing Director of Russell Implementation Services, said the costs of FX trading had been under the radar for too long. Russell’s analysis* of 40,000 FX trades shows the cost of FX transactions can be up to nine times higher than either investors or managers expect.

“Our research shows that many funds are unaware FX transactions can be so costly, and investors can’t assume FX trades are being executed efficiently by their investment manager. In Australia, we see Qantas Super as a leader in this space for first monitoring and then taking definitive action for a long-term solution to stop performance drag on members’ returns due to FX leakage. I’m glad Qantas Super is joining our other global agency FX clients in taking action to achieve best execution and enhanced transparency in FX markets,” Mr. Battye said.

Russell’s agency FX model has been operating since 2003 and is designed to cut FX transaction costs through a process that is a cost effective alternative to traditional FX execution services. The program has surpassed A$68 million in total savings on behalf of the Russell global equities funds as well as other institutional clients.

“The savings we have made across Russell Investments’ funds underscore that we practice what we preach. Implementing an agency FX program provides investors with a quick, clear and easy solution to the challenges they’re now identifying in the FX marketplace. Not only can this save them time and deliver lower costs, but it can also demonstrate their commitment to industry best practice,” Mr. Battye concluded.

Click to request a copy of the research “Are your FX fees too high?” .

*Russell analysed 40,000 FX trades executed by investment managers with custodians and other foreign exchange counterparties between January 2008 and December 2009 on institutional assets totaling approximately A$23 billion.

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Commenting on the review, Steven Tang said it was the largest sector review undertaken by Zenith as it includes all Global, Regional, Country (ex-Australia), Global Small Companies and Index funds.

The Zenith 2011 International Shares Sector Review appraised 180 International Shares products and confirmed:

• 12 were rated HIGHLY RECOMMENDED; and
• 39 RECOMMENDED.

The key changes to the Recommended List post the review include the addition of 7 new funds across various categories, 2 upgrades and 5 downgrades for existing funds.
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Steven Tang noted that it is often assumed that investors are willing to pay higher fees for active management based on the skill of the underlying manager and consequent presumed outperformance of a passive benchmark. However, it is logical to assume that this ability to outperform is contingent on the manager being truly active i.e. adopting positions away from the passive benchmark.
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“Zenith believes that the international share sector affords the greatest scope for active management, relative to all other sectors, given the size and breadth of the investable universe,” added Steven Tang.

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Global investment services firm Russell Investments is encouraging investors to think outside term deposits and cash and look for income alternatives such as high dividend paying shares which can boost returns, provide capital growth and be more tax effective.

Russell’s High Dividend Australian Shares ETF (RDV), launched in May 2010, has just completed its first financial year. Despite a difficult market environment, RDV was able to deliver on its goal of earning a higher dividend yield than the broad market, while still maintaining an element of capital growth. It returned 6.2%, with a 5.4% dividend yield, or 6.6% yield once grossed up for franking credits. The yield for the broad market over the same period was 4.3% – over 100 basis points below RDV.

“RDV’s performance shows investors don’t have to sacrifice their capital growth to get a good income return and this should be a reason to diversify out of term deposits or cash,” said Scott Bennett, portfolio manager at Russell Investments. “RDV provides an income return and selects stocks which offer other desirable qualities such as capital growth, so investors can have their cake and eat it too,” said Mr Bennett.

The ETF is based on a specially constructed index, the Russell Australia High Dividend Index, which 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.

Diversification and tax considerations key

Russell says investors should not only diversify out of cash but also make sure their equity holdings are diversified to reduce stock specific risk.
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“Investors are increasingly using ETFs as an anchor to a direct equity portfolio as it helps them diversify across stocks, sectors and industries. They then complement this with their own favourite stock picks or managed funds,” said Mr Bennett.
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Investors should also consider how they can take advantage of tax benefits such as franking credits as part of their investment strategy. For example, in the case of ETFs like RDV, franking credits are passed onto the investor. Equity ETFs, like RDV, have naturally lower turnover and can qualify for tax breaks under the CGT discount rules, meaning any realised gains made after a year may be one-third or one-half tax-free to investors. This is further enhanced by the fact the money investors would have used to pay tax each year may stay invested, adding to the growth potential of the investment.

Australian dividends catch eye of overseas investors

High dividend paying Australian equities are becoming popular with international investors who are relying on dividends to fund their income needs as yields from cash instruments in other developed economies remain low.
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“The fact international investors are scouring the Australian market for dividends shows how competitive the yields are in our market,” said Mr Bennett.
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“As we head into the new financial year we want investors to be aware of alternatives to cash investments which provide solid income but don’t require you to forgo other benefits such as capital growth,” Mr Bennett concluded.

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On 29 June 2011, the Federal Court of Australia ordered that York be wound up and appointed Mr Paul Burness of Worrells as liquidator.

The Court’s orders follow an ASIC investigation into York’s failure to prepare and lodge audited financial reports and director’s reports and hold annual general meetings from 30 June 2008 to date. York also failed to appoint the statutory minimum of three directors and comply with a court order dated 9 June 2009 which required financial accounts be lodged with ASIC within 28 days.

ASIC’s action reflects its commitment to ensuring companies demonstrate openness and transparency and keep investors well informed.

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The changes include powerful new tax tools that could mean a better after-tax investment return for clients on particular transactions and new trading enhancements that reduce the time spent on portfolio management, client reviews and rebalances.

Head of BT Wrap, Chris Freeman, said the changes were part of an ongoing drive to increase the efficiency for advisers and deliver even better value to BT Wrap investors.

“These features are game changing. Not only will they make it easier for advisers to trade equities and managed funds, but they’ll also enable them to proactively manage tax outcomes of certain sales when trading. These enhancements have the potential to directly improve clients’ after-tax investment returns and in challenging markets like these, we all know that’s becoming increasingly important.”

BT Wrap will now offer “Minimum Gain” (Min Gain) as the new default sale allocation method for investment and accumulation accounts, meaning the parcel that will be sold first is the one that results in the lowest estimated taxable gain.
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In addition, BT Wrap will provide access to additional information on the trading screen. Advisers will now benefit from access to the estimated taxable gain or loss of the proposed trade to help make smart trading decisions and they’ll be prompted with warnings if a proposed trade may lose specific tax concessions. New daily financial year-to-date reporting for estimated realised and estimated unrealised capital gains will also be introduced to facilitate more meaningful dialogue between advisers and accountants to better manage clients’ CGT outcomes.
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Mr Freeman said early feedback from advisers has been overwhelmingly positive.
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“We have been working closely with advisers on these changes and the feedback we have already had is that this will dramatically improve advisers’ ability to offer better service to clients, and to do so more efficiently,” Mr Freeman said.

Details of the changes

• New default sale allocation method. The new default sale allocation method for investment and accumulation accounts is Min Gain. This increases the potential for clients to obtain a better after-tax investment return on particular transactions. It replaces the traditional ‘First In First Out’ (FIFO) method. Min Gain automatically sells the parcel that results in the lowest estimated taxable gain. For pension accounts the default sale allocation method is ‘Maximum Gain’ (Max Gain) – seeking a tax result which is generally appropriate for that environment. The appropriate default sale allocation method depends on a client’s particular circumstances – advisers can change from the default allocation to ensure the appropriate method is selected.
• Automatic calculations display the estimated taxable gain or loss for each sell order on the trading screen– giving advisers better tax insight to help make the right trading decisions.
• Automatic warnings at the point of trade where the trade could trigger the loss of specific tax concessions. A sophisticated warning system will alert advisers to the potential loss.
• Financial year-to-date Capital Gains Tax reporting on both estimated realised and estimated unrealised gains or losses. The reporting will display the sale (or simulated sale) as it applies to each tax parcel allocated to the sale and, for each tax parcel sold, will provide a separate CGT calculation. In addition, the report will help advisers manage their clients’ tax more effectively on a daily basis, without waiting for the end of the financial year.
• Single-trading screen. Advisers can now place up to 50 listed security and managed fund trades on a single screen. The single-screen trading feature – which brings market and company information, tax simulations, up-to-date cash balances and the trading engine together – makes the process simpler and trading smarter. Previously buy and sell trading was performed across up to five screens.

Click to download a copy of the enhanced-trading-quick-reference-guide and tax-quick-reference-guide from BT.

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Last year, the government announced a new tax system for managed investment trusts (MITs) that will reduce complexity, increase certainty and minimise compliance costs for MITs and their investors.  In April, a further announcement was made to defer the start date of the new laws from 1 July 2011 to 1 July 2012.  The government also announced two minor changes to the previously announced measure to facilitate the entry of MITs into the new tax system.

The new tax system will be largely based on recommendations arising from the Board of Taxation review of the taxation arrangements applying to MITs.

Key aspects of the new tax system will be:

• an elective ‘attribution’ system of taxation that will replace the present entitlement system and provide that investors are taxed only on the income that the trustee allocates to them on a fair and reasonable basis, consistent with their entitlements under the trust deed or the trust’s constituent documents
• implementation of rules dealing with ‘under’ and ‘over’ distributions that are within a 5% cap, so that trustees are not required to reissue statements and investors are not required to revisit tax returns removal of double taxation that arises in certain circumstances
• abolition of Division 6B of the Income Tax Assessment Act 1936 which relates to corporate unit trusts.

Click for more information about the taxation of MITs.

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