The Reserve Bank has cut the official cash rate by 25 basis points to 2.0 per cent. This is significantly below the corresponding rate of 7.25 per cent in August 2008 and the rate of 4.75 per cent in November 2011 when the current cycle of policy easing commenced.

Cash investments such as term deposits have been regarded as a safe option for cautious investors due to the stability of their capital value and, at least historically, the delivery of an adequate level of income. However, official cash rates are now at historically low levels and the income from term deposits has fallen to levels marginally above the underlying rate of inflation.

By contrast, a well-managed portfolio of select corporate bonds, equities, property and infrastructure can deliver an attractive and predictable income stream that is stable and can be expected to rise over time. In order to achieve a sustainable income stream, however, investors do need to accept some short-term volatility in the capital value of their portfolio. There are many companies with dividends that are stable or rising but with share prices that nonetheless move through a 25 per cent range over a year.

Jeff Rogers, the Chief Investment Officer of ipac funds in AMP Capital’s Multi-Asset Group, said: “A strategy based on term deposits is exposed to high income variability over time but benefits from low capital volatility. It is good for people with a specific short-term spending goal because you know your initial investment is safe. But it is a risky strategy for meeting the goal of achieving a sustainable income stream over an extended period. The fluctuations in cash rates are just too large. Importantly, while interest rates will undoubtedly rise again in the future, retirees need to recognise that the average level of cash rates in the years ahead is most likely to be lower than our experience during the past 30 years.

“A diversified portfolio of bonds, shares and real assets can be managed to meet the goal of a predictable and sustainable income stream that rises progressively over time although it will exhibit capital volatility as the price of the securities goes up and down. This stability of income can be achieved through the selection of investments with specific characteristics: high-quality corporate bonds with fixed coupons, shares of quality companies whose management is committed to delivering rising dividends to its owners, property assets with long-term rental agreements and infrastructure assets with inflation–linked contractual cash flows.

“The most important thing is for people to be clear on what they’re trying to achieve and then identify an investment strategy best tuned to meet that goal. A financial adviser can help retirees identify and articulate their goals, recommend a strategy that is right for them and their circumstances, and help deal with the challenges and uncertainties on the journey.”

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Craig Keary

AMP Capital has launched a website for financial advisers to help them have conversations with their clients about goals-based investment strategies.

Goals-based investing is an approach whereby an adviser identifies a client’s goals first and then develops investment portfolios that aim to specifically help meet each of those goals.

The new website provides advisers with insights into goals-based investing: what it is, how it is different from current investment approaches, typical goals and risks, and the priorities that clients generally set around their goals.  Content will be continually added to the site so that it becomes an ongoing resource for advisers.

AMP Capital Head of Retail and Corporate Business Craig Keary said: “A goals-based approach puts the client at the centre of the investment process.  Rather than start with an investment product, advisers start with a client need; for example, achieving a certain level of monthly income, going on holidays every few years or leaving an inheritance.  Many advisers already use this approach and we want to make it easier for them to have conversations with their clients about it as well as help advisers who are new to goals-based investing implement it in their practices.

“Goals-based investing is a strategic priority for AMP Capital.  We’re seeing increased demand for goals-based funds from advisers and clients and intend to expand our range as well as deliver more goals-based tools for advisers during the course of the year.”

Jeff Rogers, the Chief Investment Officer for ipac and a member of the AMP Capital Multi-Asset Group, is leading the development of the firm’s new goals-based offerings.

Mr Rogers said: “Success of a goals-based strategy is not about outperforming benchmarks or competitors.  Rather, it is measured by how well a client’s portfolio is tracking against their stated goal.  It’s about being more relevant to investors and their needs, not only in terms of product design but also through ongoing communication and reporting.”

AMP Capital has created new-look, customer-focused performance reports for its goals-based funds in conjunction with advisers and customers.  The reports focus on the tangible outcomes the funds aim to achieve rather than their performance against a benchmark, making them more engaging and relevant for advisers and customers.

Advisers can access the website at http://www.ampcapital.com.au/goals

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