Matt Schiffman

The majority of Australian investors believe the investment environment facing their younger counterparts will be more difficult, according to Legg Mason’s 2014 Global Investment Survey.

The survey, which looked at the attitudes of 4,200

affluent investors in 20 key markets, found Australian investors were particularly concerned when it came to the long-term future of the investment landscape.

Overall, 70% of Australian respondents felt investment prospects would be worse for future generations. Only 45% believed they were currently doing very well or extremely well at saving for retirement.

Legg Mason’s Global Head of Distribution Marketing, Matt Schiffman, said the results demonstrated the significant challenge ahead for local investors to achieve their investment goals.

“Australians as an investor group display a larger level of concern at the way the investment landscape is changing”, said Mr Schiffman. “Low interest rates and rising property prices are impacting the ability of their younger family and friends to get on the investment ladder, and they are searching for new opportunities to generate the income they need.”

‘Reality gap’ persists for Australian investors

The survey also identified a significant gap between those investment returns Australian investors expect to get, and what they are actually receiving. While investors expected an average 9.2% annual return, the survey found they were currently receiving 6.2% on average – a ‘reality gap’ of 3%.

Interestingly, although Australians invest 10% more in property than the global average, and give property the highest allocation out of all their income producing investments, the ‘reality gap’ was most pronounced in property investment. Australians’ property investments yielded them an average of 3% per year, well below the expected 9.2%.

“Australians have a well-documented love affair with property, but current low average yields in this sector are affecting income opportunities for investors,” said Mr Schiffman. “We found returns were closer in line with expectations for asset classes like equity income and guaranteed income products, which were less popular with Australian investors.”

Emerging economies present best opportunities

When it comes to global investments, the survey found Australian investors are increasingly looking outside of traditional investment destinations and towards emerging economies. Two thirds (66%) of Australian investors believe China presents the best international investment opportunity over the next 12 months, while over half (55%) saw opportunities in emerging markets in general.

However, the incidence of overseas investing among Australian respondents was generally low compared to the global average. Less than two thirds (60%) of investors allocated more than 1% of their portfolio to international investments, while only 40% had increased their focus towards global opportunities in the past five years.

“Australians are generally more reluctant to look outside of their home market for investment opportunities,” said Mr Schiffman. “This could be a result of tax efficiencies and compliance issues that serve to reinforce the home bias, as well as a generally risk-averse investment style – 77% of investors described themselves as ‘conservative’ in outlook.”

Australian advisers compare favourably

The Global Investment Survey also examined investors’ attitudes to their advisers. Australian advisers scored better than their overseas counterparts when it came to tailoring advice (43% of investors rated their adviser well in this regard) and taking time to know their client (45%), but were below the global average in bringing clients unique investment opportunities (30%) and asking the right questions (30%).

Mr Schiffman said the findings presented important insights as to how Australian advisers could improve the client experience. “While the standard of advice in Australia is comparatively high from a global standpoint, opportunities exist for advisers to improve their service offering, particularly around responding more rapidly and comprehensively to client needs,” he said.

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The appointment follows significant growth in the Australian business, with Legg Mason recently recording its best year of inflow.

Beau Titchkosky, Head of Sales for Legg Mason Australia said, “Colin’s appointment underpins our longer term growth plans and reflects the success of our business in developing tailored solutions under our hybrid distribution model. In building out our team we have looked for a strong blend of technical knowledge and relationship skills that can help us provide an edge in the way we service the Australian and New Zealand markets.”

The Australian sales team has progressively expanded with other more recent hires including Sales Directors Nathan Masalski from AllianceBerstein in 2012 and Ben van Den Tol from ING Commercial Bank in 2013. The growth in the Australian sales team is part of a continued strategy to build momentum more broadly, and this may potentially result in further appointments in the future.

Beau said the environment was positive for further expansion of the sales team. “Legg Mason in Australia is receiving continued and growing support from a range of asset consultants, multi-managers and dealer groups and our goal is to deliver on their expectations from an investment performance and relationship perspective.”

Colin joins Legg Mason after three years at JP Morgan as Vice President, Institutional Business. His previous experience also includes 11 years at UBS in London where he was most recently promoted to Executive Director, Head of Prime Brokerage.

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Australian income investors hoped for an average income return of 8.4% from their investments, however, respondents reported their actual return was 5.7%, on average – almost 3% less than hoped.

Legg Mason head of Global Marketing Matt Schiffman said that the ‘reality gap’ of -2.7% was significant in the current environment: “Three quarters of Australian investors say they are seeking out better income opportunities and a similar proportion want to become more knowledgeable about the opportunities available.

“But close to four in 10 indicated they do not have a good understanding of the income producing products available to them and 85% of investors want their adviser to bring them more income opportunities,” Mr Schiffman said.

The overwhelming majority of Australian investors (71%) are conservative when it comes to investing in income generating products. Nonetheless, 69% of investors say income is now important or extremely important to them.

This emphasis has increased in recent years, with 60% of respondents saying income is somewhat more important or much more important to them than it was five years ago.

Of the thirteen countries surveyed, Australians have the highest holdings of real estate investments (27%) after Germany, and the lowest proportion of equities (19%) after France, in their overall investment allocation. This is compared with other developed nations like the US (which has 7% real estate and 39% equities) and the UK (which has 17% real estate and 27% equities).

“Australians’ well known love-affair with real estate is reflected in the findings. But when it comes to income generating investments, Australians may be better placed to diversify more strongly beyond real estate, and increase their allocation to equity investments that pay a high level of income, which may also provide them with the added advantages of dividend imputation,” said Mr Schiffman.

Australian investors were also among the least likely to invest for income internationally (58%) due to concerns about global uncertainty and levels of risk involved.
 
Global Investment Trends
Around the world, income investors are seeking, on average, an annual investment return of 8.9%, but in reality are receiving 6.1%: a shortfall of 2.8%.  Despite this, only 54% of investors globally are prepared to take on more risk to make up this shortfall.

Asian investors take out the top three positions in willingness to assume more risk for a higher yield, with large majorities of investors from China (77%), Singapore (73%) and Hong Kong (63%). However, Japan is the exception to the rule with just 36% prepared to take on more risk.

The most unrealistic investors are from Taiwan, as they expect an annual return of 10% compared with an actual return of 6.0% (representing a ‘reality gap’ of -4.0%). Chinese investors have the highest outright return expectations at 10.5%, leaving a -3.4% gap between their preferred return and their actual return of 7.1%.

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As fears of a sell-out of fixed interest assets build, investors should look beyond large developed bond markets, to Asia and to Australia, for less volatility and potentially higher returns, according to Legg Mason affiliate Western Asset.

During the GFC, many investors fled to the safe haven of fixed interest , but concerns are now surfacing as to whether there could be a sell-off in developed markets like the US, Europe and Japan.

According to Western Asset, not only do Asian and Australian bond markets represent good value in their own right, they are also less susceptible to global events causing market jitters, such as a potential US double dip.

“If you are concerned about global uncertainty, such as the possibility of a US double dip recession, then Asian and Australian bonds are the place to be,” said Rajeev De Mello, head of Singapore fixed income at Western Asset. “During the last quarter of 2008, for example, Asian bonds proved resilient to the global sell-off.”

Why Asian bonds for Australian investors?

A decade ago the Asian region was considered an emerging market, but economic fundamentals have improved for many countries. Several regional bond indices have been created in recent years and bond funds can provide ready access for foreign investors.

“There are still a lot of myths around about Asian bonds being risky and illiquid, but with governments across the region putting their houses in order, and yield rates attractive, the risk/return equation is looking really good,” said De Mello.

As well as representing good value and stability, Asian bonds are also attractive as a currency play. China’s recent change to its exchange rate regime is likely to lead to faster appreciation of Asian currencies in the medium to long term, while increased investment in the region will also support currencies.

“Foreign ownership of local currency bonds across Asia has already begun, with around 27% of Indonesia’s bond market held by foreign owners. Singapore has around 20%, while Thailand has less than 10% but China and India have less due to entry barriers for foreign investors”, said De Mello.

Korea has also been one of the main beneficiaries of cross investment within Asia and is one of the most liquid and highly rated bond markets in the region.

De Mello adds bonds provide good diversity for a portfolio, for an Australian investor, but are also more straightforward than some other more structured/indexed fixed interest products available.

The ‘kangaroo effect’

Australian fixed interest has also been attracting the attention of foreign investors, due to its good yields and positive outlook.

However the so-called ‘kangaroo effect’ is also taking hold, with many foreign corporates now choosing to issue bonds in the Australian investment grade market.

“It is now possible to issue long-dated bonds, with terms of up to 10 years, bringing Australia into the ‘big league’ of bond issuers like the US. This is a sign that the local market is really developing,” said Anthony Kirkham, head of investment management for Western Asset Australia.

“Australia is now becoming a destination of choice for corporate bond issuance, and we predict many more entrants will come.”

Kirkham recommends that investors target a fixed interest fund that offers a diversified selection of companies and sector allocations when looking to invest in Australian bond markets.

“It is also important to look for stable returns, and having a globally integrated research capability helps,” Kirkham said.

The Legg Mason Australian Bond Trust is ranked as the top performing Australian (Core) Fixed Income fund over one year in the Mercer August 2010 Survey.

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