“The global financial crisis has focused investor attention on one kind of risk, market risk – the risk associated with market volatility – and whether we are still in a bear market.

“As a result, investors have made avoiding or minimising this risk their priority, resulting in them keeping most, if not all, their money in cash, rather than focusing on their ultimate goal which is a retirement income that will last.

“Even now, when volatility has largely returned to pre-GFC levels, many investors are still keeping a significant proportion of their retirement savings in cash options such as term deposits, in the belief that this is the least-risky strategy.

“However, while this approach minimises market risk, it exposes investors to a number of other risks including inflation risk, income risk and opportunity risk,” Mr Dickman says.

He said that inflation risk, which is when higher levels of inflation eat away at returns and capital, is a major issue for those who have money in term deposits.

“As the interest rates offered on term deposits fall – as they are already starting to do – the return on the capital will also decrease.

“Inflation also means that capital locked up in a non-growth asset will have less value at the end of its two, three or five year term.

“Opportunity risk is associated with this. If the money is locked away in a term deposit for two, three or five years, it is money that can’t be used elsewhere – therefore opportunities for better returns and capital growth are being missed,” he said.

Mr Dickman added that perhaps the biggest risk for investors at the moment is income risk.

“Investors who took their money out of other investments to put into cash when the government introduced the bank guarantee have most likely sacrificed income.

“Term deposits may seem a safe haven now, but people probably don’t realise that this choice means they have introduced future income risk into their portfolio.

“With the first of the baby-boomer generation now entering retirement, as well as the trend of longer life expectancy, a stable, regular income will become a priority. This is something people won’t get from a term deposit where the interest is usually paid at the end of the term.

“Indeed, the burgeoning ageing population, combined with the higher health costs associated with people living longer, makes it even more important for Australians to be adequately prepared to fund their retirement.  A potential risk in its own right is relying on future governments to pick up the tab for those who run out of money.

“Therefore retirees in particular need to consider other investments, and find a balance between their desire for low-risk investments and their need for returns that will generate ongoing income in their retirement.

“It comes back to the value of taking a balanced approach through a diversified portfolio, and understanding that different investments offer different benefits, returns and risks.

“No single investment will provide investors with all three elements of high liquidity, high returns and low risk, so a combination is needed.

“Diversity also helps to manage all types of risk.

“Investors must assess each individual asset class on its own merits and make investment choices based on their own needs of income, liquidity, growth and risk,” Mr Dickman said.

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RaboDirect, the online savings and investments bank, has again turned up the heat on the term deposit market, this week announcing a market-leading rate of 7.15% p.a. on its five year term. The bank already offers the best rate for a one year term deposit with 6.60% p.a. and is delighted to again be providing all customers the opportunity to gain the best returns – with both the one and five year rates also available to DIY Super and business customers.

The RaboDirect one and five year term deposit interest rates are available from this week, for balances up to $1 million. The leading rates are offered on a per annum basis; however RaboDirect also offers the option for term deposit interest to be paid monthly, quarterly, or half yearly or yearly. This allows customers to select the payment timing that best suits their financial needs.

Greg McAweeney, General Manager of RaboDirect said: “Term deposits continue to offer above average returns as investors remain cautious about volatile equity markets. Customers want to save with a bank that offers consistently competitive term deposits that are not here today and gone tomorrow which is often a feature of the market. RaboDirect has been delivering on this promise. Customers also have the peace of mind of saving with the online banking division of Rabobank, the world’s safest privately-owned bank.”*

“The beauty of term deposits is that they provide a guaranteed return as well as great rates, as our one and five year market-leading offers highlight. And because you can opt to take your interest monthly, quarterly or half yearly, locking your funds away on a secure five year term still allows you access to the interest. This is especially beneficial for retirees who are in the capital preservation stage.”

A RaboDirect term deposit can be opened online in minutes with a minimum balance of as little as $1,000.

Log on to www.rabodirect.com.au for more information about its term deposit products and relevant investment strategies, as well as its high interest savings accounts.

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The latest Tria Investment Partners Industry Fund Review shows the top 10 funds account for more than two thirds of total Industry Fund assets under management, and growing.

“The big are getting bigger, applying pressure on trustees of the smaller Industry Funds (IFs) to shore up their respective future positions via growth or consolidation,” said Tria Investment Partners managing partner Andrew Baker.

Overall, the Industry Fund segment grew by 17 per cent in the year to June 30, 2010 – thanks largely to a return to positive investment returns and continued strong net inflows.  The only superannuation sector to outpace this growth was the self-managed category which continues it remarkable growth.

“For industry funds, it was the combination of strengthened investment returns and strong net inflows that delivered a healthy growth environment across the sector,” Mr.  Baker said.

But it was off-market merger activity that has proven most potent.

“The 2010/11 Industry Fund Review confirms our prediction that the market would continue to segment into the categories of leaders, followers, and the tail. We have seen three funds out of the eleven in the followers category (EquipSuper, Health Super and Westscheme) announce consolidations in the past year,” Mr Baker said.

Of the leaders, the largest, AustralianSuper, grew its market share to 15.1 per cent (up from 14.9 per cent the previous year) to June 30 2010. More recently, AustralianSuper has announced its intention to merge with WA-based Westscheme, a move which will further entrench market dynamics while creating a $40 Billion market leader.

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Fixed interest manager PIMCO Australia’s EQT Diversified Fixed Income Fund has been awarded a ‘Highly Recommended’ rating by Lonsec, in its first rating of this fund.

The actively managed DFI fund provides a broadly diversified exposure to domestic and international fixed interest markets by investing 50% in the PIMCO Australian Bond Fund and 50% in the PIMCO Global Bond Fund. The fund will at times also have a modest allocation to high yield and emerging markets debt.

“This rating primarily reflects Lonsec’s regard for the depth and quality of PIMCO’s investment team which is focused on top down and bottom-up analysis. Lonsec believes PIMCO benefits from a well established top down and bottom up portfolio construction process with highly formalised and disciplined decision making covering duration, yield curve and sector positioning, driven by its Global Investment Committee,” said Andrew Coutts, Lonsec senior investment analyst.

The global portfolio is managed in the US by PIMCO founder Bill Gross, with the domestic portfolio managed by Rob Mead.

“Lonsec regards Rob Mead as a quality investment professional with significant experience in the industry and with PIMCO,” Mr Coutts said.

The Lonsec review “notes that the Fund has exhibited the strongest track record in the Lonsec Peer Group of outperformance across both ‘down’ (63%) and ‘up’ (68%) markets over the three years to November 2010, with ‘all’ markets outperformance for the Fund also being 67% compared to the Lonsec Peer Group’s average of 49%.”

Lonsec notes the Fund’s ‘total return’ approach implies a degree of indifference as to the source of returns either from income/distributions (e.g. coupons) or growth (e.g. asset price growth).

“This may result in significant active positions away from the benchmark in an attempt to add value for investors,” said Mr Coutts. The Manager believes that focusing on the on longer term (3-5 year) secular trends presents better opportunities for the Manager to outperform relative to the broader market.

“Lonsec is pleased with PIMCO’s renewed emphasis on risk management, including the development of advanced risk management and portfolio monitoring systems,” Mr Coutts said.

The fund is managed to maximise total returns, with a target tracking error of 2-3% relative to a composite benchmark, which comprises the Barclays Capital Global Aggregate Bond Index hedged to Australian dollars and the UBS Australian Composite Bond Index.

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According to Mr McNeill, Aviva Investors has seen strong signs that the listed property sector is recovering from its ‘self inflicted wounds’, largely driven by a return to the fundamentals that stood it in good stead prior to 2005: conservative gearing, good management, and ownership of high quality properties.

“The role of listed property as a defensive asset class offering reliable returns and high liquidity even during the tough times is one that was forgotten when many listed property trusts (also known as REITs – Real Estate Investment Trusts)  took their eye off the ball in the chase for frankly unrealistic and certainly unsustainable returns,” said Mr McNeill. “Such strategies included the use of excessive gearing, unsuccessful forays into overseas property markets and corporate structures that failed to focus on shareholder value.

However, according to Mr McNeill, many REITs have learned their lesson, cleaned up their portfolios and strategies, and refocused on the basics. And investors should be the beneficiaries.

“There’s an increasing number of REITs now able to offer investors what they should always have had from their listed property investment – that is, exposure to high quality, diversified real estate portfolios that deliver an attractive, sustainable and growing income stream,” he said. “These options may not be glamorous but they are solid, effective and reliable.

“Investor interest in the sector has definitely increased. We’re meeting and briefing an increasing number of advisers and they are very pleased to hear our current views on how the listed property sector has improved, as it enables them to offer their clients a relatively low risk investment with the income returns they want,” he said. “Even advisers who’ve been burnt in the past are now revisiting the sector and looking for a managed fund that has a simple structure, full liquidity and offers exposure to a diversified portfolio of good quality REITs.”

According to Mr McNeill, three REITs that illustrate Aviva Investors’ current view on listed property are:

• Bunnings Warehouse Property Trust. “This has been a good performer over the last five years, with growing income distributions, quality management and conservative gearing,” he said. “It is an example of how a simple, old fashioned property trust can meet the risk and return objectives of REIT investors.”
• GPT Group. “GPT is probably the best example of the sector’s back to basics approach, having fixed its balance sheet, simplified its strategy and returned to its position as an owner of some of Australia’s best commercial property assets,” said Mr McNeill.
• Westfield Retail Trust. “This spin off of 50% of Westfield’s Australian and New Zealand shopping centre portfolio has been designed as a simple old-fashioned REIT, focused on owning quality property and paying out the majority of its net income as a distribution to investors,” said Mr McNeill.”

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