FIRPTA is a US tax levied on foreign persons when they dispose of real property interests.

Russell recommends superannuation investors construct broad multi-asset portfolios designed to meet their specific investment objectives. Alternative investments, including direct property and infrastructure, locally and overseas, are important components of this multi-asset approach.

“Russell’s own multi-asset portfolios are continually evolving to take advantage of new investment opportunities as they arise,” said Andrew Sneddon, Managing Director and Portfolio Manager, Multi-Asset Solutions.

“The potential abolition of FIRPTA tax prima facie makes future investments in US real estate more attractive and we are currently looking to enhance our range of multi-asset portfolios with allocations to direct property and infrastructure in the US as well as Europe and Asia,” said Mr Sneddon.

Samantha Steele, Senior Research Analyst, Alternative Investments said, “While Australian institutional investors have long discussed the need to capture global property opportunities, it seems this tax announcement may be the tipping point which will see a more definite move offshore for many funds.

“US direct property and infrastructure provide attractive opportunities for Australian super funds as part of their global real estate / infrastructure portfolios. The increasing scale of Australian funds means they are looking offshore,” said Ms Steele.

In addition to revising its own multi-asset portfolios, Russell recommends funds update their asset allocation models to highlight the increased attractiveness of US direct property and infrastructure relative to other asset classes, if the reforms become law.

Traditionally many super funds have shunned this investment opportunity because the US tax cost is too large. FIRPTA can erode 35-40% of the investment income and is not refundable to the Australian super investor. This is far higher than the maximum 15% tax that Australian super funds face.

In Australia, Russell can advise Australian investors on offshore real estate / alternative investment through its ready access to the global team’s experience and insights, to assess whether and which US property and infrastructure investments are appropriate for its multi-asset portfolios.

Ms Steele said super funds looking for investment opportunities in alternatives should now consider the increased attractiveness of US property and infrastructure in after-tax terms. Equally, super funds that have relegated this asset class to ‘no go’ status for tax reasons should now reconsider.

“Prime real estate in the US has recovered strongly since the global financial crisis and is close to pre-crisis pricing. That said the asset class still looks cheap on a relative basis when compared to historical yield spreads versus treasury and corporate bonds.

“While capital appreciation may be moderating, investors should still be able to achieve 7-9% total returns over the next few years, much of which will be income. Positive tailwinds for the asset class are substantial demand, a dearth of new construction, low interest rates and benign inflation,” Ms Steele said.

In late 2011 Russell released a report highlighting Australian investors were planning to increase their allocation to global non-listed property by as much as 34%. The groundbreaking research was conducted by Russell Investments, the Asian Association for Investors in non-listed Real Estate Vehicles Limited (ANREV) and the Australian Institute of Superannuation Trustees (AIST). Foreign tax drag was highlighted as a key deterrent for 43.6% of investors in the 2011 Survey, with many particularly cautious about the US.

“Australians are savvy property investors, and are clear-eyed about the opportunity to diversify their property holdings and bolster their offshore expertise. However there are still numerous challenges and super funds will need to negotiate this new territory prudently,” Ms Steele concluded.

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The risk vs. return analysis is developed annually as a practical reference tool for advisers and investors, charting the annual returns of different asset classes over the last three decades. The analysis demonstrates how the returns of various asset classes differ significantly year to year and over the long-term.

While A-REITs achieved an impressive 32.8% return in 2012, making up for losses in previous years, the long term perspective of Russell’s analysis highlights the importance of investing in a well-diversified, multi-asset portfolio.

Despite month to month volatility from concerns about Europe, U.S. fiscal cliff negotiations and a Chinese slow down, most asset classes returned at least high single digit if not double digit returns in 2012. Australian equities and global shares (hedged) delivered nearly 20% and global shares (unhedged) delivered 14.7%, pushing the 2011 performance winners – Australian and international bonds – from the top spots. Even with this fall, bonds returned solid results with Australian bonds at 7.7% and international bonds at 9.7%.

Once again, those ‘playing it safe’ by sitting on the investment sidelines in cash during 2012 would have missed out on the strong performance of growth assets, with cash only returning 4%.

Director of Client Investment Strategies at Russell Investments Scott Fletcher said: “The risk-on, risk-off volatility is likely to continue in the foreseeable future and the risk vs. return analysis demonstrates the value of diversification, particularly in this environment. The results of the analysis continue to support our belief that a well-diversified, multi-asset portfolio which adapts to a changing environment, is the best way to more consistently achieve investors’ goals.”

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The global asset manager says building a post-retirement solution is a complex task for funds, due to the numerous variables unique to their member profile and business objectives, but not impossible.

In the new paper Retirement Solutions: A Roadmap for Super Funds, Russell sets out a defined series of six steps funds can take to develop suitable post-retirement solutions, taking into account variations in member needs and circumstances, plus the fund’s objectives.

Russell Investments Australasia CEO, Chris Corneil said: “Funds can’t afford to wait for the answer to post retirement products to just magically appear. We have an aging population, quickly approaching retirement and current offerings aren’t going to meet the challenge. But despite that imperative there is no clear market direction. Different organisations are proposing often conflicting solutions. For example some organisations are arguing for more equities in retirement to provide growth whereas other organisations argue for bonds to provide protection against adverse markets. This paper is designed to provide a framework for funds to find an answer to those conflicting messages and offer members a new breed of solutions that will provide acceptable post retirement outcomes,” he said.

Russell’s six steps guides superfunds through; understanding the membership base; articulating the fund’s philosophies; identifying objectives and strategies of the retirement solution offering; evaluating current and needed organisational capabilities; determining required components of a solution and how they fit together and finally the implementation – selecting providers, execution, monitoring and reviewing.

Mass customisation – the minimum standard
While the roadmap suggests that there isn’t a single right answer for all superfunds the paper draws some important conclusions as it works through the six steps.

One of the critical areas Russell says funds need to respond to is offering a tailored approach to asset allocation for a large number of individuals, or mass customisation. Mass customisation involves using members’ individual goals and objectives, spending needs, account balance and risk tolerance as inputs to arrive at tailored investment solutions for each individual member.

Tim Furlan, Director of Superannuation at Russell Investments said: “We believe mass customisation is the minimum standard of asset allocation advice that funds should deliver and members have the right to demand. Many of the differences in views we encountered when developing the guide weren’t because some people were right and others were wrong. But because different solutions are appropriate for different retirees depending on their circumstances. Mass customisation is the way that we can deliver solutions that are right for the particular circumstances of individual retirees in a cost effective manner.”

One solution Russell is presenting to Australian clients is the Russell Adaptive Investing (RAI) methodology for creating customised solutions for members on an individual basis. Russell likens the RAI methodology to a ‘second generation lifecycle approach’, designed to give members an optimal asset allocation. An important part of this approach is the recognition that simple and single asset investment solutions will be inadequate, and that a multi asset approach needs to be adopted to address post-retirement income needs.

Using member data normally held on an administration system, the methodology adapts to market impacts and each member’s changing needs and circumstances, delivering a personal portfolio on a scalable basis.

“There has been resistance to these types of strategies due to perceived implementation inefficiencies but we’d argue it can be implemented effectively and efficiently. Both the roadmap and RAI recognise that we need to put member’s needs first by looking at each member individually to adequately meet their income issues. The focus on asset allocation doesn’t mean that we’re ignoring the risk of outliving your savings. What we found is that investment risk overwhelms longevity risk early in retirement, so investments are where we need to start. ” Mr Furlan said.

In conclusion Mr Corneil said: “An individual’s retirement outcome isn’t solely determined by their account balance on their last working day. According to Russell’s 10/30/60 Retirement Rule*, as much as 60% of investment earnings are generated in the post-retirement phase, so the key point we’d stress is – the post retirement phase is too important to be sidelined due to perceived complexity. Implementing appropriate solutions isn’t as hard as many believe and it’s something we as an industry have to do.”

*According to the Russell 10/30/60 Retirement Rule, the sources of your investment earnings during retirement approximately follow the following breakdown: 10% from money saved during working years, 30% from the growth of savings before retirement and 60% from growth that occurs during retirement.

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This season the market has delivered a 9% increase in dividends to investors compared to the previous reporting season. The growth has been captured by Russell’s high dividend and high value indexes as per data from the semi-annual reconstitution of these indexes, released today.

The Russell Australia High Dividend Index, which forms the basis of the Russell High Dividend Australian Shares ETF (RDV), has benefitted from the dividend growth by capturing companies with an emphasis on forward looking dividends and those with more stable earnings profiles. A table of the new top holdings in both indexes is included in the notes to editors.

“In this period of lower growth forecasts and heightened volatility, companies are taking the prudent approach and returning capital to shareholders instead of reinvesting cash. This has resulted in Australian companies delivering actual income for investors,” said Scott Bennett, Russell Portfolio Manager.

For investors in RDV this has provided an additional 2% (including franking credits) in income than the market, well above current term deposit rates. Some of the surprising income performers identified in the semi-annual reconstitution of the Russell Australia High Dividend Index are:

• BHP – increased its dividends as a result of the April buyback and confirmed strong dividends going forward. This is consistent with the RDV index methodology of increasing exposure to companies with solid dividend prospects.
• Newcrest – paid a dividend of $0.20 per share and announced a special dividend of $0.20. While noting the yield on Newcrest is still low, its dividend has benefitted from the stronger price of gold. Newcrest has had strong dividend growth over the last five years rising from $0.05/share to $0.50/share.
• Coal & Allied Industries (CNA) – CNA accepted a joint takeover bid which will result in a grossed up dividend of $11.42 per share, with a share price of $122.50 providing an attractive 10% dividend.

Value to be found in resources as financials lose “cheap” appeal
Regarding the Russell Australia High Value Index, Mr Bennett said the index has been selling down its exposure to banks which have recently outperformed the market and instead buying into resources which have recently underperformed.

“In stock movements this translates into buys of BHP and Rio and selling down the banks, in-line with our strategy of providing investors with an easy access point to a disciplined buy low, sell high, investment strategy,” he said.

The index, designed to systematically buy companies trading “cheaper” and sell those whose prices look “expensive” relative to the broader market, had recently changed its position from earlier in the year as the value opportunities shifted.

“Contrary to the direction taken by many investors earlier in the year, Russell’s High Value Index saw value in financials at a time when market watchers were shying away, and went underweight resources while they were experiencing a rally,” Mr Bennett said.

The strategy has paid off with the index outperforming the broader market since its launch in April 2011.

Russell ETFs outperform
The strong performance of Russell’s proprietary indexes has also helped its custom built ETFs – the Russell High Dividend Australian Shares ETF (RDV) and Australian Value ETF (RVL) – to outperform the broader market. RDV has delivered investors a 7% yield (annualised) before franking credits, close to 2% more than the broader market. And RVL, launched in April, has outperformed the broader market by 0.8% by identifying relatively cheap and undervalued stocks.

“The performance of Russell’s ETFs shows us even during trying market conditions, there are other opportunities for investors than traditional capitalisation weighted indexes,” Mr Bennett concluded.

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Russell’s Volatility Toolkit offers daily perspectives on changes in capital markets relying on its strong team of over 500 global investment professionals. It also contains a range of educational articles covering topics such as: ‘behaviours that threaten your financial security, ‘investment strategies for the worried and confused; and ‘how you can learn from volatility’ with historical overviews of previous market cycles.

Investors are also given tips on how to ride what Russell has coined the ‘cycle of market emotions’, enabling them to better distinguish between points of maximum financial risk and maximum financial opportunity in the markets.

The new toolkit follows the launch of Russell’s Helping Advisers website in July this year. Russell’s Chief Executive Officer for Australasia, Chris Corneil, said the toolkit was part of Russell’s ongoing commitment to improving investor education. 

“Given the recent market movements and the likelihood of continued volatility, it’s not surprising investors are experiencing some anxiety and uncertainty. We have a responsibility to give investors as much guidance as possible so they can make more informed decisions about their investments now and in the future,” he said.

The toolkit also offers institutional investors up to date information on how Russell’s own portfolios are being managed and adjusted to deal with and take advantage of market volatility. To support clients through this period and help them manage stakeholder concerns, Russell’s institutional and adviser clients will be able to re-issue any materials from the online toolkit. Materials, including videos, will be accessible to all online and via Twitter.

Russell’s market outlook

Russell’s believes the US and global economies will continue on a path of gradual recovery, even though that recovery is fragile and sub-par.

“We think market sentiment is fluctuating more dramatically than changes in the underlying economic fundamentals. For this reason, we don’t recommend investors reposition their portfolios to cash at this time. Well-diversified portfolios will cushion the effects of market volatility,” said Andrew Pease, Chief Investment Strategist, Asia Pacific at Russell.

According to Russell, for many investors with well-diversified portfolios and a medium to long-term perspective, staying with their strategic asset allocation is in most cases a preferred option.

“The current market volatility may cause actual asset allocations to diverge from their strategic benchmarks. We would encourage investors to rebalance their asset allocation as volatile markets take them away from their long term strategic asset allocation,” Mr Pease added.

“Like all investors we are riding the rollercoaster of volatility but we are confident our team of experts have the knowledge and experience necessary to guide us and investors through this challenging time,” Mr Corneil concluded.

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