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Author: Provision Wealth

Where are we in the search for yield? Is it about to reverse as the Fed starts quantitative tightening?

Date: Sep 21st, 2017

For some time now, the investment world has been characterised by a search for decent yield paying investments. This “search for yield” actually started last decade but was interrupted by the Global Financial Crisis (GFC) and the Eurozone debt crisis before resuming again in earnest. 

When investment assets are in strong demand from investors, their price goes up relative to the cash flow (eg dividends, interest or rent) they provide pushing their yield down. This is evident in recent times in response to the “search for yield” with yields falling across the board as the next chart shows. 

Source: Bloomberg, REIA, RBA, AMP Capital

But everything goes in cycles. So has the “search for yield” gone too far? Will the US Federal Reserve’s shift to start reducing its bond holdings cause a reversal? 

Drivers of the search for yield

Interest in yield based investing is not new and is in fact a normal part of investing. Particularly when investors are a bit wary about going for growth. In fact, in Japan it’s become pretty much the norm as interest rates have been stuck at zero for years. In the 1950s, yield focussed investing was the norm in the US and Australia. The search for yield also became apparent last decade and played a role in the GFC itself (as investors piled into yield based investments underpinned by “sub-prime” mortgages, oblivious of the risks). There are three main drivers of the “search for yield” in recent years:

  • First, low interest rates and bond yields and the flow on to bank deposit rates due to low inflation and sub-par growth have encouraged investors to search for higher yielding investments. Central banks buying up bonds and displacing investors into other assets have accentuated this.

  • Second, reduced fear of economic meltdown (as the GFC and subsequently the Eurozone public debt crisis subsided) has helped investors feel comfortable in taking on the greater risk that this entails. 

  • Finally, aging populations in developed countries is seeing baby boomers move into pre-retirement and retirement, driving a demand for less volatile investments paying income. Normally, this demand would go to bonds and bank deposits but as their yields are so low some of this demand has gone into other yield paying investments.

Demand for yield from aging populations has further to go as populations age. For example, in Australia the share of the population aged 65 and over is projected to rise from 15% now to 22% by 2061. However, the second driver is cyclical and will reverse next time there is a sustained bout of risk aversion – just as it did in the GFC. 

The first driver is a mix of structural and cyclical influences, though, and it’s probably been the main driver of the search for yield. Bond yields and interest rates have been trending down for 30 years or so and this is structural reflecting a downtrend in inflation, which resulted in a long-term super cycle bull market in bonds. But falls this decade also contain a big cyclical element reflecting the sub-par global growth and deflation seen after the GFC. This accentuated the super cycle bull market in bonds and put the search for yield on steroids. This is where the greatest risk of a reversal in the search for yield trade lies.

The logic of falling yields 

The search for yield is understandable and can be seen in relation to Australian commercial property ie office, retail and industrial property. The next chart shows average commercial property yields and 10-year bond yields. While average commercial property yields have fallen since the early 1980s from an average of 8.3% to around 5.5%, the yield on bonds has crashed. The longer the decline in bond yields has persisted, the more investors have expected it to continue, driving rising demand for higher yielding assets like property.

Source: Bloomberg, AMP Capital

With Australian 10-year bonds yielding 2.8%, it’s little wonder investors might find commercial property on an average yield of around 5.5% more attractive particularly once capital growth of, say, 2.5% pa (ie inflation) for a total return of 8%, is allowed for. The property risk premium – the return potential property provides over bonds – at 5.2% remains high & well above early 1990s and pre-GFC levels that caused problems for property.

Source: Bloomberg, AMP Capital

The same logic applies to investment in assets such as unlisted infrastructure, listed variants of both commercial property and infrastructure, shares and corporate debt.

But are we getting close to a reversal?

Has it gone too far? The greatest risks are around corporate debt where the gap between US investment grade and junk bond yields and US government bond yields has narrowed sharply to around levels that prevailed prior to the tech wreck and again prior to the GFC. But as we saw in the mid-1990s and mid-2000s, spreads can remain low for a while before trouble arises, which is usually when the economy turns down and there is no sign of that just yet. 

For equities the gap between the forward earnings yield on shares and bond yields has narrowed in recent years. But this gap – which is a guide to the risk premium shares offer over bonds – still remains relatively wide by pre GFC standards.

Source: Thomson Reuters, Bloomberg, AMP Capital

And finally for real assets, using commercial property as a guide, as indicated earlier the risk premium offered by commercial property relative to bonds remains wide, albeit it has narrowed as property yields have fallen and bond yields have risen (a bit). Overall, it’s hard to argue the search for yield has gone too far given how low bond yields still are. That said, corrections like what we saw in shares and corporate debt during 2015-16 are healthy in ensuring this remains the case.

But what about the risk of an upswing in bond yields, particularly with the Fed moving to quantitative tightening? This is the biggest risk and our view is that the super cycle bull market in bonds is over. See “The end of the super cycle bull market in bonds?” which can be found at There are several reason for this:

  • First, global growth is looking stronger as evident in strong business conditions indicators across most countries. Global growth is improving and becoming more synchronised globally. Nearly 75% of the 45 countries tracked by the OECD are seeing accelerating growth, the highest it’s been since the initial bounce out of the GFC in 2010.

  • Part of the reason for this is that the “muscle memory” from the GFC, which commenced a decade ago, is fading and this is contributing to stronger confidence.

  • The risk of deflation is receding and giving way to the risk of a rise in inflation as capital and labour utilisation is on the rise globally & productivity growth is poor, reflecting: low levels of investment; increasing levels of populist regulation in some countries; and as older workers retire. While the impact of technological innovation (the Amazon effect, artificial intelligence) will keep this gradual there will still be a cycle in inflation and the risks are gradually pointing up.  

  • Reflecting this, central banks are gradually retreating from ultra easy policy. The Fed is the most advanced here as the US economic recovery is further advanced. As a result, the Fed is moving towards allowing its holding of government bonds and mortgage-backed securities to start declining. This will be achieved by the Fed not rolling over (ie not reinvesting) the bonds on its books as they mature so it won’t be as dramatic as actually selling bonds. But its holding of bonds will nevertheless decline and it will be sucking cash out of the US economy. In other words, it will be undertaking “quantitative tightening” to reverse the “quantitative easing” of a few years ago. This is good news and reflects the strength of the US economy much as its commencement of rate hikes did in 2015. Nevertheless, combined with continuing gradual Fed rate hikes, it will likely see a resumption of the upwards pressure on bond yields acting as a gradual dampener on the search for yield.

The upswing in bond yields is likely to be gradual – with periodic spurts higher then fall backs like over the last year – as the Fed will likely be gradual, other central banks including the Reserve Bank of Australia are well behind the Fed in being able to tighten and yield focussed demand from aging populations will act as a constraint. But the trend in bond yields is likely to be up unless there is an unexpected relapse in global growth.

What does it all mean for investors?

There are several implications for investors: expect lower returns from government bonds as yields gradually rise; the search for yield likely has further to go in relation to commercial property and infrastructure but it is likely to wane as bond yields rise; share markets are now more dependent on earnings growth for future gains (and the signs are positive) but cyclical sectors geared to higher earnings will likely be the outperformers and yield plays may be underperformers. That the Fed is moving to start reversing its post-GFC quantitative easing (money printing) is another sign the global economy is getting back to normal. This is good for investors.


Source: AMP Capital 21 September 2017


Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Salary sacrificing super

Date: Sep 20th, 2017

If you make voluntary super contributions through a salary sacrifice agreement you should be aware of how your contributions will affect your super balance. You can agree with your employer for your voluntary contribution to be in addition to your employer’s compulsory super contribution.

If you are deciding whether you should salary sacrifice some of your income into your super or you are already salary sacrificing, you may want to find more information or check your entitlements under the Fair Work Act 2009.

One example of a salary sacrifice arrangement is to have some of your salary or wages paid into your super fund instead of to you.

Salary sacrificed super contributions are classified as employer super contributions, rather than employee contributions. This reduces the amount of super guarantee contributions that your employer is required to make for you, unless the terms of the agreement between you and your employer specify that they continue to pay the minimum super guarantee amount. If you make super contributions through a salary sacrifice agreement, these contributions are taxed in the super fund at a maximum rate of 15%. Generally, this tax rate is less than your marginal tax rate.

The sacrificed component of your total salary package is not counted as assessable income for tax purposes. This means that it is not subject to pay as you go (PAYG) withholding tax.

If salary sacrificed super contributions are made to a complying super fund, the sacrificed amount is not considered a fringe benefit.

The Fair Work Commission regulates employment agreements and conditions. To check your conditions contact Fair Work CommissionExternal Link.

The Fair Work Ombudsman has information on deducting pay & overpaymentsExternal Link. You can contact the Fair Work Ombudsman on 13 13 94.

See also:

Salary sacrifice limitations

If there are no limitations specified in the terms of your employment, there is no limit to the amount you can salary sacrifice. However, you should also consider whether the:

  • additional salary you wish to sacrifice will cause you to exceed your concessional (before-tax) contributions cap and attract additional tax – this cap limits the amounts that can be contributed to your super fund and still receive the concessional tax rate of 15%

  • salary amount you sacrifice will attract Division 293 tax – this occurs when you have an income and concessional super contributions of more than

    • $300,000 in one year, before 1 July 2017

    • $250,000 in one year, from 1 July 2017.

For further assistance or information please contact us on |PHONE| 


Reproduced with the permission of the Australian Tax Office. This article was originally published on

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5 reasons commercial property is a great source of stable retirement income

Date: Sep 14th, 2017

Residential property has become the new religion in Australia. The buoyant market, particularly in Sydney and Melbourne where house prices have jumped 75% and 50% respectively in recent years, means residential is constantly talked about and analysed. 

But as more and more baby boomers move into retirement, there is a growing need to seek investments that provide reliable income streams and protect against the unique risks they face such as inflation.

So long as Australians associate ‘property’ with ‘residential’, there is a danger they will ignore commercial property — an asset class that has historically delivered the very stable income, defensive attributes and potential for solid long-term gains that retirees require today. 

More Australians, particularly retirees, therefore, need to start looking beyond residential and understand the 5 key advantages of commercial property.


The first advantage of commercial property – retail, industrial and office – is that income underpins commercial property as a great investment. Over the past 30 years, commercial property has delivered total returns of 9 per cent a year. In general, some 2 per cent of the total return has been capital growth. The remainder 7 per cent is income – that’s more than double the standard term deposit rates, albeit with more risk.

By contrast, capital growth dominates residential returns. If we use a three-bedroom home in Sydney or Melbourne as proxy, residential property delivered a greater total return over the past thirty years. However, some 7 per cent of the total residential return was capital growth. That left income at just 3 per cent.


Importantly, the income investors earn from commercial property is stable. Tenants, such as businesses and government, lease buildings generally for between 3 to 10 years, sometimes longer. Those long-term leases provide income security.

For example, our Wholesale Australian Property Fund acquired the Codan Building, a campus-style facility in Adelaide suburb of Mawson Lakes for $32.1 million in March this year. The building is fully leased to Codan, an ASX-listed company with a strong track record. The tenant signed a new 15-year lease that started in December 2015 with a 10-year option, and the property provides an initial income return of over 7.5 per cent.

Residential tenants, however, typically sign up for just 6 to 12 months, and in most states they can break that lease with 8 weeks’ notice. 

Within commercial property’s longer leases are fixed escalations in rent – each year rents are increased at an agreed rate of around 3 to 4.5 per cent.

There is also much less chance of a commercial property being damaged by a rogue tenant.


Commercial property also has a low correlation to equities, which makes it relatively stable when markets are volatile.

Firstly, the market prices commercial property funds based on valuations which mean a lot of the day-to-day volatility is smoothed out, both relative to the equities market and even relative to listed property options.

Secondly, in a downturn total property returns can fall hard and dramatically, but the income from commercial property is less impacted in the short term because of legally binding leases. Because they have signed up to long-term rental agreements, the tenant must keep paying their rent each year, regardless of whether their profits rise or fall.

That low correlation to equities, and relative stability, means commercial property provides excellent portfolio diversification and some protection from downside risk.


Additionally, commercial property is an excellent hedge against inflation, one of the biggest risks for retirees. When inflation accelerates, price rises flow through to higher profits, and in turn that flows through to higher rents and rising land values for commercial property. Historically, commercial property values have tended to rise at rates similar to inflation. That relationship has held for a very long time.

Commercial property therefore provides protection against an unexpected inflation spike. These spikes can have a double-whammy effect on retirees: not only does the price of day-to-day items such as food go up, but core defensive assets such as government bonds suffer.

Commercial property preserves the ‘real’ (after inflation) value of a retiree’s portfolio, allowing the income returns they generate to grow at a similar rate to the cost of living.


And finally, commercial property also offers a solid return outlook. 

We have seen commercial property prices rise in recent years. Investors have been attracted to the sector’s yields in a low interest rate environment. Given our view that interest rates are set to remain low over the medium-term (the next three years or so), we believe that trend has further to run.

Overall we expect commercial property to deliver a 7-8% total return over the medium term, with about 5-6% in income and the remainder in capital growth. That outlook is based on deals we are seeing and executing, where commercial property is being valued and sold on the expectation of a 7 to 8% return.

Looking beyond residential

When we look around at other sources of income and asset classes, the outlook for returns from commercial property is excellent.

Cash and term deposits are no longer adequate sources of income, and The Reserve Bank is unlikely to raise rates aggressively any time soon. Traditional asset classes such as stocks and bonds face the large-scale challenges posed by both slowing global economic growth and historically low interest rates.

Geopolitical tensions, such as North Korea’s missile program and China’s territorial dispute with neighbouring countries over the South China Sea, is instilling further uncertainty in financial markets.

While residential property has been strong, and a crash is unlikely, its growth is now moderating.  Combined, the solid returns, stable income, and low correlation to equities that commercial property offers makes it an extremely attractive investment for Australians, particularly retirees seeking reliable income streams and protection against sequencing and inflation risk.

It’s time for Australian investors, particularly retirees, to look beyond residential and consider investing in commercial property.

Upcoming webinar

Join Christopher Davitt, Fund Manager for the AMP Capital Wholesale Australian Property Fund as he provides an update on the Fund and discusses recent properties that have been purchased. Tuesday 19 September 2017, 2pm-3pm. Register now.

It’s important to be aware that there are risks associated with investing in the Wholesale Australian Property Fund. Before investing, please read the Product Disclosure State which can be found by visiting our website.


Source: AMP Capital 14 September 2017

Author: Christopher Davitt is Fund Manager for the AMP Capital Wholesale Australian Property Fund and Australian Property Fund.

Important note: Investors should consider the Product Disclosure Statement (“PDS”) available from AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) (“AMP Capital”) for the Wholesale Australian Property Fund (“Fund”) before making any decision regarding the Fund. The PDS contains important information about investing in the Fund and it is important investors read the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. National Mutual Funds Management Ltd (ABN 32 006 787 720, AFSL 234652) (“NMFM”) is the responsible entity of the Fund and the issuer of units in the Fund. Neither AMP Capital, NMFM nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document. Past performance is not a reliable indicator of future performance.

While every care has been taken in the preparation of this document, AMP Capital makes no representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. Investors and their advisers should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.

Another five great charts on investing

Date: Sep 12th, 2017

New ways to access various investments, tax changes and new regulations, all with social media adding to the noise. But it’s really quite simple and this can be demonstrated in charts. This note continues our series that began with “Five great charts on investing”, which can be found here and looks at another five great charts – well, one is actually a table – on investing.


Chart #1 Time in versus timing

Without a tried and tested asset allocation process, trying to time the market, ie selling in anticipation of falls and buying in anticipation of gains, is very difficult. A good way to demonstrate this is with a comparison of returns if an investor is fully invested in shares versus missing out on the best (or worst) days. The next chart shows that if you were fully invested in Australian shares from January 1995, you would have returned 11.3% per annum (including dividends but not allowing for franking credits, tax and fees). 

Source: Bloomberg, AMP Capital  

If by trying to time the market you avoided the 10 worst days (yellow bars), you would have boosted your return to 12.5% pa. If you avoided the 40 worst days, it would have been boosted to 17% pa. But this is very hard to do and many investors only get out after the bad returns have occurred, just in time to miss some of the best days and so end up damaging their returns. For example, if by trying to time the market you miss the 10 best days (blue bars), the return falls to 8% pa. If you miss the 40 best days, it drops to just 3.7% pa. Hence the old cliché that “it’s time in that matters, not timing”.

Key message: market timing is great if you can get it right, but without a process the risk of getting it wrong is very high and if so it can destroy your returns.

Chart #2 Look less

If you look at the daily movements in the share market, they are down almost as much as they are up, with only just over 50% of days seeing positive gains. See the next chart for Australian and US shares. So day by day, it’s pretty much a coin toss as to whether you will get good news or bad news. But if you only look monthly and allow for dividends, the historical experience tells us you will only get bad news around a third of the time. Looking out further on a calendar year basis, data back to 1900 indicates the probability of bad news in the form of a loss slides to just 20% in Australian shares and 26% for US shares. And if you go all the way out to once a decade, since 1900 positive returns have been seen 100% of the time for Australian shares and 82% for US shares. 

Daily and monthly data from 1995, data for years and decades from 1900. Source: Global Financial Data, AMP Capital

Key message: the less you look at your investments, the less you will be disappointed. This matters because the more you are disappointed, the greater the chance of selling at the wrong time.

Chart #3 Risk and return

This chart is basic to investing. Each asset class has its own risk (in terms of volatility and risk of loss) and return characteristics. Put simply: the higher the risk of an asset, the higher the return you will likely achieve over the long term and vice versa. The next chart shows a stylised version of this. Starting with cash (and bank deposits), it’s well known that they are very low risk but so is their return potential. Government bonds usually offer higher returns but their value can move around a bit in the short term (although major developed countries have not defaulted on their bonds). Corporate debt has a higher return potential again but a higher risk of default – particularly for junk bonds. Corporate debt is basically a hybrid between equities & government bonds. Unlisted or directly held commercial property and infrastructure offer a higher return again but they come with higher risk and are less liquid and can be less able to be diversified (although this can be remedied by investing via a managed fund). Equities can offer another step up in return but this is because they come with higher risk as they are subject to share market volatility and individual companies can go bankrupt wiping out share holder capital. Beyond this, private equity entails more risk again and so tends to command an even higher return premium. Each step up involves more risk and this is compensated for with more return.



Source: AMP Capital Key message: Investors need to allow for the risk (and liquidity) and return characteristics of each asset. Those who don’t mind short-term risk (and illiquidity in the case of unlisted assets) can take advantage of the higher returns growth assets offer over long periods. The key is that there is no free lunch.

Chart #4 Diversification

But this not the end of the story. The next table shows the best and worst performing asset class in each year over the last 15. 

Best and worst performing major asset class 

Year Best Asset Class Worst Asset Class 


Aust listed property

Global equities unhedged


Unlisted infrastructure 

Global equities unhedged


Global listed property 

Global equities unhedged


Global listed property 



Aust equities Cash



Global listed property

Aust bonds


Aust equities 

Global listed property


Aust bonds 

Aust listed property


Aust equities 

Unlisted property


Global listed property 

Global equities unhedged


Unlisted infrastructure 

Aust equities


Aust listed property 



Global equities unhedged 

Australian bonds


Global listed property 



Unlisted infrastructure 



Unlisted infrastructure 


Note: refers to the major asset classes. Source: Thomson Reuters, AMP Capital 

It can be seen that the best performing asset each year can vary dramatically and that last year’s top performer is no guide to the year ahead. For example, those who loaded up on listed property after their strong pre-Global Financial Crisis (GFC) performances were badly hurt as they were amongst the worst performing assets through the GFC. So it makes sense to have a combination of asset classes in your portfolio. This particularly applies to assets that are lowly correlated ie that don’t just move in lock step with each other. For example, global and Australian shares tend to move together during extreme events. But bonds and shares tend to diverge when crises hit – as we saw in the GFC when shares fell sharply but bonds rallied. And so there is a case to have bonds in a portfolio to help stabilise returns.

Key message: diversification is also a bit like the magic of compound interest. Having a well-diversified exposure means your portfolio won’t be as volatile. And this can help you stick to your strategy when the going gets rough.

Chart #5 Residential property has a role 

Chart #1 in the first edition in this Five Charts series highlighted the power of compound interest, with a comparison showing the value of $1 invested in various Australian asset classes back in 1900 and what it would be worth today. Unfortunately, I do not have monthly data for Australian residential property returns back that far but I do have them on an annual basis back to 1926 and this is shown in the next chart starting with a $100 investment. (Commercial property return series only really go back a few decades.)

Source: ABS, REIA, Global Financial Data, AMP Capital  

Again it can be seen that over very long periods the power of compounding works wonders for shares compared to bonds and cash. But it can also be seen to work well for Australian residential property with an average total return (capital growth plus net rental income) of 11% pa, which is similar to that for shares. All of which highlights, along with the diversification benefits of a real asset like property, the case to have it in a well-diversified portfolio along with listed assets like shares, bonds and cash. The key is to allow for the different “risks” experienced by property versus shares. Property prices are less volatile than share prices as they are not traded on share markets and so are not as subject to the whims of investors and movements in their values tend to relate more to movements in the real economy. But residential property takes longer to buy and sell and it’s harder to diversify as you can’t easily have exposure to hundreds or thousands of properties exposed to different sectors and countries like you can with shares. So there are trade-offs between residential property and shares.

Key message: given their long-term returns and diversification benefits, there is a key role for residential property in your investment portfolio (putting aside issues of current valuations).

Source: AMP Capital 11 September 2017 

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note:

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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