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Author: Provision Wealth

Downsizing should be a choice, not a wealth strategy

Date: Feb 19th, 2018

Downsizing to a coastal town or regional hub can hold lifestyle appeal, but don’t bank on it as a strategy to fund your retirement.

For many empty nesters, who may not have had the benefit of employer-paid super throughout their working life, the value of the family home can be seen as the jewel in the crown of a retirement funding strategy. After all, who cares about the Age Pension when you’re sitting on good real estate?

Swapping a high-maintenance family home for something smaller can give you more time for the things you enjoy, but keep in mind, it may not deliver the funds needed to enjoy a quality retirement.

Be aware of the ‘sea change’ downsides

The Association of Superannuation Funds of Australia (ASFA) did the sums recently, finding that downsizing for a sea or tree change has the potential to free up valuable home equity.

As a guide, sea changers moving from the Sydney metro area to the popular NSW retiree haven of Forster-Tuncurry could pocket up to $650,000 in home equity thanks to the difference in median home prices between the two regions.

However, there are drawbacks to consider. Choosing to live outside our big cities can make it harder to access specialist medical care – something that becomes more important as we age.

In addition, property price growth in our major state capitals tends to outpace regional areas. This matters because further down the track you may need to rely on home equity to fund the rising cost of aged care.

Remaining in the same city can be even less rewarding

Downsizing within the same city often provides fewer financial benefits than a sea or tree change. Property transaction costs in particular will eat away a substantial chunk of your home equity.

In Sydney for instance, the median apartment price is $762,509, and on that price you can expect to pay $29,807 in stamp duty alone. Once you’ve set aside sufficient proceeds to live off comfortably for the rest of your life, you could be faced with taking a very substantial downgrading in the type of housing or lifestyle you can afford.

The bottom line is that relying on the value of your home should not form the focus of your retirement plans.

A better solution? Your long-term plan

If you’re eager to cut housework or garden maintenance, downsizing can be a good option. However, if you’re hoping to fund a decent retirement, it may make much more sense to grow a separate pool of investments – preferably throughout your working life.

That said, good advice can make a measurable difference to your final nest egg at any life stage, and it’s never too late to get started.

The beauty of relying on your investments rather than your home to fund retirement, is that it gives you choices. If you don’t want to sell a much-loved family home, you don’t have to. And, if a more compact home is on your retirement radar, you can afford to make the move on your own terms, buying where and whenever you choose.

For tailored advice that lets you make the most of all your assets, not just your home and to enjoy a fulfilling retirement.Contact us on |PHONE|

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

Source : AMP 15 February 2018 

This article provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

 

Australian’s love affair with debt – how big is the risk?

Date: Feb 15th, 2018

Introduction

If Australia has an Achille’s heal it’s the high and still rising level of household debt that has gone hand in hand with the surge in house prices relative to incomes. Whereas several comparable countries have seen their household debt to income ratios pull back a bit since the Global Financial Crisis (GFC), this has not been the case in Australia. Some worry Australians are unsustainably stretched, and it is only a matter of time before it blows up, bringing the economy down at the same time. Particularly now that global interest rates are starting to rise. This note looks at the main issues.

Australia – from the bottom to the top in debt stakes

The chart below shows the level of household debt (mortgage, credit card and personal debt) relative to annual household disposable income for major countries.
 

Source: OECD, ABS, RBA, AMP Capital

While rising household debt has been a global phenomenon, debt levels in Australia have gone from the bottom of the pack to near the top. In 1990, there was on average $70 of household debt for every $100 of average household income after tax. Today, it is nearly $200 of debt (not allowing for offset accounts) for every $100 of after tax income.

Why has debt gone up so much in Australia?

The increase in debt reflects both economic and attitudinal changes. Memories of wars and economic depression have faded and with the last recession ending nearly 27 years ago, debt seems less risky. Furthermore, modern society encourages instant gratification as opposed to saving for what you want. Lower interest rates have made debt seem more affordable and increased competition amongst financial providers has made it more available. So, each successive generation since the Baby Boomers through to Millennials have been progressively more relaxed about taking on debt than earlier generations. 

It’s not quite as bad as it looks

There are several reasons why the rise in household debt may not be quite as bad as it looks:  

  • Firstly, higher debt partly reflects a rational adjustment to lower rates and greater credit availability via competition.

  • Secondly, household debt has been rising since credit was first invented. It is unclear what a “safe” level is. This is complicated because income is a flow and debt is a stock which is arguably best measured against the stock of assets or wealth.

  • And on this front, the rise in the stock of debt levels has been matched by a rise in total household wealth in Australia. Thanks to a surge in the value of houses and a rise in financial wealth, we are far richer. Wealth rose 9.5% last year to a new record. The value of average household wealth has gone from five times average annual after tax household income in 1990 to 9.5 times today. 

Source: ABS, RBA, AMP Capital  

So, while the average level of household debt for each man, woman and child in Australia has increased from $11,837 in 1990 to $93,943 now, this has been swamped by an increase in average wealth per person from $86,376 to $475,569.   

Source: ABS, RBA, AMP Capital  

As a result, Australians’ household balance sheets, as measured by net wealth (assets less debt), are healthy. Despite a fall in net wealth relative to income through and after the GFC as shares and home prices fell, net wealth has increased substantially over the last 30 years and is in the middle of the pack relative to comparable countries.

Source: OECD, ABS, RBA, AMP Capital  

  • Fourthly, Australians are not having major problems servicing their loans. According to the Reserve Bank’s Financial Stability Review non-performing loans are low and Census and Household Expenditure Survey data shows that mortgage stress has been falling. Of course, this may reflect low mortgage rates with interest costs as a share of income running a third below its 2008 high. 

  

Source: RBA, AMP Capital  

  • Fifthly, debt is concentrated in higher income households who have a higher capacity to service it. This is particularly the case for investment property loans.

  • Sixthly, a disproportionate share of the rise in housing debt over the last 20 years owes to investment property loans. As servicing investment loans is helped by tax breaks the debt burden is not even as onerous.

  • Finally, lending standards have not deteriorated to the same degree in Australia as they did in the US prior to the GFC where loans were given to NINJAs – borrowers with no income, no job and no assets.

So what are the risks?

None of this is to say the rise in household debt is without risk. Not only has household debt relative to income in Australia risen to the top end of comparable countries but so too has the level gearing (ie the ratio of debt to wealth or assets).   

Source: OECD, RBA, AMP Capital

It certainly increases households’ vulnerability to changing economic conditions. There are several threats:  

  1. Higher interest rates – the rise in debt means moves in interest rates are three times as potent compared to say 25 years ago. Just a 2% rise in interest rates will take interest payments as a share of household income back to where they were just prior to the GFC (and which led to a fall in consumer spending). However, the RBA is well aware of the rise in sensitivities flowing from higher debt and so knows that when the time comes to eventually start raising rates (maybe later this year) it simply won’t have to raise rates anywhere near as much as in the past to have a given impact in say controlling spending and inflation. And so, it’s likely to be very cautious in raising rates (and is very unlikely to need to raise rates by anything like 2%.)

  2. Rising unemployment – high debt levels add to the risk that if the economy falls into recession, rising unemployment will create debt-servicing problems. However, it is hard to see unemployment rising sharply anytime soon.

  3. Deflation – high debt levels could become a problem if the global and local economies slip into deflation. Falling prices increase the real value of debt, which could cause debtors to cut back spending and sell assets, risking a vicious spiral.  However, the risk of deflation has been receding. 

  4. A sharp collapse in home prices – by undermining the collateral for much household debt – could cause severe damage. Fortunately, it is hard to see the trigger for a major collapse in house prices, ie, much higher interest rates or unemployment. And full recourse loans provide a disincentive to just walk away from the home and mortgage unlike in parts of the US during the GFC.

  5. A change in attitudes against debt – households could take fright at their high debt levels (maybe after a bout of weakness in home prices or when rates start to rise) and seek to cut them by cutting their spending. Of course, if lots of people do this at same time it will just result in slower economic growth. At present the risk is low but its worth keeping an eye on with Sydney and Melbourne property prices now falling. But high household debt levels are likely to be a constraint on consumer spending.

Conclusion

While the surge in household debt has left Australian households vulnerable to anything which threatens their ability to service their debts or significantly undermines the value of houses, the trigger for major problems remains hard to see. However, household discomfort at their high debt levels poses a degree of uncertainty over the outlook for consumer spending should households decide to reduce their debt levels.  

Source: AMP Capital 15 February 2018

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.

The problem with the active vs passive debate

Date: Feb 14th, 2018

How did we find ourselves here? 

It’s a question I ask myself whenever I come across an article or when I’m drawn into a discussion comparing index fund returns with the after-tax returns of active fund managers. And I’m asking it a lot lately. 

As head of AMP Capital’s Multi Asset Group, the debate is usually misdirected by the time it gets to me, considering the multi-asset management process picks from different styles and strategies – including low-cost index strategies where it makes sense – to come up with a blended approach designed to meet an outcome for investors.

If anything, I’m an advocate for investing in index funds in the right place and at the right time when it is appropriate for the investor’s goals. At the end of the day, our returns are judged after fees and it’s in our interests to keep costs down as it is for any investor, financial adviser or superannuation fund trustee as long as you’re getting the right outcome.

However, as someone who works within a traditional active funds management business, I find myself addressing some of the inconsistencies in this well-worn “for and against” active versus passive argument, and invariably I’m left frustrated by where the debate ends up.

The wrong argument

The root of most of my frustration wading into this debate stems from my belief we’re having the wrong argument. 

What clients really need from asset managers is to help them deliver on their financial goals. Financial goals, in my experience, are absolute and relate to growth in capital to fund retirement; they’re about delivering a level of income every year or over whatever the period may be with confidence. As investment managers, we need to be able to deliver this with certainty and with limited surprises along the way. 

Rather than focus on goals, the industry has instead taken on this benchmark-aware mindset, mainly because it’s an easy way to compare ourselves to our peers. 

The funds management industry, in my view, has gone so far down this benchmark-aware path we’ve not only convinced ourselves but also our clients that we’re only doing a great job if we’re beating the benchmark. We’ve created this narrative at the expense of explaining what really matters to clients, which is their goals.

I absolutely get why there’s a bifurcation happening in the market right now where clients are moving away from that middle ground I’d describe as ‘core benchmark-aware products’ where they have been paying a decent management fee in return for something that’s essentially the benchmark. It’s not great value for them. 

Investors are rightfully moving away from these products into either very low-cost products or, at the other end of the scale, cost-effective but much more differentiated products where they also get value from their (typically higher) management fees. 

At AMP Capital, we’re doing the same thing as evidenced by the recent changes in our Australian Equities business. In October, we announced a repositioning of the business to focus on areas where there is long-term demand and where AMP Capital will deliver active and cost-effective capabilities that match client needs. 

As much as anyone, I understand the importance of reducing costs. Our aim as an industry should be to deliver great outcomes after costs. 

Lacking trust

The problem facing the funds management industry is one of trust. As we stand here today, active fund managers are not always trusted to deliver performance because of the sins of the past where some managers dressed up essentially index funds as actively managed funds and charged 100 basis points or more in fees for the privilege.  

At this point in time, the only thing clients can put their hands on and trust is cost. It’s the only tangible thing they have.
 
In reality, however, there are far more opportunities to deliver great outcomes for clients beyond focusing on cost alone. If we design great products to meet client goals and get the alpha component of the funds management process right, we can deliver much more beyond the savings investors are seeking by shunning active management and marching into passive funds. 

More than a few things have gone right for the index funds’ narrative, which has fuelled investor demand for low-cost passive funds at a time I believe investors need active management..  

What a time it’s been to own the benchmark while share markets have been driven by the actions of central banks globally printing money and leaving interest rate setting at their most accommodative. Correlations between shares and sectors have been unusually high as the market’s momentum has trumped anything earnings related.

Now, with inflation back on the horizon, and with many tipping four rate hikes this year from the US Federal Reserve, there has never been a more important time for investors to be thinking about what outcome they are investing for and which managers are best placed to deliver, rather than which benchmark they’re tracking.

I love a thoughtful discussion about the role both active and passive strategies play within a portfolio to help clients meet a desired outcome, but when the debate ends up pitting active fund performance against the benchmark I again ask myself how did we get here? And how can we change the debate so that we talk about what’s really important for clients?

 

Source: AMP Capital 14 Feb 2018

Author: Sean Henaghan

Sean Henaghan is the Director and CIO of AMP Capital’s Multi-Asset Group with responsibility for over $70 billion (as at June 2014) invested in AMP Capital’s multi-asset portfolios, multi-manager single sector portfolios and Tailored Investment Solutions. Mr Henaghan is a member of the AMP Capital Global Leadership Team and also sits on the AMP Capital Investment Committee.


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.

The pullback in shares – seven reasons not to be too concerned

Date: Feb 09th, 2018

The pullback in shares seen over the last week or two has seen much coverage and generated much concern. This is understandable given the rapid falls in share markets seen on some days. From their highs to their recent lows, US and Japanese shares have fallen 10%, Eurozone shares have fallen 8%, Chinese shares have fallen 9% and Australian shares have lost 6%. This note looks at the issues for investors and puts the falls into context.

Drivers behind the plunge

There are basically three drivers behind the plunge in share prices. First, the trigger was worries that US inflation would rise faster than expected resulting in more aggressive rate hikes by the US Federal Reserve and higher bond yields. Flowing from this are worries that the Fed might get it wrong and tighten too much causing an economic downturn and that higher bond yields will reduce the relative attractiveness of shares and investments that have benefitted from the long period of low interest rates.

Second, after not having had a decent correction since before Donald Trump was elected president and with high and rising levels of investor confidence, the US share market was long overdue a correction, which had left the market vulnerable.

Finally, and related to this, the speed of the pull back is being exaggerated by the unwinding of a large build up of so-called short volatility bets (ie bets that volatility would continue to fall) via exchange traded investment products that made such bets possible. The unwinding of such positions after volatility rose further pushed up volatility indexes like the so-called VIX index and that accelerated the fall in US share prices. Quite why some investors thought volatility would continue to fall when it was already at record lows beats me, but this looks to be another case of financial engineering gone wrong!

With shares having had a roughly 5-10% decline (in fact US share futures had had a 12% fall) from their recent highs to their lows and oversold technically and with the VIX volatility index having spiked to levels usually associated with market bottoms, we may have seen the worst but as always with market pull backs it’s impossible to know for sure particularly with bond yields likely to move still higher over time and if there is further unwinding of short volatility positions to go.

Considerations for investors

Sharp market falls with talk of billions of dollars being wiped off shares are stressful for investors as no one likes to see the value of their investments decline. However, several things are worth bearing in mind:

First, periodic corrections in share markets of the order of 5-15% are healthy and normal. For example, during the tech com boom from 1995 to early 2000, the US share market had seven pull backs greater than 5% ranging from 6% up to 19% with an average decline of 10%. During the same period, the Australian share market had eight pullbacks ranging from 5% to 16% with an average of 8%. All against a backdrop of strong returns every year. During the 2003 to 2007 bull market, the Australian share market had five 5% plus corrections ranging from 7% to 12%, again with strong positive returns every year. More recently, the Australian share market had a 10% pullback in 2012, an 11% fall in 2013 (remember the taper tantrum?), an 8% fall in 2014 and a 20% fall between April 2015 and February 2016 all in the context of a gradual rising trend. And it has been similar for global shares, but against a strongly rising trend. See the next chart. In fact, share market corrections are healthy because they help limit a build up in complacency and excessive risk taking.

 


Source: Bloomberg, AMP Capital

Related to this, shares literally climb a wall of worry over many years with numerous events dragging them down periodically, but with the long-term trend ultimately rising and providing higher returns than other more stable assets. In fact, bouts of volatility are the price we pay for the higher longer-term returns from shares.



Source: ASX, AMP Capital

Second, the main driver of whether we see a correction (a fall 5% to 15%) or even a mild bear market (with say a 20% decline that turns around relatively quickly like we saw in 2015-2016) as opposed to a major bear market (like that seen in the global financial crisis (GFC)) is whether we see a recession or not. Our assessment remains that recession is not imminent:

  • The post-GFC hangover has only just faded with high levels of business and consumer confidence globally only just starting to help drive stronger consumer spending and business investment.

  • While US monetary conditions are tightening they are still easy, and they are still very easy globally and in Australia (with monetary tightening still a fair way off in Europe, Japan and Australia). We are a long way from the sort of monetary tightening that leads into recession.

  • Tax cuts and their associated fiscal stimulus will boost US growth in part offsetting Fed rate hikes.

  • We have not seen the excesses – in terms of debt growth, overinvestment, capacity constraints and inflation – that normally precede recessions in the US, globally or Australia.

Reflecting this, global earnings growth is likely to remain strong providing strong underlying support for shares.

Third, selling shares or switching to a more conservative investment strategy or superannuation option after a major fall just locks in a loss. With all the talk of billions being wiped off the share market, it may be tempting to sell. But this just turns a paper loss into a real loss with no hope of recovering. The best way to guard against making a decision to sell on the basis of emotion after a sharp fall in markets is to adopt a well thought out, long-term investment strategy and stick to it.

Fourth, when shares and growth assets fall they are cheaper and offer higher long-term return prospects. So the key is to look for opportunities that the pullback provides – shares are cheaper. It’s impossible to time the bottom but one way to do it is to average in over time.

Fifth, while shares may have fallen in value the dividends from the market haven’t. So the income flow you are receiving from a well-diversified portfolio of shares continues to remain attractive, particularly against bank deposits.



Source: RBA, Bloomberg, AMP Capital

Sixth, shares and other related assets often bottom at the point of maximum bearishness, ie just when you and everyone else feel most negative towards them. So the trick is to buck the crowd. As Warren Buffett once said: “I will tell you how to become rich…Be fearful when others are greedy. Be greedy when others are fearful.”

Finally, turn down the noise. At times like the present, the flow of negative news reaches fever pitch – and this is being accentuated by the growth of social media. Talk of billions wiped off share markets, record point declines for the Dow Jones index and talk of “crashes” help sell copy and generate clicks and views. But such headlines are often just a distortion. We are never told of the billions that market rebounds and the rising long-term trend in share prices adds to the share market. And as share indices rise in level over time of course given size percentage pullbacks will result in bigger declines in terms of index points. And 4% or so market falls are hardly a “crash”. Moreover, they provide no perspective and only add to the sense of panic. All of this makes it harder to stick to an appropriate long-term strategy let alone see the opportunities that are thrown up. So best to turn down the noise and watch Brady Bunch, 90210 or Gilmore Girls re-runs!

 

Source: AMP Capital 09 February 2018

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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