Provision Newsletter

Some of the best business ideas are crazy. Others are plain boring. There aren’t any magic rules for finding the good ones. Your best shot at picking the right idea is to make sure it’s a good fit for your personality and your skills.

About the idea

Maybe you already have a lot of business ideas but you can’t pick one. Or perhaps you want to start brainstorming. There are just two things to remember about business ideas.

They’re allowed to be crazy

• Amazon started selling books online when everyone was perfectly happy going to the store and keeping their credit card details off the internet.

• Airbnb invited users to let their homes to complete strangers – people they might never meet.

They’re allowed to be mundane

• You might take an existing product or service and do your own version of it at a lower price, or in a different location, or with some other minor tweak. 

• Or you might find a weird little niche that no one else has explored yet. Throx did that. They sell socks in threes so people don’t need to worry about losing one in the laundry. 

Tips for landing on the best business ideas

As you come up with ideas, you need a way to pick the good ones. It’s an important choice because your next step is to invest time, energy and possibly cash exploring that idea. These three tests will help you decide on the best ones for you.

1. Find ideas you’re passionate about
   Does the idea excite you? If you’re wildly passionate about your business then you’ll have much more energy and focus.

2. Choose a business idea that fits with your skills
   Do you have years of experience, qualifications, contacts, or a special talent to use to your advantage? The more you do, the greater your chances of success and the less you have to pay someone else.

3. Make sure you can make money from your idea
   You’ll need a plan for turning your idea into revenue. Some ideas can be monetised in many different ways.

Find a small business idea you’re passionate about 

Examine the ideas circling your mind. Do a few stand out as something you’d really like to try? Bring those to the top of your list. If you’re only just starting to brainstorm small business ideas, then focus first on areas where you have a passion.

If you’re passionate about what you’re doing, business will be much more fun. You’ll also find it easier to get up early, work late, and battle through obstacles. Plus your mind is better at absorbing information that genuinely interests you, which could help you learn faster.

Choose an idea that fits with your skills

It’s much easier to get a business off the ground if you can do a lot of the early work yourself. Otherwise you’ll have to hire a lot of professionals, and that’s going to get expensive.

Idea for an app? You should be able to develop a minimum viable product on your own. Want to open a hospitality business? You should know a thing or two about the service industry.

Relevant skills and experience will also be a big plus when it comes to getting finance. Lenders won’t even consider backing you unless your CV convinces them you know what you’re doing.

You don’t have to be a total expert before you start. It’s okay to learn on the job. But when you look at all the steps required to start your business, make sure you can take responsibility for a good chunk of them yourself.

How to make money from your small business idea

Once you’ve chosen your best business ideas, you need to figure out how to turn them into cash. That’s what a business model is for. It’s your plan for making money.

Business models are many and varied. Some types of business make money by selling goods to consumers (retail), others by selling goods to shops (wholesale), and others by leasing goods. Some businesses make money by charging clients an hourly fee for a service, while others charge a flat fee. These are just basic examples of business models. There are all sorts of creative variations.

Business models generally fall into broad categories like retail, manufacturing, software-as-a-service, professional services, and so on. Many categories have general rules about:

• what customers are charged for

• average markups on products or services

• reasonable operating costs

Mixing business models

Your small business idea might lock you into a particular business model. If you open a shop, you’re going to operate pretty much the way other retailers do. But your business might allow you to mix up a bunch of business models.

If you’ve invented a product, for example, you might manufacture it, supply it to retailers, and sell it direct to customers through your own store. Try to investigate the business models that apply to you. An accountant familiar with your type of industry can give you great insights. 

Remember that you’re just choosing between business ideas at this stage. You don’t need a full financial plan yet. But make sure you ask yourself:

• can I realistically make money from this idea?

• do I need special expertise (such as wholesale experience) to make the business work?  

Once you’ve picked an idea to explore further, you should get a financial advisor to help work out the business model in more detail.

The best business idea is the one that fits you

When deciding on a business idea to pursue, make sure:

• you’re genuinely excited by it, because you’ll spend a lot of time on it

• you can carry it out (while doing a lot of the work yourself)

• you have a plan for monetising it

Once you’re satisfied you can pour energy and skill into it, and you can see a financial return for those efforts, you’re ready to move to the next step. Start thinking about how to start a small business.

Source: Xero

Reproduced with the permission of Xero.

Xero is software designed to make life better for small businesses and their advisors. Its online accounting platform provides the foundation on which businesses can build a complete business solution. It connects businesses with their bank, accounting tools, their accountant, payment services and third-party apps, so everything is securely available at any time, on any device.

Important:
This 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. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page. “

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.00 per cent. This follows a similar reduction at the Board’s June meeting. This easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.

The outlook for the global economy remains reasonable. However, the uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside. In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up. The slowdown in global trade has contributed to slower growth in Asia. In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.

Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led to expectations of easing of monetary policy by the major central banks. Long-term government bond yields have declined further and are at record lows in a number of countries, including Australia. Bank funding costs in Australia have also declined, with money-market spreads having fully reversed the increases that took place last year. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is at the low end of its narrow range of recent times.

Over the year to the March quarter, the Australian economy grew at a below-trend 1.8 per cent. Consumption growth has been subdued, weighed down by a protracted period of low income growth and declining housing prices. Increased investment in infrastructure is providing an offset and a pick-up in activity in the resources sector is expected, partly in response to an increase in the prices of Australia’s exports. The central scenario for the Australian economy remains reasonable, with growth around trend expected. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income is expected to support spending.

Employment growth has continued to be strong. Labour force participation is at a record level, the vacancy rate remains high and there are reports of skills shortages in some areas. There has, however, been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2 per cent. The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low. A further gradual lift in wages growth is still expected and this would be a welcome development. Taken together, these labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

Inflation pressures remain subdued across much of the economy. Inflation is still, however, anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices. The central scenario remains for underlying inflation to be around 2 per cent in 2020 and a little higher after that.

Conditions in most housing markets remain soft, although there are some tentative signs that prices are now stabilising in Sydney and Melbourne. Growth in housing credit has also stabilised recently. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.

Source: Reserve Bank of Australia, July 2nd, 2019

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Email: rbainfo@rba.gov.au

A common concern ever since the Global Financial Crisis (GFC) ended a decade ago is that the next recession is imminent. This concern has become more pronounced recently as yield curves – ie the gap between long-term bond yields and short-term borrowing rates – have inverted (or gone negative) as in the US. This concern has taken on added currency now that the US economic expansion is the longest on record. Surely it must be living on borrowed time?

This matters a lot. The US is the world’s biggest economy in US dollar terms (at 24% of world GDP), its share market is around 56% of global share market capitalisation and being central to the world’s financial system it sets the direction for global share markets, including Australia’s. What’s more, while share corrections (say falls of 5-15%) and even mild bear markets (with say a 20% decline that turns around quickly) are common, the key driver of whether they turn into a major bear market (where shares fall 20% and a year later are down another 20% or so like in the GFC) is whether we see a recession or not – notably in the US (see the table in Correction time for shares?). So, whether a US recession is imminent or not is critically important in terms of whether a major bear market is imminent.

Longest but not the strongest

The cyclical bull market in US shares is now over ten years old. This makes it the longest since WW2 and the second strongest in terms of percentage gain. And according to the US National Bureau of Economic Research the current US economic expansion that started in June 2009 is now 121 months old and compares to an average expansion of 58 months since 1945. This makes it the longest on record (since 1854). See the next two tables. But it’s noteworthy that it’s not the strongest. In fact, GDP and employment growth through this expansion have averaged around half that seen in the average post war expansion. Both have been the second weakest. 

Data is for the S&P 500. A cyclical bull market is defined as a rising trend in shares that ends when shares have a 20% or more fall. It could be argued that the 20% fall in July to October 1990 was not really a bear market as it was too short & shares surpassed their prior highs within a year. If it was not really a bear then the latest bull market becomes the second longest. Source: Bloomberg, AMP Capital.

Source: National Bureau of Economic Research, AMP Capital

Absence of excess

Numerous growth slowdowns and recession scares – notably around 2011-12, 2015-16 and since last year – and post GFC caution have kept this expansion slow. A key lesson of past economic expansions is that “they do not die of old age, but of exhaustion”. The length of economic expansions depends on how quickly recovery proceeds, excess builds up, inflation rises and the central bank tightens. The current US economic expansion may be long, but it has been slow. As a result, it’s been taking longer than normal for excesses that precede recessions – around cyclical spending, debt and inflation – to build up. First, cyclical spending in the US as a share of GDP remains low. In particular, there has been no “boom” in spending on consumer durables, business or housing investment resulting in a glut that needs to be worked off as occurred prior to all of the recessions in the last 50 years. All are around or below long-term averages as a share of GDP, in contrast to highs seen prior to past recessions. Basically, no boom = no bust!  

Source: NBER, Bloomberg, AMP Capital

Second, growth in private sector debt has been modest and well below the surge seen prior to the recessions of the early 1990s, early 2000s and 2008-09 as household debt growth has been weak. While corporate debt is up, the ratio of profits to interest payments is well above average and the ratio of corporate debt to assets is low. (Yes, public debt to GDP in the US is a concern but high public debt has not been a precursor to recession and the public sector’s taxing and money printing abilities mean it’s a totally different risk to excessive private debt.)

Finally, there is no sign of the surge in inflation that traditionally precedes recessions. Sure, the labour market has been flashing warning signs with unemployment and underemployment having fallen sharply, warning of a wages breakout and inflation pressure.

Source: NBER, Bloomberg, AMP Capital

However, there is arguably still spare capacity in the US labour market (the participation rate has yet to see a normal cyclical rise) and wages growth around 3% remains very low. The last three recessions were preceded by wages growth above 4%. And industrial capacity utilisation at 78% is well below levels that in the past have shown excess and preceded recessions. Reflecting this, along with intense competition which has been accentuated by technological innovation, core inflation has fallen below target.

Source: NBER, Bloomberg, AMP Capital

So, while the Fed has raised interest rates since late 2015 it has not slammed the brakes on with tight monetary policy. Past US recessions have been preceded by the Fed Funds rates being well above inflation and nominal growth, whereas that’s not the case now. See the last chart. And given perceived risks to growth and the concern that it will be easier to deal with a rise in inflation than deflation, the Fed is now moving to cut rates again anyway.

The bottom line is that the excesses that normally precede US recessions – a spending boom, surging private debt and/or rising inflation/tight monetary policy – are absent. So while US economic expansion may be long in the tooth it’s far from exhausted.

But what about the inverted yield curve?

The inverted US yield curve that started in the last few months is certainly a concern as they have preceded past US recessions.

Source: NBER, Bloomberg, AMP Capital

However, there are several reasons not to be too concerned. First, the lag from yield curve inversion to recession averages around 15 months (which takes us to second half next year), there have been numerous false signals and following yield curve inversions in 1989, 1998 and 2006 shares actually rallied. Second, various factors may be inverting the yield curve unrelated to growth expectations including still falling long-term inflation expectations, low German and Japanese bond yields and higher levels of investor demand for bonds post the GFC as they have proven to be a good diversifier to shares in times of crisis. Third, the retreat from monetary tightening has been a factor behind the rally in bonds but this is positive for growth. Finally, other indicators are not pointing to imminent recession – as noted above we have not seen the sort of excess that normally precedes recession.

The bottom line

Issues around the trade war and tensions with Iran certainly pose a risk to US growth and could drive short term volatility in share markets. But the combination of easing monetary conditions globally, the removal of caps on US Government spending for next year (which threatened a mini “fiscal cliff”) as part of a deal to suspend the debt ceiling and the absence of the excesses that contribute to recessions would suggest that US – and hence global and Australian – shares are likely to be higher in 6-12 months’ time.

Shares up and bond yields down – which is right?

This brings us back a puzzle that has worried some this year: share markets are up but bond yields are down…surely one market must be wrong? But this occasionally happens in the investment cycle. Basically, shares having fallen last year on growth fears are looking through short-term growth uncertainties and focusing on lower for longer interest rates and bond yields making shares relatively cheaper and the likelihood that monetary and fiscal stimulus will ultimately boost economic growth. By contrast bonds have been focussing on falling inflation and lower for longer short-term interest rates. So, there is logic behind both shares and bonds rallying at the same time. Ultimately though if global growth picks up over the next 12 months, bond yields will start to rise again – but it’s likely to remain gradual and constrained.

If you would like to discuss any of the issues raised by Dr Oliver, please call on |PHONE| or email |STAFFEMAIL|.

Source: AMP Capital 23 July 2019

Important notes: 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) (AMP Capital) 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 and must not be provided to any other person or entity without the express written consent of AMP Capital.

By Flying Solo contributor Fiona Adler

If you think of the truly impactful, amazing people you know, that are operating 10x above their peers, chances are they have an uncanny ability to prioritise. They might work hard, yet they are not rushing and not particularly stressed. But somehow they achieve amazing results. In fact, they often have an enviable calmness and a sense of clarity around them.

These could be entrepreneurs, business leaders, people climbing the corporate ladder, or people excelling in their field, whatever it is. In fact, you can find them in all kinds of professions – developers, marketers, customer service consultants, sales professionals, human resources, finance, legal, etc. There are also incredible examples who are full-time parents, volunteers, or students.

So what’s the secret of these high performers? How do they achieve so much more than the rest of us without even breaking a sweat?

The answer is simple – they decide what’s important, and then they do the important things.

These two distinctions are equally important, but here we’re looking at prioritisation – the act of deciding, or choosing, what’s most important. If you’re wondering how to be more productive, start with prioritisation.

Why prioritisation matters

Prioritisation is effectively about making choices. It’s seeing all of the options available to you and honing in on what is really going to move the needle. It’s having the maturity to know that you can’t do everything now. It’s an acknowledgement of the reality that the fewer things you choose to do, the better you’ll be able to do them.

Right now, prioritisation is more important than ever. Never before have we had access to so many ideas implanting thoughts about other things we should be doing and access to resources on how to do it. If I get an idea to do something, chances are I can delve into it, find examples of others doing that thing, learn how to do it, and next thing you know, I’ve added something completely new to my day. This is an amazing time we’re living in! But equally, we can so easily get side-tracked (and before you know it I’ve spent half a day on something I didn’t even know existed at the start of the day!).

To prioritise, you need a clear goal

In order to prioritise and use our time wisely, we need to have a clear understanding of where we’re headed – something we’re aiming towards. This can be a vision or even your values, but the more concrete it is the better – which is why I prefer to focus on a goal.

Knowing your goal gives you a frame of reference against which you can judge all the possible things you could be doing.

Will this thing move me closer to my goal? Which option is more likely to get me closer to my goal? What is the most impactful thing I could do to move closer to my goal?

These are the questions that high performers are constantly asking themselves.

Don’t make the mistake of having too many goals either – these need to be prioritised too! Yes it might be nice to increase customer satisfaction, reduce costs, have a record sales month, and expand your product line, but it’s not realistic to do these things at the same time (especially as these are somewhat conflicting).

You need to choose which one to focus on now. Which goal will give you the best results? Choose one for now and you can switch to another once you’ve made progress against that one.

Prioritisation connects your daily actions to your goals

With a clear goal in mind, you can prioritise how you spend your time. The key is to take action towards your goals each day. Which also means that you say ‘No’ to a whole lot of other options and refuse to get sidetracked.

The foundational habit here is starting each day with a clear set of high priority actions.

By proactively planning your day, it’s you who decides what’s really important and you who creates your day.

Remember, it’s not the quantity of things you get done, it’s all about doing the right things.

Don’t think you’re being lazy by refusing to do other tasks that are not in alignment with your goal. We’re actually being lazy when we don’t force ourselves to decide what’s the most important!

How to use prioritisation in practise…

Almost all of the top thinkers on prioritisation theories and frameworks agree that being highly effective, comes down to how well you prioritise your day.

Here’s how to prioritise so that you accomplish more of the important things.

1. Plan your day

Don’t just let the day happen. Deliberately take 5 minutes to plan – either first thing in the morning or the night before. Here’s how to write an effective daily action list.

2. Be intentional and proactively decide how your day will unfold.

Think about how you want to feel when the day ends. What do you want to have accomplished?

3. Choose 3-5 small, but meaningful actions to do that day.

Aim low – yes, seriously! Instead of coming up with a shopping list of things you’d like to do, restrict yourself to 3-5 things. Then get into the habit of actually doing them! Attack the day with laser focus and stick with it until those things are done.

4. Each action should be achievable in under an hour.

Break your items into small actions. They should each be quite small so keep breaking them down until you think you could do it in less than an hour. (It could be just a draft of the first paragraph, some sketches, writing an email, etc.)

If you get into the daily prioritisation habit you’ll be amazed at the results you’ll achieve. The cumulative effect of consistently taking the right actions (instead of floundering around doing thousands of unprioritisated tasks), makes a huge difference to your productivity. Soon, others will be wondering how you get so much done without working like a crazy person!

Source : Flying Solo July 2019 

This article by Fiona Adler is reproduced with the permission of Flying Solo – Australia’s micro business community.Find out more and join over 100K others.

Important:
This 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. Any information provided by the author detailed above is separate and external to our business and our Licensee. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Australia’s love of home ownership can lead real estate investors to overlook the potential benefits of global listed real estate and owning a share of some of the best real estate assets in the world.

Most investors understand the benefits of listed real estate. It has higher liquidity and lower transaction costs than direct property.

But there are three lesser known benefits of listed real estate that may make it suitable for investors seeking income.

1. Attractive risk-adjusted returns

The first is attractive risk-adjusted returns. Given close to 60% of the asset class is in North America, therefore using US data as a proxy, for investors in that jurisdiction willing to hold listed real estate for five years or more¹ , listed real estate has the potential to generate similar returns, and the same diversification benefits to a portfolio over time, as physically owning the actual buildings. However we’d note that there may be more shorter term volatility as shown in Figure 1, but that is to be expected as you can find daily liquidity for an illiquid asset class.

Many investors equate listed real estate with equities and view it as a short-term investment. But the asset class hits its stride when held over time. Real estate, both listed and direct, is a long-term investment by the very nature of the leasing contracts and the longevity of the physical assets.

The correlation of returns between listed and unlisted increases significantly as the investment horizon lengthens. Indeed, the correlation between the two is 0.9 of listed share prices and the underlying real estate valuations of the assets they own on a rolling three year basis (figure 1 is the US)², if you remove leveraging differences from both asset classes and control them for the industry practice of appraisal smoothing.

Figure 1 – Rolling Three Year Annualised Total Return: Listed Shares & Underlying Real Estate Assets – USA

Source: Green Street Advisors – December 2018

2. Direct property beacon

We believe that listed real estate trusts (REITS) can also be used by investors to determine what the direct market is likely to do. Again using the US as a proxy, when analysing US data of whether REITs are trading at a premium or discount to net asset value (NAV) – the value of the trust’s holdings at a given time — has historically been an indicator in that jurisdiction of how the direct market will move in the coming 12 -18 months, although future performance can never be guaranteed.

Put very simply, if a REIT trades at a premium to its NAV, the market believes its assets will appreciate above levels indicated by market pricing of the underlying direct real estate. The inverse occurs when trading at discounts.

When REITs in the US have traded at NAV discounts greater than 10 per cent, historically they have subsequently outperformed the unlisted market by more than 1200 bps per annum over the next three years. Observed NAV premium/discounts in the public market provide a strong signal as to the appropriate mix of listed vs unlisted real estate, and there have been times in the past when investors with no listed exposure have experienced suboptimal performance.

Figure 2 – Listed Premiums/Discount and unlisted returns

Source: Green Street Advisors – March 2018

Figure 3 – Listed Returns minus unlisted returns, next 3 years (Ann.) 

Source: Green Street Advisors – March 2018

3. Global Appeal

The third characteristic is the growing global appeal of listed real estate.

Listed real estate was once the poster child of leverage, particularly in Australia during the financial crisis. But that was now a decade ago and many lessons have been learned and now listed real estate has resumed the role for which it was intended: a proxy for direct real estate at a point in time when allocations to real estate as an asset class are rising.

Globally, in many markets, listed real estate is trading at a discount to NAV. The biggest discounts are in Japan developers, retail and the UK and New York office markets. Australian REITs, with the exception of retail malls, are trading at a premium, with larger premiums ascribed to fund managers, industrial and datacentre landlords.

In individual markets where listed real estate is trading at a discount to NAV, the best management teams have been taking advantage of strong pricing in direct real estate markets, selling core assets and using the proceeds to either pay down debt or return capital to investors.

Listed real estate can be a complement to unlisted property or a useful proxy for unlisted property. This is particularly the case for investors who want to establish an allocation to real estate but are struggling amid global competition for quality assets and don’t want the headache or complexity of managing direct property assets. The AMP Capital Core Property Fund has allocations to both listed and unlisted real estate.

Greater diversification

On top of these benefits, global listed real estate typically has deep and unrivalled access to a greater diversity of institutional quality real estate sectors than the unlisted market. These sectors may include (but are not limited to) last mile logistics, datacentres, healthcare, aged care and manufactured housing.

These different sectors perform under varying economic conditions and their relevance and portfolio sizing should be assessed on what role they play in the underlying economy of the future. Given many of them are intertwined with long-term secular economic trends, having exposure to these assets is more logical to us than owning a retail dominated fund or a residential apartment investment.

Risks of investing in listed real estate

As with all investments there are associated risks to be aware of. Risks specific to real estate investments include the risks of investing in share markets, property and international markets, as well as the risks associated with interest rates, gearing and the cost of debt, derivatives, investment management, co-ownership of assets, fluctuations in rental income, rental demand and fund termination risks. For more information of the risks of investing in these types of assets, investors should consult the offer documents for the fund.

¹Source: Green Street Advisors (Feb 2016)
²Source: Green Street Advisors (Dec 2018)

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 AMP Capital Core Property Fund (Fund)) before making any decision regarding the Fund. The PDS contains important information about investing in the Fund and it’s important investors read the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. The Trust Company (RE Services) Limited (ABN 45 003 278 831, AFSL 235150) (The Trust Company), a wholly owned subsidiary of The Trust Company Limited (ABN 59 004 027 749), is the responsible entity of the Fund and the issuer of units in the Fund. The Trust Company has not prepared this information and makes no representation or warranty as to the accuracy or completeness of any statement in it. Neither The Trust Company nor any company in the AMP Group (which includes AMP Capital and AMPCFM) 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 information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. Investors 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. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

Author: James Maydew, BSc (Hons), MRICS, Head of Global Listed Real Estate, Sydney, Australia

Source: AMP Capital 11 July 2019

Important notes: 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) (AMP Capital) 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 and must not be provided to any other person or entity without the express written consent of AMP Capital.

Investors have profited from strong returns, backed by central bank liquidity and falling interest rates. But with rates seemingly at rock-bottom levels and global economic recovery maturing, returns could fall and markets could become more volatile. Investors may benefit from looking to use Dynamic Asset Allocation (DAA) to profit from shorter market cycles if they are to keep generating wealth.

Investors have enjoyed strong returns from markets in recent years, fuelled by Central Bank quantitative easing and record-low interest rates. Things have been so good and returns so smooth that many investors may have forgotten that financial markets are cyclical.

However, because we are now entering late cycle and rates are already so low, any change in interest rate direction could potentially challenge valuations and trigger greater market volatility.

If investors are to seize opportunities and generate wealth in this new environment, they will need to be flexible and adjust their portfolio to the market’s ebbs and flows.

We believe investors should increasingly turn to Dynamic Asset Allocation (DAA), a strategy that allows investors to regularly adjust their allocations to markets and asset classes based on what the market is doing and what they believe it is likely to do.

But how do investors implement DAA?

The principles of DAA

To successfully use DAA, investors must first understand the principles that underpin it. At AMP Capital we have engraved four key principles into our DAA investment process that will help any investor considering implementing such a strategy:

1. Risk is not the same as volatility

The first principle is that ‘volatility’ is not ‘risk’. Volatility is backward looking and measures an asset’s variability (how much its price moves around). Risk, however, is the potential to lose money and not recover. Investors using DAA should focus more on price ‘risk’ than on backward looking analysis like volatility.

2. Factor in investor expectations

Investors must also understand the critical role of investor expectations. High-performing companies with low volatility can have more downside risk than low-performing companies with high volatility. High-performance companies can find it increasingly hard to meet investors’ big expectations. When they disappoint, their shares fall. But low-performing companies’ expectations are typically lower and easier to beat. If they beat low expectations, their shares are can be strongly re-rated.

3. Diversification based on historical correlation is destructive

The third principle is that investors shouldn’t rely on historical correlations. Correlations can change, and they typically increase during economic instability. We often see high-priced popular investments become overcrowded. But when the economy turns, investors all decide to sell at the same time. Investors should consider diversifying based on asset valuations and how crowded a position is, rather than using historical correlations.

4. The market cycle leads the economic cycle

The final principle is that history has shown us that weak economic conditions don’t always lead to weak future share market returns. If you aim to buy assets when the economic cycle is strong and sell them when it’s weak, you may inevitably miss out on opportunities and be exposed to risks. It would, however, also be unreasonable to assume that the macroeconomics and earnings have an insignificant impact on future market returns. Indeed, a sustained and durable move higher in shares requires strong support from earnings growth and a healthy macro backdrop.

Cycles

DAA recognises that markets are driven by cycles. Those cycles range from multi-year ‘secular’ cycles to multi-month periods called ‘cyclical’ cycles. The secular cycle drives the primary trend in the share market; but the shorter cyclical cycles can also impact on investors’ financial goals. Secular cycles are driven by valuations; cyclical moves are driven by investor sentiment and central bank actions.

In the new market environment investors are facing now, it’s safe to assume the secular market cycle will deliver low returns. Shorter-term business cycles will therefore become critical, and to keep generating returns, investors should consider using DAA in attempting to lock in profits during upswings and protect returns during downswings.

Author: Nader Naeimi – Head of Dynamic Markets and Portfolio Manager of Dynamic Markets Fund Sydney, Australia

Source: AMP Capital 26 June 2019

Important notes: 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) (AMP Capital) 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 and must not be provided to any other person or entity without the express written consent of AMP Capital.