SMSF News

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Read our insights on the latest news, trends and changes related to SMSF advice.

April 2022 Investment Review: Share markets decline as interest rates rise further

Talking points

  • After bouncing back in March, share prices declined over April.
  • Australian equity investors were cushioned from the severity of global equity markets by outperformance from the Australian market and the depreciation in the $A.
  • Bond yields continued to move higher as high inflation persisted.

 

 

International Equities

 

 

Global share markets responded negatively to further interest rate increases over April. As was the case earlier in 2022, higher interest rates disproportionally impacted “growth” orientated equities. Those companies reliant on earnings growth in future years (rather than current earnings) typically have their valuations more heavily influenced when interest rates rise. Inflation combined with some lower than expected profit results from growth companies (e.g. Netflix) last month created a significant fall in “growth” styled equities. With the United States having considerable exposure to growth sectors, such as Information Technology, the US underperformed the broader global average, with the S&P 500 Index dropping 8.5%. Losses in other developed markets were less significant. The UK once again moved against the trend, rising by 1.0% as it continued to benefit from increased oil and energy prices.  

Share markets in emerging economies outperformed those in developed economies last month, with the MSCI Emerging Market Index declining 3.5% in local currency terms. There were positive returns in oil exporting regions, with Middle Eastern markets producing solid results. However, Chinese share prices continued to decline with the ongoing COVID related lockdowns in major cities, generating considerable uncertainty over the near term outlook for economic growth and company earnings.  

Global infrastructure and property sectors again performed better than equities overall. With cashflows in these sectors often closely linked to inflation, support for property and infrastructure assets has been relatively strong over recent months.

 

Australian Equities

Losses on the Australian equity market were less than the global average last month, as has been the pattern for most of the past quarter. The ASX200 index outperformed global equities by 15.6% in the 3 months to April. Relatively low exposure to “growth” styled equities and high exposure to resources & energy are two key contributors to this outperformance.

Australian energy stocks continued to advance last month, supported by a further 4.4% increase in the global oil price. However, there was some reversal of the recent appreciation in resource stocks, with the sector falling in value by 4.2% over April. This weakening was at least partially attributable to a 7.2% fall in the iron ore price, which is likely to have been impacted by the uncertainty over the Chinese growth outlook. As was the case globally, Information Technology stocks recorded a large decline, with the sector falling by 10.4%. Losses in the sector over the past year are now 22%.

More defensively positioned sectors increased in value over April. Utilities were the strongest, rising by 9.3%. A 12.4% jump in AGL’s share price made a significant contribution to the Utility sector’s performance. AGL is currently proposing a demerger of its energy retailing and electricity generation businesses, while the ongoing prospect of a takeover of the company could also be providing share price support. Outside of utilities, other defensive sectors such as Consumer Staples, Property Trusts, and Healthcare posted positive returns.

 

Fixed Interest & Currencies

The pattern of higher inflation leading to higher interest rates continued over April. In Australia, evidence of the uplift in inflation was provided in the release of the March quarter Consumer Price Index data, which showed the latest inflation rate to be 5.1%. This was followed by the decision of the Reserve Bank to lift the cash interest rate from 0.1% to 0.35%, which is consistent with the recent trend set by central banks across the globe. With inflation continuing to exceed expectations, bond yields have moved steadily higher. Last month, US 10-year Treasury Bond yields jumped from 2.32% to 2.89%. Despite having lower cash and shorter-term yields than the US, Australian longer-term interest rates remained above US equivalents, with the Australian 10-year government bond yield rising from 2.84% to 3.12% over April. As has been the case over each of the first 4 months of 2022, rising bond yields led to negative returns for fixed interest investors.

 

With the further increase in US interest rates, there was strong support for the $ US last month. As a result, the $A declined from US 74.8 cents to US 71.5 cents. This deprecation helped soften the impact of falling US equity valuations for Australian investors with unhedged exposures. The $A was, however, stronger against both the Euro (up 1.2%) and the Japanese Yen (up 1.9%) over April.

 

Outlook 

The magnitude of the change in bond yields over recent months appears to have moved beyond market consensus on the likely path of cash interest rate movements. Bond yields are higher than is implied by most economist forecasts of future cash rates. The relatively sudden removal of central bank bond buying (through their quantitative easing programs) may have led to a shortfall in bond demand, thereby creating a price fall (yield increase) beyond the fundamental or logical valuation. If this is the case, then a premium is currently available in bond yields, which should ultimately be rewarding for investors. 

What does this mean for fixed interest investors? Opportunities to take on more duration (interest rate term) exposure in fixed interest portfolios should now be considered. The short to medium term section of the yield curve appears particularly attractive (3-year government bonds in Australia are now yielding 3.0%), with yields above the most reasonable estimates of inflation averages for the equivalent period. Investing to take advantage of this duration premium appears to be a more robust strategy than holding large amounts of cash or taking on too much credit exposure at this time.

Whilst the rise in interest rates may have provided more conviction around the most appropriate approach to fixed interest, the outlook for equities is less clear. Rising interest rates have definitely been a major factor behind the weakness in equity markets this calendar year. However, if bond yields have “overshot” fundamentals (as implied above), then perhaps the risks to equities from this point forward should be considered lower as further increases in bond yield become less likely.

There are, however, other contributors to equity market risk outside of the interest rate factor. Although the economic backdrop remains reasonable with solid employment and household spending prevailing, profit margins have come under increasing pressure in recent months as input costs, particularly labour, are forced higher. Not all companies can pass on higher costs in full, and previously expected earnings growth forecasts could be challenged.

Notwithstanding the increase in risks associated with company earnings, equity prices have already materially declined over recent months, reducing the potential for further decline. Global equity valuations are now 12.1% below the level recorded at the close of 2021. Far more significant declines have been recorded in Asian equities, global smaller companies and sectors such as Information Technology, which may now be offering compelling value when compared with the broader global equity asset class.

If you have any questions or want to discuss your investment strategy then please book at chat with me.

 

 

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February 2022 Investment Review: Volatility spikes in response to invasion of Ukraine

Talking points:

  • In a month of high day to day volatility, global equities moved lower in response to the invasion of Ukraine by Russia.
  • Australian equities moved against the worldwide trend, finishing the month higher.
  • Bond yields continued to rise as the military conflict heightened inflationary pressures.

 

 

International Equities

 

 

Unsurprisingly, the Russia-Ukraine conflict over February heavily impacted European share markets. Germany (down 6.5%) and France (down 4.7%) both performed below the global market average decline of 2.8%. The United States also experienced a significant 3.0% fall, with ongoing weakness in the higher growth sectors (particularly Information Technology) adding to the market decline.

In contrast, markets with substantial commodity exposure outperformed. Supplies of oil, gas, wheat and various other base metals and rare earths are expected to be heavily impacted by the Russian invasion of Ukraine. Commodity prices jumped significantly as a result. Oil prices were nearly 9% higher over the month and have now risen 27% so far this calendar year.

New Zealand, Canada, Norway and the United Kingdom were all examples of markets that benefited from the higher commodity prices and avoided equity market decline. The Japanese market was another to outperform, with the fall in the Nikkei Index restricted to 1.8%. In periods of heightened uncertainty, the Japanese market and currency are often viewed as “safe haven” assets and can outperform as a result.

Emerging markets also had mixed results over the month. Prior to the market being closed in late February, the Russian market had dropped 36% during the month. With MSCI and other index providers announcing that Russian listed stocks will be excluded from global and regional indexes, further selling pressure is expected should the Russian market re-open.

Other Eastern European markets also performed poorly over February, with an average decline of 11.7% (excluding Russia). However, elsewhere the jump in commodity prices supported emerging equity markets, with the Middle East and Latin America particular beneficiaries.

After a large decline in January, the Chinese share market stabilised somewhat in February with a flat result, although Hong Kong reversed its January increase with the Heng Seng Index falling 4.6%.

 

Australian Equities

 

The Australian equity market outperformed global averages significantly, with higher commodity prices being the key driver. The energy sector jumped 8.6%, with resources more broadly being 6.4% higher. Iron ore prices consolidated their gains from January, which supported the larger resource stocks of BHP (up 5.4%) and Rio Tinto (up 5.9%). However, larger price gains in other commodities saw some smaller mining companies, such as South 32 (up 24.9%), perform particularly well.

In addition to the resource rally, there was also a continuation of the dominant trend in January that saw more defensive “Value” stocks outperform higher “Growth” orientated stocks. One of the explanations for this trend was the ongoing rise in inflationary pressure (stemming from higher commodity prices) and the related increase in bond yields. These higher yields reduce the attractiveness of stocks reliant on earnings growth in future years. As a result, the Information Technology sector was once again the weakest performer with a decline of 6.6%.

More cyclical consumer stocks were impacted by concerns over the potential impact of the military conflict on global growth and consumer sentiment. The Consumer Discretionary sector dropped 5.0%. In contrast, more defensive sectors including Property Trusts (up 1.4%), Utilities (up 3.4%), Consumer Staples (up 5.6%) and Financials (up 3.0%) all performed well.

Despite the strong gains from some small resource companies, smaller companies continued to lag larger companies over February. The ASX Small Ordinaries Index was flat over the month. With an annual gain of 5%, smaller companies have lagged the broader market by 5% over the past year.

 

 

Fixed Interest & Currencies

 

 

With the jump in commodity prices adding further inflationary pressure across the global economy, there was additional upward pressure on interest rates last month. Some of the rise in global bond yields was, however, tempered later in the month due to the possibility that an extended conflict in Ukraine would reduce the magnitude of policy tightening by central banks. As a result, the rise in the U.S. 10 year Treasury Bond yield was limited to just 0.04%, with the yield finishing the month at 1.83%.

Australian yields increased by more, however, possibility due to expectations that Australia would be less negatively impacted by the military conflict. Australian 10-year government bond yields jumped from 1.88% to 2.13%.

 

 

 

Stronger commodity prices and higher bond yields contributed to a rise in the $A last month. Partially reversing the depreciation in January, the $A rose from US 70.1 cents to US 71.8 cents.

 

Outlook

The outbreak of war in Ukraine has both tragic human outcomes as well as significant global economic impacts. For those specific countries, companies and commodities directly impacted, the effects are clear and potentially long lasting. However, from an overall macro-economic and global share market perspective, the consequences are less apparent. Clearly uncertainties and risks have been heightened and the fall in global share market values over recent weeks is an appropriate response to that heightening of risks. Past experience, however, does suggest there is a tendency for equity markets to recover post an initial sell-off, well before any underlying geopolitical event has been resolved. This may reflect the reality that military conflicts don’t necessarily have negative implications for longer term company earnings at the aggregate level.

For Australian investors, the geographical isolation from the military conflict, together with the high resource and energy exposure of our economy, creates the potential for at least relative outperformance from the local market.

Concurrent with the risks stemming from the war in Ukraine, investors also need to consider the ongoing implications of rising inflation and interest rates – with inflation risks ballooning further as a result of the conflict. Although central banks may be more cautious around lifting interest rates in an environment of heightened uncertainty, any relaxation of a tightening regime could further entrench inflation and then ingrain higher interest rates into the medium term.

Despite the significance of events of recent weeks, our portfolio positioning preferences have changed little. Within the fixed interest asset class, the ongoing prospect of higher interest rates remains, and duration positions should be held relatively short to avoid the prospect of capital loss on bonds.

Although risks have increased, equity exposures should be maintained near neutral levels for investors who have the tolerance to hold exposure to these risks. On balance, risks and return prospects within Australian equities have improved relative to broader global equities given events of recent weeks. As such, a slight bias towards Australian equities may be warranted. Consistent with this improved relative positioning of Australia, high commodity prices and potentially increased latitude for interest rates to rise could add support for the $A. Although high commodity prices (and high iron ore prices in particular) could correct downwards at any time, short term recent upward momentum in the $A may have further to run, and some additional currency hedging could be considered over this period.

Should you have any questions or want to discuss your investment strategy then please book at chat with me.

 

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What are the 8 dimensions of wellbeing?

 

When you think about wellbeing, you often think about your physical health. Are you exercising enough, eating well and keeping healthy habits? But, in reality, it is so much more than that.  

Your wellbeing is a conscious and deliberate process of making choices that help us to live our best life. A life full of purpose, satisfying work and play, joyful relationships, a healthy body and mind, financial confidence and ultimately happiness. 

According to research, a person’s wellbeing can be measured against eight dimensions of wellness: physical, spiritual, social, emotional, intellectual, occupations, environmental and financial.  

Each dimension means something different to everyone. Understanding what it means to you can help you uncover what you value in life, where your strengths are and what you might need to work on. 

Physical

The Physical Wellness Dimension involves things that keep us active and healthy. Our physical wellbeing is so important to our mental health, longevity and ensuring we live our best lives. This doesn’t mean we must all be athletes. But it does mean building good physical health habits, having a healthy diet, exercising regularly, and having the appropriate health care for our needs. The more we are in tune with our bodies and what they need, the less likely we will be to become reliant on the healthcare system or even our families and loved ones. 

Intellectual

The Intellectual Wellness Dimension involves things that keep our brains active and our intellect expanding. It’s about mastering new skills, learning new things or helping to educate others. Having the time and resources to keep your mind active and supporting your loved ones can help you live a long life. 

Spiritual

The Spiritual Wellness Dimension is a broad concept that represents one’s personal beliefs and values and involves having meaning, purpose, and a sense of balance and peace. It includes being able to volunteer your time to support causes that mean something to you and help others to live a more purposeful life. 

Emotional

The Emotional Wellness Dimension involves the ability to express feelings, adjust to emotional challenges, cope with life’s stressors, and enjoy life. It includes building and nurturing relationships to strengthen our support networks and ensure we have the resources to spend time and money on those we love and the things we enjoy in life. 

Financial

The Financial Wellness Dimensions addresses your financial wellbeing. It covers your income, debt, savings and investments as well as your financial literacy. It also means having the resources to support and protect those you love. To live your best life, you need to be confident in your current financial situation or your future financial prospects.  

Occupational

The Occupational Wellness Dimension involves aligning your work to what you value in life. Ensuring that you pursue work that has meaning and purpose and reflects your values, interests and beliefs. Living your best life means work shouldn’t feel like work. 

Social

The Social Wellness Dimension involves having healthy relationships with friends, family and the community. Living your best life means living a life where you participate with others you care about and have the time to do so. 

Environmental

The Environmental Wellness Dimension involves living in an environment that promotes positive wellbeing. Such as preserving areas where we can live, learn and work, providing pleasant, stimulating environments that support our wellbeing and offer the natural places and spaces to promote learning, contemplation and relaxation. We need to create the right environments to help us live our best lives now and into the future, for both ourselves and our loved ones.  

Our financial advice process will help you to uncover which areas of wellbeing are most important to you and how close you are to living a life aligned with those areas of wellbeing.  

Our advisers will then work with you to set goals and shape strategies to make sure you are on the right path to living your best life. A life full of purpose, satisfying work and play, joyful relationships, a healthy body and mind, financial confidence and ultimately happiness. 

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What is a Director Identification Number (director ID) and do I need one?

You may have heard about the new rules which require directors of Australian companies to obtain a Director Identification Number (director ID). The new requirement to obtain a director ID also applies to individuals who have an SMSF with a corporate trustee, which is why I wanted to bring this new requirement to your attention. All directors of your corporate trustee will need to apply for their own director ID by the prescribed deadline.

This document provides some important information about Director Identification Numbers, including how to apply for one and by when.

An application for a director ID must be made individually and only by those who are applying for the director ID. As you are required to prove your identity as part of the process, our firm, or any other third party, is not able to apply for a director ID on your behalf.  

What is a Director Identification Number (director ID)?

A director ID is a unique identifier that directors need to apply for, like a tax file number. If you are a director of multiple companies, you are only required to have one director ID that will be used across all companies. You will keep your director ID forever even if you change companies, resign altogether from your director role(s), change your name, or move overseas.

Why do I need a Director Identification Number?

As part of the Government’s Digital Business Plan, it is rolling out a Modernising Business Registers program which includes the introduction of director IDs. The main purpose is to prevent the use of false or fraudulent director identities as well as to improve the efficiency of the system by making it easier to meet registration obligations and trace director activity and relationships. By improving the integrity and security of business data, it is expected to reduce the risk of unlawful activity. 

 

How do I apply for a Director Identification Number?

There are 3 key steps to apply for your director ID.

Step 1: Set up myGovID – If you do not already have a myGovID you will need to set this up before you can apply for your director ID online. You can find information on how to setup your myGovID by downloading the app at:  https://www.mygovid.gov.au/set-up  

Step 2: Gather your documents – You will need to gather some information that the ATO already knows about you to verify your identity. You will need your tax file number, your residential address held by the ATO, and information from two of the following documents:

  • Bank account details
  • ATO notice of assessment
  • Super account details 
  • Dividend statement
  • Centrelink payment summary
  • PAYG payment summary  

Most of this information can be downloaded from your myGov account so it may be worthwhile linking to this service ahead of applying for your director ID. Note, myGovID is different to your myGov account. Your myGov account allows you to link to and access online services provided by the ATO, Centrelink, Medicare and more, while myGovID is an app that enables you to prove who you are and to log in to a range of online government services, including myGov.  

Step 3: Complete your application – Once you have a myGovID and information to verify your identity, you are ready to apply for your director ID. You can click on the following link to start the application process. The application process is quick and should take you less than 5 minutes.  

https://abrs.gov.au/persons/ui/secure/start/applyForDirectorID?action=applyfordirectorid 

Further information about the application process, and step-by-step instructions, can be found via this link: https://www.abrs.gov.au/director-identification-number/apply-director-identification-number

By when do I need to have a Director Identification Number?

The director ID deadline depends on when you were first appointed as a director of any Australian company. This may or may not be when your SMSF corporate trustee company was established. Please contact our team if you are unsure which deadline applies to you.  

 

 

How can we help?

If you have any questions or would like further information about director IDs, please feel free to get in touch, or arrange a time for a meeting, so we can discuss your requirements in more detail. 

Although we are unable to apply for a director ID on your behalf, we would be more than happy to guide you through the process.

 

 

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July 2021 investment review – Chinese concerns lead to patchy equity market results

Talking points for July 2021

  • Share market returns were inconsistent across major markets in July, with a significant sell-off recorded in China. 
  • The Australian market was led higher by resource stocks in anticipation of strong earnings announcements and higher dividends.
  • Bond markets remained unconcerned about rising inflation, with yields drifting lower again.

 

International Equities

A better-than-expected earnings reporting season in the United States provided a renewed source of confidence for investors who pushed the US S&P 500 Index further into record territory with a 2.4% gain. 

Other major markets were more subdued. Although the UK and Germany had flat results, other European markets were mainly positive. There is now considerable focus on the UK as it provides a potential blueprint for the full reopening of economies with high COVID vaccination rates. 

Although there has been a lift in COVID infections across developed economies over recent weeks, this doesn’t appear to have had a major impact on share markets. Japan is the exception where a marked rise in case numbers coincided with a sharp decrease in the Nikkei Index of 5.2% last month. 

Renewed government regulatory action significantly impacted returns in China (down 7.3%) and Hong Kong (down 9.6%). Chinese authorities announced significant reforms to the education sector, effectively banning profit making enterprises from school curriculum related education. The changes are believed to address concerns over the heavy use of these services in China, creating inequality and higher costs for families raising children. These costs are viewed as one of the reasons China has been unable to significantly increase its birth rate despite authorities abandoning the ‘one child’ policy due to concerns over the ageing of the population. The education reforms follow increased regulatory activity impacting listed businesses in China, particularly in the Information Technology sector. 

 

Australian Equities

 

Gains on the Australian market were marginally behind the global average, with the S&P ASX 200 Index advancing 1.1%. The resource sector (up 6.6%) was a material contributor to this rise, with investors encouraged by the likelihood that end of year earnings results would confirm that continued high commodity prices lifted both the size of profits and dividends from the sector. While the majority of commodity prices continued to rise over July, there was a pullback in the price of iron ore (down 9.9% in $ US terms) due to expectations of reduced volume demanded from China.

The more domestically focussed cyclical stocks were impacted by COVID related lockdowns, with the consumer discretionary sector falling 0.5% and financials slipping 1.4%. Conversely, defensive sectors performed better, with both healthcare and consumer staples rising. It was also a positive month for utilities, with some merger and acquisition activity suggesting that lagging listed valuations were becoming attractive to private and institutional buyers.

Following a large jump of 13.4% in June, the Information Technology sector continued to exhibit high volatility, with the sector falling 6.9% in July. In annual terms, the rise of the Technology sector of 24% is now below the overall market increase of 29%.

 

Fixed Interest & Currencies

 

Although not changing its cash rate target, the Australian Reserve Bank did announce a slight adjustment to its monetary policy settings last month. The change is related to the size of the bond purchase program that is associated with the central bank’s quantitative easing initiative. Previously, the RBA had been purchasing approximately $5 billion in government bonds per week in the 5-year to 10-year maturity range, intending to manage interest rates lower across the yield curve. This purchase program is now expected to be reduced to $4 billion per week. The change reflects an acknowledgement that the economic recovery has been faster than expected. 

However, despite this change and the confirmation that annual inflation had jumped from 1.1% to 3.8% in the June quarter, longer term bond yields continued to drift lower, with the 10-year yield falling from 1.49% to 1.14%. 

Similarly, in the US, where annual inflation has now surpassed 5%, the 10-year Treasury yield fell from 1.45% to 1.24%. The bond market’s assessment is clearly that inflationary spikes are temporary and that monetary policy will remain loose for an extended period. The downward movement in yields over recent weeks may also indicate bond markets having more concern about the impact of the ongoing COVID crisis than is apparent in equity markets. 

The downward trend in the Australian currency also continued last month. Weaker iron ore prices and the fact that Australian bond yields fell by more than US equivalents contributed to a 1.8% drop in the $A to $US 73.8 cents. There was a similar decline in the $A against the Euro. The weaker currency was positive for investors holding global assets on an unhedged basis, with the $A value of foreign currency domiciled investments appreciating as a result.  

 

Outlook 

In some respects, the direction of market movements prevailing over July mirrored the dominant trend of recent months. Falling bonds yields associated with positive economic and earnings data made equities even more attractive than they were in the prior month. However, beneath the surface there are signs of a change in the pattern of equity market growth.

Firstly, the appetite for more defensively positioned equities less reliant on cyclical earnings growth appears to be mounting. The cause of this could reflect the view that the upswing in the earnings cycle is starting to plateau. However, it may also be associated with the persistence of COVID infection rates and the possibility that COVID related restrictions will be a constraint on economic growth for some time to come. Locally, takeover bids for Sydney Airports and Spark Infrastructure demonstrate that listed valuations for defensive and infrastructure styled assets are attractive, having not being bid up over the past year to anywhere near the same extent as more cyclical and “growth” styled equities. The combination of earnings being boosted by materially positive inflation with the maintenance of interest rates being held artificially low, creates a unique situation for property & infrastructure styled assets in particular. The “real” or physical nature of the asset allows for ownership in geared structures that can exploit the differential between interest rates and the inflation linked cash flow growth these assets are likely to produce.

Secondly, the equity market rally is appearing to become narrower in scope. In July, for example, 5 of the 11 industrial sectors on the Australian market posted negative results. Geographically, Japan, China and some European markets also declined over the month. This is despite a material fall in longer term bond yields, that all else being equal, should have supported a general lifting of equity market valuations. 

Based on this, a more cautious approach to equity market exposures may be warranted, with an increased focus on defensively positioned assets able to maintain some earnings growth despite a possible deceleration in the broader economic cycle linked growth rate. 

 

 

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Read this before you start investing in a fixed interest ETF

Exchange Traded Funds or ETF’s are one of the most popular and commonly asked about investments. Why? In large part due to their relative low cost and simplicity in getting invested, especially when compared to the incumbent wholesale managed funds, which seem outdated with the application process and minimum investment limits.

Popularity and demand have led to the ETF market expanding significantly, and with greater choice comes a greater need for investigation and research before investing. Even within an asset class such as fixed interest, there are significant differences between the options, but it is common for people to get confused thinking they are all the same. I liken it to the citrus family of fruits (asset class), where they share characteristics, but as anyone who has mistakenly bitten into a slice of grapefruit when expecting an orange will tell you, they are very different. 

Appreciating that not all fixed interest ETFs are the same is the best place to start. Be mindful that the name of the ETF doesn’t always tell the whole story, but terms such as high yield, unconstrained, emerging, and hybrid should make clear the need to get familiar with the detail of the investment strategy (likely higher risk). So always read beyond the label!

 

Why is knowing what to look for important?

If you don’t know what to look for with fixed interest ETFs, you might cost yourself a lot of money. So, where to start? The Fact Sheet (example below) and Product Disclosure Statement are always an excellent place to start. My eyes go in search of two details first, as I find these are a good guide on whether this investment is what I am looking for and if further investigation is warranted:

  • Underlying index that the ETF is tracking: This tells you what the investment performance will be mirroring and if this is what you are looking for
  • Funds or assets under management: Size matters, and if an ETF is too small (especially when it has been around a while), it may point to low levels of interest and therefore pose liquidity issues when you want to trade

Your homework doesn’t stop there, and other details which are useful to understand are:

  • Fees
  • Tracking error
  • Historical returns may also prove helpful in narrowing the options, as one of the foundation rules of investing is that higher returns indicate more risk
  • Details of the company that is offering the ETF
  • Liquidity of the investment (best to check the trading volumes using the ASX website or your brokerage account for this)

The details above will help you make an informed assessment on whether the ETF is right for you and your portfolio. However, it is essential to note that these individual details in isolation only tell part of the story, so bringing it all together makes all the difference. 

 

When do you use fixed interest ETFs in a portfolio?

While fixed interest is commonly used to make up the defensive allocation of a portfolio, it doesn’t always ring true. Buyer beware, as fixed interest can also be risky. Doing your research and reading the details of the investment are critical.

A fixed interest ETF is unlikely to be the solitary investment in your portfolio, so you should consider what role it needs to fill to enhance overall performance and risk. Good portfolio construction is all about ensuring that the whole is greater than the sum of its parts.

 

What fees are involved?

Much the same as any investment fund, it depends on the strategy. Your passive strategies will in most cases, be between 0.15-0.40%. Active strategies will extend beyond this based on the investment manager and strategy employed but are unlikely to go above 1%.

 

Any innovations in this area?

Actively managed fixed interest exchange-traded products (ETPs) are becoming available in a variety of shapes and sizes now so that you can build a far more diversified portfolio within your share trading account. 

 

Final thoughts

Not all fixed interest is the same, and the risk/return profile can vary substantially. Therefore, you must be clear on what you want your investment in a fixed interest ETF to do for your portfolio and then do your homework on what option is the best fit. Don’t get seduced by the fixed interest ETF that had the best performance last year, and don’t think that these are the same as a term deposit as there is more risk involved.

 

If you want to discuss how any of the above info relates to your investment strategy then you can contact a Pekada financial adviser.

 

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Pension Minimums to Remain Halved for the 2021/22 Financial Year

In somewhat surprising (but welcomed) news, a weekend media release from the Government has announced that the 50% reduction in pension minimums are to be extended for the 2021/2022 financial year.  

These measures were initially adopted for the 2019/20 & 2020/2021 financial years due to the impact of Covid. In the release it was noted that this measure “…continues to make life easier for our retirees by giving them more flexibility and choice in their retirement.” 

Is this necessary when investment markets have recovered? I’m not convinced, but happy to provide advice on the opportunities it presents to you.

Important: Remember that the reduced minimums are an option and not a mandatory reduction to your payments. You have the choice to reduce or retain pension payments, providing they meet or are above the reduced minimum.

For our clients on an ongoing service package, we will be in touch to discuss your options in the new financial year. If you want to have a chat sooner to understand your options then please get in touch, or book a chat with your adviser at our online booking page.

NOTES: 

  • This media release occurred over the weekend and didn’t provide a lot of detail. We expect more information to follow, and we will continue to provide relevant updates as they come to hand.
  • Also, a lot can happen in a month and we will have to wait until 1 July 2021 to assess exactly what this means for you and your minimum pension payments for the 2021/22 Financial Year. However a reasonable estimate will be possible from 1 July 2021. This estimate will become actual when your super funds 2021 accounts have been completed.

 

 

How do you work out your reduced minimum annual payment?
Use the percentage factors in the table below to calculate your minimum annual payment amount, using your age at 1 July of the financial year (or at the date your income account commenced, if later).

 

 

 

Read the Government media release here.

 

 

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How much money do you need to start an SMSF?

SMSFs are not for everyone, but for those individuals where an SMSF is entirely appropriate for them, the benefits can be considerable.

In the context of ongoing public debate regarding the appropriate minimum size for an SMSF, new research has been provided to provide insights into the true costs of running an SMSF. And the research shows SMSFs are cheaper to run than many people may think.

The findings allow SMSF trustees and potential SMSF trustees to compare appropriate estimates of fees for differing SMSF balances with institutional superannuation funds (commonly referred to as APRA regulated funds).

The costs include establishment, annual compliance costs, statutory fees and some investment management fees. Direct investment fees have been excluded.
What does the research tell us?

  • SMSFs with less than $100,000 are not competitive in comparison to APRA regulated funds (SMSFs of this size would generally only be appropriate if they were expected to grow to a competitive size within a reasonable time).
  • SMSFs with $100,000 to $150,000 are competitive with APRA regulated funds (SMSFs of this size can be competitive provided the Trustees use one of the cheaper service providers or undertake some of the administration themselves).
  • SMSFs with $200,000 to $500,000s are competitive with APRA regulated funds even for full administration. (SMSFs above $250,000 become a competitive alternative provided the Trustees undertake some of the administration, or, if seeking full administration, choose one of the cheaper services).
  • SMSFs with $500,000 or more are generally the cheapest alternative regardless of the administrative options taken. (For SMSFs with only accumulation accounts, the fees at all complexity levels are lower than the lowest fees of APRA regulated funds).

This research highlights that SMSFs with a low complexity can begin to become cost-effective at $100,000. This is a significant departure from what many had believed to be the case. For simple funds, $200,000 is a point where SMSFs can become cost competitive with APRA regulated funds or even cheaper if a low cost admin provider is used. With the proposed expansion to six member SMSFs, we may see many more take up this option at this threshold.

 

Comparing 2 member funds

From a cost perspective, the real benefit of an SMSF is when it achieves scale in balance and this can occur when members pool their superannuation savings. The below comparison can be used to grasp the ranges you might fall into.

But it’s more than cost

When determining whether an SMSF is right for you, your analysis must go further than just a simple comparison of the costs versus APRA Regulated Funds. It should also factor in your retirement and income goals and whether you have the desire, time and expertise to take on the role of an SMSF trustee. It’s also worth factoring in SMSF members may not receive the same level of protection in the event of theft or fraud that members in APRA regulated funds do.

 

How can we help?

If you would like to discuss whether an SMSF is right for you, please feel free to give me a call.

 

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SMSF Association Report: Cost of Operating SMSFs 2020

Earlier this month, the the SMSF Association released their research report on the ‘Cost of Operating SMSFs 2020’. No doubt the purpose of this was to provide guidance and insight regarding the cost-effectiveness of self-managed superannuation funds (SMSFs).

While everyone’s situation is unique, it does serve as a useful tool in deciding on whether an SMSF is right for you.

The research updates a report previously prepared by Rice Warner for ASIC in 2013. For this report, Rice Warner has also been given access to anonymised expense, cash flow and balance information for approximately 100,000 SMSFs. This has allowed them to consider actual costs incurred.

Some of the findings in relation to the range of costs for SMSFs are:

  • Most SMSFs with low balances either grow to a competitive size or are closed.
  • SMSFs with $100,000 – $150,000 are competitive with APRA regulated funds, provided the trustees use a lower cost service provider or elect to undertake some administration tasks themselves.
  • SMSFs with $200,000 or more are competitive with both industry and retail funds, even when the SMSF has engaged a full service administration provider.
  • SMSFs with balances of $500,000 or more are generally the cheapest alternative.

Be sure to do your own research and understand the limitations of this report in comparing the options relevant to you. In particular fee rebates or subsidies cannot be captured as part of the comparison with APRA regulated funds.

If you want to read the report, you can access it here on the SMSF Association website. Also, for any queries or to discuss your personal situation please contact me directly.

 

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What happens to your SMSF when the unexpected occurs?

Your SMSF is a long-term plan. Much can happen during this time including illness, incapacity or death of a member.

It is best practice to have contingency plans in place to deal with unexpected events. For example, if a fund member dies, leaving you as the sole member are you happy to continue with the SMSF

Outlined are some issues to consider planning for as trustees. Leaving the planning to when, and if an event happens may be too late.  

Death 

Think about where you want your superannuation to go on your death. The introduction of the $1.6 million transfer balance cap means larger sums of money may need to leave the superannuation system sooner, as a result planning has never been more critical. You may need to think carefully about who receives your superannuation on death to maximise its benefit for your beneficiaries.

The rules of your SMSF, as set out in your trust deed and related documents, determine how the trustee structure is to be reconstructed on the death of a member. It also details how death benefits are to be handled by you and your fund.

A lot of careful consideration needs to be given to understanding the member’s wishes to ensure that your fund’s trust deed and broader governing rules are drafted appropriately to achieve these requirements.

Legal tools to help direct your superannuation can include making a binding death benefit nomination to nominate who will receive your superannuation on your death or providing for your pension to continue (or revert) to a permitted beneficiary (such as your spouse) following your death.

You may also consider appointing a corporate trustee. If the membership of an SMSF with individual trustees changes, the names on the funds’ ownership documents must also change. This can be costly and time-consuming. A corporate trustee will continue to control an SMSF and its assets after the death or incapacity of a member. This is a significant succession-planning issue for an SMSF as well as for the estate planning of its members.

Diminished or loss of capacity

Consider the consequences if you become unable to act as trustee (e.g., due to mental incapacity). You can appoint an enduring power of attorney to act in your place as trustee, if required. This is someone who can be trusted to handle your financial affairs and can be appointed as trustee of the SMSF. 

Member leaves the fund 

How would your SMSF be affected if one or more of the fund members decided to exit the fund? For example, an SMSF heavily weighted in real estate may have to sell the asset or introduce a new fund member to allow the exiting member to transfer out of the fund.

Separating couple

Family law contains a number of options for superannuation to be split between a couple who separate or divorce. Your superannuation is treated separately to your other property, and specialist advice may be needed.

Reviewing your insurance 

SMSF trustees should regularly review insurance as part of preparing your investment strategy. This includes considering whether or not insurance cover should be held for each SMSF member. Your insurance cover may be essential if an unexpected event occurs.

In some circumstances, you may already be holding insurance through membership of a large super fund. This policy may exist due to an employment arrangement and may be more cost-effective than an equivalent valued policy that you could hold within an SMSF. However, not all insurance policies are the same, so seeking advice will help you to understand your needs.

Administration of your SMSF

If an unexpected event occurs you may need to consider winding up the fund if managing the fund will be too time-consuming, onerous or costly for the remaining members.

As annual SMSF running costs generally remain fixed, your superannuation balance may fall to a level where it is not cost-effective to remain in an SMSF – at this point, it may be appropriate to transfer out of the fund (e.g., to a retail or industry fund).

How can we help?

If you need assistance with planning for an unexpected event or reviewing your current strategies, please feel free to give me a call to arrange a time to meet so that we can discuss your particular circumstances in more detail.

 

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