SMARTEN UP the easy money days are over. And don’t forget your super

By Rod Myer

It is now 10 years since the global financial crisis threatened the end of the economic world as we know it. And that time has been a fantastic time to make money if you had the stomach and the cash to get back into the market after the busts of 2008.

The All Ordinaries Index has gained 89 per cent to 6248 points at the time of writing. The US Dow Jones Industrial index is up a remarkable 377 per cent since its GFC lows. Housing has been the market in everybody’s sights and the annual residential property price rise across the country has averaged 5.5 per cent a year according to the Australian Bureau of Statistics. For individual markets like Melbourne and Sydney the figure would have been greater.

But there are signs that the easy money days are over and simply throwing money at the markets is not going to be the way to success in the near future.

Firstly there are political dangers on the horizon. US President Donald Trump is taking actions that could release the dogs of trade wars with China, putting the world’s economic superpowers at loggerheads. His new tariff regime has boosted Chinese imports subject to levies by 44 per cent to a total of $US250 billion worth of goods. Retaliation by China, Trump says, will result in another $US267 billion in tariffs.

Then there is the end of the property boom in Australia and elsewhere. Official figures show property has been in decline for a year. That will affect both spending in the economy and the banking sector which has been such a cash cow for investors since the GFC.

David Simon, principal of Integral Private Wealth says that outlook along with the revelations of misconduct revealed by the banking Royal Commission has taken the heat out of the banking sector.  He also sees another risk. “The amount of credit Australian consumers demand is higher than what Australians are prepared to deposit in the banking system. So that means the banks have to go overseas and raise money in an environment where US interest rates are rising. Because it is going to be hard for banks to raise rates here, paying more for credit is going to hit their bottom line.”

But despite, or because of, falls in share prices there is another aspect of the bank equation that makes them attractive and that is their dividend yield. NAB has a double digit yield (at time of writing) with the lowest of the big four being ANZ at a little over eight per cent compared to around two per cent for the risk free term deposit yield.

So that means owning the banks as part of a balanced portfolio is an attractive proposition. But you need to understand the risks around them and not expect the post-GFC experience to repeat itself.

BMF Wealth founder and chairman Barry Mendel says one of the keys to investment success is a global spread. His group advises wealthy individuals and families and various foundations.

He says the Australian market is limited with only two per cent of the world’s investments, so it is important to get access to the other 98 per cent.

BMF has their antennae out and has not necessarily liked what they have seen. “We think we’re going into troubled times, so we’ve reduced our exposures to Australian equities in the last three years or so.” Now, he says, BMF is reducing exposures to some foreign equities as well.

While the US markets are in record territory the massive boom in the tech giants like Apple, Amazon and Google is masking the state of the overall market. “If you take out the six biggest tech stocks the S&P 500 is only up about four per cent year on year,” Mendel said.

In Europe things are shaky with the UK market vacillating at around five per cent above highs of 18 years ago and European markets are still approximately 20 to 30 per cent below pre-GFC levels.

“The Chinese market has not gone anywhere in the last six months and is down again. The emerging markets are down with a thump falling 15 per cent across the board in the past six months,” Mendel said.

The US situation post-Trump has seen markets rise on his tax cuts which have not necessarily flowed through to workers’ incomes. Meanwhile in Australia we lack political leadership and economic foresight and that is demonstrated financially by a weaker currency.

Those concerns mean that BMF is recommending a significant lower exposure to equities and has reduced allocations from 70 per cent of holdings held three years ago. Consequently, cash and alternative holdings are rising.

Another private investment house Crestone Wealth also sees the investment markets as tapering off but still providing useful options for investors.

“We make the judgement that we are a long way along the macro-cycle. We don’t say end of the cycle but it is a late period in the cycle,” said Creston chief investment officer Scott Haslem. “An end of the cycle would see rising credit, (interest rates) wage inflation, restrictive economic policy or policy error and none of those look like hard road blocks at the moment,” he said.

The key to investment success is setting up a robust structure to begin with so Crestone works with its clients to develop an appropriate risk profile on which to build a portfolio, Haslem said.

The environment demands some caution in equities. “We’re modestly underweight equities, by about one per cent depending on the type of portfolio. Whereas a growth portfolio might have been 62 per cent equities its now 61 per cent,” Haslem said. Most of that underweight position is in Australian equities with the general position for global equities still neutral.

Where Crestone does see problems is in the fixed interest or bond market. “We’re exiting the grand experiment of quantitative easing (money printing by central banks) which means central banks will start withdrawing liquidity,” Haslem said.

That means interest rates will start to rise and bond prices will fall. To prepare for that Crestone has cut its bond exposures by four percentage points from the usual level of 17 per cent in a growth portfolio.

Superannuation as a structure

The question for most investors is how to make the necessary changes to account for the investment climate. If you have a large portfolio and an adviser, you can model the sorts of changes talked of above depending on your perspective on the future.

However for many people superannuation is the vehicle they use to drive their investment strategy and despite recent changes there are still good options, says Nerida Cole, head of advice for Dixon Advisory. ”Working together as a couple, to build and structure your super, can help you maximise available tax concessions,” she said.

“Although it is harder to get money into super (than before recent changes), there are quite a few strategies that can help. If you’re close to retirement, knowing the various contribution types and how they work can make hundreds of thousands of dollars of difference. For example, downsizer contributions are a new type of contribution that allow up to $300,000 to be added to super from age 65 onwards,” Cole said. They apply to people trading down their family home for a smaller property.

You can, of course, have your super managed in a retail or industry super fund in which case you just have to make investment selections between categories like balanced or growth but the possibilities can extend to choosing particular stocks and investments.

We think we’re going into troubled times so we’ve cut back our exposures to Australian equities in the last three years or so.

Barry Mendel
BMF Wealth founder and chairman

But for some people a self-managed super fund can be useful. “Running an SMSF is a bit like running your own business. You’re in control, but you also have the responsibility to meet all the rules and regulations. You need to be prepared to make decisions – to help drive the SMSF to creating the income and growth you want.”

“But just like with your own business, as a SMSF trustee, you can consult with professionals to help guide your decisions. You’ll want to think through what you do want to achieve from an investment perspective and be able to communicate that clearly, so you can assess the advice you receive and hold your adviser accountable,” Cole said.

Despite some recent rule changes, the primary advantage of investing inside super still rings true. That is, the maximum tax rate your superfund pays on investment earnings is 15 per cent. Considering money invested personally can be taxed at a rate as high as 47 per cent, the savings can really add up.

If you’re saving for retirement, it can be really useful to get to know the basics of how to get money into super to build a balance as quickly as possible. “Pre-tax contributions are usually the best way to start but making additional post-tax contributions is often an underrated strategy and can also really make a difference to your end balance,” Ishara Rupasinghe, a director at Dixon Advisory said. See your adviser for details.

If you do set up an SMSF one key issue is structuring it through your life so as to take more risk when that is appropriate and less as you age.

“For instance, an SMSF member who has 30 years until retirement has more time to recover from a dip in the market, so having greater exposure to growth investments makes sense; provided they’re comfortable riding any ups and downs. On the other hand, someone who is five to 10 years away from throwing in the towel at work might want to trim their exposure to growth and focus on assets that provide more stable income; because if markets experience a big dip, they don’t have the luxury of waiting for it to bounce back,” Rupasinghe said.

“This is your retirement nest egg after all, so it’s important to keep an eye on your SMSF investments and get help from a trusted professional if you’re not sure what options might be best for you.”

With a total superannuation balance limit of $1.6 million, couples should consider whether they can work together to take advantage of the amount each person can hold. Spouse splitting, where one member of a couple withdraws an amount from their super and recontributes it to their partner’s super account, is one strategy that can help with this, Leesa Jackson, executive director at Dixon Advisory says.

“The total superannuation balance limit of $1.6 million and pension transfer balance cap of $1.6 million makes it important for individuals drawing down their super in excess of the minimum pension amount, to consider which accounts they are withdrawing from, and whether they are withdrawing this as a pension or a lump sum,” Jackson says. Your adviser can help you understand that decision.

“For example, if you’ve reached the $1.6 million transfer balance cap limit and have an accumulation account and have met a condition of release, you could choose to withdraw some money from the accumulation account to reduce the amount of super incurring up to 15 per cent tax (in the accumulation account) on earnings and capital gains – rather than withdrawing it from a pension account where earnings are taxed at zero per cent,” Ms Jackson says.