Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 323

Welcome to Firstlinks Edition 323

  •   11 September 2019
  •      
  •   

Sometime in the next year, if there is no major market fall, total assets in superannuation will hit $3 trillion on the way to a forecast $10 trillion in 20 years, as shown below. Not bad for a country with GDP of about $1.9 trillion. The entire market value of all listed companies in Australia is about $2.1 trillion. While super funds obviously invest in a wide range of other asset classes, super investments will increasingly move offshore.

Projected superannuation assets, 2020 to 2040

Source: Association of Superannuation Funds of Australia

Already, this is making a major contribution to Australia's current account balance, which recently went into surplus for the first time in 44 years. With foreign equity holdings reaching $1.5 trillion, Australian investors now hold a record $141 billion more foreign equities than the amount of Australian equities owned by foreigners. AustralianSuper holds 44% of its assets overseas, or $76 billion, a doubling in five years. It contrasts with the heavy home bias in SMSFs.

Does history really repeat?

A phrase commentators love to trot out in its many variants is, "Those who cannot learn from history are condemned to repeat it." It's in contrast to, "This time it's different." One reason history might not be much of a guide to market behaviour is that we live in an age of automated trading driven by algorithms. History did not have powerful computers obeying quants.

Take the case of people arguing that the inverse yield curve is a sign of impending recession. A trader-friend offers another theory. In the US, borrowers can repay fixed rate mortgages without penalty. As rates fall, they refinance into lower rates, which means mortgage-backed securities are repaid at a much faster rate than expected. Large insurance and pension funds hold these assets against long-term liabilities. As the mortgage bonds are repaid, algorithms automatically buy longer-dated bonds to manage the maturity mismatch, driving down long bond rates.

Other factors suggest history offers no guide. Former Federal Reserve Chairman, Alan Greenspan, thinks the yield curve will continue to invert due to changing demographics. He said recently: “An ageing population is driving demand for bonds, pushing their yields lower.”

In this week's packed edition

Last week we showed how the Future Fund is investing in different fixed income assets, including peer-to-peer lending. Continuing our Interview Series, Daniel Foggo, the CEO of RateSetter, explains how 'marketplace' lending works, with some surprising insights. He thinks of his business as a fund manager for the large asset class of consumer finance.

While there is no doubt the financial advice industry needed to fix clients' best interest duty, an unwelcome consequence of the Financial Services Royal Commission inquisition is that full-service advice will increasingly be confined to wealthier people. On Tuesday this week, the Ending Grandfathered Conflicted Remuneration Bill 2019 passed which bans commissions paid to financial advisers from 1 January 2021, only 15 months from now. Many advisers will not survive this change.

Treasurer Josh Frydenberg's announcement said:

"Grandfathered conflicted remunerations can entrench clients in older products even when newer, better and more affordable products are in the market. Ending the payment of grandfathered conflicted remunerations will remove this inherent conflict and restore trust in the financial advice industry."

No mention of what new business model is supposed to pay for compliance-heavy and complex financial advice, because the majority of people cannot afford it. We ask if FoFA now stands for Failure of Financial Advice, and jump into the comments section if you have a view.

Peter Thornhill has a big following among our readers with his unconventional approach to asset allocation. He argues that chasing dividend yields is the wrong approach to finding income.

SMSFs are coming under increasing regulatory scrutiny. Graeme Colley provides a detailed checklist for trustees to review whether they are risking non-compliance and their tax status.

Investors need to watch that they are not buying into a company at the very peak of its growth, just as it enters a flat period. Nick Griffin describes how watching the S-curve works.

The Governor of the Reserve Bank, Philip Lowe, has warned the Government that interest rates can't do the heavy-lifting for the economy, and more fiscal stimulus is needed. July retail sales fell 0.1% despite recent rate cuts and tax refunds. He told a group of central bankers in New York:

"We can be confident that lower interest rates will push up asset prices, and I think that later on, we will have problems because of that."

It's timely that Michael Collins reviews the declining influence of interest rates and central banks.

The decline in the Australian dollar in the last year has boosted performance of foreign assets, and Gofran Chowdhury looks at the merits of holding cash in a foreign currency.

Finally, Peter Rae explains how many LIC's are struggling to remove their large discounts to NTA, as well as reviewing the latest new transactions in the market.

This week's White Paper from Legg Mason is 'Solving for the Retiree Problem with Innovation' and looks at research and philosophy for retirement income assets.

Graham Hand, Managing Editor

For a PDF version of this week’s newsletter articles, click here.

 


 

Leave a Comment:

banner

Most viewed in recent weeks

Are term deposits attractive right now?

If you’re like me, you may have put money into term deposits over the past year and it’s time to decide whether to roll them over or look elsewhere. Here are the pros and cons of cash versus other assets right now.

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

How retiree spending plummets as we age

There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

20 US stocks to buy and hold forever

Recently, I compiled a list of ASX stocks that you could buy and hold forever. Here’s a follow-up list of US stocks that you could own indefinitely, including well-known names like Microsoft, as well as lesser-known gems.

Latest Updates

Property

Financial pathways to buying a home require planning

In the six months of my battle with brain cancer, one part of financial markets has fascinated me, and it’s probably not what you think. What's led the pages of my reading is real estate, especially residential.

Meg on SMSFs: $3 million super tax coming whether we’re ready or not

A Senate Committee reported back last week with a majority recommendation to pass the $3 million super tax unaltered. It seems that the tax is coming, and this is what those affected should be doing now to prepare for it.

Economy

Household spending falls as higher costs bite

Shoppers are cutting back spending at supermarkets, gyms, and bakeries to cope with soaring insurance and education costs as household spending continues to slump. Renters especially are feeling the pinch.

Shares

Who gets the gold stars this bank reporting season?

The recent bank reporting season saw all the major banks report solid results, large share buybacks, and very low bad debts. Here's a look at the main themes from the results, and the winners and losers.

Shares

Small caps v large caps: Don’t be penny wise but pound foolish

What is the catalyst for smalls caps to start outperforming their larger counterparts? Cheap relative valuation is bullish though it isn't a catalyst, so what else could drive a long-awaited turnaround?

Financial planning

Estate planning made simple, Part II

'Putting your affairs in order' is a term that is commonly used when people are approaching the end of their life. It is not as easy as it sounds, though it should not overwhelming, or consume all of your spare time.

Financial planning

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.