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Welcome to this edition of Your Financial Future, which reviews the September 2006 quarter. In this issue we discuss what rising interest rates mean for investments generally.
We also expose the myth that it's best not to take any risks when investing your life savings and introduce you to Anuj Shangle, one of the financial planners on hand to help you grow your wealth.
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In addition, we profile Orion Asset Management, which manages Australian shares on behalf of the Fund, inform you about the FREE Will storage offer from the Fair Go Member Benefits program and examine how different asset classes have performed over the past quarter.
What rising interest rates mean for your investments
Interest rates have risen and could rise even further - a trend that could have an impact on your investment portfolio. Here's how!
Bonds and fixed interest
Bonds are issued by Governments and companies to raise money. When issued, bonds have both a face value (which is paid back when the bond matures) and a coupon rate, which is a set interest rate paid at set intervals for the life of the bond.
During the bond's life, its face value can change as it is traded amongst investors and as they calculate what they will earn, based on its coupon rate and the time left before it matures.
If interest rates rise, new bonds coming onto the market are issued at higher coupon interest rates. This means that the face value of old bonds must drop to make them competitive with new ones. It makes sense: a bond promising 5% interest is surely worth less when one promising 5.5% becomes available.
However, in the long term, higher interest rates can potentially help bond fund investors earn higher returns because bonds with higher interest rates provide more interest income than bonds with lower rates.
Equities
Rising interest rates often cause a short-term drop in share prices. This is because investors fear that the increases could affect consumer spending and make it more expensive for companies to borrow money and fund further expansions - and these are factors which could affect company earnings. Many investors also switch out of equities into bonds because their yields are rising.
However, the fact that the Reserve Bank of Australia has decided to increase rates is often a signal that stocks do have a good long-term outlook. The Reserve Bank often raises rates because the economy is growing too rapidly - a sign that company earnings should also be growing and thus, so should share prices.
Cash
When short-term interest rates edge up, interest paid on cash also rises. But because interest rate rises are often a signal that inflation is rising, investors should be wary that inflation isn't taking a big chunk out of their returns on cash.
Property
Rising interest rates are usually bad for real estate because it costs more to buy houses and other properties. Given the already sharp rises in recent years, housing prices could be especially vulnerable to rising rates this time.
What you can do
Although no one really knows what the future may bring, it's important to remain focused on your
long-term goals and not be overly worried about short-term market movements. You may have chosen your long-term investment strategy for a number of reasons, such as:
- To meet your financial goals;
- Because of the number of years you have left until retirement;
- Because of your level of risk tolerance; and
- To diversify your investments and spread your risks.
Many advisers warn against knee jerk reactions to short-term changes in the market. Instead, they believe that carefully selected and age-appropriate strategies work well for most investors over the long term.
However, if the reasons for setting your long-term investment strategy have changed or to check whether your strategy remains relevant in today's market, please call Member Services on
1800 067 059 to speak to one of our planners at no additional cost.
How to limit the fall out of rising interest rates
Interest rates have been rising and could rise further. You can't stop this, but you may be able to manage your debts better and you can make sure that you are paying the lowest rates and fees possible on your mortgage.
Managing your debts better
Careful use of debt - such as buying a house - can help you build up your wealth. However, poor use of debt, combined with rising interest rates, will quickly erode your wealth. The interest you pay on debt is money that cannot be saved or invested - it's just gone!
If you have several debts, each attracting different rates of interest, you should try and pay off your higher interest rate loans first. Better still, consider rolling all your remaining debts into one loan with a lower interest rate, such as your mortgage. Generally, interest rates on mortgages are significantly lower than those on personal loans and credit cards. However, it is also essential to maintain the repayments to assist with reducing the loan.
Some points to consider:
Firstly, it's important to remember why you selected your investment strategy in the first place. You might have chosen it for a number of reasons, such as:
- If you are unable to stop borrowing money, then no amount of consolidation is going to help you reduce your debt and you will end up with a greater problem.
- Before you consolidate your debts, make sure you know what the fees are. If there are no upfront fees, the move may be worthwhile but remember to weigh up all the costs.
- You can claim a tax deduction on the interest incurred on some debts - for example, on a negatively geared investment in property. However, there are no tax deductions allowed on interest paid on credit card debt or a home loan. It is generally more beneficial to extinguish debts which don't attract tax deductions first, due to their higher after-tax cost.
If you are unable to control your debts and are having difficulties making repayments, you need to take fast action. If you have a large amount of debt, it is essential that you advise your lenders immediately so that you can work out a repayment plan.
Find a better home loan
For most of us the biggest effect of increasing rates is the change in our mortgage repayments. Sadly, however, many Australians are paying higher mortgage rates to their high profile brand banks, which in turn, are looking to produce the maximum profits to their shareholders. But you don't need to do this!
The home loan market is highly competitive and there are many perhaps less known players offering highly competitive mortgage rates and slashing the extra fees and charges.
For more information on our home loans service, call 1800 800 002 or click here.
The myths of financial planning
In these days of financial information overload, it's often difficult to discern fact from fiction. For this reason, we expose another financial planning myth in each issue of Your Financial Future to help guide you through the maze of information out there in the marketplace.
Myth: It's best not to take any risks when investing your life savings
Risk is something you'd rather not live with and yet, its hard to build a nest egg without it. In fact, without it, investment markets wouldn't exist.
Risk deters the cautious and penalises the imprudent, but it is also the reason why, over long periods of time, stock markets outperform bonds. Promises of extra returns are the incentive markets provide to encourage investors to take risk.
Risks are, therefore, at the heart of investing. Sadly, however, some investors miss out on investment opportunities because they are afraid to take any risks at all. Indeed, those who have stuck with less risky investments, such as cash and fixed interest, have typically earned lower returns over the long-term (see table below). Conversely, many investors have also lost money by jumping in 'boots and all' without contemplating any of the potential risks involved in their choices.
How the asset classes have performed*
Source: UBS Australia Bank Bill Index (91 day Commonwealth Treasury Note Index pre Jan 1999), UBS Australian Composite Bond
Index, S&P/ASX 200 Property Accumulation Index (ASX Property Accumulation Index pre April 2000), S&P/ASX 300 Accumulation Index,
(ASX All Ordinaries Accumulation Index pre April 2000), MSCI World Net Index (A$). All dividends reinvested excluding fees and charges.
What this chart confirms is that there is a strong relationship between the amount of risk you may be willing to take and the potential return on your investment.
What the 2006/07 Federal Budget means for you
Widely welcomed changes announced in the Government's 2006/07 Budget are set to overhaul the superannuation system. Several of these changes are likely to affect how you plan for your retirement and we recommend that you take this opportunity to discuss your personal situation with one of our financial planners. Please call Member Services on 1800 067 059 if you have any questions about how these changes may impact you.
In addition to simplifying the superannuation system, the Budget's changes provide more incentives to use superannuation as a way of saving for your retirement. You will also have greater flexibility as to how and when you can draw down your superannuation when you retire.
Most of the changes are proposed to take effect from 1 July 2007, but at this stage, they are merely proposals which still have to be passed into law. Transitional arrangements are also expected to be introduced to ensure that those who have put plans in place to retire within the next few years are not disadvantaged by the changes.
What the Budget means when planning your retirement
In the past, your super contributions have been taxed at three points: when you contribute to super, on the returns earned while your super is invested and finally, when your withdrawal benefit is paid.
The Budget proposals have now removed the last point of taxation: when you take your end benefit in a lump sum or as a pension on retirement, but only if you are aged 60 or over.
This means that Reasonable Benefit Limits (RBLs) will no longer apply - a move that will greatly reduce the complexity of retirement calculations. For this reason, it is advisable to review your strategies if RBLs have been a focus in your retirement planning. For example, strategies such as a non-commutable pension, or splitting your super contributions with your spouse to gain two tax-free thresholds and two RBLs, may no longer be your best options.
What the Budget means if you are planning to retire before age 60
Very little has changed for people planning to retire before age 60 as a result of the budget. Concessional tax treatment on super continues to be available (as was the case prior to the budget) and will be simplified. For those with amounts close to current RBLs, it is an opportunity to review your position with a planner.
What the Budget means if you are contributing to super:
- The Budget abolishes aged based limits on employer superannuation contributions. In their place, it introduces an annual employer contribution limit of $50,000 on all deductible superannuation contributions, including those made by salary sacrifice. Any contributions made above this limit will be taxed at 45% (instead of 15%).
- The Budget also introduces a cap of $150,000 a year on superannuation contributions paid from your post-tax income. However, $450,000 can be contributed at one time providing no further un-deducted contributions are made for the next 3 years.
- Deductible superannuation contributions can now be made for employees aged 75 years or less.
An important warning about Eligible Termination Payments (ETPs)
The Budget has important implications for you if you are entitled to specific payments from your employer on termination of employment. From 1 July 2007, it will no longer be possible to roll these payments into superannuation, and in some cases, you could pay a lot more tax when you receive these. For some, it may be financially viable to retire before 1 July 2007 in order to receive these payments under the existing rules.
If you have a large employer termination payment available to you, it's best to speak to one of our planners to determine your best course of action. Contact Member Services and they will assist you with this.
Important reminder:
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Help is on hand!
Please contact our Member Services team with any questions on
1800 067 059 or drop into any one of our branches.
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While the Budget announcements have been widely welcomed, they are only proposals at this stage and still have to be passed into law. Before changing your superannuation arrangements, it is important to remember that after consulting with the superannuation industry in the next few months, the Government could alter its proposals.
The home loan quandary
To fix or not to fix? That is the question you may be asking about your home loan, given that interest rates have risen recently and there's talk of more increases to come.
Unfortunately, there are no straight forward answers. Much will depend on your personal circumstances. There are a host of factors to consider, including:
- What types of deals are available at the time.
- How much it costs to switch. Charges vary widely but they can sometimes outweigh any savings on the rate.
- How flexible the fixed rate deals are. Some fixed loans have restrictions on extra repayments and early payouts which can prevent you from paying off your loan quickly.
- How important certainty - that is, knowing exactly what your repayments are going to be over the next couple of years - is to you.
- The risks of interest rates falling again versus the risk of not fixing if interest rates go even higher.
The bottom line is that trying to pick whether you will come out ahead on a fixed or variable rate is a gamble which needs careful consideration.
We can help! One of our Chifley Home Loans consultants can help you assess whether you'd be better off fixing your loan or not. And, whether you decide to fix or not, you might find that Chifley Home Loans, which won bronze in Money magazine's Best of the Best 2006 awards, has a highly competitive, no-nonsense home loan that's perfect for you.
For more information on Chifley Home Loans click here
or call 1800 800 002.
Super Splitting
Don't forget that as a member of this Fund you are now able to "split" any of your superannuation contributions made on or after 1 January 2006 with your spouse.
This is in line with new laws which allow spouses to transfer their superannuation contributions, including the compulsory nine per cent Superannuation Guarantee, to each others' super fund accounts.
For more information on the new super splitting rules*, please call Member Services on 1800 067 059.
* A $20 fee applies where splitting outside FPS
Financial Planner profile: meet Dean Godbee
Dean Godbee is a member of the Chifley Wealth Creation team, ready to help you with your financial planning needs.
Dean recently returned to financial planning after spending some time helping corporations structure their superannuation and insurance arrangements for staff. He's now eager to get back into individual financial planning and to build "lasting and trusting" relationships with clients.
"For me it's all about the human element and making a difference in my clients' lives. I spend time and effort in getting to know each person and what makes them tick. Only then can I give them the best advice," he says.
Dean says he just "fell" into financial planning after graduating from Uni with an economics degree and after accepting a job at a major financial services group. "One thing led to another. Ten years ago the financial planning industry was in its infancy and there was lots of potential," he says.
He hasn't looked back. He now has over nine years of experience in financial planning and is a Certified Financial Planner, having worked at various financial services groups and dealerships. However, he says he particularly enjoys the positive culture at Chifley.
"Our focus here is on what benefits the member and this ensures that we provide quality advice to our clients without compromise".
When he's not busy growing his client's wealth, Dean can be found carefully trying to maintain his work/life balance by spending time with family and friends and keeping fit.
Meet your fund managers
One of the managers we've carefully selected to manage international equities on behalf of the Fund is Boston Company Asset Management, which is part of Mellon Financial Corporation. It has over A$50 billion in assets under management, of which $6.2 billion was for Australian clients as at 31 December 2005.
The Boston Company has been selected as part of our multi-manager approach to investments. This approach is based on research which shows that using several carefully selected investment managers in one portfolio will produce a better result, more consistently and with lower volatility, than a single manager over any reasonable period.
Different managers use different styles of investment and some styles perform better at different times of the investment cycle. By combining these different managers, we are able to remove style bias from your portfolios.
The Boston Company is an active manager which uses both quantitative and qualitative techniques to get the best returns. It uses a bottom-up approach, focussing on individual stock selection rather than economic and industry trends. Its aim is to uncover high quality undervalued companies with strong balance sheets. Each share it chooses has to be attractive not only on its own but also in the context of the entire portfolio.
The Boston Company complements other managers looking after international equities in your portfolios, such as Alliance Capital and State Street Global Advisors (SSgA).
Alliance Capital believes that research is the ultimate source of superior investment returns. Its focus is on identifying trends in global markets and selecting the fastest growing industry sectors and shares. SSgA, on the other hand, has an indexing heritage (where it invests only in the shares that make up an index). In recent years, however, it has also expanded into active shares management where it is a style neutral manager (which means that it doesn't follow a growth or value style of investing).
Want to know more?
To find out more about how we diversify your investments, contact Member Services on 1800 067 059.
Retirement Planning Booklet wins award
Your Fund's Retirement Planning Booklet recently won a Silver communications award at the Conference of Major Super Funds. This industry award is in recognition of excellence in superannuation marketing communications.
Our members are highly satisfied
A recent study reveals high satisfaction levels with the services available to you as a member of FuturePlus Super.
FuturePlus Super belongs to a grouping of large superannuation funds, which are serviced by FuturePlus Financial Services. These services include access to the call centre, website, seminars, worksite presentations and financial planning. FuturePlus Financial Services also provides these services to members of the Local Government Superannuation Scheme and the Energy Industries Superannuation Scheme.
The study, conducted by independent company Woolcott Research, found that that 63% of members surveyed are "highly satisfied" with the service they receive, compared to 47% of NSW super fund members in general.
In addition, the members of the three funds also make much more use of the services than do members of other funds in NSW. Over 60% had telephone contact with FuturePlus Financial Services in 2005 (compared to 16% at other funds) while 33% met with one of its financial planners (13% at other funds).
Far more members made use of the online services (29% vs 17%), worksite presentations (17% vs 4%) and seminars (17% vs 4%) than did members of other funds in NSW in 2005.
Jim Thomas, General Manager, Advisory, for Chifley Financial Services says: "We are delighted with these results. They show that member satisfaction with the Fund continues to rise and continues to be higher than that of members of rival funds. But we don't intend to rest on our laurels. As always, we will keep looking at adding products that better help our members create wealth and at new ways of enhancing our services."
Parramatta office opens for business
We've opened a branch in Parramatta to service and bring us closer to you.
The branch is located at 10 Smith Street and the staff are ready and able to help you with
your superannuation and other needs. You can contact the new office on
02 9354 1400 or fax them on 02 9354 1410.
The latest from Fair Go
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