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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$). All dividends reinvested excluding fees and charges.
What this chart confirms is that there is a strong relationship between the amount of risk you may be willing to take and the potential return on your investment.
*Performance indices used to compile this chart are: Australian shares - All Ordinaries Accumulation Index; International shares - MSCI World Gross Accumulation Index ($A); Property - Listed Property Trust Accumulation Index; Australian Bonds - Commonwealth Bank Bond Accumulation Index; Cash - UBS Warburg Australia Bank Bill Index. All earnings are reinvested but do not take into account the impact of tax and fees on earnings. This example is based on historical performance and is not indicative of future performance (future performance is not guaranteed and is dependent upon economic conditions, investment management and future taxation).
Ways to approach risk
Firstly, it's wise to determine your risk tolerance before you start. Some people thrive on taking risks; others may not sleep for many nights after taking the smallest risk. It's also important to note that the level of risk you will be comfortable with will vary from time to time as you develop different goals throughout your life and as your financial circumstances change.
Secondly, you will benefit from taking the time to understand the risks involved in your investments and how they can be minimised.
So, what does risk actually mean in the investment sense?
Basically, investment risk refers to the chance that you will make a gain or a loss when you invest, and importantly, the degree of that potential gain or loss. There are also different types of investment risk, including:
Market risk - The risk that movements in the market could push the value of your investments down
(or up) - and sometimes quite suddenly. Called market volatility, this can become a problem if you don't have the time to ride out the downturns in the market. And, while it may be tempting to bail out of an investment that has fallen, history has shown that investors who stick with their strategy tend to go on to recover and prosper.
Political risk - The risk that investment values can be affected by legislative changes or factors such as war, government instability, civil unrest and so on. For example, consider the effects a change in tax laws can have on your long-term investment strategy.
Inflation risk - The risk that inflation could eat away your investment gains. For example, while some investments, such as savings accounts, have little risk of default, there's the risk that inflation will cut into the returns being achieved. To keep inflation from eroding your returns over time, you need some capital growth, and the best way to get this is to invest in some growth assets, like shares and property.
Interest rate risk - The risk that movements in interest rates could affect your returns, especially when it comes to fixed interest investments.
Currency risk - While investing offshore is a great way of diversifying your portfolio, there's the risk that movements in the exchange rate could affect the value of your investments. To control this risk, many managers hedge their international investments, which is much like taking out insurance against currency changes.
Ways to minimise risk
An extremely effective way to reduce risk is to diversify your investment portfolio or, in other words, to avoid having all your eggs in one basket. Diversification helps you spread your investments across different asset classes, countries, investment managers or companies. When one of these isn't doing well, the chances are that another could be thriving and making up for the shortfall.
Because investment markets fluctuate, another proven way to reduce your risks is to invest for the
long-term. This helps ride out the short-term changes in asset values. Your risks can be greatly reduced because you have time to ride out the fluctuations and benefit from the higher long-term returns.
If you would like to discuss risk minimisation strategies or the level of risks in your portfolio,
please call Member Services on 1800 067 059 to speak to one of our planners at no additional cost.
Financial Planner profile: meet Anuj Shangle
Anuj Shangle, the joint winner of Chifley Financial Services' Wealth Creation Financial Planner of the Year 2006, came to Australia eight years ago to study for a Masters in Business Administration (MBA) degree and never left.
"I only intended to stay for two years but I then fell in love with the country," he says.
Anuj was born in India where he worked as a customs and excise inspector after completing a Bachelor of Commerce degree. After becoming a permanent resident in Australia and completing his MBA, he decided to become a financial planner because he was inclined towards finance and numbers.
"But what really gives me satisfaction as a financial planner is making a difference in peoples' lives, both financially and emotionally," he says.
Anuj has six years of experience in the financial planning industry. He first started off at AMP before moving across to Chifley in 2002.
Anuj, who has a particular passion for estate planning, works out of both Chifley's Sydney and Parramatta offices. As part of his job, he sometimes visits members and worksites in the South West and Western regions of NSW - a treat because he loves travelling to different parts of Australia. In fact, he once drove from Perth to Sydney to get a real feel for his new home country.
One of the managers we've carefully selected to manage Australian equities on behalf of the Fund is Orion Asset Management, a boutique fund manager which won Morningstar's Emerging Fund Manager of the Year 2005.
Boutiques are small specialised funds management firms typically established by proven investment professionals who have broken away from the bigger investment houses to set up their own businesses. They often outperform the larger managers because they are singularly focused on trying to achieve performance and don't have the distractions of a big bureaucracy. Being small, they can also be more flexible in their investment approach. And, being owner managed, there are better incentives to reward success.
Orion, which opened its doors for business in late 2002, was started by an experienced team of investment specialists, many of whom had previously worked at Credit Suisse Asset Management.
It basically believes that markets are inefficient and that the true value of an individual share is often not reflected in the market on any particular day. It also believes that companies' earnings growth prospects are often mis-priced by the market and that a strong disciplined research process can identify these anomalies.
As a result, Orion is strongly research driven and uses technology intensively to identify ideas. Once it identifies a company with good prospects, it rigorously examines that company by visiting it and by using relative valuation techniques and balance sheet analysis.
Orion 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.
If you have any further questions, or if you do not understand any of the information provided to you, please contact Member Services on 1800 067 059.
Where there's a Will, there's a way
FREE Fair Go Will storage offer*
Do you have an up-to-date legal Will?
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Until the end of November 2006, we would like to offer Fair Go members FREE WILL STORAGE FOR 12 MONTHS* when they purchase a Will. This service includes storage in a secure fireproof safe, a copy is sent to the Will writer, an annual Will update reminder and notification to Executors of the location of the Will.
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Enter the Fair Go promotional code 6206 4739 10 when prompted and also write this code on the
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Free Seminars
Are you looking to set aside some money for a house, a holiday or perhaps for your children's education? Would you like to know more about investment options, risk and return and managed funds? Are you wondering whether you will have enough money to retire on?
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Investment and market commentary
Do you know what happened in investment markets during the past quarter?
Investors were taken on a bumpy ride during the September quarter, thanks to falling commodity prices (which hurt resource stocks) and concerns about global economic growth. The big news items were that oil prices fell and that the Reserve Bank of Australia lifted interest rates while the US Federal Reserve didn't.
Australian shares
After a bad month in July, the Australian share market rebounded in August and September, returning
2.9% for the quarter, but still underperforming most overseas markets. The Australian market was helped along by a reasonably strong profit reporting season and much merger and acquisition speculation. The industrials sector was one of its best performers, jumping 5.9% on the back of frantic takeover activity and stronger overseas markets. The resources sector, however, slumped 7.2% on concerns about slowing US economic growth.
International shares
International shares outperformed Australian shares by 2.2% over the quarter, rewarding investors with a return of 4.1% (hedged) and 5.1% (unhedged). Despite evidence of a slowing US economy, investors around the world welcomed a pause in US interest rate hikes and a softening in oil prices.
Taking heart from its ongoing economic growth, Europe (excluding the UK) was a star performer, gaining 7.7% during the quarter while emerging markets also shone with a rise of 5.5%. The Japanese Nikkei Index, a very strong performer earlier in the year, lagged somewhat during the quarter to gain only 2.5%.
Listed Property Trusts (LPTs)
Australian LPTs continued their outstanding run, rewarding investors with a return of 10.6% for the quarter because of accelerated interest from overseas investors and as investors rushed into more defensive assets during the early part of the three month period.
Fixed interest
Despite worries about rising inflation, Australian bonds gained 2%, outperforming cash by 0.5%, during the quarter. Nonetheless, the Australian fixed interest market was unable to keep pace with its international counterparts. On a hedged basis, global fixed interest rewarded investors with a 3.6% gain. Concerns about inflation in the US influenced much of the activity in world markets, although these concerns have since eased, thanks to a fall in oil prices and a weakening in the US housing market.
Cash and currencies
Cash returned 1.5% for investors in the three months to end September. The Australian dollar fell marginally against major currencies in the latter half of September as spot commodity prices (such as for gold) continued to weaken. Over the quarter, the Australian dollar gained against the US dollar, Euro and the Japanese Yen, but fell against the New Zealand dollar and the British pound.
Contact us
Chifley Financial Services Limited
Ground Floor
28 Margaret Street
Sydney, NSW 2000
Member Services
T: 1800 067 059
F: (02) 9273 0033
Financial Planning
T: 1800 800 002
This document was prepared for the exclusive use of members of FuturePlus Super by Chifley Financial Services Limited (ABN 75 053 704 06) as the Approved Trustee of FuturePlus Super and an Australian Financial Services Licensee (AFSL 231148).
Please note that the information contained herein is of a general nature only. It has not been prepared taking into account your particular investment objectives, financial situation and particular needs. You should assess whether the advice is appropriate to your individual investment objectives, financial situation and particular needs. Before making an investment decision, you should seek the assistance of a professional adviser.
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