SMSF - Investing for Income by @SMSFCoach

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Investing for Income How to seek out income from every sector of your portfolio. Presented By: Liam Shorte SMSF Specialist Advisor™ NextGen Wealth Solutions

description

Tips on Investing for additional income from every sector of your Self Managed Superannuation Fund portfolio. We cover cash, high interest accounts, term deposits, Bonds and Hybrids, Direct Shares, Equity for Income Funds, ETFs both High Yield and Bonds, Commercial Property and International shares. Showing you how to make the most of your SMSF while managing the risk. This is part one of a 2 part series with the second part “Investing for Growth” to follow. Check out our blog at Http://smsfcoach.wordpress.com or follow us on twitter at @SMSFCoach and @NextGenWealth

Transcript of SMSF - Investing for Income by @SMSFCoach

Page 1: SMSF - Investing for Income by @SMSFCoach

Investing for Income

How to seek out income from every sector of your portfolio.

Presented By: Liam ShorteSMSF Specialist Advisor™ NextGen Wealth Solutions

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Important informationThis presentation has been prepared by Genesys Wealth Advisers Limited ABN 20 060 778 216, Australian Financial Services Licence Number 232686 and principal member of the FPA. Any advice contained in this presentation is general advice only and does not take into consideration the participants personal circumstances. To avoid making a decision not appropriate to you the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. Any reference to the participants actual circumstances is entirely coincidental. When considering a financial product please consider the Product Disclosure Statement. Genesys and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products.

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Investing for Income from all sectors

• Cash • Term Deposits • Annuities• Listed Income Securities / Hybrids / Bonds• Fixed Interest funds • Australian Property • Australian shares• Exchange Traded Funds• International shares

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Cash is King (at the moment) but only if you make it work for youDo not settle for less than 3.0% for cash needed in next 3 months and do not pay account keeping fees. Use: •Macquarie Cash Management Account – 3.25% (Nov 2012)•CBA Cash – 3.25%

Link to High Interest Savings Accounts with no Fees / charges like:

•INGDirect – cash rate 5.35%(Personal) 5.0% SMSF for 4 months reducing to 3.5% (switch to Term Deposit after 4 months)•Ubank (Part of NAB) – bonus cash rate 5.46% if you put in $200 per month (No withdrawals) •RaboDirect – Bonus Cash rate 5.46% for 4 months reducing to 4.3%

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Term Deposits

• Beware the 4,5, 7 month specials!

• Look to spread some funds to lock in better 2, 3and 5 year rates. American rates not likely to rise before July 2015.

• Government guarantee reduced to $250K and may disappear soon.

• www.ratecity.com.au or www.mozo.com.au for deals

• Best consistent options: INGDirect, UBANK & Rabo Direct

• Don’t be scared of these banks as they are secure competitors. Approved Deposit Taking Institutions.

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Our new TERM DEPOSIT facility!

• Access over 24 Term Deposit Providers with one application

• Move from one to another at maturity without need for new forms

• Access to great rates for cash or term deposits easily• Only one place gets your information so you will not be

spammed• ID only needs to be submitted to the facility once.• Rates from 1month to 5 years and many options in

between.

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Annuities – evolving and becoming attractive againIssues about providers as a long term investmentBenefits of annuities• You are paid a guaranteed income regardless of how markets perform • You don't have to pay tax on your income from age 60 • You don't pay tax on investment earnings • You have the peace of mind of a regular fixed income – 4.45% Index

linked Drawbacks of annuities• In some cases you cannot take out your money as a lump sum (changing

and access within first 10-15 years common now) • You cannot choose how your money is invested by the fund manager• You may not be able to transfer to an account based pension• Over the long term, an annuity might pay less than cash or term deposits

or an account based pension – trading return for certainty

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LISTED INCOME SECURITIES : Corporate Bonds, Floating Rate Notes or Hybrids • Pre-GFC too little upside and too much downside. Now

decent rates of return reflect risk taken.

• Debt issued by Blue-chip companies

• Pay a fixed or floating rate

• Stick to the top issuers to protect your capital

• Recent issues like CBA PERLS VI, Westpac and Suncorp Notes offering 6.5-8% Yield very popular.

• Look to stagger maturities to avoid interest rate risk

• Note that the shares themselves are returning similar yields.

DO NOT TREAT

LIKE TERM DEPOSITS

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Current Comparison of bank hybrid securities

 

Bendigo CPS

Suncorp CPS2

CBA PERLS VI

(CBAPC)Westpac CPS

(WBCPC)ANZ CPS3

(ANZPC

Price ($) 100 100 100 99 98

Official ranking Preference

sharePreference

share Perpetual note Preference share Preference share

Risk characteristics Equity-like Equity-like Equity-like Equity-like Equity-like

Distribution rate 3m BBR + 5%3m BBR +

4.65% 3m BBR +3.8% 6m BBR +3.25% 6m BBR +3.1%

Distribution typeCash + franking

creditsCash + franking

creditsCash + franking

creditsCash + franking

creditsCash + franking

credits

Compulsory distributions No No No No No

Cumulative No No No No No

Principal repaymentBEN shares or

cashSUN shares or

cashCBA shares or

cash Westpac shares ANZ shares

Maturity date* 13-Dec-19 17-Dec-19 15-Dec-20 31-Mar-20 1-Sep-19

Capital trigger EventTier 1 capital <

5.125% NoTier 1 capital <

5.125%Tier 1 capital <

5.125%Tier 1 capital <

5.125%

Non-viability trigger event Yes Yes Yes No No

YTM (on current price) 3m BBR + 5%3m BBR +

4.65% 3m BBR +3.8% 6m BBR +3.6% 6m BBR +3.7%

Current Bank Bill Swap Rate (BBSW)

3 month 3.13%

6 month 3.16

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Fixed Interest / Credit Funds – Deal with all of the above locally and internationally

• Professional Mangers • Diversified Portfolio• Global reach• We use a mixture of conservative funds as a core and then some more

aggressive equity like managers to seek higher returns.

Sector Limits (Min/Max)

Core Income Portfolio 20/100

Domestic Hybrid Securities

0/30

Global Investment Grade 0/40

Global High Yield 0/15

Emerging Market Debt 0/15

Credit Opportunities 0/20

Core portfolio includes:RMBS, CMBS, floating rate notes, asset backed and fixed rate corporate debt securities

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Sample of current conservative exposure

81.6%

6.8%

11.2%

0.4%

Post fee as at 30 September 2012 3 months (%) 1 year (%) 3 years (%pa) Since inc1 (%pa)

Fund Performance 2.38 6.65 7.19 5.88

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Australia is out of balancePercentage of superannuation assets invested in fixed income

Also… Australia has a aging “baby boomer”

population

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Opportunities in credit marketsWorld’s largest property group

Jan 07: +0.27%Dec 11: +2.78%

Jan 07: +0.12%Dec 11: +2.53%

Large US conglomerate

Jan 07: ~0.10%Dec 11: +1.70%

Stable rental income

Diversified tenants and lease profile

4/14 global AA rated banks

Credit spreads

Spread data sourced from Bloomberg. January 07 spread taken as at 01/01/07; November 2011 spread taken as 30/11/11. Not indicative of actual portfolio.

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Why use a Fixed Interest Fund Manager?

1. Strong returns through numerous cycles. 7.2% avg. over last 9 years. 14.47% last 12 months (Sept. 2012)2. Highly rated by researchers3. Awarded portfolios- Highly diverse credit portfolios that are not easy to create

Forward Looking Investment Yields

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Benefits of Long-Term InvestingThe risks of cash

Gross A/Tax (Low) A/Tax (High) Super

Twenty Years to December 2010

Cash 4.3% 3.5% 2.2% 3.7%

Cash (Real) 1.8% 1.0% -0.3% 1.2%

Australian Shares 11.0% 11.2% 9.0% 11.4%

Ten Years to December 2010

Cash 3.8% 3.1% 2.0% 3.2%

Cash (Real) 0.9% 0.2% -0.9% 0.3%

Australian Shares 8.4% 8.6% 6.4% 8.7%

Cash is a HIGH RISK investment when it comes to Shortfall & Inflation risks

Cash UNDERPERFORMANCE IS LARGER on an after-tax basis

Short term feeling of security versus long term feeling of INSECURITY

Source: ASX/Russell Long Term Investing Report, 2011. Inflation averages = 2.5% (20yrs) and 2.9% (10yrs)

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Dividend Franking CreditsTaxable Income Accumulation Phase

Taxable Income

Pension Phase

TLS Shares $1260 $540 $1,800 $1,800

ANZ Shares $840 $360 $1,200 $1,200

Total $2100 $900 $3,000 $3,000

Tax @ 15% $450

Tax @ 0% $0

Less: Franking credits

$900 $900

Excess Franking credits

$450 Refund $900 Refund

The Power of Franking Credits – The 30% boost

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Our Direct Share – Income Portfolio

Designed for income with a growth twist!5.9% Income Yield and 95% Franked

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Example of Diversification - Metcash

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But then there is real diversification! WESFARMERS

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Equity for Income FundsExploring stocks Inside and Outside The Top 50 As Well

1. “Cheap stocks” based on proprietary research 1-2% dividend yield premium vs market

2. Skew towards sustainable yielding names 1-2% incremental income

3. Further enhance income by selling options 2-3% incremental income

4. Reinvest part of income in downside protection 1-2% incremental cost

TARGET ~8-10% gross yield ~70% of market risk

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Where do they find that extra income

-5%

0%

5%

10%

15%

20%

Merlon Capital Partners

Zurich Equity Income Fund

MLC Incom

ebuilder

CFS Equity Income

Perennial Shares for Income

Vanguard High Yield Fund

Inco

me

as a

Per

cent

age

of C

urre

nt U

nit P

rice2

Other Income

Franking Credits

Dividend Income

Fees

1 Historical beta vs ASX 200 using Bloomberg total return data2 Average of 2009, 2010 & 2011 distributions as a % of 23 November unit price

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Style & market exposure

Value Passive Growth

Core Style

His

tori

c B

eta

1

0.5

1.0

MerlonEquityIncome Zurich

EquityIncome

MLCIncomeBuilder

PerennialShares for

Income

CFSEquityIncome

Russell RDV or

Vanguard HighYield ETFs

MoreConservative

MoreAggressive

1 Historical beta vs ASX 200 using Bloomberg total return data2 Average of 2009 and 2010 distributions as a % of 12 January unit price

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Seeking Income Using Exchange Traded Funds

EquitiesWithin the equities asset class, investors can access high

dividend ETFs.

• iShares S&P/ASX High Dividend (IHD), • SPDR MSCI Australia Select High Dividend Yield Fund (SYI), • Russell High Dividend Australian Shares (RDV) and• Vanguard Australian Shares High Yield (VHY).

Besides the big four major banks, these ETFs invest in a number of companies with strong dividend yields, including Metcash (MTS), Wesfarmers (WES) and Toll Holdings (TOL).

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Bond Exchange Traded Funds (ETFs)

• These ETFs, however, invest according to specific benchmarks. For example,, the iShares UBS Composite Bond Index Fund (IAF) tracks the UBS Composite Bond Index and therefore invests in both corporate and government bonds.

• The Russell Australian Select Corporate Bond (RCB), on the other hand, tracks the DBIQ 3-year Investment Grade Australian Corporate Bond Index and therefore only invests in corporate bonds.

• Some defend against inflation like the iShares UBS Government Inflation Index Fund (ILB) which invests in an index made up of inflation-linked bonds issued by Australian and state governments.

• To get diversification across a selection of income securities, we invest in a range of ETFs.

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International Shares – Why bother?

• Majority of US and International Shares pay 1-2% Dividends

• They do not offer a good income return in AUD$ terms now that growth is subdued

• Poor returns from this sector because the Aussie Dollar has been strong

However:

• S & P 500 in US is at 1460 back where it peaked pre-2008

• ASX S & P Top 200 is at 4,490 (peaked at 6,853 in Nov 2007) 36% below its peak.

• DO NOT WRITE OFF OVERSEAS SHARES – Except Greece!

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Global Equity Shareholder Yield Opportunity• 9% per annum are not out of reach. Companies that are committed

to 3 principles: cash dividends, share repurchase, and debt repayment

• Portfolio of high-quality global companies with attractive income and capital appreciation potential

• Generating strong free cash flow and use their excess cash to provide shareholder yield

• Cash-flow-oriented approach and relatively low correlation with benchmark

• Look for a record of strong returns since inception

As at 30-

Sep-2012

3 Month

s%

1 Year

%

2 Years

%

3 Years

%

Fund¹ 2.48 10.03 6.86 5.52

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Fund 2: Chance to ride the wave of “Chindian” growth

A Global Fund that offers investors the opportunity to invest in a selection of the world’s most outstanding companies in portfolio of 20 to 40 stocks. 21.9% return in last year after fees.

• Priority, they focus on minimising any risk of permanent capital loss.

• Management invest in the funds they manage. • If risk of permanently losing invested capital is low then assess the

ability of the company to deliver superior returns over the medium term.

• An outstanding company is one which has a sustainable competitive advantage earning returns on capital well in excess of the business cost of capital for a sustained period. E.g. KFC – 16,000 new sites expected in China

• “Morningstar’s Fund Manager of the Year” award for International equities.

• Easy to understand why they invest

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Property – Healthcare & Industrial In – Retail OutWhy not Residential? We are seeking Income - Residential provides historically low income returns (2-3.5% average in Sydney).If you need income to fund pensions, holidays, upgrade cars, medical expenses etc then you can’t depend on residential income flow.We address property investment for Growth in a separate seminar.

Why Commercial? •Traditionally pays a much higher income yield on your investment. •Can use property in your own business, your children's business?•You can leverage your investment by borrowing.•You can access it via direct, listed, unlisted markets

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Healthcare Trust: 7.33% 5 year average Income Distribution• Investment in a portfolio of leading Australian hospitals,

medical centres and day surgeries • Will invest in the Fund for at least five years. • Regular, stable quarterly income • The potential for capital growth over the medium to long

term • Well positioned to cater for Australia’s large ageing

population • Manager’s expertise in healthcare and property

management provides distinct competitive advantage when selecting the best assets and development opportunities

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Direct Industrial Fund (closed to new money)

New unlisted retail property fund investing directly in a diversified selection of Australian industrial assets (4-6 max)Features and benefits•Sustainable, stable and growing tax- advantaged income payable quarterly from long term leases (WALE 14.8 yrs)

•8 cents per unit average annualised yield target

•Potential for capital growth by acquiring and actively managing a diversified portfolio of quality Australian industrial properties. •Daily unit pricing for transparency.

•Over the investment term – geographic, asset and tenant diversification to reduce investment risk.

•Suitable for retail, SMSF and IDPS investors.

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Coles Distribution CentrePerth - WA

TOLL Fleet & Logistics Centre – Altona VIC

Grace Worldwide Logistics Centre – QLD

Australia Post Distribution Centre - Kingsgrove

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Portfolio of $250K with 5% income target = $12,500

$250,000 Portfolio

Investment Rate of Return

Annual Income

$150K in 1 year Term Deposit

Term Deposit 4.5% 6750

$70K in RDV ETF Basket of 50 Shares 6.1% 4,270

$30K in 3 x Hybrids

ORGHA, CPAPC & IANG 6.9% 2,070

5.24% $13,090

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A quote to finish

“When all is said and done, there is really only debt, equity and property in which to invest. It’s the combination of asset classes and the blends within each asset class that determines the success of a portfolio over the long-term”

Mike Crivelli – Founder of Perennial Investment Partners.

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Thank You – Questions?

For more information:

Check out our blog: The SMSF Coach http://smsfcoach.wordpress.com

Our new website going live this week:www.nextgenwealth.com.au

Facebook: www.facebook.com/nextgenwealth

Twitter: @SMSFCoach