Investing in Retirement

Stability back in fashion

Lesley Parker

April 20, 2011

Balancing act...investors are advised that a diverse portfolio is important to achieve an adequate income in retirement.

Three years after the peak of the global financial crisis, retirees and pre-retirees remain wary, saying they would rather have peace of mind than chase high returns, according to new research.

In a survey late last year, researcher Investment Trends asked 1000 retirees and pre-retirees what they thought was most important in a retirement investment product and they overwhelmingly valued stability over high returns.

The five features the respondents ranked most highly were tax effectiveness (which was rated as essential, very important or important by 91 per cent of those surveyed); easy access to their money (87 per cent); a product that was easy to understand (86 per cent); stable returns (86 per cent) and protection against market falls (77 per cent).

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''These results turn established wisdom on its head, with stable returns proving much more important than higher returns or lower costs,'' says the chief operating officer of Investment Trends, Tim Cobb. ''That may reflect investors' experiences during the GFC, with many experiencing large and unpredictable fluctuations in their retirement savings.''

ANNUITIES AND GUARANTEES

Cobb says the results indicate it might be ''time for investors and advisers to take another look at annuities and some of the innovative new retirement income products which offer protection against market falls''.

Annuity-style products, with their contracted rates of return, have been a hard sell for many years and especially while the sharemarket offered double-digit returns.

However, anyone who watches television will have seen how Challenger's ad campaign taps into the anxiety retirees are feeling by promoting ''safe, reliable retirement income'' from its annuity products.

With these products, you make an initial investment in return for agreed income payments over a contracted period. The rate of return is fixed at the outset and doesn't fall if markets go down - but it doesn't rise if markets go up, either.

Then there are ''capital-protected'' products. AXA's North product, for instance, offers an optional ''protected retirement guarantee'' feature that locks in guaranteed income.

Advisers say clients, particularly retirees, are more wary because of the GFC but their advice to them is not to give up on risk - market risk - only to take on other forms of risk, such as the danger that inflation will erode the value of their retirement savings.

An HLB Mann Judd financial adviser, Chris Hogan, says that while most of his older clients are more risk-averse, ''they still recognise that growth assets are an essential component of their investment portfolios''.

NO FREE LUNCH

A financial adviser and director of Multiforte Financial Services, Kate McCallum, who also finds retirees in particular are more risk-aware, says ''it comes down to the practical challenge of how to protect capital while achieving the return they want''.

She gets the occasional inquiry from a client about annuity or capital-protected products ''but we're not fans of protected products as they're very expensive and we believe a well-constructed portfolio that's managed - not set-and-forget - can be a better option''.''I suppose the key message here is: there's no free lunch,'' McCallum says.

''There's a cost of having the capital protection and the certainty and this needs to be evaluated for each client [with regard to] their comfort level with volatility and their return requirements.''

Hogan says he doesn't see much interest in annuities and capital-protected products, either. ''Our view is that we don't need to get too tricky with innovative products,'' he says. ''Protection is available simply and cheaply through holding term deposits, uncomplicated fixed-interest funds and cash'', as part of a diversified portfolio.

He, too, notes that capital protection typically comes at a cost. ''For an annuity, the cost is lack of liquidity,'' he says, with your capital sum locked up for a set period.

People also need to compare the return being offered on an annuity with term deposits, which currently have quite high interest rates.

''For other structured products with capital protection built in, the underlying fees can be very high,'' he says. ''We generally don't think the cost is worth it.''

(In a recent relaunch of the North platform, AXA - well aware of criticisms concerning cost - cut its standard administration fees, halving the rate for smaller account sizes from about 0.9 per cent to 0.4 per cent.)

McCallum notes that with many capital-protected products there's a set period for the protection to work. ''If you have to break the set term, there are usually hefty penalties associated with that.''

DIVERSIFICATION IS BEST

The head of retail for Australian Unity Investments, Cameron Dickman, says those who keep their money in cash aren't necessarily working towards their ultimate goal of having a retirement income that lasts as long as they do.

While keeping a significant proportion of retirement savings in cash options such as term deposits minimises market risk, ''it exposes investors to a number of other risks, including inflation risk, income risk and opportunity risk'', he says.

Inflation risk is the risk that capital locked up in non-growth assets, such as term deposits, will have less value at the end of, say, a two-, three- or five-year term.

Opportunity risk is the risk that you'll miss out on better returns and capital growth from opportunities that might become available while your money is locked up.

Perhaps the biggest risk at the moment is income risk, Dickman says.

A stable, regular income will become a priority for the baby boomers now starting to enter retirement but they won't get that from a term deposit for which interest is often paid at the end of the term, he says.

''Retirees, in particular, need to … find a balance between their desire for low-risk investments and their need for returns that will generate ongoing income in their retirement,'' Dickman says. ''It comes back to the value of taking a balanced approach through a diversified portfolio and understanding that different investments offer different benefits, returns and risks.''

Key points

• Retirees are more interested in stable returns than high returns or low costs.
• Capital-protected and annuity products tap into this concern.
• But advisers say the cost of such products has to be weighed against the promised peace of mind.
• They warn that being in cash to avoid market risk means you take on other risks, such as inflation.
• Diversification is the best protection, they say.

 http://www.smh.com.au/money/investing/stability-back-in-fashion-20110419-1dlzl.html#ixzz1MT4O7Zax

Reap the fruits of your labour

Annette Sampson

May 11, 2011

Matter of choice...the fund you choose is a critical decision. Photo: Erin Jonasson

Don't ruin your retirement by leaving your money in a lagging super fund, writes Annette Sampson.

Inertia is costing super fund members tens of thousands of dollars in lost earnings and future retirement benefits.

While most employees have the right to choose where their money is invested, or at least choose an appropriate investment option within their fund, the vast majority don't exercise that right.

This is creating a lucky-dip universe where those fortunate enough to land in a good fund do well but others unknowingly remain in underperforming funds that can severely limit their lifestyle when they reach retirement.

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Money Tables

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Research for Money by SuperRatings shows that the median return for super funds generally quoted in news reports disguises the fact that some funds perform much better than the average - and some much worse.

Despite the Howard government's introduction of fund choice, about 80 per cent of super money remains invested with employers' default funds. Much of this money is in the default option of that fund - typically a balanced portfolio, which SuperRatings defines as being one that has 60 per cent to 76 per cent of its investments in so-called growth assets such as shares and property.

Over the 12 months to March 31, the median balanced fund returned a solid 5.1 per cent - largely thanks to the post-GFC recovery in global sharemarkets.

But if you were unlucky enough to be in the worst performer on SuperRatings's database, you would have lost 1.9 per cent over the year.

By contrast, the best performer returned 8.2 per cent - more than 10 percentage points better than the laggard and three percentage points better than the median.

MASSIVE DIFFERENCE

Of course, super isn't a short-term game and the fact that your fund may not have done well over a particular 12-month period generally isn't cause to run screaming in the opposite direction.

The managing director of SuperRatings, Jeff Bresnahan, says different funds do well at different points in the market cycle and he would generally recommend investors judge theirs over five years to seven years to gain a clearer picture of how well they do under a wider range of conditions.

But even over these longer periods the differences can be substantial.

Over the past five years, SuperRatings says the best-performing fund has returned 5.3 per cent a year while the worst has lost 0.9 per cent. Over the past 10 years, the best performer has returned 7.3 per cent a year, versus 2.8 per cent for the bottom-of-the-pack fund.

To put this into perspective, it says someone who invested $100,000 in both funds five years ago would now have $125,696 if they had been in the top performer; $95,582 in the worst. Five years is not a long time in terms of retirement savings but even over this sort of period, being in the wrong fund could have cost up to $30,000.

Over the past 10 years, SuperRatings says, $100,000 would have grown to $201,924 in the best fund and $131,549 in the worst. That's a difference of about $70,000 and while the top fund gave investors a healthy return, the bottom fund merely kept pace with inflation - lagging the performance of even the median cash fund.

Bresnahan says the past 10 years have been a good test of how funds cope with a full range of market conditions. ''We had the tech bubble and crash, then the rally in mainstream shares, the GFC and the mini rally following it,'' he says. ''If your fund has underperformed by a big margin over 10 years you'd have to consider whether it warrants sacking it.''

Bresnahan says that over five years, a five-percentage-point annual difference in returns generates a difference in outcomes of just under 30 per cent; over seven years, the difference is almost 40 per cent.

''That's where apathy costs [investors] big time, because we don't penalise managers who get it wrong.''

AVOID THE DUDS

The chief executive of the Australian Institute of Superannuation Trustees, Fiona Reynolds, says even a 1 per cent difference in returns can make a huge difference over your working life. She says inertia is costing some fund members dearly and the government is trying to address this problem through its proposed super reforms.

These include the introduction of a new low-cost default fund to be known as MySuper, having the regulator put out information so consumers can more easily compare funds and streamlining the administration of funds and making it easier for consumers to transfer between them.

However, Reynolds fears many consumers will remain unengaged with their super until their account balances grow to a size where they realise this is serious money.

The principal of Mercer, Russell Mason, says it is disappointing to compare financial homework with all the work people put into researching a new-car purchase. ''If only they put the same effort into selecting their super fund,'' he says. ''It would have a far greater effect on their situation.''

However, Mason warns that simply opting for the best-performing fund without knowing why it has done well can be dangerous - particularly if you use shorter-term performance results.

''One of the warning signs [that a fund might be a dud] is if it is performing well outside the range of other funds - either on the downside or the upside,'' he says.

''If 90 per cent of funds returned 7 [per cent] to 12 per cent last year and yours returned 3 per cent or 20 per cent, it should ring alarm bells. We have seen examples of extraordinary performance that comes about because of high risk and leaves investors very exposed if circumstances change.''

DON'T RELY ON LABELS

Mason warns that even within a definition such as ''balanced'' there can be legitimate reasons why one fund will do better than another. He says there is a big difference between having 60 per cent of your fund in growth assets and having 75 per cent. If two funds have the same official weighting, one might use more passive investments such as index funds while the other may have more illiquid assets such as infrastructure and private equity, or be more inclined to use more active fund managers.

''The vast majority of members have a poor understanding of what they're invested in,'' Mason says. ''Many hear 'balanced' and think it means a 50:50 mix of defensive and more risky investments.''

The head of investment consulting at Mercer, Graeme Mather, says a joint effort by the Association of Superannuation Funds of Australia and the Financial Services Council to produce a standard risk measure should help consumers better understand the risk-return trade-off. He says the move will require funds to estimate the number of negative years that investors can expect in every 20 years and they will then be rated on a scale of one to seven using that information.

While that doesn't address other risks in super funds, such as liquidity risk or the risk that the people running the fund will have problems, Mason says it should at least help consumers understand why a fund with a 10 per cent return but a low-risk rating may actually be a better prospect than one that has returned 12 per cent or 15 per cent by taking on much more risk.

AGE MATTERS

Reynolds says consumers should also be aware that if a fund is doing its job properly, it should tailor its investment strategy to its membership. This may mean a fund with a largely young membership will have different returns to one with mainly older members but both could be doing a good job.

''It's about what works for members rather than just how [the fund] compares to someone else,'' she says. ''There has been too much following the rest of the industry.''

Mather says one legacy of the GFC has been increased volatility in investment returns - though it has also created opportunities. SuperRatings'a figures show the effect of the GFC has by no means worked its way out of the system, with median fund returns over the past three and five years lagging, or barely in line with, inflation.

Over the past three years, the median balanced fund has returned just 1.3 per cent a year while the return over five years is a marginally better 2.5 per cent. ''People might look at that and say they'd have been better with their money in a bank account but most people wouldn't save for retirement without super,'' Reynolds says. ''The returns still don't look too good at the moment but for many people, retirement is still a long way off and over that time they'll be better off in the compulsory system.''

Set for double-digit returns

SuperRatings's figures show funds are on track for a double-digit return this financial year, which will come as good news to fund members still smarting from the losses incurred during the GFC.

The managing director of SuperRatings, Jeff Bresnahan says while the markets are still volatile and returns will swing up and down from month to month, the median balanced fund returned 9.53 per cent in the nine months to March 30 and could top 10 per cent if investment conditions remain positive.

Australian shares are the biggest driver of fund returns but Bresnahan says the good news is that funds haven't just been riding on the market's coat-tails.

He says the median Australian share option has outperformed the broader sharemarket over one-, three-, five- and 10-year periods, even after fees and taxes. He says balanced funds have benefited from this.

The two top-performing balanced funds - Catholic Super's balanced option and Local Super's growth option - both returned 8 per cent or more through the year to March 31 (though Local Super's conservative option did better with 8.5 per cent) and the top Australian share fund, NGS Super, produced a 10 per cent return. See tables page 6.

Bresnahan says capital stable funds have benefited from a flight to US, German and Australian bonds. International shares have also contributed to some funds' profits, though the rising Australian dollar has taken the edge off those returns for funds that don't hedge their currency exposure.

The SuperRatings tables show the top international share options have recorded stellar returns in the past year - as high as 11.1 per cent - though the GFC still has most funds in the red over the past three to five years.

However, the extent to which funds benefited from the recovery in overseas markets has depended on their currency hedging. SuperRatings says the MSCI World Index's return over the past 12 months was 12.36 per cent, after hedging against a rising Australian dollar. But the unhedged version of the index returned 4.25 per cent.

Bresnahan says most funds in the SuperRatings survey partially hedge their currency exposure, typically 26 per cent to 50 per cent of international portfolios.

The head of investment consulting for Mercer, Graeme Mather, says many funds have reduced their level of hedging to about 35 per cent to take advantage of a potential winding back of the Aussie dollar. This has taken gloss off returns but may pay off if the dollar depreciates.

http://www.smh.com.au/money/super-and-funds/reap-the-fruits-of-your-labour-20110510-1eg2p.html

Investor Dialogue: Soo-Hai Lim

Soo-Hai Lim, manager of Baring Asean Frontiers Fund, explains why he thinks Southeast Asia has the greatest potential in the region.

By Rupert Walker | 17 March 2011
Keywords: baring | asean frontiers fund | asean | southeast asia

Soo-Hai Lim joined Baring Asset Management in 2005 and manages its Asean Frontiers Fund, a $370 million Dublin-registered fund that is regulated by the Hong Kong Securities and Futures Commission. Lim also directs research in the Australasia and Asean markets, and is a key member of the portfolio construction team for all Asian regional mandates. Lim is Singaporean and was previously the country specialist for Australia and Malaysia for five years at Daiwa SB Investments. His frontiers fund started life with a wider Pacific mandate, but in 2008 the focus changed.


Why did you change the mandate of the original fund?

We decided that it was too restrictive and not consistent with our belief that the greatest potential within the region was among the Asean nations — despite the original fund’s strong performance. The Asean countries are on a secular growth trend, supported by young demographics — especially in Indonesia and the Philippines — and it is at least as convincing as India’s story. So we gained the approval of unitholders to change the mandate to an Asean focus, and hence changed the benchmark, and we also gained the flexibility to invest in companies on the frontier of the region, such as Sri Lanka, to give some extra spice to our investors. We can invest up to 30% of our net assets in non-Asean countries: so far that’s only been Sri Lanka, but Bangladesh is now on our radar. Overall, we are restricted to 15% more or less than a country’s representation in the benchmark, and 5% either way for a named company, and a 10% absolute limit. Currently, the fund is invested in around 70 stocks.

LIM'S TOP THEMES Focus on unrecognised growth stocks in Asean and frontier countries  1  Rising consumption by half a billion people offers vast opportunities  2  Asean learned hard lessons in 1997 and passed the global crisis test  3

What is your investment philosophy and style?

We are stock pickers and make our selections through intensive bottom-up analysis and use the well-established “growth at a reasonable price” criteria. But, we also have our own five-point check-list to help find attractive opportunities. These are growth, liquidity, valuation, management and currency. We have a stock template and score each proposition from one to five, with “one” denoting outperformance potential, “five” for underperformance and “three” as benchmark performance.
Basically, we look for stocks where growth potential isn’t fully priced in, and can expect to produce excess returns — that is alpha — over our benchmark, the MSCI Southeast Asia Total Net Return. In terms of our broader approach, geographical focus dominates sector considerations, although we have certain preferences, such as energy and materials. The key is that we gain outperformance through stock selection rather than asset allocation.


And your process?

We use both qualitative and quantitative methods to screen for ideas in our investment universe. Our qualitative methods include the use of top-down macro, thematic, sector views from our strategic policy group in London, as well as our own views of the catalysts for the individual Asean markets to direct our research focus to look for alpha-generating ideas. A key part of this process is intensive meetings with companies’ managements in our search for unrecognised growth stocks. We also use these meetings to assess potential stock ideas in any part of the value chain of that company’s industry. To supplement the qualitative screening, we have our in-house quant screens based off several growth and value factors like earnings per share revision, momentum return on equity to rank stocks in our investment universe into deciles.
Just as important, our process is continuous, involving constant discussion, analysis and review. We are also happy to receive input from brokers, as long as they add value. By that I mean that they have reliable market information, come up with original ideas early and can provide access to company management.


Who are your investors?

We enjoyed substantial inflows last year from European retail customers, and always have a healthy distribution in Hong Kong to retail investors and funds of funds.


What are the best opportunities now?

At the moment we are underweight Singapore (which makes up more than a quarter of our benchmark) and Malaysia, and overweight Indonesia, Thailand and the Philippines. Indonesia’s improving macroeconomic trajectory is well established, and there are key companies such as Astra that are tremendously placed. In fact, Astra has a great story: it has a 50% share of the domestic market for the assembly and distribution of motor vehicles, and historical precedents show there is a linear correlation between vehicle penetration and increases in per capita GDP. So, if Indonesia’ growth continues, Astra will be a major beneficiary. The Philippines is especially exciting — it has a young, educated and increasingly affluent population that could sustain a consumer boom and is almost underwritten by the traditional remittances from its diaspora. If the new president can deliver on his promises of reform, like reducing corruption and increasing tax collection, then its potential is enormous, in particular in the consumer and infrastructure sectors. We have already enjoyed strong performance here, taken profits, and are now looking to reinvest in some stocks that have fallen to attractive levels.
Thailand has some great companies and can justifiably boast about being an agriculture superpower; unfortunately it has suffered from unstable politics during the past couple of years. Malaysia is perhaps too reliant on commodities riches, to the detriment of the development of other industries and companies, but its closer relationship with Singapore should lead to opportunities. Meanwhile, Singapore constantly re-invents itself, and it always offers attractive, well- managed companies to invest in. Our underweight position simply reflects better investment opportunities elsewhere in the region.


What about the frontier markets?

Sri Lanka appealed to us because companies such as the conglomerate John Keells and a couple of bank stocks looked undervalued following the end of the civil war and evidence now of political stability. We also have exposure to greater China through a holding in the Baring China A-Shares Fund. Bangladesh has enormous potential, but valuations have already shot up, so we will be looking for opportunities on any weakness. Laos is a country we’re now examining closely as the latest frontier market this year.


What are the greatest risks?

Inflation is certainly a problem within the region. But, a large part of it is perhaps due to a temporary rise in food prices due to extreme weather events and farmers struggling against poor harvests. On the other hand, as these economies grow richer, dietary habits change, which could lead to a permanent, secular sift in food prices. Politics remains an issue in Thailand, execution of policy is an issue in the Philippines, Vietnam is suffering from the effects of an overheating economy and land acquisition difficulties are holding Indonesia back.
Despite these problems, the region offers among the best opportunities in the world today. And, crucially, local companies are rising to meet those challenges. That translates into great investment potential.

This interview was first published in the February issue of FinanceAsiamagazine.

http://www.financeasia.com/News/250672,investor-dialogue-soo-hai-lim.aspx