Summary: This year our most popular features focused on bank stocks, super and pension changes and the 2015 Federal Budget. We hope you enjoy our top 10 most read stories, in a year that saw several potential policy changes run up the flagpole.
Key take out: 2015 has seen investors continue to search for yield while watching interest rates, the Australian dollar and superannuation policy closely.
Key beneficiaries: General investors. Category: Shares.
It’s been a big year for self-directed investors: the search for yield has continued in earnest, the government made fresh attempts to balance the Budget using superannuation, and takeover activity has been heating up.
Here’s a wrap of our 10 most popular features, in case you missed any of them. Some consistent themes pop up in the list: three of the stories focus on bank stocks, while another three focus on this year’s Budget and its accompanying changes to pension access. Other reads on the state of the Aussie dollar, possible takeover targets and the importance of asset allocation are still as worthwhile as when they were first published. Enjoy.
1. Budget 2015: The investor’s guide (May 12)
This year’s Federal Budget offered some encouragement for Australian investors from a macroeconomic perspective. As James Kirby wrote, the deficit was set to shrink and GDP growth was scheduled to return to a healthy level. Of course, December’s Budget update, the Mid-Year Economic and Fiscal Outlook (MYEFO), has since dampened some of these hopes, with a downgrade in growth forecasts and an increase in the projected deficit.
But the big change in this year’s Budget for retirees was the restrictions on pension access. For retirees with a modest super balance, pensions are scheduled to increase; for retirees with a higher super balance, there is no change; but for retirees with balances in the middle, around $400,000 to $1.1 million, part pensions are set to reduce. Letters arriving in our inbox showed that many readers are understandably disappointed by these cuts.
2. Hunt for yield: The sequel (March 25)
As Eureka Report readers are well aware, the search for yield has continued this year and looks set to stay around well into next year. Even if the US Federal Reserve’s long-awaited interest rate increase puts pressure on other central banks to tighten, rates are likely to remain at historically low levels in Australia and around the world.
After the Reserve Bank cut the cash rate from 2.5 per cent to 2.25 per cent in February, and in anticipation of further easing (which came in the form of a May cut to 2 per cent), I published a list of the best yield stocks on the ASX at that time. Alongside the banks, insurer IAG rose up the list, along with Automotive Holdings Group, which was later included in the Income First model portfolio. I warned readers that any yield over 6 per cent signals the need for close research, as a high dividend in some cases means the market thinks the company faces challenges.
3. The superannuation squeeze (April 8)
Ahead of the May budget, a number of policy ideas were run up the flagpole. These included restricting access to pension entitlements, taxing super fund earnings, increasing the government pension from age 85 and including the family home in the assets test for welfare payments.
Robert Gottliebsen wrote that he regards many of these ideas as horrific, pointing out that the superannuation movement faces considerable pressure from young people and needs to make super relevant to them. He invited Eureka Report readers to share their views or suggest better ideas for reform. Then he published summaries of your responses and also forwarded this material to then assistant treasurer Josh Frydenberg and opposition leader Bill Shorten (see We hear you!, April 15 and Super: Something’s got to give, April 22).
4. Balancing act: The trouble with too many bank stocks (March 30)
Bank stocks are consistently one of the most interesting topics for many Eureka Report readers. In March, with Commonwealth Bank holding above $90 a share, analyst James Hannam considered the implications of the banks’ rise for investment portfolio construction.
If an investor can find 15 uncorrelated investments, they can reduce volatility in their portfolio by around 50 per cent, he wrote. But he added that the banks are highly correlated investments, meaning an investor with 40 per cent of their portfolio in local banks effectively has 40 per cent of their portfolio in one investment.
Since this story was published, bank share prices have fallen somewhat and yields have risen. But the principle of diversification remains as important as ever.
5. The high conviction offshore portfolio (January 12)
In 2014, less than one in five active equity fund managers beat the market, according to research from Bank of America Merrill Lynch. So what were they doing wrong?
Clay Carter says most fund managers own too many stocks, meaning their portfolios resemble the market. Instead, he suggested readers hold a high-conviction portfolio, diversified by industry and geography. He also recommended readers started investing straight away, rather than trying to time the market. Although Eureka Report has since changed the way we cover international equities (see Eureka international stocks: New plans, December 2), these principles are still useful to international and domestic investors.
6. The two best banks for income investors (August 10)
James Samson has written repeatedly that the Income First model portfolio should offer diversification as well as a solid yield. With that in mind, his initial investment in bank stocks made up a total of 12 per cent of the portfolio, significantly underweight the market.
In this story, he explained his preference for ANZ and NAB over Westpac and Commonwealth Bank for the portfolio. The big four banks are all extremely solid, world class banking assets, and the market was discounting ANZ and NAB because the relative quality of earnings was not as high, making these stocks more compelling in terms of yield and value, he wrote.
The Income First model portfolio is now almost 68 per cent invested and covers a range of industries – find out more here.
7. A wake up call on the Aussie dollar (March 18)
The Australian dollar has been trading around US72c this month, down from US82c at the start of the year. In March, when the dollar was buying around US77c, Robert Gottliebsen alerted readers to a Macquarie forecast that the dollar would continue to fall and would stay as low as US71c through 2017.
A sustained fall in the currency would lead to price rises for imported goods, he predicted. He tipped that tourism would boom but warned it was hard to see industry-wide growth anywhere in the world – instead, it was individual companies that were doing well.
8. Hockey’s pension plan will hurt (May 6)
One aspect of this year’s Budget that was leaked in advance was the plan to restrict access to the age pension. A number of retirees receiving a part age pension are set to have their payments reduced as the Government changes the taper rate on assets. Currently someone loses $1.50 per fortnight for every $1000 in assets they have over the limit but the plan for 2017 is to remove $3 in age pension for every extra $1000 in assets.
Scott Francis modelled the effect of this change on retirees with different levels of assets, both for singles and couples. He highlighted concerns that the proposal reduces the incentive to save extra money for retirement, as well as penalising retirees who have worked all their life and saved for retirement so they are less dependent on the age pension.
9. Beyond Toll: More takeover targets to watch (February 18)
In February, Japan Post made a stunning takeover offer for Toll Holdings that valued the logistics business at a 49 per cent premium. At the time, it seemed likely that this would be followed by further merger and acquisition activity, and indeed several deals have taken place or at least been proposed this year.
Tom Elliott, whose funds management group Beulah Capital has run a specialist takeover fund, has nominated several takeover picks for Eureka Report subscribers to keep an eye on. He predicted the tie-up between TPG Telecom and iiNet, then suggested future interest in commodity stocks and financials such as Challenger and Mortgage Choice. Watch this space.
10. The banks versus Telstra (January 19)
Given the low interest rate environment, the team at Stocks In Value compared the major yield plays on the Australian share market. They found that in January, Telstra looked slightly overvalued, although Westpac, ANZ and NAB screened as in value at that stage.
But the story warned that yields were not to be taken for granted as they reflect assumptions about future earnings that might not eventuate. SIV warned of the possible downside risk to dividends if APRA required increases in capital ratios sooner than expected. Of course, in July, the regulator called for the banks to hold more capital, which was followed by a string of equity raisings. We’ve regularly encouraged investors to consider diversifying their portfolio of income-generating assets.