Market Insights Retirement Services Australia
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Retirement Services Australia Market Insights 25 March 2020 CURRENT VIEW: We think that remaining in cash is still the best option for the near term given the recent developments in the money and credit markets. These include a liquidity crunch, a spike in credit spreads and fear that many investors will default on mortgages as unemployment rates rise. Risks and uncertainties remain high. Although liquidity problems are being addressed aggressively by Central Banks across the globe, particularly by the U.S. Federal Reserve (Fed) and Reserve Bank of Australia (RBA) with their rate cuts and massive quantitative easing programmes, we have yet to see a reasonable level of stabilisation in the very fragile credit and equity markets. We think that it may be too early to make a judgement about the effectiveness of these measures as they have just been deployed. Still, we expect some improvements in the coming days as these combined actions by the Fed, RBA and Australian government seek to provide some relief to distressed financial markets. We recognize that the current prices of shares are significantly cheaper than their highs of February 2020, and we also think that current risks still outweigh rewards given the uncertain economic impact this pandemic brings. We continue to remain cautious as overall sentiment could get much worse if the economic damage turns out to be larger than forecasted. The extent of the “damage” will be revealed in April through the reporting of Gross Domestic Product (GDP) [2], unemployment and company earnings data across China, Europe, US and Australia. The results are expected to be bleak. After obtaining this information, we and you as an investor will have a better assessment of how bad the situation is, and whether policy measures taken by our government and other governments are appropriate enough to address the economic and financial market fallout. Thus, we expect another correction in the financial markets once this information becomes available. Whether such a correction will move prices further south or north is unknown at this point in time, but we struggle to validate a positive market response to what is likely to be very negative economic data. Nonetheless, the disclosure of this information will help financial markets to price financial assets more effectively, and in turn, help Australian, US, European and Chinese markets to find a floor in asset prices which is essential for stabilization of financial markets and economies. Another reason we are deciding to stay in cash for now is because of the death cross we have seen that recently formed in the ASX200. The death cross is a technical chart pattern that traders often use in an attempt to predict bearish market momentum[1]. Although we have already seen equities tumble and enter a bear market ahead of the formation of this pattern, historical data suggests that prices still fall. Given the current level of uncertainty and sensitivity of the markets to news headlines, further falls in prices is not an impossible case—although we hope that it won’t be as steep as we have seen during the last few weeks. Looking ahead, we think that the equity markets will be trading sideways for a while before proceeding into a sustainable recovery. This U-shaped pattern is due to the fact that uncertainties still
remain, one of which is when a proper medication will be commercially available so that we can finally continue on with our normal routine before this pandemic. For the complete list, see note we sent last week. Moving back into the markets This is a guide to our current position regarding investing back into markets and what you can expect when we do return you to market. Our investors traverse risk profiles from Defensive to Very Aggressive. For clients focused on strong growth and recovery of capital we have formulated an “Alpha Portfolio” designed to deliver high growth in today’s complex climate. For the more risk averse investors, we have created “Core and Satellite” portfolios for the following risk profiles which we have described in more detail below: The High Growth Alpha Portfolio This portfolio is composed of ETFs and direct Australian equity shares. Attributes considered are current economic and financial outlook, return objective, time horizon, and other qualitative factors deemed relevant. The model portfolio is concentrated to certain sectors which we believe will perform well in years ahead. Even though the portfolio is concentrated to certain sectors, the allocation of the underlying
securities in each sector is ensured to maintain diversification to mitigate the idiosyncratic risk of each companies. The sector allocation for the model portfolio is presented below. Sector Allocation (%) Cash 2 Healthcare – Australia 12 Healthcare – World 28 Technology – Australia 0 Technology – World 47 Natural Resources – Australia 2 Natural Resources – World 3 Mid Cap – Australia 0 Small Cap – Australia 2 Emerging Markets 4 The model portfolio is currently overweight Technology and Healthcare sectors as we believe that the current economic climate with global lockdowns are making these sectors far more desirable investment options than traditional markets. COVID-19 has focused businesses in which the governments around the world consider non-essential as nearly redundant, with operations being closed temporarily. This opens opportunities in technology with people utilising household technology more often and business operations also compensating for the alternative work settings at home. The healthcare sector is favoured because it is currently at the front line in the development of solutions to the current pandemic. We will share with you our specific ETF and Stock Selection when we are ready to move back into the market.
CORE PORTFOLIO Investment Selection This section presents the ETFs included in our portfolios as of March 2020. Cash BetaShares Australian High Interest Cash ETF (AAA) BetaShares Australian High Interest Cash ETF provides convenience with an acceptable rate of return. Its mandate is the investment of its funds to bank deposit accounts maintained by the largest banks in Australia. The benefits of scale are immensely relevant to a fund that invests entirely in bank deposits. The size of the fund can be taken advantage to negotiate lower costs and improved rates with different banks. BetaShares currently invests its capital to cash at call accounts (38%), notice accounts (58%), and term deposits (4%). AAA is an attractive selection for retail investors and given its satisfactory yield, it is an adequate option for parking an investor’s cash. Domestic Fixed Interest iShares Core Composite Bond ETF (IAF) The iShares Core Composite Bond is a fund that aims to track the Bloomberg AusBond which is largely composed of securities issued by the Australian Commonwealth Government, Australian states, and territories (known as semi-government issuance) and supranational organisations (bodies that span multiple countries, such as the Asian Development Bank). The diversified index is of high credit quality, with an average rating of AA. The fund has a relatively low fee of 0.20% and is believed to be an appropriate diversified fund to gain exposure to the market of domestic fixed interest. International Fixed Interest Vanguard International Fixed Interest Index Hedged ETF (VIF) The Vanguard International Fixed Interest Index Hedged ETF aims to track the return of the Barclays Global Treasury Index hedged into Australian dollars before taking into account fees, expenses and tax. The Barclays Global Treasury Index is a value-weighted index of approximately 1,300 fixed income securities issued by the governments of approximately 34 countries that has an investment grade credit rating. As of 31 December 2018, Japan, North America, and Europe (ex UK) dominates more or less 90% of the index. The fund is a good investment to have access to international bond markets given its low management cost. For international exposures, we specifically choose a fund that is hedged as to protect the investor’s total return from currently weak AUD. Vanguard International Credit Securities Index Hedged (VCF) The Vanguard International Credit Securities Index Hedged aims to track the return of the Barclays Global Aggregate Government-Related and Corporate Index hedged into Australian dollars before taking into account fees, expenses and tax. The Barclays Global Aggregate Government-Related and Corporate Index is a market cap-weighted index of fixed income securities issued by government related entities and investment-grade corporations. As of February 2019, the index has over 3,500 issuers and over almost 17,000 individual securities, with an average credit quality of A for the total portfolio. The index is dominated by securities issued by corporations based in North America and Europe (ex-UK). For international exposures, we specifically choose a fund that is hedged as to protect the investor’s total return from currently weak AUD.
iShares JP Morgan USD Emerging Markets Bond AUD Hedged (IHEB) The iShares JP Morgan USD Emerging Markets Bond AUD Hedged aims to provide investors with the performance of an index, before fees and expenses, composed of U.S. dollar denominated, emerging market bonds The Index measures the performance of U.S. dollar denominated fixed and/or floating rate emerging market bonds issued by sovereign and quasi-sovereign entities. The Index is market value weighted and may consist of both investment grade and non-investment grade bonds. This fund is a good diversification and a good way to gain exposure to emerging markets’ economy. It is not unusual for emerging markets to outperform developed markets during recovery phase of economic cycle. For international exposures, we specifically choose a fund that is hedged as to protect the investor’s total return from currently weak AUD. Domestic Equity SPDR S&P/ASX 200 ETF (STW) SPDR S&P/ASX 200 ETF aims to invest in every stock in the S&P/ASX 200 Index and thus delivering a replicated performance of the index. The S&P/ASX 200 is a free-float-adjusted, market-cap-weighted index. It is Australia’s most used stock market benchmark and covers approximately 80% of the market. The low fees of 0.13% of the fund and the low tracking error make it an excellent option for an investor who wants to track the performance of the domestic equity market. Vanguard Australian Shares ETF (VAS) The fund seeks to track the total return of the S&P/ASX 300 Index before taking into account fund fees, expenses, and tax. The S&P/ASX 300 Accumulation Index is a free-float adjusted capitalisation weighted index of approximately 300 Australian equities (shares) representing approximately over 85 per cent of the value of all Australian based companies and property trusts listed on the ASX. The fund charges a fee of 0.14% and is one of the cheapest in the broad market of ETFs. BetaShares Australian Sustainability Leaders ETF (FAIR) The fund employs a passive management approach designed to track the performance of the Index, before fees and expenses. The benchmark index is the Nasdaq Future Australia Sustainability Leaders TR AUD. The Fund will generally invest in the securities that comprise the Index in the proportion of the weightings of the securities in the Index which is a full replication strategy. As of February 2020, the fund is biased to Healthcare sector, Real Estate, and financial services. VanEck Vectors S&P/ASX MidCap ETF (MVE) VanEck Vectors S&P/ASX MidCap ETF aims to track the returns of the S&P/ASX MidCap 50 Index. The S&P/ASX Index is a highly liquid and investable index offering investors a portfolio of 50 companies diversified across industry sectors. The fund is included in the universe as to gain exposure to mid-cap companies in Australia. These companies tend to outperform large cap companies during bounce back or recovery phase of an economic cycle. SPDR S&P/ASX Small Ordinaries Fund (SSO) The fund seeks to track the performance of S&P/ASX Small Ordinaries Index. In order to achieve the objective, the SPDR S&P/ASX Small Ordinaries Fund employs a sampling strategy, which means that
the Fund is not required to purchase all of the securities represented in the Index or employ a full replication strategy. Instead, the fund will take positions to a set of securities believed to represent the total risk and return characteristics of the index. Five sectors currently dominate the Australian small-cap universe: basic materials, consumer cyclicals, real estate, financials ex REITS (real estate investment trusts), and industrials. These five constitute almost 73% of the overall index in August 2019. This composition is more diversified in comparison to the Large-Cap segment which is dominated by financial services sector. Moreover, the weights in the S&P/ASX Small Ordinaries are comparatively more spread than the large cap index. This fund is included in the universe as to gain exposure to small-cap companies in Australia which is believed to perform well during economic bounce backs. International Equity Vanguard MSCI Index International Shares Hedged ETF (VGAD) The Vanguard MSCI Index International Shares Hedged ETF seeks to track the total return of the MSCI World ex-Australia, hedged into Australian dollars Index. The returns tracked are before taking into account fees, expenses and tax. The MSCI World (ex-Australia) Hedged Index captures large- and mid- cap representation of more than 20 developed-markets countries (excluding Australia). The index covers about 85% of the free-float adjusted market cap in each country. The fund has a low management fee of 0.21%. For international exposures, we specifically choose a fund that is hedged as to protect the investor’s total return from currently weak AUD. Magellan Global Equities Fund Currency Hedged (MHG) The Magellan Global Equities Fund ETF aims to replicate the performance of Magellan Global Fund. The manager seeks to invest in companies with sustainable competitive advantages that can earn long term returns for the investors. The fund shall be composed of 20 to 40 securities and to cash as well. As of end of 2019, the company is majority invested in consumer cyclical and communication services. As to region, majority of the fund is allocated to North America. Magellan’s approach is fundamental in nature and it usually takes years before the investments reap the expected returns. The fund usually chooses from large established companies in the developed market with global operations. For international exposures, we specifically choose a fund that is hedged as to protect the investor’s total return from currently weak AUD. SPDR S&P World ex Australia Hedged Fund (WXHG) The fund aims to track the performance of the index which is the S&P Developed ex Australia Hedged AUD Index - a large- and mid-cap representation of more than 20 developed markets excluding Australia. The index covers about 85% of the free-float-adjusted market cap in each country. In seeking to achieve the investment objective for SPDR World (Hedged), the Investment Manager will employ a passive investment strategy comprising two components: (1) Investment component which is to gain exposure to the securities comprising the Index indirectly by purchasing units in SPDR World; and (2) Currency hedging component which is forward foreign exchange contracts will be entered into to reduce the impact of foreign currency fluctuations between the currencies in which each security in the SPDR World is denominated, and the Australian dollar. For international exposures, we specifically choose a fund that is hedged as to protect the investor’s total return from currently weak AUD. iShares Core MSCI World All Cap AUD Hedged ETF (IHWL)
The fund aims to track the return of the index, the MSCI World Investable Market Index 100% hedged to AUD. The index is market capitalisation weighted and measures the performance of large-, mid- and small-capitalisation stocks across developed market countries which comply with MSCI’s size, liquidity, and free-float criteria. As of March 2020, the IHWL holds approximately 3,700 large-, mid- and small- cap stocks across developed countries, providing diversification. The benchmark MSCI World Investable Markets (currency hedged) Index has a long track record, giving investors a good idea of what to expect with the fund. About 65% of the portfolio is invested in the US, making the American economy an important influence on the risk and returns of global equities. It is worth noting that many large, US-listed companies have a substantial global footprint. IHWL holds another 15% in Europe, and 9% in Japan. iShares S&P 500 AUD Hedged ETF (IHVV) The US stock market the most influential and most liquid in the world. It comprises over half the market capitalisation of global equities. The S&P 500 is a market cap-weighted index and free-float- adjusted that represents about 80% of the market capitalisation of all US equities. It composed of the leading 500 companies in the United States. iShares S&P 500 AUD Hedged IHVV aims to replicate the S&P 500 thru full replication of the underlying securities. Its low cost and hedged status make it a good addition to the international exposure. Domestic Listed Property Vanguard Australian Property Securities Index ETF (VAP) The Vanguard Australian Property Securities Index ETF aims to track the performance S&P/ASX 300 A- REIT. To track the performance of the index, the fund will invest in all the underlying securities of the index, which is also call the full replication. The S&P/ASX 300 A-REIT Index is a market cap weighted and free float adjusted index. REITs are listed vehicles that own and operate property--mainly collecting rent, as opposed to operating a business. There are REIT requirements that income must be passed through to investors, not retained. This fund is a low-cost ETF that well represents the domestic listed property sector of Australia. International Listed Property SPDR Dow Jones Global Real Estate Fund (DJRE) The SPDR Dow Jones Global Real Estate Fund seeks to provide investment return, before fees and other costs, that closely correspond to the performance of the Dow Jones Global Select Real Estate Securities Index. This is to be achieved by fully replicating the more than 200 underlying securities in the index, resulting to a low tracking error portfolio. Stocks included in the index shall have 75% of its revenue from owning and operating properties, have a market cap of at least USD 200 million, and shall meet liquidity requirements of the index provider. The SPDR does not immediately distribute the cash dividends, and instead, it reinvests the amount in the amount until it pays them to investors via semi-annual distributions. The fund is an excellent option for a core global property strategy. Conclusion We continue to meet each day and discuss at length the rapidly changing economic and financial market climates. Our focus is on making sure your wealth is being managed sensibly through this complex and challenging period. Whilst our desire for good returns for your investments is a constant,
our need for capital preservation through the volatility remains at the foundation of our considerations. We look forward to moving you back to market and seeing you reap the rewards of a carefully constructed investment portfolio. For now, we appreciate your patience as economies and financial markets the world over adapt and adjust to the pandemic we are experiencing. As always we welcome your enquiries and are happy to take your calls to discuss your views, requirements and concerns. Take Care The Investment Committee Name Role Email Peter Rheinberger Chair peter@rfegroup.com.au Paul Whitelaw – CFP CA Senior Financial Planner paul.whitelaw@rfegroup.com.au Ava Macapugay - M.Ec BIS Senior Economist ava.macapugay@rfegroup.com.au Juno Fragante - CPA, CFA Senior Portfolio Analyst juno.fragante@rfegroup.com.au
[1] The death cross appears on a chart when a stock’s short-term moving average, usually the 50-day,
crosses below its long-term moving average, usually the 200-day. It is interpreted by analysts and
traders as signalling a definitive bear turn in a market.
Definition sourced from Investopedia. https://www.investopedia.com/terms/d/deathcross.asp
[2] The Gross Domestic Product measures the value of economic activity within a country. Strictly
defined, GDP is the sum of the market values, or prices, of all final goods and services produced in an
economy during a period of time.
This document has been prepared by R Financial Educators Pty Ltd trading as Retirement Services
Australia ABN 37102003118. R Financial Educators is a corporate Authorised Representative of it’s
wholly owned AFSL company Ipraxis Pty Ltd AFSL 329337. It is general information only and is not
intended to provide you with financial advice or take into account your objectives, financial situation or
needs. You should consider, with a financial adviser, whether the information is suitable for your
circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result
of any reliance on this information. You may obtain advice regarding your personal situation from
Retirement Services Australia by calling 1300 071 107 or our website
www.retirementservicesaustralia.com.au
R Finanical Educators Pty Ltd Level 15 MLC Centre
trading as Retirement Services Deloitte Building Level 57
Australia 60 Station Street 19-29 Martin Place
ABN: 37 102 003 118 Parramatta NSW 3150 Sydney NSW 2000
help@retirementserviesaustralia.com.au T: 1300 071 107 T: 1300 071 107
retirementservicesaustralia.com.au
R Financial Educators Pty. Ltd, ABN 37 102 003 118; authorised representative of iPraxis, AR 461048. iPraxis Pty. Ltd AFSL #329337, ABN 3911436500You can also read
