Monetary Policy Decision – Statement by Philip Lowe, RBA Governor, December 2017

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Monetary Policy Decision – Statement by Philip Lowe, RBA Governor, December 2017

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

Conditions in the global economy have improved over 2017. Labour markets have tightened and further above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy continues to be supported by increased spending on infrastructure and property construction, although financial conditions have tightened somewhat as the authorities address the medium-term risks from high debt levels. Australia's terms of trade are expected to decline in the period ahead but remain at relatively high levels.

Wage growth remains low in most countries, as does core inflation. In a number of economies there has been some withdrawal of monetary stimulus, although financial conditions remain quite expansionary. Equity markets have been strong, credit spreads have narrowed over the course of the year and volatility in financial markets is low. Long-term bond yields remain low, notwithstanding the improvement in the global economy.

Recent data suggest that the Australian economy grew at around its trend rate over the year to the September quarter. The central forecast is for GDP growth to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved further, with the forward-looking indicators being more positive than they have been for some time. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.

Employment growth has been strong over 2017 and the unemployment rate has declined. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead. There are reports that some employers are finding it more difficult to hire workers with the necessary skills. However, wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time.

Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. The Bank's central forecast remains for inflation to pick up gradually as the economy strengthens.

The Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

Growth in housing debt has been outpacing the slow growth in household income for some time. To address the medium-term risks associated with high and rising household indebtedness, APRA has introduced a number of supervisory measures. Credit standards have been tightened in a way that has reduced the risk profile of borrowers. Nationwide measures of housing prices are little changed over the past six months, with conditions having eased in Sydney. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities.

The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Source: Reserve Bank of Australia, December 5th, 2017

Enquiries

Media and Communications
Secretary's Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Source: MLC Economic Monthly update

November Economic Update with Bob Cunneen

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November Economic Update with Bob Cunneen

Which key events have been driving markets? Watch this video of NAB Asset Management's Senior Economist Bob Cunneen talking to Head of Investment Communications Jason Hazell to find out.

They discuss:

  • the ambitious Wall Street

  • the announcement of Jerome Powell as the next US Fed Chairman and

  • the strong rebound in Australian shares in October.

Download the 2 page – November economic & market update

Source: MLC Economic Monthly update

Faster than the wind – how mandatory super contributions help Australians get ahead

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Faster than the wind – how mandatory super contributions help Australians get ahead

There's a lot of debate in the superannuation industry about what constitutes an 'adequate' contribution rate.

 

Most experts say somewhere around 12-15 percent over a full working life should provide retirees with a decent nest egg. And indeed, the Australian super system is heading to a 12 per cent mandatory super guarantee (SG) rate by 2025, assuming no more government tinkering.

As many investors will only have been getting 9 per cent or less for most of their working lives, a lot of time is spent figuring out ways to encourage members to engage more with their super and make additional contributions.

But is equating member engagement with more voluntary contributions really such a big issue?

Let's look at the evidence from How Australia Saves — Vanguard's recent collaboration with Sunsuper that offers some fascinating insights into the experiences and behaviour of 1.1 million members in one of Australia's biggest super funds.

Half full or half empty…

As you can see in the chart below, in 2016 the vast majority of members only had their employer SG contribution, which has stood at 9.5 per cent since 2014-15.

Relatively few members—around 8 per cent in total—supplemented this with any voluntary contributions, whether salary sacrifice or non-concessional, or both. .

How Australia Saves 2017: Contribution types, 20161

Now, it's fair to say that just 8 per cent making voluntary contributions doesn't sound great. And in the finance industry we tend to use this sort of statistic as evidence of widespread member disengagement and mass apathy.

But let's flip it for a second. Looked at another way, we can see that 92 per cent of active Sunsuper members are getting at least 9.5 per cent of their salaries into their retirement savings. And they are on a path to getting 12 per cent by 2025.

So the big message here is the power of default contribution settings in Australia. Even for members who do nothing, the system delivers them at least 9.5 per cent of their salaries – and even more if they qualify for additional measures such as the Low Income Tax Offset (LITO) or Government co-contribution scheme.

Finding a balance

This opens up an interesting debate about finding the right balance between compulsion and voluntary participation.

As a comparison, let's turn to a country where contributing to retirement savings is generally entirely voluntary.

Our flagship US research publication, How America Saves, looks at 4.4 million participants in Vanguard defined contribution (DC) retirement plans.

Average contribution rates: Vanguard DC plans permitting employee-elective deferrals2

As you can see in the chart above, the median contribution rate in 2016 was 10 per cent. This sounds healthy until you realise that it includes both participants (members) and employer contributions.

If we include members who could have contributed but chose not to, the median rate drops to 7.4 per cent.

So the near universal 9.5 per cent contribution rate in Australia is looking pretty good—especially as it all comes from the employer.

On your marks…

One way of looking at member engagement is a yacht race, with the finish line as some notion of 'adequacy'—let's say a 12-15 per cent contribution rate.

Over in the US there's feverish activity in pre-race tacking and maneuvering just to get to the starting line.

The Australian team is already there, thanks to our mandatory 9.5 per cent SG, which acts a bit like the famous winged keel that propelled us to success in the 1983 America's Cup.

Of course, this is not to say we should be complacent. And anything we can do to encourage members to boost their contributions can only be a good thing – as How Australia Saves confirms.

If you seek further assistance and information please contact us on |PHONE|

1 Source: Vanguard using Sunsuper data, 2017
2 Source: Vanguard, How America Saves 2017

 Source: Vanguard 13 November 2017 

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients' circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2017 Vanguard Investments Australia Ltd. All rights reserved. 

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Source: MLC General article newsletter

Realism-v-reality – working part-time as retirees

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Realism-v-reality – working part-time as retirees

Are you planning to boost your retirement income by doing some part-time work once you eventually retire? Perhaps you have included the expectation of some paid work in your calculations about how much you need to finance your retirement.

If so, this leads to another question: How realistic is that expectation?

A Vanguard research paper, Retirement transitions in four countries, may help provide some answers.

More than 5560 pre-retirees (who are planning to retire within 10 years) and recent retirees (who retired over the past 10 years) age 55-75 took part in the study covering Australia, the United States, United Kingdom and Canada. This includes 743 Australian pre-retirees and 703 Australian recent retirees.

In short, the researchers wanted to compare the expectations of pre-retirees with the experiences of recent retirees – including in regard to doing some work as a retiree.

Researchers found that pre-retirees were up to four times likely to say they expect to work in retirement compared to the proportion of recent retirees actually working. Consider the findings:

  • Australia: Pre-retirees expecting to do paid work at least once a week in retirement (42 per cent). Recent retirees actually working at least once a week (11 per cent).

  • United States: Pre-retirees expecting to do paid work at least once a week in retirement (42 per cent). Recent retirees actually working at least once a week (14 per cent).

  • United Kingdom: Pre-retirees expecting to do paid work at least once a week in retirement (40 per cent). Recent retirees actually working at least once a week (10 per cent).

  • Canada: Pre-retirees expecting to do paid work at least once a week in retirement (47 per cent). Recent retirees actually working at least once a week (14 per cent).

These findings raise another question: Why is there this gap between expectations to work in retirement and actually working?

"There are several possible reasons for this difference," the researchers write. "Pre-retirees may feel they need more sources in retirement, and so expect to work.

"It could also be true," they add, "that recent retirees had the same idea [as pre-retirees], but then, upon retiring, realised that the work was no longer necessary in retirement. Pre-retirees may also be overestimating their ability to find suitable work."

Whether retirees do some work much depends on such factors as employment opportunities, health and family obligations – and whether they actually want to do paid work after getting a taste for retirement.

A message is that you should be particularly cautious about counting on part-time work as a retiree to boost your retirement income.

If you seek further assistance on this topic please contact us on |PHONE|

Source : Vanguard 13 November 2017 

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients' circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2017 Vanguard Investments Australia Ltd. All rights reserved. 

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

 

Source: MLC General article newsletter

'If only I had a second chance'

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'If only I had a second chance'

No matter our age, most of us would probably look back on some aspects of our lives and say to ourselves: "If only I could do that again; if only I had a second chance".

 

This, of course, tends to occur quite frequently in regards to our investing and saving.

Often, we regret not giving enough attention in the past to our personal financial planning, not beginning to invest regularly from early in our working lives and not adequately diversifying our portfolios.

And most of us probably have made investments that we wouldn't have touched in hindsight.

Just think about what you may have done differently with your investing and your financial planning if you had a second chance. This may help guide what you do in future.

A Vanguard study published earlier this year included a survey of more than 700 Australians aged 55-75 who had retired within the past 10 years, asking what they would have done differently with preparing for their retirement.

Perhaps unsurprisingly, many of these recent retirees strongly believe that they should have saved more (45 per cent of survey respondents), begun planning earlier for retirement (36 per cent) and spent more time on retirement planning (28 per cent).

In line with this what-would-I-do differently theme, online investment newsletter Cuffelinks published an excellent looking-back article a few months ago for its 200th issue.

Cuffelinks asked 37 well-known investment and economic specialists: "What investment insights would you give your 20-year-old self if you could go back in time?"

Their responses included: keep a budget, make the most of compounding returns, start saving and investing early, understand the relationship between risk and return (the higher the potential return, the higher the potential risk), hold a diversified portfolio, set an appropriate strategic asset allocation and understand that investment markets move in cycles.

And other responses included: avoid emotional-investment decisions, avoid chasing the investment herd, block out dist

racting market "noise" and don't pay excessive fund management fees. Another twist on looking back for investors comes from US personal finance author Paul Brown. It's been 30 years since Brown, who is over 60, wrote his first book on saving for retirement.

As he enters the popular age group for retirement, Brown asked himself in a New York Times article if his advice may have changed over the past three decades given his real-world experience.

"No, I wouldn't change any of the advice," Brown writes. "I told people to start saving aggressively while they're still young and to diversify their holdings. It was good counsel then and it is good counsel today.

"I also remain a steadfast believer in index funds and in keeping investment costs as low as possible," he adds. "That's how I have invested just about all of my retirement savings."

Yet based on his experiences, Brown says he would have added "not only more empathy but more real-world advice".

Two of his additional suggestions are to extend your working life, if possible, past conventional retirement ages and save more than you think you need because life doesn't always go according to plan.

It can be a valuable exercise to think about what we would have done differently as investors if given a second chance.

When looking back, however, watch out for the trap of becoming overly focussed on a past investment loss; it could impede your willingness to take appropriate risks in the future, as behavioural economists warn us.

 Please contact us on |PHONE| if you seek further assitance .

 Source : Vanguard 10 November 2017 

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients' circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2017 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Source: MLC General article newsletter

Monetary Policy Decision – Statement by Philip Lowe, RBA Governor, November 2017

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Monetary Policy Decision – Statement by Philip Lowe, RBA Governor, November 2017

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

Conditions in the global economy are continuing to improve. Labour markets have tightened and further above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Australia's terms of trade are expected to decline in the period ahead but remain at relatively high levels.

Wage growth remains low in most countries, as does core inflation. Headline inflation rates are generally lower than at the start of the year, largely reflecting the earlier decline in oil prices. In the United States, the Federal Reserve has started the process of balance sheet normalisation and expects to increase interest rates further. In a number of other major advanced economies, monetary policy has become a bit less accommodative. Equity markets have been strong, credit spreads have narrowed and volatility in financial markets remains low.

The Bank's forecasts for growth in the Australian economy are largely unchanged. The central forecast is for GDP growth to pick up and to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved, with the forward-looking indicators being more positive than they have been for some time. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.

The labour market has continued to strengthen. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead. The unemployment rate is expected to decline gradually from its current level of 5½ per cent. Wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time.

Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. In underlying terms, inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures, especially in retailing. CPI inflation is being boosted by higher prices for tobacco and electricity. The Bank's central forecast remains for inflation to pick up gradually as the economy strengthens.

The Australian dollar has appreciated since mid year, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to continued subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

Growth in housing debt has been outpacing the slow growth in household income for some time. To address the medium-term risks associated with high and rising household indebtedness, APRA has introduced a number of supervisory measures. Credit standards have been tightened in a way that has reduced the risk profile of borrowers. Housing market conditions have eased further in Sydney. In most cities, housing prices have shown little change over recent months, although they are still increasing in Melbourne. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities.

The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Source: Reserve Bank of Australia, November 6th, 2017

Enquiries

Media and Communications
Secretary's Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Source: MLC Economic Monthly update

THE AGE OF THE SUPERCOMPANIES

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THE AGE OF THE SUPERCOMPANIES

Mike Gallagher, CFA, CAIA, Head of Distribution, Intermede Investment Partners

American corporations are enjoying a golden age of profitability. Intermede examines the sources of their current relative dominance and the potential risks faced by some of the technology businesses that currently sit at the top of the pile.

A March 2016 article in The Economist argued that the process through which the level of corporate profitability typically mean-reverts appeared to be broken in the United States1

High profits typically attract new entrants to a sector, after which increased competition dilutes these supernormal returns. Discouraged investor capital then heads for the exits, planting the seed for the cycle to begin again.

An observation from consulting firm McKinsey supports the view that US firms have bucked this trend in recent years: “An American firm that was very profitable (one with post tax returns on capital of 15-25%) in 2003, stood an 83% chance of still being very profitable in 2013 … In the previous decade, the odds were about 50%”.

The proposed causes of this sustained corporate dominance included increased consolidation (the number of listed firms in the US has halved in the last 20 years), as well as an increased level of concentration within industries.

An outcome of the above shifts (to which we would add as additional causes, the decreased bargaining power of labour, and a declining corporate tax burden) has been a leap in profitability. Cash flow return on investments for US companies has gone from an average of approximately 5.5% (1976-1996) to closer to 9% (1997-2016).2

Clearly then, this has been a good period for US corporations. At the forefront of this trend have been the small set of mega cap technology businesses (“supercompanies”) that have risen to dominance in recent years, as reflected in Chart 1.

Chart 1: Supercompany dominance in recent years

Source: ‘The profound implications of five increasingly dominant tech companies’, medium.com, accessed 26 September 2017.

As investors, how should we view this trend?

A period of peak optimism with respect to the operating prospects of a business can coincide with a heightened level of investment risk, if this positive sentiment leads the market to place an excessive valuation on the future earnings stream of the company. It is therefore important to seek correctives when times are good. One arguably reliable behavioral guardrail can be found by reviewing the mixed history of technology investing.

Why do things go wrong?

In a widely-circulated recent client memo,3 Oaktree’s Howard Marks listed the risks that can deflate technooptimism: an unforeseen change in environment; the emergence of a hidden flaw in a young business model; excellence in concept being undercut by weakening execution; or (perhaps most commonly) extreme overpricing of decent fundamentals subsequently resulting in destruction of investor wealth.

Our favourite encapsulation of irrational valuation dynamics came from Scott McNealy, the ex-Chairman of Sun Microsystems, from a 2002 interview reflecting on the way in which the market priced his company at the dotcom peak:

“Two years ago we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is also very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes that with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realise how ridiculous those basic assumptions are?”4

Thankfully, valuations for today’s tech companies are somewhat more reasonable. Chart 2 shows the extent to which current technology market capitalisation is supported by profits this time around:

Chart 2: Tech renaissance

World technology stocks price and earnings, 1996 – 2017

Sources: BlackRock Investment Institute, with data from MSCI and Thomson Reuters, July 2017. Notes: the price index is based on the MSCI All-Country World Technology Index. Earnings are represented by the aggregate 12-month forward earnings estimate. Both series are rebased to 100 at the start of 1996.

So where are the dangers for this set of supercompanies?

Given the near-duopoly position of current portfolio holdings Facebook and Google in the online advertising market (it was widely reported in May 2017 that the two companies are currently capturing almost 100% of the growth in online advertising spend5) one area we are carefully considering is the potential risk of antitrust action. The recent €2.4 billion fine imposed on Google by the EU Competition Commission6 for exploiting its dominance in search is a salient reminder of the need for vigilance.

But, it is also important we do not let our inner pessimist blind us to the extraordinary (and still-strengthening) competitive positions held by these businesses. In October 2012, when Facebook hit 1 billion users, 55% used the service daily. When Mark Zuckerberg announced in June 2017 that the 2 billion milestone had been reached, the fraction of daily users had increased, remarkably, to 66%.7 The next most popular service on the web, YouTube, with 1.5 billion regular users, is owned by Google.8

The continued strong growth in earnings and cash flows being generated by both businesses speaks eloquently of their extraordinary ability to monetise human attention.

For now at least, we believe, it appears to be the age of the supercompanies.

Source : nabassetmanagement October 2017

1. ‘Too much of a good thing’, The Economist, 26 March 2017.

2. US Industrial firms weighted by net assets, Credit Suisse, MSCI.

3. ‘There they go again… again’, Marks H, Oaktree Capital Management, L.P, 26 July 2017.

4. ‘Scott McNealy on the bubble’, Scott McNealy, Nyquist Capital, accessed 26 September 2017.

5. ‘How Google and Facebook have taken over the digital ad industry’, Ingram M, Fortune, 5 January 2017.

6. European Commission – Press release, Brussels, 27 June 2017.

7. ‘Two billion people coming together on Facebook’, Facebook newsroom, 27 June 2017.

8. ‘YouTube has 1.5 billion logged-in monthly users watching a ton of mobile video’, techcrunch.com, 22 June 2017.

Important information

This publication is provided by Antares Capital Partners Limited (ABN 85 066 081 114, AFSL 234483) (ACP) a member of the group of companies comprised National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686), its related companies, associated entities and any officer, employee, agent, adviser or contractor therefore (‘NAB Group’). Any references to “we” include members of the NAB Group. An investment in any product or service referred to in this publication does not represent a deposit or liability of, and is not guaranteed by NAB or any other member of the NAB Group.

This information may constitute general advice. It has been prepared without taking account your objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.

Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. Any opinions expressed in this publication constitute our judgement at the time of issue and are subject to change. Neither ACP nor any member of the NAB Group, nor their employees or directors give any warranty of accuracy, not accept any responsibility for errors or omissions in this publication.

Any projection or other forward looking statement (‘Projection’) in this document is provided for information purposes only. No representation is made as to the accuracy of any such Projection or that it will be met. Actual events may vary materially.

This information is directed to and prepared for Australian residents only.

The funds referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such fund.

ACP may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.

 Important: Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

 

 

 

 

 

Source: MLC General article newsletter

Behavioural finance: Why is it so relevant in the field of investing?

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Behavioural finance: Why is it so relevant in the field of investing?

Tom Stevenson, Investment Director

I was delighted that Richard Thaler was awarded the 2017 Nobel Economics Prize. Thanks to the work of Thaler and other giants in the field of behavioural economics like Daniel Kahneman and Amos Tversky, it is increasingly accepted that ‘homo economicus’, the rational agent always seeking economic advantage, does not exist.

 

 

Instead, it is now understood that when we make economic, financial and investment decisions, we do so as flawed humans with an inbuilt tendency to do the wrong thing. Recognising this is the first step towards changing our behaviour for the better.

Thaler’s particular contribution to this debate is the power of the ‘nudge’, the idea that people need to be prodded towards making decisions that will improve their lives. Whether those decisions are about eating healthily, driving safely or making sensible decisions about saving and investing, we all need to be nudged in the right direction. 

Behavioural finance is particularly relevant to the field of investing. Many of the mental shortcuts – or ‘heuristics’ in the jargon – that have evolved over the millennia have helped humans survive and develop but tend to make us bad investors.

The quick recognition of patterns in our environment has historically helped us spot danger and avoid it. But the necessity to make these kinds of judgements very rapidly in the jungle or out on the savannah has meant that humans have developed two distinct ways of thinking – fast and slow, instinctive and analytical, System 1 and System 2 in the behavioural literature. 

Fast, instinctive, system 1 thinking is great for survival. It is generally pretty unhelpful when it comes to making investment decisions. These are better served by slow, analytical, system 2 thinking.

The problem is that system 1 thinking is much more powerful than its rational system 2 counterpart. At times of stress it kicks in and overrides our rational brains. And there are few more stressful environments than financial markets when our life-savings are at stake. Overcoming the biases that all investors are prey to is key to managing our money successfully – and very few of us manage it.

One of the more important biases that influences our investing behaviour is called loss aversion. It refers to our tendency to feel the pain of losing money around twice as intensely as our enjoyment of making it. This goes some way to explaining why most savers and investors are too cautious – why so much money is parked in cash and other perceived safe havens despite overwhelming evidence that sheltering in a persistently low-yielding asset will make us progressively poorer over time.

Confirmation bias is another important behavioural tic that can prevent us making sensible decisions. It describes our desire to seek out information that supports our prejudices. The ever deeper understanding of our preferences, interests and opinions by the likes of Google, Amazon and Facebook means these cognitive loops are going to get ever more closed. The election of Donald Trump was the most obvious triumph for the manipulation of confirmation bias.

A related bias is known as the Endowment Effect, our willingness to ascribe a higher value to what we own than what we do not. If you have ever bought or sold a house, you will recognise this. The house you are reluctantly selling is self-evidently worth more than that insulting offer the estate agent conveys to you. Meanwhile the owners of the house you are looking to buy are obviously deluded in holding out for such an unrealistic price.

Anchoring is one of my favourite biases because it shows just how irrational we can be when it comes to out investments. The famous example of this is an experiment that asked people to write down the last three digits of their phone number multiplied by 1,000 before making estimates of house prices. The higher the phone number, the higher the estimates. A related bias is herding. Ask someone what the average height of a giant Redwood tree is and then see how their answers are influenced by other people’s equally ill-informed guesses.

So behavioural finance matters to us as inpidual investors, but it also matters at a broader societal level too. And this is why Thaler fully deserves his prize and the $1.1m reward that went with it.

His work on nudging people towards better decisions was instrumental in the design of arguably the most important recent change to our pensions system. Fifteen years ago, the Government recognised that a significant squeeze on pensioner incomes was around the corner and it understood that the prevailing system of tax incentives for pension saving worked better in an imaginary world populated by homo economicus than a real one full of flawed humans.

Auto-enrolment recognises that you don’t need to make saving compulsory. The irrational human inertia that had stopped people saving enough could be turned on its head to ensure that they stayed signed up to their company pension. The proportion of people saving into a private pension has risen in five years, the pensions regulator calculates.

Back to investment, the most successful investors I have worked with over the years have been those with the ability to master their emotions, to over-ride the human biases that make successful investing so difficult for the rest of us. Anthony Bolton and Jim Slater were very different people and investors but they shared this ability to park their emotions, shut out the noise and swim against the tide.

James Montier in his definitive study called Behavioural Investing, says investors should accept that these biases apply to all of us and focus on the facts, not the stories. As a boss of mine once said: ‘In God we trust; everyone else brings data’.

 

Source :Fidelity International October 2017


Reproduced with permission of Fidelity Australia

This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity Australia’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.
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Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Any information provided by the author detailed above is separate and external to our business. Our business does not take any responsibility for their action or any service they provide.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Source: MLC General article newsletter

Technology: An adversary in the fight for 2% inflation

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Technology: An adversary in the fight for 2% inflation

It's been a generation since inflation last ravaged Australia, with costs for ordinary consumer goods rising on a seemingly daily basis. Indeed, in the wake of the global financial crisis, inflation in many countries has been lower than policymakers would like.

Low inflation, it turns out, can be a problem too.

Over time, declining or stagnant prices can strangle economic growth, depress workers' earnings and erode standards of living. That's why central banks here and in the US, Japan and Europe have tried to nudge inflation upwards to 2% or so – a rate thought sufficient to keep prices and wages rising without causing consumers too much pain.

The causes of low inflation range from globalisation, sluggish economic growth around the world (including a slowdown in China), and "transitory" factors" such as cheaper mobile phone plans.

But they're not the whole story, according to Joe Davis, Vanguard's global chief economist.

"Technology is an important, and often overlooked, challenge that central banks face in sustainably meeting their inflation targets," said Mr Davis. "Our calculations reveal that technology's role in the economy is growing exponentially. And, of course, technology's reach extends well beyond Silicon Valley."

Moore's Law: A high-tech drag on inflation

You may not have heard of Moore's Law, but you've been affected by it.

Coined by Gordon Moore, founder of the US tech giant Intel, Moore's Law began as a way of explaining the swift improvement in computers' processing abilities. Lately it's become shorthand for the spread of ever more powerful – and cheaper – technologies. We see it in consumer electronics: the mobile phone that's twice as powerful and half as expensive as the one you replace, or the new TV that is flatter, sharper, and cheaper than last year's model. These direct effects drag down measures of inflation for those products.

"Moore's Law is about more than mobiles, TVs and Amazon Prime," Mr Davis said. "Its knock-on effects restrain the need for higher prices in every corner of the economy, not just in high-tech products. In an increasingly digitised world, the cost of producing many goods and services keeps inching lower and lower."

By analysing detailed industry data from the US Bureau of Labour Statistics and Bureau of Economic Analysis, Vanguard found that improvements in technology reduced annualised inflation in the US by half a percentage point. Without Moore's Law, in other words, that elusive 2% inflation target would have been achieved years ago. Interest rates would be higher.

"The impact is most pronounced in technology-intensive industries," Mr Davis said. "Moore's Law helps explain how investment managers like Vanguard can serve clients at ever-lower cost. It's key to the lower-cost electric cars rolling off assembly lines in Silicon Valley and Detroit. And it helps explain the slowing rates of inflation in fields like education and retailing."

The inflation debate

So far, there's little sign that policymakers at the US Federal Reserve are factoring Moore's Law into their discussions about why their 2% inflation target keeps slipping into the future.

"Moore's Law deserves a seat at the table," Mr Davis said. "It provides a more complete and accurate picture of the forces that shape monetary policy and inflation. And it bolsters Vanguard's long-held view that lower unemployment is less likely to set off the kind of inflation rises that it did before Moore's Law was in full effect.

"We live in a digital world that makes 2% inflation harder to achieve," he added. "To ensure a victory in their fight, policymakers need to better appreciate this new technological challenger in the ring."

Source : Vanguard October 2017 

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients' circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance. 

© 2017 Vanguard Investments Australia Ltd. All rights reserved.

Important: Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Source: MLC General article newsletter

How to develop a "dynamic" approach to retiree spending

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How to develop a "dynamic" approach to retiree spending

As Smart Investing recently discussed, the combination of historically-low yields, expected muted investment returns and growing life expectancies are making it particularly challenging for retirees to calculate how much to draw down from their retirement savings.

A critical issue here is how much retirees can withdraw from their portfolios each year to finance their current spending and to generate future income for the rest of their lives, no matter how long. It's challenging.

Two traditional approaches are to draw down a set percentage each year of a portfolio's value or to set a dollar amount to withdraw in the first year of retirement and then to increase that amount annually by the level of inflation.

One of the difficulties with the set percentage-of-portfolio withdrawal strategy is that the dollar amount withdrawn and spent each year may much depend on how the markets have performed. This makes budgeting even tougher.

While the dollar-plus-inflation strategy may provide the comfort of an inflation-adjusted income, retirees face the risk of spending more than they can afford when markets have underperformed, increasing the risk of depleting their savings. And after markets have performed strongly, the dollar-plus-inflation strategy may lead to retirees spending less than they can afford.

Several Vanguard research papers* discuss a "dynamic-spending rule" as another approach to retirement drawdowns and spending. This provides for retirees to set a maximum and a minimum percentage withdrawal limits for their annual spending limits – in other words, a floor and a ceiling – based on the performance of the markets and a retiree's unique goals.

As the authors of the papers explain: "To implement the dynamic spending strategy, a retiree would first select a spending rate or the percentage of the portfolio that will be withdrawn in the first year, as well as a ceiling and a floor.

"The ceiling is the maximum amount," the authors explain, "that you are willing to allow real (inflation-adjusted) spending in any given year, while the floor is the maximum amount you can tolerate for real spending to decrease in a given year."

It should be emphasised that the actual percentages for a floor and ceiling depends much depends on retirees' circumstances, including whether they are conservative, balanced or more aggressive investors. For instance, a floor might be 2.5 per cent, while a ceiling could be 5 per cent of the portfolio's value in the previous year.

Retirees can spend a higher percentage of their portfolio's value when markets have done well in the previous year and reduce spending to a lower percentage – within these acceptable limits – when markets haven't done as well.

Of course, many retirees receive a superannuation pension with a set aged-based minimum withdrawal rate. By taking a dynamic approach, such members could calculate how much to reinvest, if any, each year.

When a portfolio returns are above a retiree's drawdown ceiling, an opportunity should arise to build up a portfolio in particularly good years. This has a smoothing effect for the years when returns are down.

For further asistance please contact us on |PHONE|

A rule for all seasons: Vanguard's dynamic approach to retirement spending, April 2017, by Michael DiJoseph, Colleen Jaconetti, Zoe Odenwalder and Francis Kinniry. 
From assets to income: A goals-based approach to retirement spending, September 2016, by Colleen Jaconetti, Michael DiJoseph, Zoe Odenwalder and Francis Kinniry.

Source : Vanguard 18 October 2017  

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients' circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance. 

© 2017 Vanguard Investments Australia Ltd. All rights reserved.

Important: Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Source: MLC General article newsletter