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Firstlinks newsletter - 8 October

Graham Hand  |  08 Oct 2020Text size  Decrease  Increase  |  
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Morningstar acquired Firstlinks in October 2019. Join 90,000 unique users and receive the Firstlinks weekly editorials and free investment ebooks.

Budgets are forecasts, and more than most, Josh Frydenberg and Treasury waved a wet finger in the air in compiling the 2020 version. How many companies will now employ a new apprentice for a $100-a-week subsidy? Which back-of-the-envelope showed 3.5 million businesses would use the instant asset write-off and the 1 million loss carry-back? At a time when, to use the Treasurer's words, "Our cherished way of life has been put on hold”, these estimates are understandable. But the $17.9 billion for superannuation savings based on the new YourSuper proposal is wishful thinking.

Exploring YourSuper is our main Budget focus this week. For a broader analysis, see Shane Oliver's summary in the White Paper section. Given the adverse changes in recent years, we should be grateful there were no meaningful announcements on superannuation and SMSFs, including nothing on the next stage of the Superannuation Guarantee.

We noted last week the strong fund flow into global investments, but the biggest surprise package is the support for fixed interest products with rates at all-time lows. The first two tables below from BetaShares show flows in August 2020, and the third table from the ASX is total balances as at August 2020. It shows $12.2 billion invested in fixed interest in Exchange Traded Products, up from $9.1 billion a year ago, and the trend is the same overseas.

Please don't switch off because we are focussing on fixed income or just because bonds may not be as exciting as equities or superannuation or demographics. We have three articles with a fixed income focus which are all worth reading since so many people are now switching into bond funds.

First, Damien Klassen examines the cherished 60/40 portfolio, the 60% equities/40% bonds exposure used by millions of Australians. When investing, the past is irrelevant, as all earnings are in the future. Does 60/40 still work?

Second, my interview with Vivek Bommi of Neuberger Berman shows how fixed interest and stock markets bailed out companies facing the pandemic, and how high-yield bonds are attracting flows in the current market.

Third, Damon Shinnick and Jonathan Baird explain how an active bond fund is able to achieve returns not directly available for retail investors. Unlike the stock market where anyone can buy anything, the vast majority of opportunities in fixed interest are not available to the public other than via funds.

On to other markets. There is a crucial problem for active equity managers when they become too big for their market. Andrew Mitchell explores why this temptation to grow causes underperformance.

Some industries have benefitted greatly from COVID-19, and Josh Gilbert asks whether the boost to food delivery and related services will be sustained in the long run, or is the happy meal over?

And back to basics on managing an SMSF, Julie Steed warns that claiming a tax deduction for contributions needs to follow a process to ensure a favourable tax treatment.

Now, off to check the YourSuper comparison tool and get my share of the $17.9 billion.

is the editorial director of Morningstar Australia

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