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6 investing hacks in a low interest rate world

Emma Rapaport  |  15 Aug 2019Text size  Decrease  Increase  |  
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In yesterday's article, we explored how record-low cash rates and bond yields are putting retirees in a dangerous position, forcing them into riskier assets as they search for sustainable income streams.

At the same time, buyers are piling into assets that promise a high yield, subsequently bidding up prices and forcing stocks into overvalued territory.

Following are six alternative options for retirees who seek a stable income but are reluctant to journey too far up the risk curve:

  • High interest savings accounts
  • Cash exchange-traded funds
  • Global and Australian bond funds
  • Listed property funds
  • Income equity funds
  • High yield exchange-traded funds.

Don Hamson, managing director of Plato says retirement income offerings on the market today tend to be a one-size-fits-all approach.

"The need has never been greater for new and innovative retirement income solutions for Australia’s retirees," he says.

Several managers, including Magellan, are said to be developing retirement products to service the more than five million baby boomers moving into retirement.

Hunt around for a high interest savings account

Savings accounts from the big four banks are returning base rates of just over 1 per cent. However, annual inflation is running just above the cash rate, eroding the value of those savings. But investors can get better rates if they shop around.

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To achieve a more reasonable rate of growth, consider an account with a maximum variable rate option. To be eligible for the maximum rate, you'll typically have to comply with terms and conditions like making regular deposits or transaction linking accounts.

Introductory rate or teaser/honeymoon rates are also offered as an incentive to open a savings account. This offer typically has an expiry date, after which it will revert to the standard variable rate.

Many people fail to look outside the major banks and thus risking missing out on better rates on offer at some smaller institutions. Endeavour Mutual, for instance, offers a maximum variable rate of 2.75 per cent on its Lifestyle account, and RAMS pays a maximum rate of 2.55 per cent for its Saver account.

Highest variable rates - all lenders

Cash rate banks high interest

*Exluding children’s accounts. Source: Ratecity.com.au, as at 05 Aug 2019

Tip funds into a cash ETF

Cash exchange-traded-funds typically aim to outperform the S&P/ASX Bank Bill Index, after fees and expenses.

An ETF is a collection of investments that trade just like a stock on an exchange, and is generally used to track the performance of a specific market index

Two of the main options here are the BetaShares Australian High Interest Cash ETF (AAA) and the iShares Core Cash ETF (BILL).

Pinnacle Investment Management is also planning to launch a new zero-fee cash ETF managed by Omega Global Investors. The “zero fee” applies to the investment management fee only. Investors must still pay between four and 15 basis points a year for indirect costs.

Of these, Morningstar Australia only provides research coverage on the BetaShares ETF.


Source: Morningstar

Awarding it a Neutral rating, Morningstar says this ETF delivers an “acceptable but uninspiring” rate of return.

BetaShares deposits the pool of capital into cash at-call accounts, notice accounts and term deposits—with weightings of 38 per cent, 58 per cent and 4 per cent, respectively.

Morningstar says the size of this ETF helps the fund negotiate better rates, but that customers may be better off shopping around the banks.

“The benefits of scale are immensely relevant to a fund that invests entirely in bank deposits. AAA can muscle its size to negotiate lower costs and improved rates with a panel of banks.

“However, banks may offer seductive introductory rates that later revert to lower ones. Most customers would be deterred by the reams of paperwork to shop around, but some motivated retail investors could juice out the most competitive personal deposit rates by regularly switching between financial institutions.”

Global and Australian bond funds (unlisted)

If you’re worried about the near-term future, you may want to consider adding more bonds to your portfolio.  

Bond funds provide access to a portfolio of Australian and global short- and long-term fixed income securities such as government bonds, corporate bonds and other debt securities. Through the fund, investors are exposed to multiple economies, interest rates and yield curves.

Funds may also include allocations to high-yield credit and emerging market debt securities.

Morningstar analysts' global bond (active) favourites include the silver-rated PIMCO Global Bond fund, silver-rated Legg Mason Brandywine Global Opportunistic Fixed Income trust.

For Australian bonds (active), analysts have singled out the gold-rated PIMCO Australian Bond fund, the silver-rated Schroder Fixed Income fund, and the silver-rated Janus Henderson Australian Fixed Interest fund.

"We are conscious that replicating past absolute performance will be tough from the starting point of low yields and tight credit spreads, but this doesn’t hinder PIMCO Australian Bond’s lofty competitive standing," says Morningstar director, manager research, Tim Wong.

"Its deep and broad research reflects superior bond market knowledge and keeps PIMCO at the apex of managers, in our view."

On the passive side in Australian bonds, Morningstar analysts prefer silver-rated iShares Australian Bond Index fund and the silver-rated Vanguard Australian Fixed Interest Index fund.

While for global bonds (passive), the Vanguard Global Aggregate Bond Index Fund (Hedged) and the Vanguard International Fixed Interest Index Fund (Hedged) both have bronze ratings.

Are global and Australian listed property funds (unlisted) worth a look?

Property funds are investments where you, alongside other investors, buy units in a fund which invests in listed property like listed property trusts, developers and infrastructure investments.

Among Australian property (active) funds, gold-rated Zurich Investments Australian Property Securities is one of Morningstar analysts' favourites for Australian property exposure, alongside silver-rated Pendal Property Securities.

For global property (active), analysts lean towards gold-rated Resolution Capital Global Property Securities fund.

Income equity funds could be the key

In the Australian share market managed funds space, there are two types of equity income funds.

In the first, managers buy a basket of Australian stocks but place a big emphasis on those that pay high dividends and good franking credits. They're typically managed for zero tax investors who can utilise franking credits.

Slightly more complex, the second type also buy a basket of stocks, but use a set of derivative strategies to really juice up the income generation. They sell call options on stocks that are held in the portfolio and the premium, the income received from selling those call options, flows through – there is a lot of income distributed to the investor.

Funds typically provide investors with regular distributions, generally paid on a monthly basis, provided the fund has enough income.

Morningstar's favourite in the income-equity space in the silver-rated Investors Mutual Equity Income fund.

"We have high conviction in IML’s value-based approach to investing and application of options, convincing us that it tops equity-income peers," senior analyst Matthew Wilkinson says.

If you're the type of investor who is really living off the income generated by your investment portfolio, the derivative strategies that generate so much income may be worth considering.

However, be mindful of the other risks that entails, including higher fees and shorter track records, which mean management is a bit less proven with the strategy. Nor should you discount the tax implications of income payments that don't come with franking credits.

High yield ETFs

Dividend ETFs are a developing feature of the Australian listed product market. Products belonging to Morningstar’s “dividend” strategic-beta group (Australia) collectively held $2.1 billion of investors’ assets at the beginning of 2019.

This should come as little surprise in the context of the prevailing low interest rates and the secular upward trend in demand for sources of investment income, as the first waves of baby boomers have entered retirement, says Ben Johnson, director of global exchange-traded fund research for Morningstar.

Unlike passive ETFs, which typically replicate the performance of a market index or asset, and often use a market-cap weighted methodology (e.g S&P/ASX 200), Morningstar classifies dividend-ETPs as belonging to the strategic-beta group product group.

Strategic beta (or smart beta) products must still be index tracking, but they typically set aside market cap methodologies and lean towards other factors such value, dividends, low-volatility, momentum and quality - or a combination.

When it comes to dividend-ETPs, these products typically start with a regular share portfolio, and then skew the portfolio towards higher-than-average dividends – current and/or projected.

For example, Vanguard's VHY and Russell's RDV both use forward-looking consensus forecasts. SPDR's SYI focuses on trailing dividends and earnings, say Morningstar fund analysts.

Morningstar analysts' favourites include bronze-rated Vanguard Australian Shares High Yield ETF (VHY), bronze-rated SPDR MSCI Australia Select High Dividend Yield ETF (SYI) and bronze-rated Russell High Dividend Australian Shares ETF (RDV).

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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