December 2012 Review Comments
Written by Tony Gray   
Tuesday, 11 December 2012 15:31

Portfolio Valuation & Comment

We have updated the format of the reports and the change will vary depending on the types of investments held.  The Portfolio by Asset Class report now shows the interest rate and maturity date for term deposits for example.

Asset Class Comments

One of the main themes we have held has become mainstream thinking in recent months – that being that as interest rates fall we will see shares and listed property rise as investors chase yield.

With inflation and especially wage inflation not an immediate risk and job ads continuing to decline (negative for employment), we expect further rate cuts.  Bond (swap) markets are pricing in a 71% chance of another 0.25% rate cut by the Reserve Bank by March 2013 – which would take the overnight cash rate to 2.75%.  Philip Lowe, the Deputy Governor of the Reserve Bank, last week gave a speech where he put a figure on the higher cost of money to the banks and hence borrowing rates.  This figure was an additional 150 basis points – this means the RBA feel the current 3.0% cash rate is the equivalent of 4.5% before the GFC!

We feel the risks of holding longer dated bonds (or bond funds) is too high and, with term deposit rates continuing to drop, the dividend income premium from shares provides a much higher than normal buffer to compensate for the risk of share price falls.  The yield curve now has a ‘Nike’ symbol shape to it, with declines through 2013, before slowly rising for all time periods out to 30 years.  The 10 year bond yield is 3.08% - a very miserly premium to the current 3.00% cash rate!

Shares have not yet advanced beyond reasonable value and we see modest upside potential and healthy dividend yield income.  We are less positive on listed property, where many trusts now trade at premiums to asset backing.  We are not yet selling out, but a case for lightening exists if we see unit prices rise at the rate of the last 12 months.

I have identified an unlisted property trust I am prepared to recommend – the Australian Unity Healthcare Property Fund – A Class units.  This is a first for me in 18 years, as I have never previously been prepared to accept the liquidity risk of unlisted property.  When I began reviewing portfolios as part of my training in 1994 I was horrified to see losses of 90% plus from investments trapped in unlisted funds – something that was forgotten by many advisers by the time 2008 rolled around.

The A Class units hold 20% of application monies in cash, meaning redemptions should be promptly met if we decide to exit in future.  This is at the cost of a lower income return and lower growth potential than the main wholesale units.  All the same, I feel the defensive characteristics of the type of properties (hospitals and medical centres), indexation of rents to CPI, an expected yield of 8.3% on the main units (we estimate 7.3% on the A Class units) and buying at asset backing justify investment.  This is of course subject to a discussion as to whether this investment is appropriate for your portfolio.

The trend price of $US spot gold prices appears to have turned negative and we are now more inclined to raise cash from gold related exposures – with international assets the most likely replacement. 

While the $A remains stubbornly high, it does represent an opportunity to buy international exposure simply not available in Australia and at a substantial discount to what we would normally have to pay.  Adding Asian or emerging market exposure to portfolios through the use of (say) exchange traded funds is one option.  Another choice is to introduce a global infrastructure fund – as infrastructure assets are in demand by institutions (including sovereign wealth funds) looking to secure long-term compounding cash-flows.  These niche additions are intended to supplement (not replace) international exposure provided by the active (non-indexed) fund managers we are prepared to recommend in this space.   

2013 Changes

Di Brozek continues to hunt out the best term deposit rates we can source and will be taking a greater contact role in confirming maturities and re-investment.  Candice Whiting will be assisting me with monitoring and implementation of planning strategies and may also be confirming certain actions with you.  The objective is to free up more of my time for investment monitoring, reviews and research.

Have a safe and enjoyable Christmas and New Year.  Whilst I endeavour to review portfolio and planning matters on a rolling basis, sometimes market or regulatory changes intervene – so do not be shy in making contact with any queries in relation to your portfolio, markets or planning.

Best wishes,
A.W. (Tony) Gray BCom, LLB, Dip FP, GDipAppFin, CFP, FFin
Principal, TG Financial

Please treat the above comments as General Advice or general information, with no action to occur until we have considered with reference to your financial position, needs and goals.


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