September 2013 Review Comments
Written by Tony Gray   
Tuesday, 17 September 2013 10:39

Portfolio Valuation & Comment

Reporting season is over, with a mixture of positive and negative results, but with a relatively flat outlook for Australian company earnings.

The table below sets out the 1 year total returns (income plus growth) for the main asset classes.

Index Returns – 30 June 2013

Index Returns

Returns from international shares, Australian shares and listed property were very strong.  International share returns were aided by the falling $A.  Fixed interest returns were barely positive as rising long bond yields saw bond values drop.

Most portfolios hold little if any bond exposure and instead have exposure to higher yielding term deposits – although rates have been steadily falling.

Clearly the growth side of portfolios had a very strong financial year.  Unfortunately, it is rare for two consecutive years of strong returns to occur domestically – although international shares have managed to produce strong returns for extended periods in the past (the last time was the late 1990’s).

Below are some brief comments on the main asset classes – which guides our advice on how to position portfolios.

Australian Shares

Values are ‘ok’ at best.  Whilst this does not preclude the potential for a solid 12 month return, equally there is higher than average risk of a sell-off that might be triggered by overseas events.  We continue to focus on individual stocks and gross income yields remain comfortably above defensive (fixed interest) yields – so at least there is some income reward for accepting the capital volatility.

International Shares

International shares remain cheaper than Australian stocks, with greater return potential in our opinion.  The $A also remains historically high.  Continuing to average into international shares with surplus cash-flow is recommended – although this will vary depending upon your specific position – as income yields tend to be lower and less reliable than for local shares.

Domestic Listed Property

By far the largest sector relates to shopping centres and we see evidence of declining rents as tenants negotiate renewals.  This plus rising bond yields mean this sector faces headwinds for some time.  While prices of some trusts have declined since May (e.g. Westfield Retail has dropped by 17%), the total return potential is generally not yet high enough to tempt us to apply new funds at this time.  We will continue to monitor as gearing levels are relatively low and the discount to asset backing is expanding.

Fixed Interest

Term deposit rates have continued to fall, but rates now rise the further out in time you go – which is a change from earlier this year when 3 and 6 month rates were above 1 and 2 year rates.  While further cuts by the Reserve Bank cannot be ruled out, we feel that rising bond yields (10 year Commonwealth Government Bonds are now yielding 4.07% compared to the RBA overnight cash rate of 2.50%) suggests a ‘normal’ interest rate and economic cycle.  Put another way, we think interest rates will begin to rise in the not too distant future.

We may well see the banks introduce some ‘specials’ again to secure longer dated funding.  If the premium to at-call and shorter dated deposits is sufficient, then applying maturing term deposits to longer terms (reinstating a rolling maturity approach) may be worthwhile.

At-Call Funds

The interest return of circa 3% on at-call monies is only a modest discount to 6 or 12 month term deposits, so maintaining a higher than normal reserve pending opportunities does not come at a great cost to income.  This of course is not a long-term approach, but means specific investment opportunities can be immediately actioned.

In summary, we doubt 2013/14 returns will be anywhere near as strong as for 2012/13 but apart from bonds, we don’t have major concerns about the main asset classes either.  If you have any concerns or queries about your portfolio, please contact me to discuss.

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.

Last Updated on Tuesday, 17 September 2013 10:53

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