Welcome to Firstlinks Edition 309
Graham Hand
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High interest in low rates
In my 40 years (yikes!) in financial markets, there's never been anything like the current levels of low interest rates. I cut my teeth in the 1980s on bank balance sheets with short-term rates at 18% and long bonds at 15%. With the Reserve Bank making the first cash rate reduction since August 2016 and some economists tipping the rate could fall to 0.5%, millions of savers will see their income further eroded. Adding to the woes for pensioners is a deeming rate stubbornly stuck at an unreasonable 3.25%, as if that can be achieved without risk.
The fall in yields in the last year, as shown below, is remarkable, and it explains why bond funds have delivered exceptional one-year returns. The price gain in the actively-traded November 2029 2.75% Australian Government Bond is 12% since 5 June 2018. It just keeps rallying. The lesson from this chart is to expect low rates for a long time, and adjust plans accordingly.
Source: National Australia Bank
Bank margins generally suffer from lower rates as they earn less from their billions of interest-free deposits, but the mortgage business remains handsome. I had a fixed rate investment loan mature last week, and while I wait for lower rates before refixing, CBA placed me on a variable rate of 4.99%. Why not make it a neat 5%! How many people would not notice this usury?
While a cash rate of 0.5% seems ridiculously low, spare a thought for the Swiss, where the National Bank offers minus 0.5% to stop the Swiss franc appreciating too much. And our Reserve Bank has not done any of the so-called 'unconventional monetary policy' adopted by other central banks. What's next? Jump start cables?
Ashley Owen provides one of his cracking charts showing bond rates, inflation and real GDP since 1870, and he explains why he expects higher rates in the medium term.
It's therefore not surprising to see Listed Investment Companies (LICs) and Exchange Traded Funds (ETFs) offering cash, cash-enhanced, global bonds, corporate bonds and hybrids attracting strong support as investors scramble for alternative sources of income. The table below shows ETF flows for the March 2019 quarter with fixed income featuring strongly.
Remember our Education Centre is a great resource for finding LICs, LITs and ETFs. Meanwhile, Phil Hofflin says investors need to rethink asset allocation and not assume the defensive nature of bonds will always be repeated.
Yesterday was World Environment Day ...
Although the superannuation industry allocates a mighty $2.7 trillion of assets and all fund managers aspire to ethical principles, there are no standards around ethical disclosure and what constitutes an ethical fund. There's now an Ethical Advisers' Co-op to help investors. So it is timely to interview Phil Vernon from Australian Ethical to hear how they manage an ethical framework, and also read Tim Kelly describe how to know if a deal is a 'greenwash' or genuine.
... and while on ethics, we apologise to any apple that took offense
We had to laugh. Here at Cuffelinks, we regularly promote articles on Facebook (yes, for a cost). And just after we received Annabelle Miller's interesting article on the need for Facebook and Google to better manage their content, we posted an ad for last week's article on food investing trends. The picture with the article showed a measuring tape around an apple, and Facebook's multi-billion dollar AI engine knocked back the ad within minutes for the following reason:
"This ad isn't running because it uses images that excessively focus on a person's body or any given body part (ex: focusing on abs or belly fat). This can make users feel bad about themselves, and goes against our core value of fostering a positive global community. What to do next: Avoid images with close-ups of specific body parts or before-and-after photos."
You have to worry about AI, supposed to be the way of the future, when it cannot distinguish between a fruit and a body. Maybe that's why it's called 'artificial' intelligence. At least the apple's sensitivities are safe while Facebook works out how to restrict posts by terrorists and extremists.
Or was it Facebook protecting apple?
Only three weeks to go to EOFY
Some jobs we put off, but the EOFY waits for no one. Michelle Bromley gives a quick checklist of superannuation and tax items to make the most of your investment outcomes this year.
There's no better time to think about your goals in retirement, and Vanguard's White Paper below called 'From assets to income: a goals-based approach to retirement income' is worth reading in front of a hot fire on a cold winter's night.
Also check your energy usage. Michael Debs shares some excellent charts which show how Australians are outliers in energy, and the best way to reduce costs is greater efficiency.
Finally, it's timely to rethink the role of cash. Matthew Lemke argues it is widely misunderstood, and secure ballast in a portfolio helps it stay afloat in tough times.
And lots of comments last week on possible super changes under Have Your Say.
Graham Hand, Managing Editor
For a PDF version of this week’s newsletter articles, click here.