Quarterly Annual Investor Review Superannuation 30 June 2012

Quarterly Annual Investor Review Superannuation 30 June 2012

Investment news Income investing: beyond cash and bonds March 2013 Written by Michael Karagianis, Senior Investment Strategist, MLC With returns from cash and bonds falling, investors need to look for other ways of generating more sophisticated strategies to deliver reliable income and capital security. Since the global financial crisis (GFC) theres been a surge in the popularity of investments that provide a reliable income stream. A long period of increased market uncertainty has tended to make investors riskaverse and conservative about their choices. In Australia, demand for term deposits has soared, helped by attractive interest rates. Investors desire for predictable income and capital security has also led to a boost in demand for other income-based investments, especially bonds. Chart 1 shows how the financial assets of Australian households have changed since the GFC. Chart 1: Australian households have moved away from shares into bank deposits since the GFC Income-based investments such as term deposits and bonds are also popular because of our aging population. Retirees need to draw down savings to meet lifestyle costs and there is a risk their savings wont last throughout their retirement. For both reasons, investment strategies that deliver more predictable returns with lower risk are attractive to Australian retirees. Investment news Income investing: beyond cash and bonds Term deposits and bonds may not deliver However, interest rates are now so low that term deposits and bonds alone are unlikely to meet retirees needs throughout

retirement. After the last cut in official interest rates in 2012, term deposit rates dropped to around 4%. This is too low to both provide adequate lifestyle income for retirees and compensate for inflation. Chart 2 shows the recent slump in bank term deposit rates. Returns from bond investments have also started to decline, reflecting the low bond yields. Chart 2: Australian bank deposit rates have continued to decline More diversified income investments are needed Given the decline in term deposit rates and bond yields, a portfolio needs to include a wider range of income-generating investments in order to deliver both predictable income and a reasonable degree of capital stability. Here are some other strategies to consider. Income from shares shares that pay a high dividend can deliver stable income flows. When dividends are franked, they can be very tax effective. For example, Australian banks are offering around 6% pa fully franked dividends, which grosses up to around 8.759% pa for retirees. However, share dividends are still exposed to share price movements. Absolute return investments the manager has flexibility to choose the types of assets they invest in. This means there is the potential to deliver a more even income stream in a range of market conditions. Alternative assets this term covers a very wide range of assets that dont fit in the traditional asset classes of shares and bonds. Just some examples are hedge funds, residential and commercial property, infrastructure and private equity. When traditional assets are highly volatile (such as shares) or have declining returns due to falling interest rates (such as cash and bonds), alternative assets can: increase diversification in a portfolio, producing a different pattern of investment returns, or provide a higher return to compensate for the investment being less easy to sell. Corporate bonds these are a potential building block in an income-oriented portfolio because they have higher interest rates than government bonds. The right solution needs the right combination of strategies These types of investments can expand the options for retirees seeking a more stable pattern of income and other investors looking for reasonable returns with lower capital risk. Speak to your financial adviser about the combination of investments thats right for you.

Investment news Income investing: beyond cash and bonds Important information This information has been provided by MLC Investments Limited (ABN 30 002 641 661) and MLC Limited (ABN 90 000 000 402) members of the National Australia Bank group of companies, 105153 Miller Street, North Sydney 2060. This communication contains general information and may constitute general advice. Any advice in this communication has been prepared without taking account of individual objectives, financial situation or needs. It should not be relied upon as a substitute for financial or other specialist advice. Before making any decisions on the basis of this communication, you should consider the appropriateness of its content having regard to your particular investment objectives, financial situation or individual needs. You should obtain a Product Disclosure Statement or other disclosure document relating to any financial product issued by MLC Investments Limited (ABN 30 002 641 661) and MLC Nominees Pty Ltd (ABN 93 002 814 959) as trustee of The Universal Super Scheme (ABN 44 928 361 101), and consider it before making any decision about whether to acquire or continue to hold the product. A copy of the Product Disclosure Statement or other disclosure document is available upon request by phoning the MLC call centre on 132 652 or on our website at mlc.com.au. An investment in any product offered by a member company of the National Australia Bank group of companies does not represent a deposit with or a liability of the National Australia Bank Limited ABN 12 004 044 937 or other member company of the National Australia Bank group and is subject to investment risk including possible delays in repayment and loss of income and capital invested. None of the National Australia Bank Limited, MLC Limited, MLC Investments Limited or other member company in the National Australia Bank group guarantees the capital value, payment of income or performance of any financial product referred to in this publication. Past performance is not indicative of future performance. The value of an investment may rise or fall with the changes in the market. Please note that all performance reported is before management fees and taxes, unless otherwise stated..

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