AJ Radio – Episode ​15 (Recorded 17th October 2017)

In this 15th Episode of AJ Radio we discuss retirement. Specifically, we explore what you should do if you don’t have enough money for retirement, and what are the steps you could consider taking to handle this situation. We also give a quick update on the speculative and very interesting cryptocurrency market.


Are industry super funds headed for an asset allocation disaster?

Superannuation funds within the retail and industry super fund market usually offer ‘balanced’ or ‘growth’-based investment options. But what does this really mean; and aren’t these funds all the same?

On 31 May 2017, Vanguard’s Balanced Index Fund reported an allocation to growth-based assets of 49.9%.

Over the years, my interpretation of a balanced profile for an investor has been fairly similar to Vanguard’s 50/50 position; that is, one’s holdings are fairly equally split between growth-based assets and defensive assets. The question is, are industry super funds applying the same principle or, more importantly, are they headed towards an asset allocation disaster?

Recently I reviewed Catholic Super’s asset allocation, and I discovered something interesting. Delving into the target’s asset allocation for a ‘balanced’ fund I noticed a 70% growth-based assets allocation. This is a massive divergence from Vanguard’s recommendation, not to mention any number of portfolio theory textbooks. It made me wonder, has Catholic Super’s marketing department ‘mislabeled’ this investment option?

When reviewing Catholic Super’s strategic asset allocation, I also noticed that growth-based exposure was sitting at around 74%, if you included the ‘defensive alternatives’. If these alternatives are removed, it pushes the exposure up to 81%, as it is unclear exactly what these might entail.

Australian Super’s ‘balanced’ option appears to be in similar territory. When I looked at the mix of assets, if credit, fixed interest and cash are included as defensive assets, then growth-based exposure sits at 73%.

Neither Catholic Super nor Australian Super provide a date reference for these asset allocations on their respective website, so these percentages may have changed since they were originally published. It’s reasonable to assume, however, that both Australian Super and Catholic Super are taking a tactical asset allocation position – but have they reasonably exceeded these boundaries?

For years now, industry super funds have been reporting strong returns above those of their peers. The question must be raised, therefore, have these funds’ marketing divisions been pushing up returns by ‘mislabeling’ investment categories in order to attract new investors? Of greater concern, though, is whether these funds are potentially exposing investors to far more risk than the labels may imply?

So, let’s go back to the Vanguard Growth Index Fund reported on 31 May 2017. The index presently sits with a maximum range of exposure for growth-based assets at 72%.

You might ask, does having a larger exposure to growth-based assets matter? Doesn’t it mean higher returns for the members of the super fund and everybody is happy?

The short answer is: volatility and market downside. These factors make it very difficult for an investor whose risk profile is balanced to ensure they are matched carefully with the right exposure for their risk tolerance.

So, who has got it right? Vanguard, or the industry super funds? Which asset allocation really is ‘balanced’?

As Warren Buffett famously said, ‘Only when the tide goes out do you discover who’s been swimming naked.’

AJ Radio – Special Edition on Insights from CFA Institute New York

In this special edition of AJ Radio we reveal what the founder of AJ Financial Planning, Alex Jamieson, recently learnt from attending the CFA Institute Conference held in New York. Hear his insights on which sectors of the share market will be benefit from the election of Donald Trump.

Why solar is not dead under Trump…….

Thinking of investing in renewables?

Does it make sense to invest in this sector, and what are the advantages?

Did you watch the sunrise this morning? Here’s some interesting facts:

  • Every 88 minutes, 470 exajoules of energy from the sun hits Earth’s surface. That is as much energy our planet consumes in one entire year.
  • Every 112 hours, which is around 4.6 days, the sun provides us with 36 zettajoules of energy. That’s as much energy as is contained in all proven reserves of oil, coal, and other natural resources on our planet.

Yet today, only around 1% of total global electricity comes from solar power.

In 1977, the cost per watt to use solar power energy was $76.67. Even in 2003, it was believed that the cost of solar power would never get below $1 per watt due to the cost of the raw materials required to manufacture solar panels.

Today, however, solar power sits at around 0.10 to 0.30 per watt – depending on the manufacture and location. In Chile a few weeks ago, they just set a new solar price record of $0.0291 pWh.

To put all these facts into perspective, consider other fuel sources such as natural gas, which sits at around 0.07 cents per watt, while coal sits at 0.13 per watt. So it would be fair to say that traditional resources are under threat –possibly even headed towards extinction.

When it comes to technological development, most people think of a linear model extrapolating this line into the future, or a rate of curve. For example, take 1, 2, 3, 4 … You would expect the next number to be 5. The reality is that in some aspects of technology and manufacturing, the development can be exponential. Consider the miscalculation of the projected cost of solar – out by 142%!

When you think about the renewable energy sector, solar has two powerful advantages that are not applicable to other sources:

  1. Sunshine is abundant worldwide, although ironically the poorest countries on Earth are often the sunniest places.
  2.  Solar has the ability to equalise the energy market from country to country and township to township.

What does this mean? Hopefully, solar has the potential to reduce the overall cost of energy and living costs in the long term.

So what are the opportunities for you, the investor? Where can you invest in solar or renewable energy listed companies within the Australian marketplace? At this stage the list is very small, but here are some you might consider:

  • Meridian Energy
  • Redflow
  • Infigen Energy

In comparison to the global markets, these Australian companies are fairly small and their journey on the development curve is still early in the business lifecycle.

If you don’t feel confident to pick and choose your investment options, you might prefer to consider an ethical or sustainable managed fund that might also have exposure to the renewables sector with other investments also pull together.

Please also remember that before embarking on any investment or strategic financial planning decisions, you should always seek professional guidance from a licensed financial planner –  and of course we would recommend our team at AJ Financial Planning.

Navigating retirement funding: Is superannuation such a great idea?

Superannuation and retirement have always gone hand in hand. Yet recent budget announcements around taxation, contribution caps and other proposed changes have caused a stir and understandably, some Australians may be reconsidering the merits of superannuation.

Presently, retiree couples with a low income or seniors tax offset can each earn around $74,000–$83,580 p.a. before they start paying any taxation on income outside of their superannuation environment.

Let’s say, for example, that a couple’s capital was all invested in a term deposit. Based on today’s interest rates, they could each have around $2.7 million in a term deposit before paying any taxation.

Alternatively, if they invested their money in a share portfolio, each portfolio would have to be worth around $1.67 million before they had to pay any taxation.

So the question is, with all the confounding complexities around super; is it really worth the headache?

The other question is, will the proposed changes have much of an impact on the general retirement population? The budget announced a $1.67 million cap per person on a superannuation fund (combined $3,340,000 per couple) before any taxation comes into play. Anything above this may be subject to a 15% accumulation taxation on earnings.

For most Australians, this excess will likely move from their superannuation into their personal names once the measures are potentially introduced.

As you can see by these limits, for most retirees around Australia, taxation will only start to be a factor if they hold more than $4.94 million in combined assets, excluding their own home (both inside and outside of super).

On the other hand, if you only have a couple of hundred thousand in superannuation at retirement, does it make sense to have a superannuation fund with all the hassle of fees, regulation changes and complexities, etc., or are you better off just having the money invested in your own name?

Part of this answer will depend on the capital gains element of your portfolio, i.e., how much is generated on an ongoing or a forecasted basis in the future. The biggest benefit for superannuation is that if it is in pension phase, under the proposed limits from a capital gains standpoint it will be 100% tax-free.

Moving forward, I suspect that most people will look to manage their legislation risk—the risk of the government changing their mind—by holding some assets inside of superannuation, and some outside of superannuation.

This will also assist with distributing the tax base across both structures, and keeping a foot in both camps should there be any changes.

However, like most strategic financial planning, you have to consider all the above factors in context to your personal situation. You will also need to consider the benefits of salary sacrifice contribution into superannuation, or deductible contributions, as well as a whole range of other factors in determining which path is best.

Please also remember that before embarking on any investment or strategic financial planning decisions, you should always seek professional guidance from a licensed financial planner. Of course, I recommend AJ Financial Planning.