GEARING
Time to shift investment The recent interest rate cut by the Reserve Bank of Australia has created a number of opportunities for self-managed super funds. PETER VAN DER WESTHUYZEN explains.
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ith the Reser ve Bank of Australia (RBA) cutting the cash rate recently, and the possibility of further rate cuts in the near term, self-managed super fund (SMSF) investors now have the opportunity to chaange gear in their investment strategy to make the move out of cash. A leveraged solution may help SMS SFs get the most out of Australian equities which right now are delivering attractive dividend return ns and franking credits. While leveraging into shares can magnify losses if the market falls, it can also help diversify your portfolio and generate long-term returns, even if equity markets remain flat for the next three to five years. With historically high dividend yields and franking credits, there is currently an opportunity for SMSF investors with the right set of circumstances to generate returns by leveraging into some of Australia’s largest listed companies.
were five years ago. This recent attraction to cash has been quite appealing for investors. Many investors are shifting their investments into cash to take advantage of its perceived safety, and returns from term deposits that are being offered by some with interest rate premiums of greater than 1.50 per cent over the RBA cash rate. However, the RBA’s November rate cut has potentially put an end to that party. In addition, two-year Australian bond yields are pointing toward further interest rate cuts over the next 24 months. It is likely that this expectation has contributed to a noticeable slowdown in the rate of growth of deposits held on the Australian books of individual banks in September 2011, compared to the previous two months. With such a large amount of cash sitting on the sidelines, it is worthwhile reconsidering Australian equities as an investment class.
INVESTMENT AND RETURNS FROM CASH ARE NOW SLOWING
WHY CONSIDER A SHIFT IN INVESTMENT STRATEGY?
On 1 November, the RBA lowered the cash rate for the first time in over two years from 4.75 to 4.50 per cent. This shift in RBA monetary policy comes at a time when deposits on the Australian books of individual banks had increased by over 16 per cent in the two years to September 2011, rising from $1.23 trillion to over $1.43 trillion. During that time, the average Australian household saving rate had also been on the increase, with the average Australian saving almost twice as much of their household income than they
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MONEY MANAGEMENT
The stock price declines in many of Australia’s largest listed blue chip companies over the past 18 months have seen dividend yields on a number of ASX top 10 listed companies increase to levels not seen since the early 1990s and immediately after the global financial crisis. In fact, the average dividend yield on the ‘big four’ Australian banking stocks has recently traded at a premium of over 5 per cent relative to the rate of return on twoyear Australian government bonds, for only the third time in the last 20 years (see Chart 1).
SMSF Professional
For some of Australia’s largest blue chip companies, dividend yields when grossed-up for franking credits are trading at levels above 10 per cent, providing SMSF investors with the ability to use leverage as an opportunity to generate returns even if stock prices remain flat over the next five years (see Chart 1). Incidentally, if one had purchased shares in any of the ‘big four’ banking stocks over the last 20 years on
November 24, 2011
a day in which the stock traded on a dividend yield with a premium of five per cent or more over the twoyear government bond rate and held the investment for five years, the average annual capital return (unleveraged, and excluding dividends) would have been 21.5 per cent. On all 548 occasions in which that investment opportunity was available (ie between 1991 and 2006), a positive return would have