Investors who liquidated assets to protect income and capital by moving into cash, will shortly need to re-consider their position if they are to maintain their income at reasonable levels.
Mr David Bryant, head of Australian Unity Investments, said that the rapid and significant interest rate decreases are good for people with mortgages, but not so good for people, such as retirees and pensioners, who moved into cash and short-term interest-bearing deposits to give a regular income and protect capital.
"The present investment circumstances, particularly after the RBA's recent 100 basis point interest rate cut is a sharp reminder of the importance of diversification - not only between, but also within, asset classes. "Investors who quit equities and property markets and other investments over the last year, and who put their money into cash and short-term deposits, would have been fairly comfortable when they were getting returns of around 8% or more."
We have now seen short-term deposit rates drop to around 4.5%, and with the Reserve Bank now reducing official rates to 4.25% they have eliminated six years of rate increases in just three months. This represents a fall in interest rates of more than 40% - and a reduction in the earning power of cash of the same amount. With firm expectation that interest rates will drop even more significantly in coming months, investors need to think about the strategies they will adopt so that they can earn a suitable level of income.
"On the other hand, the return and risk outlooks for other fixed income products are now looking significantly better. "For example, the more canny bond managers who were already concerned with the sub-prime market before it collapsed, such as Vianova, are performing exceptionally well, producing returns in excess of 10% for the year*, and should continue to provide outstanding returns as bond issuers, even governments, increase their yields to attract investors.
"At the same time, our mortgage income fund is currently producing an income return for investors of 7.4% pa* and our lending managers report that they are currently able to write loans at higher returns with lower risk than they have for many years. "These loans are secured by first mortgages, provide good geographic diversity and the portfolio has a very conservative loan to valuation ratio of 62.57%*. "These higher returns will be reflected in the good income our investors receive.
"So there are a couple of pointers for investors. Firstly, cash deposits returns are likely to decrease as central banks continue to lower official interest rates to stimulate the economy. Indeed, it is extremely unlikely that returns from cash will keep up with inflation in the nearer term, especially for tax-paying investors. In fact such investors will find the buying power of their capital will most likely go backwards.
"Secondly, diversification is important - not just between asset classes but within asset classes, and for those seeking a higher level of income there are a number of excellent options other than cash or term deposits. "Thirdly, the market downturn and ongoing volatility has illustrated the danger of relying on past performance to predict what the future holds.
Any comparisons between current and pre-2007 performance is like comparing apples and oranges.
"But modifying this is the fourth point investors should always bear in mind. Good managers will always do well over time," Mr Bryant said.
Australian Unity Investments is the funds management arm of financial services, health and retirement living services provider Australian Unity. It has over $5.5 billion in funds under management*. Its investment approach is to use its established in-house expertise in property and mortgages while also forming joint ventures and strategic alliances with other organisations with specialist expertise.
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* As at 31 October 2008
Further information:
David Bryant
Email: dbryant@australianunity.com.au
Facts and opinions presented in this press release are current at its publication date, but will change according to market conditions. A reference to the performance or features of an investment product issued on behalf of Australian Unity Investments should be considered in the context of current details and the Product Disclosure Statement for that product, available from our web-site: www.australianunityinvestments.com.au or by telephoning 13 29 39.