With interest rates expected to remain low in 2015, the pressure is on for Self Managed Super Fund (SMSF) trustees to find alternative investment options that provide sustainable income in their portfolios.
Couple this with statistics on the massive cohort of baby boomers reaching retirement age and expected to move into the pension phase of their investment lifecycle, and the incredible wave of cash flowing into yield based investments is inevitable. To put this into some perspective, the number of Australians over the age of 65 is expected to increase by 75% over the next 20 years (from 3.3 million in 2012 to 5.8 million in 2032)*.
The Demographic Shockwave
Delving into what this means for equity markets, a recent white paper issued by UBS Securities Australia entitled ?The Demographic Shockwave? found that this trend is not confined to Australia. Developed world populations are ageing, fertility rates are declining, longevity is increasing, and most importantly ?Baby Boomers? across the globe are retiring. The UBS analysis shows that this ageing demographic has significant implications for economic growth. The paper found that older populations result in slower economic growth. In this environment UBS?s model suggests that demographic shifts are likely to provide a headwind to economic growth for 15 years to come. In a low growth environment, investors benefit most from high yielding asset classes, such as government bonds, and property, as the return from income exceeds the return from capital growth. This makes sense. Faced with the prospect of how to deploy their capital, companies are more likely to issue it in the form of higher dividends than invest it in low growth opportunities.
Given the aging demographic, the slowing economic environment and the increase in SMSFs, the research suggests that defensive strategies, especially sustainable income strategies, are more likely to outperform over the next 15 years.
Just how big is the SMSF market?
The Australian superannuation system is the fourth largest in the world and currently stands at $1.6 trillion. With compulsory superannuation set to increase from 9% to 12%, a recent Deloitte study estimated that this pool of superannuation assets could reach $7.6 trillion by 2033*.
Astonishingly, one third of the current $1.6 trillion of superannuation assets are held within Self Managed Super Funds and if this trend continues we could see over $2.5 trillion in SMSF accounts by 2033.
Of the 1 million current SMSF members in Australia, 82% are over the age of 45 and therefore fast approaching retirement. Having the flexibility to manage their own finances, they are now looking for yield bearing investments to support the lifestyles they have become accustomed to.
SMSFs turn to Exchange Traded Funds for yield based investments
One need look no further than the exponential growth in the exchange traded fund (ETF) market to realise where a significant portion of this money is going. With the Australian ETF market recently cracking through the $10 billion mark, research shows that the single biggest user group of ETFs is SMSF, making up approximately 50% of the market,
With close to 100 products across all asset classes, the ETF market has experienced significant growth over the past five years, growing at a cumulative annual growth rate of 43%. Better yet, this trend is accelerating. In 2013 alone, the Australian ETF market grew at a growth rate of 54%, increasing in size from A$6.5 billion under management to over A$10 billion.
Part of this growth may be attributed to the increase in fixed income ETFs available to Australian investors. In 2012, the ASX approved the listing of the first fixed income ETF, and in so doing opened up a new investment option allowing SMSFs to gain direct exposure to government and corporate bonds. There are now 11 fixed income ETFs now available with a combined funds under management of over A$500 million which has proven to be another successful tool for SMSFs to diversify their portfolio into other yield producing asset classes.
It is important to note that ETFs are considered by ASIC to be complex financial products. Some are more complex and risky than others. For more information on ETFs and risks associated with them, see ASIC’s Moneysmart website at https://www.moneysmart.gov.au/investing/complex-investments/exchange-traded-products
The dramatic increase in demand for ?high dividend? ETFs.
Even more impressive is the dramatic increase in ?high dividend? ETFs. There are now five high dividend ETFs available in the Australian market with a combined funds under management of close to A$1 billion. UBS?s tailored strategy is the latest offering to be brought to market to directly address the significant demand for high yielding investments.
UBS has created a unique high yield ETF, the UBS IQ Research Preferred Australian Dividend Fund (ASX code: DIV) is designed by UBS?s Australian equity analysts specifically for the Australian market. The local analyst input differentiates this high dividend yield ETF from existing offerings where portfolios are built using straightforward rules. Importantly, this 40 stock equity portfolio offers investors a high yield with franking, and is constructed by focusing on companies with improving balance sheets that can grow their dividends into the future. In other words, it is a ?sustainable income? portfolio.
In an environment where interest rates are expected to remain low, and with the growth in SMSFs showing no signs of abating, ETF usage is expected to grow exponentially as the wall of retirement money searches for income yielding investments. All things considered, income focused investment portfolio?s look set for another strong year.
*Source: ASX, “Spotlight on ETPs” Dec 2013
* Dynamics of the Australian Superannuation System – Deloitte Actuaries & Consultants (September 2013)
About the Author
Stephen Small is ETF Capabilities Manager for UBS Global Asset Management.
UBS has a long-term track record of providing index-based investment solutions to clients globally. The first UBS ETF was launched in Luxembourg in 2001. Since then UBS has launched over 100 ETFs globally, with funds under management in excess of AUD 17 billion as of 31 December 2013. The UBS Australian ETF platform was established in 2012 with the launch of the UBS IQ Research Preferred Australian Share Fund, ASX code: ETF.
UBS ETFs are managed by an experienced asset manager, UBS Global Asset Management, with a long-term commitment to passive management (managing passive assets for 30 years).
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