A Smart Alternative

Introducing the Ardea Real Outcome Fund and ActiveX Ardea Real Outcome Bond Fund (Managed Fund) (ASX: XARO)

Doors, Choices, Choose, Decision, Opportunity, Choosing

With the RBA recently cutting the official cash rate twice to a record low levels of 1.00% p.a., for many investors the need to consider other income sources to maintain current levels of income has increased. As such, the Ardea Real Outcome Fund (ARO) or its related ASX-quoted active ETF launched in December 2018, the ActiveX Ardea Real Outcome Bond Fund (Managed Fund) (ASX:XARO), may be smart alternatives for those investors to consider as term deposit (TD) rates decline in line with falling cash rates. But first, it’s important to be clear that ARO and XARO are not cash or TD substitutes. This is because neither ARO nor XARO benefit from the government guarantee for bank deposits. Instead ARO and XARO are actively traded fixed income strategies which are intended to deliver a return higher than cash and TDs but may experience negative monthly returns and are subject to a range of other risks. For these reasons, ARO and XARO are not suitable to replace ‘at call’ cash products or where the investor is uncomfortable with the change in risk profile. That said, with current advertised one- and two-year TD rates from the big four Australian banks dipping below 2.00% p.a.1, ARO or XARO may be suitable investment alternatives for investors looking to invest surplus cash over a longer investment horizon and can tolerate a higher risk level than TDs. ARO seeks to strike the right balance by offering the potential for higher medium-term returns than TDs2, but less risk than many other income seeking investments3. A minimum 2-year time horizon for an investment in ARO or XARO is recommended.

ARO’s volatility has been consistently lower than risk levels experienced by many common Australian income asset classes. Commonly used income alternatives like dividend paying stocks, bank hybrids, mortgage backed securities and credit investments may provide higher returns than TDs but can also experience significant volatility in adverse environments, with hybrids and credit investments also being subject to greater liquidity risk.

For investors willing to accept a higher level of risk than cash or TDs, including the risk of modest short-term volatility and of capital loss, ARO can be a smart alternative for surplus cash invested in low return bank deposits.

The following characteristics of ARO and XARO are relevant to consider as an alternative for medium term surplus cash:
✓ historically low volatility returns vs. other income-generating asset classes (see chart above).
✓ daily liquidity as ARO processes redemptions daily and XARO investments can be sold on market at any time (0.025% bid/offer spread for unit trust or on-market spreads for active ETF vs. the typical break costs for TDs if redeeming prior to maturity).
✓ smooth quarterly distributions with minimal administration (vs. continually rolling TDs).
✓ returns independent of the direction of interest rates from Ardea’s ‘relative value’ investment approach (TD returns typically decline as interest rates fall).
✓ low correlation to equity and bond market fluctuations offers portfolio diversification benefits.
✓ low credit risk (portfolio is primarily invested in ‘AAA’ and ‘AA’ rated government bonds and excludes credit investments).
✓ low interest rate risk (portfolio is managed with close to zero interest rate duration)
✓ no FX or emerging markets risk.
✓ ‘risk-off’ strategies that are designed to profit in adverse environments and therefore offer the potential for additional returns when equity and broader fixed markets are more volatile.

Why choose ARO/XARO over conventional fixed income funds?
Conventional fixed income funds typically have only two choices for generating higher income:

  1. Buy longer dated bonds and so take more interest rate duration risk, (i.e. so there is the potential for capital losses if bond yields rise)
  2. Buy credit investments (e.g. corporate bonds, loans, etc.) and take more credit risk, with the potential for capital losses in adverse market environments
    In our opinion, both these choices currently carry more risk for less return and may no longer be as defensive as previously assumed. The following articles provide further insight:

In our opinion, both these choices currently carry more risk for less return and may no longer be as defensive as previously assumed. The following articles provide further insight:

The unfavourable asymmetry of duration risk
Compensation for credit risk is poor
Bonds don’t always diversify equity risk

By contrast, each of ARO and XARO offers another alternative that has low interest rate duration risk, no credit investments and returns that are independent of declining interest rates and bond yields. It does this by combining Ardea’s unique ‘relative value’ (RV) investment approach, with ‘risk-off’ strategies that are designed to profit in adverse market environments, to target low volatility fixed income returns, irrespective of broader bond and equity market fluctuations. While ARO’s investment approach is unique, its portfolio is made up of the same high-quality government bonds and cash investments that conventional defensive fixed income strategies typically use. What’s different is the way Ardea extract returns from these securities and the wide range of risk management strategies used. The resulting return profile exhibits low correlation to equities, government bonds and credit markets, while aiming to deliver returns that are higher than cash rates with low levels of volatility. The following articles provide further insight: In our opinion, both these choices currently carry more risk for less return and may no longer be as defensive as previously assumed. The following articles provide further insight:

There’s more to fixed income than just buying bonds
Rethinking fixed income in retirement
Market inefficiency is a growing opportunity in fixed income

Combining uncorrelated RV return sources with risk-off strategies allows ARO and XARO to offer the potential for higher returns in more volatile environments, when conventional investments may incur losses. This type of return profile can be a useful risk diversifier when added to a broader investment portfolio.

These characteristics were evidenced in ARO’s performance throughout the market volatility experienced in 2018, as shown in the charts below. ARO’s returns remained positive and smooth through the bond and equity market volatility experienced in 2018 and early 2019.

Unless otherwise specified, any information contained in this publication is current as at the date of this publication and is provided by Fidante Partners Limited ABN 94 002 835 592, AFSL 234668 (Fidante Partners), the responsible entity and issuer of interests in the Ardea Real Outcome Fund and ActiveX Ardea Real Outcome Bond Fund (Managed Fund) (together, the Funds). Ardea Investment Management ABN 50 132 902 722 AFSL 329 8289 (“Ardea”) is the investment manager of the Funds. The information has been prepared on the basis that the reader is a ‘wholesale client’ within the meaning of the Corporations Act 2001. It is intended to be general information only and not financial product advice and has been prepared without taking into account your objectives, financial situation or needs. You should consider the product disclosure statement (PDS) and any additional information booklet (AIB) for the Funds before deciding whether to acquire or continue to hold an interest in the Funds. The PDS can be obtained from your financial adviser, our Investor Services team on 13 51 53, or on our website http://www.fidante.com.au. Please also refer to the Financial Services Guide on the Fidante Partners website. Past performance is not a reliable indicator of future performance. Neither your investment nor any particular rate of return is guaranteed.
It is not intended to be relied upon as a forecast or research and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy, nor is it investment advice. Fidante Partners makes no representation or warranty as to the accuracy of the data, forward‐looking statements or other information in this material and shall have no liability for any decisions or actions based on this material. Fidante does not undertake, and is under no obligation, to update or keep current the information or opinions contained in this material. The information and opinions contained in this material are derived from proprietary and non-proprietary sources considered by Fidante Partners to be reliable but may not necessarily be all-inclusive and are not guaranteed to be accurate.

Top 3 ways an SMA helps clients optimise tax

Copia Investment Partners

Let’s face it, there are few free lunches in giving investment advice. Which makes any reward from reducing a client’s tax burden well worth the effort. For most advisers, the chance to present a tax effective investment solution to clients has strong appeal as part of the advice value proposition: the challenge is how do you explain those concepts in a simple way that clients understand.

In this article we’ll take you through three ways in which tax optimisation can benefit your clients.

We’ve designed the examples to apply to clients transitioning into a Ralton Asset Management Separately Managed Account (SMA) such as the Dividend Builder, but the concepts can be applied more broadly.

First way a SMA is tax efficient: Avoid tax inheritance

For clients where tax management is a priority, avoiding the inheritance of a capital gains liability is a great first step, because it stops the client taking on a tax burden in the first place.

You can show your client what this means using chart above. It shows a hypothetical increase in a managed fund’s unit price over a period that begins when a fund manager buys a stock into that fund, and when it sells that same stock. In the middle of that period, the investor buys units in that fund. The price of that unit has inflated since the stock was bought, because it includes the accrued capital gain. 

The investor has no choice but to buy into that gain, even though they were never invested during that initial period. They have inherited a capital gain liability. Of course, for the sake of simplicity we have made very simple assumptions, but the concept remains. 

For completeness, it should also be noted the opposite is true. If a fund is carrying a capital loss, then the investor can inherit those losses and potentially reduce taxable income – but that is not typically the objective of investing.

In the next chart we’ll compare managed fund example to the Ralton SMA Dividend Builder.

Before explaining this chart, it’s important to highlight that in Ralton’s SMA, the investor has beneficial ownership of shares. And that makes all the difference in terms of what tax burden they are responsible for.

If we assume they invest the same day through the period as the previous example, the capital gain begins from when they invest, and not the start of the period like it was with the fund. That’s because they’re buying shares in their own name through the managed account structure, rather than units in a fund carrying capital gains. They will avoid inheriting a capital gains liability. All other things equal, you would expect their tax burden to be lower.

Second way a SMA is tax efficient: In specie transfer

Another way to optimise tax for clients is to transfer stock holdings into the SMA via in specie transfer. That will save selling down assets, and avoid a capital gains liability even before the new investing takes place.

In the example above, an investor holding ANZ moves their investment into the Ralton Dividend Builder SMA, which also holds ANZ alongside 24 other stocks, such as BHP, WOW and AMC. The key point here is through a transfer, the amount of selling is minimised through the transition into the SMA.

The opposite also works. An investor moving out of an SMA may decide to keep ANZ and sell out of the rest. That may reduce the tax burden on the way out.

Logistically, the ‘in specie’ stock transfer is typically nominated during the platform application process. The adviser will nominate where in specie transfers apply, saving the investor any avoidable capital gains.

And by avoiding the trade, the investor also saves on brokerage costs. It all adds up and gives more of the return to your client.

This is the advantage of having beneficial ownership of shares. The same outcome is generally not possible with managed funds.

Third way a SMA is tax efficient: Manage individual holdings

As a beneficial owner of stocks, SMAs also allow the client to manage their holdings in a way that optimises their personal tax position. A client can elect to hold or sell parcels of stock depending to benefit their overall tax position. For example, a gain on one parcel may be used to offset a loss on another, and so on. This technique of splicing of individual parcels is generally not available in a managed fund arrangement.

Managed funds have their benefits too

While the examples above highlight some examples of tax advantages of SMA over a managed fund, there are still plenty of reasons a fund arrangement may be suitable for other investors. Managed funds often have the advantage of being able to invest over longer periods, in less liquid stocks, that may provide a higher return potential. There are also more investment options available in the managed fund space, especially if the investor has a specific portfolio need. For example, advisers seeking a seasoned smaller companies strategy from OC Funds Management, or a low-risk equity income strategy in this part of the cycle could consider the Vertium Equity Income Fund, or even the Chester High Conviction Fund for a highly active Australian equity strategy – these options are not available as SMAs, but as managed funds offered by Copia.  

Ralton is an Australian Equity Income SMA Specialist

Established in 2005, Ralton offers three SMA portfolios including Concentrated Australian Equity, Dividend Builder and an Australian Equity Ex 50. The portfolios are externally rated, have all outperformed since inception (February 2008) after fees, and are available on major platforms, including Powerwrap.

Tools to explain, with your branding

Copia has developed a range of presentation charts to help advisers explain concepts about SMA the easy way. If you would like to receive copies with your branding, please reach out to Copia’s Distribution team. 

DISCLAIMER

Performance returns of the Ralton Dividend Builder Portfolio, Ralton Concentrated Australian Equity Portfolio and the Ralton Australian Equity Ex 50 Portfolio are based on a model portfolio and are gross of investment management and administration fees, but net of transaction costs. The total return performance references are historical and do not allow the effects of income tax or inflation. Total returns assume the reinvestment of all portfolio income. Past performance is not a reliable indicator of future performance.

This document is for general information only and does not take into account the specific investment objectives, financial situation or particular needs of any specific reader. As such, before acting on any information contained in this document, readers should consider whether the information is suitable for their needs. This may involve seeking advice from a qualified financial adviser. Ralton Asset Management (ABN 45 114 924 382) (Ralton) is the provider of the Ralton Dividend Builder Portfolio, Ralton Concentrated Australian Equity Portfolio and the Ralton Australian Equity Ex 50 Portfolio. For further information, contact Copia Investment Partners Ltd (AFSL 229316, ABN 22 092 872 056) (Copia) by calling 1800 442 129 or email clientservices@copiapartners.com.au. Any opinions or recommendations contained in this document are subject to change without notice. Ralton and Copia are under no obligation to update or keep information contained in this document current.

Meet the Manager Series

These ‘Meet the Manager Luncheons’ are hosted by Powerwrap as part of the Step Ahead Program. We provide a open forum that allow fund managers the opportunity to meet and discuss their products or macro or micro issues with Powerwrap’s Dealer Group clients.

Set-Top Boxes, Conference, Interior Design, Tv

Upcoming Meetings

DateFund ManagerDetailsLocation
19 September India Avenue Please join Powerwrap & India Avenue for a boardroom lunch to learn about the fund and investment in India. Monday September 19th 2019 – 12:30 – 2:00pm | Location: Powerwrap – Level 14 / 356 Collins Melbourne Vic 3000
10 OctoberAdviser Forum 2TBAMelbourne
16 October2 Fund managers presentingTBASydney

August Event – Adviser Forum

Powerwrap hosted an Adviser Forum on diversification in a low yield world through Infrastructure, Microcap stocks and Australian Ethical. A huge thank you to our speakers Nick Langley, RARE Infrastructure, David Keelan, Ellerston Capital, and Will Baylis, Martin Currie, for their key insights.

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Powerwrap’s Model Portfolios

Each month Powerwrap gives investors the chance to see the inner workings of Powerwrap’s model portfolios and SMA’s. See whats stocks the Model Manager bought and sold.

WCM (International) – Update


Blackmore Capital Equity Investors Monthly Portfolio Update

The audacious rise in global equity markets was abruptly punctuated in August.  Investor mood darkened with the disconcerting rupture in US and China trade relations coupled with key economic indicators showing a further withering of global economic growth. Yet, by the end of August an element of recovery in risk sentiment shielded equity markets from the harshest effects of an intensifying trade war and an underwhelming 2019 earnings reporting season. A raft of stimulus measures and more monetary easing by central banks provided ballast to limit some of the duress felt during August.   A weak August reporting season underlined the fragility of the Australian and global economies. Overall, analysts downgraded their outlook for June 2020 earnings by around 2%. Earnings downgrades were most heavily felt in cyclical and industrial companies. By contrast, defensive sectors outperformed the broader market, with consumer staple and healthcare stocks delivering resilient earnings results.  

At a time when cash returns are close to zero, an important source of support for the Australian equity market will be its ability to deliver positive earnings and dividend growth for the 2020 financial year. The ASX 200 remains on track to expand earnings per share by low-to-mid single digit growth.  Nonetheless we are cognisant that the current state of the global economy warrants a sense of investor caution. Elevated cash levels are held in readiness for future turbulence.  

Blended Australian Equity Portfolio  |  Australian Equities Income Portfolio

The Blended Australian Equities Portfolio finished the month of August down -2.18% compared to ASX 200 Accumulation Index down -2.36%. Positive attribution for the Blended Australian Equities Portfolio was driven by Healius (HLS), News Corporation (NWS), and Resmed (RMD). Whereas, Cleanaway Waste Management (CWY), Brambles (BXB), and Caltex (CTX) weighed negatively on the portfolio’s attribution. The Australian Income Portfolio finished the month of August down -3.08% compared to the ASX Accumulation Index down -2.36%. Positive attribution for the Australian Income Equities Portfolio was driven by Healius (HLS), Woolworths (WOW), and Viva Energy REIT (VVR). Whereas, Brambles (BXB), Cleanaway Waste Management (CWY), and Caltex weighed negatively on the portfolio’s attribution.

Blended Australian Equities Portfolio

The Blended Australian Equities Portfolio commenced investing in Feb 2014. Since its inception, the portfolio has achieved a compound annual return of 11.7% compared to the ASX 200 Accumulation Index of 8.4%. Click here for full report.

Australian Equities Income Portfolio

The Australian Equities Income Portfolio commenced investing in May 2014. Since its inception, the portfolio has achieved a compound annual return of 10.3% compared to the ASX 200 Accumulation Index of 8.3%. Click here for full report.


BanyanTree Investment Group

August was a tough reporting season for ASX-listed companies, with both small cap and large cap stocks underperforming expectations (on average). According to data from Bloomberg, 65.5% of the companies reported revenue which came in below market expectations and 52.8% of the companies missed analysts’ earnings estimates. The results were materially below previous reporting seasons. Outlook commentary was subdued and cautious, especially from companies with global revenues. On a positive, we saw capital management (e.g. buybacks and higher dividends) from companies with balance sheet flexibility and earnings visibility.

BANYANTREEINVESTMENTGROUP

* Key takeaway #1 – FY19 results were weak. On an aggregate basis, revenue surprised on the downside by -1.8% and earnings missed expectations by -1.2%.

* Key takeaway #2 – Outlook disappointed and earnings revisions followed. Market expectations were revised lower post the August update, with revenues revised down by -0.2% and EPS revised lower by -2.9%. We had noted heading into this reporting season that we were particularly interested in the outlook commentary from management teams, rather than the FY19 numbers. The cautious outlook commentary is not entirely surprising given the macro and geo-political uncertainties in the market.

* Key takeaway #3 – Consumer discretionary surprised on the upside. One of the key surprises in the August reporting season was the consumer discretionary sector. On average, the performance was solid versus expectations, prior reporting period and, on average, the sector saw positive revisions. For the stocks we follow, revenue came in +1.8% above market expectations, were up +8.5% on prior year and saw market revisions of +1.4%. Similarly, EPS came in +6.3% above market expectations, +9.1% above pcp and saw positive revisions of +1.5%. We are cautious in reading too much into the numbers as a proxy for significant and sustained improvement in consumer spending at this stage.

* Key takeaway #4 – Industrials disappointed. The broader Industrials universe had a tough reporting period, with revenues coming in -3.4% below expectations and EPS -8.5% below. For the key industrials we follow, difficult macro led to lower volumes and higher input costs drove material margin pressure.   

* Key takeaway #5 – Capital management was a positive. Buybacks and higher dividends were again a feature for companies which have balance sheet flexibility and stable earnings outlook. Some of the companies which announced a buyback included Amcor (AMC), AGL Energy (AGL), Aurizon Holdings (AZJ) and Link Administration (LNL). Notable companies under our coverage which saw dividends growth included Origin Energy (ORG), Qube Logistics (QUB), Rio Tinto (RIO) and JB Hi-Fi (JBH). * Key takeaway #6 – Cost out a focus, but then again it always is. Removing costs, especially in industries under earnings pressure, was again a feature with several companies announcing new cost out programs or increasing the value of existing efficiency programs.    

To view the full report please click here.

Recent additions to the Powerwrap Approved Products List – Month of August 2019

Recently, Powerwrap has added the following funds to our Approved Products List (APL). Some are subject to close. If you are an adviser who would like access to any of these funds please raise a ticket through Hive or the Service Desk. 

APIR CODE Fund Manager – Managed Fund Description
IM BasedIPO Wealth Fund TD, Property & Fixed Interest
IM BasedDorado First Mortgage Fund First Mortgage funding
IM Based Shenkman UCITS Vehicles   Corporate Credit
IM BasedThe Lake Road Champion Lakes Trust Real Estate
IM BasedEPG Contributory Mortgage Fund Contributory mortgage fund
WFS0285AUPendal Sustainable Future Australian Share Model Portfolio ASX
BTA3816AU Pendal Dynamic Income Fund Global Equity
SPI1337AU  Spire USA Multifamily Fund IV Australian feeder fund
IM BasedGCI Invoice Finance Trust Global Credit
IM BasedAustralian Diversified Bond Series II Bonds
IM Based  Australian Diversified Income Fund Bond
BQC8924AUCloudbreak Digital Opportunities FundCrypto Currency
HOW8743AUKapstream Absolute Return Income Plus Fund-Class IFixed Income
VGC2877AUThe Vega FundGlobal macro equities/derivatives
BFL3446AU Wheelhouse Global Equity Income Put-write strategy with tail risk protection
FID0026AUFidelity Future LeadersASX Equities
ETL0445AUPIMCO Capital securities wholesaleBonds
ETL4432AUL1 Capital UK residential property II High yield residential property
IM BasedPEP Secure Assets Fund APrivate Equity
IM BasedICAM Duxton Port Infrastructure TrustInfrastructure
PER0746AU         MCP Diversified Aust Senior Loans Fund Credit
PER7240AU         MCP Secured Private Debt Fund II Credit
PER7697AU         MCP Real Estate Debt Fund Credit
Close endedMutual Private Opportunities Fund
SWI1413AUWCM Quality Global Growth Fund Global Equities

Earnings season wraps up and trade tensions continue

Red and Black Boat

All things market related

Australia

The ASX200 Index closed the month of August down 3.06% making it the worst month of the year. Markets across the globe were hit with higher volatility and steep losses all due to mounting trade tensions and warnings of an economic downturn. Even positive company earnings results in the final week of reporting season, weren’t enough to calm the storm. Falls were felt across almost every sector with Resources and Energy hit the most. China facing stocks were hit even harder due to a shrinking Daigou market hit by the trade war concerns. At the time of writing, the market was trading at around 6,647 points.

Source Morgans
Source Morgans

Global Markets

It was a similar story in global markets. Wall Street closed in the red, down 1.72% and the S&P 500 was down 1.81%. Global markets edged lower after an inversion of the US yield curve. If history is anything to go by, once an inversion of the 2 and 10 year Treasury bonds occurs, a recession is sure to follow. It occurs when the interest rates on short-term bonds are higher than the interest rates paid by long-term bonds. Usually investors receive a higher yield on a longer term bond than for a shorter term bond because their money is locked up for a longer time. However, when this relationship inverts it means investors become concerned that their money isn’t safe in the longer term i.e. trade war between the US and China resulting in weaker global economic growth. The most worrying part is that the yield curve has inverted before every US recession since 1955. But on the positive side, it happens months or years before the actual recession starts. So the downturn is still a while away.

Key themes for investors going forward:   

  • US-China trade war
  • Seasonally weak August to October period
  • It’s possible but unlikely that the RBA will go below 0.5% in the cash rate
  • Inverted yield curve a precursor to recession
  • Australian Housing market has bottomed

According to BanyanTree – Here are 6 key takewaways from reporting season.

A message from Powerwap Operations

We would like to provide you with an overview of how we will be providing you with the annual reports for your clients.

Annual Investor Statements and Annual Tax reports

This year we will be providing clients with two reports; an Annual Investor Statement and an Annual Tax Report for the 18/19 Financial Year.

Annual Investor Statements will be provided prior to the end of September 2019.

The target date for dispatch of the Annual Tax Reports is also the end of September 2019.

Meeting regulatory obligations

Powerwrap, as the Responsible Entity of the Managed Investment Scheme through which investor accounts are offered, must provide investors with Annual Investor Statements by the end of September each year.

In previous years, Powerwrap has combined this statement with the clients’ Tax Report, meaning one report was issued covering both.

In a number of cases, at the end of September Powerwrap was still waiting on distribution and tax component information from some fund managers in order to run the Tax Reports. This meant a draft report was issued in order to meet the September deadline, with another, final report being issued once all the relevant data had been received.

In order to streamline this process for everybody, and to minimise the number of draft reports being issued, this year we will be splitting out the reports into two:

  • Annual Investor Statements will be provided by the end of September. 
  • The target issue date for Tax Reports is also the end of September but in the event all relevant information has not been received some reports may be generated after this date.

We will provide further information and updates as we progress.

Please do not hesitate to let your Relationship manager if you need any further information or detail.