Debt recycling is the process of replacing mortgage debt, or bad debt, with investment debt, which is known as good debt. 

This strategy enables investors to start building wealth while they’re still paying off their home. As equity is built up in their home, funds are re-drawn and invested. Income from these investments can be used to further reduce the mortgage balance, while the growth component contributes to wealth accumulation.

This is how debt recycling worked for one couple.

Mark and Jane have built up considerable equity in their home, and upon advice from their financial planner decided to make that equity work harder for them. The couple currently owes $240,000 on their home, which is valued at $400,000. Their licensed planner recommends Mark and Jane implement a debt recycling strategy, refinancing their current loan to give them a $300,000 loan limit. This releases $60,000 of available equity for investment.  

Mark and Jane’s planner recommends they invest their $60,000 equity into a portfolio of managed investments specifically chosen for income potential. After one year, their portfolio has grown in value to $65,000, and yielded an income of $4,000 which is used to reduce their mortgage further. After regular loan repayments, their mortgage balance is $230,000 after the first year. The couple then draw the extra $10,000 in equity to make an additional contribution to their investment portfolio. This process is repeated each year until their mortgage is extinguished.

Debt recycling can benefit investors prepared to invest not just funds, but also time and patience. To learn if it would be appropriate for you, contact your licensed financial planner.

To discuss debt recycling in action call (02) 4926 2300 or email us. 

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Achieving any goal in life usually involves starting with a plan. Investing is no different. One of the most important things to understand before you embark on an investment plan is the relationship between risk and return.

Some investors focus only on maximising returns without considering the risk taken to achieve those returns. Others are so concerned about losing money that they seek to avoid risk altogether. Yet the single, most important lesson investors can learn is that risk and return cannot be separated.

Common risk profiles

There are many investments available with different levels of risk to cater for investors of different risk profiles. As the investment timeframe is naturally linked to life stage, risk profiles can be generalised across age groups (that is, the younger you are, the longer investment timeframe you have and the more aggressive you can be). There is no ‘one size fits all' approach to risk profiling among age groups.

There are a number of risk profiles, but for the sake of this article, we have outlined the three main profiles:

Conservative

Conservative investors are generally prepared to accept lower returns with lower levels of risk in order to preserve capital. Conservative portfolios tend to be allocated predominantly to defensive assets, such as cash and fixed interest, with the remainder in growth assets.

For this reason, people in retirement (in the wealth protection phase of their investment journey) may adopt a more conservative attitude to risk. They have less time to ride out the ups and downs of the share market and tend to have less of their portfolios allocated to shares and other high risk asset classes.

Balanced

Balanced investors generally have more of an equal mix of growth and defensive assets, and are comfortable with taking calculated risks to achieve good returns.

Growth

Growth investors are more comfortable with a higher level of risk in order to achieve potentially higher returns. Their prime objective is to accumulate assets over the medium to long-term and capital security is secondary to potential wealth accumulation.

Investors in this category can therefore expect to have around 85 per cent of their portfolio allocated to growth assets, although still diversified across shares, property and alternative assets.

Whichever risk profile you may fit into, the most important consideration when it comes to investing is that your investment plan needs to be tailored to your individual needs and goals.

Source: Macquarie

To learn more about how your risk profile will impact future savings, talk to your financial planner.
Call (02) 4926 2300 or email us. 

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You have heard us talk about investment asset allocation or diversification, but we thought it might be a good idea to expand on that explanation to show you how it affects your investment portfolio.

You already know that asset allocation is spreading the money in your portfolio over a mix of the different investment types available, but what is the right mix and does “one size fit all?”

As with anything personal, your own financial portfolio must suit your specific needs – both now and in the future. So, with each of your objectives and timeframes in mind, the most important aspect to look at when determining your investment spread is risk.

There are three types of risk that must be considered:

1. General market risk – largely dependent upon economic conditions;
2. Market sector risk – a particular sector of the market, e.g. industrial vs resource stocks;
3. Specific risk – a particular share or property.

As you can see, each risk is affected by different factors, so the best way to manage all types of investment risk is to ensure that your portfolio is adequately diversified to cater for volatility and over-reactions. Put simply: when one goes down, another goes up.

Once the risk factors are taken into account, it’s time to look at the specific assets within the portfolio, investing across cash, fixed interest, Australian shares, international shares and property. All of which will provide something unique at the different points of the investment cycle.

Remember that the longer you plan to invest, the more important good diversification becomes. This further minimises risk and your growth potential is maximised.

We hope this explanation helps you to understand why we’re so focused on the right asset spread for you.

Call (02) 4926 2300 or email us.

If you have any questions about asset allocation or your personal portfolio, please contact our expert team of financial planners here at Leenane Templeton.

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US

Key considerations for fixed income investing

The Federal Reserve has continued to partially remove stimulus via further reductions in quantitative easing (QE) this year. Despite this reduction, US 10 year treasury yields have fallen from 3% in January to approximately 2.5%. We are not particularly concerned about the risk of inflation, which is usually the key driver of higher interest rates. There is too much excess capacity and structural unemployment in the global economy (especially in Europe) for us to be overly concerned of an inflation spike. However, The US Federal Reserve owns close to 35% of all US Treasuries with more than 5 years of duration remaining. There is a risk that rates could rise with the removal of Federal Reserve buying. As a result, we recommend investors allocate a significant proportion of their defensive assets to credit funds with minimal duration exposure, to reduce the risk of loss of capital if US 10 year government bond yields do indeed rise significantly.

Will stronger GDP growth lead to strong earnings growth and market gains?

Despite slow growth in the first quarter which was largely weather related, we believe US GDP growth in 2014 is likely to be in the vicinity of 2.5-3%, which is higher than the growth rates of 2013. Importantly, public sector revenues have improved due to stronger consumption and higher asset prices, which has led to higher tax receipts. The budget deficit is likely to decline to 3 to 4% of GDP, negating the need for major expenditure reductions or tax increases. The outlook for corporate capital expenditure is positive, and consumer confidence is robust due to recent gains in housing and equity prices as well as employment growth.

While the outlook for US GDP growth is reasonably positive, the outlook for corporate earnings is not particularly promising. First quarter earnings grew at close to 2%, and we are doubtful that consensus expectations for 8% earnings growth this year will be achieved. Tailwinds of reduced interest expenses, no real wages growth, productivity gains and US dollar weakness have been key drivers of US corporate margin expansion in recent years. A number of these earnings tailwinds have abated. Corporate margins may hover at their current historically high levels, but further margin expansion is unlikely to be significant. The U.S. dollar has strengthened against most major foreign currencies over the past year, which is a headwind for earnings growth (earnings from subsidiaries are worth less in US dollar terms and exports priced in local currencies are also worth less in US dollar terms).  Interest rates are likely to gradually increase in the years ahead, providing a further headwind to earnings per share growth. The consequences of this is not necessarily poor share market performance – but further price earnings multiple expansion is likely to be a prerequisite for any further equity market appreciation of considerable magnitude.

Europe

Expect slow growth and diversity in GDP growth rates

We expect Europe to exhibit slow, albeit positive GDP growth throughout 2014. Business and consumer confidence have improved, and this could lead to more robust business and consumer spending. The medium term inflation outlook in Europe is low, and is likely to fluctuate around 1% or less. Given the very high unemployment rate of close to 12% (with significant disparity between countries), and low workforce participation rates, wage inflation pressures are minimal. The output gap is also wide in Europe, with significant excess capacity. As such, with nominal GDP likely to grow at about 2%, European nations are less able to inflate their way out of their high net debt levels.

Banks remain in deleveraging mode, and credit conditions remain relatively tight. Growth rates between European nations are likely to remain varied – Germany is likely to exhibit more positive growth, with Spain and Italy continuing to lag.

The outlook for UK GDP growth is more promising – consumer spending is growing and business investment has finally started to exhibit some robustness. Inflation is also higher, equating to significantly higher nominal GDP growth than continental Europe.

Japan

Japan is likely to experience slower growth this year, mainly due to the sales tax increase in April 2014 from 5% to 8%, which is likely to dampen consumption, and also due to more constrained government expenditure post extraordinary stimulus in 2013. GDP growth is likely to be in the vicinity of only 1%.

Source: IOOF, May 2014

Our financial planners are ready to help with any economic or finance questions you may have.
Call (02) 4926 2300 or email us.

Disclaimer

The team at Leenane Templeton are here to help with any questions you may have in relation to economic growth, your investment strategy and the general economic outlook as a whole. Give us a call.

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If your footie team didn’t have one, they’d always be “wooden spooners”. You wouldn’t go on holiday without having one and you’d never have friends over for a barbie without one. What are we talking about? A plan, of course! Planning for success is a vital aspect to securing your finanial position.
 

Yet amazingly, when it comes to money, most people don’t have a plan.
 

They make excuses like being too busy or not yet earning enough money. Or it’s too hard and they don’t know where to start. No one plans to fail but by not having a plan, many do exactly that.
 

Managing money is not that hard but most people have never been shown how to do it properly.
 

The truth of instant wealth
 

Unfortunately, there is no magic way to instant wealth. When you’re filling in the squares of the lottery form, spare a thought for the odds of winning first division of the Saturday night Gold Lotto – about 678,755 to 1! And in many cases, even when you win the big prize, if you don’t have a plan, it will simply slip through your fingers.
 

By first learning to accumulate wealth we are able to live the lives we want and achieve our goals.
 

Just do it!
 

The secret to success is to make a start. It doesn’t matter that the plan is incomplete or not perfect. There are proven techniques that can make you wealthy over time. You just need to apply these methods in a disciplined way and stick to a plan over time.
 

The secrets are simple:
• To spend less than you earn.
• To drive down personal debt as quickly as possible.
• To save regularly.
• To invest in assets that will produce tax-effective income as well as growth.
• To borrow money to boost your investments.
 

Applied properly these strategies can reduce tax, helping you to grow your wealth even faster.
 

Being in control
 

In the fast-paced world in which we live, it’s easy to think we are swept along and there isn’t much we can do to influence where we end up. Of course, that’s not true and most of us will know people who were “lucky” and achieved their dreams. But was it really luck?
 

Successful people often set goals for themselves and have a plan to achieve them. The plan might not be fool proof, but they adapt it as they go along to give themselves the best chance of succeeding.
 

Like having a personal fitness coach, a skilled financial adviser can work with you to create a plan, monitor it and with your ongoing commitment help make it work for you.
 

Our team of professional and award winning financial planners are at hand to help with any questions you may have regarding this article.
Call on (02) 4926 2300 or email us.
 

Disclaimer.
 

Planning for success should be a priority for all of us as we look to the future. To explore further how we can help you please contact the team here at Leenane Templeton.

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Google search
 

Total advertising spend globally is expected to grow to around US$720 billion by 2020 (in line with World GDP growth). In the online space this growth is likely to be even faster as advertisers continue to align advertising dollars with consumer habits. The chart below shows that in spite of the explosive growth in the time spent by consumers online and increasingly also on mobile platforms, advertising dollars have been relatively slow to follow.

If we assume that growth in digital advertising continues to grow in line with media consumption habits to 36 per cent of all advertising spend by 2020 (from 22 per cent today), then this would represent 13 per cent p.a. growth in Google’s core market to $260bn by 2020. Assuming Google can grow its market share of this market to 50 per cent from 45 per cent today, core Google search could command $130bn p.a. in gross revenue.
 

You Tube and Android

Adding to the above opportunity, Google has further growth avenues via its YouTube and Android businesses. You Tube is going after TV advertising budgets, which still remain the dominant category for advertising spend globally. YouTube is the largest online video site globally and as such is uniquely positioned to drag advertising dollars away from TV. It’s currently estimated that YouTube has captured just 1.8% of the current $230bn plus global TV advertising budget. If this were to increase to 6 per cent by 2020 this would represent a further $20bn revenue opportunity for Google.  Adding to this success is Android, the mobile phone operating system Google gives away free to “smart phone” manufacturers including HTC, Samsung and Sony. Google benefits from users being directed to Google Search and Google Maps, but also via users being directed to the Google Play store which sells apps and where Google earns a commission. Android has grown from essentially zero users 4 years ago to over 1 billion now. Assuming continued growth in activations and US$5 in revenue per device via downloads from the Google Play store, this represents another US$12.5bn revenue opportunity by 2020.
 

So how do we get to $1 trillion?

Adding these core revenue drivers together and subtracting traffic acquisition costs, we estimate that Google can achieve US$130bn p.a. in revenue by 2020 (a 15% p.a. growth rate from around $50bn net revenue today). This should equate to roughly $65bn of EBITDA in 2020. Rolling that forward one year and applying the same 12x EV/EBITDA multiple that Google trades on today, achieves an enterprise value of $895 billion by 2020. Add back the estimated $120 billion in net cash that the group is expected to have accumulated by 2020, we arrive at a market capitalisation of over $1 trillion. Google’s current market capitalisation is US$343bn with US$60bn in net cash. Our estimates represent a 260 per cent rise in the share price over the next 7 years.
 

While clearly the actual outcome is likely to be different from the expectations above, the assumptions used are not aggressive for a company with a dominant position in an area of strong secular growth that will benefit from improved earnings largely independent of economic conditions. The bulk of Google’s growth will come from consumers shifting to online media, a world which Google dominates now and is expected the company will extend its dominance in the future.
 

To determine whether these investments are suitable for your personal circumstances, speak with one of our financial planners today.
 

Source: K2 Asset Management, February 2014
 

Disclaimer.
 

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The Australian economy remains in very good shape, both in the context of its own historical performance and when compared to other developed economies. Very few developed nations can match Australia’s combination of vital economic statistics: low unemployment (5.6%), solid credit rating (AAA rating), low government debt/GDP, low inflation (2.4%), solid economic growth rate (3.1%) and strong relationships with global economic powerhouses. We expect to see reasonably strong GDP growth in the domestic economy driven by export growth and a gradual recovery in consumer demand in 2014. Interest rates remain at historically low levels and the Reserve Bank of Australia has shown little inclination towards a tightening of monetary conditions in the short to medium term.
 

State and federal governments are expected to take advantage of the low interest rate environment to embark on a number of infrastructure projects. This, along with productivity improvements as corporates maximise operating leverage, will support employment growth stability.
 

Economy in transition
 

The stability of the Australian economy is dependent on a transition from mining capex led growth to an increase in domestic consumption. And while the transition is unlikely to be orderly, we believe all the necessary ingredients are in place for a gradual lift in the non-mining economy.
 

Australia’s prosperity is not about resources alone. The services industry continues to grow in Australia in sectors such as tourism and financial services, while manufacturing and agriculture still make a meaningful contribution to GDP as Australia embarks on niche products and value add production lines. Despite Australia having likely witnessed the peak in mining capex, bulk commodity and LNG exports are forecast to grow significantly in 2014 pushing the balance of payments into surplus. Retail sales are showing signs of improvement from a fifty year trend low with the 2013 Christmas period expected to be very strong.
 

Contributing to the improved retail outlook has been the increase in household wealth. The savings rate remains above historical averages. Combined with an average 10 per cent increase in house prices, there is a strong ‘wealth effect’ for Australian households with significant pent-up demand. The very high savings rate in Australia is likely to fall, funding an improvement in discretionary spending.
 

China is now the third largest source of inbound tourists to Australia and increasingly a significant investor in the Australian housing and commercial property market. The falling Australian dollar will see this trend strengthen and also encourage domestic travellers to holiday within Australia. A substitution of domestic for international tourism will also provide a fillip for the non-mining economy.
 

Australian equities for income
 

After a strong 2013, we are still positive on the outlook for Australian equities in 2014. We believe the market is still attractively valued given a price-to-earnings ratio of 14.7x which is around the historical average. The dividend yield of the market also remains highly attractive versus other asset classes with a gross franked yield of 6.2 per cent, significantly better than cash (2.6 per cent) and bonds (4.3 per cent). We expect to see continued improvement in market earnings revisions and growth as indicators for world economic growth are strong into 2014 and the domestic benefits of lower interest rates and Australian dollar flow from house prices to construction to broader domestic activity. We view the tapering of quantitative easing as confirmation of a lower macro risk environment which will see higher returns from higher beta, or more cyclical stocks, that have not been rewarded in the last few years of high uncertainty, especially in Australia. Australian equities as a global source of income wwill remain a very strong theme. Income will be a large percentage of total return in 2014 with high quality companies with minimal income risk a key focus for the income portfolios.
 

If you would like to discuss the market further or any other investment and financial planning matters, please do not hesitate to contact our professional and award winning team.
 

Source: Legg Mason, February 2014
 

Disclaimer
 

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China’s growth is expected to slow to 7.5% this year; the offi cial government target in its 2011-2015 fi ve-year plan is for an average growth rate of 7.0% per annum. Growth is slowing partly because Europe’s recession has crimped exports but also because China’s central bank is deliberately seeking to tighten credit conditions to stop speculative investment into property and other assets.

China launched a credit-fueled investment boom in 2008/09 in response to the Global Financial Crisis (GFC), which saw total debt rise from 160% of GDP to 210% of GDP according to official figures. While these debt levels are manageable, there is a lingering concern that more debt has been accumulated in the ‘shadow banking system’ and that property speculation is continuing. Accordingly, the central bank recently moved to tighten credit conditions more aggressively with a particular focus on non-bank fi nancial intermediaries.

Even if growth slows to 7.0%, this is still a significant growth rate considering China’s annual GDP is now over US$8.2 trillion, ranking it as the second largest economy in the world (after the US at nearly US$16 trillion and excluding Europe as a region rather than a country).

However, China’s growth is likely to be less investment-intensive in the future given investment has grown to over 50% of the economy and China’s new leaders aim to rebalance the economy towards consumption.

A slowdown in investment will obviously reduce demand for steel and other building materials, which will impact many commodities like iron ore, coal, copper and alumina – all of which are key exports of Australia. At the same time that China’s demand for commodities is slowing, global supply is set to increase, so it is likely that commodity prices will continue to weaken and that Australia’s export income will be under pressure.

The rebalancing of China’s economy is important for its long term stability and it will remain an important market for Australia; however it is likely that we have seen the end of the global mining boom. We see a long period of lower commodity prices and reduced mining activity ahead.

A slowdown in mining will obviously be a drag on Australian growth, particularly in the mining states of Western Australia and Queensland, but surely lower interest rates and a falling AUD will offset the mining slowdown?

In the past, the answer would be a resounding yes, but this time other sectors of the economy – such as retail, housing construction and business investment – are only showing modest signs of recovery. Lonsec believes there are a number of reasons for this including:

1 Attitudes to debt have changed post GFC, with companies, households and government all seeking to increase savings and reduce debt levels.

2 Low business confi dence on poor profi t growth and burdensome government policy has led to a focus on productivity measures rather than investment.

3 Job insecurity stemming from business and government reducing employees, in a number of sectors, has led to cautious consumer behavior.

These factors are not going to change overnight but falling interest rates, a falling currency and a clear Federal election result should eventually see the broader economy rebound. Accordingly, we expect the Australian share market to retain an upward trend but recommend investors tilt their portfolios towards financials and industrials.

William Keenan – General Manager Equities Research – Lonsec

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