It’s no secret that we are living longer. Thanks to factors such as better medical care and advancements, education around good foods and exercise and more, we are living better lives for longer.
In Australia today, over 15% of the population is over 65 years of age (this was a mere 8% in 1964) and current life expectancy is around 72 years for males, and 82 years for females.
However, the flipside to living longer is that a financial risk is presented: the risk of outliving your savings.
According to Malcolm Whitten, Portfolio Manager for Nikko Asset Management, in the Netwealth hosted webinar ‘Finding income without sacrificing growth’, living longer is a global phenomenon which is creating compressed yields, as people shift to spending less, resulting in surplus savings and less economic growth across the board.
So, the challenge then becomes how can you achieve the income and growth you need over this longer period of time in order to enjoy a financially stress-free lifestyle?
According to Malcolm, Australian equities are the key; “Australian equities can be an ideal way to derive income and growth from your equity investments. They can serve the dual functions of delivering income for today and building wealth for the future. We believe they can help resolve the longevity crisis that is present in Australia.
Australian equities have shown to be strong performers. Over the past 25 years, the Australian equity market has delivered a 10% average annual return, displaying a remarkable consistency in delivering both income and growth, both vital factors in overcoming the longevity challenge we face.
“The key when it comes to evaluating and investing in Australian equities is to balance the dual requirements of income and growth. And our team consistently seeks to balance these two elements, only selecting equities that we believe can fulfill these multiple objectives to provide our investors with money to live off now whilst also creating future income and capital growth”; says Malcolm.
According to Malcolm, Nikko Asset Management applies an active management style, which ensures the team is ready to take advantage of any market anomalies that create mispricings that are in effect, opportunities to create and add value for investors.
“When we refer to anomalies we are referring to citing behaviours such as fear, herding, loss aversion and fear of missing out (FOMO) that can be triggered by various factors from geopolitical events (such as Brexit or the French election), to industry innovation and disruption through to environmental issues and more. It is these anomalies that create the mispricings we then leverage in order to create and add value for investors.
How do we do this? We initially assess a company’s intrinsic value through looking at factors such as cash flow, profit, debt, ultimate earnings variability, return to shareholders, acquisition versus organic growth, management quality and more. Once this initial analytical work is done, we are then ready to respond accordingly to changing circumstances, as they happen in order to create value for our investors. This active management style allows us to act as and when needed in order to leverage these market moments and further build on a portfolio that delivers both growth and income.”
An ideal example of an equity that delivers both income and growth is Lend Lease. Unlike traditional construction companies, it has a very diversified pipeline of work and projects. Through partnering with asset owners, such as boroughs in UK or Chicago private landholders, they don’t need to own the land they develop, they are paid to design, develop and construct and then earn an interest in their projects. This interest is then placed into a fund, which they again earn a fee on managing. This process has enhanced their profits and return on equity as well as lowering the risk in terms of variability of profits. And the return and distribution to shareholders is positive.
According to Malcolm, “Australian equities can help overcome the longevity risk of outliving one’s money in retirement. However, the key to delivering the ideal mix of income and growth can only be achieved, in our view, via an active management style and disciplined investment process over the long-term.”
About the Nikko AM Australian Share Income Fund
The Nikko AM Australian Share Income Fund has delivered an annualised grossed up dividend yield of 8.78% since inception (November 2008) to May 2017, exceeding the S&P/ASX200 Accumulation Index yield (grossed up for franking credits) over the same period, which had a grossed-up dividend yield of 6.12%. In addition, it has delivered a long-term growth return of 10.54% per annum since inception, proving that finding income without sacrificing growth is indeed possible.
Nikko Asset Management Australia Limited ABN 34 002 542 038, AFSL 229664 (Nikko AM Australia) is the responsible entity and issuer of units in the Nikko AM Australian Share Income Fund ARSN 133 980 819 (Fund). Nikko AM Australia is part of the Nikko AM Group. The information contained in this material is of a general nature only and is not personal advice. It does not take into account the objectives, financial situation or needs of any individual. Investors should consult a financial adviser as well as the information contained in the Fund's current Product Disclosure Statement (PDS) and the 'Additional Information to the PDS' which are available at www.nikkoam.com.au/pds before deciding to invest in the Fund. Applications will only be accepted if made on a current application form. An investment in the Fund is not a bank deposit and distributions and the return of capital are not guaranteed. Past performance is not an indicator of future performance. Any references to particular securities or sectors are for illustrative purposes only and are as at the date of publication of this material. This is not a recommendation in relation to any named securities or sectors and no warranty or guarantee is provided that the positions will remain within the Fund. The Fund growth return is the change in redemption prices over the period. The grossed up dividend yield for the Fund is before fees and relates to the Fund's holdings and differs from the Fund's distribution due to franking credits, management fees and other costs. There are also timing differences between the Fund grossed up dividend yield and the Fund distribution return. Dividends for the grossed up dividend yield are calculated on the stock's ex-dividend date. Dividends for the distribution return are generally calculated when the dividend is received (which can be after the ex-dividend date and the reporting period herein). Nikko AM Australia adopts a distribution policy, whereby a certain amount of income is held back each quarter, with the full amount released at the end of the financial year. Nikko AM Australia net returns are post fees, pre tax using redemption prices and assume reinvestment of distributions. Fund inception date: November 2008.
Any reference to a particular investment is not a recommendation to buy, sell or hold the investment. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.