Summer A stepping stone back into the market Investing in property is attracting cautious investors

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1 Summer 2013 A stepping stone back into the market Investing in property is attracting cautious investors Caton s Corner The year in review with BT s Chief Economist, Chris Caton

2 Times are changing Welcome to what will be our final edition of Better Investor magazine. The last few years have been a journey for us, and our investors. Together, we have experienced the Global Financial Crisis, natural disasters, global political change and the European Debt Crisis, to name a few. From now on, you will hear from us twice each year in a refreshed BT newsletter with a new approach to helping you prepare for your best financial future. Thank you for your support and we hope you have enjoyed Better Investor. Summer 2013: Contents 3 A stepping stone back into the market Hesitant investors are finding new confidence in property investment. We explore how and why. 6 CATON S CORNER Resident BT Chief Economist, Chris Caton shares his year in review and outlook for Summer 2013

3 Cover story A stepping stone back into the market Property investments are looking more attractive to investors ready to dip their toe back into the market. The days of the GFC are hopefully behind us, but a lot of investors still remain reluctant to leave the safe-haven of cash and term deposits when considering the levels of risk they feel comfortable with. However, the combination of high yield, recent strong performance and sector reform are now making property investments more attractive to investors looking to dip their toe back into the market. Until recently, many investors have done well over the short and medium term by favouring term deposits and cash. However, the pendulum has now begun to swing back towards growth assets. People with maturing term deposits are beginning to feel the effect of falling interest rates and compressed margins being offered by the banks. At the same time, they are starting to notice the very attractive yields on offer from bank stocks and property trusts as well as the recent strong performance from shares and property. One factor that has influenced this gradual shift away from term deposits to property is the tangible nature of property as an investment you can see the buildings, know the location and understand how you can generate revenue. But although these factors make investing in property sound like an easy feat, for a lot of people, borrowing substantial amounts of money to purchase a house, unit or shop and managing the day-to-day requirements of an investment property can feel too hard, or overwhelming. Putting your money in a managed fund that invests in property can be an easier solution to this. The investments are managed by fund managers that specialise in property, taking some of the onus off the investor to do the research and make the big decisions. Returns from property funds and listed property trusts have been more and more promising over the past year the Australian listed property market, for example, offered an average yield of about 6% at 30 September It has also offered good capital appreciation as investors have regained confidence that the trusts are being well managed and will maintain or increase distributions over time. The index of listed property (the S&P/ASX 200 A REIT Accumulation Index) returned about 21% in the year to 30 September

4 Cover story continued Performance of listed property, Australian shares and cash to 30 September 2012 Market Index 1 year 3 year Australian property S&P/ASX 200 AREIT Accumulation Index 21.45% -1.13% Global property S&P/Citigroup Global REIT Index (Total Return) (AUD) 21.72% 9.87% Australian shares S&P/ASX 200 Accumulation Index 14.83% 1.85% Cash UBS Warburg Bank Bill Index 4.36% 4.56% Source: Advance Asset Management 2012 Is it safe to return? Contemplation of listed property can bring back unsettling memories from 2008, when the Australia Real Estate Investments Trusts (A REITs) sector fell 55.3%, one of the worst results for an asset class ever. The massive fall followed a huge run-up in the A REITs sector from the early 1990s. While initially this strong performance was due to the strength in the underlying property markets, increasingly in the lead up to the GFC, the growth came from high levels of gearing and diversification into overseas investment and property development. The average level of gearing jumped from about 15% in the 1990s to a peak of about 45% in Payout ratios extended to an unsustainably high 100% of earnings. So when credit dried up during the GFC and property values fell, many trusts struggled to manage their debt. Some failed while others had to completely re-shape their businesses. The right mix You might be thinking about your super, an investment for your children s education or expanding your investment portfolio, and the range of different types of funds is enormous. There are funds that focus entirely on A REITs, those that focus entirely on unlisted property and those that offer a hybrid of listed and unlisted property. You can also diversify geographically with funds that focus on global REITs or those that focus on specific regions such as Asia. You can choose between lower cost index funds or exchange traded funds or benefit from the expertise of active fund managers. A financial adviser can help you decide whether property investment is right for you. To find an adviser, or for more information on BT s range of managed property funds, call or visit btonline.co.nz. Property analysts say the sector has reformed and now looks more like it did in the early 1990s. Gearing is back down to an average of about 28%. Many property trusts have sold overseas properties and closed property development arms. Dividend payout ratios have fallen to a far more sustainable level of around 80%. So while the average yield of around 6% is currently similar to the yield at the height of the boom, it is now backed by profit rather than borrowings something that investors should definitely note. 4 Summer 2013

5 Caton s Corner Paving the way to positive performance 2013 begins with a bigger challenge than Chris Caton shares his view on the opportunities and uncertainties for investors in the year ahead was a good year for the sharemarket in particular and investment markets in general. The US sharemarket, as measured by the S&P500 index, rose by 13.4%. Global shares rose by 16.9% for the year, including dividends. The Australian sharemarket, as measured by the ASX200 index, did slightly better. It rose in 10 of the 12 months, and by a total of 14.6% for the year as a whole. The accumulation index, which includes dividend payments, increased in every month bar one (May), to show a total gain of 20.3%. The ASX200 began the year at 4057 and finished at This should not have been a complete surprise. A year ago, I made the point that the Australian sharemarket was fundamentally cheap, which is to say that the price/earnings (P/E) ratio was significantly less than its longterm average. This doesn t guarantee that the market will rise the same statement was true at the start of 2011 and the market proceeded to have a poor year but it certainly paves the way for a positive performance. There are in fact two principal drivers of a rising market; either it is driven by an improving earnings performance or it is re-rated, which is to say that the P/E ratio rises. In 2012, the latter force prevailed, while earnings forecasts were reduced over the course of the year. The gains in 2012 were foreseen by many analysts. According to the Australian Financial Review, the average forecast of a panel of eight strategists made at the start of 2012 was that the ASX200 index would rise by 12.8%, to Even BT s chief economist did reasonably well, foreseeing a rise to Given that the market actually pushed through 4700 on the first trading day of 2013, my forecast was, in a sense, out by less than a day begins with a bigger challenge than 2012 did. Since the market is no longer massively cheap, gains this year are more likely to be driven by (need) earnings growth. And given the uncertainty about economic growth this year, mainly because of the impending end of the boom in capital spending in mining, there is a wide disparity of views about earnings growth this year, and hence a wide range of forecasts for the ASX200 index. Again according to the Australian Financial Review, the range of forecasts from a panel of strategists for end-2013 is from 4000 to 5100, with an average forecast of just 4557 lower than the current level of the market. If the average forecaster turns out to be correct, the market will be down in three years out of four. It s a very long 5

6 time since that happened! Equity investors would make a positive return for the year only because of dividends. I should say that my forecast is equal to the highest of the analysts polled, but given the gloom of the panel on average, it is well to ask: where are the uncertainties? The biggest relates to what happens when the mining capex boom ends. My (relative) optimism reflects a belief that the transition in growth away from mining capex will occur without over-much disruption. The Reserve Bank of Australia has prepared the ground for growth elsewhere by cutting rates as much as it has (the cash rate was lowered four times by a total of 1.25 percentage points in 2012). This is likely to lead to some response in consumer spending and in construction. Some of the growth in mining capex will also be replaced by mining exports, made possible because of the increased capacity of the industry. There are, in addition, the ever-present overseas risks. The most prominent of these in recent weeks has been the fiscal cliff in the United States. As was always likely, political wrangling as to how to resolve this continued past the deadline of 1 January. On 2 January, agreement was reached on a (smaller) tax increase to replace the expiring Bush tax cuts and other measures. There is still work to be done on the spending side, but this will be done by the new Congress, and will probably not be finalised for two months or so. And then there are Europe and China. The former will hang like a dead weight around the neck of the global economy, but is very unlikely to end in catastrophe. China, on the other hand, is just as likely to surprise on the upside as on the downside. As one barometer of the influence of China on Australia, the price of a tonne of iron ore, having fallen from $170 to less than $90, has recovered to close to $130. Back to Australia A year ago, I wrote scathingly of the view being pushed at the time, by one weekend tabloid in particular, that the Australian labour market was on the verge of crisis. At the time, the unemployment rate was 5.3%. It is now 5.2%. That said, some rise is likely from here, but unemployment should remain comfortably below 6%. One thing that would help the Australian economy greatly would be a lower value of the Australian dollar. Last year, I made the point that the Australian dollar finished the year almost exactly where it started. This year, it began at US cents, and finished only slightly higher, at US cents. Over the course of the year, however, it rose as high as US cents and sank as low as 96.5 US cents. I have been spectacularly wrong in forecasting the currency in the past, so my credibility is not great. But I cannot envisage a world in which the mining capex boom ends and the Australian dollar remains super-strong. The Australian currency should lose at least 10 cents over In December, the Australian Government announced that it was unlikely to meet its long-term commitment to achieve a Federal budget surplus in the current financial year. This should have surprised no-one; indeed I made the point when the Budget was brought down in May 2012 that the commitment was very unlikely to be met. The Government was immediately assailed for breaking its promise. Its economic credibility, we were told, was in tatters. This is nonsense. To have slavishly done whatever would have been necessary to achieve the massive single-year turnaround required to deliver the surplus would have done the economy far more harm than good. It remains true, of course, that the Budget needs to be pointed towards surplus as a medium-term objective. Caton s Corner Dr Chris Caton, BT s Chief Economist writes Caton s Corner every month. To read the latest edition of Caton s Corner, visit from where you can also subscribe to his daily podcast. The views expressed in this article are the author s alone. They should not be otherwise attributed. While the information contained in this document has been prepared with all reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatement however caused. All forecasts and estimates are based on certain assumptions which may change. If those assumptions change, our forecasts and estimates may also change 6 Summer 2013

7 FUND PERFORMANCE BT General Investments performance (% pa to 31 December 2012) Fund name 1 mth 1 yr 3 yr 5 yr 10 yr LVR^ Dist. CPU* BT Classic Investment Funds Diversified BT Active Balanced Fund NEF % 0.00 BT Asset Selection Fund % 0.39 BT Balanced Returns Fund % 0.00 BT Split Income Fund % 0.51 BT Diversified Share Fund NEF % 0.89 BT Split Growth Fund % 1.75 International shares BT International Share Fund % 0.09 BT Global Share Fund 1, % 0.00 Australian shares BT Core Australian Share Fund % 3.83 BT Select Australian Share Fund % 1.96 BT Natural Resources Fund % 0.00 Fixed interest/income BT Australasian Bond Fund % 0.71 BT Global Bond Fund % 0.00 BT Investment Funds Diversified BT Diversified Share Fund N/A 75% 0.99 BT Future Goals Fund % 0.04 BT Active Balanced Fund N/A 75% 0.08 BT Income Plus Fund % 0.32 International shares BT International Fund % 0.00 BT American Share Fund % 0.00 BT Asian Share Fund % 0.00 BT European Share Fund % 0.00 BT Japanese Share Fund % 0.00 BT Technology Fund % 0.00 Ibbotson International Shares High Opportunities (Unhedged) N/A N/A N/A N/A N/A 70% N/A Platinum International N/A 75% 0.00 Australian shares BT Australian Share Fund % 3.65 BT Imputation Fund % 1.51 BT Smaller Companies Fund % 2.43 Property BT Property Securities Fund % 0.61 Fixed Interest/income BT Fixed Interest Fund % 0.40 Cash BT Cash Management Trust % 0.00 BT Premium Cash Fund BT Premium Cash Fund % _This Fund is closed to new investors. 2_The investment manager for this Fund changed on 5 June Performance before this date may not be directly comparable. 3_The investment manager and the benchmark for this fund changed on 5 June Performance before this date may not be directly comparable. NEF = Nil Entry Fee. N/A = Not all fund performance figures were available at the time of print. *Distribution CPU is calculated for the period 1 October 2012 to 31 December ^LVR describes the Loan to Value Ratio, or the maximum amount BT Margin Lending will loan against each managed fund. All lending ratios are subject to change without notice. How are these returns calculated? Performance figures are calculated net of all fees and before taxes. 7

8 The information in this edition of Better Investor is current as at January 2013 and is given in good faith and has been derived from sources believed to be accurate at this date. It is general information only and should not be considered a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. Returns shown are historical and you should remember that past performance is not a reliable indicator of future performance. This newsletter may contain material provided directly by third parties. While such material is published with necessary permission, BT Financial Group (BTFG) accepts no responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, BTFG intends by this notice to exclude liability for this material. Things you should know General Investments include all Investment Options in the BT Investment Funds and BT Classic Investment Funds ranges, and the BT Global Share Fund. Please note that our Select Manager Investment Options are not listed. Westpac Financial Services Limited ABN / BT Funds Management Limited ABN / BT Funds Management No.2 Limited ABN are the responsible entities and issuers of units in the Funds referred to in this issue of Better Investor. The BT FSG is available A Product Disclosure Statement (PDS) is available for each of the Funds and can be obtained by calling us on , or visiting You should obtain and consider the PDS before deciding whether to acquire, continue to hold or dispose of units in the Funds. An investment in the product(s) is not an investment in, deposit with or any other liability of Westpac Banking Corporation ABN (the Bank) or any other company in the Westpac Group. It is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. The Bank is not the issuer of the product. Neither the Bank nor any other company in the Westpac Group stands behind or otherwise guarantees the capital value or investment performance of the product(s). How are these returns calculated? Performance figures are calculated net of all fees and before taxes. Unless otherwise stated, performance data represents the combined growth and distribution return from holding units for the specified time period in the fund, calculated on the last day of each relevant month using exit prices. We assume distributions are reinvested (net of fees, if any), and ongoing management fees and expenses are deducted. The stated returns do not take into account entry fees, tax at the unit holder level, and inflation. For updated performance information, please visit All figures are in Australian dollars. Exchange rate fluctuations between the Australian dollar and the New Zealand dollar affect the New Zealand dollar value of the return for New Zealand investors. If your distribution is paid to your New Zealand bank account, the exchange rate at which the AUD distribution was converted to NZD was $ BT8358B-1212rr NZ