Di­ver­si­fied fo­cus

Money Magazine Australia - - INVESTING -

Brad Bugg, Morn­ingstar’s head of multi-as­set in­come, says re­tirees have al­ways looked for two things: in­come to live off but also cap­i­tal sta­bil­ity.

Morn­ingstar launched a di­ver­si­fied in­come fund in 2014. It has an as­set al­lo­ca­tion of 40% growth as­sets like shares and prop­erty and 60% de­fen­sive as­sets such as cash and bonds.

Since in­cep­tion it has earned 4.72% a year against its bench­mark of 3.59%. “Its goal is to gen­er­ate CPI plus 2%,” says Bugg. “In the cur­rent en­vi­ron­ment its tar­get re­turn doesn’t sound sexy or ap­peal­ing. In a nor­mal en­vi­ron­ment where in­ter­est rates rise back to nor­mal lev­els, it will prob­a­bly gen­er­ate re­turns in a range of 4–6%.

“We’ll iden­tify a port­fo­lio of stocks which we think will give us a good in­come, we also look to fund man­agers to build cer­tain ex­po­sures. In the in­ter­na­tional bond space, for in­stance, you’re get­ting higher and higher yields there so we look to fund man­agers to go out and source the best op­por­tu­ni­ties in that mar­ket.

“We also use ETFs. They are a good way of get­ting ac­cess to mar­kets, par­tic­u­larly in­ter­na­tional mar­kets, which many of us may not be able to do our­selves.” Bugg says we are at an in­flex­ion point. The val­u­a­tions of a lot of the div­i­dends-pay­ing stocks that self­man­aged su­per funds have flocked to are stretched, and bond yields are at a level where they have be­gun to rise.

“In terms of the pol­icy de­bate around frank­ing cred­its, it’s go­ing to be an in­ter­est­ing pe­riod for those stocks which peo­ple have tra­di­tion­ally sought out as gen­er­at­ing in­come. We don’t know what the out­come would be of La­bor’s pro­posed pol­icy but reg­u­la­tory risk can some­times be more de­struc­tive to value than com­pa­nies do­ing the wrong thing.”

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