Preserving Capital & Investing for Income
The difficult conditions affecting share markets around the world has presented as big a problem for defensive investors seeking a higher income component to their investment returns, as it has for those seeking capital growth.
So with income-focused investors battered by unforeseen capital losses, we are now looking at these markets to ask… “Where to invest from here?”
The defensive sector has many sub sets that we would normally recommend but a significant number of these are closed to new investors as the funds deal with the effects of the global financial downturn: this has led us to scour the markets for the best ideas in income producing assets so we have defensive alternatives to invest in today.
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Opportunity |
Status |
Opinion |
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Cash Accounts |
Open |
Cash has been one of the few winners in 2008 but in 2009, with official rates expected to fall further, cash management rates of 2.50% and 2.75% are becoming the norm. Following the recent declines in capital value yields in percentage terms, even for defensive assets, have risen and there is a compelling argument to move some cash back into markets for 2009. |
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Mortgage Funds |
Closed |
Whilst these funds have managed their investments well they have encountered high levels of withdrawals in the flight to bank deposits that followed the Government’s introduction of the deposit guarantee last year. Returns are now significantly above cash rates and are considered good value should the funds reopen in 2009. We have all mortgage fund investments on hold at the moment. |
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Diversified Fixed Interest |
Recommended |
We have a couple of actively managed conservatively run funds that we are recommending to clients now. Their key attributes are their conservative bias and the ability to move money to the areas of opportunity, without having to slavishly follow an index benchmark. Many sectors are now yielding 14-15% on the capital invested because whilst the capital value has reduced, income is holding up very well. Government bonds gave the most performance gains in 2008 (up 15%) but in 2009 this is unlikely to be sustained. |
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Alternatives |
Closed |
Most alternative investments we consider to be investment grade are closed to new investments. Those alternatives that are still open in the market are focussed on single sectors (Gold, Commodities, Momentum trading) and have significant risks associated with them. |
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New Issues |
Case by Case |
There have been and will continue to be new income-oriented investments with compelling earnings. The most recent of these was Westpac SPSII with an indicative yield of 5.75% fully franked and AMP Bond with an interest payment at approx 4.75% above the official cash rate. Both with terms of five years. These and other offers are coming to market, and if you are interested in hearing more about these offers as they are announced, just let us know. |
Some clients have expressed an interest in Gold as a “safe haven”. Gold is traditionally seen as a hedge against inflation because it does not produce anything and it only appreciates in value in line with what someone will pay for it. In late February it broke the $US1,000 per ounce prompting a rise in gold scrap, old jewellery and even gold teeth to hit the market – a sure sign of a ‘top’! Denis Gartman, noted US Economist and author of the ‘Gartman Letter’ stated on Bloomberg this week …
“Gold should trade around $US900 - 925 for the foreseeable future, so there does not seem to be the opportunity in that market, as the price of gold is already at these levels.”
So for income-oriented investors we see are some good opportunities emerging in both the traditional managed funds (Diversified Fixed Interest) and in new Issues to market, that can boost flagging interest income for funds now held in cash.
Please Note: This commentary is for general information only and should not be construed as tailored advice. It is the ‘house view’ of The BKO Group and should not be acted upon without further discussion with us.