Financial Newsletter Sunshine Coast
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However, a number of products have now emerged which allow superannuation funds to gain the benefits of gearing without breaking the “no borrowing” rules. These products include internally geared managed funds, and instalment warrants (eg. the Telstra share offerings).
· A new opportunity
To continue this trend, the government has recently amended the superannuation law to allow funds (including Self-Managed Superannuation Funds, or SMSFs) to borrow money for investment. However, there are a number of strict conditions that must be met before the arrangement is allowed.
In practice, the permitted arrangements will work much like instalment warrants. The superannuation fund will make an initial payment (similar to a deposit) and from that time onwards it will be entitled to the full income and capital gains that flow from the investment. The fund will be required to make future payments that basically constitute principal and interest repayments on the loan. In the event of default, the lender must be limited to claiming the underlying investment (even if its value is less than the outstanding loan balance).
Behind the scenes, it is crucial that the correct legal documentation is put into place. The rules require that the investment purchased using the borrowed monies is held on trust for the superannuation fund, and the fund trustee would have a beneficial interest which can be converted to full legal ownership upon the making of the required future payments.
· Case study – instalment warrants in SMSFs
Let’s consider Anthony and Jane, who have $80,000 in cash within their SMSF. If the fund purchased an Australian share portfolio that grows at 12% per annum, the $80,000 would grow to almost $250,000 after 10 years (before considering capital gains tax).
As an alternative, Anthony and Jane could use the $80,000 to purchase instalment warrants that provide exposure to $160,000 worth of shares. Assuming an interest rate of 8.5% per annum on the underlying loan, the net value after 10 years would be around $340,000.
This simple example shows the benefit to a SMSF of being able to leverage its capital through the use of the instalment warrant. In addition, the fund would receive the dividends and associated franking credits from the entire portfolio of $160,000.
Another advantage of this strategy is that the SMSF can better diversify its investments. For example, the $160,000 can obviously allow a broader selection of shares and managed funds than $80,000 does. Alternatively, Anthony and Jane could decide to leverage, say, $50,000 of the fund through the instalment warrant and gain access to $100,000 of shares. The remaining $30,000 could be kept as a cash reserve to meet fund expenses, to provide some short-term capital stability, or to prepare for a future investment opportunity that may arise.
· What’s next?
Although there has already been some involvement of superannuation funds in the instalment warrant market in recent years, the rule allowing borrowing is still very new. It is likely that in due course, product development will be encouraged as superannuation funds (and SMSFs particularly) look to take advantage of this wealth creation opportunity.
It is important to note that instalment warrants are not suitable for all situations, so contact your Futuro adviser if you’d like to know more.
Climate change and investments
Much of the current debate around climate change is focussed on how fast it is changing and to what degree humans are to blame.
What is not in doubt is that the world’s climate is not static – as the past few million years have shown.
Whether future changes are likely to be positive or negative, we need to show a degree of caution and recognise that we can’t be 100% sure of how things will turn out.
The impact of climate change on the economy is a good example of this. Many industries will be forced to make expensive modifications to business practices, and scores of individual businesses will no doubt perish if they cannot adjust. At the same time, changes in consumer demands and sources of economic value will provide opportunities for those who are in a position to take advantage of them.
For both professional and individual investors therefore, it is crucial to recognise the various impacts of climate change on the companies or funds that they will potentially invest in. Here are some examples.
- Energy sources and the price of coal
Coal is currently a cheap way to generate electricity, but many will argue that this won’t be the case once the “real” cost is taken into account (ie. the environmental impact of burning coal). With moves at various levels towards a carbon-trading system, the opportunities for companies specialising in wind, solar and geothermal energy will improve. And if consumers see their electricity bills rising, they will be more inclined to seek energy efficient appliances for their household or business.
- Impact of drought on the agricultural sector
The current drought in Australia has lead to a considerable re-think on the topic of water availability and pricing. Water scarcity can lead to lower crop yields and/or higher prices for agricultural output. Farmers are responding through demand for technologies that enhance their yields or enable better water usage and recycling.
- Rising sea levels
Increasing global temperatures and the consequent rise in sea levels will most obviously impact on the lifestyles of coastal communities. As a result we could see new demands for infrastructure that is suitable for the new environment that some of these communities may be faced with. In addition, the effects of these changes on fisheries and various ecosystems may lead to increased opportunities in farming and, again, technologies that enable these ecosystems to adapt.
- Extreme weather and the effect on insurers
Insurance companies aim to be adequately compensated (via premiums paid by policyholders) for the risks they are taking. In response to increased frequency of floods and storms, we are likely to see developments in policy design as the insurer seek to clarify events covered and events excluded. And in response to higher premiums, we may see opportunities for improved building standards and materials as consumers seek to better weather-proof their possessions.
One thing that won’t change along with the climate is the fundamentals of good investment decisions. These changes will result in many winners and many losers, and the prudent investor will be seeking to choose the right place to invest.
Your Futuro adviser is well equipped to guide you on making smart investment decisions in a time of threats and opportunities.
The world needs Christmas
Beyond the rush of shopping, parties and the anticipation of holidays, Christmas still has the power to bring people together in the spirit of goodwill.
The practice of exchanging gifts has become traditional around the world and an essential ingredient of Christmas. Gift giving may have originated with the Three Wise Men who brought gold, frankincense and myrrh to Jesus, but was also linked to St Nicholas, who evolved in many European countries into Santa Claus.
In different cultures around the world, the Christmas season is celebrated in a variety of ways.
- In Britain, groups of serenaders called "waits" travelled from house to house, singing carols. These 19th century “songs of joy” are still among today's most beloved Christmas music.
- In Iraq, families gather around lighted candles as children read the Christmas story. After the reading a bonfire of thorn bushes is lit. If the thorns burn to ashes, good luck will fill the year ahead. When the fire dies each person jumps over the ashes three times and makes a wish.
- In Greece, 40 days of fasting precedes a Christmas feast, which always features "christopsomo" or Christ Bread. These large, sweet loaves are shaped and engraved with images that reflect the family's profession.
- In China, paper lanterns decorate the "Tree of Light" whilst children await visits from Dun Che Lao Ren, which means Christmas Old Man.
- In India, mango and banana trees are decorated and small oil-burning lamps light the edges of rooftops as special decorations.
All these different traditions have one thing in common... they bring families and friends together in a time of love and acceptance. We really do need Christmas.
Joyeux Noel. Feliz Navidad. Froehliche Weihnachten. Sung Tan Chuk Ha. Een Plesiergiege Kerfees… or in other words, “Merry Christmas”!
All representations and information contained in Futuro in Focus are made in good faith and are believed to be correct at the time of preparation. Articles are of a general nature and they do not purport to be specific investment advice. Individual needs or other considerations have not been taken into account, thus information contained herein should not be relied upon as a substitute for detailed advice. Futuro Financial Services will receive fees or brokerage from the provision of advice or placement of investments. You may, by contacting our Privacy Officer on 07 3018 0400 or by writing to Futuro Financial Services Privacy Officer GPO Box 942 Brisbane QLD 4001, request not to receive further editions of Futuro in Focus.