With the recent decrease in short-term interest rates, many investors have been looking for other options that will provide a decent yield – the amount of cash flow an investment provides relative to its price. The chart below shows yields across a wide range of investments at their current level, and where they were just 12 months ago.

Pursuit of Yield image

 

 

 

 

 

 

 

 

 

Talk of yields turning into the next ‘bubble’ has been increasing recently so I wanted to look into this further and find out what WealthPartners’ clients need to be aware of, and if in fact a bubble is looming.

What’s driving the pursuit of yield?

According to Dr Shane Oliver, Head of Investment Strategy at AMP Capital a yield bubble is still a long way off. Even though housing prices are still high, the majority of asset prices are still generally lower – thus providing acceptable yields for investors. The reduction in interest rates on bank deposits and low bond yields have forced investors to look elsewhere for returns. However, credit risk in Australia is still low and the low global inflation rates indicate that the pressure for asset yields has not yet reached an extreme.

There are still plenty of investment options that are providing decent yields including corporate debt, real estate investment trusts, shares and unlisted non-residential property. For investors who are in a position to take on more risk, they may be able to benefit from increasing their exposure in areas that have been underperforming in recent months, but should begin to benefit from global and Australian growth.

What’s the WealthPartners’ take on the Yield Bubble?

Our feeling on the Yield Bubble is that there isn’t one at the present moment. We do have a number of clients who are actively chasing income within their portfolios as they move towards retirement and we work with them to ensure that their exposure within the market meets their appetite for risk.

In a recent interview with FPA Magazine, WealthPartners Director, Andrew Heaven, highlights this point,

“We’ve essentially got clients chasing income and what we’ve seen with our clients at the moment is we’re trying to ensure there’s greater respect for preservation of capital. Risk adjusted returns is the key. I don’t think it is a bubble at the moment, I don’t think our clients think it’s a bubble, but what we want to make sure is that clients understand what risks they’re taking in the portfolios. If you drill down a bit further into the actual asset classes, it’s about consistency and perseverance of earnings and then what is distributed through dividends to the actual clients.”

The WealthPartners approach

A key component to developing any strategy with our clients is to determine their appetite for risk. This is something we regularly discuss with clients and in our blogs as we believe this forms the basis of helping our clients reach their goals.

As Andrew recently explained to FPA Magazine, “The conversation we’re having with our clients is about their risk profile and if they are really prepared to accept the risk and volatility. The challenge for clients is in understanding what defensive assets look like, and what does that really mean in terms of volatility and the provision of income to them.”

Where to from here?

At WealthParnters, our main objective is to take a practical and long term approach towards developing a client’s portfolio. Our clients have benefitted greatly over the last few years by sticking with long term options that have provided them with the returns they were after.

Dr. Oliver also mentions three key trends to watch as the chase for yields and returns increases:

• Valuation indicators such as price to earnings multiples for shares, yield spreads for bonds and the return premium property offers over bonds;
• The rate of growth in private sector credit or debt.
• Indicators of inflationary pressure and hence future interest rate hikes.
We are also keeping an eye on the current trends of leveraging into property into Self – Managed Super. Our main concern is that many investors don’t fully understand the associated risk with this type of strategy.

If you have any questions on how the topics discussed here may affect you, please don’t hesitate to contact your advisor.

 

For full copies of the article mentioned in the Blog see below:

Is yield the new bubble? – FPA Magazine, November 2013