All posts by Robert Wright

Megatrends for 2025 and beyond…

By Robert Wright /February 28,2025/

Megatrends are long-term structural changes that affect the world we live in. Importantly, they shape communities but they also create investment opportunities and risks. Learnings from historical megatrends include: 1) they often solve a problem through innovation; 2) the scope of the megatrend can initially be underestimated; and 3) the duration of a megatrend is typically longer than anticipated. There are numerous megatrends likely to influence markets that investors should consider: the shift to the cloud and generative AI, the ageing population, rising geopolitical tensions and so on. Today we highlight just some of the current megatrends.

The continued growth in “winners take all” dynamics

A megatrend that continues to play out is growth in “winner take all” or at least “winner takes most” dynamics in the global economy. Reduced cross-border frictions, the growth in digital goods and distribution channels, and the increasing importance of scale and network effects have allowed companies to scale to a size almost unimaginable in the past.

The rise of the so called “magnificent seven”, the group of leading US technology companies, is a good example of these forces playing out. This group now accounts for a higher share of global markets than the leading companies of the tech bubble era of the early 2000s. However, unlike that time, their size today has predominantly been fuelled by enormous growth in revenues and profitability, albeit some speculative elements may have played a part more recently.

A key risk for some of these businesses is antitrust. Microsoft, Apple and Alphabet have recently attracted the attention of the antitrust authorities, with increased competition the primary motive. We view that it is a low probability that regulators break up these businesses, meaning the underlying economic forces will continue to allow successful businesses to scale far more quickly and to far larger sizes than historically was the case. This presents a significant opportunity for global investors, as these companies can deliver outsized returns. On the other hand, these trends also increase disruption risks to legacy businesses and industries.

To benefit from the former and guard against the latter, investors should focus on quality companies that have strong and enduring competitive advantages. These advantages typically include scale, pricing power, brand strength, network effects and intellectual property.

Glucagon-like peptide-1s (GLP-1s) and solving obesity

One of the biggest health issues facing developed countries is obesity. The development of the GLP-1 class of weight loss drugs such as Ozempic promises to transform the treatment of obesity and significantly improve health outcomes for societies. GLP-1s stimulate the brain to reduce hunger and act on the stomach to delay emptying, so you feel fuller for longer, have a lower calorie intake and lose weight.

Take up is likely to be strong over coming years as supply constraints ease and continued innovation delivers a more convenient oral pill and mitigates potential side effects such as nausea. Growing clinical evidence of health benefits, such as lower risk of heart problems, will also encourage governments and insurers to cover the cost of the drugs. These developments have dramatically changed the outlook for obesity, with the US recording its first fall in obesity rates since at least the 1970s, a dramatic turnaround from predictions of just a few years ago.

 

 

 

 

 

Source: CDC, OECD, WHO, IHME, Harvard

The development also has some significant investment implications. Most obvious are the potential investment opportunities in the drug manufacturers, although given high expectations we need to carefully monitor scientific developments and the pricing environment. There are also several investment risks to consider, with the potential for lower demand for certain medical device companies, food manufacturers and quick service restaurants.

The unrelenting rise in sovereign debt

Not all megatrends are positive for investors; one megatrend to be wary of is rising sovereign debt. In many parts of the world fiscal responsibility is no longer a priority as governments focus on more immediate issues and winning elections. In the US the national debt has been rising since the 1980s. In 2010, following the government’s response to the Global Financial Crisis, it first exceeded 90% as a percentage of GDP – the level identified by academics Reinhart and Rogoff as associated with a worsening in growth outcomes. A further spending binge during the 2020 COVID pandemic has resulted in the US national debt rising to more than 120% of GDP.

 

 

 

 

 

Source: Federal Reserve Economic Data

With the US Federal budget deficit expected to hit $1.8 trillion in 2024 and both parties promising billions more in spending, debt is likely to continue to build. US national debt has not been a major issue for markets to date, but the risk of a debt crisis, accompanied by rising bond yields and volatile markets, increases as debt levels continue to rise. Many other countries are in a similar position, with debt to GDP exceeding 100% in the UK, France, Spain, Italy and Japan. Australia is relatively well placed with the national debt at 38% of GDP.

What does this mean for investors? Governments have three ways to “solve” excessive national debt: (1) austerity – cutting spending and raising taxes; (2) default; or (3) financial repression – printing money to inflate the problem away. The first is politically unpalatable and appears unlikely, the second would be an outright disaster and can be avoided by countries that issue debt in their own currency such as the US. Thus, the most likely outcome is money printing, or central bank financing of budget deficits in more technical terms, resulting in a period of structurally higher inflation.

While it’s impossible to be precise in terms of the timing of a potential debt crisis, investors can seek to protect themselves by investing in real assets, such as property and equities, with a focus on high quality companies with pricing power that can protect investors in times of high inflation.

These are just a few of the megatrends shaping markets today and in the future. As investors, a long-term focus and active management are key to both taking advantage of the opportunities these trends provide and avoiding risks that may arise.

 

Source: Magellan

The ins and outs of geared share funds

By Robert Wright /February 28,2025/

Geared share funds are high risk and high reward. When share markets are doing well, the returns can be very high, but the opposite is also true. We look at the pros and cons, and the role of geared share funds in a diversified investment strategy.

Geared share funds can be a great way for investors to invest in shares – and share in the rewards – when the share market performs well over long periods of time.

Geared share funds magnify both positive and negative returns, so they’re considered high risk, high return investment options.

But exactly what is a geared share fund, and are they for everyone?

Let’s take a look at the ins and outs of this unique investment option.

What is a geared share fund?

Geared share funds accept money from investors and borrow money to invest alongside investors’ capital. The fund uses the pool of investors’ money and borrowed money to buy shares.

They amplify both positive returns and negative returns on the shares in which the fund invests.

On the upside, geared share funds generate higher returns than overall share market returns when markets are rising. Conversely, the value of your investment will drop further than equivalent investment options without internal gearing.

They are best explored as part of a long term, diversified investment strategy.

How do geared share funds work?

When you invest money in a geared share fund, the fund will borrow money to invest on your behalf, alongside your investment.

For example, for every $1,000 you invest in the fund, the geared share fund may borrow another $1,000. That would give you $2,000 of exposure to the shares in which the fund invests. So in addition to the returns generated from your capital, you also receive all the returns from the borrowed funds (less the cost of borrowing).

The fund’s gearing, or borrowing, effectively magnifies the returns of the underlying investments, whether they are gains or losses.

Geared share funds generally perform well when the share market is growing at a higher rate than the interest charged on borrowed money.

Geared share funds borrow at institutional interest rates, which are generally lower than those offered to individual investors.

Pros of geared share funds

• The gearing, or borrowing, is done within the fund: unlike a margin loan, the fund, rather than the investor, is responsible for repaying its loans. This model allows investors to keep a long term view on their investments, rather than worry about day to day performance of their investments.
• Investor exposure is limited to their invested capital: while the fund borrows on behalf of its investors to buy shares, if the share market falls, and the fund’s loans need to be repaid, individual investors will never lose more than their invested capital.
• Gains are magnified by gearing: when the shares in which the fund invests go up, the return to the investor may be much higher than if they had simply purchased an equivalent fund without gearing.
• Franking credits are magnified by gearing: when a geared fund invests in Australian shares, the gearing will also magnify the level of franking credits payable as part of income distributions.
• Long term gains magnify long term share performance: investors seeking to invest for a decade or more, and who are willing to ride out short term market falls, can do very well with geared share funds. The compounding effect of the additional returns from gearing is very powerful over the long term.

Cons of geared share funds

• Fees are relatively high: fees are charged not just on the $1,000 you invest, but also on the $1,000 that the fund borrows on your behalf. Fees reduce your return.
• Losses are magnified by gearing: when the shares in which the fund invests go down, losses will be much higher than if you simply purchased the same shares with the same initial investment.
• Short term share market falls can lead to big investment losses: investors who need to take out their capital at a particular point in time, or who are not prepared to wait for markets to recover, can suffer big losses if this coincides with a fall in markets.

When to consider geared share funds

Geared funds can play an important role within a diversified portfolio for investors looking for above average investment performance over the long term by accelerating their Australian and/or global share allocations.

Investors who can ride out short term market volatility and do not need to take out their money in the short term, may benefit from the long term returns that geared share funds can offer. Geared funds should therefore be particularly attractive to superannuation investors who cannot access their capital until retirement.

Investors who are risk averse and who may need to cash in their investment in the short term, may not find geared share funds a suitable investment.

Investors should always seek financial advice to ensure investments are suitable for their objectives, investment horizon, and personal circumstances.

 

Source: CFS

Using the bucket strategy to make your money last longer

By Robert Wright /February 28,2025/

How do you find the sweet spot between using your retirement savings to enjoy a comfortable standard of living, and investing so you won’t run out of money in the future? It’s a big question for many retirees.

Two in three retirees (69%) are concerned about running out of money in retirement, according to new research from Colonial First State (CFS)*.

A total of 41% said they sometimes felt so concerned about running out of money that it affected how they used their retirement savings and their current standard of living. A further 28% said this fear affected them significantly. Just one in three said they never worried about it.

With that in mind, it’s worth understanding what’s known as the ‘bucket strategy’ for how to manage your savings in retirement.

This strategy was conceived as a way for retirees to balance spending with the need to preserve capital and invest to grow your future retirement savings to last the distance.

How much you put into each bucket, and how you invest those buckets will depend on your level of retirement savings, the lifestyle you want in retirement, your risk appetite and any other income you may have. It’s worth getting financial advice to ensure this approach is right for you.

What is the bucket strategy?

Simply put, the bucket strategy involves keeping your money in different investment types designed to deliver short term, medium term and long term returns.

• Short term bucket: This is money you think you’ll need to access in the next one to three years. Consider keeping it in cash, such as high yield savings accounts or term deposits with staggered maturity dates.

This is money to live on and perhaps an emergency fund for those unexpected expenses, such as when your washing machine stops working or your car conks out.

There should be enough to get you through a market downturn if needed, so you don’t need to cash in higher growth investments and turn paper losses into real ones or sell units in your pension investment option when they may have experienced a short term drop in value.

Factor in any other income, such as the Age Pension if you receive it, or any work income, and set aside money to cover the rest.

• Medium term bucket: Consider holding money you may need in the next four to six years in income producing, relatively ‘safe’ assets like high quality bonds, fixed income investments, low risk, dividend paying stocks or a balanced pension investment option.

This bucket is designed to help your retirement savings keep pace with inflation. If you hold too much in cash, your retirement savings won’t grow very quickly.

• Long term bucket: This is the money you want to invest to grow over the long term. It can be kept in higher growth investment types that are often seen as higher risk, such as a growth pension investment option or growth shares.

This should be money you won’t need to touch for seven to 10 years, which gives it time to grow irrespective of any short term market volatility that may occur.

More than half your retirement savings may be generated from earnings on your pension investment option after you have retired^, so it’s worth quarantining a good amount in your long term bucket.

How does it work?

The bucket strategy is intended to balance the need to preserve your capital in retirement by putting some of your savings into low risk cash options.

This enables retirees to access income when you need it without dipping into higher growth investments that will grow your retirement savings over the long term and can therefore provide peace of mind about spending while also helping your retirement savings last longer.

It can be particularly beneficial in times of market volatility, such as if there is a market downturn, to prevent you having to sell higher risk investments at an inopportune time.

Keeping all your retirement savings in conservative investment options or cash that may not keep pace with inflation may be low risk but it won’t provide you with the best retirement outcomes over the long term.

As the funds in bucket 1 are used, consider topping it up from bucket 2, or even bucket 3, depending on market conditions, what you’re invested in, and how your investments are performing.

As mentioned, how much you put into each bucket, and how you invest those buckets will differ depending on your individual situation. It’s worth getting financial advice to ensure this approach is right for you.

And this strategy may require more active management of your retirement savings than some people may be comfortable with.

But the bucket strategy offers built in diversification by incorporating different investment types and time frames and can be useful for helping you decide how much to spend and how much to invest for the long term.

 

* Financial literacy and retirement study conducted between July and September 2024. Respondents included 834 retiree respondents.

^ Calculations by CFS. Projection starts at age 25 (with salary of $100,000), retirement at age 65 and super lasts until age 92.  Superannuation earnings, tax on earnings, investment and administration fees, and yearly indexation of contributions and income stream payments, are based on the default assumptions used in ASIC’s Moneysmart calculator, available at moneysmart.gov.au as at August 2024.

 

Source: CFS

What assets can you have before losing your Age Pension?

By Robert Wright /February 28,2025/

There are many benefits to receiving an Age Pension or even a part pension, but there are limits to what level of income or assets you can have, to be eligible.

Regarding assets, the key limits as at 20 September 2024 are as follows:

To receive a full pension, assets (excluding the value of the primary residence) must be less than:

	Home­owner	Non-homeowner
Sin­gle	$314,000	$566,000
Couple, combined	$470,000	$722,000

1. Indexed every 20 March, 1 July and 20 September. Source: Australian Government Services Australia.

To receive at least a part pension, assets must be less than:

	Home­owner	Non-homeowner
Sin­gle	$695,500	$947,500
Cou­ple	$1,045,500	$1,297,500
Couple – separated by illness	$1,233,000	$1,485,000

1. Indexed every 20 March, 1 July and 20 September. Recipients of Rent Assistance will have higher thresholds. Source: Australian Government Services Australia.

It’s important to note that if you get Rent Assistance, your cut off point will be higher. Use the Payment and Service Finder to find out your cut off point.

Asset reduction strategies

There are a number of strategies that may be used to reduce asset levels, which may result in qualifying for a part pension or increasing the current pension amount received.

However, before reducing your assets it is important to bear in mind whether your remaining savings can support any shortfall in your retirement income needs, as any increased pension amount may still be inadequate. Personal circumstances can also change and increase the reliance on your reduced savings. For example, future health issues may require a move into aged care, which can bring increased expenses.

With that in mind, here are six possible asset reduction strategies to help boost your pension:

1. Gift within limits, for more than 5 years before qualifying age

If there is a desire to provide financial assistance to family or friends, gifting can reduce your assessable assets. The allowable amounts a single person or a couple combined may gift is $10,000 in a financial year or $30,000 over a rolling five financial year period. Any excess amounts will continue to count under the asset test (and deemed under the income test) for five years from the date of the gift. This is called deprivation.

If you are more than five financial years away from reaching your age pension age or from receiving any other Centrelink payments, you can gift any amount without affecting its eventual assessment once you reach age pension age.

2. Homeowners can renovate

Your home is an exempt asset and any money spent to repair or improve it will form part of its value and will also be exempt from the assets test.

3. Repay debt secured against exempt assets

Debts secured against exempt assets do not reduce your total assessable assets. An example is a mortgage against the family home, regardless of what the borrowed funds have been used to purchase. However, using assessable assets to repay these debts can reduce the overall assessed asset amount. Crucially, you must make actual repayments towards the debt; depositing or retaining cash in an offset account will not achieve this outcome.

4. Funeral bonds within limits or prepaying funeral expenses

If you wish to set aside funds or pay for your funeral costs now, there are a couple of ways to do this which may reduce your assessable assets.

A person can invest up to $15,500 (as at 1 July 2024) in a funeral bond and this amount is exempt from the assets test. Members of a couple can have their own individual bond up to the same limit each. By contrast, if a couple invests jointly into a funeral bond, this must not exceed $15,500 i.e. it is not double the individual limit².

In comparison, there is no limit to the amount that can be spent on prepaid funeral expenses. For the expenses to qualify, there must be a contract setting out the services paid for, state that it is fully paid, and must not be refundable. Importantly, both methods of paying for funeral costs are designed purely for this purpose and preventing assets from being accessed for any other reason.

5. Contribute to younger spouse’s super and hold in accumulation phase

If you have a younger spouse who has not yet reached their Age Pension age and is eligible to contribute to super, contributing an amount into their super account may reduce your assessable assets. The elder spouse can even withdraw from their own super, generally as a tax free lump sum, to fund the contribution.

Investments held in the accumulation phase of super are not included in a person’s assessable assets if the account holder is below Age Pension age. Before using this strategy, any additional costs incurred should first be considered. Holding multiple super accounts may duplicate fees. Shifting funds into an accumulation account may increase the tax on the earnings on these investments to as much as 15%. Alternatively, earnings on the funds are tax free if invested in an account-based pension or potentially even personally.

Additionally, contributing to a younger spouse who is under Age Pension age, and still working, will ‘preserve’ these funds. They should also ensure they do not exceed their contribution caps³.

6. Purchase a lifetime income stream

Lifetime income streams such as an annuity purchased after 1 July 2019 may be favourably assessed^, according to the Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Bill 2018⁴. Where eligible, only 60% of the purchase price is assessed. This drops to 30% once the latter of age 84 (based on current life expectancy factors) or five years occurs.

To receive concessional treatment, the lifetime annuity must satisfy a ‘capital access schedule’ which limits the amount that can be commuted voluntarily or on death⁴. This is illustrated below:

 

 

 

 

 

4. Source: Parliament of Australia.

Voluntary commutations must follow a ‘straight line’ declining value, falling to nil at life expectancy. The death benefit can be up to 100% until the investor reaches half of their life expectancy, at which point it will follow the voluntary withdrawal value⁴.

Conclusion

Reducing your assessable assets within the relevant assets test threshold can provide many benefits such as increasing your existing pension or allowing you to qualify for a part pension, if you are currently above the upper asset test threshold.

While it is tempting to intentionally reduce your asset levels to gain these benefits, it is important to remember the Age Pension payment rate is determined by applying both an income and assets test. The test that results in a lower entitlement determines the amount receivable. If the income test is the harsher test, reducing your assessable assets may provide little or no benefit.

If the assets test is harsher, you should not lose sight of the fact that any reduction in your assets means there are fewer assets for you to call upon if required.

 

References:
1. https://www.servicesaustralia.gov.au/assets-test-for-age-pension?context=22526
2. https://www.servicesaustralia.gov.au/funeral-bonds-and-prepaid-funerals?context=22526
3. https://www.ato.gov.au/super/self-managed-super-funds/contributions-and-rollovers/contribution-caps/ and https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/contributions-and-rollovers/contribution-caps
4. https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fems%2Fr6224_ems_58c16ce0-95fa-4ef6-afe4-668b3e41fb62%22

 

Source: BT