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Extra payments into super, no matter how tiny, can do a lot for your balance. It doesn’t have to be a regular amount or a big lump sum to make a difference. More bang for your buck Putting money away for spending in 10, 20 or 30 years’ time is a lot to ask. But apart from having more income to look forward to in retirement, there are other incentives to get you saving a little more into super. Here are five great reasons to save just a little bit into super, starting right now: More money for your future retirement Saving for retirement shouldn’t mean going without now so you can have more to spend later. But it’s also important to get the balance right between enjoying quality of life while you’re still earning and in the future when you’re not. Putting even a little extra into super can help you meet your savings goal for a comfortable life in retirement. So it’s well worth weighing up whether $4 for one more take away coffee each week is worth it compared with the extra $20 you could be putting into super each month. That’s $240 a year and around $10,000 during your working life. And with the magic of compounding that $4 a week could see you a lot better off by the time you retire. Savings on your tax bill Saving a little into super instead of a regular savings account has another silver lining. Depending on how much you earn and the highest rate of tax you’re paying (your marginal tax rate), you could save on tax for every extra dollar you put into super. Extra super savings from the Government Helping yourself with extra super payments can also see you get help from the Government. If you’re on a low income, you’ve got two ways to make payments into super and have the Government put more money into your super fund. Low Income Super Tax Offset (LISTO): This handy acronym means that the Government will pay a tax offset straight into your super account if your adjusted taxable income for a year is $37,000 or less. The LISTO is worked out as 15% of the concessional contributions (including before-tax contributions such as SG and salary sacrifice) you or your employer pays into your super fund, up to $500. It all happens automatically when your super fund reports the contributions they received on your behalf to the ATO, as long as your super fund has your Tax File Number. If eligible, your LISTO payment from the Government can be as much as $500 or as little as $10 depending on your adjusted taxable income in a financial year and how much extra before-tax contributions you or your employer have paid into your super in the same period. Government co-contributions: if you are a low to middle income earner that meets certain requirements and make extra payments into your super fund the Government will make a payment of up to $500 towards your super in a single year. Just like LISTO you’ll need to be earning less than a certain amount to be eligible and it all happens automatically when you lodge your tax return with the ATO. But to get the Government co-contribution, you’ll need to make your extra super payment as an after-tax (or non concessional) contribution. Your money earn more money By saving into super instead of a regular savings account, you have the freedom to choose how your money is invested. Particularly when interest rates on regular deposits and even term deposits in the bank are low, investments can offer you the potential to earn more from your savings, depending on the type of investments you pick. Your super keeps growing during a career break If you stop earning for a while, super guarantee contributions from your employer are on pause too. You might take time off to travel or study, or care for kids or other family members. But this is a time when even a small break in your super contributions can have a big impact later on. This is why the Government offer to chip in and help out with your retirement savings when your paid income is lower or non existent and you still manage to make extra payments into super. If you’re one half of a married or de facto couple and taking time off from paid work, there’s another way to make sure your super doesn’t suffer a setback. Your partner can make some additional contributions for you to keep your balance growing and as a way for you to benefit from extra help from the government. And if you’re the one helping out your spouse with their super savings, it can put money back in your pocket too. Making a spouse contribution could mean you’re eligible for a tax offset of up to $540 less on your tax bill for the year. Make super savings easy It’s really hard to stay motivated to save into super as it’s money for a time that’s far away from now. This is why you need to make super savings, small, easy and regular with automated payments. $10 or $20 a month paid into your super with salary sacrifice is perhaps less than you spend on take away coffees or your streaming subscriptions. If it’s an amount that you won’t really miss from your everyday cash flow, then make a commitment to save it in super instead. And as you start to see the benefit of how that extra amount could add up in your super balance and annual statement, perhaps you’ll get motivated to make it $50 or $60 each month instead.   Source: MLC

Earnings season is coming up for ASX investors. Following is what to look for…    Companies face sustained pressure from high rates •    JB HiFi and Wesfarmers’ Kmart focus points. ASX-listed companies will reveal their half year results in the coming weeks – and investors should be looking for high quality earnings and consistent messaging from company CEOs. The consensus view that Australia is entering a rate cutting cycle has seen momentum return as the dominant market driver. As a result, many ASX-listed companies are trading at or near historical highs on the back of an improving outlook for earnings. Given that backdrop, there will be a lot of focus on commentary around trading in January and into February. Much of the market has quite a short time horizon – and given market positioning we expect elevated share price volatility on results days. We focus on the medium to long term and try to use the results season to get deeper insights into what is changing within companies. We want to find out more about their strategic direction and understand the rationale behind capital investments. All these factors are key to long-term outcomes. Here’s a quick summary of the two main factors to look out for in results: One: Consistent messaging Consistent messaging on strategy is important this earnings season. Have there been any significant changes in terms of what they’re spending their money on? Are they extending outside of the areas of core competency? You might see softer language around timing and quantum of the benefits of a project. Sometimes a company places its focus on one part of the business or strategy and in the next reporting period on something else. That might suggest that what was highlighted six months ago hasn’t gone to plan. Two: Earnings quality The second thing to focus on is earnings quality. High quality earnings are backed by cash flow. Check that earnings haven’t been helped by the release of provisions, increasing rates of capitalised expenditure and that there’s not a lot of non recurring or significant items excluded from the underlying result. Poor or deteriorating earnings quality can be a good lead indicator of future earnings pressure. Look for rates resilience Both factors are particularly relevant after two and a half years of higher interest rates which have heaped pressure on consumers and corporate profit margins. And the longer that rate hiking cycle goes, the harder it gets for corporates to deliver reasonable results. Earnings quality can start to deteriorate as companies pull a few levers hoping to support profits until economic conditions improve. Corporates just stretch a little further to deliver results. Look at the consistency of messaging over time and at earnings quality as a way to frame results. This might present a different picture than looking at short-term profits. Case studies The performance of retailers JB HiFi and Wesfarmers’ Kmart business will be focal points this earnings season after two and a half years of rate pressure on consumers. JB HiFi (ASX: JBH) This business has been one of the standout performers in the retail space. JB HiFi had a very strong share price performance over the 2024 calendar year. Part of that is the market gaining confidence that JB will show strong earnings growth in 2025. Another driver is expectations that the company will be a beneficiary of a wave of new consumer products hitting the market from the developments in artificial intelligence. There have been mixed indicators from global electronics retailers on this benefit over the last few months. It will be a focus area for investors in the JB HiFi result. Kmart (Wesfarmers, ASX: WES) The performance of Anko, Kmart’s home brand, may not make a major impact on conglomerate Wesfarmers’ bottom line, but it will be closely watched. Anko has been a key driver of Kmart’s recent success – 85 per cent of products sold at Kmart are now Anko. That has plenty of benefits because Kmart gets complete control over product development and increased scale, which flows through to lower prices to customers. Over the past 12 months management has started saying they’re looking to take the Anko brand global, partnering with different retailers. If they can show they’re getting real traction offshore, it could be a very interesting medium to long term story for Kmart and Wesfarmers. Source: Perpetual

The Government has legislated changes to the cost of residential aged care, for Australians entering care from 1 July 2025. A female aged 65 today has a 59% probability of entering aged care at some point in their lifetime. For a 65-year-old male, the probability is 43%. At some point in our lifetime we are more likely than not to need care. Yet, few of us are proactively planning for it. Confusion, concern and complexity seem to be the common thread when we ask older Australians about aged care, making professional, financial advice absolutely critical. Changes to accommodation payments When entering residential aged care, you will need to agree on an accommodation price with the aged care facility. Whether or not you need to pay the agreed amount will depend on your means assessment. You can pay the accommodation amount as a lump sum called a Refundable Accommodation Deposit (RAD) or as a Daily Accommodation Payment (DAP) which is a non refundable daily payment, or a combination of both. From 1 July 2025, aged care facilities will be required to retain 2% per annum of the RAD/RAC balance. The retention amount will be calculated daily and deducted monthly for a maximum of 5 years from when the RAD/RAC was paid. The DAP will be indexed twice per year in line with changes to the consumer price index. The DAP will continue to be calculated based on the outstanding RAD and maximum permissible interest rate at the date of entry. The daily accommodation contribution for low-means residents will not be indexed and will continue to be calculated based on their means. Changes to ongoing care fees In residential aged care, you will pay the basic daily fee to cover the day to day expenses such as meals, laundry and cleaning. From 1 July 2025, the hotelling supplement contribution (HSC) will be introduced to fund day to day expenses in addition to the basic daily fee. The HSC will be payable depending on the resident’s assessable assets and income with a daily cap of $12.55. In residential aged care, you may also pay the means-tested care fee. This fee is an additional contribution as determined by your means assessment. It is an ongoing fee towards personal and clinical care costs. From 1 July 2025 the non clinical care contribution (NCCC) will replace the means tested care fee as a contribution towards non clinical care costs. The NCCC will be payable depending on the resident’s assessable assets and income with a daily cap of $101.61. The NCCC will also have a lifetime cap where it will be no longer payable when: the resident has been in aged care for more than four years; or the resident has paid $130,000 (indexed) in total NCCCs. Assessable assets and income for the HSC and NCCC will be the same as that currently assessed for the means-tested care fee. Making sense of the numbers The following example illustrates the difference in aged care fees for clients entering care before or after 1 July 2025. Hermione is a single Age Pensioner, aged 85 and entering residential aged care. She has recently sold her home to pay a $550,000 RAD. She has $700,000 in a bank account and currently receives assets-test affected part Age Pension of $19,302 p.a. As the RAD is an asset for aged care means testing, Hermione’s assessable assets are $1,250,000. Due to the RAD being an exempt asset under social security means testing rules, her assessable assets are $700,000 for Age Pension purposes.   Pre-1 July 2025 rules Post-1 July 2025 rules Basic Daily Fee $23,203 $23,203 Hotelling Supplement Contribution Not applicable $4,581 Means-Tested Care Fee / Non Clinical Care Contribution $18,035 $36,923 RAD retention amount (only applies for 5 years $0 $11,000 Total (first year) $41,238 $75,707   If entering aged care before 1 July 2025 Hermione’s means-tested care fee is subject to a lifetime cap of $82,018 (indexed) whereas from 1 July 2025, the non clinical care contribution is subject to a lifetime cap of $130,000 or tenure in residential aged care of 4 years (whichever is earlier). Source: Challenger

There are no prescribed steps for winding up an SMSF, however there are a number of specific requirements that must be satisfied. Overview There are a number of reasons why a fund may need to be wound up including: The members have insufficient assets to justify having an SMSF. Running the SMSF has become too onerous. The last remaining member has died. Wind up an SMSF in an orderly and equitable fashion Whilst the circumstances surrounding the reasoning behind the wind up of an SMSF may vary, the process is generally the same. Winding up an SMSF essentially involves determining the value of the fund’s assets and its liabilities and using the assets to pay out those liabilities in an orderly and equitable fashion. Liabilities generally include: members’ benefit entitlements taxes or duties owed by the fund insurance premiums due and payable by the trustee expenses payable to other parties in relation to the fund’s activities and the wind up process itself (e.g. auditors, accountants, advisers). Winding up could potentially be a lengthy process as it may be necessary to wait until lumpy assets such as property have been sold so that all liabilities can be extinguished. The Superannuation Industry Supervision (SIS) Regulations do require the trustee to give certain priorities to the various liabilities of the fund including ensuring the initial tranche of sale proceeds of assets are allocated to any liabilities with respect to the administration and other costs associated with the wind up proceedings. If the fund is solvent, the next priority are member benefits – the amounts allocated to members must be equal to at least their minimum guaranteed benefits. If the fund is insolvent, members still receive the next priority but their benefit entitlement will be calculated as a proportion of the remaining assets of the fund. There are also provisions in the SIS Regulations relating to the communication to members and also the regulator of the decision to wind up a fund. The regulator is required to be informed of a trustee’s decision to wind up a fund before, or as soon as practicable after the wind up process has commenced. The decision to wind up a fund is also a significant event, and therefore must be communicated to members. The trustee must inform members as soon as practicable after it is reasonable for the trustee to expect that the wind up will commence. Winding up action plan The SIS Regulations do not prescribe the steps a trustee should take in the wind up of a fund, and it would be unlikely for the fund’s trust deed to contain detailed steps, however the following is indicative of the steps that a trustee would be required to complete. Convene a trustee meeting to ratify the decision to wind up the fund. Record the decision in the trustee minutes, along with the timetable for the wind up. Notify the regulator of the trustees’ decision to wind up the fund. Inform members of the decision to wind up the fund, the reasons for it and what it will mean for them. Make provision for the outstanding expenses of the fund, including tax, insurance premiums, administration charges and professional advisers’ fees. Calculate all members’ entitlements up to the date of the wind up. Arrange for the transfer of members’ benefits to another complying super fund, and (if there are any pensions), ensure the transfer balance cap reporting is completed as soon as possible. Arrange for payment of all outstanding expenses and taxes. Complete the final set of fund accounts (with audit), the fund’s final annual return as required by the regulator and the final tax return for the fund. As a practical consideration, the trustee should continue to keep the SMSF’s bank account open as long as possible to ensure that any delayed receipts can be banked and forwarded to the correct entity. The ATO have published a guide on how to wind up an SMSF which may be helpful, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/winding-up. Source: BT  

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 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 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: 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. 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. 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. 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. 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. 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: 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 … Read more

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

For many investors, the promise of ESG (Environmental, Social and Governance) investing has been evasive.  Confusion around what “ESG Investing” actually is has led to many investors becoming disillusioned with their portfolios. So, what is “ESG investing”? Is this the same as ethical, responsible or green Investing? The straightforward answer is ‘no”. Unfortunately, many in the industry as well as academics and investors use these terms interchangeably. They are, depending on your perspective, very different things. For retail investors these terms tend to coalesce around the concept of a “good” portfolio that doesn’t own companies that “do bad things”. It goes without saying that the definition of “bad things” differs from investor to investor. Does this include just landmines and tobacco? Or does it extend to broader “sin stocks” like gambling, pornography and alcohol? Is coal mining bad? Or is all mining bad? Is coal powered electricity generation on the “bad’ list?  What about uranium?  Does an exclusion on tobacco include the company making the packaging for cigarettes or the supermarket selling them in their stores? All these considerations usually fall within the gambit of a portfolio’s list of exclusions. i.e. what is prohibited from the portfolio. There are more complex considerations like materiality levels and supply chains, but the core of the investor expectation is generally what they don’t want to see in their portfolio investment portfolios. Given issues with data quality and transparency from companies, specificity around materiality levels and details around supply chains up and down the value chain and the active part being played by regulators guarding against perceived greenwashing many investment managers are increasingly finding making “hard exclusions” a risky business proposition. While some products, usually (but not always) described as ethical, contain these exclusions, this is not what the bulk of institutional investors consider to be “ESG integration”. Following the establishment and global adoption of the United Nations Principles for Responsible Investment (UNPRI), the definition of responsible investing and ESG investment has taken a significant turn. The UNPRI effectively defines the integration of ESG factors into investment decisions as the key defining action of Responsible Investment. Principal 1 states “We will incorporate ESG issues into investment analysis and decision-making processes”. This doesn’t say anything about how to incorporate these issues, nor does it require that investors take any specific action with respect to them. Given this, investment managers are open to “incorporate ESG” in any manner that suits their investment process. Subsequently it is crucial for both advisers and investors to recognize these differences, as failing to do so not only muddies the discourse around sustainable finance but can also lead to ineffective investment strategies. To help investors more easily allocate capital to support their views, Lonsec Research has identified four key Responsible Investment (RI) styles: Ethical, ESG Integration, Sustainability and Impact. While managers may have a primary RI style and integrate ESG into their investment process, it is the RI style that should be used to determine with primary focus of the strategy. Ethical investing is a values driven approach where investors choose companies based on their personal moral compass. This may include avoiding industries like tobacco, alcohol, or weapons, regardless of the company’s financial performance or environmental footprint. It’s highly subjective, and what is ethical to one person may not be to another. Ethical investors tend to focus on alignment with their beliefs rather than a specific framework. In contrast, ESG investing takes a more systematic approach, integrating Environmental, Social, and Governance factors into investment decisions in a variety of ways. Investors can incorporate ESG factors to different degrees, from simply screening out companies with poor ESG performance to actively selecting those excelling in sustainability or governance. Some investors may focus on specific issues, such as gender equality or reducing carbon emissions, while others look for companies that balance strong ESG practices with solid financial returns. The most prevalent approach seen in one where investors consider ESG risks, alongside all risks, and ensures that the expected return from the stock or bond adequately compensates for this risk. There are also strategies that prioritise shareholder engagement, using the power of ownership to push companies toward better ESG performance. Whether through exclusionary screens, positive selection, or active engagement, ESG investing offers a flexible framework that allows investors to address a broad range of concerns, while still aiming for long-term positive financial performance. ESG investing aims to balance financial return with mitigating risks related to sustainability and corporate governance, often serving as a benchmark for responsible capitalism. Green investing is laser-focused on environmental impact. Investors in this space prioritise companies that are leaders in areas such as renewable energy, sustainable agriculture, or carbon reduction. While green investing is a subset of ESG, it doesn’t account for the broader social or governance aspects. For example, a company may be a leader in reducing emissions but fail miserably on labour practices or board diversity. When these approaches are confused, it dilutes the progress each seeks to make, and it is vital that financial advisers and their clients understand these distinctions. Ethical investing is about aligning investments with personal values, ESG is about evaluating comprehensive risk, and green investing is purely environmentally focused. Clarifying these definitions empowers investors to make better choices, driving real change in their areas of interest. Source: Lonsec

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 … Read more

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

Global The introduction of DeepSeek’s open-source R1 model shocked global markets in January, challenging our understanding of capex requirements and competition in artificial intelligence. Despite the DeepSeek rout, the MSCI World Equity Index ended January +3.5% higher, led by strength in European equities as investors rotated out of US tech exposures and into defensive and high growth European names. Global risk-off sentiment saw 10y US Treasury (UST) yields end the month 3bps lower and 2y UST yields -4.5bps. The move came as the market began to push out the timing of Fed cuts and became increasingly concerned around the inflationary impacts of Trump’s potential trade policies. At the tail-end of the month, the market shifted its focus to the implementation of the tariffs on Canada, Mexico and China. The market knows there are likely to be both permanent revenue-generating tariffs and temporary bargaining tool tariffs, but the challenge is to understand the difference and the implications for markets. Elsewhere, global Purchasing Managers’ Indexes (PMIs) in December continued to highlight a divergence between still robust services and languishing manufacturing activity. The global manufacturing PMI remains just shy of 50, straddling expansion and contraction. Meanwhile the global services gauge remains expansionary at 53.8. US The December Federal Open Market Committee (FOMC) Meeting Minutes underscored the hawkish undertones delivered at the meeting itself. Federal Reserve officials expressed increased concern around “potential changes in trade and immigration policy” that could result in upside inflationary risks. Subsequently, non-farm payrolls data showed that the US added 256,000 new jobs in December, well above consensus expectations of 165,000. The unemployment rate also fell from 4.23% to 4.09%, prompting the market to re-evaluate the magnitude and timing of US interest rate cuts in 2025. However, following this, core CPI came in at 0.225% Month on Month, below consensus expectations at 0.3%. Donald Trump was inaugurated on the 20th of January, and soon after signed a slew of Executive Orders (26 on his first day), ranging from withdrawal from the World Health Organization to declaring an energy emergency and winding back Biden-era policies that favoured renewable energy. Following his inauguration, Trump announced a raft of tariffs on Canada, Mexico and later China before backing down and saying he would direct federal agencies to review trade relations and policies. He also singled out copper, aluminium and steel for targeted tariff hikes. At the FOMC meeting in the back end of January, the Fed opted to leave interest rates on hold, as widely expected. Fed Chair, Powell remarked that rates were in a “good place” and indicated that the Committee would be taking a “wait and see” approach. On 31 January after-market, Donald Trump signalled 25% tariffs on Canadian and Mexican goods and 10% tariffs on Chinese imports, which would take effect from February 1. In response, Canada retaliated with a 25% counter-tariff, Mexico planned countermeasures, and China vowed a World Trade Organization (WTO) complaint. Australia The November CPI print showed that monthly trimmed-mean inflation decelerated from 3.5% to 3.2%. While services and housing inflation continued the downward trend, electricity prices surprised to the upside after various subsidies came off. Retail sales data was the next notable print of the month. The monthly retail trade increase of +0.8% was below consensus estimates of +1.0%, though upward revisions were made to the prior month, meaning the October print was 0.2pp stronger than previously reported. The labour force survey was stronger than expected, with 56.3k jobs added in December (vs the 15.0k consensus assumption). The unemployment rate rose by 0.1pp to 4.0% as expected. The quarterly CPI print at the end of the month saw several market participants bring forward RBA cut expectations. The trimmed-mean measure printed at 0.5% (vs 0.6% consensus). This was driven by a deceleration in housing, with both construction costs and rental inflation easing more than expected. Post-CPI, the market all but fully priced a Feb cut. New Zealand The main macro data point this month was NZ’s quarterly inflation print on Jan 22, which came in at +0.5%; in line with consensus but lower than the previous +0.6% reading. The +2.2% Year on Year reading marks the first time annual inflation has stuck in the target band for two quarters running in four years. Europe EU unemployment remained steady in December at 6.3%, in line with consensus expectations. Of the Euro Area members, Spain reported the highest unemployment rate at 10.6% while Germany recorded the lowest reading at 3.4%. In the UK, 10-year gilt yields reached their highest level since August 2008 at the beginning of January amid concerns around government debt and stubborn inflation in the area. However, the spike largely evaporated with yields shifting lower later in the month following an unexpected fall in British retail sales. Mid-month saw EU inflation print in line with expectations at +2.4% Year on Year. The print is higher than November’s +2.2% increase, with energy and services shifting the gauge higher. Inflation continues to hover just above the ECB’s 2% target, despite four interest rate cuts last year. The ECB cut rates in a widely anticipated move and signalled further rate cuts with the magnitude and timing to be informed by upcoming data prints. China Both CPI and Producer Price Index (PPI) ended 2024 with soft readings, in line with market expectations. However, the December Services PMI print at 52.2 beat expectations of 51.5, suggesting some improvement in the Chinese economy. This was then solidified by the GDP print which came in at +5.4%, ahead of consensus estimates of +5.0%. A retail sales beat pointed to a further pickup on the supply side. December trade data also came in above expectations for imports and exports. Exports rose +10.7% (vs consensus at +7.3%), though this beat came as US tariff risks loomed, with some attributing the beat to a frontloading of shipments. At the end of January, both manufacturing and non-manufacturing PMIs missed expectations. Australian dollar After posting a -5.0% decline against the USD in December, the Australian dollar ended … Read more