Insights

We all know that the world is changing rapidly, and this has seen a flow-on impact on how society thinks about charitable giving. Social media, technological change and our day-to-day cost of living means that Not-for-Profits need to think differently to ensure they remain relevant to this new socially conscious generation and how Not-for-Profits invest their funds to continue to benefit their ongoing mission and values.

According to the 2020 Australian Communities Report, Australian givers are looking for a more personalised experience and to build relationships with organisations that they donate to or partner with. This may mean being practically involved in the organisation (volunteering) or even as simple as understanding the impact that their donation makes.

The 2019 Community Trends Report shows that Australians seek transparency and impact from charitable organisations. The key issue that Australians want transparency over is administration costs with seven in ten Australian givers rating this as an extremely important charity essential. Most believe that charity administration costs should comprise 20% or less of the organisation’s total revenue. For those younger Australian givers, having a website is also seen as an important part of the engagement and communication process when dealing with a charity.

The report also highlighted how much the cost of living is impacting on Australians’ ability to donate to charities. More than half of Australian givers agree that the cost of living and changes to housing prices have significantly or somewhat decreased their ability to give to charities.

Some key takeaways from these reports that NFPs should consider:

• Focus on local causes as Australians prefer to support charitable organisations with a local/national focus

• Consider how your charity can highlight a specific issue that people can directly donate to, rather than just raising awareness generally of an issue

• Ensure you can provide givers with a detailed breakdown of where donations are allocated

• Consider how you currently report on the impact donations are having on your charity’s goals and mission, can you improve or change the way you report?

• Simplify your organisation’s mission and ask “will this help achieve our purpose?”

• Where possible, invest in developing effective leaders and communicate leadership wins of the organisation to donors

Investment Watch is a quarterly publication produced by Morgans that delves into key insights for equity and economic strategy. This latest publication will cover;

• Asset allocation – Migrating toward a risk-on strategy
• Economic strategy – The view from the FED
• Equity strategy – Preferencing cyclicals and small-caps
• Updated Morgans Best Ideas
• … and much more

Morgans clients receive exclusive insights such as access to our latest Investment Watch publication. Contact us today to begin your journey with Morgans.

Preview

In recent months, debate has shifted away from ‘recession risks’ towards expectations for a ‘soft landing’ or even the possibility of a ‘no landing’ scenario for the US economy. Inflation has remained on a mild downward trend, there is better visibility on the US rate cutting cycle and China’s increased stimulus is reducing downside risks both domestically and globally.

These are all ingredients supporting the market’s migration toward a risk-on footing. We saw this in the February reporting season via a broad rotation from expensive defensives toward more economically leveraged cyclical industrials and small-caps. We discuss opportunities to put cash to work in global equities, real assets, and fixed income. In Australian equities we favour the healthcare, financials, retail, travel, resources and energy sectors, and we also call out several small-caps via our Best Ideas report.

Shares represent your part ownership (or share) in a business.

Companies can raise money to finance their business by 'going public'. Going public means being listed on a stock exchange and issuing shares to investors.

By paying for the shares, each investor buys part ownership of the company's business and becomes a shareholder in the company.

The money that a company raises in this way is called equity capital. Unlike debt capital which is borrowed money, equity capital does not need to be repaid as it represents continuous ownership of the company.

In return for investing in the company, shareholders can receive dividends and other benefits. A dividend is the distribution of a company's net profit to shareholders.

Shares that have been issued to investors by a listed company can be sold to other investors on the sharemarket. You make a profit when you sell your shares for more than you paid for them.

Buying and selling shares

Your adviser can buy and sell existing shares on your instruction on any business day on one of the recognised Australian securities exchanges (ASX or Cboe).

Orders to buy and sell shares are entered into a computerised trading system by your broking firm (e.g. Morgans). Buy and sell orders are matched by price in the order they were entered into the system.

That way, every order is processed by price and on a first in, first served basis. Larger orders do not have any priority. A trade occurs whenever a buy order is matched with a sell order.

Trades are settled on the second business day after the trade takes place. This means ownership of the shares and related payments between the buyer's broker and the seller's broker are transferred on that day.

All Australian listed shares are registered electronically on either the Clearing House Electronic Sub-register System (CHESS) operated by a subsidiary of the ASX Group, on behalf of listed companies, or on the companies' own sub-registers.

New shares

Alternatively, you can buy new shares that are issued by companies from time to time by applying to participate in a float or initial public offering (IPO). Shares you buy through an IPO are registered as Issuer Sponsored Holdings. The price of shares issued in a float is generally specified in the prospectus.

If you wish to buy shares in the float, you should first review the prospectus then fill out the attached application form specifying the number of shares you wish to buy and lodge it with your adviser before the application deadline.

Once new shares are issued and listed on a recognised Australian securities exchange, they may trade at a market price substantially different from the issue price (either higher or lower). This is due to supply and demand for the shares in the company.

Share performance

Sharemarket indices represent the overall performance of companies listed on a stock exchange. Investors can use these indices to track how an investment is performing by watching its share price.

The key sharemarket indices in Australia are the Standard & Poor's (S&P)/Australian Securities Exchange (ASX) indices.

These include the All Ordinaries Index (All Ords), which is a market capitalisation index comprising the 500 largest companies listed on the Australian Stock Exchange, and segments of the ASX, called:

• S&P/ASX20 – Top 20 stocks
• S&P/ASX50 – Top 50 stocks
• S&P/ASX100 – Top 100 stocks
• S&P/ASX200 – Top 200 stocks
• S&P/ASX300 – Top 300 stocks

Another way to track your shares' performance is to calculate the dividend yield from your portfolio on an annual or more regular basis. This can be a more reliable measure because share prices rise and fall on a daily basis, whereas dividend income is usually much steadier and often grows over time.

Risk and benefits

Capital growth

As a longterm investment, shares have the potential to provide better returns after tax than any other major investment. However, past performance is no guarantee of future returns.

Although share values have risen over the long-term, this has been punctuated with periods of short-term volatility, where prices can go up or down very quickly. For this reason, it is usually important to adopt a medium to longterm investment view of five years or more.

Dividend income

Another benefit of being a shareholder is dividend income, although dividend yields vary greatly from company to company.

Companies trying to grow their business might provide a low dividend yield (perhaps 2-4%) while other, more established companies might provide a higher dividend yield (potentially between 6-8%).

Tax benefits

Shareholders have to pay Capital Gains Tax on any net capital gains made by selling shares; however, their income tax liability can be offset through dividends they receive with franking credits.

Franking credits pass on the value of any tax that a company has already paid on its profits. A company can pay a fully franked dividend if it has paid full corporate tax on the profits distributed as dividends. A partly franked dividend would be paid if the balance of the franking account was not sufficient to pay a fully franked dividend. An unfranked dividend is declared where there is nothing in the franking account.

A company will advise shareholders of the status of the dividend at the time of payment. If you receive franked dividends, you must declare both the cash amount and any franking credits as assessable income in your tax return. Then you can apply the franking credit amount to reduce your income tax liability.

Risks

Share prices of any company, even a blue chip, are always subject to change. Some investors fall into the trap of putting all their money into one asset class – usually at its peak, and then watch as another asset class takes off without them. It is important to have a number of different shares in your portfolio to reduce the risk inherent in share investing.

It's never too early to start planning for retirement. Now is the time to start thinking about wealth preservation.

Areas of concern

The major issues facing retirees can be summarised as:

• longevity - "how long will I live for, and will my capital last?"
• inflation - "will my money be able to retain its spending power"
• income - "from where will my income be sourced?"

Longevity

Our life expectancies are increasing over time. This trend is rapidly rising due to the amazing amount of medical breakthroughs we are experiencing, as well as our increased knowledge on better living through diet and exercise.

The problem is that as we live for a longer period of time we also need to support ourselves for longer in retirement. There are no guarantees on how long our assets will last.

Inflation

The second most important issue is whether our capital can keep pace with inflation. High-inflationary periods can erode capital over time if we have not allowed for sufficient exposure to growth assets. Having a large allocation to cash can actually be detrimental to an investment portfolio over the longer term.

To keep pace with cost of living increases over time, therefore, it is imperative an investment portfolio has some exposure to growth-type assets (such as Australian and international shares, and property). Just how much exposure will depend on each individual's aversion to risk.

Income

The three main sources of income in retirement are:

• superannuation – in the form of a pension income stream and/or lump sum withdrawals.
• non-superannuation assets - in the form of returns from shares, property, cash and fixed interest.
• Centrelink - that is, age pension benefits

The capital required to provide the income from these sources (excluding Centrelink) will vary depending on how much you need in retirement, your age at retirement and how long you think you will need the funds to last.

How long you continue to derive income from your saved capital will depend on how much you spend each year – and how much you actually "spend" could be different to what you had "planned".

Of course, Centrelink is there to supplement your other income if your financial position qualifies you for a full or part age pension payment. However, there should be an attempt in your retirement planning to minimise dependency on Centrelink benefits. This mitigates any regulatory risk in relation to potential Government policy changes in the future.

Retirement portfolio strategies

How can you maximise your income and capital position? Consider the following tips.

For defensive assets

• During market uncertainty try to hold at least three years of income payments in cash, preferably in a higher yielding account. This should provide ample time to reflect on current markets and to ensure you do not need to draw down on capital to fund superannuation pension payments. It avoids having to sell down assets in low market periods.
• Within the 3 year cash allocation, consider having two years of payments in short term money market investments. These pay slightly higher rates than normal "at call" cash accounts.
• Maintain diversification of income assets with some potential for growth. There are a number of quality fixed interest investments available that pay reasonable income with some equity characteristics but without the same degree of risk.
• Try to draw down from defensive assets if extra funds are needed. Your aim is to preserve capital so if you need additional funds to cover larger lump sum expenses draw from your defensive assets where possible.

For growth assets

• Maintain your growth assets for at least five to seven years without accessing them. Your objective here is to achieve reasonable growth to manage longevity issues.
• Maintain a good spread of growth assets. Diversification across various sectors is the key to minimising capital losses during volatile periods.
• Consider some capital protection strategies if required.
• Take advantage of shares that offer franking credits. The pension phase in super is a tax free environment, which means franking credits are fully refunded back into the account. The long term compounding benefits of this to your account balance can be significant.
• Review your portfolio and rebalance regularly as required to ensure your desired asset allocation is maintained. This is the best way to ensure your portfolio continues to meet your objectives for risk and return.

Investing

Asset allocation

Successful asset allocation means achieving your objectives with the least possible risk. To do this you need to understand the behaviour of asset classes and products.

Establishing an asset allocation that is consistent with your goals and risk tolerance should be your top priority.

Borrowing to invest

Due to the long-term nature and inherent risks of borrowing, it may not be an appropriate strategy if you are already in retirement.

However, most investors in this age group understand market conditions more, and have experienced the ups and downs that come with share markets. They are therefore more inclined to take a little more risk with their investment dollars.

Borrowing to invest is not without risk and when markets fall it is very important you keep in touch with your adviser so that you can both manage your loans as effectively as possible.

Risk profiles can change over time

Getting your investment risk profile right is very important. When you meet with your adviser, he or she will generally discuss your attitude towards investing and how much risk you think you can tolerate. A risk profile questionnaire helps determine this.

However, remember that your risk profile may change over time particularly as you near retirement. Your investment outlook could change from growth to more income-type investments. This is why it is important to re-assess your position on a regular basis.

Understanding the risk/return trade-off for the various asset sectors is very important. That is, the greater the returns, the greater the risk you take; and vice versa. Everyone wants nirvana – where risk is low and returns are high – but this is near impossible to achieve.

Putting risk/return trade-off into more perspective, defensive assets such as cash and fixed interest pay relatively good income, but have no growth and therefore low risk. Shares on the other hand have high potential for capital growth and so the risk factor is also higher.

Debt management

At this stage of your life, most of your personal debt – your mortgage, personal loans, credit cards – would be under control or even eliminated.

For those who still have a mortgage or other personal debt, now is the time to pay it out. Or at least manage your debt within your retirement savings strategy.

With the changes to superannuation rules, many people are reconsidering the traditional strategy of using available cash to repay their debt as soon as possible. Instead, they are converting the debt to interest-only and using the freed up cash to contribute to their superannuation account.

At retirement, a lump sum benefit is withdrawn - tax free if over age 60 - which is then used to retire the debt completely. This can be a very effective method for some.

However, before you consider this strategy it is very important you seek advice from your financial adviser, who will work out whether this is the best plan for your circumstances. In some instances it may still be better to stick with tradition and concentrate on repaying your debt sooner.

Wealth protection

In these later years, with your debts paid off, your main focus tends to be on health and having adequate income.

If something happened unexpectedly, the main concern would be day to day living expenses and medical costs during recovery. Making major changes after illness, such as home modifications, may also be a financial outlay that would need to be covered.

Your options

Trauma and TPD cover remains a priority for retirees as the lump sum benefit can help if you have been diagnosed with a critical illness. This lump sum could be used to make alterations to your residence or car, and to cover medical or remedial costs.

Life cover can supplement superannuation benefits or other income for a non-working spouse in the event of a death of the primary income earner.

Circumstances change with your stages of life so you should talk to an adviser about what product and features suit your needs.

Centrelink issues

Centrelink benefits are available for eligible seniors who have retired or are about to retire. Eligibility is based on two tests – the Incomes Test and the Assets Test. Your financial position (combined if a couple) is taken into account for these two tests, and eligibility for benefit payments is determined by the outcome of these tests.

We recommend you visit the ‘Retirement years' on the Services Australia website. This page is a very useful guide to help individuals understand income support, what additional services and supplements are available and how you can make a claim. It also discusses residential aged care for those who are looking at their options for retirement homes..

Estate planning

Estate planning is an area that can be easily neglected. Individuals often overlook the importance of having an up to date Will and Powers of Attorney.

Estate planning focuses on wealth preservation and wealth transfer so regardless of whether times are good or bad, your objective should still be to distribute your wealth to your nominated beneficiaries in the most effective way.

As well as your Will and Powers of Attorney, you should also be thinking about:

• Superannuation does not automatically come under the scope of your Will unless specifically nominating your Estate as the beneficiary. For this reason you need to establish additional nominations for your superannuation.
• Business succession planning - if you have a business you should have a business succession plan in place.

Many Not-for-Profit (NFP) Boards face the increasing challenge of delivering on their mission with less operating cash flow. There are many reasons for the reduction in cash flow including lower funding/donations, rising operating costs and many more.

Often, a focus on more efficient use of working capital and reserves can be part of the solution. As Boards search for a better return on funds, it’s a good reminder of what the ACNC requirements are. You can read a full copy of the Guide on the Australian Charities and Not-for-profits Commission website (bit.ly/acnc-requirements). All NFP organisations are unique and regardless of their size, cause or association, should develop an Investment Policy Statement (IPS) that is robust and functional, as well as flexible enough to cater for both Board and organisational change and to meet the long-term goals of the organisation in an ever-changing environment. The Board of a NFP has a fiduciary responsibility to protect the organisation's assets and ensure that its operations and activities use the assets to further the NFPs mission. Therefore, an IPS is critical.

An IPS is essentially a roadmap for funds management; it sets the ground rules for investing and outlines how investment decisions will be made and what steps must be taken to ensure good governance. It also helps link values, mission and operational needs to the organisations’ financial resources. A good IPS is clear and functional and does not need to be overly complicated nor legalistic. It should articulate the governance of the funds, define how the funds are to be invested and confirm what outcomes are expected in terms of returns. It should also clarify any constraints that need to be in place. Many NFPs have ethical and SRI overlays that restrict investment in certain sectors, activities or companies, for example alcohol and tobacco; these restrictions need to be included in the IPS.

A robust IPS will provide certainty that investment decisions are being made in-line with the NFP’s stated risk appetite. Stakeholders should be able to go to the IPS, understand exactly how funds are invested and the governance structure in place.

So what needs to be considered in an IPS?

What is the purpose for the investment assets?

Roles and Responsibilities:

• Who does what? Risk profile

Investment Framework

• Types of securities in which the organisation can invest: e.g. Cash, Bonds, Shares, Managed Funds
• Quality and maturity of fixed income securities
• SRI-Socially Responsible Investing
• Target return e.g. a total return on investments of CPI + 3% (risk profile dependent)
• Type of investments in which the organisation may not invest: e.g. XYZ Organisation will not invest in securities purchased on margin, options, futures or other derivative instruments
• Asset diversification including a Strategic Asset Allocation (SAA)

Investment Monitoring and Reporting

• The use of professional financial advisers Reporting framework and cycle
• Portfolio monitoring and rebalancing to SAA should be adopted as a risk-management strategy

There is a lot to consider for a NFP Board when designing, implementing and managing an investment portfolio. Morgans works with clients in the NFP sector helping them navigate the road to higher returns. We have considerable experience working with large and small organisations and will tailor solutions specific to the NFP’s needs and circumstances.

To learn more about how NFP organisations can earn a greater return and gain the best understanding of the risks involved, please contact a Morgans Adviser near you.

Our best ideas are those that we think offer the highest risk-adjusted returns over a 12-month timeframe supported by a higher-than-average level of confidence. They are our most preferred sector exposures.

Additions: This month we add Superloop (ASX:SLC).

Removals: This month we remove Mineral Resources (ASX:MIN).

Large cap best ideas

Treasury Wine Estates (ASX:TWE)

It may take some time for the market to digest TWE’s acquisition of Paso Robles luxury wine business, DAOU Vineyards (DAOU) for US$900m (A$1.4bn) given it required a large capital raising. The acquisition is in line with TWE’s premiumisation and growth strategy and will strengthen a key gap in Treasury Americas (TA) portfolio. Importantly, DAOU has generated solid earnings growth and is a high margin business. It consequently allowed TWE to upgrade its margins targets. While not without risk given the size of this transaction, if TWE delivers on its investment case, there is material upside to our valuation. The key near-term share price catalyst is if China removes the tariffs on Australian wine imports.

CSL Limited (ASX:CSL)

While shares have struggled of late, we continue to view CSL as a key portfolio holding and sector pick, offering double-digit recovery in earnings growth as plasma collections increase, new products get approved and influenza vaccine uptake increases around ongoing concerns about respiratory viruses, with shares trading at 25x, a substantial discount (20%) to its long-term average.

ResMed Inc (ASX:RMD)

While weight loss drugs have grabbed headlines and investor attention, we see these products having little impact on the large, underserved sleep disorder breathing market, and do not view them as category killers. Although quarters are likely to remain volatile, nothing changes our view that the company remains well placed and uniquely positioned as it builds a patient-centric, connected-care digital platform that addresses the main pinch points across the healthcare value chain.

QBE Insurance Group (ASX:QBE)

With strong rate increases still flowing through QBE's insurance book, and further cost-out benefits to come, we expect QBE's earnings profile to improve strongly over the next few years. The stock also has a robust balance sheet and remains relatively inexpensive overall trading on 8x FY24F PE.

South32 (ASX:S32)

S32 has transformed its portfolio by divesting South African thermal coal and acquiring an interest in Chile copper, substantially boosting group earnings quality, as well as S32's risk and ESG profile. Unlike its peers amongst ASX-listed large-cap miners, S32 is not exposed to iron ore. Instead offering a highly diversified portfolio of base metals and metallurgical coal (with most of these metals enjoying solid price strength). We see attractive long-term value potential in S32 from de-risking of its growth portfolio, the potential for further portfolio changes, and an earnings-linked dividend policy.

Pilbara Minerals (ASX:PLS)

We view PLS as a fundamentally strong and globally significant hard-rock lithium miner. The company has successfully executed on ramping up the expansion of Pilgangoora, while progressing plans to expand output (P680 and P1000). Supported by a strong balance sheet, with net cash at ~A$2.1bn at the end of December, PLS’ expansion plans remain uniquely undeterred by the significant weakness in lithium prices. For PLS, the best form of defence against lithium prices is to stay on the attack, with its medium-term plans to continue expanding its production aimed primarily at building greater economies of scale and a more defensive margin.

Woodside Energy (ASX:WDS)

A tier 1 upstream oil and gas operator with high-quality earnings that we see as likely to continue pursuing an opportunistic acquisition strategy. WDS’s share price has been under pressure in recent months from a combination of oil price volatility and approval issues at Scarborough, its key offshore growth project. With both of those factors now having moderated, with the pullback in oil prices moderating and work at Scarborough back underway, we see now as a good time to add to positions. Increasing our conviction in our call is the progress WDS is making through the current capex phase, while maintaining a healthy balance sheet and healthy dividend profile. WDS still has to address long-term issues in its fundamentals (such as declining production from key projects NWS/Pluto), but will still generate substantial high-quality earnings for years to come.

Morgans clients can download our full list of Best Ideas, including our mid-cap and small-cap key stock picks.