Answers by Paul Rickard

Question 1: How did the broker analysts react to RIO’s profit result?

Answer: Although RIO’s half year profit of US$4.8bn was below consensus by around 10%, and the interim dividend of US41.48 per share was short of the consensus of US1.64, most analysts were relatively relaxed about the result. The miss on profit was largely blamed on higher tax, finance costs and depreciation, as well as restructuring costs. Operational metrics were sound, with improved copper cost guidance.

Morgans lifted its target by $1 to $110 and kept its rating at “hold”, Citi maintained its “neutral” rating and target of $113, while Morgan Stanley maintained its “equal weight” rating and target of $118. Ord Minnett raised its target by $1 to $121 and kept its “buy” recommendation.

Question 2:  I manage my own SMSF and want to optimise my investment strategy. Which ETFs are best suited for SMSFs, and should I include international equities for long term growth?

Answer: The starting point is to work out what your investment objectives are how much risk you are comfortable in taking. With this information, you can broadly match to one of the typical investment allocations (high growth, growth, balanced, moderately balanced, conservative etc.). If you go to the website of one of the big industry super funds, for example Australian Super, you can see target asset allocations for these risk types. You can also see information on the expected long term return, expected volatility of that return (more often than not, described as the frequency of negative years) and other risk information.

You can purchase ETFs that match these target asset allocations, for example, ETFs that track the Australian share market (e.g. VAS), an ETF that tracks international shares through the MSCI (VGS), an ETF that tracks the Australian bond market (VAF) etc.

Almost all asset allocations will have international equities.

Potentially, a simple way is to purchase a “pre-mixed” ETF of other ETFs. Vanguard offers an ETF that tracks a “conservative” index (VDCO), a “balanced” index (VDBA), a “growth” index (VDGR) and a “high growth index” (VDHG).

Question 3:  How will RBA rate cuts and affect my investment strategy?

Answer: Lower interest rates typically support higher equity valuations, with moderate growth and disinflation supporting elevated market multiples. Companies’ financing costs also fall. Focus on quality dividend-paying stocks that benefit from lower rates and consider that Australian households’ real incomes are likely to increase due to lower mortgage costs and lower inflation, though consumers remain cautious. Banks could see reduced net interest margins but could benefit from improved credit conditions.

Question 4: When is RIO paying its interim dividend. Is there a DRP in operation?

Answer: RIO is paying its fully franked interim dividend of US$1.48 per share (approx. A$2.27 – exact amount to be confirmed) on 25 September. It will trade ‘ex’ the dividend on 14 August, so the last date to buy the shares and receive the fully franked dividend is 13 August. RIO offers a dividend re-investment plan (DRP). Shares are issued with no discount. The last date to elect to participate in the DRP, or opt out if already in, is Thursday 4 September.