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Dangers of the Trump trade · The Money Puzzle

0:09
Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm
0:13
Speaker 1: James Kirby, the editor at The Australian. Welcome aboard, everybody,
0:16
Speaker 1: you know. Regular guest on the show who we haven't
0:19
Speaker 1: actually heard from for a while is Doug Churek. Now,
0:21
Speaker 1: we used to talk to Doug quite a lot when
0:23
Speaker 1: he was a full time advisor, and he is still
0:26
Speaker 1: I might add to mention more private wealth, but more
0:29
Speaker 1: recently he's also ascended, if that's the right word, to
0:33
Speaker 1: the family office, to the world of the family office.
0:36
Speaker 1: And if you know anything about family offices, you'll know
0:38
Speaker 1: that they need at least twenty million to be called
0:40
Speaker 1: a family office. So there's a lot to invest if
0:43
Speaker 1: you are involved with the family office, and he is
0:45
Speaker 1: the chair of one which will for the moment remain
0:49
Speaker 1: discreetly discreet. And that's the nature of that whole business,
0:53
Speaker 1: isn't it discretion at all costs?
0:55
Speaker 2: How are you, Doug?
0:56
Speaker 1: Nice to have you on board.
0:57
Speaker 2: Thank you, James, and hello listeners.
0:59
Speaker 1: It's interesting just before we came to where we were
1:02
Speaker 1: just I was just asking you really whether at that
1:07
Speaker 1: level family office professional investor, sophisticated investor level like whether
1:12
Speaker 1: in the end it so they really are facing the
1:14
Speaker 1: same issues as mom and dad every day investors listening
1:17
Speaker 1: to the show, or whether they come in from a dangle.
1:21
Speaker 1: And this year focuses so much on the US and
1:25
Speaker 1: so much on Trump and the Trump trade, and the
1:27
Speaker 1: notion that the US shares are the go this year,
1:31
Speaker 1: that they will do better than Australian shares. They did
1:33
Speaker 1: twice as good last year, twenty two percent versus eleven.
1:36
Speaker 1: They did twice as good the year before. Everything would
1:39
Speaker 1: suggest that they'll also be better this year. Is that
1:44
Speaker 1: a theme that you would take on board in your work,
1:48
Speaker 1: that US shares are still the main play going forward.
1:52
Speaker 2: So they say if you've met one family office, you've
1:56
Speaker 2: met one family office, which is another way of saying
2:00
Speaker 2: family investment offices, which you know James probably need monies
2:05
Speaker 2: like two hundred million to five hundred million to really
2:08
Speaker 2: be able to justify a highly personalized approach to investing.
2:12
Speaker 2: They have their own favorite investments. Some may be linked
2:16
Speaker 2: to the way they made money the business. They may
2:18
Speaker 2: be linked to property development. They may love private lending.
2:21
Speaker 2: So it's it's quite different and not homogeneous, and it's
2:26
Speaker 2: probably fair to say that the proportion of public equities
2:30
Speaker 2: in a family office portfolio is less, as you would
2:34
Speaker 2: also probably say of a Australian institutional superfund, an industry fund,
2:40
Speaker 2: the future fund, and you would also say of an
2:43
Speaker 2: endowment fund. And so there are a lot more private
2:45
Speaker 2: investments involved, so their exposure is less, But the dilemma
2:49
Speaker 2: is still the same, which is at the moment if
2:52
Speaker 2: you do embrace low cost investing ETFs, index investments, direct indexing,
2:57
Speaker 2: or you invest in a fund that promises to beat
3:00
Speaker 2: the market. Nevertheless, most are following the weight of money,
3:03
Speaker 2: and the weight of the money at the moment in
3:05
Speaker 2: the world equity market has grown to seventy five percent
3:07
Speaker 2: in the US and about thirty percent in pen stocks,
3:12
Speaker 2: and those are trading at extremely high valuations. And so
3:16
Speaker 2: the same problem a mom and dad investor faces is
3:20
Speaker 2: the same one a family office spaces, albeit maybe in
3:23
Speaker 2: a smaller relative proportion.
3:26
Speaker 1: Yes, okay, I suppose one useful thing these days is
3:29
Speaker 1: in theory. At least, there's much more access than there
3:32
Speaker 1: used to be. So once upon a time, very wealthy
3:34
Speaker 1: investors would have shares in the US and every day
3:37
Speaker 1: investors wouldn't have any not a chance, I mean not
3:40
Speaker 1: a chance that they would have that. And now you can,
3:42
Speaker 1: you know, open up an online brokerage account, sign up
3:46
Speaker 1: and put five hundred bucks on any stock you wish
3:49
Speaker 1: in the world, and it's not that difficult. So what
3:52
Speaker 1: do you think of that? What do you think of
3:54
Speaker 1: that core notion that the US remains the place to
3:57
Speaker 1: be in terms of share price appreciation this year.
4:03
Speaker 2: Yeah, so look, there's no doubting the US economy is strong,
4:07
Speaker 2: it's resilient, it's innovative. But history tells us that investors
4:11
Speaker 2: can overpay. They overpaid in two thousand. They overpaid during
4:15
Speaker 2: this period called the nifty to fifty, which was probably
4:18
Speaker 2: a little bit more diversified than the era of the
4:20
Speaker 2: Magnificent Seven. And I think that's the situation we're in.
4:24
Speaker 2: And the sort of forecast returns off such a high valuation,
4:28
Speaker 2: which expects some kind of what we call mean reversion
4:31
Speaker 2: or valuations returning to normal, are actually quite disappointing for
4:36
Speaker 2: the US market. And if you look at this questions
4:39
Speaker 2: to ask, how can it get any better? There are
4:41
Speaker 2: the demand for equities extremely high, the proportion of investors,
4:46
Speaker 2: particularly in the US, in the four to one ks
4:49
Speaker 2: are all the way with equities. Institutions are all the
4:52
Speaker 2: way with equities, and those companies that are in the
4:55
Speaker 2: market are making super profits, particularly the large tech companies,
4:59
Speaker 2: and so there is not a lot of tail breeze
5:02
Speaker 2: behind to keep filling the sales, and there are quite
5:05
Speaker 2: a few headwinds. You know. We just learned the other
5:08
Speaker 2: day that maybe there's a cheaper way to do AI
5:11
Speaker 2: out of China using something called deep seek, which might
5:15
Speaker 2: turn out to be a deep fake, but if true,
5:17
Speaker 2: it means you don't need to buy expensive Nvidia chips.
5:21
Speaker 2: And you know, and if that's not the banana peel
5:25
Speaker 2: out there, that the market will slip over. Another one
5:27
Speaker 2: could arise. And if you know, I doubt that you
5:30
Speaker 2: or I have in our pockets on Motorola or Ericsson phone.
5:34
Speaker 2: But most of our listeners would remember those errors when
5:37
Speaker 2: those tech companies dominated, so.
5:40
Speaker 1: They and you assumed they were going to be there
5:41
Speaker 1: for a long time.
5:43
Speaker 2: Some do and that's the risk. And at the moment,
5:45
Speaker 2: so many people are all on one side of the
5:47
Speaker 2: boat that it's quite possible that's not wise. So put
5:51
Speaker 2: in some numbers. The US market pe at the moment,
5:54
Speaker 2: if you just looked up a simple ETF that all
5:57
Speaker 2: investors could buy. It's trading on twenty seven times earnings,
6:01
Speaker 2: which is very expensive. And if you bought an ETF
6:03
Speaker 2: that bought every company outside the US, it'd be on
6:06
Speaker 2: a pe of fifteen. So you basically stocks in the
6:10
Speaker 2: US are trading at twice the price elsewhere in the world,
6:13
Speaker 2: and history suggests that you probably get a lower return
6:17
Speaker 2: going forward. And some algorithmic models that try to do
6:21
Speaker 2: tactical or dynamic acid allocation would be flashing red lights
6:25
Speaker 2: to deweight your exposure to the US market. But you
6:30
Speaker 2: know it doesn't necessarily have to be done just by
6:33
Speaker 2: not owning the index. There are parts of the index
6:35
Speaker 2: that are sort of underappreciated. So the pe of all
6:39
Speaker 2: of the low price companies in the world is eleven.
6:41
Speaker 2: So in short, you can move your money from the
6:44
Speaker 2: US outside the US and own companies trading at half
6:48
Speaker 2: the price, or you can move them to just buying
6:52
Speaker 2: the bottom third by price stocks in the world, and
6:55
Speaker 2: you can buy them for one third the price. So
6:57
Speaker 2: the market isn't uniformly expensive, it's on average, it's concentrated
7:02
Speaker 2: in a number of small number of large growth companies
7:06
Speaker 2: and there is good value around that. But other than
7:09
Speaker 2: James Kirby and his media empire, most of the journalists
7:14
Speaker 2: are a little bit lazy and just look at the
7:16
Speaker 2: index and they don't deaverage and they don't see that
7:18
Speaker 2: within the market there's still, you know, some reasionable value
7:21
Speaker 2: and you might want to direct your money elsewhere.
7:24
Speaker 1: You're not clearly, You're sounds like you're talking that it's
7:27
Speaker 1: all within a relatively normal frame. You're not chilled or
7:32
Speaker 1: disturbed by where the shares are at the moment. And
7:36
Speaker 1: we had that, you know, there was that flurry of
7:39
Speaker 1: activity around Deep Seek when it came on the scene.
7:42
Speaker 1: First people had never heard of it. Next thing they
7:43
Speaker 1: had shot in video from being the most expensive stock
7:48
Speaker 1: in the world out the window, and it had the
7:50
Speaker 1: biggest one day sell off in dollar charms that they'd
7:53
Speaker 1: ever seen on Wall Street. The point I'm making is
7:56
Speaker 1: that was do you do you do you see that?
7:59
Speaker 1: Do you see incidents like that as opportunity to buy
8:01
Speaker 1: the dip or do you see them as confirmation that
8:05
Speaker 1: this share markets are terribly overvalued and dangerously so.
8:10
Speaker 2: So again, parts of the share market are terribly overvalued,
8:15
Speaker 2: which then pull up the whole share market. And if
8:17
Speaker 2: an investor thinks they're getting diversification by buying an index
8:22
Speaker 2: fund or using a fund that tracks the index, they'll
8:25
Speaker 2: be disappointed because at the moment, if you bought a
8:29
Speaker 2: global index equity fund, seventy five percent of your money
8:33
Speaker 2: would go into the US and that's not diversified, and
8:37
Speaker 2: thirty percent of your money would go into ten American companies.
8:40
Speaker 2: And that's so they are at worrisome of high valuations,
8:45
Speaker 2: and I think investors should be worried about that and
8:47
Speaker 2: take some steps to try to diversify around it. And
8:51
Speaker 2: all I'm trying to say is you don't need to
8:53
Speaker 2: completely exit the share market. That could be a problem
8:57
Speaker 2: because again, valuations aren't a timing tool, but the expected
9:02
Speaker 2: returns from these expensive companies which dominate the index unfortunately,
9:07
Speaker 2: and again an index is just a rule, and it
9:09
Speaker 2: might be this rule is wrong, and it might even
9:11
Speaker 2: be the case that since everyone is now following an
9:13
Speaker 2: index strategy as the dominant way of investing, it may
9:17
Speaker 2: actually be self replicating these concentration risks in super big,
9:21
Speaker 2: expensive companies. Yes, yes, I think investors need to worry,
9:25
Speaker 2: and they probably should double check what's under the hood
9:29
Speaker 2: of their ETF or their index fund or their active fund,
9:32
Speaker 2: and if they're not careful, they may find that they
9:34
Speaker 2: have a very high exposure. The good news is they've
9:37
Speaker 2: would have made a lot of money from that. And
9:40
Speaker 2: there's two ways they've made it. Because the other other
9:41
Speaker 2: way they made a lot of money is in the
9:43
Speaker 2: very weakening Australian dollar and most investors offshore don't hedge
9:48
Speaker 2: their currency exposure, so have made a double whammy of
9:51
Speaker 2: a return in the last year.
9:53
Speaker 1: Yes, they have to. So if I'm in the family
9:56
Speaker 1: office and the old patriarch and I'm down at the
9:58
Speaker 1: end of the table, right, I'm on a gold chair,
10:00
Speaker 1: smoking cigar, and I have and you've just given this presentation,
10:03
Speaker 1: I say, listen, Doug, So what do I do? What?
10:06
Speaker 1: What do you what? My an active diversified investor do
10:09
Speaker 1: who is a little bit uneasy about how well the
10:14
Speaker 1: share market went for them in the last two years,
10:15
Speaker 1: particularly their uses. When you say diversify, is there a
10:19
Speaker 1: very obvious basket that they should go to? Is it gold?
10:24
Speaker 1: Is it bonds?
10:25
Speaker 2: It is there?
10:26
Speaker 1: Is there is there a low hanging fruit there?
10:28
Speaker 2: Yeah, So you're you're asking the unanswerable question because you
10:31
Speaker 2: know which is a market try. But yeah, the other
10:37
Speaker 2: day I played golf and I saw signs saying extreme
10:40
Speaker 2: weather policy. And that sign only comes out when they
10:43
Speaker 2: think the temperature is going to be above thirty seven degrees,
10:46
Speaker 2: or you could you go to another golf course in
10:48
Speaker 2: their extreme weather policy might be forty degrees. So most
10:52
Speaker 2: of the time you should have no opinion on share
10:54
Speaker 2: market prices or even for that matter, currency, But when
10:57
Speaker 2: things aren't extremes, then I think you need to roll
10:59
Speaker 2: out your policy that says, do we accept this unusual
11:03
Speaker 2: event happening and the valuation of the US share market
11:07
Speaker 2: is at an extreme and you can choose not to
11:11
Speaker 2: do anything about it, or you could pull out your
11:13
Speaker 2: extreme policy and said, let's take some profits and shift
11:17
Speaker 2: them elsewhere. Now, some of your suggestions were to take
11:20
Speaker 2: them completely off the poker table and move them into
11:22
Speaker 2: something defensive. That's one strategy, and there are some algorithms
11:27
Speaker 2: or methodologies that say doing so. We call that dynamic
11:30
Speaker 2: acid allocation or tactical acid allocation. But what I was
11:34
Speaker 2: trying to say a minute ago is there are other
11:36
Speaker 2: parts of the share market that aren't bad value. The
11:39
Speaker 2: problem is not uniform. The problem of these rich valuations
11:43
Speaker 2: is highly concentrated. And you could name seven of the reason.
11:46
Speaker 2: Seven of those now if you need magnific yeah, and
11:50
Speaker 2: if you pull them out, if you invest around them,
11:53
Speaker 2: you can buy stocks that are one third the price
11:56
Speaker 2: and aren't trading. You can go to Europe, you can
12:00
Speaker 2: go to Japan. Unfortunately, in Australia, maybe uniformly, you wouldn't
12:04
Speaker 2: want to buy our index and then have all your
12:06
Speaker 2: money going into the Commonwealth Bank and some the richest
12:10
Speaker 2: bank in the world. So be careful just saying I'm
12:13
Speaker 2: all in Australia, because Australia has a little bit of
12:15
Speaker 2: this sector evaluation excess at the moment in our banking stocks,
12:20
Speaker 2: So you need to bravely go elsewhere.
12:23
Speaker 1: We have a magnificent whatever six the four banks and
12:27
Speaker 1: the two miners, the banks particularly, yes, I know we
12:30
Speaker 1: have made a point on the show very readily that
12:32
Speaker 1: you cannot expect forty five percent returns. We'll comework banks
12:36
Speaker 1: shares every year, my friends, you cannot. It may never
12:39
Speaker 1: happen again, and what you do about that is up
12:41
Speaker 1: to you. But don't expect that to be repeated. Very
12:44
Speaker 1: good we'll take a short break. We'll be back in
12:46
Speaker 1: the moment. Hello, welcome back to the Australians Money Puzzled podcast.
12:58
Speaker 1: I'm James Kirby, Well the Editor Australian talking to doctor
13:01
Speaker 1: Doug Turek. I mentioned more private wealth and also in
13:07
Speaker 1: mysterious family office whose name he won't tell me. So
13:10
Speaker 1: we just have to struggle on, folks. I know it's
13:12
Speaker 1: my job try and find out. I'll try and find
13:14
Speaker 1: out now, Doug, would you please talk to our listeners
13:19
Speaker 1: about this whole business of private credit and this sense
13:24
Speaker 1: that many investors are advisors and advertisements and financial media.
13:31
Speaker 1: It said, it's putting it in front of mum dad,
13:34
Speaker 1: investors who listen to this show every day, Investors who
13:37
Speaker 1: listen to this show that they've missed the boat, that
13:40
Speaker 1: they should have been investing in alternatives. They should especially
13:43
Speaker 1: have been investing in private credit, and that the other
13:46
Speaker 1: banking system has retraced, if you like, from a lot
13:49
Speaker 1: of work and private credit is in there. It's a
13:52
Speaker 1: whole new world. And I'm sure that wealthy clients that
13:56
Speaker 1: you know have been in private credit and alternative of
14:00
Speaker 1: that nature for a long time. But I'm terribly skeptical
14:04
Speaker 1: that this that that at this stage the good deals
14:10
Speaker 1: are gone there, that's certainly going to be overpopulated, and
14:13
Speaker 1: that that area is not actually where mom and deld
14:16
Speaker 1: should be. Certainly not an enlisted version of it, where
14:19
Speaker 1: people package up what's supposed to be private credit and
14:22
Speaker 1: then put it on a public market. But this is
14:24
Speaker 1: the way in for many investors. I've had some people
14:27
Speaker 1: on the show express deep skepticism about Liam short was
14:30
Speaker 1: on a few weeks ago. But I have no idea
14:33
Speaker 1: what your view is, but I'd like to hear it.
14:35
Speaker 2: Yeah, so, I mean you just background. You did note
14:39
Speaker 2: that post GFC rules encouraged banks to retreat from high
14:43
Speaker 2: risk lending. But also there's a new lot more endowment
14:47
Speaker 2: fund investment style envy which has also been rised of
14:52
Speaker 2: private equity, not just private lending. And of course, when
14:55
Speaker 2: central banks put interest rates to nil and bond yields
14:59
Speaker 2: were pitifully low for decades, investors stretched for yields. All
15:04
Speaker 2: of us created the growth in demand, and of course
15:07
Speaker 2: financial service markets love to respond to demand, so there
15:10
Speaker 2: are number of companies coming to the market to now
15:14
Speaker 2: offer retail investors what was something done more at the
15:18
Speaker 2: private end. There was a recent paper from the RBA
15:21
Speaker 2: that said the Australian private lending markets around forty billion,
15:25
Speaker 2: which sounds a lot, but it's only, according to that report,
15:29
Speaker 2: two and a half percent of business lending. So maybe
15:33
Speaker 2: we haven't missed the boat and there's still a lot
15:35
Speaker 2: more room to grow. Private lending does make the regulators
15:39
Speaker 2: nervous because they don't have a lot of transparency over it.
15:42
Speaker 2: But on the other hand, maybe they should care less
15:44
Speaker 2: because they're not protecting banks which are highly leveraged beasts
15:48
Speaker 2: and systemically important and maybe failed private lenders isn't a
15:53
Speaker 2: problem as much for society, but it could be a
15:55
Speaker 2: problem for mom and dad investors who are thinking there's
15:58
Speaker 2: always liquidity there. Most private lending is through closed funds.
16:03
Speaker 2: Your money gets locked up, and some will remember money
16:07
Speaker 2: frozen after the GFC in mortgage trusts and in property
16:11
Speaker 2: trusts which took decades for the money to come back.
16:14
Speaker 2: So there are a few listed private vehicles and they
16:19
Speaker 2: they're the positives of those is you can always get out,
16:22
Speaker 2: but you might get out at a terrible discount. Like
16:25
Speaker 2: one of the offerings I think from Qualititasks was down
16:29
Speaker 2: twenty percent during the COVID crisis, but you can still
16:32
Speaker 2: get your money out. So ironically, these private vehicles might
16:35
Speaker 2: actually be the analog of a listed rate versus an
16:39
Speaker 2: unlisted rate, and in a crisis, you should buy move
16:45
Speaker 2: money between the two. But one of the concerns that
16:49
Speaker 2: you might have is this demand is being filled by
16:51
Speaker 2: a lot of new entrance to the markets who haven't
16:54
Speaker 2: had any experience with defaults, and so they're probably more
16:59
Speaker 2: willing to take risks than they should, and when default happens,
17:02
Speaker 2: they don't know what to do. And in my family office,
17:06
Speaker 2: one of my colleagues on the committee has a rule
17:09
Speaker 2: not to work with a private lender who hasn't been
17:11
Speaker 2: around since the GFC, and it's quite happy to work
17:14
Speaker 2: with a firm that had some workouts where there were
17:17
Speaker 2: some failures, because the thought is they've learned a lot
17:20
Speaker 2: from that, so you might be careful working with some
17:23
Speaker 2: of the new lenders that come to market. Personally, I
17:26
Speaker 2: have some concerns where private lending and private equity work together.
17:30
Speaker 2: There has been a problem with private equity liquidity, so
17:33
Speaker 2: a lot of money went into private equity back in
17:36
Speaker 2: the Go Go twenty twenty twenties, before COVID and we
17:40
Speaker 2: had spacks and we had crazy investments in private equity.
17:44
Speaker 2: They're due to come out, but no one wants to
17:46
Speaker 2: list them on the IPO and money stuck. So some
17:49
Speaker 2: private lending companies have been helping private equity firms by
17:53
Speaker 2: lending the money to pay back to shareholders and in
17:56
Speaker 2: debting some of the companies. I think that might have
17:58
Speaker 2: been the fault of Red Lobster in America. So private
18:02
Speaker 2: credit and private equity I have often don't work very well.
18:06
Speaker 2: And I'd also stay away from private lenders who use
18:09
Speaker 2: debt to enhance returns, which sometimes you can see anecdotally.
18:13
Speaker 2: I've heard that ten to twenty percent of the construction
18:16
Speaker 2: cranes in Melbourne are now owned by private lenders. You
18:20
Speaker 2: probably some of your listeners would have read that rock Pool,
18:23
Speaker 2: which used to be owned by Quadrant private equity, that
18:26
Speaker 2: company couldn't serve its debt defaulted and now it's owned
18:29
Speaker 2: by Metrics, the private lender.
18:32
Speaker 1: So yes, to which we can only say, did they
18:35
Speaker 1: really think they were going to? Was that their desired outcome?
18:38
Speaker 1: Shall we say? And I'm sure it wasn't.
18:42
Speaker 2: Well, there are some land borrowers who are quite happy.
18:46
Speaker 2: They aren't too upset. If something fails. They call it
18:48
Speaker 2: loan to own. So if they think there's still you know,
18:52
Speaker 2: the LVR or the loan to value ratio is low
18:54
Speaker 2: enough and there's still value in the property, you know
18:56
Speaker 2: they will get all their money back. So private, particularly
19:01
Speaker 2: to property development, there is the land value of security,
19:06
Speaker 2: perhaps less so in corporate. So you talked about is
19:09
Speaker 2: the area overpopulated perhaps? But the other thing to keep
19:13
Speaker 2: in mind is that where we are in the lending cycle,
19:16
Speaker 2: and you have to have a kind of a view,
19:17
Speaker 2: are we going into tough conditions? Will there be a
19:20
Speaker 2: lot of failures? And you may want to then avoid
19:23
Speaker 2: the sector if you think that there's going to be
19:26
Speaker 2: more and more bankruptcies in Australia and we seem to
19:28
Speaker 2: be reading more and more about them. These high interest
19:31
Speaker 2: rates are biting and inflation has also hurt the business
19:35
Speaker 2: model of a lot of companies. So we could be
19:37
Speaker 2: at the early stage of postponed, forever postponed recession and
19:42
Speaker 2: therefore private lending would not be a good thing. Keep
19:45
Speaker 2: in mind the yields aren't as exciting as you think,
19:49
Speaker 2: and I suspect private lending twenty years ago, done maybe
19:53
Speaker 2: by the Yale Endowment Fund, which created all this envy,
19:56
Speaker 2: maybe gave fifteen to twenty percent returns. But now lending
20:00
Speaker 2: to a property developer on a second mortgage basis might
20:03
Speaker 2: only be a nine, nine or ten percent return. And
20:06
Speaker 2: by the time you pay a one to two percent fee,
20:08
Speaker 2: and then you pay maybe a performance fee on top
20:11
Speaker 2: of some other fee, you may only be seeing yields
20:14
Speaker 2: of around eight percent.
20:15
Speaker 1: Which you can get in some conservative just Frank shares.
20:21
Speaker 2: That's right. You can buy a coal mine that pays
20:23
Speaker 2: that same dividend. You can buy a property trust that
20:25
Speaker 2: pays its same yield, and these are what the academics
20:29
Speaker 2: call asymmetric returns. That's as good as you get. And
20:33
Speaker 2: then the problem is if you don't have a concentrated portfolio,
20:35
Speaker 2: and you know, some individuals like this, some family offices
20:38
Speaker 2: love private lending and they do it themselves, you might
20:41
Speaker 2: get none of your capital back. So the return, yeah,
20:45
Speaker 2: it may it's not for everyone. The liquidity may be overstated,
20:49
Speaker 2: the time of investing may be wrong, so just be
20:53
Speaker 2: careful looking for this shiny new thing. But on the
20:56
Speaker 2: other hand, you know, high yield investing does work over
20:59
Speaker 2: the and some of it is a kind of alternative equity. Well,
21:03
Speaker 2: the first rule is just don't call it a defensive investment.
21:07
Speaker 2: If you were going to invest in private lending, then
21:10
Speaker 2: take the money from your equity portfolio, not your safe
21:13
Speaker 2: money portfolio, not your defensive money. It's not a substitute
21:17
Speaker 2: for your government bond or a corporate bond, or your
21:20
Speaker 2: bank deposit or your term deposit. It really is a
21:23
Speaker 2: substitute for your come wealth bank shares.
21:27
Speaker 1: Okay, give that mind, folks. It's interesting. We had Liam Short,
21:30
Speaker 1: as I said a couple of weeks ago. You can
21:32
Speaker 1: hear that show, and Liam really was all of you,
21:36
Speaker 1: just don't go near it. Doug has a more nuanced view.
21:39
Speaker 1: It's interesting and I lead you to decide which is
21:43
Speaker 1: best for you. You can hear them both. Okay, we'll be
21:46
Speaker 1: back in the moment with some really good questions. Okay, foxing, Hello,
21:58
Speaker 1: welcome back to The Australian's Money Puzzle podcast. James Kirby
22:01
Speaker 1: here with Doug Turek. Now, Doug, a couple of questions.
22:04
Speaker 1: I might read the first, you could read the second,
22:07
Speaker 1: John says, suburb show you've been able the financial literacy
22:11
Speaker 1: of housandes. Thank you very much.
22:12
Speaker 2: John.
22:12
Speaker 1: By the way, the reason I kept the reason I
22:16
Speaker 1: left that line in from John was just in the
22:17
Speaker 1: interest of disclosure. I suppose I should tell the listeners
22:21
Speaker 1: I have I've just recently started the year done on
22:23
Speaker 1: the board of Extra the Financial Literacy Foundation with Chairman
22:28
Speaker 1: Paul Clitherow. And that's just to as an item up disclosure.
22:33
Speaker 1: I should have mentioned that before. Now so that you are,
22:36
Speaker 1: I've it's put it out there. Okay. So John's question,
22:40
Speaker 1: with Goldman Sachs coming out with their twenty percent upside
22:42
Speaker 1: for China stocks in twenty twenty five, perhaps signaling a
22:45
Speaker 1: greater rise in all things China, how does an Australian
22:49
Speaker 1: citizen invest in the battered Chinese property sector? If you
22:58
Speaker 1: really want to do that, how would you do it?
23:01
Speaker 1: And you know, we have to take people like Omen
23:03
Speaker 1: Sacks seriously if they say, you know, what's the most
23:07
Speaker 1: famous investment back if it says this is going to
23:09
Speaker 1: be the year for Chinese equities and they're very hard
23:11
Speaker 1: on Chinese property, but you got to take it on board.
23:12
Speaker 1: What do you think, Doug.
23:13
Speaker 2: Well, I would first of offer some caution about the strategy. Yes,
23:17
Speaker 2: China equities are cheap, but there are many professional investors
23:20
Speaker 2: who considered China uninvestable. And by the way, if you
23:25
Speaker 2: agree with that, and if you agree with that, keep
23:27
Speaker 2: in mind that half the value of investment in a
23:30
Speaker 2: so called diversified emerging market index are like fund is
23:33
Speaker 2: in China and Taiwanese stocks, so you should be also
23:38
Speaker 2: a bit reticent of that. If you agree with regards
23:41
Speaker 2: to Chinese property sector, we can look at that both
23:44
Speaker 2: direct and indirect. I do, funny enough, have a Hong
23:48
Speaker 2: Kong based client who bought up property in Beijing, and
23:52
Speaker 2: confidentially he tells me he's not sure he could ever
23:54
Speaker 2: get his money out if he sold it, so a
23:58
Speaker 2: reminder may be a one way trip for your capital.
24:01
Speaker 2: A quick search tells me that an Australian citizen could
24:04
Speaker 2: buy a property in China only if one they're a
24:07
Speaker 2: resident work presumably working living there. Two they're only allowed
24:10
Speaker 2: to buy residential property, and three they're only allowed one property.
24:14
Speaker 2: So I don't think that's going to help John much.
24:17
Speaker 2: I did have a little look around, and there is
24:20
Speaker 2: a New York Stock Exchange list at ETF called the
24:22
Speaker 2: China Real Estate Fund, and it invests in Chinese companies.
24:26
Speaker 2: And the interesting thing of that it's trading on a
24:29
Speaker 2: pe of four, which is about half what our routs pay,
24:32
Speaker 2: and it's trading seventy three percent off its five year
24:35
Speaker 2: old peak price. So you can buy it for twelve
24:37
Speaker 2: dollars a unit, not sixty dollars a unit. There you are.
24:41
Speaker 1: This is not advice.
24:45
Speaker 2: Whatever.
24:45
Speaker 1: There was a case of information. This is information only,
24:48
Speaker 1: but interesting information. Nonetheless, thank you for that. I'm sorry
24:51
Speaker 1: that was John, Yes, John on China. Okay, Now if
24:54
Speaker 1: you'd like to read the question, which is from David.
24:57
Speaker 2: Yeah, David. The conversation over the past few weeks got
24:59
Speaker 2: me think, despite all the discussion about gold being a
25:02
Speaker 2: buffer in a portfolio, does the psychology of gold investors
25:06
Speaker 2: stop it from being a real buffer? Rather than selling
25:08
Speaker 2: down gold holdings when the markets slump, do gold investors
25:11
Speaker 2: hold on to the gold waiting for the end of
25:13
Speaker 2: the world while selling down all other asset classes. If
25:17
Speaker 2: that's the case, then gold doesn't buffer. It just sits
25:19
Speaker 2: at the bottom of the drawer hoping for armageddon.
25:23
Speaker 1: There you go. Isn't that really interesting? That is such
25:26
Speaker 1: an insight, And we often talked about gold over the years,
25:30
Speaker 1: and no one's ever said that before. It's so true.
25:33
Speaker 1: You know, you have gold, you worry about whatever the markets, inflation,
25:40
Speaker 1: the entire enterprise, the entire global economy and how it
25:43
Speaker 1: stacks up and death, etc. You say, oh, gold, You know,
25:46
Speaker 1: gold is the headge. Gold is the buffer. Gold will
25:48
Speaker 1: do when things go wrong. Gold will see me rise.
25:51
Speaker 1: But then do you sell us? It's probably very unlikely
25:54
Speaker 1: to sell us. In fact, if there was a big
25:57
Speaker 1: share market crash tomorrow, you'd say, oh, I'm I'm so
26:00
Speaker 1: got to have that gold, But would you actually go
26:02
Speaker 1: and sell it there?
26:04
Speaker 2: Well, if that's the case, that's good for David, because
26:07
Speaker 2: you don't want a whole bunch of people selling when
26:09
Speaker 2: there's a crisis. So that would imply gold will hold
26:12
Speaker 2: its value. So David could be a contrarian and indeed
26:14
Speaker 2: sell it. He does mix a few words like the
26:17
Speaker 2: bottom drawer, So if he's talking about physical gold, then
26:21
Speaker 2: my rule of thumb is that's insurance. That's not an investment,
26:24
Speaker 2: and that would sit in your drawer or the custodian's drawer,
26:28
Speaker 2: or you've buried it in the garden. So for sure,
26:30
Speaker 2: that's an insurance against financial armor, GEDD and a breakdown
26:34
Speaker 2: of the system. But as far as gold as an
26:37
Speaker 2: investment asset, look, it is complicated. I'm pretty confident over
26:41
Speaker 2: the long term it will preserve its buying power more
26:43
Speaker 2: than your paper money will. But in a crisis it
26:47
Speaker 2: may or may not go up. There have been If
26:50
Speaker 2: we look back to the last crisis we had in
26:52
Speaker 2: the COVID crisis of twenty twenty, gold did go down
26:56
Speaker 2: initially for about a week or two, and I think
26:58
Speaker 2: that was a lot of selling to buy some cheapen stocks.
27:02
Speaker 2: But then after a while another wave of buyer came
27:04
Speaker 2: in and said, oh, here's all this money printing company,
27:07
Speaker 2: I'd better buy gold. Gold has continued to climb. So, look,
27:11
Speaker 2: gold's a complicated asset. I didn't recommend it or like
27:14
Speaker 2: it for you know, about thirty years of my career,
27:17
Speaker 2: but I started putting it into Climb's portfolio is about
27:19
Speaker 2: five years ago. I think is the investment case for
27:22
Speaker 2: gold is weakened now that bonds are back and yielding
27:25
Speaker 2: and gold isn't. On the other hand, central banks are
27:28
Speaker 2: buying it, so they may know some things we don't.
27:30
Speaker 2: And I am open minded about you owning gold albeit,
27:35
Speaker 2: you know, to be frank, some people own so little
27:38
Speaker 2: it won't make any difference in their portfolio. It's like
27:41
Speaker 2: my friend's quarter strength decaf latte, which the barista calls
27:45
Speaker 2: a why bother.
27:48
Speaker 1: I don't know, Doug. I mean, if you had, you know,
27:51
Speaker 1: if you've got, if you're wiped out, and does you
27:53
Speaker 1: know ten thousand left or one hundred thousand left in gold,
27:56
Speaker 1: then it's one hundred thousand more than nothing, isn't it?
28:00
Speaker 1: So i'd bother. I take you on on that one.
28:04
Speaker 1: All right, hey, great question, Thank you very much, David.
28:07
Speaker 1: Now finally from Dean Appra, the regulator has announced the
28:11
Speaker 1: phasing out of bank hybrid stocks. Yes, indeed, and we
28:14
Speaker 1: have never mentioned it recovered it. I was disappointed to
28:17
Speaker 1: hear this as I've always found bank hybrids such as
28:19
Speaker 1: combank peerls capital loads to be a great source of
28:22
Speaker 1: reliable income with good share price and relative liquidity. I'd
28:27
Speaker 1: love to get your take on why they decided to
28:29
Speaker 1: do this and what alternatives to bank hybrids you might suggest. Okay, Well,
28:35
Speaker 1: the hybrids were always a uniquely Australian thing, you know,
28:39
Speaker 1: because we didn't really have a great evolved bond market
28:43
Speaker 1: as they do in the US, and this strange beast
28:46
Speaker 1: called the hybrids came up, and people, regulators particularly but
28:50
Speaker 1: also sort of academics and finance were very uncomfortable with it.
28:53
Speaker 1: It wasn't the bond, it wasn't the share. It was
28:55
Speaker 1: a bit of a bond. It was a bit of
28:56
Speaker 1: a share. How do you assays it? Et cetera, et cetera.
28:58
Speaker 1: The regulators never knew to do with it. People love them,
29:02
Speaker 1: and through the GFC people went into them again. The
29:06
Speaker 1: majority of hybrids were bank hybrids, and our banks were
29:10
Speaker 1: guaranteed by the government, so really they were by no
29:13
Speaker 1: means a typical. They were a unique product. And in
29:17
Speaker 1: that that they they and in that many people were uncomfortable.
29:20
Speaker 1: Many people in power were uncomfortable about them. So they're going, Doug,
29:24
Speaker 1: What I'd really love to know is your call on it,
29:27
Speaker 1: and what someone like Dean or other people who had
29:30
Speaker 1: those bank hybrids for years and liked them and knew
29:32
Speaker 1: that they were liquid, and knew that they had good returns,
29:36
Speaker 1: and they were maybe perhaps a bit more stable than
29:38
Speaker 1: the equity version of the same thing, CBA being the
29:41
Speaker 1: stock behind it. There, what they might what they might
29:44
Speaker 1: do now.
29:46
Speaker 2: Yeah, well, look, all I can do is agree with
29:48
Speaker 2: your commentary. These were above averaging yielding investment lending investments
29:54
Speaker 2: for below average risk, and there were two reasons for that.
29:57
Speaker 2: One is they were inaccessible to form investors don't get
30:02
Speaker 2: ranking credits back. And secondly, there was an implicit guarantee
30:06
Speaker 2: from the government who would look after mom and dad
30:08
Speaker 2: investors who are the dominant owners. So basically the government
30:11
Speaker 2: doesn't want to be in it. One. I've heard one
30:13
Speaker 2: colleague say this is the same government that didn't like
30:16
Speaker 2: franking credits at a previous election. So either way, they're
30:20
Speaker 2: on the way out. But one thing to remind is
30:23
Speaker 2: they're not going away tomorrow, Dean, And you can still
30:26
Speaker 2: buy hybrids second hand on the share market all the
30:29
Speaker 2: way up to twenty thirty two, so you know, you
30:32
Speaker 2: have six seven years to still enjoy hybrids. They're not
30:36
Speaker 2: trading as profitably before because they've now become scarce and
30:40
Speaker 2: priced up, and also all credit spreads are yielding very tightly,
30:45
Speaker 2: or because we're in this risk risk go for risk
30:48
Speaker 2: phase at the market. But anyway, they're still around and
30:50
Speaker 2: you can still buy them secondhand on the market. But
30:53
Speaker 2: unfortunately when they go away, this fee free holding access
30:57
Speaker 2: to high incomes lendings security will go away, and you'll
31:02
Speaker 2: be forced to do one of two things. You'll have
31:04
Speaker 2: to go to a fund manager who will package up
31:07
Speaker 2: some over the counter diversified bonds. Probably the closest thing
31:11
Speaker 2: to a hybrid is something we call a subordinated note,
31:14
Speaker 2: which the banks already issue today, but they're just not
31:17
Speaker 2: listed on the stock market. So this access through the
31:20
Speaker 2: ASX was quite an interesting thing, and you know, I
31:22
Speaker 2: think the ASX will feel disappointed that it's going to
31:25
Speaker 2: lose all this trading revenue, so we might see the
31:28
Speaker 2: ASX work with the banks and the government to make
31:31
Speaker 2: subordinated bonds listed on the market, which are a little
31:35
Speaker 2: bit safer by definition. So as it's currently structured, you'll
31:39
Speaker 2: have to go to a fund manager and maybe give
31:40
Speaker 2: away zero point two percent of your yield if it's
31:43
Speaker 2: a sort of a rule based index mix, or maybe
31:46
Speaker 2: half a percent of a year if it's through a
31:48
Speaker 2: trading active fund style manager who might easily pay his
31:52
Speaker 2: way by or her way by taking lots of risk.
31:55
Speaker 2: Or you've got to put together your own basket of
31:57
Speaker 2: over the counter bonds and they're are you prompt to
32:02
Speaker 2: get anywhere near the same return. You're going to take
32:04
Speaker 2: a lot of illiquidity risk and credit risk because again
32:07
Speaker 2: the hybrids were above average return for below a average risk.
32:12
Speaker 2: So you'll be buying what are called junk bonds. And
32:14
Speaker 2: I don't think that's good for mom and dad investors.
32:17
Speaker 2: But the government has got out of protecting you.
32:21
Speaker 1: Oh that's interesting, yes, okay, but it's interesting just to
32:25
Speaker 1: feel back there. Your immediate move was to say, too, Dean,
32:30
Speaker 1: you're looking for you're looking for bonds now, because you
32:33
Speaker 1: had a son of a proxy bond. It was an
32:35
Speaker 1: Australian version of a bond, but it was a bond
32:37
Speaker 1: more than it was a share.
32:39
Speaker 2: It was for sure a lending investment. It was the
32:41
Speaker 2: least reliable, the riskiest way to lend money to a bank.
32:46
Speaker 2: So our banks are voracious lenders. They are a factory
32:50
Speaker 2: of mortgages and they get money many different ways, from deposits,
32:54
Speaker 2: from equity, from secured bonds, senior unsecured bonds, support neded bonds,
33:00
Speaker 2: and then these hybrids, which sit at the lowest tier
33:04
Speaker 2: of the risk spectrum, and that's why they paid the most.
33:07
Speaker 2: So they're going away, so you just got to get
33:09
Speaker 2: a different slice of risk. It may be a safer
33:11
Speaker 2: slice of risk. Many years ago I considered that you
33:14
Speaker 2: could build your own hybrid, so you could instead of pearls,
33:18
Speaker 2: which was referenced here, you could put half your money
33:21
Speaker 2: in a CBA share and half your money in a
33:23
Speaker 2: CBA senior secured bond, and you might get about the
33:27
Speaker 2: same return of a hybrid, but probably just a little less.
33:31
Speaker 1: Yeah, right, DII.
33:33
Speaker 2: Hybrid because in theory that you can diy your own hybridsye.
33:37
Speaker 2: If that makes sense.
33:39
Speaker 1: It's in fact, it's entirely feasible, I imagine, and not
33:43
Speaker 1: impossible at all. Not nothing as complicated as trying to
33:46
Speaker 1: build a bond ladder or replication ETA for something. There's
33:49
Speaker 1: only two parts to it, the share in the bond. Okay, terrific.
33:53
Speaker 1: We may leave it there, Doug, thank you very much
33:57
Speaker 1: for being on the show today. Really good to talk
33:59
Speaker 1: to you. Anything you wanted to add there before we
34:02
Speaker 1: wrap No.
34:03
Speaker 2: Just again, it's been a great year to be an investor,
34:06
Speaker 2: but it's also a very important time to be cautious
34:09
Speaker 2: because everything. A lot of things went well last year,
34:12
Speaker 2: and I think it might be some time to take
34:14
Speaker 2: some profits and be very careful.
34:17
Speaker 1: That's interesting. You are about the third person perhaps in
34:21
Speaker 1: six shows say that. I think, folks, we can call
34:25
Speaker 1: that a theme. We can call that a theme safely,
34:29
Speaker 1: all right. That was Doug Turek. Great to have him
34:31
Speaker 1: on the show again. Today's show was produced by Leah
34:33
Speaker 1: Sam mcglue. Thank you Leah and the email. Please keep
34:37
Speaker 1: them rolling the money puzzle at the Australian dot com
34:40
Speaker 1: dot auk You soon
35:00
Speaker 2: At