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Big super cock-ups - Should you switch? · The Money Puzzle

0:10
Speaker 1: Hello and welcome to The Australian's Money Puzzle Podcast. I'm
0:13
Speaker 1: James Kirby, the Wealth Editor at The Australian. Welcome aboard, everybody.
0:18
Speaker 1: For a long time on this show, we have supported
0:22
Speaker 1: big industry super funds and we have said regularly that
0:27
Speaker 1: they perform well and they do over a 10-year period
0:31
Speaker 1: and that they are cheap. That is, the expenses are
0:35
Speaker 1: that they have and what they charge you, the investor,
0:38
Speaker 1: is quite reasonable. Part of that is because they don't
0:40
Speaker 1: have to make a profit. They are not for profit
0:44
Speaker 1: industry funds. But always added the caveat that they're a
0:48
Speaker 1: law unto themselves. They're very big fish in a small pond.
0:51
Speaker 1: They're not particularly answerable to any regulator in particular. They're
0:56
Speaker 1: not particularly answerable to their own investors. And sooner or later,
1:01
Speaker 1: this was going to be trouble. And CBUS, the big
1:05
Speaker 1: industry super fund, really has spoiled the party here. They
1:08
Speaker 1: have about 930,000 members, about 94 billion under assets, big operation,
1:15
Speaker 1: and behave so badly basically behind the scenes in terms
1:19
Speaker 1: of not delivering due payments to death benefits and disability payments,
1:27
Speaker 1: basically to the most vulnerable people and investors in their group.
1:31
Speaker 1: that ASIC had to go as far as taking them
1:34
Speaker 1: to court and suing them for allegations of problems in
1:38
Speaker 1: this area. So this sort of burst the bubble, I think,
1:41
Speaker 1: to a degree on Big Super. And there has been,
1:45
Speaker 1: in and around the same time, a whole string of incidents.
1:49
Speaker 1: CBUS isn't the only one. Unisuper, their site was out
1:52
Speaker 1: for days some months ago where people couldn't see their super,
1:56
Speaker 1: couldn't see what they have. ART. Australian Retirement Trust, which
2:00
Speaker 1: is the second largest super fund in the market, they
2:04
Speaker 1: had delays for days of pensioner payments. And in common
2:09
Speaker 1: with these issues I just mentioned at the other funds,
2:14
Speaker 1: they don't advertise this. They don't tell you about this.
2:17
Speaker 1: They tell you if you're affected. But basically, under the
2:22
Speaker 1: current system, they're able to quietly try and put out
2:25
Speaker 1: these spot fires as they occur. The issue now, of course,
2:29
Speaker 1: is that ASIC has really put this on the table
2:31
Speaker 1: and the ASIC deputy chair, Sarah Court, is saying that
2:35
Speaker 1: there's going to be more action on this. And even
2:37
Speaker 1: as I speak to you today, this morning, literally an
2:41
Speaker 1: hour or so before we started to sit down and
2:43
Speaker 1: record this show, HESTA, the big fund that's traditionally associated
2:47
Speaker 1: with hospital workers and nurses, is also in trouble, can
2:52
Speaker 1: you believe, for an entirely different issue. But it's got
2:56
Speaker 1: to do with their unlisted assets and the degree to
3:00
Speaker 1: which they mark them down and didn't mark them down
3:03
Speaker 1: in a coordinated fashion back at the time of the
3:06
Speaker 1: COVID crisis. So it's really all starting to turn. And
3:10
Speaker 1: I want to look at this and I want to
3:12
Speaker 1: also look at property. Unlisted assets on the investment side,
3:15
Speaker 1: unlisted assets are the big mystery at industry funds. They
3:20
Speaker 1: have been useful to them, but they also are very
3:22
Speaker 1: opaque assets. And it's very hard to get steer on
3:26
Speaker 1: how much they have, how much they're worth, except to
3:28
Speaker 1: say that in commercial property, certainly there's a lot of
3:31
Speaker 1: problems starting to form and CBUS has had big losses
3:34
Speaker 1: there and so have other funds. We'll put it all together.
3:38
Speaker 1: My guest today is James Gerrard of financialadvisor.com.au. Hi, James.
3:42
Speaker 1: How are you? Hi, James. Good.
3:44
Speaker 2: Thanks for having me on.
3:46
Speaker 1: Good to have you on. I can't recall if we
3:48
Speaker 1: spoke on air about industry funds before, but One of
3:52
Speaker 1: the things, we've talked about them, but we haven't talked
3:54
Speaker 1: about what could go wrong. One of the things I
3:57
Speaker 1: noticed that is very clear here in these scandals that
4:02
Speaker 1: are breaking almost weekly on the big super funds is
4:06
Speaker 1: that they used outsourced services. In the case of CBUS,
4:10
Speaker 1: they've tried to turn the blowtorch, if you like, on
4:14
Speaker 1: link market services, which they had used. And I think
4:17
Speaker 1: in In some of the more recent scandals, there's been
4:19
Speaker 1: other service companies like Mercer has been mentioned in passing here.
4:25
Speaker 1: I don't know about you, but I never take, I
4:28
Speaker 1: have no time for a company who blames the outsourced
4:31
Speaker 1: service because they outsourced, right? I don't want to know.
4:36
Speaker 1: I don't care. I don't even want to hear that
4:38
Speaker 1: they outsourced it. It's their problem. I don't know if
4:40
Speaker 1: that's a reasonable response. Do I sound reasonable? It is.
4:45
Speaker 2: I agree with you. I don't think it really matters
4:48
Speaker 2: how you get to the outcome. That's not the super
4:50
Speaker 2: member's concern, whether it's done in-house or it's outsourced. It
4:54
Speaker 2: should be the timeframe and what happens at the end
4:57
Speaker 2: of it. And there should be management there, sort of
5:00
Speaker 2: ensuring these timeframes are met, whether they're in-house or they're outsourced.
5:04
Speaker 2: And it's funny that Link has popped up and said, hey,
5:07
Speaker 2: we do the outsourcing for quite a few super funds
5:10
Speaker 2: on the insurance side. And there's plenty of other customers
5:12
Speaker 2: that we have. They're all meeting their KPIs with regards
5:16
Speaker 2: to processing times. We're just following the instructions that you
5:19
Speaker 2: gave us. And so don't blame us, go blame yourself.
5:23
Speaker 1: Yes, yeah, that's right. So one of the things for listeners,
5:26
Speaker 1: I'm sure many of our listeners have their savings, probably
5:30
Speaker 1: the most important financial dimension of their lives beyond their homes,
5:34
Speaker 1: if they own their homes, is their super. And we're
5:38
Speaker 1: seeing in each of these cases, that there are weaknesses
5:42
Speaker 1: being revealed at super funds, serious weaknesses. Now in the
5:45
Speaker 1: case of CBUS, in case you've missed it, folks, it's
5:47
Speaker 1: worth actually just going through what on earth's going on there.
5:51
Speaker 1: There are, they are facing regulatory inquiry by both APRA,
5:56
Speaker 1: the prudential regulator on questionable expenses. They're also facing an
6:02
Speaker 1: inquiry from APRA on the links and suitability of personnel
6:07
Speaker 1: related to their union appointments through CFMEU. And then they're
6:11
Speaker 1: facing a core case from ASIC about delays to payments.
6:19
Speaker 1: And as a sort of rational financial person, I will say, okay,
6:23
Speaker 1: I don't like any of that. But I look at
6:26
Speaker 1: the 10-year returns for CBUS and they're fine. They're absolutely passable.
6:31
Speaker 1: They're about 8%. And that's about what you'd expect at
6:34
Speaker 1: most of those big funds. So the investment formats to date, James,
6:38
Speaker 1: hasn't been hit. But as an advisor, are you concerned
6:48
Speaker 1: if there's an organization and there's all sorts of problems
6:53
Speaker 1: at the back office, are you concerned that could in
6:57
Speaker 1: some way, or could it interfere with their performance in
7:00
Speaker 1: the front office where they're investing? In other words, could
7:03
Speaker 1: one spoil the other? Could one poison the other?
7:06
Speaker 2: Look, it's a flag or an indicator. You would suspect
7:10
Speaker 2: that the teams are very separate in terms of the
7:13
Speaker 2: investment committee and the investment team versus the back office function,
7:17
Speaker 2: but they're all governed by the same upper management. And
7:21
Speaker 2: so it's a logical conclusion to go, all right, well,
7:23
Speaker 2: if this part's not working, is that a systemic issue
7:26
Speaker 2: with the super fund overall? Do they not have the
7:29
Speaker 2: right management in the board to be able to make
7:32
Speaker 2: these decisions across all different departments? And I think it's
7:35
Speaker 2: a shame overall because I like the competition that industry
7:39
Speaker 2: super funds bring. They hold the retail accounts, super funds
7:42
Speaker 2: accountable and drive competition in the market. And it's a
7:46
Speaker 2: shame to see that these things have come out and
7:49
Speaker 2: that their conduct has been that way because if anything,
7:52
Speaker 2: we want more super funds out there driving down costs
7:54
Speaker 2: and more competition for investors rather than less super funds.
7:58
Speaker 2: But one point I'd make is that industry super funds
8:01
Speaker 2: are still a little bit in the bed with the union.
8:03
Speaker 2: So when you look at the investment committee and the
8:06
Speaker 2: board composition, I'm sort of painting a broad brush here,
8:09
Speaker 2: but for several of the major industry super funds, their
8:12
Speaker 2: management and directors are comprised of something like half of
8:17
Speaker 2: independent directors and half.
8:18
Speaker 1: Linked to unions.
8:20
Speaker 2: And so I sometimes question the, I guess, the governance
8:23
Speaker 2: and the investment expertise that these super funds have, given
8:26
Speaker 2: that And probably this is too strong to say, but
8:28
Speaker 2: it's not like a union junket, but there's definitely union
8:31
Speaker 2: influence there in a lot of the major industry super funds,
8:33
Speaker 2: which I don't particularly like.
8:36
Speaker 1: So what you're bringing up is the credentials, if you like,
8:41
Speaker 1: of these people at the top of the funds. And
8:46
Speaker 1: I see what you're saying, because once upon a time
8:48
Speaker 1: when they were small funds, when there was a few
8:49
Speaker 1: million in them, then maybe perhaps that was to be expected.
8:53
Speaker 1: But now we're talking about gigantic organizations like cbus is
8:57
Speaker 1: 92 billion dollars is everyone on the board across all
9:01
Speaker 1: aspects of that money are they capable of sitting on
9:04
Speaker 1: a board would they be put on another board of
9:06
Speaker 1: another company that was valued at 92 billion there's a
9:09
Speaker 1: question i think it does puts it on the line
9:12
Speaker 1: all right now i want to what i want to
9:13
Speaker 1: do is take a short break and we're going to
9:15
Speaker 1: come back and we're going to look at what if
9:18
Speaker 1: you are facing this situation if you are in these
9:20
Speaker 1: funds what you should be doing Hello and welcome back
9:31
Speaker 1: to the Australian's Money Puzzle podcast. I'm James Kirby talking
9:34
Speaker 1: to James Gerrard. Look, I suppose for most people, James,
9:37
Speaker 1: they see these stories and they say, gosh, I don't
9:40
Speaker 1: like that. I see Unisuper. There was a problem with Unisuper.
9:44
Speaker 1: If I was in Unisuper, I couldn't actually see my
9:46
Speaker 1: super for a while. Or at Art, my payments were
9:49
Speaker 1: delayed for one reason or another. At CBUS, I can
9:53
Speaker 1: hardly keep up with the number of investigations that's going
9:56
Speaker 1: on in this fund. So, what does someone do if
10:00
Speaker 1: they're in one of those funds? Should they switch? And
10:04
Speaker 1: is it a big trouble to switch?
10:07
Speaker 2: I think it's a case of not overreacting in the
10:10
Speaker 2: first instance and not throwing out the baby with the
10:13
Speaker 2: bath water. I think understanding what the issue is with
10:17
Speaker 2: your particular super fund. So I'd encourage people to read
10:21
Speaker 2: James Kirby's articles in the wealth section of The Australian,
10:24
Speaker 2: which covers all of these industry super fund issues.
10:27
Speaker 1: I want to just jump in there about one thing,
10:29
Speaker 1: which I should mention, just to finish off on CBUS,
10:32
Speaker 1: because I didn't quite finish off there. One of the
10:35
Speaker 1: things I did make that point in at the weekend
10:37
Speaker 1: was that Morningstar, the international rating agency, was not able
10:42
Speaker 1: to separate the cultural weaknesses, if you like, in their
10:47
Speaker 1: assessment of CBUS. And specifically, when they were moving to
10:52
Speaker 1: downgrade their parent view of CBUS from average to below average,
10:57
Speaker 1: made the point that they were uncomfortable with the personnel
11:01
Speaker 1: on the board, specifically with the political links. So to
11:04
Speaker 1: that extent, That's a financial agency not remotely interested in politics,
11:09
Speaker 1: which found that they couldn't separate the two. So just
11:14
Speaker 1: coming full circle back to that, I think we have
11:16
Speaker 1: to take it that there is a point at which
11:18
Speaker 1: they cross and there's a point at which one cuts
11:20
Speaker 1: into the other and they're not actually entirely autonomous. So
11:24
Speaker 1: develop what you were saying there about how people should
11:27
Speaker 1: assess this, not to overreact, fair enough, but at what
11:30
Speaker 1: point do you act?
11:32
Speaker 2: So just to finish... Plugging you, so read James in
11:35
Speaker 2: The Australian, and then it's about putting it into context,
11:37
Speaker 2: understanding what's important for you in your super account. And
11:41
Speaker 2: if you have had delayed pension payments once in a
11:45
Speaker 2: 10-year period, you think, okay, that's okay. But if there
11:49
Speaker 2: seems to be more systemic problems and you have the
11:51
Speaker 2: government regulator coming in, you have third-party independent research houses
11:54
Speaker 2: coming in, putting out views, then you start to build
11:57
Speaker 2: a bit of a case for, well, is it worth it?
12:00
Speaker 2: Are there alternatives that don't have the same scrutiny and
12:04
Speaker 2: issues that are with my current fund and would my
12:06
Speaker 2: retirement savings be better being put elsewhere? And then if
12:09
Speaker 2: you make that decision that, yes, okay, I prefer to
12:11
Speaker 2: go to another fund, then the next step is to
12:14
Speaker 2: understand what will that cost you financially to move from
12:18
Speaker 2: one super fund to another super fund. And in answering that,
12:21
Speaker 2: it really depends on what stage you're in. If you're
12:23
Speaker 2: in the accumulation stage, there's potentially a capital gains tax
12:26
Speaker 2: will be triggered when you sell down all of the investments.
12:29
Speaker 2: But then on the other hand, It may not be
12:31
Speaker 2: triggered because most industry super funds are unitized, which continuously
12:36
Speaker 2: calculate capital gains tax. So whatever you have as a
12:39
Speaker 2: balance showing today, that's inclusive of any capital gains tax
12:42
Speaker 2: that's continuously counted. And then it depends also if you're
12:46
Speaker 2: maybe in the pension phase where there's definitely no tax implications.
12:50
Speaker 2: The next thing to consider is time out of the market.
12:53
Speaker 2: It usually takes one to two weeks for the current
12:55
Speaker 2: super fund to sell down your investment. You're in cash.
12:58
Speaker 2: There's a rollover request with the new super account. It'll
13:01
Speaker 2: usually take three to five days to set up your
13:03
Speaker 2: new super account. So under normal commercial timeframes, you might
13:07
Speaker 2: be out of the market from one to three weeks.
13:09
Speaker 2: And if the markets move upwards over that period, you've
13:13
Speaker 2: lost out because you're.
13:14
Speaker 1: Sitting in cash.
13:14
Speaker 2: But conversely, it can work out in your favor if
13:17
Speaker 2: there's a downturn in the market. So that's just a
13:19
Speaker 2: risk which could go for you or against you.
13:22
Speaker 1: And there is one other issue, which is you're probably
13:25
Speaker 1: insured by your super fund. And if you switch... What happens?
13:31
Speaker 2: Do you know? Yeah, no, that's a great question. And
13:35
Speaker 2: some people are unable to get new insurances. So it's
13:39
Speaker 2: of critical importance that we keep their current insurances in place.
13:43
Speaker 2: So some super funds will have takeover clauses where you
13:47
Speaker 2: can port your current insurances over to the new one.
13:50
Speaker 2: But if that doesn't work, it's not offered, too difficult,
13:53
Speaker 2: you've got options. You either look to take out insurance
13:56
Speaker 2: with the new super fund or You can take out
13:58
Speaker 2: independent insurance elsewhere with a retail standalone company and they'll
14:02
Speaker 2: link it to your super fund and request a payment
14:05
Speaker 2: once a year. Alternatively, you can keep a small residual
14:08
Speaker 2: balance in your old super account and you need to
14:11
Speaker 2: contact the super fund because every super fund is different,
14:13
Speaker 2: but it's usually between $ 5, 000 to $ 10, 000 that you'll need
14:16
Speaker 2: to keep as a minimum balance and you'll need to
14:19
Speaker 2: keep the account active by either signing the form every
14:22
Speaker 2: year and a half or putting a contribution in to
14:24
Speaker 2: keep the insurance cover active in the old super fund.
14:27
Speaker 1: Oh, that's interesting. So if you keep a minimum amount in,
14:31
Speaker 1: so you could, let's say a person has 100,000, they
14:34
Speaker 1: could take out 85 and leave 10 or 15 in there,
14:38
Speaker 1: and then that could just tick along. But in doing so,
14:43
Speaker 1: the insurance arrangements would tick along. And if they switch funds,
14:46
Speaker 1: then can they choose not to have insurance with the
14:48
Speaker 1: new fund? They can, yeah.
14:50
Speaker 2: It's part of the application form where they want to
14:52
Speaker 2: opt in or out of the automatic insurances.
14:55
Speaker 1: Right, okay. Okay. That's really interesting. So folks, that's really
14:59
Speaker 1: worth thinking about, that issue. And it's very interesting what
15:02
Speaker 1: James said, that you can switch. If you're in accumulation,
15:05
Speaker 1: that's pre-retirement, right? You can switch and most of the
15:08
Speaker 1: funds unitize as they go. So actually, for once, capital
15:12
Speaker 1: gains isn't an issue. You just slide across from fund
15:14
Speaker 1: number one to fund number two. So the issue might
15:18
Speaker 1: be the older you are, particularly, the more the issue
15:20
Speaker 1: of insurance will come up. Because as you know, as
15:22
Speaker 1: you get older, It costs more to be insured. And
15:25
Speaker 1: if you walk in cold off the street, you're going
15:28
Speaker 1: to pay a lot more than someone who was in
15:29
Speaker 1: an arrangement, an industrial arrangement, if you like, for a
15:33
Speaker 1: decade or two decades. So keep that in mind. And
15:37
Speaker 1: we are not going to stand here, actually, and say
15:39
Speaker 1: roll over from one fund to another. That's not how
15:42
Speaker 1: we operate. But we would ask everyone to consider their
15:45
Speaker 1: own situation and whether they think the fund that they're
15:47
Speaker 1: in is good enough. And it's the same fund that
15:50
Speaker 1: they considered when they joined. And there are people out
15:53
Speaker 1: there already suggesting that people roll over. I would always
15:57
Speaker 1: say there's two sides to that. You know, there's leaving
16:00
Speaker 1: and then there's where do you go? And one of
16:02
Speaker 1: the things that's occurring with these incidents with the super
16:06
Speaker 1: funds is that it's like any of these stories. When
16:11
Speaker 1: the dam bursts, they all come flying through. So if
16:13
Speaker 1: you asked me who's in trouble last week, I would
16:15
Speaker 1: have said Art, UniSuper and CBUS. This week, I have
16:18
Speaker 1: to add Hestac. to that gang. So it's not over yet.
16:22
Speaker 1: We are not quite clear as to who the good
16:25
Speaker 1: guys are and who the bad guys are. And that's
16:27
Speaker 1: only in terms of their management ability. I would call
16:30
Speaker 1: it their non-investment management ability. This is where the issues are.
16:33
Speaker 1: The performance of the funds have run broadly as you
16:39
Speaker 1: would expect them to so far. So we haven't seen
16:42
Speaker 1: any fund infected, if you like, by this incompetence in
16:46
Speaker 1: other parts of the organisation. But there's time for that. Okay,
16:49
Speaker 1: we'll take a short break. Back in a minute. Hello,
17:01
Speaker 1: welcome back to The Australian's Money Puzzle. I'm James Kirby
17:04
Speaker 1: talking to James Gerrard. We're talking, to our surprise really,
17:07
Speaker 1: about a lot of the issues that have emerged in
17:11
Speaker 1: recent days on the big super funds. And I thought, folks,
17:13
Speaker 1: that we really should cover that. I would be remiss
17:16
Speaker 1: of us not to do so. Part of the trouble
17:20
Speaker 1: at the funds, I said that their performance to a
17:23
Speaker 1: large degree is acting as one. By that, I mean
17:26
Speaker 1: there isn't an awful lot of difference in the 10-year
17:28
Speaker 1: timeframe if you look at how the different big funds
17:31
Speaker 1: are performing. And I'm talking here all the time about
17:33
Speaker 1: the industry funds. They dominate. Australian Super, CBUS, Host Plus, Unisuper,
17:38
Speaker 1: you know them. They never stop advertising. I'm sure you're
17:42
Speaker 1: familiar with them. One of the things that has occurred, though,
17:46
Speaker 1: is that On the investment side, the big funds also,
17:50
Speaker 1: the industry funds, one of their merits or certainly one
17:54
Speaker 1: of their advantages had been that they have unlisted assets.
17:58
Speaker 1: That is, they have a large weighting on unlisted assets.
18:01
Speaker 1: Very simply, they are assets that aren't on the share
18:03
Speaker 1: market that you can't go and look up and find
18:06
Speaker 1: out about. And part of that had been in commercial property.
18:10
Speaker 1: The property that operated for the big funds is called ISPT.
18:16
Speaker 1: And it acts as an umbrella group for them. It
18:20
Speaker 1: acts for Australian Super and CBUS and Unisuper, all those
18:23
Speaker 1: names I've just mentioned. They poo their money. And ISPT
18:28
Speaker 1: is their operator in commercial property. And they had a
18:32
Speaker 1: $ 200 million loss last year. They had a $ 1. 5 billion
18:36
Speaker 1: loss this year, which tells you that the big super
18:40
Speaker 1: funds are exposed quite heavily to commercial property. And separately, CBUS,
18:46
Speaker 1: who are so far the worst of the funds in
18:50
Speaker 1: relation to their management issues just now, they have also
18:56
Speaker 1: had a negative return in the last financial year. And
18:59
Speaker 1: though they did 12% over a decade, that's really dropped
19:04
Speaker 1: and it's dropped to only 2%, you see, in the
19:06
Speaker 1: last three years. So you can see that the unlisted
19:10
Speaker 1: asset side of the business for the big super funds
19:12
Speaker 1: is starting to become a problem at the worst possible time,
19:15
Speaker 1: you might say, James.
19:18
Speaker 2: What I observe over time with these unlisted assets is
19:22
Speaker 2: that they're good for a smoothing effect because listed share
19:27
Speaker 2: markets are sometimes very volatile. They go up a lot,
19:30
Speaker 2: they fall a lot, whereas these unlisted assets just tend
19:33
Speaker 2: to chug along and Also, the funds who own them
19:36
Speaker 2: have the advantage of, I guess, a bit of valuation
19:39
Speaker 2: bias or treatment that it's a little bit difficult to
19:43
Speaker 2: value these investments on a daily basis. So sometimes they
19:46
Speaker 2: might only be valued half yearly or yearly, which means
19:49
Speaker 2: that if you have a short shock to share markets,
19:53
Speaker 2: like what we saw when COVID hit and that recovers
19:55
Speaker 2: a few months later, that whole market downturn has been
19:59
Speaker 2: in between the valuation cycle of the unlisted asset. And
20:02
Speaker 2: so its value has been flat throughout that whole period.
20:06
Speaker 1: It stabilizes the ship because it doesn't look as bad
20:08
Speaker 1: because you don't have shares that are falling through the floor.
20:11
Speaker 1: That's part of what happened at Hester, really, isn't it?
20:13
Speaker 1: That's part of the issue that they had to sooner
20:16
Speaker 1: or later sort of adjust their valuations. But their problem
20:21
Speaker 1: was that they did it in stages. And this hasn't
20:25
Speaker 1: been good enough. And this is the problem they've been
20:27
Speaker 1: hit with.
20:29
Speaker 2: That's right. Yeah, it's unfortunate for those Hester members because
20:32
Speaker 2: my understanding from what I saw today was that Hester
20:36
Speaker 2: had to revalue down an unlisted investment and they did
20:40
Speaker 2: so for part of the investment options they had. And
20:42
Speaker 2: then I think some members saw it and go, oh,
20:44
Speaker 2: that went down a lot. I'm going to move over
20:45
Speaker 2: to a different investment option, maybe one that hasn't fallen
20:48
Speaker 2: by as much. So they switched out of the one
20:50
Speaker 2: that had been readjusted to another one, which they thought
20:53
Speaker 2: was more stable, but it just turned out that one
20:55
Speaker 2: hadn't been adjusted yet. So then that one got readjusted
20:58
Speaker 2: a week later. So they got a double hit.
21:01
Speaker 1: Gosh. Yeah. And there is always that thing of arbitrage,
21:05
Speaker 1: but that's the problem, isn't it? Because they're unlisted, the customer,
21:10
Speaker 1: the investor can't possibly know how much their own portfolio
21:15
Speaker 1: is worth. Yeah. And there's a point at which they'll
21:18
Speaker 1: never know because they're unlisted and they won't know till
21:21
Speaker 1: the day they put them for sale, really. Isn't that
21:23
Speaker 1: the ultimate test? That's the thing.
21:25
Speaker 2: Some of these assets are very expensive. We're talking hundreds
21:29
Speaker 2: of millions of dollars type Assets that could be toll roads,
21:32
Speaker 2: that could be airports. And these type of assets, they
21:35
Speaker 2: don't sell every day. So you can have investment specialists
21:38
Speaker 2: and valuers give opinions as to what they're worth. But
21:41
Speaker 2: as you say, you don't really know until you actually
21:43
Speaker 2: sell the asset. So you might be creating this false
21:45
Speaker 2: sense of security by thinking you have this asset, but
21:48
Speaker 2: when you go to liquidate it, there's no one around
21:50
Speaker 2: wanting to pay the price that you thought it was worth.
21:53
Speaker 1: Yes. So I think maybe to be fair to the funds,
21:56
Speaker 1: the big funds and to listeners, the thing about the
21:59
Speaker 1: industry funds is They are more dependent on unlisted assets.
22:03
Speaker 1: And unlisted assets have their advantages in many ways. But
22:07
Speaker 1: beyond a doubt, part of the problem is that you
22:10
Speaker 1: can't fully or as easily understand exactly how much your
22:14
Speaker 1: portfolio in that fund is worth because they can't understand
22:18
Speaker 1: it or they certainly won't reveal it unless they must.
22:21
Speaker 1: And that's an ongoing problem because of their dependency on
22:24
Speaker 1: these unlisted assets, much more so than for-profit funds. traditionally.
22:29
Speaker 1: That is a big difference between the two funds. Okay,
22:31
Speaker 1: really interesting. We're going to stay with this issue now
22:34
Speaker 1: and segue for once, usefully, into a question that relates
22:38
Speaker 1: to the show that we've just been doing. Quite a
22:41
Speaker 1: detailed question. It's from Darek, D-A-R-E-K. I'll try to synopsize
22:47
Speaker 1: it as much as I can. We invested in a
22:50
Speaker 1: privately held subsidiary fund of ASX-listed Centura Capital, called Centura Health.
22:57
Speaker 1: And direct, big time, basically, into this fund. And the
23:02
Speaker 1: units were to generate 6% yield. And they used jointly
23:06
Speaker 1: held self-managed super funds. And of course, the point I
23:09
Speaker 1: should have made in the earlier part of the show
23:11
Speaker 1: is the obvious alternative, if you are unhappy altogether with
23:16
Speaker 1: your industry fund or your big super fund of any
23:18
Speaker 1: description is self-managed super. We will leave that for another
23:23
Speaker 1: day as to how suitable you might be to it.
23:26
Speaker 1: and how much you should have in it. But it
23:28
Speaker 1: is the obvious ultimate sort of alternative to big super
23:31
Speaker 1: is self-managed super funds that anyone can have if they're
23:34
Speaker 1: prepared to put in the time. Now, Derek says, because
23:37
Speaker 1: the initial return of our investment was in line with
23:41
Speaker 1: the company brochure, we increased the investment with two additional payments.
23:45
Speaker 1: Soon after the final payment, the unit prices started declining
23:51
Speaker 1: Then we started losing some money in our investment. Initially,
23:54
Speaker 1: we trusted the fund they would overcome this weakness. We
23:57
Speaker 1: kept our full support in it. Unfortunately, our judgment was
24:01
Speaker 1: wrong and the unit prices continued to decline. In 2024,
24:06
Speaker 1: that's a few months ago, March 2024, we asked for
24:09
Speaker 1: a complete withdrawal of our investment. At that time, we
24:12
Speaker 1: held over and he gives a large number here. dollar number.
24:18
Speaker 1: As soon as the redemption process started the price per
24:20
Speaker 1: unit started plummeting down to 76 cents at the third redemption.
24:25
Speaker 1: Also the number of units in each redemption was ridiculously
24:27
Speaker 1: low that is they were letting them only redeem a
24:30
Speaker 1: small amount I expect at the time. Summarizing the amount
24:33
Speaker 1: of cash received and the current value of the remaining
24:35
Speaker 1: units we've lost 25% of our initial investment. That's a
24:39
Speaker 1: terrible hit on what should have been a steady property.
24:43
Speaker 1: Just to finish Derek says, we thought multi-billion dollar companies
24:47
Speaker 1: such as Centura Capital was to be reputable and trustworthy
24:50
Speaker 1: ASX company, and they couldn't get it wrong. My question is,
24:53
Speaker 1: is there anything that I can do to stop this? Okay.
24:56
Speaker 1: First things first, there's nothing obviously inappropriate in this issue
25:00
Speaker 1: with this property trust or ARETA, as they call them
25:03
Speaker 1: now at Centura. Commercial property has been in the doghouse
25:08
Speaker 1: for some time now. And if a fund is said
25:12
Speaker 1: that they expected things to improve. That could have been
25:14
Speaker 1: a genuine expectation. They all want things to improve. They
25:18
Speaker 1: don't want things to get worse. But the issue is
25:21
Speaker 1: obviously with a fund, when people start selling at the
25:24
Speaker 1: same time and they have redemptions, then they have to
25:27
Speaker 1: manage that very slowly because the money is not there.
25:30
Speaker 1: It's as simple as that. And that happens at most
25:33
Speaker 1: big funds. And though we tell people on the show
25:36
Speaker 1: a million times, this is the issue, it always surprises people.
25:40
Speaker 1: that they can't get all their money out of a
25:42
Speaker 1: big property fund when things go the wrong way. They
25:45
Speaker 1: can't get it out on the day they wish. You've
25:47
Speaker 1: read that fairly closely, James. This is never advice. It's
25:50
Speaker 1: only information, as everyone knows. But if I was sitting
25:52
Speaker 1: opposite you and I said to you, hey, James, I've
25:54
Speaker 1: been in Centura and I can't believe how badly it's gone.
25:57
Speaker 1: I've lost 25%. Is there anything you would say to
26:00
Speaker 1: me that I haven't thought of there?
26:02
Speaker 2: I probably would have started by saying that you should
26:05
Speaker 2: have seen me in 2020 when you first invested and
26:08
Speaker 2: we would have discussed.
26:10
Speaker 1: Yes, I'm sure it would have been wonderful. But I'm
26:12
Speaker 1: talking to you in late 2024 and I'm really pissed
26:15
Speaker 1: off because I've lost 25% on my investment. Is there
26:19
Speaker 1: anything at first glance, as I said, that seems to
26:22
Speaker 1: me very bad luck, bad timing, particularly bad timing?
26:25
Speaker 2: I guess it's important for people to have the right
26:29
Speaker 2: timeframe for these type of investments because even though it's property,
26:33
Speaker 2: it's healthcare related, it's still classified as a growth investment.
26:37
Speaker 2: And so I'd start by saying that you should go
26:39
Speaker 2: into something like this if you have at least a
26:41
Speaker 2: five-year timeframe and it hasn't been five years yet and
26:44
Speaker 2: appreciate they're still behind the initial investment amount by quite
26:48
Speaker 2: a bit, but they should be having at least a
26:50
Speaker 2: five to 10-year timeframe on this type of thing. And
26:52
Speaker 2: then that's because the fortunes of this type of investment
26:57
Speaker 2: really swings from year to year quite dramatically. And so
26:59
Speaker 2: if I use the index, for example, there's a Vanguard
27:02
Speaker 2: ETF VAP, which covers the whole listed property and REIT sector.
27:06
Speaker 2: So it'll have Goodman Group in it, Mervec, Dexus, all
27:08
Speaker 2: these type of companies, over the past 12 months, if
27:11
Speaker 2: you put money in at this time a year ago,
27:13
Speaker 2: you'd be up 40%. But then if you go back
27:16
Speaker 2: 12 months before that and you put money into it,
27:18
Speaker 2: you would have been down 30%. So even though it's property,
27:22
Speaker 2: you think it's all commercial buildings and hospitals, it does
27:25
Speaker 2: swing quite wildly because there's these external factors which impact
27:29
Speaker 2: the value of these investments. And so when it comes
27:31
Speaker 2: to property and these type of property investments, one of
27:34
Speaker 2: the big things that's an external factor in terms of
27:37
Speaker 2: what they're worth is what's happening in the bond market.
27:40
Speaker 2: Because these type of property trusts are seen as what
27:42
Speaker 2: we call in the finance world as a quote-unquote bond proxy.
27:46
Speaker 2: Investors will swing between bonds to generate yield and swing
27:50
Speaker 2: to property trusts at the right time. And what we've
27:53
Speaker 2: seen over the past couple of years is the cash
27:54
Speaker 2: rate go up, bond rates go up, and investors have
27:58
Speaker 2: sold out of these type of property and healthcare trusts.
28:01
Speaker 2: And thus, we're seeing these big drops.
28:03
Speaker 1: This would partly explain the sense you had. Yeah, partly.
28:07
Speaker 2: Yeah, and- I've reviewed and had a look into some
28:10
Speaker 2: of the other healthcare property trusts because our clients own them.
28:14
Speaker 2: So one, for example, is Australian Unity. They have a
28:16
Speaker 2: healthcare trust and that hasn't performed spectacularly over the past
28:20
Speaker 2: recent period. But over the long term, it's done absolutely fine.
28:23
Speaker 2: And so it's been this bond proxy issue, but also
28:26
Speaker 2: there's industry specific issues as well that's caused some headwinds
28:30
Speaker 2: for these type of investments, which in time you'd expect
28:33
Speaker 2: them to resolve themselves. Looking at the long timeframe, things
28:35
Speaker 2: have been fine. But It's a difficult one for Derek
28:39
Speaker 2: as to what to do because I can feel the
28:42
Speaker 2: disdain with this investment and the wanting to get out
28:45
Speaker 2: of it, but on the other hand, not wanting to
28:46
Speaker 2: take a 25% loss there. So, yeah, I can't give
28:51
Speaker 2: the personal advice.
28:52
Speaker 1: Why have they had such a good– the last six months,
28:55
Speaker 1: you say, have been good for this, even though the
28:58
Speaker 1: news has been bad, if you like, about commercial property
29:01
Speaker 1: up until very recently. Why the change in sentiment towards
29:04
Speaker 1: the property trusts of late?
29:06
Speaker 2: Yeah, it's because investors have a crystal ball and they're
29:08
Speaker 2: always looking forward. They're not looking at today at their feet.
29:11
Speaker 2: They're looking down the road and they see that inflation
29:14
Speaker 2: is coming down. America, Europe, places around the world have
29:17
Speaker 2: reduced the cash rate. And so we're seeing the bond
29:20
Speaker 2: rates start to come down. And so ahead of that,
29:23
Speaker 2: the property investments are receiving a lot of money again
29:25
Speaker 2: as people reverse what they did a few years ago.
29:27
Speaker 2: They're now selling out of the bonds and shoveling money
29:30
Speaker 2: back into the property trusts.
29:33
Speaker 1: And they're doing that on the assumption that rates are
29:35
Speaker 1: going to come down.
29:37
Speaker 2: Correct.
29:38
Speaker 1: And they didn't. or didn't allow for the election of
29:41
Speaker 1: Donald Trump in that particular scenario. I don't know about
29:47
Speaker 1: those rates coming down, folks. Sorry. Just a thought. Okay.
29:52
Speaker 1: We'll come back to that one. All right. Final question.
29:54
Speaker 1: Do you like to read it? It's from Andrew. Yeah.
29:57
Speaker 2: Again, it's from Andrew. Andrew asks, Do you think it's
29:59
Speaker 2: time for ComBank to split stock? So stock split, they
30:03
Speaker 2: seem to be very high and which is a detriment
30:06
Speaker 2: compared to other banks in the broader market. And then
30:09
Speaker 2: he also adds that when the last major, when was
30:12
Speaker 2: the last major stock split in the ASX 20 and
30:16
Speaker 2: what happened? Did that have a positive or negative impact
30:18
Speaker 2: on the price? And Andrew says that you can't think
30:20
Speaker 2: of any stock split over the past four years.
30:25
Speaker 1: Okay. Thank you, Andrew. I question one aspect of that question,
30:28
Speaker 1: which is whether ComBank is suffering in any fashion because
30:34
Speaker 1: their stock is worth 150 bucks or thereabouts. And I
30:38
Speaker 1: think certainly in this market of late, there's a wow
30:41
Speaker 1: factor being attached to ComBank and the fact that the
30:45
Speaker 1: stock is 150 bucks. And it almost sort of makes
30:49
Speaker 1: a point about just how good a stock Or just
30:52
Speaker 1: how successful a stock it's been. For what it's worth,
30:55
Speaker 1: you might challenge me on this, James. The only stock
30:57
Speaker 1: split of any serious significance I could have find really
31:00
Speaker 1: was CSL back in 2007. Three for one split. And overseas, Tesla,
31:09
Speaker 1: of course, and Nvidia, I think, more recently. When a
31:14
Speaker 1: company has a stock split, it tends to be they
31:16
Speaker 1: are dizzyingly successful. Warren Buffett famously, of course, did a
31:21
Speaker 1: sort of a kind of a split with the A-class
31:23
Speaker 1: shares and the B-class shares once upon a time, which
31:27
Speaker 1: was a similar thing. So we haven't had one for
31:29
Speaker 1: a long time. I think it's a great notion, Andrew,
31:33
Speaker 1: sometimes a great notion that they could split. There is
31:37
Speaker 1: obviously people who, for some reason, feel better buying two
31:45
Speaker 1: CommBank shares for 75 bucks each rather than one for 150,
31:49
Speaker 1: but actually it makes no difference whatsoever, I think. What
31:53
Speaker 1: do you think, James?
31:54
Speaker 2: Yeah, no, that's absolutely right. And I would pretty much
31:57
Speaker 2: guarantee that if they did a stock split, that the
32:01
Speaker 2: stock split would go up in value because there'd be
32:03
Speaker 2: more perceived value in having the stock at a lower price.
32:07
Speaker 2: But as you say, it makes absolutely no difference. But
32:09
Speaker 2: for the average mom and dad investor, they like a
32:12
Speaker 2: lower price because they're used to investing into things like
32:15
Speaker 2: physical property, and that's very straightforward. the higher the price,
32:18
Speaker 2: the more expensive a property, but it doesn't work the
32:21
Speaker 2: same on the share market. That said, I don't think
32:23
Speaker 2: CBA has too much of an issue. You touched on
32:25
Speaker 2: Berkshire Hathaway, their class A units are over $ 700, 000 per stock.
32:31
Speaker 2: So that's- Each.
32:33
Speaker 1: Yeah. Each.
32:33
Speaker 2: And they do, as you say, have the class B.
32:35
Speaker 1: There's something to worry about, Andrew. Yeah.
32:37
Speaker 2: So yeah, if CBA gets to 700,000, maybe send in
32:40
Speaker 2: another request and then, yeah, that's probably more valid at
32:43
Speaker 2: that stage. But I think at the current price, it's
32:45
Speaker 2: It would be good for perception, but it's not really necessary.
32:49
Speaker 1: It's a fascinating thing that CommBank is sitting there at
32:52
Speaker 1: 150 and all the brokers are saying, sell at 100,
32:55
Speaker 1: sell at 110. It goes to 120, sell, 130, sell.
32:59
Speaker 1: I mean, it's an embarrassment at this stage for them
33:03
Speaker 1: that all the major brokers are saying that this stock
33:07
Speaker 1: is worth roughly $ 100 and the market is saying it's
33:11
Speaker 1: worth $ 150. And that situation has been going on all year.
33:18
Speaker 1: No one knows how it's going to change. But I'll
33:20
Speaker 1: tell you one thing. If I was Matt Common and
33:22
Speaker 1: it started to slide, that might be the time to
33:25
Speaker 1: announce a split. And then you could get the James
33:28
Speaker 1: Gerrard theory that it would just go up anyway because
33:30
Speaker 1: people would think it's cheaper. Though, of course, it isn't cheaper.
33:33
Speaker 1: It's the same price. It's more liquid, though. It is
33:36
Speaker 1: more liquid. And we should explain to everyone that the
33:40
Speaker 1: theory behind the stock split is that At a certain point,
33:43
Speaker 1: stocks that are very successful, where the share price goes
33:46
Speaker 1: absolutely bananas. A liquidity issue does arrive ultimately. And so
33:51
Speaker 1: they do split to bolster liquidity, which is what happened
33:55
Speaker 1: at Tesla and Nvidia. And CSL, once upon a time,
33:59
Speaker 1: there is no risk of them needing to do a
34:02
Speaker 1: stock split at the moment at CSL because they have
34:04
Speaker 1: been sliding and going nowhere, I have to say, for
34:07
Speaker 1: some time. And now with Kennedy Jr. as health minister
34:11
Speaker 1: in the Trump administration, CSO has been sort of fresh
34:15
Speaker 1: because of the fears that he will not be enthusiastic
34:19
Speaker 1: about vaccines. And that's very likely since he never has
34:23
Speaker 1: been all the way till now. Okay, but we're moving
34:26
Speaker 1: slightly off track.
34:27
Speaker 2: Aren't we?
34:28
Speaker 1: We were supposed to be talking about big funds and property. Okay, terrific. Hey, James,
34:32
Speaker 1: thank you very much. That was very interesting. And I
34:34
Speaker 1: think it was a very pragmatic response to the issue
34:38
Speaker 1: at Big Super and the issues that are forming I mean,
34:41
Speaker 1: as we say, the million-dollar question on those big funds, folks,
34:44
Speaker 1: is whether they can quarantine their successful investment performance from
34:49
Speaker 1: the sort of hapless, inept news stories we're seeing on
34:52
Speaker 1: the management side. How long can they keep those two
34:54
Speaker 1: things separate? That's the issue. Okay, we'll be talking to
34:57
Speaker 1: you soon. Thank you, James. Talk to you again.
34:59
Speaker 2: My pleasure.
35:00
Speaker 1: Thanks, James. Thanks very much to Leah Samoglu, who produced
35:05
Speaker 1: today's show. On Thursday, look out for Will Hamilton. on
35:09
Speaker 1: our annual advisors list special that will be on Thursday.
35:13
Speaker 1: And keep the emails rolling at themoneypuzzleattheaustralian.com.au. Talk to you soon.