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Rate cut tipping point for investors · The Money Puzzle

0:12
Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm
0:15
Speaker 1: James Kirkby, Well, the editor at the Australian. Welcome aboard everybody. Well,
0:18
Speaker 1: we finally got the red cut. It turns out, if
0:23
Speaker 1: you look at it closely, it was a line bowl decision.
0:27
Speaker 1: In fact, James Glynn, who writes for the Wall Street
0:29
Speaker 1: Journal in Australia, did a piece this morning, it being
0:33
Speaker 1: a Thursday, twentieth February, and he's really good on this issue.
0:38
Speaker 1: It's his expertise, and the whole piece basically says why
0:42
Speaker 1: did they do it? Like, why did they do it
0:43
Speaker 1: if they didn't believe it? Why did they do it
0:46
Speaker 1: if they spent the entire press conference explaining and warning
0:50
Speaker 1: about the dangers in the economy that were the sort
0:53
Speaker 1: of dangers that wouldn't justify a red cut. So, folks,
0:57
Speaker 1: the only thing I'm saying is, yes, the radcut's here.
0:58
Speaker 1: It's very important the first one or four years, so
1:01
Speaker 1: that is very important. There may be an easying cycle,
1:04
Speaker 1: so as investors we have to be ready and respond
1:06
Speaker 1: to that. But as a preface, I would say, don't
1:11
Speaker 1: take the economists quite so seriously when they say three
1:14
Speaker 1: or four cuts this year that may not occur. It
1:18
Speaker 1: certainly may not occur quickly, so no one knows the future.
1:21
Speaker 1: You keep that in mind before we talk about the
1:23
Speaker 1: issues that are on the table today. To join me
1:27
Speaker 1: is James Girard of Financial Advisor dot com dot you.
1:31
Speaker 1: How are you, James.
1:32
Speaker 2: I'm doing very well, James. Thanks for having me on.
1:34
Speaker 1: Four years since there was a red cut. It's interesting
1:36
Speaker 1: that the thing that strikes me and our listeners know
1:42
Speaker 1: awfully well, don't need to be told. Okay, so the
1:44
Speaker 1: mortgage goes down a bit. If you're borrowing for property,
1:47
Speaker 1: that's good too, or you're on a variable rate. Interesting
1:50
Speaker 1: another dimension is you're borrowing. Capacity as an investor immediately
1:54
Speaker 1: goes up, right. I was reading yesterday for the average
1:55
Speaker 1: Australia on the average wage can borrow twelve thousand more
1:59
Speaker 1: than they could before that cut. So you put that
2:02
Speaker 1: into an investor perspective and people can do more than
2:05
Speaker 1: they could previously. So that's the borrowing side, which is
2:10
Speaker 1: interesting and in many ways obvious. I think what's less obvious,
2:13
Speaker 1: James is the impact across the board for investors who've
2:18
Speaker 1: become quite comfortable. I won't say, complacent, comfortable with the
2:23
Speaker 1: fact that they can get pretty good, like pretty good
2:27
Speaker 1: four to five percent in cash risk free government guaranteed
2:34
Speaker 1: and that now is going to feed and it's going
2:36
Speaker 1: to come up. It's going to create all sorts of
2:38
Speaker 1: other issues for investors, isn't it. Could you explain to
2:40
Speaker 1: people how that kicks in.
2:42
Speaker 2: Yeah, people have enjoyed really high cash rates over the
2:44
Speaker 2: past three to four years, with the official cash rate
2:47
Speaker 2: going from that low of zero point one percent up
2:49
Speaker 2: to four point three five percent, But of course we've
2:52
Speaker 2: reached the peak and we are coming down the other
2:53
Speaker 2: side now. And as you've mentioned, we've had the first
2:56
Speaker 2: rate cut, and who knows how fast and aggressive that
2:59
Speaker 2: will be. It is likely to continue if you believe
3:02
Speaker 2: the share market and the economists at the banks. Now
3:05
Speaker 2: what that means is for the average retirees that they've
3:08
Speaker 2: seen their interest income increase significantly over the past couple
3:12
Speaker 2: of years, but now we're in that reversal phase where
3:15
Speaker 2: they'll start to see less and less interest there. And
3:17
Speaker 2: I've already started to have conversations with concerned clients who're saying, look, James,
3:21
Speaker 2: if interest rates drop by half percent one percent, this year.
3:25
Speaker 2: That's literally thousands of dollars of income that I'm not getting.
3:28
Speaker 2: And so look, the answer is, if you're a cash
3:32
Speaker 2: and defensive investor, you can't really change that. You can't
3:35
Speaker 2: go all right, just because we've had a quarter of
3:37
Speaker 2: a percent rate drop, I'm going to jump into the
3:38
Speaker 2: share market. You just need to adjust to that and
3:42
Speaker 2: just become accepting that this is just part of the cycle.
3:44
Speaker 2: Rates go up and rates come down.
3:46
Speaker 1: Yeah, but it's not just retire is any diversified investor
3:49
Speaker 1: is comforted. I'm comforted by the fact that where once
3:53
Speaker 1: upon a time I had a certain amount in cash,
3:55
Speaker 1: and you always have a certain amount in cash you
3:57
Speaker 1: should have for a variety of reasons, it is quite
4:00
Speaker 1: nice to know that you could get a passable rate
4:04
Speaker 1: on that. But if inflation is three ish and the
4:09
Speaker 1: cash rate is now down, the RBA cash rate is
4:11
Speaker 1: now down to four, you get into the point again
4:13
Speaker 1: where your cash in the bank is maybe not even
4:17
Speaker 1: making money for you if you include inflation. So what
4:20
Speaker 1: I want to ask you is, I imagine a lot of
4:23
Speaker 1: listeners and investors are considering safe. And I put the
4:31
Speaker 1: word safe in what we call and what we call
4:33
Speaker 1: in the trade sneak quotes safe investments, whether there's a
4:38
Speaker 1: similar sounding rate, But the issue is that there's much
4:43
Speaker 1: more risk. So I'm just thinking about what people in
4:47
Speaker 1: this situation might say. They say, Okay, I've got too
4:49
Speaker 1: much in cash. I should have employed that before. Now
4:53
Speaker 1: this really is the trigger. Rates have come down, rates
4:55
Speaker 1: of coming down, so I must get I must move
4:58
Speaker 1: to safe alternative. What traditionally are the safe alternatives, Jeames?
5:03
Speaker 1: And maybe we'd also might mention what's being put in
5:07
Speaker 1: front of people as new alternatives. I'm thinking of private credit, etc.
5:13
Speaker 2: Yeah, So quite simply, we have cash and bond investments
5:17
Speaker 2: on the defensive side of the portfolio. So cash is cash,
5:21
Speaker 2: high interest cash term deposits. We have bonds which are
5:24
Speaker 2: government bonds, corporate bonds, private credit type arrangements as well.
5:29
Speaker 2: And then on the growth side we have property and
5:31
Speaker 2: shares both here and overseas. And as we see the
5:34
Speaker 2: RBA cash rate decrease, we have winners and losers in
5:37
Speaker 2: all of those different types of asset classes. And I
5:39
Speaker 2: like to use the term tipping point, and what I
5:42
Speaker 2: mean by that is that people don't need to do
5:44
Speaker 2: anything today, but there's going to be a tipping point
5:46
Speaker 2: at some stage where they go, Okay, today I'm getting
5:49
Speaker 2: five percent interest on my high interest bank account. I'm
5:52
Speaker 2: happy with that. But then we have another RBA rate
5:54
Speaker 2: cut and another one and that goes down to four
5:56
Speaker 2: and a half and then four percent, and ago have
5:58
Speaker 2: I reached this tip in point where I'm now unhappy
6:01
Speaker 2: with that rate from that highris bank account, and I'm
6:03
Speaker 2: now going to move my money or part of my
6:05
Speaker 2: money into something else. So with regards to what those
6:08
Speaker 2: other investments are, we have on the winner's side property
6:12
Speaker 2: reads on the ASX, they're generally portfolios of commercial property
6:18
Speaker 2: assets and you get rental income from that being a
6:20
Speaker 2: part owner of that portfolio. Now, they are a beneficiary
6:24
Speaker 2: of falling cash rates because these property trusts generally borrow
6:27
Speaker 2: money to buy these commercial properties. Somewhere between thirty to
6:30
Speaker 2: fifty percent of the value is funded by debt. And
6:33
Speaker 2: also the way that these property trusts are valued are
6:36
Speaker 2: using a discount of cash flow method. The lower the
6:38
Speaker 2: cash rate, quite simply, the higher the evaluation on these properties.
6:42
Speaker 2: And so we should see rising values rise in returns
6:45
Speaker 2: on these type of property assets. And although they're not
6:48
Speaker 2: capital secure, they're not guaranteed by the government, like bank
6:50
Speaker 2: accounts half of two hundred and fifty thousand. There will
6:53
Speaker 2: be this tipping point where people go, I'm willing to
6:55
Speaker 2: take that additional risk to jump into these property reads
6:58
Speaker 2: or otherwise high even in bank shares, because I just
7:02
Speaker 2: can't do if this's fall in cash right anymore, or
7:04
Speaker 2: my cash term deposits and bonds.
7:06
Speaker 1: Very simple. Good idea there, James, and very appropriate, I imagine
7:12
Speaker 1: for some people the issue of property trusts, so folks,
7:17
Speaker 1: as James is saying there, they have always been a
7:21
Speaker 1: alternative because we don't really have a bond market per se,
7:25
Speaker 1: and the way they have a bond market in the US,
7:28
Speaker 1: so we have these proxies that act as defacto bonds
7:32
Speaker 1: for local investors. In Australia, generally people aren't using bonds.
7:35
Speaker 1: They're using things like property trusts, franked bank shares and
7:40
Speaker 1: traditionally hybrids which are CRUs fading away. Will come to
7:42
Speaker 1: that in a moment. It's interesting, James, just proving your point.
7:46
Speaker 1: The biggest property trust in Australia, goodman, boy, can they
7:49
Speaker 1: time their moves. It's a brilliant company and everyone knows
7:52
Speaker 1: that it's quite obvious. It's leagues ahead, it's Combank versus
7:55
Speaker 1: the banks, Goodman versus the rest of the property trust.
7:57
Speaker 1: But it launched an enormous equity issue this week and
8:04
Speaker 1: then there was a redcut straight into it. It was
8:06
Speaker 1: like just perfectly timed. Okay, So there's property trust. Not
8:10
Speaker 1: everyone likes them, of course, and they're on franked worth
8:13
Speaker 1: mentioning that they're not dividends para se, they are distributions.
8:18
Speaker 1: What else might someone consider if they were looking around.
8:23
Speaker 2: Long duration bonds? And duration is a technical term for
8:28
Speaker 2: how long will this investment continue to pay interest before
8:32
Speaker 2: it matures? And using simple economics, if the cash rates
8:36
Speaker 2: likely to keep going down, the common sense thing to
8:39
Speaker 2: do would be to try and lock in the current
8:41
Speaker 2: high interest rates for as long as possible. Now, you
8:44
Speaker 2: can't do that with a high interests bank account because
8:46
Speaker 2: they're at call their variable interest rates, and as we
8:49
Speaker 2: see every RBA REATECUD, you'll see a reduction in the
8:52
Speaker 2: interest on your online high interests bank account. Turn deposits.
8:55
Speaker 2: On the other hand, you can get turned the posits
8:57
Speaker 2: up to five years and they're they're locked in interest
9:02
Speaker 2: for that whole period. So for people wanting to go, Okay,
9:05
Speaker 2: I want to lock in this interest rate, and I'm
9:06
Speaker 2: happy to lose access to that capital. Longer term deposits,
9:10
Speaker 2: longer term bonds are an option to consider. But of course,
9:14
Speaker 2: with the pricing of the term deposits, the banks have
9:16
Speaker 2: already thought forward. They have a whole team of ractuaries
9:18
Speaker 2: and economists who are didn't want the cash.
9:20
Speaker 1: Rate they've got already, haven't they.
9:22
Speaker 2: No, that's right. Yeah, So like a five year term
9:24
Speaker 2: deposit with a major bank is around three to three
9:26
Speaker 2: and a half percent, whereas a twelve month turn deposit
9:29
Speaker 2: is around four and a half percent at the moment,
9:31
Speaker 2: So the banks have already they're thinking there's going to
9:34
Speaker 2: be about a one percent rate cut or so over
9:36
Speaker 2: the next five years.
9:37
Speaker 1: You know, it's interesting, isn't it. Money talks. That's what
9:40
Speaker 1: I listened to. You know, take that rather than listening
9:44
Speaker 1: to economists or futurists or anybody else who wants to
9:48
Speaker 1: take a bet on where rates are going, Just watch
9:51
Speaker 1: what the banks are doing, folks. That's the real money.
9:53
Speaker 1: They're betting with their own money, and they're saying that
9:56
Speaker 1: they are of the opinion that rates will come down
9:58
Speaker 1: whatever above the pace two which to come down. So
10:01
Speaker 1: what would be if I was trying to find a
10:04
Speaker 1: term deposit, what should I be looking for four percent more?
10:11
Speaker 1: Is that still feasible?
10:13
Speaker 2: It is still feasible. It just depends on the term.
10:17
Speaker 2: It seems that one to two years is a sweet spot.
10:19
Speaker 2: At the moment they're still offering relatively good rates of interest.
10:23
Speaker 2: But beyond two years, between two to five years, the
10:26
Speaker 2: interest rates are drop in because the banks are taken
10:28
Speaker 2: into account the more normalized RBA cash rate going to
10:32
Speaker 2: that sort of that one percent lower than what we
10:34
Speaker 2: have today. So also, just with noting the guarantee on deposits,
10:40
Speaker 2: that two hundred and fifty thousand dollars is still in place.
10:42
Speaker 2: So that's a good thing to do when for people
10:44
Speaker 2: who've downsized house and they have all this money in
10:48
Speaker 2: their bank account. Although it's administratively a hassle to do,
10:52
Speaker 2: but it is prudent to split your accounts into two
10:55
Speaker 2: hundred and fifty thousand dollars lots to pick up that
10:57
Speaker 2: effectively guaranteed money from the federal government.
11:00
Speaker 1: Yeah, so just to revise on that, folks, As James says,
11:02
Speaker 1: it's not just effective, it's explicit thanks to the GFC
11:07
Speaker 1: all approved the positive taking institutions, not just banks, eighty
11:11
Speaker 1: eyes two hundred and fifty thousand per person per bank. Hey,
11:15
Speaker 1: on the unlikely event, anyway that a bank would topple over,
11:18
Speaker 1: and that the government would allow them to do that
11:21
Speaker 1: in our economy to be super safe, if you had
11:24
Speaker 1: five hundred thousand, you'd put two fifty in each bank.
11:26
Speaker 1: That's what you're driving at, James.
11:29
Speaker 2: That's it.
11:29
Speaker 1: Yes, And really this is the thing I suppose this
11:32
Speaker 1: is the hard part of rates going down, folks, that
11:35
Speaker 1: nothing is as safe as risk free money, and in
11:40
Speaker 1: our particular economy it is government guaranteed. So that's the
11:44
Speaker 1: hard part of rates going down, which perhaps is underplayed
11:47
Speaker 1: when there's so much attention to mortgages. But as someone
11:51
Speaker 1: was making the point, the mortgagees get such a they
11:53
Speaker 1: get a huge amount of attention, but not everybody has
11:56
Speaker 1: a mortgage. Okay, we'll take a short break back at
11:58
Speaker 1: the moment. Hello, Welcome back to The Australian's Money Puzzle podcast.
12:09
Speaker 1: James Kirby here with James Gerard. Now, I was just
12:12
Speaker 1: thinking that was interesting about alternatives bonds, property trusts. We
12:19
Speaker 1: should say bank shares high dividend frank Bank shares, which
12:23
Speaker 1: are traditionally the other traditional options. Now interestingly, I was
12:28
Speaker 1: talking about how things can play in your favor and
12:31
Speaker 1: how the good Man Group launched a huge cash raising
12:35
Speaker 1: beautifully timed in the same week that the RBA cut rates,
12:40
Speaker 1: which basically advertises the fact that properly trusts will will
12:43
Speaker 1: have the win behind them in a very similar vein.
12:47
Speaker 1: There is a huge push at the moment and I'm
12:49
Speaker 1: getting it's interesting, folks, I'm not kidding. I'm getting every
12:53
Speaker 1: single day, if not every few hours, I'm being asked
12:58
Speaker 1: to meet or talk or come to visit or have
13:02
Speaker 1: someone on the show who's pushing private credit, private investing
13:07
Speaker 1: generally private private equity too, but private credit. And we've
13:12
Speaker 1: had people on the show saying watch out, like Liam
13:15
Speaker 1: Short was on the show if you recall a few
13:17
Speaker 1: weeks ago from the Sonas Group, and he was on
13:20
Speaker 1: ambiguous really he said basically sidesteppitt. I wouldn't go so
13:24
Speaker 1: far as to say that, but it's worth knowing that
13:29
Speaker 1: the conditions are now absolutely perfect for these promoters. Private
13:34
Speaker 1: credit being the alternative to banks, where there are the
13:38
Speaker 1: providers of credit who in turn provide income opportunities to
13:43
Speaker 1: retail investors. This was all restricted to the high end
13:47
Speaker 1: of town and very rich people basically until very recently. Suddenly,
13:51
Speaker 1: James were just flooded with it. I imagine you're flooded with it,
13:56
Speaker 1: are you. I went to a lunch on Tuesday Wednesday.
13:59
Speaker 1: There was like one hundred advisors and there they were
14:01
Speaker 1: just siteing there being briefed by this guy on this
14:03
Speaker 1: whole scene, and I just wonder. I got the impression
14:06
Speaker 1: that was entirely new to them from the questions that
14:09
Speaker 1: were coming up. Are you being flooded with this wave
14:13
Speaker 1: of private credit promotion? For the want of a better.
14:16
Speaker 2: Word, most definitely, it's a good time for that particular
14:20
Speaker 2: type of investment because they can play off the story
14:22
Speaker 2: that you're going to lose interest on your cash and
14:25
Speaker 2: your bonds. Let's take a comparable, slightly more risk, but
14:29
Speaker 2: let's go to private credit so you can maintain the
14:32
Speaker 2: income that you'll get in today in the face of
14:34
Speaker 2: these fall in cash rights.
14:35
Speaker 1: So as if I come in to you and I say, hey, James,
14:38
Speaker 1: I just heard about this thing private credit. I've always
14:40
Speaker 1: had my money in the bank, they say they're better.
14:43
Speaker 1: They say their returns are super they say their track
14:46
Speaker 1: record is fantastic. They say the banks are withdrawing. This
14:52
Speaker 1: is their crucier line, that the banks as we know
14:55
Speaker 1: them are withdrawing from the financing of business or many
14:58
Speaker 1: businesses as we know it. What's your a hunch on this?
15:01
Speaker 1: Is it like flavor of the month? Is it all
15:04
Speaker 1: going to end in teers or is it a structural
15:06
Speaker 1: change where this becomes an active asset class for retail
15:10
Speaker 1: investors From here on.
15:13
Speaker 2: It is a worthy investment asset class. But there's a
15:16
Speaker 2: real large amount of I can't say the words that
15:22
Speaker 2: needs to be done with it. And my response would be,
15:25
Speaker 2: do you remember companies like Australian Capital Reserve back in
15:28
Speaker 2: twenty eight two thousand and nine who advertised in newspaper TVs, Hey,
15:32
Speaker 2: we're safe as term deposits. We're going to get you
15:34
Speaker 2: ten percent return. Now, I'm not saying private credit is
15:39
Speaker 2: the same, but I'm saying that it's not as simple
15:42
Speaker 2: as what it seems. And the potential risks that the
15:44
Speaker 2: investor are taking can be relatively small or they can
15:48
Speaker 2: be extremely large. But in my twenty years of finance,
15:51
Speaker 2: I've learned that a lot of promoters of investments will
15:54
Speaker 2: use smoke and mirrors and fancy brochures to hide the
15:57
Speaker 2: true risk that that investment has. That's very easy to
16:01
Speaker 2: do with private credit because it sounds nice and sexy
16:04
Speaker 2: and it can provide a good return. But the average
16:07
Speaker 2: moment dad investor typically doesn't drill down. So if you
16:09
Speaker 2: ask the average moment dad investor, why do you like this,
16:12
Speaker 2: what's your risk? What's the exposure? They won't have an
16:15
Speaker 2: idea other than oh, they told us it was a
16:17
Speaker 2: safe thing.
16:17
Speaker 1: They like the headline number, and who wouldn't. That's right,
16:20
Speaker 1: it's the little asterix you got to watch. There's that
16:23
Speaker 1: little asterix beside the number yeah, which goes into the
16:25
Speaker 1: fine print, which says this is hell of a lot rescuer.
16:28
Speaker 1: Then you might think this could be collateralized. This could
16:32
Speaker 1: expose you to all sorts of risks that you have
16:36
Speaker 1: previously had no exposure towards. And crucially, going back to
16:41
Speaker 1: what we were saying at the start of the show,
16:44
Speaker 1: the approved deposit taking institution deposit cash deposits that we
16:51
Speaker 1: know and maybe less attractive than they were, our government guaranteed,
16:56
Speaker 1: and this stuff has no guarantee whatsoever. And if it
16:58
Speaker 1: says it's guaranteed, it's just guaranteed by the promoter. The
17:03
Speaker 1: guarantee is only as good as the promoter, which means
17:06
Speaker 1: damn all really sometimes very much true in the historical
17:11
Speaker 1: chakras that we've had in the past in this area. So,
17:13
Speaker 1: but you say it's worthy, how might I approach it?
17:17
Speaker 1: What would I be? What's the key things I should
17:19
Speaker 1: be looking for? If I've got three private credit opportunities
17:22
Speaker 1: in front of me, or my advisor has put that
17:24
Speaker 1: in front of me, or I've got three advertisements and
17:26
Speaker 1: they all look good, how do I begin to select
17:30
Speaker 1: one from the other.
17:33
Speaker 2: Having three private credit investments all in front of you,
17:37
Speaker 2: they could look very similar on the surface, they have
17:40
Speaker 2: a similar return profile. However, you need to understand what
17:45
Speaker 2: is happening with your money. If you give your hard
17:47
Speaker 2: earned money to this particular fund manager or investment structure,
17:51
Speaker 2: what's it being useful and how are they using that
17:53
Speaker 2: to then provide you with a seven to ten percent
17:56
Speaker 2: income every year from that. So on one end of
17:59
Speaker 2: the spectrum, you may have private credit which has been
18:01
Speaker 2: lent to ASEX listed companies who are expanding and acquiring
18:05
Speaker 2: other companies, and that's a lower risk activity because the
18:09
Speaker 2: ASX listed companies who are the borrowers of this private credit,
18:12
Speaker 2: they're good credit worthy companies. On the whole, you have
18:16
Speaker 2: to drill down, but on the whole it's an listed
18:19
Speaker 2: company borrowing money is safer than a startup company who's
18:23
Speaker 2: running at a loss and need private credit to survive,
18:26
Speaker 2: and if they don't get that, they're going to implode
18:29
Speaker 2: and shut down. So that could actually be what the
18:31
Speaker 2: private credit is being used for Fund number two. So
18:34
Speaker 2: again on the surface, they look very similar. They're both
18:36
Speaker 2: given you ten percent return, but one is quote on
18:38
Speaker 2: a relative sense, safer and the other one is extremely
18:41
Speaker 2: high risk. So the answer there is just really doing
18:44
Speaker 2: your due diligence and not putting the scent of your
18:46
Speaker 2: money into it unless you can tell someone else what
18:49
Speaker 2: this is and explain it to them what the risks
18:51
Speaker 2: and the potential returns are very good.
18:54
Speaker 1: And one other thing, perhaps James, which a number of
18:57
Speaker 1: people have mentioned, is track record. There's two funds. One
19:02
Speaker 1: is from a fund manager who's in this business for
19:04
Speaker 1: twenty years. They've got track record, and the other is
19:09
Speaker 1: from a fund that's having a go never did it before.
19:14
Speaker 1: Keep that in mind. It's a very useful distinguishing differentiator. Okay,
19:18
Speaker 1: we have some great questions. I want to move on
19:20
Speaker 1: to them straight away. We'll be back in a moment. Hello,
19:30
Speaker 1: Welcome back to The Australian's Money Puzzle. James Kirby here
19:33
Speaker 1: with James Girard. Now, can you see the questions on
19:37
Speaker 1: the screen. Yes, would you like to read the first
19:39
Speaker 1: one from Paul sure Thing? Paul asks, given the banks
19:43
Speaker 1: a ceasing issuance of hybrid securities and existing ones will
19:47
Speaker 1: mature in coming years, what impact will this have on
19:49
Speaker 1: hybrid ETFs? Yeah, very great, great question, Paul, thank you.
19:54
Speaker 1: That's ETFs that package Australian hybrids together. Is that what
19:57
Speaker 1: he means?
19:58
Speaker 2: That's right? Yeah, there's one or two of them out
20:00
Speaker 2: there that I can recall.
20:02
Speaker 1: So what happens to them? They slowly fade away?
20:05
Speaker 2: Yeah, I think the ATIF managers will probably rebrand them
20:08
Speaker 2: and expand the mandate to say this isn't just hybrid securities.
20:12
Speaker 2: This will now be private credit or other things like that.
20:15
Speaker 1: Yeah, they won't be sending the money back, they won't
20:19
Speaker 1: be saying oh listen, hey, listen to you what, we'll
20:21
Speaker 1: give you the money back, because yeah, no, they don't
20:23
Speaker 1: do that. I imagine you're one hundred percent right there,
20:25
Speaker 1: James Paul. Watch for the note from your hybrid ETF
20:30
Speaker 1: to tell you that they've got some new ideas and
20:32
Speaker 1: welcome to their new plans. Because whatever else they're going
20:35
Speaker 1: to do, and we don't know what it is, it'll
20:37
Speaker 1: be something broadly similar where they're offering income from the markets,
20:41
Speaker 1: from the investment markets, but they won't be giving you
20:44
Speaker 1: the money back. They never do that. Okay, More broadly
20:48
Speaker 1: on hybrids, we could come back to that another time.
20:52
Speaker 1: They've been phased out right. Sophisticated investors could play various
20:55
Speaker 1: arbitrage games on those hybrids, couldn't they. But for most
20:58
Speaker 1: people most of the time, that particular era is over,
21:02
Speaker 1: and they were very popular with people. Things like the
21:05
Speaker 1: Pearls series from CommBank were very popular. They were a
21:09
Speaker 1: funny sort of a beast. They were hybrid half equity,
21:12
Speaker 1: half bond, and for some reason the regulator launched them,
21:15
Speaker 1: and for some reason the regulator sorry signed them off
21:20
Speaker 1: maybe fifteen twenty years ago, and for some reason they
21:23
Speaker 1: lost heart and closed them down. More recently, Okay, I'm
21:27
Speaker 1: going to put two questions together here because they're both
21:29
Speaker 1: on Super Once. It's from Sandy Sandy says James Kirby.
21:32
Speaker 1: I like the piece you did on sorting out the supersystem.
21:35
Speaker 1: The only area this is from the Australian a few
21:38
Speaker 1: weeks ago. The only area that I find debatable is
21:41
Speaker 1: that Super is biased against young people. This is interesting.
21:44
Speaker 1: Listen to this. Clearly pension mode being tax three is
21:47
Speaker 1: a bonus. However, you failed to mention that a young
21:49
Speaker 1: person today, if they started a job in twenty twenty five,
21:53
Speaker 1: would be paid twelve percent. Paige Sandy saying paid twelve percent.
22:00
Speaker 1: The technical reality here is that twelve percent comes under
22:03
Speaker 1: the Supernovation guarantee. That is, twelve percent must go into Super.
22:07
Speaker 1: Sandy says, when Superinnovation started it was just three percent.
22:11
Speaker 1: It was a good twelve years before it became a
22:13
Speaker 1: reasonable payment. That might explain why the average worker has
22:16
Speaker 1: a relatively low balance. Yes, it all comes down to
22:18
Speaker 1: the debate about whose money it is, Sandy. I'm of
22:21
Speaker 1: the opinion that it's my money, and if News Corporation
22:25
Speaker 1: must to put twelve percent of my package into Super
22:28
Speaker 1: and must do so, by law. That's fine, but it's mine.
22:32
Speaker 1: And I'm also of the opinion that they didn't have
22:34
Speaker 1: to put it into SUPER. I'd get it in another form.
22:38
Speaker 1: I wouldn't have written it if I didn't think so.
22:40
Speaker 1: I still think it's the case that it's biased against
22:43
Speaker 1: young people. But just to zone in on that, what
22:45
Speaker 1: I really mean about that is that all the benefits
22:47
Speaker 1: are when you're retired, and there's really very few benefits
22:52
Speaker 1: in accumulation. And I think the amount you can put
22:54
Speaker 1: in on a concessional basis is much, much too small,
22:57
Speaker 1: considering you can have two million head tax free and super.
23:02
Speaker 1: The amount that you can put in per year when
23:04
Speaker 1: you're working and building your SUPER is tiny on a
23:07
Speaker 1: concessional basis. Okay, but thank you, Shendy Luke, wonderful podcast.
23:12
Speaker 1: Thank you. A key actuarial firm has suggested a flat
23:15
Speaker 1: ten percent tax on SUPER at all life stages. This
23:18
Speaker 1: seems unfair to all those who have paid fifteen percent
23:21
Speaker 1: since SUPER became compulsory in the nineteen nineties. Okay, Luke,
23:25
Speaker 1: it wasn't a firm, actually, it was the Actuaries Institute
23:29
Speaker 1: who met the remarkably what would you say, provocative posal
23:32
Speaker 1: a ten percent flat tax on super at whatever age
23:35
Speaker 1: you were, so that you wouldn't be getting these different
23:38
Speaker 1: tiers at different ages and different amounts. That would be
23:42
Speaker 1: something that would make it fairer to younger people and
23:46
Speaker 1: would rebalance the system not so much in favor of
23:48
Speaker 1: older people. I think for that alone, I thought it
23:51
Speaker 1: was pretty good anything to add to all that. JG.
23:57
Speaker 2: You know, there's always going to be winners and losers
23:58
Speaker 2: when government changes to super legislation and where their grandfather things.
24:02
Speaker 2: It just makes the whole system more complicated. But I'd
24:06
Speaker 2: probably say that it's not going to happen. We're not
24:08
Speaker 2: going to see ten percent tax on all life stages
24:10
Speaker 2: in SUPER. A government that introduces that will be the
24:12
Speaker 2: opposition after the next election.
24:16
Speaker 1: The opposition after the next election. But then they're not
24:20
Speaker 1: the government the opposition after the next election. Do you
24:23
Speaker 1: mean it would be an opposition policy?
24:25
Speaker 2: Is just saying I'm saying that retirees will vote and
24:29
Speaker 2: kick them out of government because the gray nomads are
24:31
Speaker 2: not going to be happy with having a ten percent
24:34
Speaker 2: tax retrospectively applied to their current tax supersediens.
24:38
Speaker 1: No, but I don't It would probably not be anyway,
24:41
Speaker 1: But it is such theoretical stuff that I think we'll
24:43
Speaker 1: just put it to one side.
24:45
Speaker 2: Roland, all right, rolling here we go. I'm a customer
24:48
Speaker 2: of a bank which was formerly a credit union. As such,
24:51
Speaker 2: the customers are the owners, with one share each, probably
24:54
Speaker 2: about thirty to forty thousand shareholders. What is the likelihood
24:57
Speaker 2: of these types of institutions being bought by bigger banks
25:00
Speaker 2: and me receiving my share of the proceeds all of
25:04
Speaker 2: all the banks listing as a public company similar to
25:07
Speaker 2: AMP demutualization. There are quite a few ex credit unions about,
25:11
Speaker 2: and I would assume that it would be a way
25:13
Speaker 2: for the big banks to expand their banks without upsetting
25:16
Speaker 2: the a triple C.
25:17
Speaker 1: The golden age of demutualization is more or less past
25:21
Speaker 1: us ruland because they demutualized just about everything at one stage,
25:26
Speaker 1: and all those big AMP being a classic example, of course,
25:29
Speaker 1: and iag a lot of the stuff in there was demutualized.
25:34
Speaker 1: And all the building sized societies, of course dem mutualized
25:37
Speaker 1: and became little banking stocks and then were mapped up
25:40
Speaker 1: by the big banks. So yes, it is possible that
25:43
Speaker 1: some of them may come through that system. Seems to
25:46
Speaker 1: have become much more difficult the sort of it seems
25:49
Speaker 1: to me like the stuff that was going to be
25:50
Speaker 1: demutualized is demutualized, and it came to a grinding holt.
25:54
Speaker 1: I don't think it was any regulatory reason why it
25:56
Speaker 1: came to a grinding holt, but it did, and there
25:58
Speaker 1: was a bit of a backlash. I think something like,
26:00
Speaker 1: for instance, where there was enormous value builtable over hundreds
26:03
Speaker 1: of years and put on the market and frittered away
26:06
Speaker 1: very quickly. Not impossible, Roland, but I think unlikely because
26:12
Speaker 1: also the brand, if you like, of the credit union,
26:16
Speaker 1: just like the brand of other remaining mutuals, is at
26:21
Speaker 1: heart that they're not listed, that they are mutualized. Is
26:25
Speaker 1: there attractions so to that extent, they would chuck that
26:29
Speaker 1: core attraction if they went and demutualized and try to list.
26:33
Speaker 1: What do you think, James, I agree with that. Yeah.
26:36
Speaker 2: Part of that appeal of using the credit union is
26:39
Speaker 2: that independence and that sort of for the customer type approach,
26:42
Speaker 2: and where it gets swat up by a big bank,
26:44
Speaker 2: you're going to have a lot of unhappy credit union
26:47
Speaker 2: customers looking for other credit unions to move to. And
26:50
Speaker 2: also credit unions generally have lower profit margins than big banks,
26:55
Speaker 2: and so for a big bank to acquire credit union,
26:57
Speaker 2: it's not really a very profitable exercise because they're buying
27:01
Speaker 2: a less profitable business. And also the gross strategy is
27:03
Speaker 2: quite low. They're not going to expand that thirty or
27:06
Speaker 2: forty thousand shareholder base or customer base to one hundred
27:09
Speaker 2: two hundred thousand dollars. So that's why we haven't seen
27:11
Speaker 2: the big banks at quite credit unions.
27:13
Speaker 1: That's the answer, isn't it really? There? You are ruland
27:17
Speaker 1: so you might be lucky, but it's unlikely I would imagine. Okay, David,
27:22
Speaker 1: final question, could you please ask an appropriate guest that's you, James,
27:27
Speaker 1: how much extra should Australian investors pay up for Australian
27:31
Speaker 1: shares for US as international shares for the benefits of franking? Ah? Gee?
27:35
Speaker 1: How long have you got? Could do a thesis on that?
27:37
Speaker 1: Couldn't you? Really? What are the benefits of franking? I've
27:41
Speaker 1: been facetious here. The Australian American chairs have beaten the
27:44
Speaker 1: hell out of Australian shares a year after year, which
27:46
Speaker 1: which suggests franking. There was useful, especially if you're retired.
27:50
Speaker 1: Doesn't exactly set the market on fire, does it. Yeah.
27:55
Speaker 2: I think that's a true sentiment, and I probably don't
27:57
Speaker 2: agree with the premise of the question around how much
27:59
Speaker 2: extra should I pay for Australian shares. I think it
28:01
Speaker 2: really comes down to preference. If you look over a
28:04
Speaker 2: thirty year period, US shares have done better on a
28:07
Speaker 2: capital growth perspective than Australian shares have not on a
28:10
Speaker 2: total return basis as well. So if you're a growth
28:13
Speaker 2: based investor, you would lean towards US shares, But if
28:16
Speaker 2: you're a dividend or a more balanced type investor, you
28:19
Speaker 2: would lean towards Australian shares, but not necessarily pay more
28:22
Speaker 2: for it, but just allocate more for your money there.
28:25
Speaker 1: Yeah. Yeah, And as you say, it's nice to get
28:29
Speaker 1: four and a half percent dividend yield, and maybe that's
28:32
Speaker 1: six percent franc in your pocket, but it's not a
28:39
Speaker 1: great constellation. You get four percent capital growth and your
28:44
Speaker 1: equivalent to US share is doing twenty five percent capital
28:47
Speaker 1: growth in a year, which many of them do for
28:50
Speaker 1: many years.
28:51
Speaker 2: Now.
28:51
Speaker 1: That doesn't mean it'll go on forever, of course, but
28:53
Speaker 1: we're waiting all right. The second part of David's question
28:56
Speaker 1: was a related question is do investment strategist take it
29:00
Speaker 1: acount of the benefits of franking when structuring acid allocation
29:03
Speaker 1: models for use in Australia. Oh, yes, I expect, so, David,
29:07
Speaker 1: franking isn't relevant to the international investor, Isn't that right?
29:10
Speaker 1: So it's really only talking about Australian based investors that
29:18
Speaker 1: would be investment strategists would take account into franking, Yes
29:22
Speaker 1: they would and generally just explain to people in case
29:25
Speaker 1: they don't know about franking, James, and we don't need
29:27
Speaker 1: to go into how it works. But in terms of
29:31
Speaker 1: what they call grossed up, if a share says it's
29:35
Speaker 1: going to pay four and a half percent, then the
29:39
Speaker 1: franking for the investor, the way it works when it
29:42
Speaker 1: comes out the other end of the line is more
29:45
Speaker 1: like what would it be to the average investor if
29:47
Speaker 1: the yield, the headline yield was four and a half percent,
29:50
Speaker 1: then what would the person actually get in their pocket.
29:53
Speaker 2: It'd be somewhere around six six and a half percent,
29:56
Speaker 2: because it's basically the tax that large company has paid
29:59
Speaker 2: or ready to the tax office. You're just getting the
30:01
Speaker 2: credit for that, so you just gross up four and
30:03
Speaker 2: a half percent by thirty percent, which is somewhere between
30:05
Speaker 2: six and six and a half percent.
30:07
Speaker 1: And that's why our bank shows are a lot better
30:09
Speaker 1: than they look in terms of their dividends. Of their
30:13
Speaker 1: dividends four in fact they factor for most people, they're
30:17
Speaker 1: more like six. And if you're retired, it's even higher.
30:20
Speaker 1: Isn't that right?
30:22
Speaker 2: That's right? Yeah, because when you're retired and the government
30:26
Speaker 2: previously wasn't successful in making this change, that you get
30:30
Speaker 2: a refund of your excess franking credits if you're not
30:32
Speaker 2: paying any tax. Noting the people in super in account
30:36
Speaker 2: based pensions don't pay any tax. So you get the
30:39
Speaker 2: cash dividend twice a year from a bank, but then
30:42
Speaker 2: also your super fund will give you a refund of
30:44
Speaker 2: those franking credits as well as an extra credit, which
30:47
Speaker 2: is fantastic, which people who are working, if their tax
30:50
Speaker 2: rate is above thirty percent, they don't get those refunds back.
30:53
Speaker 2: In cases, if their tax rate is say forty seven percent,
30:56
Speaker 2: they have to pay more tax even though they again
30:57
Speaker 2: the dividends, I'll still have to pay up to seventeen
30:59
Speaker 2: percent tax on top of that.
31:01
Speaker 1: So the less actually pay, the higher your dividend. Absolutely,
31:05
Speaker 1: which when in the election before last, when it became
31:09
Speaker 1: an issue, most people were surprised to hear that. But
31:14
Speaker 1: the people who benefit from it knew all about it,
31:18
Speaker 1: and boy, oh boy did they kick up when anybody
31:20
Speaker 1: went near it. And can I say, it's complicated, but
31:23
Speaker 1: it all makes sense. And if you can't understand it,
31:26
Speaker 1: you can ask Paul Keating how he created it. But
31:29
Speaker 1: it actually does all make sense. Each part of it
31:32
Speaker 1: makes sense. But the outcome of it is that a retiree,
31:37
Speaker 1: because they don't pay tax, gets actually a higher gets higher,
31:41
Speaker 1: gets more money in their pocket from dividends. And that
31:43
Speaker 1: is why, folks, we have a very dividend heavy economy
31:48
Speaker 1: with a stop market that reflects that that is dominated
31:50
Speaker 1: by the banks which are consistently high dividend payers, and
31:54
Speaker 1: the big miners who pay big dividends when they have
31:59
Speaker 1: big profits. They're considerably more cyclical than the banks. But
32:02
Speaker 1: that's how it all works. Okay, that all made a
32:04
Speaker 1: lot of sense to me at least. James, thank you
32:06
Speaker 1: very much.
32:08
Speaker 2: My pleasure is always thanks for having me on.
32:10
Speaker 1: Great to have you on. And folks, keep in mind
32:13
Speaker 1: I'd love to have some more correspondence. We've had lots
32:16
Speaker 1: of emails and I've managed to get through them all.
32:19
Speaker 1: And I noticed just in passing that getting a lot
32:21
Speaker 1: of questions, particularly about shares of late and particular shares.
32:25
Speaker 1: So we will do a special on that where we
32:27
Speaker 1: just do share market and we look at a whole
32:29
Speaker 1: bunch of share activity and questions relating to shares that
32:33
Speaker 1: have come in recent weeks. Okay, keep the emails coming.
32:36
Speaker 1: The money Puzzle at the Australian dot com dot Au.
32:39
Speaker 1: Today's show was produced by Leah Sam mcglue. Hope you
32:43
Speaker 1: soon