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The AI Share Market Backlash · The Money Puzzle

0:14
Speaker 1: Hello and welcome to The Australian's Money Puzzle Podcast. I'm
0:17
Speaker 1: James Kirby, the Wealth Editor at The Australian. Welcome aboard, everybody.
0:21
Speaker 1: One of my favourite shows of the year, regular guest,
0:24
Speaker 1: Will Hamilton of Hamilton Wealth Partners, goes off on an
0:29
Speaker 1: odyssey around the world every year and he goes to
0:32
Speaker 1: all these various investment conferences and wealth conferences, etc. And
0:36
Speaker 1: he comes back on the show around this time of
0:39
Speaker 1: the year, every year, and he tells us basically what
0:43
Speaker 1: the mood is out there and what people are saying
0:45
Speaker 1: and what really is on the table, if you like,
0:49
Speaker 1: with wealth advisors around the world. It's always interesting. He's here.
0:55
Speaker 1: He's back. He has no jet lag this time. The
0:57
Speaker 1: last time we caught it really tight and he did
0:58
Speaker 1: it virtually off the plane. We're going to talk about
1:02
Speaker 1: rates and where on earth they may or may not
1:04
Speaker 1: be going. We're going to talk about the craze for
1:07
Speaker 1: private credit and to the extent that is going to
1:09
Speaker 1: be any good for you should you ever deem to
1:12
Speaker 1: go near it. Backlash on AI, interesting, had to happen.
1:17
Speaker 1: The question is whether it's just a moment or whether
1:21
Speaker 1: it's going to stay with us and lots of other
1:24
Speaker 1: issues that we've already talked about before the show. How
1:27
Speaker 1: are you, Will Hamilton? Welcome home.
1:29
Speaker 2: Thank you very much, James. Thanks for having me. I'm
1:31
Speaker 2: very well, thank you.
1:33
Speaker 1: Always good to have you. I imagine we have to
1:37
Speaker 1: talk about rates first of all. I just walked into
1:40
Speaker 1: the building this morning. Two people came up to me
1:41
Speaker 1: and said, what's going on with rates? What's going on?
1:43
Speaker 1: Are they going down or are they going up? Off
1:46
Speaker 1: the CPI yesterday, I said, look, I don't know. If
1:50
Speaker 1: you want my opinion, I don't think anything's going to happen.
1:52
Speaker 1: I don't think they're going to go up or down
1:54
Speaker 1: in Australia this year. But informed by your global rolling around,
2:00
Speaker 1: what do you think?
2:01
Speaker 2: Look, let's deal with offshore and then domestically. And I
2:04
Speaker 2: think rates are going down offshore. You had powers last night.
2:08
Speaker 2: held rates steady in the US, but has very much
2:10
Speaker 2: indicated that potentially next month, we're going to see the
2:14
Speaker 2: first cut in the United States. We've already seen cuts
2:16
Speaker 2: in the UK and in Europe. Rates are going down.
2:20
Speaker 2: Inflation has appeared to be stickier. It's definitely stickier than
2:24
Speaker 2: what people thought, but inflation is going down offshore, and
2:28
Speaker 2: that's why interest rates are going down. Not to the
2:31
Speaker 2: extent that people thought at the beginning of the year,
2:33
Speaker 2: but we are going to see rates trending offshore. We're
2:36
Speaker 2: trending down. Now, Australia is a different matter. Because we've
2:40
Speaker 2: got variable interest rates for mortgages, we saw interest rates
2:45
Speaker 2: go up less than offshore. So 100 basis points or
2:49
Speaker 2: one full percent less in Australia than the US. We
2:55
Speaker 2: have not tackled wage price inflation in Australia as they
2:58
Speaker 2: have offshore. And therefore, our inflation is stickier. And Therefore,
3:05
Speaker 2: I cannot see interest rates falling. Probably the second quarter
3:12
Speaker 2: of next year would be the earliest you could consider.
3:15
Speaker 2: So that April to June period is when you could
3:19
Speaker 2: potentially see rates come down. So you won't see it
3:23
Speaker 2: before that. We haven't tackled inflation. But likewise, they shouldn't
3:28
Speaker 2: come down as much because we didn't increase as much.
3:31
Speaker 1: But you're still of the opinion that they will come down?
3:35
Speaker 2: Eventually.
3:36
Speaker 1: Eventually, yeah. But you still have the opinion the next
3:38
Speaker 1: move is that it drops?
3:40
Speaker 2: Yeah. I don't think we're going to see, after yesterday's figure,
3:44
Speaker 2: I don't think we're going to see an increase.
3:46
Speaker 1: Okay, very interesting. Yeah, because basically the figures aren't great.
3:51
Speaker 1: They're really not great for the domestic economy. That doesn't
3:53
Speaker 1: mean the markets aren't great, of course. The markets have
3:56
Speaker 1: been very good so far. A little bit of a
3:59
Speaker 1: wobble in the last few days, a bit of extra
4:03
Speaker 1: volatility there. in the US. And of course, we are
4:08
Speaker 1: in August and we are heading towards that time of
4:10
Speaker 1: the year where the US traders tend to lose their nerve.
4:14
Speaker 1: And if we have corrections or crashes, they come, famously
4:19
Speaker 1: come in the September, October period. If there is one
4:22
Speaker 1: this year, and I don't know what's going to happen,
4:24
Speaker 1: but of course we should be on standby for a correction,
4:27
Speaker 1: that's for sure. It will be triggered for, it would
4:31
Speaker 1: seem it would be triggered, not by politics, or buy rates,
4:35
Speaker 1: but by perhaps a backlash against the initial excitement over AI.
4:43
Speaker 1: AI excitement drove the big cap stocks, the big cap
4:47
Speaker 1: stocks drove all markets around the world. That's why your
4:50
Speaker 1: ASX index fund did so well last year and your
4:54
Speaker 1: US one did twice as well. But you detected a
4:58
Speaker 1: at various meetings and conferences. What is it? Is it
5:01
Speaker 1: a skepticism? Is it a skepticism about AI? Or is
5:04
Speaker 1: it a skepticism about the perceived economic potential of AI
5:09
Speaker 1: that's already built into stock prices?
5:12
Speaker 2: So Goldman Sachs produced a report early June, which everyone
5:16
Speaker 2: seems to be talking about. And if your listeners Google this,
5:20
Speaker 2: they'll be able to find it. But basically, a trillion
5:23
Speaker 2: dollars has been invested in AI. And When somebody does something,
5:29
Speaker 2: others are playing catch up. They're doing the same. They're
5:32
Speaker 2: trying to keep up. So everyone's skeptical about the revenue
5:37
Speaker 2: enhancements or the productivity improvements that come through. Where are
5:41
Speaker 2: these going to come from? And with the extent of
5:45
Speaker 2: a trillion dollars being invested, the argument is this is
5:48
Speaker 2: a hell of a lot of money. And it is.
5:50
Speaker 2: It's an extraordinary amount of money. Like it's half the
5:53
Speaker 2: market cap of the Australian equity market. This is US dollars.
5:58
Speaker 2: And therefore, the return required is substantial. The argument coming
6:04
Speaker 2: out that when everyone does the same thing, no one
6:07
Speaker 2: comes out with an advantage. And therefore, and where are
6:11
Speaker 2: we going to see this advantage? And one thing is,
6:14
Speaker 2: it is disinflationary. That's one thing you can be sure.
6:17
Speaker 2: And the real way to play this is, hence why
6:21
Speaker 2: NVIDIA is run, is through the input players. So your consultants,
6:26
Speaker 2: because everyone needs to get advice on what everyone else
6:29
Speaker 2: is doing, as well as the chip manufacturers, TSMC, et cetera.
6:33
Speaker 2: But we've got into the doubt phase. So yes, there's
6:38
Speaker 2: all this investment. This is great. But what is the
6:42
Speaker 2: quantification of the productivity improvements? Where are they going to be?
6:45
Speaker 2: All the revenue enhancements. And everyone seems to be playing
6:49
Speaker 2: the same game.
6:50
Speaker 1: So where is the return on investment? Is that what
6:53
Speaker 1: we're talking about? Yeah. Okay. And so the question is,
7:00
Speaker 1: Do the big AI-fueled stocks from the mega caps, the
7:07
Speaker 1: Facebooks and Microsofts and NVIDIAs, or for that matter, an XDC,
7:12
Speaker 1: Macquarie Technology, do they come off the boil?
7:16
Speaker 2: After an incredible run for something like NVIDIA, to keep
7:21
Speaker 2: going to the extent that they have is unhealthy. And
7:24
Speaker 2: that's when that B-word bubble starts coming out. And it's normal.
7:28
Speaker 2: that things consolidate and consolidation often means retrace a little bit.
7:32
Speaker 2: But I do think as everyone can see that there
7:33
Speaker 2: is a difference. So for those that are trying to
7:36
Speaker 2: compare the tech cycle now with the tech cycle back
7:39
Speaker 2: in the beginning of the century, there were companies, even
7:43
Speaker 2: Amazon back then wasn't making money. These companies are making
7:47
Speaker 2: some decent money, but it's just, it's healthy. I always
7:50
Speaker 2: think that when things get on a roll, like that's, that's,
7:56
Speaker 2: where you do get bubbles in it, it's unhealthy. And
7:58
Speaker 2: it's great to see things consolidate.
8:01
Speaker 1: Yes, because it stops it from going crazy. And I
8:04
Speaker 1: have seen some sort of leading figures make that point that,
8:07
Speaker 1: for anyone who's old enough to remember, it is elevated
8:11
Speaker 1: pricing and particularly elevated PEs on these companies, AI-driven or
8:18
Speaker 1: linked or manufacturing companies. But they do have revenues. And
8:23
Speaker 1: some of them have profits. And that was not the
8:26
Speaker 1: case in the dot-com era. And consequently, the theory is
8:30
Speaker 1: that then it is not a bubble. It certainly isn't
8:32
Speaker 1: a bubble yet. I've seen some pretty powerful gurus, if
8:36
Speaker 1: you like, of the market making that point in recent times. Okay,
8:40
Speaker 1: another thing you were trying to explain to me was
8:43
Speaker 1: about the excitement and fashion for private credit and private
8:47
Speaker 1: equity generally or unlisted investments. where retail investors are late
8:52
Speaker 1: to the party as always and going into them now,
8:55
Speaker 1: and the market is only waiting for them to come
8:57
Speaker 1: along and launching lots of offers and products. But you
9:02
Speaker 1: came upon, in terms of a theme that you came
9:06
Speaker 1: across at different conferences, there was a sense that, not
9:10
Speaker 1: that it wouldn't work, but there was a worry about liquidity.
9:14
Speaker 1: And what that means, folks, to make it really simple,
9:17
Speaker 1: is if you put 10 grand into an unlisted company, fund,
9:21
Speaker 1: and a day comes where you say, I want to
9:23
Speaker 1: get that 10 grand out, they may say to you, sorry,
9:26
Speaker 1: you can't have that money today. We can't give it
9:29
Speaker 1: to you right now. And if you haven't had that experience,
9:31
Speaker 1: it's worth having because it's disturbing. So what were they saying, Will?
9:35
Speaker 2: Private credit seems to be the number one thing that
9:38
Speaker 2: people are concerned about. But overall, when it comes to
9:41
Speaker 2: this alternative space, last year, the theme was the democratization
9:45
Speaker 2: of private assets, which I really don't like that term.
9:48
Speaker 2: But I think In the full 12 months, it's been
9:52
Speaker 2: a rush. And now people have realized you need to
9:54
Speaker 2: manage liquidity and portfolios. And there's no doubt, I know
9:58
Speaker 2: as a wealth manager, we could when it comes to
10:01
Speaker 2: private credit and private equity, we could waste every minute
10:04
Speaker 2: of every day seeing a manager and it's still the case.
10:07
Speaker 2: And whilst the ducks are quacking, the fund managers are
10:09
Speaker 2: coming out here and feeding them. But you need Liquidity
10:14
Speaker 2: management is very important and therefore it's not surprising these
10:17
Speaker 2: so-called evergreen structures, which the Hamilton Lanes, et cetera, you're
10:20
Speaker 2: going to continue to see KKR and lots of them
10:23
Speaker 2: are going to come out here and you're going to
10:25
Speaker 2: see a lot more of these where they're semi-liquid or
10:27
Speaker 2: they've got liquidity provisions. But everyone should remember that when
10:33
Speaker 2: things go wrong, they all have the right to lock up. Now,
10:37
Speaker 2: when it comes to private credit, it is the big
10:39
Speaker 2: trend and there is a big disparity in quality between
10:42
Speaker 2: private credit managers. Are banks being replaced by private credit?
10:47
Speaker 1: Are they? Because this is their presentation, isn't it? They
10:50
Speaker 1: stand in front of every conference and they say, listen, folks,
10:52
Speaker 1: you may not know, but the banks aren't banks anymore.
10:55
Speaker 1: They don't do banking. We are the banks. We are
10:58
Speaker 1: the new banks. We're doing all the banking. What do
11:00
Speaker 1: you think of that pitch?
11:01
Speaker 2: There's no doubt that the banks are doing less and
11:03
Speaker 2: therefore it has become open to private credit. And as
11:06
Speaker 2: I said, there's a big disparity in the quality between
11:10
Speaker 2: those that I think are more established than the better
11:13
Speaker 2: managers and those that have just come by. I think
11:15
Speaker 2: we haven't gone through a default cycle and people need
11:18
Speaker 2: to remember that. First of all, I would caution any
11:23
Speaker 2: of the listeners to look at single asset lines because
11:26
Speaker 2: they have 100% downside. So you need to look at
11:29
Speaker 2: something that is pulled, but you've got to make sure
11:32
Speaker 2: that you are confident that a manager can manage a
11:35
Speaker 2: default cycle. And we haven't seen that. And Yes, there's
11:39
Speaker 2: been the odd default here or there in some of
11:42
Speaker 2: the funds, and some of them have managed really well.
11:45
Speaker 2: But some of the new guys, and especially the term
11:47
Speaker 2: I can't stand, we have never had a default. That
11:50
Speaker 2: makes me run in the opposite direction at a million
11:51
Speaker 2: miles an hour, because that manager, what expertise they brought
11:54
Speaker 2: to the table in managing that default.
11:57
Speaker 1: Oh, very interesting. It's like the journalist who says, I've
12:00
Speaker 1: never had a libel action. I've never had a correction.
12:05
Speaker 1: I've never had a correction. No one ever has... No
12:07
Speaker 1: one has ever said I got anything wrong. Just one
12:10
Speaker 1: last thing on that. For the retail investor, often the avenue,
12:16
Speaker 1: because often these funds, they've got pretty high entry points,
12:20
Speaker 1: 20 grand, 50 grand, 100 grand, just to go in.
12:23
Speaker 1: For most people, most of the time, the pathway to
12:27
Speaker 1: these alternatives or alternative funds or whatever, private credit, private equity,
12:33
Speaker 1: is ironically, I think, through the stock market. Do you
12:36
Speaker 1: think there's any particular weakness or is it a plus
12:39
Speaker 1: or a minus?
12:40
Speaker 2: I don't want to mention names. I think that's unfair,
12:43
Speaker 2: but there is one that comes to mind and I
12:46
Speaker 2: think it still is trading at a discount to its NTA.
12:49
Speaker 2: And that's the issue. These things are always easy to
12:52
Speaker 2: get in. And when you want to get out, they
12:54
Speaker 2: can be very difficult. So just be aware. And like
12:57
Speaker 2: with leaks, listed investment companies, they don't necessarily trade where
13:01
Speaker 2: they should.
13:02
Speaker 1: But you don't have a problem with the sort of
13:05
Speaker 1: inherent contradiction of buying private assets on a public market.
13:09
Speaker 2: For some people, I think that's the only way they're
13:10
Speaker 2: going to be able to do it. If that's what
13:12
Speaker 2: they want to do, make sure you do your research
13:15
Speaker 2: and your homework.
13:16
Speaker 1: Okay. Hey, we'll take a short break. A couple of
13:18
Speaker 1: other big issues I want to talk to you about.
13:21
Speaker 1: We'll be back in a moment. Hello, welcome back to
13:28
Speaker 1: the Australian's Money Puzzle podcast. I'm James Kirby, wealth editor
13:32
Speaker 1: at The Australian, talking to Will Hamilton, regular friend of
13:36
Speaker 1: the show. And he is telling us about basically an
13:40
Speaker 1: international trip he's just done and the views out there
13:44
Speaker 1: in the wider world from wealth managers, fund managers, but
13:47
Speaker 1: particularly advisors in the wealth space at the moment. One
13:50
Speaker 1: of the other big themes will I come upon every
13:54
Speaker 1: day at the moment from a global perspective, and it's
13:56
Speaker 1: kicking in here locally too, is this notion that having
14:02
Speaker 1: had some very good years on the market driven by
14:05
Speaker 1: large caps, that we're going to have a swing to
14:09
Speaker 1: small caps and small caps are now going to have
14:12
Speaker 1: a run and they're going to have their day. A
14:14
Speaker 1: couple of things I want to say before I put
14:16
Speaker 1: it to you. First thing is I looked at the
14:19
Speaker 1: small cap indices. And basically, it's a flat line for
14:22
Speaker 1: about five years. And even the very good small cap
14:25
Speaker 1: managers that I'm aware of, the numbers are okay. So
14:28
Speaker 1: maybe they did two or three or 4% more than
14:30
Speaker 1: the index, but gee, you wouldn't exactly be minting it
14:33
Speaker 1: with them. What do you think of this notion, which
14:36
Speaker 1: is the flavor of the month just now?
14:38
Speaker 2: Look, the disparity in valuation between small and mids and
14:42
Speaker 2: the large caps is close to record highs. And that's
14:47
Speaker 2: one of the But one of the key reasons is
14:51
Speaker 2: the small and mids tend to have higher gearing than
14:54
Speaker 2: the large cap companies. And so when you are in
14:57
Speaker 2: an upward cycle on interest rates, they get punished. When
15:02
Speaker 2: you are looking at a downward cycle on interest rate,
15:06
Speaker 2: that is to their advantage. So I think it's been
15:10
Speaker 2: a very crowded trade. Everyone's been talking about this for
15:12
Speaker 2: a year. And I will admit we've got– we put global–
15:17
Speaker 2: mids in probably the beginning of this year and been
15:21
Speaker 2: a drag.
15:22
Speaker 1: Because it hasn't started yet.
15:23
Speaker 2: Well, it did last month in July, but apart from that,
15:28
Speaker 2: it's been six months of drag. And interesting, we use
15:33
Speaker 2: generally Broadcap managers domestically in Australia, and the manager we use, again,
15:37
Speaker 2: I think it's unfair to mention unless you want to know,
15:40
Speaker 2: has outperformed the index by about 5%, 6%. They've got
15:44
Speaker 2: that ability to play the whole market from right down
15:47
Speaker 2: to tiny and they can put a couple of the
15:50
Speaker 2: large caps in. That's the way we prefer to play
15:53
Speaker 2: it in Australia because Australia is a small market. Its
15:56
Speaker 2: capitalization is 1.9 trillion US dollars. It's 2% of the world.
16:00
Speaker 2: It's a tiny market and we think that's the best
16:02
Speaker 2: way to play it.
16:03
Speaker 1: Okay. I noticed for the retail investor, even some of
16:06
Speaker 1: the better known small cap funds and even the ones
16:08
Speaker 1: that are listed as the best, they're tiny. like 20
16:12
Speaker 1: mil market cap, 50 mil market cap. Is that a
16:15
Speaker 1: problem in and of itself?
16:18
Speaker 2: Yeah, it is because these things will outperform on the
16:21
Speaker 2: upside and the downside is high. And that's because of
16:25
Speaker 2: the way our business is run and the way we look,
16:28
Speaker 2: I think we look at volatility and the volatility in
16:32
Speaker 2: companies that are that small is just extreme. And so
16:35
Speaker 2: we would never touch that. There's a lot. And the
16:37
Speaker 2: other thing is, There's a lot of companies that are
16:40
Speaker 2: listed in the small cap space that should never have
16:43
Speaker 2: been listed. And that's what managers will remind you. And
16:46
Speaker 2: of course, they're avoiding them. But they just should never
16:48
Speaker 2: have been listed in the first place. There's a lot
16:50
Speaker 2: of junk.
16:51
Speaker 1: A lot of junk. And that, I suppose, is the
16:53
Speaker 1: argument against buying an index fund of small caps. Because
16:59
Speaker 1: if there's 1,000 stocks and roughly even small caps in Australia,
17:03
Speaker 1: there's probably about 1,400 small caps. And I don't know
17:07
Speaker 1: how many of them are junk, but hundreds and hundreds
17:10
Speaker 1: of them are junk. And you're buying them. You're buying
17:13
Speaker 1: them if you buy the index. While if you buy
17:15
Speaker 1: a manager who specializes in small caps, you would hope
17:17
Speaker 1: that they're not buying the junk. But of course, they
17:20
Speaker 1: will always get caught by somebody. Okay, totally different business.
17:24
Speaker 1: Other end of the spectrum. In our market, it's something
17:27
Speaker 1: I've asked lots of people. I haven't had a chance
17:29
Speaker 1: to ask you on air. Our market was very much
17:33
Speaker 1: driven by the bigger cap stocks. The banks are completely
17:39
Speaker 1: running the show at the moment on the ASX. Five banks,
17:43
Speaker 1: Big Four and Macquarie in the top ten. Commonwealth Bank
17:46
Speaker 1: on a league of its own. Commonwealth Bank at $ 130,
17:50
Speaker 1: the biggest stock in the market. Bigger than BHP. And
17:54
Speaker 1: everyone says all year long, all the top brains, all
17:59
Speaker 1: the big houses, all the brokers, local and international, say sell,
18:03
Speaker 1: get away from that bank. And they're all wrong. So far.
18:07
Speaker 1: Where do you come on that one?
18:08
Speaker 2: Under-owned institutionally and over-owned in retail land. Self-directed investor that's
18:15
Speaker 2: wanting his dividend goes and buys the banks. But every
18:19
Speaker 2: institutional fund manager will be underweight. Hence the volatility in
18:23
Speaker 2: these things. I think that it's run too hard. And
18:27
Speaker 2: if it was me, I'd be taking some profits. I
18:29
Speaker 2: think that the fact that it's the largest company, its
18:32
Speaker 2: valuation is where it is. We've got to be sensible
18:35
Speaker 2: about these things, and it's run incredibly well, and good
18:38
Speaker 2: luck to those that have it or bought it. But
18:42
Speaker 2: nothing ever continues going up in a straight line.
18:45
Speaker 1: Yeah, okay. I saw someone say a gorgeous quote the
18:49
Speaker 1: other day, this old line about something being priced for perfection,
18:53
Speaker 1: and someone said, CBA is priced beyond perfection, which probably
18:57
Speaker 1: does capture the issue of it. OK, we'll be back
19:02
Speaker 1: in a moment with some great questions. Very good questions,
19:05
Speaker 1: I have to say, our particular selection this week. And
19:08
Speaker 1: there's quite a few of them. So stick around because
19:09
Speaker 1: we're going to go through quite a range of issues
19:12
Speaker 1: which will be useful to everybody, I'm sure. Back in
19:15
Speaker 1: a moment. Hello and welcome back to the Australian's Money
19:25
Speaker 1: Puzzle podcast. I'm James Kirby, the wealth editor at The Australian,
19:29
Speaker 1: talking to Will Hamilton. Hamilton Wealth Management. Will, if you
19:32
Speaker 1: don't know, is a top wealth manager. He is on
19:36
Speaker 1: our top 100, which is about to become top 150
19:39
Speaker 1: advisors list, which we publish in The Australian every year.
19:43
Speaker 1: And he's at Hamilton Wealth Partners. What about six questions here?
19:47
Speaker 1: Why don't we read them alternately? And also why don't
19:51
Speaker 1: we aim to try and get through them as well?
19:54
Speaker 2: Okay, so Pete asks, what is the biggest bubble, Nvidia
19:58
Speaker 2: with a market cap of US $ 2. 8 trillion or cryptocurrency
20:02
Speaker 2: market cap US $ 2. 5 trillion? Look, I think we've talked
20:06
Speaker 2: about Nvidia and why just consolidating and is a positive
20:11
Speaker 2: thing because that stops that word bubble. Cryptocurrency, I don't follow.
20:15
Speaker 2: I have no intention to follow it and we don't
20:18
Speaker 2: have investments.
20:19
Speaker 1: So you're not even one of these people who say,
20:24
Speaker 1: if my clients want to invest in it, then they can,
20:27
Speaker 1: but I don't recommend it.
20:28
Speaker 2: Yeah, we have done that, but that's their decision and
20:30
Speaker 2: they sign forms. That's their decision.
20:32
Speaker 1: Yeah. Okay. I hope you like that answer, Pete. Okay. Kate,
20:36
Speaker 1: He says, when you next have an advisor on the
20:39
Speaker 1: show to discuss tax deductions, can you please ask the following?
20:44
Speaker 1: I have a Spotify subscription, which now includes audio books.
20:47
Speaker 1: I'm regularly using it to listen to finance books to
20:50
Speaker 1: help me understand and manage my personal portfolio. Do you
20:54
Speaker 1: think I could claim a percentage of the subscription? I'll
20:56
Speaker 1: tell you what, Kate, I think you should be able to, okay?
21:00
Speaker 1: But this is not advice and it's information only. However,
21:04
Speaker 1: in the real world... where the ATO has thought of
21:08
Speaker 1: everything you could possibly think of and are so tight
21:11
Speaker 1: and mean on all these things, they would say to you,
21:14
Speaker 1: if you could get them to agree, they would say
21:16
Speaker 1: to you that you could claim the Spotify subscription if
21:20
Speaker 1: you listened to absolutely nothing else but finance podcasts and
21:24
Speaker 1: you could prove to them that you did so. And
21:26
Speaker 1: at that, I would say they would try to kick back.
21:28
Speaker 1: But I think they would have to take it on
21:31
Speaker 1: that basis about claiming a percentage of You'd have to
21:35
Speaker 1: prove what percentage it is. So if you really think
21:39
Speaker 1: it's worth that much trouble, I wouldn't stop you having
21:43
Speaker 1: a try, but I would refer to a conventional tax
21:46
Speaker 1: advisor on that. But I know I'm doing this a
21:48
Speaker 1: long time. I've tried to claim all sorts of things
21:51
Speaker 1: over the years, from clothing to whatever, and every single
21:55
Speaker 1: time I got knocked back when I tried. That doesn't
21:59
Speaker 1: mean you won't be successful. But that would be, I think,
22:02
Speaker 1: that would be the conventional wisdom. Does that sound, how
22:05
Speaker 1: does that sound to you, Will?
22:06
Speaker 2: Yes, absolutely. Like you, I can't give, I'm registered with
22:11
Speaker 2: the TPB, but that's for financial advice tax only. So
22:14
Speaker 2: this is a bit different. So yeah, I would talk
22:16
Speaker 2: to your tax advisor.
22:18
Speaker 1: Yes, and your tax advisor will say, oh God, it
22:20
Speaker 1: sounds like a lot of trouble. Ironically, this principle probably
22:24
Speaker 1: isn't tested because this is a new area, right? podcasts
22:28
Speaker 1: are new. If you subscribe to a financial publication, then
22:32
Speaker 1: you can. So why can't you if you subscribe to
22:35
Speaker 1: a financial podcast? I'm with you, Kate, but I don't
22:38
Speaker 1: know if you'll get over the line. Okay. Do you
22:40
Speaker 1: want to see the question from Adam?
22:42
Speaker 2: I can. Adam asks, is there a minimum amount for
22:45
Speaker 2: it to be worth having a family trust like there
22:47
Speaker 2: is with self-managed super funds? And can assets be gifted
22:50
Speaker 2: from an individual to a family trust without paying CGT?
22:54
Speaker 2: So Both a self-managed super fund and a family trust
22:58
Speaker 2: have compliance costs. So costs to operate that vehicle for
23:03
Speaker 2: the year and to report to ASIC or in the
23:07
Speaker 2: case of the self-managed super fund to the Australian Taxation Office.
23:10
Speaker 2: So there are compliance costs and those compliance costs are
23:15
Speaker 2: about the same. And therefore, you need to have at
23:20
Speaker 2: least a million dollars, at least a million dollars to
23:23
Speaker 2: justify either vehicle, I think.
23:25
Speaker 1: Okay. I don't like your answer, but I like the
23:27
Speaker 1: clarity of it. Yeah. Okay.
23:30
Speaker 2: And can assets be gifted from an individual to a
23:32
Speaker 2: family trust without paying CGT? The answer is no. If
23:36
Speaker 2: you are transferring ownership from an individual to the trust,
23:43
Speaker 2: and you realize a capital gain, the Australian Taxation Office
23:47
Speaker 2: is going to want its share of that.
23:49
Speaker 1: Yes. Okay. Very good. Very clear answers. I hope that
23:52
Speaker 1: was useful to you. I just want to also mention something.
23:56
Speaker 1: The point that Will is making, like how much should
23:59
Speaker 1: you have in an SMSF? Will, I would say that
24:02
Speaker 1: you're on the high side, okay, on a million dollars.
24:05
Speaker 1: Not on the family trust, but on the SMSF. You're
24:07
Speaker 1: on the high side. But I think the answer probably
24:10
Speaker 1: is somewhere between half a million and a million these days.
24:13
Speaker 1: And I want to make a point here, which is worth,
24:16
Speaker 1: bear with me. It's from, I just did some work
24:18
Speaker 1: during the week. and it was about financial advisors and
24:23
Speaker 1: their charges. The point Will is making about compliance is,
24:27
Speaker 1: if it costs you so many thousand per annum to
24:31
Speaker 1: do something, right? Let's say it's an SMSF. And let's
24:36
Speaker 1: say you think your SMSF makes a certain amount. Put
24:39
Speaker 1: a number on it. 10,000, 100,000. You've got to subtract
24:42
Speaker 1: that 5,000, right? You have to subtract the cost of
24:46
Speaker 1: the vehicle from what you made. And so that, in
24:49
Speaker 1: a way, informs... how much you need to have in it.
24:51
Speaker 1: And I came across something which I really couldn't. I
24:55
Speaker 1: missed this when it happened. But it's about the costs
24:59
Speaker 1: of advice in the market. So financial advisors, by the way, OK,
25:05
Speaker 1: on average, your average advisor rose their average fee to
25:08
Speaker 1: the average person last year up to, it's up over
25:12
Speaker 1: $ 5, 000 now. 17% rise last year in financial advice fees. OK, 17%,
25:14
Speaker 1: like four times the inflation rate. And that's not even
25:22
Speaker 1: the one I'm looking for. That's not the screamer. In
25:26
Speaker 1: the issue of particular advice on self-managed super funds, but
25:32
Speaker 1: you hear this, this is from Investment Trends. I'll just
25:36
Speaker 1: read the paragraph. In some cases, fee increases have been astronomical.
25:40
Speaker 1: A year ago, the average upfront fees faced by self-managed
25:44
Speaker 1: super funds dealing with specialist advisors rose by 40%. 2,600
25:51
Speaker 1: to 3,600 in one year. And last year, being the
25:56
Speaker 1: 12 months to June, they added a few more hundred
25:59
Speaker 1: just for good measure. And they're now charging 3,750 per annum.
26:04
Speaker 1: So the fees really are rising. I don't want to
26:07
Speaker 1: get too deeply into this, but I just want to
26:09
Speaker 1: go back to the point that Will made, that the
26:11
Speaker 1: way to do it is reverse engineered. How much is
26:14
Speaker 1: your fee? And then when you know how much your
26:16
Speaker 1: fee is, we could then make the point of whether
26:20
Speaker 1: it makes sense for you to actually pay that fee.
26:23
Speaker 1: And that really is how it makes sense. That's on
26:26
Speaker 1: a strict technical basis. Obviously, you might have aspirations, okay?
26:29
Speaker 1: So you might have half a million and you say,
26:31
Speaker 1: I'm not going to have half a million for long.
26:32
Speaker 1: It's going to get bigger and I've got plans and
26:34
Speaker 1: maybe it's worth it for you and I wouldn't stop you. Again,
26:37
Speaker 1: this isn't advice. This is information. All right, I'm the
26:41
Speaker 1: next one. Okay, Jen. Hi, Jen. Could you please explain
26:46
Speaker 1: what hedging means and how it relates to ETFs And separately,
26:51
Speaker 1: she asks, could you explain how shares such as Rio
26:54
Speaker 1: and BHP are affected by changes in the dollar? Look, Jen,
26:57
Speaker 1: the second question is too big, except to say, at
27:00
Speaker 1: that scale, Rio, BHP, these are multinational companies, and they
27:04
Speaker 1: literally try to offset their assets and liabilities in the
27:08
Speaker 1: currency where they are. So they're almost beyond hedging when
27:12
Speaker 1: you get to that sort of global multinational stage. But
27:14
Speaker 1: on the simpler question of, could you please explain what
27:18
Speaker 1: hedging means to and specifically how it relates to exchange-traded
27:23
Speaker 1: funds or index funds. Would you like to have a
27:27
Speaker 1: go at that, Will?
27:30
Speaker 2: So what hedging means, and you can buy either listed
27:34
Speaker 2: or unlisted funds that are hedged. So they protect you
27:39
Speaker 2: in a rising Australian dollar. So they hedge out the risk.
27:46
Speaker 2: So that's the key thing. So And it's interesting because
27:51
Speaker 2: if you actually looked at 30th of June, the returns
27:55
Speaker 2: for the indexes hedged and unhedged are pretty well identical
27:58
Speaker 2: for the year. But if you look back six months ago,
28:00
Speaker 2: hedged dramatically underperformed unhedged.
28:04
Speaker 1: Okay. So, Jen, nothing's free, right? So what they do
28:07
Speaker 1: is they say you've got two choices with an ETF.
28:11
Speaker 1: You've got the American stock market ETF and the American
28:14
Speaker 1: stock market ETF hedged. And the hedged one, makes a
28:20
Speaker 1: promise to you that the machinations, if you like, of
28:22
Speaker 1: the currency markets will not affect you. I won't say
28:26
Speaker 1: it won't affect you at all, but they won't affect
28:27
Speaker 1: you as much as a non-hedge fund because what they
28:30
Speaker 1: do is they spend a certain amount of money forward
28:34
Speaker 1: buying currencies. And then if they get it right, then
28:40
Speaker 1: the change in the currency doesn't affect you as much. Now,
28:43
Speaker 1: that's a terribly simplistic explanation of it. Any part of
28:46
Speaker 1: that wrong, Will?
28:48
Speaker 2: No, I think that you take an unhedged position if
28:51
Speaker 2: you believe the Australian dollar is going to fall because
28:56
Speaker 2: you have exposures to foreign currencies. Likewise, if you feel
29:00
Speaker 2: the Australian currency is going to appreciate, then you do
29:03
Speaker 2: look at a hedge position.
29:05
Speaker 1: But that's tactical, right? That's someone really active like you. Correct.
29:10
Speaker 2: But to do it, you're doing it because of a
29:12
Speaker 2: view on the currencies.
29:14
Speaker 1: So in a way, these products shouldn't, I won't say
29:16
Speaker 1: they shouldn't exist, but they're a bit They're a bit hopeless, really,
29:19
Speaker 1: in some ways, because if there's an ETF that's hedged,
29:23
Speaker 1: it's going to be permanently hedged, right? They're not going
29:25
Speaker 1: to turn it on and off.
29:27
Speaker 2: Correct. And likewise, with open-ended funds, there's classes that are
29:33
Speaker 2: unhedged and there's classes that are hedged. Probably harder to
29:36
Speaker 2: get hedged exposure because not every fund has hedged exposure.
29:41
Speaker 2: It's growing in demand as investors are wanting this. But yeah, correct.
29:47
Speaker 2: It's the fund itself. But there are some that you
29:50
Speaker 2: talk to the fund manager and they say, oh, we'll
29:52
Speaker 2: look at 25% of it and we'll dynamically hedge. So
29:56
Speaker 2: if they've got a particularly strong position, they have the
29:58
Speaker 2: ability to do that on a component of their portfolio.
30:02
Speaker 1: Okay, very good. All right. So, Jen, that's what it is, basically,
30:06
Speaker 1: very roughly. They spend some money trying to protect you
30:11
Speaker 1: from currency changes by forward buying currencies and trying to
30:16
Speaker 1: get it right. It's not an exact science. And there
30:20
Speaker 1: are some studies that show over a very long period
30:22
Speaker 1: of time, there isn't an awful lot of difference between
30:25
Speaker 1: the hedged and the unhedged. Again, I want to check
30:27
Speaker 1: that with Will. But like I say, I bought an
30:29
Speaker 1: ETF and I held it.
30:30
Speaker 2: I think it's on a 10-year basis. It's pretty well identical.
30:32
Speaker 1: Yeah, on a 10-year basis. So why would you bother?
30:35
Speaker 1: But that's up for you to make your own mind up.
30:38
Speaker 1: I never bothered buying hedge stuff because I try to
30:41
Speaker 1: buy for the long term and I don't really sell
30:43
Speaker 1: unless I think I've got it wrong or in the
30:46
Speaker 1: unlikely event it's been so good I better take some
30:48
Speaker 1: off the table. Less of an issue. All right. Hall,
30:52
Speaker 1: final question. And you can have fun with this, Will.
30:55
Speaker 1: if you want.
30:55
Speaker 2: Yeah, I love it. That's a great question from Paul.
30:58
Speaker 2: He was watching the riots in Buenos Aires and researched
31:02
Speaker 2: the reasons for Argentina's demise since the 1920s. Increasing fiscal
31:06
Speaker 2: deficits and borrowing in US dollars seems to be the
31:09
Speaker 2: common result from many websites. He's also watched our Aussie
31:13
Speaker 2: deficits and overall debt climb over time, some of it
31:15
Speaker 2: having been unproductive debt to fund our luxurious lifestyles, e.g. politicians'
31:21
Speaker 2: salary packages. So are we heading for an Argentinian I
31:26
Speaker 2: think the first thing is actually Argentina goes back to
31:28
Speaker 2: the 19th century, so the late 1800s, and the first
31:31
Speaker 2: debt crisis. So it's been a long time. But secondly,
31:36
Speaker 2: there is a very high level of corruption. Now, whilst
31:41
Speaker 2: Paul feels that our politicians have luxurious lifestyles and salary packages,
31:47
Speaker 2: you'd have to say that, as they call it in Asia,
31:50
Speaker 2: political patronage does not agree with not exist here in Australia,
31:54
Speaker 2: which is outright corruption. Yeah.
31:57
Speaker 1: Yeah. It's clean. We'd like to think it's relatively clean.
32:01
Speaker 2: And these things exist also in some Latin American countries.
32:05
Speaker 2: Whilst our deficit is high, it is not high on
32:08
Speaker 2: global standards. And I think that's, yeah, and I think
32:12
Speaker 2: that's also got to be taken into account. Whilst it's
32:18
Speaker 2: We can all sit here and spend hours debating whether
32:20
Speaker 2: the government is running the country correctly or not. I
32:24
Speaker 2: think it's very different from the semi-dictatorships you have in
32:30
Speaker 2: Latin America and the degree of corruption that exists.
32:35
Speaker 1: And for that matter, the US, not that it's a
32:38
Speaker 1: dictatorship yet, but we don't run deficits anything like they
32:42
Speaker 1: do as a percentage of our GDP, remotely like them.
32:48
Speaker 2: Just a couple of weeks ago, I was just shocked
32:50
Speaker 2: at the degree their annual deficit is.
32:52
Speaker 1: Yeah, I know. It's scary. And they have no intention
32:55
Speaker 1: of reining it in because it's an exploitive situation. I
32:59
Speaker 1: had a big, long conversation with someone yesterday about this,
33:02
Speaker 1: how they continually exploit their historic dominance and eminence in
33:08
Speaker 1: the market. So when there's a crisis often triggered by
33:10
Speaker 1: the U.S., everyone goes back into the U.S. because of
33:13
Speaker 1: the safety of their markets and their money markets seen
33:15
Speaker 1: as the preeminent markets. sovereign markets, but gee, I don't know.
33:19
Speaker 1: Nothing lasts forever. And you just wonder how long you
33:21
Speaker 1: can use that. Question for another day, but thank you, Paul.
33:25
Speaker 1: Big picture thoughts there and very interesting. Terrific. Thank you
33:30
Speaker 1: very much, Will.
33:31
Speaker 2: Thank you, James.
33:32
Speaker 1: Folks, I'd love to make a few points to you.
33:36
Speaker 1: In the coming weeks ahead, we will, in the next
33:38
Speaker 1: month being September, we'll have some guest presenters when I
33:42
Speaker 1: am overseas. I'll tell you about that shortly. And also,
33:47
Speaker 1: I would like and ask you again, thanks for all
33:50
Speaker 1: the correspondence and Google reviews and all that, but what
33:53
Speaker 1: I would like you to do, if you would, is
33:55
Speaker 1: just tell one other person about the money puzzle. That's
33:59
Speaker 1: what I would really appreciate if you could. Okay, and
34:02
Speaker 1: keep those emails running, themoneypuzzle at theaustralian.com.au. Talk to you soon.
34:14
Speaker 1: Thank you.