A super fund aimed at those with grandchildren

Andrew Maloney is the CEO of a start-up called Student Super which began in February this year.

He has also spun off a super fund for grandparents to set up for their grandchildren called Golden Goose Gifting, to help them get a 20 year head start on their super while they’re still babies.

It’s a fairly vanilla superfund where the money goes into indexed funds; there’s no fees below $1000 which is a pretty good thing. The fee is basically 1% plus $78 in administration fees and it looks like an interesting option for grandparents to buy for their grandkids.

It’s also worth talking to Andrew for his investing knowledge. He’s a long standing subscriber to The Constant Investor who has done quite well, so I asked him what his methods are.

Here’s Andrew Maloney, the CEO and Founder of Student Super and Golden Goose Gifting.

Andrew, so you’ve launched something called Golden Goose Gifting, tell us how it works.

Yeah, we’ve launched a super fund essentially for university and high school kids in February this year and that was our original target market.  Then we started getting some phone calls, originally a friend of mine called and then we actually got phone calls to our call centre from grandparents saying how young can we open a super fund for our grandkids, we want to put money into the super fund.  We ended up with just so many phone calls, five or six, we thought there’s an actual product here.  You do the maths on compounding an extra 20 years into your super, instead of starting at 18 you start as a baby or a five year old, you really add a lot to the compound curve and it wasn’t very hard for us to create.

We’ve just created a simple ability for parents to open the account but grandparents to gift into a baby or a child’s super fund.  So we launched that about a month ago and called it Golden Goose Gifting. 

Is there any difference between that and a normal super fund?

To be honest, not really.  The only difference is just making sure as a fund we know who all the players are so we didn’t really have to build that much, it was just a matter of making sure we knew who the actual member was, who was opening the account.  If you’re opening an account as a baby or a child obviously someone is doing it for you.  By law that has to be a parent or guardian.  It’s important for us to be able to know that that’s been done correctly and then it’s just the ability of the parent/guardian to add the contact details of people might want to gift to it, it could be uncles, grandparents, anyone, friends.  That way the fund knows who all the players are, where the money is coming from and who exactly is a member.

That’s the layer of software we’ve built on top and it’s fairly simple so we’re not charging anything for it, it’s just a normal super fund underneath with its charges and there’s nothing for the gifting.

I take it from what you say that somebody could open a super fund for a baby in Australian Super or Host Plus or Rest or something if they wanted to.  There’s nothing particularly unique about what you’ve done, it’s just simply that you’ve created the product, given it a name and just made it.

Yeah, we’ve just made it easier.  Also we’re now building in, for example, EFT functionality so in that process we’ll ask you – at the moment it’s B Pay but it will become EFT and when that happens it will just ask you what your bank account details are and do you want to give $5 a week or $10 a week so the actual payment process will be very easy.  If you do it in another fund you’re going to have to do it B Pay and you’re going to have set it up at your own bank account, so it’s just a little bit cleaner and simpler through us.

And would the contributions by a grandparent to the fund affect their own superannuation circumstances?  In particular I’m looking at the maximum contributions that a person can make.  If someone was already maxing out their super would this take them over the limit?

We got advice on this and it doesn’t have any effect at all on the grandparent’s tax, super, anything.  It’s equivalent to a grandparent putting $50 or $100 in a birthday card and it has no impact on grandparent at all. 

And what about the tax situation of the fund, of the child’s fund?  I assume that the result is that the tax is the same, it’s 15% contribution tax and then 15% ongoing tax inside.

Actually, it is considered a personal contribution which affects the 15% and then after that it’s normal.  The other thing with tax and children I’m only now starting to research now that we’re getting more questions, is tax for children outside of super is quite an interesting complicated area.  Children are taxed higher than normal adults and so we’ve actually got sort of a double tax.  We don’t get caught up in the complexity of child tax, which if you go to the ATO website and have a look at they’re quite complicated.  It’s actually a lot simpler to do it in Super.  You don’t want a scenario where you’d be putting serious assets to a child’s name outside super, the income on that would kind of get taxed at an extremely high rate.

In fact they get taxed at the top marginal rate, don’t they?

That’s right, yeah.  Go to the ATO website but I think it’s $416 or $460, after that the child gets really high tax, the top marginal rate.

I presume that the funds that this is attached to is simply the student fund that you already set up in February, so the money goes into the same pool, is that correct?

Yeah, it’s absolutely the same.  That’s kind of a nice extra part of this, is that if you’ve got a young child and you start gifting for a couple of years into it when they’re very young when they’re 18 and they wanted to stay with us they’re going to have a super fund that is actually built for 18, 19 and 20 year-olds.  We’re building up educational components and it’s a fund built for that age group.  I think it’s kind of a lot of kids now at 18 and 19 have very small amounts in their accounts and therefore don’t care about super, I think if you’re an 18 year old whose grandparents have been putting money in and you’ve got a reasonable balance you’d care a lot more about knowing this is my super account, I’m going to tell my employers, I’m not going to have duplicate funds.  I think that’s an extra sort of kind of benefit, that they end up in a good fund for young people.

What do you do with the money?

We just went to our asset consultant when we set up the fund and said our brief is we evidence based investing strategy, what do you recommend?  They came back and said that’s an easy request, if it’s evidence based it should be index investing.  Then we looked at the different index products out there, Vanguard, Blackrock, Macquarie, and we chose Macquarie just based on their pricing.  We use Macquarie True Index product.

Which index products are we talking about, is it a range of ETFs or what?

Yeah, our asset consultant set the ratios of defensive to aggressive assets and then they sort of take the Macquarie True Index, international index and if it’s in our high growth that’ll be a bigger percentage and if it’s in our balanced it would be a smaller percentage and so it’s cash property index of international markets and Australian shares in different ratios depending on the investment option.

You do get a variety of options, do you?  You can have high growth and conservative, and so on?

Yeah, what we do is just based on our research before we launched the fund and we talked about with young people having options but they didn’t actually want them because they didn’t feel confident they had the knowledge to know which to choose.  In fact their bias was actually to choose highly conservative, we think about 30% would have chosen cash.  When we launched the fund we set it up so that when you first come in your first $1,500 is in cash and that gives us a bit of time to educate the member about investing.  Again, about 30% of students didn’t even know super was invested so you’re really starting with very low knowledge base.  The first $1,500 in cash, after they’ve clocked 1,500 we put them into the growth option, again with no choice, and until they get to $5,000 at that point we say right, now you can choose balanced, growth or high growth. 

We kind of want to get them on an education learning curve before we finally say to them okay, you’ve now got $5,000 in your account, you can choose which of these three options.

What are the fees?

Our fees are just under the average of all super funds, it’s 99 basis points and then the admin fee is $78 per year or $1.50 per week.  But we then discount that, if you’ve got a balance between $1,000 and $5,000 we halve the admin fees.  Instead of $78 it’s $39 plus the 99 basis points.  Then under $1,000 we actually have no fees at all.  That’s particularly good for our teenage members who are joining as teenagers and doing casual work at Christmas, that kind of job where you might get a little bit of super over Christmas, $200.  What was happening to them is they were then being charged by the normal super funds $200 to look after that over the next year and of course by the end of the year they had nothing and then they’d get another Christmas job and it would all repeat.  We’d call this thing the zigzag of death, it’s just a little bit of balance, eaten by fees, more small balance, eaten by fees.

The easy solution that we saw was to charge under $1,000 and you protect those early balances.

Do you lose much money on that though, is it a sustainable thing to do?

I guess in the early part through the balance the basis point fee is tiny anyway, it’s mainly the weekly admin fee we’re losing so it’s not a lot of money.  I guess it works for us as long as the customer stays with us for a long time.  We just see our job as doing a good job as a super fund and our member base like us.  The background is we just did a study of 4,000 uni students last week and asked them would you recommend your current super fund to your family and friends, and the net promoter score for the current industry was minus 60, so that’s a really negative score.

We think it’s not a big challenge, really, to provide a decent product to a member base and have them say look I’m pretty happy with my super fund and I’m going to stay with it.  One of the things we do is when they graduate we change names to Professional Super, obviously it feels more relevant if they’ve got the right name.  Then we tailor our website to young professionals when they move through to that.  We think they’ll stay.

One of the things you were telling me was that you’re a Constant Investor subscriber, Andrew, and you’re an investor yourself.

I am.

You were saying that you’ve done quite well at that.  Perhaps you could explain to us what your strategy has been.

Right.  I guess I’ve sort of had a career of starting businesses relating to students which is not generally very profitable so I’ve been lucky that my investing has sort of funded that.  Probably my best call was buying realestate.com.au at 60 cents which I think it’s $76 today.  Sadly I didn’t get the full run, I think I ended up selling out at about $13.  I guess my investment philosophy is sort of Charlie Munger, Warren Buffet, good companies at a good price.  Most of the time I’m looking at things and I’m saying no, the idea that you don’t have to invest in anything and just wait for the opportunity.  You’ve got to understand business themes other people don’t. 

REA was amazing, I could see the internet was definitely well-developed, the internet wasn’t going away.  The real estate industry was big, it was clearly a lower cost solution to search for real estate using the internet.  I was amazed that people around me couldn’t see the same thing, it was like how does this go any other way.  It was a natural market so it was going to spiral up into a dominant position and so I sort of always have had a very concentrated portfolio and when I saw realestate.com.au I think I pulled out credit cards to invest in that. 

Another interesting one I had I remember years ago was Carsales, I’d started investing in realestate.com.au and what else is like this, I saw Carsales and couldn’t find it listed on the stock market so I called them up and said who owns you and they said we’re an unlisted public company.  I rang a friend and said what’s that, and he said well it’s like a public company that’s not listed but you can actually ask for their share registry.  I rang them back and said can I have your share registry please.  I wanted to buy $10,000 worth of shares off someone who wanted to sell them, and my plan was just to write to some smaller shareholders and say if you want to sell the shares I’ll pay you a dollar or something, and proceed.

What I didn’t realise is that James Packer was doing the same thing, so they were really sceptical when I called up and really uncooperative but in the end I got the list and wrote to some people and ended up with some Carsales shares before they listed.  My investment philosophy is pretty simple, it’s find a good company, what’s its return on equity, if you give them a dollar do they give you $1.20 back, and then wait for the price to not reflect their growth trajectory.

What have you invested in at the moment?

Again I’m pretty concentrated, at the moment I found this company about five years ago, we built an app for uni students, it’s still one of the bigger apps used by uni students, but maps all of university campuses.  We needed to draw maps and so we needed aerial pictures.  We found this company called Nearmap that was taking photos every three months, it was fantastic service and we rang them up and said can we use it.  They said we don’t have a pricing to give you guys but just use it for nothing and call us in three months and we’ll work out a pricing model for you.  I would call them every three months for about two years saying hey, we’re using it, we’d love to pay for it and they kept saying yeah, don’t worry, keep using it for free. 

Eventually I realised these guys were doing so well they just didn’t need my money, that’s how successful they were.  I started buying Nearmap shares sort of probably four years ago and so now that’s a big part of my portfolio.

You would have been paying around 50 cents, would you?

Yeah, I started at around that, I bought a lot around 60 cents and the big debate at the time, only a year ago, was they’re successful in Australia, can they duplicate their business in America and I looked at the numbers and it just seemed that they were, and of course once they got America running where will they go next.  America had a big competitor so it was actually quite a tough market to go to whereas the European markets didn’t have competitors.  I thought at 60 cents I took the view that America was definitely going to work and if that happens they were definitely going to go to Europe, and couldn’t understand why it was 60 cents.

What do you think of them at $1.60 instead of 60 cents?

I think the share price went up to $1.80 and I was very tempted to start selling it at $1.80, I think it’s got a great trajectory and in three years and five years it will be double or triple but $1.80 was getting a little ahead of itself.  I was very pleased it actually raised capital at $1.70, so they’ve been really good at raising capital.  Those guys have guided for $1.70, as long as they’re patient they’ll make money.  I thought $1.80 was getting a bit too expensive but I wasn’t brave enough to sell.

Fair enough.  Good to talk, Andrew, thank you.

Pleasure, good on you.