This week in The Money Café, James Kirby and I discuss:
- The trajectory of interest rates;
- Sydney house prices down from the peak, but Hobart’s boom goes on;
- It’s been a tough year for SMSFs;
- Why trailing commissions are clinging onto life;
- Financial institutions are pulling out all stops to capture millennials – just look at Raiz; and
- Paying performance fees is a good idea, in the main.
Hello, I’m Alan Kohler, Publisher of The Constant Investor.
And I’m James Kirby, Wealth Editor at The Australian.
And we are The Money Café.
The Money Café.
James, it’s good to see you. I’ve had a week off.
A cold July week off.
You stayed around here then, obviously.
Yeah, and I hope you had a decent chat with somebody last week in my absence.
We did, we had Eli Greenblatt last week and he is terrific particularly in his world of retail. It’s so interesting, what a great beat he has and he does it very well.
This week I noticed that we’ve got RBA coming out with a rates on hold decision which was not in the slightest bit unexpected.
Yeah, the 23rd in a row.
23rd in a row, 23rd month in a row, but the interesting thing is they said in the statement, they pointed out in the statement, that wholesale interest rates are rising.
Yeah, they actually said a few things. They also said that lending conditions could continue to tighten.
What is happening to actual mortgage rates?
Mortgage rates, well this is irrespective of the RBA and I don’t mean that lightly, I mean it for a fact. People should keep an eye out because rates are rising, they’re creeping up basically. The official cash rate is 1.5, it’s been like that for two years, hasn’t changed, but the banks are lifting their rates all the time and the regional banks are now touching 6%, Alan, on standard variables and they’re over 6 for investment loans.
What are they doing? The buggers. They’re profiteering are they not?
They’re doing banking which is lending money and making money out of it.
Why are the regionals doing that?
The ostensible explanation is that the funding costs are higher for regionals than big banks.
We believe that, don’t we, because they are.
Apparently they are and the point to make is if you’re an investor and you want to be pretty plucky anyway to be looking at property just now but if you were looking at it if you’re picking mortgage rates 5% and 6% there are no property yields out there that are 5% or 6% unless you’re in something quite exceptional like a country town or something, and the prices are falling. It’s tough, that’s a tough scenario.
Good thing you get a tax deduction on the difference.
That’s all you’re going to get for the next year or two, your tax deduction on your negative gearing which is fine as far is it goes.
As you say house prices are falling. We had the June results from Core Logic the other day, obviously always in the first day of the month, and basically the big picture story is that prices in Sydney are down 4.8% from the peak.
All prices as such, yeah.
National average I think is 1% or 1.5%, Hobart prices up 12.7% for the year which is the second year in a row they have gone up by one eighth.
The exception that proves the rule.
Isn’t it interesting?
It is interesting, sure, it had to happen I suppose sooner or later.
The boom in Hobart goes on.
Did we say on the show already that the average house price in Hobart is now higher than Adelaide?
Yeah, you’ve told me that.
I just find that an enthralling piece of information because it tells you a lot about both cities.
It tells you that Adelaide is really falling behind, it does.
That’s right. Anyway, the point is that house prices, according to the people I’ve been surveying, the economists and house price experts – nobody has the faintest idea, of course. Leaving that aside the general feeling is that we’re likely to see 10% decline top to bottom.
I’m not a pessimist at heart but I have to say at least, at least.
Sure. The 10% to 15% would make it a standard decline from a boom, that’s what they always are.
When was the last time we had a standard decline?
They happen all the time, you can see it in the graph. I can’t remember the last time.
Was it in the last decade?
2012 was down 4%, there was a fall then. The one before that in 2008 was 10% and the one before that to 1992, I think, was also 10%.
Particularly prior to the 1992 decline it was an absolute red hot boom as we have seen here. Sydney prices are up 70% from the bottom, red hot boom.
That was red hot, yeah.
If you get away with a 10% decline after a 70% rise you’ve done okay I reckon.
Yeah, as long as you’re not on the wrong side of it and you didn’t buy at the top, I know.
Didn’t buy at the top, that’s it.
I do worry, actually, everyone is different and this time around there’s a few things. There’s no wage growth, that’s one point, so the ability of people to repay mortgages you really wonder about that. You worry about the fact that people can now have property in super.
That all depends on unemployment, it all depends on unemployment.
Yeah, which is holding us up, I think.
That’s right. If unemployment rises then you’ll see a particularly more savage house price decline I would think.
The thing that makes me worry is the economy. You say nobody knows, and it’s true nobody knows, but some know more than others and I would never listen to property industry people on this subject, you can’t. If you ask a property developer or an agent what else are they going to say? It’ll be fine, things are okay, listen to Harry Triguboff this week. The bank economists really know the numbers and the banks know more than anyone else, I think, as a helicopter view that both ANZ and NAB have pushed out their estimates as to when things will stabilise. Both of them have made their forecasts more negative than they were and they are both forecasting – as recently as last March they were saying prices were going to go up this year and now they’re saying they’re going down.
They were certainly wrong last March.
Yeah, I don’t know where that came from but they have been caught with that.
It’s worth noting that Mark Delaney from Australian Super, which is the biggest super fund, I think they’ve got over $100 billion.
Yeah, they have, they are the biggest by a mile.
He has been out and about, I don’t know why he’s been out and about but he’s been in both The Australian and The Financial Review talking about how they’re reducing their exposure to equities.
I noticed that number one, it wasn’t Ian Silk, it was the Chief Investment Officer, and I noticed obviously they invited people in to hear our friend opine so I think they’re softening up their gigantic customer base for a decline in earnings next year.
I suppose so.
Because it was 11% this year, you can’t do that every year as a super fund.
Of course not.
Or anything like it.
Anyway, they’ve said that they reduced their equities exposure, or they’re going to, from 62% to 55%.
That’s a fair peel off, isn’t it? All around the world I suppose.
The 62% is unusually high so it really should be less. Last time I looked at the Future Fund its exposure to equities was 6% in Australia, 6% of its portfolio.
Yeah, only 6.
Only 6% in Australian equities and 11% in international equities, total of 17% in equities, in total 17%.
You’re saying the biggest super fund seems to have piles more shares than Future Fund?
Yeah. The Future Fund performs better than they do, heaps better.
That’s interesting, because I would have assumed that they were more or less even keel in their allocations.
No. So they have got way too much equities I would think because don’t forget that allocation in equities doesn’t include infrastructure so all private equity or venture capital, those sort of things, which is where the Future Fund has got its money in less liquid investments and the Future Fund doesn’t have the same problem that super funds like Aussie Super have which is that they have to be able to give people their money back in three days.
Yeah, they can actually calendar their payouts, can’t they?
Yeah, they know exactly when their payouts are but Aussie Super and the rest of them if somebody writes to them and says I want my money so I can switch it into Host Plus or Hesta they have to cough it up in three days.
They have to have that at call money.
They have to have more liquidity so they can’t put so much into airports and toll roads directly, they’ve got to own Transurban.
I’m wondering, it looks so good, we were talking about that market in Australian Super, 11% in one year, 12% last year. The long term, long-long term average on super funds is more like 6% or 7%. The SMSFs, there’s a million people in SMSFs, and I’ve got to say this has been a rough year for them in that the government really crunched down on them. The industry funds look so good, you say to yourself gee if they can do 11% that’s a high bar running money by yourself. I was just wondering if you’ve got a million people in SMSFs is that kind of a natural peak? You’ve got 25 million people in the country, how many people could you reasonably expect to run their own super?
I don’t know how many but a lot of that million people are in the SMSF because they want to have their money in cash because they’re scared.
They want a lot of cash, they want a big holding in cash.
That’s right. A big part of the reason people have an SMSF is because they want to have more cash than the super funds do because they’re more scared of the markets. Their returns are way less than 11%.
Because they got stuck in low interest funds.
Because they’re getting 2% from cash.
I’m wondering is it a natural peak anyway, is there a natural peak for the SMSF group at a million? How many could you reasonably expect to have?
I don’t know.
Yeah, well it’s never been tested I suppose because it was all new and it’s been growing for so long, but it’s just one of those things that I have started to wonder apart from the fact that it’s been a tough year for them I think there might be something of a natural plateau kicking in there for the SMSFs and some of the stuff coming out still about advisors and shonky financial advisors and the things they’re doing. The latest thing ASIC exposed was these people going in to financial advisors and the advisor is telling them open an SMSF so we can put all your money into one property and of course the guys are linked to these properties. The number one reason ASIC did the survey, the number one place that new SMSF operators wanted to put their money was property. It’s scary really.
Well they won’t be getting much return from property over the next couple of years.
No, they won’t.
Property is not an unsafe investment, it’s fine, it’s just not going to return much over the next few years.
Yeah, unless prices go up it’s not going to return anything because we were just saying 6% rates, 5% rates, 4% yields, 3% yields, nothing coming in. It actually costs you to have an investment in property.
While we’re talking about financial advisors trailing commissions, it’s like I won’t believe they’re gone until they’re – you know what, the Irish Prime Minister or at least what Conor Cruise O’Brien said about the dodgy Irish Prime Minister one time, Charlie Haughey, he said I won’t believe he’s dead until I see him buried at the crossroads with a stake through his heart. I won’t believe trailing commissions are gone until I see them buried at the crossroads with stakes through their heart, Alan.
Because of what we talked about last time with the grandfathering because FOFA grandfathered existing trailing commissions and all these financial advisors are living on that.
Yeah, but BT, to be fair to them, and also Macquarie Bank have voluntarily terminated all grandfathered commissions this last two weeks.
There you are.
Yeah, did you see that?
Yeah, I think you told me about it.
No, I couldn’t have told you about it because it didn’t happen until the last few days.
You must have been pressing it then because I’m sure you did.
I don’t know if I was pressing it but there remains a variety, IOOF for instance, still has trailing commissions and they stink.
The reason I think that is because we made it our BT Financial Group Mega Trend.
Did we now?
As we need to do this time as well.
Yes, we need to do it this time as well. Why don’t we make the Mega Trend the global efforts by the financial institutes to attract younger people, Millennials, to capture them and the good and bad in that.
Which neatly segues to Raiz.
It’s good, isn’t it?
Tell everyone about Raiz because no one knows who they are and they don’t even know how it’s spelt.
It’s Raiz and it used to be called Acorns which is an American business they copied, brought it to Australia, started off calling it Acorns in Australia and now it’s called Raiz, and it is a Millennials saving platform. They’ve even got a super fund that they’ve recently launched.
They have. The idea is it’s like a coin jar, and I’ve always got a coin jar, but trouble is I don’t have any cash anymore because you’re always using pay wave credit cards so I haven’t got any cash, my coin jar is languishing, it’s kind of not going up.
But surely these guys have a design that it’s digital, I assume.
Yeah, so what they do is they round up whatever payments you make on your credit card, it gets rounded up to $1 to the nearest next dollar and the difference is put into their fund.
Is it just credit cards, is that the main?
Yeah, just credit cards. When you pay wave your credit card if you buy something for $11.65 35 cents is goes into – because it’s rounded up to the next dollar.
Yeah. I see there’s 16 million credit card accounts in Australia.
My son as an account and he reckons basically you’re saving about $600 a year.
Okay, well it’s painless.
It’s painless, you don’t kind of notice it. There’s a little button that you can put another $10 in any time you like, you just hit the button and $10 more goes in.
It’s encouraging people to save.
Raiz, basically company is a fund manager.
What do they do with the money, how do they invest it?
They invest it in ETFs and there’s a range of ETF strategies ranging from conservative to aggressive.
There’s one thing I’ve got to intervene with here which is they had a pretty hopeless float actually just in the last week or two ago.
I don’t know whether that means they’re good or bad but certainly they got a lot of criticism because I can’t exactly remember the numbers but basically they’ve done about 15% from the day they floated.
More than that, in fact. They floated at $1.80 and they’re down to $1.12.
Okay, well that means it’s not a great business or someone priced it wrong.
It was overpriced in the float, of course.
Yeah, of course.
Honestly, in my experience there’s not many floats that are not overpriced.
They rarely make a mistake on the downside.
They especially get overpriced when the founders take money off the table in the float and use the IPO to get some cash.
Yeah, a liquidity event as they like to call them.
Liquidity event, which is what happened in the case of Raiz because George Lucas, the founder, took out $1 million and $1 million went to the staff.
Personally, I don’t think that’s terrible.
Unless you were in the IPO. You like the business as opposed to the stock?
I like the stock too. Obviously with hindsight $1.80 was a bad price.
I wouldn’t be interested in it as a stock.
Is $1.12 a good price? It probably is.
I like the idea, the concept.
The question is how much money will they end up managing because they charge for accounts $5,000 and below they charge $1.25 per month fee.
I think the average amount of money in it is about $1,000, that’s all they have.
Is it, okay.
The average account is $2,000, the total FUM, funds under management, are $200 million that they’ve got now.
That’s tiny in FUM game.
That’s right, they’ve only just started.
Why did they float so early for?
It’s a start up.
Yeah, they shouldn’t have floated so early, that’s what’s wrong with them.
George needed the cash obviously, he’s obviously running his mortgage up funding the business to start with and he needed some money.
It’s good. As a Mega Trend it’s a good one and it’s timely because there are efforts all the time to attract Millennials, to get them engaged, to invest and to get involved in super, and that’s another one.
I put in a call this morning to interview George for The Constant Investor so hopefully I’ll get him next week.
You’ll definitely get him now, he has to come on now to clear the air.
Okay. Is it time to do questions?
I think it is.
Okay, let’s do them alternatively.
One here is addressed to you but I think he’s mistaking you for me.
Dear JK, yeah.
Dear JK, he says in your weekly show you said you didn’t like ETFs and I think I said I didn’t like them, you like ETFs.
That was you, yeah that’s right.
Because they were very passive but you also said you weren’t a fan of the performance paid or incentivised managed fund managers because they were focussed on performance only.
I don’t know who said that, it wasn’t me.
What then should fund managers – or rather how should they be paid if not on performance? The reason for my question is that I intend to move away from employing a financial planner who charges me a fee to maintain an agreed asset allocation using passive style wholesale funds, largely Dimensional FM, because I can do this job quite easily myself by using a diversified ETF. I do have exposure to equities and a fixed interest mixed, keep up the good work says Mark. I think JK and AK are both in favour of performance paid managers, fund managers, are we not?
In the mean.
In the mean?
Yeah, there’s nothing inherently wrong with it.
Well, you’re in favour of paying for performance. I note that Mr Thorburn of NAB came out the other day, yesterday, and said he’s against bonusses.
Yeah, what was that about? Including his own I hope.
Yeah, paying for performance is like bonuses. It’s like paying a bonus to an employee. Your fund manager is an employee and you pay them for performance, that’s fair enough.
I don’t think there’s a perfect recipe. If it’s too much about performance the guys push the boat out and they bend the rules, this is the problem. If it’s not about performance they’ll lose interest. It’s very hard to get it, I wish there was a perfect Answer, Mark, I don’t think there is. A good balance of performance and ongoing justified fees makes the best sense I think. Will I read the next one? You want to say more on that one?
Just on Mark I just want to say I’m totally on board with sacking the financial planner if all they’re doing is keeping you in passive investments because he’s hardly doing anything and you’re probably paying him an absolute fortune.
I would say to Mark though be careful on moving off your plan, Dimensional are impressive actually, I’ve always thought, in that game. This is from Clinton. Hi all, thanks again for your hard work with the podcast. It’s not hard work at all, Clinton, it’s easy. Around eight months ago…
Don’t say that, James, this is so hard everybody. We spend hours preparing.
It’s easier than the other work we do.
You wouldn’t believe how hard it is.
Around eight months ago I wrote to The Money Café to ask whether Malcolm Turnbull’s plan for income tax cuts were realistic or just politics. It was understandably dismissed as politics by James and Alan. As of this week, first week of July, many low and middle income earners will be getting an extra $11 a week. Did you expect these cuts to be legislated and will they bring any benefit to the economy? Hooray, they got an $11 a week tax change through. Honestly, I think it’s the smallest of achievements and the benefit to the economy will be proportional with the size of the tax cut which is small.
Also bear in mind that the tax cut will not appear in people’s pockets or bank accounts until a year’s time.
Because it’s a rebate, isn’t it, of some sense.
It’s at the end of the year so you don’t get it now.
Yeah, it’s a microscopic achievement.
You’re such a cynic.
It’s certainly politics but did we expect the cuts to be legislated? Of course. Who is going to turn down a tax cut in an election year, really.
Yes, whether we’ll ever see the full plan, the polls would suggest we’re not going to see it because the polls would suggest that Labor are going to win, every one of them, but we’ll see.
Another question, from Dave this time. Hi, Alan and James, Money Café show is great, I love listening to it while I’m in Europe for the year.
Good for you, Dave.
I want to know your thoughts, if you have any, about the social trading platform of eToro. Do you think the service might come to Australia? I’m a user and just testing the waters with it for the past year. Copy traders and copy funds are the features I use as I don’t have time to be informed, I prefer a long term investment but I feel I am missing out on gains in the market. I’ve had a look at eToro.
Good because unfortunately I didn’t look at it, yes.
I like it.
Well it was a fairly superficial look, I have to confess.
What is it, a trading app?
It’s a trading platform but what they do is they allow you to copy funds, other funds, and all you do is hit copy funds and off you go and your portfolio copies somebody else’s, like a successful trader.
Yeah. The way they make money is through the spread. On the spread on equities…
Yeah, because you’re going to be trading.
But it’s not much of a spread, it’s 0.09% spread.
Is it US, is it European?
Yeah, it’s US, it’s American.
I see, that sounds interesting.
It is interesting, you should look at it, have a look at it. You should do something in the wealth section of The Australian about it, I’m sure your readers…
Yes, I’ll put that on my diary, Alan. Okay, well thank you for that, Dave, there is lots of them and it’s certainly original, I haven’t heard of such a service before.
What’s more you can trade commodities, oil, you can trade cryptocurrencies on it.
If you’re very brave.
But you can follow other people who are losing money too.
You can all lose money together. That’s about Bitcoin, by the way, nothing else. Hi, Alan and James, thank you for your commentary. You should commend yourself on the positive contribution your journalism has meant to the finances of thousands of Australian families over the years. Thank you very much, Matthew.
Commendations, James, well done.
Isn’t that nice. In a recent podcast James mentioned The Australian ran a broad sheet table of all the super funds and their performance over the last ten years or so. I was wondering if you could pass on the date so I can look it up. Matthew, first of all if you go to the wealth section of The Australian online you’ll see a story called the best super funds. It’s sitting there in the middle, I think it’s in the opinion slot, have a look at that. That’s my sort of own interpretation of the numbers. The full enormous table of the APRA funds was run on, I’m almost certain, Saturday June 2. We’ll just check that while we’re talking but it’s Saturday, June 2, was when it was. That’s how you can have a look at that. Okay, next question.
Next question I’ll have to read out. Good morning gentleman, great show. I haven’t been able to do a cycling trip around Europe but I am able to walk around the shores of Lake Macquarie, Hunter Valley, while listening to your highly entertaining and informative show. That’s good, Chris – this person’s name is Chris, he’s currently walking around Lake Macquarie.
Good for him, a nice part of the world.
Don’t fall in, Chris. I’m a bit new to this but I think Wilson Asset Management had a new fund open in the last month or so and it closed last week. It’s shares, WGB, started to trade this week. If that is more or less correct can you tell me what is the difference of joining the fund instead of waiting and buying the shares when they start to trade, and if you can ASX shares have gained a bit in the past few months, do you see any headwinds for this stock. What Wilson Asset Management launched, Chris, was a global fund. Geoff Wilson’s fund has been going for quite a while, there’s Wilson Asset Management is a listed investment company.
There’s a string of them, isn’t there, there’s a charity based one as well and they’re a very good fund manager. I think we should put that on the table, they really are.
They are very good. What they did was they have launched a global one, that’s all, and it’s investing in international equities and they’re going to bring their expertise to bear on that. Obviously, international equities are all the go lately with Platinum and Magellan doing so well getting all this money and Geoff Wilson wants to get a bit of a whack of that money, and why not.
And I imagine he’s as capable as anyone in that game, in fact Platinum and Magellan have not been having a good run this last couple of weeks.
I reckon that now is precisely the time to wind back your international equities and head into Australian equities because I think the Australian equities have underperformed since the GFC.
That’s a long time, that’s a decade.
It’s a decade, Australian equities have done very badly and I think what we’re heading into is a period of outperformance of Australian equities.
Underpinned by miners and banks, is it?
Not banks, definitely not banks.
But they’ll recover, if they don’t recover you can’t outperform, really. They’re 35% of the market.
I’m not talking about the index I’m talking about Australian stocks, small caps in particular.
Medium caps and mining companies. The market as a whole will do better, I think, because the banks won’t go down much because they’ll be propped up by the dividends.
They’ll be neutral.
They’ll be neutral, I think, and the mining companies will all do well so I reckon it’s time for Australian companies to do quite well. It’s partly because the Australian dollar will be weak so all of the Australian international stocks, such as CSL and Cochlear and that, will do well because of the currency. I actually think that the tide is turning on that but I suppose time will tell.
Alright, that’s interesting.
So the headwinds for the new Wilson Asset Management LIC are going to be that international equities probably will, in my view, underperform.
Relative to Australia.
Relative to Australia and also the American market, what’s going to happen there.
I wish I knew, you’ve got to think honestly it’s heading for a fall and we’re heading towards the seriously rocky September/October crash season.
Well we’re having a trade war.
There is seriously a lot of things to worry about.
Interest rates are going up.
Not to mention the president.
Not to mention the president, let’s not mention the president, don’t mention the Trump.
His erratic approach to everything.
James, I think we should leave it there for today. Don’t forget, everyone, you can subscribe to The Money Café on Apple Podcasts or your app of choice. While you’re there it’s helpful to leave a review or rating, it helps listeners find the show. Also send in a question, we’d love to answer it. E-mail us the question to email@example.com. Until next week, I’m Alan Kohler, publisher of The Constant Investor.
I’m James Kirby, Wealth Editor at The Australian.
Talk to you next week.