Why you should always look for a company that has a female CFO, what’s happening with the property market next year, and the arrival of Amazon in Australia.

This week James Kirby and I discuss:

  • The first outlook for 2018 from UBS;
  • What is going on with the property market;
  • Telstra and SMSFs;
  • The arrival of Amazon;
  • Bitcoin and the institutional players come to play;
  • Malcolm Turnbull’s tax cuts;
  • How to invest in clean-tech; and
  • ETFs.

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.

Now, James, raise your bat.

Okay, bat is raised, Alan, open face.

100,000 downloads we’ve had so far. 

That’s right, I just heard.

I call that a tonne.

A tonne, indeed it is.  Isn’t it good?  Folks, thank you very much.  We’re absolutely delighted with that.  100,000 downloads already and we’re not even – I don’t know, we’re not even six months old, never mind a year old, so we’re only starting.  Keep coming to the site, keep listening to the podcast and sending in the questions too, we’ve really enjoyed doing them all and we’ll do some in a while.  Now, Alan, what’s on the agenda?

Well, we’re sitting here on Wednesday and tomorrow the first test in the Gabba.  Are you going up to Brisbane for the first test, James, you being a dedicated…

I would love so much to be there, oh boy.

Wouldn’t you love to be there for the first four bowls of an Ashes test?

Yeah, it’s going to be good.  I hope it’s going to be really competitive.  I mean, I don’t think it’s going to be a walkover and I really don’t think Australia is going to just be a stroll in the park.  Too many people think that.  I’m not sure, you know, neither team are fabulous really.

I’ve got my tickets for the Boxing Day Test in Melbourne.

Yes, good.

They arrived yesterday so I’m looking forward to that.

Yeah, it will be great.

And it’s coming up to the end of the year and apparently we’ve got the first outlook of the year for 2018 from UBS, what do they say, James?

First, outlook for 2018, it’s a bit like spotting your first Christmas tree, your first brokers report that comes across your desk that looks at 2018 and every year it’s a race to be earlier and earlier.  So, this one is from UBS, as you can imagine, it’s fairly well done. 

I’d say it’s probably, David Cassidy.

It is David Cassidy, you’re right, that’s right, I was just looking for his name here.  It’s fairly bullish I’ve got to say, they’re talking 8% or 10% again on the Australian market, they’re saying it should finish around 6,275 and it’s 6,000 this morning.  I’m sure what people want to hear is what are their stock tips.  They are, Alan – these are the jump outs to me anyway – BHP, can’t get away from it I suppose, and part of that is that they’re saying that if there’s going to be an upside in the Australian stock market it’s going to come from commodities and mining.  They are neutral on banks and a little bit sceptical about China and online plays and healthcare plays.  But they’re tipping BHP, Origin, AGL Energy – there’s three sort of resource and energy stocks – and two gambling stocks, Aristocrat Leisure which is like a gambling technology, and Star.  It’s interesting they tipped Star and not Crown, and I can see why they are because to me Crown is in disarray really.

I’m very sorry to hear they’re tipping gambling stocks, it’s about time those gambling stocks started going down.

Betting on gambling stocks.  Well, I have no problem with gambling stocks and they’re a legitimate part of the market.  Actually, Woolworths is there and Woolworths if a gambling stock.

It certainly is, so there’s three gambling stocks.

That’s right, isn’t that interesting, three gambling stocks, three or four resources stocks and no banks in there, folks.  I don’t actually see any financials either.  That gives you an idea of where the big international brokers are looking at in our market for next year and it’s fairly up-tempo, fairly up-tempo.  Though they do make the point that we will lag international markets.  But that I think they mean Europe especially, but so be it.

Speaking of next year I suppose a lot of the listeners want to know what’s going on with the property market next year.

Yeah, are you looking at clearance rates?

Well CoreLogic put out their clearance rates today I think and they’ve shown that for the past four weeks Sydney has had an auction clearance rate under 60%.

That’s low, right, what’s normal?

And last weekend was under 55%.

Right.

I mean considering in the peak of the boom they were 80% clearance rates.

Yeah, okay.

Clearance rates are a bit of a forward looking indicator and so what that indicates – so, I rang up CoreLogic this morning to say what do you think that means for next year and the bloke there, Cameron Kusher, said that he thought that it meant minus 10% to 15%…

Where?

On Sydney properties, Sydney house prices next year.  So, Sydney house prices have only come down 0.6% from the peak but they have come down from the peak 0.6%.

Yeah, and the clearance rates have really come down.

And the clearance rates have really come down, so the indication to them is that we’re looking at 10% to 15% down on Sydney house prices next year and Melbourne clearance rates are holding at this point at around 70%, not coming down as much or even at all to be honest. 

Yeah, actually and I think the Melbourne clearance rates are a fraction higher than they were last year. 

Yeah, so the suggestion is that the Melbourne market won’t fall as much as Sydney’s.

So there is a correlation is there, like a dependable correlation between clearance rates.  I never thought that they were that reliable as an indicator.

Well, they’re reliable-ish.

Reliable-ish?

I mean, they’re an indicator that the market is softening.

Actually, Shane Oliver, who is…

Gees you’re a hard man to please, James.

Well I want to know the facts, Alan, my house is on the line so to speak.  Shane Oliver did a graph there recently where he mapped the clearance rates against the prices themselves and they do actually track, they do on a broad basis.

There you are.

But there’s all sorts of games around clearance rates, isn’t there.  For instance, Sydney never had a lot of auctions anyway compared to other cities and people don’t put their house up for auction, they put them up for private sale when things get rough.  So they’re an indicator on a trend basis but I wouldn’t get over-excited by them myself.  Also, on property did they talk about beyond Sydney and Melbourne?

Not specifically about next year.  I mean the Perth market is starting to recover, it obviously had a shocking time.

Yeah, you’ve got to think that’s actually probably the best value in the whole country now.

Actually, Hobart has been moving this year.  Hobart prices are some of the biggest gains in the past little while.

Yeah, we have had fun with Hobart prices before.

Yeah, we have.

In that we say when Hobart prices are starting to move it’s the very top, folks.

And leaving it aside you don’t know what’s going to happen but the thing is that now is not a good time to invest in real estate, that’s the point.  You’re not going to get the returns.

Yeah, I see Morry Schwartz in the newspapers this morning, all the newspapers this morning, Morry Schwartz being the Melbourne based second generation property developer who also owns The Monthly and these other publications.  He made a really interesting point, he said it’s a generational opportunity to sell property which I thought was really something coming from a…

To sell property?

To sell property, that the market is so strong that it’s like a once in a generation opportunity if you can get the prices…

To sell?

Yeah, to sell.

Okay.

In other words it’s the top of the cycle, he thinks.

Yeah.

I suppose it makes sense that a lot of people would think that but it’s interesting to see someone saying it deep in the market and acting on it.

Well, it’s a bit like saying it’s the middle of the day, the sun is overhead.  I mean…

Not quite as easy to pick the type of market as that.

Blinding insight.

You can deal with Morry, separately. 

I tell you what I don’t think I’d buy at the moment is Telstra but you reckon that retail shareholders are into Telstra.

Hold on a second now, I never did say go buy Telstra, folks.

No, I didn’t say you did.

But a lot of commentators are lively, very lively commentariat, on The Australian this morning.  There were several commentators in there saying I had suggested as much, I hadn’t.  But, what I did say was amazingly Telstra – this guy, Hasan Tevfik, he’s from Credit Suisse, he’s a good guy, a good operator.  He looks at SMSFs.  Now, very few people look at SMSFs in the institutional markets but he does and he ranks the most widely held stocks and then he listed the top 10 most widely held stocks by retail SMSFs and the number one was Telstra, right.  I saw like I think anyone else would see it and say well there you are, I know what’s happened there, they’ve all been left inside Telstra and all the sort of smart money is gone, and all the institutions are gone.  But I rang him and he said no, they’re buying Telstra.  I said are you serious and he said yes, they are.  There was one dividend cut, that dividend cut may not come again, it’s yielding 9% and the retail SMSF brigade are back in Telstra.  Not even that they’re back in but they never left and they’re okay with it.  It’s interesting.  Actually, the tenor of the comments generally were supportive at 9% yield.

Sure.  Well, mostly SMSFs are retirees.

That’s right.

And they’re running their portfolios for income.  They reckon 9% yield is fine, thanks very much, and…

It’s fine as long as the stock doesn’t go down this morning on you.  The thing is it already has fallen…

The main thing you worry about is a dividend cut because the price going down most people – I mean I’ve spoken to a few retirees who are in this situation, who own Telstra and other high yield stocks and they don’t really care about what’s going on with the capital, they don’t care whether it goes down because that’s the kids’ money.  Really.

What, they never intend to spend the capital?  They’re going to live off the earnings forever, they must be in a very good position financially.

No, but they’re living off the earnings.

Yes, they’re trying to.

Well, they are, but whatever it is they’re living off the earnings plus the pension or whatever they’ve got.

Yeah.

For them the question of what the share price does is more or less irrelevant.  The people who care about the share price are the kids who inherit the shares when they die. 

Yeah, but I’ve got to say as an inter-generational wealth management plan it’s blinkered, isn’t it?

The people who are buying Telstra are those who couldn’t give a stuff about their kids.

I can’t agree with you.  I mean perhaps there are some that would say look, the yield is 9 and it was only 8 a year ago, it’s got better.  But, I think generally people watch it go from $5.50 to under $4 and you get queasy.

I’m just saying that most of the people who kind of have some eye on capital growth are happy with 5% or 6% yield with a 5% or 6% capital growth prospect from earnings per share.  Most of the time most stocks you talk to – I interviewed the guy for The Constant Investor, the guy who runs Scentre Group and a few other stocks.  Who did I interview the other day…

This is a property trust, the shopping centres.

A retail trust.  Who did I interview on Monday that was the – Stockland, the guy who runs Stockland, Mark Steinert, and I said what are you, an income stock or a growth stock.  As always he said, they always say this, we’re a bit of both.

We’re a bit of both because I don’t want to lose anyone, fair enough.

Because we’re going to grow.

Yeah.

But, the thing about Stockland, for example – now, Stockland is a property company, they’re developers, they build communities plus shopping centres and retirement villages and they are paying a 5.5% yield and they are getting 5% or 6% capital growth.

Yeah, well I have to say if I’m looking for yield I want to know that the capital underneath is, at the very least, not going down and ideally are going up.  That’s not happening at Telstra and I’d be awfully careful of buying into shopping centre based property trusts, I must say, at the moment and at these levels.

So, do you want to know my favourite yield stock?

Tell me your favourite yield stock?

Fortescue Metals.

What’s the yield on Fortescue Metals?

10%.

10%, that’s because…

Full franked, hello.

Hello.

But the thing is…

That’s because they’ve fallen, right, it is because they’ve fallen and Rio and BHP have been going nicely upwards.

Well, yes.

And they’ve fallen because the…

They’ve fallen a bit because they have a low-quality iron ore.

Lower grade iron ore, but they always had the lower grade iron ore.

That’s it.  So there’s a bit of a risk.  I mean as I tell investors 9 or 10% dividend yield is not risk free, you don’t get that kind of yield without risk.  Yes, there are risks but the question is really if you’re buying Fortescue or Telstra the question is really are they going to cut the dividend?  And, with a 55% payout ratio they’re probably not, it’s probably okay.  It’s not as if they’re 80% or 90% payout ratio…

It’s miles lower than the banks who are trying to come down from those levels.

That’s it.

Actually, you know that guy I mentioned, Hasan Tevfik, the Credit Suisse guy who looks at the SMSFs, he was intrigued himself because he’d never done this before, this exercise of looking at the most widely held SMSF stocks.  Interesting, in the top 10 were all the commodity players.  Now, not Fortescue but Woodside, Rio, BHP were all in there, and Santos.

And so they’ve all turned themselves into yield stocks.

Well, with the exception of BHP who really blew it.

Yeah.

But yeah, it’s there and it was never there before.  Yeah, Fortescue is really intriguing.  We mentioned a few weeks ago about the CFO, the American woman who bought an enormous amount of stock on her own account which I must say made me think she knows something that we don’t and is keen on the stock, it could be good.

The other stocks to watch – this is perhaps a topic for another day, but always look for a company that’s got a female CFO, they’re the best.

Well, there you go, it’s actually hitting that one too.

Because they’re grown-ups, because they’re sensible.

Alright.

Women are much better at managing money than men.  You’re speechless now.

Yeah, I’m not so much speechless.

Everybody, folks, Kirby doesn’t know what to say to that.

Kirby doesn’t know how to move on that one because it’s such a minefield, that’s why so to speak, yes.

Okay, let’s move on then to our next topic.

Well, an interesting point, Alan.

What’s our next topic.  The next topic is…

Amazon.

Amazon.

Yes, now my colleague, Eli Greenblat, has a report in The Australian today suggesting that Amazon are going to open on Friday.

Yeah, well look if I may say the scoop on that was in The New Daily.

I didn’t see The New Daily.

Eli did a very nice follow up but it was a follow up.

I’m sure he’ll take issue with you on that.  So, that’s the 24th of November for Amazon which would give them plenty of time to be in for Christmas.

So, we don’t have Thanksgiving, I don’t know why everyone is talking about Black Friday in Australia, that’s absolute rubbish.

I know.

I mean honestly.

Yeah, it past me by, I’ve got to say.

Honestly, talk about the Americanisation of Australian retail. 

Yeah, take your Thanksgiving somewhere else, please.

Black Friday here is just another bloody Friday.  Anyway, so it’s going to open up.

It looks like it’ll be in for Christmas.

Someone should tell Jeff Bezos we don’t have Thanksgiving in Australia, but yes they’re about to start.  So, I went on their website last night to see if you could buy something other than books.

Sorry, is there an Amazon.com.au?  There is?

Yeah, it’s been there for years.

But that’s always been there, yeah.

It’s all books.  Of course, what’s going to happen between now and Black Friday is suddenly all this other stuff will appear on that website other than books, that’s the idea.

And will the postage be cheaper?

Cheaper than what?

Well, traditionally if you bought from Amazon the book is a dollar and the postage is 15 or something, so that’ll have to come down, right? 

I presume so, surely.

It has to, yeah.

I’m not a big buyer of books on Amazon to be honest.

Yeah, I’ve always bought books off Amazon over the years.  But that’s the problem, the postage.

Well, I presume they’ll have them in the Dandenong warehouse now rather than shipping them from overseas.

Eventually, yeah.

Well anyway, I went on there last night to see if there was anything other than books there and I couldn’t see anything.

Is that so?  Yeah.

So, it’s still just books.

I’m puzzled.  You’re saying it’s just books but they’re not coming from Australia anyway.

No, but Amazon.com.au has been there for ages selling books, right?

Yes.

And it’s still the same.

But you think those books come internally from Australia?

Well I’m buggered if I know.

Actually, you can find out.  When you order it’ll tell you where they’re coming from.  The vast majority of books on Amazon come from The Book Depository which unfortunately is an Amazon subsidiary, it’s not from a little second-hand store.

Well, I download my e-books, I’ve stopped buying physical books, and read them on my phone.

Well, I’m reading on devices all day, I like to read a book in the evening.

There you are.

A hardback book ideally, oh yeah.

My arms get tired.

Yeah, I like that.  Now, what else have we got.

Now, you want to talk about Bitcoins, what do you want to say about Bitcoins?

I do want to talk on Bitcoin.  I tell you what I think this week about Bitcoin, and we could have a Bitcoin segment each week, we won’t but why don’t we make cryptocurrency the BT Mega Trend of the week.

Well it’s certainly a mega trend.

It really is.

It’s a mega trend.

And what I find fascinating now is slowly but surely the institutional players, if you like, are starting to respond not just from the wings, not just passing comments but like really having a look at cryptocurrency and Bitcoin and saying what’s going on, will it work, won’t it work.  This week I saw two different things.  One was BNP Paribas of Paris did a serious big report into cryptocurrency, Bitcoin in particular.  They made a few points, some of them you’ve heard before.  The scepticism about that it could never work because it will never be a proper value of exchange, that the regulators won’t let them.  But, the other thing that was interesting was as investors everyone loves the idea of Bitcoin having a set number of Bitcoins, whatever the number is.  It’s like 17 million now, isn’t that right, and the max they can do is… 

21 million.

21 million.  But they made a really interesting point that even hypothetically if Bitcoin was to take off in any way it would be deflationary because you can’t print money, you can’t stoke the inflation side so it would actually have a deflationary effect on global economy.  I never heard that argument before.

Well, like most of us – that sounds to me like they don’t know what they’re talking about, I mean in the sense that…

They made a passing job at sounding like they did.

Well, except that there was a hard fork at Bitcoin in August where a new Bitcoin, called Bitcoin Cash, was created.  There was going to be another fork this month called SegWit2x which was called off but they can have another fork and another fork…

But they’re different currencies, right?

Sure.

But then isn’t another argument about currency scarcity?  And that there’s an endless capacity for creating new cryptocurrencies.

Yeah of course, that’s right.

Is that a concern?

No, well look I suspect we’re both at the outer limits of our knowledge on this but…

Everyone is, I mean to be fair we talked about Shane Oliver, he did a report, I was going to mention him too.  Just shortly after BNP Paribas, AMP Capital’s Chief Economist, Shane Oliver, did a paper on Bitcoin and at least at the bottom of it he said I don’t fully understand Bitcoin which I think is well worth putting in because no one really seems to fully understand it.

No, people are buying it as a store of value, they think it’s kind of the new gold, that it’s a way of buying an asset that is not dependent on governments and central banks.

Yeah.

A lot of people are just playing pass the parcel.

Playing pass the parcel, it’s a great game.

No doubt about it, that’s true.

It’s a great game.  But, to take you up on something, Alan, you said a week ago or two weeks ago, I can’t recall, you said something about comparing Bitcoin and gold you were saying that Bitcoin doesn’t need a vault and that gold does.  But, I saw someone selling a Bitcoin vault there recently.

Yeah, but it’d be a virtual vault, it wouldn’t be an actual real thing.

It would be a virtual vault, the whole damn thing is virtual, but the point I’m making is I thought you didn’t need one.  I thought you didn’t need extra protection.

Well, no, I’m talking about – well, it’s just easy to transport, easy to store, you don’t have to buy space in a bank to store your gold bars.

Why would you need to store Bitcoin?  Why would you need to go that extra…

Because you own them, what are you talking about?

But they’re virtual, aren’t they?  So, where are they held, they’re held…

You own them, they’re yours, they go into a Bitcoin wallet, you have to have an account with somebody.  I interviewed someone for The Constant Investor the other day called Rupert Hackett of Bitcoin.com.au.

And his name was Rupert Hackett?

His name was Rupert Hackett, which was a magnificent name.

Magnificently appropriate, interesting in context.

Anyway, just as a bit of a plug here in The Constant Investor we’re having a weekly interview with somebody to do with Bitcoin and cryptocurrency, and we’re now starting Crypto 101 which is the basics every week, some aspect…

Good, so you may actually fully understand it soon.

By the end of this process, it might take five years but at the end of the process we’ll understand Bitcoins and cryptocurrencies because every week there’ll be Crypto 101.

Well, you know, I think there’s as many people in – there’s certainly great passing interest and casual interest in Bitcoin, isn’t there?  I mean almost as much as shares it seems to me in terms of questions on radio or questions generally around the streets, if you know what I mean.  Before we do the questions have we any other issue we were going to bounce around?

I just wanted to ask you what you think of Mr Turnbull’s tax cuts.

Well, I think he’s in a very weak position to deliver them.  I wouldn’t get excited about them just yet and they’re very middle, of course, they’re very much the middle zone around the $80,000 mark or whatever.

You don’t think we should spend the money just yet?

I wouldn’t.  But, if the ALP get in – you know, if Turnbull stays in, or the Libs stay in, the tax rate is going to be 47.5 because Medicare is going to go to 2.5.  If the ALP get in the tax rate is going to go to 49.5 because it’s going to be 45 plus 2.5% for Medicare plus 2% for the reinstated temporary deficit levy, 50% before you start.  That’s a high tax rate, it really, really is.

I don’t know what to say really.  I mean honestly, I thought Mr Turnbull’s effort the other day to talk about tax cuts at the Business Council of Australia dinner was pathetic.

Probably not a great place to do it.

Well, it’s the right place but Jesus, I mean he’s just cancelled parliament next week, he’s absolutely in trouble, he’s in more trouble than a one-armed bricklayer in Bagdad and here he is.  So, Cathy Wilcox of the Sydney Morning Herald had a wonderful cartoon where he was doing a doorstop and all these journalists were asking him all these difficult questions and then the last frame shows him running off, throwing money at them and running away.

Yeah, the last refuge of the desperate politician perhaps.

Yeah.

Middle bracket tax cuts.

So, we have some questions.

Now, let’s have a look at the questions.

Michael says he really enjoys the podcast, he’s got a few questions.  If my recall is correct in your episode on 9th of the 11th Alan mentioned speaking to Chief Economist of Beta Shares, David Bassanese, regarding the possibility of a thematic ETF on lithium.  I wonder, what about a clean tech ETF?  Fair enough, I’ll put it to them, Michael.  I mean, I don’t know whether they’ve – to be honest I have no idea whether they’ve got one, they might have one.  In fact, I’d be surprised if you couldn’t, there’s so many ETFs now.

You certainly could get one in the US but I don’t know about…

There’s an ETF on everything.

Yeah, I mean they’re launching them every other day, I don’t know if there is one just yet.  There’s a clean tech index so it wouldn’t be hard to…

Michael is acknowledging this; numerous ETFs in the US based around renewable energy and clean tech, do you think we might see an ETF like these to be traded on the ASX soon?  I reckon you could absolutely count on it, Michael.

Absolutely, yeah.

Finally, he’d love to know if you were going to invest in a clean tech space what are your opinions on the best way to do this?  Do you have a view on that Wealth Editor?

I have, yes.  I would say that individual clean tech companies, despite the fact that the index looks so good individual ones are very – they’re quite risky individually and there isn’t much in the way of midcap or large cap so you’re kind of doubling in small cap space to some degree.  If you step away from AGL or whatever – maybe a way in is to look at companies like AGL, that’s one of the UBS tips of the year actually I noticed.

Yes, so it was.

It depends on your definition really.

I know, well they’re desperately trying to become a clean energy company.

They’re trying to certainly pitch themselves as that.

Pitch themselves as that and not quite everybody is believing them.

Yeah.

Infigen Energy is a company that has got windfarms, I think they’re okay.  I don’t think they’re a small cap risky stock, they’re okay.

Yeah.

Another company that’s a surprising clean energy company is Stockland because they’re covering the roofs of all of their shopping centres with solar panels and they’re generating a lot of electricity.

Okay.

Believe me, do you believe me?

Well, I believe that it’s true, I don’t know if they’re a clean tech company though.

Well, there you go.

Monstrous shopping centres may not be what people have in mind when they’re looking for clean tech.

But to be honest, Michael, there aren’t that many opportunities on the ASX to invest in renewable energy directly, there aren’t that many opportunities.  There’s a few but not that many.  Stephen says governments around the world are struggling with the capacity to actually collect tax revenue from multinationals.  I have not thought it through comprehensively but how about we consider the possibility that GST paid by such businesses is not able to be clawed back on their BAS returns, unless they qualify as a local taxpayer.

Well, he’s onto something.  There’s no two ways about it, the tax trap for multinationals has to be the consumption tax because as long as they’re a multinational and there’s different regimes and there will always be different regimes.  There will be a little island somewhere that will put their hand up and allow them to do this and that.  Do you see the way Apple are moving their money around, now moving it out of Ireland ahead of changes in the EU.  A consumption tax GST arrangement hardened up around multinationals I reckon is the way to go there, Stephen.  So, a very good point.

Yeah, I agree.  I mean firstly I’ve written a few times in fact that the way to get around this is for companies’ sales to be taxed, not their profits.  Because profits can be moved, sales can’t be.  Sales are made where…

On the ground, yeah.

Sales are made here.

Yeah, within the economy, domestic borders.

Google sells it stuff here but the profits are made in Ireland or Bahamas or wherever.

And they’d all have to fall in line including BHP, including our own multinationals.

That’s right.

Who won’t step out of Singapore.

The problem with that is that the low profit margin businesses like supermarkets will be vastly disadvantaged because at the moment their profits are 5% of their sales whereas a lot of tech companies their profits are 50% of sales.

Sorry, they’re tiny margin, so in what way are they disadvantaged?

Well, because they pay a profit on the 5% of their sales so if you tax their sales instead…

Of course, yeah, they’re gigantic…

They would be massively disadvantaged.

Yeah.

You’d need to find a way around that but everyone is trying to find a way to tax them and there’s actually an interesting paper on the Australian treasury website looking at this problem and looking at options.  So, if anyone is interested in following that up, Stephen.  Now, finally from Peter; I must say The Money Café is the highlight of my week.  Well, you’re a sad lonely man, Peter, I must say.

Actually, Peter, it’s the highlight of our week too.

We’re all sad lonely men around here, oh dear.  I’m holding some beta shares, US dollar ETFs in my SMSF, only 2.5% of the portfolio.

It sounds like a diversified character.

It’s a very diversified portfolio, Peter is a rich person.  I’m wondering how close the US dollar ETF tracks to the actual currency movements.  My conundrum at the moment is whether I continue to hold the ETF against the continued deterioration of the exchange rate or whether I cash in my chips and buy some shares that are in a favourable position.  Buying some shares might be a better bet, what are your thoughts?

That’s a tricky one, Peter.  I think you’ve got to approach these un-hedged, really, don’t you? ETFs – it’s part of the risk, maybe people aren’t used to investing in any way offshore, in any direct way offshore to the extent that now you can buy these ETFs that are basically in the US, buy them on the ASX.  So, that currency risk you’ve just got to go with it and over a long period of time I think it tends to even out.  So, I would go un-hedged and just take it on the chin with the currency part.  But, the other point he makes which is a very important point, is that they grow really slowly.  If you have an emerging markets ETF and the emerging markets are shooting out the lights then you look at the ETF it’s just going to go up gently or it’s going to go down gently.  I mean that’s the deal, that’s the deal, it’s an index, it’s not a company.  So, if he’s getting frustrated about that that’s the real price of an ETF.

So, different opinions make the world go around and my opinion is that if you’re going to invest overseas in any way it should be hedged.  Because if you think you know what the currency is going to do you’re wrong.

That’s right, and I say just take it on the chin.

But you want to invest in the thing, right, so if you’re going to invest in whatever stocks in the US then invest in stocks in the US, don’t take a currency risk at the same time, do it in a hedged way.  Now, it’s very difficult if you buy a…

You’ve got to pay for the hedging.

Well one way to do it is to buy Australian Dollar ETFs in the US.

But that’s very circuitous.  

No, but don’t take currency risk is all I’m saying.

Well, I think you must.  These are totally different views, yeah.

Because I’m saying…

Totally different views.  I think it’s too much work and in the end you’re taking risks anyway, and this idea – that’s very elaborate, Alan, and…

I think if you want to play the currencies become an FX trader, do that.

I saw one time we were on – a million years ago I sat on the Advisory Board of Fairfax Super, I was and so was Steve Bartholomeusz, my colleague when we were staff reps as such.  They got this report about hedging, should you or shouldn’t you.  A big long massive report.  The final conclusion was you should hedge about a third of what you have exposed, that was the sort of mathematical outcome of it.  So, for what it’s worth that’s the formal answer, Peter, if you’re a bit frustrated with the divergent views here.

Well, James, it’s useless for individual – you know…

I know it is, I just think hedging is for a retail investor, long term just go with it and the dollar bounces around and it ends back at 75 cents at the end of the day.

For the record, folks, I don’t agree.  Hedge.  Invest in the thing not the currency because the currency is going to go do something you don’t know and it will bugger up your whole returns, it will just bugger up your returns.

The hedging people don’t know either.

Well, that’s right.  Where are we?  We’re done.

I think that’s it, isn’t it?  Yes indeed.

That’s where we should leave it for today.  Now, don’t forget everyone you can subscribe to The Money Café on Apple Podcasts or your app of choice and as always, it’s very helpful if you can leave a review or a rating, it helps everyone find the show and please send in a question.  The questions can be e-mailed to hello@theconstantinvestor.com which is my little product.  Until next week I’m Alan Kohler, Publisher of The Constant Investor.

And I’m James Kirby, Wealth Editor at The Australian.

See you next week.