Have we reached ‘peak franchising’? Why we lag China on electric cars. Would you pay a financial adviser $2000 a month?

This week in The Money Cafe, James Kirby and I discuss the following topics:

  • Marking Bob Dylan’s birthday.
  • A week of sad stories in the royal commission. Small business: less ugly than expected with culpability on both sides.
  • Westpac gets off on a legal nicety when it comes to the swap rate.
  • Warning signs for investors as we reach peak franchise.
  • Telstra and AMP retain buy recommendations despite some horrid runs. Have they turned the corner?
  • Do we need to nudge consumers to buy electric cars?
  • Company tax cut conspiracy theories.


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.

Well, before we get into the serious business, James, you’d be aware, of course, that today is Bob Dylan’s birthday.

I wasn’t aware of that, Robert Zimmerman’s birthday.

Robert Zimmerman’s birthday, he’s turned 77 today and I think that is worth marking.

That is well worth marking, Alan.

Being a Nobel Prize winner in literature among other things, of course.

Yes, among many other things, yeah what a fabulous story that is.  The other funny thing is though I’ve got to say I went to see him in concert once, dreadful.

Yes, well he’s not at his best in the concert, let’s face it.

Dreadful, and it was like a pilgrimage, there was all these people who have been waiting all their lives because it was in Dublin and gee he was bad – bad, bad, bad.

Yeah, I know he’s bad, I’ve been to see him in concert as well.

Well, that was a long time ago.

It was a bit like Lou Reed in concert, honestly, it was terrible.

Yeah, and the thing about Bob Dylan is he only got worse, his voice got worse.

And this is what’s good about Leonard Cohen, you know, because in concert Leonard Cohen was fantastic, he was better than on record.

I saw him, yes, he was better than on record actually, he was terrific, yeah.

Now, speaking of performances the Royal Commission…

Yes, that is a performance, isn’t it, it’s theatre for us all.

Now, we got onto small business this week, what’s your take on what we’ve been hearing this week?  We’ve had some sad sob stories.

I know, we’ve had so many sad stories.  So, I thought actually that the small business one might be the worst, by that I mean the worst in terms of how people seem to have been treated, like financial advice, consumer banking, and it was that whole thing about Bankwest and did they do over their people in WA during the GFC, after the GFC, when Commbank bought them.  That was thrown out pretty quick so that was interesting.  I think they’re sad stories, I think it shows a real sloppiness with the banks, sales culture with the banks but we know that too.  But, small business is a little bit more engaged.  I don’t think people are quite as wide-eyed and innocent as some people might have been in the other sections of the inquiry because…

You’re not saying they deserve it, are you?

No, I’m not saying they deserve it but I’m saying they’re in business and it’s business. 

You kind of are saying that, that’s bad.

No, it’s not like you have a little old granny who ends up with 50,000 grand and she walks into a financial advisor and she has no idea.

Well, you end up with that because the little old granny has gone guarantor on the children and lost her house.

Yeah, as is an established principle but that’s family businesses, family businesses take risks, you have to take risks.  My own family were in business and my dad taught me, he only taught me when he had retired, that he used to put our house in a bond and he did it several times to get contracts as a builder.  I’m just saying that this particular segment isn’t as fiery as I thought and I think there is a culpability on both sides.

What I’ve been thinking about as I watch it this week is that this culture of Australian banks where they only lend on property.  What they do is if you’re in small business and you want a loan you have to put your house up, right?  It’s not so much a guarantor so much as actually just putting your own house up.  I’ve actually been thinking about it and what it means is the banks aren’t really concerned about whether the business person can pay it back.

They were more interested in the house than the cash flows.

All they’re worrying about is security.

Yeah.

And that kind of also kind of applies to personal lending or mortgages lending as well and for investors, property investors, all they’re focussed on is the security which means that they’re not sufficiently focussed on the ability to repay.

Or financing the business per se, the cash flows…

Well that’s my point, that’s what I’m saying.  They’re not actually focused on is the business going to have enough cash flow to repay the loan or is the person who’s borrowing for an investment property making enough in salary to repay the loan, all they’re worried about is the security.  I think that that is a fundamental flaw with Australian banking.

What’s the alternative, is there an alternative?

They should be doing more cash flow lending.  I mean there’s all these outfits springing up now to provide cash flow lending to businesses at very high interest rates so you can get a cash flow loan for your business without putting your house on the line as long as you pay 20% interest.

You might as well go and put your business on a credit card, you have a better deal.

Well, that’s the point but all these peer to peer lenders and that are actually making loans to companies, small businesses, at those kind of interest rates because the banks won’t do it.

Yeah, it’s a rock and a hard place.  You don’t want to put your house on the line but a part of it if you’re going to do a business I think it’s often part of it and if you want to pay 40% or 30% on an online platform well what sort of a business is going to get over that hurdle?

Speaking of the banks did you see that Westpac has got done in court, this isn’t the Royal Commission, it’s in court, over manipulation.  Well, they got done for unconscionable conduct but got off on market manipulation and I don’t understand the difference to be honest.

Yeah, a legal nicety maybe.

I doubt that I’m going to read the judgement to see the difference but really…

They got away more likely than many people thought that they might.  Mind you they have got so many problems inside in the Commission because they’re popping up just as regularly as all the other banks on that basis.  I thought the other thing from the Commission was this part on small business I think it will actually make people think about franchises because franchises totally dominate the case studies that are coming up in the bank.  Wendy’s, Pie Face and Poolwerx, those three were right across the commission, most of those cases.  You mentioned the woman, the very ill woman, that signed over her house…

Was that a Wendy’s?

Poolwerx franchise.

Yeah, and somebody else got into trouble buying two Wendy’s franchises.

Yeah, that’s Bank of Queensland. 

Does anyone eat Wendy’s burgers?  Honestly…

Yeah, people do.  The thing is if you go into a business and a, you go into a franchise arrangement, that’s going to be hard to make a go of and then you’ve got the bank putting your home on the line, it’s really difficult.  I think one of the things it shows is that franchises are often not just difficult but impossible.

Yeah.

Maybe we’re reaching peak franchise which wouldn’t be a bad thing.

Half the time these poor people are basically buying themselves a job.

They’re buying themselves a job, I know.

What’s more they’re borrowing money, putting their house up, to buy the job.

Franchises probably were a great thing once upon a time but my oh my what we have today is not a great thing in many, many cases.

You put Telstra and AMP as investments on your list here, does this mean you’re recommending them as investments?

I put Telstra and AMP as investments, question mark.

There’s no question mark, as investments with no question mark.

It’s inferred.

It’s an inferred question mark.

Yeah, it’s an inferred question mark.

Okay, did you get that everybody, it’s an inferred question mark.

I didn’t get to hit the button on the typewriter.

Are they investments or are they don’t touch with a barge pole?

What’s worth recording is both have buy notes on them for all their problems and AMP is most interesting because I would have thought that was the one that was really facing the unknown with this whole swag of class actions coming down the line but there you are, Morgan Stanley put a buy on them this week and said that they’ve been oversold.  If you know Telstra is just under $3 and I think AMP is just under $4 and I imagine a lot of our listeners have stock in those companies because they possibly inherited them, if you like, from privatisations or demutualisation.  As a stock they may have turned the corner, they may, because Morgan Stanley will be very silly to put a buy on AMP without doing their numbers pretty carefully.

So, I reckon, for what it’s worth, that investing is a comparative game and the question is, is Telstra and AMP the best you can do, really?

Yeah, I don’t know if it’s the best you can do.

They may be on a buy but god you can do better than that, dear oh dear.

Yes.  I’m really making this for people who are stuck with them, and there are millions of people who are stuck with them and so they mightn’t have sold them.

Definitely, so if you’ve got them I agree with that, don’t sell them now.

Yeah, they may be bouncing along the bottom, exactly.  That’s the point I wanted to get to, Alan.

Mind you, I reckon Telstra is probably in more trouble than AMP.

Do you?

I do.

But the unknowns in AMP are huge, unknowns in Telstra aren’t as mystifying, they know who their competition is, they know what the competition is planning.

I know, but it’s bad.

TPG.

Well, everything.  NBN, TPG…

With TPG also I think we mentioned last week, just because TPG is the disruptor doesn’t mean that it’s an investment either.

In fact, I’m struggling to find anything in the telecommunications industry that you’d invest in to be honest at the moment because it’s all so competitive, so under pressure.

Just might be about to eat each other alive.

I think so.

Yeah, like a cannibalisation.

I think so.

Yeah, that’s interesting, it could be.  One of the things we must mention this week, there’s a couple of good stories about electric cars, the whole electric car scene.  We should also make it our Mega Trend, I think Alan, the BT Financial Group Mega Trend being the future of electric cars and what’s coming down the line.  What triggered this specifically was a big report that said Australia was years behind the rest of the world, that around the world the average number of cars on the road is 2% are electric and Australia is 0.2% for a start.

One tenth.

Pretty bad.

No, that’s one hundredth – no, 0.2, one tenth…

Somebody will correct us fast.

Anyway, the thing is that…

A fraction, that’s the way out of that one, it’s a fraction of the international amount.

And it’s interesting because Australia is supposed to be early adopters, our self-image in Australia is we are early adopters of technology.

And we often were, the figures are there to prove it.

So, why would we not be early adopters of electric cars?

Because there’s no encouragement whatsoever.

We don’t usually need encouragement to buy mobile phones, we’re snapping up mobile phones like mad.

Because it was incumbent forces that were actively blocking it like coal.  I’m just plucking these out of the air, by the way, but it’s true.

What encouragement is there overseas for buying electric vehicles, they just do it.

There are specific encouragements in the EU.

I see, to get the price down.

There are subsidies.  So, it’s interesting with Tesla just being sort of on the brink there, there was a very interesting little company out of WA that popped up the other day and they had won a six year contract with Tesla, they’re lithium miners.  So, people have been betting on the lithium miners and the boom in electric cars which I think will come but they may not come here.  Did you meet someone or there was some report you came across about how the governments are missing out on it as well?

I just was interested to read Peter Harris, who’s the Chairman of the Productivity Commission, remarking that the greatest failure in his time as Productivity Chairman is the failure of state governments to have road user charges because when we all start driving electric vehicles there’s going to be huge holes blown in budgets.  I suppose the federal government as well because of the petrol excise because they make so much money.  All the road user charges really are put through petrol now.

So, the electric car people won’t be paying the petrol charges, is that what he’s saying, so that blows a hole in the – well, he’s got plenty of time, there’s only 0.2% electric cars on the road.

It’s interesting because as you point out there’s no incentives in Australia to buy electric vehicles.  In fact, the incentives are the other way, that the government is going to be trying to stop us buying electric vehicles because their revenue is going to decline when we stop buying petrol.

So you’ve got people like Peter Harris actively – I mean I’m not saying he’s campaigning against electric cars but he’s talking about taxing them.

He’s pointing at it and he’s saying it’s a terrible failure.

That they’re not taxed.

That road users are not taxed, the taxes that are meant to fund the building and the maintenance of roads actually come from petrol, not from just charges on the road.

It’s interesting, Barnaby Joyce of all people was banging on about this in his final days in parliament.

Electric vehicles, really?

About taxing them on the road, I didn’t say Barnaby Joyce was flying the flag for them.

I wouldn’t believe a word Barnaby Joyce says on the subject, anything to do with electric vehicles.

No, but basically what he was saying was what Peter Harris is saying, tax them, yeah sure but how about encouraging them as well because wouldn’t it be good to see them and see them succeed here.  4% of cars in China on the road are electric cars so I think it seems to be the case that we are behind, quite a bit behind, and that’s a tax that they’re talking about.  They might as well do that one, Alan, because they don’t seem to be able to get any other taxes done.  Company tax cuts, gone.

I was very interested to read the tweet the other day by Tony Windsor, the former member for New England…

And no friend of Barnaby’s.

That’s right.  So, after Pauline Hanson torpedoed the government’s company tax cuts he tweeted that he thought it was all a put up job and that she was in league with the government and that it was all deliberate and that the government doesn’t – I can’t remember the exact wording of it but basically the tenor of it was that the government had put Pauline Hanson up to it to torpedo the company tax cuts because they don’t actually want to do it.  This is his point.

They don’t want to do it?

They don’t want to do it because there’s no votes in that and this will give them all this money that they can hand out in personal income taxes which basically is going to bribe the voters for votes.

Well, as conspiracy theories go it’s a good one.

It’s not bad.  The problem with that theory is that it’s actually blown a massive hole in the government’s entire economic policy because their only economic policy for creating economic growth in this country was to cut company tax, now that’s gone they haven’t got one.

Well, they did say they’d take it to the election, they didn’t say they’re dropping it.

Yeah, but it’s got no credibility, zero credibility.

Well, it’s true that it’s zero votes, no one is going to vote it.  No one is going to march on the streets for company tax cuts.

They haven’t got an economic policy anymore, it’s finished.

Yeah, well we’ll see.  Will they get anything through?  And I mean anything.  Will they get the teeny weenie tax cut on July 1 through, $3,000 that is, in the middle bands?  I’d be surprised if they even achieve that.  How are we doing on the letters this week?

Well, there are tonnes of questions.  I’m not even sure we’re going to get through them all.

We can have a go.

Geoff says I’ve been listening with interest to the issues with Blue Sky Investments around asset valuations and the related fees calculated on these asset valuations.  I am with a large industry super fund who has a lot of off-market assets.  I am now left wondering if the valuation of these off-market assets is a true and honest reflection of their real worth.  These valuations impact the stated performance of the industry super funds.  Now, is there a concern – he goes on to say, and I won’t read the whole thing but it’s an interesting point because I remember when the Motor Traders Association Super Fund, MTAA, do you remember that?

Yeah, when it blew up.

It blew up, and the reason it blew up is because it put a whole lot of money into unlisted assets.

Yes, but so did all the other ones and they didn’t blow up.

No, but they put too much in.

Yeah, as a portfolio allocation.

Yeah, so most of the allocations that the industry super funds put into unlisted infrastructure assets is 10% to 15%, maybe 20% at the most, and I can’t remember what MTAA’s allocation was but it was a lot.  The problem was…

They froze did they?  They were illiquid, they couldn’t sell them?

They couldn’t sell them.  Also, it is the case, Geoff, that the valuations of these things are done according to periodic professional valuations rather than the market because there’s no market for them whereas if you buy a share on the stock exchange of course you see the valuation every day.  With some of these things you’re relying on one of the big four accounting firms or somebody else to come in and put a valuation on it and it happens once a year or something so you’re relying on that as being the valuation.  You’re right, Geoff, that there are some question marks about the valuations but on the whole there’s nothing much you can do about it.

Some day it’ll happen, there has to be especially as more and more people shift into that area, the illiquidity, there’s going to be a price.  For what it’s worth in the GFC the really big ones, Australian Super, Host Plus, Rest, they didn’t get caught.  A lot of people said this is it, this is the reckoning for the industry super funds and it didn’t happen, whatever way they were constructed.

That’s right.  I think Blue Sky is a quite different situation, it is the case that Glaucus Research, the short selling hedge fund, has criticised their valuations and said that the assets that they own are overvalued.

Blue Sky are not representative of the best operators in that area to put it ever so mildly.

But the point, to finalise this Geoff, it has been known that they get caught which is the Motor Traders Association, MTAA Super Fund got caught in exactly the way that you’re saying.  So, it’s not impossible, Geoff.

What’s this next one.  Hi guys, love the show, thanks for putting up with all of us, all of us that are probably ETFs, I mean to say.  James, you are correct, it is Jose by saying the J, the Portuguese way of saying it instead of the silent J.  Thank you, I was only guessing about that, of course.  A bit of fun now, challenge time.  I would like to mark on my calendar a day ten years from now to compare Alan’s fund of choice versus the Vanguard high growth index fund, that’s an index fund.  He wants you to do a Warren Buffet type bet.  Alan, I think you mentioned Selector Ex 50 High Conviction Equity Fund, this is the one that you were very hot on a week or two ago.

All I was going was pointing out that it had won the first quarter in rankings.

You ran them up the flagpole.

All I’m saying is it did…

Are you taking the challenge or not?

Jose is talking about 10 and 20 years from now.  Jose, I’m 66, I reckon in 10 years I’m going to down at the beach and I’m not going to be sitting in the Saporito Café doing The Money Café with Kirby, if I am I’ll slit my wrists.

Okay, that’s your answer, you’re going to have to go with that one, Jose.

It’s Jose, you’re right.

Yes, it’s Jose, can’t you see that’s what he said, with a J.

He’s written that, he said that, that’s right, it’s not silent.

Okay, I intend to be here in 10 years’ time folks just for what it’s worth.  Okay, Wes says – actually you should read this, it’s your turn there.

Is it, okay, right.  I’ve noticed lately that there’s been a divergence between index ETF prices and the underlying index.  For example, Blackrock IVVU.US rose 0.73% last night while today, the 22nd of May the IVV.AU is down 0.56% in line with the ASX.  Why does the ASX movement on the day outweigh movement of the underlying index?  I’ve got absolutely no idea, Wes.

I think we covered this before that the index funds don’t move instantly, they don’t move on microseconds like the market and there’s a gap between when they rectify their numbers and the actual numbers.

Yeah, if you say so, I don’t know.  They’ve got to siphon off their fees too.

Yeah, sure, that’s true.

The timing may be different.  Should Newscorp be shorted?  You were an employee of Newscorp, I’m a contractor to them.

Yeah, I’m delighted with that question, should Newscorp be shorted, and my answer will be oh so careful, my answer is not yet.

The answer is absolutely, yes.

My answer is that it’s among the top 20 shorted stocks, number one, but has been for at least two years.  I had a look this morning, for what it’s worth Newscorp share price is more or less the same as it was a year ago and also more or less the same as it was two or three years ago.  So, as a short it hasn’t been great so far.

So, it’s been a poor short, it’s been a losing short, there you are.

It has not been a successful short.  Maybe we’ll just jump straight through to the next part of that question.  Hi, Alan and James, first I like your podcast, great work.  I heard last week you mentioned Host Plus is the best performing industry superannuation fund, yes I did.  I read an article, sorry James, which mentioned the following; Host Plus has now more than $800 million in VC, that’s venture capital, and more than 40% of its entire portfolio in unlisted assets, I’d be concerned about this figure.  Isn’t that interesting, that’s just like the earlier question, concerned about these illiquid assets in Host Plus.  Well, funny enough I met the Host Plus guys for dinner just a while ago.

Did you just?

I did, David Elia, the CEO and his very interesting Chief Investment Officer.

So where did he take you, was it a nice dinner, was it Vue de Monde?

No.  Sam Sicilia, Chief Investment Officer, a very interesting man.  We went to a place – is it Maha perhaps?

Yeah, Maha.

Yeah, where they knew everybody because they’re Host Plus and they’re the hospitality guys, right, so everyone knew them in the restaurant.  The chef came out, very interesting.  Anyway, about those guys, they’re very capable.  Yes, they came number one.  They came number one by a fraction, there was about five or six funds doing as well as them and I think we covered it pretty well earlier.  Yes, they have a risk, they have a lot of illiquid assets, but they have yet to…

Is it 40%, did he tell you that, is it 40% in unlisted assets?

It quite possibly could be.

It probably is, yeah.

Yeah.

And if they get a run of course – I mean, look…

Their argument is that their premium is because they’re long term and it’s a strong argument.

Yeah.

It’s a super fund, after all.  Okay, what else have you got?

What’s next, well this is our last question.  Tony says my mother has a large portfolio valued at $7 million, well done mum, half super and half personal, mix of shares, managed funds.  She has minimal financial knowledge so she has relied on the services of a well-regarded boutique financial advisor.  The advisor knows his stuff, well qualified, has been servicing her for the past 10 years.  Well, we’ll just pass over that, dear oh dear.  He takes care of everything.  I have recently taken an interest in her affairs which she has welcomed.  My primary concern relates to the fees.  In recent years they have moved to a fixed fee of $32,000 plus 4% per annum, no commissions.  Does such a fee sound reasonable?

Plus 4% per annum?

So, I wrote back to Tony because I wanted to know because it sounded like it was $32,000 plus 4% of the $7 million which would be kind of incredible but actually it’s not, it just increases by 4% per annum.

Which is more than inflation, but anyway, yes.

So, $32,000 as a percentage of $7 million is 0.45%.  Now, what I said to Tony in my e-mail, just so everyone knows and can hear it as well, is that $32,000 is an outrageous amount of money.  It’s absolutely ridiculous.

But she’s got $7 million under management.

Yeah, but so what?  I mean, it doesn’t cost more to run $7 million than it costs to run $1 million or $700,000.

More complex perhaps.

No, absolutely not.

You could have a more demanding client but Tony’s mum may not be.

So I said to Tony, listen, it is an outrageous amount of money, ridiculous fee, however you’re not going to do better.  This is the whole problem with the financial services industry in my opinion.

You’re not going to do better, that percentage will be what you have to face, yeah, wherever you go.

You’ll be very lucky to find a financial advisor who will do it for less than 0.45% of the sum.

Yeah.

Maybe you’ll get off at 0.3% but fair dinkum, $32,000…

And she has to go somewhere.  Your point is the fees are too high, not just from this fellow but from all of them.

The fees are too high.  I mean, we’re talking $2,700 or $2,800 a month.  I said to Tony how would you and your mum feel if this bloke, who I’m sure is well-regarded and knows his stuff, well-qualified, if he sent her a bill, an invoice, for $2,750 per month every month, if she got an invoice?

He wouldn’t get passed month one.

Well, she wouldn’t even pay for month one because she’d be going so what have you done for me this month? 

Exactly.

So, this in my opinion is the fundamental problem with the financial services industry which the Royal Commission is uncovering, which is that it’s too dear.

Well if it was per hour at least she would know how much she is charging and then at least the whole thing might be more interactive where at the moment obviously they’re coasting away.

Well, if he was charging $32,000 on a per hourly rate he’d be constantly at her place, I mean she’d never get rid of him.

In the living room, yeah.  Well, a good way to look at it, Alan. 

And that’s where we’ll leave it today, James, shall we?

Yeah.

Where’s my little script, I can’t remember.  Don’t forget you can subscribe to The Money Café on Apple Podcasts or your app of choice and while you’re there it’s very helpful if you could leave a review or rating and it helps listeners find the show, also send in your questions, as we’ve been doing we’ll answer them and we’ll get to them next week.  Send the questions, as we have been doing we’ll answer them and we’ll get to them next week.  Send the questions to hello@theconstantinvestor.com and my wonderful daughter Phoebe will read them and send them onto us.  Until next week, I’m Alan Kohler, publisher of The Constant Investor.

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