The 200,000 download party episode. Can Blue Sky survive the shorts? Zuckerberg’s bum testimony.

This week James and I discuss everything under pressure and besieged: Blue Sky, Afterpay, Mark Zuckerberg and even the very idea of a tariff war between the US and China.


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

And I’m Alan Kohler, Publisher of The Constant Investor.

And we are The Money Café.

The Money Café.

Well, Alan, it’s a very newsy week, there’s so much going on.  There’s actually quite a few things going off the rails as well we could say this week.

We don’t know where to begin.

We don’t know where to begin.  Well, actually I do know where to begin but what I want to tell everyone listening first of all is that you’re listening to a show, folks, that is coming up in the world.  We just saw the figures for our latest – you can measure podcasts like you can measure video and we’ve had 200,000 downloads now, Alan, in total since we started.

Well, that’s a lot.

That’s a lot in podcast world, I can tell you, and the thing is that it took us nearly a year to get 100,000 back in November and we have doubled it in four or five months.  So, there’s momentum.

So, we’re accelerating.

There is, and so I suppose one thing we might say to everyone is keep rolling in the questions because we’re able to answer them all still.

And thanks very much for listening and supporting us, we really appreciate it.

Indeed, thank you everybody.  Now, let’s start not with global and macro but mini micro in Australia and the Blue Sky story, Alan.  The reason I want to start with this is because being frank about it we have talked about Blue Sky for a couple of weeks and you in The Constant Investor, I don’t think in The Australian, you had featured them fairly regularly, Rob Shand and co.  Of course, they have been cut to pieces.

Not that often.

I didn’t mention how often.  Well, anyway you got him, you got Rob Shand, the MD of Blue Sky, yesterday and you interviewed him and I actually listened to it because you had it on the site. 

So, what did you think of the interview, James, did you listen to it on your way home?

I did.

Did I do an okay job?

Yes, except there was times he just refused to answer, really, wasn’t there?  I mean there was one very simple question which was that they had charged 17% in fees on a deal and you had the numbers and you asked him three times, and every time he kind of went around the houses but he just never confirmed or denied and that’s the nature of it.  So, I don’t think as a Blue Sky observer I would be – at the end of the interview I didn’t feel any more confident about them, I didn’t feel substantially more confident about them than I did before the interview.

I think the thing to remember with Blue Sky is there’s two entities listed on the stock exchange with the name Blue Sky, one is BLA which is the Blue Sky alternative funds management business that actually collects the fees and runs the business.

The fund manager, yeah.

The fund manager.  The other is BAF which is the Blue Sky Alternative Access Fund.  I happen to own some shares in BAF, not in BLA.  The reason I own the shares in BAF is because – and that’s kind of the one that I have been kind of recommending, I have not pushed it but I think…

You were enthusiastic about it and you also invested, yeah.

And I’ve always thought it was a good vehicle for small investors to get access to alternative investments by which I mean things like water rights, student accommodation, venture capital, private equity and so on which big super funds all have a lot of their money in, 10% to 20% of their funds.

And it’s one of the reasons that they outperform.

Yeah.  So, 10% to 20% of super funds’ money tends to be in these alternative assets and small investors don’t really have much opportunity to do the same to diversify in that way and so I thought that BAF was a good way to do that.  Now, BAF invests in the Blue Sky funds, they have a whole lot of unlisted funds and the BAF listed fund is a way to invest…

And is that down as well by two thirds?

No, it’s down a bit, in fact what’s happened to BAF is it’s gone from a 10% premium to its net asset value to a 20% discount now. 

Okay.

So, it’s gone from $1.10 to 80 cents.

Okay, assuming that net asset value, by the way, is fair and square.

That, of course, is the question.  So, one of the accusations from Glaucus Research is that the assets are exaggerated.

Are exaggerated, yeah.

But, the main point of the basis of that is mainly that Blue Sky quotes their assets under management as a gross figure including the debt, not a net figure.  So, Glaucus’ point is that other alternative asset managers in the US such as KKR and Blackstone quote the net figure which is the equity that they put into the assets, not the total amount that they’ve bought which includes the debt.  Blue Sky’s response is that in Australia – so, what they’re talking about is property assets, commercial property, and that other commercial property managers in Australia also quote as the assets under management the gross figure including the debt, and that is true.  I’ve checked that out, it is true.

Yeah, it’s true but the residual issue is that Blue Sky are – it’s kind of half true because they’re half a property manager and they’re half a private equity manager and there’s nothing else quite like them so they’re able to, if you like, hide behind the fact that there is nothing else quite like them so he could regularly say to you well, we are keeping up to industry standards but there’s nothing to compare them to.  Is that part of the problem?

Well, it comes down to price in a way.  So, the question is if they are a property manager, as you say half their assets are property and a quarter of their assets are private equity and a quarter of their assets are alternative assets and so on, but half is property.  So, should they be priced as a property manager or priced as an alternative asset manager?  When they were $11 they were clearly overpriced particularly as a property manager.  I mean, the property managers are priced at one times assets.

And they were being priced by multiples of that.

Even now Blue Sky after falling 45% are still three times their net assets. 

But, of course back to the point that they’re half property and half private equity which is much more difficult to measure in price.

That’s right.  So, to some extent it comes down to – because Glaucus is basically accusing them of being crooks and shonks, and sort of lying and all this stuff.  So, it comes down to some extent as to whether you think that’s right.  I mean, are they crooks or are they not, and my view is they’re not.  So, I’ve known these people for a long time, I’ve known them – you know, I mean I haven’t been to their house for dinner but I kind of know them a bit.

Okay, and one last thing.  You weren’t disturbed that the founder sold so many shares a few months ago, David Sowerby, that he sold…

Well, I knew all about that. 

That didn’t rattle you?

I knew Sowerby quite well and I obviously was aware when he sold when he stepped down and to me it was genuine.  I mean, it is true that he sold not at the top, nowhere near it.

I know, but he didn’t buy at the top either, did he?

I actually thought when he stepped down to look after his family and his kids I thought well, good for you.  I thought I wish I could do that, I wish I would have done that instead of – so, that bit I’m fine with.

Right.

I think that the shares were definitely over-priced, they were a good short at $11, are they still a short at $5.75 or whatever they are now?  Possibly.  I think they might have some more downside.  This is on the BLA share price, the top company, I think they might still be expensive in the circumstances.  But, Glaucus says they’re worth no more than $2.69 and probably even less if not zero.  I reckon that’s wishful thinking on Glaucus’ part.

Okay, well that was good to air that actually and to see where you were on it.  Just while we’re in full confessional mode I also should mention we’ve been also talking about Afterpay.  Now, nothing in common with Blue Sky to the extent it is an utterly different business but we talked about Afterpay a few weeks ago, I mentioned that it was the outstanding stock of the year I thought for me certainly last year, and I was an investor in it.  I think I had something like tripled my money in it at the start of the year.  I have to say an incident occurred this week and to some extent there’s a momentum here right, because we’re seeing Blue Sky unfurl, we’re seeing GetSwift, we’re seeing BigUn, we’re seeing a lot of shockers in this market at the moment.  Afterpay is being shorted at the moment, about 9% of the stock is shorted, and I know that Ownership Matters, the proxy advisor, did like a shadow shopping test on Afterpay and discovered that kids basically could buy alcohol which breaks a range of rules and Afterpay had no checks on that.

But, I don’t understand this, Afterpay doesn’t sell grog themselves, isn’t it up to the vendor of the grog to make sure that they don’t sell to kids?

No, no, it was actually up to them to ensure the ID checks on their cards.  They came out yesterday, Afterpay came out yesterday and said they’re going to tighten up their ID checks and everything like that.  But, they also said they were going to change their fee payment structures.  They’re outside the credit code because they’re a new invention and they’re beyond the reach of regulators.  So, I just put it on the record that I am not as enthusiastic about them as I was.

Well I think it’s scandalous, I wish I hadn’t been allowed to buy booze when I was 15, I would have been much happier.

Would you?  I bet there some Friday nights you had great fun.

You were over in Ireland there, you would have been buying Guinness when you were 15.

We had no ID checks whatsoever, I can tell you, in Limerick at the bar you just rocked up and if you were tall enough you get served.

Now, another business that’s in trouble you can talk to me about is Spaceship Super.  So, they’re a start-up super business.

Yes, here’s another company which in common with Afterpay and Blue Sky we have been interested in this company because it was new, it was doing something that hadn’t been done before, it offered some promise, it was a start up and their idea was a millennial focussed superannuation fund that would specialise in technology and do things that hadn’t been done before in super.  A really attractive proposal.  They barely got started and this week they have been hit with a fine by ASIC for false and misleading statements.

Because 80% of their money is in ETFs.

Yeah, which is not a sin in itself but they gave the impression they were out and buying tech start-ups and everything else.  So, that’s very disappointing as well, really disappointing.  There’s a very good analyst called Guy Carson at Tamim Asset Management and he makes the point that you get this sort of stuff at the very top of the market, this is when all the bubbles start to burst you get a plethora of…

He reckons it’s an end of cycle signal?

He reckons it’s a late cycle signal.

A late cycle signal, there you go, folks.

And I would tend to agree with him.  So, we’re reversing our way into the program this week, folks, in that we normally talk big picture at the start and individual companies later but this week I thought it made sense to start with Blue Sky.

So, what is our big picture, James?

Big picture has to be the phony tariff war.

Well, your correspondent here wrote last Saturday in The Australian that it’s all rubbish and they’re actually negotiating an FTA.  So, everyone went don’t be stupid.

Well, you may be wrong.

They’re going to do a deal, they will do a deal, they have to do a deal.  Of course, they’re heading for it and what they’re doing in the meantime is shouting at each other about it.

What in particular makes you think they’ll do a deal?  Is it the Chinese response or is it the Trump administration approach?

Whether it’s a formal free trade agreement or a formal agreement or not there’ll be some sort of deal where China gives way.  China has already said that they will make a concession which is that they’ll cut the tariffs on cars.

Talk is cheap, Alan, talk is cheap.  They have often said they’ll make concessions.  So, what makes it different this time around?  It’s easy for a country to say we will work on our trade law.

I don’t know, maybe I’m wrong but there’s never been a trade war in history that’s worked out for either side.  I mean, there have been tonnes of them down the years in the last 500 years and I think that Trump might be a complete idiot, that’s true, in fact I meant that, he is a complete idiot so it’s possible that they’ll go into it, that’s true.

But do you think rational minds will prevail?

You would certainly hope so. 

Okay, talking about rational minds did you see or read or watch any of Mark Zuckerberg’s extraordinary five-hour congress testimony session?

I couldn’t get past the fact he was sitting on a cushion.

Yeah, what was that about?  There was all these little funny side things like he put his notes on the table and everybody started taking photographs of the notes and he sat on a cushion, he’s not small is he?

Well, he must have been trying to raise himself up unless he’s got a bad back or maybe he’s got a bruised bum and someone has kicked his arse, and he’s got a sore.

Well there was no explanation but apart from the cushioning of the Zuckerberg bum he was in there for five years and he did not put a foot wrong.  It was the best day on Facebook shares for two years, 5%, which is no joke.

And you said before it was like someone batting for two days, it was great.

It was, it was like Justin Langer sitting in there for two days in The Ashes or something, it was quite extraordinary.  He’s in again today, whether he’ll be quite as flawless I don’t know but the first day is the day that really matters when you have those big sort of circus testimonies.  I’ve got to say it was very impressive, he was very articulate and he was very slick but without being smarmy.

I know, he’s 33, I mean fair dinkum, what was I like.  Could you have done that when you were 33?

No, I could not have done that when I was 33 but then I didn’t go to Harvard and I didn’t create Facebook, so let’s put that on the…

And you’re not worth $65 billion.

Neither is my personal net worth in that league.  What else do we have?

But, the question on Facebook is what’s going to happen now because…

I think if he gets through this and no one hits him out of left field with something that the stock price will recover.  It hasn’t really fallen through the floor, it is down 10%.

Will there be regulation?

Inevitably there’ll be more regulation.

So, Europe has this thing called the General Data Protection Regulation, GDPR, which comes into effect, as it happens, next month which was passed two years ago and it’s going to happen.  That puts all this regulation about the use of data and in particular requires consent, so companies like Facebook and Google before they pass on the data to anyone else or use it they have to have explicit consent from the user.  Now, America has always kind of just held up its nose about that and there’s never been really any serious discussion about that sort of thing happening in America but I think maybe that will happen now, something like that.

It could happen, but they’ve got an enormous audience, they’ve got a committed audience, they’ve got a locked in audience and they’ve got enormous advertising base.  As long as the people keep going to the site and if they have to tick one more box they probably will.  I had commissioned Craig Carter to do a piece on Facebook and the FANGs mid-week and he is an expert tech investor, as you know, for all his life.  He thinks it’s actually just a moment in time for Facebook, that it’s a soft spot but that they’ll rise out of it and get that going again which is interesting and I’d certainly take him very seriously when he makes a call like that.

Now, Jimmy, we’ve got a couple of questions.  Do you want to go into those?

Yes, let’s get onto the questions, yeah, you go first.

Okay, Charles says bonds, discuss.  He says no one ever talks about corporate bonds, how to invest in them, through who or how, or what do you do.  If you want something better than a term deposit how do you go about corporate bonds?  Please tell us, James.

Well, Charles, I desperately actually tried to cover this and I very regularly in the wealth section of The Australian have material on corporate bonds.  There’s a handful of corporate bonds traded on the ASX, you can take a look at those.  There is also bond funds being launched all the time and there’s bond ETFs.  So, they’re out there, Charles, I would suggest that unless you have a considerable personal portfolio I wouldn’t go off buying individual corporate bonds at $50,000 a pop each but you can buy ASX listed bonds.

Also, there’s a specialist bond broker called FIIG.

There’s several, there’s FIIG and there’s I think it’s called Jamieson Coote.

Jamieson Coote?

Yeah.

So, there’s FIIG, Jamieson Coote, so if you’re interested, Charles, you can ring them up and say hello, my name is Charles and I’d like to buy a bond and they’ll be all over you like a rash.

They will.  Okay, hi Alan – well, we’ll do that one in a second, actually, how about this one.  Adam, hi guys, big fan of the show.  I have a question in regards to the Aveo Group.  Now, the Aveo Group, to remind people, is the retirement home company which was featured in a Four Corners special a few months ago about the standards and the way they kind of push expenses on retirement homes.

That was our friend, Adele Ferguson.

It was Adele Ferguson who was knocking them over again this week with the ATO and the bad behaviour in the ATO which was a damn good story.

We need to keep on Adele’s good side, James, fair dinkum.

Yeah, you don’t want her chasing you down.  Now, Adam says I was looking at buying some of these Aveo shares and I was going through their financials, I noticed their price to book ratio between 2009 and 2012 – which by the way, Adam, was five years ago and if you’re going to buy the shares make sure you bring yourself up to date.  Anyway, he says how is this possible somebody would buy the company and liquidate it for a profit, have I missed something?  Cheers.  Do you know anything about them?

Well, to be honest I don’t know what the price to book ratio was in 2009 to 2012 but I do know that currently it’s 0.8 which is to say that the shares are trading at a 20% discount to net assets.

And, Adam, all of those retirement groups are on the nose at the moment, the three big ones, they’re all struggling.

So, I think a price to book ratio of 0 would be if you’ve got that then the company’s share price is zero.

Yeah, if it came up one morning or something, Adam, it might have been a technicality.  Often you find when a figure is really crazy like that, you see a PE for 112 or something, it’s often a technicality.  So, the answer, I suppose, to Adam is it’s 0.8 which is kind of normal. 

Look, it might have been some sort of glitch, some glitch in the matrix back then.

Alright, and as they say more widely it seems extremely difficult for these retirement groups to actually make money.

So, James, I think our BT Financial Group Mega Trend should be the question from James.

Yes.

What about that?

Yes, indeed.

It’s the BT Mega Group…

Let’s get our sponsor’s name right, BT Group, it’s very easy.

BT Financial Services Group, which is part of the Westpac financial mega group, they are sponsors of this podcast, thank you very much, and we havye a BT Mega Trend each week.  Today it is…

The extraction of investors from coal, how about that.  It is, though, I mean because let’s put it on the table, one of the world’s biggest mining companies is Rio and Rio are 100% out of coal.  Also, some big banks, and I don’t want to name them because I might get them wrong, have said they won’t finance coal mines.

ANZ has said that.

ANZ.  The Norwegian Sovereign Fund which made its money out of oil is also out of fossil fuels, and the Rockefeller Fund, so let’s not underestimate it.  People around the world are moving away from coal.  But, the question from James says just wanted to know your thoughts about Japan building 45 coal plants.  I didn’t know that, I didn’t know Japan was building 45 coal plants.  Should Australia sell out of coal or should we keep going to renewables, I’d love to hear your analysis.  Love the show. 

So, they’re apparently all HELE coal plants, which stands for high energy low emission coal plants.  I don’t quite know how that works, presumably it just means that there’s less carbon emissions.  I don’t know whether it’s less carbon emissions than LNG but in any case they’re building five coal power plants…

45.

They are?

45, yeah.

45.

Which is an enormous number of coal plants.

Yeah.

When we thought that they were fading away around the world.

Well, because they had this slight accident back then, I can’t remember when it was.

Fukushima, four or five years ago, which makes you think it’s not a typical market.  It’s not a typical energy market.

No, they’ve got a bit of a problem.

They’re terrified about nuclear I suppose.

Well, they shut it all down.

That’s right.

They shut it all down and then they had to replace it with LNG, right, and so they’ve been importing huge amounts of LNG to provide their electricity and as we know from pictures, I’ve been to Tokyo, and they burn a lot of electricity in Tokyo.  There’s lights on all the time, it’s incredible.  So, they need electricity, quite a lot of it, and LNG is more expensive than coal so they’re building these coal power plants.

So, what’s our answer to James?

What’s the question?

Should Australia sell out of coal?  I don’t think Australia will sell out of coal because it has coal and as long as there’s some economic merit people will attempt to make money from it but I do think some of the smarter companies who can choose to get out of coal are getting out and Rio typifies that.

And, the second part of his question is should we just be going renewables and the answer is well the world is going renewables, that is true, and it’s because renewables are now cheaper than coal.  A new renewables plant, either solar or wind, is cheaper to build, the power is cheaper than a new coal plant.  Japan is presumably doing it because they haven’t got enough wind and they haven’t got enough room for solar and not enough sunshine.

There you are.  Okay, well, James, I do hope that answers your question.  Thank you for all the questions, as I say we are now running at 200,000 downloads and thank you very much everyone for your support, especially in the early days when we started this podcast.  Keep the questions rolling, we’re going to answer them all for as long as we can and don’t forget you can subscribe to The Money Café on Apple Podcasts or your app of choice, and when you’re there it’s very helpful if you could leave a review or a rating because it helps listeners find the show.  Send in questions, we’ll answer them of course, the e-mail is hello@theconstantinvestor.com and until next week, I’m James Kirby, Wealth Editor at The Australian.

And I’m Alan Kohler, Publisher of The Constant Investor.

Talk to you soon.