The risky business of blokey super fund. Why banks don’t want the wealthy. What’s the ACCC really up to with its four pillars review?

This week James Kirby and I discuss the eventual end of quantitative easing, the ACCC’s deeply confusing messages, how gender affects the risk curve for Australian superannuation funds, and answer a bag of listener questions.
 
Topics covered:
  • What happens when the Fed decides to unwind QE? Janet Yellen hopes it’ll be like paint drying.
  • Why James is scared of property trusts?
  • You need a really good reason to buy banks/Telstra/utilities as rates start to rise.
  • What does Rod Sims really want from the ACCC’s four pillars review?
  • Can banking and wealth management coexist in the one organisation?
  • How men make super funds riskier.
  • Is there a false sense of demand in the property market?

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 Cafe.

The Money Café.  G’day JK how’s it going?

Good, and good day to you, Alan.  We have a very interesting line-up of issues today, actually and one of the things we were doing folks before we started was trying to get some order on them.  Because, it is actually a week that’s packed with news.  The big news will be I would imagine ultimately what way the rates are going to move in the future.  We’re going to look at that.  We’re going to look at whatever the ACCC is up to asking to review the four pillars, the famous four pillars policy, which is of course the one that doesn’t allow the big banks to take each other over.  And some questions we have, a roll up of at least four questions this week, Alan.  We had more, but we’re just going to pick out four this week and also, we just want to say, please keep sending in the questions.  We absolutely love to answer them and hear from you.

Now Alan, the US Fed had a statement this week.  A big statement from Janet Yellen and it has set off all sorts of repercussions across the markets.  Explain really what she said and why it matters to everyone.

Okay, the two things that they said were, that they would begin next month to unwind their balance sheet, which is now $4.5 trillion worth of bonds, up from $1 trillion before the GFC, and that’s the consequence or the result of quantitative easing.

What does that mean for most people?  Who cares?  What does it mean when the Fed starts unwinding its bond holdings?  What’s its effect for me or you? 

Okay, we’ve heard of quantitative easing, right?  Which is what the Federal Reserve and the Bank of Japan and the European Central Bank have been doing for the last eight years.  What they’ve been doing is printing money and using that money to buy bonds off banks.  So, the banks get cash and the Federal Reserve gets bonds and there’s been colossal amounts, I think it’s $11 or $12 trillion worth around the world of which $4.5 trillion is sitting in the Federal Reserve balance sheet, which is a whole lot of government bonds.

As they do this, the pressure is then for rates to lift?  In simple terms is that the case?

Well…

The mechanics of it is that yields will lift…

If they wind it back…

Bond yields will lift and so rates will lift?  Is that a logical sequence?

Well they’ve been buying bonds which tends to force interest rates down.  And quantitative easing has been bullish for markets, because it’s led to liquidity coming into the system in the banks and they’ve been using it to buy other assets and stuff like that.  You would think, therefore, that the reverse of quantitative easing, which is what we’re now heading into, would be bearish. 

Yeah.

You could call it quantitative tightening.  Now what Yellen has said, not last night, but has said previously, is that when we do this, it will be like watching paint dry, it’ll be so slow, you won’t even notice it.

She hopes.

Yeah, that’s right.  It will be so slow, so gradual, that you won’t even notice it, you won’t feel a thing.  You won’t feel a thing and that is yet to be seen, of course. 

But if we were to see something, what would it mean …

They aren’t going to actually sell bonds.  What they’re going to do is stop rolling them over. 

Right.

As they mature.  What they’ve been doing at the moment, is as they mature they re-invest the money back into bonds to maintain their holdings at $4.5 trillion, but now they’re not going to do that and the expectation would be that they’ll, kind of, decline very gradually and that’s fair enough.  The other thing they said was, that they’re not going to put up interest rates today but, they hinted that they’ll do it in December, at their next meeting, which is December, so therefore everyone assumes that they will and there you go.

And I notice our own banks, I’ll get the right bank here, ANZ has accelerated, if you like, its forecast for bank rises and having said previously, no rate rises until 2019 are now saying til next year.  Which seems to be just about what everyone’s saying, til next year.

Well, ANZ was referring to Australian interest rates.

Yes.

The Australian Reserve Bank is slightly different, in that the Federal Reserve in the US is clearly in a hiking cycle, having already hiked three times.  Obviously, they’re into it now and the only question is how quickly they do it?  And I think that there’s an expectation that there’ll be one in December and then more next year and everyone’s looking at all that, but, none of it was a surprise last night.  I mean, the US dollar did actually pop up at the moment the thing came out.  But really that just was the removal of uncertainty. 

I suppose if you’re sitting in Australia.  The issue is rates may rise, they may not rise til next year, but they may rise.  But the other thing is, all these stocks that have been beneficiaries of quantitative easing, like property trusts and Telstra and high yielding stocks, they’re in for a rocky ride, aren’t they?

Oh, yes that’s right.  So the banks and Telstra are the high yielding stocks, real estate investment trusts have all benefited, as you say from falling bond yields over the last few years and including this year and that’s going to become a headwind as opposed to a tailwind for those stocks. 

I’ll tell you something, I was looking at the gearing rates.  Do you remember the last time property trusts went off the rails in the wake of the GFC and the whole problem was that they had high gearing rates.  Now, when we say high gearing rates, that means they had maybe more than 40%, that is roughly that their borrowings were more than 40% of their overall value.  If you look at the property trusts right now, some of the big ones are already up over 40.  There’s one that’s called Centuria, that’s over 40.  Even Westfield is coming up on 40.  And what I would be concerned about is, they’re up over 40 when rates are low, right?  The rates are rock bottom low and the values have been rising.  It’s not like they’re not borrowing, it’s just that the gearing stays looking reasonable because the values keep going up.  But if the values flatten and rates go up, those property trusts are going to, they’re going to be pressured.

Yes, you’re a bit scared about property trusts, aren’t you?

I am because I’m not convinced that they… every time I read about property trusts there is this sort of line that’s trotted out everywhere that they’ve cleaned up their act and they’re not like they used to be and they’re behaving themselves.  But actually, they’re borrowing as much as ever.  The point I’m making is that their gearing rates don’t reflect that because the values kept going up.  But if the values flatten and they’re bound to flatten now and if the rates start to go up then their gearing rates are going to jump, they’re going to jump right before our eyes.  I would keep an eye on that.  I would really watch property trusts where you see like Cromwell for instance, this week.  Just this week, Cromwell had its debt downgraded by Moody’s, that’s one of the big property trusts.  That doesn’t happen very often. 

Yeah, that’s right.

Downgraded to junk, by the way, downgraded to junk.  Worth thinking about that.

I think what you’re saying and it’s correct is that with interest rates, if we’re into an interest rate rising cycle, which we are now then you’d have to have a pretty good reason for buying a stock that benefits from lower interest rates. 

Yes.

You have to really think hard about it.  Because there’s no tailwinds, there’s no easy ride for those companies, as they’ve had, right?

No.  The utilities and the Telstras of this world.

There’d need to be a good reason for doing it and to be honest in all of the banks, Telstra, the real estate investments trusts you’re highlighting, I can’t think of a good reason.

No.  Which is a nice way for us to open up another issue of the week, which is banks.

Yeah, well, I’m just asking you, what do you think is going on?  Because what’s his name?  The ACCC’s Rod Sims, says he doesn’t like the four pillars.  I mean catch up Rod.  Come on.  Heavens above we’ve had this for quite a long time.

We’ve had it since… Good lord, we’ve had it since the days of Peter Costello.  But interestingly, it’s there so long, people have forgotten a few things.  First thing is, it’s not a law.  It’s not a law.  It’s not written anywhere.  It’s just a policy on the run.  The second thing is, it was designed originally to stop the major banks taking over each other.  Specifically, NAB and ANZ were trying to do it.

And it was originally five pillars because AMP was included in it. 

That’s right.  That’s right and then they reduced it back to four.

They had four because who cares about AMP anymore? 

Because they’re so small.

No, nobody wants it. 

But, now here’s the thing.  So, Rod Sims, who I think plays games a fair bit with both the public and the government, has said that he’s submitted to the Productivity Commission to examine the four pillars.  Well, once upon a time that would have just rung bells all around the place because people would say, my God, so that means the banks are going to be allowed to take over each other, because if the Productivity Commission was to examine the four pillars they would surely say, where’s the economic rationale in it?  And you do wonder.  So what Rod Sims is saying is, he’s put it to the Productivity Commission because he wants them to examine whether they shouldn’t be allowed to buy any more regional banks.  Well, I would say, it’s way too late on that one too.  There was eleven of them at the time they launched the four pillars and now there’s three. 

Three, is there three?  I thought it was two.  There’s Bendigo and Adelaide and then there’s Bank of Queensland.  What else is there?

There’s Bendigo, the Bank of Queensland and there’s one that’s called a bank in Queensland as well, it’s very small.  I think it’s called White Bay.  I think they’re technically a bank.

So he wants the seven pillars?

Well, I wonder what does he really want?  I really don’t know.  But, I would not…

What does Rod Sims really want?  That is the…

I would say folks, don’t be surprised if the Productivity Commission comes out and says, actually the four pillars make no sense at all to us.  Let them take each other over and if they did, what would happen?

Well, the thing is it’s not up to the Productivity Commission.  It’s up to the Treasurer.  And as you pointed out, it isn’t the law.  Unlike, the media laws, there was a law that says you can only own two out of three of the main media things in each city, or 75% reach.  So there was a law and now they’ve removed the law right?  But in this case it’s ad hoc.  It’s case by case. 

It’s very hard to defend.  Times have changed.  Switzerland, for instance had two huge banks.  Swiss Banking Corporation, SBC and UBS, they merged and you know, the sky didn’t fall in.  In Scotland, not banks but they had two huge global fund management groups, Standard Life and Aberdeen and they’ve merged.  In a relatively small economy, it’s going to be very hard to defend the banks here…

I reckon if ANZ and NAB, if they wanted to merge, they’d put a submission to the Treasurer, the Treasurer would get a submission from the ACCC and from the Productivity Commission and then would say no.  In my opinion.

I don’t know.  I don’t know. 

At the moment.  Maybe in five years’ time he’d say yes, because they’re all crumbling because of fintech and blockchain.

Actually, on the same subject.  Commonwealth Bank today announces today that it’s going to sell Colonial First State.

Well, it has sold its insurance, CommInsure, so it announced two things.  It has sold CommInsure…

It had to get out of CommInsure, it was an embarrassment. 

That’s right.  So it sold that for $3.8 billion, so it was a lucrative embarrassment, if you could put it that way.

I think it was less than book value. 

Oh is that right?  Okay, there you go.  They’ve sold that to the Chinese and then they’ve said they’re going to have a “strategic review” of Colonial First State, which means it’s on the chopping block.

Would anyone like to buy it?  Yes, well if I was in active funds management, I’d be getting out of it too.  I wouldn’t stretch it though to say that banks and wealth don’t mix.

Oh, I would. 

I don’t think so.

The whole thing was, they all bought, CBA bought Colonial, Westpac bought BT, ANZ partnered with ING, NAB bought MLC right, and it was all, I can’t even remember when that was.  Fifteen years ago.  It was all just a huge optimism about how they’d be able to sell more products to their bank customers right?

Bank assurance.

We’d all walk into the bank branches and the tellers would flog super at us, when we did our banking right?  That was the idea.

And it turned out they did.  But they did it so badly and so amateurishly.

Yeah, but no one goes into bank branches anymore, apart from anything else.

You don’t have to go in to be sold a package though.

Well you do, kind of.  Everyone’s doing their banking on line.  And you can’t really sell superannuation to them.

Everyone says they’re all getting out of wealth management.  Well Citi in Australia has multiplied their staff by four.  They’re employing hundreds of people.  Right now, they’re expanding, so actually Citi are looking at the situation saying, no we can do it.  People have done it around the world.  I just think in this market they haven’t, they’ve been hand-fisted attempts, and they just haven’t …

The other problem is that big funds, large super funds find it very difficult to perform very well, because they’re too big.  And they’re all getting, the bank owned funds are getting slaughtered by the industry funds, in terms of performance and by smaller funds that are able to be more nimble and make better returns and so they’re all losing out, so they might as well just get rid of them.

These are swings and roundabouts.  I tell you, it’s not the end of it.  They can’t resist it.  They can’t resist wealth management and they will be back to it.  This is just a cycle, they come and go.

Which is a good segue into your other topic, which is that men make super funds riskier and the problem is all these banks are run by men.  Clearly, that is the problem.  Tell us the research that’s led you to this conclusion James.

Research, which is fine and sometimes you see surveys in newspapers, some of which we are associated with, and The Australian…

Which are a load of rubbish, but anyway.

No, no.  We all have a feeling that we can sometimes get excited about surveys that are very slim and when you look at them closely it finds out they’ve interviewed 40 people.  Or 5 people, or 500 people.  But they’re tiny right?  But there’s a gigantic survey at University of Adelaide, 21,000 SMSFs are surveyed, which is a hell of a lot of funds in any sample size but particularly SMSFs, since there’s only a million of them.  So it’s reasonably…

Yes, that’s a big survey.

It’s a genuine sample size.  And they have come to the conclusion that funds dominated by men are riskier.  That men in super funds will move the fund up the risk spectrum. 

Why does that not surprise me James?

Yeah.

It doesn’t surprise me at all.

I’ve never seen this actually done on the super frontier.  So, I think you’ll find that it’s something …

I will also venture to suggest that it’s far worse than the survey suggests because all the men would be lying their heads off about what they’re doing in their funds.

About returns.  I rang the professor.

You did?

Operating under the wonderful name of, Ralf-Yves Zurbrugg in Adelaide this morning and I said listen, what empirical evidence have you got on this?  Is this out of the blue?  And he said, all the surveys around the world show that men are bigger risk takers and that they’re weakness is they go for the big one.  They want the ten bagger; they want the one they can talk about, you know?  The one that doubled in price or whatever, and this comes up again and again.  I said to him, tell me one thing.  If they take more risk, is it more rewarding?

Yeah, good question.  And?

And he hasn’t done that work yet.

Oh!!  That’s terrible.

I said, well why don’t you do that the next time.

We need to compare the returns of men and women. 

That would be good.

Surely, he could have done that work?

Well, I suggest that he does.  Now we must do our questions.

Oh, the questions, yes that’s right.  What was I going to ask you about?

The first two.

So, James wants to know, James. 

Yes.

Is it a false demand in the property market in the sense, false sense of demand to sum up it’s a long question, but to sum up.  He says, given that a lot of the demand for property that’s been driving prices up is from investors, as, the prices come down, that demand from investors will dry up.

Yes.

And therefore, that demand is not real from investors.  What do we think about that?

I think the demand is actually quite real and property will always be attractive for investors because of the long-term nature of the capital improvement. 

Not to mention negative gearing.

Not to mention negative gearing, which seems to be safe.  I think on that front I wouldn’t be waiting for the investors to go James, but I would say the latest figures show that first home buyers are back in the market and that’s probably healthy.  Investors were running really way ahead of their long-term average as part of the market.  So we’re going to see first home buyers in the market, which probably makes for a more real authentic property market and authentic demand than we’ve seen for a while.

Yeah, and the demand fundamentally has been underpinned by immigration.

Immigration and overseas buyers.

Which has doubled in the past 10 years from 100,000 to 200,000 and that’s kind of underpinned the shortage of housing.  Which, I think and there’s no sign of immigration slowing down.  I actually think that it means that property is likely to have soft landing, I would have thought.

Yeah, yeah.  I think you’re right.

Famous last words, but there you go.

You can define soft another time, 5 – 10% drop at worst.

10% is soft, I’m calling that.  I mean, 30% is bad, 10% is what happens all the time.  That’s what happens.

You should be able to take 10%.  What’s the next question?

Oh, shareholder class actions.  Nick is confused about our puzzlement on why shareholders would effectively sue themselves.  My view is that once someone elects to sue a company, it is rational for all shareholders to jump aboard.  If they don’t they are effectively subsidising the other shareholders and extracting value.

Yeah, look it’s a great point.

He’s right isn’t he?

Yeah, he’s right.  Yes, Nick you are right, of course.  But the point we were making was, ultimately, if the class action wins as a shareholder, you pay the money.  The directors still get their millions for whatever performance they had.  They don’t pay, it’s the shareholders that pay.  I think there’s two other questions.

There are.

I might ask you the first of them.  Alan and James, great show.  Thank you very much.  And this is from James as well.  I noticed this morning that the Australian dollar rate, that is the rate with the US dollar is 80 cents, 80.001 closing for the week.  My question is, does that imply that is RBA intervention to keep the exchange rate low?  Is there any statement from the RBA about this?  I don’t know if the RBA need to intervene an awful lot more, because the difference between the Fed rate and our rate is now so small.  I mean, there at 1.25 and we’re at 1.5 is that right?  So this idea that they have to keep lifting our rates is not really on the agenda any more.

They’re certainly not intervening as far as I’m aware, and they have intervened.  There have been times when they’ve intervened, but the trouble is that they’re running onto a battle field with a pop gun.  It’s a massive market the foreign exchange market. 

It is.  I wouldn’t say it’s pointless.  It’s a pretty close to pointless exercise, isn’t it?

Well, the fact that it’s exactly 80 cents is just a coincidence. 

I think perhaps, it’s not that they don’t know that.  But, this idea of job owning where they say, they tell everyone they’re doing this and they hope that it might work.

Okay, and the final question is from Travis.  A quick question.  I’d like to hear a little bit more about ETFs.  You have cautioned people about them, well actually to be precise Travis, Alan cautions people about them.  He thinks they’re terrible.  I don’t think they’re terrible, I think they’re very useful.  But, his question is, what timeframe are you thinking that they might become problematic?  Alan, when are ETFs going to pull down the whole market?

Next week.   Next week.  Just kidding.  But, I’m not saying that.  I think that the money in ETFs is likely, in my opinion to be more flighty than long term investment money that has examined companies and invested in companies for the long term.  Money in ETFs is possibly going to flood out of them at the time when the market falls, in the way that the money has flooded into them.  So, I’m concerned.  My number one concern is that.  That when the market starts to turn the money will flood out of ETFs and you’ll get into a spiral, which will worsen any downturn that occurs.

Okay.

And the second thing is, when you’re buying ETFs that are the market ETFs, so the ASX200 or ASX300, you’re basically buying companies according to size and if you go through the top 10 companies, on the ASX, which actually represent about 45% of the index.

Yes.

So, if you buy the ASX200 index, you’re basically investing in four banks, BHP, Telstra, Woolworth’s, Wesfarmers.

If you buy the plain vanilla index, yeah.

If you buy the plain vanilla index, you’re putting half your money into those top 10 companies, and if you look at individually, each of them, you wouldn’t invest in them. 

Okay.  I will just say on the other hand, they’re fantastic for getting in, for ways, for instance to get into the American stock market without any complications.  You just buy an ASX listed ETF, to get into emerging markets they’re terrific.

Exactly.  No, that’s fine.  I’m okay with that.

I wouldn’t underestimate either these Smart Beta ones either, where you strip out some of the problems that you’re talking about…

I was looking at an ETF this morning and it was called ROBO ETF, which invest in 20 robotics companies.

There you go.

And that’s great.  Love it.

There you are.  Okay, well we might leave it at that.  And of course, we’d love to have some more questions.  If you send in a question hello@theconstantinvestor.com is the address and 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 super helpful if you could leave a review or a rating.  It really does help us find listeners for the show.  Until next week …

Or you can subscribe to The Constant Investor while you’re there for a dollar, one dollar for the first month. 

Or you can subscribe to a national newspaper The Australian, which is also a tremendous organ of both record and news.  And until next week I’m James Kirby, Wealth Editor of The Australian.

And I’m Alan Kohler, the publisher of the wonderful Constant Investor.

Thank you.