The trouble with Telstra. The Tesla big short. The class action gravy train picks up steam.

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

    • Telstra’s nightmare week.
    • Some of Australia’s utility stocks had been overvalued for years, and are now facing a reckoning as rates rise.
    • CSL is now bigger than NAB and ANZ, and it’s a yield stock.
    • Budget washup: reverse mortgages ride again!
    • Catherine Brenner leaves CC Amatil after ten years. Has anyone made a comeback from this kind of spiral?
    • The class action gravy train picks up steam as the banking royal commission rolls on.
    • Listener questions: people are fired up by Alan’s dismissal of index investing.


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

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

And we are They Money Café.

The Money Café.

The Money Café in the aftermath of the budget, Alan, and also some big stock market stories happening this week, also some fallout from AMP and Catherine Brenner and what’s going on with her and some really interesting questions, some very interesting what you might call provocative questions, Alan, coming up later in the show.  But, why don’t we kick off with Telstra actually, because we both wanted to talk about that today.  Why don’t you just bring us up to speed, Alan, what has happened to the once great dividend paying telco?

Well, the stock has fallen 10% this week to 6/7 year low of 2.87, that was on Tuesday, and down from 3.20 not too long ago, because firstly they came out with a profit warning.

A profit warning, yeah.

Well, it was kind of a speech by Andy Penn in Boston at a conference over there in which he said that he is terribly optimistic about the long term and he still has a very positive vision about the company being a technology company, etcetera, however just in the short term a few problems and profit is likely to be at the lower end of the range.  However, we’re going to pay the dividend of 22 cents this year.  So, that caused 5% off the share price on Monday.

Which was a lot because it’s a big stock and that brought it under $3 which is really bad considering this was $5 a few years ago.

Then on Tuesday the Tuesday came out, out came the analyst reviews of the Andy Penn show, and the critics pandered and said basically – and the nub of what the analysts said was that the dividend won’t be kept at 22 cents, they might keep it at 22 cents this year, but forget that in the future and Citi’s analyst, David Kayne, said it’d probably come down to 11 cents.

That’s really low, I didn’t see that one, that’s half of what it is.

That’s right.  So, here’s the thing, if Andy Penn can’t persuade people that it’s a growth stock being a technology company…

He has already killed it off as a dividend stock already because he cut the dividend, didn’t he?

Right, but if it’s not a growth stock it has to yield 6% at least.

Sure, otherwise buy a bank.

Sure, so if it’s not a growth stock it’s got to yield 6%.  11 cents dividend means that the price comes down to $1.80 not $2.80 but $1.80 and that’s how it yields 6%.  So, Andy Penn is under a lot of pressure.  He has to persuade people that it’s okay, that it’s worth $2.80 or $3 which means it’s yielding like 3% and that’s okay because it’s a growth stock.

Yeah, so he has to persuade them that it’s a growth stock, then cut to the chase what he has to persuade them is that share price is going to go up.  He hasn’t explicitly said this but in cutting the dividend, which they never did, and because they were the big fat dividend stock in the middle of the market in cutting the dividend he through all his cards on growth and it’s not coming down the line.

So, the very interesting point that you made in your column in The Australian today is that Telstra, Commonwealth Bank, AMP, were big retail held stocks because of their privatisations and in fact they actually brought a whole lot of people into the stock market that weren’t there before.

They brought millions of people into the stock market, AMP, the privatisation of Commbank and others, particularly Telstra which was privatised in stages and it’s most unfortunate that this particular basket of stocks, being almost like any core of any basket of stocks that any casual investor or active investor in Australia would have, they’re the very ones that are really in trouble right now.  The banks are in trouble obviously but Telstra, particularly.  Part of this, Alan, the deeper story maybe is that for a few years these stocks they kind of coasted really and they got overvalued because interest rates were so low.  So, basically what happened was someone said gee I’m getting 4%, 5% or 6% on my dividends, I’m getting more if you gross them up for franking so why on earth would I sell them.  But, now the tide is turning and part of that is, though we haven’t seen it here yet, part of that is that interest rates are going up around the world.  Did you see the US bond yields overnight?

It went back above 3%, currently it’s 3.068.

It’s the highest level in eight years I think.

That’s right, so I mean it went above 3% a couple of weeks ago then it popped down again under 3%, 3% was always seen as the big barrier and then once it goes through that decisively then the bond yield keeps going up.  That, as you intimate, produces a headwind for yield stocks.

Yield stocks, and that’s what most of our blue chips are.  If you look at them the four banks, Telstra – this is the sort of hardcore, if you like, of retail investors’ selection of stocks in Australia, BHP and Rio, but they were traditionally not bought for a dividend.

With the wonderful exception, if I may say, of CSL which has just become bigger than ANZ and NAB.

Yeah, it became bigger than NAB last week…

That was on your list and I just stole it.

You did.  Allow me to enhance that.  It was bigger than NAB last week and this week it’s bigger than ANZ, so really when we talk about the big four banks well stand aside because CSL is just marching on. 

And it is a growth stock.

Yeah, it does pay a dividend but it’s small.

It pays a dividend but it yields about 2.5% which is the yield that a growth stock is fine.

And you don’t mind 2.5% if every time you look at the price of the stock it’s higher.

Yeah.

Which is the case with CSL and has been really for a long time.  So, I think we’ve made this point before and we made it long before this sharp decline we’re seeing in the yield stocks now, we have been saying to people all the time to watch that, to watch how there will be a swing away from the dividend stocks, from the blue chip sort of stayers like Telstra and the four banks and to widen your views really and look at companies outside of that, CSL being the obvious one.  Though, Alan, I would have thought it was pricey, and it’s always been pricey, it just shows you you can be pricey and keep going up in price if you do the right thing.  Even in the last few months they’ve moved I think it’s from 140 to 165, something like that.

Yes.

Those are big numbers and a big company to manage to do that.

Yeah, that’s right.  So, what were you going to say about the budget, let’s just knock that off quickly because the budget is boring, let’s face it.

Yes, but investing isn’t boring and if you’re investing you probably have an SMSF.  If you’re an active investor, and a million people have SMSFs, there was two or three things that I just want to really kind of ram home here about what happened in the budget.  One is there was a few things they did for SMSFs for once, because they’re normally doing things against SMSFs, but they did a couple of things and I think it was to try and win back this constituency which they really have trouble with in recent times.  So, if you’ve got an SMSF the most people you can have in it is four and now they’ve opened that up to six, that’s really worth knowing because of course it means that sometimes grandkids and that can be involved, can be on the family SMSF.  Another thing is that they’ve loosened the rules about how it has to be audited, it used to be every year and they’ve moved that out to three years.  The other item is that they’ve introduced reverse mortgages, government backed reverse mortgages if you don’t mind, called the pension loan scheme.  It’s got various restrictions but it’s certainly put reverse mortgages on the map and I’m getting loads of queries and calls and requests both from readers and listeners about how do they work and from the industry about how they work. 

I’ve expressed I’m pretty sceptical about reverse mortgages to be honest and I would say to people it’s not an extreme option but you want to be very sure what you’re doing because of course the interest accumulates.  But, it’s there and the government one is there and it’s cheaper than the ones in the market, the government one is called a pension loan scheme and it’s offered at 5% which is considerably less than commercial mortgages which are 6% up.

Okay, can we stop talking about the budget now?

Okay, we will, yes.  But, I wasn’t really talking about the budget, I was talking about reverse mortgages.

Okay, reverse mortgages.

Okay, well you want to talk about AMP, tell us about Catherine Brenner who has less gigs this week than she had last week.

Well, she’s stepped down from the Coca Cola Amatil board which she’s been on for ten years and she’s only mid 40s so she was young to get on that.

Yeah, she had really shot out the lights on the boardroom since she was on AMP.

So, she had a decent go on the CC Amatil board and now she’s gone.  So, clearly the AMP situation has had a pretty big effect on her career you’d have to say.

Yeah, so what does someone do, you’re 45, you’ve virtually come out the high end, you’ve gone through one door and out the other door of Australian corporates.  You were on the board of AMP and Coca Cola, two prime boards, AMP blew up underneath you and to some extent you’ve walked off in disgrace.

You spend more time with your family.

Yeah, you can spend more time with your family but professionally what do you do?  What does she do?  She’s got an office there in Chifley Square as all the sort of big name directors do, do you think she’ll return to the fray as such?  Do you think she’ll return to centre stage?

She might have to have a little time on the sidelines like Cameron Bancroft and David Warner.

Can you think of anybody in corporate Australia that came back?

Not that she roughed up one side of the ball, I mean it wasn’t quite that bad.

No, and it wasn’t caught on camera or anything like that but can you recall anyone who was in such trouble at such high levels and did recover and came back?

I’m struggling to be honest.

I’m struggling as well, yeah.  It’s pretty unforgiving at that level, isn’t it, especially board level which all winks and nods, and basically very much an inner circle of who’s who.

I noticed James Hird did the video before ANZAC Day the other day for Channel Seven, so he’s on the way back.

He has recovered, yes, he has indeed, that’s true.  That’s sport though.

There you go.  Hey, did you notice that Maurice Blackburn has come late to the AMP class action party with a cut price class action.

A cut price offer, I know.  The leading game in this country has gone from being almost like sort of pole-faced to being like American movies.  There’s a story this morning, one law firm alleging that Slater and Gordon are out there offering Bunnings tokens to farmers up in Queensland on some action, that’s kind of where it’s got to.

Bunnings tokens?

Yeah, which you’re not supposed to do.

Yeah, well Maurice Blackburn’s litigation funder which is called, I think, Litigation Funding Group or something, is funding its class action.  They’re going to take 12.5%.

12.5%, and my colleague, Ben Butler, this week in The Australian he has been covering class actions, that is he’s been covering the Royal Commission and as a natural add on to that he’s been covering class actions.  There are several against AMP and he makes the point that Quinn Emanuel came in with 10% which is 2.5 points below the 12.5% from Maurice Blackburn so the class action lawyers – it’s so competitive now that they’re undercutting each other.

So, there’s a discount war going on.

There’s a price war going on in class actions, isn’t that amazing?

I wonder whether the shareholders are looking at this, at the fee that’s being taken, and is that what’s deciding them which class action to go with?  I mean, I don’t understand how it all works, what’s going on.  If you’re an AMP shareholder do you get to say okay, I’ve got this little range of class actions, I’ll pick that one.  I don’t know.

Because, their lower rate is leading me to believe that more money will come down the line to be shared.

I presume so, that’s right.

That’s the offer, isn’t it?

But, what you want most of all is to win, so I don’t know.

Yes, I don’t.  Because, when you have multiple class actions invariably what happens is one law firm gets to run it in the end so it doesn’t really matter, it’s not going to be decided on their commissions, is it?  But, we’ll see how it pans out.  It just shows you about class actions that I know they’re very good and they can be very useful at times but it has become a business within a business in this country and there’s aspects of it I really don’t like, you know.

Yeah, but what you want is a really good lawyer, you want someone who’s going to win the caper, you want Meaghan Markle’s boyfriend from Suits, one of those guys.

Yeah, you do, you want someone very good indeed.  Was there anything else we wanted to mention?  Well, we have to talk about the big issue of the week, well the big issue of the week among our listeners and certainly among our question sender inners which is about ETFs and managed funds.  Now, just to recap here and to run a little replay last week when we were talking about all this you mentioned a fund and you said that this fund, was it Selector, it had done very well.  Then, you jumped ahead if I recall correctly and you said this is what you need, you need a fund like this and our readers and listeners are making the point that you need a fund like that but the thing is they’re not out there, there is no fund that does that every year.  There’s questions from Peter, Tim and Jose.  I’ll just read the last one which is from Tim.  I can’t believe I never thought of investing in a fund that returns 30% a year instead of boring old indexing, says Peter.  Love the show, gents, but perhaps Alan needs to redeem himself of those comments.  Well, maybe you might clarify.

Somebody wrote a ten page question to us.

Yes, that was Peter, he’s included there, I’ve shortened Peter’s question considerably to the essence of it which is come one, Alan, where is this managed fund that does 30% a year forever?

Okay, so there is no managed fund that I know of that’s done 30% per annum over a long time, Selector as I mentioned did 30% last year, for the past 12 months, so it won the Mercer rankings.

Yeah, and I suppose one of the things that the people are saying history shows the guys who shoot out the lights one year are not the guys who shoot out the lights the next year it would seem, that’s often the case.

Well, there’s a couple of things to mention here.  Firstly, somebody who does produce good returns year after year, and they do exist, you can find them in the rankings, there are funds that do solid returns like 20% for ten years, okay.  I mean, I don’t have any records for 40 years but what I’m saying is that somebody who’s able to produce 20% returns, 15% returns, for 10 years is good at it, they are good at it.  It is true that that is no reliable guide to what’s going to happen in the future so past returns, all that stuff.  However, what you’re seeing in that is somebody who knows what they’re doing, that’s all.  So, I interviewed a fund yesterday and a guy – he has produced 17.4% over I think 10 years, so that’s not 20 or 30 but it’s 17.4, it’s quite good.

Well, there’s a couple of things here, isn’t there.  Often, it’s the case the early years it’s easy to shoot out the lights when the fund is small and the other thing is it’s hard to keep track of whether the team are still in place.  You go in and you say guys, the marketing people say we’ve done 18% for seven years and you go in and you buy, but unfortunately the boy wonder or girl wonder that had been the stock picker has moved on and you don’t know.  So, that’s the danger, isn’t it?

I’ll tell you fund that’s done 25% for 50 years per annum, 25% per annum for 50 years, and that is the great proponent of index funds, Warren Buffet.  So, the reason that Warren Buffet is a billionaire is because of the power of compound interest at 25% per annum for 50 years.  If he had got the market return, if he’d actually invested in index funds for those 50 years, we would never have heard of him.

No, that’s very true.

I mean, we wouldn’t know who Warren Buffet was.

The real issue now is that Warren, unfortunately, is in his late 80s so he’s not going to do it again, is he, he doesn’t have another 50 years to go.

That’s right, so the person who’s doing it at the moment is Jeff Bezos at Amazon.  I’ve looked at the comparison and actually at the same time in their history they were about the same price, Amazon and Berkshire Hathaway at the same point in their history are the same price which is a bit more than $1,000 per share.  Berkshire Hathaway went on to be worth $35,000 or whatever it is.

So, this could still be early days in Amazon.

Well, that’s an argument.  Now, obviously that’s not a managed fund, that’s a company, but nevertheless Berkshire Hathaway is a kind of managed fund and it’s an investor.

Yeah, it’s a conglomerate, yeah.

The other thing is I am in general anti-ETF, that is true.  Firstly, I’m against them in general because I think they’re distorting the market, just all this passive investment.

I’m certainly not against them in general.

I think I’m against them in particular as a vehicle for individuals investing because I think it lulls you into thinking you’re not making a decision about which stocks to invest in but you are.  So, if you invested in the ASX200 ETF you’re putting 30% of your money in the banks and I reckon if you want to do that that’s fine but make a decision to do it.

And I think they’re for people who don’t know a lot and that’s a lot of people when they’re looking at investment markets, ETFs are very useful, that’s the first thing.  I don’t worry about them dominating the market, not for a long time.  My concern about them is that passive investing is kind of ethically oblivious investing.  So, not just that you’re buying rubbish, knowingly buying rubbish when you buy an ETF, but you’re buying the worst of the worst because it doesn’t matter who they are, the worst cons and fraudsters out there on the stock market, you’re buying them.  Because, when you buy the ETF you buy everything.

Well, that’s what I’m saying as well, I mean that’s my problem as well.

Yeah, that’s where I’m coming from.  So, I think we’ve covered that fairly well, now we have to gallop through the questions because there’s lots of them but we’ll try and have a go with each one.  A question from Darragh.  Hi gents, love the show.  I’m going to be greedy with two questions.  I want to save some money for my two year old daughter, what long term investments would you advise?  The immediate answer here nine times out of then is ETFs, Darragh. 

Not from me it’s not.

Not from Alan Kohler.  I can’t find any saving products with decent rates.  Yes, you can’t because interest rates are at 1.5%, Darragh.  Should I purchase long term government bonds?  Gee, well we’re not going to give individual advice here, Darragh, and we never do.

Don’t buy bonds.  I mean, that’s my general advice.

Well, you certainly wouldn’t be looking at government bonds.  I would look at the kind of shares that we’ve been talking about on the show that are really looking good for the long term and I wouldn’t hold back from buying ETFs when you’re talking about long term introductory investment.  The other part of this question is any advice on methods to reduce my taxable income other than interest and depreciation on property?  You mentioned some older products coming back into fashion.

What are you like at tax advice, James?

And the last part is keep up the good work and it’s great to see Limerick trouncing Dublin 19-2 in the 2018 battle of the Australian finance pods.  Thank you, Darragh.  I’m going to surmise Darragh may just be Irish with a name like Darragh, a great name.

Well, if Kirby is Limerick am I Dublin, what’s going on?

Yeah, you might be Dublin, I might be Limerick.  I’m certainly Limerick, Darragh, once upon a time.  Now, the answer to your question.  There’s two things you haven’t mentioned that you could do, one is salary sacrifice, I mean make sure you do that, that’s still worth doing.  You can put up to $25,000 a year away in super and in a tax effective manner.  So, you’ve got to subtract your SGC from that.  If you work for a company perhaps you could do a novated car lease which again is one of the very few ways people on a standard salary can get some sort of tax effectiveness into their portfolio if they’re not in business.  Do you want to take the question from Adrian there, Alan?

From Adrian.  Hi guys, love the work you do on the podcast, the amount of value you guys cram into a short time is absolutely fantastic.  Well, there you are, thank you very much Adrian, we do our best.  I’m reviewing my super fund and trying to work out how well they perform compared to other funds, some of the funds seem to have very high but variable returns.  As I am in my early 30s I think it makes sense to take more risk at least for now and then become more conservative over time but some of these high performing funds take annual maximum management fees in excess of 2%.  Well, are there any ‘gotchas’ about moving super that I need to be careful about? 

There’s a menu of them.

Well, you’re absolutely right, Adrian, that the good thing to do is in your early 30s take more risk because you’re investing for the long term and the volatility of the market or returns in the short term are irrelevant to you.  So, that’s fine and I think that you’re right to become conservative over time as you approach retirement.  Do not pay 2%, goodness gracious that’s shocking.  Who’s charging 2%?

Hang on a second, but don’t you also say if someone is really good, if they’re a super stock picker, and they’re doing 20% a year every year, would you pay 2%?

I’m in favour of performance fees, that is true.  I’m not in favour of if he is talking about…

Yeah, these are fixed, these are give me the percentage regardless of my performance.

Well, if that’s the case it’s a bit unclear but I think the base fee, management fee, should be minimal and the performance fee should be relatively high, and I’m fine with that.  Then they should report to you after fee returns.

Yeah.

So, as long as your after fee return is fine then that’s all fine but as for moving super funds if you’re talking big super funds you need to just check out the ones that have got the highest returns over the long term.  The same thing applies to what we were talking about with managed funds which is that it is true, as they say in the ads, that past performance is no reliable guarantee for future performance.  However, past performance is what you’ve got and that does tell you whether a fund is any good or not and knows what they’re doing.  The top performing fund last time I looked was Host Plus.

Yeah, and I think actually on our BT Mega Trend for the week I think we will actually bring it in right here.

Well, BT won’t be happy with us saying Host Plus is our Mega Trend, heavens above, they’ll be very upset.

No, but they do make the point that active funds do outperform index funds over the long term.  Having said that yes, the top ones were not just Host Plus, the entire top 10 this year at least were industry funds.  You can get those, Adrian, on the APRA website.  They issue them once a year and you can see quite clearly how everyone did.  Make sure you look not just over a year but over 10 years where it is a quite a mixture of funds who perform.  I’m going to jump through to the question from Chris.  Chris says hi, I came across this article and I’m struggling to believe it’s true.  I understand the purpose of CDS, that’s credit default swaps, as a way to protect against credit risk.  But, isn’t it a complete manipulation of their use for companies to ask or contract another to trigger a default so they get a payout?  He includes then an article from The Economist which luckily I had time to read, Alan, and it’s an absolute mind bender.  It’s about how the big American funds basically exploit CDS, these credit default swaps, and in a way that’s really kind of immoral but not illegal.  So, yeah, the short answer is Chris, yes it is.  I’m struggling to believe it’s true as well.

So, are people conspiring to trigger a default that’s not a real default in order to capitalise the CDS?

Yeah.

Goodness gracious.

Yeah, the same people who are financing – it’s unbelievable but it’s not illegal, it turns out. 

How could that not be illegal, I can’t believe that.

It just isn’t yet.  I suppose now they’ll make it illegal because it probably wasn’t done before.

They just haven’t caught up with it.

Haven’t caught up with it.  Is there CDS markets in Australia?  Yes, there is, particularly with the banks.  If you recall back in the dark days of the GFC the credit default swap of Macquarie was a sort of

screaming indicator of how things were going for them.  I remember that the price of the credit default swap went up sevenfold in 2008 perhaps when Jim Chanos was shorting them and called them the world’s great short, but they survived.  So, yes, we do have them.  By the way, Jim Chanos, do you know what his big short is at the moment?

What?

Tesla, not Telstra, the short is over there, Tesla.

Tesla which is Telstra without a T or something.

So how about that.

Well, that’s interesting.

It is.  Next question, Wes.  Guys, love the podcast.  Can you explain how much interest we as a country pay on the 550 billion every year?  The government is all happy about this extra 8 billon they’ve found this year whereas if we just paid off the debt we would save all that interest.

Well, you’re absolutely right, Wes, but they are under pressure to spend some money on buying some votes.

That’s right, there’s an election coming.

So, the only reason they want to pay off the debt there, the only reason they would pay off the debt, is because they want to protect the triple A rating from the credit rating agencies and the credit rating agencies are quite happy with the surplus being a couple of years hence.  So, they don’t need the debt to be paid off any faster than they were going to because the credit rating agencies are fine.

And the rate they pay would defend on different issuances, wouldn’t it?  There would be a scale on that.

I’m just trying to remember the figure of the interest in the budget and I think it was around about $60 billion so it is quite a large number and it is true that that $60 billion if it wasn’t being paid could be spent on other things that are rather more useful, that is true.

Okay, indeed.  Alright, there you go, Wes.  Finally, a question from Steven.  Hi guys, I enjoy your podcast even though sometimes a few days late, that is he listens to them a few days late.

We’re never late.

That’s alright, you can listen to them any time you like, Steven.  Regarding your budget special – this is the one that we recorded inside the lockup, folks – I must take exception with your comments that it was noteworthy the government was limiting tax to 23.9, that would be limiting tax revenues to 23.9% of GDP.  He says this is no hurdle, if they want to be reformative they should have limited spending to 23.9 and let the public decide if they’re being taxed too much.  What do you think of that, Alan?

Well, the 23.9% of GDP limit to tax receipts is in effect a limitation on spending but it’s not an absolute percentage of 23.9%.  What they’re doing effectively is limiting spending because they have also said that they will have a balanced budget through the cycle, that’s what their aim is.

Yes.

Which means that they will have to have a surplus for a little while and in order to have a surplus you have too have spending that’s below 23.9% of GDP for a while and that’s what they say they’re going to do.

So, it’s close but not identical.

It is by implication a limitation on spending of 23.9% over the course of the cycle, in fact, because that’s what they’ve said they’ll do.

Assuming they do stick to it.  Alright, I think we’d better leave it there for today.  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, it helps listeners find the show.  Also, send in a question and we’ll answer it on next week’s episode.  Can I just say, folks, do keep the questions short, a paragraph should do it, really.  Okay, can you tweet us your thoughts and of course send in the e-mails to hello@theconstantinvestor.com.  Alright, 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.