Why we like Google. Super myth busting. Italy…and you think our coalition has problems.

This week James Kirby and I pick through the wake of the productivity commission’s massive report into Australia’s superannuation system, wonder about the prospect of an Italian exit from the Eurozone and marvel at what private equity can do when they get their hands on an IPO.


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.

And it’s a big week on the Money Café.  Gee Alan, I mean it really is, it just keeps going doesn’t it?  We go from one big, in terms of news and news cycle, there’s so much happening around the place these last few days.  Productivity Commission Report, I actually didn’t realise it was going to be such a big deal, but it is.

Well, it is and I think you’ve got to start on that, because, Mr Wealth Editor, you…

I will, because I’ve almost read the 571 pages.  I’ve read a lot of it, I’ll tell you that because I’ve written about it, I think four days in a row.

So, what do you think?

I think it’s a magnificent piece of work, it really is.  It really is and it taught me a few things I never knew.

What did you learn, for example, what?

Like I thought trailing commissions were gone in the financial system.

But they’re grand-fathered.

I know but do you know how many people are still paying them, or how many accounts are still paying them?

How many?

466,000.

Jesus!

Yeah.  So things like that, they’ve put numbers around and so if our listeners aren’t up to speed, it was a huge report, a powerful report, made two very big suggestions.  One was that you’d have one superannuation fund for the rest of your life when you started work and the other was that as part of that, in doing so, you would eliminate the duplication which is probably the most wasteful thing in the super system.  A third of all superannuation accounts are duplicates.  Yeah, and I didn’t know that.

Yeah, I knew that.

Did you know it was that many?

I’m not surprised to be honest.  I mean particularly now, everyone’s moving around jobs all the time, more so than they used to in the past.

Mm, exactly and then you move into fairly contentious ground, for instance that they say what they could do is have 10 funds that are the best 10 funds and they will be the ones you make a choice from.  And this is default funds which is what most people are in, and that would mean, whatever else it means, it would mean the Fair Work Commission would no longer – that whole system of industry funds wouldn’t be as powerful as they are at the moment.  I’m very interested to see Chris Bowen today say that he would not object to it.

Well because the 10 best funds probably are industry funds.

They are at the moment, they are.

They are.

So that was another thing that it’s hard to imagine, beyond doubt, the industry funds are doing the best.

Well that’s right and actually one of the things that the Productivity Commission has done is called out the federal government’s bias against industry funds.  They haven’t done it explicitly but they’ve conclusively shown that industry funds not only are cheaper to run, that is to say their fees are lower than bank-owned retail funds, but their performance is better.

Yeah and the two things combine actually. 

Not only should the federal government now shut up about how bad industry funds are versus retail funds, they should probably issue a ‘please explain’ to the retail funds and say, what the hell’s going on?  Why are your customers…

How come you’re not shooting out the lights, ever.

Why are your customers not doing as well, what’s going on?

With the honourable exception of the JB Weir Goldman Sachs fund, but I think that is a staff fund.

Yeah, there you are.

Isn’t that interesting.  Yeah.  So it was a very, very good piece of work as I say.  Then the next immediate question is, will any of this come to pass?  Is it possible, will it happen?  It would be a very good thing if it did.  Hey another aspect was that my super, they’re doing better than average.  That was a pretty good – most people don’t realise that, that the poorest people in the system with the smallest amounts, that layer, their performance is above average, better than the system.  Average, by the way, for what it’s worth, for all future uses is 5.6% a year.  That’s the long-term average.

Yes, but the average performance of the industry funds is 6.8% and the average performance of the bank funds is 4.9%.  So that 5.6 is an average of those two, quite widely disparate numbers.

It is, or you could say it’s been pulled up the industry funds.  The other thing I would say, is nothing’s perfect and no investment style is perfect, and the thing about the industry funds is that they have that big, big tilt towards illiquid assets, infrastructure and what they call alternatives for want of a better word.  Every investment cycle and every investment style ultimately finds trouble somewhere especially if it becomes general.  If everyone does the same thing then it’s not going to be as good as it used to be.

Well, maybe, except these performance numbers that we’re talking about are 20 years.  I mean this is not short term.  So the industry funds outperformance over the bank funds is long term, sustained.

It is long term and sustained, but I think that’s worth knowing that they have a different investment style and if the retail funds did the same investment style, they might do better.

Well, that’s right, but it’s a better…

It’s more successful.

It’s a better industry style.

Yeah, it has a better record.

Now, see, I think – I haven’t read it all as you have, I’ve read enough of it to jump to conclusions, shall I say? 

Yeah, jump away, jump ahead!

Which is that the problem, to a large extent, is inequality that they’re calling out.  The problem is, yes, there are winners, people are in good funds.  There’s a whole lot of people who are getting left behind.

The vast majority of people are in good funds.  Most people are served well by the system.  The problem is up to one in four funds, and I’m saying this carefully now, not one in four people, but one in four funds are underperformers.  So the problem is, if you’re stuck in an underperforming fund, it’s a big price for you to pay as a person.

What I’m saying is, when you’ve got a whole lot of funds, when you’ve got multiple funds, there’s going to be a difference in performance of some sort, right, which means that a lot of people are going to have at retirement, there are going to be different amounts of money, right?

Yeah.

And these people who have found themselves in lower performing funds, even if it’s lower performing by a little bit, as opposed to a lot, so they end up with $50,000 less than the person next door.

That’s right.

The question is, is that fair?  And the reason I’m asking whether it’s fair or not is because it’s not like you’ve made a decision, you’ve decided to have less money in retirement.  You haven’t said I’m going to go with such-and-such a fund, even though it means I’m going to have $50,000 less in retirement.  It’s a different thing.

But it’s a market, you can choose.

Yes, I know but that the thing is you can’t base your decision on anything you know about.  Choice is fine as long as informed, right?  So competition and informed choice is the basis of capitalism and the operation of an efficient market.  What I’m saying is choice in superannuation is meaningless because you’re choosing something that’s 40 years in the future and you cannot know what you’re choosing.  Your basing your choice on something you can’t know.

Yeah, but there has to be risk, we can’t all be on defined benefits.

So I’ve written a couple of times, in The Australian, that really what should happen is that there should be one default fund for everybody which is run by the Future Fund.

Yes, I know.

And you know that, and the Productivity Commission has specifically rejected that and said, that’s a bad idea and I’m not convinced.  I think it is a good idea.

Well you know, thinking out loud, those top 10 industry funds put together, I mean they’re not far off.  I mean Australian Super is $100 billion fund.

But what I’m saying is, so you’re a 25 year old, right, and you’ve got a drop down menu of 10 super funds to choose from.  How on earth do you choose?

People choose because they say “I’m in hospitality I’ll choose Host Plus”, that’s how they choose, they have no other guidelines.

I know but that’s a hopeless basis on which to choose, and I’m saying that there’s a big difference in performance between the number one fund and the number 10 fund and what’s more, that difference between number one and number 10 over the next 10 years could be reversed, who knows?

Yeah.

So the choice that we’re going to make between the top 10 funds is completely meaningless, you can’t make it.  There’s no basis on which to make the choice.

That’s investment.

No, it’s not.

It is, all you know is history, you don’t know what’s going to happen next.

Because we’re talking about people who don’t know what they’re doing, we’re talking about people who have no expertise.  It’s not fair to say, here you go, here’s your choice of 10, you choose.  They’ve got absolutely no idea.

That’s why they invented [9:18].

It needs to be made for them.  The choice needs to be made for them, here’s one fund, it’s the Future Fund and what’s more, the 10 year performance of the Future Fund is 8.5%, right?  Now, it is better than all of the averages.

I know, it’s not a directly comparable fund.

Yes, it is.

It’s not a fund that you…

It’s entirely directly comparable.

It’s not actually, it’s a global fund, runs on different lines, it doesn’t have to advertise and do all the things that the retail or an industry funds do.

It is, it’s an Australian fund, at the moment it happens to have 6% of its money in Australian equities which is half what it was five years ago, right.  Because that’s what it thinks is a good idea. 

That may not be widely out of line with other big industry funds.

But it’s got 11 or 12% of its money in international equities.  It’s no more international than any other super fund, than Australian Super, it’s just pretty good and its performance over 10 years is 8.5%.  Now the difference between 8.5% and even the 6.8% average of the industry funds over 40 years is a million dollars.

Look, they said, even someone in their 50s could be cut short by $50,000, someone in their 50s on retirement if they’re in an underperforming fund.  So it really does kick in…

I got asked today by somebody who’s in AMP, right, and their super is run by AMP.  Well AMP is the fourth worst performing fund.  He’s asked me should I rollover my fund into something else?  I mean that’s a disgrace that this person is in a super fund that’s earning 3.5% per annum because they’re going to miss out.  They’re going to be $500,000 less than somebody in Australian Super and that is completely unfair.

Yeah, the only thing I would argue with you is I think people have to take responsibility, you know, they should know.  There was this ABC Four Corners, did you see the one about super?  They went down the street asking people about their super.

Yeah.

People didn’t know where their super was, how much do you have in super?  Haven’t a clue.  Do you know who your super is with?  I don’t know.  I really find it hard to be sorry for someone like that.

Yeah, but how would you go about choosing a super fund? 

Well I would look at the returns.  I know you say you…

What you’ll understand or learn about is their past returns.

That’s right.  And that’s how I make – unfortunately that’s how we make all our investment decisions in life, we don’t know what the future ones will be.

Right, so you’re saying that the thing to do would be to choose the number one performing fund over the past 10 years, that’s what you should do.

I would think if one has sustained a performance of 5.6% or more over 10 years, it’s a good start.

So what’s the point of having the other 9 in the top 10?

Because they change all the time – keep your eye on it!  We better move on.  That was interesting about super.  I mean we could do the whole show on super, and maybe the listeners would like us to do that but maybe they wouldn’t.

Okay let’s move on.  We need to talk about Italy which we know far more about, do we?

Oh yeah, we know so much more about Italy than we do about Australian super.  I met someone at lunchtime and they said to me, so you know – this man is not from Australia, and he did make the point, a European background – and he said to me, “Do people realise there’s always been a crisis in Italy?”  Which was always an old joke, basically, that Italy, there was always a crisis of some sort.  However, I didn’t realise that they’ve actually been doing quite well.

Yeah, that’s right.

The market has been outperforming the FTSE for nearly two years, they’ve pulled down their debt.  They actually have been tacking along very nicely, but suddenly it’s scary actually because their whacky, and I mean whacky looking political coalition was threatened at least.

Well, I think it’s interesting that the President gets to say, no, you can’t have that finance minister. 

Yeah.

So the government comes in, right, they win the election, they’ve got a coalition, Five Star Movement and the League…

And he’s an anti-EU guy.

Yeah, so they put up this bloke, Paolo Savona, as the finance minister, he’s 81, doesn’t like Europe, thinks it’s all terrible and the President says, no, sorry, can’t have him.  So everyone spits the dummy and the government falls apart.

There’s a crisis, yeah, yeah.  So they’ll go back again.

I know, I think it’s amazing.  But apparently the President gets to say yes or no to each of the ministers, which I suppose our Governor General has the same power.

Possibly, but would never ever ever use it.

Yeah, so maybe that’s the difference between us.  Anyway, the idea that Italy leaves the EU is ridiculous because they can’t possibly do it.

A Texit, you call it, as like a Brexit.

No, it’s Quitaly!

I must say if Italy left the EU, really on top of Britain it would be…

They’d be broke.

Well, they would be broke, of course, the EU would bank roll the Italians so often and so many times…

Hey speaking of Italy, what’s going on at Myers?

Is there a link?

Not that I’m aware of.

No, I don’t think so. 

That was just a non-segue.

It was, it was a non-segue segue.  Well, their rudderless, of course, they have no chief or at least he hasn’t arrived yet.

They still haven’t got anyone?

No they have got someone, he’s on his way from the House of Fraser.

What, is he on a boat?

Well, he hasn’t put his feet under the table yet and meanwhile they’re having a fight with their concession holders.  So you know when you go into a department store and you’re looking at, whatever, a jacket, and there’s someone across the aisle and you say, “Excuse me, can you come over here?”  The way it works in Myer, it’s all concession outlets.  Sunglass Hut, Country Road, Mecca – there’s a whole bunch of them and what they’ve been doing is they’re not cooperating with Myer.  An internal email got leaked and one of the Myer GMs put out an email saying, “You must help people in our store if they’re asking”, even though these people are not technically now employees.

So when you come up and say, “Where’s the lingerie?”  They say, “Nothing to do with me, mate.”

No, sorry mate, that’s not me!  And you would get cross, you know, but actually they’re not working for Myer, but they’re bosses have least space in Myer.  So where was…

It’s got to be written in the contract.  You know, you will direct people to the toilet or the lingerie.

That’s right, you’ve got to write everything into contracts, these days, and Myer is still in deep doo-doo on the share market, folks, just in case you have forgotten, it’s at 43 cents and it was $2.56 a couple of years ago.  So they’re still bouncing along the bottom, I think is what’s happening with Myer.  Now this is a segue, this is a bit better.  Myer was once at least a very successful marketing exercise for an IPO, but it was a failure as an IPO, pretty fast.

Well it was a success for the private equity firm that owned it.

It was a success for TPG that floated it and then made themselves a lot of money.  But there’s another IPO coming down the line which you were having a look at, Viva Energy, which I know very little about.

So Viva Energy…

It’s energy, that’s all I know, oil…

They own all the Shell service stations and the Shell refinery in Geelong and also the Coles, speaking of Myers, they own the Coles stores, the Coles service stations, what are they called?

Oh the Coles service stations.

The convenience stores.

On the highways, is that what you mean?

Yeah.  They were spun out of Shell 2014, sold to a Rotterdam based business called Vitol Energy, which is a privately owned company.

I remember, yes.

And then they sold or at least floated the properties into a Real Estate Investment Trust, a REIT, listed on the Australian Stock Exchange, called Viva Energy REIT.

They own the buildings of these outlets.

That’s right the REIT owns the buildings.  They sold them into the stock exchange for $1.5 billion which is what they’re still worth, having bought the business for $2.9 billion.  So they got the business effectively, for $1.4 billion, net after getting rid of the property.

Yeah.

They’re going to float it now, not very long – this is like three years later, they’re going to float it for anything between, according to the analysts, $4.3 billion and $6.3 billion.

Which would make it bigger than Medibank, which is the last big float.

Yeah, so it’s a big float.

The last big, retail float.

So it’s $1.4m to at least $4.4m – they’re going to make $3 billion.

In how many years?

Three years.

Wow, that is smart.

I mean goodness me, why bother working?

Yeah.  If they get it and they probably will because the institutions will all go like lemmings into it.

Well, that’s the minimum, the maximum’s $6.3b.  So it could be they make $5 billion, heavens above. 

Smart, Alan.  Smart, but would you invest in oil – would you invest in a Geelong…

Service stations, would you invest in service stations at the beginning of the era of electric cars?

That’s right, or a Geelong based oil refinery, possibly the last one in the southern hemisphere, last one in Australia.

Absolutely not.  So I wouldn’t touch it with a barge pole!

Okay, well we’ll keep that in mind.  When it floats, we’ll see how it goes.  Mark my words, I’ll look back on that one.  Okay, in July it says here, okay.

In July, that’s right.

In July, oh that’s not far away.

You’ll be swanning around somewhere won’t you?

Don’t worry, I won’t forget.  Okay, also before we do our correspondence, there was a very interesting little story, I thought at least, for our listeners who are into collectibles and investing in very interesting things like cars and paintings and maybe jewellery.  De Beers which you’re bound to have heard of who are the world’s biggest diamond company.  Always were, basically controlled the world diamond industry and came out of South Africa and Botswana as well.  Well, they always said, for all my life that I recall – the whole thing about De Beers was they had real diamonds and that they were anti-synthetic diamonds.  This week they gave up and they said they’re going into the synthetic diamonds business.

I don’t know much about this, but I presume that there is not much of a scarcity factor with synthetic diamonds because you can just make them.

They’re all the same, that’s the thing.

I know, but you could just make them, right?

You can just make them, you can just roll them on the production line.

So you don’t have to find them.

They still cost, I noticed, about half the price of a real one.  Now a synthetic diamond isn’t a fake diamond.  A fake diamond is a bit of plastic that’s…

No, it’s a proper diamond.

It’s actually a diamond, that’s right.  Chemically it’s a diamond and the same properties and structure inside and all that, but it’s synthetically done in the lab.  But yeah so that’s the end of De Beers as we know it, actually which was one of the world’s most powerful companies for a long time.

Is that right, you think it’s the end of De Beers.

Well, it’s the end of De Beers as they were, the great natural diamond, sort of propagandists…

The world’s going to be flooded with diamond.  They’re going to be two-Bob a dozen.

Yeah, well if you have diamonds or if you like that area, be aware.  Okay, some correspondence.

You can ask me the first question, all right?

Okay, I’ll ask you the first question, from Derek.  Can the analyst ratings for buy, sell, hold, found on trading platforms like Morningstar, or on CommSec be relied on as objective advice or are they biased.  What do you reckon?

The answer of course, is they cannot be relied upon because…

Well yeah, they are biased.

Because who knows what’s going on with the analysts.  Now a lot of analysts are not biased but you don’t know which one’s which and a lot of the analysts work for brokers who are trying to get business from the company that they’re analysing.

I think you can say, with hand on heart, they are all biased towards buying rather than selling stocks.

Yes, precisely.

And also, if our listeners are familiar with the term ‘hold’, you know, it’s buy or hold or sell.  But you know, holds are often sells.  That is they’re very slow to put sell on something but hold is a very clever thing someone came up with as a sort of…

Yeah, but there’s also the problem of the broking firm trying to get business out of the company…

And then they have relationships with that company.  They may even have floated that company, for instance.

That’s right.

If you recall when we made our short-lived experiments with share recommendations and all that on Eureka Report one time, we had this big debate about what is a hold.  Like a stock is either a buy or it’s a sell.

We didn’t want to have holds, we thought a hold was rubbish.

That’s right. 

We thought what the hell’s the point of having a hold.

Yeah, in our innocence we thought you could do that.  So it’s worth knowing folks.  Now also I think on our BT Financial Group Megatrend of the week, I think this week a good subject would be the future of the FAANGs the high-tech super stocks that still dominate the world because, it’s true you know, I mean FAANGs…

So you’ve been sitting on the BT Financial Group Megatrend, ready to wheel it out at this point.

Nicely done wasn’t it?  But see the entire American stock market depends on these five stocks, really, and the whole world depends on the American stock market, so you can’t underestimate how important they are.  But our question, which came through Twitter, and apologies, I can’t recall who it was from, but he asked, if you had $10,000 which FANG stock would we recommend.  Just to remind everybody, FAANGs are Facebook, Amazon…

Apple.

…Apple.

Netflix.

Netflix and Google.

Which is Alphabet actually, but it’s…

When you want to buy Google on the American stock market it goes under Alphabet, just so everyone knows that, the holding company.

No, but the code is, GOOG, even though the company’s name is Alphabet, the code is GOOG, so it’s still technical ‘G’.

Well, it’s a good question and I thought no better person to answer this question than our old friend, Clay Carter who is an expert, particularly on American stocks, offshore stocks, especially the US.  He’s a Canadian originally and he works out of Macrovue in Sydney where he helps them do research and compile model portfolios at various times.  So I said to Clay, “Clay you’ve got two hours, which FAANG stock would you recommend?”

Two hours?  He wouldn’t need two hours for that?

No, he didn’t, 20 minutes, and he said definitely Google, also known as Alphabet.  And I’ll just read briefly his main point, he says, not only is it reasonably valued on 2019 earnings less than 20 times, which is less than its actual growth rate, but there’s a lot going on particularly with artificial intelligence. Oh yeah, and driverless cars, was it Google that bought…

Waymo.

Waymo, yeah.

Which is by far the leading driverless cars business.

Driverless car tech stuff.  And he says, these in turn will eventually be monetised and possibly spun out to the enrichment of shareholders and then he has his report on this.  So that’s interesting because I think if we didn’t, I didn’t really know which to choose, but you’ve been very hot on Amazon.

Well this question arrived on Twitter and I tweeted back, well inside 20 minutes, I might add, instantly.

Yes, yes, but what did you say? 

Amazon.

What is your argument for Amazon.

Well because – I just said Amazon, I didn’t actually justify it.  I don’t feel like I have to, but anyway, so what I think is…

Oh you have to.

I’m just agog at Amazon I think it’s just an unbelievable company, it’s just incredible.

It is.  All these stocks have had a great run, but they’re all down 15% or so…

I read something the other day that said the world has become a company town.

Yeah.  Have you seen how those American cities are fighting over trying to get the Amazon headquarters.

But it’s also got a huge amount of artificial intelligence going on and it’s got so much potential in growth from online shopping, but also the web services business, I mean, it’s unbelievable.

Yeah, well two things to say, it’s so easy to buy overseas shares now compared to how it used to be, and the other thing is the FAANG stocks, as a group are down 15% or so, in recent weeks.  They are on one of those sort of cyclical seasonal downturns they have.  So if you’re going to do it, well it’s 15% cheaper than it was. 

We might leave it there for today Alan.  I think we’ve covered the bases pretty good there.   Do send in your correspondence.  Last week we had too much, this week we only had two.  Don’t forget you can subscribe to the Money Café on Apple Podcasts or an app of your choice and while you’re there, it’s super helpful if you could leave a review or a rating.  It helps listeners find the show, and send in your questions, as I say, the email address is hello@theconstantinvestor.com.  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.