Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm
Speaker 1: James Kirby, the editor at the Australian. Welcome aboard everybody. Well,
Speaker 1: you may not have yet I got your full results
Speaker 1: for the financial year, but you may start to be
Speaker 1: getting your super returns. They were probably at the nine
Speaker 1: percent mark, maybe higher. If you've any decent fund at all,
Speaker 1: and if you were looking at how your shares went, my,
Speaker 1: oh my very very good year, you would expect on
Speaker 1: the Australian market that you did at least twelve percent.
Speaker 1: I'm talking your shares doing about eight percent and your
Speaker 1: dividends doing maybe four and a half thereabouts, So you
Speaker 1: get a total return on twelve ish good year by
Speaker 1: Annie's Andrew's historically comfortably ahead of inflation. And then the
Speaker 1: US markets absolutely wonderful. I mean they are wonderful. Returns
Speaker 1: from the US markets. Are you looking at in the
Speaker 1: order of twenty percent plus on world indusies. You're looking
Speaker 1: at more like mid twenties on US induses. The US
Speaker 1: indicies are now so powerful, are so successful that they
Speaker 1: are representing seventy percent of the world stock market as
Speaker 1: represented the Morgan Standy Capital International Index, the MYSKI as
Speaker 1: they call it. So the question we ask is is
Speaker 1: this as good as it gets both on your super
Speaker 1: and on your share market return. We had actually own
Speaker 1: on the show last week, of course, needless to say,
Speaker 1: as I expected, as I predicted, we had a big
Speaker 1: response to that. And as I said, we could almost
Speaker 1: do that show every single month of the year and
Speaker 1: we'd have avid listeners every month of the year. How
Speaker 1: much should you have in super? And I thought actually
Speaker 1: was quite good in how he it really got into
Speaker 1: the tickets there on the basis that you know it
Speaker 1: is different for everyone. A lot of it is your
Speaker 1: own expectations. There are forming as you can follow you
Speaker 1: mister show, make sure you listen back to it. My
Speaker 1: guest today is, of course James Girard of Financial Advisor
Speaker 1: dot com dot you friend of the show, best friend
Speaker 1: of the show. How are you, James Gerard?
Speaker 2: I'm doing great. Thank you, James, lovely beyond as always.
Speaker 1: Great to have you on. Tell me, I imagine you've got
Speaker 1: all these smiling clients. They probably think you're marvelous to
Speaker 1: they Oh, James, that's so good this year. You're so
Speaker 1: good as an advisor, and you sit there going, yeah, well,
Speaker 1: you know the markets were domn good this year. Is
Speaker 1: it a year like that?
Speaker 2: Pray tell most of my clients have been with me
Speaker 2: for ten years or more when we've been through good years,
Speaker 2: but they've been through bad years as well. So they're
Speaker 2: happy having double digit returns, most of them. But they
Speaker 2: understand that there will be a bad dye that comes
Speaker 2: and we have to sort of look things over long
Speaker 2: period of time. But yeah, you'd always take a positive
Speaker 2: return over a negative return. But I guess from here
Speaker 2: is just about will it continue, which I think will
Speaker 2: public explore a little bit today.
Speaker 1: Yes, I mean I have a self managed fund and
Speaker 1: I fortunately finally took my own advice about a year
Speaker 1: and a half ago, and I did shift substantially into
Speaker 1: offshore markets. And I say substantially, maybe a quarter of
Speaker 1: all the shares are now in one way or another,
Speaker 1: not on the X, mostly on the US, and mostly
Speaker 1: I am using funds or ETFs to access that rother
Speaker 1: than picking them individually. But you know, it really did
Speaker 1: lift it. And you're talking twenty percent plus rather than
Speaker 1: rather than twelve on the local market. And I was
Speaker 1: talking to someone last night and they were saying that
Speaker 1: when is the Australian market ever going to come around?
Speaker 1: When is it ever going to be better than the US,
Speaker 1: because it isn't year after year, year after year after year.
Speaker 1: Half far back. You want to go. When they go
Speaker 1: really well, we go okay. When they fall, we fall
Speaker 1: with them. It's a difficult one. So in terms of
Speaker 1: just super returns and super returns being let's see there
Speaker 1: nine percent for everybody, and then let's see that they
Speaker 1: are heavily underpinned. No matter who you're with, buy share markets,
Speaker 1: and the share markets were exceptionally good. I imagine the
Speaker 1: danger with an advisor is that people start to expect
Speaker 1: that this is normal, that this is what they should
Speaker 1: get each year.
Speaker 2: Correct, people have short memories. That wasn't that long ago
Speaker 2: that the technology stocks in America were out of favor
Speaker 2: and a lot of big companies were dropping twenty forty
Speaker 2: fifty percent in value over a twelve minleth period. Now,
Speaker 2: of course, the fortunes for those companies have changed, and
Speaker 2: conditions are great for share markets. And also cash rates
Speaker 2: are high as well, so bond and turned the posits
Speaker 2: are yielding grade. So we're in a slightly unique situation.
Speaker 2: Where all asset allocations are forming well, because usually where
Speaker 2: the share market's doing well, you're not getting that match
Speaker 2: on cash and property markets are doing greater. Share markets
Speaker 2: doing well, but everything across the board has been going
Speaker 2: great over the past fourfronds. So you are absolutely right.
Speaker 2: Investors shouldn't get complacent because it's not always going to
Speaker 2: be like this.
Speaker 1: Yes, I mean, I don't want to be harbinger of
Speaker 1: doom or anything like that, but what's a period two eight?
Speaker 1: Oh my god, to wait. Everything was falling, everything, I remember.
Speaker 1: The only thing because at the time we're running an
Speaker 1: investment like a newsletter and it was just so grim.
Speaker 1: The only thing that was that there was any action
Speaker 1: at all was these gas exploration stocks in Queensland. That's
Speaker 1: about the only thing. And everything was going the wrong way,
Speaker 1: absolutely everything. And what people forget is not just that
Speaker 1: it felt, but it was so grindingly difficult because it
Speaker 1: fell by nearly fifty percent between the top of two
Speaker 1: oh seven and the very bottom of two oh nine.
Speaker 1: And I think, just as a word of warning for
Speaker 1: anyone who gets a little bit too excited about the
Speaker 1: returns they've just had, there are periods where it is
Speaker 1: gruelingly difficult to be exposed to shares, and there is
Speaker 1: a sense of it will never turn. It always does,
Speaker 1: but it can take But the COVID crash didn't take
Speaker 1: that long in it James and be six months, but
Speaker 1: the GFC crash took two years to happen, that was
Speaker 1: the hard part, and maybe two years to recover there thereabouts.
Speaker 1: So you really have to have a strong constitution to
Speaker 1: go with it, especially as an independent investor. But structurally,
Speaker 1: I wonder if it's the case that the conditions last
Speaker 1: year that drove such a good share market return would
Speaker 1: seem to be perfect again this year and we don't
Speaker 1: see anything yet that would change that. So is it
Speaker 1: the case that people probably could be confident on shares
Speaker 1: and if they are, should they have more overseas because
Speaker 1: we know independent Australian investors still have not much overseas
Speaker 1: compared to successful institutional investors such as the Future Fund.
Speaker 2: It's an interesting situation because you have on one hand,
Speaker 2: as you say, the market conditions which are conducive for
Speaker 2: more share market gains. So you're going through the sort
Speaker 2: of normal economic indicators and things that we as professional
Speaker 2: investors have a lookout for our clients economic indicators. So
Speaker 2: you know GDP in America's great unemployment, slow monetary policy,
Speaker 2: or inflations falling. It's come down from nine percent it's
Speaker 2: now three percent, So that means that the Fed Reserve
Speaker 2: should decrease interest rate or cash rates, which would be
Speaker 2: good for share markets in America. If you look at
Speaker 2: the political situation, it's looking more likely with a Trump win,
Speaker 2: and that seem to be good for share markets because
Speaker 2: Trump is a pro business so that should be a
Speaker 2: shot in the arm for share markets and corporate earnings.
Speaker 2: They've been strong and it looks like they will continue
Speaker 2: to be strong. So on one side, everything looks good,
Speaker 2: ticking the boxes for share markets to keep going up.
Speaker 2: But on the other hand, we always have to have
Speaker 2: regard to valuations of share markets. How expensive or cheap
Speaker 2: is the share market compared to historical averages. And one
Speaker 2: of the very crude metrics we have a look at
Speaker 2: is what's called the price to earning ratio. And at
Speaker 2: the moment, the US share market is traded on a
Speaker 2: price to earnings ratio of about twenty nine times earnings,
Speaker 2: which is higher than the historic rate of eighteen times,
Speaker 2: which means that share markets historically more expensive now compared
Speaker 2: to historical averages. And what I've observed is that share
Speaker 2: markets always go back to the long term average. So
Speaker 2: on one hand, there's room for more games to be had,
Speaker 2: but on the other hand, at some stage in the future,
Speaker 2: there will be a drop to go back to the
Speaker 2: long term average.
Speaker 1: So twenty nine times is the peer on the US
Speaker 1: market right now?
Speaker 2: Yeah at the moment, Yeah.
Speaker 1: That's getting high.
Speaker 2: It is.
Speaker 1: What would you see as a comfortable number.
Speaker 2: I'd tell you back around that twenty five, which is
Speaker 2: still above the average, but still not too overvalued. So,
Speaker 2: pulling out my crystal ball as I do occasionally, I
Speaker 2: think that in the lead up to the US presidential election,
Speaker 2: share markets will continue to bubble along and see maybe
Speaker 2: five or ten percent gains. But then after that, and
Speaker 2: if Trump gets into power, that's when we'll start to
Speaker 2: see some shocks to market. He may reignite a trade
Speaker 2: war with China, for example, or it could be something
Speaker 2: outside of Trump's controller, might be a geopolitical event with
Speaker 2: Russia or Ukraine flaring up. So something will happen. Because
Speaker 2: the more expensive share markets are, the more sensitive share
Speaker 2: markets are to negative news. Because the investors are just
Speaker 2: looking for a small piece of information to go Aha.
Speaker 2: This is a signal we need to take our profits
Speaker 2: and start selling.
Speaker 1: And as you see, the last time Trump one share
Speaker 1: market had quite a lift straight away after his election.
Speaker 1: You might say that would happen with any Republican candidate,
Speaker 1: but it just so happens that he's the world this time,
Speaker 1: whether you like him or not. Herely comes again. Okay,
Speaker 1: just one final thing on that. The bit I always
Speaker 1: worry about every year is the US Autumn jituus, the
Speaker 1: September October, the crash season, all the great crashes, all
Speaker 1: the great drops. They always happen in September October. It's
Speaker 1: late July. We're only about six or eight weeks off
Speaker 1: from that patch. Personally, I'm always very very careful of
Speaker 1: bank shares before that patch because there's often a drop.
Speaker 2: What do you think I agree with that it is
Speaker 2: a historical warning period where shar marketers are conducive to
Speaker 2: drop in. But on the other hand, we do have
Speaker 2: those strong economic factors they're saying that we should plow
Speaker 2: through this time around and keep getting stronger. So it
Speaker 2: really depends on using that that's saying you can't see
Speaker 2: around corners. It's going to be something that pops up
Speaker 2: in just smack us in the face that caused the
Speaker 2: share markets to drop that we don't know what it
Speaker 2: is today.
Speaker 1: Yeah, the black Swan event as they call it. Okay,
Speaker 1: now that's the share market. We're going to bounce around
Speaker 1: on a few subjects today, folks, for the simple reason
Speaker 1: that there are a couple of pressing subjects. I know
Speaker 1: that you would all be very interested in, James one
Speaker 1: of the things I wanted to also talk about. And
Speaker 1: they're unrelated, folks, but they're all related to investors and
Speaker 1: the activities that you or I might be doing in
Speaker 1: the market. Just quickly, in the stockbroking world and in
Speaker 1: the advisory world, there's a format for investors that has
Speaker 1: become very popular and it's growing very very quickly called
Speaker 1: self managed accounts SMAs. And everything I've read about sma's
Speaker 1: talks about how great they are and how they're growing
Speaker 1: so quickly. And you said to me, I don't like
Speaker 1: them at all. I wouldn't go near them, and I
Speaker 1: wouldn't put anybody into them. And then I said to you, well,
Speaker 1: why don't you say that loud and clear and to
Speaker 1: a pie supplouded in the Australian, which you did, which
Speaker 1: was great. What do you think now about those SMAs?
Speaker 1: Do you think people are starting to become a little
Speaker 1: skeptical about them? And just if you would for the listeners,
Speaker 1: should they be approached by anyone with the self managed accounts,
Speaker 1: which are, as I said, the hottest thing you've seen
Speaker 1: for a long time in the local market in terms
Speaker 1: of a structure for in the independent investors, just encapsulating
Speaker 1: you would what you thought was wrong with them.
Speaker 2: Absolutely, So these separately managed accounts, they're there to provide
Speaker 2: convenience to the client but also to the financial advisor
Speaker 2: because basically the financial advisor is selecting a fund to
Speaker 2: invest into and that's run by a separately managed account manager.
Speaker 2: So it could be an asset manager, it could be
Speaker 2: a company like Lonzec or morning Stuff. So basically the
Speaker 2: financial advisor is placing you as the client, into a fund.
Speaker 2: That fund is then investing into other managed funds in
Speaker 2: ets and shares, and that's all you usually wrapped up
Speaker 2: inside of a platform. So if you count the laser fees,
Speaker 2: you have financial advisor feed, you have separately managed account
Speaker 2: manager fee, you have fund manager fee, you have ETF
Speaker 2: manager fee, and then you have platform feed. So there's
Speaker 2: like four or five different types of fees in there,
Speaker 2: and the financial advisor, at the end of the day
Speaker 2: has no control over whether BHP is being sold or
Speaker 2: Rea Tinto's being sold because he's outsourced that responsibility. So
Speaker 2: I have no issues with separately managed accounts if it's
Speaker 2: made very clear that the investment management part of the
Speaker 2: service that the financial advisor is providing has been outsourced,
Speaker 2: and if the advisor is truly providing other services. So
Speaker 2: I've got some friends who have financial advisors and they
Speaker 2: operate SMAs very legitimately because they're focused on clients with
Speaker 2: say disabilities, and they're helping the family set up trusts,
Speaker 2: and they're giving advice around how to deal with indis
Speaker 2: and other things like that. But if it's a run
Speaker 2: of the mill financial advisor who's hanging their hat with
Speaker 2: regards to what they do for you on investment management,
Speaker 2: and they're putting you into an SMA, you're paying them
Speaker 2: a fee basically for nothing, and there being among themselves
Speaker 2: in industry conferences about how easy it is to manage
Speaker 2: clients money.
Speaker 1: How easy because you pay the m a fee, So
Speaker 1: they pay someone as a fee, and they in turn
Speaker 1: pay layers of fees across the system. And they've outsourced
Speaker 1: the whole issue of investment management. So what's left for
Speaker 1: them to do red tape box ticking exactly.
Speaker 2: And what really irks me is that in their reviews
Speaker 2: with clients is they're pretending like, oh, yes, we made
Speaker 2: this change to our portfolio when we've shifted x percent
Speaker 2: to US shares, but really they had no control of
Speaker 2: it at all. Is that manager who paid another manager
Speaker 2: to do that made a change. They're just reporting back
Speaker 2: to you but pretending like they are the one that
Speaker 2: instigated that change, which is all bollocks.
Speaker 1: It reminds me of It reminds me of the occasional
Speaker 1: fleeting commentation that occasionally made their way through my own section,
Speaker 1: where someone would write these global macro pieces and then
Speaker 1: I would look and I'd say, I think I somewhere before,
Speaker 1: and I would see there it was on the Wall
Speaker 1: Street journe the economists, and I'd say, okay, yeah, that's
Speaker 1: not gonna work anymore for our audience. Okay, look, just
Speaker 1: before we go to the break, one last thing, really
Speaker 1: interesting about that concept about if Trump wins, because it
Speaker 1: is elections are so important now, and they are so
Speaker 1: we're getting very extremes right to the middle of the
Speaker 1: road is gone. As we know just now. In elections
Speaker 1: we find there's a labor government in Australia, there's a
Speaker 1: labor government, quite a left wing labor government replacing quite
Speaker 1: a right wing Tory government. In the UK, there's a
Speaker 1: surprise rebound of the left against the right in France.
Speaker 1: And then of course in the US the ultimate market
Speaker 1: and this is why we're interested in it because it's
Speaker 1: not a show about politics, it's about show about markets.
Speaker 1: But if Republicans win, and if Trump wins, the last
Speaker 1: time he won, the market government big lift. Paradoxically, the
Speaker 1: economy is very good under Biden, but he's not getting
Speaker 1: any of and he kudos on that front. And Trump.
Speaker 1: You see even the big players on Wall Street who
Speaker 1: would say they don't like him and don't like aspects
Speaker 1: about him, in recent times our curring favor. And there's
Speaker 1: lots of stories about the big War Street leaders going
Speaker 1: back to Trump and forgiving Trump. And basically they're pragmatic.
Speaker 1: They're saying, discuss going to win we better be on
Speaker 1: site with him. But I wanted to ask you, was
Speaker 1: if Trump wins, then do you see that as something
Speaker 1: that would extend the bullmarket basically that we've been seeing
Speaker 1: on the US.
Speaker 2: I do, but I think it'll be short term in nature.
Speaker 2: We may see a bit of what we can call
Speaker 2: buyers remorse after maybe three or six months. So if
Speaker 2: Trump gets elected, they'll be hooray, this is great for business,
Speaker 2: this is great for reducing tax prompting the US economy
Speaker 2: to drive forward, increase their GDP. But after three or
Speaker 2: six months, people might go, oh, what have we done here?
Speaker 2: And that'll start to happen once Trump comes out with
Speaker 2: his quite extravagant policy decisions, off the cuff comments, and
Speaker 2: so markets will start to then pull back because although
Speaker 2: share markets like Republicans because they're more pro business, share
Speaker 2: markets like stability as well, they don't like it when
Speaker 2: the politician comes out with an unexpected policy announcement, which
Speaker 2: Trump has done historically. So I think that short term boosts,
Speaker 2: but then sometime between three months and maybe nine months,
Speaker 2: we might see a pullback as reality sets in of
Speaker 2: who they've actually elected.
Speaker 1: Yeah, and I suppose you'd have to say, it would
Speaker 1: also be a win for old business and fasten fueled
Speaker 1: business up against ESG business by definition. Yep, Okay, that's
Speaker 1: also something I suppose that we have to consider as investors. Right,
Speaker 1: we'll take short break and we'll be back in the moment. Hello,
Speaker 1: Welcome back to The Australian's Money Puzzled podcast. I'm James Kirby,
Speaker 1: the World editor at The Australian, talking to James Gerard
Speaker 1: right on the show Heat of Financial Advice dot com
Speaker 1: dot au. One of the more interesting things I saw
Speaker 1: this week a couple of things happened. The ETF industry
Speaker 1: hit two hundred billion in the local market and on
Speaker 1: they go, and they are steaming along with the big players,
Speaker 1: particularly you would know Vanguard and the domestic sort of
Speaker 1: champions Beta shares both becoming stronger and stronger in recent times.
Speaker 1: As all the ETF players doing fairly well, Global X etc.
Speaker 1: People going in there as the market comes to understand
Speaker 1: that ETFs that amazing proposal they offer an investor, which
Speaker 1: is that you will do as well as the market.
Speaker 1: You won't do any worse, and you won't do any better.
Speaker 1: You will not shoot out the lights, neither will you
Speaker 1: do terribly because you will just do whatever the market does.
Speaker 1: So if the ASX did twelve percent last year and
Speaker 1: you had an ASX ETF, you did twelve percent, and
Speaker 1: a lot of people are perfectly happy with that, certainly
Speaker 1: as a core of their portfolio. Now one of the
Speaker 1: things we've got to be careful about is, just as
Speaker 1: we're starting to understand ETFs, the goal post move and
Speaker 1: financial people being what they are, they can never leave
Speaker 1: things alone, and they are starting to create things called
Speaker 1: active ETFs where they change, but they don't offer what
Speaker 1: they used to right, So what they do is they say, yes,
Speaker 1: we have two ETFs. We have the traditional mirror ETF
Speaker 1: where we just whatever the ASX does, we will get
Speaker 1: exactly that. But then they have active ETFs and they
Speaker 1: say something like it's the exact same it used to be.
Speaker 1: Accept we're doing something slightly different whatever that might be
Speaker 1: equally weighted. We're trying to balance the share portfolio so
Speaker 1: certain things don't happen, and that's called active ETFs, and
Speaker 1: they are very, very different, and I wish the industry
Speaker 1: would make it more clear to the everyday investor that
Speaker 1: they are not what we regard as ETFs. And this
Speaker 1: is leading me into the first question, which is from Daniel,
Speaker 1: just wondering if you are able to provide an overview
Speaker 1: of the best performing active ETFs listed on the Australian
Speaker 1: Stock Exchange over the last five years. I am thinking
Speaker 1: it might be a good time to move from non active. Right,
Speaker 1: that's passive, that's the traditional mirror etf. I was talking
Speaker 1: about our index fund, which just matches a market too active. Daniel,
Speaker 1: it's a great question. I bet we'll get a damn
Speaker 1: good answer from James because he's actually gone and taking
Speaker 1: the trouble to look at this. And James, I wonder,
Speaker 1: I'm only going to guess now, but I'm the best
Speaker 1: performing active ETF on THEESX will be something utterly obscure
Speaker 1: like a NASDAK options driven something or other. I don't
Speaker 1: know the answer. Tell me what, Tell me what it is.
Speaker 1: I'm not completely wrong, tell me that's right.
Speaker 2: It's something that's not a traditional asset. It's one of
Speaker 2: those crypto ETFs that's atly beaten around for a bat
Speaker 2: twelve months or sorry, but it's up close to two
Speaker 2: hundred percent as sort of timed it.
Speaker 1: Well, Okay, so actually even more off the table than
Speaker 1: I thought. It's not even it's crypto. So you see
Speaker 1: how far is crypto from what people think ETFs are.
Speaker 1: I think this captures exactly what I'm driving after, Daniel.
Speaker 1: But all right, so that's the answer, Daniel. So I
Speaker 1: don't even want to know its name. Some crypto ETF
Speaker 1: which is just like as far away from conventional, traditional
Speaker 1: and conservative investing as you can get, was the winner, Daniel.
Speaker 1: Now the bigger question is Daniel, and this is never advised.
Speaker 1: This is to all the Daniels in the world. If
Speaker 1: you're thinking it's a good time to move from traditional
Speaker 1: ETF to active ones. I wonder what James Girard has
Speaker 1: to say.
Speaker 2: And I do have something to say. Yeah, cuting that
Speaker 2: mind back ten years ago, everybody who invested into share
Speaker 2: markets via a financial advisor alread investment manager typically done
Speaker 2: so bio and managed funds. They were very popular. But
Speaker 2: fast forward ten years ETF so all the rage and
Speaker 2: so the ETF managers they're in a very crowded market.
Speaker 2: Now there's lots of ETF managers, there's hundreds of ETFs.
Speaker 2: They're trying to still get momentum, get more money into ETF.
Speaker 2: So what they're doing is saying, okay, we've sort of
Speaker 2: done all of the passive ets we can. We've got
Speaker 2: baskets for share markets, property markets. We've even narrowed down
Speaker 2: ETF baskets to countries. You can invest in Japan versus India.
Speaker 2: You can invest in bank stocks as a ETF. So
Speaker 2: now they're saying, okay, we're going to offer active ETFs,
Speaker 2: which sounds great, but really it's a bit of spoken
Speaker 2: mirrors because they're really just going back to managed funds.
Speaker 2: And the problem with managed funds active managed funds, which
Speaker 2: are now being called active ETFs, is that seventy percent
Speaker 2: of them will underperform the index on a twelve month period.
Speaker 2: So just let that seit with few. If you invest
Speaker 2: in a share market ETF and Australian share market ETF
Speaker 2: a passive one fine, your average return over a tenu
Speaker 2: period is going to be around nine percent return. If
Speaker 2: you invest into an active ETF that targets Australian share market,
Speaker 2: seven out of ten of those managers are going to
Speaker 2: underperform the index ETF on a twelve month period, and
Speaker 2: over a ten year period, nine out of the ten
Speaker 2: active ETF managers are going to underperform the index. There.
Speaker 1: I think it's unbelievable. So the managed funds, the stock pickers,
Speaker 1: they faded and let's name some names they've faded, right,
Speaker 1: Platinum which is to rule the roost, or Magellan are perpetual.
Speaker 1: They were stock pickers. They got it wrong. They didn't
Speaker 1: beat the index. Here after you, an industry created ETFs
Speaker 1: or index funds, and they said, look, we just matched
Speaker 1: the index. That's all we promised, no more, no less,
Speaker 1: And they have collected two hundred billion dollars from Australian
Speaker 1: investors because everyone loves the idea, and believe it or not,
Speaker 1: the same people who invented them have gone off and
Speaker 1: created active ETFs, which are stocked pickers basically. And it
Speaker 1: turns out that those active btfs they're is as bad
Speaker 1: as the old managed funds, that they don't match the index.
Speaker 1: I actually didn't know that, you know, I have only
Speaker 1: heard this this morning. I actually didn't think that they
Speaker 1: would be so bad, yep, But they are. Is that amazing?
Speaker 2: Yeah, Because the only real difference is that the old
Speaker 2: managed funds were unlisted. You had to put in a
Speaker 2: paper application to buy the active managed fund, whereas the
Speaker 2: new breed of manage fund. These active ETFs same philosophy
Speaker 2: in that they stop pickers. The only difference is that
Speaker 2: you buy them through the share market rather than buying
Speaker 2: them off market. I'm using paper based applications.
Speaker 1: Yeah good, It's so difficult, isn't it. And by the way, folks,
Speaker 1: there are always active managers who beat the index always well,
Speaker 1: they are so few and far between. And the number
Speaker 1: that beat the index here every year you could put
Speaker 1: on the head of a pin. Okay, before we get
Speaker 1: over critical on the active ETFs, so we have put
Speaker 1: out a big fat warning on them so that everyone
Speaker 1: knows the difference between buying an ACTIVETF and managed fund.
Speaker 1: Nothing in it? Is that fair to say, James, am
Speaker 1: I overdoing it? Is that more or less that? Yeah?
Speaker 2: Yeah, that's pretty much. The only difference is the way
Speaker 2: that you buy. You either buy it directly with the
Speaker 2: fund manager if it's an old school manage fund, or
Speaker 2: you buy it through the share market if it's an
Speaker 2: active ETF. But other than that, they underneath what they
Speaker 2: do exactly the same. The pick stocks charge of fee.
Speaker 1: We will leave that on the table for you to consider.
Speaker 1: We will take a break and we will be back
Speaker 1: with a terrific batchup questions that largely run off last
Speaker 1: week's show about how much you should have in Super
Speaker 1: back in a moment. Hello, Welcome back to The Australian's
Speaker 1: Money Puzzle podcast. James Kirby and James Gerard here with
Speaker 1: you this morning. We're all sitting pretty as I mentioned
Speaker 1: at the start, all feeling terribly good about our Super
Speaker 1: this year. Isn't it nice when it comes right? Isn't
Speaker 1: it really nice when your shares come right? I'll tell
Speaker 1: you what, folks, anyone who's a long term investor, if
Speaker 1: you through those dog years where the market goes backwards,
Speaker 1: it breaks your heart.
Speaker 2: James.
Speaker 1: I don't know if your investors tell you this, or
Speaker 1: your clients, but to be putting money into Super pre
Speaker 1: tax at the max thirty thousand a year and to
Speaker 1: watch your Super go down is hard. You don't forget,
Speaker 1: so you do appreciate it. Well, it's good. Now on
Speaker 1: the issue of how much you should happen Super, we
Speaker 1: have a string of questions. Why don't we read them
Speaker 1: on all alternative to James? If you want to read
Speaker 1: the first one from.
Speaker 2: Dan Perfect, Dan says, Hi, my partner and I are
Speaker 2: roughly twenty to twenty five years away from retiring. However,
Speaker 2: if the current trend continues, which it most likely will,
Speaker 2: there will be significant difference in super balance at retirement,
Speaker 2: potentially one million dollars versus one hundred thousand dollars. Will
Speaker 2: this matter from a tax perspective? At retirement? Is it
Speaker 2: worth and what's the best strategy to even out our superbalances?
Speaker 2: Is it best to do it now or closer to retirement?
Speaker 1: Great question, and that holds for anyone if you're in
Speaker 1: your thirties, especially you know one partner is getting whatever.
Speaker 1: In that case, you're looking at a situation one part is,
Speaker 1: partner is super it's going to be multiples of the other. Okay,
Speaker 1: that's in every second household in Australia. So what's the risk, James?
Speaker 1: And what could they possibly do?
Speaker 2: So it is important to try and equalize supernovation balances
Speaker 2: for retirement and the reason is that that the news
Speaker 2: has been placed around the neck of tax free super
Speaker 2: and have slowly been tightened. Already we've seen the one
Speaker 2: point nine million dollar cap come in on the maximum
Speaker 2: amount that you can have in the pension phase tax
Speaker 2: free and then from next year if it gets legislative,
Speaker 2: there'll be that all for thirty percent tax on unrealized
Speaker 2: gains and income above three million dollars inside a super
Speaker 2: So as a plan in strategy to mitigate the risk
Speaker 2: of a higher super account getting tax because who knows,
Speaker 2: twenty twenty five years down the track, they may have
Speaker 2: brought that threshold down to a million dollars and start
Speaker 2: to tax that higher account balance. More won't be tax
Speaker 2: free in retirement, so you should start to do that now.
Speaker 2: A few things that you can consider, and again not advice,
Speaker 2: just general information. There's contribution split in, so that's where
Speaker 2: eighty five percent of a spouse's super contribution can be
Speaker 2: sent to the other spouse's account. So let's say partner
Speaker 2: number one has ten thousand dollars as a super contribution
Speaker 2: into their account, they can actually pick up eighty five
Speaker 2: hundred dollars of that contribution and send that across to
Speaker 2: partner number two's super account, and they can do that
Speaker 2: on a yearly basis. So that's great to boost the
Speaker 2: balance of the lower balance spouse. The other thing that
Speaker 2: they could have a look at, depending on income levels,
Speaker 2: is what's called the spouse contribution. So that's where lower
Speaker 2: income spouses and generally lower income correlates to lower superbalances
Speaker 2: because of lower super contribution. So I've just made an
Speaker 2: assumption here that the spouse with the lower super balance
Speaker 2: has a lower income. So the higher income spouse puts
Speaker 2: three thousand dollars into their lower income spouse's super account,
Speaker 2: and that means that the higher income spouse gets a
Speaker 2: five hundred and forty dollars tax offset as well. So
Speaker 2: not only are we boosting the lower super balance by
Speaker 2: three thousand dollars, the higher income spouse gets a five
Speaker 2: hundred and forty dollars tax offset. So that's great. And
Speaker 2: then this is this is a few other little things
Speaker 2: like government code contributions, salary sacrifice, cash up, concessional contributions
Speaker 2: for the spouse with the lower super balance. But because
Speaker 2: we have taps with how much money you can put
Speaker 2: into super, it's not something that you can just approach
Speaker 2: age fifty nine and go, okay, great, we're gonna equally
Speaker 2: this million dollars one hundred thousand dollars too late. You
Speaker 2: have to do it well in advance.
Speaker 1: Well in advance, so you're thinking the right way Dan.
Speaker 1: I mean, the basic thing is that what you don't
Speaker 1: want is a ludicrous situation where you're both together and
Speaker 1: you have more than one point nine million and super
Speaker 1: and your partner has very little and super and you're
Speaker 1: paying tax on your super when the other person has
Speaker 1: who knows, like a million dollars they could have had
Speaker 1: in there before they hit attacks, before they were to
Speaker 1: pay tax at all. That's the essential thing. So planning,
Speaker 1: planning way, I had great idea. Okay, that was Dan.
Speaker 1: There's a few of them, so we'll try and get
Speaker 1: through them before the end of the show. Hi, James,
Speaker 1: regular listener. I've learned a lot from it, so thank you,
Speaker 1: Thank you, Neil. I'm semi retired. Just move my super
Speaker 1: into a pension account. Investments earnings are now tax free.
Speaker 1: Yeah whoo. But wondering if this should modify my investment strategy.
Speaker 1: Capital gains are not a concern now, so our growth
Speaker 1: stocks more attractive. Okay, it's very quickly, James. We're always
Speaker 1: told about growth, lots of growth when you're younger, move
Speaker 1: it towards income when you're older. Neil is challenging that
Speaker 1: to a degree. He's saying, hey, you know I could
Speaker 1: I don't have to worry about tax now, maybe I
Speaker 1: should have more growth. He's kind of upending the textbook principles.
Speaker 2: What do you think he may be buoyed from the
Speaker 2: optimism gained by double digit.
Speaker 1: Maybe the exact sort of person we've been concerned about
Speaker 1: who thinks it's perhaps easier than it is. Yeah, yeah,
Speaker 1: that's right.
Speaker 2: So we will real kneel back down to earth. And
Speaker 2: what I'd say to Tamil is that you need to
Speaker 2: think about what's important for you in retirement when you're
Speaker 2: not earning an income and you're relying on your super
Speaker 2: account to generate your income stream to support your spending
Speaker 2: for the rest of your life. And so to answer
Speaker 2: my own question, it's income. That's what we want from
Speaker 2: your investment. It's not capital growth anymore. We want reliable,
Speaker 2: high income. So depending on your current mix, so I'd
Speaker 2: be probably looking at staying that type of arrangement. And
Speaker 2: for all the nails in the world, as we get
Speaker 2: close to retirement, generally we want to be more defensive.
Speaker 2: We want to put in more blue tip stocks, more
Speaker 2: bonds in there, focus on capital preservation and income. So yeah,
Speaker 2: I probably wouldn't be going for all out, let's go
Speaker 2: growth strategy, because if we have a snap event and
Speaker 2: something that block blacks one event, as you coined earlier, James,
Speaker 2: we could see Super accounts dropped by thirty percent and
Speaker 2: that would just send peace people who were in that
Speaker 2: transition to retirement phase back five or ten years with
Speaker 2: their super balance. So we definitely don't want that to happen.
Speaker 1: That's right, that it is the risk, all right, Christine,
Speaker 1: I'm a long time listener, first time caller. My question
Speaker 1: is if I wanted a total investment portfolio inside and
Speaker 1: outside of super A fifty percent of Australian shairs and
Speaker 1: fifty percent international shares, what should I consider? In other words,
Speaker 1: is it better to hold the Australian shares outside of
Speaker 1: Super and the international shares in Super? Does it not
Speaker 1: make any difference? It makes a difference, Christine, probably because
Speaker 1: your Australian chairs have a four and a half percent
Speaker 1: evidential than your American ones have not have the bugger
Speaker 1: rold basically, isn't it what is it? Is it even
Speaker 1: two percent? James? I'm not sure? Very low? So what's
Speaker 1: the you might give give Christina some guidance there.
Speaker 2: Yeah, it's a slightly difficult one because it depends on
Speaker 2: a lot of individual circumstances with regards to how old
Speaker 2: you are. So how soon can you access your super?
Speaker 2: What type of strategy are you going to employ? Will
Speaker 2: it be a buy and whole will it be a
Speaker 2: take profits every year? What's your tax rate personally as well?
Speaker 2: So you almost need to draw out like a little
Speaker 2: matrix and go all right, Well, Christine's basically asking between
Speaker 2: super and non super, and she's also asking between Australian
Speaker 2: shares and international shares, So just looking at the characteristics
Speaker 2: of each of those and as you said, James, Australian
Speaker 2: shares higher dividends, lower growth compared to international shares, and
Speaker 2: international shares higher growth historically but lower dividends. And then
Speaker 2: with superinnuation. When you're working, the maximum tax that you
Speaker 2: can pay in your super account is fifteen percent, but
Speaker 2: if you're retired it's zero percent tax, and with your
Speaker 2: employment income where personally you can pay up to forty
Speaker 2: seven percent tax. So you have to sort of like
Speaker 2: consider all those things and then work out what's the
Speaker 2: best approach is. There's no one single answer for that one, unfortunately.
Speaker 1: Yeah, there isn't Obviously, super is a tax protected vehicle
Speaker 1: and is excellent as a tax vehicle once you'll retire, Christine,
Speaker 1: And that's fairly obvious. And as James says, in terms
Speaker 1: of guidance in those particular allocations, the big difference is
Speaker 1: the Australian shares for a long time have trailed the
Speaker 1: US shares in terms of their growth and very much
Speaker 1: the case in recent times. They do, however, have a
Speaker 1: four and a half per cent of evident deal and
Speaker 1: that is nice because when things go down, you still
Speaker 1: get that need and that is what a lot of
Speaker 1: people depend on for income. Okay, James, read the last
Speaker 1: two questions. I'll just introduced into questions. There are two
Speaker 1: questions on the same thing, folks, and everyone's always asking
Speaker 1: about this. If you're moving money around in your super
Speaker 1: fund in any fashion, do they sell the shares and
Speaker 1: then do they buy them back? And does that cost you?
Speaker 1: That's basically what these two questions are about. But James,
Speaker 1: if you'd like to read the two of them, one
Speaker 1: from Luke and one from Chris, and we'll deal with.
Speaker 2: Them of course. So well, let's start with Luke. So
Speaker 2: Luke says, regarding the recontribution strategy with Super to minimize
Speaker 2: your family's tax on inheritance and just as a side
Speaker 2: to that, that's seventeen percent on the taxable component of
Speaker 2: your soup up if it goes to a non financial dependent. So,
Speaker 2: coming back to Luke, if you had some shares in Super,
Speaker 2: do you have to sell the shares to take them
Speaker 2: out of Super and then recontribute back cash back into Super.
Speaker 2: So the answer to that depends on the type of
Speaker 2: Super account you have. If you have a self managed
Speaker 2: Super account, you will maybe able to do what's called
Speaker 2: an in specie transfer, so you sign a piece of paper,
Speaker 2: you do what's called an off market transfer, the share
Speaker 2: of transferred from Super to your personal name, and then
Speaker 2: you can do another transfer and put them back again.
Speaker 2: Whereas if you're with a retail or industry super fund,
Speaker 2: they're more likely to say no, sorry, we can't help
Speaker 2: you with that. That's not one of the features of
Speaker 2: our fund, and you have no option other than to sell,
Speaker 2: send the cash out to your personal bank account, send
Speaker 2: the money back into the super fund, repurchase the shares.
Speaker 2: Last thing I'd say with that is just be careful
Speaker 2: of what the tax office coin as wash sale rules.
Speaker 2: So if you sell the one hundred percent of say
Speaker 2: BHP from your super, you cash that out, and you
Speaker 2: put that cash back in again, you buy BHP again.
Speaker 2: Although this is not the same purpose. For tax purposes,
Speaker 2: the tax office may have a look at you, particularly
Speaker 2: if you have a self managed to per fund, and say,
Speaker 2: why exactly did you do that transaction where you're trying
Speaker 2: to dodge tax them. So you need to be careful
Speaker 2: about maybe not buying exactly the same shares back that
Speaker 2: you sold as part of that recontribution strategy.
Speaker 1: And you would say to the tax office, good gosh,
Speaker 1: though I never tried to do anything. I tried to
Speaker 1: pay as much tax as possible every time. That's my
Speaker 1: whole approach. Yeah, sure, okay. Look in terms of that one,
Speaker 1: that's interesting, James, So an SMSF, that's an advantage of
Speaker 1: an SMSF. Then that recontribution strategy is actually a pragmatic
Speaker 1: and practical thing. While learnd the big funds it's a
Speaker 1: bit of trouble. It sounds like a lot of trouble. Actually,
Speaker 1: I never knew that, all right, And I suppose also,
Speaker 1: you know, you don't have to be so if a
Speaker 1: person was doing something like that, you don't have to.
Speaker 1: You could buy, for instance, an ETF from one company
Speaker 1: on the Australian share market, and then you could sell
Speaker 1: one and then and buy another ETF from another company,
Speaker 1: which is a completely different investment for tractors doing the
Speaker 1: same thing in the unlikely event that the ATO would
Speaker 1: be so ab third as to try and challenge you
Speaker 1: on what is a legitimate strategy. Okay, what about the
Speaker 1: question from Chris.
Speaker 2: Chris says, thanks for the podcast. If I change settings
Speaker 2: within my super fund from conservative to high growth, for example,
Speaker 2: does that mean my balance is cashed out to an
Speaker 2: existing shareholding, attracting capital gains tax? In other words, do
Speaker 2: I take the short term hit for switching my super settings?
Speaker 2: She is, Chris. So, with most what we call unitized
Speaker 2: super funds, which are actually most retail and industry super funds.
Speaker 2: Every day, in the unit price of your balance option,
Speaker 2: your growth option, you Australians, your option, they continuously factor in
Speaker 2: capital gains tax into that unit price at the end
Speaker 2: of the day. So if you're to sell down to cash,
Speaker 2: there's no capital gains tax hit. So it's more if
Speaker 2: you run your own self managed super fund, that's when
Speaker 2: you crystallize the gain or loss on the individual stock
Speaker 2: et for managed funding your self managed super fun So
Speaker 2: in most cases know that's not an issue at all,
Speaker 2: but it's best just to check if your super fund
Speaker 2: because some retail funds in particular, they do calculates capital
Speaker 2: gainst tax separately, but from ninety percent of them, they're
Speaker 2: all built into the unit price of the day. So
Speaker 2: what if you see on your balance, that's what you're
Speaker 2: going to get if you cash it in.
Speaker 1: Yeah, really interesting, isn't it. So there you are. There's
Speaker 1: the two questions. First of all, we're on a similar
Speaker 1: theme about moving money around, and it's interesting there were
Speaker 1: very different answers for self managed super funds and retail funds,
Speaker 1: and that's a really interesting dimension to it, and I
Speaker 1: thought that's an interesting the recontribution strategy, by the way, folks,
Speaker 1: just one last thing if you don't understand those and
Speaker 1: it's loopy, but it works, and it's entirely legitimate if
Speaker 1: you have super and you leave it in an inheritance,
Speaker 1: the taxable component being the part where you had some
Speaker 1: tax concession. For most people is the vast majority of
Speaker 1: their super right because it was composed three, you actually
Speaker 1: pay seventeen percent tax. Your inherent tours would pay seventeen
Speaker 1: percent tax on that super if they were adult children.
Speaker 1: Is that it James who are who are the ones
Speaker 1: who have to pay seventeen percent tax?
Speaker 2: Absolutely so from husband and wife or spouse to spouse,
Speaker 2: no tax, but to adult children who are not financially dependent,
Speaker 2: seventeen percent tax on the taxable component.
Speaker 1: So people say there's no death taxes in Australia, but
Speaker 1: actually SUPER, which is more more important and more common
Speaker 1: and becomes, after the family home, the main investment for
Speaker 1: many people, there is inheritance tax and it's seventeen percent.
Speaker 1: To avoid that, legitimately, you can continually take a certain
Speaker 1: amount out of SUPER and re contribute that amount back in.
Speaker 1: Can you believe this? And when each time you put
Speaker 1: that for every dollar you take out, when you put
Speaker 1: the dollar back in, that dollar is reduced from the
Speaker 1: taxable component of the inheritance.
Speaker 2: Is that it one hundred percent?
Speaker 1: Yeah? Okay, so absurd, but entirely legitimate. And I must say,
Speaker 1: if you wanted to ensure that your adult children, in
Speaker 1: the fullness of time, got the most inheritance they could
Speaker 1: possibly get from your super, then you would do it.
Speaker 1: Is there limits on how well you can't just basically
Speaker 1: take out a millionaire put it back in. You've got
Speaker 1: to do with the systematically, don't you what's the procedure?
Speaker 2: That's right and probably timely that this is mentioned. Because
Speaker 2: the non concessional contribution cap has increased from one hundred
Speaker 2: and ten thousand to one hundred and twenty thousand, then
Speaker 2: for people who are below the age of seventy five,
Speaker 2: they could actually pull forward two future years of that
Speaker 2: annual contribution as well. So at the moment, it's a
Speaker 2: maximum of three hundred and sixty thousand dollars that people
Speaker 2: can pull out of SUPER, which will have a mix
Speaker 2: of taxable and tax free component, and then they could
Speaker 2: go to their personal bank account and then they put
Speaker 2: that back into SUPER. And when it goes back into SUPER,
Speaker 2: it goes in as that non concessional contribution up to
Speaker 2: three hundred and sixty thousand, and that increases the tax
Speaker 2: free component, so less tax to non dependence later on.
Speaker 1: By doing that strategy, it's a strategy that could only
Speaker 1: have been devised in a completely hatchwork quill system that
Speaker 1: has emerged over the years. But I tell you what folks,
Speaker 1: wealthy people in Australia, they systematically do it. As I say,
Speaker 1: we don't realize that there is actually an inheritance tax.
Speaker 1: And not only that, but that inheritance tax is based
Speaker 1: on that taxable component in Super and for many families,
Speaker 1: Super will be that will be the inheritance apart from
Speaker 1: the family home. Okay, terrific. Hey, there's really good James,
Speaker 1: quite technical of times nature of it. I hope it
Speaker 1: was useful to you all. I'm sure it was. You
Speaker 1: were interested in how much you should have in Super.
Speaker 1: Maybe you might also be interested in how much Super
Speaker 1: you might leave someday to somebody if you don't spend
Speaker 1: it all. Okay, Hey, thank you James.
Speaker 2: That's my pleasure. Thanks having me is always in you
Speaker 2: know what. Great questions from the listeners. Very intelligent, very
Speaker 2: insightful question.
Speaker 1: So they are indeed well done.
Speaker 2: Well done listeners.
Speaker 1: Yes, thank you listeners and keep them rolling please, I'd
Speaker 1: love to have some more the money Puzzle at Thesustralian
Speaker 1: dot com dot au. Okay soon