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Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm

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Speaker 1: James Kirkby, Well, the editor at the Australian. Welcome aboard everybody. Well,

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Speaker 1: we finally got the red cut. It turns out, if

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Speaker 1: you look at it closely, it was a line bowl decision.

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Speaker 1: In fact, James Glynn, who writes for the Wall Street

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Speaker 1: Journal in Australia, did a piece this morning, it being

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Speaker 1: a Thursday, twentieth February, and he's really good on this issue.

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Speaker 1: It's his expertise, and the whole piece basically says why

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Speaker 1: did they do it? Like, why did they do it

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Speaker 1: if they didn't believe it? Why did they do it

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Speaker 1: if they spent the entire press conference explaining and warning

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Speaker 1: about the dangers in the economy that were the sort

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Speaker 1: of dangers that wouldn't justify a red cut. So, folks,

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Speaker 1: the only thing I'm saying is, yes, the radcut's here.

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Speaker 1: It's very important the first one or four years, so

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Speaker 1: that is very important. There may be an easying cycle,

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Speaker 1: so as investors we have to be ready and respond

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Speaker 1: to that. But as a preface, I would say, don't

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Speaker 1: take the economists quite so seriously when they say three

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Speaker 1: or four cuts this year that may not occur. It

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Speaker 1: certainly may not occur quickly, so no one knows the future.

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Speaker 1: You keep that in mind before we talk about the

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Speaker 1: issues that are on the table today. To join me

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Speaker 1: is James Girard of Financial Advisor dot com dot you.

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Speaker 1: How are you, James.

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Speaker 2: I'm doing very well, James. Thanks for having me on.

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Speaker 1: Four years since there was a red cut. It's interesting

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Speaker 1: that the thing that strikes me and our listeners know

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Speaker 1: awfully well, don't need to be told. Okay, so the

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Speaker 1: mortgage goes down a bit. If you're borrowing for property,

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Speaker 1: that's good too, or you're on a variable rate. Interesting

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Speaker 1: another dimension is you're borrowing. Capacity as an investor immediately

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Speaker 1: goes up, right. I was reading yesterday for the average

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Speaker 1: Australia on the average wage can borrow twelve thousand more

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Speaker 1: than they could before that cut. So you put that

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Speaker 1: into an investor perspective and people can do more than

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Speaker 1: they could previously. So that's the borrowing side, which is

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Speaker 1: interesting and in many ways obvious. I think what's less obvious,

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Speaker 1: James is the impact across the board for investors who've

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Speaker 1: become quite comfortable. I won't say, complacent, comfortable with the

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Speaker 1: fact that they can get pretty good, like pretty good

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Speaker 1: four to five percent in cash risk free government guaranteed

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Speaker 1: and that now is going to feed and it's going

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Speaker 1: to come up. It's going to create all sorts of

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Speaker 1: other issues for investors, isn't it. Could you explain to

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Speaker 1: people how that kicks in.

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Speaker 2: Yeah, people have enjoyed really high cash rates over the

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Speaker 2: past three to four years, with the official cash rate

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Speaker 2: going from that low of zero point one percent up

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Speaker 2: to four point three five percent, But of course we've

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Speaker 2: reached the peak and we are coming down the other

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Speaker 2: side now. And as you've mentioned, we've had the first

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Speaker 2: rate cut, and who knows how fast and aggressive that

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Speaker 2: will be. It is likely to continue if you believe

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Speaker 2: the share market and the economists at the banks. Now

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Speaker 2: what that means is for the average retirees that they've

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Speaker 2: seen their interest income increase significantly over the past couple

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Speaker 2: of years, but now we're in that reversal phase where

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Speaker 2: they'll start to see less and less interest there. And

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Speaker 2: I've already started to have conversations with concerned clients who're saying, look, James,

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Speaker 2: if interest rates drop by half percent one percent, this year.

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Speaker 2: That's literally thousands of dollars of income that I'm not getting.

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Speaker 2: And so look, the answer is, if you're a cash

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Speaker 2: and defensive investor, you can't really change that. You can't

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Speaker 2: go all right, just because we've had a quarter of

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Speaker 2: a percent rate drop, I'm going to jump into the

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Speaker 2: share market. You just need to adjust to that and

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Speaker 2: just become accepting that this is just part of the cycle.

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Speaker 2: Rates go up and rates come down.

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Speaker 1: Yeah, but it's not just retire is any diversified investor

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Speaker 1: is comforted. I'm comforted by the fact that where once

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Speaker 1: upon a time I had a certain amount in cash,

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Speaker 1: and you always have a certain amount in cash you

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Speaker 1: should have for a variety of reasons, it is quite

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Speaker 1: nice to know that you could get a passable rate

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Speaker 1: on that. But if inflation is three ish and the

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Speaker 1: cash rate is now down, the RBA cash rate is

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Speaker 1: now down to four, you get into the point again

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Speaker 1: where your cash in the bank is maybe not even

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Speaker 1: making money for you if you include inflation. So what

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Speaker 1: I want to ask you is, I imagine a lot of

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Speaker 1: listeners and investors are considering safe. And I put the

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Speaker 1: word safe in what we call and what we call

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Speaker 1: in the trade sneak quotes safe investments, whether there's a

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Speaker 1: similar sounding rate, But the issue is that there's much

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Speaker 1: more risk. So I'm just thinking about what people in

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Speaker 1: this situation might say. They say, Okay, I've got too

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Speaker 1: much in cash. I should have employed that before. Now

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Speaker 1: this really is the trigger. Rates have come down, rates

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Speaker 1: of coming down, so I must get I must move

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Speaker 1: to safe alternative. What traditionally are the safe alternatives, Jeames?

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Speaker 1: And maybe we'd also might mention what's being put in

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Speaker 1: front of people as new alternatives. I'm thinking of private credit, etc.

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Speaker 2: Yeah, So quite simply, we have cash and bond investments

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Speaker 2: on the defensive side of the portfolio. So cash is cash,

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Speaker 2: high interest cash term deposits. We have bonds which are

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Speaker 2: government bonds, corporate bonds, private credit type arrangements as well.

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Speaker 2: And then on the growth side we have property and

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Speaker 2: shares both here and overseas. And as we see the

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Speaker 2: RBA cash rate decrease, we have winners and losers in

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Speaker 2: all of those different types of asset classes. And I

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Speaker 2: like to use the term tipping point, and what I

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Speaker 2: mean by that is that people don't need to do

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Speaker 2: anything today, but there's going to be a tipping point

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Speaker 2: at some stage where they go, Okay, today I'm getting

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Speaker 2: five percent interest on my high interest bank account. I'm

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Speaker 2: happy with that. But then we have another RBA rate

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Speaker 2: cut and another one and that goes down to four

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Speaker 2: and a half and then four percent, and ago have

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Speaker 2: I reached this tip in point where I'm now unhappy

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Speaker 2: with that rate from that highris bank account, and I'm

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Speaker 2: now going to move my money or part of my

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Speaker 2: money into something else. So with regards to what those

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Speaker 2: other investments are, we have on the winner's side property

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Speaker 2: reads on the ASX, they're generally portfolios of commercial property

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Speaker 2: assets and you get rental income from that being a

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Speaker 2: part owner of that portfolio. Now, they are a beneficiary

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Speaker 2: of falling cash rates because these property trusts generally borrow

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Speaker 2: money to buy these commercial properties. Somewhere between thirty to

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Speaker 2: fifty percent of the value is funded by debt. And

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Speaker 2: also the way that these property trusts are valued are

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Speaker 2: using a discount of cash flow method. The lower the

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Speaker 2: cash rate, quite simply, the higher the evaluation on these properties.

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Speaker 2: And so we should see rising values rise in returns

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Speaker 2: on these type of property assets. And although they're not

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Speaker 2: capital secure, they're not guaranteed by the government, like bank

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Speaker 2: accounts half of two hundred and fifty thousand. There will

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Speaker 2: be this tipping point where people go, I'm willing to

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Speaker 2: take that additional risk to jump into these property reads

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Speaker 2: or otherwise high even in bank shares, because I just

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Speaker 2: can't do if this's fall in cash right anymore, or

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Speaker 2: my cash term deposits and bonds.

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Speaker 1: Very simple. Good idea there, James, and very appropriate, I imagine

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Speaker 1: for some people the issue of property trusts, so folks,

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Speaker 1: as James is saying there, they have always been a

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Speaker 1: alternative because we don't really have a bond market per se,

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Speaker 1: and the way they have a bond market in the US,

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Speaker 1: so we have these proxies that act as defacto bonds

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Speaker 1: for local investors. In Australia, generally people aren't using bonds.

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Speaker 1: They're using things like property trusts, franked bank shares and

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Speaker 1: traditionally hybrids which are CRUs fading away. Will come to

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Speaker 1: that in a moment. It's interesting, James, just proving your point.

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Speaker 1: The biggest property trust in Australia, goodman, boy, can they

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Speaker 1: time their moves. It's a brilliant company and everyone knows

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Speaker 1: that it's quite obvious. It's leagues ahead, it's Combank versus

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Speaker 1: the banks, Goodman versus the rest of the property trust.

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Speaker 1: But it launched an enormous equity issue this week and

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Speaker 1: then there was a redcut straight into it. It was

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Speaker 1: like just perfectly timed. Okay, So there's property trust. Not

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Speaker 1: everyone likes them, of course, and they're on franked worth

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Speaker 1: mentioning that they're not dividends para se, they are distributions.

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Speaker 1: What else might someone consider if they were looking around.

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Speaker 2: Long duration bonds? And duration is a technical term for

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Speaker 2: how long will this investment continue to pay interest before

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Speaker 2: it matures? And using simple economics, if the cash rates

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Speaker 2: likely to keep going down, the common sense thing to

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Speaker 2: do would be to try and lock in the current

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Speaker 2: high interest rates for as long as possible. Now, you

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Speaker 2: can't do that with a high interests bank account because

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Speaker 2: they're at call their variable interest rates, and as we

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Speaker 2: see every RBA REATECUD, you'll see a reduction in the

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Speaker 2: interest on your online high interests bank account. Turn deposits.

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Speaker 2: On the other hand, you can get turned the posits

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Speaker 2: up to five years and they're they're locked in interest

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Speaker 2: for that whole period. So for people wanting to go, Okay,

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Speaker 2: I want to lock in this interest rate, and I'm

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Speaker 2: happy to lose access to that capital. Longer term deposits,

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Speaker 2: longer term bonds are an option to consider. But of course,

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Speaker 2: with the pricing of the term deposits, the banks have

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Speaker 2: already thought forward. They have a whole team of ractuaries

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Speaker 2: and economists who are didn't want the cash.

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Speaker 1: Rate they've got already, haven't they.

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Speaker 2: No, that's right. Yeah, So like a five year term

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Speaker 2: deposit with a major bank is around three to three

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Speaker 2: and a half percent, whereas a twelve month turn deposit

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Speaker 2: is around four and a half percent at the moment,

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Speaker 2: So the banks have already they're thinking there's going to

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Speaker 2: be about a one percent rate cut or so over

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Speaker 2: the next five years.

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Speaker 1: You know, it's interesting, isn't it. Money talks. That's what

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Speaker 1: I listened to. You know, take that rather than listening

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Speaker 1: to economists or futurists or anybody else who wants to

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Speaker 1: take a bet on where rates are going, Just watch

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Speaker 1: what the banks are doing, folks. That's the real money.

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Speaker 1: They're betting with their own money, and they're saying that

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Speaker 1: they are of the opinion that rates will come down

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Speaker 1: whatever above the pace two which to come down. So

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Speaker 1: what would be if I was trying to find a

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Speaker 1: term deposit, what should I be looking for four percent more?

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Speaker 1: Is that still feasible?

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Speaker 2: It is still feasible. It just depends on the term.

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Speaker 2: It seems that one to two years is a sweet spot.

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Speaker 2: At the moment they're still offering relatively good rates of interest.

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Speaker 2: But beyond two years, between two to five years, the

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Speaker 2: interest rates are drop in because the banks are taken

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Speaker 2: into account the more normalized RBA cash rate going to

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Speaker 2: that sort of that one percent lower than what we

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Speaker 2: have today. So also, just with noting the guarantee on deposits,

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Speaker 2: that two hundred and fifty thousand dollars is still in place.

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Speaker 2: So that's a good thing to do when for people

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Speaker 2: who've downsized house and they have all this money in

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Speaker 2: their bank account. Although it's administratively a hassle to do,

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Speaker 2: but it is prudent to split your accounts into two

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Speaker 2: hundred and fifty thousand dollars lots to pick up that

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Speaker 2: effectively guaranteed money from the federal government.

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Speaker 1: Yeah, so just to revise on that, folks, As James says,

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Speaker 1: it's not just effective, it's explicit thanks to the GFC

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Speaker 1: all approved the positive taking institutions, not just banks, eighty

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Speaker 1: eyes two hundred and fifty thousand per person per bank. Hey,

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Speaker 1: on the unlikely event, anyway that a bank would topple over,

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Speaker 1: and that the government would allow them to do that

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Speaker 1: in our economy to be super safe, if you had

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Speaker 1: five hundred thousand, you'd put two fifty in each bank.

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Speaker 1: That's what you're driving at, James.

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Speaker 2: That's it.

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Speaker 1: Yes, And really this is the thing I suppose this

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Speaker 1: is the hard part of rates going down, folks, that

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Speaker 1: nothing is as safe as risk free money, and in

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Speaker 1: our particular economy it is government guaranteed. So that's the

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Speaker 1: hard part of rates going down, which perhaps is underplayed

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Speaker 1: when there's so much attention to mortgages. But as someone

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Speaker 1: was making the point, the mortgagees get such a they

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Speaker 1: get a huge amount of attention, but not everybody has

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Speaker 1: a mortgage. Okay, we'll take a short break back at

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Speaker 1: the moment. Hello, Welcome back to The Australian's Money Puzzle podcast.

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Speaker 1: James Kirby here with James Gerard. Now, I was just

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Speaker 1: thinking that was interesting about alternatives bonds, property trusts. We

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Speaker 1: should say bank shares high dividend frank Bank shares, which

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Speaker 1: are traditionally the other traditional options. Now interestingly, I was

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Speaker 1: talking about how things can play in your favor and

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Speaker 1: how the good Man Group launched a huge cash raising

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Speaker 1: beautifully timed in the same week that the RBA cut rates,

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Speaker 1: which basically advertises the fact that properly trusts will will

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Speaker 1: have the win behind them in a very similar vein.

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Speaker 1: There is a huge push at the moment and I'm

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Speaker 1: getting it's interesting, folks, I'm not kidding. I'm getting every

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Speaker 1: single day, if not every few hours, I'm being asked

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Speaker 1: to meet or talk or come to visit or have

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Speaker 1: someone on the show who's pushing private credit, private investing

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Speaker 1: generally private private equity too, but private credit. And we've

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Speaker 1: had people on the show saying watch out, like Liam

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Speaker 1: Short was on the show if you recall a few

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Speaker 1: weeks ago from the Sonas Group, and he was on

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Speaker 1: ambiguous really he said basically sidesteppitt. I wouldn't go so

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Speaker 1: far as to say that, but it's worth knowing that

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Speaker 1: the conditions are now absolutely perfect for these promoters. Private

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Speaker 1: credit being the alternative to banks, where there are the

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Speaker 1: providers of credit who in turn provide income opportunities to

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Speaker 1: retail investors. This was all restricted to the high end

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Speaker 1: of town and very rich people basically until very recently. Suddenly,

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Speaker 1: James were just flooded with it. I imagine you're flooded with it,

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Speaker 1: are you. I went to a lunch on Tuesday Wednesday.

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Speaker 1: There was like one hundred advisors and there they were

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Speaker 1: just siteing there being briefed by this guy on this

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Speaker 1: whole scene, and I just wonder. I got the impression

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Speaker 1: that was entirely new to them from the questions that

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Speaker 1: were coming up. Are you being flooded with this wave

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Speaker 1: of private credit promotion? For the want of a better.

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Speaker 2: Word, most definitely, it's a good time for that particular

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Speaker 2: type of investment because they can play off the story

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Speaker 2: that you're going to lose interest on your cash and

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Speaker 2: your bonds. Let's take a comparable, slightly more risk, but

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Speaker 2: let's go to private credit so you can maintain the

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Speaker 2: income that you'll get in today in the face of

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Speaker 2: these fall in cash rights.

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Speaker 1: So as if I come in to you and I say, hey, James,

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Speaker 1: I just heard about this thing private credit. I've always

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Speaker 1: had my money in the bank, they say they're better.

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Speaker 1: They say their returns are super they say their track

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Speaker 1: record is fantastic. They say the banks are withdrawing. This

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Speaker 1: is their crucier line, that the banks as we know

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Speaker 1: them are withdrawing from the financing of business or many

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Speaker 1: businesses as we know it. What's your a hunch on this?

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Speaker 1: Is it like flavor of the month? Is it all

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Speaker 1: going to end in teers or is it a structural

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Speaker 1: change where this becomes an active asset class for retail

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Speaker 1: investors From here on.

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Speaker 2: It is a worthy investment asset class. But there's a

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Speaker 2: real large amount of I can't say the words that

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Speaker 2: needs to be done with it. And my response would be,

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Speaker 2: do you remember companies like Australian Capital Reserve back in

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Speaker 2: twenty eight two thousand and nine who advertised in newspaper TVs, Hey,

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Speaker 2: we're safe as term deposits. We're going to get you

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Speaker 2: ten percent return. Now, I'm not saying private credit is

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Speaker 2: the same, but I'm saying that it's not as simple

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Speaker 2: as what it seems. And the potential risks that the

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Speaker 2: investor are taking can be relatively small or they can

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Speaker 2: be extremely large. But in my twenty years of finance,

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Speaker 2: I've learned that a lot of promoters of investments will

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Speaker 2: use smoke and mirrors and fancy brochures to hide the

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Speaker 2: true risk that that investment has. That's very easy to

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Speaker 2: do with private credit because it sounds nice and sexy

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Speaker 2: and it can provide a good return. But the average

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Speaker 2: moment dad investor typically doesn't drill down. So if you

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Speaker 2: ask the average moment dad investor, why do you like this,

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Speaker 2: what's your risk? What's the exposure? They won't have an

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Speaker 2: idea other than oh, they told us it was a

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Speaker 2: safe thing.

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Speaker 1: They like the headline number, and who wouldn't. That's right,

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Speaker 1: it's the little asterix you got to watch. There's that

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Speaker 1: little asterix beside the number yeah, which goes into the

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Speaker 1: fine print, which says this is hell of a lot rescuer.

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Speaker 1: Then you might think this could be collateralized. This could

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Speaker 1: expose you to all sorts of risks that you have

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Speaker 1: previously had no exposure towards. And crucially, going back to

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Speaker 1: what we were saying at the start of the show,

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Speaker 1: the approved deposit taking institution deposit cash deposits that we

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Speaker 1: know and maybe less attractive than they were, our government guaranteed,

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Speaker 1: and this stuff has no guarantee whatsoever. And if it

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Speaker 1: says it's guaranteed, it's just guaranteed by the promoter. The

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Speaker 1: guarantee is only as good as the promoter, which means

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Speaker 1: damn all really sometimes very much true in the historical

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Speaker 1: chakras that we've had in the past in this area. So,

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Speaker 1: but you say it's worthy, how might I approach it?

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Speaker 1: What would I be? What's the key things I should

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Speaker 1: be looking for? If I've got three private credit opportunities

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Speaker 1: in front of me, or my advisor has put that

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Speaker 1: in front of me, or I've got three advertisements and

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Speaker 1: they all look good, how do I begin to select

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Speaker 1: one from the other.

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Speaker 2: Having three private credit investments all in front of you,

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Speaker 2: they could look very similar on the surface, they have

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Speaker 2: a similar return profile. However, you need to understand what

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Speaker 2: is happening with your money. If you give your hard

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Speaker 2: earned money to this particular fund manager or investment structure,

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Speaker 2: what's it being useful and how are they using that

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Speaker 2: to then provide you with a seven to ten percent

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Speaker 2: income every year from that. So on one end of

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Speaker 2: the spectrum, you may have private credit which has been

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Speaker 2: lent to ASEX listed companies who are expanding and acquiring

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Speaker 2: other companies, and that's a lower risk activity because the

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Speaker 2: ASX listed companies who are the borrowers of this private credit,

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Speaker 2: they're good credit worthy companies. On the whole, you have

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Speaker 2: to drill down, but on the whole it's an listed

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Speaker 2: company borrowing money is safer than a startup company who's

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Speaker 2: running at a loss and need private credit to survive,

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Speaker 2: and if they don't get that, they're going to implode

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Speaker 2: and shut down. So that could actually be what the

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Speaker 2: private credit is being used for Fund number two. So

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Speaker 2: again on the surface, they look very similar. They're both

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Speaker 2: given you ten percent return, but one is quote on

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Speaker 2: a relative sense, safer and the other one is extremely

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Speaker 2: high risk. So the answer there is just really doing

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Speaker 2: your due diligence and not putting the scent of your

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Speaker 2: money into it unless you can tell someone else what

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Speaker 2: this is and explain it to them what the risks

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Speaker 2: and the potential returns are very good.

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Speaker 1: And one other thing, perhaps James, which a number of

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Speaker 1: people have mentioned, is track record. There's two funds. One

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Speaker 1: is from a fund manager who's in this business for

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Speaker 1: twenty years. They've got track record, and the other is

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Speaker 1: from a fund that's having a go never did it before.

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Speaker 1: Keep that in mind. It's a very useful distinguishing differentiator. Okay,

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Speaker 1: we have some great questions. I want to move on

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Speaker 1: to them straight away. We'll be back in a moment. Hello,

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Speaker 1: Welcome back to The Australian's Money Puzzle. James Kirby here

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Speaker 1: with James Girard. Now, can you see the questions on

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Speaker 1: the screen. Yes, would you like to read the first

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Speaker 1: one from Paul sure Thing? Paul asks, given the banks

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Speaker 1: a ceasing issuance of hybrid securities and existing ones will

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Speaker 1: mature in coming years, what impact will this have on

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Speaker 1: hybrid ETFs? Yeah, very great, great question, Paul, thank you.

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Speaker 1: That's ETFs that package Australian hybrids together. Is that what

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Speaker 1: he means?

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Speaker 2: That's right? Yeah, there's one or two of them out

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Speaker 2: there that I can recall.

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Speaker 1: So what happens to them? They slowly fade away?

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Speaker 2: Yeah, I think the ATIF managers will probably rebrand them

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Speaker 2: and expand the mandate to say this isn't just hybrid securities.

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Speaker 2: This will now be private credit or other things like that.

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Speaker 1: Yeah, they won't be sending the money back, they won't

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Speaker 1: be saying oh listen, hey, listen to you what, we'll

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Speaker 1: give you the money back, because yeah, no, they don't

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Speaker 1: do that. I imagine you're one hundred percent right there,

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Speaker 1: James Paul. Watch for the note from your hybrid ETF

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Speaker 1: to tell you that they've got some new ideas and

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Speaker 1: welcome to their new plans. Because whatever else they're going

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Speaker 1: to do, and we don't know what it is, it'll

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Speaker 1: be something broadly similar where they're offering income from the markets,

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Speaker 1: from the investment markets, but they won't be giving you

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Speaker 1: the money back. They never do that. Okay, More broadly

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Speaker 1: on hybrids, we could come back to that another time.

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Speaker 1: They've been phased out right. Sophisticated investors could play various

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Speaker 1: arbitrage games on those hybrids, couldn't they. But for most

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Speaker 1: people most of the time, that particular era is over,

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Speaker 1: and they were very popular with people. Things like the

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Speaker 1: Pearls series from CommBank were very popular. They were a

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Speaker 1: funny sort of a beast. They were hybrid half equity,

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Speaker 1: half bond, and for some reason the regulator launched them,

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Speaker 1: and for some reason the regulator sorry signed them off

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Speaker 1: maybe fifteen twenty years ago, and for some reason they

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Speaker 1: lost heart and closed them down. More recently, Okay, I'm

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Speaker 1: going to put two questions together here because they're both

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Speaker 1: on Super Once. It's from Sandy Sandy says James Kirby.

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Speaker 1: I like the piece you did on sorting out the supersystem.

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Speaker 1: The only area this is from the Australian a few

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Speaker 1: weeks ago. The only area that I find debatable is

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Speaker 1: that Super is biased against young people. This is interesting.

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Speaker 1: Listen to this. Clearly pension mode being tax three is

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Speaker 1: a bonus. However, you failed to mention that a young

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Speaker 1: person today, if they started a job in twenty twenty five,

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Speaker 1: would be paid twelve percent. Paige Sandy saying paid twelve percent.

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Speaker 1: The technical reality here is that twelve percent comes under

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Speaker 1: the Supernovation guarantee. That is, twelve percent must go into Super.

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Speaker 1: Sandy says, when Superinnovation started it was just three percent.

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Speaker 1: It was a good twelve years before it became a

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Speaker 1: reasonable payment. That might explain why the average worker has

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Speaker 1: a relatively low balance. Yes, it all comes down to

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Speaker 1: the debate about whose money it is, Sandy. I'm of

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Speaker 1: the opinion that it's my money, and if News Corporation

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Speaker 1: must to put twelve percent of my package into Super

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Speaker 1: and must do so, by law. That's fine, but it's mine.

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Speaker 1: And I'm also of the opinion that they didn't have

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Speaker 1: to put it into SUPER. I'd get it in another form.

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Speaker 1: I wouldn't have written it if I didn't think so.

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Speaker 1: I still think it's the case that it's biased against

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Speaker 1: young people. But just to zone in on that, what

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Speaker 1: I really mean about that is that all the benefits

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Speaker 1: are when you're retired, and there's really very few benefits

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Speaker 1: in accumulation. And I think the amount you can put

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Speaker 1: in on a concessional basis is much, much too small,

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Speaker 1: considering you can have two million head tax free and super.

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Speaker 1: The amount that you can put in per year when

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Speaker 1: you're working and building your SUPER is tiny on a

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Speaker 1: concessional basis. Okay, but thank you, Shendy Luke, wonderful podcast.

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Speaker 1: Thank you. A key actuarial firm has suggested a flat

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Speaker 1: ten percent tax on SUPER at all life stages. This

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Speaker 1: seems unfair to all those who have paid fifteen percent

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Speaker 1: since SUPER became compulsory in the nineteen nineties. Okay, Luke,

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Speaker 1: it wasn't a firm, actually, it was the Actuaries Institute

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00:23:29,040 --> 00:23:32,760
Speaker 1: who met the remarkably what would you say, provocative posal

432
00:23:32,800 --> 00:23:35,320
Speaker 1: a ten percent flat tax on super at whatever age

433
00:23:35,359 --> 00:23:38,879
Speaker 1: you were, so that you wouldn't be getting these different

434
00:23:38,960 --> 00:23:42,560
Speaker 1: tiers at different ages and different amounts. That would be

435
00:23:42,600 --> 00:23:45,720
Speaker 1: something that would make it fairer to younger people and

436
00:23:46,040 --> 00:23:48,280
Speaker 1: would rebalance the system not so much in favor of

437
00:23:48,359 --> 00:23:51,600
Speaker 1: older people. I think for that alone, I thought it

438
00:23:51,680 --> 00:23:55,240
Speaker 1: was pretty good anything to add to all that. JG.

439
00:23:57,000 --> 00:23:58,840
Speaker 2: You know, there's always going to be winners and losers

440
00:23:58,880 --> 00:24:02,760
Speaker 2: when government changes to super legislation and where their grandfather things.

441
00:24:02,760 --> 00:24:06,080
Speaker 2: It just makes the whole system more complicated. But I'd

442
00:24:06,119 --> 00:24:08,000
Speaker 2: probably say that it's not going to happen. We're not

443
00:24:08,040 --> 00:24:10,399
Speaker 2: going to see ten percent tax on all life stages

444
00:24:10,440 --> 00:24:12,920
Speaker 2: in SUPER. A government that introduces that will be the

445
00:24:12,960 --> 00:24:14,760
Speaker 2: opposition after the next election.

446
00:24:16,359 --> 00:24:20,320
Speaker 1: The opposition after the next election. But then they're not

447
00:24:20,400 --> 00:24:23,560
Speaker 1: the government the opposition after the next election. Do you

448
00:24:23,560 --> 00:24:25,120
Speaker 1: mean it would be an opposition policy?

449
00:24:25,720 --> 00:24:28,959
Speaker 2: Is just saying I'm saying that retirees will vote and

450
00:24:29,160 --> 00:24:31,919
Speaker 2: kick them out of government because the gray nomads are

451
00:24:31,960 --> 00:24:34,320
Speaker 2: not going to be happy with having a ten percent

452
00:24:34,400 --> 00:24:38,040
Speaker 2: tax retrospectively applied to their current tax supersediens.

453
00:24:38,520 --> 00:24:41,280
Speaker 1: No, but I don't It would probably not be anyway,

454
00:24:41,280 --> 00:24:43,840
Speaker 1: But it is such theoretical stuff that I think we'll

455
00:24:43,880 --> 00:24:44,840
Speaker 1: just put it to one side.

456
00:24:45,280 --> 00:24:48,440
Speaker 2: Roland, all right, rolling here we go. I'm a customer

457
00:24:48,560 --> 00:24:51,040
Speaker 2: of a bank which was formerly a credit union. As such,

458
00:24:51,119 --> 00:24:54,399
Speaker 2: the customers are the owners, with one share each, probably

459
00:24:54,400 --> 00:24:57,720
Speaker 2: about thirty to forty thousand shareholders. What is the likelihood

460
00:24:57,760 --> 00:25:00,679
Speaker 2: of these types of institutions being bought by bigger banks

461
00:25:00,720 --> 00:25:04,080
Speaker 2: and me receiving my share of the proceeds all of

462
00:25:04,320 --> 00:25:07,040
Speaker 2: all the banks listing as a public company similar to

463
00:25:07,200 --> 00:25:11,320
Speaker 2: AMP demutualization. There are quite a few ex credit unions about,

464
00:25:11,359 --> 00:25:13,320
Speaker 2: and I would assume that it would be a way

465
00:25:13,359 --> 00:25:16,000
Speaker 2: for the big banks to expand their banks without upsetting

466
00:25:16,080 --> 00:25:17,040
Speaker 2: the a triple C.

467
00:25:17,560 --> 00:25:21,280
Speaker 1: The golden age of demutualization is more or less past

468
00:25:21,480 --> 00:25:25,360
Speaker 1: us ruland because they demutualized just about everything at one stage,

469
00:25:26,119 --> 00:25:29,560
Speaker 1: and all those big AMP being a classic example, of course,

470
00:25:29,600 --> 00:25:33,920
Speaker 1: and iag a lot of the stuff in there was demutualized.

471
00:25:34,560 --> 00:25:37,800
Speaker 1: And all the building sized societies, of course dem mutualized

472
00:25:37,840 --> 00:25:40,199
Speaker 1: and became little banking stocks and then were mapped up

473
00:25:40,200 --> 00:25:42,960
Speaker 1: by the big banks. So yes, it is possible that

474
00:25:43,160 --> 00:25:46,399
Speaker 1: some of them may come through that system. Seems to

475
00:25:46,440 --> 00:25:49,280
Speaker 1: have become much more difficult the sort of it seems

476
00:25:49,280 --> 00:25:50,800
Speaker 1: to me like the stuff that was going to be

477
00:25:50,800 --> 00:25:54,200
Speaker 1: demutualized is demutualized, and it came to a grinding holt.

478
00:25:54,720 --> 00:25:56,480
Speaker 1: I don't think it was any regulatory reason why it

479
00:25:56,520 --> 00:25:58,479
Speaker 1: came to a grinding holt, but it did, and there

480
00:25:58,520 --> 00:25:59,879
Speaker 1: was a bit of a backlash. I think something like,

481
00:26:00,440 --> 00:26:03,399
Speaker 1: for instance, where there was enormous value builtable over hundreds

482
00:26:03,440 --> 00:26:06,639
Speaker 1: of years and put on the market and frittered away

483
00:26:06,760 --> 00:26:12,360
Speaker 1: very quickly. Not impossible, Roland, but I think unlikely because

484
00:26:12,400 --> 00:26:16,080
Speaker 1: also the brand, if you like, of the credit union,

485
00:26:16,800 --> 00:26:21,520
Speaker 1: just like the brand of other remaining mutuals, is at

486
00:26:21,600 --> 00:26:25,879
Speaker 1: heart that they're not listed, that they are mutualized. Is

487
00:26:25,920 --> 00:26:29,240
Speaker 1: there attractions so to that extent, they would chuck that

488
00:26:29,400 --> 00:26:33,040
Speaker 1: core attraction if they went and demutualized and try to list.

489
00:26:33,160 --> 00:26:36,040
Speaker 1: What do you think, James, I agree with that. Yeah.

490
00:26:36,080 --> 00:26:39,119
Speaker 2: Part of that appeal of using the credit union is

491
00:26:39,119 --> 00:26:42,760
Speaker 2: that independence and that sort of for the customer type approach,

492
00:26:42,800 --> 00:26:44,560
Speaker 2: and where it gets swat up by a big bank,

493
00:26:44,880 --> 00:26:47,120
Speaker 2: you're going to have a lot of unhappy credit union

494
00:26:47,160 --> 00:26:50,600
Speaker 2: customers looking for other credit unions to move to. And

495
00:26:50,640 --> 00:26:54,840
Speaker 2: also credit unions generally have lower profit margins than big banks,

496
00:26:55,040 --> 00:26:57,480
Speaker 2: and so for a big bank to acquire credit union,

497
00:26:57,760 --> 00:27:01,359
Speaker 2: it's not really a very profitable exercise because they're buying

498
00:27:01,359 --> 00:27:03,879
Speaker 2: a less profitable business. And also the gross strategy is

499
00:27:03,920 --> 00:27:06,199
Speaker 2: quite low. They're not going to expand that thirty or

500
00:27:06,200 --> 00:27:09,240
Speaker 2: forty thousand shareholder base or customer base to one hundred

501
00:27:09,280 --> 00:27:11,480
Speaker 2: two hundred thousand dollars. So that's why we haven't seen

502
00:27:11,520 --> 00:27:13,560
Speaker 2: the big banks at quite credit unions.

503
00:27:13,880 --> 00:27:16,720
Speaker 1: That's the answer, isn't it really? There? You are ruland

504
00:27:17,240 --> 00:27:22,000
Speaker 1: so you might be lucky, but it's unlikely I would imagine. Okay, David,

505
00:27:22,359 --> 00:27:27,080
Speaker 1: final question, could you please ask an appropriate guest that's you, James,

506
00:27:27,320 --> 00:27:31,280
Speaker 1: how much extra should Australian investors pay up for Australian

507
00:27:31,320 --> 00:27:35,679
Speaker 1: shares for US as international shares for the benefits of franking? Ah? Gee?

508
00:27:35,840 --> 00:27:37,879
Speaker 1: How long have you got? Could do a thesis on that?

509
00:27:37,920 --> 00:27:41,440
Speaker 1: Couldn't you? Really? What are the benefits of franking? I've

510
00:27:41,440 --> 00:27:44,399
Speaker 1: been facetious here. The Australian American chairs have beaten the

511
00:27:44,400 --> 00:27:46,360
Speaker 1: hell out of Australian shares a year after year, which

512
00:27:46,400 --> 00:27:50,280
Speaker 1: which suggests franking. There was useful, especially if you're retired.

513
00:27:50,480 --> 00:27:54,400
Speaker 1: Doesn't exactly set the market on fire, does it. Yeah.

514
00:27:55,119 --> 00:27:57,080
Speaker 2: I think that's a true sentiment, and I probably don't

515
00:27:57,080 --> 00:27:59,120
Speaker 2: agree with the premise of the question around how much

516
00:27:59,119 --> 00:28:01,960
Speaker 2: extra should I pay for Australian shares. I think it

517
00:28:01,960 --> 00:28:04,320
Speaker 2: really comes down to preference. If you look over a

518
00:28:04,320 --> 00:28:07,399
Speaker 2: thirty year period, US shares have done better on a

519
00:28:07,400 --> 00:28:10,440
Speaker 2: capital growth perspective than Australian shares have not on a

520
00:28:10,520 --> 00:28:13,879
Speaker 2: total return basis as well. So if you're a growth

521
00:28:13,880 --> 00:28:16,600
Speaker 2: based investor, you would lean towards US shares, But if

522
00:28:16,600 --> 00:28:19,560
Speaker 2: you're a dividend or a more balanced type investor, you

523
00:28:19,560 --> 00:28:22,440
Speaker 2: would lean towards Australian shares, but not necessarily pay more

524
00:28:22,480 --> 00:28:25,480
Speaker 2: for it, but just allocate more for your money there.

525
00:28:25,880 --> 00:28:28,639
Speaker 1: Yeah. Yeah, And as you say, it's nice to get

526
00:28:29,160 --> 00:28:32,080
Speaker 1: four and a half percent dividend yield, and maybe that's

527
00:28:32,119 --> 00:28:39,360
Speaker 1: six percent franc in your pocket, but it's not a

528
00:28:39,400 --> 00:28:43,840
Speaker 1: great constellation. You get four percent capital growth and your

529
00:28:44,080 --> 00:28:47,920
Speaker 1: equivalent to US share is doing twenty five percent capital

530
00:28:47,920 --> 00:28:50,320
Speaker 1: growth in a year, which many of them do for

531
00:28:50,440 --> 00:28:51,000
Speaker 1: many years.

532
00:28:51,040 --> 00:28:51,280
Speaker 2: Now.

533
00:28:51,560 --> 00:28:53,560
Speaker 1: That doesn't mean it'll go on forever, of course, but

534
00:28:53,680 --> 00:28:56,400
Speaker 1: we're waiting all right. The second part of David's question

535
00:28:56,560 --> 00:29:00,000
Speaker 1: was a related question is do investment strategist take it

536
00:29:00,000 --> 00:29:03,080
Speaker 1: acount of the benefits of franking when structuring acid allocation

537
00:29:03,200 --> 00:29:07,360
Speaker 1: models for use in Australia. Oh, yes, I expect, so, David,

538
00:29:07,480 --> 00:29:10,120
Speaker 1: franking isn't relevant to the international investor, Isn't that right?

539
00:29:10,200 --> 00:29:18,520
Speaker 1: So it's really only talking about Australian based investors that

540
00:29:18,640 --> 00:29:22,720
Speaker 1: would be investment strategists would take account into franking, Yes

541
00:29:22,760 --> 00:29:25,440
Speaker 1: they would and generally just explain to people in case

542
00:29:25,480 --> 00:29:27,440
Speaker 1: they don't know about franking, James, and we don't need

543
00:29:27,480 --> 00:29:31,239
Speaker 1: to go into how it works. But in terms of

544
00:29:31,280 --> 00:29:35,160
Speaker 1: what they call grossed up, if a share says it's

545
00:29:35,160 --> 00:29:38,960
Speaker 1: going to pay four and a half percent, then the

546
00:29:39,160 --> 00:29:42,480
Speaker 1: franking for the investor, the way it works when it

547
00:29:42,520 --> 00:29:45,200
Speaker 1: comes out the other end of the line is more

548
00:29:45,400 --> 00:29:47,760
Speaker 1: like what would it be to the average investor if

549
00:29:47,800 --> 00:29:50,080
Speaker 1: the yield, the headline yield was four and a half percent,

550
00:29:50,160 --> 00:29:52,560
Speaker 1: then what would the person actually get in their pocket.

551
00:29:53,520 --> 00:29:56,120
Speaker 2: It'd be somewhere around six six and a half percent,

552
00:29:56,160 --> 00:29:59,560
Speaker 2: because it's basically the tax that large company has paid

553
00:29:59,800 --> 00:30:01,560
Speaker 2: or ready to the tax office. You're just getting the

554
00:30:01,560 --> 00:30:03,560
Speaker 2: credit for that, so you just gross up four and

555
00:30:03,600 --> 00:30:05,880
Speaker 2: a half percent by thirty percent, which is somewhere between

556
00:30:05,920 --> 00:30:06,920
Speaker 2: six and six and a half percent.

557
00:30:07,320 --> 00:30:09,720
Speaker 1: And that's why our bank shows are a lot better

558
00:30:09,760 --> 00:30:13,760
Speaker 1: than they look in terms of their dividends. Of their

559
00:30:13,800 --> 00:30:17,680
Speaker 1: dividends four in fact they factor for most people, they're

560
00:30:17,760 --> 00:30:20,640
Speaker 1: more like six. And if you're retired, it's even higher.

561
00:30:20,680 --> 00:30:21,240
Speaker 1: Isn't that right?

562
00:30:22,320 --> 00:30:25,840
Speaker 2: That's right? Yeah, because when you're retired and the government

563
00:30:26,160 --> 00:30:30,000
Speaker 2: previously wasn't successful in making this change, that you get

564
00:30:30,000 --> 00:30:32,840
Speaker 2: a refund of your excess franking credits if you're not

565
00:30:32,920 --> 00:30:36,479
Speaker 2: paying any tax. Noting the people in super in account

566
00:30:36,480 --> 00:30:39,120
Speaker 2: based pensions don't pay any tax. So you get the

567
00:30:39,120 --> 00:30:41,960
Speaker 2: cash dividend twice a year from a bank, but then

568
00:30:42,240 --> 00:30:44,480
Speaker 2: also your super fund will give you a refund of

569
00:30:44,520 --> 00:30:47,480
Speaker 2: those franking credits as well as an extra credit, which

570
00:30:47,520 --> 00:30:50,560
Speaker 2: is fantastic, which people who are working, if their tax

571
00:30:50,640 --> 00:30:53,320
Speaker 2: rate is above thirty percent, they don't get those refunds back.

572
00:30:53,560 --> 00:30:56,000
Speaker 2: In cases, if their tax rate is say forty seven percent,

573
00:30:56,160 --> 00:30:57,600
Speaker 2: they have to pay more tax even though they again

574
00:30:57,640 --> 00:30:59,200
Speaker 2: the dividends, I'll still have to pay up to seventeen

575
00:30:59,240 --> 00:31:00,600
Speaker 2: percent tax on top of that.

576
00:31:01,080 --> 00:31:05,440
Speaker 1: So the less actually pay, the higher your dividend. Absolutely,

577
00:31:05,840 --> 00:31:09,880
Speaker 1: which when in the election before last, when it became

578
00:31:09,920 --> 00:31:14,600
Speaker 1: an issue, most people were surprised to hear that. But

579
00:31:14,720 --> 00:31:17,920
Speaker 1: the people who benefit from it knew all about it,

580
00:31:18,000 --> 00:31:20,200
Speaker 1: and boy, oh boy did they kick up when anybody

581
00:31:20,240 --> 00:31:23,760
Speaker 1: went near it. And can I say, it's complicated, but

582
00:31:23,800 --> 00:31:26,400
Speaker 1: it all makes sense. And if you can't understand it,

583
00:31:26,640 --> 00:31:29,440
Speaker 1: you can ask Paul Keating how he created it. But

584
00:31:29,480 --> 00:31:32,800
Speaker 1: it actually does all make sense. Each part of it

585
00:31:32,840 --> 00:31:37,000
Speaker 1: makes sense. But the outcome of it is that a retiree,

586
00:31:37,200 --> 00:31:40,720
Speaker 1: because they don't pay tax, gets actually a higher gets higher,

587
00:31:41,240 --> 00:31:43,360
Speaker 1: gets more money in their pocket from dividends. And that

588
00:31:43,520 --> 00:31:47,360
Speaker 1: is why, folks, we have a very dividend heavy economy

589
00:31:48,000 --> 00:31:50,880
Speaker 1: with a stop market that reflects that that is dominated

590
00:31:50,960 --> 00:31:54,640
Speaker 1: by the banks which are consistently high dividend payers, and

591
00:31:54,720 --> 00:31:58,960
Speaker 1: the big miners who pay big dividends when they have

592
00:31:59,080 --> 00:32:01,960
Speaker 1: big profits. They're considerably more cyclical than the banks. But

593
00:32:02,000 --> 00:32:04,720
Speaker 1: that's how it all works. Okay, that all made a

594
00:32:04,760 --> 00:32:06,760
Speaker 1: lot of sense to me at least. James, thank you

595
00:32:06,880 --> 00:32:07,320
Speaker 1: very much.

596
00:32:08,080 --> 00:32:09,760
Speaker 2: My pleasure is always thanks for having me on.

597
00:32:10,160 --> 00:32:13,280
Speaker 1: Great to have you on. And folks, keep in mind

598
00:32:13,320 --> 00:32:16,120
Speaker 1: I'd love to have some more correspondence. We've had lots

599
00:32:16,120 --> 00:32:18,800
Speaker 1: of emails and I've managed to get through them all.

600
00:32:19,240 --> 00:32:21,840
Speaker 1: And I noticed just in passing that getting a lot

601
00:32:21,840 --> 00:32:25,200
Speaker 1: of questions, particularly about shares of late and particular shares.

602
00:32:25,240 --> 00:32:27,040
Speaker 1: So we will do a special on that where we

603
00:32:27,160 --> 00:32:29,640
Speaker 1: just do share market and we look at a whole

604
00:32:29,680 --> 00:32:33,239
Speaker 1: bunch of share activity and questions relating to shares that

605
00:32:33,280 --> 00:32:36,560
Speaker 1: have come in recent weeks. Okay, keep the emails coming.

606
00:32:36,680 --> 00:32:39,400
Speaker 1: The money Puzzle at the Australian dot com dot Au.

607
00:32:39,560 --> 00:32:43,040
Speaker 1: Today's show was produced by Leah Sam mcglue. Hope you

608
00:32:43,080 --> 00:32:43,320
Speaker 1: soon