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.
Speaker 1: You've probably seen our market being in exceptionally good shape
Speaker 1: in recent weeks. We're going to talk about the market,
Speaker 1: about the outlook for the year ahead. When I say
Speaker 1: the year ahead, of financial year ahead, if you're an
Speaker 1: active investor, you've probably had a good idea already how
Speaker 1: you did last year, the year to June. You're probably
Speaker 1: starting in terms of planning what you might do this year.
Speaker 1: And I've got the ideal guest to give us a
Speaker 1: steer basically as an investor, how to approach that. A
Speaker 1: couple of other things I want to talk about as well.
Speaker 1: It was very interesting, I thought this week to see
Speaker 1: Joe Biden step down. What I mean by that is
Speaker 1: it was very interesting to see someone at that age
Speaker 1: where time had basically caught up with them. They resisted
Speaker 1: that in an unfortunate way, and then of course they
Speaker 1: were humiliated really and forced to stand down. And I
Speaker 1: wonder as an investor many people will will ultimately face
Speaker 1: the same problem, or their parents will face the same problem.
Speaker 1: And at what point do you let go? And how
Speaker 1: would you know when to let go? I want to
Speaker 1: talk about that too, because it's a really interesting topic.
Speaker 1: My guest today is Hugh Robertson of Centaur Financial Services.
Speaker 1: He's a regular on the show. He's always going to
Speaker 1: talk to. He is sitting this morning in some splendor,
Speaker 1: I might say. I can see him. He's in Brisbane
Speaker 1: and I can see out his office window, and I
Speaker 1: gotta tell you it just looks fantastic. What are those
Speaker 1: What are the name of those hills that I can
Speaker 1: see out your window?
Speaker 2: Hugh, that's the great divide in range, James. But it
Speaker 2: is with Don on the Gold Coast today, and that's
Speaker 2: just the hinter land, right.
Speaker 1: That's one of the most beautiful places in the world,
Speaker 1: isn't it really.
Speaker 3: We are very blessed, very lucky.
Speaker 1: Yeah. And I see the other thing I see is
Speaker 1: blue sky, which I must say looks so good this
Speaker 1: morning as well, because I'm not seeing any I can
Speaker 1: tell you out of my window. Now we talk about
Speaker 1: Biden in a minute. But original idea we had thrashed
Speaker 1: out in having you on the show. I want to
Speaker 1: do firstly, which is about setting up for the year
Speaker 1: ahead as an investor, really, unless you did something really
Speaker 1: wrong or you were awfully unlucky, you've probably had a
Speaker 1: damn good year. In the year to June. You can
Speaker 1: see that all the big super funds have had a
Speaker 1: very good year, and they're talking eight percent and eight percent,
Speaker 1: you bet. I think most investors would have got that
Speaker 1: at least. And on the share market, I'm betting that
Speaker 1: anyone who had a decent share portfolio, their return was
Speaker 1: in the teens. If you happen to own an investment property,
Speaker 1: it probably did eight or nine percent. If you owned one,
Speaker 1: and it probably did twenty percent plus a lot of numbers.
Speaker 1: Going the right way, you can still get five percent
Speaker 1: government guaranteed in cash. It's like a what they call
Speaker 1: a Goldilocks environment in many ways for investors. But what
Speaker 1: I want to ask you, Hugh, is if I were
Speaker 1: sitting in your office and I was saying to you,
Speaker 1: what should I do this year? What should I be
Speaker 1: aware of? How are you guiding people at the moment.
Speaker 2: It's a great question and very topical. As we're doing
Speaker 2: our reviews with our clients. This is these are the
Speaker 2: conversations and if you go back sort of twelve months,
Speaker 2: we were going to have a hard landing. Remember that
Speaker 2: was the narrative. It's we've gone from a hard landing
Speaker 2: to a soft land into no landing. Everyone who's confusing
Speaker 2: us with pilots at the moment, and it's a difficult
Speaker 2: terrain to navigate because you are the information is changing
Speaker 2: very quickly, so you've really got to be proactive in
Speaker 2: your decision making and not take big bets. I feel
Speaker 2: that we've seen where people have gone wrong is they've
Speaker 2: taken a big bet. It might be that we think
Speaker 2: interest rates are going to go down substantially, so we're
Speaker 2: going to put all of our fixed interest portion of
Speaker 2: our portfolio into long duration bonds as an example, And
Speaker 2: if you did that, you would have definitely been impacted
Speaker 2: negatively over the past twelve months. So when the facts change,
Speaker 2: our views need to change. And if we're going on
Speaker 2: under the current assumption that no landing scenario and everything's good,
Speaker 2: there is some geopolitical risk out there in the world.
Speaker 2: There is who would have thought would be doing a
Speaker 2: podcast saying that someone tried to assassinate Donald Trump. So
Speaker 2: there's some uncertainty out there, and in times of uncertainty,
Speaker 2: you diversify so that you want to stay in your
Speaker 2: large caps internationally and domestically, maybe entertained some small caps
Speaker 2: because of the valuation divergence evaluation gap as at a
Speaker 2: historically high level. And I feel not chasing last year's winners,
Speaker 2: that Magnificent seven, A lot of people now want to
Speaker 2: get into that maybe the time's too late, or if
Speaker 2: you did want to get in very small exposure. I
Speaker 2: feel even post COVID, it's just been a very different
Speaker 2: investing regime, so you've got to not get too confident
Speaker 2: that you're a stock picking guru. And I can tell
Speaker 2: you that the majority of fund managers we spoke to
Speaker 2: over the past twelve months have been bearish on financials,
Speaker 2: and for the financial year twenty three twenty four, financials
Speaker 2: delivered thirty percent yet a lot of managed funds and
Speaker 2: professional fundmations.
Speaker 1: So they've been bearish on financials and they've been completely wrong, right.
Speaker 3: Yeah, And they were bullish on resources, which.
Speaker 1: You know, which kind of tells us no one actually
Speaker 1: knows what's going to happen next. But because they have
Speaker 1: an extraordinary thing locally at least, so we have the
Speaker 1: common Went Bank just basically carrying the locomotive basically in
Speaker 1: the market one hundred and thirty dollars extraordinary price, number
Speaker 1: one bigger stock in the market now comfortably bigger than BHP,
Speaker 1: and all the top ten full of banks, all four
Speaker 1: of them in there, plus Macquarie. Okay, so just develop
Speaker 1: that a little bit about big bets. Would you say
Speaker 1: that every year anyway here?
Speaker 2: Yeah, yes I would, And I feel ass allocations becoming
Speaker 2: more important to the everyday investor. If you imagine your portfolios,
Speaker 2: you've probably never been wealthier for the listeners out there
Speaker 2: in terms of house price, are their superannuation or in
Speaker 2: a non superinvestment portfolio with that, but it really starts
Speaker 2: to come with some much needed discipline and some strategy
Speaker 2: around how you allocate your capital. What we mean by
Speaker 2: that is if you want to take a if you
Speaker 2: want to make a move to going back to that,
Speaker 2: rebalancing your portfolio into some bonds, maybe taking some equity exposure,
Speaker 2: or maybe selling some of your banks. Let's go with
Speaker 2: selling some of the banks, don't sell the whole exposure.
Speaker 2: Maybe you sell it off over four installments for five installments,
Speaker 2: you know your dollar cost average on your way into
Speaker 2: investments and your dollar cost average your way out. That way,
Speaker 2: if the facts change and financials have a run, you're
Speaker 2: not left naked and alone. So I think that's where
Speaker 2: that's probably the one difference in conversation of to what
Speaker 2: we used to have, where we might make a ten
Speaker 2: percent out of one investment into another. Now it's usually
Speaker 2: a bit smaller and we do it over a few
Speaker 2: more periods.
Speaker 1: Okay, So caution there all the way. When you were
Speaker 1: tell me, it's just a little bit more about what
Speaker 1: you were trying to say about big bets and rates.
Speaker 1: There was an assumption that rates would drop. There was
Speaker 1: an assumption in the US at rates would drop, particularly
Speaker 1: and here you're not convinced with that assumption any longer.
Speaker 2: Yes, I feel that we were led by the Federal
Speaker 2: Reserve and the Reserve Bank and the quote unquote experts
Speaker 2: giving us direction and consensus views. And I think we
Speaker 2: had US rates were going to go down six times
Speaker 2: in calendar year twenty four, and Aussie rates might have
Speaker 2: been going to go down three times, if memory serve's
Speaker 2: right at the start of the year, and todate we
Speaker 2: haven't had rates go down in either, And in fact,
Speaker 2: it looks like within Australia, rates actually may go.
Speaker 1: Up, So.
Speaker 3: You can't.
Speaker 2: You shouldn't as an investor, you shouldn't make your investment
Speaker 2: decision based off that economic forecast or that consensus view.
Speaker 2: You've got to make it based off what you need
Speaker 2: personally in your portfolio and how much down downside risk
Speaker 2: can you take. And I feel people have tried to
Speaker 2: use macroeconomic indicators maybe a little bit too much to
Speaker 2: predict what's going to happen with markets. We saw that
Speaker 2: over the last couple of years with the magnificence or
Speaker 2: even just tech stocks in general. You know, they got
Speaker 2: hammered in what was that twenty two and so then
Speaker 2: a lot of people weren't in them at all when
Speaker 2: they recovered in twenty three, and when they did get
Speaker 2: into them eventually, you know that already gone up.
Speaker 1: They had done this amazing run. Yes, yeah, as people
Speaker 1: forget that, the entire lift on the markets driven by
Speaker 1: the US, the entire lift on the US driven by
Speaker 1: the big tech stocks, the entire lift in the big
Speaker 1: stocks substantially driven by a company called Nvidio, which no
Speaker 1: one had heard of a couple of years ago, being
Speaker 1: an AI stock. I read for it was responsible for
Speaker 1: one third of the lift to one third of the
Speaker 1: lift of the US market, and the US market is
Speaker 1: seventy percent of the world, so you could extrapolate there,
Speaker 1: and it's really quite stunning. Looking at another point you
Speaker 1: made there, I just wanted to tease out that a
Speaker 1: little about small caps. What are you leading to there
Speaker 1: about small caps and if the theory is that small
Speaker 1: caps are due their day and that they lagged to
Speaker 1: some extent, that they'll run now behind the large caps,
Speaker 1: this is their phase. If that's the case, first of all,
Speaker 1: is that what you're thinking? And secondly, how would an
Speaker 1: investor listen to the show get in on the action?
Speaker 3: Great question.
Speaker 2: If you look at traditionally, small caps would have a
Speaker 2: greater upside than large caps, and it's a greater reward
Speaker 2: and therefore we have greater risk. If you look over
Speaker 2: the past few years, the divergence in terms of valuation
Speaker 2: between the large caps versus the small caps has never
Speaker 2: been greater. And what that means from our perspective is
Speaker 2: that it's worth looking there. And I think within the
Speaker 2: past week we saw small caps global small caps go
Speaker 2: up about ten percent. I know for the month of July,
Speaker 2: they are up about ten percent.
Speaker 1: Yeah, they've had a suddainly had this hotter on, haven't
Speaker 1: they just this last few weeks? Yeah?
Speaker 2: Yeah, And this was off the back of again the
Speaker 2: forecasts around Okay, it's not going to be a recession,
Speaker 2: so it's almost like risk is back on the table.
Speaker 2: People are willing to take risk again. And the NA videos.
Speaker 2: Every large cap company started as a small cap company,
Speaker 2: and you've got now when there was a chart released
Speaker 2: by JP recently as talking about the relative pe gap
Speaker 2: and it's never been larger. So what that's telling you
Speaker 2: is that small caps are cheap and you don't need
Speaker 2: a lot right for that to go well because it's selling.
Speaker 2: Some of them are at a price to earnings ratio
Speaker 2: of eight to ten times, and their earnings, like their
Speaker 2: earnings yield is ten percent right now, so they don't
Speaker 2: need to necessarily even make a lot more money for
Speaker 2: the share price to go up. It could just be
Speaker 2: that the price to earnings ratio reverts to normal and
Speaker 2: there's you know, there could be a substantial return on
Speaker 2: investment there.
Speaker 1: Okay, So yeah, I didn't quite realize that it's not
Speaker 1: just that they are due there d but that they
Speaker 1: are the pricing of the small cap stocks is actually
Speaker 1: behind the eirport in terms of the rest of the market.
Speaker 2: Yes, and on all historic sort of tangibles. I know
Speaker 2: that the data that I was looking at was from
Speaker 2: just going back fifteen fifteen plus years, and on the
Speaker 2: chart you've had that the small caps had never been
Speaker 2: never been cheaper. And that also makes sense in a
Speaker 2: way too. During a recession and if people are scared,
Speaker 2: small caps will go down further, and because people will
Speaker 2: leave that space and go into large caps, which by
Speaker 2: theory are safer. So it makes sense why it has
Speaker 2: been that way over the past few years. People have
Speaker 2: been a bit scared and they've been able to put
Speaker 2: their money into From a global perspective, Microsoft, Google and
Speaker 2: those big businesses that aren't going to go broke. But
Speaker 2: now there's the opportunity there to maybe exploit some of
Speaker 2: those up and coming businesses that are the future leaders
Speaker 2: that are outside those sort of top one hundred two
Speaker 2: hundred companies on the Australian Stock Exchange or globally.
Speaker 1: Well, so if I was with you and folks, it's
Speaker 1: we're telling you that he was a regular invariably in
Speaker 1: the upper reaches of our Tough Financial Advisors list that
Speaker 1: we release every year with Barons. He's also one of
Speaker 1: the younger advisors at the upper reaches of that list.
Speaker 1: So if I was looky enough to be sitting in
Speaker 1: your splendid office and we were both gazing out over
Speaker 1: the Gold Coast hinterland on a lovely morning, and I
Speaker 1: said to you, that's all fine, Hugh, how do I
Speaker 1: go near small caps? Even in the Australian market, it's
Speaker 1: probably roughly two thousand small caps, of which perhaps a
Speaker 1: few dozen are going to be great, But how do
Speaker 1: I find them or how do I approach that area
Speaker 1: as an investor.
Speaker 2: We've got the rise and rise of exchange traded funds,
Speaker 2: is the answer to that. So you've got a lot
Speaker 2: of options and even there's active active exchange traded funds
Speaker 2: now online. So I feel you want to you do
Speaker 2: want to diversify, because you only need if you are
Speaker 2: called Tesla back a few years ago, as it was
Speaker 2: having its meteoric rise, it was exceeding ten percent of
Speaker 2: it went up one hundred percent or something or even
Speaker 2: more over the year, so she needed some discipline there.
Speaker 2: So a portfolio manager that was sort of taking profits
Speaker 2: routinely off the table just to manage risk. But you
Speaker 2: could go in exchange traded funds they've got, there's small
Speaker 2: cap index funds, there's small cap active managers. If you're
Speaker 2: a client coming in to our office, we would want
Speaker 2: to We think that small caps usually aren't as well
Speaker 2: researched as the large caps, so there is an advantage
Speaker 2: for a skilled manager to add value there, to find some.
Speaker 1: A staff picker can really add value on like.
Speaker 2: Picking, definitely in small companies which aren't as well covered
Speaker 2: as large ones and emerging markets. I think that the
Speaker 2: evidence and the academic research has always shown.
Speaker 1: That even in our own market, who I would imagine
Speaker 1: that's the case, isn't it. There's some really good small
Speaker 1: caps that basically no one the brokers don't look at them,
Speaker 1: no one ever visits them. They don't get covered in
Speaker 1: the papers in the Australian, you don't read about them
Speaker 1: right because they just can't get out there to them all.
Speaker 1: But there are managers that specialize in literally going out
Speaker 1: and sitting in front of these people and studying them. Yeah.
Speaker 2: Yeah, And I think those managers have got some great
Speaker 2: track records that with a little bit of research.
Speaker 3: You could feel quite.
Speaker 2: Confident there, and then what are we talking about allocation
Speaker 2: wise of your portfolio. It's probably only a maximum of
Speaker 2: five percent of your portfolio would then go into that manager.
Speaker 2: We're still trying to manage risk, but we're trying to
Speaker 2: get that manager really to all that investment strategy of
Speaker 2: small caps really to add a benefit. That five percent
Speaker 2: exposure could still add a good benefit if it goes
Speaker 2: well to the whole portfolio, whereas if it doesn't go well,
Speaker 2: then it hasn't hurt too much. And I think when
Speaker 2: I was looking at the June thirty numbers, just at
Speaker 2: the ax the two hundred accumulation next did twelve point
Speaker 2: one and the small lords. So the small caps did
Speaker 2: nine point three, so it was catching up. But over
Speaker 2: three years IX two hundred delivered six point four and
Speaker 2: small caps was negative one point five.
Speaker 3: So you can say that there's opportunity there.
Speaker 1: Okay, So if we get a reversion to the mean,
Speaker 1: then they should have their day. Very interesting. Okay, Hey,
Speaker 1: we will take a break and we will come back
Speaker 1: and talk about something quite different that we allude to
Speaker 1: at the start of the show. Hello, and welcome back
Speaker 1: to the Money Puzzle Podcast. I'm James Kirby. I'm talking
Speaker 1: to Hugh Robertson, and it's been an amazing couple of weeks,
Speaker 1: that's for sure. It matters. It always matters if you're
Speaker 1: an investor, especially in share markets. Folks. We just lemming
Speaker 1: like really follow the momentum at least of the US markets,
Speaker 1: and if they're going well, we're going well. And if
Speaker 1: they're not going well, we are not going well. And
Speaker 1: that is unavoidable and has been the case for as
Speaker 1: long as anyone can remember. Hence the importance of US
Speaker 1: national economy news, Hence the importance of the assassination attempt
Speaker 1: on Trump, the big sympathy vote he's going to get
Speaker 1: on the back of that, the increased chances and assumption
Speaker 1: actually that he will win. Now, adding to that, then
Speaker 1: we had this week, we had finally, and probably too late,
Speaker 1: Joe Biden resigning as a sitting president as such, because
Speaker 1: everyone finally the pressure came to him that he was
Speaker 1: not so much too old. I don't think that's the
Speaker 1: accurate word at all, but his condition, if you like,
Speaker 1: and his ability to operate at the level expected of
Speaker 1: a president, it's simply not there. And became terribly obvious
Speaker 1: at the worst possible time in the US presidential debates
Speaker 1: and in press conferences, etc. And what may meant impressure
Speaker 1: on me was I was just thinking about investors. The
Speaker 1: same thing will happen to a lot of investors. And
Speaker 1: if it doesn't happen to them that who are listening now,
Speaker 1: it could be happening to their parents at the very
Speaker 1: same time. And there's a point at which many people
Speaker 1: will have to think about throwing in the towel, just
Speaker 1: like Biden did, tell me about this area first of all,
Speaker 1: about the issue as it comes across your desk and
Speaker 1: what do you do.
Speaker 2: This is extremely common conversations nowadays, and it's a great
Speaker 2: way of framing the question. Watching Biden and how he's
Speaker 2: gone over the past few weeks and conducted himself, you
Speaker 2: don't think he could really be.
Speaker 3: The leader of a world powerhouse.
Speaker 2: And it's the same sort of analogy of people that
Speaker 2: have made a lot of money during their working career
Speaker 2: and they've got a pretty good financial powerhouse right now,
Speaker 2: and how do we make decisions going forward. There's more
Speaker 2: noise than ever, it's more fusing than ever. The volatility
Speaker 2: seems greater than ever. And I remember a stat once
Speaker 2: years ago that I read that it was to the
Speaker 2: extent of every year after the age of sixty, you
Speaker 2: lose about two percent of your financial literacy capability. And
Speaker 2: when you play that out, you go, okay. There's a
Speaker 2: lot of people who are sixty right now who they're fine,
Speaker 2: they've only lost two percent, But after ten years they've
Speaker 2: lost twenty percent, and you start to go okay, Now
Speaker 2: that starts to become a little bit problematic.
Speaker 3: By eighty five, they've lost fifty percent.
Speaker 2: And the challenge is from an investment perspective, is that
Speaker 2: everyone's going to live longer than they expect. We sort
Speaker 2: of benchmark how long our parents lived as to our
Speaker 2: life expectancy, but we're all we're living longer. The people now,
Speaker 2: the retirees now, are going to live longer than their parents.
Speaker 2: I think we've now got actually a negative life expectancy
Speaker 2: for people being born today. So from that perspective, you
Speaker 2: really want to make sure you've got good discipline around
Speaker 2: what you do. And I think it's necessarily just a
Speaker 2: buy and hold approach. If you look at Commonwealth Bank shares,
Speaker 2: which we just talked about previously, everyone just holds them
Speaker 2: because they'll never go down, they'll never do anything poor.
Speaker 2: But that doesn't mean there's not an opportunity cost of
Speaker 2: holding that and other assets doing better or protecting your estate.
Speaker 3: And I think when I.
Speaker 2: Think about if someone like Biden was managing their money,
Speaker 2: they just wouldn't know where it all is either. So
Speaker 2: I think there's a really important aspect of and not
Speaker 2: saying that people necessarily have to deal with the utilized
Speaker 2: professional advisors, but I think they definitely get the peace
Speaker 2: of mind benefit of that.
Speaker 1: Can I ask you just even separate to the sort
Speaker 1: of pure scientific research that says that sort of drop
Speaker 1: in in literacy, which might be relevant, but then you're
Speaker 1: talking about some people who are highly literate financially really
Speaker 1: smart and capable, so they've got a long way to drop.
Speaker 1: But I what I want to ask you is more
Speaker 1: than that. It's about attitude, like attitude to risk. For instance,
Speaker 1: do you think that changes as people become advanced stalledage?
Speaker 3: Yes, I.
Speaker 2: Think there's risk capacity and there's risk tolerance. What's someone's
Speaker 2: capacity for risk? Obviously people with high net wealth can
Speaker 2: take more risk, but then what's their tolerance to risk?
Speaker 2: So that's where you really come back to that goals
Speaker 2: based advice and what people are trying to achieve, and
Speaker 2: you work it towards the goals. I think more than
Speaker 2: ever now, as we're allocating capital for clients, we're doing short, medium,
Speaker 2: and long term buckets and that's got very different risk
Speaker 2: return profiles, income profiles, and that's something that's proven really
Speaker 2: appropriate with the clients, and it's meant that just even
Speaker 2: that if the listeners imagine having those three different buckets
Speaker 2: of wealth, you know that what you're allocating in your
Speaker 2: long term bucket that's meant to be volatile, but that's
Speaker 2: going to keep pace with inflation. It's going to mitigate
Speaker 2: longevity risk by continuing to go up in value even
Speaker 2: though it's going to be more volatile your medium and
Speaker 2: for that we've been using index options. We feel that's
Speaker 2: quite appropriate. And maybe if we break it off twenty
Speaker 2: percent of the portfolio into that longevity where we don't
Speaker 2: necessarily mind the volatility of an index and we're happy
Speaker 2: to and it's low cost, so that works well, then
Speaker 2: you've got sixty percent in that middle term bucket and
Speaker 2: that's managed more actively because we're really trying to manage
Speaker 2: that downside risk and take advantage of opportunities they emerge, and.
Speaker 3: That's a very diversified portfolio.
Speaker 2: And then you've got your short term bucket, which is
Speaker 2: really your fixed interest, your hybrids, your credit, some bonds,
Speaker 2: and I think if listeners fill their portfolios that way,
Speaker 2: it gives you three different you're very clear on which
Speaker 2: bucket is doing what job for you.
Speaker 1: Can I ask you one thing for a practical thing
Speaker 1: for people who are managing their own money, or I
Speaker 1: suppose the ultimate example of that being self managed super funds.
Speaker 1: What happens if someone had a super fund, they started
Speaker 1: it in their thirties or forties, it did well, They
Speaker 1: was proud of how they did it, doing fine. They
Speaker 1: get older, they get to eighty or seventy five or
Speaker 1: eighty five or whatever, and something happens, right, something pragmatic happens,
Speaker 1: there are some health issues or whatever, or even they
Speaker 1: just find it all too hard. They're just fed up
Speaker 1: of the documentation, they're fed up of the cybersecurity, et cetera.
Speaker 1: Because one of the things was running a self managed
Speaker 1: super fund. And I have noticed, even over the twenty
Speaker 1: years I've had mine is level of documentation that I
Speaker 1: am asked to do the slightest damn thing, Especially once
Speaker 1: you move outside conventional funds, it's just utterly tiresome. And
Speaker 1: I could see a d where perhaps depends on the rewards.
Speaker 1: I suppose if I'm knocking it out of the park
Speaker 1: every year, and I say, all right, that's the price
Speaker 1: you pay. But what I'm leading to is where someone
Speaker 1: just says, I'm really I've had enough. I've got plenty,
Speaker 1: and I'm tired of the stress and strain and work
Speaker 1: of running my own money. Problem is the person is older, right,
Speaker 1: what can they do? Can they turn around and say
Speaker 1: can they call a big super fund and say can
Speaker 1: I join you?
Speaker 3: Absolutely?
Speaker 2: And I feel that's appropriate for a lot of people
Speaker 2: as they get older, whether they want to get their
Speaker 2: kids into self made super fund, so the intergenerational wealth
Speaker 2: is playing a more active role, and as they slowly
Speaker 2: sort of exit through, they might if there's lumpy assets
Speaker 2: in the self made super fund, for example, you might
Speaker 2: bring the kids in and then the kids kind of
Speaker 2: contributions going in is what's funding the parents exit out
Speaker 2: with pension payments and or if you if it was
Speaker 2: all liquid when you were you could sell it all
Speaker 2: a couple of it's all in pension phase. You sell,
Speaker 2: you can roll it all over and there's no tax
Speaker 2: on there because you're in pension phase. A couple of
Speaker 2: gainst tax free, and you could roll over into a
Speaker 2: super fund. Then you don't have any of the trustee
Speaker 2: responsibilities and you just get your regular pension payments. You
Speaker 2: can do a reversionary pension nomination to your spouse if
Speaker 2: you want, or you can leave it to the estates.
Speaker 2: I feel a lot of people that were in self
Speaker 2: made super funds, we see that, you know, in their eighties,
Speaker 2: they don't really want the hussle of things. They just
Speaker 2: want simplicity in their life in every area, and they
Speaker 2: don't want to leave a big mess for their family
Speaker 2: as well, So you really work hard over the years.
Speaker 2: Usually the first step will be that they will relinquish
Speaker 2: control over the investment strategy and they'll engage someone like
Speaker 2: us to say, hey, can you run the money for
Speaker 2: us and allocate it because we just we don't have
Speaker 2: the time nor the care to read about it. And
Speaker 2: they might say, you know, we want to keep the
Speaker 2: Westpac shares though, because we've had them forever, but they
Speaker 2: don't want to when I'm eighty. I'm not sure that.
Speaker 3: I'm going to be wanting to manage my own money.
Speaker 3: I'm going to want to.
Speaker 2: Look at like the day we've got outside here, i
Speaker 2: want to be out walking the beach and having a
Speaker 2: coffee with my wife and seeing grandkids. So I feel
Speaker 2: from that perspective that listeners and people being aware that
Speaker 2: you can actually roll up, wind up the self managed
Speaker 2: superfund and roll into an industry superfund or a retail
Speaker 2: superfund or in some instances, James, we will just put
Speaker 2: into their bank accounts.
Speaker 3: So that way, if there's.
Speaker 2: A taxable component within the super we've wiped out the
Speaker 2: death tax that we don't talk about in Australia.
Speaker 1: The defacto inheritance tax that's applied a supervins if the
Speaker 1: person when the person dies, if it goes to the
Speaker 1: adult children. Yeah, that's basically it isn't it. Yeah, seventeen percent.
Speaker 1: We I'm sure you know about this, folks. If you don't,
Speaker 1: and we can come back to with another time, let
Speaker 1: me know in the emails. Okay, we have to go
Speaker 1: for a break and we will do some questions back
Speaker 1: in a moment. Hello, and welcome back to the Australian's
Speaker 1: Money Puzzle. I'm James Kirby talking to Hugh robertson regular
Speaker 1: guest on the show. We're having a really good discussion
Speaker 1: about some very interesting issues. We just covered the issue
Speaker 1: there provoked ily like are prompted by the Joe Biden resignation,
Speaker 1: which is at what stage do you throw in the
Speaker 1: towel as an investor? And you might say I'm never
Speaker 1: going to throw in the towel, but you might change
Speaker 1: your mind when you're easy, or you might change your
Speaker 1: mind when you're fifty five, a reason that I can't
Speaker 1: tell you, but it's worth knowing that you can move
Speaker 1: across and if you had a certain managed superfund, you
Speaker 1: can actually pick it up and you can switch back
Speaker 1: into institutional investment. And it's nice to know that. I
Speaker 1: have a couple of questions, Hugh. Could I put a
Speaker 1: question if you don't mind, could I give you? Could
Speaker 1: I ask you a question without notice? The only reason
Speaker 1: I wanted I've just remembered that I promised on Monday
Speaker 1: we had a question we couldn't answer about CGT couldn't
Speaker 1: answer fully and I'd just like to know what your
Speaker 1: broad observation is on it, would you mind if I
Speaker 1: read it out? Even though I didn't it didn't send
Speaker 1: it to you in advance. It's from a listener called
Speaker 1: Beryl b. E Ryl. She says, I purchased an apartment
Speaker 1: which I lived in for five years, and then I
Speaker 1: moved out, and I've been renting it for twenty years, okay,
Speaker 1: and I'm looking at moving back into it. And I've
Speaker 1: heard that if I moved back into it and lived
Speaker 1: there for the rest of my life, that those inherit
Speaker 1: who this property will not pay CGT if they said it,
Speaker 1: is it true that after all the years I rented
Speaker 1: out that property and the CGT liability is wiped out? Beryl,
Speaker 1: I said, And I wanted the second opinion on this,
Speaker 1: but I said, whatever else is going on, and this
Speaker 1: is never advice, and this is information only to all
Speaker 1: the barrels in the world world that if a property
Speaker 1: is rented out for a couple of years, then it
Speaker 1: was an investment property and for those years that it
Speaker 1: was rented out, it's an investment property and the CGT
Speaker 1: would be applicable to that. Is that? Am I right
Speaker 1: or wrong? But do you know.
Speaker 3: That's my understanding.
Speaker 2: We had a client this week in the office that
Speaker 2: I one hundred percent agree with you, And we had
Speaker 2: a client this week in the office that said, no,
Speaker 2: there's something about pro rata, and there's something about this.
Speaker 2: My understanding is that for the time you live in it,
Speaker 2: it's PPR, you do always get there is that window
Speaker 2: of time where you're allowed to not live in it
Speaker 2: and still claim it, that six year window. But if
Speaker 2: you've rented it out for twenty years, my understanding is
Speaker 2: that when you moved out of it, it ceased to
Speaker 2: be your PPR, and you would your principal place of
Speaker 2: residence and then you would have assigned effectively a value
Speaker 2: of that. So from that first five years you lived
Speaker 2: there that was capital gains tax free. Then there's all
Speaker 2: my like a reset of the cost space over that
Speaker 2: twenty years from what it was at the start when
Speaker 2: you rent out valuation wise to what it was when
Speaker 2: you moved out. Then you would get your CGT discount
Speaker 2: on that as well, and then the period that you
Speaker 2: moved in at the end, whatever that went up by
Speaker 2: that would be your principal place for residence exemption. Again
Speaker 2: assuming that yeah, she's that's my understanding.
Speaker 1: So yeah, it would seem the years that it was
Speaker 1: rented our CGT applicable years, it would seem because it
Speaker 1: was rented for twenty years.
Speaker 2: Yeah, and if the account had gone back to me,
Speaker 2: I could have given you the exact answer right now.
Speaker 3: But they haven't got back to me. So hope, I
Speaker 3: think seventy percent confident.
Speaker 1: All right, Well, we've tried twice, and I think you
Speaker 1: will find the chances that CGT free after renting it
Speaker 1: for twenty years are slim. Indeed, I think that would
Speaker 1: be fair to see as a very broad observation about
Speaker 1: that type of situation for everybody, not just one person. Okay,
Speaker 1: Now some quick questions and we'll roll through. There's quite
Speaker 1: a couple of interesting questions here, Jared says. Roger Montgomery
Speaker 1: has promoted it, and a recent art good by Tim
Speaker 1: Buam has encouraged it. Private credit and private credit funds,
Speaker 1: so there's probably some bad private credit groups out there.
Speaker 1: How does a newcomer get a chance to look at
Speaker 1: the providers and undertake analysis? Whoa Jared, I don't know,
Speaker 1: because ASSEK this morning, Joe Longo, the chairman of Asked
Speaker 1: this Morning, is saying, Hey, hang on a second, this
Speaker 1: private credit we're not totally on top of it. We
Speaker 1: want to see more though it's all the fashion at
Speaker 1: the moment. Have you any if I come into you
Speaker 1: you and I said, hey, I don't have private credit.
Speaker 1: I'm reading about it everywhere. All these people seem to
Speaker 1: be making lots of money and there's piles of new funds.
Speaker 1: Would you say, hold on, James, I don't like this
Speaker 1: at all, or would you say, I have a suggestion.
Speaker 1: What would you do?
Speaker 2: We don't use private credit, and that's not to say
Speaker 2: we never would. The challenge is there's a lot of
Speaker 2: different conflicting conversations. So private credit will come here out
Speaker 2: and say, look, banks aren't lending anymore. So that's what's
Speaker 2: given prominence to us, which is great, and you need lending,
Speaker 2: and we're very selective. We underwrite all of our deals
Speaker 2: and we're very good with it. So you definitely need
Speaker 2: to be very active in that space and choosing a
Speaker 2: very capable manager so you are looking at track record.
Speaker 3: One of the challenges I see.
Speaker 2: With it, and this takes me back to GFC days,
Speaker 2: Global Financial Crisis days, and the challenge that I have
Speaker 2: with it is if all this money flows in because
Speaker 2: you're saying we're going to pay you eight to ten percent,
Speaker 2: ten to twelve percent. All the money's flowing in, those
Speaker 2: guys have to keep finding deals to make then, so
Speaker 2: my concern becomes, do those deals start to get a
Speaker 2: little bit looser and looser just to make sure that
Speaker 2: they're employing the client the investors' money to generate that
Speaker 2: income that they've promised.
Speaker 1: Yes, I really like the way you're thinking, and that's
Speaker 1: exactly instinctively how I would think the same thing. If
Speaker 1: it's a boom area. Okay, and it is, and there's
Speaker 1: piles of funds being leashed unleashed, then by definition the
Speaker 1: mathematics are simple. There are only so many private credit
Speaker 1: deals out there. And ten years ago, I bet it
Speaker 1: was great. Even five years ago it must have been terrific. Okay,
Speaker 1: But now there are so many fund managers running around,
Speaker 1: and if they all collect lots of money to go
Speaker 1: and enter this business, then guess what. They can't sit
Speaker 1: there and do nothing. They have to do deals. They
Speaker 1: have to invest for you. The problem is there's ten
Speaker 1: other funds that want to invest. Hey, guess what happens?
Speaker 1: It gets bid up, just like the house around the
Speaker 1: corner at the auction on a Saturday morning, and so
Speaker 1: the valuations, which are not as transparent as share market valuations,
Speaker 1: we could become a problem. Is that some of what
Speaker 1: you're alluding to.
Speaker 3: Yeah, very much.
Speaker 2: So it's a trade case carefully area. I don't disregard it,
Speaker 2: and we're looking at it often to meeting with managers
Speaker 2: and talking to it. But it's it reminds me of
Speaker 2: the mortgage funds back in global financially, and I'm not
Speaker 2: saying it is like that, but it just it rhymes
Speaker 2: with the things like that and some of the stories,
Speaker 2: and I'm just cautious. If we went into a recession,
Speaker 2: there could be really difficult times. If interest rates continue
Speaker 2: to rise, there could be different So it's not I
Speaker 2: think the point for me is it's.
Speaker 3: Not an alternative to a term deposit.
Speaker 2: It is very much a sits as in the risky
Speaker 2: side of your portfolio. Doesn't mean it's not good, but
Speaker 2: just you've got to you want someone that's very well
Speaker 2: diversified in that space. They're big, they're diversified. It does
Speaker 2: mean that you're going to get slightly less income some
Speaker 2: of these things that some are saying twelve percent, some
Speaker 2: are saying ten, some are saying eight. For me, just
Speaker 2: understanding risk and reward, I'd more align myself to the
Speaker 2: eight percent one because you know, for them to make
Speaker 2: their money, if they're paying you twelve percent, what they've
Speaker 2: got to be earning fifteen percent. So if I'm a
Speaker 2: borrow wife, if I'm borrowing and I've got to pay
Speaker 2: fifteen percent, I'm high risk by nature.
Speaker 1: That's right. If they're paying you ten and they have
Speaker 1: to get a few percent themselves, and what on earth
Speaker 1: are they lending to? Whom are they lending? Who is
Speaker 1: in the position that they're so bad basically that they
Speaker 1: must pay those rates. That's what you have to think about. Okay,
Speaker 1: terrific answer, Thank you very much. And the other issue is,
Speaker 1: of course, if things go south, as you mentioned, how
Speaker 1: do you get your money out? Okay? And okay, So
Speaker 1: them are listed on the share market, but hey, you
Speaker 1: know there's a basic oxymoron there. Private credit listed on
Speaker 1: the share market. It's not private. It's not private. It's
Speaker 1: not private anymore of it's public market. Come on. Okay, now,
Speaker 1: as a technical question from Stephen though, it's interesting because
Speaker 1: it's Frank dividends. I have a listed investment companies that
Speaker 1: aren't doing great are paying partially franked dividends instead of
Speaker 1: fully franked dividends. I assume it's because their profit reserve
Speaker 1: has dwindled. I do not understand where the unfranked part
Speaker 1: of the dividend comes from. Okay, what did you think
Speaker 1: of that question? Hue from Stephen.
Speaker 2: So Stevens writing, sort of the profit reserves dwindling if
Speaker 2: you went, like a few years ago, they were paying
Speaker 2: like ridiculous amounts of dividends. The listed investment companies so
Speaker 2: different from listed investment trusts that have to pay out distributions.
Speaker 2: Listed investment companies get to choose what they pay out.
Speaker 2: So what I was thinking of with the unfranked part
Speaker 2: of the dividend is probably international shares that have come through.
Speaker 2: You know, there's some of those things won't have the
Speaker 2: franking attached to them, whereas if it was a Shawan
Speaker 2: share fund that's or listed investment company that's invested in
Speaker 2: all in bank shares, that would typically be fully franked.
Speaker 2: So that that's the only thing that I thought of.
Speaker 2: There's you know, Stephen was riding his the profit reserves
Speaker 2: is what they're using to pay and they get to
Speaker 2: set there so they don't need to because it's a company,
Speaker 2: they don't need to pay out all the income they receive,
Speaker 2: so usually they will. They like it to be fully franked,
Speaker 2: but it's not a condition, and you just have to
Speaker 2: go in and read the company's and your reports to
Speaker 2: find out. It's hard to find information on franking credits,
Speaker 2: but it is. We see it's very valuable to investors.
Speaker 2: But he'd have to look in the annual report.
Speaker 1: So Stephen, if it had two stocks and one was
Speaker 1: one hundred percent Australian focused, come by bank did nothing
Speaker 1: else for Australia, then it's one hundred percent franked. But
Speaker 1: if the other one was a minor see and they
Speaker 1: had ninety percent of their operations around the world outside Australia,
Speaker 1: then they'd never be able to get one hundred percent
Speaker 1: franking in here the domestic market. That's generally the explanation,
Speaker 1: not always, but that would invariably be the explanation. Okay,
Speaker 1: final question from lil. Could you provide listeners with information
Speaker 1: on investment bonds also known as insurance bonds for what
Speaker 1: might be an alternative option if you're looking for tax
Speaker 1: efficient structures. It comes up all the time. I've had
Speaker 1: advisors who will not touch these bonds, hate them. I've
Speaker 1: had advisors who say, look, they're okay. Again, it's often
Speaker 1: put forward as an alternative to SUPER. So what I
Speaker 1: would say, what everyone has said so far, for what
Speaker 1: it's worth listeners, is get your super sorted out first,
Speaker 1: because that's the best tax break from most people most
Speaker 1: of the time. But the insurance of the investment bonds,
Speaker 1: could you explain to you what they are and why
Speaker 1: someone might want one in our market and there and
Speaker 1: their pros and cons if you could.
Speaker 3: You're right.
Speaker 2: A lot of advisors to discredit the investment bonds are
Speaker 2: insurance bonds, and I know a lot of the advisors
Speaker 2: that appear on this podcast that do so. From the
Speaker 2: point of view in its simplicity, the insurance bond, it's
Speaker 2: a friendly society bond that comes under sort of insurance
Speaker 2: law as opposed to investment law. So it's internally taxed
Speaker 2: at thirty percent, but then it's CGT three after ten
Speaker 2: years or in the event of death. Then the investment
Speaker 2: component you get to choose a host of different investments.
Speaker 2: So this is where with all the superinnuation changes. The
Speaker 2: last few years, insurance bonds have tried to have a
Speaker 2: bit of a resurgence as the Super two point zero
Speaker 2: once you can't put any more into Super sho exactly right, James.
Speaker 2: You utilize super first, then whatever's not there goes into
Speaker 2: an insurance bond. Challenges have been that they can be
Speaker 2: a little bit expensive and the investment options haven't traditionally
Speaker 2: been that great, so most people would say, look, we'd
Speaker 2: prefer to put it into a trust because remembering that
Speaker 2: death doesn't constitute a capital gains tax event, so if
Speaker 2: you had it in a trust with your children's beneficiaries,
Speaker 2: you wouldn't have to sell everything and you could easily
Speaker 2: do that intergenerational wealth. As in terms of where's the
Speaker 2: tax efficiency, it's debatable because you could have around one
Speaker 2: hundred and eighty thousand dollars a year before you're at
Speaker 2: that average tax rate of thirty percent. It certainly kicks
Speaker 2: in with the marginal tax rates, but your average tax
Speaker 2: rate is pretty high. Level of income earned, a lot
Speaker 2: of investors might be better off investing in their own
Speaker 2: names and then passing the money on.
Speaker 3: But the good thing.
Speaker 2: One thing that's probably little known about insurance bonds that
Speaker 2: is pretty unique outside of the souper is that you
Speaker 2: can switch the investment options without capital gains tax. So
Speaker 2: if you think if you had been in a tech
Speaker 2: a fund that had tech exposure over the past twelve months,
Speaker 2: it's done really great, And you say I want to
Speaker 2: rebalance my portfolio, You're not going to have to pay
Speaker 2: capital gains tax on that, whereas if if it was
Speaker 2: in your personal portfolio, you probably wouldn't sell because of
Speaker 2: the capital gains tax. So I think it's definitely worth
Speaker 2: looking at.
Speaker 1: Yeah, that's useful. I can I ask you one last thing.
Speaker 1: It's a big difference between you must hold for ten years?
Speaker 1: Is that right?
Speaker 3: That?
Speaker 1: Have I got that right to optimize it?
Speaker 2: If you die, it's okay, if you die, it goes
Speaker 2: through capital gains tax free.
Speaker 1: We have you assuming you say a lot.
Speaker 2: Yes, So the investment component it starts to kick in
Speaker 2: pro rated discounts in year eight and nine.
Speaker 1: Okay, So you really have to this a long term thing,
Speaker 1: right you really want to be thinking eight nine, ideally
Speaker 1: ten years plus.
Speaker 2: Yeah, And I know, yes, absolutely, And I know a
Speaker 2: few of the product providers are really going out there
Speaker 2: trying to produce information now as an estate planning vehicle.
Speaker 2: We certainly haven't seen a lot of traction for it
Speaker 2: at this point in time because the other aspect that
Speaker 2: we're seeing right now is if you're going to get
Speaker 2: an inheritance from your parents and say you're forty or
Speaker 2: fifty years old, right now, the first thing you should
Speaker 2: be doing is putting that money off your mortgage, and
Speaker 2: then if you have more more money, then maybe it's
Speaker 2: topping up super So they haven't really needed the benefit
Speaker 2: of a bond or a trust. It's and I think
Speaker 2: with that Intergenerational Wealth Report, I think we might have
Speaker 2: touched on this last time. I think the government's really
Speaker 2: going to crack down on more ways to get tax
Speaker 2: revenue out of deceased estates. There's thought there on rather
Speaker 2: than doing something for a state planning wealth transfer purposes,
Speaker 2: giving the money now to your kids and helping pay
Speaker 2: off the debt, mortgages and things like that might be.
Speaker 1: A yeah, that's a really good answer. Yes, that's really
Speaker 1: worth thinking it through. Little so they look they have
Speaker 1: their advantage. Just be careful with the sales talk on
Speaker 1: that stuff. Think about what you need first. Think about
Speaker 1: the fact that what else is out there as Hugh says,
Speaker 1: is there a mortgage debt that's not tax deductible? Just
Speaker 1: whole mortgage debt? Going to get that first superinnuation contributions
Speaker 1: because that's speet and then you can get into the
Speaker 1: blue sky if you're looky enough to even consider the
Speaker 1: products of that nature. This again is information only, but
Speaker 1: this is as you can see, a repeated line of
Speaker 1: a repeated view on the show from Top Advisors and
Speaker 1: always worth listening to. Okay, hey, we're running out of time.
Speaker 1: Thank you very much, Hugh. That was great. We really
Speaker 1: rolled around there, lots of different subjects. Thanks a lot you.
Speaker 3: Thank you very much for having me. It's been great.
Speaker 1: We'll have you on the show again. All right. That
Speaker 1: was Hugh Robertson folks of Centaur Financial Services, and he
Speaker 1: is one of the top advisors in the land regularly,
Speaker 1: as they say, ranks high on the top advisors list.
Speaker 1: I'd love to have some more questions or comments sentiment.
Speaker 1: The email is the Money Puzzle at the Australian dot
Speaker 1: com dot au. Talk to you soon.