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Money Australia - May 2018

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REAL ESTATE
MAX THE TAX PERKS
BLOCKCHAIN TECHNOLOGY
19 ASX-LISTED STOCKS TO WATCH
SPECULATIVE BUYS
3 SHARES UNDER $1
EFFIE
ZAHOS
21 THINGS I’VE
LEARNT OVER
21 YEARS
MAY 2018 $7.95
moneymag.com.au
ISSUE 211
@MoneyMagAUS
Paul
Clitheroe’s
answers
HOW SHOULD
I INVEST $106K
IN SHORT/MED
TERM?
PETER
$70K IN
PERSONAL
DO WE SELL
DEBTS. WILL
OUR OLD HOME I EVER BUY
OR RENT IT OUT? A HOME?
ANDREA
CLAIRE
PLUS PAUL REVEALS
FINANCIAL INVESTMENT
• WORST
• VIEWS ON OVERSEAS MARKETS
INVESTING OVERSEAS: DIRECT v ETFs v MANAGED FUNDS
SEPTEMBER 25 2017 AUST $4 50
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USS
UDE&GUARANTEED TO
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weekly
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BACHELOR MATTY J
Nic & Keithh share
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Over after
a
Meet the woman he’s
really in love with
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George finally reveals
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Nic & Keith share
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‘I MADE A TERRIBLE
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German invader takes on Holden’s home grown hero
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THATTORE
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SHARE INSIGHTS: WHY 2ND LEVEL TH NKERS BEAT THE MARKET
THE BUSINESS OF DYING: GOODBYE FOR AS LITTLE AS $1500
HEALTH INSURANCE: YOUR 10 KEY QUEST ONS ANSWERED
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CONTENTS
34
20
48
COVER STORY
INTERVIEW
OLDER CHILDREN
Q&A – Paul Clitheroe’s
answers
Co-founder of Community
Power Agency, Jarra Hicks
What they can do to gain
financial independence
ON THE COVER
34
42
58
66
70
80
Paul Clitheroe’s answers
21 things Effie Zahos has learnt
Real estate tax perks
Blockchain stocks to watch
Investing overseas
Speculative buys
UPFRONT
6
8
10
12
16
20
24
26
30
Editor’s letter
Our experts
In your interest: Paul Clitheroe
News & views
In brief
Interview: Alan Deans
Ask the experts
Ask Paul
Smart spending
MY MONEY
42
46
48
50
51
52
53
54
54
Financial lessons: Effie Zahos
21 lessons in 21 years
Rental cars: Nicola Field
Insurance options compared
Older children: Alex Moffatt
Shopping: Effie Zahos
Rent v buy
Banking: Effie Zahos
Family money: Susan Hely
Small business: Anthony O’Brien
What if...: Annette Sampson
The challenge: Maria Bekiaris
Disclaimer: The information featured in this magazine is general in nature and does not take into account your objectives, financial situation or needs. You should consider the appropriateness of the information having regard to your own circumstances. Before making an investment, insurance or financial planning decision you should consult a licensed professional
who can advise you of whether your decision is appropriate. Bauer Media does not have an interest in the promotion of any company, investment or product featured in this magazine.
Who will be Money magazine’s 2018 Bank of the Year?
What about Home Lender of the Year?
For the 14th year Money will reveal the financial
institutions providing customers with top value in 13
key categories.
ALL WILL BE REVEALED IN THE JUNE ISSUE ON SALE MAY 31
4 MONEY MAY 2018
MAY 2018, ISSUE 211
62
74
88
OVERSEAS BUYS
CAST A WIDE NET
FACT OR FICTION
10 questions on international property answered
The best and worst
ETF performers
New column ponders the
death of buy and hold
PROPERTY
A-REITs: Pam Walkley
Top 5 prospects
Deductions: Tyron Hyde
Max the tax perks
Overseas property
10 questions answered
Real estate: Pam Walkley
56
58
62
65
66
68
70
74
IN EVERY MONTH
7
89
90
mm0518_cover_nobar
SHARES
INVESTING
77
78
79
Privacy notice
Databank
The hot seat
Blockchain: Susan Hely
Stocks to watch
Superannuation: Susan Hely
Labor’s imputation crackdown
Going global: Vita Palestrant
Direct v ETFs v managed funds
ETFs: Tony Kaye
Round-up of the best and worst
At large: Ross Greenwood
Super: Vita Palestrant
SMSF solutions: Sam Henderson
80
82
84
85
86
88
Strategy: Greg Hoffman
Risky stocks on the radar
Intelligent Investor: John Addis
A look at Coles
Outlook: Shane Oliver
This month: Marcus Padley
Value.able: Roger Montgomery
Fact or fiction: Scott Phillips
2018-04-1
REAL ESTATE
MAX THE TAX PERKS
SPECULATIVE BUYS
3 SHARES UNDER $1
LOGY
BLOCKCHAIN TECHNO
TO WATCH
19 ASX-LISTED STOCKS
EFFIE
ZAHOS
21 THINGS I’VE
LEARNT OVER
21 YEARS
MAY 2018 $7.95
moneymag com.au
ISSUE 211
@MoneyMagAUS
Paul
Clitheroe’s
answers
HOW SHOULD
I INVEST $106K
IN SHORT/MED
TERM?
PETER
SAVINGS & GIVEAWAYS
2
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PAGE 91
$70K IN
PERSONAL
DEBTS. WILL
DO WE SELL
OUR OLD HOME I EVER BUY
A HOME?
OUT?
IT
RENT
OR
ANDREA
CLAIRE
PLUS PAUL REVEALS INVESTMENT
FINANCIAL
• WORST
TS
VIEWS ON OVERSEAS MARKE
•
Tv
INVESTING OVERSEAS: DIREC
ETFs v MANAGED FUNDS
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MONEYMAG.COM.AU
MONEY MAY 2018 5
FROM THE EDITOR
Lessons about life and money
“I
don’t care too much for money, and
money can’t buy me love.” If you’re a
Beatles fan you’ll recognise these words from
their 1964 smash hit Can’t Buy Me Love. I
read with interest that when Paul McCartney
was asked by journalists to explain the song’s
meaning in 1966, he said that “all these material possessions are all very well, but they
won’t buy me what I really want”.
So true, but as Marcus Padley points out in
his column some of us require a little hindsight
to learn this. With typical Padley humour he
says: “As I look back, I have realised that, apart
from children, cars are perhaps the worst
investments I have ever made.” It appears the
1980s for Marcus was all about fast cars – no
fewer than 15 of them.
How much richer do you believe you could
have been with financial hindsight? I know that
if I applied everything that I have learnt since
I joined the Money brand 21 years ago, from
the day I got my first pay, I’d be in financial
bliss. Don’t get me wrong; I’m doing fine. But
like Marcus I probably wasted a decade of
money-making opportunities.
Fortunately, as our cover story this month
shows, not all Money readers need a lesson in
hindsight. As our financial guru Paul Clitheroe
notes in his annual Q&A session, “What I do
love is a distinct shift towards questions from
younger readers”. Whether young or old, it’s
really never too late to build your fortunes; it’s
just harder if you leave it later.
This year our readers even got to ask Paul
Contact us
To send a letter to the editor,
write to
Money, GPO Box 4088,
Sydney NSW 2001 or email
money@bauer-media.com.au
Feedback
Letter of the month
Gift for the future
For all inquiries and letters, please
include name, address and phone
details. Letters may be edited for
clarity or space. Because of the
high number of letters received, no
personal replies are possible.
LITHIUM DS
CANNABIS,
T TREN
BITCOIN, ON INVESTMEN
VERDICT
208
.
E
CHALLENG
SAVINGS YOU SAVE?
8 WEEK
CAN
HOW MUCH
4 WAYS TO
PAY FOR
SCHOOL FEES
CAREER
BREAKS
COSTING
YOU $159,5
90
ment bonds
• invest
funds
• managed funds
tion
• educa
loan
• home
nts
offset accou
US
50
PAUL
INVESTING 8 THEMES
TO ACT ON
REAL ESTATE PROS & CONS OF
HOLDING ONTO FIRST HOME
INTELLIGENT INVESTOR
20 LESSONS FROM 20 YEARS
$300k
SUPER
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Why downs
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APRIL 2018 $7 95 ISSUE 210
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PAM WALKL
WHAT $100K
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CLITHEROE
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BUYING A
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ATE GUIDE
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WITH JUST $50
On Sunday morning I grabbed my latest
copy of Money and took up the offer of
the 12-month subscription as a gift for my
adult nephews.
They are hard-working boys and making
great decisions to build their wealth for the
long term. I’m so proud of them.
My inspiration? I’d literally come from
the deathbed of a dear friend. While he
fought for every breath his wife said, “I
need to sell my car – I don’t know how I’ll
pay for the funeral.” I’ve found trusted specialists who will help with the car sale and
a broker to negotiate their mortgages.
I may not be able to help this family
as much as I wish, but I know with the
learnings and insights that will come from
Money magazine my nephews will never
experience my friends’ horror situation.
Susan, email
How to get Money
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Call: 136 116
Online: magshop.
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6 MONEY MAY 2018
Not all areas are booming
I am so tired of reading about the “property
price boom”, now the “slowdown” and a possible “price crash”. Rarely in any article is it mentioned that not all of Australia boomed! We in
Western Australia have been going backwards
for years.
It is self-presumptuous of writers to assume
all readers are in the eastern states. It alienates
us. Although we have come to expect this
blind self-involvement from Sydney and Melbourne, it would be lovely if the editor could
add a token “although not all areas of Australia
have experienced price growth”. Not all of us
are sitting back marvelling at our equity; many
of us here are counting our losses.
Catherine, WA
Ed’s note: As Terry Ryder highlighted in our
February issue: “If you do come across this
kind of coverage, which generalises about
Australia as a single market, ignore it.” Where
articles permit we do cover all states and territories but I do hear what you are saying.
Donations eaten up
I have just read the letter from Patrick regarding “Charity doesn’t have to begin at home”
(March issue). While I applaud his sentiments
I do hope he researched the charity to which
he has signed over his $100 a month. So much
of well-intentioned donations are eaten up in
administration fees, sometimes more than
90%. I am appalled at how sometimes so little
gets to the actual intended organisation.
As the charity to which he has made the
wonderful donation is not mentioned, it is not
known how much of his money actually reaches the needy.
Miri, NSW
a few questions like “What’s the worst financial decision you’ve made?” Nice to read that
Paul is only human and that he too has had
some money woes.
On the subject of advice, it is very disappointing to hear what is coming out of the
banking royal commission. As we were heading to the printers, financial advisers were in
the spotlight. Dodgy financial advice provided
to consumers by the big banks and wealth
planners still appears to be rife. Consumers
being charged fees for services that weren't
delivered and receiving inappropriate advice
and improper conduct by an adviser were just
some of the findings. While there are certainly
great financial advisers, these findings will do
little for consumers’ trust in the industry.
One of the most asked questions I get
is, “Do you know a good financial adviser?”
There’s certainly no shortage of financial
advisers – numbers have increased by nearly
40% from around 18,000 in November 2009
to more than 25,000. But as the royal commission heard, less than half of them have
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told the regulator they hold a relevant university degree. Stricter education guidelines are
coming in on January 1, 2019.
Effie Zahos,
Editor, Money
magazine
Visit Money online
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you’re there sign up for our free
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moneymag.com.au
Don’t tell me what
you value,
show me your
budget, and I’ll
tell you what you
value.”
JOE BIDEN, US POLITICIAN
PRIZE WORTH WINNING
Each month we’ll award one letter a
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Write to:
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MONEY MAY 2018 7
OUR EXPERTS
What is the
last thing you
splurged on?
The Money
team
EDITORIAL
Chairman & chief
commentator
Paul Clitheroe
Editor Effie Zahos
Deputy Editor
Maria Bekiaris
Art Director
Ann Loveday
Designer
Heather Armstrong
Senior Sub-editors
Bob Christensen,
Janice Hogg
Senior Writers
Susan Hely, Pam Walkley
Online Content
Producer
Sharyn McCowen
CONTRIBUTING
WRITERS
John Addis, Alan
Deans, Nicola Field,
Ross Greenwood,
Sam Henderson, Greg
Hoffman, Tyron Hyde,
Tony Kaye, Alex Moffatt,
Roger Montgomery,
Anthony O’Brien, Marcus
Padley, Vita Palestrant,
Scott Phillips, Annette
Sampson, Mark Story
CONTRIBUTING
ARTISTS
Reg Lynch, Rob Shaw,
Jim Tsinganos, John
Tiedemann, Richard
Whitfield
PHOTOGRAPHS
Getty Images
8 MONEY MAY 2018
ADVERTISING
National Brand &
Partnership Manager
Isabella Severino
(02) 8116 9389
Brand Executive
Melanie Savvidis
(03) 9823 6382
PRODUCTION
Controller
Carly Zinga
Advertising Production
Dominic Roy
MARKETING
Brand Manager
Gemma Harland
Subscriptions
Ellie Xuereb
PAUL CLITHEROE
TYRON HYDE
SCOTT PHILLIPS
Paul has been the chairman of Money magazine
since its launch. Paul says:
“Vicki, my wife, had a special birthday not too long
ago. Despite my dislike
of jewellery due to huge
mark-ups and hopeless
resale value, I bought a
lovely pair of wholesale
diamonds and had them
set as earrings. She loves
them, which is far more
important than money.”
Tyron is the CEO of Washington Brown Quantity
Surveyors. Tyron says:
“The last thing I splurged
on was a new Callaway
driver. I should’ve invested
my money in golf lessons
instead as it hasn’t helped
my game!”
Scott is general manager
at the Motley Fool. Scott
says: “I’m a sucker for
gadgets in general, and
mobile phones in particular, so it didn’t take me
long to buy a Google Pixel
2 XL. Made by Google, it’s
not cheap, and probably an
indefensible purchase, but
I love it.”
NICOLA FIELD
TONY KAYE
ALEX MOFFATT
Nicola is a former chartered accountant and
Money contributor. Nicola
says: “Inspired by images
of a well-groomed Aussie
parliamentarian jogging
in London, I splurged on a
pair of 2XU running pants.
At $95 they cost five times
more than my normal
jogging shorts. Were they
worth it? No. I’m still managing a shuffle at best.”
Tony is the editor of
InvestSMART. Tony says:
“Call it growing old disgracefully, but my Easy
Rider instincts finally got
the better of me (again)
just recently when I
‘invested’ in a Suzuki GSXS1000F motorcycle. My
strategy is to hold on, as
tightly as possible, for the
longer term.”
Alex is a wealth manager
at Joseph Palmer & Sons.
Alex says: “Dinner at
Riccardo’s Trattoria, a
fabulous Italian restaurant in Albert Park. My
favourite meal is the white
anchovies, but you need
to book ahead!”
MANAGEMENT
CEO Paul Dykzeul
Chief Financial Officer
Andrew Stedwell
Commercial Director
Australia Paul Gardiner
Syndication inquiries:
acpsyndication@
bauer-media.com.au
ISSN 1444-6219
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when we have not honoured a redemption request on time due to a lack of liquidity.
IN YOUR INTEREST Paul Clitheroe
There’s only
one Warren
Buffett, so ignore
any ridiculous
claims that you
too can achieve
huge returns
I
was watching some clown on TV the
other night banging on about earning
15% on your investments. Normally
I would fast-forward through the advertisements but given it was about money
I thought I’d watch. The salesperson was
making a pretty good pitch about simply
following in the footsteps of legendary US
investor Warren Buffett. Now, I have no
problem with this. Thanks to the Money
TV show, I spent three days in Omaha
some years ago tagging along with and
filming the legend.
He is known for his common sense. One
of his earliest investments was Coca-Cola.
He figured the population would grow and
they would drink lots of the stuff. He was
right. This has been his strategy ever since.
He did not invest in the dotcom boom of
the late 1990s, saying “it makes no sense to
me”, but stuck to “old-fashioned” companies that made money.
So following a commonsense view works
for me. But why will this give me 15% a
year? According to the cheery chap on the
TV ad, I would learn to invest like Buffett
and I would also average over 15% a year.
Sounds good.
The only problem is that he is pretty
much unique. Millions of people globally
try to “invest like Buffett” and fail. It is not
that easy. So if you want to invest like
Buffett, just buy shares in his company
Berkshire Hathaway and you will be investing just like Buffett. In fact, exactly the
same! I don’t need a TV ad to tell me that.
The next problem is that historical returns are no guide to the future.
Let’s take a decent chunk of money, say
$200,000, and earn 15% a year. Let’s say we
are aged 30. Our money will double every
10 MONEY MAY 2018
4.8 years – let’s just call it every five years.
So at age 40 we have $800,000; at age 45 it
is $1.6 million. By 60 it has doubled three
more times and we have $12.8 million. At
70 it is $51.2 million. As we get to our life
expectancy at 80 or so, the kids will be
very happy with our $204.8 million. If our
30-year-old lived to 100 they would have
$3.27 billion. In fact, they would have quite
a lot more, as I have only been doubling the
$200,000 every five years, not 4.8 years.
I think you get the point.
Such is the power of compound interest
that 15% a year will make you a billionaire
over many decades. Even starting with
$50,000 would just about make a 30-yearold a billionaire by 100. Gift $50,000 to a
newborn child and they will have $1 billion
by about 70.
So clearly this “invest like Warren Buffet
and make 15% a year” is a load of hogwash.
We’d all be billionaires. Yes, he is a billionaire, at about $84 billion at last count. But
he is the only person who has invested like
Buffett, and he may not in the future.
You know the real problem with all this
high-return crap that is flogged by investment promoters is that it makes us forget
the truth. The truth is that most of us will
work hard and invest intelligently and earn
closer to 6%–7% on our money, before fees
and tax. I actually do have a long-term
over-15%-a-year investment. My dad, a doctor, bought $2000 of shares in the float of
Commonwealth Serum Laboratories (CSL)
in 1994. I mention that Dad was a doctor as
he could see the key role of blood plasma.
I did not know what blood plasma was. He
left half of these to me and half to my sister.
They have certainly averaged better than
15% a year. Shame it was not my idea!
I also have any number of dog investments, which I pretend do not exist. Anyway, even including my dad’s insight, I am
nowhere near averaging 15% across my
portfolio, and nor will I ever get there.
But back to the truth. Promises of potential high returns blind us to the truth. The
truth is that our wealth will come from
saving. If we save enough in our super,
paying off our home, buying a few shares or
an investment property or building a business of our own, we can slowly but surely
build wealth at the returns available to all
of us. But, believe me, the number is not
15%. Try half of that.
I am really sorry about this but if we fail
to become financially independent as we
get into our 50s, 60s and 70s, we may well
look back and blame not getting that 15%.
Yes, I know, bad things happen to good
people and some of us will have every right
to point out illness, divorce and misfortune.
But for most of us the truth will be more
mundane. We just did not save enough.
Paul Clitheroe is Money’s chairman and
chief commentator. He is also chairman
of the Australian government’s Financial
Literacy Board and a best-selling author.
NEWS&VIEWS
THIS MONTH
THE BUZZ
Let’s clean up lending
This is a great opportunity to tackle unfair practices
T
he banking royal commission began its second round
of public hearings last month
and if the first sessions are
anything to go by big changes
are coming to banking and insurance. The first round focused
on consumer lending practices,
covering mortgages, car loans,
credit cards, junk insurance and
account errors.
The commission explored the
experiences of consumer advocates and real people as well as
industry. The first witness was
Karen Cox, from the Financial
Rights Legal Centre, which
provides free assistance to
people struggling with debt. Cox
detailed how irresponsible lending and crippling debt were putting people at risk of bankruptcy,
homelessness and suicide.
Four Australians also bravely
shared their personal struggles
with the impact of pushy sales,
irresponsible lending and bad
products. They included Nalini
Thiruvangadam, a single mother of two, who described how
she’d missed rent payments and
pawned jewellery to make car
loan repayments.
Robert Regan, a widowed
pensioner with an acquired brain
injury, spoke about relying on
charities for food after being given a $50,000 loan he eventually
lost to scammers and couldn't
afford to pay back.
Irene Savidis described being
pressured to sign up to a junk
insurance policy with her credit
card when, in fact, she wasn't
eligible to make a claim because
she was a stay-at-home mum.
Bank executives were taken
to task over a litany of problems,
including irresponsible lending,
fraud by intermediaries and
staff, poor dispute resolution and
hardship practices, and failure to
manage conflicts of interest.
One particular area of focus
was the conflict of interest
created by commissions paid
to mortgage brokers and
introducers. Documents produced by NAB relating to its
scandal-plagued home loan
Introducer Program summed up
the problem as follows: “The risk
and reward equation for bankers
was unbalanced in favour of
sales over keeping customers
and the bank safe.”
Many of the problems raised
during the consumer lending
hearings remain unresolved.
With an interim report due in
September, the inquiry provides
a unique opportunity to make
lending fair, through banning
mortgage broker commissions,
lifting broker standards, introducing tougher penalties for
non-compliance and improving
compensation for customers.
Katherine Temple, senior
policy officer, Consumer Action
Law Centre
ON MY MIND
CALENDAR
OF EVENTS
Tuesday, May 8
Federal budget
Thursday, May 10
Westpac consumer
confidence index
NAB business confidence
Tuesday, May 15
RBA meeting minutes
Thursday, May 17
Unemployment rate
12 MONEY MAY 2018
Ageing face of first timers
H
ousing affordability is
perceived as a millennial
plight. However, this assumption
might no longer hold true with
a growing number of older buyers
entering the property market for the first time.
ING research shows the average age of first
home buyers nationally has risen from 27 in the
early 1990s to 31 as of December 2017. The trend
is likely to continue as property prices outstrip
wage growth and people get married later.
Lenders will need to address the unique
obstacles that older borrowers face. We’re seeing
the minimum retirement age shift towards 67
and this is likely to rise over the next couple of
decades. With Australians working longer, then
longer loan terms may become a reality as older
borrowers juggle mortgage repayments and other
household expenses.
Under the responsible lending regime, borrowers
over 50 are required to show how they will meet
their loan repayments in retirement, or have
a solid exit strategy. I expect banks to loosen
the requirements of the exit strategy over the
next decade, allowing older borrowers to make
repayments from pensioner income or reverse
mortgage repayments.
Steve Jovcevski, property expert, mozo.com.au
NEWS BITES
Australia’s first digital “neobank”,
Xinja, has launched its first
product – a prepaid tap-and-go
card. The card has no ATM fees in
Australia or overseas and charges
a 3.5% international transaction/
FX fee. The card is being sent out
to Xinja’s wait list, made up of
consumers who have signed up
to be part of the development of
a new bank in Australia.
BetaShares is taking on Vanguard for
Australia’s cheapest exchange traded
fund. For a fee of 0.07% a year, you’ll
be able to buy into the BetaShares
Australia 200 ETF (ASX code has not
been confirmed).
Red Energy has teamed with the
Qantas Frequent Flyer program to
allow its customers to earn points
on eligible energy bills. Some
customers may be able to earn up
to seven points per dollar spent
on certain plans. Bonus points are
also available for new customers
and customers moving house.
Vanguard has introduced its first
actively managed ETFs – Global Value
Equity (ASX: VVLU) and Global
Minimum Volatility (VMIN). The fee is
0.28%pa on both.
Bank reform sorely needed
W
e’re all watching the financial services royal commission, impressed by the way the
commissioner and counsel assisting are working through such a
huge volume of material to find out what has gone
wrong and why.
The royal commission has made multiple potential findings of failures to comply with laws, regulatory guides and codes.
Part of its brief is to examine the adequacy of
existing laws and codes. While new laws may
indeed be necessary, an institution with a culture
that fails to comply with existing laws is not likely
to change in response to new ones.
Perhaps a better solution would be
a combination of:
more effective surveillance, supervision and enforcement by better-resourced regulators; and
finding ways in the regulatory
framework to encourage and reward
entities with a strong customer focus
and a strong compliance culture.
•
31%
of Aussies have been stung with a late payment
fee in the 12 months to February, according to
a survey by Pureprofile for Easy Bill Pay. Gen
X accounts for 17% of all late fees nationwide.
Of those surveyed 28% say not receiving
a reminder was the top reason they
paid late, 15% blame it on a busy
Mike Lawrence, CEO, Customer Owned
schedule while 13% say they
Banking Association, which represents mutual
misplaced bills.
banks, credit unions and building societies
•
MONEY MAY 2018 13
NEWS&VIEWS
THIS MONTH
BOOK OF THE
MONTH
DOWNLOAD OF
THE MONTH
WE STUDY
BILLIONAIRES:
THE INVESTORS
PODCAST
I
SLOW AND STEADY
John De Ravin, RRP $39.95
R
etired actuary John De Ravin has
compiled a list of 100 wealth-building
strategies for all ages.
There are ideas for teenagers and young
adults, tips for families with young children
as well as suggestions for pre-retirees
and retirees. The bulk of the strategies
outlined in the book are for families in the
wealth-building phase.
De Ravin says the book is not going to
teach you how to get rich quick but will
show you that getting a few things right –
even small things – can make a big
difference to your finances in the long run.
Five readers can win a copy.
t might be a US
podcast but it’s
still valuable for
Aussie investors.
The
behind many of
Th idea
d b
the episodes is that hosts
Preston Pysh and Stig Brodersen read and talk about the
books that have influenced
billionaires the most.
The pair typically talk about
Warren Buffett, Ray Dalio,
Stanley Druckenmiller, George
Soros, Charlie Munger and other financial whizzes.
That’s not all you’ll get,
though. Pysh and Brodersen
often interview successful
investors and business owners
to get their insights.
Some of the recent episodes
at the time of writing covered
topics such as the Bitcoin
debate, momentum investing
and private equity investing.
In 25 words or less, tell us your favourite
“simple” strategy for building wealth.
Send entries to Book of the Month, Money,
GPO Box 4088, Sydney NSW 2001 or
email money@bauer-media.com.au.
Don’t forget to include your name and
postal address. Entries open on April 30,
2018 and close on May 30, 2018.
TAX TIP
Beware overseas
capital gains trap
E
very year, thousands of Australians
move overseas, perhaps to take up a job
in a new country, to study at a foreign university or to retire somewhere with a lower
cost of living.
If you’re thinking of making the move, and
you’re wondering what to do about your
Australian home, you need to be aware of
a substantial new tax charge.
Normally when you sell your home any
profit you make is exempt from capital gains
tax (CGT). But under a change announced
in the last budget, foreign residents will no
longer be able to claim the CGT main residence exemption from May 9, 2017.
So if you go overseas permanently or for a
long period, cease to be tax resident in Australia and then decide to sell your Australian
home, you could be hit by a big CGT bill since
the entire profit (not just the bit that relates
to your non-resident period) will be taxed.
The one bit of good news is that foreign
residents who held property on May 9, 2017
will remain entitled to claim the exemption
where the property is sold by June 30, 2019.
This means that most people who are potentially affected will actually have just over
another year before the new rules apply.
If you’re going overseas for good, the
tip is to make sure you sell your Australian
home before you go (in which case the CGT
exemption will be fully available) or do so by
June 30, 2019.
MARK CHAPMAN, DIRECTOR OF TAX COMMUNICATIONS AT
H&R BLOCK. MCHAPMAN@HRBLOCK.COM.AU
SNAPSHOT Extra funds for the future
Proportion of superannuation contributions beyond
compulsory level by personal income PA (2018)
Under $25k
$25k to $49k
$50k to $69k
$70k to $79k
$80k to $99k
$100k to $149k
$150k+
2010
Average
20.8%
Proportion of superannuation
contribuutions beyond compulsory llevel
2011
PLOOLRQ
super members
contribute above
the compulsory
level.
2012
2013
2014
2015
2016
2017
2018
Source: Roy Morgan Single Source - 12 months ended January 2018. Base: Australians 14+ with superannuation currently making contributions.
14 MONEY MAY 2018
ASX CODE: A200
The Biggest 200
THE
SMALLEST
COST
BetaShares Australia 200 ETF
The world’s lowest cost Australian shares ETF *
· Invest in the largest 200 companies on the ASX in a single trade
· Ultra-low 0.07% management fees or $7 for every $10,000 invested per year
· Buy or sell A200 like any share
Find out more at betashares.com.au/a200
Important: BetaShares Capital Ltd (ACN 139 566 868 AFS Licence 341181) is the product issuer. Investors should read the PDS (available at www.betashares.com.au)
and consider their individual objectives, financial situation and needs and obtain financial advice before making any investment decision. An investment in the Fund
is subject to investment risk and the value of units may go down as well as up. A200 management fees include other ongoing Fund expenses, excluding transaction
costs of buying and selling the Fund’s investments.
*Source: Bloomberg, based on Expense Ratios of Australian shares ETFs traded in Australia or on overseas exchanges.
X MORE
MONEY
STORIES
ON P42-55
TOP
PROMOTIONAL
BONUS SAVINGS
ACCOUNTS
RaboDirect 3.05%
advertised rate, 1.80%pa
without bonus; HSBC
3.00% advertised rate,
1.60%pa without bonus;
BOQ 2.90% advertised
rate, 1.30%pa without
bonus; Citi 2.85%
advertised rate, 1.70%pa
without bonus; Bank of
Melbourne, BankSA,
St.George Bank (Qld,
Vic, WA, Tas, NSW)
2.85% advertised rate,
0.80%pa without bonus.
Source: Canstar as at
13-Apr-18.
16 MONEY MAY 2018
INTEREST RATES
How US moves hit
our hip pockets
George Lucas, CEO of Acorns Grow Australia
H
ow does all the
mumbo-jumbo
economic jargon
around the US
market affect Aussie hip pockets?
Why are we so focused on interest
rates here and in the US?
One reason is that interest rate
policy affects what we pay on
our mortgages. In Australia, most
mortgages are on variable rates.
There is no sign of inflation and
wages growth is tepid. This takes
the pressure off the Reserve Bank
to increase short-term rates. The
expectation is that they will remain
at current levels, maybe until 2019.
Fixed-rate mortgages, however,
are linked to the rate of three- to
five-year Australian government
bonds. These bonds are affected
by overseas interest rates and their
relative value compared with US
government bonds.
So expectations and market
moves in the US can affect the
rate we pay when we lock in a
fixed-rate mortgage. The US is at
full employment, wages growth is
picking up and the Federal Reserve
has begun increasing short-term
rates. This means we may have seen
the lows of fixed-rate mortgages
and those of us looking to lock in
rates for three to five years may not
get anything better soon.
Many commentators see rising
short-term rates in the US and flat
rates in Australia. Finance theory
tells us that in this environment the
Australian dollar should fall against
the US dollar. But it hasn’t.
Based on interest rate
differentials, you could argue that
the Australian dollar should be below
70¢ to the US dollar. But it isn’t.
The Australian dollar is also
driven by commodity prices, which
are doing OK, and is used by the
markets as a proxy for economic
growth in China, which is holding up
well. So for the Aussie dollar, interest
rate differentials are less important.
Sometimes pure finance theory
can’t explain everything.
Broadband gets up to speed
T
here have been mixed reports from consumers
about their NBN experience. Complaints about
broadband speeds are at a record high, says Teresa
Corbin, CEO of the consumer organisation ACCAN.
However, the results of the Australian Competition
and Consumer Commission’s speed-monitoring program
have been positive. It found that NBN broadband services
from iiNet, Optus, Telstra and TPG are now delivering
between 80% and just over 90% of the maximum plan
speeds in the evening busy hours.
Of concern, though, is the fact that about 5% of
monitored connections are delivering lower than 50% of
the advertised speed, says Corbin.
Only four retailers are mentioned in the ACCC’s report.
NBN plan speed delivered during busy period
iiNet
Source: ACCC
Optus
= benchmark level 60%
Telstra
TPG
Note: Busy period = 7pm to 11pm.
COMPILED BY MARIA BEKIARIS
MY MONEY
IN BRIEF
VACANCY RATES
How Airbnb hits
rental vacancies
Simon Pressley, head of research,
Propertyology
S
omething isn’t
adding up with
residential vacancy
rates. We believe that the emergence of Airbnb as an alternative
short-stay accommodation option
is having a significant influence on
the supply of property to long-term
tenants.
Four consecutive years of high
volumes of property investor transactions should result in oodles of
extra rental supply. And attractive
incentives to help first home buyers
in NSW and Victoria would normally
mean easing rental demand.
Under normal circumstances,
these trends would result in vacancy
rates rising significantly. But that
hasn’t happened.
We have observed a similar anomaly in parts of regional Australia. And
we think it’s no coincidence that the
common denominator among locations with an out-of-cycle tightening
of vacancy rates is tourism popularity – it’s the Airbnb effect!
Instead of adding investment
properties to the traditional (longterm) rental pool for local residents,
an increasing number of investors
are putting their properties up for
rent to short-term visitors such as
tourists and business travellers.
Airlie Beach in north Queensland
has seen vacancy rates plummet
from 7.5% to 1.5% over the two
years ending January 2018.
Other popular tourism
destinations to experience a significant rental tightening include
Mooloolaba (2.1% to 1.1%), Hervey
Bay (3.2% to 2.8%), Cairns (2.3%
to 1.8%), Orange (2.7% to 1.7%) and
Millionaires’ club booms
here are more property millionaires than ever before,
according to CoreLogic, which found that 16.1% of all
houses and 9.5% of all units sold nationally over the 12
months to December 2017 transacted with a price tag in
excess of $1 million.
Not surprisingly, at 23.8% of houses and 11.6% of units
the proportion of $1 million sales in capital cities was higher than in regional areas, with 4.6% of houses and 3.8% of
units selling for $1 million or more.
COMPILED BY MARIA BEKIARIS
T
Torquay (2.5% to 1.3%).
In Hobart, Australia’s strongest
property market by a long streak since
late 2016, short-stay popularity has
contributed towards skyrocketing
rents. A number of clients that Propertyology helped invest in Hobart before
the boom report their rental income
increased by up to 25% in the past
year alone.
39%
of first home buyers who took out
their mortgage in the past two years
received help from family members
to enter the market compared
with 25% who took out their
mortgage more than five
years ago, according to
RFi Group.
Sydney recorded the highest proportion of sales of at
least $1 million in 2017 with 49.3% of houses and 22.3% of
units hitting the magic number. This is more than double
the proportion five years ago when 18.8% of houses and
just 5.4% of units in Sydney reached $1 million.
CoreLogic says that with a number of capital cities
recording falls, and the premium sector of the market
hardest hit by falling values, we may see a decline in the
share of sales worth more than $1 million in 2018.
Million-dollar house sales
Million-dollar unit sales
Sydney
Melbourne
Brisbane
Adelaide
Perth
Hobart
Darwin
Canberra
0%
Sydney
Melbourne
M
Brisbane
Adelaide
Perth
Hobart
Darwin
Canberra
0%
Source: CoreLogic
2017
2012
10%
20%
30%
40%
50%
Source: CoreLogic
2017
2012
5%
10%
5%
15%
20%
25%
PROPERTY
IN BRIEF
X MORE
PROPERTY
STORIES ON
P56-65
TOP LOW-RATE
LOANS
Reduce Home Loans
3.39%pa, 3.40%pa
AAPR1; Mortgage
House 3.44%pa,
3.44%pa AAPR; Reduce
Home Loans 3.49%pa,
3.51%pa AAPR; Easy
Street Fin Services
3.49%pa, 3.51%pa AAPR;
Homestar Finance
3.49%pa, 3.52%pa AAPR.
Source: Canstar as at 13Apr-18, ranked by AAPR.
1
AAPR on $250,000 loan
for 25 years.
MONEY MAY 2018 17
XMORE
INVESTING
STORIES ON
P66-79
TOP AUSTRALIAN
SHARE FUNDS
BY 5-YEAR
PERFORMANCE
Bennelong
Concentrated
Australian Eq
(BFL0002AU),
17.3%pa 5-year return;
Macquarie Australian
Shares (MAQ0443AU),
15.2%pa 5-year
return; Grant Samuel
Tribeca Alpha Plus
(ETL0069AU), 14.4%pa
5-year return; Spheria
Opportunities
(WHT0025AU),
12.0%pa 5-year return.
Source: Morningstar as
at 31-Mar-18.
18 MONEY MAY 2018
DOWNSIZING
Couples
who benefit
the most
C
ouples with lower
downsizing. (See table.)
IMPACT OF DOWNSIZING
balances are likely
A key reason for the
STARTING BALANCE RETAIN HOME DOWNSIZE DIFFERENTIAL difference is the threshold
to benefit more from
$100,000
the federal government
for age pension eligibility.
$41,510
$69,269
$27,759
scheme that allows
“For a couple with a
$200,000
$47,505
$72,382
$24,877
Aussies aged 65 or
balance of $100,000,
$300,000
$53,139
$75,479
$22,340
over to downsize their
nearly half of the downsize
$400,000
$58,232
$79,035
$20,803
home and divert up to
proceeds, $285,500, would
$300,000 each into
not factor into the age
$500,000
$62,425
$82,694
$20,269
their super.
pension asset test, being
$600,000
$65,976
$86,302
$20,326
Modelling by global
under the threshold. On the
$700,000
$69,269
$90,268
$20,999
consulting and actuarial
other hand, for a couple
firm Milliman shows
with a starting balance
invested $600,000 of the proceeds
that a couple with just $100,000
over this threshold, all downsize
into their super, while those with a
in super could expect a $27,759
proceeds would reduce, or eliminate
starting balance of $700,000 would
boost in their real annual income
altogether, eligibility for the age
boost their income by $20,999 by
if they sold their family home and
pension,” says Milliman.
Goal posts keep moving
t’s no secret that people invest
differently based on their stage
in life as their goals change over
time. Robo adviser Stockspot,
which has compared the goals and
aspirations of different generations
of its clients, says the typical path
starts with building some basic
savings, then accumulating wealth
in working years and then spending
it in retirement.
It found that the most popular
portfolio for millennials was its
high-growth option while for gen
X it was the growth option, and
baby boomers most commonly
invested in a balanced portfolio.
Interestingly, US shares were the
most popular investment theme for
all three generations.
Older investors are keen on
shares that pay good dividends and
millennials are more likely to invest
with a social conscience.
I
MILLENNIALS
US shares
Global (non-US) shares
Australian socially responsible shares
GEN X
US shares
Asian large companies
Australian dividend shares
BABY BOOMERS
US shares
Australian dividend shares
Asian large companies
COMPILED BY MARIA BEKIARIS
INVESTING
IN BRIEF
AGRICULTURE
At last there are
signs of growth
Julian Beaumont, investment director,
Bennelong Australian Equity Partners
T
he agricultural
sector has been
a difficult one for
investors historically. Ag companies
have generally required significant
capital investment, produced low
returns on that capital and been at
the mercy of the weather, crop damage and price fluctuations. Reflecting as much, the largest ASX-listed
ag stocks – GrainCorp, Australian
Agricultural Company and Nufarm
– have been volatile but essentially
gone nowhere over the long term.
However, there has recently been
a renaissance in the opportunity set
for potential investors. Many of the
new breed of successful ag stocks
reflect Australia’s reputation for
“clean and green” quality produce.
Their success is not so much due
to Australia operating as the fruit
bowl for Asia; it comes down to
number of positive developments
have unfolded recently at jeweller Michael Hill International. The
most important has been the decision
to close its loss-making US stores and
downsize and reposition the sister
brand Emma & Roe.
Michael Hill’s founder once regarded the US as the ultimate prize but
he’s since admitted defeat. And Emma
& Roe initially aspired to be like Pandora but it’s now pivoting to be like
Lovisa, closing all but six stores.
By eliminating these losses,
Michael Hill’s profits will step up to
a higher plateau in the 2019 financial
year, after incurring around $20 million in closing costs this year.
Michael Hill has reached saturation
in Australia and New Zealand, where
it derives 86% of its profit. Canada
is performing well with revenue and
operating profits both growing 19%
COMPILED BY SUSAN HELY
A
a value-add in the form of a brand,
intellectual property or other unique
competitive advantage.
The most obvious examples have
been the infant formula stocks such
as Bellamy’s and a2 Milk, which
are selling their premium branded
products in increasing volumes and
at increasing prices in China and
elsewhere. Particularly in the case of
Bellamy’s, the market continues to
under-appreciate its pricing power
and market opportunity.
Likewise, Treasury Wine Estates
quickly sells out of its Penfolds
and other luxury wine brands at
ever-increasing prices. The Treasury
business, under its various corporate
forms, has been a losing investment
in recent decades. It has, however,
worked hard to grow demand and
reappraise the supply-demand equation with Dan Murphy’s and its other
retail and distribution customers,
and thereby regain pricing power.
Costa might seem like just a fruit
farmer but it has built a stronger
business through dominant market
positions, geographic diversification
and protected cropping. As well, it
has intellectual property that allows
it to produce quality berry varieties
with all-year-around availability, and
it is leveraging this offshore with
operations in China and Morocco.
These three stocks were the
standouts in the February reporting season, with first-half earnings
growth in each case of 25% or more
and positive stock price reactions.
We expect further attractive returns
as investors lose their old-school
bias against the sector.
SHARES
IN BRIEF
XMORE
SHARES
STORIES ON
P80-88
HOLD Michael Hill
The Intelligent Investor: Alex Hughes
RECOMMENDATION
BUY
HOLD
SELL
below
$1.00
up to
$1.50
above
$1.50
Source: Intelligent Investor;
price as at 21 Mar-18 close of business
HOLD at $1.12
in the most recent half. With half as
many stores as there are in Australia,
it suggests the Canadian network can
grow for years yet. But simple maths
shows that it’s hard to get total growth
when the smallest business is the only
one that’s growing.
As best we can tell, Michael Hill
is well managed and the insiders
undoubtedly have skin in the game.
But retail is risky so it pays to tread
carefully. Below $1, which amounts to
a PE ratio of 10 (after factoring in store
closure costs), the margin of safety
becomes adequate. At that price, investors would get a 10% earnings yield
(and a 5% unfranked dividend yield)
and low to mid single-digit growth.
But with the price hovering above
that we recommend you HOLD.
The Intelligent Investor is owned by
InvestSMART Group.
TOP FIXED
INCOME ETFS
($A) BY 3-YEAR
RETURN
Russell Australian
Select Corporate Bond
ETF (RCB) 2.80%pa;
Vanguard Australian
Fixed Interest Index
ETF (VAF) 2.25%pa;
BetaShares Australian
High Interest Cash ETF
(AAA) 2.23%.
Source: ASX as at 31Mar-18.
MONEY MAY 2018 19
INTERVIEW
STORY ALAN DEANS
Power
to the
people
P
Fact file
Jarra Hicks
Director and co-founder of
Community Power Agency. Age 33,
lives in Newcastle, NSW
lenty of savvy city folk are
saving on power costs by
installing solar panels and
batteries in their homes.
Loves “outdoorsy” activities like camping, cycling
But their country cousins are going one better. Upwards of 60
and rock climbing; she is also a belly dancer. Wanted
community renewable energy projects
to become an interior designer; first job was a
– mostly wind or solar – have sprung up in
receptionist at a hotel in Thailand, earning the
towns around Australia as neighbours pool
equivalent of 50¢ an hour. Has been
their cash to green their environment and
influenced by her mother Kathryn’s
make money. Yes, the two do go together. More
passion for sustainability and
projects are on the way.
the environment.
Perhaps the two best known are wind turbines
installed at Denmark, near Albany, WA, and Daylesford,
near Ballarat, Victoria. To show how the community
has embraced them, the two Daylesford turbines have
been named Gale and Gusto by local school kids. Buoyed
on climate change and generating local economic benby their success, the local co-op that is the owner has
efits. They have to stack up economically. The projects
since started a solar farm and is looking at micro hydro
that are up and running are paying returns better than
projects. It has also set up electric vehicle charging staa bank. Projects range from 4% to 10% rates of return.”
tions in league with the local council and community
There is one dark cloud, however. That is the ongoing
organisations, and together they have committed to
policy changes and uncertainties caused by fickle govmake the area a zero net emissions showcase.
ernment policy. “If, for example, the RET (renewable
Supporting this groundswell is Jarra Hicks, whose
energy target) was repealed, that would affect returns.
Community Power Agency (CPA) advises communiIt was affected by the removal of the carbon price, so
ties on setting up such schemes. She reckons there are
there is a whole bunch of community members putting in their money expecting the government to have
multiple reasons why they make sense.
“We have done national surveys to understand what
stable policies.”
is driving people on the ground,” says Hicks. “It is
But Hicks foresees a steady improvement in policy
a combination of community energy being a unique and
settings over time. “In NSW, ACT and Victoria, there
beautiful opportunity of building communities, being
are specific programs to support community renewable
energy. Victoria is the best example. They have estabpart of a transition to renewable energy, taking action
20 MONEY MAY 2018
ROB SHAW
lished a grant fund and regional power hubs, which have
capacity and resources to help communities get projects
off the ground. They are the main beacon of hope at the
moment. But even with the federal renewable energy
target, we see communities becoming really engaged.”
The upside for investors? “The biggest source of income
from a renewable energy project is the electricity that
you sell. All the costs are upfront. There are very low
ongoing costs. So from that sense it is very stable. You
put your money in, you can go down to the bowling club
and see the solar panels on the roof, you can see them
producing energy and it is pretty steady.”
Indeed, clubs are showing keen interest because they
use sizeable amounts of electricity to power refrigerators. On the NSW South Coast, Repower Shoalhaven
is a community co-op that is backing small local solar
installations. It raised $120,000 in 10 days from locals
for a 99kW solar installation on the roof of the local
bowling club. Hicks says that saved the club $4000 in
the first month alone and is expected to save $300,000
to $400,000 over the 10-year life of the project. Investors
have a projected rate of return of 7.86%.
“Generally, a group of passionate people will get
together either as an offshoot of an existing group or
because they have a common interest. It might start with
four or five people who get working on it and attract
others. Many start as not-for-profit groups, and for their
first project they might gather donations and install
panels on the roof of a kindergarten, a church or a hall.
It might only be 4kW or so, but it gives them a win, a
skill and builds up their reputation in the community
and membership base.”
MONEY MAY 2018 21
INTERVIEW
22 MONEY MAY 2018
Positive role ... a former activist,
Hicks decided to come up with
solutions rather than protest.
“Opposition arises
when local people feel
they have no say and
no benefit”
potato and strawberry farms and thatch-roofed
houses. Yet the locals don’t notice them, and
reckoned tourists were nutty for commenting
on something they saw as normal.
“What has been found all over the world
is that where local people are involved, have
some say in the project and benefit from it
then they support developments and do so
very strongly. Opposition arises when local
people feel there has been no engagement, that
they have no say and no benefit, yet they have
to live with the change in landscape which
they tend to love and are attached to. It’s not
about the turbines themselves.
It’s about how people go about
developing the projects.”
Hicks started working in the
community renewable energy
sector 10 years ago, when it was
in its infancy in Australia. She
focusedondevelopmentstudiesat
the University of Newcastle, first
with an honours degree and last
year completing a PhD. Her job
now involves developing business
models that can meet ethical
commitments as well as being
economically viable.
Shewasaclimatechangeactivist
at an early age but later changed
tack. “Nicky and I met as student
activists. We got sick of saying
no to things, protesting against something.
Instead, we said we wanted to help find solutions. Say yes to things.”
Hicks says she has long appreciated the value
of money, even as a young girl. “My parents
would give me pocket money, from the age
of about 7, and they always gave it to me in
notes so I had a sense of how much it was.
But I asked for it in coins then would spend
it really quickly because it would disappear
in dribs and drabs. I didn’t think much of
spending it a few cents at a time. So I switched
back to notes and didn’t spend it so quickly.
I was more aware of its value. To me, that’s
the lesson: that little bits add up.”
She puts her own money into renewable
energy projects. “I have invested in two of
them. I do that because I want my money to do
good in the world. It needs to make financial
sense but I think it’s really important that my
investments deliver a social and environmental
benefit as well as an economic benefit. I have
taken my money out of any banks that invest
in fossil fuel. I don’t believe that is the future.
We have an obligation as individuals to make
sure that where our money sits aligns with
what we believe in.”
ROB SHAW
The investment case alone is
starting to attract many investors,
including those with self-managed
superannuation funds. Hicks says
that she knows of projects that have
raised the funds they need within
an hour of the offer opening. There
is no one-size-fits-all package.
Some offer minimum investments
of $500 and others $5000. The
Daylesford wind turbines cost
$12.9 million, with $9 million of
that from 2000 members in the
co-op that owns the project. The
balance was made up by a loan
from Bendigo Bank and a state
government grant.
“What is really interesting is
that the people investing in solar
xxxxxxxx
are not the wealthiest people,” says
xxxx
Hicks. “They are more middle
income. We sometimes think
that it’s only rich people who
are doing it but it is really people who own
their own homes. People who rent, who live
in apartments, who can’t afford the upfront
capital and that is where community energy
comes in. We are opening the opportunity
up to them as well.”
Hicks founded CPA in 2011 with her business partner, Nicky Ison, and shortly after
they embarked on study tours in Europe,
the US and India to understand how projects
had succeeded there. In Germany, she found
that country towns were prepared to support
large-scale wind projects, something that
hasn’t always been the case in Australia.
Dardesheim in Saxony has a population of about
1000 yet is happy to have 31 wind turbines in
fields within a kilometre of the village. “It has
become a positive symbol for the town and
their transition to 100% renewable energy,”
says Hicks. “Ninety per cent of the locals are
co-investors [in the project], which is owned
and operated by a corporate developer.”
It was a similar experience on Samso, a
small island in Denmark. In an article for the
news website RenewEconomy, Hicks wrote
that Samso’s offshore wind turbines at first
seemed out of place beside idyllic wheat,
WINNER
2018
ASK THE EXPERTS
CASE STUDY
Caught
out by
‘interest
free’
In reality, most credit card
purchases don’t qualify for
the 55-day exemption
NAME: Doug Hardy
STATUS: Using credit card to pay for
renovations to the family home.
QUESTIONS: Can you explain how 55-day
interest-free credit cards work? Is there
a genuine 55-day interest-free card that allows
you to pay interest only on what you owe?
What is the best rewards card with benefits
for my family?
ANSWERS: Realistically a 55-day interestfree credit card does not exist. To get it, you
would need to do all your spending on the very
first day of your billing cycle (30 days plus
25 days to pay the bill). If you want to forgo
home delivery from Coles in lieu of home
improvements or purchase of whitegoods,
consider the HSBC Low Rate Credit Card,
which charges an interest rate of 13.25%pa
with up to 60 days interest-free.
24 MONEY MAY 2018
credit card division, he was told that if
there is any outstanding balance of even 1¢,
then interest is payable immediately, not
after 55 days.
Also he discovered there is a delay of
four business days in transferring funds
and making payments on the credit card.
“It would be nice if that could happen on
the same day or next business day like most
other things,” says Doug.
He wants to switch credit cards. But
which is the best – Mastercard or Visa – for
his family? He would like one with points
accumulation and a lower interest rate.
Also he does value the free home delivery of orders from Coles, which comes in
handy for his young family. “We would like
to actually have 55 days interest-free as we
used to with our bank,” says Doug.
He says he did have a better card but
switched to Coles. “Is Coles alone in this
or have times changed so much that this is
standard practice for all financial services
providers these days?”
COMPILED BY SUSAN HELY
RICHARD WHITFIELD
D
oug is renovating his house and
using his Coles Mastercard to
pay for most materials to take
advantage of the card’s 55-day interest-free
feature. “We have always been diligent in
having it paid it off in full but due to some
recent financial changes we had a balance
owing,” says Doug.
What he discovered was how the card’s
interest-free feature really worked: the 55
days is based on the monthly billing cycle
and isn’t 55 days on every purchase.
“I expected the nearly 20% interest to be
charged on the ‘old debt’ which I found on
the recent statement to be around $15. What
I didn’t expect was the $45 interest charges
on all transactions during the month starting from day one,” he says.
When he called Coles and spoke to its
Key words
are ‘up to’
Flexibility
of a 0% deal
STEVE MICKENBECKER
ANDREW BOYD
Steve is the group executive, financial services, at Canstar, Australia’s
financial comparison website. canstar.com.au
Andrew is co-founder of Credit Card Compare, which specialises in
looking at credit cards. creditcardcompare.com.au
I
D
f you have ever shopped for a credit card you would have heard the
term “55 days interest-free”. It sounds too good to be true, when
you consider that banks make their money by charging more interest
on the money you owe them than on the money you deposit with
them. What exactly does 55 days interest-free mean?
If you have an eye for detail you will also have noticed that when
the bank advertises its credit card, it will use the words “up to” before
mentioning anything about the interest-free period. This is because
almost no one gets 55 days interest-free on all of their purchases.
So here’s how it works. You receive a credit card statement every
month, ruled off at the same time each month and recording your
purchases and payments for the preceding month plus any interest
charged. Let’s say that is 30 days. It also shows you the outstanding
balance, the minimum payment required and the due date for payment. If the bank gives you 25 days from the statement date before
you have to make your payment, that is how you get to 55 days – the
30 days from any purchase you make on the very first day of the billing period plus the 25 days to pay.
Now, realistically, can you get the 55 days for all of your purchases?
To do so would require that you do all of your spending on the very
first day of your billing cycle. If you are using the card for a one-off
purchase that’s possible; otherwise it’s not. For example, if you make
a purchase three weeks into the cycle, the 55 days falls to 34 days.
But there’s more. If you have not paid the
previous month’s balance in full by the due
date, you receive zero interest-free days for
the following month. Likewise, if you don’t
pay the current month’s balance in full by
the due date when it arrives, you again miss
the 55 days.
The other thing to be conscious of is that
not every card provider gives you the 25
days after the statement date to pay. That’s
how it started years ago but most have
shortened the term to 10 or 15 days, so that
the maximum interest-free benefit is 40 or
45 days, not 55.
So, does 55 days interest-free really
exist? Realistically, the answer is no. If
you are a stickler for repaying your card in
full by the due date, the way most cards
work is that you will receive a spread of
interest-free days. That can help with your
budgeting or mean that you earn interest on
your savings for longer, which is great. But
it is not 55 days.
If you’re not a stickler, you won’t be getting interest-free at all for the months you
let your repayments slip. The important
words to note in the advertising are “up to”.
The way
most cards
work is that
you receive
a spread of
interest-free
days
oug can get free delivery at shop.coles.com.au if he uses a
Coles credit card, spends $100 or more, and home delivery is
possible where he lives. However, it excludes tobacco and tobacco-related purchases and remote delivery orders.
If he has a good credit score, the aptitude for playing the
points game and time to invest in learning how it works, then
a rewards credit card could work for him. Rewards could include
air travel, travel credit or vouchers, cinema tickets, smartphone
insurance, travel insurance, airport lounge passes and access to
some fun experiences.
If Doug was willing to forgo home delivery from Coles in lieu of
home improvements or purchase of whitegoods, he might consider the HSBC Low Rate Credit Card, which features:
A low 13.25%pa purchase rate.
0% finance for 60 months for furniture, kitchens, computers,
TVs, home improvement and more at 1000 participating retailers.
Up to 55 days interest-free on purchases.
No points earned on purchases.
If he thinks he can’t pay off upcoming purchases in the coming
months, he may want to consider a card with a promotional 0%
interest on new purchases.
These will allow him to purchase materials for his home
improvement and then gradually pay them off without incurring
interest. Minimum monthly repayments are usually about 2%–3%
of the total balance. After the 0% interest promotion period, any
remaining balance will start to accrue interest.
He could also change to the Coles Low Rate Mastercard with
its lower interest rate of 12.99%pa compared with 19.99%pa on
his current Coles No Annual Fee Mastercard or Coles Rewards
Credit Card. (For Coles credit cards in general, the annual fee
and how you earn flybuys points varies significantly; for details
see creditcardcompare.com.au.)
Given that Doug wants a card that offers free home delivery,
earns rewards and has a low interest rate on purchases, he has
other options:
Coles Low Rate Mastercard. Doug can contact Coles to switch
his existing card to the Coles Low Rate Mastercard, which earns
uncapped shopping credits on his purchases, up to 55 interest-free days on purchases and has a home delivery option.
David Jones American Express credit card. This card offers free
standard delivery for items purchased both in store and online
(excludes gift cards, hampers, fresh food, wine club, gift registry
and large items).
David Jones American Express Platinum credit card. The
platinum version offers free next-day courier delivery for items
purchased in store only (excluding gift cards, hampers, fresh food,
wine, gift registry and large items).
Myer credit card. This offers free standard delivery for
orders worth $100 or more (except for any goods that require
special delivery).
•
•
•
•
•
•
•
•
MONEY MAY 2018 25
ASK PAUL
Q
&
A
James is wary of the expensive housing market but ...
With $700k in cash, go for it
Q
NEED
PAUL’S
HELP?
Send your questions to:
Ask Paul, Money
magazine, GPO Box
4088, Sydney NSW
2001 or money@
bauer-media.com.au.
Sorry, but Paul can’t
personally answer your
questions other than
in the Q&A column.
By submitting your
question to Money,
you consent to having
your question and the
response you receive
from Paul published
in the print and digital
edition of Money.
26 MONEY MAY 2018
My wife and I are both in our mid-40s
and live in Sydney, with two children of
primary school age. After looking after
our young children, my wife is not currently in
paid employment but is looking to get back into
the workforce.
We have sold our property overseas and will
soon be bringing the cash to Australia. We will
have about $700,000 in cash, including all other
savings, but no other investments, excluding super
contributions, which are split between the UK and
Australia. We have two small investment schemes
for our kids worth about $20,000 in total.
We don’t own any other property and our combined pension pots are worryingly underfunded
at about $200,000 in total. I am making small
additional super contributions from my salary.
It is tempting to move and buy in another city
to reduce our mortgage and financial stress, have
more financial freedom to boost our savings and
be able to travel more. Ideally, though, we want
to stay in Sydney where there are more jobs, a
vibrant city and a strong network of friends.
We are trying to decide what to do to get on the
housing ladder in Australia and also secure a less
stressful financial future.
Should we rentvest to stay where we live on the
north shore and invest some of the cash elsewhere,
outside a property purchase? Or, should we buy
the best house we can afford where we are and
bank on the long-term value of greater growth in
a desirable suburb?
I hear your logic about buying in a city other than
Sydney, James, but I can easily see that is not a real
option for you. As you say, Sydney is where your
friends are, not to mention the vibrancy you enjoy and,
of course, work. So I think I should assume Sydney is
your future.
Both you and your wife are in your mid-40s and with
the $700,000 from the sale of your overseas property
I do think that owning a property on the north shore is
very realistic.
One of the better pieces of news for you, which no
doubt you are well aware of, is the slowing market.
About the only people pleased about this are those
with no property but with some cash – and that is you!
The logic of buying your future home, renting it and
you renting elsewhere is technically sensible. But is it
what you want?
I can’t give you advice on what is important to you
but if I take myself back to when my wife Vicki and
I had primary school kids, we would be using the
savings to buy a home that we could afford, near good
schools, and enjoy living there.
You probably have two decades of work in front of
you, so there’s plenty of time to pay off a mortgage
and grow your super and investments. I can’t give you
advice on how to live but I know what I would do in
your situation.
Katherine’s super is growing so there’s ...
No need to
be paranoid
Q
I’m 31, live in Melbourne and earn
$144,000 (package). I’ve always been
good at saving and good at spending it
on travel.
The media have done a great job of making
me paranoid about women and retirement
and my savings account interest is rubbish.
So over the past six months I’ve spread some
of my money out and now it looks like this:
$1200 in Acorns, $1500 in RateSetter loans,
$3500 in BrickX (six properties), $8000 in
Clover (exchange traded fund), $71,000 in
super and $55,000 in savings.
I’ve paid off my HECS and my car, I have a
credit card I rarely use and I salary sacrifice
$1200 a month into my super fund.
I’m a buy-and-hold investor (read lazy). I
really don’t know what to do with my savings,
which are currently lazier than me. Where
should I put my money to retire well?
At 62 divorced Mike is doing it tough but should ...
Super is your best friend, Katherine. You pay a
fair bit of tax, in particular on the top part of your
income, and I really would like to see you top up
your super as much as possible. You will only pay
15% tax on money you add to your super and you
can add up to $25,000 pre-tax.
Continuing to invest in things such as ETFs is
a good plan.
I can’t get upset about you saving and travelling. You are young and I think travel is an experience you should not miss.
You have already built assets of around
$140,000, and while I am really
pleased that at 31 you are
concerned about retirement
you are already doing
pretty well. Some I
know around your age
are also travelling but
on the credit card!
With your wellpaid job and good
existing savings,
providing you keep
on adding part of your
earnings to your super
and investments, I would
not be overly paranoid.
Keep looking for a job
Q
I am starting from scratch
at 62 with just $400,000: no
job, no other investments or
income. I am now in shared accommodation paying rent.
Well, my ex-wife demanded divorce
and I lost heavily in the property
settlement, including my house in
Australia. I was working overseas
and unfortunately my contract also
ended and, as you know, it is difficult to find a job at 62.
I have just returned to
Australia to settle here. My
Newstart claim has been
rejected by Centrelink, as I
do not meet the residency
requirements. How can I
best invest the $400,000 so
that I can get some regular
income for my survival?
This is a hard one, Mike. You have been
through a very tough time. Clearly, you
have taken the first key step and been
to see Centrelink. As I understand it, you
need to be here for 104 weeks to qualify
for Newstart. There are a range of conditions that would allow you to get it earlier
but it sounds as if you do not qualify.
I am also 62 and have many friends
who are our age, so I do know that
getting work is difficult. But I would
encourage you to keep searching for
a job, even if it is part time and not ideally
what you want.
As for investing, this really depends on
your attitude to risk. You could certainly
put a percentage of your savings into a
number of quality shares. The advantage
is that the income is much higher than
that from a bank. Bank shares, for example, pay dividends of around 6%.
But I do think you need to keep at least
half your capital in safe investments such
as term deposits until you qualify for
Newstart or retirement benefits or find
work. I do wish you all the best.
MONEY MAY 2018 27
ASK PAUL
A
Q
&
A
Whether Therese has a lease or a loan ...
A car will just
devour money
Q
I have been trying to do the sums to see if I would
be better off getting a new vehicle through a
novated lease or a personal loan. Combined
income is around $170,000pa net.
Hi, Therese. It really depends on the income of the person who
is buying the car and the value of the car. Any of the novated
lease companies can then run the numbers for you. You can
compare this with the repayment schedule on a personal loan
and then you will have a black-and-white answer. I suspect
if you compare the novated lease with a really low-interest
personal loan there will not be a lot of difference. I reckon the
real issue is the actual cost of the car.
The advice I have been giving for 40 years is “buy the
cheapest car your ego can live with”. They are just money-devouring, depreciating disasters. Sure, we need one but the
best advice I can give you is to buy a cheap, reliable one.
With help from an inheritance, Daniel is in a great position to ...
Build wealth outside super too
Q
I’m 42 and my wife is 38. We
have three young children,
aged eight, five and two. I
currently have no debt … kind of.
I have a loan of $200,000 with an
offset account holding the cash in
case we need to dip into it for
a renovation we’re about
to embark on. But
thanks to a recent
inheritance from
my grandmother’s estate, I
think we won’t
need that.
We have
further savings
of $590,000 (the
proceeds of a house
sale, investment house
sale and inheritance), of
which $500,000 is likely to be spent
this year on a renovation. Our house,
once completely renovated in the next
six to 12 months, will be worth around
28 MONEY MAY 2018
$2 million-$2.2 million. Our household income is $170,000pa.
I have no other investments, property or shares and I’m not contributing any extra to my super.
So my question is, what next? Am
I better off having a home loan and
investing more money? Or do I aim to
have no loan and then invest?
What should I invest in given the
capital we have?
After about four decades of answering
money questions, it is very obvious to me
that my stress levels do go up as I read
them. At times I nearly break into a cold
sweat! So thanks for your question, Daniel
– I don’t think my heart rate went up a
beat a minute!
You are in a fantastic situation at a
pretty early stage of life. A debt-free, fully
renovated house really takes the pressure off you both and you can enjoy your
young family without financial stress.
But I agree with your question. With
three growing kids, life will not be cheap
and while a paid-off house is great it does
not pay any bills. You still have plenty to
do to create enough wealth to make you
financially independent.
With household income of $170,000
you will be paying a fair bit of tax, so I do
think that super is likely to be an excellent
vehicle for you. A 15% tax rate on money
you add via salary sacrifice, and then a
15% rate on earnings in the fund, make
it an excellent wealth builder. Including
your current employer contributions you
can put in a maximum of $25,000 each.
I think that this is where you should hold
shares, so go with a growth option inside
your super fund.
The problem, of course, is that you
cannot access super for some 20 years,
so I would prefer that you also have a
wealth-creation plan outside super. Given
you own your home and you are building
a share portfolio in your super, I like the
idea of you thinking about buying an
investment property.
Abigail needs to do homework on ...
Closing her
DIY super
fund
Q
We have a self-managed super
fund managed partly by our
financial adviser and partly by
me. My husband has just retired. The
management fee for the adviser is 1.4%,
plus brokerage, with a balanced portfolio.
I have invested in term deposits and an
exchange traded fund. The five-year
return on the adviser’s investment has
been 9.14%. I am considering switching
to an industry fund and seek your advice
on how this can be done and any negative
consequences. Is there an in specie
transfer process to an industry fund?
If the adviser has been getting you 9.14% after
fees over the past five years that is really pretty good. If that is before fees, it is not so good.
It also depends on the risk-adjusted return but
as your adviser has built you a balanced fund
it should be pretty similar in risk to any other
balanced fund.
I must admit that I do ponder if the costs
in a DIY fund are worthwhile. The big industry
and retail funds all have very low-cost options
these days. They can do this and give you a
portfolio of local and global assets, as they are
huge. But I don’t see how an in specie transfer
is going to work. My understanding is that you
will have to shut down your DIY fund, sell your
investments and transfer cash to a new fund.
This may also involve some capital gains inside
your fund.
I do not disagree with your plans – many
people are doing exactly this – but you need to
do more homework which will be applicable
to your DIY fund and the assets it holds.
Elizabeth has a good income, so a ...
$600k mortgage looks reasonable
Q
I’m 30 and earning $88,000pa;
my partner is 33 and earning
$104,000. I bought a two-bedroom
apartment two years ago for $450,000
(with a $100,000 deposit); now it’s worth
$500,000. I have the mortgage down to
$268,000 (due to $65,000 in an offset
account) as we make higher repayments.
We plan to start a family in the next
one or two years and need a bigger house.
Ultimately, we’d want to keep our apartment. (It’s in an amazing spot, very close
to the beach and a train station, and we
could always get renters in, currently for
about $400pw.) We would buy another
place with three bedrooms. Units in the
areas we want to live in are going for about
$700,000-$800,000.
We are thinking of several options:
1. Rent out our place and rent a bigger
house for us.
2. Sell our place to help with a larger
deposit but pretty much lose any profits
that would come our way in a few years by
holding onto it. (We don’t want to do this.)
3. Rent out our place with rent almost
covering the full mortgage repayments
(negatively geared), and take all our
available cash out (about $70,000 in cash,
$20,000 in shares, $60,000 equity loan)
as a deposit on a unit ($700,000 unit plus
stamp duty with a $150,000 deposit would
mean a loan of about $600,000, with
repayments of about $3000 a month).
4. Take existing cash and buy a cheaper
house (say $500,000-$600,000) further
away to also rent out to help grow our portfolio while renting where we want to live.
We would love some guidance.
You have given me plenty of information, Elizabeth, which helps me a lot.
I want to see you own your new home.
This eliminates option 1. I don’t like your final
option. I think you should live where you want
to live and closer-in properties generally grow
in value faster.
You don’t want to do option 2, so between
the two of us it looks like we are focusing on
renting your unit and buying. It all gets down to
how your budget looks with $3000 a month in
repayments. If this is OK, and I think it will be
given your joint income, you should go for it.
Do run your numbers with a higher rate of
interest – at some stage the rates should go
up – but on a loan of around $600,000 I don’t
see this being an issue. In fact, while I don’t
want it to drive you into a higher level of debt,
I think you could comfortably stretch to a higher loan. Your safety margin is enhanced by the
equity in your original apartment.
MONEY MAY 2018 29
SMART SPENDING
THIS MONTH
Destination Hoi An, Vietnam
Serenity now ... clockwise, from above, the Four Seasons is in easy reach of
Hoi An; the Nam Hai cooking school; a cooling coffee; after-dark lighting.
Five things to do
1. Keep your fluids up. Coffee is plentiful and
second only to rice as a major export for Vietnam.
Grown in plantations after the French introduced it in
the 1850s, the Vietnamese have given it an indulgent twist by pouring over ice with a generous swirl
of condensed milk. Drink it in a short or long glass
depending on how intense you like your brew.
2. Check out the town. At sunset lanterns light
up the ancient port and UNESCO-listed Hoi An old
town. Sample flavourful local cuisine in a riverside
restaurant in the 19th-century French-style terraces,
buy a lantern to take home or wander the cobblestoned streets just soaking up the vibrant scene.
3. Go fishing. Local Jack Tran offers novel tours
with fun as a key ingredient. The “fishing trip” is
unforgettable as the crew entertains with origami,
Gangnam-style dancing in boats and net fishing les-
30 MONEY MAY 2018
sons, topped with an onboard feast, all served with a
dollop of history and a revealing taste of real life.
4. Cook like a local. There is a cooking school
on every corner in Hoi An but the epitome is found at
the Nam Hai academy, where even pro chefs come to
learn the secrets of Vietnamese cuisine. Located at
the luxe Four Seasons resort, guests can learn how
to create local dishes in the beautiful kitchen villa.
5. Tailor a new look. Hoi An is famed for its
skilled tailors and while there are a handful of reputable shops, such as A Dong Silk in Le Loi Street, there
is a host of imitators. Keen to get clothing or shoes
made? Before you go research fabric, style and what
to ask for, and allow plenty of time for fittings.
JANICE HOGG
The writer travelled to Vietnam courtesy of Vietnam Airlines and stayed as
a guest of the Four Seasons resort, The Nam Hai, Hoi An. Vietnamairlines.
com; fourseasons.com/hoian
DRIVING PASSION
WINE
SPOTLIGHT
Built for the
school run
T
hey were fast becoming the vehicle
of choice for Aussie families during
the 1990s, but then people movers were
gazumped by the SUV boom.
Their low ride, sliding doors and the
ability to fit several seats on a car-sized
chassis provided a good mix of practicality, driveability and reasonable fuel economy. And some of them, such as the 1990
Toyota Tarago and 2003 Honda Odyssey,
even managed to look pretty good.
Other models, such as the Mitsubishi
Nimbus and early model Kia Carnival,
were less inspiring to look at, and the segment’s “soccer mum” tag was a negative
for buyers seeking a car that offered an
escape from the daily grind.
People movers still hold an important
niche market, though, thanks to their
limousine comfort that’s unmatched by
all but the biggest SUVs.
Models such as the Hyundai iMax and
Volkswagen Multivan are popular with
commercial buyers, while the Carnival,
Odyssey and Tarago are still well represented on school runs.
DAVID BONNICI, WHICHCAR.COM.AU
2017 Zonte’s Footstep ‘Excalibur’
Sauvignon Blanc
$20
$41,490- $37,990- $29,990$61,290 $47,590 $32,990
Kia Carnival
Honda Odyssey
LDV G1O
The Carnival (pictured)
has blossomed into a
sleek family hauler that
wouldn’t look out of
place in a presidential
motorcade. It carries
up to eight people in
comfort and style,
with an airy cabin that
exhibits plenty of clever
detail. The Carnival
offers powerful petrol
and diesel engines
and comes with a seven-year warranty.
Pros: Space, comfort,
economical diesel
engine.
Cons: Steering feel,
thirsty petrol V6,
truck-sounding diesel.
kia.com
The Odyssey’s sleek
looks have made way
for more cumbersome
van styling, but it’s still
a spacious and wellmade blend of wagon
and people mover that
seats up to eight with
ample storage. Other
attractions are a logically presented dash,
light controls, sharp
steering, strong yet
frugal performance and
superb all-round vision.
Pros: Roomy cabin,
slick drivetrain, keen
handling.
Cons: Road noise,
ungainly looks, child
seat limitations.
honda.com.au
The Chinese-made G10
seats up to nine and is
the only people mover
with a sub-$40,000
price tag. The vanbased G10 looks good
but that affordability
comes at the expense
of refinement, with
cheap plastics and less
comfortable seats. And
it only has a three-star
ANCAP rating.
Pros: Affordability,
decent interior presentation, nine-seat
option.
Cons: Poor resale
value, no passenger
airbags, thirsty.
ldvautomotive.
com.au
EXTRAVAGANCE
Flowery
gesture
Reveal the time by
pressing a petal on
this Van Cleef & Arpels
Marguerite “Daisy”
watch made between
2000 and 2009.
How much: $116,707
Where to buy: 1stdibs.com
This lively company is based in
McLaren Vale,
under the care
of the talented
Ben Riggs, with
grapes sourced
from the Adelaide
Hills. It is a classy
sauvignon with
attractive ripe
tropical flavours:
mango, lychee
and passionfruit.
It is clean, fresh
and intense with
a seductive finish.
SPLURGE
2015 Bass Phillip
‘Premium’ Pinot
Noir $220
Phillip Jones has
been a pioneer
of Gippsland
and of pinot noir
in Australia and
makes what
are arguably
Australia’s finest examples
of the variety.
Attractively
perfumed with
black cherry
and spice, deep
and powerful in the
mid-palate, yet with
amazing finesse on
an endless finish
laced with persistent
yet elegant tannins.
Needs time.
PETER FORRESTAL
MONEY MAY 2018 31
SMART SPENDING
THIS MONTH
SMART TECH
Upgrade for a
dreamy experience
H
ow long do you spend sleeping
every night? Is it six, seven, eight
hours, or more? The point is, you're
probably spending around a third of
your life catching ZZZs.
That’s a lot of sack time, and
because it’s such a large chunk of your
life many people say you shouldn’t
skimp when buying a bed: invest in a
quality mattress and frame, and even if
it seems expensive, it will be worth it in
the long run.
Ideally, that same philosophy should
apply to technology. After all, we probably all spend a lot more time than
we’d care to admit staring at screens,
typing on keyboards and interfacing
with all our devices and accessories.
If you look at your personal tech
set-up now, can you spot areas where
you skimped or delayed replacing older
items, where it’s significantly affecting
your usage or enjoyment?
With tech, we often resist upgrading
until gadgets actually stop working.
But it’s also important to be mindful of
how sub-par or outdated technology
makes for a sub-par experience.
As with the bed you dream on, don't
sell yourself short.
PETER DOCKRILL
What is it? Kingston
HyperX Fury S Gaming
Mouse Pad XL
How much? $35
Pros: The fact that you
can significantly upgrade
something as minor as
a mouse pad just goes to
show how multi-faceted
your overall tech experience is. XL mouse pads like
this Kingston are designed
for gamers, so their devices don’t run off their pads
during fast-paced gaming.
But the same size actually
benefits all usage, giving
you an expansive 90cm
x 42cm canvas to glide
around on.
Cons: None. Soaks up
coffee spills too.
kingston.com
What is it? Dell
UltraSharp U2718Q 27in
4K Monitor
How much? $999
Pros: One of the most
significant computing
upgrades is moving to
a larger, high-res display.
Even if you use a notebook, you should consider
outputting video to an
external monitor – it’s better ergonomically, with a
much greater perspective
for work or play – such as
this Dell, providing a luxurious 27in with a crisp 3840
x 2160 resolution.
Cons: To lower the price
substantially, consider
dropping to 24in or opting
for Full HD (1920 x 1080).
dell.com/au
What is it? Apple
iMac Pro
How much? From
$7299
Pros: Few of us could
justify buying a computer
that costs as much as a
second-hand car but if
you want to take the tech
experience concept to its
zenith this is it: killer specs
powering a 5K Retina
27in display, housed in
sleek space grey. If your
budget doesn’t stretch
this far, consider what kind
of upgrades might most
appreciably improve your
current gear, and don’t
be afraid to spoil yourself
where money allows.
Cons: See “How much?”.
apple.com/au
GIVE IT UP
WEBFIND
The Smith Family
EZIBUY.COM.AU
What is it? The Smith Family is
a national children’s charity helping
disadvantaged Australians to get
the most out of their education.
Where your money goes:
The Smith Family offers a number
of learning support and mentoring programs including the arts,
literacy, numeracy, technology
and finance. There are also learning clubs and a learning-for-life
program. According to the Smith
Family website, 80% of funds
raised go to programs and last
32 MONEY MAY 2018
year its work reached more than
151,497 children, young people
and their families.
How to donate: There are a
number of ways you can support
the charity. You can make a oneoff or ongoing monthly donation;
you can sponsor a child for $48
a month; you can donate new or
good quality clothes or, in the
lead-up to Christmas, give toys
and books. Visit thesmithfamily.
com.au or phone 1800 024 069
for more details.
It started as a
mail order business and you can
still arrange to
have catalogues
posted out to
you. Ezibuy sells
women’s clothing
from a number
of private labels
but also has items
from UK fashion label Next.
The site also has a big collection of homeware, accessories,
menswear and kidswear.
invest with
trilogy and join
the pride today
Did you know investments in the Trilogy Monthly Income Trust are
secured by registered irst mortgages over Australian property?¹
For more than 10 years, the Trilogy Monthly Income Trust has
consistently paid investors a monthly distribution, in fact we haven’t
missed a payment – even during the worst of times.
invest in the trilogy
monthly income trust
7.69%pa²
previous monthʼs distribution rate
find out more
1800 230 099
info@trilogyfunds.com.au
trilogyfunds.com.au/cash-money
1 Assets of the Trust also include cash at bank, basic deposit products (including term deposits held with Australian Authorised Deposit-taking Institutions) and investments with other related managed
schemes as detailed in the PDS.
2 IMPORTANT: Net rate calculated daily and paid in arrears for the month ended 31 March 2018 (net of fees, costs and taxes, assuming no reinvestment). Past performance is not a reliable indicator of
future performance, which will be determined by the future revenue generated by the assets of the Trust. Trilogy Funds Management Limited ACN 080 383 679 AFSL 261425 (Trilogy) is the responsible
entity of the Trilogy Monthly Income Trust (Trust) ARSN 121 846 722, a registered pooled mortgage fund issued pursuant to the Product Disclosure Statement (PDS) dated 1 September 2017. The PDS
is available at www.trilogyfunds.com.au/tmit and should be read in full, particularly the risks section, prior to making any investment. All investments, including the Trust, involve risk which can lead to
loss of all or part of your capital. Trilogy provides general inancial product advice only and recommends you seek personal advice from a licensed adviser on the suitability of this investment to your
objectives, inancial situation and needs. Investments in the Trilogy Monthly Income Trust are not bank deposits and are not government guaranteed.
COVER STORY QUESTIONS ANSWERED
oney was launched
in 1999, about 19
years ago. We
produce 11 issues a
year, with December-January b
being a combined edition
featuring ourr Best of the Best awards.
So I think I must have answered about
88 x 19 question
ns since 1999.
no surprise to anyone but
It would be n
most questions involve property, and they
have become increasingly sophisticated
in nature. I no lo
onger need to explain
offset accounts and
a it is pretty obvious that
readers have got a strong understanding of
negative gearing.
What I do love is a distinct shift towards
questions from younger readers. And, no,
older! As you can
it is not just me getting
g
see in this issue, they range from young
34 MONEY MAY 2018
people planning a family to those with young
kids already. This is terrific. It shows how much
progress we have made as a nation in building
financial literacy skills in younger people.
At the other end of the spectrum, I get a lot
more questions from older Australians. This is
also great as it reinforces a fact we know. We
are living longer and on average living better
than at any time in history. No longer do we
automatically retire at 65 and look forward to
a modest lifestyle in our declining years. We
“older folk” are out there, often working part
time and enjoying life. In fact, as I write this,
my wife Vicki and I are in Japan with friends
about to walk the Kumano-Kodo pilgrim trail.
And there is a bunch of people our age and
older doing exactly the same.
Almost 19 years later, life is very different,
meaning the questions I get are different. And
that is a good thing.
Next level ... Peter
wants a proper job,
then a property.
With ETFs,
investors can
make things
as complex or
as simple as
they like
1. I’M CASHED UP
BUT WHERE DO
I INVEST NOW?
Q
I am 25 years old and pondering my next “big’’ investment. I
have recently sold some shares
for about $94,000. I still have
about $12,000 in my portfolio which I am also
looking at cashing in. I have about $10,000
in the bank, which I can use for discretionary
spending but don’t really want to touch.
I am looking for my first proper full-time
career job and my plan is to buy an investment property six months to a year after finding my job. How should I invest my $106,000
in the short/medium term? I am thinking of
an exchange traded fund (ETF) but they seem
complicated and not so easy to understand.
Peter
First up, Peter, having over $100,000 at
your age, plus the experience you have had
buying and selling shares, will be really
valuable in the coming decades.
I know what you are saying about
ETFs – they are becoming more and more
specialised. But they are a favourite of mine
as investors can make things as complex or as
simple as they like. A complex strategy would
see you making investments in a number of
specialised ETFs that “fit” with your strategy.
For example, you might have a macro
economic view and focus on certain growth
areas. For the sake of debate, let’s say these
were health and aged care, biotechnology and
resources. You could choose three ETFs to
cover these areas.
Equally, you could keep it simple and go
with something like a Vanguard global ETF
and let it spread your money broadly across
the planet.
My advice to you, though, is based on
your time frame. The job market is strong in
Australia and I would expect you will find
that full-time job. That would see you buying
property in the next year.
I could not recommend anyone buying
shares with such a short-term outlook – my
minimum time frame is five to seven years.
So keep the money secure in an interest-bearing account and start to do your
research on a property.
IF you were
talking to your
30-year-old
self today, what
advice or guidance
would you give?
At 30, my wife Vicki and I had
been married for three years
and our first child was on the
way. We had put down a small
deposit on an inexpensive
semi-detached home and,
with my four partners, started
our business ipac Securities in
a one-room serviced office.
So it was hardly a grand
start but it was a wonderful
time in life. Funnily enough, at
the time I was giving myself
advice wondering why I had
quit a well-paid research job
to start my own business and
earn nothing for two years.
Vicki was working as a school
teacher and was our sole
income earner.
Thankfully, I stuck to the
plan and starting a business
was without doubt the best
thing I could have done. About
the only guidance I could give
to my 30-year-old self would
be: “Keep at it!”
And thankfully, this question
did not ask me to give myself
advice as a 20-year-old ...
I could have done with some!
MONEY MAY 2018 35
COVER STORY QUESTIONS ANSWERED
2. WILL I
EVER HAVE
MY OWN?
WHAT are
two or three of the
worst financial
decisions you made
and how have these
helped you in life?
These generally involve beer or
lifestyle toys. In my late 20s,
along with a few uni mates,
we paid $21,000 for a house
near Mt Beauty in Victoria. We
thought it was a no-brainer.
Mt Beauty is about 45 minutes
from Falls Creek and is a beautiful place. We figured it would
boom as the ski fields grew.
Part of this was correct.
Skiing did boom but skiers
wanted to rent and stay up at
the ski fields. We sold the place
many years later for $11,000.
Next is my passion for
sailing. My excuse is that the
costs are in my budget but
boats are a magnificent way
to burn up cash.
36 MONEY MAY 2018
Q
I am a 54-year-old single
woman. I rent a house and have
savings of just under $200 and
only around $60,000 in superannuation. I work full time, earning $88,000. It
seems that all my income consistently goes to
just paying rent and debts: car loan $40,000,
credit card $5500 and two personal loans
totalling $23,400.
I would desperately love to have a home of
my own, a place to finally fully unpack all of my
belongings, knowing that it’s a place of permanency. I am sick with concern that I will never
be able to retire and that I will be working until
I’m carried out in a coffin.
Claire
Hi, Claire, I do feel for you and how hard it
is to get ahead. I also know how much you
would love your own place. As you say, the
ability to unpack and be in a home you own
is a wonderful goal.
You have debts of some $70,000 and
clearing these is your first goal. Until this
is done it is not going to be possible to
make any real progress with your savings.
But before we look at this, please remember
you will have some $8000 a year going into
super. This, plus the earnings on your current $60,000, are growing wealth for you.
But the $40,000 car loan is a big part
of the problem. I imagine this means a
pretty nice car. Would you consider selling it? There are many really reliable cars
around these days for a fraction of $40,000.
I appreciate the car may not sell for this
amount but I feel your repayments are
a real anchor on you going forwards.
A hard look at your budget would also
be great. $88,000 is a good salary. I am
sure that rent and car repayments take
a big chunk out of your income. I am not
certain whether you have children with
you but, if not, a valid option is a dramatic
Ready to go ... Casey
has the deposit but is
unsure of timing.
cut in living costs for a couple of years to
clear personal debt.
By now you are probably wishing you had
not emailed me. But if you take no action,
I do not see how you will own your own
home, unless an inheritance is a possibility.
So it is time to consider how important this
goal is and whether you want to take pretty
drastic action to get there.
You do have choices, though. Remember
that you will be eligible for an age pension
in a bit over a decade. Pensioners who rent
do get an extra amount. So another option is
to keep building your super and retire with
a nice pot of money in super, plus a pension.
I cannot make this decision for you but
I can tell you that in the early 1990s my wife
and I made a decision to sell our cars, buy
one cheap second-hand car and shred our
living costs to get ahead. It worked.
3. MARKET IS WEAK,
SO IS IT A GOOD
TIME TO BUY?
Q
We’re looking to enter the
Sydney owner-occupied housing
market (at $650,000) in the
next 12 to 18 months. Analysts’
suggestions range from no capital growth to
a 5% fall. If we’re not expecting capital growth,
should we keep building a deposit until there
are signs of growth? What are the pros and
cons of getting into the market now, with
small growth prospects. We’re saving $36,000
a year, we have a $130,000 deposit and we will
be just above needing mortgage insurance.
Casey
The good news for you, Casey, is that,
as you say, for the first time in years the
Sydney market is slowing. This is nothing
to do with the long-term outlook for
property. The city’s population continues
to grow rapidly, job creation is excellent
and while infrastructure is always going to
lag population growth at least there is a lot
of construction.
What I think is super-important is that
you buy a well-located property. Transport
will not get any easier as the population
grows, so access to public transport is
critical. Lifestyle is a huge driver of future
property value, so I am always keen to own
property near lifestyle facilities – and a good
coffee shop.
I am not fussed about when you buy. You
have a great deposit and an excellent ability
to save so there is no need to rush in. I think
Lifestyle is a
huge driver of
future property
value, so make
sure there’s a
good coffee shop!
MONEY MAY 2018 37
COVER STORY QUESTIONS ANSWERED
the market will be pretty weak but there are
only so many good properties.
If you see one at a decent price, I’d buy
it. Sure, in the short term it may not grow
in value, or may even fall for a year or two;
however, the long-term outlook in big cities
like Sydney as well as bigger regional centres looks very sound.
Timing any market is a mug’s game; we’ll
never get that right. For some 40 years I have
just bought quality shares and well-located
property when I could afford them and then
hung on. Time – by which I mean holding
the shares or property for the long term
– and a growing population and economy
mean it is hard for decent investments not to
do well. What can catch you out is too much
debt, so apply common sense to how much
you borrow.
Timing any
market is a
mug’s game;
we’ll never get
that right
38 MONEY MAY 2018
WHAT are
your thoughts on
Bitcoin and other
cryptocurrencies
as an investment?
Next question. At this point in
their development, cryptocurrencies are not an investment.
You may as well go for dog
no. 5 in race 6 at Dapto. I have
a pretty simple rule. If I don’t
understand it, I don’t invest in
it. Period.
Out of reach ... Maja
can’t really afford
to buy where she
wants to live.
4. HOW CAN
WE AFFORD OUR
DREAM HOME?
Q
My family can’t afford to buy
where we currently rent (Melbourne’s inner north). We want
to eventually buy in this neighbourhood and are unsure of how best to work
towards this dream. We can rent here ($2000
a month) for the next five years thanks to a
private lease.
We have $110,000 in savings, our parents
are offering to gift us $100,000 and we have no
debt (only my $16,000 HECS). My partner Ben’s
super is $72,000 (he’s 37), mine is $58,000 (I’m
36). His annual gross income is $80,000, give
or take $20,000, and mine is currently $70,000
(next year it will be $85,000). Our four-year old
has $20,000 and our 18-month old has $5000
in a kid’s savings accounts.
So what are our best next steps? We’re planning to salary sacrifice into super and transfer
the kids’ savings into investment bonds. We’re
also toying with the idea of buying an affordable
investment property but aren’t sure.
Maja
Hi Maja and Ben. The inner north of
Melbourne is not cheap, so I understand the
issue you face.
First up, I thought I had better quantify the
size of the problem and I very quickly learnt
that it depends on where you want to live in
the inner north. Suburbs like Carlton and
Essendon have some very nice places listed
for sale but the ones I looked at seemed to
average around $1.5 million-plus. But in
Coburg and Brunswick I saw nice houses for
under $1 million.
I expect it would have sold by the time
you read this but the four-bedroom house
at 25 Woolacott Street, Coburg, with a
price guide of $910,000 to $1 million, made
me realise why so many Sydney families
are moving to Melbourne. A good-sized
Edwardian home, “this handsome bay-windowed residence offers immaculately
maintained family living with great scope
WHY does the
As for all of
us, maybe your
first home
requires a bit
of compromise
Bon voyage ... Asher
plans to take a year
off to go sailing.
to enhance under the existing roofline. In a
cul-de-sac of quality homes close to Sydney
Road shops, tram and train services.” This
property, at around $1 million and close to
a great city, looked just fantastic.
A $1 million buy would see you with an
$800,000 mortgage. A low-interest principal and interest loan would see you paying
$3600 a month; take out your rent of $2000
and you would need to find another $1600 a
month. On your combined salary of around
$160,000 next year, this is very affordable.
However, if we assume interest rates go
up and we calculate repayments at 6%, they
are $4800 a month. This I suspect you could
manage but it would take a fair chunk of
your income.
So the answer lies in which suburb in
Melbourne’s inner north you would want to
live. As for all of us, maybe your first home
requires a bit of compromise. But with two
good jobs and an excellent deposit, in your
shoes I’d be looking to buy now and borrow
an amount that you feel comfortable with.
My pretty short search found quite a
number of properties you could afford. It
may not be exactly the street or suburb you
want but the first home is, for nearly all of
us, a stepping stone.
5. WHAT’S A SAFE
HARBOUR FOR A
$350k WINDFALL?
Q
I have a question about investing an inheritance. I will soon be
coming into about $350,000.
I am 30, living in Sydney with
my partner (no children) and renting. In about
a year we are planning to do a trip around Australia in a sailing boat for 12 months. We are on
target with our current savings to make this
happen regardless of this inheritance.
My partner will be able to dribble in some
money doing online work while we are travelling. I have $60,000 in a term deposit, $20,000
in a high-interest account and zero debt. Where
would you suggest we invest this money? We
may want to look at purchasing a house when
we return so may need access to some of it.
Asher
Well, Asher, this is a lovely question to
answer. I quite often get questions like this
from retirees but rarely from people in your
majority of the
financial advice
industry steer clear
of assisting clients
to address their direct
property issues – ie,
strategy, research,
buy, hold, sell –
especially when
about 50% of the
average household
balance sheet
comprises direct
property?
Because as an industry we generally
can’t add value. Like most investors,
Vicki and I own a home and we own
investment property. Our home is
located to suit us and the kids, work,
transport, decent coffee places,
and so on. Any of us can make this
decision; it is not that hard!
With investment property, the
key rule is to buy what you understand. It is not hard to work out
where growing suburbs are thanks
to Bureau of Statistics data, which
is freely available. There is also any
amount of free data on property. All
we need to do is read and visit a load
of properties that are up for sale, and
we can make as good a decision as
any expert.
Incidentally, there are fee-charging
professional property buyers available if you are too busy, and they do
a good job.
One tip: avoid property seminars
like the plague. The promoters look
to flog their overpriced developments and finance. They get rich
while those who follow their advice
usually get poor.
MONEY MAY 2018 39
COVER STORY QUESTIONS ANSWERED
age group. What is terrific is that you can
fund this trip from your own resources
and some online work while you are away,
protecting the inheritance for the future.
About the only thing I regret not doing
is taking a year out at around your age and
spending it in Europe. But I had a good
job and I was concerned about not finding
another one. Basically I was just too conservative. This was an error on my part and
I am glad you are following your dreams.
With your money, I want you to keep it
safe and simple. Why not pop most of it in
a safe term deposit with one of our banks.
You’ll get about 2.7%. The rest you could
keep in a high-interest online account.
I am a keen sailor, though most of my
sailing is ocean racing, but I do love the idea
of pottering around Australia in a leisurely
fashion. Have fun!
IN your opinion, if they
did abolish negative
gearing what will be the
effect on: 1. House prices.
Will this drive mum and
dad investors out of the
market? 2. Rents. Will
investors increase them
to make up the shortfall?
Oh, for heaven’s sake, this
stuff is the sort of spin put out
by property floggers. We are
the only first-world country
with negative gearing. Other
countries have perfectly stable
property markets, generally
with less inflated prices and an
adequate supply of rental properties. They also tend to make
your home loan tax-deductible.
Now there is a radical
concept: make it easier for
all Australians to own their
own home rather than letting
tax policy drive up prices via
negative gearing.
40 MONEY MAY 2018
6. DO WE SELL
OUR OLD HOME OR
RENT IT OUT?
Q
My husband and I own our
$475,000 home (bank valuation,
with $260,000 mortgage at
3.74% fixed until September) in
the western suburbs of Melbourne. We are also
in the process of building a new, bigger home
(not far away) which will be ready to move
into in June. We are unsure whether to rent or
sell our current home. If we rent it, do we do
interest only and put the extra dollars towards
our new home to pay it off faster. The bank valuation is currently $760,000 but we are hoping
it will go up after completion ($680,000 mortgage at 3.85% variable).
We have no other debts and plan on having
a family in one to two years. We currently work
for others and make $220,000, plus super, combined. We are also in the process of starting up
a side business working from home, which may
take up some investment. We have no other
savings except for super, about $5000 in stocks
and $20,000 cash in our offset accounts.
Andrea
Well, Andrea, this is an exciting time for
you both. A new home getting close to
completion, starting a small home business
while you plan a family. My wife Vicki and
I have this sort of excitement in our lives.
Our oldest child, a son, has just returned
from working in Singapore with his wife to
take up a role with the same company here.
We now have a grandpuppy, and who knows
what the future will bring!
Our second child, a daughter, has just
bought a home with her long-term partner
and talk of babies and puppies is all around
us. Not to mention financial issues such as
yours, mortgages, bigger homes and so on.
All of this is also a great experience for our
youngest daughter, who is only 23.
As with our adult children, there are a few
key numbers that come into play. I’d love you
to be able to keep your existing home and
make it an investment for you.
The first number we need to look at is the
mortgage of $680,000 on your new home.
Repayments will be about $3200 a month, so
about $38,000 a year.
The next key number is income. It
depends quite a bit on what you each earn
but if I say $110,000 each then you would
both clear about $75,000. With $150,000
income after tax, yearly repayments of
$38,000 is a snack. But if you go to one
income as babies come along, then the
repayment is about half of your one income.
This is OK but then we need to go to another
key number, your interest rate.
Our mortgage was 18.75% in January 1990
and took decades to get back to about 7%.
Like an elephant I never forget, so never say
never when it comes to rising rates. If your
rate went up to 7%, on one income you are
looking pretty crook.
However, that said, there is no short-term
evidence of a rapid rise in rates. I also suspect that you would both be back at work
after starting your family. Also, as young
people I would think that your salaries will
rise and there is the prospect of additional
income from the business you are starting.
In fact, if you did sell your current home,
I suspect in a year or two you would be
looking to buy an investment property. So
while there are no guarantees for Vicki and
I, for our adult kids or for you, if I was in
your shoes I would keep your current home.
I’d switch to interest only and build as big
a buffer in your new home’s offset account as
quickly as you can.
ARE the overseas
markets, especially in
the US, due for a big
correction? Or are we past
the bad days of the subprime mortgage crisis and
back to the glory days
of prosperity.
Big changes ... Andrea
and Antoni are building
a new home and
planning a family.
Don’t worry about super at this early stage
in your life. Your employer contributions
will see that grow and compound in value.
Just make sure you are in a good, low-cost
fund and in a balanced or growth option.
While you are at it, check your insurance.
This may be in your super fund already. You
need enough death cover so if something
happens to one of you the other is protected.
You also need income protection insurance.
An illness or accident away from work
Good question. My view is we
are somewhere in between
these two extremes. The
media love either a boom
or a bust. Either generates
much interest, drives a greater
number of readers, viewers,
listeners or followers and
advertising revenue. The truth
is, though, that the global
economy spends most of its
time just muddling along.
Markets will always rise
and fall and we always have
had, and always will have, big
rises and falls. Right now the
global economy is in decent
shape. The big economic
drivers – the US, China, India,
Europe and south-east Asia –
are all growing. With a global
population growth of some 92
million a year, there is growing
demand, which is good for just
about every economic indicator, if not the environment.
could be catastrophic, in particular if this
happened to the primary income earner at
a time when you had young children. Sorry
to finish on a bit of a downer but insurance
just makes sense as you build debts and plan
a family.
With Vicki and my young adult family
full of enthusiasm for life, looking at homes
and contemplating families, I really understand what an exciting time this is for you.
Embrace every moment! M
MONEY MAY 2018 41
MY MONEY FINANCIAL LESSONS
21
things
I’ve
learnt
over
21 years
STORY
EFFIE ZAHOS
You don’t
have to be
a genius
to create
wealth.
Just use
common
sense and
follow some
basic rules
to achieve
your goals
I
don’t pretend to be a financial guru nor do I
pretend to be any wiser financially than some
of our Money readers. Believe me, some of
our readers are extremely money savvy and
I suspect quite a few of them could easily take
my seat as editor of this magazine. Having said that,
though, after 21 years on this wonderful brand I’ve
picked up some real money gems. Interestingly, the
ones that have stuck with me are the simple ones. It’s
easy to take risks and look good when the market is up
but it’s far more inspirational if you can build financial
security in an everyday situation because, let’s face it,
most of us sit in that world.
1
IT’S NOT WHAT YOU EARN THAT
COUNTS, IT’S WHAT YOU SPEND
Paul Clitheroe, Money’s chairman and chief commentator,
taught me this little gem when he offered me a job to
move from banking into TV on half my salary. Of course
he said it was a wise move, despite the lower pay, as it’s
“not what you earn that counts but what you spend!” On
a lighter note, another money-saving tip that I picked
up from Paul was to occasionally forget to bring your
wallet to lunch. He was known for this strategy back
when we were filming the popular Channel 9 program
Money in the late 1990s.
2
COMPOUNDING INTEREST CAN MAKE
YOU A MILLIONAIRE
The great Albert Einstein once said: “Compound interest
is the eighth wonder of the world. He who understands
it, earns it … he who doesn’t … pays it”. Put simply,
compounding interest means you earn interest on your
interest. A double boost for your savings! Throw time into
the mix and it is a serious money-making weapon. Take
this example: the average 25-year-old making $60,000
a year would only need to save and invest 10% of their
annual pay in fortnightly instalments and they’d have
over $1.3 million at 65. This assumes a return of 7%pa
and that they never get a pay rise.
3
NOTHING BEATS
THE BASICS
I keep things pretty simple and that works out just fine
for me. Making money is about buying good-quality
assets and holding them for a reasonable amount of
time. If you can ride out the bumps then you should
end up pretty well. As for where to invest, don’t overcomplicate things. There really are only a handful of
options you can invest in – yourself, cash, fixed income,
property and equities. There’s nothing mysterious about
these asset classes.
4
LEARN HOW TO
SAY NO
This has been one of the hardest skills for me to acquire.
I always took “no” as an insult to the person who was
asking for something to be done, when in fact it’s quite
the opposite. It shows that you have direction, focus and
a plan. Saying no can also be financially healthy too.
“No” to happy hour (again hard for me), “no” to extravagant dinners and “no” to keeping up with the Joneses!
5
I AM MY BEST
INVESTMENT
Invest in yourself and understand your net worth.
Be proud of your achievements and don’t be afraid to
take on risks. I moved from banking to TV and then
from TV into magazines. I had no experience in either
of these fields but that didn’t stop me from applying.
Women are often their own harshest critics. Don’t let
your insecurities get in the way of moving forward. So
long as you believe in yourself go for it!
6
I WILL CONTINUE TO
MAKE MISTAKES
Should I buy? When do I sell? There’s FOMO, or fear of
missing out. Often I am consumed by investor paralysis.
The best advice I have received is not to do nothing.
Doing nothing may be easier but it gets you nowhere.
7
BALANCE IS A
LOAD OF BULL
You can have it all: a full-time job, kids, partner and
a home, so long as you accept that it will come at a
price. On any given day my home looks as if it has been
burgled (and I have a cleaner!). I’ve missed countless
school presentations, though, to be fair, some of them
have been pretty lame. My beautiful husband (who’s
understanding 74.3% of the time) has accepted the fact
that I can be an emotional mess and that cooking is not
one of my strengths. And you know what? That’s OK!
8
LOVE
THY SUPER
Superannuation has all the key elements for wealth
creation: time, so the miracle of compound interest
can work; money goes in on a regular basis, so you get
MONEY MAY 2018 43
MY MONEY FINANCIAL LESSONS
the benefits of dollar cost averaging and, last but not
least, there are the tax perks! Earnings are taxed at only
15% inside a super fund. Once we move to a retirement
pension phase there is no tax on earnings.
9
NEVER MIX FRIENDS
AND MONEY
I learnt this the hard way. What’s worse than having to
chase up debt when the person on the receiving end is
a lifelong friend? Don’t get me wrong: I’m still happy to
help out but now I either just gift the money – far easier
and I can never be disappointed (it’s also good karma)
– or if it’s a big request I set up a formal arrangement.
10
BUSYNESS IS A THREAT
TO YOUR WEALTH
I’m like the builder without a finished home(thisis
actually true), the hairdresser without
a great cut and the finance expert
who could do with more time on her
finances. Often I’m so busy with work
that I neglect my own personal affairs
and this has cost me money. The tip
here is to make the time and get your
money working for you rather than
you working for it.
11
USE JUST
ONE CALENDAR
I’ve never really understood the concept
of having a personal calendar and a work one. There’s
only one of me so I run just one calendar. By scheduling
everything into the one diary I have a better picture of
what my personal and work commitments are.
12
COST PER WEAR IS MORE
IMPORTANT THAN COST
This needs little explanation and most fashionistas
would agree that Louboutins at just $2.64 per day are a
bargain. Disclaimer: you would have to wear the shoes
for 365 days in order to reduce the price to $2.64.
13
TIME IS MONEY
FOR YOU TOO
Doing everything yourself may save some cash but if
you believe your time is money then some quick sums
will tell you that it’s OK to outsource some services.
Your hourly rate should be at least double the cost of
the outsourcing.
44 MONEY MAY 2018
14
HAVE A PLAN – AND
STICK TO IT!
As Benjamin Franklin once said: “If you fail to plan,
you are planning to fail!” For me short-term goals are
just as important as long-term goals. Too often we
talk about saving for retirement and as I’m getting
older I’m certainly realising the importance of building wealth in the long term. But I need motivation
to get there, which is why my short-term goals are
just as important. Plan to have fun along the way
otherwise you may never get there. Visualise your
goals (short or long), put them down on paper and
focus on doing what’s needed to get you there.
15
SET YOUR SAVINGS
TO AUTOPILOT
The best thing I ever did was learn to pay myself
first, set up some money buckets and automate
my savings. I set up a periodical payment
of just $40 each payday to go into my
kids’ accounts. I almost didn’t do it, as
I thought $40 was too little, but at the
time that was all I could afford. That was
six years ago and to be honest I forgot I
had actually done this. The money was
never an investment for them but a cash
pot to be used either for their first car
or to help out with a post-HSC holiday,
which for the eldest is the end of this year.
16
BUDGETS AREN’T
SET IN STONE
I know people who’ve never done a budget and are
financially successful while others watch every cent
yet because of their circumstances continue to live
from pay to pay. If you’re going to do a budget you’ve
got to be honest with yourself. If you like to go to the
hairdresser every six weeks you’ve got to note that.
There’s no point making a budget that doesn’t reflect
your life. For me a budget is a living-and-breathing
document I revisit every six months. If you are going
to follow a budget it’s really important you have an
emergency fund attached to it, otherwise you set
yourself up for failure.
17
TRY TO WORK OUT WHAT
MAKES YOU TICK
Why are some people better savers than others? How
do advertisers trick us with “mid-priced” options.
What are the brain barriers that stop us from reach-
ing our goals. Understanding your financial psychology
could save you money. Take the time to find out why
you do what you do. The answers could be surprising.
18
YOU DON’T HAVE TO PAY
FULL PRICE
I’m never afraid to ask for a discount. Yes, there is a time
and a place to haggle. I’m not a big fan of going on an
overseas holiday and haggling a poor local on an item that
costs only a few Aussie dollars. I’m talking more about
haggling on everyday items at home. As I said in one of
our free e-newsletters, I saved $1878 in under four hours
by simply phoning my service providers and asking for a
discount. The surprising part was just how easy it was.
19
IF YOUR KIDS ARE BAD WITH
MONEY, LOOK AT YOURSELF
Long before kids get a taste of financial literacy in school,
theylearnfromthebankofmumanddadandthoselessons
(good or bad) can have a lasting influence. How much
damage have I done? I’m not too bad here. I’ve even gone
so far as to write a kids’ book about saving money as I
picked up very early that one of mine was a spendaholic.
I’ve managed to curb this illness and now I have one
reformed spender and another child who’s a great saver.
20
I MAY BE MY PARENTS’
RETIREMENT FUND
I’m in the “sandwich generation” and by definition that
means I’m a middle-aged individual who is pressured
into supporting both ageing parents and growing children. Yep – that sounds just about right. It’s important
to do a financial check-in with your parents and other
family members to find out whether they expect your
support in their later years. Don’t put your head in the
sand about this one as it will come back to bite you.
Better to know now rather than later.
21
PERSONAL FINANCE IS JUST
THAT ... PERSONAL
It took me a while to realise this. As editor of a finance
magazine I get to speak to some of the best experts in the
country. You’d think this would be good but to be honest
I always feel that I’m not investing enough, that there are
always better products to get into and that I don’t know
enough. I’ve finally put this down to fear of missing out – in
my line of work it’s to be expected but then I remember
that nothing beats the basics. Always remember that
what works for me may not necessarily work for you.
The important thing is that you reach your own goals. M
MONEY MAY 2018 45
MY MONEY RENTAL CARS
Crash
course in
insurance
STORY
NICOLA FIELD
That dream
holiday can
turn into a
nightmare
if you
don’t have
adequate
cover for
your rental
vehicle
A
rental car is a vacation freedom machine
but it can blow your budget if you’re
caught up in a bingle. Never assume you
won’t have a car accident on holiday.
This was a mistake I made two years ago
when visiting the Gold Coast. I knocked back the offer
to pay for additional cover on a rental car and within
20 minutes I’d wiped out the car’s side mirror pulling
into the hotel car park. The $600 repair bill undid all
my good work in researching the cheapest flights and
best-value accommodation.
The thing is, when you’re on holiday you’re probably
motoring in unfamiliar territory, and this can raise the
stakes of having an accident.
The daily hire cost of a rented car includes “loss
Premiums for standalone car
rental excess
INSURER
COVER FOR 5DAY CAR HIRE 1
CAR RENTAL
EXCESS
COVERED
EXCESS
PAYABLE
Hiccup
$84.49
$4000
Nil
Allianz Car Rental
Excess
$65.29
$4000
Nil
Carhireexcess.com.au $45.17
$4000
TripCover
RACV
Non-member
Gold member
Nil
$47.82 ($11.72/day) $4000
$32.72 ($8.02/day) $4000
Nil
$300
$74.67
$63.47
Nil
Nil
$4000
$4000
1 Assumes rental in Cairns from July 9-13, 2018 for a driver aged 30-plus.
Source: www.hiccup.com.au, www.allianz.com.au/travel-insurance/rental-car-excess,
www.carhireexcess.com.au, www.racv.com.au
46 MONEY MAY 2018
damage waiver” but if you’re involved in a collision you
could face an excess of around $4000 for a small car or
closer to $6000 for a four-wheel drive.
Even if the damage is relatively minor (as it was in my
case), you can cop a repair bill that exceeds the cost of
fixing the car. That’s because some rental companies add
a portion of the car’s daily hire rate to the cost of physical
repairs to compensate for the vehicle being off the road.
One way to avoid over-the-top repair charges or a skyhigh excess is to take out additional cover. However, taking
up the extra insurance offered by the car rental company
can add over $40 a day to the hire charge.
As a guide, Money looked at the cost of renting a Toyota Corolla from July 9 to 13, 2018 in Cairns, a popular
midwinter holiday destination. As the table shows (page
47 far right), it would cost $341.31 to rent the car through,
say, Hertz, but add in Hertz’s $44-a-day SuperCover and
the total leaps to $517.31.
Both Thrifty and Europcar take a more complex
approach with several tiers of cover that can see the base
hire rate skyrocket from $279.62 to as much as $481.27
in Europcar’s case.
To further muddy the waters, adding extra cover to
your wish list can also increase add-on fees such as
administration and location charges, pushing up the total
cost by more than the advertised premium.
The cost of cover isn’t the only problem. The terms and
conditions for each excess waiver product are spelled out
in product disclosure statements. However, it’s unlikely
most holidaymakers will spend the first 15 minutes of
their vacation wading through a policy document.
Those who do may be surprised to find they aren’t
always completely covered despite product names that
suggest otherwise. Tyres and windscreens are common
exclusions, along with damage to the car’s
undercarriage or roof or water damage.
Giventhehighpremiums,it’shardtoseehow
car rental companies aren’t making money on
these policies, and a survey by Canstar Blue
found 57% of hire car customers purchased
extra insurance from the rental company.
However, there are ways to avoid a high
excess without blowing your holiday budget.
Standalone excess cover
A number of insurance companies offer
standalone excess cover. With TripCover it
costs $8.02 a day if you’re happy to wear a
$300 excess, or $11.72 a day for zero excess –
around a quarter of what you’ll pay with Hertz.
Check what your motoring association
offers too. For example, RACV members can
tap into extra savings on this type of cover.
Not only are these standalone policies a lot
cheaper than cover purchased through a car
rental company, you could also enjoy greater
protection. Allianz and Hiccup, for example,
both include cover for tyres, windscreens,
glass, undercarriage and overhead damage.
Despite the savings, there are downsides.
If you have an accident you may need to pay
the car rental company for the cost of damage, then claim it back from your insurance
company. In addition, this type of insurance
protects just one aspect of your vacation. Pay
a little extra for travel cover and you can be
protected for considerably more.
Travel cover
Not all travel policies include car rental
excess but where they do consumers can
enjoy good value. With Zoom Travel Insurance, for instance, the $70.55 premium on
our hypothetical trip to Cairns doesn’t just
include $5000 worth of car rental excess, it
also buys cover for lost luggage, travel delay
expenses, accidental death and more.
Always check the policy document to see
how much you’re covered for. Go Insurance’s
car rental excess cover is worth $2500, potentially leaving drivers with a shortfall.
Credit cards
Complimentary travel insurance is a common
perk of premium level credit cards, and it often
5-star rated travel insurance:
products offering rental vehicle
excess cover for family domestic
cover
COMPANY
PRODUCT
includes car rental excess cover, though the
level of protection varies widely, so be sure
to read the policy document.
Westpac’s Altitude and Platinum credit
cards, for instance, include up to $5500 in
cover for cars rented in Australia. National
Australia Bank’s complimentary card insurance includes rental car cover up to $5000
though with a $300 excess.
The travel insurance on the Commonwealth
Bank’s card includes just $2250 worth of car
rental excess, possibly leaving the driver with
inadequate cover.
The verdict
If you need a rental car for purposes other than
a vacation – for example, your own vehicle
is being repaired – standalone excess cover
makes a lot of sense.
If you’re confident that your credit card’s
complimentary travel cover provides the
protection you need, it can be a money-saving
option. But where that’s not the case, travel
insurance offers good all-round value.
Importantly, stick to the rental company’s
hire rules. Break these and you can void your
cover no matter which insurance option you
drive away with. M
Rental car insurance costs
CAR
RENTAL
RENTAL
COST 1
COMPANY
RENTAL VEHICLE
EXCESS COVER
– MAXIMUM
BENEFIT
TOTAL
EXCESS
PREMIUM
Budget Direct
Domestic
$4000
$98.13
$100
Go Insurance
Go Plus domestic
$2500
$82.49
$100
InsureandGo
Gold domestic
$5000
$79.19
$100
InsureandGo
Silver domestic
$4000
$73.60
$100
Online Travel
Insurance
Domestic
$30001
$92.11
$200
World2Cover
Travel Insurance
Domestic
$5000
$72.00
$100
Zoom Travel
Insurance
Domestic
$5000
$70.55
$0
EXCESS WITHOUT
ADDITIONAL
COVER
COST OF ADDITIONAL COVER
TOTAL CAR
RENTAL
COST WITH
ADDITIONAL
COVER 1
Hertz
$341.312
$4560
$44 per day
$517.31
Budget
$268.98
$4500
$100
$409.01
Damage recovery
$4000
Single vehicle
accident $2200
$27 per day – reduces damage
recovery fee to $500. Single
vehicle accident fee of $2200
still applies.
Thrifty
Europcar
$246.70
$279.62
$4730
$378.97
$33 per day – zero excess
$408.40
$128.83 collision damage waiver
$159.64 super collision damage
waiver
$201.65 GoZen
$408.45
$439.26
$481.27
1
Source: www.canstar.com.au. Based on Canstar’s 5-star rated products in the Family Australia
profile from the 2017 Travel Insurance Star Ratings. Quotes, as of 23-03-18, are based on travel
within Australia for a family travelling five days in mid-July. Quotes obtained for a family with ages
45, 45, 15 and 11.
1
Cover for an excess of $2000 to $10,000 is an optional extra with the additional cost reflected in
the premium.
Assumes rental of a Toyota Corolla in Cairns from July 9–13, 2018 for a driver aged 30-plus.
Based on “pay later” rental option as Hertz SuperCover is not currently available to organise online for “pay now”
car hire rate.
Sources: www.hertz.com.au/rentacar/reservation, www.budget.com.au/en/home, www.thrifty.com.au,
www.europcar.com.au
Prices as at 25-Mar-18.
2
MONEY MAY 2018 47
MY MONEY OLDER CHILDREN
STORY ALEX MOFFATT
Adult children
are remaining
at home for
longer. Here
are 11 things
they can do to
gain financial
independence
Live
and
learn
O
ne of the toughest issues parents find themselves dealing with in today’s world is children
living at home into their 20s and sometimes
– heaven forbid – beyond. While the companionship of still-living-at-home-children/kids
(SLACKs) can be heartwarming, it’s hard not to think that
somehow these children are refusing to face the real world
and all the financial responsibilities that entails.
Last year’s census showed that between 2011 and 2016 the
proportion of 20- to 24-year-olds living with their parents
grew from 41.4% to 43.4%. For 25- to 29-year-olds, the jump
was from 15.7% to 17%. It is a trend that is hard to ignore and
one that shows no sign of changing, certainly while house
prices keep heading north.
Several years ago, the author Robyn Hartley wrote the
following for the Australian Institute of Family Studies about
the trend: “Young people leave home willingly or reluctantly.
They leave with confidence, hope and a sense of adventure.
They leave with trepidation and anxiety, in fear, disgrace and
despair. They may be encouraged out, helped out, pushed
out, run out. They may be clung to, cried over, exhorted to
stay. When the young leave, parents sigh with relief, weep
for the loss, fear the worst, hope for the best.”
One of the greatest gifts that parents can give young
adults who live at home is to encourage (implore? exhort?
demand?) them to learn some financial and life skills to
prepare them for the inevitable time when they move into
their own accommodation.
Gaining such skills improves their chances of attaining
financial independence and success. Instead of the children
leaving home with trepidation, they will depart with a keen
eye and enthusiasm for their financial future. Their future
husbands/wives/partners will thank you for it.
48 MONEY MAY 2018
1
WORKING
(AT LEAST PART TIME)
Having a job, if only part time, not only improves independence but gives a feeling of self-worth and allows
young people to learn the value of money – how to earn
it, how to save it and how to spend it. Some parents
chip in by matching their children’s earnings/savings
dollar for dollar.
2
PAYING RENT
(EVEN A NOMINAL AMOUNT)
Paying rent to parents while living at home is a way of
enforcing saving. It also teaches budgeting and starts
the process of planning for essential expenditure. Of
course, many parents end up returning the accumulated rent by paying it back to their children when they
eventually move out.
3
SAVING
AND BUDGETING
According to a recent survey, the “bank of mum and dad”
now ranks as Australia’s fifth largest mortgage lender.
Children who earn, budget and put aside savings each
week/month, and who see those savings grow and earn
interest, learn discipline. Saving and budgeting also
provide huge satisfaction and increased confidence to
young people. A statistic worth remembering is that five
years of saving $100 a week adds up to the princely sum
of $26,000, not including interest. That’s enough to buy
a car. Living at home allows children to save in many
ways – doing their own washing and ironing, cooking
and eating at home, and washing the car with a bucket
of warm soapy water.
PAYING
DAY-TO-DAY EXPENSES
Young adults who pay their day-to-day expenses, such
as a car, mobile phone or gym membership, particularly
from their own savings, develop greater discipline,
are more aware of budgeting techniques and develop
a keen understanding of the issues of essential versus
discretionary spending. Spending other people’s money
is easy; spending your own sharpens the mind.
6
WHAT REALLY
IS NECESSARY?
Young adults need to learn about what is necessary and
what is extravagance. Perhaps the old iPhone can do
another couple of years before it is upgraded? Is a BMW
really the best car for a 21-year-old? Understanding the
concept of discretionary spending creates in young adults
a greater respect for money and the things that it can
buy. Importantly, it also earns the respect of parents.
7
VOLUNTEERING
FOR A CHARITY
Volunteering, perhaps for a charity, improves perspective and reinforces that there are many others worse
off. It gives young adults a greater sense of self-worth,
particularly when they see the results of their work
and are thanked for their efforts. There are plenty of
charities looking for help.
8
BUYING SHARES
(IDEALLY IN BLUE-CHIP COMPANIES)
Gaining a knowledge of the stockmarket and other
investment opportunities should be a large part of any
young adult’s financial education. Investing (ideally
their own money) creates a good discipline for longterm savings, develops the skills of asset valuation,
and teaches patience and, occasionally, how to handle
disappointment. New investors should resist the temptation of making a quick buck via speculative investments
including cryptocurrencies.
4
PUTTING A DEPOSIT
ON A HOUSE/APARTMENT
Many young adults remain at home to save money to get
a toehold in real estate. Real estate prices in Australia
may be out of the reach of many but the sooner a young
adult can put a deposit – no matter how small – on a
modest house or an apartment the better (so long as they
are not locked into unachievable mortgage payments).
Rent paid by tenants in the apartment or home can help
pay the mortgage.
Again, putting a deposit on real estate involves planning and budgeting, and teaches the value of attaining
a large goal by making small steps and about the value
of what will probably become a person’s major asset (or
liability). I have a friend who, in the early 1990s, took out
a mortgage and invested in a three-bedroom apartment
with a bay view in St Kilda, Melbourne, putting all rent
from tenants into paying off the loan. Three years ago
she became the unencumbered owner of the apartment,
in one of Melbourne’s hippest suburbs, now worth close
to $2 million. And she didn’t outlay a cent.
5
Spending
9
otherpeople’s
money
is easy;
10
spending
your own
sharpens
the mind
TAKING A BACKPACKING HOLIDAY
IN A THIRD-WORLD COUNTRY
Equally, few things beat a cheap backpacking holiday in
a third-world country such as India, Nepal or Indonesia,
or many parts of Africa, to teach a young adult some
perspective, and how far some hard-earned savings
really can go when travelling.
DON’T BE A SLAVE TO FASHION – THOSE
MUST-HAVES CAN BE EXPENSIVE
While that new pair of $350 Jimmy Choo shoes or a
Prada handbag might be fashion’s latest must-have, they
are very expensive and will eat quickly into hard-won
savings. Young adults who fall into the trap of needing
the latest fashions rapidly find their savings disappearing. Far better to shop frugally and save more. And,
remember, when the time comes for a car, white ones
are always cheaper than coloured ones.
HELPING
AROUND THE HOUSE
Houses don’t run by themselves. There is washing,
cleaning, cooking and tidying to do. Parents should set
a roster so children can get involved in all these things.
Kids doing their own laundry is a complete no-brainer.
Perhaps they could buy food for, and then cook, dinner
once a week. Some might even have a crack at cleaning
the bathrooms every now and again. M
11
Alex Moffatt is a wealth manager at Joseph Palmer & Sons.
MONEY MAY 2018 49
MY MONEY SHOPPING
Buying
v hiring
STORY EFFIE ZAHOS
If you don’t want to buy an item for the wardrobe or
home, it’s easy these days to hire it. We look at three
purchases to see how the numbers stack up
The dress
The fridge
The movie
Camilla and Marc Bowery slip dress in navy
Cost: hire $159 v retail $599
Where: yourcloset.com.au
Westinghouse 605L with French doors
Cost: hire $25.99pw (48 months) v retail
$1857
Where: radio-rentals.com.au
Bad Moms 2
Cost: hire $6.99 v retail $19.99
Where: iTunes
If you were to wear this dress four times,
then you’d be better off buying it rather
than hiring it. But if you’re a fashionista
who never wears the same item twice, then
you’d be better off hiring it. Welcome to
the many designer rental websites where
new-season dresses can cost less than your
dry-cleaning bill.
Be sure to factor in any postage and
handling fees (express shipping on Your
Closet is free on orders over $150). Ask
how they would handle the return if, for
whatever reason, the dress didn’t fit. Check
late fees and be sure to get the answer to
this all-important question: “What happens
if I spill a drink on it?”
Mostcompaniesincludedry-cleaningwith
each rental but, depending on the damage,
you may be asked to pay the retail cost of
the dress less your rental fee. Insurance
cover of up to $100 is included with Your
Closet rental fees.
Verdict: Overcomes the social pressures
(and costs) around having to wear a new
outfit for each social event. Just be sure you
don’t abuse the system as it could end up
costing you more. Personally, I like to invest
in a few classic pieces and wear them to
death because that’s when CPW (cost per
wear) works out in your favour.
50 MONEY MAY 2018
Some quick sums here show that you’d
end up paying three times the retail price
of the fridge if you took out the 48-month
option, or just over twice the retail price
if your contract was for 36 months. The
total cost of this arrangement really doesn’t
hit home when it’s advertised as a weekly
cost. While there may be benefits to hiring, be sure to find out your total costs,
whether you end up owing the item at the
end of the term, if there are termination
and/or cancellation fees if you break the
contract and whether you’re paying more
for insurance.
Verdict: Tread with caution. Use the rent
versus buy calculator at moneysmart.gov.
au to see which is the better deal. There
may even be other options that are cheaper, such as taking out a personal loan to
buy the fridge rather than hiring it or, if you
qualify, applying for a no-interest loan of
up to $1500 from not-for-profit Good
Shepherd Microfinance.
If you buy a movie on iTunes you can watch
it any time and as often as you want. If
you rent a movie, you have only 30 days
to decide when to watch it. Then once
you hit “play” you have 48 hours from
that point to finish it. You can download
your rental on one device and also stream
it on another. Unfortunately, only 38% of
movies and 39% of TV titles available in
the US via streaming services are available
here. So while we may be spoilt for choice
on the number of streaming services to
choose from, we have less than half of
the catalogues of their US counterparts.
Verdict: Movies are cheap to rent but
expensive to buy. Unless it’s a classic, one
that you intend to watch over and over
again, then the answer is to rent it. Just
compare prices with other services. Google
Play, for example, has this same movie to
rent for $5.99 and to buy for $18.99. M
Effie Zahos BANKING
Truth behind comparison rate
The widely used number is becoming outdated and needs to be refined
T
here’s a home loan that’s advertised
for 3.69% and another for 3.52%.
Which do you choose? Savvy
shoppers know that aside from looking at
features you should never compare loans
based on their advertised rates but rather
their comparison rates. The problem with
this, though, is that some experts are now
suggesting that comparison rates may have
passed their use-by date.
Vincent Turner, CEO of online mortgage
broker Uno Home Loans, says comparison
rates, while noble in their intention, don’t
accurately demonstrate the true cost of a
loan to the consumer. “The main reasons
for this are that comparison rates are
calculated using a loan value of $150,000 –
significantly less than the value of the average Australian mortgage – and are always
calculated across a 25-year term.”
By law lenders must show you the comparison rate. The figure typically includes
the interest rate as well as most upfront and
ongoing fees and charges.
Whatever its shortcomings, it does help
customers identify the true cost of a loan.
As an example, a loan with an advertised
rate of just 3.74% and no establishment
fee could have a comparison rate of 4.06%
because of an ongoing annual fee and a
discharge documentation fee.
Low headline rates that increase after
a certain period and loans loaded with fees
are a good example of why comparison
rates still have a place. But as Mitchell
Watson, Canstar’s head of research and
ratings, says, there’s an opportunity for
refinement of the comparison rate to make
it more useful for consumers.
“The loan amount is too low against the
Australian Bureau of Statistics’ reported
national average of $400,000 and a loan
seldom goes the full 25-year term,” he
says. “The impact of this is that a low loan
amount inflates the impact of fees and a
longer term largely sanitises the impact of
upfront fees.”
He also notes that there are now more
complex loan structures that the comparison rate hasn’t necessarily kept up with,
undermining a level of its comparability.
Also not all fees are included. Some
smaller lenders that claim no legal or settlement fees, but then ask consumers to pay
a third party to cover these services, are
unfairly showing lower comparison rates.
“This is one particular area that needs
to be addressed to ensure that a consumer
is using a comparison rate they can truly
compare and it isn’t influenced by lender
business structure,” says Watson.
Turner’s concerns lie with the fact that
for larger loans the interest rate usually has
a bigger impact on cost than fees. A small
discount on the interest rate can often
negate an annual or ongoing fee.
“Because comparison rates are calculated
using a small loan size, they heavily penalise loans that have upfront or ongoing fees,”
he says. “This can make loans that would
be cheaper for a customer borrowing a
large amount look more expensive.”
Take his example where a customer
borrows $800,000 over 25 years.
Option 1 has a variable rate of 3.7%, a
$300 upfront fee and a $395 annual fee, and
would cost $1,237,568 over the life of the
loan. Option 2 has a variable rate of 4.14%
with no upfront or ongoing fees, and would
cost $1,285,709.
Option 1 costs nearly $50,000 less but
both loans have the same comparison rate
of 4.14%. This is because the comparison
rate overestimates the impact of the $300
upfront and $395 ongoing fees on the cost
of Option 1.
So where to now? Canstar’s Watson says
the comparison rate should be updated to
reflect new consumer borrowing behaviours, ensure fee comparability across
the market and define the treatment of
new complex structures such as
loan-to-valuation (LVR) tiering.
“Ultimately the comparison rate is not
going to work for every borrower’s situation or account for every variability,” he
says. “However, it is a good guide to help
understand any fee or rate escalation that
can occur on a product which may then
alert the borrower to look further into the
loan before applying.”
In the meantime, Turner suggests that if
you are comparing loans a good idea is to
calculate the interest portion of monthly
repayments over a certain time frame for
each loan and add costs.
“The cost over the first three to five
years of a loan is a useful comparison point
when taking out a new loan because it is
difficult to predict lenders’ pricing long
term. However, consumers should also
be undertaking an annual review of their
home loan to ensure their home loan is still
competitive in the market.”
Finance expert and author of The Great
$20 Adventure, Money’s editor Effie Zahos,
appears regularly on TV and radio. She
started her career in banking.
MONEY MAY 2018 51
FAMILY
MONEY Susan Hely
F
How to help ageing parents
Make sure your own
financial future is secure
before you step in
M
y parents’ finances were hit
hard by the GFC. They became
super-frugal and worried about
money. My dad, who had remarried and
had a new family, tried to make up his losses by picking winning shares – a strategy
that had worked for him decades earlier but
was disastrous in his 80s. My mother went
on the age pension and stopped spending.
My parents didn’t want to ask their middle-aged kids, with their own financial
responsibilities, for any assistance. And it
was hard to broach the delicate topic. They
were stubborn and proud.
When your elderly parents need a bit of
financial help, what do you do?
Before you jump in, make sure your own
finances are sound. You certainly don’t
want to jeopardise your own future. Any
decision depends on how much they need
and for how long. Ask yourself: what are
the long-term costs and benefits?
I have a friend whose parents didn’t have
much income in their retirement, apart
from the age pension, but they did own
their home. She bought it to provide a cash
pool for them. This generous act allowed
her parents to stay there and she benefited
from negative gearing and the tax deductions because she borrowed to invest in the
property. She is responsible for all outgoings such as the rates and all the deductible
Age takes its toll
Cognitive studies show that the ability to manage complex tasks diminishes
as people get older. For financial tasks the
decline typically starts after 60.
Many ageing parents don’t want to admit
that they’re having trouble managing
money. This can lead to a snowballing of
financial woes. It is another reason
to keep your finances straightforward as you age.
52 MONEY MAY 2018
expenses, freeing up further cash for her
parents. This arrangement does have negative implications for the age pension but
her parents have a much better lifestyle.
Financial planner Jason Petersen, from
5 Financial, says he is seeing more clients
who are helping their ageing parents. He
says elderly people are typically asset rich
but cash poor as the compulsory superannuation system has only been in operation
for 26 years, not long enough to set people
up for a long retirement.
Petersen suggests these options:
• Set up a loan
If you lend your parents money, it doesn’t
impact on the age pension. But if you give
it to them, either as a lump sum or regular
deposits, it is counted in the income test.
If your parents own their home, they
could take out a reverse mortgage. But
adult kids might prefer to give them a line
of credit instead. With reverse mortgage
interest rates at around 6.2%, Petersen says
parents will save around 2% if their kids
lend them the money.
He recommends documenting all loans
over $10,000. It is important proof in case
of a dispute with other family members and
the loan isn’t referred to in the will.
• Consider a family trust
Some families are setting up discretionary
trusts to pay their parents an income, says
Petersen. The advantage of doing this is
that adult children don’t pay tax on the
money distributed to their parents as their
parents probably don’t pay tax or are on the
lowest rate.
Petersen recommends a family trust for
people who have more than $1.6 million in
superannuation. The excess can be placed
into the family trust but to be cost effective
you need to have $200,000 to $300,000 to
set one up. The annual running costs are
typically $2000 to $3000, which can be offset by the tax saving.
• Prepare a budget
Often ageing parents are generous with
their money and gifts and so they can be
preyed on by charities. You may have to
help rein in their donations. Setting up
a budget for them can give them a clear
sense of where their money should go,
particularly for food and services.
• Be aware of family dynamics
While there are plenty of good stories of
children pulling together to help parents,
there can be family dramas. Often, elderly parents are being pulled in all sorts of
directions. You don’t want to bail out your
parents and have them give your money to
other family members. Sometimes it might
be better to organise their groceries or the
house repairs or pay for services such as
health insurance.
Susan Hely has been a senior investment
writer at The Sydney Morning Herald. She
wrote the best-selling Women & Money.
Anthony O’Brien BUSINESS SOLUTIONS
Funds needed to get into the golf
NAME: Glenn Palmer
BUSINESS: Putt18, Blue Bay,
NSW.
QUESTION: I need to access
more funding so I can produce
additional units of our interactive
golf putting mats and to invest
in some marketing. What are
my options?
I
’m the owner of Putt18
located at Blue Bay on the
NSW Central Coast. Putt18
is an indoor interactive golf
putting game that can be used
at home or in the office, in
schools, clubs and sports bars.
While it can be fun for the fam-
ily or friends, it can also help
improve golfing skills.
The business was launched
at the PGA Merchandise Show
in Orlando, Florida, in January
2017. Our putting mats sell on
Amazon or putt18.com.au from
$159.95. We are selling units in
Australia and overseas and
believe we can sell more mats
to help grow the business.
We’ve been down a few paths
to get some funding to grow
the business. We produced our
first round of units with some
funding from a relative and
have accessed some government grants.
could
get up
term can
for an
1Fintechs
2Prospa:
3Moula:
4Look
fill the gap
to $250,000
be extended
investor
With tens of millions playing golf
Your business must have a
With a Moula short-term unseworldwide, you could well enjoy
monthly turnover of more than
cured business loan, you can borthe rub of the green with Putt18
$6000 and demonstrate six
row between $5000 and
although landing a financial eagle
months of trading to be eligible for $250,000. Loan terms range
is your big challenge at present.
a loan from Prospa. From your letfrom six to 12 months, with term
The best way to fund growth is ter, Putt18 ticks the second box.
extensions available to two years.
to reinvest some profits into the
With Prospa, you can borrow
There are no upfront fees, no
business. If this isn’t an option,
between $5000 and $250,000
transaction charges and no pendipping into a mortgage held
alties for early repayment. Interwith loan terms from three to
24 months. If you borrow more
against an asset such as your
est is charged at 1% a fortnight,
than $50,000 you’ll need to prohome might prove a cost-effecwhich is a significant impost but
vide some basic financials.
tive way to access some finance,
typical of these short-term lendYou’ll pay between 1% and 3%
advises Tony Haworth, a senior
ing platforms. You must also be
in interest per month depending
partner at AAP Finance Brokers.
able to show monthly sales of
on the health of the business. The
If you don’t have a mortgage,
$5000 to be eligible for a small
establishment fee ranges from
fintech firms such as Prospa and
business loan from Moula. Other
1.5% to 2.5%, depending on the
Moula could fill the void. These
eligibility criteria include an ABN
amount you borrow. Repayments
online, non-bank lenders offer
or ACN, and you must show
can be made daily, weekly or fortbusiness finance based on your
some proof you have been in
nightly and will include interest,
cash flow rather than askbusiness for six months by
principal and any fees.
ing for some security.
means of your bank
Jason Day is
There are no
This may only
statements and
There were
Australia’s highest
penalties for
be a short-term
accounting data.
ranked golfer, having
early
solution.
Moula works
amassed a total of
repayHaworth
with Xero, MYOB
golf holes in the world
ment.
warns that
$US40,272,953 and Reckon cus($A52,477,268.68)
in 2015
Call
there are traps,
tomers. You can
scottishgolfhistory.org
in career earnings.
Prospa on
such as higher
find out more on
1300 882 867.
interest rates.
1300 885 893.
576,534
Anthony’s tips
Your letter indicates you sought
financial assistance from a relative. If this source has dried up,
have you considered finding an
investor to partner with you?
However, unlike Prospa and
Moula, an investor – regardless of
whether they are a golf enthusiast, banker, venture capitalist
or business angel – will want to
see business plans, cash flow
forecasts and existing client contracts before sinking money into
your company.
It’s also fair to expect that an
investor will want to understand
your business model and marketing strategy and see evidence of
your sales skills before taking a
chip shot on Putt18.
Anthony O’Brien is a small business and personal finance writer
with 20-plus years’ experience in
the communication industry.
■ Callout
Are you a small business owner with a challenge you’d like Money to help solve? Email anthony@corpwrite.com.au with your question and
contact details. You must be willing to provide a photo.
MONEY MAY 2018 53
W
WHAT IF? Annette Sampson
Banks tighten their
lending standards
All borrowers could be affected eventually, possibly
leading to a credit crunch and falling house prices
IS THAT LIKELY?
If you’ve been following the banking royal
commission you’d be aware that it has
painted a poor picture of how the banks
assess loan applications. Commonwealth
Bank has admitted that a technical glitch
saw it approve thousands of overdrafts
without recording any living expenses
while ANZ admitted to contacting
customers offering them “pre-approved”
overdrafts without properly checking
whether they had the ability to pay.
ANZ also admitted it did not undertake
any checks on living expenses claimed
by borrowers in mortgage applications
made through brokers. There have also
been allegations of bribery, falsified loan
documents and other misconduct.
This is despite the existence of the
responsible lending provisions of the
National Credit Act, which require lenders to make reasonable inquiries before
approving a loan. The Australian Securities
and Investments Commission last year
launched a civil action against Westpac for
allegedly flouting this requirement.
Westpac and ANZ have reportedly tightened their assessment of loan applications,
and while the royal commission is not due
to report until September most analysts
are predicting banks will continue to act to
reduce irresponsible lending.
BUT ISN’T THAT A GOOD THING?
It’s hard to argue that the banks shouldn’t
make more effort to ensure they are not
making loans to people who can’t afford it –
especially as they’re already legally obliged
to do just that. But while changes will only
affect marginal borrowers, investment firm
UBS warns all borrowers could ultimately
be affected.
As banks revert to undertaking a full
assessment of each credit application,
including a more thorough analysis of customers’ income, living expenses, assets and
liabilities, UBS says there is the potential
for a credit crunch which could lead to falling house prices and a broader economic
slowdown. “Mortgage (and other consumer
credit product) underwriting standards in
Australia seem to have been lax for some
time,” it says.
While the Australian Prudential Regulation Authority is getting tougher with
lenders, UBS says the evidence to the commission so far suggests there is still a way
to go. It paints two possible pictures.
In the rosier scenario, banks will tighten
their standards and gradually reduce the
assessed household income of borrowers.
This would lead to a steady reduction in
the flow of credit and a slow easing in the
housing market.
In the more extreme scenario, UBS says
the commission could set a strict definition
on the “reasonable inquiries” lenders must
make, effective immediately – including
tighter assessment of your income and
THE CHALLENGE Maria Bekiaris
Stop unwanted calls
Add your number to a register or download an app
I
f, like me, you Google a number you don’t
recognise instead of actually answering
the phone, then you’d really hate receiving
telemarketing calls. Research by Choice
found that 89% of people received at least
one unsolicited call in a six-month period
and 25% of people receive unwanted calls
from charities on a weekly basis.
The good news is that there are a number
of steps you can take to, at the very least,
54 MONEY MAY 2018
reduce the number of unsolicited calls
you receive.
The first thing you should do is add your
number to the Do Not Call Register at
donotcall.gov.au. It won’t cost you anything
and you only need to do it once. The
Australian Communications and Media
Authority, which manages the service, says
a reduction in calls should be noticeable
after 30 days.
DID YOU KNOW?
mating their outgoings. The measure is
Mortgage broker commissions have
also unlikely to give a true picture as it is
also been highlighted by the royal commission
based on a modest standard of living
with Commonwealth Bank general manager of home
for various types of households. It is
buying Daniel Huggins admitting there is an incentive
defined as the median spend on
for brokers to maximise their income by putting borrowers
the absolute basics (things like
into larger loans over longer terms.
most food, children’s clothes,
utilities, transport costs and
BEST-CASE SCENARIO
communications) and a top
The banks move slowly to address their shortcomings with a gradual
25% spend on discretiontightening of credit availability, though even this would likely dampen
ary basics such as childhousing prices and the broader economy.
care, entertainment and
adult clothing. In reality,
WORST-CASE SCENARIO
the figures used are a
A full-scale credit crunch leading to an economic downturn. House prices
lowball estimate.
could fall substantially over several years and if this feeds through to the
In its rosier scenara full review of your living
broader economy we could see existing borrowers becoming financially
io, UBS says the banks
costs. This could lead to
stressed, leading to broader credit problems.
would slowly increase this
a sharp reduction in how
measure over time. But
much they will lend to borTHE WILD CARD
more drastic action, such as
rowers and largely wipe out
UBS says the impact of tighter lending standards is likely to be
lifting it to more realistic levfalse applications. That could
exacerbated by the rollout of comprehensive credit reporting that
els immediately and including
lead to a credit crunch, especially
will require all banks to give credit agencies much more data
“lumpy” items you might incur
for lower-income households, which
on your credit history. This will give lenders a much
over the full term of the loan, could
in turn could lead to a significant ecomore complete picture of your finances when
see a much sharper contraction on
nomic slowdown. In this case, UBS warns,
assessing your loan application.
credit availability.
the Reserve Bank could not help by reducPut simply: either way, the amount you
ing interest rates as the capacity of borrowcan borrow would be reduced; it is just a
ers to service their loans is assessed using
claimed expenses, lenders use this measure question of how much and how quickly.
a minimum interest rate of 7.25%.
as a check. In most cases, they simply use
UBS has estimated in some instances it
whichever figure is highest – your declared
could reduce consumers’ borrowing
expenses or your estimated expenses using
PROBLEMS IN GETTING
capacity by up to 40%.
this measure.
A TRUE PICTURE
Key to the whole picture is a statistic called
The problem is that neither may give an
Annette Sampson has written extensively on
the household expenditure measure. This
accurate picture of your day-to-day living
personal finance. She was personal finance
is an estimate of household spending based
costs and how much you have left over to
editor with The Sydney Morning Herald,
a former editor of the Herald’s Money
on more than 600 items from the Australiservice your loan. It is human nature for
section and a columnist for The Age. She has
an Bureau of Statistics’ household expendiborrowers to present a rosy picture when
written several books.
ture survey. Instead of verifying borrowers’ applying for a loan, including underesti-
It won’t stop SMS marketing and doesn’t
stop all calls. For example, you may still get
calls from charities or for surveys.
The next option is to use Google or a
reverse lookup service such as reverseau.
com or reverseaustralia.com to try and find
out who is calling. It won’t always work but
if you can figure out who has tried to
contact you and it is a nuisance call you can
block them.
Some Samsung Galaxy phones have an
in-built feature to flag suspicious calls,
which would definitely come in handy. But
you can also try it yourself.
On an Android phone you can select the
number from your call log. Press down on
your phone and an option will pop up to let
you block/report as spam.
On an iPhone you simply select the
number from recents and press “i”. Scroll
down and you’ll see the option to “Block
this caller”.
Another option is to download a caller
ID app that can help you identify unwanted
callers and spam calls.
One free option, which is rated highly
and is available for both iOS and Android,
is Truecaller, which filters and blocks
spammers and also filters junk SMS
automatically. Another popular app
available for Android phones is Hiya, which
says it helps millions of users identify
incoming calls and texts from unknown
numbers, spammers and telemarketers.
You can try a few of these types of apps
to see if they help stop unwanted calls.
Needless to say, you should also think
twice before giving out your number. It’s
a good idea to keep it off social media and
avoid putting it on any online forms you
need to fill in.
If you are getting calls from an
organisation you’d prefer to no longer hear
from, then the best way to put a stop to the
calls is to actually answer the phone and
make that clear when you speak to them.
Just politely ask them to remove you from
their call list.
MONEY MAY 2018 55
PROPERTY AREITs
Real estate trusts
are poised to deliver
solid, rather than
spectacular, returns
for long-term
investors
Yields for
the taking
STORY PAM WALKLEY
A
ustralian real estate investment
trusts (A-REITs) have underperformed the broader sharemarket
over the past few months with many
now trading at either discounts or
only slight premiums to their net tangible assets.
So does the sector now represent good buying?
Certainly for investors seeking reliable regular
income, A-REITs are a good fit. And if Labor wins
the next federal election and its proposed changes
to the dividend imputation system (limiting tax
refunds to those who pay tax or are full or part
pensioners) go ahead, A-REITs are likely to be
more popular among investors chasing income.
Although the sector is not producing the double-digit returns it did two or three years back, it
continues to provide reliable yields, says Dinesh
Pillutla, managing director of Core Property, an
independent real estate researcher. Some of the top
stocks chosen by Core Property’s head of research,
Selwyn Chong, as good long-term prospects for
Money readers are yielding 7% plus (see breakout).
After a mixed year for A-REITs in 2017, when
total returns averaged 6%, Pat Barrett, investment
analyst with UBS, which invests in the sector,
expects total returns of 8% this year – 5% from
income and 3% from growth.
56 MONEY MAY 2018
The APN property group, also an
A-REIT investor, has a slightly more
bullish prediction of a total return of
between 8% and 12% for the sector over
the next 12 months.
APN describes the recent reporting
season as “rather good” and “offering
convincing evidence that the A-REIT
sector remains an attractive option for
income-focused investors”.
But short-term share price volatility
has “pushed this into the background”,
says Mark Mazzarella, APN’s assistant
fund manager, real estate securities.
“Between July 1 and December 31 last
year the total return of the S&P/ASX
200 A-REIT Accumulation Index was
a healthy 9.8%, outperforming the S&P/
ASX 200 Accumulation Index by 1.4%.
“Then US bond yields jumped by a
third, prompting a fall in A-REIT prices.
In the first two months of this year, the
A-REIT sector’s total return declined
by 7%, versus the equity market, which
has been flat over this period. Falls
of this ilk get attention but are small
beer for genuine long-term investors.
In fact, they’re often an opportunity,”
says Mazzarella.
Last year big retail landlords such as
Scentre Group and Vicinity were the
losers because they were hit by fears
that the big online operations, especially
Amazon, would decimate the local retail
sector, says Barrett. And while this
didn’t happen, both Scentre and Vicinity
recorded negative returns.
The winners were industrial landlords, particularly the Goodman Group,
which delivered a total a total return of
22% on the back of increased usage of
warehouse space.
Big fund managers, buoyed by the
inflow of overseas funds, were also
winners, with Charter Hall and Abacus
returning more than 30%.
This year the tailwinds for the sector
are expected to overcome the headwinds,
says Barrett. “Australian property offers
one of the highest yields in the world and
so is attractive from a global perspective
andwedoexpectalotmoremoneytoflow
to this country this year.” The winners
from this will be the fund managers.
Industrial landlords are tipped to be
winners again as online retailers increase
their presence here and increase their
demandforwarehousespace.Barrettsays
he expects the Goodman Group will have
another good year on the back of this.
Core Property’s Pillutla expects the
industrial property sector to remain
strong through this year and next as
increasing demand continues to drive
the market. The researcher says the
biggest yield payers in the sector this
year will be Centuria Industrial (7.7%)
and Propertylink (7.3%).
Another tailwind is the strength of the
office sector on the eastern seaboard,
with Sydney office buildings delivering
average rental growth of 20%–25% last
year. Big office landlords such as Dexus
will feel the benefit this year, says Barrett.
“Investor demand for quality office
assets remains elevated and offshore
investors continue to be the dominant
group among buyers of office assets.
Australia is one of the preferred destinations for these investors,” says the
Core Property March round-up of the
latest reporting season.
“Demand for Sydney and Melbourne
CBD office assets is expected to continue
and the A-REITs with the highest exposure to these markets – Investa Office
Fund, Dexus and GPT – are trading on
full-year 2018 yields of 4.8% to 5.2%.”
A continuation of the merger and
acquisition fever that started late last
year with the $32 billion takeover bid
for retail landlord Westfield by Unibail-Rodamco is expected to also buoy
the sector this year, says Barrett. In
late March the deal received Foreign
Investment Review Board approval but
at the time of writing shareholders of
the companies involved had not voted
on it. If it goes ahead, Barrett says some
of the money flowing from it will come
back to the A-REIT sector, supporting
its pricing.
Despite these positives, both Barrett
and Pillutla expect retail conditions to
remain challenging. “A continual shift
in spending patterns and store closures
as well as the increased threat from
online retailers” will all have an impact,
says Pillutla.
“Retail insolvencies will impact retail
landlords’ ability to capture retail rental
growth,” says Barrett.
Another headwind for the sector is
bonds, Barrett says. As we’ve seen in the
past, if US bond yields rise Australian
bonds usually follow and this will see
some move away from defensive assets,
especially A-REITs. M
THE TOP 5
PROSPECTS
•
Goodman Group
(ASX: GMG) is an
experienced investor,
developer and manager
of industrial assets with
a strong balance sheet
to support future growth
plans. With assets under
management of around
$34.6 billion, Goodman
has one of the largest
global industrial and
logistics platforms in the
world. Strong growth in
its platform is expected
for a number of years
through a pipeline of $10
billion in developments,
two-thirds of which have
pre-committed tenants.
•
Charter Hall (CHC)
is a property investor
and manager with assets
under management of
$21.9 billion in Australia.
With no debt on its balance sheet, the property
platform allows CHC to
co-invest on property
funds alongside institutional and retail investors, supporting further
growth. Equity flows into
Charter Hall’s platform
remain strong, including
offshore investors seeking access to leading
Australian assets.
•
Australian Unity
Office Fund (AOF) has
a $575 million portfolio
of CBD and fringe office
assets predominantly on
the eastern seaboard,
with one property in
South Australia. The
portfolio is well placed
for growth through
development opportunities at its locations in
Parramatta, NSW, with a
development application
in place to expand the
office at 10 Valentine
Ave, as well as the state
government looking at
options to acquire its
32 Phillip St location.
Australian Unity Office
trades on an attractive
yield of around 7%.
•
Centuria Metropolitan (CMA) has a portfolio of around $900 million
in metropolitan and
fringe office assets
across Australia. It has
expanded substantially
since listing in December
2014 at $183 million,
with growth coming
from its access to wellplaced, attractive office
assets with secure and
stable tenants. Recent
acquisitions in Perth
provide Centuria with
the potential to benefit
from any improvement
in the resources sector.
It trades on an attractive
yield of about 8%.
•
Viva Energy (VVR)
has a highly stable
portfolio of 438 petrol
stations and convenience properties, the
bulk of which are Shell/
Coles petrol stations on
long-dated leases with
fixed average rental
increases locked in. Since
listing in August 2016,
Viva has acquired 13
sites for $103 million and
has capacity to a further
$160 million via debt,
which would be accretive for investors. Viva
provides a stable portfolio, potential growth
from acquisitions and an
attractive 7%-plus distribution yield.
MONEY MAY 2018 57
PROPERTY DEDUCTIONS
STORY TYRON HYDE
For investors, the tax perks
have traditionally been a key
element of their strategy.
The rules have changed but
there are tactics to minimise
the damage
4 ways
to play the
new game
I
n my opinion, the changes to depreciation legislation introduced in the
2017 federal budget (see page 60 for a
summary) favour the big companies
and listed trusts, not the average
residential property investor.
Why should Macquarie Bank, for instance,
be able to package up a pool of second-hand
properties and claim the depreciation on the
previously used assets, yet you and I can’t?
Why should UniSuper be able to buy a second-hand residential property and claim
depreciation on the assets but your self-managed super fund (SMSF) can’t?
And why should Westfield be able to buy
a second-hand shopping centre that’s 50 years
old and claim the depreciation on it but I can’t
58 MONEY MAY 2018
claim depreciation on a second-hand air-conditioning unit that’s two years old in, say,
Bondi, St Kilda or New Farm?
It doesn’t seem fair to me.
So I’ve come up with four ways to keep
the playing field level and to help the average residential property investor think outside the box in relation to these new laws.
1Shiny gold strategy
The shiny gold strategy is to consider buying new property again because of
the massive differences in depreciation. But
when I say buying new, I don’t mean buying
a sparkly new apartment in a 300-unit block;
I’d be looking at units in a small block. Nor
do I mean buying off-the-plan from someone
who is making $50,000 commission. I’d buy
land and actually engage with a builder, or
consider doing a small development.
At Washington Brown, a lot of our clients
are building a two-on-the-block duplex with
the same footprint as a house. It’s a great
option because, from a depreciation point
of view, you get the same building costs but
if you have two ovens, two dishwashers and
blinds you can claim a far greater allowance
for depreciation.
If you are going to buy new, remember
that it is riskier because you have to time the
market. You’ll need to educate yourself and do
your own research – there are companies out
there that will give you good advice on what
strategies to use and what areas are going
2
Renovate and
detonate
This approach involves buying a property
and renovating so that you’re still eligible to
claim the depreciation allowances on it. This
is because you bought those items – they’re
not previously used – so you can claim depreciation on them. Under the new legislation,
renovating will be more attractive because
it gives investors the chance to depreciate
the new plant and equipment over the life of
the new items.
Going deeper into this strategy, I’d suggest
you buy a property that is between eight and
15 years old. If the property is 10 years old,
for example, you will be able to claim the
building allowance – at 2.5% a year – for the
next 30 years.
Then before you start to demolish the property or rip out the kitchen and bathroom,
make sure you find out the values attached
to the plant and equipment items that are in
the property already. For example, there still
might be $100 left of depreciation on the oven
or dishwasher – and when you remove those
items you can claim a capital loss. A capital
loss can be more valuable than depreciation
allowances, so make sure you don’t miss out
on claiming a capital loss for those items that
you remove when you start your renovations.
Next, put in a new oven and dishwasher and
the other plant and equipment items, have a
quantity surveyor prepare a new depreciation
report and start claiming for the depreciation
of these new items in the same way as you
would if you had bought a brand-new property.
For this strategy you can get more total tax
deductions, not only depreciation, by buying
something that is 10 years old than something
that is brand new. Note, I say more deductions,
not depreciation, as I’m adding the capital
losses into the equation.
raider
3Corporate
strategy
This strategy involves buying a property in
a company name, because corporate entities
can still claim depreciation allowances on
second-hand plant and equipment under
the new depreciation laws. I’ve just put this
strategy into play myself! I bought a property
in a company name for £40,000 in Durham,
England, where I’m getting £400 a month
rent. As I bought it in a company name, I’m
eligible for the depreciation allowances and
the travel allowances as well.
But that’s not the only reason I bought
this property.
Accountants have always said: “Don’t buy
properties in company names because you
don’t get the benefit of the CGT discount
when you sell it.” Normally if you own a
property for more than one year, you only
pay CGT on half of the gain at your marginal
tax rate. For example, if you make $100,000
net profit on a property that you’ve held for
more than a year, you halve that and only
pay CGT on $50,000. But you don’t get the
50% discount if you bought the property in
a company name.
But I have no plans to sell my UK property,
so that’s why I don’t care about paying the
CGT. This particular strategy works for me
with this property because it’s low cost and
overseas and I can still claim depreciation.
While this might not be the best approach
for every property, it works for me.
Another reason that I bought the property
was for cash flow. As an overseas investor I
couldn’t borrow £40,000 to buy the property
Building a two-on-the-block duplex with the same
footprint as a house is a great option
– I had to pay cash. This means the property
is cash-flow positive from day one.
Finally, I also think that worldwide corporate
tax rates are going to go down. Who knows?
If I change my mind and in 10 years I sell my
property, the company tax rate might be 15%
to keep up with the US. So my CGT liability
might be the same as it would have been had I
bought in my own name and been eligible for
the CGT discount. I’d bet my last dollar that
the company tax rate isn’t going to increase
any time soon in Australia.
An added bonus of buying this property in
the UK is that I can claim one trip to Durham
each year to inspect it, and I can claim the
travel costs as a legitimate business expense.
boys’ commercial
4Big
strategy
This is a strategy to reconsider for non-residential property. It’s not a secret strategy
but rather it suggests that the government
thinks its system is broken, so maybe there’s
something in it for us!
Because the 2017 budget changes do not
affect commercial, industrial or retail property, why not take a look at these types more
seriously? Historically, commercial property
has provided better yields than residential
property, and this is still the case. The downside has always been that you often get longer
vacancy periods between tenancies, so you
have to make sure you have adequate cash
flow to survive these periods.
You can still buy a second-hand commercial
or retail property, funeral parlour, childcare
centre – anything non-residential – and claim
the depreciation on plant and equipment. Personally, I can’t see the government changing
this situation as there are too many big players
investing in the commercial property space.
So if you can’t beat them, join them!
Types of second-hand property on which
you can claim all depreciation, as you could
previously on residential property, include
farms, industrial buildings, shopping centres,
retail shops, offices, warehouses, hairdressers
and childcare centres.
▼
to show strong returns. There are
also off-the-plan salespeople with
glossy brochures and a slick sales
pitch, so you’ll need to learn to tell
the difference.
I have made money buying where
people don’t want to buy – doing the
opposite of what other people do. Legendary sharemarket investor Warren
Buffett calls it being “contrarian”. Once
everyone is doing it, it loses its shine!
NEXT PAGE
Keep it simple: the key points
Win a copy of the writer’s book
MONEY MAY 2018 59
PROPERTY DEDUCTIONS
Keep it simple: the key points
T
deemed to have been previously
used and the new owner cannot
claim depreciation on the plant
and equipment.
1
5
he best way to understand
the new depreciation rules
is to break them down into nine
simple key points:
From May 10, 2017, if you
acquire a second-hand residential property that contains
“previously used” depreciating
assets, you will no longer be able
to claim depreciation on them.
This refers to the plant and equipment depreciation schedule,
including ovens, dishwashers,
lights, air-conditioners, TVs,
carpets, lounge suites, blinds,
common property plant and
equipment items.
2
The building allowance, or
claims on the structure of
the building, has not changed.
You will still need a depreciation
schedule to calculate these
deductions, which typically
account for 85% of the overall
construction cost. The structure
includes brickwork and concrete.
The proposed changes do
not apply if you buy the
property in a corporate tax entity,
super fund (note self-managed
super funds do not apply here) or
a large unit trust. In other words,
you can still buy a second-hand
property in a company name and
claim depreciation on it. You can
buy a second-hand property in a
super fund – as long as it’s a large
one – and a large trust can buy
a property as long as it has 300
members or more, and claim
depreciation on that property.
6
The proposed changes only
relate to residential property.
Commercial, industrial, retail and
4
If you renovate a house
while living in it, then sell it
to an investor, the assets will be
60 MONEY MAY 2018
8
If you engage a builder to
renovate a property – or you
do the work yourself – and it is
also being used as an investment
property, you will still be able to
claim depreciation on it when you
have finished the renovations. As
above, this is because the assets
you install are brand new, therefore you can still claim. But if you
bought a property renovated by
someone else and they lived in it
for six months or a year and then
sold it, you can’t claim depreciation on the oven and dishwasher,
etc, in the future, because they
have now been previously used.
See the difference?
9
3
Acquirers of brand-new property will carry on claiming
depreciation in exactly the same
way as they have done so to date
for both plant and equipment and
structure. This is great news for
the property industry, because
a lot of developers rely on depreciation as part of their marketing
strategy to attract investors.
The government resisted making changes to depreciation on
brand-new property because it
did not want to halt construction,
which would have had an impact
on the supply of new property.
A downturn in the construction
industry would also have a knockon effect – if tradies are out of
work, they aren’t paying tax!
ture and the plant and equipment
items. This is because it’s brand
new, and was brand new when
you put in that oven. Therefore,
you can still claim it because the
costs are known.
other non-residential properties
are not affected, so you can still
buy a second-hand office or
similar and continue to claim the
second-hand carpet, exactly as
you could before. You can’t do
this for residential property, as
I’ve explained above.
7
If you engage a builder to
build a brand-new house,
or do the work yourself and it
remains an investment property, you will still be able to claim
depreciation on both the struc-
While investors purchasing
second-hand property can
now no longer claim depreciation
on the existing plant and equipment, they will have the benefit
of paying less capital gains tax
when they sell the property.
How? Well, what they would have
been able to claim in depreciation
under the previous legislation
now simply gets taken off the
sale price in the event you sell
the property in the future (more
about capital gains tax later).
This last point is perhaps the
most interesting of all. Basically,
what it means is that what you
would have been able to claim in
depreciation under the previous
legislation, you can now simply
take off the sale price in the event
you sell it in the future. Or another
way of putting it is that you can’t
claim depreciation while you hold
the property but when you sell
it you can claim a capital loss for
what you didn’t claim.
Readers can
win a copy of
the book
Tyron Hyde is CEO of
Washington Brown
(washingtonbrown.
com.au), a quantity surveyor that also offers
a number of reports to
help you save, including
the CGT Saver and
Building Allowance
Maximiser. This is an
edited extract from his
book Keep Claiming It!
(Major St Publishing,
RRP $29.95). Money
has 10 copies of the
book to give away. To
win a copy tell us in
25 words or less your
best tip for maximising
perks of owning an
investment property.
Send your entries to
money@bauer-media.
com.au or Money magazine, GPO Box 4088,
Sydney, NSW 2001.
Entries open on April
30, 2018 and close on
May 31, 2018.
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SOLD
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PROPERTY OVERSEAS PROPERTY
THE
EXPERTS
10
MOST-ASKED
QUESTIONS
Mark Chapman,
director of tax
communications,
H&R Block
Peter Koulizos,
lecturer and chairman of the Property
Investment Professionals of Australia
(PIPA)
Bill Russell,
general manager
international and
commercial, Raine &
Horne Group
Sally Tindall,
money editor,
RateCity
62 MONEY MAY 2018
On
foreign
shores
There are extra challenges and traps
in taking the international plunge
Q
What countries could be a good
investment?
The same advice that would apply to
Australians who buy property interstate
also stands when investing internationally.
In other words, it is far wiser to buy property only in countries that you are familiar
with personally.
However, before taking a plunge into
overseas property consider the stability of
the political system and the strength of the
local economy.
Thailand and Bali, in Indonesia, are
familiar to many Australian holidaymakers. Moreover, these countries have reasonable levels of political stability and strong
tourism-backed economies.
For Australian downsizers seeking to
stretch their retirement nest eggs further,
it’s possible to buy a three-bedroom villa
in the Thai holiday mecca of Phuket from
around $400,000, while investors could
consider Hua Hin, just south of Bangkok,
where two-bedroom apartments sell from
about $250,000. Incidentally, small houses
in Bali sell for around $250,000 too.
Properties in Bali or Hua Hin generally
offer decent income yields but, more significantly, they are typically well managed by
local property specialists. Having a good
property manager in place is critical if you
hope to enjoy decent returns from an overseas investment.
If you want to buy a property in Europe,
there is good value in Spain and Portugal.
If you spend €500,000 ($797,000), you also
secure yourself residency and a passport to
all of Europe.
BILL RUSSELL
Q
What are some of the costs
associated with buying overseas,
eg, is there stamp duty?
When investing in property overseas, consider the stability of the political system but
also the local tax laws.
For example, in the US there are additional levies/taxes on property owners to
cover the cost of services such as the police,
emergency services, sanitation, education,
health and welfare, transportation, parks
and social housing.
This tax can add tens of thousands of
dollars annually to the cost of home owner-
ship in some parts of the US. Here in Australia most of these services are covered by
our state and national taxes.
In Hong Kong, a foreigner, or someone
without a permanent Hong Kong identity
card, can pay almost twice the amount of
the regular stamp duty on a property that
locals pay. Additionally, there is a buyer’s
stamp duty, which is 15% of the purchase
price regardless of the transaction amount.
This impost is levied by the Hong Kong
government on foreigner investors.
When buying overseas property, be
sure to familiarise yourself with the local
laws and taxes and be aware that the legal
protections in some countries aren’t what
we’ve come to expect in Australia.
BILL RUSSELL
Q
How do I finance the purchase
of a property overseas?
Investing in overseas property is not for
the fainthearted. Neither is organising the
finance for it. One of the easiest ways to do
this is to find a willing lender in the same
jurisdiction as the property. If you don’t
know where to start, a local broker could be
a good first port of call.
However, if you’d rather go direct to a
lender, HSBC is a good option. Any Australian branch can refer you to a local
bank manager to help get the ball rolling,
provided HSBC has a retail presence in
that country.
HSBC is also set up for international
customers, with a new transaction account
that lets you store funds in multiple currencies, which may help with the ongoing
management of the property.
Borrowing money from an Australian
lender for a property overseas isn’t as commonplace as you might think. At the end of
the day, it’s a risk most banks aren’t eager
to take on because if something goes wrong
they’re faced with the very unattractive
proposition of re-possessing a property in a
foreign country.
Australia’s largest bank, CBA, will consider it on a case-by-case basis but you will
need to offer an Australian property as
security. CBA also won’t use rent from the
international property in its serviceability
calculations – it will want you to prove you
can meet the mortgage repayments with an
Australian-based income.
Other banks, such as Westpac, will let
you use equity in an Australian property
for a deposit for an overseas one; however,
you’ll have to go to a local lender for the
actual loan.
SALLY TINDALL
Q
What kind of deposit and
serviceability requirements will
I have to meet for a loan?
While every lender will have its own
unique set of lending criteria, it’s worth
assuming you need a generous deposit,
equity in Australia and robust income
streams. Remember, whether you go with
an Australian lender or one in the foreign market, you’re likely to be deemed
high risk so your financials will have to
convince them you are a safe bet.
SALLY TINDALL
Q
Do I need to visit the property
before I buy?
Your due diligence should include visiting
the area and inspecting the property you
wish to buy. Most people want to see something before they buy it. Whether it is a TV,
lounge suite or car, many people will go to
the effort to drive to the store and actually
see what they are buying.
Even in this modern world of online
clothes shopping, people have the option to
order the item online, have it delivered to
their home, try it out and if they don’t want
it they can return it for free. Trying to
return a house once you have bought it just
doesn’t work!
I would strongly recommend that you go
to the effort and expense of travelling to
the area where you wish to buy and checking out a number of places, as property is
expensive no matter which country you
wish to purchase in. Don’t just rely on the
photos you see on the internet and the selling agent’s recommendation.
PETER KOULIZOS
Q
Are there any implications in
transferring the money to buy
the property?
In many countries there are no problems
with Australians transferring large sums
of money. However, there are exceptions to
MONEY MAY 2018 63
PROPERTY OVERSEAS PROPERTY
the rule. For example, in India if you transfer money to someone who is not a relative,
any amount above 50,000 rupees (about
$750, depending on the exchange rate) is
taxable and must be declared as income.
That said, you must be an Indian national
to buy property in that country anyway.
BILL RUSSELL
Q
How will the rent be
paid to me?
It would be usual for the rent to be paid in
the local currency. Here’s a simple example
to illustrate how the exchange rate can
affect your property and cash flow.
Let’s imagine that you bought a villa in
Tuscany. The purchase price is €100,000
and the tenant pays €10,000 a year in rent.
Cash expenses such as property taxes,
repairs and property management fees
average €3000pa.
Let’s assume that the exchange rate is $1
equals €0.50.
Purchase price: €100,000 ($200,000)
Rent: €10,000 ($20,000)
Expenses: €3000 ($6000)
Now let’s assume that the exchange rate
adjusts and $A = €0.60. Unfortunately, you
have no control over exchange rates but
as you can see any change can affect your
cash flow and wealth.
Purchase price: €100,000 ($166,667)
Rent: €10,000 ($16,667)
Expenses: €3000 ($5000)
With this movement in the euro against
the Aussie dollar, your property is worth
less, you collect less rent and your expenses
have decreased. However, if the exchange
rate went the other way you would be in a
better position.
PETER KOULIZOS
Q
How will I be taxed on any
income I make?
Australian tax residents are taxed on all
their worldwide income so you’ll generally
need to declare any income you earn from
your overseas property in your Australian
tax return each year.
It’s possible that the country where your
property is located may also seek to tax
your income. If that’s the case, you’ll be
able to claim a foreign tax offset (basically
a credit) in your Australian tax return for
64 MONEY MAY 2018
any foreign tax you’ve paid; in effect, this
offset prevents you being taxed twice on
the same income.
Some countries have negotiated tax
agreements with Australia which give the
other country the sole right to tax rental
income. That’s an unusual situation but you
should ask your accountant to check the
relevant double tax agreement with that
country, just in case.
MARK CHAPMAN
Q
Can I claim tax deductions and,
if so, what for?
You can essentially claim all the same
deductions that an owner of an Australian
rental property would be able to claim,
including mortgage interest, repairs and
maintenance, depreciation on new plant
and equipment for your house (such as a
new fridge or air-conditioner), agency and
cleaning fees, local land rates and so on.
If you incur a loss on your rental property because your deductible expenses
exceed your income (in other words, it is
negatively geared), you can offset the loss
against your other taxable income in the
year. Remember that since July 1, 2017, you
can no longer claim a tax deduction for the
cost of travel to visit your property.
Ensure that you keep records (translated
into English) of all income and expenses. If
you intend to claim deductions, you must
be able to show that the property was available for rent at commercial rates throughout the period to which the expenses relate.
MARK CHAPMAN
Q
Will I have to pay capital gains
tax when I sell?
The short answer is yes. The normal CGT
rules apply to overseas properties as well
as Australian ones. If you own the property
for more than 12 months, you should be
entitled to the 50% CGT discount.
If the other country also imposes CGT
on the disposal, you should be able to claim
a foreign tax offset against your Australian
gain to prevent double taxation.
As with rental income, get your accountant to check the terms of any double tax
agreement with the country where your
property is located. In some cases, the
agreement may give the sole right to tax
capital gains to the other country.
MARK CHAPMAN
Visit moneymag.com.au/overseas
propertyquestions for the benefits and risks
of investing in property overseas. M
Pam Walkley REAL ESTAT
TE
What to do with a dud
If your investment is a poor performer, it may be best to bite the bullet and sell
I
ncreasing residential real estate values
over the past few years, especially in
Sydney and Melbourne, mean most
investors who bought a property a few
years back would expect to have made a
killing. But not every residential investment is a golden goose; some turn out to
be a lemon.
So how do you know if your property is
a dud? And if you decide it is, what should
you do about it? Selling is going to cost you
(think selling costs, perhaps capital gains
tax and stamp duty if you reinvest in another property) but holding on could cost you
more in the long run.
Stuart Wemyss, director of ProSolution
Private Clients and a property investment
expert, defines a dud property as one that
has appreciated at less than 7%pa and/or
has not kept up with its peers.
Wemyss has financially modelled the
impact of selling a dud investment, paying
the CGT and reinvesting in a higher-quality
property. He uses the example of a Melbourne property that has produced 5.8%pa
growth over about 27 years, compared with
the overall growth rate of 7.1%pa for the area
over the same period. He found that even
though the property is cash-flow positive
and the owner would have to pay capital
gains tax, they would be better off selling.
In the example the owner sells for the
current value of $650,000 and buys a
replacement property that grows at 7.8%
a year. After 15 years the investor will
be $319,000 better off (net of all costs) in
today’s dollars, Wemyss says.
Another expert, Michael Yardney, CEO of
Metropole Property Strategists, also a proponent of holding for the long term, says that
if a property has not performed well over
three or four years it’s likely to be a dud.
One thing to consider before selling is
the relative performance of your existing
investment property and the length of
time you have owned it, says Wemyss. “If
the performance has been very poor over
a long period of time, then the evidence is
compelling. However, if the performance
has just been OK but not great and you
haven’t owned the property for a long time,
then I’d probably advise you to hold onto it
for a little while longer.”
Another consideration is the size of your
home loan and the amount of equity in
the investment property to be disposed of.
“The advantage of selling an investment
property with a lot of equity is that it allows
you to reduce your home loan (which provides significant compounding savings).
However, if your investment has little equity and/or your home loan is small, then it
will have little impact,” says Wemyss.
If you have an underperforming property the problem could be market related or
relate specifically to your property, says
Yardney. It would usually fall into one of
four categories:
Timing: Buying when values are at or
near the peak can mean that your property’s price may languish for a few years, or
even fall for a while.
Price: If you pay too much, you’re likely
to have a few years of no capital growth.
Location: Some suburbs underperform
others and even in the better areas some
locations are not as desirable as others.
Poor property selection: If you’ve
bought the right property at the wrong time
or paid too much, you’ll generally find real
estate is forgiving and in time your property will start to perform, says Yardney. “But
if you’ve bought the wrong property or in
the wrong location, sometimes you just
need to bite the bullet and sell so you can
buy something better.”
The key, of course, is that you do buy
a better-performing property. And this
requires you to do a lot of research and
perhaps enlist an expert, which will come
at a cost.
•
Land banking meets
crowd funding
“Land appreciates, buildings depreciate”
has long been a golden rule of property.
Over the years investors have made fortunes from land banking but others have
lost out if their land was not rezoned for
development.
Crowd funding has opened up land
banking to investors with a minimum of
$2000. KSI Investments, using DomaCom’s crowdfunding platform, has raised
$6.4 million for a parcel of land at Rossmore, 5km from Sydney’s planned airport
at Badgerys Creek.
It has now opened up a new fund for an
adjoining block, which it hopes to rezone
for 110–140 houses over the next five to
seven years, greatly improving the value of
the land. See ksiinvestments.com.au.
•
•
•
Pam Walkley, former property editor with
The Australian Financial Review, has
hands-on experience of buying, building,
renovating, subdividing and selling property.
MONEY MAY 2018 65
INVESTING BLOCKCHAIN
On the
starting
blocks
STORY SUSAN HELY
O
ne of the technology buzzwords being
championed by around 20 companies
listed on the ASX is “blockchain”. This
is the game-changing technology that
was designed in 2009 to support the
virtual currency Bitcoin. And it is popping up in all
sorts of places.
More entrepreneurs are hailing the potential of
blockchain to overhaul their technology, claiming it
will save the company money to give clients a better
experience and provide more security for data and
personal details. Blockchain, it seems, can fix a wide
range of issues.
Until recently the only way for investors to gain access
to blockchain technology was through cryptocurrencies
and initial coin offerings (ICOs). But the volatility of
cryptocurrencies is too extreme for many investors, not
to mention the lack of prudential regulation.
Listed companies using blockchain give investors
another way to invest in the technology that allows
information to be stored and exchanged by a network
of computers without any central authority, making it
harder for data to be altered or hacked.
But because blockchain is an evolving technology, some
companies are still in the testing phase and not actually
using it in their business. They are more speculative
operations with little cash flow and no profit. Take a close
look at the financials if you are thinking of investing.
Other companies are further down the track, working
on transforming fairly mundane corporate tasks such
as Webjet’s Rezchain, the hotel distribution industry’s
blockchain-enabledtechnologyplatformwherecompanies
share data “on chain”, and the ASX’s blockchain trial
to process equity transactions and replace the ageing
66 MONEY MAY 2018
Investors
should look
beyond the
hype before
putting their
funds into this
cutting-edge
technology
Canada’s
main players
CODE
COMPANY
BKLLF
360 Blockchain
BIGG
Big Blockchain
BTL
BTL Group
CPTO
CryptoGlobal
DMG
DMG Blockchain
Solutions
HIVE
HIVE Blockchain
Technologies
KASH
HashChain
Technology
HUT
Hut 8 Mining
LTV
Leonovus
MOGO
Mogo Finance
Technology
CHESS settlement system. Digital Asset Holdings, the
start-up run by former JP Morgan Chase banker Blythe
Masters, will supply the technology to the ASX.
“Broadly, they are all in the process of adopting
blockchain,” says Jun Bei Liu, deputy portfolio manager at Tribeca Investment Partners. “Unfortunately,
technology does take time.”
Overseas, there are some big international businesses
already using blockchain including Visa, Mastercard
and IBM. Liu says that Australian banks, Computershare
and the ASX are all trialling blockchain, attracted to
the way it can reduce trading frictions and supposedly
make transactions more secure and cost effective. It is
also believed to be more efficient than the current systems that go through a third party, and eliminates the
paper trail. Some blockchain technology experiments
promise to transform fundamental things, such as the
way we vote and the way we interact online.
Liu says it is early days for blockchain but it has the
potential to transform how business operates. “We are
in the very early stages.” She believes it is prudent and
critical for all listed companies to look into blockchain
and consider adopting it, as it can deliver a competitive
edge that will be beneficial for shareholders.
“In the next 12 to 24 months, blockchain will be
a mainstream technology,” says Liu.
There have been over 1300 unlisted initial coin
offerings, many involving blockchain. Some of them
have raised many millions of dollars in short periods
on a purely speculative business proposition that is in
the trial phase. For example, take the Australian-based
ICO Power Ledger, a blockchain-enabled solar energy
trading platform. It was launched in October 2017, and
the coin offering or peer-to-peer lending raised $34 mil-
lion. Power Ledger’s blockchain technology
identifies who owns excess solar energy and
then links them directly to other consumers
who need to buy excess solar, cutting out
commercial margins and reducing consumers’
energy costs.
A problem for investors is understanding
how the technology works. As with Bitcoin,
few investors outside the rarefied tech-head
community really understand what happens.
Should you invest in something you don’t
really understand? Investors are vulnerable
to the hype – which can be very convincing
– and need to take care.
“It can be better to get into blockchain
through large rather than small companies,”
says Liu. She advises investors who have done
their research to place a small portion of their
portfolio in blockchain companies. “Definitely
don’t put all your eggs in one basket.”
She says Australia is not as mature as other
offshore markets. For example, Canada has
embraced blockchain technology and has
a number of large companies.
One of the more promising blockchain
announcements has come from Webjet.
Over the past two years it has developed the
blockchain-based Rezchain, which enables
travel companies to eliminate the pain of
reconciling accounts payable and accounts
receivable, and the out-of-pocket costs that
unreconciled data is likely to cause.
Rezchain helps address a common problem throughout the hotel distribution chain
of disputed bookings, which accounts for
3%-5% of the total. In these cases one group
has trouble getting the money from customers because there is a dispute that can
take months to resolve. In some instances,
bookings are not invoiced at all, meaning one
party is 100% out of pocket unnecessarily.
Rezchain shares data “on chain” to address
mismatched data in real time, eliminating
disputes at the invoice stage.
“The digital trial is not easily corruptible,”
says Liu. “Every participant has the date
and whatever they do is documented. That
eliminates a lot of the cost across airlines and
hotels. The client has a better experience too.”
Webjet has signed Rezchain agreements
with several travel companies including
Thomas Cook (Europe), DidaTravel (China)
and Mitra Global (Indonesia) as well as the
hotel chain Far East Hospitality. “In a low-margin, high-transaction volume business, it is
essential to find ways to be more efficient and
eliminate administrative burdens that add no
value. It was this fundamental principle has
led to the development of Rezchain,” says
John Guscic, Webjet’s managing director. M
Names to watch on the ASX
Code
Company
Description
Share
price
Change
YTD
Market cap
FACL
Alchemia
A shell with rumours of a blockchain deal in the works. $1.6m cash on hand at the end of the March quarter
$0.012
9.1%
$3.6m
BPG
Byte Power Group
Announced it was setting up a cryptocurrency exchange based in Brisbane late in 2017
$0.009
0.0%
$27.6m
CCA
Change Financial
Key investor in the Ivy Project, related to ivyKoin, a blockchain currency that can reveal details about a transaction
if requested
$0.910
9.7%
$57.7m
CHP
Chapmans
Investment company that has secured a $US4m investment in US-based blockchain currency trading platform
Securrency
$0.010
-9.1%
$11.9m
DCC
DigitalX
Advisory work for ICOs and blockchain consulting services and related software development
$0.205
-40.0%
$102m
FFG
Fatfish Internet
Group
Invested in a new cryptocurrency exchange to be set up in Singapore by the founder of Chi-X, Tony Mackay
$0.045
-42.3%
$20.8m
FGF
First Growth Funds
Recently raised $3.45m to invest in blockchain-related investment opportunities
$0.016
-5.9%
$23.9m
ICI
iCandy Interactive
ICOs and mobile games
$0.160
0.0%
$44.4m
KYK
Kyckr
Regulatory technology company that has built a blockchain-based corporate identity platform for compliance
$0.190
2.4%
$16.2m
MBM
Mobecom
It has a product that turns loyalty points into a digital currency that is redeemable at participating businesses
$0.275
-32.9%
$20.3m
NOV
Novatti Group
Its software can work with blockchain software and can help owners of bitcoin convert their currency into $A
$0.240
-31.5%
$38.9m
OOK
Ookami
Website and app allowing investment in IPOs, backdoor listings and capital raisings specialising in cryptocurrency
and blockchain ideas
$0.044
-69.3%
$13.4m
RFN
Reffind
Offers blockchain-based business process applications (BaaS); blockchain-based SaaS.
$0.015
-65.2%
$8.2m
S3R
Serpentine
Technologies
Investigating blockchain-related investment opportunities across education and technology sectors. Hopes to
receive $4.4m payout from previous subsidiary, which is involved in 3D printing
$0.007
-46.2%
$4.8m
SHO
SportsHero
Collaborating with cryptocurrency platform Pundi X to launch its own cryptocurrency designed for sports prediction
mobile app
$0.145
50.0%
$26.2m
TSN
Transaction
Solutions
International
A digital transactions provider that owns a cyber security company in Sydney and 25% of an ATM operator in India
$0.008
-27.3%
$17m
YOJ
Yojee
Blockchain logistics in Asia and Australia. Has developed cloud software to automate and streamline the movement
of goods
$0.195
-28.3%
$163m
WEB
Webjet
Developed the blockchain-based Rezchain, which enables travel companies to match details more accurately
$11.29
4.5%
$1.3bn
Zyber Holdings
Digital storage and transaction network, similar to Dropbox, that allows the sharing of files and collaboration of
groups across multiple networks and systems without leaving a digital footprint on any involved device
$0.022
5.6%
$11.8m
ZYB
Source: Jun Bei Liu, Tribeca Investment Partners. As at 27-Mar-2018.
MONEY MAY 2018 67
INVESTING SUPERANNUATION
STORY SUSAN HELY
While most industry super funds don’t have to worry
about losing tax credits, it’s another story for SMSFs
Who will be
R
etirees are nervous about
Labor’s proposal to remove
tax credits for people who
pay little or no tax. Many
self-funded retirees hold
around 30% to 40% of their savings in Australian shares and rely on the income from
dividends and franking to fund their lives.
But the impact of Labor’s proposals on your
retirement savings depends on what sort of
superannuation fund you have.
You can relax if you belong to an industry
fund and have an account-based pension. It
appears you won’t have to forgo any of your
income.
But if you have a self-managed fund (SMSF)
you are firmly in the firing line of Labor’s policy, which was revised on March 27, after an
outcry, to exclude anyone receiving a welfare
payment. SMSFs with at least one pensioner
or allowance recipient before March 28, 2018
will also be exempt from the changes.
Butthepolicycouldalso
impactsomeretailpension
HOW IT WOULD WORK
funds from big financial
$1M SMSF WITH TWO MEMBERS BOTH IN PENSION PHASE
groups. Those funds that
DAVID & LISA
MICHAEL & ALICE
are standalone and do
45% Australian shares
not pool the savings of
90% Australian shares
Asset allocation
25% international shares
pre-retirement members
10% cash/fixed interest
30% cash/fixed interest
(theaccumulationphase)
AUSTRALIAN SHARE INCOME
with those of retirees in
the pension phase could
Dividend amount
$36,000
$18,000
also be hit. Also affected
Franking credits
$12,342.86
$6171.43
willbethoseretireeswho
TAX REFUNDABLE
hold any shares outside
Current laws
$12,342.86
$6171.43
super and don’t pay tax
and don’t receive welfare
Labor proposal
$0
$0
payments.
Total loss of income
$12,342.86
$6171.43
Labor is accused of
Source: Jonathan Philpot, HLB Mann Judd. Assumes the Australian shares yield 4% and 80%
favouring industry super
are fully franked.
funds and going after
68 MONEY MAY 2018
self-managed funds. “It is product-specific,
attacking SMSFs,” says financial consultant
Rice Warner.
So why won’t members of industry funds
be affected by the crackdown?
The reason is that industry funds typically
pool their members’ savings, mixing the
pre-retiree funds with retiree funds. For
example, both types of member could be in
the balanced option. Because the fund as an
entity pays tax, individual members won’t
be affected by the proposal.
AustralianSuper, Australia’s biggest fund,
which manages more than $130 billion of
retirement savings on behalf of more than
2.2 million members from around 270,000
businesses, isn’t worried about Labor’s policy.
“The proposed changes are not likely to have
a material impact on investment returns for
AustralianSuper members as long as the fund
remains a significant taxpayer,” says Stephen
McMahon, AustralianSuper spokesman. “The
full impact cannot be known, however, until
more detail is provided on how the policy
will be applied. For example, large funds like
AustralianSuper have a large amount of assets,
which they pool together, and pay tax at the
fund level rather than the individual level.”
McMahon says it is SMSFs that will be
impacted. “As they have a smaller pool of
hit hardest
assets, they will typically have insufficient
tax liabilities to offset any excess imputation
credits. This means they are more likely
to receive a cash refund.”
Many industry funds have a member
direct option that give members much of
the flexibility of a SMSF. AustralianSuper
offers shares in the S&P/ASX 300 Index,
exchange traded funds (ETFs) and term
deposits. Will these be impacted by Labor’s
proposals?
“There should not be any difference
in impact between member direct or
pre-mixed asset classes,” says McMahon.
“Any impact will depend on exposure
to dividend-paying equities, rather than
on the particular option that is chosen
by the member. The fund is one single
taxpayer and lodges one single tax return,
so we would not expect that a treatment
distinction would apply between member
direct or pre-mixed asset classes.”
Sunsuper’s manager of asset allocation,
Andrew Fisher, supports the AustralianSuper view. “Sunsuper is a tax-paying
fund. We won’t be affected,” he says. “As
we aggregate up and apportion out the
funds, we pay tax.”
Sunsuper sets a daily tax accrual rate
and daily franking credits across all funds
to treat all members equally.
At the end of the year, says Fisher, Sunsuper compares the tax liability with the
tax credits and makes any adjustments
for members.
Fisher says that if retirees lose the
franking credits worth 1% to 1.5% from
their Australian equities, then the asset
class becomes a lot less attractive. “If
you look at any superannuation fund,
there is a significant bias to Australian
equities compared to international equities because of the higher dividends and
franking credits.”
If you are worried about the impact on
your SMSF, Rice Warner says you can
partially or fully transfer your money
into a fund that pays tax so that you can
continue to get the franking credit benefit.
But Fisher recommends that you talk
to a financial planner about the implications before moving from an SMSF.
“Each individual has different tax-paying
circumstances. You need to take a lot of
things into account before you move from
an SMSF to an industry fund.”
Of course, there are many steps before
Labor’s proposals take effect. First, it has
to be elected, then it would have to get the
legislation through the Senate. M
Popular strategy
will be undermined
Imputation began 30 years ago to avoid the double
taxation of company dividends. Australian companies provide a franking credit for the tax they
have paid and this is attached to the dividend. The
system was made more generous from July 2000
when the franking credits became refundable if
they exceeded the owner’s tax rate.
Not surprisingly, financial planners and
do-it-yourself investors favoured Australian shares
both directly and in pooled vehicles, basing their
retirement income on both the dividends and the
franking credits.
Franking credits are worth around 1% to 1.5%,
which may not sound like a lot but in this low-interest environment they are equivalent to the cash
rate and they can be gold.
“Many strategies have been built around living
off the income (including franking credits) and
preserving the capital until later in retirement. This
strategy has been far more effective than buying
annuities or shifting into lower-value lifecycle products,” says Rice Warner.
Chris Bowen, Labor’s shadow treasurer, says
Labor’s proposed tax claim is targeted at the top
20% of wealthy retirees who receive 80% of the
tax credit. He says the top 1% of self-managed
funds received an average cash refund of more
than $80,000 in 2014-15.
MONEY MAY 2018 69
INVESTING GOING GLOBAL
There’s a
world out
there
STORY VITA PALESTRANT
It’s easier than ever, and more important than ever,
to invest in international shares, either through a fund
or as an individual
A
nyonepayingattentiontotheir
super fund’s balanced option
willhavenoticedinternational
equities playing a greater role.
Why?Becausefundmanagers
are taking advantage of growth opportunities
overseas that are not available in Australia.
They are doing what any fund manager
should do – diversifying their portfolios and
seeking opportunities to boost members’
returns. And thanks to the internet, globalisation and discount online broking, it’s
never been easier or cheaper for individual
investors to do the same.
You can get exposure to the global giants
like Apple, Amazon, Alphabet, Samsung,
Microsoft, Johnson & Johnson, Visa, the Kraft
Heinz Company and Tencent Holdings via
managed funds and exchange traded funds
(ETFs) or buying shares directly.
The Australian sharemarket is pretty small.
It represents just under 3% of the world’s total
sharemarket value and it’s a fairly concentrated market at that, which in itself poses
some risks for investors. In recognition of
this, many balanced or default super funds
have 25%–35% of members’ money invested
in international equities.
Robin Bowerman, head of market strategy
and communications at Vanguard Investments
Australia, says that while some level of “home
bias” is understandable because of dividend
imputation and its benefits to retirement
income, it can have a downside.
“If you are overly concentrated in the Australian sharemarket, then the risk in the
portfolio goes up fairly significantly because
you simply don’t have exposure to things like
tech companies in the US or the large global
organisations.”
Bowerman points out that the S&P/ASX 200,
the benchmark index for Australian equity
performance, is dominated by two sectors:
mining and financial services.
“While they have been pretty good invest-
FEES ARE THE KEY
“Time and time again, when you look at investment returns over
the longer term it is actually about keeping your fees down,” says
Vanguard’s Robin Bowerman. “You can’t control the performance
because markets are volatile, they move around in cycles, but you can
control the fees. If you can keep your fees as low as possible you give
yourself a much better chance of success in the long term.
“For people with perhaps 15 to 16 different shares in their portfolio,
you simply add one more share, an ETF with global equity exposure,
and you’ve got strong diversification. You’re adding thousands of
companies to your portfolio with one trade.”
70 MONEY MAY 2018
Whether you go with an ETF or managed fund depends on your
situation, says Morningstar’s Anthony Serhan. “Are you investing a whole bunch of money or putting it in gradually? If you are
drip-feeding it in, by and large your best bet is a managed fund.
“The thing about buying an ETF is they are an index, so the ongoing
expense ratios are less, but if you are paying $25 or $20 a trade and
you convert that into a percentage it’s more expensive. You can rapidly see any cost benefit you might have had disappear in an ETF.”
With a managed fund you can set up a monthly debit or fund
transfer and that doesn’t come with a brokerage cost.
OFFSHORE BROKERS
CUT THE COSTS
ments over the last 20 years, there is no guarantee that it’s going to continue over the next
decade or two. So it’s simply an argument
for diversification. The key point is you are
investing in growth of the global economy, not
just the Australian economy,” says Bowerman.
WHERE TO START
If you want to invest offshore your best bet is
to leave it to the professionals, says Anthony
Serhan, managing director of research strategy, Asia Pacific, at Morningstar: “It’s a great
way of getting started. If I think about the
options – managed funds, ETFs and direct
stocks – a lot of it is going to depend on how
much money you’re investing and your level
of sophistication and comfort.
“Your first entry should be via a professional manager and you should take the time
to understand what that manager is doing
and learn about global investing through the
manager. If you just want to take a punt on
Berkshire Hathaway or Apple or one of the
individual stocks you can go through a local
broker, and if you are not allocating too much
of your money that’s OK.
“Unless you’re a sophisticated investor and
have time to put into it, I think you are better
off using a managed vehicle. The first thing
I’d look for is a global manager. Someone who
doesn’t have any particular constraints and
is going to give you an exposure to North
America, Europe and Asia and some other
parts of the market.
“Implicit in that is that sometimes some
securities will be going down while some of
the other securities will be going up,” he says.
Serhan is not particularly enthusiastic about
singling out winning regions or sectors. “My
comment on all that is if you pick a good global
fund you already have exposure to all that
but in proportion. That’s why I like having
some of my money invested in a good active
manager because they are making those
decisions for me.
“They will give me some new regional
exposure but if that country gets either really
overpriced relative to other countries they’ll
move the money around for me. You can have
some great runs on some of these technology
funds but am I going to take the view on when
it’s a good time to do that? I’m not sure.
“I’d say if you haven’t invested in global
equities to date, your first entry should be
via a more diversified global strategy. Then
if you want to start adding in a few bells and
whistles you start looking at some thematic
options, either regional themes or sector
If you want to invest directly in international shares you may be better off using
the platform of an overseas-based trading firm offering services in Australia.
Analysis by Canstar on a $15,000 trade
found domestic platforms were almost
twice as expensive for trades in the
UK and US.
Canstar recently awarded five-star
international share trading ratings to
IG Markets, Interactive Brokers Australia and Saxo Capital Markets. None of the
top-performing domestic brokers, mostly
bank owned, received a five-star rating
for trading offshore.
Canstar’s Josh Callaghan says the fivestar international platforms charge on
a per share basis rather than the trade
value basis used by domestic brokers.
“That means you are more likely to get
better value on high-priced shares such
as Alphabet and Amazon.”
International brokers also tend to offer
more favourable exchange rates, says
Callaghan. He recommends that investors check whether they can hold funds
in multiple currencies when trading
international equities to better manage
the currency risk.
Ongoing fees are another thing to
watch. “If you’re the sort of investor
that’s looking to buy and hold, ongoing
costs aren’t your friend,” says Callaghan.
It can be worth paying a bit more in the
initial transaction fee to avoid it being
eroded by ongoing fees.
The Australian market is attracting
more global companies. For example,
Japan’s second largest online broker,
Monex, wants to challenge the dominance of the big banks. It says its economies of scale allow it to lower brokerage
costs, with trading in US markets starting from $US9.99 ($12.80).
While existing brokers may charge on
the trade transaction plus the exchange
rate, Monex says it only charges a comparatively low fee per transaction.
To see more on Canstar’s research go to
canstar.com.au/international-sharetrading/canstars-top-internationalshare-trading-platforms.
For more on investing in international
shares see moneysmart.gov.au/investing/
shares/international-shares.
MONEY MAY 2018 71
INVESTING GOING GLOBAL
themes. But that’s not where I would be recommending somebody start.”
Platinum International fund
WHERE
TOP FUNDS
INVEST
GROWTH OF $10,000 (TO 28 FEB, 2018)
$23,200
$19,900
Fund $22,188
Market Index $22,562
Category $21,153
$16,600
$13,300
$10,000
2013
2014
TOP 5 STOCK HOLDINGS
2016
2017
TOP 5 COUNTRIES
2.68%
2.51%
2.22%
2.16%
2.16%
Inpex Corp
Glencore PLC
Samsung Electronics Co
TechnipFMC PLC
Lixil Group Corp
2015
24.25%
16.16%
15.94%
9.74%
8.71%
China
United States
Japan
United Kingdom
South Korea
Source: Morningstar
Magellan Global
GROWTH OF $10,000 (TO 28 FEB, 2018)
$23,200
$19,900
Fund $22,691
Market Index $22,562
Category $21,153
The graphs on the left
show Morningstar’s
finalists for its 2018
international equities
award. They show
some commonalities
and some differences
in the top five countries they invest in and
their top five stock
holdings. Platinum was
also Morningstar’s
overall fund manager
of the year.
All three global
funds have more than
doubled the initial
investment of $10,000
since 2013.
$16,600
TOP UP THE
TOOL KIT
$13,300
$10,000
2013
2014
TOP 5 STOCK HOLDINGS
2016
2017
TOP 4 COUNTRIES
7.54%
6.16%
6.07%
5.82%
5.07%
Apple Inc
Facebook Inc A
Lowe’s Companies Inc
Alphabet Inc C
Visa Inc Class A
2015
85.63%
7.62%
4.55%
2.20%
United States
Switzerland
United Kingdom
France
Source: Morningstar
Vanguard Index Int’l shares
$19,900
Fund $21,905
Market Index $22,562
Category $21,153
$16,600
$13,300
$10,000
2013
2014
TOP 5 STOCK HOLDINGS
Apple Inc
Microsoft Corp
Amazon.com Inc
Facebook Inc A
JPMorgan Chase & Co
Source: Morningstar
72 MONEY MAY 2018
2015
2016
2017
TOP 5 COUNTRIES
2.31%
1.73%
1.56%
1.07%
1.01%
•
•
GROWTH OF $10,000 (TO 28 FEB, 2018)
$23,200
Invest in yourself too.
Both Vanguard and
Morningstar have a
wealth of information,
research and tools that
can be very helpful.
Learn more at:
vanguard
investments.com.au/
retail/ret/investorresources/learning/
education.jsp
morningstar.com.
au/learn
United States
Japan
United Kingdom
Germany
France
61.06%
9.44%
6.49%
3.68%
3.56%
PASSIVE v ACTIVE
There’s often a debate about whether you are better
off buying a low-cost index fund that passively
tracks the market, or investing in an active fund
that attempts to pick winners.
Vanguard’s Bowerman says there is a role for
both types of funds. “We argue both have legitimate
roles but the approach there is to say the default
position is to buy the index because you are buying
the whole market. If there are areas you think will
outperform, or your adviser is telling you that you
should tilt the portfolio one way versus the other,
then why not do that. You can actively take those
sorts of positions.
“The default position for everybody should be
to start off with buying the whole market and then
tailoring it to what suits them, their risk profile
and time horizon.”
This is often referred to as a core-satellite strategy.
Using low-cost index funds as the core strategy
can be an efficient way to implement your asset
allocation and reduce your overall costs.
Serhan agrees. “You can have both and most
people as they build their portfolios will have both
active and passive managers that they are using.
If you’re not a particularly active investor and you
are happy just to take a really long-term view, just
put your money in there and then come back to it
in a number of years then maybe indexing is fair.
If you are an active investor and really interested
in international markets and want to see positions
getting taken, then maybe an active manager is
the way to go.”
Bowerman says investors also need to decide
what type of investor they are – whether balanced
or conservative – when figuring out their asset
allocation. “If you look at any of the major super
funds, they tend to publish their asset allocation.
That’s a great way for investors to understand what
professional portfolio construction looks like.”
Either way, for most people – those who aren’t
super wealthy – managed funds and ETFs are
often the most cost-effective way of accessing
international equities.
“They will give you an exposure you might
not be able to get yourself by buying individual
shares because you get a better diversification
through a listed investment company, an ETF
or a managed fund than you would going in
individually and buying foreign shares,” says
Laura Menschik, a certified financial planner
and director of WLM Financial.
She says it’s important to read the prospectus
and the product disclosure statement and see if
you feel comfortable with how the fund is investing
your money. The message from all three experts
is to be an informed investor. M
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INVESTING ETFs
Cast a
wide net
Exchange traded funds are booming as investors
seek easy, low-cost exposure to thousands of
stocks in every part of the world
STORY TONY KAYE
I
f you’re invested directly in the
Australian stockmarket, there’s a
reasonable chance you hold shares
in one or more of the big banks,
some miners, perhaps a retailer or
two, and maybe some other large companies.
It’s a broad, well-diversified spread of shareholdings, you may be thinking, able to deliver
both growth and income as a part of your
overall investment portfolio and longer-term
wealth strategy.
And, there’s nothing wrong with that, which
is why millions of Australians have very
similar portfolios.
But why not buy a single share that owns
a bit of every Australian company you do,
and a whole lot more? And why just limit
yourself to Australian shares? Why not buy
a share that holds all the companies in the US
S&P 500 Index or, even better, one that holds
thousands of stocks from around the world?
That’s exactly what more than 300,000
Australian investors are doing, thanks to the
proliferation of exchange traded funds (ETFs)
listed on the Australian Securities Exchange.
74 MONEY MAY 2018
At the end of March there were just over 200
ASX-listed ETFs holding $37 billion in investors’ funds – certainly nothing to sneeze at.
But Australia’s market pales into insignificance when compared with the global ETF
market, with more than 7000 products listed
on the stock exchanges of some 60 countries,
collectively holding $US4.4 trillion ($5.7 tril-
lion) in assets. Most of those products and
assets are in the US.
At the simplest level, ETFs are listed funds
that use the capital provided by their investors
to buy the shares of other listed companies,
based around a defined investment mandate.
In most cases that mandate is to have a shareholding in every company within a specific
Australia’s 10 biggest ETFs
ASX
code
ETF name
Geographic
focus
STW
SPDR S&P/ASX 200 Fund
Australia
5 stars
0.19%
$3593m
IVV
iShares S&P 500 ETF
US
5 stars
0.04%
$2530m
VAS
Vanguard Australian Shares Index
Australia
5 stars
0.14%
$2521m
IOO
iShares Global 100 ETF
Global
4 stars
0.40%
$1347m
IOZ
iShares Core S&P/ASX 200 ETF
Australia
5 stars
0.15%
$1271m
VTS
Vanguard US Total Market Shares Index ETF
US
5 stars
0.04%
$1226m
AAA
BetaShares Australian High Interest Cash ETF
Australia
5 stars
0.18%
$1210m
VEU
Vanguard All-World ex-US Shares Index ETF
Global
4 stars
0.11%
$1170m
VAP
Vanguard Australian Property Securities Index ETF
Australia
4 stars
0.23%
$1002m
VHY
Vanguard Australian Shares High Yield ETF
Australia
4 stars
0.25%
$998m
Funds under management. Source: InvestSMART. Data at 27-Mar-18. 1Management expense ratio.
InvestSMART
rating
MER1
Market
cap
Research
shows
that ETFs
outperform
most
active fund
managers
over time
stockmarket index. For example, there are ETFs on
the ASX that own a percentage of every company
in the S&P/ASX 200 Index, which tracks all of the
biggest listed companies in Australia.
By owning every company in an index, ETFs are
often referred to as index funds. The ETF will track
whatever the index does and generate the same return
for its investors as the index minus management fees
and trading costs.
There is countless research already available
to show that ETFs outperform most active fund
managers over time. Indeed, the latest analysis of
the Australian market, released by S&P Dow Jones
Indices in mid-March, shows that more than 60% of
fund managers underperformed the S&P/ASX 200
Index over three and five years, rising above 70%
over 10 and 15 years.
Betting on a winner
Who better to put that to the test than legendary
American investor Warren Buffett, the world’s third
richest person. In January, he won a $US1 million
wager made in 2007 against fund manager Ted Seides that an index fund tracking the S&P 500 Index
would outperform a collection of hand-picked hedge
funds over a 10-year period. Buffett won the bet by
a country mile and donated his winnings to charity.
Best performers
ASX
code
Security name
Geographic
focus
MER1
Market
cap
1-yr
yield
1-yr
return
UBP
UBS IQ MSCI Asia Apex 50
Ethical ETF
Asia
0.45%
$9.60m
1.80%
36.00%
IBK
iShares MSCI BRIC ETF
Emerging
markets
0.72%
$38.75m
2.05%
33.70%
IAA
GGUS
ETPMPD
iShares Asia 50 ETF
Asia
0.50%
$410.38m
1.94%
33.03%
BetaShares Geared US Equity
Fund2
US
0.80%
$17.42m
1.01%
31.33%
ETFS Physical Palladium
Global
0.49%
$0.77m
0%
30.87%
Market
cap
1-yr
yield
1-yr
return
Source: InvestSMART. Data at 27-Mar-18. 1Management expense ratio. 2Currency hedged.
Worst performers
ASX
code
Security name
QAG
BetaShares Agriculture ETF2
Global
0.69%
$2.66m
0%
-10.64%
ETFS Physical Silver
Global
0.49%
$56.99m
0%
-11.70%
MNRS
BetaShares Global Gold
Miners ETF2
Global
0.57%
$5.00m
0.38%
-14.02%
BBOZ
BetaShares Australian Equities
Strong Bear Hedge Fund
Australia
1.38%
$87.74m
0%
-17.37%
BBUS
BetaShares US Equities
Strong Bear Hedge Fund
US
1.38%
$70.73m
0%
-32.68%
ETPMAG
1
Geographic
focus
MER1
2
Source: InvestSMART. Data at 27-Mar-18. Management expense ratio. Currency hedged.
MONEY MAY 2018 75
INVESTING ETFs
John Davies, the global head of exchange traded
products for S&P Dow Jones Indices, based in London,
says that ETFs have become the essential investment
building blocks for investors around the world.
“There has been a huge growth,” he says. “The products have evolved across markets and regions, and
we’ve got to the point now where there’s no asset class,
no geographic region or country that you can’t access
through an ETF.”
InvestSMART research shows Australia’s top 10
ETFs ranked by market capitalisation held more than
$16 billion in shareholders’ capital – almost half of the
total Australian ETF market.
We have also found a number of interesting themes
that are evolving in the Australian ETF market. The
most popular ETFs are focused on either Australian or
US shares, although there is now also strong interest in
fund products that have holdings in companies based
in Europe, Asia and Latin America. There is also an
increasing focus on products that provide investors
with regular income payments, which are supported
by holdings in government and corporate bonds.
And then there’s the growing array of products
which focus on different thematics, such as robotics,
ethical investing, property, gold and oil, and on different
currencies. Furthermore, rather than just buying one
ETF, more investors are buying into funds that invest
across various ETFs to offer growth and income strategies, exposures to international markets and specific
asset classes.
Of course, not all ETFs are created equal. Performances will vary depending on a fund’s overall investment
strategy, the period of time being tracked and its costs.
The tables on page 75 show InvestSMART’s
data on the top five and bottom five
ETF returns over the 12 months
to the end of March. There’s
a wide disparity in performance, ranging from a
high of 36% to a low
of almost -33%.
Even though
ETFs historically have been a
passive vehicle,
financial strategists and advisers are now using
them in an active
wayfortheirclients.
“T hey have
become portfolio
building blocks ... and
the more recent evolution
of that is that you’ve now got
financial groups using ETFs
completely to provide investment
76 MONEY MAY 2018
solutions,” S&P’s Davies explains. “They are not just
putting clients into ETFs to get a single exposure but
they’re sitting down with their clients and designing
portfolios to achieve their end goal.”
Rise of millennials
There’s been another interesting development in the
growth of the ETF and that’s the rapid uptake of these
products by millennials (those born from the early
1980s through to the late 1990s). They now account for
roughly a third of the total market.
The big attraction of ETFs to younger investors is
the easy diversification across different shares and
markets, the low-cost structure and the ability to buy
and sell them online just like any other stock.
A March report by research firm Investment Trends
and exchange traded product issuer BetaShares found
that just over one in four ETF investors are retired, with
the typical buyer aged 49. Self-managed super funds,
although still a sizeable force in the ETF sector at 33%,
are losing ground to other segments.
And that’s sending a strong signal to the ETF market
that more solid growth is on the cards, with funds under
management in Australia set to rise by at least 30% this
year to reach $40 billion–$45 billion.
The report found that almost a third of “next wave”
investors (defined as those planning to invest in the next
12 months) are millennials who appear to be particularly
interested in ETFs as part of their investment strategy.
When looking at individuals who use online brokers to invest, Investment Trends found that 38% of
millennials currently use or intend to use ETFs in the
next year, compared with 32% of gen Xers and 27% of
baby boomers.
“The ETF industry has continued to grow and
mature in Australia, and this year we are
seeing evidence of a marked change
in the type and age of investors as it
becomes more mainstream,” says
AlexVynokur,thechiefexecutive
of BetaShares.
“The combination of the
historically low interest rate
environmentinAustraliaand
low levels of affordability for
residentialhousingiscausing
millennial investors to think
innewwaysaboutinvestment
and wealth creation.” M
Tony Kaye is the editor of
InvestSMART.
This article contains general
investment advice only. Download
InvestSMART’s Australian ETF Quarterly Report or to access more ETF insights
go to investsmart.com.au/etf.
Younger
investors
now account
for roughly
a third of
the ETF
market
Ross Greenwood AT LARGE
Boost your energy levels
Investors are turning to oil and gold as tensions flare in the Middle East
F
or years energy has been a sleeper
in the world economy. Now, for the
first time, it is re-emerging as a force
that could push up inflation, raise interest
rates and rewrite the economic narrative of
the past decade.
Because it has been such a long time since
there was anything else, it is understandable that people take for granted relatively
cheap fuel prices and low interest rates.
Yet the tension in the Middle East over
the past six months has heightened the
belief that oil prices are headed up, which
in turn fuels inflation and potentially
brings in higher interest rates.
Now consider Australia, which imports
91% of its fuel in the form of petrol or diesel, or oil that is then refined into motor
fuels. In many ways we are highly vulnerable to any price increases that occur overseas, or any shortages in supply.
Wholesale fuel prices are 14% higher than
they were a year ago. Motorists are paying
around 10¢ a litre more, on average, than
they were a year ago. So far the rise has
been relatively small in the overall scheme
of things but this might only be the start.
The buffer for Australia has been the dislocation in OPEC over the past five years.
In the face of new production from shale
oil in America and Russian supplies in the
Arctic, OPEC producers have refused to cut
output for fear it will undermine their own
government revenues. As a result the world
has been awash with oil, and this has been
reflected in the prices we pay for fuel and
the overall inflation rate.
But as tensions in the Middle East escalate – especially for major suppliers including Russia and Iran, which are the targets
of sanctions from the US – the ability for
the Australian government to control supply and limit price impacts on the population is seriously curtailed.
Consider that if the world experiences
higher fuel prices, then if interest rates rise,
the pressure on governments with trillions
of dollars of debt is also increased. The
big test of global financial markets will
always be the debts they have incurred to
ward off economic downturns (think about
the quantitative easing strategy of the US,
Europe and Japan to borrow money when
interest rates went to zero).
In other words, though you might grumble about paying an extra 20¢ a litre at the
bowser, with higher oil prices the real test
of your wealth and your wellbeing might be
the knock-on effect of higher energy prices
on the cost of money.
It is also worth noting that gold prices
have started to head north with the fears
around the Middle East. The reason for
this is twofold: gold is generally a source
of stability when the world is increasingly
dangerous and it is a store of value when
inflation starts to rise.
Some had suggested that Bitcoin could
replace gold as that store of value. It is true
that Bitcoin is capable of being traded globally and relatively easily. But the behaviour
of gold and Bitcoin in recent months (gold
up, Bitcoin well down) seems to confirm,
for the moment, that investors prefer gold
as their store of value when tensions rise.
The big takeaway from this is that you
should have some oil-based energy in your
portfolio. You can see with the $600 million takeover bid for AWE by Mitsui, and
the $13.5 billion offer by private equity player Harbour Energy for Santos (still to be
decided on foreign investment grounds by
the Foreign Investment Review Board and
Treasurer Scott Morrison), that there is an
appetite for Australian energy stocks.
Among the smaller stocks, several
companies have seen big price increases
in the past 12 months, including Buru
Energy (market cap $136 million) and Blue
Energy (market cap $138 million). One
bigger company – Beach Energy (market cap $3.3 billion) – has also picked up
enormously over the past two years as oil
prices have improved and its own reserves
have increased.
The underlying message, perhaps, is that
just as you should have a glimmer of gold
in your portfolio, so too should you have
some oil … just to keep the wheels turning
if times change.
Ross Greenwood is Channel 9’s finance
editor and Radio 2GB’s Money News host.
MONEY MAY 2018 77
SUPER Vita Palestrant
Real-time revolution
A fast new payments system will reduce complexity and costs
A
revolutionary payments system,
developed by Australian banks and
the Reserve Bank, is being rolled
out this year to the benefit of super funds.
It will enable real-time payments and greater accuracy and efficiency, which should
deliver members significant savings.
Currently Australia’s $2.5 trillion superannuation industry facilitates a vast and
complex network of financial transactions
which can be impacted by issues such as
mismatched or misdirected payments, lost
super and delays. This can be challenging
for the funds, members, employers and the
tax office.
The network of payments comprises contributions to funds from employers, top-up
contributions by members, cash payouts
by the funds to members at retirement or
transfers to other funds.
These transactions can take up to three
days, being held back by banking hours and
the way remittance advice is transmitted
separately from the payments.
While the current SuperStream payment
system has delivered some powerful benefits, it was also developed when payment
technology was less sophisticated, meaning
that data and funds move separately, which
can lead to mismatches. Clearing houses
manage these issues for the industry but
this creates cost, complexity and delays
(see breakout).
Under the New Payments Platform
(NPP) transactions will take place in under
a minute and, crucially, transaction data
will travel with the payment, providing
increased accuracy and transparency.
Payments can be made all day, every day,
including weekends and public holidays.
Bank cut-off times and delays will be a
thing of the past.
In its report “The NPP and Superannuation: A Revolution in Efficiency”, KPMG,
in partnership with Commonwealth Bank,
estimates the industry will save $19.2 million a year for fund members by switching
to NPP’s real-time payments.
78 MONEY MAY 2018
“Based on a 3% investment
return, the switch to realtime payments from the
average two-day lag
could see savings
boost to $19.2 million
annually, as funds
would be earning
interest rather than
sitting in transit,”
says Michael Eidel,
executive general
manager of cash-flow
and transaction services
at CBA.
“This is above and beyond
the savings available for members
through greater administrative efficiency
for all stakeholders in the system, including
funds and employers. The NPP infrastructure is here, and businesses need to engage
with the ecosystem, collaborate and co-design to deliver on the things to make a better experience for the super fund member.”
So far the NPP is being rolled out to per-
Who will benefit
from the NPP?
Employers: It will ease the administrative
burden of having a clearing house and dealing with changing employee details. The
PayID functionality can make this simple.
Super funds: Reduce costs, improve efficiency and boost member experience. With
simpler reconciliation and quicker access to
funds, these challenges can be eased.
Members: The need for up-to-date
balances, keeping track of lost super and
easy access to funds is key. These can all
be facilitated with PayID and near realtime payments.
ATO: The tax office’s goals to make super
payments simpler and reduce the instances
of lost super will be easier to achieve when
all of these factors are in play.
Source: KPMG
sonal banking customers
only with banks gradually contacting them
to create a PayID. It
can be something
easy to remember such as your
mobile phone
number or email
address, which
is then securely
linked to your
nominated account.
PayID can only be
used to put money into
your account, never take
money out of it.
“Improving the efficiency, effectiveness and efficacy of payments within
the superannuation system will mean
smaller and more valuable back-office
functions, improved relationships with custodians and other service providers and,
most importantly, a better experience for
members,” says Paul Howes, partner, head
of asset and wealth management, at KPMG.
But there is still some way to go before
super fund members hear from their funds.
The industry is examining how it can best
use and implement the new system.
“The NPP creates scope for greater efficiencies which could potentially benefit
consumers in the long run due to faster
payments and data transfers occurring. At
this stage the industry is in the process of
assessing those opportunities,” says Martin
Fahy, CEO of the Association of Superannuation Funds of Australia.
As with existing payment networks, the
NPP is regulated by the Reserve Bank,
whose role is to maintain “our strong financial system and efficient payments system
we currently enjoy”, says Fahy.
Vita Palestrant was editor of the Money
section of The Sydney Morning Herald
and The Age. She has worked on major
newspapers overseas.
Sam Henderson SMSF SOLUTIONS
Fight looms on franking credits
QUESTION
It’s not just SMSFs that will lose out. Labor’s proposals will hit all investors
I
an, since Bill Shorten introduced his proposed policy on
franking credits, the emails and
social media have been going crazy
as retirees and SMSF members take
up arms and express their dismay at
the proposal. And it’s just a proposal
at this stage as he still needs to get
voted in!
But Labor is simply thumbing its nose at
a group that it thinks will never vote for it
anyway. If you look a little deeper though,
all investors – especially Money magazine
readers – need to be wary of Labor if it
takes power when we go to the polls some
time between now and May 2019.
Franking credits are tax rebates that are
available to shareholders of companies
that have already paid up to 30% tax on the
SAM SAYS
$2,500,000,000,000 – a lot of zeros!) hots
up between DIY and industry funds.
The industry funds are run by the
unions, which in turn are the puppeteers
for Bill Shorten, and they’re dead against
anything that supports the flow of money
away from their precious pots of cash.
Industry funds have been bleeding at the
top end to SMSFs for some time and they’re
keen to put an end to it. The franking credits policy was just the first step.
Labor also plans on putting a ban on
borrowing money inside an SMSF, which
will preclude many from investing in property in their super despite the numbers of
investors being very low, at less than 4% of
assets, and no evidence to suggest that they
are being anything but frugal.
So, too, Labor plans to tax anyone who
earns more than $75,000 a year (ironically equal to the average full-time wage in
Australia) in retirement or has more than
$1.5 million in super.
Outside super, Labor plans to get rid of
negative gearing as well as reduce the capital gains discount from 50% to 25%
for assets held for longer than
12 months.
Retirees may see a
So Ian, I wish I had better
shareholders’ behalf. Those
reduction of up to
news for you but you probwho pay less than the 30%
ably know what you need
company tax rate can claim
to do when the election
back their credits as cash.
comes around in the next 12
This may include retirees
in their retirement
months. You should also get a
on an account-based pension
cashflow
good adviser and accountant to
who pay zero tax in retirement
help you navigate the ever-changand who rely on the franking
ing environment and make sure you
credits to provide them with much
and your mother are best placed for the
needed cash flow in these low-interest-rate
future. Good advice can reduce your tax
times.
Retirees may see a 10%–30% reduction in and boost your wealth.
their retirement cash flow and almost certainly will head for the age pension if Labor Sam Henderson is a CEO and senior adviser
at the multi-award winning accounting and
takes power at the next election. This will
financial planning firm HendersonMaxwell.
be a passionate fight.
com.au. Sam is host of Money Manager on
But far worse lurks beneath the policy
Sky News Business Friday nights at 6.30 and
papers. Labor has SMSFs squarely in its
sights as the fight for the $2.5 trillion (that’s specialises in managing money for SMSFs.
Hi, Sam. Good on you for speaking out about the franking credits refund issue. I am a
self-funded retiree with $1 million in super. It sounds a lot but my wife and I don’t consider ourselves as wealthy.
We still need to watch our spending. Further, it appears those people who save and
invest their money (and take risks in investing) are penalised by the Labor Party. In
addition to the above, my mother, who is in a nursing home (and is in receipt of the
age pension), has a few shares. My sister and I apply to the tax office each year for
the refund of the tax credits for mum. As you are aware, nursing home fees are very
expensive and extra money is always welcome.
But, alas, if this new rule becomes law, there will be less money for my mother (who
worked very hard during her lifetime and saved money to invest).
What should we do? Ian
30%
MONEY MAY 2018 79
SHARES STRATEGY
STORY GREG HOFFMAN
Here are three small companies to consider for
those who have the stomach for speculation
Risky stocks
on the radar
“W
hat’s the deal with
CVCheck?” my dad
asked me as we stood
in the kitchen making
conversation while the
kettle boiled. I was visiting my parents for Easter.
“The world is moving in their direction,” I told him,
“but I suspect they’re going to need to raise one more
round of funding before they reach break-even, which
might happen in the 2019 financial year.”
CVCheck (ASX: CV1) is in the verification game. It
80 MONEY MAY 2018
runs more than 250,000 verification checks a year for
employers, government departments and individuals.
CVCheck has the technology to efficiently provide
police, credit, academic qualification, reference and
other checks for compliance, employment screening
and licensing purposes.
In October last year I flew to Perth to attend the
annual meetings of two companies. CVCheck was
one of them. It’s only a tiddler, with a market value of
$18 million at the time of writing.
From my research and what I saw at the meeting,
I was unimpressed with the directors. First, the board
of this small company held an incredible 17 meetings in
the 2017 financial year. I expressed my opinion at the
meeting that this was a sign of either disorganisation or
ineffectiveness. A company of this size should be able
to take care of its business in 10 board meetings or less
per year, in my view. I also noted the lack of substantial
investment in the company by most directors.
Yet I was impressed by CEO Rod Sherwood. He struck
me as a capable executive and I was pleased to see him
put even more “skin in the game” in March by buying
shares from the company’s founder. This took his holding
to $1 million, a powerful motivator.
I think he’s the right person to pursue what seems to be
an interesting business opportunity. As CVCheck remains
unprofitable, a few million dollars more of cash in the
company’s bank account is now the missing ingredient for
me. If the company takes care of that, then I would look to
increase the small stake currently held by my family. In
the process of resolving that situation, I suspect the share
price might hit 6¢ or less before it has a decent chance of
seeing 10¢ or 15¢ (the share price is 6.5¢ at time of writing).
Global Construction Services
While walking past a building site on that Perth trip,
I noticed a beam with a “GCS” logo on it. I connected
the dots and deduced it was listed company Global Construction Services (GCS), a stock I knew a few canny
investors were keen on.
The company provides formwork and concreting
services as well as scaffold services and facades. Clients
include the likes of Multiplex, Lendlease, Fortescue Metals, Woodside and John Holland. It’s currently benefiting
from strong construction activity across the country and
boasts a healthy balance sheet with a couple of million in
debt dwarfed by $44 million in cash as at December 31.
The bullish argument goes that the stock represents
good value on its current numbers, with further upside
probable in its facades business. Here’s why.
Investigations into the deadly fire at London’s Grenfell
Tower in June 2017 revealed that the cladding used on the
building was highly flammable. This incident has sent
shockwaves throughout the property business.
Audits are under way to identify potentially dangerous
cladding on buildings in Australia. GCS’s management
team expects thousands of commercial buildings to be
impacted. If this proves to be the case, the opportunity
to remediate or replace the cladding could be substantial
for GCS’s 51%-owned Gallery Facades business, which
specialises in this kind of work. At the time of writing
I haven’t purchased any GCS shares but it’s on my radar
and at prices below 70¢ per share I am rather tempted.
Frontier Digital Ventures
Having considered an unprofitable tiddler in CVCheck
and a profitable but cyclical business in GCS, Frontier
Digital Ventures (FDV) offers a different type of risk. This
company is building a portfolio of investments in online
classifieds businesses in emerging economies. Frontier
seeks out local entrepreneurs in each market with whom
it can partner to grow their businesses.
Frontier’s first and most successful investment was a 30%
stake in Zameen, Pakistan’s leading property website. In
three separate investments, Frontier contributed a total
of around $6 million to funding the company. And based
on Zameen’s latest fundraising round, Frontier’s stake is
worth around $60 million, or roughly 10 times its total
investment to date. That figure also compares favourably
with Frontier’s own market value of $85 million at the
time of writing (63¢ share price).
In addition to Zameen, Frontier has 14 other investments.
These include 42.1% of Encuentra24.com, the leading
online general classifieds business in the Central American
markets of Costa Rica, Nicaragua, Honduras and Panama.
Encuentra24’s revenues totalled more than $6 million in
2017 and are growing quickly. Frontier’s investment is
perhaps worth more than $17 million based on the price
paid to increase its stake in June last year.
Other investments include 37% of Pakistan’s leading
car classifieds website, PakWheels, as well as stakes in
property websites in Uruguay, Paraguay, Bolivia, Vietnam,
Myanmar, Philippines, Sri Lanka, Nigeria, Ghana and
Angola. It also has investments in other auto classifieds
businesses in Philippines, Myanmar, Morocco and Ghana.
And, finally, a general classifieds business in Tanzania.
Many of these investments are likely to fall short of
expectations and Frontier’s experienced CEO, Shaun Di
Gregorio, actively manages its portfolio. He owns more
than 17% of Frontier, worth around $14 million, so he
has plenty of motivation to invest the company’s cash
pile carefully.
Di Gregorio also has a wealth of experience from his
time as general manager at REA Group (realestate.com.
au) and he was also CEO of iProperty Group, the leading
property portal in South-East Asia which was acquired
by REA for around $750 million.
There’s every chance that over the next five years a couple
more of the company’s smaller investments could provide
10-fold returns too. If that turns out to be the case, then
today’s investor in Frontier is likely to do well.
As with GCS, I haven’t pulled the trigger on this one
at the time of writing. But despite the obvious risks of
exposure to investments in emerging economies, this
is an interesting strategy being pursued by a credible,
proven manager. There is substantial potential reward
to go with the clear and present danger.
If you’re a conservative investor, these three stocks are
ones to steer clear of. And even for those who have a place
for more speculative positions, I’d limit investments in
any of these stocks to 2% or 3% of a balanced portfolio.
There is
substantial
potential
reward to
go with the
clear and
present
danger
Greg Hoffman is an independent financial educator, commentator and investor. He is also non-executive chairman
of Forager Funds Management (not involved in Forager’s
investment process). Disclosure: Private portfolios managed
by Greg Hoffman own shares in CVCheck.
MONEY MAY 2018 81
SHARES INTELLIGENT INVESTOR
STORY JOHN ADDIS
Hauled
over the
Coles
Especially
in retailing,
it’s best to
focus on
the creative
side in
times of
‘creative
destruction’
82 MONEY MAY 2018
A
ccordingtoWikipedia,JosephSchumpeter
had three goals in life: to be the greatest
economistintheworld,thebesthorseman
in all of Austria and the greatest lover
in all of Vienna.
Unfortunately for Joseph, he is best remembered
for the phrase “creative destruction”, which nailed
capitalism’s essence. Shareholders in Wesfarmers,
which is soon to offload Coles, would be aware of this
truth phrase. Retail managers have to be exceptional
just to achieve average returns. This is a frighteningly
competitive sector.
In the early 1960s, Australia had 27 department store
businesses. Two remain, both hanging by a thread, with
Myer a potential bankruptcy candidate. Long-sincedead chains such as Dick Smith, Borders and Bi-Lo
have been replaced by new retail concept stores such
as Smiggle, Zara, Peter Alexander, Mecca, H&M and
Nespresso all offering bespoke evidence of Schumpeter’s
creative destruction.
High-margin businesses like software and medical
devices have room for error. A stuff-up might lead to
a few rough years but it won’t send the business under.
In retail, margins are razor thin. A screw-up can quickly
lead to a call to the administrators.
These thoughts crossed my mind while reading about
the Wesfarmers proposal to spin off Coles. Non-discretionary retailing is more resilient – eating and drinking
remain popular – but even here a textbook turnaround
didn’t make for great returns.
Richard Goyder’s tenure at Wesfarmers was defined
by the takeover of Coles in 2007. Five years later the
turnaround was deemed a success. But it wasn’t easy.
A former Coles IT director once told me that this was
back-breaking, expensive work, where every aspect of
the company’s operations was upended.
Woolworths went through a similar exercise more
recently, a former operations director telling me that
a store visit would start out the back by the bins, with the
regional and shop managers. There they would carefully
remove the contents, checking the sell-by dates on all
the products thrown out. Wastage was often a simple
case of mismanagement. This was how she reduced it.
Thentheyenteredthewarehouse,checkingforproducts
that had been left languishing on the floor. “If that was
a $10 note lying there,” asked the ops manager, “you’d
pick it up, right? That costs us $10 so why is it still on
the floor?” This is what success looks like in retailing:
opening bins and leaving no bag of stone-ground flour
unturned. It’s a tough business.
Measures like this slashed Woolies’ operating costs,
which got it onto our “buy” list in 2015 and 2016. For
halved, the market repricing the business based on its
higher debt, turnaround costs, the risk it may fail and
a downturn in retail spending. But the turnaround
worked and the share price doubled, all the way back
to where it was before the purchase. There have been
dividends along the way but this has not been a wonderful investment.
Despite us combing through the retail sector when
share prices tumbled in May last year, we came out of
the dumpsters empty-handed. The risk-reward ratio still
wasn’t in our favour. Now you might understand why.
Both large supermarket chains are high-quality
businesses but you need exceptional management at
the top of their game to earn a decent return from them.
For specialty retailers, this argument stands even truer.
What’s an investor to do? During the Victorian mining
booms, fortunes were made by selling shovels to gold
diggers. More recently, the best way to capitalise on
booming air travel has been to invest in airports rather
than airlines. For the same reasons, we’d rather invest
in a retail rent collector than a retail chain.
Scentre owns 16 of the top 25 Australian malls and is
well placed to cope with the onslaught from Amazon.
Occupancy rates are near 100% and space vacated by
shrinking department stores is being leased to newer
specialty retailers (there’s that creative destruction again).
With a 5.5% forward yield at the time, we added it
to our equity income portfolio and put it on the buy
list last month. Call it creative rather than destructive.
The biggest
factor in
the success
or failure
of any
investment
is the price
you pay
John Addis is the founder and editor-in-chief at Intelligent
Investor, part of InvestSMART Group (under AFSL
282288). Find out more about Intelligent Investor and
start a 15-day free trial at investsmart.com.au/money.
Coles, it led to operating profit more than doubling from
$779 million in 2009 to $1609 million in 2017 (earnings
will fall this year, however). Under Wesfarmers, Coles’
earnings have grown at an impressive 9.5% a year.
This may sound like a dream run but for investors it
has been anything but. There are two problems.
First, the capital required to bring it about. Over
$8 billion has been invested in Coles since 2009, which
equals around $1 billion a year – a huge number for
earnings growth of this magnitude.
The second is the price Wesfarmers paid for Coles.
There were concerns at the time, and the numbers
now confirm them. Wesfarmers overpaid, effectively
pre-selling to Coles shareholders a large part of the
value created by the turnaround before it happened.
The biggest factor in the success or failure of any
investment is the price you pay. Wesfarmers shareholders
learned this the hard way.
After the bid’s announcement, the stock more than
Rough ride for shareholders
Wesfarmers share price
$50
$40
$30
esfarmers
makes bid
or Coles i
Septemb
2007
$20
$10
2001
2003
2005
2007
2009
2011
2013
2015
2017
MONEY MAY 2018 83
OUTLOOK
O
Shane Oliver
Buckle up for more volatility
After a rough start to the year, all eyes are on the US (and China)
W
hile nothing much has really
changed in terms of the outlook
for the Australian economy,
news out of the US has driven significant
volatility in shares and financial markets
generally in 2018.
The year started off strongly in January
with global shares, led by the US, powering
higher. But worries about rising US inflation and a more aggressive Federal Reserve
hit markets in February; and then just as
they had recovered much of their losses, US
tariff hikes, mainly targeted at China, a correction in tech stocks and worries about
some loss of momentum in global growth
indicators knocked prices again.
After the relatively smooth ride seen in
2017 for investors, a return to volatility and
a correction in sharemarkets was inevitable
at some point.
The good news is that while global
growth is no longer accelerating, it’s likely
to remain strong with overall monetary
conditions remaining easy and high levels
of consumer and business confidence likely
to feed through to strong consumer spend-
ing and business investment. We see global
growth this year of around 3.9%. This in
turn will drive strong profit growth.
In Australia the economy is likely to continue growing. While the consumer will
remain constrained by low wages growth,
high under-employment and the fading
wealth effects as Sydney and Melbourne
home prices fall, this should be offset by
a falling drag from mining investment and
stronger non-mining investment and infrastructure spending.
Australian growth is likely to remain
below Reserve Bank expectations, and with
low inflation likely to linger longer and
a likely tightening in bank lending standards we don’t see the RBA raising interest
rates until early 2019 at the earliest.
The main risks to watch out for are:
whether the severe trade tensions
between the US and China deteriorate into
a trade war threatening global growth;
what the Mueller inquiry into President
Trump’s campaign and Russia finds and,
more importantly, how Trump responds;
how far and fast the Fed hikes rates; and
•
•
•
how far Sydney and Melbourne proper•ty prices
fall.
In terms of the latter, in the absence of
much higher interest rates or much higher
unemployment or a continuing supply
surge, we don’t see a crash in Australian
property prices but it’s worth keeping an
eye on.
Against this backdrop, May has the
potential for more sharemarket volatility.
On the global front the key things to watch
are: US–China negotiations towards heading off the commencement of tariff hikes
potentially in late May; the May 21 deadline
for the US to decide on foreign investment
restrictions on China; Trump’s decision
by May 12 on whether to return to sanctions on Iran (which could mean higher oil
prices); and the possible summit between
Trump and North Korean leader Kim JongUn some time this month.
In Australia, with the Reserve Bank likely to be comfortably on hold, the focus will
be on the May 8 federal budget – and here
the news is likely to be good.
Thanks in large part to stronger than
expected corporate tax collections, the
budget deficit is coming in below expectations and should allow the government
to announce decent personal tax cuts and
keep on track for a return to surplus by
2020–21. The personal tax cuts will most
likely be planned to start in July 2019 but
they may start earlier, which will provide
a boost to consumer spending. This should
provide at least some buffer against any
US-generated volatility.
All up, providing the US-China trade
spat does not degenerate into a full-blown
global growth-zapping trade war – which
we don’t think it will as it won’t be good
for Trump in the November mid-term
elections – the global and Australian
economies will continue to grow and this
should provide support for sharemarkets.
Shane Oliver is head of investment strategy
and chief economist at AMP Capital.
84 MONEY MAY 2018
Marcus Padley THIS MONTH
H
Our most
precious
asset
The trappings of success, such as a flash car, won’t guarantee happiness
M
oney is a different thing to different people. For the naive it is
something to wave in other people’s faces. But let me tell you something
that many of you will only wake up to in
hindsight, in later life: after gambling, showing off is perhaps the most costly and pointless waste of money you will ever pursue.
When I was 20 I owned a second-hand
diesel Mercedes 190. It was only a year old
and cost me every penny I had, £6000, but
it was a quality, safe car and it had a motor
that, looked after properly, could have done
me very nicely for the next 400,000 kilometres which, in London, would have taken
me through the next 25 years.
But rather than keep it I sold it and in the
next 15 years as a broker I went through
10 new cars and in so doing got nailed by
the endless depreciation and extortionate
lease costs that were quietly taken out of
my meagre salary through salary sacrifice. I would hate to add it up but without
doubt a significant part of my 1980s wealth
was thrown down the drain on a Ford
Cortina Mark III, a Ford XR3i, a Golf GTI,
a Volkswagen Passat, another Golf GTI,
a pimped-up Nissan 200SX, a Jaguar XJS, a
red BMW coupe and a rather fabulous TVR
S soft top, also in red. To mention a few.
As I look back, I have realised that, apart
from children, cars are perhaps the worst
investments I have ever made. And for
those of you who don’t believe me and are
currently driving a flash symbol of your
financial naivety, possibly on finance,
just wait until you try to sell that bauble
of financial success, because, as you will
eventually find out, it represents exactly
the opposite.
I have had my current car for seven years
and, along with a classic leather jacket I
bought 30 years ago, it is like a stock that
you get right. It is a shining example of how
a quality purchase that manages to deliver
on your expectations on a long-term time
horizon pays off. And if happiness is expectations met, then this car has, finally, made
me happy because my expectations have
already been met and the rest is in for free.
I expect to be driving this car until either it,
or I, die. And that will make me happy.
In light of this eventual financial understanding I can but regret those years of
misery I spent wanting a better car.
If you want to read about money and
happiness, then Robert Kiyosaki, I am not
ashamed to say, changed my life with his
book Rich Dad Poor Dad, which landed at
a very appropriate moment in my lap and
in my life. I had just been made redundant
by ABN Amro Australia, which gave me
the choice: take a lump sum or take a job
with BZW Australia. BZW had bid for
ABN Amro’s Australian equities business.
At ABN Amro we had just placed the first
tranche of the Telstra IPO and had made
a small fortune as a broking house. BZW
wanted Telstra 2 and Telstra 3.
I took the lump sum, thank goodness.
Many of my colleagues who went to BZW
ended up out of a job anyway, as did the
head of equities who was offering to
employ us. Freed of the rat race and armed
with Kiyosaki’s wisdom, I then set out to
build my own assets instead of everybody
else’s. I moved into private client stockbroking where I could, to some extent at
least, build an asset of my own, rather than
an asset belonging to a faceless institution.
Twenty years later, money now represents something other than a flash car and
expensive trappings. These are the things
of younger men. I have learnt of their folly.
Money is now important for a less ostentatious reason. Time. Money is time, the
most precious asset of all, an asset that you
have to lose to appreciate.
But the great thing about time is that it is
all around you all of the time and, rich or
poor, you can have it all. You just have to
stop for a moment, put down your mobile
phone, turn off that computer, turn off that
television, turn to someone you love and
think, if you had all the time and money
in the world, what would you do? Because,
amazingly enough, as anyone who has ever
bothered to do it can tell you, whatever it is,
it is not a function of money, and you could
almost certainly be doing it already.
Marcus Padley is the author of the daily
stockmarket newsletter Marcus Today.
For a free trial of the newsletter, go to
marcustoday.com.au.
MONEY MAY 2018 85
ALUE.ABLE Roger Montgomery
VA
SECTOR TECHNOLOGY
Towards the pain threshold
The higher that stocks such as Amazon and Uber go, the further they have to fall
86 MONEY MAY 2018
While much of the commentary during
the recent technology boom lauded the
superiority of everything from the disruptive asset-sharing models of Uber and Airbnb to 3D printing, the underlying business
models of many operators remain unviable
without the support of private equity injections at increasing valuations. Where this
is the case, investors need to be especially
cautious. By way of example, Tesla and
Uber continue to be loss-making despite
despite valuations of about $US51 billion
($64 billion) and $US60 billion respectively.
Meanwhile, Amazon is being openly
attacked by the US president on Twitter,
Tesla and Uber’s autonomous vehicles
have killed people, setting
back projected start dates for
an autonomous driving future,
and Airbnb hosts are being levied with conditions that limit
short-term leasing.
It was inevitable that as these
companies gained unprecedented power there would be a societal or regulatory response.
In the US, the Democrats, who
were arguably defeated at the last
election because they cosied up to
big business, are returning to their
roots with an election blueprint
and new economic agenda ahead of
the November mid-terms called “A
Better Deal”. The section of “A Better Deal” entitled “Cracking Down on Corporate
Monopolies and the
Abuse of Economic
and Political Power” is
focused entirely on antitrust
enforcement and merger law,
the most important but arguably weakest component of
America’s competition policy.
Meanwhile, in a decision
with far-reaching consequences for many tech
companies, Europe’s highest
court, the Luxembourg-based European
Court of Justice, responded to a complaint
by Barcelona taxi drivers who wanted to
prevent Uber from setting up in the city.
The court agreed that Uber drivers should
be regulated like a transport company and
not a technology service.
In Europe, a set of sweeping reforms
under the banner of the general data protection regulation (GDPR) will be established
shortly. Under the GDPR, European residents will have control over how their digital data is used and arranged, including the
“right to be forgotten”. They will have the
power to remove or update data on company
servers, be able to request the data and
port it to another company.
Today, even with tech stocks reaching a threshold commonly described
as correction territory, bullish sentiment remains. We note that, according to The Wall Street Journal, 91%
of analysts maintained a “buy” or
“overweight” recommendation for
Facebook, Amazon and Google and,
according to FactSet, tech companies in the S&P500 are expected
to post year-on-year earnings
growth of 22%.
There is no reason that tech
stocks, especially unprofitable
ones, are precluded from rising
substantially after the recent
conniptions are digested but the
higher they go the greater the subsequent pain for investors who
don’t rotate into more defensive
sectors such as healthcare and
perhaps utilities.
Roger Montgomery is
founder and CIO at the
Montgomery Fund.
For his book, Value.Able,
see rogermontgomery.com.
Disclaimer: The Montgomery Global Fund owns
shares in 51Job.
Prices as at close of business, 13-Apr-18.
A
s the bull market progressed,
an over-dependence on a hypernarrow band of technology stocks
has transpired. The investment universe
has not seen so much capital concentrated
in a single sector which, through ETFs,
can be sold at the click of a mouse.
Meanwhile, the emerging perception of
increased regulatory risk for FAANG
stocks (Facebook, Apple, Amazon, Netflix
and Google) has not only capped prices, it
has served as an important reminder that
excess profitability cannot be extended
indefinitely and will always come up
against an opposite force. That may be
competition but it may also take the form of
societal rejection or regulatory backlash.
Listed among the 10 most valuable companies in the world, Google dominates search
with a 90% share, Facebook commands
88% of social media traffic in the US and
by some accounts nearly half of Americans
obtain their news from Facebook. By 2016,
the share of online US consumers bypassing
search engines in preference for Amazon
was 55% and the biggest Chinese tech companies, including Tencent and Alibaba, command similar or even larger shares.
As recently as February, the NYSE
FANG+ Index (also including Baidu, Netflix,
Alibaba, Nvidia, Tesla and Twitter) was collectively valued at multiples of three times
that of the broader market. The divergence
is even greater than during the peak of the
tech bubble in 2000. While the S&P500 has
advanced a phenomenal 331% in the nine
years since 2009, Amazon is up over 2100%,
Apple 1100%, Netflix 5300% and Google
586%. Add Facebook, Microsoft and Nvidia
to that list and eight stocks now account for
over 15% of the entire S&P500 and just shy
of 50% of the NASDAQ-100 index.
At the time of writing, Netflix trades at a
PE of 218 times earnings and Amazon.com
trades at 312 times. Facebook and Google-parent Alphabet, both of which have
been directly linked with privacy concerns,
now trade at valuations near 52-week lows.
Netflix share price
$US350
Tesla share price
$US400
51Job share price
$US100
$US380
$US300
$US90
$US360
$US80
$US340
$US250
$US70
$US320
$US200
$US150
$US100
❶
$US60
$US300
May
Jul
Sep
Nov
Jan
Mar
Netflix
NASDAQ code
Netflix hit a record
NFLX
117.6 million subscribers
Price $US311.65
in the last quarter of
52wk ▲ $US333.98
2017. This was thanks
52wk ▼ $US138.66
to the addition of
Mkt cap $US135bn
6.4 million international
Dividend –
and 1.9 million US
Dividend yield –
subscribers. International
PE ratio 218
subscribers grew 11% in
the fourth quarter from
■ SELL
the third quarter and US
subscribers grew at just under 4%. In 2017 the
number of international Netflix subscribers
surpassed US domestic subscribers.
While the company is expected to earn
between $US1.88 and $US3.27 a share,
the stock is trading at between 74 and 153
times earnings. It faces extra competition
after Disney announced in November that
its own two largest franchises, Star Wars
and Marvel, will move exclusively to Disney’s
own streaming service from 2019. Fourteen
Disney films have grossed more than $1 billion
worldwide, including two Star Wars releases
and four Marvel movies.
With 55 million Netflix subscribers in the US,
compared with 94 million pay TV subscribers,
and a steeper growth trajectory, 40 of the 56
analysts covering Netflix have a “buy” rating
and only two have a “sell” rating. We believe
the most expensive tech names are at the
greatest risk of disappointment.
$US280
$US50
$US260
$US40
$US240
May
❷ Tesla
Jul
Sep
Nov
Jan
Mar
NASDAQ code
Elon Musk has
TSLA
impressively built from
Price $US300.34
scratch a car marketing
52wk ▲ $US389.61
and manufacturing
52wk ▼ $US244.59
machine that in
Mkt cap $US51bn
2018 is expected to
Dividend –
generate sales of
Dividend yield –
between $US14 billion
PE ratio –
and $US26 billion.
The achievement
■ SELL
is phenomenal.
More phenomenal is Tesla’s market cap of
about $US50 billion, having produced only
about 100,000 vehicles last year. Ford has a
market cap of $US44 billion and total global
sales of 6.6 million units. Remember, these
companies are in the same industry.
In 2017 Tesla burned more than $US2 billion
and is expected to spend more in 2018. But
the company has a cash balance of just
$US3 billion. It has said that it won’t need to
raise money to ramp up model 3 production.
But in 2016 Musk said Tesla wouldn’t need to
raise capital, but then raised money twice in
2017 to the tune of about $US3 billion in mixed
equity-debt offerings.
In 2018 the company is expected to lose
between $US0.64 and $US12.58 a share. This
compares with a share price of $US289 at
the time of writing. We believe Tesla’s bond
investors, who have been selling aggressively,
have the picture right and equity investors
have yet to catch on.
$US30
May
Jul
Sep
Nov
Jan
Mar
❸
51job
NASDAQ code
Founded in 1998 and
JOBS
listed in the US, 51job
Price $US91.27
Inc is headquartered in
52wk ▲ $US92.63
Shanghai. The company
52wk ▼ $US37
provides human
Mkt cap $US5.6bn
resource outsourcing
Dividend –
and consulting, as well
Dividend yield –
as recruitment solutions,
PE ratio 95
training and assessment.
51job has a long runway
■ BUY
of revenue and earnings
growth ahead as more employers migrate to
online advertising for jobs. Meanwhile, the
company has put through a range of price
increases of up to 45%. Previously, and for six
years, a one-month membership with 20 job
listings would cost an advertiser 600 yuan
($123). As of February 1, the price increased to
between 800 yuan and 1000 yuan.
These price increases carry no incremental
costs and will boost margins beyond the
strong increases of 2.5% year on year in the
fourth quarter of 2017.
Despite a 128% increase in the share price in
the past 12 months to over $US88, we believe
there is value and currently estimate the
company’s intrinsic value at circa $US100.
MONEY MAY 2018 87
FA
ACT OR FICTION Scott Phillips
Buy and hold is dead
Just to spite the doomsayers, this style of investing won’t go quietly
I
t’s the headline that just keeps on
giving, year in, year out: buy and hold
is dead. And it’s been doing the rounds
again recently. But what is it? And is it
really dead?
Buy and hold is a style of investing that,
really, should just be called, well, investing. That is, buying shares with the intention of not selling them for a long time.
These days, of course, you can hold shares
for a matter of seconds, if you should so
choose (and if your programming skills
are up to snuff).
But no, buy and hold isn’t dead. Rumours
of its death have been greatly exaggerated.
And repeated. A quick Google search gave
me thousands of results for that phrase.
From 2016. And 2014. And 2009. And 2002.
One author was honest – sort of – by calling
his book Why Buy and Hold Is Still Dead
(Again). And if you can explain that title to
me, you’re better than I am.
Those who suggest that the mortal existence of buy and hold has passed are usually
making one of two spurious arguments.
The first group would say: “Well, you
can’t just buy any stock and never sell it and
hope to make money. Look at HIH, Kodak
or OneSteel.” Which, of course, completely
distorts the intention of buy and hold in the
first place. Only the obstinate or deliberately mischievous could believe that buy and
hold applied to any – or every – company on
the ASX.
The second group will point to periods
of market volatility, such as the past few
months of uncertainty, or the GFC, and
make the very real point that if you’d only
sold at the top then bought back in at the
bottom, you’d have made more money than
if you’d simply decided to buy and hold.
They must have great crystal balls.
Of course, cherry-picking periods or
companies is like saying that there’s no
point in trying to drive safely because people are killed every year. Or not bothering
to service the car. I don’t think anyone
takes that line of argument seriously.
88 MONEY MAY 2018
Foolish takeaway
Those who suggest its
time has passed are
usually making one of
two spurious arguments
investing. Some
b
s have, though,
i
calling it buy to
hold, to make clearer that buy and hold
was never meant to be synonymous with
set and forget.
The world’s best buy-and-hold investor,
of course, is Warren Buffett. He’s amassed
a fortune of over $84 billion by doing just
that. And there’s a clue: the number of “Buy
and hold is dead” articles is only slightly
greater than the “Buffett has lost it” pieces
that have been written, almost continuously, for more than two decades.
For those keeping score at home, the ASX
is up 8.4%pa over the past three decades,
and 8.1%pa over the past 20 years, according to Vanguard. Ah, but that was then. Buy
and hold is dead now, they’ll say. Except the
ASX has gained 13.1% and 11.6%pa over
the last one and five years, respectively.
Ironically it’s the past 10 years that has
been the underperformer. So perhaps if buy
and hold was dead for a little while, it’s had
a Lazarus-like resurrection.
That hasn’t stopped the naysayers, of
course. At almost any time over the past 30
years, there was a welter of opinion trying
to tell you that buy and hold was dead. They
wouldn’t be the people who are trying to
make a buck convincing you to use their
services to buy and sell shares, would they?
Perish the thought.
Scott Phillips is The Motley Fool’s general
manager. You can reach him on Twitter@
TMFScottP and via email ScottTheFool@
gmail.com. This article contains general investment advice only (under AFSL
400691).
T
he data in these tables compares
some of the most popular super
funds. They are a mix of industry funds,
master trusts and government funds.
Industry funds are set up by employer
associations and unions; many are
offered publicly, some have restricted
membership (NP). Master trusts (corporate and personal) are set up by banking,
insurance or financial planning groups.
All performance figures are after all fees,
charges and tax applied to the fund have
been deducted. The table here shows
performance of funds’ balanced options.
But most super funds offer many other
choices of investment mix.
The data is provided by SuperRatings,
a totally independent Australian superannuation research company. It is the leading source of superannuation information
to the Australian media and is renowned
for its timely commentary and opinions
on the various superannuation funds
available. SuperRatings assesses over
250 superannuation funds and products.
SuperRatings takes into account risk-adjusted investment performance, fees,
insurance, service delivery, education,
financial planning facilities, employer
support, fund governance and flexibility
of the options. The judging is mainly
quantitative but does include qualitative assessment.
Calculators, fund comparisons, fund
ratings, news and expert opinion can be
found at www.superratings.com.au.
Best super funds: balanced options
RANKED BY 5-YEAR RETURN
3 -YEAR
RTN
(%PA)
5-YEAR
RTN
(%PA)
RANK1
7-YEAR
RTN
(%PA)
10.7%
1
9.8%
1
10.4%
2
9.4%
3
TYPE
2018
RATING
1-YEAR
RETURN
RANK1
HOSTPLUS Balanced
Industry
Platinum
13.2%
2
9.1%
1
AustralianSuper Balanced
Industry
Platinum
13.1%
3
8.2%
3
Cbus Growth (Cbus MySuper)
Industry
Platinum
11.8%
8
8.3%
2
10.3%
3
9.5%
2
Intrust Core Super MySuper
Industry
Platinum
13.0%
4
7.5%
8
10.2%
4
8.9%
8
CareSuper Balanced
Industry
Platinum
11.5%
13
7.9%
6
10.1%
5
9.2%
4
AustSafe Super MySuper (Bal)
Industry
Gold
13.8%
1
7.4%
10
9.9%
6
8.9%
6
Sunsuper for Life Balanced
Industry
Platinum
11.6%
11
7.8%
7
9.8%
7
8.7%
13
VicSuper FutureSaver Growth
(MySuper)
Industry
Platinum
11.0%
18
6.6%
24
9.8%
8
8.6%
18
Catholic Super Bal. (MySuper)
Industry
Platinum
11.3%
14
8.1%
4
9.7%
9
8.8%
9
MTAA Super My AutoSuper
Industry
Gold
10.7%
25
8.0%
5
9.7%
10
7.9%
29
Industry NP
Platinum
10.3%
27
6.7%
22
9.7%
11
9.0%
5
Equip MyFuture Balanced Growth
Industry
Platinum
11.5%
12
6.8%
20
9.6%
12
8.9%
7
BUSSQ PC Balanced Growth
Industry
Personal
Platinum
9.3%
36
7.4%
11
9.6%
13
8.7%
10
First State Super Growth
Industry
Platinum
12.2%
6
6.9%
18
9.5%
14
8.6%
15
Energy Super Balanced
Industry
Platinum
10.9%
21
7.2%
12
9.5%
15
8.5%
19
HESTA Core Pool
Industry
Platinum
11.1%
15
7.1%
13
9.3%
16
8.7%
11
Telstra Super Corp Plus Balanced
Corporate
Platinum
9.5%
34
6.1%
29
9.3%
17
8.7%
12
Vision SS Balanced Growth
Industry
Platinum
11.6%
9
7.0%
15
9.3%
18
8.6%
17
REST Core Strategy
Industry
Platinum
10.7%
23
6.5%
25
9.2%
19
8.6%
14
TWUSUPER Balanced2
Industry
Gold
11.1%
16
6.9%
17
9.1%
20
8.3%
20
FUND
UniSuper Accum (1) Balanced
SR50 Balanced (60-76) Index
1
10.6%
RANK1
6.5%
8.8%
RANK1
8.0%
Rankings are made on returns to multiple decimal points. 2 Interim returns.
SuperRatings indices median returns
1 YEAR
3 YEARS
5 YEARS
7 YEARS
SR25 High Growth (91-100) Index
13.6%
7.5%
11.0%
9.1%
SR50 Growth (77-90) Index
11.8%
6.9%
9.8%
8.6%
SR50 Capital Stable (20-40) Index
5.2%
3.8%
5.2%
5.4%
SR50 Australian Shares Index
11.4%
5.9%
8.3%
7.8%
SR50 International Shares Index
16.7%
8.1%
14.3%
11.0%
SR25 Property Index
5.9%
6.8%
9.1%
8.9%
DATABANK
YOUR GUIDE TO SUPER DATA
WHAT THEY
MEAN
Rank Superfundshavebeen
rankedbyfive-yearreturns.
Returnsarenetofmaximum
fees.Highbalancesmayqualify
forlowerfeesandthusbetter
returns.Rankingsforone-,threeandseven-yearreturnsshowthe
performanceoftheparticular
fundcomparedwithpeers.
NPmeansmembershipofthe
fundisrestricted.
Pr meansperformanceresults
arepreliminary.
ReturnsareasatFebruary28,
2018.
SuperRatings rating
Platinum are best value
for money funds; Gold
are good value for money;
Silver, reasonable value;
Bronze are below average
in performance and features;
and Blue are bottom of the
ladder.
Percentages in brackets indicate proportion of growth assets.
MONEY MAY 2018 89
THE
HOT SEAT
T
“That dumb decision has
cost me $600k in equity...
and still growing”
What is your favourite
thing to splurge on?
What was your first job?
My first real paying job was actually window cleaning. A guy across the road from where I grew up ran
a domestic window-cleaning business. So when I
wasn’t studying for my associate diploma in business, I spent my working days window cleaning very
nice two-storey houses in some of Melbourne’s nicest suburbs. This money went a long way in helping
me save a deposit to buy my first property at 23.
That’s easy – travelling. I was fortunate to grow up
in an airline family, so that meant a lot of air travel
both domestically and around the world. Experiencing different cultures, making new friends, visiting
incredible natural and man-made wonders, and
getting a true appreciation of all humanity and this
amazing planet is priceless.
If you had $10,000 where
would you invest it?
What’s the best money
advice you’ve ever received?
My dad never sat me down and said, “Son … ”. Instead
I watched him work three jobs (with an airline and two
part-time cleaning jobs), plus Mum did some part-time
work too, to support me and my brother. Their hard
work gave us a great upbringing but also saw them
retire at 55. So it was actions rather than words which
taught me to work hard.
What’s the best investment
decision you’ve made?
I’m very satisfied with compound returns on the
properties my wife and I have bought over the years,
so the best decision for me was to educate myself
on all things residential property. I’m talking about
researching property markets, understanding what
drives demand to push prices higher, learning about
cash flows, lending and leverage, and finally how to
minimise risk. There are no shortcuts on this stuff.
What’s the worst?
On the property front, that first property I bought
when I was 23. Some smart accountant who was
moonlighting as a property expert told me to sell it
because I was now paying tax on the rental income.
That was a dumb decision which has cost me about
$600,000 in equity – and still growing!
On the share front, back in 1994 I bought 4800
shares in a small government business which was privatising via an IPO ... Commonwealth Serum Laboratories (CSL). It listed at $2.30 a share. I thought I did well
when I sold them for around $6. With buybacks over
time the share equivalent price would be around 75¢ at
IPO and it is now worth over $150! Not to mention just
under $100,000 in dividend payments. Ouch!
90 MONEY MAY 2018
Ben
Kingsley
Ben is founder and
managing director
of Empower Wealth;
co-host of the investment podcast, The
Property Couch; chair
of the Property Investors Council of Australia; best-selling author
of The Armchair
Guide to Property
Investing. His new
book, written with
Bryce Holdaway, on a
money management
system for
households, will be
released later this year
through Major Street
Publishing.
Cryptocurrencies, of course! Just kidding. My wife
and I have been building a property portfolio that will
generate us healthy passive income for our retirement
years, or should I say our continued travelling years. Our
plan is to buy two more properties over the next couple
of years and then focus on paying off the debt. So the
$10,000 would go into the offset account against our
family home debt to reduce the loan interest for now
and it helps improve our equity position.
What would you do if you had
only $50 in your bank account?
My planning and actions have ensured that scenario
will never happen.
Do you intend to leave
an inheritance?
We have two boys under 8 so, yes, we plan to leave
them a part of our legacy ... the part we don’t spend on
travelling. That said, the most important legacy will be
what we have learnt on our financial journey.
What do you think is the biggest
issue facing property investors?
Short-term confidence. As the daily news feeds
continue to speculate on the cooling property markets
in Sydney and Melbourne, combined with regulation
and policy interference (designed to also cool the
market), some investors will lose their nerve and act
irrationally. Investing sensibly in property is all about
playing the long game.
Finish this sentence: money
makes ...
... more of it, if you put it to work (invest) wisely.
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