Author archives: Alex Jamieson

AJ Radio – Episode ​15 (Recorded 17th October 2017)

In this 15th Episode of AJ Radio we discuss retirement. Specifically, we explore what you should do if you don’t have enough money for retirement, and what are the steps you could consider taking to handle this situation. We also give a quick update on the speculative and very interesting cryptocurrency market.

 
 

AJ Radio – Episode ​14 (Recorded 20th ​September 2017)

In AJ Radio’s 14th of episode, we talk about sequencing risk. What is it and how do we manage this type of risk when it comes to investing? We also provide an update on the geopolitical situation with North Korea and what impact this may have on the global financial markets.

 

Should investors participate in class actions?

A flurry of class actions over the past few years raises the question: is this area of law becoming the new feeding ground for ambulance-chasing lawyers?

The marketing and PR is slick: ‘If we don’t win your case, you don’t have to pay a cent’; ‘Just register for the class action and you might receive some money; if it fails, you don’t have to pay anything’.

With any great concept the question must be asked: does it make sense for an existing shareholder of a company to participate in a class action against that company? You hear the words ‘money’ and ‘free’ – is this too good to be true?

Let’s look at an example back in 2012, when National Australia Bank (NAB) settled a class action, paying out around $115 million in a settlement to its shareholders.

However, bearing in mind about 40% of this capital – according to the Australian Financial Review (AFR) newspaper – would have paid off the litigation funding partner, and about 10% would have gone to the lawyer representing the case. So, to keep the maths simple, about 50% of the ‘winnings’ went out the door, and shareholders got to keep the other 50%. Isn’t this just free money?

In another case involving NAB (the consumer bank fee settlement), again the AFR reported the sums paid to the litigation funding partner and the solicitor were even higher – about 70% – so each case can vary, but it’s still free money, right?

Now, let’s work out if this makes sense. To keep it simple, let’s assume you owned 100% of a large bank like NAB as a single shareholder. Congratulations, you are now $82 billion richer. One day, a smart lawyer with a glittering smile approaches you and begins a discussion.

…. ‘You have been a victim of misconduct by the NAB board and management. Here’s an idea: let’s sue the company you own and get you some money – because what they did was wrong!’

‘Wow, that sounds like a great idea! Let me get this straight; I can sue the company I own, and you will get me some money… so how much do I get if I win?’

‘Well,’ replies the clever lawyer, ‘you will get to keep between 30 to 50 per cent of the settlement money, but the best part is it won’t cost you a cent to go through the process and if you don’t win, you still won’t pay anything at all.’

‘Okay, great… let me just clarify to make sure I have the concept: I can engage you to sue the company that I own. If I win – let’s say settlement is worth $6.6 million – the company pays this amount to you, of which you keep $4.62 million and hand me $1.98 million.

‘Plus, the company I own will likely have spent at least $600,000 to $1 million defending the matter in the courts, and hands this over to the lawyers it has had to engage…’

‘Yes, isn’t it great?’ says the intelligent lawyer.

‘So, in total the company has spent $7.2 million in settlements and legals and I will receive $1.98 million. Aren’t I down $5.22 million overall on my investment as the company I own is an asset?

‘I’m a bit confused; wouldn’t it be simpler to simply raise this at the annual general meeting and vote against the board of directors and save all these costs?’

You can see how the absurdity of this argument only really becomes apparent when you imagine yourself as a 100% shareholder in the company. Why would anybody agree to such a ludicrous process?

In most cases, an investor gets to have their say each year at the annual general meeting. Every shareholder gets a vote on how the company is run and yes, you are only a very small piece of the pie and with a very small point of influence. But so too is an individual in a class action. So, isn’t it time we started to use our votes, linking ‘the crowd’ with smart tech to save all the legal costs?

Keep in mind the situation can change, for example, you may not be a shareholder as in the case of the NAB bank fee settlement case, or if the company is no longer trading and is possibly placed into administration this changes things too; every person’s situation is different.

The reality is, however, that when I log onto a law firm’s website to see the final outcome from a class action, I am warmly greeted with a form that asks me to agree ‘not to disclose the loss assessment formula or its contents to any other person’.

Could it be that what this line really means is ‘Psst, we don’t want anybody to know what is really going on’?

AJ Radio – Special Edition on Insights from CFA Annual Conference Philadelphia

In this AJ Radio special edition, we bring you all insights from the CFA Annual Conference where our very own Shaun Gilbert attended to join some of the global leaders in the asset management industry from around the world to gain the latest insights.

Are industry super funds headed for an asset allocation disaster?

Superannuation funds within the retail and industry super fund market usually offer ‘balanced’ or ‘growth’-based investment options. But what does this really mean; and aren’t these funds all the same?

On 31 May 2017, Vanguard’s Balanced Index Fund reported an allocation to growth-based assets of 49.9%.

Over the years, my interpretation of a balanced profile for an investor has been fairly similar to Vanguard’s 50/50 position; that is, one’s holdings are fairly equally split between growth-based assets and defensive assets. The question is, are industry super funds applying the same principle or, more importantly, are they headed towards an asset allocation disaster?

Recently I reviewed Catholic Super’s asset allocation, and I discovered something interesting. Delving into the target’s asset allocation for a ‘balanced’ fund I noticed a 70% growth-based assets allocation. This is a massive divergence from Vanguard’s recommendation, not to mention any number of portfolio theory textbooks. It made me wonder, has Catholic Super’s marketing department ‘mislabeled’ this investment option?

When reviewing Catholic Super’s strategic asset allocation, I also noticed that growth-based exposure was sitting at around 74%, if you included the ‘defensive alternatives’. If these alternatives are removed, it pushes the exposure up to 81%, as it is unclear exactly what these might entail.

Australian Super’s ‘balanced’ option appears to be in similar territory. When I looked at the mix of assets, if credit, fixed interest and cash are included as defensive assets, then growth-based exposure sits at 73%.

Neither Catholic Super nor Australian Super provide a date reference for these asset allocations on their respective website, so these percentages may have changed since they were originally published. It’s reasonable to assume, however, that both Australian Super and Catholic Super are taking a tactical asset allocation position – but have they reasonably exceeded these boundaries?

For years now, industry super funds have been reporting strong returns above those of their peers. The question must be raised, therefore, have these funds’ marketing divisions been pushing up returns by ‘mislabeling’ investment categories in order to attract new investors? Of greater concern, though, is whether these funds are potentially exposing investors to far more risk than the labels may imply?

So, let’s go back to the Vanguard Growth Index Fund reported on 31 May 2017. The index presently sits with a maximum range of exposure for growth-based assets at 72%.

You might ask, does having a larger exposure to growth-based assets matter? Doesn’t it mean higher returns for the members of the super fund and everybody is happy?

The short answer is: volatility and market downside. These factors make it very difficult for an investor whose risk profile is balanced to ensure they are matched carefully with the right exposure for their risk tolerance.

So, who has got it right? Vanguard, or the industry super funds? Which asset allocation really is ‘balanced’?

As Warren Buffett famously said, ‘Only when the tide goes out do you discover who’s been swimming naked.’

AJ Radio – Episode ​11 (Recorded 1​1th ​May 2017)

In AJ Radio’s eleventh episode, we look economic principles and how we can take advantage of this theory in today’s world. We then discuss how this might apply to your next investment idea!

AJ Radio – Episode ​10 (Recorded 1​4th ​March 2017)

In AJ Radio’s​ ​tenth episode we delve into the key things you need to do before another financial year ends. We will also discuss some things you can do to start off the next financial year in the strongest possible way.

AJ Radio – Special Edition on Insights from CFA Institute New York

In this special edition of AJ Radio we reveal what the founder of AJ Financial Planning, Alex Jamieson, recently learnt from attending the CFA Institute Conference held in New York. Hear his insights on which sectors of the share market will be benefit from the election of Donald Trump.

AJ Radio – Episode 9 (Recorded 17th January 2017)

In AJ Radio’s ninth episode we delve into forecasts – what exactly is a forecast, and what might be in store for the 2017 year ahead. We will also discuss some legislative changes happening with Centrelink and superannuation and what this means for you.