These days whenever I watch sport, I can’t help wondering whether the competitors that win are using performance-enhancing drugs. I think ever since the Lance Armstrong saga a number of years ago, many people are now sceptical of sport, particularly when there are large amounts of money on the table.
My suspicions were again aroused recently when I read an article in The Wall Street Journal. The journalists reported that Nike may have been directly involved in performance-enhancing programs or doping of their track and field athletes (see article).
There’s no doubt that drugs in sport gives players an unfair advantage over their competition. It’s certainly not a level playing field when the majority are not taking drugs and then somebody comes along and cleans up the trophies and the money because of artificial enhancement of their performance.
The problem can then progress over time to a situation where such a large proportion of the field is taking performance-enhancing drugs, anybody who is clean does not stand a chance of getting on the podium. The Lance Armstrong scenario is a case in point.
But what does all this have to do with superannuation? Well, recently APRA finally commenced its enquiry into the classification of superannuation investment options, such as which assets should be classified as defensive and which should be classified as growth.
So why is this such an issue?
Well, think of it like the performance-enhancing drug situation. You have a group of competitors (super fund asset managers) that are all abiding by the rules with 50% growth-based exposure and 50% defensive-based exposure portfolios. They all refer to them as ‘balanced’ and are competing on equal terms.
Whichever fund ‘wins’ the title of top-earning super fund receives the fame, the glory, and more importantly the cash influx of new investors joining the fund.
Then a new super fund asset manager comes on the scene that might say something like this: ‘Definition of growth exposure and defensive exposure is nonsense …” As a result, this fund manager believes it can break the rules and use what I will term ‘performance enhancing stimulants’ to boost its fund’s returns.
So while on the surface the fund manager might be calling the fund ‘balanced’, in reality, it puts very little exposure into defensive assets; in fact it reduces it down to, say, 10 or even 0%.
As you can imagine, the returns are higher, the fame and glory follows, and around $2 billion or so of new investor money rolls in the door. All these new investors think this is great; they are in a balanced fund and look how great the returns are. Yet these investors are unaware of what the fund might be doing with their lifetime savings and all the extra risk that comes with this investment option.
Now other fund managers might think this is unfair, and with the stakes so high, they also look to inject performance-enhancing stimulants into their portfolios too. Before long, we have moved onto phase two as I outlined above in the example of Lance Armstrong: whereas before just one fund tried it; it becomes prevalent to the detriment of investors.
In fact, this issue is happening right now, with a large number of industry superannuation funds having exposure to growth-based assets.
Will this end in tears? When it comes to investing, if it sounds too good to be true, then usually it is – but only time will tell.
I believe when a person chooses an investment option, it should be reflective of what they are expecting and should also be protected by regulator guidelines around what mix of assets can provide long-term conservative, balanced growth.
Unfortunately, it might be some time before this becomes a reality, so until then we are left to navigate this maze of performance-enhanced fund managers, and try to figure out which investment to choose that best matches your goals.
If you are trying to decide what investment options you need for your superannuation, I recommend you seek professional guidance from a suitably qualified and practising financial planner and of course, I recommend AJ Financial Planning.
In this 24th Episode of AJ Radio we explore the world of ultra low interest rates, what this means for the future, and where investors can get a decent return.
These days formulating monetary policy, which is set by the Reserve Bank of Australia (RBA) and other central reserve banks such as the US Federal Reserve, may give the impression that it is a sophisticated process and an exact science. It’s reasonable to think that these micro-adjustments of interest rates are to ensure that our economy will stay healthy and that the changes are set to perfection.
If we were to put together a list of criteria that we thought could be the objectives of the RBA and other similar operations around the world, it would be fair to consider the following four factors to be important to decision makers:
If we take a scientific approach to this broad range of criteria over the past 100 years, the question arises as to whether they are being met over the long term. Or are we just see-sawing through the boom–bust–recovery–repeat cycle?
It is fairly early days, but questions are starting to be asked about monetary policy:
Let’s take a simple and recent example. Typically, when a housing market or economy got too heated, in the past the RBA would step in and gradually increase the cost of capital on borrowers by raising interest rates.
Now, the trade-off with this is that households are affected – and some might say hurt – financially. People on very tight budgets find they struggle to make ends meet, whereas people on high incomes who have surplus income are possibly less affected. The flip side of this is that lenders and investors make an instant higher rate of return on capital, either through loans, a term deposit or other fixed-interest investment.
The question is, has monetary policy targeted or discriminated against a specific group of the population, or was the pain felt equally across society for the greater good?
In more recent times we saw a change of approach, which I am not sure was deliberate but it highlights why I believe we should be thinking about this problem a different way.
Recently we saw APRA step in and raise the service rates that banks apply to evaluate a loan. The interest rates for existing borrowers did not change, yet any new borrowers, who were likely to be buyers of property, are now subject to a tougher lending regime. These new borrowers do not pay a higher interest rate, but are subjected to much tougher lending criteria.
This subtle change might have been one of the key reasons for the cooling and then stabilising of the housing market, which had started to overheat. If borrowers collectively can’t pay more for property, then prices will naturally adjust to meet this new status quo.
So was this approach more equitable for the citizens of Australia than the change in interest rates as in the earlier example?
At the time of writing this article, the market is forecasting further interest rates cut by the RBA, which will drop rates to ultra-low levels.
If this strategy plays out, it will likely favour anybody who has a home loan, but disadvantage anybody who wants to get a return on their retirement funds. It will certainly place tremendous pressure on retirees who invest capital into the markets to obtain a reasonable rate of return on the fixed-interest part of their portfolio.
My issue with this kind of monetary policy is that it directly and unfairly targets segments of the population.
The reality with monetary policy is that in most cases it is not black and white. Each change has a widespread knock-on effect on the economy and on citizens. Not enough work has been done in this area to properly consider these effects and ensure a socially equitable outcome.
Today the RBA cash rate sits at 1%. If the status quo of the boom–bust–recover–repeat cycle continues, we have historically used around 3% in cuts to interest rates when a meltdown occurs. So we don’t have much to play with, as a 3% cut would take our RBA cash rate into negative. You only have to look at Germany and Switzerland to see the reality of negative interest rates – so it’s not as crazy as it sounds.
Right now, Australian and New Zealand are apparently considering the option of using Quantitative Easing – otherwise known as QE – as another tool.
In our view this would be the equivalent of a nuclear bomb monetarily and societally. The main reason I say this is that it is effectively ‘printing money’. The ‘treatment’ is to try to stimulate the economy by injecting massive amounts of liquidity into the financial system: rather like gulping down a Red Bull.
Like any ‘quick-fix’ medicine, there are always side-effects. With QE, one side-effect is that it can inflate asset prices both of property and shares.
In my view this is troubling as it can widen the wealth gap. People who have assets can benefit significantly, whereas people who have little find attaining assets becomes further from their reach.
Populations that have very wide gaps in social structure often results in unstable political environments and general societal unrest. One might refer to this as the ‘populism cycle’. Social unrest has a history of reoccurrence. We have already seen the effects of this around the world, where housing becomes unaffordable and making ends meets becomes an insurmountable challenge.
Hopefully, before the RBA pushes the red button, there will be some widespread, open and frank discussion with decision makers and the Australian people about QE.
I would be bold enough to say, in fact, that a referendum on QE should be held, so that society is informed before this tool of mass destruction is unleashed.
Getting a return on fixed interest these days is fairly challenging for the average investor. If you are worried about where to get a decent fixed-interest return and what options might be available, I recommend you speak to a suitably qualified, practising financial planner and of course I recommend you contact AJ Financial Planning.
Back in 1987, Warren Buffet made the following statement in a letter to Berkshire Hathaway shareholders: ‘Our basic principle is that if you want to shoot rare, fast-moving elephants, you should always carry a loaded gun …’
Before you gasp in horror, the elephant he was referring to was a metaphor for the purchase of a large business, and the gun meant having the available cash to transact quickly when others cannot, or if there are concerns about the future due to economic uncertainty (such as a share market crash). Historically, Warren has been able to secure such purchases on very favourable terms and a large number of them have proven to be very profitable.
In his letter he went onto say: “If we find the right sort of business elephant within the next five years or so, the wait will have been worthwhile.”
More recently Warren has routinely explained to shareholders at Berkshire Hathaway’s annual general meetings and at media interviews that as a company gets larger, it becomes harder to outperform the market. The company’s 2018 annual report valued its portfolio at around US$172 billion. Yet one only has to look at Berkshire Hathaway’s share price to see it has underperformed on the S&P index by around 15.28% over the past five years. So it would be fair to wonder whether the company is starting to come under some pressure for its performance. It is unclear if this is a long-term trend, or simply that the market has not had a crash for a long time, to allow Warren to deploy his elephant gun.
In portfolio theory we talk about the law of large numbers, and the main reason fund managers that are providing “active management” understand their limitations with the size of assets they actively manage. In a lot of cases, the good ones simply close the fund to new investors at some point as the fund cannot handle unlimited amounts of capital.
There are a few reasons why this law persists in our industry. The first has to do with position size. Let’s take a portfolio worth around $1 million. If you purchase an investment option worth around $10,000 and it goes up by 30%, you might say ‘Hey, what a great return!’ Well, not really. You just gave yourself an administrative stomach-ache. The return, although good, only moved up the value of your fund by 0.3%. As the size of the portfolio gets larger – say $150 billion plus – your ability to buy a large enough stake to make a worthwhile return gets harder and harder.
Another aspect of this law has to do with being able to move capital around in the portfolio. With such massive position sizes it can sometimes take six to twelve months just to sell out, which creates some questions about being nimble in a quickly changing market.
The third reason has to do with inflows. Each year a huge amount flows into Berkshire Hathaway from dividends of listed companies that Berkshire Hathaway owns and all the profits from the private companies they own too. Warren’s company needs to allocate this into existing or new investment options. This growing cash pile can make the situation worse: when there is too much cash not being deployed effectively we call this ‘cash drag’ because it can create a drag on performance returns.
So, what does all this have to do with Australian Super? Well, as at 30 June 2018 this super fund provider reported that they had about A$140 billion or so in funds, which they manage on behalf of members. They also have a huge amount in super contributions coming in, which they need to allocate each year to investment options.
The larger the super funds become should mean some increase in economics with hopefully cheaper fees in the long term based on economics of scale. This would normally be one of the selling points of increasing its size. However, it appears Australia Super did not get this memo, as they had close to doubled their administration fees by 30 June 2019.
The reality is that as these super funds get larger, they start to push the limits of what they can do as an outperformance fund and may simply just track or underperform the respective indexes. It will be just a case of time to see if this plays out.
As you can see, if your money is being lumped into a large pool and yet you are looking for an active management approach, you start to see a clash with these two strategies in the longer term.
So the next time you are thinking about selecting your investment options or a superannuation fund, it is important that you seek quality advice from a practising financial planner and of course, I recommend AJ Financial Planning.
In this 23rd Episode of AJ Radio we recap our recent attendance of Vidcon – the largest multi-genre online video conference held in LA. Hear Alex talk about where this exciting landscape is heading and some investment opportunities you might want to look at.
For some time I have been thinking about the following equation and asking myself, does it hold true?
increase business size = lost authenticity
Recently Suzy attended the VidCon industry event, which is held in LA each year. Around 30,000 people attend and this is pretty much the largest industry YouTube event in the world. As a point of interest, YouTube is owned by Google, and the reasons Suzy was there on AJ Financial Planning’s behalf was to get some insights on the latest trends in media and marketing, market insights, and new investment ideas in areas of growth.
With YouTube attracting around two billion views per day, there are a lot of eyeballs interested in this streaming platform.
Whenever we get boots on the ground to track down new ideas and insights from time to time, I particularly like to look at side issues or missions that relate more to business, and where things are at – and where they are headed – in specific areas. In the past we haven’t reported on the information gathered, but this time I want to share some of the interesting aspects of our findings as something a little bit different from our normal market and finance information.
I told Suzy that my particular interest was in a business located in sunny LA in the coastal town of Costa Mesa, which is close to Huntington Beach. It’s a small jiujitsu academy called Art of Jui jitsu (AOJ). You might ask what does jiujitsu have to do with financial planning and taking care of my investments? Fair question. Well, for me it was more how AOJ is being run. The building where it’s located is classic 1950s architecture, which I have a soft spot for, and a unique selection for a business premises. The business’s branding is refreshing and clean, the studio fit–out unique and simple, with well–selected artwork. In reality, this was no ordinary dojo. We were interested to see if these themes could be extended to other businesses, and how the elements had come together.
Now Suzy just made a simple call to the AOJ operation and indicated that she wanted to drop by just to see the place from an architectural and design perspective. She mentioned that she had come all the way from Australia and the person she spoke to sounded happy and surprised. They were also very welcoming. I refer to this as a test of the ‘Aloha spirit’ of a business, a term from Hawaiian culture.
Upon Suzy’s arrival there was a small team of staff who warmly greeted her. Suzy noticed that the design of the dojo is influenced by feminine energy, with a white design that is unusual in what is generally a masculine environment. It was welcoming and had a unique twist, blending both feminine and masculine energy within the environment.
Now, a normal, old–school type of entrepreneur would try to franchise this idea, or scale it up around the US and the rest of the world to make millions!
Thus comes the question: by doing so, would you lose the magic of this experience and would the authenticity be diluted with scale? Would this business’s ‘Aloha spirit’ be lost each time it was duplicated?
We know that a copy of a copy is never as good as the original. If you have thousands of people running these facsimile businesses but with different agendas, at what point does it get too difficult to get everybody on the same page? After all, a great concept can only take you so far.
More importantly, though, is it okay for this business to just ‘be’ as it is and not become a massive empire?
The authenticity of a company transcends not just the fluffy stuff people see in the media; it is the fabric of the company and at some point, I wonder if growth will cause cracks in its structure?
So for any budding entrepreneurs thinking about growing their business exponentially, I wonder at what point does the successful formula start to break down – or does it ever break down?
As for Suzy and her experiences at VidCon, stay tuned! We will have more on her insights on this and possible investment opportunities too!
In the past, portfolio theory was fairly simple. To work out how much you should allocate to growth-based assets, you simply used the following formula:
100 – your age
The result was the percentage you should have in growth-based assets, and the balance would go into fixed interest/defensive assets. So if you were 30, you’d have 70% growth-based assets, and 30% fixed interest/defensive assets. Simple!
These days things are a lot more sophisticated, with detailed behavioural finance profiling based on an investor’s unique attitude to money and investing, to maximise and optimise their asset allocations.
Most investors today are likely to have some exposure to fixed interest investments depending on their individual mix. But what happens when interest rates fall close to zero? In this case a fixed asset class is simply not going to provide a return, so in the longer term should they drop this exposure from their portfolio?
If we think about economics in simple terms, typically a central bank will increase interest rates when times are good, and drop them when times are bad or there are economic concerns that warrant movement.
So, what is happening right now? Well, as the RBA is continuing to drop the rate, it may be wise to be a little cautious: they could be expecting some drama in years to come. Then again, these cautionary measures might serve to nullify this potential drama.
With interest rates at ultra-low levels, investors might be tempted to simply move funds out of the fixed interest or defensive asset classes, and chase growth or higher yields in other areas of the market.
At the time of writing this article, we can see this happening right now: term deposit investors are dumping their safe investments, opening stockbroking accounts and flocking towards the household names that have historically yielded high dividends.
This is why we are currently seeing a ‘pop’ in prices in this high-yield space, as capital transitions towards these asset classes.
We think this is might end in tears.
At some point, we suspect this spike will normalise, and then reality will set in. Investors who have bought into this area will likely see a share price adjustments reversion, which will likely offset any high dividends they might have received.
One of the biggest risks you face as an investor is being tempted into moving into a higher category of risk to chase higher returns, during a period where you might be needing to be more conservative.
On the bright side, at the moment there are a few areas of the market that still provide a reasonable return on fixed interest and defensive assets, but I suspect this window will close within two years’ time as the market catches on.
The reality is, if you’re holding onto that term deposit thinking things will get better, looking at the 10-year bond yield, which is currently paying 1.28% p.a., unfortunately it’s pricing in only one interest rate rise within the next 10 years.
As we all know, a small piece of economic news can change things dramatically, but at this stage the market is not predicting higher interest rates anytime soon.
Like most things to do with finance, this is a fairly complex area to navigate. Deciding exactly where to head to maintain your asset allocation weighting and keep the protection levels at a suitable level can be tricky. And although everyone’s situation is different the portfolio theory, which is based on hundreds of years of positive interest rates, will be challenged. So we do need to be thinking about these issues today – before any opportunities are vaporised.
So before you jump in and try to work out for yourself which way to turn to capture the moment, we would recommend that you speak with a suitably qualified, practising financial planner and of course, I recommend AJ Financial Planning.
Members of superannuation funds aren’t entitled to vote on who the directors are. In fact, as a member, do you have a say on anything to do with your superannuation company? Who runs it; how it is run; the direction in the organisation is headed?
The answer is no. The only option most of us have is to vote with our feet: either select another investment option, or select another superannuation fund.
So, does this mean that super funds and the way they are run is less like a democracy and more like a dictatorship?
This question is somewhat interesting. Let’s delve deeper.
The trustees and directors of your superannuation fund should be acting in your best interest and those of all its members. Yet surprisingly, many fund trustees have never asked their members to vote on issues that have a direct impact on them financially.
This month, AMP Superannuation Funds was in hot water with APRA, which subsequently imposed directions and conditions on AMP Super due to potential concerns about its conduct. Did they act in the best interest of fund members? At this stage, it is unclear what the findings will be.
Some super funds do conduct surveys to find out what members want. Media Super mentioned in their 2018 annual report that they had surveyed their members.
This raises yet another question: is a survey different to allowing a member to say, ‘Actually, I disagree and I vote that this board member should not be re-elected’? A vote can be legally binding and has a lot more power than a ‘How are you feeling about us?’-type survey. Isn’t it about time members have a real voice via a vote?
You may wonder why this is important. It is. Let me explain further.
On 1 February 2019, the Australian Financial Review reported that Media Super had invested in a collectable 429-year-old violin (see our recent blog post https://www.ajfp.com.au/2019/02/15/how-can-i-tell-if-my-super-fund-provider-is-in-financial-difficulty/). As a result of this ‘unusual’ investment, I became interested in the directors of Media Super, and how are they handling the best interest of, and duty of care to, its members.
So, who are the directors or Media Super and why is it of concern? Reading their website, it calls itself the industry ‘super for creative people’ and is focused on the ‘print, media, entertainment and arts professionals’. Their annual report is full of colourful pictures depicting these professions.
It would make sense that the directors also have backgrounds in at least one of these industries, and to ensure the board is fairly balanced from the point of view of skills, capability to perform the role, and experience in different sectors of the industry.
Looking at page 49 of Media Super’s 2018 Annual Report, if my interpretation of this information is correct, it is interesting to note the following:
You might ask why is this a problem?
Firstly, I am confused what a manufacturing union has to do with “… media, entertainment and arts sectors and works…” I can see a somewhat-vague link with the print industry, but that is just one small part of the industry as a whole.
The questions this raises are: does the AMWU really need to have four people on the board to voice their opinions on this organisation; and is there an appropriate level of board diversity, both in terms of male/female ratio and also the range of backgrounds and expertise?
The annual report does not really go into any detail to explain this board composition, or how and why it is servicing its members.
Page 32 of the Annual Report displays the sectors represented and the stakeholders that Media Super has identified. There are 28 organisations from the media, entertainment and arts sector, but the majority of these groups seem to have no representatives on the board. Why is this so?
This throws up yet more questions, which could apply not just to Media Super, but to superannuation more broadly:
1. Is this board stacked?
2. What about gender equality on board positions?
3. Are the directors from a range of backgrounds, skills and experience?
3. When do I get to have a real vote about what is going on with the super fund and its directors?
4. Do I really want to put my life/retirement savings with this group and be a part of this fund?
For some people, the answer to this last question might be a resounding yes! For others, maybe not.
As I mentioned, on the back of the Royal Commission these are just some of the issues super fund boards are facing scrutiny over. A large number of super funds might find themselves having to take a long, hard look at themselves on these and other matters surrounding best interest duties.
If you own a self-managed super fund (SMSF), this is less of a problem and I guess this is why more people are thinking about this option. They are getting fed up with the present arrangements and looking to take control of their own super. Equally, other people are happy to go along with the current arrangements.
Like all things to do with super, it is important that you critically consider the fund you are in and what exactly is going on with your superannuation including fees, performance and ethics, too.
Keep in mind that SMSFs are not suitable for everybody. You need to meet a range of criteria before you can set one up and there are ongoing requirements.
Like all great investment ideas, it is important that you seek professional guidance from a practising and qualified financial planner, and of course I recommend AJ Financial Planning.
1 Media Super, Our Community, https://www.mediasuper.com.au/about-our-community/super-creative-people, accessed 24 June 2019
2 Media Super Annual Report 2017–2018, https://www.mediasuper.com.au/sites/mediasuper.com.au/files/msup_54061_yearbook18_web_final.pdf, accessed 24 June 2019
Centrelink’s changes to the Age Pension assets test limit in January 2017 cut off access to the Age Pension for many retirees, when the maximum value of assets owned to obtain the age pension was reduced.
If you’re a retiree and this affected you, you are probably still seething about it. Or, if you are about to retire, you might have only recently discovered that you exceed the asset test limit.
Well, 1 July 2019 might just turn out to be the answer to your problem – provided you are smart with the structuring of your financial position.
Let’s recap quickly. Back in January 2017, the Australian Government decided to reduce the asset test limit that Centrelink uses to calculate eligibility for the Age Pension, from $1,175,000 to $823,000 for a couple who own property. For a property owner who is single, this went from $791,750 to $547,000. Note, however, this asset test limit excludes the value of your primary residence and since then, the asset test limit has been indexed, so today it’s sitting a little higher than these amounts.
For a lot of people who sat close to these limits, they lost access to the Age Pension. The government did provide some grandfathering relief, with a cut-back version to try to prevent Armageddon for retirees, but anyone else just turning the qualifying age for the Age Pension was left in the dark.
Let’s jump forward to 1 July 2019. What’s about to change? Well, the government has amended its superannuation and tax legislation, and part of the new measures that have been released include a range of options for retirees with retirement income streams.
Like most things, with changes to superannuation, old ideas have an uncanny habit of reincarnation. Here’s an example: The Transfer Balance Cap of $1.6 million introduced on 1 July 2018, was really just a new version of the old Reasonable Benefit Limits, which used to be in place back in the pre-Howard era – with a few variations.
Today, the asset test exemptions with the Age Pension, which back then applied to guaranteed lifetime annuities, is making a comeback with a fancy new name: ‘Pooled Lifetime Income Streams’. Welcome back, old friend, it is like it is the year 2000 all over again!
Now like any reincarnation, or as any great tech entrepreneur will try to convince you, this time is it is ‘new’, ‘improved’, and ‘different’. Not really. To be honest we liked the old version, but like any Apple or Microsoft upgrade, we learn to live with the new version, despite transition frustrations.
So, what does this all mean?
So, what are the downsides? Any money you put into this product you may end up saying ‘Adios’ to; it is likely you will never have access to this capital again, and your estate will receive zip too. So there will likely be a need to balance these combined objectives.
The great news is, there are some solutions.
Like any great newfangled investment product or idea, it is really important you don’t dash out and try to do this yourself. This area of investment is incredibly complex and a massive amount of modelling and analysis needs to be done. So before you jump into a change in strategy, I recommend you dust off that Y2K era Motorola Razor mobile phone and give AJ Financial Planning a call.