Illiquidity within Industry Funds may prove problematic

Industry funds over the years have crept up their holdings in growth assets in their balanced funds in order to have increase performance during good times, that in itself is not necessarily a bad idea. Then, they also hold an increasing portion in unlisted assets, maybe infrastructure, direct property holdings or private equity and other 'alternatives', which don't get repriced daily on stock or bond markets.  This then lessens the volatility which has helped these fund experience seemly good returns, with less volatility. But, as I say, there is never a free lunch when it comes to investing and I think I can see the waiter coming with the bill.

As an example of the differences of unlisted assets not being subjected to the same volatility, as of March 30, Blackrock’s iShares Global Infrastructure ETF (Exchange Traded Fund so it is priced daily by the market) was down 28% this year. In comparison, over at super fund Hostplus, their infrastructure option was down a mere 2.8% this year, as per their valuation on March 27. That type of small write down doesn’t pass the sniff test.

These unlisted assets are now causing some panic within the superfunds themselves. The government, making another sweeping change with the stroke of a pen, saw fit to open up superannuation to unexpected withdrawals. Self-assessed, non-taxed withdrawals from members who’d lost their job or suffered a 20% income decline. The superfunds are demanding the government help to facilitate withdrawals, so they don’t need to liquidate assets in a crunch.

Some funds, led by the union-and-employer-controlled industry sector, want the government to underwrite a “liquidity backstop facility” that would provide immediate cash to pay withdrawals. For-profit funds oppose the idea. There is no suggestion any super fund is at risk of collapse. Rather, industry sources fear that the forced sale of assets would crush their value, crimping returns for people who remain in the fund.

Again, legislative risk and liquidity risk. If anyone should expect legislative risk, it’s the superannuation industry. The decision is a poor one, but we’ve warned about superfunds and their illiquid assets in the event of the worst. The worst happened. There is regular sabre rattling from one side of politics about superannuation funds. The LNP hold a decidedly dim view of superannuation. A cynic might suspect because it was a Labor creation and now the largest superannuation funds in the country have links to their mortal enemies, the unions. Liberal Senator, Andrew Bragg making an opportunistic, but relevant point.

Superannuation funds which may have overextended into illiquid assets, such as infrastructure and property and who did not retain adequate cash and other liquid holdings, did so knowing the risks they were adopting… To tout strong investment returns off the back of illiquid assets in the good years, only to come to the government cap in hand when markets inevitably turn, is simply a sign of bad management and poor investment governance.

To name super funds, it is reported that HostPlus and Rest super are potentially in the worst liquidity position because their members (hospitality and retail) are going to be the biggest proportion of people who take up the $10,000 superannuation withdrawal. Further to this, HostPlus started to liquidate some of their holdings in ISPT which is an unlisted property fund. ISPT, may now have to liquidate some of the assets within that fund, which gets back to actually testing if those valuations are correct by actually selling the asset at the moment. If the price is lower, this will have an impact on all the superannuation funds that hold these unlisted assets as the valuations across the board will have to come down.

I remain extremely satisfied with our investment philosophy and at the moment, the complete liquidity and with all assets traded and repriced daily on markets, means that whilst we feel every bump in the road with volatile markets, it also means we aren't left holding an asset that not priced correctly and potentially weighing down future returns as those mispricing's come to fruition. 

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

COVID19, World War 2 and a look at markets

Firstly, it's been great to see the huge reductions in new daily cases across Australia and possibly some light at the end of the tunnel.

You can see in the graph below just how quickly our curve of total infections has flattened, I don't think a result better than this could have been expected just a few weeks ago.

Graph via The Guardian

This is another positive. We might be able to enjoy some freedoms again, however, will need to remain cautious coming into winter. A second wave, as seen recently in Singapore, will do us no favours.

Markets, as always, remain unpredictable. Who knew a contract on oil might go into negative territory? Without anywhere to store oil it becomes more about the price to hold it than the actual price of the commodity.

Back to shares, and for almost the last month there has been a substantial rally. Up 20% plus on the Australian market and up 30% plus in the US. Even with these upward movements there have been some large falls, especially on the ASX. Falls of 5%, 3.5% 1.6% 1.3% and 1.2%, all within a confine of a 20% rally that occurred in less than a month. That is volatility.

Markets will be more sensitive to various pieces of economic and financial data. We should expect them to swing wildly for the foreseeable future. We’d like to hope they would at least hold their ground, but they could as equally revisit previous lows. Nothing should be discounted as a possibility. Even going upwards again.

Possibly the best way to consider the impact of COVID-19, in respect to the various curtailments and their impacts, would be akin to countries when at war. Travel is effectively off limits; various parts of the economy are shuttered, and freedoms are curtailed. In respect to a war they are generally multi-year events. Gauging the prospect of a war’s end? Hard to do. We would hope COVID-19 won’t be a multi-year affair.

In considering market movements One particularly interesting chart is the behaviour of various market factors around WW2. Across the six-year period of WW2, the S&P 500 doubled in the US, but at one point it fell 38%. What’s interesting is the behaviour of small and value stock indexes during that period. Small stocks were up over 500% during WW2 and value stocks were up nearly 300%. At one-point small stocks fell 52% and value stocks fell 48%.

The idea is being around to capture the gains when they appear. If an investor has stuck around for the risk, they may as well enjoy the reward. It is also important to keep in mind there will be various factors in the market that may outperform when a recovery eventuates.

Finally, we’re pleased to note, we have had no reports of any COVID19 cases from us, our friends or family or businesses in our little area. Also, across our clients, we’re happy we haven’t had any reports of COVID-19 exposure. We hope this continues and you all remain in good health.

Until next time.

Reproduced with permission from Mancel Finanical Group. This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

Common traits of successful "Mum and Dad" investors

I was having a discussion the other day about property investing versus share investing and people often think one is better than the other based on anecdotal evidence "my uncle did very well owning property - he's owns a few houses and they have gone up from $70,000 in 1994 when he bought them to about [insert large figure here] now" or "my grandfather bought lots of commonwealth bank shares when they floated and kept buying more and reinvesting the dividends and now his portfolio is [insert large figure here]"

We often get caught up in worrying about which asset class produces superior returns and overlook the common trait these people have.

In virtually every case, these people would have owned thier investments for a VERY LONG period of time. They remain disciplined throughout an ever changing world around them. It's easy to look backwards and see the start point to now and think it's easy, but not so easy when you are on that journey and there is so much noise in life, the media and the world around you.

The other trait of successful investors that I notice is they are thrifty. You might call it cheap. They probably wear older clothes, take cheaper holidays, go to every effort to minimise general expenditure like buying specials or reduced to clear items or not buying brand name groceries. Maybe thier TV is older and saller. Not buying a new car regularly and when they do buy a car, they do so with saved money. I could go on, but I think you get the picture. What it looks like exactly does vary because some people earn a lot more than others, but the comminality is that they make sure they spend less than they earn and do so regularly.

I love these stickers

Sure, we want to invest in assets that are going to produce the best return over the period we are going to own them, but some things are out of our control - so focus more on the things we can control. Being disciplined and investing for the long term, spending less than you earn and invest the difference and make sure you remove risks where you can like being diversified.

Is it a good time to invest?

Is it is a good time to invest? 

This is a question I get a bit and just last week I had a client say that due to the US/China situation - they'd like to hold off as to not lose money straight away.

When you think logically about how the market works, the notion that information or news that we have now means the market will fall tomorrow, next week or next month is really quite silly.

Every day there is an equal amount of buyers and sellers. Good days or bad days - there is always someone selling and someone buying. Obviously, news about a trade war or whatever it might be that week, impacts what people will be willing to buy or sell shares, so the price moves at that instant, to a point where buyers and sellers mutually agree on a fair price based on all the information available at that time.

Whilst looking at a single trade, you might have the assumption that one person in that trade has more knowledge or insight than the other, but collectively, there are billions of trades that take place every day. And the collective knowledge or all the people making those trades is the pricing mechanism used to find fair price for each stock.

I am 100% certain that you, me, Kochie, Tom Piotrowski (yes I had to google how to spell it) and even Warren Buffett, does not possess more information than the collective knowledge of the market so to suggest the market is not priced correctly based on the information available today, is not much more than laughable.  Warren Buffett would be the first to admit this - which is exactly why he has been such a successful investor - he's spent his efforts in investing controling the things he can control and not worried about the things he can't control.

Sure, we can have a punt that things might evolve more negatively than currently expected and think the market will fall further, but, it is nothing more than a punt and when you starting guessing on where the market might move and make investment decisions based on that, you will inevitably underperform the guy who acknowledges the power in markets and pricing and simply accepts the volatility that comes with investing in equity markets. We might be right the first time, or the second time, just like if I play roulette, I might guess red or black correctly, but when I start thinking I possess the ability to correctly guess and start putting the household wealth on red or black, things can come unstuck.

But - stocks can fall next week, next month and next year and some people might not be willing or in a position in life to accept that, which is exactly the reason why asset allocation of an investment portfolio is so important. 1. investing in stocks means being diversified globally to diversify away some risk and 2. having an allocation to defensive assets such as cash, fixed interest and bonds, is also so important.

It's also important to remember, that to shun growth assets such as stocks or property, you are open to other risks such as not achieving a sufficient return to meet your goals.

So, is it a good time to invest? Yes. And so is tomorrow, the day after and the day after that. Accept the power in market pricing and know that we are not smarter than the collective knowledge of all participants. And the next time the market falls 10%, 20%, 30% etc, it's still a good time to invest. The important thing is to remain disciplined and diversified.

Glenn Hilber is a Certified Financial Planner with over 10 years experience and the owner of Precision Wealth Management. Glenn can be contacted on 1300 200 012 or email enquiries@precisionwm.com.au

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

Insurance in Super. Is it Super?

I was reading this week the ask an expert section in the Brisbane Times and a question was put forward of a sad situation, but highlighting a significant issue with group insurance policies (typically those in industry funds, employer superannuation funds and sometimes direct employer funded policies).

The link to the article is here.

The situation is that the person originally had income protection insurance cover within their industry superannuation fund that had a benefit period until age 65, but at some point along the way, the policy was changed to a 5 year benefit period. Now she is on claim and nearing the end of the 5 years without being able to return to work, it's a problem.

She would have been notified at the time the change was made and perhaps ignored it (as many probably do). But what happens a lot is that we have medical issues along the way such as: back problems (insurers hate back problems as it is a common area of claim), perhaps you have had to take some time off work due to mental illness and have been taking some medication (again, mental illness is a big area of claim). So if your group policy is now changed so that it no longer suits, then you wouldn't be able to get new policy elsewhere, even if you wanted to. So they are just stuck with the fact their policy covering them to age 65 has just been slashed to 5 years.

The same thing happened to the definition of what is total and permanent disablement for those covered within AustralianSuper many years ago which negatively impacted millions of members (Link)

What you want in an insurance policy is guaranteed or non cancellable. This means that providing you keep paying the premium, they have to cover you for what is listed on your policy schedule and as per the terms in the product disclosure statement at the time you took out your policy.

The other thing is that when you are in a group insurance policy, you need to stay within that group. So, if that is in a superannuation fund, that means to keep getting than cover, you need to stay within that superannuation fund - so if some health issue occurs that prevents you from getting new cover elsewhere, you are handcuffed to that superannuation fund. The same is true with group policies provided by your employer, if you leave that employer, that cover is gone too.

The thing is, for most people, the premiums for a quality non cancellable, retail policy is usually just as good, or thereabouts, compared to the group policies I've been speaking about. You are still able to fund these policies from superannuation, but they aren't linked to one specific fund so you can in the future change fund or start a SMSF, and maintain your insurance policy which can be so valuable for so many people.

If you've got a retail policy and it feels like it's very expensive, it could well be, but that is probably because it's got too many bells and whistles (the group policies are always bare bones) or the sum insured is to high or you're a smoker (that really puts the premiums up).

So, to answer the question of this blog - is it Super? Well, for those group policies - No! They kind of suck.

Do you want to review your insurances? Give me a call on 1300 200 012 or email enquiries@precisionwm.com.au

Glenn Hilber is a Certified Financial Planner with over 10 years experience and the owner of Precision Wealth Management.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

World Cup Predictions

Well, the world cup is on again and so is all the psychic animals that move towards a team logo/flag to predict the winners.

I do hope that everyone realises that no animal possesses the ability to see the future results of football games or are really good sports tippers, and it's all just a little bit of fun. But, how is it that we actually got here and how does this relate to investing?

Well, if I got 100 dogs to go towards a winning team for a match, then, just like tossing a coin, you would expect roughly half of them to go towards the correct one. So, 50 have got it wrong and just go back to being good boys, but the other 50 are right, and continue on predicting for the next match. Again, about 50% of them get it right, and so on and so forth.

After 6 matches (3 group stages, round of 16, quarter finals, semi finals) you would likely end up with 1 or 2 (100 - 50 - 25 - 12 - 6 - 3 - 1) that have got it right throughout the whole world cup just through shear numbers and random chance. So, on the days leading up to the grand final, this 1 dog winds up on The Project, Sunrise, Today Show about how it can predict the games because they've done it the whole world cup (there might even be video's of it doing it before each game). To someone external, it seems pretty amazing but to the person who's been able to view the whole thing and has seen it's just been a game of numbers and random chance and there's 99 dogs just off to the side wagging their tail, still being good boys, but having failed at some point along the way, then the feat doesn't seem so impressive.

So, how does this relate to the world of investing?

Well, a couple of ways.

1. Occasionally news.com.au or some other media outlet who's desperately trying to create new content every day will bring out a news story about how we're heading for recession this year. The stock market is about to crash this year. Property prices are set to fall - or whatever it might be - some prediction - usually negative. And the basis for listening to 'expert' predicting this is because they predicted the GFC or some other major financial event. The thing is, these people are predicting things all the time AND there is a whole raft of these types of people making predictions, that, just through numbers and chance, someone will nail it. What we do wrong, is we then attribute skill or the power of foretelling the future to that person, rather than seeing it for what it is - the 1 lucky dog.

2. In the world of investing in shares - outperforming the stock market as a whole is the goal. A very low cost way to invest in shares is to purchase an index fund - be diversified across all stocks in that market, and simply achieve the market returns so no stock specific risk. But the problem with outperforming the market is markets are very efficient (meaning that prices reflect all information at hand) which makes it very very difficult to outperform the market and also because it costs more money to try outperform the market too. But, some people do outperform the market (Refer to prediction dog on sunrise) and again, we think this out performance is based on their skill rather than just luck. It is very very difficult to say without a doubt that it isn't based on skill, and that's why this idea of investing remains. On top of that our inbuilt desire to do better than the next guy, our neighbour etc means it very hard for us to accept "Just the index return" even if statistically, trying to do better will likely mean you'll do worse.

It's so much more complex than just asking every stock picker to pick a stock that will out perform or under perform or some very clear choice, so we can track and determine if the outcomes are any different to random chance. HOWEVER, if you look back at the massive population of funds and data, it does suggest that outcomes and chances of outperforming aren't any different to winning at the roulette table by picking red or black (0 or 00 is like the fees charged by the people trying to outperform the market - you actually need to beat it by a bit so you're still in front after fees - after 0 or 00 comes up every now and then).

So, next time you see a prediction in the paper or a fund that has outperformed the market, just think - is there 99 dogs off to the side, and this is just the lucky one - no more likely to get it right this time than all the other dogs.

But, if I see a dog predicting Australia beating Denmark, then they are definitely a good boy.

Glenn Hilber is a Certified Financial Planner with over 10 years experience and the owner of Precision Wealth Management and is also a lover of dogs.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

Should you bring forward tax deductions?

Well, the end of the financial year is almost here and that brings along with it all the reasons to spend money now, because you know....end of financial year...Duh!

I actually had a meeting yesterday about paying for advertising (which I have no intention of doing) and they were telling me paying the expense now would be a great time because I would "get it back on tax". But hang on - if an expense is good at the end of the financial year because of tax planning, why on earth would they want additional income right at the end of the year. Aren't they going to feel like suckers paying tax on that extra profit....?

So, I would hope we all know, that incurring an unnecessary expense is just silly. But there is some benefit to pushing income/expenses around. On the advertisers point of view, they would much prefer to get the sale and have the extra profit at the end of the financial year rather than not have the sale at all.

Paying for something on 30 June rather than 1 July, gives you the tax benefit 1 year sooner and you've only incurred the cost 1 day sooner - so a no brainer really. But how far forward should we pay a genuine expense so that it's worthwhile?

The answer is quite simple. As a general rule it's the proportion of the year of your tax rate. So, if you are on the 34.5% marginal tax rate, then any genuine expenses that you would pay within the first 126 days of the financial year it's worthwhile bringing forward and paying on 30 June. If you are on a lower marginal tax rate, then a bit less, a high tax rate, a bit more. Realistically though, you won't pay right on 30 June, it'll be a few days before, and when you get around that period of 126 days it's very line ball - so lets just say up to a maximum of 4 months or any expense that would come up before end of October.

The big thing though is - Do you expect to be on a different tax rate next financial year? If your income is going up and you're likely going to be on a higher tax rate next FY, then leave as many expenses as you can for next FY where you will get a bigger tax benefit, alternatively, visa versa if your income is going down.

What about a monthly cost that you can prepay for a full financial year? Like interest on a loan, or monthly insurance premiums that are deductible to you. Well, the answer is don't do it unless you get a discount (which you often can) but if there is no discount on offer for paying annually in advance, then it isn't worth it (well, the numbers state that if you pay the monthly cost at the start of every month so the first month would be 1 July and so forth, and you are on the top marginal tax rate, then there is a small benefit but as a general rule, don't prepay a monthly cost unless you're getting a discount).