5 May 2024
Don’t plan on interest rates falling this year.
Higher than expected inflation in the USA has likely blocked the ability of the US Federal Reserve to reduce interest rates and has in turn made interest rate cuts in Australia unlikely in coming months and possibly not until well into next year.
Share market expected to weaken.
Higher interest rates usually mean reduced share prices. It is timely to review your super fund investment portfolios and cull out some of your weaker stocks.
A way of simplifying superannuation fund investment.
For those who don’t wish to spend many hours per week examining the financials of companies listed on the stock market and who don’t wish to pay high fees for investment advice on their fund there are investments which don’t carry high ongoing fees, and which maintain their value relative to the market. A simplified portfolio might consist of:
1. One third in Argo investments a long term listed investment company which owns an array of major Australian companies and is therefore internally widely diversified. 20-year compound change in value 3.16 percent per annum plus dividend yield of 3.97 percent plus imputation credit of 1.7 percent equals an overall return of 8.83 percent. Clearly those who study the share market intently and have a disciplined approach can achieve a better long-term return but for those content to set and forget Argo investments is a stable alternative which unlike many recent listed investment companies it has a very low management expense ratio and unlike many listed investment companies it is not loaded with heavy investment fees.
2. One third international investment exposure via I shares S&P 500 exchange traded fund code IVV. Annual growth since inception on October 2007 9.7 % compound plus dividend yield of 0.66% unfranked for a total return of 10.36%. It is invested in the top 500 share listed on the New York Stock Exchange and NASDAQ, many of which are international in scope which negates the benefit of mixing investments to achieve weightings of European, North American and Asian funds. It too has a very low management expense ratio.
3. About 30 percent spread among long dated bank hybrid investments issued by our four major banks. These normally offer rollover options to new securities on maturity or alternatively investors can elect to receive cash. Each of the banks have a number of these hybrid securities which are a cross between equities and bonds. While not guaranteed they rank ahead of ordinary shareholders for dividend payments and given that Australian banks are among the best regulated in the world are considered reliable investments. The long-dated ones include:
· ANZ Banks AN3PL maturing 31/03/2031 paying BBSW (bank bill swap rate) + 2.9 i.e about 7.2% of grossed up franked dividends.
· Commonwealth Banks CBAPM maturing 30/06/2029 and paying BBSW + 3.0 i.e. about 7.3% of grossed up franked dividends.
· National Australia Bank NABPJ maturing 30/09/2030 and paying BBSW + 2.8 i.e about 7.1% of grossed up franked dividends.
· Westpac Bank WBCPM maturing 30/09/2031 and paying BBSW + 3.1 i.e about 7.4% of grossed up franked dividends.
Each of the above fluctuate slightly through each quarter depending on whether their next dividend is imminent, or they are trading ex-dividend. At current prices they are providing a grossed-up yield i.e. including franking credit of slightly above 7 percent per annum. While BBSW will fluctuate in approximate relationship with bank bill rates the margin is fixed for the life to maturity.
The above would be rounded out with a small amount of cash with those in pension paying mode choosing a slightly higher amount of cash.
Personal disclosure.
Our family superannuation fund owns an array of bank hybrid investments including all of the above as well as the I share S&P 500 exchange traded fund.
As always readers should take alternative advice but do be aware that financial advisers have an inherent bias against Argo investments because it is very much in the buy and indefinite hold category of investments as is the S&P 500 ETF.
Legal fees and keeping out of jail!
A popular observation of the 1980’s was “it’s a principle of British justice that a man is innocent until he runs out of lawyers. And he doesn’t run out of lawyers until he runs out of money”.
The 1980’s were the low point of business malpractices in Australia as a number of very high-profile figures described as ‘entrepreneurs’ splurged money, mostly provided by gullible banks and innocent shareholders in a series of business takeovers. These entrepreneurial characters included John Spalvins, Robert Holmes a Court, Alan Bond, John Elliott, Christopher Skase, Abe Goldberg, and a secondary cast which included Laurie Connell, Bruce Judge, Larry Adler and others.
Spalvins disappeared from Australia once a group of our leading bankers discovered, to their horror, that each of their competitors had also lent the Adsteam Group vast sums of money without their knowledge. The banks then set about unwinding Adsteam to recover their loans with bank appointed liquidators selling off the bits in a combination of share floats and trade sales. Some very good businesses were sold or re-floated including Woolworths. Spalvins left Australia.
The late Charles Williams a former stockbroker turned regulator observed that:
If company A controlled by an entrepreneur’s shares are trading at a price earnings ratio of 30 times (PE of 30) and company B making boring products or selling boring services is trading on a PE of 10 then the former uses its share scrip to purchase the latter at a handsome premium, say, by offering some of its shares, created out of thin air, to purchase the latter at a premium value, on paper, of say a PE of 12 or 13. Company A could boost its profit by this method with absolutely no improvement in A or B’s businesses! Merely the illusion that company A conducted by an entrepreneur was making brilliant acquisitions. The process worked during a time of rapidly overheating share markets when, briefly, its architects were viewed in much of the financial press as heroic figures. But it fell over when the global stock market collapse of October 1987 meant that the inflated values and inadequate incomes of the entrepreneur’s conglomerates were no longer maintainable, and the activities of the entrepreneurs began to be scrutinized.
Alan Bond’s nemesis.
Alan Bond was brought undone by British entrepreneur Tiny Rowlands. When Bond started acquiring shares in Rowland’s controlled company using borrowed money, it was seen by Rowlands as a threat. Rowlands retaliated by having his team of forensic accountants do a detailed and hyper critical analysis of Bond Corporation and its controlled businesses concluding that the group was insolvent. The detailed report was simultaneously circulated to a large number of Australian financial journalists and stock market analysts who, virtually overnight, began writing critical reports on Bond’s empire; an empire built on paper share scrip, rorting ordinary shareholders via management contracts, optimistic values and a vast array of borrowings. That led to fire sales of assets, business insolvency and Bond’s apparent bankruptcy.
Christopher Skase
Christopher Skase’s Quintex empire collapsed under its mountainous debt. Skase escaped to Spain to evade Australian legal retribution and died there in poverty.
Abe Goldberg
Abe Goldberg fled to Poland after his Lintner Group collapsed under its massive debts. Poland had no extradition treaty with Australia.
John Elliott
John Elliott’s control over his diminishing Elders IXL Group was brought undone when Harlin, the entity in which Elliott and his close associates owned their controlling shares heavily debt financed, could no longer meet its interest obligations from insufficient Elders IXL dividends. The debacle set Elliott on his path toward personal bankruptcy.
Robert Holmes A Court
Robert Holmes A Court was the first of the entrepreneurs to realize that the global stock-markets collapse of October 1987 had changed the game. Other entrepreneurs could no longer raise the finance to buy their heavily geared assets at ever higher prices. Holmes a Court acted swiftly to sell down assets and pay down his massive debt. In so doing he sold his controlling interest in Bell Group to Bond thereby leaving its large number of smaller shareholders at the mercy of the debt-ridden Bond. Bond loaned the company’s cash to Bond Corporation which had no ability whatsoever to repay it. Holmes A Court escaped with a modest fortune but suffered a premature death by heart attack. The event led to the jailing of Bond.
The incompetent financial press.
One conclusion I came to long ago was that most of our financial press consists of writers who are not sufficiently financially literate to actually get jobs as corporate financiers, stockbrokers, company CFOs etc. Trevor Sykes, the one financial journalist who tried to expose the bizarre dealings of Alan Bond was derided by his colleagues at the time who were incapable of analyzing the business real figures behind the gloss presented by Bond. Sykes subsequently became a legend as his Pierpont column exposed a long series of financial scammers, many of them associated with mining. Most of today’s financial journalists do little more than publicize whichever corporate ‘want-to- be’ feeds them selective information.
“You only get one Alan Bond in your lifetime.”
Kerry Packer.
Reveling in his America’s Cup triumph of 1983 Bond briefly became a national hero. The headlines as well as the finance pages had almost daily stories about what assets Bond/Bond’s companies were buying. Among his disconnected business assets Bond owned two television stations, being Channel 9 in Perth and Brisbane. Australian law indicated that a single owner could own four stations but no more. Packer owned the two best commercial TV stations being the Channel 9 stations in Sydney and Melbourne. Bond coveted Packer’s stations because they would give him coverage of the four largest markets. He pursued Packer to sell and being too eager he fell into Packer’s trap paying $1.05 Billion for Channel 9 in Sydney and Melbourne. The acquisition price carried a poison pill of $200 million of convertible preference shares which were convertible to ordinary shares at market price which Packer could trigger at his call. The price paid by Bond for the stations was way above their worth at the time. Packer told his inner circle that he would buy them back in the not distant future at a much cheaper price. In due course as Bond did not understand the business its profits fell and were insufficient to pay dividends to shareholders other than on Packer’s convertible preference shares. The share price kept falling until it was time for Packer to exercise his conversion right at a much-reduced price and take ownership control of all four stations.
Packer who had a deep understanding of the television business immediately reasserted strong control, cutting bloated executive salaries and restoring profitability.
Robbing banks supplanted by fraud. The 1980s entrepreneur scammers supplanted by new forms of thievery.
Lots of corporate regulation followed from the excesses of the 1980’s entrepreneurs. Bad practices did not disappear they emerged in different forms as we observed during the Global Financial Crisis which took world markets to the bottom of their cycle in July 2009 but for those who kept their nerve there were great gains to be made from the recovery from the low point.
In the USA in the aftermath of the Civil War, which ended in 1865, the gang of ex-Confederate raiders led by Jesse James and Col Younger robbed banks and trains for 17 years. Initially they were regarded as heroes in a depressed pocket of Missouri populated by former Confederates but over time they came to be regarded as a public menace. Increasing the railways contracted the Pinkerton Detectives Agency, with their fast response teams, and greater bank security reduced their easy targets. Eventually Jesse James was shot dead by one of his own followers. These days banks are no longer robbed with guns, but they and their customers are subjected to credit card fraud.
The Australian banking royal commission uncovered a raft of bad practices among the financial advisory arms of our 4 big banks and of AMP.
Most recently vast sums have been made and lost in crypto investments essentially from trading crypto currencies with no apparent underpinning of value.
The last great bank robbery?
In 2004 a subsidiary of the National Australia Bank in Northern Ireland was robbed of over 26 million pounds (over $50 Million) in a meticulously planned operation including the kidnapping of key bank staff to gain access to vaults and safe deposit boxes. Most of the money was never recovered. It was widely thought to be an operation of the Irish Republican Army (IRA). The robbery occurred shortly before a peace accord when the IRA was decommissioned. It is likely that the proceeds of the robbery were used to pension off the inner circle of “IRA hard men” to enable them to depart for new lives in distant lands, with new identities and passports probably provided by the British security services. If so, sending off the inner circle to be scattered across distant lands made it virtually impossible that they could ever again come together to organize more terrorist attacks in the UK and Northern Ireland. This is of course conjecture, and the full facts may never be known. However. the circumstantial evidence is strong that it was an IRA operation and that, in order to create a negotiated peace in Northern Ireland, the security services had an operational need to aid the inner circle of IRA “hard men” to gain new identities and remove themselves from the country; probably to be scattered among Australia, Canada and New Zealand.
Where to for Australian superannuation funds? When do SMSFs gain an advantage over Industry funds?
In Australia most investment activity has involved superannuation funds. The two major forces are Industry Superannuation funds and Self-Managed Superannuation funds (SMSFs). Managed superannuation products offered by investment houses and life insurance companies had blossomed from the time of expanded superannuation tax deductions from 30 June 1983 onwards but have since been substantially eroded by the two major forces. Their place in the market will continue to be eroded. Along the way, a number of large life insurance companies who previously distributed whole of life assurance policies distributed costly superannuation products but were eventually out competed by investment banks who in turn gave way to SMSFs and to Industry Superannuation Funds.
Sleight of hand
Publicity about industry super funds reserving some of their income and paying bonuses to those entering retirement are the type of sleight of hand once practiced on a grand scale by life assurance companies and can easily lead toward lots of bad practice.
A vast number of successful business and professional practice owners have self-managed superannuation fund with many deeply suspicious of the operation of industry superannuation funds which are cost effective for those with small amounts of superannuation but lose their advantage over SMSFs once members balances pass critical levels.
When to start a self-managed fund.
As a rough guide, a couple with sufficient income to be able to heavily fund both partners’ superannuation contributions can consider moving to a self-managed superannuation fund when their combined superannuation and current year contributions exceed $400,000. Below that point it is not worth doing. Above that point, particularly for high income earners, the advantage accrues progressively and sometimes rapidly as couples make both concessional and non-concessional contributions on behalf of both.
Cost of SMSFs
The combination of much improved SMSF software and cheap investment options mean that SMSF administration and advice packages have become more competitive. If your provider has historically high fees it is time to get alternative quotes and without disclosing your alternative pricing request your current provider to adjust their fees. This is particularly so for large funds.
For those with SMSFs but limited interest in involving themselves in significant personal research of the stock market refer to my previous newsletter available at grahammiddleton.com
Getting greatest advantage out of superannuation.
There are huge advantages in having equal superannuation accounts for couples as each are permitted to have $1,900,000 indexed, in their tax-free pension account at retirement and up to a total of $3 million each with the amount above $1,900,000 indexed, being subject to concessional tax rate of 15 percent. Or put differently $3.8 Million indexed of joint tax-free superannuation assets post-retirement and an additional amount jointly of the difference between their $3.8 million indexed and $6 million taxed at a concessional rate of 15 percent.
The most recent changes to taxing amounts above $3 Million have greatly increased the importance of couples maintaining equal balances.
For those with the ability to make large contributions consider including adult children in your family super fund.
Victorians are selling off their residential rental properties in droves.
Recent press reports indicate that some real estate agent’s rental rolls have been depleted by a third as Victorians give up on residential rental investment as the heavy increases to Victorian land tax on rental property on top of all the other costs to landlords of residential rental property has destroyed the economics of this form of investment. The sell-off is likely to continue.
While at first glance it means more houses will be bought by owner occupiers the secondary impact is to significantly reduce the number of high-rise developments which have traditionally relied upon selling about fifty percent of units to investors, off the plan, to facilitate bank financing of their projects. With investors shunning them and banks requiring about 70 percent of binding pre-construction contracts overall from both investors and home buyers it is now far more difficult to get building of high-rise projects started.
For professionals, including dentists and veterinarians, it has long been the case that their two best real estate investments have been their family home and their practice premises.
Are high-rise units a path toward home ownership?
There is an economic truth that over time land appreciates in value, but buildings deteriorate. Units in high rise buildings don’t provide direct ownership of land and hence capital appreciation is poor. Houses with adequate block size give greater value appreciation. The closer they are to transport choices and other amenities—and hence the more limited their number—the greater has been their price appreciation over time. Those who buy a high-rise rental unit in the hope that it will provide a profitable pathway toward ownership of a free-standing house are likely to be disappointed; particularly if developers are building other large apartment towers nearby.
Bank Hybrid Securities.
Currently on average a wide range of hybrid securities issued by our four major banks, ANZ, CBA, NAB, and Westpac plus Macquarie Group are providing an average grossed up return of slightly above 7 percent per annum including imputation credits. They rank ahead of ordinary shareholders but below bank deposits. Our banks are well regulated with mandatory capital adequacy ratios so I perceive their hybrid securities to be much safer than ordinary shares.
Currently approximately 43 percent of our family superannuation fund is invested in bank hybrid securities. We own a range of hybrids issued by the above five banks and varying in maturity dates when a rollover to a replacement hybrid is normally offered.
Pouring taxpayers money down a drain.
The recent announcement of a $1 billion government subsidy to create a solar panel producing plant came in the wake of there being a global surplus of panels and cuts back in production by China which has stockpiles of solar panels available to ship. If China, with a vast pool of cheap labor, is cutting back there is zero future in producing them at a competitive advantage in Australia.
Outgoing head of the Productivity Commission Michael Brennan warned last year that governments must not only beware of picking winners, but they needed to be particularly cautious about making bets on things that could plunge in price. In this instance a $1 billion subsidy has been committed after the price of panels has already plummeted. There is zero chance of this business ever being profitable.
Meanwhile we are yet to find an adequate recycling solution to an ever-expanding quantity of discarded solar panels and wind turbine blades.
Best wishes to everyone
Graham Middleton
For archive of articles including ones by Graham Middleton go to website at grahammiddleton.com. Watch for detailed article on Dental Practice valuation in two parts appearing shortly.
General advice and need to confirm.
As I sold out of an accounting and financial services group, of which I had been a founding partner, on 30 June 2020 I am no longer licensed. The above is general advice and should be confirmed with a currently licensed investment adviser. One I would recommend to you is Campbell Thompson at Ord Minette who is both courteous and experienced. His number is 0407 839 229. His assistant Simone Shelton 0402 085 892 is a helpful person also. If you are after simple transaction advice, they are ideal. I use them but have absolutely no financial interest in any services that they provide to others.
My Financial interest.
I have no financial interest in the advice I provided and seek no fee. I am secure financially and I seek no personal remuneration. If you find it worthwhile you are able to acknowledge it by making a tax-deductible donation to the registered charity which I support, the Delany Foundation who, I am confident, will apply it to worthy use.
Financial Success for Dentists
Financial Success for Dentists: Rules for How to Approach Your Dental Career sets out the key strategies which make dentists successful. It is specifically written for those dentists and dental specialists owning their own practices and for those aspiring to own practices. Among the topics included:
· Understand key practice valuation criteria.
· Learn how some dentists inadvertently reduce the value of their practice by $500,000
· Avoid long term errors when purchasing your practice.
There are many accountants, financial advisers, marketing consultants, web site designers and practice advisers who give advice from their particular disciplinary experience, but very few have the wider breadth of experience to define for their clients the key rules to follow to optimize their practice and their long-term financial outcomes. An otherwise competent financial adviser may have little understanding of what makes one practice much more successful than another. Many accountants have detailed knowledge of the taxation rules but cannot identify if a dental client has broached invisible barriers to practice growth or a threat to practice goodwill value.
I spent 33 years examining dental practice financial outcomes and reviewing the key strategies and decisions which separated successful Australian dental practices and practice owners from the less successful and this led to relevant conclusions and advice to dental practice owners.
A complete and comprehensive career guide for mature and aspiring dentists.
Based on real life situations and a lifetime of dealing with dental practice ownership outcomes this book is worthy of Text Book status for every dental teaching school.
—Merv Saultry, Founder Dental Innovations Network
To Obtain a Copy:
· Go to the Delany Foundation website at http://www.delanyfoundation.org.au
· Click on the Donations tab and make a donation of minimum $60. This is easiest by Mastercard or Visa.
· Email graham.george.middleton@gmail.com confirming that your donation has been made, as well as your name and mail address
· A copy of the book will be mailed directly to you
All production costs and mail costs are met by me personally, so all money donated goes to the Delany Foundation which contributes toward the running of schools in Ghana, Kenya and Papua New Guinea. Naturally donations above $60 are welcome.
The donation to obtain this publication will be the most cost-effective practice advice most dentists will ever receive.
Please Pass On
If you like these newsletters, please pass them on to colleagues. Past newsletters and articles in Australasian Dental magazine on business issues are at grahammiddleton.com. I can be contacted directly at graham.george.middleton@gmail.com
