Hello, and welcome to The Australian's Money Puzzle podcast. I'm James Kirby, the editor at The Australian. Welcome aboard, everybody, you know. Regular guest on the show who we haven't actually heard from for a while is Doug Churek. Now, we used to talk to Doug quite a lot when he was a full time advisor, and he is still I might add to mention more private wealth, but more recently he's also ascended, if that's the right word, to the family office, to the world of the family office.
And if you know anything about family offices, you'll know that they need at least twenty million to be called a family office. So there's a lot to invest if you are involved with the family office, and he is the chair of one which will for the moment remain discreetly discreet. And that's the nature of that whole business, isn't it discretion at all costs?
How are you, Doug?
Nice to have you on board.
Thank you, James, and hello listeners.
It's interesting just before we came to where we were just I was just asking you really whether at that level family office professional investor, sophisticated investor level like whether in the end it so they really are facing the same issues as mom and dad every day investors listening to the show, or whether they come in from a dangle. And this year focuses so much on the US and so much on Trump and the Trump trade, and the notion that the US shares are the go this year,
that they will do better than Australian shares. They did twice as good last year, twenty two percent versus eleven. They did twice as good the year before. Everything would suggest that they'll also be better this year. Is that a theme that you would take on board in your work, that US shares are still the main play going forward.
So they say if you've met one family office, you've met one family office, which is another way of saying family investment offices, which you know James probably need monies like two hundred million to five hundred million to really be able to justify a highly personalized approach to investing. They have their own favorite investments. Some may be linked to the way they made money the business. They may be linked to property development. They may love private lending.
So it's it's quite different and not homogeneous, and it's probably fair to say that the proportion of public equities in a family office portfolio is less, as you would also probably say of a Australian institutional superfund, an industry fund, the future fund, and you would also say of an
endowment fund. And so there are a lot more private investments involved, so their exposure is less, But the dilemma is still the same, which is at the moment if you do embrace low cost investing ETFs, index investments, direct indexing, or you invest in a fund that promises to beat
the market. Nevertheless, most are following the weight of money, and the weight of the money at the moment in the world equity market has grown to seventy five percent in the US and about thirty percent in pen stocks, and those are trading at extremely high valuations. And so the same problem a mom and dad investor faces is the same one a family office spaces, albeit maybe in a smaller relative proportion.
Yes, okay, I suppose one useful thing these days is in theory. At least, there's much more access than there used to be. So once upon a time, very wealthy investors would have shares in the US and every day investors wouldn't have any not a chance, I mean not a chance that they would have that. And now you can, you know, open up an online brokerage account, sign up and put five hundred bucks on any stock you wish in the world, and it's not that difficult. So what
do you think of that? What do you think of that core notion that the US remains the place to be in terms of share price appreciation this year.
Yeah, so look, there's no doubting the US economy is strong, it's resilient, it's innovative. But history tells us that investors can overpay. They overpaid in two thousand. They overpaid during this period called the nifty to fifty, which was probably a little bit more diversified than the era of the Magnificent Seven. And I think that's the situation we're in.
And the sort of forecast returns off such a high valuation, which expects some kind of what we call mean reversion or valuations returning to normal, are actually quite disappointing for the US market. And if you look at this questions to ask, how can it get any better? There are the demand for equities extremely high, the proportion of investors, particularly in the US, in the four to one ks
are all the way with equities. Institutions are all the way with equities, and those companies that are in the market are making super profits, particularly the large tech companies, and so there is not a lot of tail breeze behind to keep filling the sales, and there are quite
a few headwinds. You know. We just learned the other day that maybe there's a cheaper way to do AI out of China using something called deep seek, which might turn out to be a deep fake, but if true, it means you don't need to buy expensive Nvidia chips. And you know, and if that's not the banana peel out there, that the market will slip over. Another one could arise. And if you know, I doubt that you or I have in our pockets on Motorola or Ericsson phone.
But most of our listeners would remember those errors when those tech companies dominated, so.
They and you assumed they were going to be there for a long time.
Some do and that's the risk. And at the moment, so many people are all on one side of the boat that it's quite possible that's not wise. So put in some numbers. The US market pe at the moment, if you just looked up a simple ETF that all investors could buy. It's trading on twenty seven times earnings, which is very expensive. And if you bought an ETF that bought every company outside the US, it'd be on
a pe of fifteen. So you basically stocks in the US are trading at twice the price elsewhere in the world, and history suggests that you probably get a lower return going forward. And some algorithmic models that try to do tactical or dynamic acid allocation would be flashing red lights to deweight your exposure to the US market. But you know it doesn't necessarily have to be done just by not owning the index. There are parts of the index
that are sort of underappreciated. So the pe of all of the low price companies in the world is eleven. So in short, you can move your money from the US outside the US and own companies trading at half the price, or you can move them to just buying the bottom third by price stocks in the world, and you can buy them for one third the price. So the market isn't uniformly expensive, it's on average, it's concentrated in a number of small number of large growth companies
and there is good value around that. But other than James Kirby and his media empire, most of the journalists are a little bit lazy and just look at the index and they don't deaverage and they don't see that within the market there's still, you know, some reasionable value and you might want to direct your money elsewhere.
You're not clearly, You're sounds like you're talking that it's all within a relatively normal frame. You're not chilled or disturbed by where the shares are at the moment. And we had that, you know, there was that flurry of activity around Deep Seek when it came on the scene. First people had never heard of it. Next thing they had shot in video from being the most expensive stock in the world out the window, and it had the biggest one day sell off in dollar charms that they'd
ever seen on Wall Street. The point I'm making is that was do you do you do you see that? Do you see incidents like that as opportunity to buy the dip or do you see them as confirmation that this share markets are terribly overvalued and dangerously so.
So again, parts of the share market are terribly overvalued, which then pull up the whole share market. And if an investor thinks they're getting diversification by buying an index fund or using a fund that tracks the index, they'll be disappointed because at the moment, if you bought a global index equity fund, seventy five percent of your money would go into the US and that's not diversified, and thirty percent of your money would go into ten American companies.
And that's so they are at worrisome of high valuations, and I think investors should be worried about that and take some steps to try to diversify around it. And all I'm trying to say is you don't need to
completely exit the share market. That could be a problem because again, valuations aren't a timing tool, but the expected returns from these expensive companies which dominate the index unfortunately, and again an index is just a rule, and it might be this rule is wrong, and it might even be the case that since everyone is now following an index strategy as the dominant way of investing, it may actually be self replicating these concentration risks in super big,
expensive companies. Yes, yes, I think investors need to worry, and they probably should double check what's under the hood of their ETF or their index fund or their active fund, and if they're not careful, they may find that they have a very high exposure. The good news is they've would have made a lot of money from that. And
there's two ways they've made it. Because the other other way they made a lot of money is in the very weakening Australian dollar and most investors offshore don't hedge their currency exposure, so have made a double whammy of a return in the last year.
Yes, they have to. So if I'm in the family office and the old patriarch and I'm down at the end of the table, right, I'm on a gold chair, smoking cigar, and I have and you've just given this presentation, I say, listen, Doug, So what do I do? What? What do you what? My an active diversified investor do who is a little bit uneasy about how well the share market went for them in the last two years, particularly their uses. When you say diversify, is there a
very obvious basket that they should go to? Is it gold? Is it bonds?
It is there?
Is there is there a low hanging fruit there?
Yeah, So you're you're asking the unanswerable question because you know which is a market try. But yeah, the other day I played golf and I saw signs saying extreme weather policy. And that sign only comes out when they think the temperature is going to be above thirty seven degrees, or you could you go to another golf course in
their extreme weather policy might be forty degrees. So most of the time you should have no opinion on share market prices or even for that matter, currency, But when things aren't extremes, then I think you need to roll out your policy that says, do we accept this unusual event happening and the valuation of the US share market is at an extreme and you can choose not to do anything about it, or you could pull out your extreme policy and said, let's take some profits and shift
them elsewhere. Now, some of your suggestions were to take them completely off the poker table and move them into something defensive. That's one strategy, and there are some algorithms or methodologies that say doing so. We call that dynamic acid allocation or tactical acid allocation. But what I was trying to say a minute ago is there are other parts of the share market that aren't bad value. The problem is not uniform. The problem of these rich valuations
is highly concentrated. And you could name seven of the reason. Seven of those now if you need magnific yeah, and if you pull them out, if you invest around them, you can buy stocks that are one third the price and aren't trading. You can go to Europe, you can go to Japan. Unfortunately, in Australia, maybe uniformly, you wouldn't want to buy our index and then have all your money going into the Commonwealth Bank and some the richest
bank in the world. So be careful just saying I'm all in Australia, because Australia has a little bit of this sector evaluation excess at the moment in our banking stocks, So you need to bravely go elsewhere.
We have a magnificent whatever six the four banks and the two miners, the banks particularly, yes, I know we have made a point on the show very readily that you cannot expect forty five percent returns. We'll comework banks shares every year, my friends, you cannot. It may never happen again, and what you do about that is up to you. But don't expect that to be repeated. Very good we'll take a short break. We'll be back in the moment. Hello, welcome back to the Australians Money Puzzled podcast.
I'm James Kirby, Well the Editor Australian talking to doctor Doug Turek. I mentioned more private wealth and also in mysterious family office whose name he won't tell me. So we just have to struggle on, folks. I know it's my job try and find out. I'll try and find out now, Doug, would you please talk to our listeners about this whole business of private credit and this sense that many investors are advisors and advertisements and financial media.
It said, it's putting it in front of mum dad, investors who listen to this show every day, Investors who listen to this show that they've missed the boat, that they should have been investing in alternatives. They should especially have been investing in private credit, and that the other banking system has retraced, if you like, from a lot of work and private credit is in there. It's a
whole new world. And I'm sure that wealthy clients that you know have been in private credit and alternative of that nature for a long time. But I'm terribly skeptical that this that that at this stage the good deals are gone there, that's certainly going to be overpopulated, and that that area is not actually where mom and deld should be. Certainly not an enlisted version of it, where people package up what's supposed to be private credit and then put it on a public market. But this is
the way in for many investors. I've had some people on the show express deep skepticism about Liam short was on a few weeks ago. But I have no idea what your view is, but I'd like to hear it.
Yeah, so, I mean you just background. You did note that post GFC rules encouraged banks to retreat from high risk lending. But also there's a new lot more endowment fund investment style envy which has also been rised of private equity, not just private lending. And of course, when central banks put interest rates to nil and bond yields
were pitifully low for decades, investors stretched for yields. All of us created the growth in demand, and of course financial service markets love to respond to demand, so there are number of companies coming to the market to now offer retail investors what was something done more at the private end. There was a recent paper from the RBA that said the Australian private lending markets around forty billion, which sounds a lot, but it's only, according to that report,
two and a half percent of business lending. So maybe we haven't missed the boat and there's still a lot more room to grow. Private lending does make the regulators nervous because they don't have a lot of transparency over it.
But on the other hand, maybe they should care less because they're not protecting banks which are highly leveraged beasts and systemically important and maybe failed private lenders isn't a problem as much for society, but it could be a problem for mom and dad investors who are thinking there's always liquidity there. Most private lending is through closed funds.
Your money gets locked up, and some will remember money frozen after the GFC in mortgage trusts and in property trusts which took decades for the money to come back. So there are a few listed private vehicles and they they're the positives of those is you can always get out, but you might get out at a terrible discount. Like one of the offerings I think from Qualititasks was down twenty percent during the COVID crisis, but you can still
get your money out. So ironically, these private vehicles might actually be the analog of a listed rate versus an unlisted rate, and in a crisis, you should buy move money between the two. But one of the concerns that you might have is this demand is being filled by a lot of new entrance to the markets who haven't had any experience with defaults, and so they're probably more willing to take risks than they should, and when default happens,
they don't know what to do. And in my family office, one of my colleagues on the committee has a rule not to work with a private lender who hasn't been around since the GFC, and it's quite happy to work with a firm that had some workouts where there were some failures, because the thought is they've learned a lot from that, so you might be careful working with some of the new lenders that come to market. Personally, I have some concerns where private lending and private equity work together.
There has been a problem with private equity liquidity, so a lot of money went into private equity back in the Go Go twenty twenty twenties, before COVID and we had spacks and we had crazy investments in private equity. They're due to come out, but no one wants to list them on the IPO and money stuck. So some private lending companies have been helping private equity firms by lending the money to pay back to shareholders and in debting some of the companies. I think that might have
been the fault of Red Lobster in America. So private credit and private equity I have often don't work very well. And I'd also stay away from private lenders who use debt to enhance returns, which sometimes you can see anecdotally. I've heard that ten to twenty percent of the construction
cranes in Melbourne are now owned by private lenders. You probably some of your listeners would have read that rock Pool, which used to be owned by Quadrant private equity, that company couldn't serve its debt defaulted and now it's owned by Metrics, the private lender.
So yes, to which we can only say, did they really think they were going to? Was that their desired outcome? Shall we say? And I'm sure it wasn't.
Well, there are some land borrowers who are quite happy. They aren't too upset. If something fails. They call it loan to own. So if they think there's still you know, the LVR or the loan to value ratio is low enough and there's still value in the property, you know they will get all their money back. So private, particularly to property development, there is the land value of security, perhaps less so in corporate. So you talked about is
the area overpopulated perhaps? But the other thing to keep in mind is that where we are in the lending cycle, and you have to have a kind of a view, are we going into tough conditions? Will there be a lot of failures? And you may want to then avoid the sector if you think that there's going to be more and more bankruptcies in Australia and we seem to be reading more and more about them. These high interest rates are biting and inflation has also hurt the business
model of a lot of companies. So we could be at the early stage of postponed, forever postponed recession and therefore private lending would not be a good thing. Keep in mind the yields aren't as exciting as you think, and I suspect private lending twenty years ago, done maybe by the Yale Endowment Fund, which created all this envy, maybe gave fifteen to twenty percent returns. But now lending to a property developer on a second mortgage basis might
only be a nine, nine or ten percent return. And by the time you pay a one to two percent fee, and then you pay maybe a performance fee on top of some other fee, you may only be seeing yields of around eight percent.
Which you can get in some conservative just Frank shares.
That's right. You can buy a coal mine that pays that same dividend. You can buy a property trust that pays its same yield, and these are what the academics call asymmetric returns. That's as good as you get. And then the problem is if you don't have a concentrated portfolio, and you know, some individuals like this, some family offices love private lending and they do it themselves, you might get none of your capital back. So the return, yeah,
it may it's not for everyone. The liquidity may be overstated, the time of investing may be wrong, so just be careful looking for this shiny new thing. But on the other hand, you know, high yield investing does work over the and some of it is a kind of alternative equity. Well, the first rule is just don't call it a defensive investment. If you were going to invest in private lending, then take the money from your equity portfolio, not your safe
money portfolio, not your defensive money. It's not a substitute for your government bond or a corporate bond, or your bank deposit or your term deposit. It really is a substitute for your come wealth bank shares.
Okay, give that mind, folks. It's interesting. We had Liam Short, as I said a couple of weeks ago. You can hear that show, and Liam really was all of you, just don't go near it. Doug has a more nuanced view. It's interesting and I lead you to decide which is best for you. You can hear them both. Okay, we'll be back in the moment with some really good questions. Okay, foxing, Hello, welcome back to The Australian's Money Puzzle podcast. James Kirby
here with Doug Turek. Now, Doug, a couple of questions. I might read the first, you could read the second, John says, suburb show you've been able the financial literacy of housandes. Thank you very much.
John.
By the way, the reason I kept the reason I left that line in from John was just in the interest of disclosure. I suppose I should tell the listeners I have I've just recently started the year done on the board of Extra the Financial Literacy Foundation with Chairman Paul Clitherow. And that's just to as an item up disclosure. I should have mentioned that before. Now so that you are,
I've it's put it out there. Okay. So John's question, with Goldman Sachs coming out with their twenty percent upside for China stocks in twenty twenty five, perhaps signaling a greater rise in all things China, how does an Australian citizen invest in the battered Chinese property sector? If you really want to do that, how would you do it?
And you know, we have to take people like Omen Sacks seriously if they say, you know, what's the most famous investment back if it says this is going to be the year for Chinese equities and they're very hard on Chinese property, but you got to take it on board. What do you think, Doug.
Well, I would first of offer some caution about the strategy. Yes, China equities are cheap, but there are many professional investors who considered China uninvestable. And by the way, if you agree with that, and if you agree with that, keep in mind that half the value of investment in a so called diversified emerging market index are like fund is in China and Taiwanese stocks, so you should be also
a bit reticent of that. If you agree with regards to Chinese property sector, we can look at that both direct and indirect. I do, funny enough, have a Hong Kong based client who bought up property in Beijing, and confidentially he tells me he's not sure he could ever get his money out if he sold it, so a reminder may be a one way trip for your capital. A quick search tells me that an Australian citizen could buy a property in China only if one they're a
resident work presumably working living there. Two they're only allowed to buy residential property, and three they're only allowed one property. So I don't think that's going to help John much. I did have a little look around, and there is a New York Stock Exchange list at ETF called the China Real Estate Fund, and it invests in Chinese companies.
And the interesting thing of that it's trading on a pe of four, which is about half what our routs pay, and it's trading seventy three percent off its five year old peak price. So you can buy it for twelve dollars a unit, not sixty dollars a unit. There you are.
This is not advice.
Whatever.
There was a case of information. This is information only, but interesting information. Nonetheless, thank you for that. I'm sorry that was John, Yes, John on China. Okay, Now if you'd like to read the question, which is from David.
Yeah, David. The conversation over the past few weeks got me think, despite all the discussion about gold being a buffer in a portfolio, does the psychology of gold investors stop it from being a real buffer? Rather than selling down gold holdings when the markets slump, do gold investors hold on to the gold waiting for the end of the world while selling down all other asset classes. If that's the case, then gold doesn't buffer. It just sits at the bottom of the drawer hoping for armageddon.
There you go. Isn't that really interesting? That is such an insight, And we often talked about gold over the years, and no one's ever said that before. It's so true. You know, you have gold, you worry about whatever the markets, inflation, the entire enterprise, the entire global economy and how it stacks up and death, etc. You say, oh, gold, You know, gold is the headge. Gold is the buffer. Gold will do when things go wrong. Gold will see me rise.
But then do you sell us? It's probably very unlikely to sell us. In fact, if there was a big share market crash tomorrow, you'd say, oh, I'm I'm so got to have that gold, But would you actually go and sell it there?
Well, if that's the case, that's good for David, because you don't want a whole bunch of people selling when there's a crisis. So that would imply gold will hold its value. So David could be a contrarian and indeed sell it. He does mix a few words like the bottom drawer, So if he's talking about physical gold, then my rule of thumb is that's insurance. That's not an investment, and that would sit in your drawer or the custodian's drawer,
or you've buried it in the garden. So for sure, that's an insurance against financial armor, GEDD and a breakdown of the system. But as far as gold as an investment asset, look, it is complicated. I'm pretty confident over the long term it will preserve its buying power more than your paper money will. But in a crisis it
may or may not go up. There have been If we look back to the last crisis we had in the COVID crisis of twenty twenty, gold did go down initially for about a week or two, and I think that was a lot of selling to buy some cheapen stocks. But then after a while another wave of buyer came in and said, oh, here's all this money printing company, I'd better buy gold. Gold has continued to climb. So, look,
gold's a complicated asset. I didn't recommend it or like it for you know, about thirty years of my career, but I started putting it into Climb's portfolio is about five years ago. I think is the investment case for gold is weakened now that bonds are back and yielding and gold isn't. On the other hand, central banks are buying it, so they may know some things we don't. And I am open minded about you owning gold albeit, you know, to be frank, some people own so little
it won't make any difference in their portfolio. It's like my friend's quarter strength decaf latte, which the barista calls a why bother.
I don't know, Doug. I mean, if you had, you know, if you've got, if you're wiped out, and does you know ten thousand left or one hundred thousand left in gold, then it's one hundred thousand more than nothing, isn't it? So i'd bother. I take you on on that one. All right, hey, great question, Thank you very much, David. Now finally from Dean Appra, the regulator has announced the phasing out of bank hybrid stocks. Yes, indeed, and we
have never mentioned it recovered it. I was disappointed to hear this as I've always found bank hybrids such as combank peerls capital loads to be a great source of reliable income with good share price and relative liquidity. I'd love to get your take on why they decided to
do this and what alternatives to bank hybrids you might suggest. Okay, Well, the hybrids were always a uniquely Australian thing, you know, because we didn't really have a great evolved bond market as they do in the US, and this strange beast called the hybrids came up, and people, regulators particularly but also sort of academics and finance were very uncomfortable with it. It wasn't the bond, it wasn't the share. It was a bit of a bond. It was a bit of
a share. How do you assays it? Et cetera, et cetera. The regulators never knew to do with it. People love them, and through the GFC people went into them again. The majority of hybrids were bank hybrids, and our banks were guaranteed by the government, so really they were by no means a typical. They were a unique product. And in that that they they and in that many people were uncomfortable.
Many people in power were uncomfortable about them. So they're going, Doug, What I'd really love to know is your call on it, and what someone like Dean or other people who had those bank hybrids for years and liked them and knew that they were liquid, and knew that they had good returns, and they were maybe perhaps a bit more stable than the equity version of the same thing, CBA being the stock behind it. There, what they might what they might do now.
Yeah, well, look, all I can do is agree with your commentary. These were above averaging yielding investment lending investments for below average risk, and there were two reasons for that. One is they were inaccessible to form investors don't get ranking credits back. And secondly, there was an implicit guarantee from the government who would look after mom and dad investors who are the dominant owners. So basically the government
doesn't want to be in it. One. I've heard one colleague say this is the same government that didn't like franking credits at a previous election. So either way, they're on the way out. But one thing to remind is they're not going away tomorrow, Dean, And you can still buy hybrids second hand on the share market all the way up to twenty thirty two, so you know, you
have six seven years to still enjoy hybrids. They're not trading as profitably before because they've now become scarce and priced up, and also all credit spreads are yielding very tightly, or because we're in this risk risk go for risk phase at the market. But anyway, they're still around and you can still buy them secondhand on the market. But unfortunately when they go away, this fee free holding access to high incomes lendings security will go away, and you'll
be forced to do one of two things. You'll have to go to a fund manager who will package up some over the counter diversified bonds. Probably the closest thing to a hybrid is something we call a subordinated note, which the banks already issue today, but they're just not
listed on the stock market. So this access through the ASX was quite an interesting thing, and you know, I think the ASX will feel disappointed that it's going to lose all this trading revenue, so we might see the ASX work with the banks and the government to make subordinated bonds listed on the market, which are a little
bit safer by definition. So as it's currently structured, you'll have to go to a fund manager and maybe give away zero point two percent of your yield if it's a sort of a rule based index mix, or maybe half a percent of a year if it's through a trading active fund style manager who might easily pay his way by or her way by taking lots of risk. Or you've got to put together your own basket of over the counter bonds and they're are you prompt to
get anywhere near the same return. You're going to take a lot of illiquidity risk and credit risk because again the hybrids were above average return for below a average risk. So you'll be buying what are called junk bonds. And I don't think that's good for mom and dad investors. But the government has got out of protecting you.
Oh that's interesting, yes, okay, but it's interesting just to feel back there. Your immediate move was to say, too, Dean, you're looking for you're looking for bonds now, because you had a son of a proxy bond. It was an Australian version of a bond, but it was a bond more than it was a share.
It was for sure a lending investment. It was the least reliable, the riskiest way to lend money to a bank. So our banks are voracious lenders. They are a factory of mortgages and they get money many different ways, from deposits, from equity, from secured bonds, senior unsecured bonds, support neded bonds, and then these hybrids, which sit at the lowest tier of the risk spectrum, and that's why they paid the most. So they're going away, so you just got to get
a different slice of risk. It may be a safer slice of risk. Many years ago I considered that you could build your own hybrid, so you could instead of pearls, which was referenced here, you could put half your money in a CBA share and half your money in a CBA senior secured bond, and you might get about the same return of a hybrid, but probably just a little less.
Yeah, right, DII.
Hybrid because in theory that you can diy your own hybridsye. If that makes sense.
It's in fact, it's entirely feasible, I imagine, and not impossible at all. Not nothing as complicated as trying to build a bond ladder or replication ETA for something. There's only two parts to it, the share in the bond. Okay, terrific. We may leave it there, Doug, thank you very much for being on the show today. Really good to talk to you. Anything you wanted to add there before we wrap No.
Just again, it's been a great year to be an investor, but it's also a very important time to be cautious because everything. A lot of things went well last year, and I think it might be some time to take some profits and be very careful.
That's interesting. You are about the third person perhaps in six shows say that. I think, folks, we can call that a theme. We can call that a theme safely, all right. That was Doug Turek. Great to have him on the show again. Today's show was produced by Leah Sam mcglue. Thank you Leah and the email. Please keep them rolling the money puzzle at the Australian dot com dot auk You soon
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