Hello, and welcome to The Australian's Money Puzzle podcast. I'm James Kirkby, Well, the editor at the Australian. Welcome aboard everybody. Well, we finally got the red cut. It turns out, if you look at it closely, it was a line bowl decision. In fact, James Glynn, who writes for the Wall Street Journal in Australia, did a piece this morning, it being a Thursday, twentieth February, and he's really good on this issue. It's his expertise, and the whole piece basically says why
did they do it? Like, why did they do it if they didn't believe it? Why did they do it if they spent the entire press conference explaining and warning about the dangers in the economy that were the sort of dangers that wouldn't justify a red cut. So, folks, the only thing I'm saying is, yes, the radcut's here. It's very important the first one or four years, so that is very important. There may be an easying cycle, so as investors we have to be ready and respond
to that. But as a preface, I would say, don't take the economists quite so seriously when they say three or four cuts this year that may not occur. It certainly may not occur quickly, so no one knows the future. You keep that in mind before we talk about the issues that are on the table today. To join me is James Girard of Financial Advisor dot com dot you. How are you, James.
I'm doing very well, James. Thanks for having me on.
Four years since there was a red cut. It's interesting that the thing that strikes me and our listeners know awfully well, don't need to be told. Okay, so the mortgage goes down a bit. If you're borrowing for property, that's good too, or you're on a variable rate. Interesting another dimension is you're borrowing. Capacity as an investor immediately goes up, right. I was reading yesterday for the average Australia on the average wage can borrow twelve thousand more
than they could before that cut. So you put that into an investor perspective and people can do more than they could previously. So that's the borrowing side, which is interesting and in many ways obvious. I think what's less obvious, James is the impact across the board for investors who've
become quite comfortable. I won't say, complacent, comfortable with the fact that they can get pretty good, like pretty good four to five percent in cash risk free government guaranteed and that now is going to feed and it's going to come up. It's going to create all sorts of other issues for investors, isn't it. Could you explain to people how that kicks in.
Yeah, people have enjoyed really high cash rates over the past three to four years, with the official cash rate going from that low of zero point one percent up to four point three five percent, But of course we've reached the peak and we are coming down the other side now. And as you've mentioned, we've had the first rate cut, and who knows how fast and aggressive that will be. It is likely to continue if you believe
the share market and the economists at the banks. Now what that means is for the average retirees that they've seen their interest income increase significantly over the past couple of years, but now we're in that reversal phase where they'll start to see less and less interest there. And I've already started to have conversations with concerned clients who're saying, look, James, if interest rates drop by half percent one percent, this year.
That's literally thousands of dollars of income that I'm not getting. And so look, the answer is, if you're a cash and defensive investor, you can't really change that. You can't go all right, just because we've had a quarter of a percent rate drop, I'm going to jump into the share market. You just need to adjust to that and just become accepting that this is just part of the cycle. Rates go up and rates come down.
Yeah, but it's not just retire is any diversified investor is comforted. I'm comforted by the fact that where once upon a time I had a certain amount in cash, and you always have a certain amount in cash you should have for a variety of reasons, it is quite nice to know that you could get a passable rate on that. But if inflation is three ish and the cash rate is now down, the RBA cash rate is now down to four, you get into the point again where your cash in the bank is maybe not even
making money for you if you include inflation. So what I want to ask you is, I imagine a lot of listeners and investors are considering safe. And I put the word safe in what we call and what we call in the trade sneak quotes safe investments, whether there's a similar sounding rate, But the issue is that there's much more risk. So I'm just thinking about what people in this situation might say. They say, Okay, I've got too much in cash. I should have employed that before. Now
this really is the trigger. Rates have come down, rates of coming down, so I must get I must move to safe alternative. What traditionally are the safe alternatives, Jeames? And maybe we'd also might mention what's being put in front of people as new alternatives. I'm thinking of private credit, etc.
Yeah, So quite simply, we have cash and bond investments on the defensive side of the portfolio. So cash is cash, high interest cash term deposits. We have bonds which are government bonds, corporate bonds, private credit type arrangements as well. And then on the growth side we have property and shares both here and overseas. And as we see the RBA cash rate decrease, we have winners and losers in
all of those different types of asset classes. And I like to use the term tipping point, and what I mean by that is that people don't need to do anything today, but there's going to be a tipping point at some stage where they go, Okay, today I'm getting five percent interest on my high interest bank account. I'm
happy with that. But then we have another RBA rate cut and another one and that goes down to four and a half and then four percent, and ago have I reached this tip in point where I'm now unhappy with that rate from that highris bank account, and I'm now going to move my money or part of my
money into something else. So with regards to what those other investments are, we have on the winner's side property reads on the ASX, they're generally portfolios of commercial property assets and you get rental income from that being a part owner of that portfolio. Now, they are a beneficiary of falling cash rates because these property trusts generally borrow money to buy these commercial properties. Somewhere between thirty to
fifty percent of the value is funded by debt. And also the way that these property trusts are valued are using a discount of cash flow method. The lower the cash rate, quite simply, the higher the evaluation on these properties. And so we should see rising values rise in returns on these type of property assets. And although they're not capital secure, they're not guaranteed by the government, like bank
accounts half of two hundred and fifty thousand. There will be this tipping point where people go, I'm willing to take that additional risk to jump into these property reads or otherwise high even in bank shares, because I just can't do if this's fall in cash right anymore, or my cash term deposits and bonds.
Very simple. Good idea there, James, and very appropriate, I imagine for some people the issue of property trusts, so folks, as James is saying there, they have always been a alternative because we don't really have a bond market per se, and the way they have a bond market in the US, so we have these proxies that act as defacto bonds for local investors. In Australia, generally people aren't using bonds. They're using things like property trusts, franked bank shares and
traditionally hybrids which are CRUs fading away. Will come to that in a moment. It's interesting, James, just proving your point. The biggest property trust in Australia, goodman, boy, can they time their moves. It's a brilliant company and everyone knows that it's quite obvious. It's leagues ahead, it's Combank versus the banks, Goodman versus the rest of the property trust. But it launched an enormous equity issue this week and then there was a redcut straight into it. It was
like just perfectly timed. Okay, So there's property trust. Not everyone likes them, of course, and they're on franked worth mentioning that they're not dividends para se, they are distributions. What else might someone consider if they were looking around.
Long duration bonds? And duration is a technical term for how long will this investment continue to pay interest before it matures? And using simple economics, if the cash rates likely to keep going down, the common sense thing to do would be to try and lock in the current high interest rates for as long as possible. Now, you can't do that with a high interests bank account because they're at call their variable interest rates, and as we see every RBA REATECUD, you'll see a reduction in the
interest on your online high interests bank account. Turn deposits. On the other hand, you can get turned the posits up to five years and they're they're locked in interest for that whole period. So for people wanting to go, Okay, I want to lock in this interest rate, and I'm happy to lose access to that capital. Longer term deposits, longer term bonds are an option to consider. But of course, with the pricing of the term deposits, the banks have
already thought forward. They have a whole team of ractuaries and economists who are didn't want the cash.
Rate they've got already, haven't they.
No, that's right. Yeah, So like a five year term deposit with a major bank is around three to three and a half percent, whereas a twelve month turn deposit is around four and a half percent at the moment, So the banks have already they're thinking there's going to be about a one percent rate cut or so over the next five years.
You know, it's interesting, isn't it. Money talks. That's what I listened to. You know, take that rather than listening to economists or futurists or anybody else who wants to take a bet on where rates are going, Just watch what the banks are doing, folks. That's the real money. They're betting with their own money, and they're saying that they are of the opinion that rates will come down
whatever above the pace two which to come down. So what would be if I was trying to find a term deposit, what should I be looking for four percent more? Is that still feasible?
It is still feasible. It just depends on the term. It seems that one to two years is a sweet spot. At the moment they're still offering relatively good rates of interest. But beyond two years, between two to five years, the interest rates are drop in because the banks are taken into account the more normalized RBA cash rate going to that sort of that one percent lower than what we
have today. So also, just with noting the guarantee on deposits, that two hundred and fifty thousand dollars is still in place. So that's a good thing to do when for people who've downsized house and they have all this money in their bank account. Although it's administratively a hassle to do, but it is prudent to split your accounts into two hundred and fifty thousand dollars lots to pick up that effectively guaranteed money from the federal government.
Yeah, so just to revise on that, folks, As James says, it's not just effective, it's explicit thanks to the GFC all approved the positive taking institutions, not just banks, eighty eyes two hundred and fifty thousand per person per bank. Hey, on the unlikely event, anyway that a bank would topple over, and that the government would allow them to do that in our economy to be super safe, if you had five hundred thousand, you'd put two fifty in each bank. That's what you're driving at, James.
That's it.
Yes, And really this is the thing I suppose this is the hard part of rates going down, folks, that nothing is as safe as risk free money, and in our particular economy it is government guaranteed. So that's the hard part of rates going down, which perhaps is underplayed when there's so much attention to mortgages. But as someone was making the point, the mortgagees get such a they get a huge amount of attention, but not everybody has a mortgage. Okay, we'll take a short break back at
the moment. Hello, Welcome back to The Australian's Money Puzzle podcast. James Kirby here with James Gerard. Now, I was just thinking that was interesting about alternatives bonds, property trusts. We should say bank shares high dividend frank Bank shares, which
are traditionally the other traditional options. Now interestingly, I was talking about how things can play in your favor and how the good Man Group launched a huge cash raising beautifully timed in the same week that the RBA cut rates, which basically advertises the fact that properly trusts will will have the win behind them in a very similar vein. There is a huge push at the moment and I'm
getting it's interesting, folks, I'm not kidding. I'm getting every single day, if not every few hours, I'm being asked to meet or talk or come to visit or have someone on the show who's pushing private credit, private investing generally private private equity too, but private credit. And we've had people on the show saying watch out, like Liam Short was on the show if you recall a few weeks ago from the Sonas Group, and he was on
ambiguous really he said basically sidesteppitt. I wouldn't go so far as to say that, but it's worth knowing that the conditions are now absolutely perfect for these promoters. Private credit being the alternative to banks, where there are the providers of credit who in turn provide income opportunities to retail investors. This was all restricted to the high end of town and very rich people basically until very recently. Suddenly,
James were just flooded with it. I imagine you're flooded with it, are you. I went to a lunch on Tuesday Wednesday. There was like one hundred advisors and there they were just siteing there being briefed by this guy on this whole scene, and I just wonder. I got the impression that was entirely new to them from the questions that were coming up. Are you being flooded with this wave of private credit promotion? For the want of a better.
Word, most definitely, it's a good time for that particular type of investment because they can play off the story that you're going to lose interest on your cash and your bonds. Let's take a comparable, slightly more risk, but let's go to private credit so you can maintain the income that you'll get in today in the face of these fall in cash rights.
So as if I come in to you and I say, hey, James, I just heard about this thing private credit. I've always had my money in the bank, they say they're better. They say their returns are super they say their track record is fantastic. They say the banks are withdrawing. This is their crucier line, that the banks as we know them are withdrawing from the financing of business or many businesses as we know it. What's your a hunch on this?
Is it like flavor of the month? Is it all going to end in teers or is it a structural change where this becomes an active asset class for retail investors From here on.
It is a worthy investment asset class. But there's a real large amount of I can't say the words that needs to be done with it. And my response would be, do you remember companies like Australian Capital Reserve back in twenty eight two thousand and nine who advertised in newspaper TVs, Hey, we're safe as term deposits. We're going to get you ten percent return. Now, I'm not saying private credit is the same, but I'm saying that it's not as simple
as what it seems. And the potential risks that the investor are taking can be relatively small or they can be extremely large. But in my twenty years of finance, I've learned that a lot of promoters of investments will use smoke and mirrors and fancy brochures to hide the true risk that that investment has. That's very easy to do with private credit because it sounds nice and sexy and it can provide a good return. But the average
moment dad investor typically doesn't drill down. So if you ask the average moment dad investor, why do you like this, what's your risk? What's the exposure? They won't have an idea other than oh, they told us it was a safe thing.
They like the headline number, and who wouldn't. That's right, it's the little asterix you got to watch. There's that little asterix beside the number yeah, which goes into the fine print, which says this is hell of a lot rescuer. Then you might think this could be collateralized. This could expose you to all sorts of risks that you have
previously had no exposure towards. And crucially, going back to what we were saying at the start of the show, the approved deposit taking institution deposit cash deposits that we know and maybe less attractive than they were, our government guaranteed, and this stuff has no guarantee whatsoever. And if it says it's guaranteed, it's just guaranteed by the promoter. The guarantee is only as good as the promoter, which means damn all really sometimes very much true in the historical
chakras that we've had in the past in this area. So, but you say it's worthy, how might I approach it? What would I be? What's the key things I should be looking for? If I've got three private credit opportunities in front of me, or my advisor has put that in front of me, or I've got three advertisements and they all look good, how do I begin to select one from the other.
Having three private credit investments all in front of you, they could look very similar on the surface, they have a similar return profile. However, you need to understand what is happening with your money. If you give your hard earned money to this particular fund manager or investment structure, what's it being useful and how are they using that to then provide you with a seven to ten percent
income every year from that. So on one end of the spectrum, you may have private credit which has been lent to ASEX listed companies who are expanding and acquiring other companies, and that's a lower risk activity because the ASX listed companies who are the borrowers of this private credit,
they're good credit worthy companies. On the whole, you have to drill down, but on the whole it's an listed company borrowing money is safer than a startup company who's running at a loss and need private credit to survive, and if they don't get that, they're going to implode and shut down. So that could actually be what the private credit is being used for Fund number two. So
again on the surface, they look very similar. They're both given you ten percent return, but one is quote on a relative sense, safer and the other one is extremely high risk. So the answer there is just really doing your due diligence and not putting the scent of your money into it unless you can tell someone else what this is and explain it to them what the risks and the potential returns are very good.
And one other thing, perhaps James, which a number of people have mentioned, is track record. There's two funds. One is from a fund manager who's in this business for twenty years. They've got track record, and the other is from a fund that's having a go never did it before. Keep that in mind. It's a very useful distinguishing differentiator. Okay, we have some great questions. I want to move on to them straight away. We'll be back in a moment. Hello,
Welcome back to The Australian's Money Puzzle. James Kirby here with James Girard. Now, can you see the questions on the screen. Yes, would you like to read the first one from Paul sure Thing? Paul asks, given the banks a ceasing issuance of hybrid securities and existing ones will mature in coming years, what impact will this have on hybrid ETFs? Yeah, very great, great question, Paul, thank you. That's ETFs that package Australian hybrids together. Is that what he means?
That's right? Yeah, there's one or two of them out there that I can recall.
So what happens to them? They slowly fade away?
Yeah, I think the ATIF managers will probably rebrand them and expand the mandate to say this isn't just hybrid securities. This will now be private credit or other things like that.
Yeah, they won't be sending the money back, they won't be saying oh listen, hey, listen to you what, we'll give you the money back, because yeah, no, they don't do that. I imagine you're one hundred percent right there, James Paul. Watch for the note from your hybrid ETF to tell you that they've got some new ideas and
welcome to their new plans. Because whatever else they're going to do, and we don't know what it is, it'll be something broadly similar where they're offering income from the markets, from the investment markets, but they won't be giving you the money back. They never do that. Okay, More broadly on hybrids, we could come back to that another time. They've been phased out right. Sophisticated investors could play various
arbitrage games on those hybrids, couldn't they. But for most people most of the time, that particular era is over, and they were very popular with people. Things like the Pearls series from CommBank were very popular. They were a funny sort of a beast. They were hybrid half equity, half bond, and for some reason the regulator launched them, and for some reason the regulator sorry signed them off maybe fifteen twenty years ago, and for some reason they
lost heart and closed them down. More recently, Okay, I'm going to put two questions together here because they're both on Super Once. It's from Sandy Sandy says James Kirby. I like the piece you did on sorting out the supersystem. The only area this is from the Australian a few weeks ago. The only area that I find debatable is that Super is biased against young people. This is interesting. Listen to this. Clearly pension mode being tax three is
a bonus. However, you failed to mention that a young person today, if they started a job in twenty twenty five, would be paid twelve percent. Paige Sandy saying paid twelve percent. The technical reality here is that twelve percent comes under the Supernovation guarantee. That is, twelve percent must go into Super. Sandy says, when Superinnovation started it was just three percent. It was a good twelve years before it became a reasonable payment. That might explain why the average worker has
a relatively low balance. Yes, it all comes down to the debate about whose money it is, Sandy. I'm of the opinion that it's my money, and if News Corporation must to put twelve percent of my package into Super and must do so, by law. That's fine, but it's mine. And I'm also of the opinion that they didn't have to put it into SUPER. I'd get it in another form. I wouldn't have written it if I didn't think so. I still think it's the case that it's biased against
young people. But just to zone in on that, what I really mean about that is that all the benefits are when you're retired, and there's really very few benefits in accumulation. And I think the amount you can put in on a concessional basis is much, much too small, considering you can have two million head tax free and super. The amount that you can put in per year when you're working and building your SUPER is tiny on a concessional basis. Okay, but thank you, Shendy Luke, wonderful podcast.
Thank you. A key actuarial firm has suggested a flat ten percent tax on SUPER at all life stages. This seems unfair to all those who have paid fifteen percent since SUPER became compulsory in the nineteen nineties. Okay, Luke, it wasn't a firm, actually, it was the Actuaries Institute who met the remarkably what would you say, provocative posal a ten percent flat tax on super at whatever age you were, so that you wouldn't be getting these different
tiers at different ages and different amounts. That would be something that would make it fairer to younger people and would rebalance the system not so much in favor of older people. I think for that alone, I thought it was pretty good anything to add to all that. JG.
You know, there's always going to be winners and losers when government changes to super legislation and where their grandfather things. It just makes the whole system more complicated. But I'd probably say that it's not going to happen. We're not going to see ten percent tax on all life stages in SUPER. A government that introduces that will be the opposition after the next election.
The opposition after the next election. But then they're not the government the opposition after the next election. Do you mean it would be an opposition policy?
Is just saying I'm saying that retirees will vote and kick them out of government because the gray nomads are not going to be happy with having a ten percent tax retrospectively applied to their current tax supersediens.
No, but I don't It would probably not be anyway, But it is such theoretical stuff that I think we'll just put it to one side.
Roland, all right, rolling here we go. I'm a customer of a bank which was formerly a credit union. As such, the customers are the owners, with one share each, probably about thirty to forty thousand shareholders. What is the likelihood of these types of institutions being bought by bigger banks and me receiving my share of the proceeds all of all the banks listing as a public company similar to
AMP demutualization. There are quite a few ex credit unions about, and I would assume that it would be a way for the big banks to expand their banks without upsetting the a triple C.
The golden age of demutualization is more or less past us ruland because they demutualized just about everything at one stage, and all those big AMP being a classic example, of course, and iag a lot of the stuff in there was demutualized. And all the building sized societies, of course dem mutualized and became little banking stocks and then were mapped up by the big banks. So yes, it is possible that
some of them may come through that system. Seems to have become much more difficult the sort of it seems to me like the stuff that was going to be demutualized is demutualized, and it came to a grinding holt. I don't think it was any regulatory reason why it came to a grinding holt, but it did, and there was a bit of a backlash. I think something like, for instance, where there was enormous value builtable over hundreds of years and put on the market and frittered away
very quickly. Not impossible, Roland, but I think unlikely because also the brand, if you like, of the credit union, just like the brand of other remaining mutuals, is at heart that they're not listed, that they are mutualized. Is there attractions so to that extent, they would chuck that core attraction if they went and demutualized and try to list. What do you think, James, I agree with that. Yeah.
Part of that appeal of using the credit union is that independence and that sort of for the customer type approach, and where it gets swat up by a big bank, you're going to have a lot of unhappy credit union customers looking for other credit unions to move to. And also credit unions generally have lower profit margins than big banks, and so for a big bank to acquire credit union, it's not really a very profitable exercise because they're buying
a less profitable business. And also the gross strategy is quite low. They're not going to expand that thirty or forty thousand shareholder base or customer base to one hundred two hundred thousand dollars. So that's why we haven't seen the big banks at quite credit unions.
That's the answer, isn't it really? There? You are ruland so you might be lucky, but it's unlikely I would imagine. Okay, David, final question, could you please ask an appropriate guest that's you, James, how much extra should Australian investors pay up for Australian shares for US as international shares for the benefits of franking? Ah? Gee? How long have you got? Could do a thesis on that? Couldn't you? Really? What are the benefits of franking? I've
been facetious here. The Australian American chairs have beaten the hell out of Australian shares a year after year, which which suggests franking. There was useful, especially if you're retired. Doesn't exactly set the market on fire, does it. Yeah.
I think that's a true sentiment, and I probably don't agree with the premise of the question around how much extra should I pay for Australian shares. I think it really comes down to preference. If you look over a thirty year period, US shares have done better on a capital growth perspective than Australian shares have not on a
total return basis as well. So if you're a growth based investor, you would lean towards US shares, But if you're a dividend or a more balanced type investor, you would lean towards Australian shares, but not necessarily pay more for it, but just allocate more for your money there.
Yeah. Yeah, And as you say, it's nice to get four and a half percent dividend yield, and maybe that's six percent franc in your pocket, but it's not a great constellation. You get four percent capital growth and your equivalent to US share is doing twenty five percent capital growth in a year, which many of them do for many years.
Now.
That doesn't mean it'll go on forever, of course, but we're waiting all right. The second part of David's question was a related question is do investment strategist take it acount of the benefits of franking when structuring acid allocation models for use in Australia. Oh, yes, I expect, so, David, franking isn't relevant to the international investor, Isn't that right?
So it's really only talking about Australian based investors that would be investment strategists would take account into franking, Yes they would and generally just explain to people in case they don't know about franking, James, and we don't need
to go into how it works. But in terms of what they call grossed up, if a share says it's going to pay four and a half percent, then the franking for the investor, the way it works when it comes out the other end of the line is more like what would it be to the average investor if the yield, the headline yield was four and a half percent, then what would the person actually get in their pocket.
It'd be somewhere around six six and a half percent, because it's basically the tax that large company has paid or ready to the tax office. You're just getting the credit for that, so you just gross up four and a half percent by thirty percent, which is somewhere between six and six and a half percent.
And that's why our bank shows are a lot better than they look in terms of their dividends. Of their dividends four in fact they factor for most people, they're more like six. And if you're retired, it's even higher. Isn't that right?
That's right? Yeah, because when you're retired and the government previously wasn't successful in making this change, that you get a refund of your excess franking credits if you're not paying any tax. Noting the people in super in account
based pensions don't pay any tax. So you get the cash dividend twice a year from a bank, but then also your super fund will give you a refund of those franking credits as well as an extra credit, which is fantastic, which people who are working, if their tax rate is above thirty percent, they don't get those refunds back.
In cases, if their tax rate is say forty seven percent, they have to pay more tax even though they again the dividends, I'll still have to pay up to seventeen percent tax on top of that.
So the less actually pay, the higher your dividend. Absolutely, which when in the election before last, when it became an issue, most people were surprised to hear that. But the people who benefit from it knew all about it, and boy, oh boy did they kick up when anybody went near it. And can I say, it's complicated, but it all makes sense. And if you can't understand it, you can ask Paul Keating how he created it. But it actually does all make sense. Each part of it
makes sense. But the outcome of it is that a retiree, because they don't pay tax, gets actually a higher gets higher, gets more money in their pocket from dividends. And that is why, folks, we have a very dividend heavy economy with a stop market that reflects that that is dominated by the banks which are consistently high dividend payers, and the big miners who pay big dividends when they have big profits. They're considerably more cyclical than the banks. But
that's how it all works. Okay, that all made a lot of sense to me at least. James, thank you very much.
My pleasure is always thanks for having me on.
Great to have you on. And folks, keep in mind I'd love to have some more correspondence. We've had lots of emails and I've managed to get through them all. And I noticed just in passing that getting a lot of questions, particularly about shares of late and particular shares. So we will do a special on that where we just do share market and we look at a whole bunch of share activity and questions relating to shares that have come in recent weeks. Okay, keep the emails coming.
The money Puzzle at the Australian dot com dot Au. Today's show was produced by Leah Sam mcglue. Hope you soon