Hello, and welcome to The Australian's Money Puzzle podcast. I'm James Kirby, the editor at the Australian. Welcome aboard everybody. You've probably seen our market being in exceptionally good shape in recent weeks. We're going to talk about the market, about the outlook for the year ahead. When I say the year ahead, of financial year ahead, if you're an active investor, you've probably had a good idea already how
you did last year, the year to June. You're probably starting in terms of planning what you might do this year. And I've got the ideal guest to give us a steer basically as an investor, how to approach that. A couple of other things I want to talk about as well. It was very interesting, I thought this week to see Joe Biden step down. What I mean by that is it was very interesting to see someone at that age
where time had basically caught up with them. They resisted that in an unfortunate way, and then of course they were humiliated really and forced to stand down. And I wonder as an investor many people will will ultimately face the same problem, or their parents will face the same problem. And at what point do you let go? And how would you know when to let go? I want to talk about that too, because it's a really interesting topic. My guest today is Hugh Robertson of Centaur Financial Services.
He's a regular on the show. He's always going to talk to. He is sitting this morning in some splendor, I might say. I can see him. He's in Brisbane and I can see out his office window, and I gotta tell you it just looks fantastic. What are those What are the name of those hills that I can see out your window?
Hugh, that's the great divide in range, James. But it is with Don on the Gold Coast today, and that's just the hinter land, right.
That's one of the most beautiful places in the world, isn't it really.
We are very blessed, very lucky.
Yeah. And I see the other thing I see is blue sky, which I must say looks so good this morning as well, because I'm not seeing any I can tell you out of my window. Now we talk about Biden in a minute. But original idea we had thrashed out in having you on the show. I want to do firstly, which is about setting up for the year ahead as an investor, really, unless you did something really wrong or you were awfully unlucky, you've probably had a
damn good year. In the year to June. You can see that all the big super funds have had a very good year, and they're talking eight percent and eight percent, you bet. I think most investors would have got that at least. And on the share market, I'm betting that anyone who had a decent share portfolio, their return was in the teens. If you happen to own an investment property, it probably did eight or nine percent. If you owned one, and it probably did twenty percent plus a lot of numbers.
Going the right way, you can still get five percent government guaranteed in cash. It's like a what they call a Goldilocks environment in many ways for investors. But what I want to ask you, Hugh, is if I were sitting in your office and I was saying to you, what should I do this year? What should I be aware of? How are you guiding people at the moment.
It's a great question and very topical. As we're doing our reviews with our clients. This is these are the conversations and if you go back sort of twelve months, we were going to have a hard landing. Remember that was the narrative. It's we've gone from a hard landing to a soft land into no landing. Everyone who's confusing us with pilots at the moment, and it's a difficult terrain to navigate because you are the information is changing very quickly, so you've really got to be proactive in
your decision making and not take big bets. I feel that we've seen where people have gone wrong is they've taken a big bet. It might be that we think interest rates are going to go down substantially, so we're going to put all of our fixed interest portion of our portfolio into long duration bonds as an example, And if you did that, you would have definitely been impacted negatively over the past twelve months. So when the facts change,
our views need to change. And if we're going on under the current assumption that no landing scenario and everything's good, there is some geopolitical risk out there in the world. There is who would have thought would be doing a
podcast saying that someone tried to assassinate Donald Trump. So there's some uncertainty out there, and in times of uncertainty, you diversify so that you want to stay in your large caps internationally and domestically, maybe entertained some small caps because of the valuation divergence evaluation gap as at a historically high level. And I feel not chasing last year's winners, that Magnificent seven, A lot of people now want to get into that maybe the time's too late, or if
you did want to get in very small exposure. I feel even post COVID, it's just been a very different investing regime, so you've got to not get too confident that you're a stock picking guru. And I can tell you that the majority of fund managers we spoke to over the past twelve months have been bearish on financials, and for the financial year twenty three twenty four, financials delivered thirty percent yet a lot of managed funds and professional fundmations.
So they've been bearish on financials and they've been completely wrong, right.
Yeah, And they were bullish on resources, which.
You know, which kind of tells us no one actually knows what's going to happen next. But because they have an extraordinary thing locally at least, so we have the common Went Bank just basically carrying the locomotive basically in the market one hundred and thirty dollars extraordinary price, number one bigger stock in the market now comfortably bigger than BHP, and all the top ten full of banks, all four of them in there, plus Macquarie. Okay, so just develop
that a little bit about big bets. Would you say that every year anyway here?
Yeah, yes I would, And I feel ass allocations becoming more important to the everyday investor. If you imagine your portfolios, you've probably never been wealthier for the listeners out there in terms of house price, are their superannuation or in a non superinvestment portfolio with that, but it really starts to come with some much needed discipline and some strategy
around how you allocate your capital. What we mean by that is if you want to take a if you want to make a move to going back to that, rebalancing your portfolio into some bonds, maybe taking some equity exposure, or maybe selling some of your banks. Let's go with selling some of the banks, don't sell the whole exposure. Maybe you sell it off over four installments for five installments, you know your dollar cost average on your way into
investments and your dollar cost average your way out. That way, if the facts change and financials have a run, you're not left naked and alone. So I think that's where that's probably the one difference in conversation of to what we used to have, where we might make a ten percent out of one investment into another. Now it's usually a bit smaller and we do it over a few more periods.
Okay, So caution there all the way. When you were tell me, it's just a little bit more about what you were trying to say about big bets and rates. There was an assumption that rates would drop. There was an assumption in the US at rates would drop, particularly and here you're not convinced with that assumption any longer.
Yes, I feel that we were led by the Federal Reserve and the Reserve Bank and the quote unquote experts giving us direction and consensus views. And I think we had US rates were going to go down six times in calendar year twenty four, and Aussie rates might have been going to go down three times, if memory serve's right at the start of the year, and todate we haven't had rates go down in either, And in fact, it looks like within Australia, rates actually may go.
Up, So.
You can't.
You shouldn't as an investor, you shouldn't make your investment decision based off that economic forecast or that consensus view. You've got to make it based off what you need personally in your portfolio and how much down downside risk can you take. And I feel people have tried to use macroeconomic indicators maybe a little bit too much to predict what's going to happen with markets. We saw that over the last couple of years with the magnificence or
even just tech stocks in general. You know, they got hammered in what was that twenty two and so then a lot of people weren't in them at all when they recovered in twenty three, and when they did get into them eventually, you know that already gone up.
They had done this amazing run. Yes, yeah, as people forget that, the entire lift on the markets driven by the US, the entire lift on the US driven by the big tech stocks, the entire lift in the big stocks substantially driven by a company called Nvidio, which no one had heard of a couple of years ago, being
an AI stock. I read for it was responsible for one third of the lift to one third of the lift of the US market, and the US market is seventy percent of the world, so you could extrapolate there, and it's really quite stunning. Looking at another point you made there, I just wanted to tease out that a
little about small caps. What are you leading to there about small caps and if the theory is that small caps are due their day and that they lagged to some extent, that they'll run now behind the large caps, this is their phase. If that's the case, first of all, is that what you're thinking? And secondly, how would an investor listen to the show get in on the action?
Great question.
If you look at traditionally, small caps would have a greater upside than large caps, and it's a greater reward and therefore we have greater risk. If you look over the past few years, the divergence in terms of valuation between the large caps versus the small caps has never been greater. And what that means from our perspective is that it's worth looking there. And I think within the past week we saw small caps global small caps go
up about ten percent. I know for the month of July, they are up about ten percent.
Yeah, they've had a suddainly had this hotter on, haven't they just this last few weeks? Yeah?
Yeah, And this was off the back of again the forecasts around Okay, it's not going to be a recession, so it's almost like risk is back on the table. People are willing to take risk again. And the NA videos. Every large cap company started as a small cap company, and you've got now when there was a chart released by JP recently as talking about the relative pe gap
and it's never been larger. So what that's telling you is that small caps are cheap and you don't need a lot right for that to go well because it's selling. Some of them are at a price to earnings ratio of eight to ten times, and their earnings, like their earnings yield is ten percent right now, so they don't need to necessarily even make a lot more money for
the share price to go up. It could just be that the price to earnings ratio reverts to normal and there's you know, there could be a substantial return on investment there.
Okay, So yeah, I didn't quite realize that it's not just that they are due there d but that they are the pricing of the small cap stocks is actually behind the eirport in terms of the rest of the market.
Yes, and on all historic sort of tangibles. I know that the data that I was looking at was from just going back fifteen fifteen plus years, and on the chart you've had that the small caps had never been never been cheaper. And that also makes sense in a way too. During a recession and if people are scared, small caps will go down further, and because people will leave that space and go into large caps, which by theory are safer. So it makes sense why it has
been that way over the past few years. People have been a bit scared and they've been able to put their money into From a global perspective, Microsoft, Google and those big businesses that aren't going to go broke. But now there's the opportunity there to maybe exploit some of those up and coming businesses that are the future leaders that are outside those sort of top one hundred two hundred companies on the Australian Stock Exchange or globally.
Well, so if I was with you and folks, it's we're telling you that he was a regular invariably in the upper reaches of our Tough Financial Advisors list that we release every year with Barons. He's also one of the younger advisors at the upper reaches of that list. So if I was looky enough to be sitting in your splendid office and we were both gazing out over the Gold Coast hinterland on a lovely morning, and I said to you, that's all fine, Hugh, how do I
go near small caps? Even in the Australian market, it's probably roughly two thousand small caps, of which perhaps a few dozen are going to be great, But how do I find them or how do I approach that area as an investor.
We've got the rise and rise of exchange traded funds, is the answer to that. So you've got a lot of options and even there's active active exchange traded funds now online. So I feel you want to you do want to diversify, because you only need if you are called Tesla back a few years ago, as it was having its meteoric rise, it was exceeding ten percent of it went up one hundred percent or something or even more over the year, so she needed some discipline there.
So a portfolio manager that was sort of taking profits routinely off the table just to manage risk. But you could go in exchange traded funds they've got, there's small cap index funds, there's small cap active managers. If you're a client coming in to our office, we would want to We think that small caps usually aren't as well researched as the large caps, so there is an advantage for a skilled manager to add value there, to find some.
A staff picker can really add value on like.
Picking, definitely in small companies which aren't as well covered as large ones and emerging markets. I think that the evidence and the academic research has always shown.
That even in our own market, who I would imagine that's the case, isn't it. There's some really good small caps that basically no one the brokers don't look at them, no one ever visits them. They don't get covered in the papers in the Australian, you don't read about them right because they just can't get out there to them all. But there are managers that specialize in literally going out and sitting in front of these people and studying them. Yeah.
Yeah, And I think those managers have got some great track records that with a little bit of research.
You could feel quite.
Confident there, and then what are we talking about allocation wise of your portfolio. It's probably only a maximum of five percent of your portfolio would then go into that manager. We're still trying to manage risk, but we're trying to get that manager really to all that investment strategy of small caps really to add a benefit. That five percent exposure could still add a good benefit if it goes well to the whole portfolio, whereas if it doesn't go well,
then it hasn't hurt too much. And I think when I was looking at the June thirty numbers, just at the ax the two hundred accumulation next did twelve point one and the small lords. So the small caps did nine point three, so it was catching up. But over three years IX two hundred delivered six point four and small caps was negative one point five.
So you can say that there's opportunity there.
Okay, So if we get a reversion to the mean, then they should have their day. Very interesting. Okay, Hey, we will take a break and we will come back and talk about something quite different that we allude to at the start of the show. Hello, and welcome back to the Money Puzzle Podcast. I'm James Kirby. I'm talking to Hugh Robertson, and it's been an amazing couple of weeks, that's for sure. It matters. It always matters if you're
an investor, especially in share markets. Folks. We just lemming like really follow the momentum at least of the US markets, and if they're going well, we're going well. And if they're not going well, we are not going well. And that is unavoidable and has been the case for as
long as anyone can remember. Hence the importance of US national economy news, Hence the importance of the assassination attempt on Trump, the big sympathy vote he's going to get on the back of that, the increased chances and assumption actually that he will win. Now, adding to that, then we had this week, we had finally, and probably too late, Joe Biden resigning as a sitting president as such, because everyone finally the pressure came to him that he was
not so much too old. I don't think that's the accurate word at all, but his condition, if you like, and his ability to operate at the level expected of a president, it's simply not there. And became terribly obvious at the worst possible time in the US presidential debates and in press conferences, etc. And what may meant impressure on me was I was just thinking about investors. The
same thing will happen to a lot of investors. And if it doesn't happen to them that who are listening now, it could be happening to their parents at the very same time. And there's a point at which many people will have to think about throwing in the towel, just like Biden did, tell me about this area first of all, about the issue as it comes across your desk and what do you do.
This is extremely common conversations nowadays, and it's a great way of framing the question. Watching Biden and how he's gone over the past few weeks and conducted himself, you don't think he could really be.
The leader of a world powerhouse.
And it's the same sort of analogy of people that have made a lot of money during their working career and they've got a pretty good financial powerhouse right now, and how do we make decisions going forward. There's more noise than ever, it's more fusing than ever. The volatility seems greater than ever. And I remember a stat once years ago that I read that it was to the extent of every year after the age of sixty, you lose about two percent of your financial literacy capability. And
when you play that out, you go, okay. There's a lot of people who are sixty right now who they're fine, they've only lost two percent, But after ten years they've lost twenty percent, and you start to go okay, Now that starts to become a little bit problematic.
By eighty five, they've lost fifty percent.
And the challenge is from an investment perspective, is that everyone's going to live longer than they expect. We sort of benchmark how long our parents lived as to our life expectancy, but we're all we're living longer. The people now, the retirees now, are going to live longer than their parents. I think we've now got actually a negative life expectancy for people being born today. So from that perspective, you really want to make sure you've got good discipline around
what you do. And I think it's necessarily just a buy and hold approach. If you look at Commonwealth Bank shares, which we just talked about previously, everyone just holds them because they'll never go down, they'll never do anything poor. But that doesn't mean there's not an opportunity cost of holding that and other assets doing better or protecting your estate.
And I think when I.
Think about if someone like Biden was managing their money, they just wouldn't know where it all is either. So I think there's a really important aspect of and not saying that people necessarily have to deal with the utilized professional advisors, but I think they definitely get the peace of mind benefit of that.
Can I ask you just even separate to the sort of pure scientific research that says that sort of drop in in literacy, which might be relevant, but then you're talking about some people who are highly literate financially really smart and capable, so they've got a long way to drop. But I what I want to ask you is more than that. It's about attitude, like attitude to risk. For instance, do you think that changes as people become advanced stalledage?
Yes, I.
Think there's risk capacity and there's risk tolerance. What's someone's capacity for risk? Obviously people with high net wealth can take more risk, but then what's their tolerance to risk? So that's where you really come back to that goals based advice and what people are trying to achieve, and
you work it towards the goals. I think more than ever now, as we're allocating capital for clients, we're doing short, medium, and long term buckets and that's got very different risk return profiles, income profiles, and that's something that's proven really appropriate with the clients, and it's meant that just even that if the listeners imagine having those three different buckets of wealth, you know that what you're allocating in your long term bucket that's meant to be volatile, but that's
going to keep pace with inflation. It's going to mitigate longevity risk by continuing to go up in value even though it's going to be more volatile your medium and for that we've been using index options. We feel that's
quite appropriate. And maybe if we break it off twenty percent of the portfolio into that longevity where we don't necessarily mind the volatility of an index and we're happy to and it's low cost, so that works well, then you've got sixty percent in that middle term bucket and that's managed more actively because we're really trying to manage that downside risk and take advantage of opportunities they emerge, and.
That's a very diversified portfolio.
And then you've got your short term bucket, which is really your fixed interest, your hybrids, your credit, some bonds, and I think if listeners fill their portfolios that way, it gives you three different you're very clear on which bucket is doing what job for you.
Can I ask you one thing for a practical thing for people who are managing their own money, or I suppose the ultimate example of that being self managed super funds. What happens if someone had a super fund, they started it in their thirties or forties, it did well, They
was proud of how they did it, doing fine. They get older, they get to eighty or seventy five or eighty five or whatever, and something happens, right, something pragmatic happens, there are some health issues or whatever, or even they just find it all too hard. They're just fed up of the documentation, they're fed up of the cybersecurity, et cetera. Because one of the things was running a self managed
super fund. And I have noticed, even over the twenty years I've had mine is level of documentation that I am asked to do the slightest damn thing, Especially once you move outside conventional funds, it's just utterly tiresome. And I could see a d where perhaps depends on the rewards. I suppose if I'm knocking it out of the park every year, and I say, all right, that's the price you pay. But what I'm leading to is where someone
just says, I'm really I've had enough. I've got plenty, and I'm tired of the stress and strain and work of running my own money. Problem is the person is older, right, what can they do? Can they turn around and say can they call a big super fund and say can I join you?
Absolutely?
And I feel that's appropriate for a lot of people as they get older, whether they want to get their kids into self made super fund, so the intergenerational wealth is playing a more active role, and as they slowly sort of exit through, they might if there's lumpy assets in the self made super fund, for example, you might bring the kids in and then the kids kind of contributions going in is what's funding the parents exit out with pension payments and or if you if it was
all liquid when you were you could sell it all a couple of it's all in pension phase. You sell, you can roll it all over and there's no tax on there because you're in pension phase. A couple of gainst tax free, and you could roll over into a super fund. Then you don't have any of the trustee responsibilities and you just get your regular pension payments. You can do a reversionary pension nomination to your spouse if you want, or you can leave it to the estates.
I feel a lot of people that were in self made super funds, we see that, you know, in their eighties, they don't really want the hussle of things. They just want simplicity in their life in every area, and they don't want to leave a big mess for their family as well, So you really work hard over the years.
Usually the first step will be that they will relinquish control over the investment strategy and they'll engage someone like us to say, hey, can you run the money for us and allocate it because we just we don't have the time nor the care to read about it. And they might say, you know, we want to keep the Westpac shares though, because we've had them forever, but they don't want to when I'm eighty. I'm not sure that.
I'm going to be wanting to manage my own money. I'm going to want to.
Look at like the day we've got outside here, i want to be out walking the beach and having a coffee with my wife and seeing grandkids. So I feel from that perspective that listeners and people being aware that you can actually roll up, wind up the self managed superfund and roll into an industry superfund or a retail superfund or in some instances, James, we will just put into their bank accounts.
So that way, if there's.
A taxable component within the super we've wiped out the death tax that we don't talk about in Australia.
The defacto inheritance tax that's applied a supervins if the person when the person dies, if it goes to the adult children. Yeah, that's basically it isn't it. Yeah, seventeen percent. We I'm sure you know about this, folks. If you don't, and we can come back to with another time, let me know in the emails. Okay, we have to go for a break and we will do some questions back in a moment. Hello, and welcome back to the Australian's Money Puzzle. I'm James Kirby talking to Hugh robertson regular
guest on the show. We're having a really good discussion about some very interesting issues. We just covered the issue there provoked ily like are prompted by the Joe Biden resignation, which is at what stage do you throw in the
towel as an investor? And you might say I'm never going to throw in the towel, but you might change your mind when you're easy, or you might change your mind when you're fifty five, a reason that I can't tell you, but it's worth knowing that you can move across and if you had a certain managed superfund, you can actually pick it up and you can switch back into institutional investment. And it's nice to know that. I have a couple of questions, Hugh. Could I put a
question if you don't mind, could I give you? Could I ask you a question without notice? The only reason I wanted I've just remembered that I promised on Monday we had a question we couldn't answer about CGT couldn't answer fully and I'd just like to know what your broad observation is on it, would you mind if I read it out? Even though I didn't it didn't send it to you in advance. It's from a listener called
Beryl b. E Ryl. She says, I purchased an apartment which I lived in for five years, and then I moved out, and I've been renting it for twenty years, okay, and I'm looking at moving back into it. And I've heard that if I moved back into it and lived there for the rest of my life, that those inherit who this property will not pay CGT if they said it, is it true that after all the years I rented
out that property and the CGT liability is wiped out? Beryl, I said, And I wanted the second opinion on this, but I said, whatever else is going on, and this is never advice, and this is information only to all the barrels in the world world that if a property is rented out for a couple of years, then it was an investment property and for those years that it was rented out, it's an investment property and the CGT would be applicable to that. Is that? Am I right or wrong? But do you know.
That's my understanding.
We had a client this week in the office that I one hundred percent agree with you, And we had a client this week in the office that said, no, there's something about pro rata, and there's something about this. My understanding is that for the time you live in it, it's PPR, you do always get there is that window of time where you're allowed to not live in it
and still claim it, that six year window. But if you've rented it out for twenty years, my understanding is that when you moved out of it, it ceased to be your PPR, and you would your principal place of residence and then you would have assigned effectively a value of that. So from that first five years you lived
there that was capital gains tax free. Then there's all my like a reset of the cost space over that twenty years from what it was at the start when you rent out valuation wise to what it was when you moved out. Then you would get your CGT discount on that as well, and then the period that you moved in at the end, whatever that went up by that would be your principal place for residence exemption. Again assuming that yeah, she's that's my understanding.
So yeah, it would seem the years that it was rented our CGT applicable years, it would seem because it was rented for twenty years.
Yeah, and if the account had gone back to me, I could have given you the exact answer right now.
But they haven't got back to me. So hope, I think seventy percent confident.
All right, Well, we've tried twice, and I think you will find the chances that CGT free after renting it for twenty years are slim. Indeed, I think that would be fair to see as a very broad observation about that type of situation for everybody, not just one person. Okay, Now some quick questions and we'll roll through. There's quite a couple of interesting questions here, Jared says. Roger Montgomery has promoted it, and a recent art good by Tim
Buam has encouraged it. Private credit and private credit funds, so there's probably some bad private credit groups out there. How does a newcomer get a chance to look at the providers and undertake analysis? Whoa Jared, I don't know, because ASSEK this morning, Joe Longo, the chairman of Asked this Morning, is saying, Hey, hang on a second, this private credit we're not totally on top of it. We want to see more though it's all the fashion at
the moment. Have you any if I come into you you and I said, hey, I don't have private credit. I'm reading about it everywhere. All these people seem to be making lots of money and there's piles of new funds. Would you say, hold on, James, I don't like this at all, or would you say, I have a suggestion. What would you do?
We don't use private credit, and that's not to say we never would. The challenge is there's a lot of different conflicting conversations. So private credit will come here out and say, look, banks aren't lending anymore. So that's what's given prominence to us, which is great, and you need lending, and we're very selective. We underwrite all of our deals
and we're very good with it. So you definitely need to be very active in that space and choosing a very capable manager so you are looking at track record.
One of the challenges I see.
With it, and this takes me back to GFC days, Global Financial Crisis days, and the challenge that I have with it is if all this money flows in because you're saying we're going to pay you eight to ten percent,
ten to twelve percent. All the money's flowing in, those guys have to keep finding deals to make then, so my concern becomes, do those deals start to get a little bit looser and looser just to make sure that they're employing the client the investors' money to generate that income that they've promised.
Yes, I really like the way you're thinking, and that's exactly instinctively how I would think the same thing. If it's a boom area. Okay, and it is, and there's piles of funds being leashed unleashed, then by definition the mathematics are simple. There are only so many private credit deals out there. And ten years ago, I bet it was great. Even five years ago it must have been terrific. Okay, But now there are so many fund managers running around, and if they all collect lots of money to go
and enter this business, then guess what. They can't sit there and do nothing. They have to do deals. They have to invest for you. The problem is there's ten other funds that want to invest. Hey, guess what happens? It gets bid up, just like the house around the corner at the auction on a Saturday morning, and so the valuations, which are not as transparent as share market valuations, we could become a problem. Is that some of what you're alluding to.
Yeah, very much.
So it's a trade case carefully area. I don't disregard it, and we're looking at it often to meeting with managers and talking to it. But it's it reminds me of the mortgage funds back in global financially, and I'm not saying it is like that, but it just it rhymes with the things like that and some of the stories, and I'm just cautious. If we went into a recession,
there could be really difficult times. If interest rates continue to rise, there could be different So it's not I think the point for me is it's.
Not an alternative to a term deposit.
It is very much a sits as in the risky side of your portfolio. Doesn't mean it's not good, but just you've got to you want someone that's very well diversified in that space. They're big, they're diversified. It does mean that you're going to get slightly less income some of these things that some are saying twelve percent, some
are saying ten, some are saying eight. For me, just understanding risk and reward, I'd more align myself to the eight percent one because you know, for them to make their money, if they're paying you twelve percent, what they've got to be earning fifteen percent. So if I'm a borrow wife, if I'm borrowing and I've got to pay fifteen percent, I'm high risk by nature.
That's right. If they're paying you ten and they have to get a few percent themselves, and what on earth are they lending to? Whom are they lending? Who is in the position that they're so bad basically that they must pay those rates. That's what you have to think about. Okay, terrific answer, Thank you very much. And the other issue is, of course, if things go south, as you mentioned, how do you get your money out? Okay? And okay, So them are listed on the share market, but hey, you
know there's a basic oxymoron there. Private credit listed on the share market. It's not private. It's not private. It's not private anymore of it's public market. Come on. Okay, now, as a technical question from Stephen though, it's interesting because it's Frank dividends. I have a listed investment companies that aren't doing great are paying partially franked dividends instead of fully franked dividends. I assume it's because their profit reserve
has dwindled. I do not understand where the unfranked part of the dividend comes from. Okay, what did you think of that question? Hue from Stephen.
So Stevens writing, sort of the profit reserves dwindling if you went, like a few years ago, they were paying like ridiculous amounts of dividends. The listed investment companies so different from listed investment trusts that have to pay out distributions. Listed investment companies get to choose what they pay out. So what I was thinking of with the unfranked part of the dividend is probably international shares that have come through.
You know, there's some of those things won't have the franking attached to them, whereas if it was a Shawan share fund that's or listed investment company that's invested in all in bank shares, that would typically be fully franked. So that that's the only thing that I thought of. There's you know, Stephen was riding his the profit reserves is what they're using to pay and they get to set there so they don't need to because it's a company, they don't need to pay out all the income they receive,
so usually they will. They like it to be fully franked, but it's not a condition, and you just have to go in and read the company's and your reports to find out. It's hard to find information on franking credits, but it is. We see it's very valuable to investors. But he'd have to look in the annual report.
So Stephen, if it had two stocks and one was one hundred percent Australian focused, come by bank did nothing else for Australia, then it's one hundred percent franked. But if the other one was a minor see and they had ninety percent of their operations around the world outside Australia, then they'd never be able to get one hundred percent franking in here the domestic market. That's generally the explanation, not always, but that would invariably be the explanation. Okay,
final question from lil. Could you provide listeners with information on investment bonds also known as insurance bonds for what might be an alternative option if you're looking for tax efficient structures. It comes up all the time. I've had advisors who will not touch these bonds, hate them. I've had advisors who say, look, they're okay. Again, it's often
put forward as an alternative to SUPER. So what I would say, what everyone has said so far, for what it's worth listeners, is get your super sorted out first, because that's the best tax break from most people most of the time. But the insurance of the investment bonds, could you explain to you what they are and why someone might want one in our market and there and their pros and cons if you could.
You're right.
A lot of advisors to discredit the investment bonds are insurance bonds, and I know a lot of the advisors that appear on this podcast that do so. From the point of view in its simplicity, the insurance bond, it's a friendly society bond that comes under sort of insurance law as opposed to investment law. So it's internally taxed at thirty percent, but then it's CGT three after ten years or in the event of death. Then the investment component you get to choose a host of different investments.
So this is where with all the superinnuation changes. The last few years, insurance bonds have tried to have a bit of a resurgence as the Super two point zero once you can't put any more into Super sho exactly right, James. You utilize super first, then whatever's not there goes into
an insurance bond. Challenges have been that they can be a little bit expensive and the investment options haven't traditionally been that great, so most people would say, look, we'd prefer to put it into a trust because remembering that death doesn't constitute a capital gains tax event, so if you had it in a trust with your children's beneficiaries, you wouldn't have to sell everything and you could easily
do that intergenerational wealth. As in terms of where's the tax efficiency, it's debatable because you could have around one hundred and eighty thousand dollars a year before you're at that average tax rate of thirty percent. It certainly kicks in with the marginal tax rates, but your average tax rate is pretty high. Level of income earned, a lot of investors might be better off investing in their own names and then passing the money on.
But the good thing.
One thing that's probably little known about insurance bonds that is pretty unique outside of the souper is that you can switch the investment options without capital gains tax. So if you think if you had been in a tech a fund that had tech exposure over the past twelve months, it's done really great, And you say I want to rebalance my portfolio, You're not going to have to pay capital gains tax on that, whereas if if it was in your personal portfolio, you probably wouldn't sell because of
the capital gains tax. So I think it's definitely worth looking at.
Yeah, that's useful. I can I ask you one last thing. It's a big difference between you must hold for ten years? Is that right?
That?
Have I got that right to optimize it?
If you die, it's okay, if you die, it goes through capital gains tax free.
We have you assuming you say a lot.
Yes, So the investment component it starts to kick in pro rated discounts in year eight and nine.
Okay, So you really have to this a long term thing, right you really want to be thinking eight nine, ideally ten years plus.
Yeah, And I know, yes, absolutely, And I know a few of the product providers are really going out there trying to produce information now as an estate planning vehicle.
We certainly haven't seen a lot of traction for it at this point in time because the other aspect that we're seeing right now is if you're going to get an inheritance from your parents and say you're forty or fifty years old, right now, the first thing you should be doing is putting that money off your mortgage, and then if you have more more money, then maybe it's topping up super So they haven't really needed the benefit
of a bond or a trust. It's and I think with that Intergenerational Wealth Report, I think we might have touched on this last time. I think the government's really going to crack down on more ways to get tax revenue out of deceased estates. There's thought there on rather than doing something for a state planning wealth transfer purposes, giving the money now to your kids and helping pay off the debt, mortgages and things like that might be.
A yeah, that's a really good answer. Yes, that's really worth thinking it through. Little so they look they have their advantage. Just be careful with the sales talk on that stuff. Think about what you need first. Think about the fact that what else is out there as Hugh says, is there a mortgage debt that's not tax deductible? Just
whole mortgage debt? Going to get that first superinnuation contributions because that's speet and then you can get into the blue sky if you're looky enough to even consider the products of that nature. This again is information only, but this is as you can see, a repeated line of a repeated view on the show from Top Advisors and always worth listening to. Okay, hey, we're running out of time. Thank you very much, Hugh. That was great. We really
rolled around there, lots of different subjects. Thanks a lot you.
Thank you very much for having me. It's been great.
We'll have you on the show again. All right. That was Hugh Robertson folks of Centaur Financial Services, and he is one of the top advisors in the land regularly, as they say, ranks high on the top advisors list. I'd love to have some more questions or comments sentiment. The email is the Money Puzzle at the Australian dot com dot au. Talk to you soon.