Hello, and welcome to The Australian's Money Puzzle podcast. I'm James Kirby, the Wealth editor at the Australian. Welcome Aboard Everybody.
One of my favorite shows of the year. Regular guest Will Hamilton of Hamilton Wealth Partners goes off on a odyssey around the world every year and he goes to all these various investment conferences and wealth conferences extra and he comes back on the show around this time of the year every year and he tells us basically what the mood is out there and what people are saying and what really is on the table, if you like, with wealth advisors around the world. It's always interesting. He's here,
he's back. He has no jet lag this time. For the last time. We caught it really tight and he did it virtually. It's the plane. We're going to talk about rates and where on Earth they may or may not be going. We're going to talk about the craze for private credit and to the extent that it's going to be any good for you should you ever deem to go near it. Backlash on AI. Interesting had to happen. Question is whether it's just a moment of whether it's going to stay with us, and lots of other issues
that we've already talked about before the show. How are you will Hamilton, welcome home?
Thank you very much, Sjames, thanks for having me. I'm very well. Thank you.
Always good to have you. I imagine we have to talk about rates. First of all. I just walked into the building this morning. Two people came up to me and said, what's going on with rates? What's going on? Are they going down or are they going up? Off the CPI yesterday, I said, look, I don't know, if you want my opinion, I don't think I think's going to happen. I don't think they're going to go up or down in Australia this year. But informed by your global rolling around, what do you think.
Look, let's deal with offshore and then domestically, and I think rates are going down. Offshore Powers last night held raids steady in the US, but has very much indicated that potentially next month we're going to see the first cut in the United States. We've already seen cuts in the UK and in Europe. Rates are going down. Inflation has appeared to be stickier. It's definitely stickier than what people thought but inflation is going down offshore, and that's
why interest rates are going down. Not to the extent that people thought at the beginning of the year, but we are going to see rates trending offshore. We're trending down now. Australia is a different matter straight because we've got variable interest rates for mortgages. We saw interest rates go up less than offshore. So one hundred bass points are one full percent less in Australia than the US.
We have not tackled wage price inflation in Australia as they have offshore, and therefore our inflation is stickier and therefore I cannot see interest rates falling. Probably the second quarter of next year would be the earliest you could consider, so that April to June period is when you potentially see rates come down, So you won't see it before that we haven't tackled inflation. But likewise they shouldn't come down as much because we didn't increase as much.
But you still have the opinion that they will come down eventually. Eventually, yeah, but you still have the opinion the next move is that it drops.
Yeah. I don't think we're going to see it. I don't think after yesterday's figure. I don't think we're going to see an increase, but.
Okay, very interesting. Yeah, because basically the figures aren't great, they're really enough great for the domestic economy. That doesn't mean the markets aren't great. Of course, the markets have been very good so far. A little bit of a w in the last few days, a bit of extra volatility in the US, and of course we are in August and we are heading towards that time of the year where the US traders tend to lose their nerve and if we have corrections or crashes, they come famously
come in the September October period. If there is one this year, And I don't know what's going to happen, but of course we should be on standby for a correction. That's for sure. It will be triggered for it would seem it would be triggered not by politics or by rates, but by perhaps a backlash against the initial excitement over AI. Excitement drove the big cap stocks. The big cap stocks drove all markets around the world. That's why your ASX index one did so well last year, and your US
one did twice as well. But you detected at various meetings and conferences. What is it? Is it a skepticism, Is it a skepticism about AI? Or is it a skepticism about the perceived economic potential of AI that's already built into staff prices.
So Goldman Sachs produce a report early June which everyone seems to be talking about, and if your listeners google this they'll be able to find it. But basically, a trillion dollars hasn't been invested in AI, and when somebody does something, others are playing catch up. They're doing the same, they're trying to keep up. So will there be So everyone's skeptical about the revenue enhancements or the productivity improvements that come through. Where are these going to come from?
And with the extent of a trillion dollars being invested, the argument is, this is a hell of a lot of money, and it is it's an extraordinary amount of money, like it's half the market cap of the Australian equity market. This is US dollars and therefore the return required is substantial. The argument coming out that when everyone does the same thing, no one comes out with an advantage. And therefore, and where are we going to see this advantage. And one
thing is it is disinflationary. That's one thing you can be sure. And the real way to play this is hence won of videos run is through the input players, so your consultants, because everyone needs to get advice on what everyone else is doing, as well as the chip manufactures, TSMC, et cetera. But the big where we've got into the doubt phase. So yes, there's all this investment. This is great,
but what is the quantification of the productivity improvements? Where are they going to be or the revenue enhancements and everyone seems to be playing the same game.
So where is the return on investment? Is that what we're talking about? Yeah? Okay, And so the question is do the big AI fuel stocks from the megacaps, the facebooks and Microsofts and in videos or for that matter and next d see Macquarie technology, do they come off the boil after.
An incredible run for something like in the video. It's to keep going to the extent that they have is unhealthy. And that's when that B word bubble starts coming out. And it's normal that things consolidate, and consolidation often means retrace a little bit. But I do think, as everyone conceded, there is a difference. So for those that are trying to compare the tech cycle now with the tech cycle back in the beginning of the century, there were companies.
Even Amazon back then wasn't making money. These companies are making some decent money, but it's just it's healthy. I always think that when things get on a rule like that, it's that's where you do get bubbles, and it's unhealthy, and it's great to see it things consolidate.
Yes, because it stops it from going crazy. And I have seen some sort of leading figures make that point that for anyone who's old enough to remember, it is elevated pricing and particularly elevated pees on these companies AI driven or linked or manufacturing companies, but they do have revenues and some of them have profits, and that was not the case in the dot com era. And consequently, the theory is that then it is not a bubble.
It certainly isn't a bubble. Yet I've seen some pretty powerful gurus, if you like, of the market making that point in recent times. Okay, another thing you were trying to explain to me was about the excitement and fashion for private credit and private equity generally are on listed investments where retail investors are late to the party has always been going into them now and the market is only waiting for them to come along and launching lots
of offers and products. But you came upon in terms of a theme that you came across at different conferences, there was a sense that not that it wouldn't work, but there was a worry about liquidity and what that means, folks, to make it really simple, is if you put ten grand into an unlisted fund and a day comes for you say I want to get that ten ground out, they may say to you, sorry, you can't have that money today. We can't give it to you right now.
And if you haven't had that experience, it's worth having because it's disturbing. So what they're saying will.
Private credit seems to be the number one thing that people are concerned about, but overall when it comes to this alternative space. Last year the theme was the democratization of private assets, which I really don't like that term, but I think in full twelve months it's been a rush and now people have realized you need to manage liquidity and portfolios, and there's no doubt I know as a wealth manager, we could when it comes to private credit and private equity, we could waste every minute of
every day seeing a manager. And it's still the case. And whilst the ducks are quacking, the fund managers are coming out here and feeding them. But you need liquidity. Management is very important and therefore it's not surprising these so called evergreen structures which the clients etc. You're going to continue to see KKR and lots of them are going to come out here and you're going to see a lot more of these where they're semi liquid or
they've got liquidity provisions. Bus everyone should remember that when things go wrong, they all have the right to lock up. Now, when it comes to private credit, it is the big trend and there is a big disparate and quality between private credit managers. Our banks being replaced by private credits?
Are they because this is their presentation, isn't it. They're stand in front of every conference and they say, listen, folks, you may not know what The banks aren't banks anymore. They don't boop do banking. We are the banks. We are the new banks. We're doing all the banking. Do you think of that pitch?
There's no doubt that the banks are doing less and therefore it has become open to private credits. And I said, there's a big disparity in the quality between those that I think are more established and the better managers than those they've just come by. I think we haven't gone through a default cycle, and people need to remember that. First of all, I would I would caution any of the listeners to look at single asset lines because they have one hundred percent downside, So you need to look
at something that is pulled. But you've got to make sure that you are confident that a manager can manage a default cycle. And we haven't seen that. And yes, there's been the odd default here or there in some of the funds, and some of them have managed it really well. But some of the new guys, and especially
the term I can't stand. We have never had had a default that makes me run in the opposite direction at a million miles an hour because that manager, what expertise they brought to the table in managing that default?
Oh, very interesting. It's like the journalists to say, I've never had a libel action.
I've never had a correction. I've never had a correction, No one ever has. No one has ever said I got anything wrong. Just one last thing on that. For the retail investor, often the avenue because often these funds are they've got pretty high entry points twenty grand, fifty grand, one hundred grand just to go in. For most people most of the time, the end the pathway to these
alternatives or alternative funds or whatever private credit, private equity is. Ironically, I think through the stock market, do you think there's any particular weakness or is it a plus or minus.
I don't want to mention names. I think that's unfair that there is one that comes to mind, and I think it still is trading at a discount to its NTA. And that's the issue. These things are always easy to get in, and when you want to get out, they can be very difficult. So just beware, and like with leaks, with the investment coming means they don't necessarily try it where they should.
But you don't have a problem with the sort of inherent contradiction of buying private assets on a public market.
For some people, I think that's the only way they're going to be able to do it. If that's what they want to do, make sure you do. Just make sure you do your research in your homework.
Okay, Hey, we'll take a short break. A couple of other big issues I want to talk to you about. Will be back in a moment. Hello, Welcome back to The Australian's Money Puzzle podcast. I'm James Kirby, wealth editor at The Australian, talking to Will Hamilton, regular friend of the show, and he is telling us about basically an international trip piece just done and the views out there in the wider world from wealth managers, fund managers, but
particularly advisors in the wealth space at the moment. One of the other big themes will I come upon every day at the moment from a global perspective, and it's kicking in here locally too, is this ocean that having had some very good years on the market driven by large caps, that we're going to have a swing to small caps and small caps are now going to have a run and they're going to have their day. A couple of things I want to say before I put
it to you. First thing is I looked at the small cap indices and basically it's a flat line for about five years and even the very good small cap managers that I'm aware of, the numbers are okay. So maybe they did two or three or four percent more than the index, but g you wouldn't exactly be minting it with them. What do you think of this notion which is the flavor of the month.
Just now, look the disparity in valuation between small and meds and the large caps is close to record highs. And that's one of the one of the key reasons is the small and meds tend to have higher gearing than the large cap companies and so when you are in an upward cycle on interest rates, they get punished when you are looking at a downward cycle on interest right, that is to their advantage. So I think it's been
a very crowded trade. Everyone's been talking about this for a year and I will admit we've got we put global mids in probably the winning of this year and been a.
Drag because it hasn't started yet.
What did last month in July? But apart from that, it's been six months a drag and interesting. We use generally broad cap managers in domestically in Australia and the manager we use again I think it's unfair to mention unless you what I know is has outperformed the index by about five six percent. But they've got that, they've got that ability to play the whole market from right down to tiny and they can put a couple of
the large caps in. That's the way we prefer to play it in Australia because Australia is a small market. It's only its capitalization as one point nine trillion US dollars. It's two percent of the world. It's a tiny market, and we think that's the best way to play it.
Okay. I noticed for the retail investor, even some of the better known small cap funds and even the ones that are listed as the best, they're tiny, like twenty mil market cap, fifteen mil market cap. Is that a problem in and of itself?
Yeah, it is because these things will outperform on the upside and the downside is high. And that's because of the way a business is run and the way we look at think we look at volatility, and the volatility and companies that are that small is just extreme and
so we would never touch that. There's a lot And the other thing is there's a lot of companies that are listed in the small cap space that should never have been listed, and that's what managers will remind you, and of course they're avoiding them, but they just should never have been listed in the first place.
There's a lot of junk, a lot of junk, and that, I suppose is the argument against buying an index fund of small caps, because if there's one thousand stocks and roughly even small caps in Australia, it's probably about fourteen hundred small caps and I don't know how many of them are junk. Hundreds and hundreds of them are jug
and you're buying them. You're buying them if you buy the index file, if you buy a manager who specializes in small caps, and you would hope that they're not buying the junk, but of course they will always get caught by somebody. Okay, totally different business, other end of the spectrum. In our market, it's something I've asked lots of people. I han't had a chance to ask you on air. Our market was very much driven by the
bigger cap stocks. The banks are completely running the show at the moment on the AX five banks, Big four, an Macquarie in the top ten common Well Bank on a league of its own. Common Well Bank at one hundred and thirty dollars, the biggest stock of the market, biggest, bigger than BHP, and everyone says all year long, all the top brains, all that big house, all the brokers, local and internationals say sell get away from that bank, and they're all wrong so far. But when do you come on that one.
Under owned institutionally and over owned in retail land. Self directed investor that wanting his dividend goes and buys the banks, but every institutional fund manager will be underweight, hence the volatility in these things. I think that it's run too hard and it was may I be taking some profits. I think that the fact that the largest company at its valuation is where it is. We've got to be
sensible about these things. And it's run incredibly well, and good luck to those that have it or bought it. But nothing ever continues going up in a straight line.
Yeah, okay. I saw someone say a gorgeous quote the other day, and this old lined about something and being priced for perfection. Then someone said CBA is priced beyond perfection, which probably captures, probably does capture the issue of it Okay, we'll be back in a moment with some great questions, very good questions, I have to say, our particular selection this week, and there's quite a few of them. So stick around because we're going to go through quite a
range of issues which will be useful to everybody. I'm sure back in a moment. Hello, and welcome back to The Australian's Money Puzzle podcast. I'm James Kirby, the Wealth editor at The Australian, talking to Will Hamilton of Hamilton Wealth Management. Will, if you don't know, is a top wealth manager. He is on our Top hundred, which is about to become Top one hundred and fifty advisors list of which we publish in The Australian every year, and
he's at Hamilton Wealth Partners. What about six questions here? Why don't we read them alternately? And also why don't we aim to try and get through them as well?
Okay, so Paide asks, what is the biggest bubble Navidia with the market KAPE two two point eight trillion or cryptocurrency market cap US two point five trillion. Look, I think we've talked about in the video and why just consolidating and is a positive thing, because that stops that word bubble cryptocurrency. I don't follow I have no intention to follow it, and we don't have investments.
So you're you're not even one of these people who say, if my clients want to invest in it, then they can, but I don't recommend it.
Yeah, we have done that, but that's their decision and they signed forms. That's their decision.
Yeah. Okay, I hope you like that, answered Pete O. Kate. Kate, he says, when you next have an advisor on the show to discuss tax deductions, can you please ask the following. I have a Spotify subscription which now includes audio books. I'm regularly using it to listen to finance books to help me understand and manage my personal portfolio. Do you think I could claim a percentage of the subscription? I'll tell you what, Kate, I think you should be able to. Okay,
but this is not advice and it's information only. However, in the real world, where the ATO has thought of everything you could possibly think of and are so tight and mean on all these things, they would say to you, if you could get them to agree, they would say to you that you could claim the Spotify subscription if you listened to absolutely nothing else but finance podcasts, and you could prove to them that you did so, and at that I would say they would try to kick back,
but I think they would have to take it on that basis about acclaiming a percentage, you'd have to prove what percentage it is. So if you really think it's worth that much trouble, I wouldn't stop you having a try, but I would refer to a conventional tax adviser on that. But I know I'm doing this a long time. I've tried to claim all sorts of things over the years, from clothing to whatever, and every single time I got
knocked back I tried. That doesn't mean you won't be so successful, but that would be I think what that would be the conventional wisdom. Does that sound? How does that sound to you? Will?
Yes? Absolutely, like you. I can't give I'm registered with the TPP, but that's for financial advice tax only, so this is a bit different. So yeah, I would talk to your text advice.
Yes, and your tax advisors will say, oh god, that sounds like a lot of trouble. Ironically, this principle probably isn't tested because this is a new area, right, podcasts are new. If you subscribe to a financial publication, then you can, so why can't you if you subscribe to a financial podcast. I'm with you, Kate, but I don't know if you'll get over the line. Okay, do you want to see the question from Adam?
I can? Adam asks is there a minimum amount for it to be worth having a family trust like there is with self managed super funds? And can assets be gifted from an individual to a family trust without paying CGT? So both a self managed super fund and a family trust have compliance costs. Costs that hold to operate that vehicle for the year and to report aren't assek or in the case of the self managed super fund to
the Strand Taxation Office. So there's there are compliance costs, and those compliance costs are about the same, and therefore you need to have at least a million dollars at least a million dollars to justify either vehicle.
I think, Okay, I don't like your answer, but I like the clarity of it. Yeah, okay?
And can assets be gifted from an individual to a family trust without paying CGT? If you not? The answer is no. If you are transferring ownership from an individual to the trust, you are realizing a capital and you realize a capital gain, the strand Taxation Office is going to want to share of that.
Yes, okay, very good, very clear answers. I hope that was useful to you. I just want to also mention something. But the point that Will is making how much should you have in an SMSF. And Will I would say that you're on the high side, okay, on a million dollars, not on the family trust, but on the SMSF. You're on the high side. But I think the answer probably is somewhere between half a million and a million these days. And I want to make a point here which is
worth bear with me. It's from I just did some work during the week and it was about financial advisors and their charges. And the point Will is making about compliances. If it costs you so many thousand perannum to do something right, let's say it's an SMSF. Then, and let's say you think your SMSF makes a certain amount, put
a number on it, ten thousand, one hundred thousand. You've got to subtract that five thousand, right, you have to subtract the cost of the vehicle from what you made, and so that in a way informs how much you need to have in it. And I came across something which I really couldn't. I missed this when it happened. But it's about the costs of advice in the market.
So a financial advisors, by the way, okay, on average, your average advisor rose their average fee to the average person last year up to it's up over five thousand dollars now, seventeen percent rise last year. And financial advice fees okay, seventeen percent, four times the inflation rate. And that's not even the one I'm looking for. That's not the screamer in the issue of particular advice on self managed super funds. But hear this. This is from investment Trends.
I'll just read the paragraph. In some cases, fee increases have been astronomical. A year ago, the average up front fees faced by self managed super funds dealing with specialist advisors rose by forty percent from two thousand, six hundred to three thousand, six hundred in one year, and last year being the twelve months to June, they add added a few more hundred just for good measure, and they're now charging three seven five zero per annum, so the
fees really are rising. I don't want to get too deeply into this, but I just want to go back to the point that Will made that the way to do it is reverse engineer how much is your fee? And then when you know how much your fee is, we could then make the point of whether it makes sense for you to actually pay that fee. And that really is how you make your how it makes sense.
That's on a strict technical basis. Obviously, you might have aspirations. Okay, So you might have half a million and you say, I'm not going to have half a million for long. It's going to get bigger, and I've got plans and maybe it's worth it for you, and I wouldn't stop you. Again, this isn't advice, this is information, all right. I'm the next one. Okay, Jen, Hi, Jen, could you please explain
what hedging means and how it relates to ETFs? And separately, she asks, could you explain how shares such as RIO and BHP are affected by changes in the dollar? Look, Jen, the second question is too big, except to say that scale real BHP, these are multinational companies and they literally try to upset their assets and liabilities in the currency where they are, so they're almost beyond hedging when you
get to that sort of global multinational stage. But on the simpler question of could you clean explain what hedging means and specifically how it relates to exchange traded funds or index funds, would you like to have a go with that? Will?
So what hedging means, and you can buy either listed or unlisted funds that are hedged, so they protect you in a rising Australian dollar, so they hedge out the risk. So that's the key thing so to try and give you. And it's interesting because you actually looked at the thirtieth of June, the returns to the indexes hedged and unhedged are pretty well identical for the year. But if you look back six months ago, hedged dramatically and performed unhedged.
Okay, so jen nothing's free, right. So what they do is they say you've got two choices with the ETF. They've got the American stoff market ETF and the American staff market ETF hedged, and the hedged one says makes a promise to you that the machinations, if you like,
of the currency markets will not affect you. I won't say it won't affect you at all, but they won't to affect you as much as an unhedged one because what they do is they spend a certain amount of money forward buying currencies, and then if they get it right, then the change in the currency doesn't affect you as much. Now that's terribly simplistic explanation of it. Any part of that wrong will no.
I think that you take an unhedged position if you believe the strand dollarsment at fall, and because you're exposures to foreign currencies. Likewise, if you feel the straining currency is going to appreciate, then you do look at a hedge position.
But that's yeah, but that's tactical, right, that's someone really active like you, but correct.
But to do it you need to you're doing it because of a view on the currencies.
So in a way, these products shouldn't I won't say they shouldn't exist, but they are a bit they're a bit hopeless really in some ways, because if there's an ETF that's hedged, it's going to be permanently hedged. Right, they're not going to turn it on and off.
Correct And likewise with open ended fund there's classes that are unhedged and there's classes that are hedged. Probably harder to get hedged exposure because not every fund has hedged exposure. It's growing in demand as investors are wanting this. But yeah, correct, it's the fund itself. But there are some that you talk to the fund manager and they say, we'll look at twenty five percent of it and we'll dynamically hedge. So if they've got a particularly strong position, they have
the ability to do that. I'm a component at their portfolio.
Okay, very good, all right, So so Jen, that's what it is, basically, very roughly, they spend some money trying to protect you from currency changes, buy forward, buying currencies, and trying to get it right. It's not an exact science, and there are some studies that show over a very long period of time there isn't an awful lot of difference between the hedged and the on hedge. Again, I want to check that with Will. But like say, I bought an ETF and I.
Think it's on a ten year basis, it's pretty well idea.
Yeah, on a tenure basis, So why would you bother? But that's so for you to make your own mind up. But I never bothered buying head stuff because I try to buy for the long term, and I don't really sell unless I think I've got it wrong or in the unlikely event, it's been so good, I better take some off the table. Less of an issue, all right, hold final question, and you can have one with this will if you want.
Yeah, I love it. That's a great question from Paul. He was watching the riots and born as areas and research the reasons for Argentina's demise since the nineteen twenties. Increasing physical deficits and borrowing in US dollars seems to be the common result from many websites. He's also watched our ossie deficits and overall debt climb over time, some of it having been unproductive debt to fund our luxurious lifestyles, ege politicians salary packages. So are we heading for an
Argentinian apocalypse? I think the first thing is actually Argentina goes back to the nineteenth century, so the late eighteen hundreds and the first debt crisis, So it's been a long time. But Secondly, there's also been there is a very high level of corruption. Now, whilst Paul is the fields that our politicians have luxurious lifestyles and salary packages, you'd have to say that, as they call it in Asia,
political patronage does not degree. It does not exist here in Australia, which is outright corruption.
Yep, it's clean. We'd like to think it's relatively clean.
And these things exist also in some Latin American countries. Whilst our deficit is high, it is not high on global standards, and I think that's yeah, and I think that's also got to be taken into account. Whilst we can all sit here and spend hours debating whether the government is running the country correctly or not, I think it's very different from the semi dictatorships you have in Latin America and degree of corruption that exists.
And for that matter, the US, not that it's a dictatorship yet, but we run deficits anything like they do as a percentage of our GDP remotely like them. No.
Look, I was looking at just that couple of weeks ago. I just shocked at the degree their annual deficit is.
Yeah, I know, it's scary and they have no intention of ruining it in because of exploit the situation continually. I had a long conversation with someone yesterday about this, how they continually exploit their historic dominance in eminence in the market. So when there's a crisis, often triggered by the US, everyone goes back into the US because of the safety of their markets and their money markets seen as the pre eminent sovereign markets. But gee, I don't know.
Nothing lasts forever, and you just wonder how long you can abuse that question for another day. But thank you, Paul, big picture thoughts there and very interesting, terrific Thank you very much.
Will thank you, James folks.
I'd love to make a few points to you in the coming weeks ahead. We will in the next month, being September, we'll have some guest presenters when I am overseas. I'll tell you about that shortly. And also I would like and ask you again thanks for all the correspondents and Google reviews and all that. But what I would like you to do, if you would, is just tell
one other person about the money puzzle. That's what I would read appreciate if you could, okay and keep those emails, running the Money puzzle at the Australian dot com dot au. Talk to you soon.