The Experts

Andrew Main
+ About Andrew Main

About Andrew Main

Andrew Main has spent 35 years in journalism and stockbroking, which took him from Perth to Sydney, Paris and London. He was Business Editor of The Australian between 2007 and 2009.

He was a joint winner of the Gold Walkley Award, Australia's top journalism prize, in 2003 for a series of articles on errant stockbroker Rene Rivkin's Swiss bank accounts and he has published two books, one on the collapse of HIH insurance and the other a biography of Rivkin. He had a regular spot on ABC 702 for five years in Sydney explaining the mysteries of finance to a mid-morning audience.

More recently, he has also been a regular commentator on Sky Business

What was behind Blackmore's fall?

Wednesday, March 14, 2018

It’s not every day that a share price drops by $23.50 after an apparently supposedly upbeat half year result, but there was a fair bit more to Blackmores Ltd.’s recent interim results to suggest that there are still risks out there for the China-oriented group.

The stock dropped from $159.50 to $136 a share on February 22, despite the news that the complementary medicine group’s net profit after tax was up 20 % on the previous corresponding at $34 million, with group net sales up 9% at $287 million.

The interim dividend of $1.50, fully franked, was a 15 % improvement on the $1.30 paid out previously.

The share price has failed to bounce since, closing yesterday at $129.50. Bear in mind, if you will, that the stock price ran up to $175 a share in early January, so while it looks expensive, it is off $39 or almost 22 % below its peak.

Speaking historically, the stock ran up to $217.98 on the last day of December 2015, which smacks of window-dressing and short covering but it’s still a real number.

So what’s happened? FN Arena’s Rudi Filapek-Vandyck tagged the latest half year result as being one of the “notable disappointments” of the profit season, in amongst the naughty corner inhabitants such as Domino’s Pizza, Myer, QBE Insurance, Ramsay Health Care and Super Retail.

His main criticism seems to be that there was an earlier excess of optimism among investors and analysts about the China story, with Credit Suisse walking back, as they say in the White House, from a note in October putting a price target of $150 on the stock, up from $95 previously.

Perhaps they were just relieved that CEO Christine Holgate, poached by Australia Post during 2017, was quickly and efficiently replaced by Chief Operating Officer Richard Henfrey as of September 30.

The broker has now dropped its Blackmores recommendation from Outperform to Neutral and shaved $20 off the target price to $130 a share, half a dozen dollars below where it is now.

As Rudi put it, the Credit Suisse analysts had previously rated Blackmores’ growth prospects up there with the likes of Treasury Wines Estates and they  “now suggest Blackmores will still grow, but it won’t be at a spectacular rate.” “They also observe competitor Swisse seems to be performing better.”

Morgans has a Hold recommendation on the stock at current levels but has moved its price target up from $102.50 to $125.00.

They say the Blackmores brand is strong and is leveraged to favourable industry dynamics but is fully valued at these levels, that latter comment being what you say when your target is below the current share price.

So the only broker suggesting you buy the stock is retail specialist Ord Minnett which retains an “accumulate” rating and a sunnier target of $150 a share.

It says the half year net profit just reported was broadly in line with forecasts and that the long term demand profile of the company’s products and positioning of its brands is very strong.

A poke around the earnings numbers suggests that Blackmores is not enjoying anything like the straight-line sales growth that it enjoyed in 2013-5. The total reported sales of $287 million for the latest half were only a bit over 1% above the $283 million enjoyed in the first half of 2015-6.

And how’s this? Management’s claim of  “improved pricing stability and promotional rebates following the implementation of a program of reductions through the period” sounds a lot like a bit of calm following expensive promotion and price cuts.

It’s also worth remembering that Blackmores is a well-known name, but from my understanding doesn’t make any of its products in-house, so one of its key management issues is inventory. Too much, and it eats its head off in the warehouse, too little and the stockists start to scream.

“Continuity of supply has been a challenge in the second quarter as suppliers have struggled to respond to the Group’s increased requirements” is management-speak for what looks a lot like the latter circumstance.

The China numbers for the half were reassuring, with sales up 27 % to $74 million. This was despite the fact that many Chinese consumers now buy direct from Blackmores online, with their purchases not being counted in that $74 million number.

The best day is Singles Day in November 11, a sort of rebuttal of Valentine’s Day that celebrates young Chinese people’s single status. Blackmores offers 136 separate lines though the dominant e-commerce channel Alibaba and according to management, sales of Blackmores products on that day surpassed those achieved in the prior year after only two hours and 10 minutes.

You didn’t ask, but I gather 25 % of the lines handled by Alibaba are in vitamins, 11 % are fish oil and five % are anti-ageing. I leave the reader to speculate what the other lines are.




What a US doomsday 'expert' has revealed about Australia

Wednesday, February 28, 2018

It's worth bending an ear to prophets of financial doom because that’s what keeps markets balanced. If we were all bullish, we’d have been rooned, as farmer Hanrahan said in the poem, years ago. 

But there’s an entertaining twist about the current Australian tour by US economist and demographer Harry Dent.

Harry’s pushing a new book entitled “Zero Hour,” which is about what he says will be the “greatest political and financial upheaval in modern history."

That’s a big headline, but it’s not wonderfully informative, because we all know markets have regular busts of the sort seen around the world in 1987, in Asia in 1997 and again in 2008 with the Global Financial Crisis.

The twist is that he sees Australia as being less affected than most other developed countries if there is a major global economic bust, with the understandable exception of a likely drop in property prices.

He bills himself as a demographer and his core thesis is that as the Baby Boomers around the world ease back on spending, and the youngest is now 57, we’re headed for an inevitable slowdown.

Where’s he’s a bit exposed is that last time he was here in 2014 he predicted a major bubble-burst in the Australian property market which has not happened.

He also predicted that we would be economically drowned by a China-created tsunami that would wipe Australia out.

That hasn’t happened either, although a property bust and/or a China bust are certainly possibilities. And of course the latter would most certainly have dramatic negative effects in our economy.

But it must he hard work for a demographer peddling gloom in a country like Australia because he knows that Australia’s better placed than almost any other developed country to control its demographics, most particularly the growth rate of its population. 


Given the positive demography of Australia, his messages of doom are going to scrabble for traction. 

As he put it in an interview with Peter Switzer last week,  “no longer are demographic trends pointing up in the developed world except for Australia - lucky you guys.” 

He was basically saying we can avoid at least some recession and most importantly, support an ageing population, by bringing in young and well educated migrants from around the world. Very few other countries have that option.

This was just before the Tony Abbott-versus-most people argument about population growth burst on the scene, with Abbott calling for a halving of immigration because of issues such as strained infrastructure, unaffordable housing and crime in Melbourne caused by young men of African heritage. 

That got jumped on by Immigration minister Peter Dutton and others, leaving the former Prime Minister in a minority, if a noisy one.

He had a raft of online supporters, many of whom could spell, cheering on some or all of the points he had made.

So that’s where we sit now: Harry Dent concedes that we should be able to dampen the effects of any global recession by taking in more migrants, and lots of people in Australia who have been stuck in traffic are blaming the migrants already here.


While I understand the critics’ arguments, I believe that they are being short sighted.

Melbourne based journalist and author George Megalogenis made a strong  argument in his 2015 book “Australia’s Second Chance” in which he noted that most economic stagnation or recession in this country has tended over the last century to occur whenever there was a cutback in immigration. 

He sees carefully managed migration as a massive long term positive.

And CEDA, the Committee for the Economic Development of Australia, is with him.

“The simple fact is migration has contributed substantially to the growth of Australia and will continue to do so into the future,” explains CEDA.

 It recently conducted research that found annual permanent migration could double over the next 40 years and deliver “significant per capita economic benefit.”

Where I sit, those growing pains are real enough but they are not insuperable. They can all be picked off, one by one. 

Creaking infrastructure? Fix it. Governments and corporates can still borrow at historically low rates to build extremely efficient railways and at some point in the next 50 years a Very Fast Train or network of VFT’s will allow more people to live outside Australia’s big cities and commute into them, assuming of course they will still need to commute. 

And cars? It may be that car sharing finally takes off and all those car parks will be more than slightly redundant.

Water management will of course be difficult, as ours is the driest continent, but that one’s not insuperable either. Re-use, desalination, anti-evaporation measures and irrigation management strategies in the southern half of the continent will go a long way to increasing Australia’s potential population capacity. Meanwhile the tropical zone gets enough rain each wet season to support infinitely greater populations, as our neighbouring countries to the north have shown for centuries. 

House prices? There have been major scams with overseas investors using their children as nominees to buy established properties, but properly administered legislation favouring Australian residents, a legislative bias towards owner occupiers and a clearly articulated policy on interest rates will go some way to reducing that problem. 

The irony there is that it’s those very low interest rates which have got buyers excited about how much they can afford to borrow, rather than what properties might actually be worth. If rates are ratcheted up carefully, the bubble will deflate by itself, or prices will at least plateau.

Criminal gangs among migrant communities? We’ve seen this before in Sydney’s Cabramatta with Indo-Chinese gangs, 25 years ago, and now it’s better known as a foodie destination. 

There are always stresses and strains when migrant groups contain bigger percentages of refugees, because in many cases there’s a lack of male role models, because in many cases they are either not around, or, worse, dead. 

It must have been a total horror for the owner of a Melbourne jewellery shop having it smashed up by baseball-bat wielding thugs, as happened recently in at least one case, but that’s no argument for putting the brakes on the economic potential of your country. As a percentage of the migrant population, the villains are a rounding error. 

So when Australia has a massive inbuilt advantage that even a professional bear such as Harry Dent is prepared to concede, we might as well use it.


IPOs the big winners of 2017

Wednesday, February 14, 2018

If you’re still hiding under the table with a coal scuttle on your head after the recent global share market lurch, it’s quite understandable.

You may not be in the mood to hear a bullish tale about the Australian share market, but try this:

The 113 new floats that came into the market in 2017 managed an average end-of-year return of 61.6 per cent. 

If you look at the smaller IPOs valued below $50 million, the number was even higher at 69.8 per cent.

Meaning, if you bought them when they were issued and held them until the end of the year, that is how far ahead you would be.

Those stats come from the OnMarket group, which is involved in around one third of new floats in Australia, but keeps records for all of them.

By comparison, the ASX 200 index was up seven per cent over 2017, and we won’t bother discussing what’s been happening to it in the last few days. If you’d been on a roller coaster you would have hurt your nose and your neck.

Of course, most new floats don’t pay dividends like the blue chips do, so we’re not comparing apples with apples, but that giant differential in price performance cannot be ignored.

So, what’s going on? In very simple terms, the high franked dividend paying stocks in Australia have become what the professionals call a crowded trade, whereas the smaller end of the market is doing exactly what it is meant to do: raise capital to allow companies to expand.

Because we haven’t seen a big raft of giant floats in the last few years, the Initial Public Offering (IPO) market in Australia hasn’t garnered the attention that it perhaps deserves.

In 2017, there was only one seriously big float, the Magellan Global Trust, which soaked up $1.5 billion in October.

Indeed, it wasn’t a big year for floats in value terms, raising a total of $6 billion versus $8.3 billion in 2016, and a similar number in 2015.

Back in 2016 there were 96 new floats whose end of year equivalent return was 25.4 per cent.

That number grew slightly to 113 last year, so it’s the dramatic lift in returns to 61.6 per cent that really grabs the attention, coming in more than twice as strong.

There are of course a number of issues you need to face if you are looking at trying to get anything like that return.

One is that it’s hard to get set in the full range of floats, so there’s a theoretical element to it. This is not meant to be a plug for OnMarket but they facilitate access to new floats and as I said, they get access to about a third of them.

Two, small cap stocks are less liquid than large cap stocks, meaning they are hard to get into and out of. And if there’s a major bust such as 1987 they tend to get even less liquid. In trader talk they become “seller, no buyer’.

Their prices can also suffer from volatility. If you’ve got 100,000 of a small stock to sell and there’s only 20,000 on the buy side, you are going to have to drop your price.

It’s also true that there are more duds at the small end of the market.

But that 61.6 per cent figure takes all of that into consideration.

Which sector did best? Possibly not the ones you would expect.

Consumer staples did best with an average end of year return of 106 per cent, followed closely by materials (that’s mining to you and me)which moved ahead by 97.8 per cent.

Admittedly the staples represented less than one per cent of the total funds raised, and the materials category was only worth 4 per cent of that total.

The lion’s share of the money raised went to financial issues, which picked up 68.7 per cent of if, and meanwhile they had the least inspiring average end of year return at 17.8 per cent.

That said, 17.8 per cent is still more than twice the ASX200, even after allowing for dividends.

One of the secrets of the “scattergun” approach to new floats is that while a successful one can grow your investment several times over, you can only lose 100 per cent of your original investment.

An example from the winners is Ardea Resources Ltd, a cobalt play that listed at 20c in February and ran up to around $2 late last year. It’s slipped back to around $1.30 in recent weeks but if you’d got in at the float, that’s six times your in price.

Medicinal cannabis was almost as popular as cobalt. Two of the top 10 listings in 2017 were medicinal cannabis stocks, Cann Group Ltd and The Hydroponics Co Ltd, both managing an end of year return of just over 8 times, while infant formula group Wattle Health Ltd enjoyed a similar return.

Most have of course lost ground in the recent market reverse, but for instance Wattle Health is now around $2.30 after peaking at $2.50 a couple of weeks ago. It was below $2 for most of January so it’s by no means been a collective slide.

It’s clear that being trendy helps a great deal, but this reinforces the point that while you can only lose your original investment, you can make several times that amount on the best performers.

The next point is that to get a good average outcome, you do have spread your bets.

Ben Bucknell, a principal of OnMarket, notes that there is an inherent premium of about 25 per cent if a stock is listed, compared with it being unlisted.

“It’s called the liquidity premium,” he says.

Another potential positive at listing time is that issuers of new floats also have to leave enough on the table, in terms of potential upside, to make it worthwhile for investors to subscribe.

“Having a successful float also has the benefit of attracting the same investors back for a future float,” he says.


BlackRock CEO calls for social responsibility

Wednesday, January 31, 2018

You may not have heard of Larry Fink, but he’s set the cat amongst the financial pigeons by telling corporate CEOs a few days ago that there is more to life than just making a profit.

What separates Larry from the mob is that he’s the founder of the US giant fund manager Blackrock, which sits on a $US6.3 trillion pile of investors’ money and turned in some gobsmacking profit numbers for the 2017 calendar year.

Take your pick from an annual fully diluted Earnings Per Share figure of $US22.60, or maybe $US367 billion of net capital inflows during the year. That’s right…billion.

It makes all the difference to the social responsibility/profit debate when someone on the touchy-feely side is clearly a guru on the profit side as well.

What Fink did was to send a letter out to the CEOs of the companies that BlackRock invests in, warning them ever-so-politely that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.’’

The social responsibility debate is an old one but it’s well worth having, and Fink’s better placed than most to kick it along.

Not surprisingly, his letter got a reaction. Bloomberg columnist and investment banker Matt Levine noted that Blackrock’s a giant provider of index funds (via its iShares arm), so it has to own companies it doesn’t approve of.

“Pick your least favourite public company – guns or tobacco or oil or opioids or Facebook or whatever you think is doing most harm to society- and BlackRock Inc is among the top five holders.”

“Fink’s threat…rings a bit hollow since BlackRock’s index funds can’t sell.”

US fund manager Adrian Day was quoted by Barron’s magazine as saying Fink’s social purpose has no grounding in economics, adding that in the case of a public company, to what extent should the board spend shareholders’ funds on their favourite causes which shareholders might, or might not, support. 

In that view there’s more than a touch of economist Milton Friedman, who memorably wrote  in 1970 that “the social responsibility of business is to increase its profits”.

Others have chortled that companies which pulled out of oil and gas investments on moral grounds have missed out on the recent lift in oil prices, thus imperilling shareholder returns. And that some funds and companies which have highlighted ethical behaviour have underperformed.

But none of that takes away from the fact that Larry Fink has a good point.

He admitted that the index funds (which account for the majority of BlackRock’s FUM) cannot readily sell out of a company whose policies it doesn’t like, but they can engage with the company and vote their shares.

The New York Times notes that BlackRock spent the last two years needling energy giant EXXON over its policy of not letting independent directors meet with shareholder such as Fink. Exxon recently changed that policy, in clear reaction to BlackRock’s criticism, which included voting against the appointment of two directors.

BlackRock also supported a shareholder proposal last year to increase EXXON’s disclosures on climate change, partly because the company’s stated policy until that time had prevented the company from getting a full understanding of its long-term policy and its risk exposure.

In the letter, Fink said BlackRock’s responsibility “goes beyond casting proxy votes at annual meetings: it means investing the time and resources necessary to foster long term value.”

That’s the underlying area where he’s on ideologically and economically safer ground: long term investing usually creates more wealth and pays bigger dividends than short term.

It’s a tough one. The motor car was initially greeted as a wonderful invention just after 1900 but now it’s often seen as a scourge, particularly in cities.

That helps to remind us that there are shades of grey in the debate.

Our prime minister Malcolm Turnbull’s just sailed into a manure storm over his government’s intention to make Australia one of the top ten arms exporters in the world.

Given that Australia currently holds 0.3 per cent of the world market, there was a fair bit of “good luck with that” expressed by military experts.

Clearly there’s a moral argument if we’re packaging up nerve gas, but we’re not. Most of Australia’s arms exports are in the nature of fast patrol boats, which we hope will save lives, or Bushmaster-type armoured vehicles designed to save the lives of troops inside them.

Or what about the coal versus renewables debate? We know where it’s heading, as renewables costs keep dropping and Co2 emissions keep coming, but how soon can Australia switch off its last coal fired power station? Not as soon as activists want, but opting out of owning coal mines is unlikely to speed the process up, as the coal reserves will outlast the demand.

Just looking back at the oil industry, was it always a villain? Absolutely not. Its discovery in Oklahoma in 1859 was widely greeted as a positive, particularly by opponents of whaling, given that it was whale oil that had mostly fuelled oil lamps until then.

It was Saudi oil minister Sheikh Yamani who memorably noted in the 1980s that the Stone Age did not end for want of atone, and the Oil Age will go the same way as demand eventually dips below supply.

Was it right to own oil shares early in the 20th century? Is it right now? And what are the alternatives?

At least Larry Fink’s got us thinking about that, and other questions.


The big issues facing SMSF trustees in 2018

Tuesday, January 16, 2018

One of the benefits of the holiday season is that we can take a longer view of how our retirement savings are going.

I’m talking about SMSF Trustees, pretty much, because the average pooled superannuation fund member doesn’t have enough of a sense of engagement to motivate them to do that.

From 2012 to 2015, I was Wealth Editor at The Australian, a job I joked was about watching other people get rich. I started out writing and editing articles designed for consumption by all retirement savers, but discovered fairly early on that they were almost exclusively being read by SMSF trustees.

Why? Because they have a lot more choice about where their money is being invested than do members of pooled funds, which have for the most part been specifically designed as a “set and forget” exercise. It’s hard to get exercised about your super during the accumulation phase if your only major focus is the total balance and it keeps climbing gradually. SMSF trustees are a great deal more engaged.

So, what are the big issues for SMSF trustees in 2018?


Property prices have to be top of the list for trustees who have investment property in the mix.

Well-located residential property is pretty well bulletproof as a long-term investment but there was a report in Monday’s AFR that class action law firm Morris Blackburn is getting a growing number of inquiries from small scale investors in mortgage stress.

And that’s happening when official interest rates are at record lows and property prices have merely been easing slightly from nosebleed levels. There’s not even a whiff of a bust at this point.

It sounds daft but it is also true that the banks have been lifting borrowing rates slightly for investors, plus there are a lot of interest-only loans that have converted to interest-plus principal. That usually happens after five years. I’d have thought that anyone who bought an investment property five years ago on borrowed money SHOULD be well ahead.

The villain of the piece here is most probably the property spruiking industry, which was disappointingly unhindered by the Future of Financial Advice legislation brought in, in 2013. That cracked down on commissions for advisers payable by financial products they recommend but unfortunately property is not classed as a financial product.

Which means it’s still possible to lure blue collar workers up to the Gold Coast with a “free” flight, stitch them up with a quite probably overpriced apartment and then back the newly acquired asset into a shiny new SMSF, using a chain of supposedly unrelated middlemen. It’s not a nice practice and it’s getting SMSFs a bad name.

Which may also help to explain why the amount of money being transferred into SMSFs from pooled super funds has actually fallen in the last two years, according to the Australian Prudential and Regulation Authority, APRA.

It notes that investment flows from pooled funds to self-managed schemes fell by 5% to $6.5 billion in the 12 months to September 2017.

But let’s not throw the baby out with the bathwater here: SMSFs remain the only way you can include a specific property in your superannuation, and if for instance you have used an SMSF to buy your business premises, you are a long way ahead of any pooled super fund outcome. SMSFs can make their own arrangements, whereas pooled funds simply can’t. It’s the nature of the beast.


The related issue is Interest Rates. They will probably rise in 2018, given that the market has priced in one 25 basis point rise during the year.

That’s not a lot even if, as I’ve said, a few highly leveraged savers have already started to sweat. The point to remember, particularly when you are heading for retirement, is that more people in Australia benefit from rising interest rates than fallings.

Anyone who has eliminated or even just significantly reduced their debt load, which is what should be happening as they approach the end of their working lives, will be better off in a climate of rising rates than falling. 

Media reports often neglect this inconvenient reality because bad news sells better than good news, and there’s no more common Interest Rates story than someone who’s badly stretched financially and getting more stretched as rates rise. Call it Schadenfreude, the joy at someone else’s misfortune.

What the new mood on rates means is that savers should start looking again at fixed interest. There was a report last week that the average fixed interest offering in the US is now offering a slightly higher yield than the average equity dividend stream.

That said, as rates rise, bond prices correspondingly drop, and every galah in the bond market pet shop says the long running bull market in bonds is about to end. However there are deals to be done in commercial paper, which is higher risk but offers higher yields, and don’t forget the charms of Floating Rate Notes (FRNs) whose coupon goes up in line with interest rates.

We’re likely to see an easing of property prices before we see a lift in rates, and indeed the Reserve Bank will hold off lifting rates if it sees any major nervousness in our economy, particularly if unemployment starts to climb.

And the share market?  There’s a tad more upside than downside but the lazy franked dividend trade that saw SMSF trustees load up on the big banks plus Telstra is less attractive than it was. It’s time for SMSFs to diversify a bit more widely in the equities space, even if it’s only in slightly less well known stocks with a good record of paying franked dividends.

Governments or every stripe are capable of doing silly things, most particularly putting their hand in the super jar, but I’d stick my neck out and say neither side of the House would be prepared to get rid of dividend franking. Without a great deal of advance warning, anyway.


Industry funds face spotlight in Royal Commission

Wednesday, December 13, 2017

By Andrew Main

The subsiding of excitement that followed last week’s announcement of the Royal  Commission into banking reminded me a bit of the Amazon launch in Australia that followed not long afterwards.

In both cases, what had been portrayed (by some bankers and most retailers) as the end of civilisation as we know it turned into a slight fizzer.

Some of Amazon’s offerings turned out to be about the same price as goods already available elsewhere and we all realised the US based online retailer had had a massive blast of free publicity but was still just getting itself set up.

The banks probably don’t see their time in the spotlight in quite the same way, but managements of the Big Four will have been greatly reassured to see their share prices climb steadily all through last week.

And that was after they rolled over and agreed to support the Royal Commission.

Meaning, the cold clear light of reality puts a less scary perspective on the 2018 outlook for the banks, than the previous shivers of uncertainty about whether there would, or would not be, a Royal Commission.

I noted last week, seconds before the official announcement, that I think a Commission would be a waste of time and money, and the announcement hasn’t done a lot to change my view.

Since superannuation now represents the biggest single bag of money in Australia at $2.3 trillion, I can very much understand it being part of the Commission’s remit.

But if, as some commentators suggest, Royal Commissioner Ken Hayne is going to look into the issue of whether the industry funds should have more independent directors, that may be the wrong rabbit hole..

Contrary to the campaign that’s mainly coming from the office of Financial Services Minister Kelly O’Dwyer, it isn’t a first order issue.

You probably didn’t even notice in the excitement last week that a bill was pulled which mandated a minimum one third of independent directors on all super fund boards. Nick Xenophon’s crossbench crew said they wouldn’t support it, so it’s been taken off the table until next year.

In a neater world, the Industry funds would be copying the ASX Listing rules and moving towards the concept of an independent chair and a majority of independent directors, but as we all know, life’s seldom that simple.

The industry funds were set up in a bygone age before those ASX rules, operating instead with an equal representation model whereby each industry fund had the same number of employer representatives as union nominated trustees.

That still applies, although the employers have been a lot less noticed in the debate. That’s because they are so damn busy running their companies that most of the focus has been on the union reps. That’s the same reason why the default funds that most new employees find themselves in, are industry and not retail funds. 

And some of those union reps are drones who regard a seat on the board of an industry fund as a just reward for a long career in the union.

Some keep their trustee fees, and some send them on to the union that nominated them.

The drones know very little indeed about superannuation and they love an annual jaunt, with partner, to the relevant conference.

As Sally Patten pointed out in the AFR on Monday, it doesn’t help the industry funds’ cause that some of their funds have more than 10 trustees. She found one, which she was too polite to name, with 16 trustees. That’s more like a crowd scene than a board.

The big BUT in all this is that the industry funds have consistently outperformed the mainly bank-owned retail funds by between one and two per cent a year , and that’s what pushes the proposed legislation down the list of urgent changes required.

The reason for the disparity is not any particular genius on the part of the industry funds so much as the fact that they have a much more “sticky” membership that tends to set then forget about their accounts, often for decades. That means the funds can safely lock themselves into much longer term assets than their retail counterparts, who suffer a much higher level of churn.

There’s one possible benefit coming from all this.

Ken Hayne’s been specifically asked to see if the spending “of superannuation members’ retirement savings for any purpose that does not meet community standards and expectations, or is otherwise not in the best interests of members.”

Like the independent directors issue, that’s still a specific swipe at the Industry funds. At least this time there’s more justification.

That silly $3 million television advertising campaign showing the retail fox eyeing up the industry fund henhouse is a shining example of misallocated funds. All the retail people want is to get equal access to young people starting out with their superannuation, which they don’t currently get because the “modern awards” system drops the new starters into a default industry fund unless they specifically choose otherwise.

And then you ask yourself, why do the big industry funds see the need to advertise on television at all, given that most of their revenue comes through like clockwork from employer contributions into those default funds? It’s the original captive market.

That’s a more relevant question to ask, and the Royal Commission has been led specifically to the top of the rabbit hole marked “sole purpose test”, as in whether expenditure is in the specific interest of financing members’ retirement.

Ken Hayne’s only been given a year to examine a number of aspects of the banking business. It’s fair to say he won’t have time to go really far into every nook and cranny of the system but a simple examination of possible abuses of the Sole Purpose Test would be one of the more useful outcomes of a Royal Commission.


We don't actually need a bank inquiry as we know all that!

Wednesday, November 29, 2017

By Andrew Main
I believe that a Royal Commission into the banks in Australia, or indeed its cousin a Parliamentary Inquiry, would be a significant waste of time and money.
That’s not to say the banks haven’t covered themselves in a dense and odoriferous layer of ordure at different times and for different reasons in recent years. Hence this week’s polls which say a majority of respondents want to see some sort of investigation.
Take your pick of whichever atrocity the banks have managed.
Allegedly rigging the LIBOR rate comes up hot and strong, and the possible culprits worked for a spread of banks, but the CBA probably wins the prize.
How else can you assess the bank’s apparently Nelsonian treatment of some 54,000 alleged breaches of the money laundering laws, thanks to whoever put a $20,000 limit on deposits at those clever new Intelligent Deposit ATMs?
We shouldn’t of course discount the Comminsure scandal, whereby insurance payments to policyholders were withheld because the same bank (but a different division) reportedly adhered to outdated definitions.

My position is that those examples are all indicative of attitudes among bankers that vary between slapdash, brain dead and downright devious, but my key point is that We Know All That.

There is no single thread of villainy or conspiracy tying those issues together. You could argue (and many do) that banks have had a bad culture but a Royal Commission or a Commission of Inquiry, won’t find anything much worse than what we know already. Cock-ups and inept evasions? Yes, they are legion, but conspiracies are much thinner on the ground.

The most noise on this issue is coming from Canberra, where the Government is bleeding and in some disarray and the Opposition and cross benchers are keen to land some blows and what fatter, slow moving target is there than the banking industry? I get the politics, but I don’t see the policy benefit.

Last week we had a leak from Cabinet indicating that Immigration Minister Peter Dutton wanted the Government to back away from their refusal to hold a Royal Commission, because of threats by some Coalition members to cross the floor and vote in favour of an inquiry or a Commission.

Note that most of those rebels are members of the National Party, whose carelessness in vetting candidates’ citizenship is in large part responsible for the shortage of MPs’ votes that is currently dogging the Coalition.

Why do the Nats hate banks? I’d suggest it’s partly because most family owned farms have had no choice but to borrow from the banks over the years, with inevitably mixed results. Listed companies can raise equity but family partnerships can’t do that.

Also, there have been some colossally stupid lending practices. Remember the Foreign Currency Loans (FCLs) of the early 1980s that blew up after 1985 when the dollar sank?  Back then, there was a 10% differential between the 5% the Swiss and Japanese Banks wanted, and the 15% our banks were charging.

Westpac, which went on to nearly go bust in 1991, has the unhappy honour of having the “Westpac Swiss Franc Loans Affair” named after it, but Nationals senator John “Wacka” Williams of Inverell in Northern New South Wales says it was the Commonwealth Bank that facilitated the loan he took out.

The legal issue was that the local banks don’t appear to have explained with enough clarity the forex risk that borrowers were going to be carrying.

And so, when the Swiss currency climbed inexorably, the borrowers were crucified by a jump in the principal repayments that was far bigger than any saving they had made on the interest rate. In 1985 the dollar bought two Swiss francs; two years later it was worth only one. In some cases the principal to be repaid was more than twice the size of the original loan. Many farmers were badly hit, “Wacka” Williams being one of them.

No wonder he’s peeved, and he’s not alone.

But are the fans of a Royal Commission or Inquiry motivated by revenge, populist politics or the desire to create a better system? I fear there’s too much of the first two and only a notional interest in the third.

I can see the merit in Royal Commissions. The HIH Royal Commission in 2002, which I covered extensively, was able to conclude that a lot of incompetence and autocracy at the top of HIH, plus the existence of an industry in disguised loans called “financial reinsurance” purveyed by reinsurers to ailing primary insurers, combined to produce the biggest corporate disaster Australia has ever seen, at $5 billion. We suspected the first two but the financial reinsurance caper was a revelation.

The Royal Commission into Institutional Responses to Child Sexual Abuse will shortly hand down its conclusions that will inevitably and formally blow to smithereens that despicable culture of cover-up, relocation of paedophile priests and supposed defence of reputation amongst senior clergy that has now backfired completely. We knew what was going on, but not the sheer scale of the duplicitous obfuscation that had served the bishops so eerily well for decades.

And now South Australian premier Jay Wetherill is seeking a Royal Commission into water theft by irrigators from the Murray-Darling Basin. That should of course be a national issue but that doesn’t make him wrong.  The dire under-resourcing of inspectors alone in New South Wales justifies some serious action.

But a Royal Commission into the banks? No, we already know all too well what the banks have done wrong, separate silo by separate silo.

And they do too. Their reputations have been trashed to hell and beyond and, while some retail bankers’ learning curves are pretty much flat, the vast majority of them already realise they have a lot of work to do to climb out of the public image hole they have marched themselves into.


Janus Henderson - Bastard child comes good

Wednesday, November 15, 2017

By Andrew Main

An upbeat quarterly result with higher than expected synergies and savings from the May 2017 merger has produced a share price breakout for Janus Henderson, pushing the share price close to $50 after hunting between $40 and $45 since the merger.
It closed yesterday at $48.40 four trading days after the announcement that in the three months to the end of September, its net income jumped by 139% compared to the second quarter, at $US99.5 million versus $US41.7 million.
Before the announcement the stock was just above $45.00.
The group has slipped under the radar slightly, not least because last week’s result came out after local news deadlines and the analyst call was at midnight Australian time to conform to US regulations.
But it deserves attention if only for its legacy of Australian shareholders (in Henderson) that dates from the 1990s when the blue chip London outfit was bought by AMP.
They snapped it up in March 1998 and integrated it, calling it AMP Henderson, and then once AMP’s other wheels started to drop off around 2000, AMP demerged Henderson again and compensated AMP shareholders with shares in Henderson, a City of London fund manager with more reach around the world than AMP itself.
The consequence was that Henderson was something of a bastard child, earning money in the UK and paying dividends (unfranked, alas) to its majority of Australian investors.
In the last 10 to 15 years they did well enough out of HHG, as it was called, particularly by comparison with the deadly dull sharemarket performance of AMP.
HHG dipped to $12.50 in 2009 in the wake of the GFC but ran up thereafter to $63.30 in late November 2015.
The logic of merging with US based Janus seems reasonably compelling, particularly as it’s 57-43% in Henderson’s favour. Not only that, but the absurd circumstance of being mostly owned by Australian retail investors has now been usefully diluted.
The combined group has Australian born Henderson chief executive Andrew Formica as joint CEO with Dick Weil, from Janus. It’s no longer listed in London but simply Australia and the US.
That co-CEO role is a nice touch because the original Janus of Roman mythology was a god with two heads, one looking forward and one looking backwards. It’s not clear which way the new joint CEOs are looking but it’s no bad thing for a fundy to be looking both ways anyway.
The new group revealed that during the quarter it enjoyed net inflows of $700 million Australian, but that pales into insignificance beside the fact that simple performance added $US17.2 billion to the total of funds under management, now
Standing at $US360.5 billion.
The claim that management makes is that 75%, 77% and 87% of assets under management outperformed their benchmarks on a one, three and five year basis.
That is a clear sign that they go better over five years than one, but what sets them apart slightly is that they’re prepared to say they dumped the managers of the $500 million Henderson US Growth Fund after two years of “disappointing relative performance”.
They stated that in the two years to November 10 the fund returned 25% but the relevant US market was up 41% over the same period.
How often do you hear an Australian-based manager admit the same shortcoming?
Digestion of the merger appears to be a bigger than expected cost short term, but producing bigger than expected savings long term.
The net income for the quarter on an adjusted basis, adjusted for acquisition and transaction related costs, actually came in 18% below the previous quarter, at $US114.2 million, compared with $US139.8 million.
Earnings per share went the same way, down 18%, but the longer-term picture looks very encouraging, in savings terms.
The Group has increased expectations from what it calls recurring annual run-rate pre-tax costs synergies to at least $US125 million within three years, which is a lift from previous guidance of slightly over $US110 million.
Some of that is also expected to come from a long standing strategic partnership in the US with French bank BNP Paribas.
Three of the five brokers who follow the stock in Australia have a positive rating on it, with only Credit Suisse and Deutsche Bank having it as Neutral or Hold.
Citi’s upgraded it from Neutral to a Buy with a target of $50.75, which admittedly it’s getting close to already, while Morgan Stanley’s got a more bullish target of $58.50 and maintains a Buy recommendation.
FNArena provided that information but Bell Potter, which it doesn’t include in its survey, is more bullish again with a buy rating and a target of $63 on the stock.
Bell Potter says the combined group is proving the merits of the merger. In addition, closing funds under management were 3.4% ahead of expectations, resulting in a meaningful upgrade to estimates and a recalibration of the growth trajectory.
Credit Suisse, the local Cassandra here, says the results were disappointing because of lower performance fees and higher expenses. A miss on cost estimates reflects a higher cost profile going forward, it notes.  But even Credit Suisse concedes the outlook is more positive, calculating that the upgrade to Janus Henderson’s synergy target will add 2% to next financial year’s earnings per share.
One or other or both of Dick Weil and Andrew Formica noted last week in a statement that “Only five months have passed since the formation of Janus Henderson, yet pleasingly we are seeing green shoots in the cross-revenue opportunities brought about by our global distribution footprint, expanded product set and collaborative culture.”
Sounds like they’re both looking forward. Given what happened when Henderson was in AMP’s clammy maw, that’s probably for the best.
I know a lot of investors are chasing franked dividends but the bigger picture says you must be more globally diversified, and dividends are only franked when Australian tax has been paid.
It’s a fact of life, and you could do a lot worse than own a few Janus Hendersons. After all, you won’t have to listen to a midnight analyst call. They can listen to recordings and give you the benefit of their thoughts just a day later.


What’s Solomon Lew’s game with Myer?

Wednesday, November 01, 2017

By Andrew Main

You can accuse Solomon Lew of all sorts of things but you can’t say he’s boring.
His latest foray sees him doing his best to put a rocket up the management of the Myer group in advance of the annual meeting on November 24.
A month ago he formally sought a copy of the share register, which he is quite entitled to do, although Solly watchers note that he already knows exactly who the biggest holders are.
There’s his Premier Investments with the 10.8% stake for which it paid a comparatively high $101 million back in March, and Anton Tagliaferro’s Investors Mutual with a slightly smaller total, still exceeding 10%.
Anton said recently that his organisation had been buying in “over the last few months” which sounds like careful backfoot buying.
By comparison everyone knows Solly bought his stake in a one day raid in March at $1.15 a share, and on which he has so far copped a paper loss of almost $40 million.
So, does Solly know something the rest of us don’t about the terrific potential for perennial underperformer Myer, or is he yelling because he’s in a jam?
His record suggests he’s a risk taker who loves to scare the establishment but his win-loss record is not exclusively stellar.
Going back into the records, he took a whacking over a play he made in the late 1980s whereby a vehicle called Yannon bought $25 million worth of shares in Premier, using finance and an indemnity provided by Coles Myer Ltd. Coles Myer never disclosed the transaction despite it having lost $18 million on it. The effect of the Yannon deal was to prop up Premier at a time when it was heavily in debt from a foray into the Westfield group
The ASC, as the Australian Securities and Investments Commission (ASIC) was known then, investigated the case and recommended a prosecution but the Commonwealth Director of Public Prosecutions never laid charges, shutting down the investigation in early 2000. So Solly walked away an innocent man, although he had to contribute to a $12 million settlement with Coles Myer.
The washup of that affair meant he stepped down as chairman of Coles Myer and was subsequently compelled by chairman Stan Wallis to step down from the board entirely in 2002.
That doesn’t sound a lot like a win, most particularly in reputational terms.
Financially, he has done well from a number of leverage plays since then.
Between 2004 and 2007 he did very well out of holding a stake in Coles Ltd (as it became in 2006 after Myer was bought by private equity group TPG).
He can claim a bit more glory on that one, as it was he who encouraged the KKR private equity group to bid for Coles.
KKR didn’t get Coles in the end but in April 2007 Solly’s Premier Investments sold its 5.9% stake in Coles Ltd to Wesfarmers for $16.47 a share, collecting a gross profit of $1.14 billion.
That can’t be described as anything but a very good outcome for him.
His other subsequent coup was a very effective piece of greenmailing in relation to a parcel of shares in Country Road in 2014.
Greenmail is an entirely legal practice whereby a shareholder who owns more than 10% in a stock can hold out for the best price. Any less than 10% and the bidder is allowed to move to what’s called compulsory acquisition.
It was a complicated deal whereby South African group Woolworths had to pay Premier $210 million to buy its 11.8% stake in Country Road as part of a takeover bid Woolworths for David Jones, in which he also had a stake.
In other words, he held all the cards and that netted him well over $200 million, entirely legally.
So that’s some recent background. You can rightly conclude that Solly Lew is extremely smart and he loves nothing more than holding a blocking stake in a company that someone else wants to take over.
Which brings us back to Myer now. Solly’s complaining to anyone who will listen that Myer is badly run and that some of its stores are more like an opportunity shop than a top end retailer.
He recently asked in vain for two board seats after forcing chairman Paul McClintock to announce in September that rather than step down in favour of former Spotless chairman Garry Hounsell, as he had planned, he would put himself up for re-election at the November 24 annual meeting.
So this Solly bull is making significant inroads in the Myer china shop.
But, and this is a big but, where’s a bid for Myer going to come from that will justify his massive $101 million outlay on getting his blocking stake in the stock?
He’s muttering about calling an extraordinary meeting to roll some or all of the board, and his rumblings are made all the more valid by the fact that he has huge experience in retail and the board doesn’t.
But he’s already said he has no intention to bid and there’s no one else within cooee who wants to take over Australia’s number two department store group at a time when the entire retailing world has been thrown into uncertainty by the imminent arrival of Amazon.
Bear in mind that much of the sorrow at Myer was caused by the fact that the pre-float owners TPG cut costs out of the business then sold it for the highest price they could, which was a startling $4.10 a share, in 2009. It’s now worth around 77 cents.
Meaning, he might have to work this one the hard way: arm wrestle his way to a position of power on the board and then oh so slowly turn the ship of Myer round to the sort of profitability it enjoyed back in the mists of retailing time.
It’s a very big job and it would be a mistake to see Solly Lew as having a nice full hand of royalty cards ready to play on this one.
At this point, he’s popping on and off stage like a pantomime villain but he’s not doing it because he’s got a clever trick up his sleeve. He’s doing it because he doesn’t have a lot of alternatives.
I wrote back on September 20 when Myer shares were at 70 cents that I couldn’t see how any brokers could put a “buy” on them. Solly’s current campaign has pushed the price up to around 77 cents.
But unless you think he is a retail genius who will be allowed to rescue Myer’s fortunes, or you think there’s a bid coming for Myer from somewhere, it’s still a challenging proposition. I’d still avoid it.


Private health insurance changes - snake oil or miracle cure?

Wednesday, October 18, 2017

By Andrew Main
Health Minister Greg Hunt’s recent moves to make Australia’s private health cover slightly more affordable have had the effect of lifting the bonnet on the system, and what they show is that there’s a mutual reliance between the health insurers and the government that’s something of a tightrope act.
In simple terms, the health insurers will be allowed to discount premiums by 2% for each year by which a person is younger than 30 years old, to a maximum of 10%.
The insurers have all stated that they will pass the savings directly on to clients, which they will have to do anyway to lift membership numbers at the lower end of the age spectrum.

The bonds that bind

This is all about pooling risk of course. But what a lot of people don’t realise is quite how tight the bonds are between the insurers and the government.
Just compare, for a moment, how the general insurers operate in high risk areas like north Queensland. They know very well that coastal communities are at risk of blowing away so they set their premiums accordingly. There are screams and yells from affected communities but effectively the market is working.
Now look at the private health equivalent. Someone in their 50s with a dodgy hip limps in to the insurer and the insurer can’t decline cover. This is clearly a pre-existing condition and the insurer’s only defence is to impose the 12-month waiting period.
The top cover premium might be $5000 a year but at the end of the year the member will be able to go into a private hospital for a hip operation, at a time relatively convenient to them, and have an operation worth somewhere between $20,000 and $40,000 paid for almost totally by the insurer.
That’s an extreme example but that’s what’s happening. The health insurers also have to get their annual premium increases agreed by the government, so it’s not a free for all by any means. As you saw, they even need permission to cut their rates.
The obverse of this situation is that the government has given health insurers a stick to encourage people to take out private health cover, in the shape of the tax surcharge on higher income earners who choose not to take out private health insurance. Singles earning over $90,000 a year or couples earning over $180,000 pay the Medicare Levy Surcharge of between 1 and 1.5% of income if they don’t have private health insurance.
Why? Because the government needs the private health insurers as much as they need the government. Any public hospital doctor or administrator will tell you that without the private hospital industry, the public system would be horribly overloaded and waiting times for elective surgery would be even longer.
The other inescapable reality is that as we all live longer, health spending in Australia and other developed countries is a black hole which no measurable amount of money will ever fill.
That sounds a bit scary but at least the relevant regulators and bureaucrats in Australia understand that, and continue to make sure our private health insurers can survive and hopefully prosper.
Hunt also made it clear that overcharging by the makers of prostheses is going to have to stop, in response to some serious lobbying by a very annoyed private health insurance industry.

Worst case scenario

If you really want to see what can go wrong, look at what’s happening as President Trump fiddles around the edges of Obamacare with the clear intention of having it collapse.
One of his moves last week was to announce that the US government would stop paying subsidies to health insurance companies that help pay out-of-pocket costs of low-income people, a key component of Obamacare.
Most analysts say the move will backfire, increasing health insurance premiums and forcing more people to remain on the lowest safety net system, Medicaid.
Conclusion? Health insurance is one of those systems that’s held together by mutual need between governments and companies and any moves to change it tend to be a bit like pulling out Jenga blocks from a wooden tower.
Trump, meanwhile, is starting to kick the tower on the deluded basis that his new plan will be better than Obamacare. Congress thinks otherwise.
Back in Australia, Greg Hunt’s move has been well received but analysts don’t expect any dramatic lift in takeup of private health insurance by the under-30s.
The general view is that it won’t cut their premiums by even a dollar a week and Morgan Stanley analyst Daniel Toohey calculated that even if the 20 to 30 years old age bracket lifted their participation to the 30-to-40 year old level, it would boost the customer base by a relatively modest 4%.
That said, it’s an incremental business. Net growth in membership among the industry last year was a mere 0.9% and a tightly run health insurer such as Newcastle-based nib makes a pre-tax profit of only 5 or 6% of premium income.  
The news did help the share price of nib and the other listed health insurer Medibank.
Medibank shares enjoyed a 5 cent rise on Thursday, the day of the announcement, to $3.04 and a further lift to the $3.10 level on Friday, where it also closed at on Monday.
Nib did a little better, climbing 11 cents on the announcement to $6.01 and then lifting again on Friday to $6.07, and lifting further on Monday to $6.17.
Call it a good reception and a small rise, followed by a minor rethink on how hard it will be to make a big difference.
That share price reaction does show the market is working. The health insurers are this week in a slightly stronger position than they were before, but the hard work of increasing membership is still ahead of them.
Greg Hunt’s changes aren’t a miracle cure for the insurers but they are a useful tweak and they show the government is listening.



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