The Experts

Rickard_150x143_normal
Paul Rickard
+ About Paul Rickard

Paul Rickard has more than 25 years’ experience in financial services and banking, including 20 years with the Commonwealth Bank Group in senior leadership roles. Paul was the founding Managing Director and CEO of CommSec, and was named Australian ‘Stockbroker of the Year’ in 2005.

In 2012, Paul teamed up with Peter Switzer to launch the Switzer Super Report, a newsletter and website for the trustees of SMSFs. A regular commentator in the media, investment advisor and company director, he is also a Non-Executive Director of Tyro Payments Ltd and Property Exchange Australia Ltd.

Follow Paul on Twitter @PaulRickard17

A B-grade Budget

Thursday, June 22, 2017

By Paul Rickard

Labelling a budget that forecasts a surplus of $2.7bn and an average of $2.0bn over each of the next four years as “B Grade” is a tough call. But once the hype about the extra spending on infrastructure fades, the NSW Budget handed down on Tuesday will go down as a missed opportunity.

A little like the last term of the Howard/Costello government from 2004 to 2007, which is now judged by many to be both “wasted” and “wasteful” and led to middle class spending initiatives such as the baby bonus, the Berejiklian Government is following the same playbook. More than six years into office and facing an election in March 2019, Gladys and her team are putting electoral cycle considerations ahead of planning for the long-term challenges that NSW faces. The introduction of an ’active kids rebate’, which pays families $100 for each child who enrolls in sport or swimming lessons, is the classic example of mindless, short-term populism. 

NSW Premier Gladys Berejiklian. Source: AAP

This is not to say that the Liberal Government hasn’t already done a lot of heavy lifting. It has, and through the combined efforts of O’Farrell/Baird/Berejiklian, has run the most fiscally responsible strategy of any of the states. But NSW’s ongoing good fortune depends very much on the housing boom and employment growth, and it can’t afford to rest on its laurels.

As the biggest state and accounting for more than a third of the nation’s economic output, the health of the NSW economy is vital to the nation’s well-being. Moreover, because the states play follow the leader, where NSW goes, others will follow. 

So, missed opportunities need to be called out, risks highlighted, and Governments encouraged to focus on the long-term challenges.

A river of gold from stamp duty drives budget surpluses

The NSW budget forecasts a surplus of $2.7bn in FY17/18, down from the expected $4.47bn projected for the current year ending next Friday, but up $1.37bn from the estimate in last year’s budget. And this comes despite an increase in expenses of 5.0%, as the Government hires more front-line staff such as nurses and allied health professionals, cuts stamp duty for first home owners and implements new programs such as the active kids rebate.

NSW Budget - Key Outcomes

Headline revenue growth of 2.4% in 17/18 masks a largely unchanged GST and Commonwealth grants revenue, and is underpinned by taxation revenue, chiefly stamp duty and payroll tax, increasing by 3.7%. In fact, over the forward estimates, GST revenue is expected to fall in nominal terms to be only $31.6bn in 2020/21.

To make up this slack, taxation revenue grows at a compound rate of 4.0% pa over this period. Payroll tax increases at a compound rate of 4.8% pa, land tax at 7.6% pa and transfer duty on properties and land (stamp duty) by 2.8%. And this is despite the new stamp duty concessions for first-home buyers, a slowing home market and a record take in 2016/17 of $9.6bn (projected), up some 10.6% on the amount collected in 2015/16.

In fact, NSW’s surplus for 16/17 of $4.47bn, which compares to the original budget forecast of $3.71bn, is largely due to higher stamp duty receipts - the river of gold from a booming property market.     

NSW - Revenue Sources

Not only has NSW been enjoying a booming property market, economic output (as measured by real gross state product) has been rising at a faster rate than the rest of the nation. This has been supported by population growth of 1.5% pa and the nation’s lowest unemployment rate of just 4.8% (May, seasonally adjusted).

The good news, according to the Budget, is that the good times are set to continue. As shown in the table below, real gross state product is expected to increase by around 2.75% to 3.0% pa over the forecast period, the unemployment rate is forecast to stay at, or below, 5.0%, wages growth should start to pick up and drive an increase in payroll tax and immigration will continue to lead to population growth of 1.5% pa.

NSW - Key Economic Forecasts 

Risks

Expecting the rosy economic outlook to continue and potentially improve, and the river of gold to keep flowing, are interesting assumptions. Not without foundation, but also not without considerable risk.

The NSW Budget statement summarises the risks as follows: 

“While the risks to the economic outlook appear broadly balanced, uncertainties remain, particularly around the housing market and wages growth. The largest risk to the forecasts, both to the upside and the downside, is the outlook for the housing market given its highly cyclical nature and large flow-on effects. A significant slowdown in dwelling approvals could see the pipeline exhausted and activity decline by more than expected in 2018-19. Higher than expected interest rates or a sharp decline in dwelling prices could also bring an end to the cycle. On the upside, strong population growth or supportive government policies could boost demand and drive higher-than-expected activity.”

What NSW should be doing

Many observers would suggest that the risk of a slowing housing market, including dwelling approvals, is real and very likely. Further, if interest rates in Australia rise, which is probable in the medium term given the move by the US Federal Reserve Bank to raise US rates, mortgage stress could cause a sharp decline in dwelling prices. Further, unemployment could well be on the rise.

A prudent “A” grade Government would be planning for this very real scenario. Rather than waste money on non-mean tested middle-class welfare like the active kids rebate, or however well intentioned, hire an additional 4,500 health professionals, 1,000 teachers and other recurrent spending initiatives, the Government should be far more focused on supporting an environment for businesses to invest, prosper, and employ. The obvious thing to address is payroll tax - that insidious tax on jobs. 

Ensuring that NSW has the lowest rate of payroll tax, and potentially even abolishing it altogether, would be a strategy to deliver NSW a competitive advantage over the other states, promote employment growth and investment, and in an economic downturn, assist business. That’s what the river of gold should be applied to.  

This budget is a missed opportunity. A bare pass with a “B”.

| More

 

Pressure on BHP builds

Thursday, June 15, 2017

By Paul Rickard

In the next few days, BHP is expected to announce the appointment of a new chairman to take over from Jac Nasser. For many investors, this transition can’t come soon enough because Nasser has presided over some of the most value-destructive acquisitions in BHP history. He also championed the hopelessly flawed progressive dividend policy - now since abandoned.

Ken MacKenzie, the former Amcor CEO (and no relation to BHP CEO, Andrew Mackenzie) is emerging as the favourite. Other candidates are said to include ex-KPMG head and chairman of Westpac and Transurban, Lindsay Maxsted and the former CEO and now chairman of Orica, Malcolm Broomhead.

MacKenzie is the cleanskin on the Board, having joined it last September. Broomhead has been on the Board since March 2010, while Maxsted joined in March 2011. Both are somewhat tainted with BHP’s disastrous US shale oil acquisitions (which occurred in February and August 2011), and the progressive dividend policy that misled so many shareholders.

Shareholder activist Elliott Associates will also welcome the announcement of a new chairman, as this may open up the lines of communication between the Board and a growing band of aggrieved shareholders. Interestingly, Elliott issued another press release yesterday, calling on the new chairman to “address the company’s poor capital allocation and underperformance, nominate diverse and qualified directors, and review the executive management team”.

Elliott cited the support their campaign has achieved from shareholders, including AMP Capital (one of BHP’s largest shareholders), which in a note to investors called on BHP to conduct an “independent assessment” of Elliott’s proposal and “to prove the worth of its US onshore (oil) business and why it is compatible in the BHP portfolio”. 

Other investors cited by Elliott include Schroders Investment Management, Tribeca Global Natural Resources, Aberdeen Asset Management and BT Investment Management.

The Elliott proposal 

Elliott’s open letter to the BHP Board on 16 May and the accompanying presentation is available here. It starts by outlining BHP’s chronic share price underperformance, which is detailed in the table below. This shows that compared to a broad range of comparators (Rio Tinto, comparable portfolio, comparable pure-play mining portfolio, ASX 200, etc.), it has underperformed over pretty well every time period. For example, over the last eight years, BHP’s total shareholder return is only 46% of Rio’s.  

BHP total shareholder return relative to comparable peers

Graphically, this is represented by the following chart which shows total shareholder return since 2008 using a common base, with BHP in brown, Rio in black and the comparable portfolio in grey.

BHP total shareholder return vs Rio vs comparable portfolio, 2008 to 2017

In regard to BHP’s Achilles heel, its onshore US petroleum, Elliott says that BHP has “destroyed” US$22.7bn or 78% of its value. A total investment of US$29.1bn through US$19.9bn of acquisition costs and US$9.4bn of negative cashflow is now worth around US$6.5bn on consensus broker estimates.

US onshore petroleum - value destruction

According to Elliott, BHP is not the right custodian of the US onshore assets, petroleum offers no real operational synergies or risk diversification, BHP does not operate the vast majority of its petroleum assets and the value of these assets is obscured. Elliott concludes that “the intrinsic value of BHP’s US petroleum business is obscured by bundling it with BHP’s other assets within an overly complex group structure while managed from a great distance, with insufficient focus”.

Elliott proposes that the value of the US petroleum business should be unlocked via a full or partial demerger. They cite the demerger of South32 as clear precedent for success, noting that South32 has outperformed BHP by 47% since the demerger. They say that “a more nimble and focused independent petroleum business, with a more disciplined approach to capital management, would have avoided significantly overpaying for BHP’s US onshore portfolio.”

In regards to capital returns, Elliott says that there is strong shareholder support for BHP to return excess capital to shareholders. This won’t disrupt the balance sheet or put future growth at risk, will help ensure disciplined and optimal capital allocation, and will stop excess capital being wasted on value-destructive acquisitions and other pet projects. They say that there is a very strong case for regular buybacks, arguing that BHP needs to lift its game on buybacks as its track record has been “abysmal” (it has done these infrequently, and paid way too much relative to book value when it has).

They continue to push for a single unified entity (rather than two separate companies listed on different exchanges), and accept that this new entity would be headquartered in Australia, be an Australian tax resident, and have its primary listing on the ASX. A secondary listing would be in the UK. 

They refute BHP’s counter claim that this would cost US$1.3bn to implement, saying that the costs should only be around US$200m. The benefits of unification are less clear, however. Elliott contends (though doesn’t substantiate) that it will enhance BHP’s market value by US$5bn. They say that BHP will be able to monetise franking credits more quickly and more efficiently (current reserve US$9.8bn), and that having a single unified structure and share capital will give BHP an “acquisition currency” (other than cash) that could be used in future acquisitions.

Bottom line

Elliott and the BHP Board may not be ready yet to sit down and smoke the peace pipe, but because BHP has such a lousy record and Elliott shows no signs of going away, BHP will inevitably cede major ground on this proposal. A new chairman will make this easier. The US petroleum assets will either be put up for sale or demerged, and expect BHP to be far more focused on returning excess capital through off market buybacks.

| More

 

Wesfarmers under pressure

Thursday, June 08, 2017

By Paul Rickard

Investor strategy days are designed to show off a company’s strengths and the capabilities of the management team. The hoped for outcome is that investors and analysts go away a little more comfortable, and in due course, consider whether an upgrade is warranted. You certainly don’t want the immediate reaction to be a “sell”.

Yesterday, Wesfarmers held its annual Strategy Briefing Day. The shares, in an otherwise quiet market, fell by 2.85% to close at $40.23. So by this measure, Wesfarmers failed the test.

And this sell down comes after Wesfarmers has been subject to downgrades from analysts and bearish comments from several experts. Writing in the Switzer Super Report two weeks ago, Charlie Aitken suggested that investors go “short” on Wesfarmers. While he is bearish on all Australian discretionary retailers and retail landlords, he cited these five specific reasons in relation to Wesfarmers:

  • He views Wesfarmers as a listed “private equity group”. Due to the unprecedented inflow of funds into private equity, Wesfarmers isn’t that big on a global scale and he argues that it will struggle to compete with the global private equity giants;
  • Secondly, long standing CEO Richard Goyder is leaving;
  • The competitive pressures from Amazon and others confronting all of Wesfarmers' consumer businesses - Coles, Target, Kmart, Officeworks and Bunnings. With Bunnings, he argues that it is “as good as it gets” right now with peak cycle earnings, as new home construction has peaked and house prices are starting to soften;
  • Concerns about Wesfarmers' acquisition of 500 Homebase stores in the UK and just how smoothly the re-branding will go; and
  • From a technical perspective, the share price looks “precarious”, with a move through the 50, 100 and 200 day moving averages now confirmed.   

Last week, Morgan Stanley downgraded its rating for Wesfarmers from equal-weight to under-weight, and slashed its price target from $41.00 to $36.00.

The “good” according to Wesfarmers

At the Strategy Day, Wesfarmers CEO Richard Goyder argued that Wesfarmers was in reasonable shape. He made these points to support his case:

  • The conglomerate model, and Wesfarmers' disciplined approach to capital allocation, has produced superior long-term returns for investors. He produced the chart below, which shows that over the 32-and-a-half years to May 2017, Wesfarmers has delivered a return to shareholders of 19.3% pa, outperforming the broader market (as measured by the All Ordinaries accumulation return of 10.8% pa) by a staggering 8.3% pa; 

 

 

  • There was a smooth transition in place for the senior leadership roles involving experienced, internal executives. Rob Scott is succeeding Richard Goyder as CEO, Anthony Gianotti is taking over from Terry Bowen as CFO;
  • The strength of Wesfarmers' balance sheet, with net capex of $1.1bn to $1.2bn in FY17 (mainly on new stores and store refurbishments); 
  • Interest costs are falling;
  • The plan to transform the 500 Homebase stores in the UK into the Bunnings warehouse format (but with key local elements) is making sound progress, with four pilot stores open by June 30; 
  • The investment in Coles to deliver a better customer offer (service and price) with ‘simplicity’, the enabler was necessary in the current environment, and was the right call for the long term; 
  • The “hardware” market (Bunnings) has evolved from traditional hardware to home improvement to now home improvement and outdoor living, and this gives Bunnings “lots of runway” to grow.

The “not so good”

Against these positives, Wesfarmers warned:

  • That the investment in the “customer offer” at Coles (lower prices) had increased noticeably in 3Q17 (March quarter) and 4Q17 (June quarter) relative to the second quarter. Wesfarmers reported that the “vast majority of the 1H17 underlying EBIT decline of $64m was attributable to the second quarter investment”;
  • Target is a basket case. Wesfarmers' timeline has another two years to “fix”, two years thereafter to “reset”, and “growth” from FY21;
  • Officeworks is experiencing ”variable trading conditions”; and
  • In the resources portfolio, Curragh’s export metallurgical coal sales in FY17 is expected to be at the lower end of guided range of 8.0 to 8.5mtpa, while the Stanwell (40% owned by Wesfarmers) export rebate obligations will be significantly higher in FY18 (due to lag effect from higher coal prices).

Unfortunately for Wesfarmers, the negatives outweigh the positives.

The Brokers

Prior to yesterday’s Strategy Day, the major brokers were largely negative on Wesfarmers with (according to FNArena) one buy, four neutrals and three sells. The consensus target price was $41.87.

The brokers had Wesfarmers trading on a multiple of 15.5 times FY17 earnings, but with almost negligible earnings growth forecast for FY18, a multiple of 15.3 times FY18 earnings. The forecast dividend yield was an attractive fully-franked 5.4% for FY17 and 5.5% for FY18.

Following the Strategy Day, there is a good chance that analysts will make small cuts to earnings forecasts, marginally increasing the earnings multiples and marginally reducing the forecast dividend yield. 

Bottom Line

Wesfarmers is trading on a much lower multiple than Woolworths (15.3 times for the former for FY18 vs 20.9 times for Woolworths). However, Woolworths is seen as a recovery stock, has the momentum in the sales war with Coles, and it is now a cleaner business. 

The problem for Wesfarmers is that, given the reaction to the Investor Strategy Day, they will now be challenged to provide any new information that may lead to an upgrade. If the August full-year profit result was going to be a cracker, there would have been a more definitive hint in the briefing. It sounds like that the result is not going to be a disaster, but probably a little soft.

So, while I still prefer Wesfarmers and am happy to back a proven track record, my sense is that the stock is going to wallow. Buyers have time on their side and can afford to be patient. 

| More

 

6.5% yield and long leases to government corporations

Thursday, June 01, 2017

By Paul Rickard

The listed property trust sector has been one of the best performing sectors on the ASX over the last few years. For the three years to 31 May, it has returned 15.09% pa (distributions plus capital growth), compared to the overall market’s 6.03% pa. So far in 2017, it has been largely flat with a return of 1.20%, with distribution yields offsetting a mild pullback in unit prices. The major listed property office trusts such as GPT or Dexus continue to be well bid, with forecast distribution yields starting with a big figure of “4”. The search for yield continues.

An alternative to investing in listed property trusts is through an unlisted trust. Typically, these pay higher yields than listed trusts, are either single asset or own a less diversified mix of property assets and are smaller in size. The trade off, of course, is that there is no liquidity, so investors typically agree a timeframe for the fund with the aim of selling the assets and winding up the fund around this time to provide an exit path. 

There are several property managers who develop unlisted property funds, including Charter Hall and Centuria. One of the latest unlisted funds is the Centuria Sandgate Road Fund.

Centuria Sandgate Road Fund

The Centuria Sandgate Road Fund is acquiring 1231 Sandgate Road, Nundah, a modern A-grade office building in Brisbane’s northern suburbs.

Built in 2012, the seven-floor office building comprises large floor plates of 1,557 sqm to 2,150 sqm, 144 car spaces, and a total net lettable area of 12,980 sqm. It is located on Sandgate Road at Nundah, adjacent to the Nundah train station and Nundah Village shopping centre. The Nundah metropolitan area is an eight minute drive to Brisbane Airport, 16 minute drive to the CBD and eight minute trip by train to the CBD.

1231 Sandgate Road, Nundah Qld

The building is fully let, with a weighted average lease expiry (WALE) of 9.4 years. Queensland State Government owned corporations (Energex and Powerlink) are responsible for 80.9% of the rent, with the balance of 11.5% from a gymnasium and 7.6% from seven retail tenancies. Rents increase by average at a fixed rate of 3.5% pa.

Asset Stacking Plan

The purchase price for the building of $106.25m represents an implied capitalisation rate of 6.66%.

Fund Metrics

With stamp duty and other costs, the total transaction cost is just over $116.6m. $68.9m is being raised by the issue of 68.9m $1.00 units in the Fund to investors, and $47.8m through a debt facility. The debt facility will be fixed for five years at an interest rate of 3.9%. Based on an independent valuation of the property, the Fund will have an initial loan to valuation ratio (LVR) of 44.3%, and an initial net tangible asset value (NTA) per unit of $0.90. 

For unitholders, Centuria forecasts the following distributions:

Distributions will be paid monthly to unitholders. They are also expected to be tax advantaged to the extent that they will be 85% tax deferred in 17/18 and 70% tax deferred in 18/19. (Tax deferred income is not assessable for income tax, but does reduce the cost base for CGT purposes).

Investment Rational 

In addition to the property’s stable long-term income and long WALE underpinned by government owned tenants, Centuria sees upside for the Nundah precinct as well as an improvement in Brisbane’s office market fundamentals.

Nundah is in Brisbane’s north, strategically located close to the airport and the Brisbane CBD. It is a thriving metropolitan area for office workers and residents, with superior road and rail connectivity and strong retail amenity. Accordingly, quality office accommodation like Sandgate Road stacks up favourably to the other northern metropolitan office markets of Chermside, Hamilton or the airport itself.

Centuria says that the outlook for the Brisbane office market is improving, driven by a growing Queensland economy, limited supply of new stock and a decline in the forecast office vacancy rate.

Brisbane Office Supply

Further, as a modern A grade building with a high 4.5 star NABERS energy rating, minimal capital expenditure is required.

Fund Term and Manager

The Fund has an initial term of six years. Investors can vote to extend this by a further year, but after seven years, it can only be extended by a unanimous resolution of all investors. 

The Manager, Centuria Property Funds Limited, is incentivised to maximise returns for unitholders by potentially earning a performance fee of 20% of any excess return over an internal rate of return of 10% to unitholders (in cash). The Manager is also entitled to a base management fee of 0.80% pa of the gross asset value and a disposal fee of 1.0% of the sale price.

My view

With a long WALE and strong tenant mix, the forecast distribution yield of 6.5% rising to 7.0% is attractive. Longer term capital growth will largely be dependent on the attractiveness of the Nundah precinct and tightening in the Brisbane office market. While the initial LVR of 44.3% is a little on the high side, investors should note that the interest rate on the debt facility is fixed for five years and that the forecast interest cover ratio of 3.5 times is comfortably above the facility’s covenant of 2.0 times. 

Like all unlisted trusts, it is an illiquid investment. There is no liquidity. The minimum investment is $50,000, and as there is no cooling off period, potential investors should read and consider the Product Disclosure Statement very carefully. This is available from Centuria at www.centuria.com.au. The offer is scheduled to close on 23 June. 

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

| More

 

Product Road Test – Contango Global Growth

Friday, May 26, 2017

By Paul Rickard

The arguments for investing offshore are well known. Firstly, the Australian market is small – less than 2% of global stock markets by capitalisation. This means that 98% of opportunities are outside Australia.

Secondly, our market is dominated by financial and resources stocks. The financials sector makes up 39.2% of the Australian market, compared to 14.1% in the USA. For materials, it is 15.5% compared to 2.9%. Conversely, information technology stocks make up 22.5% of the US market compared to a trifling 1.2% in Australia. Our market simply doesn’t have the Apples, Alphabets, Amazons, Microsofts or Facebooks, or in the healthcare sector, pharmaceutical giants like Pfizer, or industrial giants like General Electric.

Thirdly, international share markets will often outperform the Australian market. While this can be true over any short term period, it is also true over a longer period. The following graph from the RBA shows the Australian (black), US (red) and World (developed markets, blue) over a 22 year period, using a common base and logarithmic scale.  Over this longer period, the US market has outperformed the Australian market.

screen-shot-2017-05-08-at-09-16-11

Yet, Australian investors remain “underweight” offshore investments.

So, a new IPO for an ASX listed investment company that offers easy access to a portfolio of global stocks managed by a very successful US fund manager should be a proposition worth considering.

But, before we road test the product, some very important disclosures. Firstly, I am a Non-Executive Director of the new listed investment company, Contango Global Growth Limited. My colleague, Mr Marty Switzer, is also a Director. Secondly, Switzer Financial Group will earn a broker firm selling fee of 1.5% of the value of successful applications lodged through us.

Contango Global Growth Limited

An ASX listed investment company, Contango Global Growth Ltd (CQG) provides investors with access to an actively managed portfolio of global equities. A high conviction portfolio, it will typically comprise 20 to 40 global growth companies.

Via an initial public offer, the Company is seeking to raise up to $330m via the offer of 300m shares priced at $1.10.

The Manager

The Company has appointed Contango International Management Pty Ltd (a wholly owned subsidiary of Contango Asset Management – ASX:CGA) to provide investment and portfolio management services. Contango Asset Management is led by George Boubouras, and manages two listed investment companies (Contango Microcap – ASX:CTN and Contango lncome Generator- ASX:CIE), as well as several wholesale equity mandates.

A specialist global equity manager, WCM Investment Management, will advise Contango and manage the portfolio. Established in 1976, WCM has a long term track record of successfully managing global equities. Privately owned by its active employees and based in Laguna Beach California, WCM has over A$23bn in funds under management. WCM is headed by Paul Black and Kurt Winrich.

The Investment Strategy

The portfolio targets quality global growth businesses with high returns on invested capital, superior growth prospects and low debt. It also requires each company to maintain a durable and growing competitive advantage, or ‘economic moat’.

Typically, this will be between 20 and 40 securities that WCM considers to have the highest expected returns and are reasonably valued. The Company is expected to be largely fully invested in equities, but may hold cash of up to 7.0% of the portfolio’s value.

The aim is to provide returns (before fees, costs and taxes) that exceed the benchmark, the MSCI All Country World ex-Australia Index, by more than 3% p.a. over rolling three-year time periods, but with lower volatility than the benchmark.

WCM will employ an investment strategy that is based on their ‘Quality Global Growth’ strategy, which has been in existence since March 2008. The differences will be the exclusion of any Australian securities, and other investment guidelines determined by Contango.

The Quality Global Growth strategy has been very successful. The following chart shows the growth of $10,000 invested in the strategy from March 2008 to March 2017, compared to the benchmark index, the MSCI All Country World ex-Australia. Assuming distributions are re-invested, $10,000 in the strategy (before fees) would be worth $29,568 compared to a theoretical $18,869 from the index.

screen-shot-2017-05-08-at-09-17-38

Moreover, the performance has been pretty consistent, with the strategy beating the index over most time periods.

The strategy has also been effective at reducing the impact of market and stock downturns. While it has captured marginally more of the upside, WCM’s Quality Global Growth Strategy has only captured 55% of the downsides over this nine year period.

screen-shot-2017-05-08-at-09-19-04

Exposure to developed markets for the portfolio is set at 65% to 100%, while exposure to developing markets in in the range of 0% to 35%. As at 31 March, the Quality Global Growth Strategy had 16% in developing markets. 57% was in the USA, as per the following chart.

screen-shot-2017-05-08-at-09-19-36

The top 10 holdings at 31 March were as follows:

screen-shot-2017-05-08-at-09-20-27
*Source: WCM, Quality Global Growth representative portfolio. March 2017.

Option

Investors in the IPO will receive one option for every share subscribed (1,000 shares will be accompanied by 1,000 options). The option allows holders to subscribe for an additional share at a price of $1.10 per share, and can be exercised at any time up until 24 June 2019.

The options will be separately quoted on the ASX, and will trade under stock code CQGO.

Fees

The Manager will earn a base fee of 1.25% plus GST. This includes the fee paid to WCM. There is also a performance fee (which will be paid in full to WCM) of 10% plus GST of the portfolio’s outperformance relative to the benchmark. This is capped at 0.75% of the portfolio’s value, and subject to recoup of any prior period underperformance.

As a listed investment company, there will also be other operational costs, including custody, registry, audit and directors’ fees. If the offer raises $330m, these are estimated to be 0.4% pa.

Risks

This has the usual risks for an offshore investment. The portfolio won’t be hedged, so investors will be exposed to movements in the value of the Australian dollar.

As an active growth portfolio, dependence on the skill and expertise of the Manager is high. It is also an investment utilizing a listed investment company structure. These and other risks are described in considerable detail in the Prospectus.

The suggested investment timeframe is for a minimum of five years.

IPO time table

The offer is expected to close on Thursday 8 June. The minimum investment is 2,000 shares at $1.10 per share, or $2,200.

Trading on the ASX is expected to commence on Friday 23 June, under stock code CQG.

The proforma NAV (net asset value) is $1.076 if $330m is raised, down to $1.067 if $55m is raised.

Our view

Apart from all the very sound reasons to invest offshore, investing in Contango Global Growth is essentially about backing an investment adviser (WCM) with an outstanding track record.

As it is a fairly narrow portfolio of 20 to 40 global stocks, there is a high dependence on the expertise of the investment management team. Hence, it is unlikely that Contango Global Growth would be your only offshore investment, or if it is, you should aim to diversify across managers.

If you are interested in considering this investment, please review carefully the Prospectus, which is available here.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

| More

 

Banks need to stop whinging and move on!

Thursday, May 25, 2017

By Paul Rickard

Australians don’t like whingers, and if you’re a bank, even less so! Their whinging over the new Bank levy needs to stop. They should recognise that they are doing more harm than good to their “cause”, and move on.

I say “cause” because they really don’t have one. The levy is supported by the public, it is not going to cost that much, and the major banks are the beneficiaries of implicit government support. There is a sound argument that Banks should pay for this.

Governments signalling out industries for specific taxes could be viewed as a dangerous precedent. Also dangerous is the precedent of a government taxing specific companies within the same industry on a different basis. And of course, once you have a tax in place, the temptation to increase the rate of tax becomes very strong.

While these are valid concerns, Governments of all political persuasions spend taxpayer dollars to support, foster and prop-up specific industries. They also prop up specific companies, particularly large employers. Look at the money splashed out on keeping Ford and General Motors Holden alive, or on steelmaker Arrium in SA or cannery SPC Ardmona. Size matters - the “too big to fail” mantra applies to many companies outside banking.

But “too big to fail” applies particularly to our major banks. This was rammed home on Monday when ratings agency S&P downgraded 23 Australian financial institutions including Bank of Queensland (BOQ) and Bendigo and Adelaide Bank. Citing “an increased risk of a sharp correction in property prices and, if that were to occur, a significant rise in credit losses”, S&P cut the rating of BOQ and Bendigo from A- to BBB+, some four notches below the major banks.

While the major banks also suffered a one notch downgrade on their stand-alone credit profile (SACP), S&P explicitly increased their “sovereign support” measure from two notches to three notches, meaning that the major banks were able to retain their AA- long term credit ratings. S&P said: ‘we are affirming our issuer credit ratings on the four major banks reflecting our expectation of likely timely financial support from the Australian government, if needed, which in our view offsets the deterioration in these banks SACPs”.

“Too big to fail” is now worth three notches for the major banks, according to S&P. This is a huge funding advantage for the major banks when accessing wholesale markets, which if translated into the cost of funds, is worth a lot more than the six basis points (0.06%) levy.

Why shouldn’t the major banks pay for the implicit government support?

The levy won’t cost that much  

According to the banks’ own estimates, the levy is not going to cost that much. Each bank has provided a pre-tax and post-tax estimate, assuming that none of the levy is passed onto customers. For Commonwealth Bank, the impact on after tax profits is around 2.4%. For NAB, the impact is around 3.7%, as the following table shows:

If dividends fall in line with the reduction in profits and payout ratios are maintained, then this would mean potential dividend cuts for shareholders of around 5c to 10c per share.

One bank implied that the full post tax cost could be applied to the dividend, conveniently forgetting to mention that banks don’t payout 100% of profits. Typically, Australian banks have a payout ratio around 75%.

A better strategy

Of course, the impact to profit and dividends assumes that none of the cost of the levy will be passed onto borrowers in the form of higher interest rates, to depositors in lower interest rates, and to other customers with higher fees. A most unlikely scenario.

But the louder the banks scream, the more Government feels compelled to involve the ACCC and other regulators to “monitor the banks behavior”, making it more difficult to pass on the costs.

A smarter strategy might have been to simply lick their wounds and move on.

The banks’ arguments don’t stack up 

Two banks have written open letters to their shareholders this week. They say its “poor public policy” or “bad public policy”, but don’t say why or provide any reasons. They don’t address the issue of the implicit government support.

One bank argues that the levy is “inefficient”, despite the fact that only five taxpayers are paying $6.2bn over four years and it can be assessed by a relatively straightforward calculation to the balance sheet. The banks also argue that foreign banks should pay. This point has merit, but just because someone else doesn’t pay doesn’t mean that you shouldn’t. At the end of the day, the foreign banks only provide limited competition to the majors in the Australian market.

Interestingly, Macquarie Bank, the fifth of the banks impacted by the levy, has chosen to keep absolutely quiet. 

Time to move on

The Government can’t back down on this, and the public doesn’t want them to. The banks’ arguments against the levy lack substance, and while they are entitled to feel a little aggrieved about the lack of consultation, it was never a realistic option for the Government to consult prior to the Budget night announcement.

The two banks who sent letters invited shareholders to share their perspective and how “we can represent you”. I am a shareholder in both banks, here is mine:  

“The community supports the bank levy. This is a fight that you can’t win.

Please focus on growing revenue, reducing your cost base and improving shareholder returns.

Time to move on”.

| More

 

Fixing BHP

Thursday, May 18, 2017

By Paul Rickard

It is somewhat ironic that in the week that BHP launched a $10m TV advertising campaign themed “Think Big”, activist shareholder Elliott Funds fired another salvo at the BHP Board and renamed its campaign from “Value Unlock Plan for BHP” to the simpler, “Fixing BHP”.

And BHP is certainly in need of some fixing. This is the same company that destroyed billions of dollars of shareholder wealth by buying assets at the top of the cycle, invested on the basis of its own ridiculously optimistic forecasts on commodity prices, and misled shareholders with a hopelessly flawed progressive dividend policy. It was way too quick to dismiss Elliott’s plan when first tabled in April (see my article here).

Elliott’s original plan had some problems. In particular, the suggestion that BHP move its primary listing to the UK. Treasurer Scott Morrison blocked the idea, reminding shareholders that there were a number of approval conditions relating to BHP’s merger with Billiton in 2001 that had to be honoured. But the substantive points of the proposal, that BHP should consider a sale or demerger of its US petroleum business and a renewed focus on capital returns, remain.

Elliott’s letter to the BHP Board on Tuesday and the accompanying presentation is available here. It starts by outlining BHP’s chronic share price underperformance, which is detailed in the table below. This shows that compared to a broad range of comparators (Rio Tinto, comparable portfolio, comparable pure-play mining portfolio, ASX 200, etc) it has underperformed over pretty well every time period. For example, over the last eight years, its total shareholder return is only 46% of Rio’s.  

BHP Total Shareholder Return Relative to Comparable Peers

Graphically, this is represented by the following chart, which shows total shareholder return since 2008 using a common base, with BHP in brown, Rio in black and the comparable portfolio in grey .

BHP Total Shareholder Return vs Rio vs Comparable Portfolio, 2008 to 2017

In regard to BHP’s Achilles heel, its onshore US petroleum, Elliott says that BHP has “destroyed” US$22.7bn or 78% of its value. A total investment of US$29.1bn through US$19.9bn of acquisition costs, and US$9.4bn of negative cashflow, is now worth around US$6.5bn on consensus broker estimates.

US Onshore Petroleum - Value Destruction

According to Elliott, BHP is not the right custodian of the US onshore assets, petroleum offers no real operational synergies or risk diversification, BHP does not operate the vast majority of its petroleum assets and the value of these assets is obscured. Elliott concludes that “the intrinsic value of BHP’s US petroleum business is obscured by bundling it with BHP’s other assets within an overly complex group structure while managed from a great distance, with insufficient focus”.

Elliott proposes that the value of the US petroleum business should be unlocked via a full or partial demerger. They cite the demerger of South32 as clear precedent for success, noting that South32 has outperformed BHP by 47% since the demerger. They say that “a more nimble and focused independent petroleum business, with a more disciplined approach to capital management, would have avoided significantly overpaying for BHP’s US onshore portfolio.”

In regards to capital returns, Elliott says that there is strong shareholder support for BHP to return excess capital to shareholders. This won’t disrupt the balance sheet or put future growth at risk, will help ensure disciplined and optimal capital allocation, and will stop excess capital being wasted on value-destructive acquisitions and other pet projects. They say that there is a very strong case for regular buybacks, although arguing that BHP needs to lift its game on buybacks as its track record has been “abysmal” (it has done these infrequently, and paid way too much relative to book value when it has.)

They continue to push for a single unified entity (rather than two separate companies listed on different exchanges), and accept that this new entity would be headquartered in Australia, be an Australian tax resident, and have its primary listing on the ASX. A secondary listing would be in the UK. 

They refute BHP’s claim that this would cost US$1.3bn to implement, saying that the costs should only be around US$200m. The benefits of unification are less clear, however. Elliott contends (though doesn’t substantiate) that it will enhance BHP’s market value by US$5bn. They say that BHP will be able to monetise franking credits more quickly and more efficiently (current reserve US$9.8bn), and that having a single unified structure and share capital will give BHP an “acquisition currency” (other than cash) that could be used in future acquisitions.

BHP’s response 

BHP hasn’t yet formally responded to the letter, which is probably a good thing because Elliott (and other aggrieved shareholders) aren’t going away. CEO, Andrew Mackenzie, might be doing a strong job of driving cost efficiencies and productivity improvements, but he is not helped by a company culture that says “BHP knows best”.

Interestingly, Mackenzie was out spruiking BHP at the Bank of America Merrill Lynch Global Metals, Mining and Steel Conference on the same day as the Elliott letter arrived. In what can only be described as a very “blue sky” presentation, Mackenzie discussed how the BHP  team had delivered material value uplift, said that BHP had a broad suite of opportunities to grow base value by 50%, forecast further cost reductions and technology initiatives to unlock resources, and promised to increase the return on capital employed.

He also described the release of latent capacity across the portfolio, offering the prospect of attractive returns for low risk. An investment of US$5bn could add over 20% to current production at an average return of 75%.

Major growth projects on the books offer potential average returns of 16%. Priced at around US$25bn, these include copper projects in Chile (Spence Growth) and at Olympic Dam in South Australia, and the Jansen potash project.

In regards to onshore US petroleum, Mackenzie said that all options were on the table. 

Bottom line

Elliott and the BHP Board may not be ready yet to sit down and smoke the peace pipe, but because BHP has such a lousy record and Elliott shows no signs of going away, BHP will inevitably cede major ground on this proposal. The US petroleum assets will either be put up for sale or demerged, and expect BHP to be far more focused on returning capital through off market buybacks.

| More

 

Pollies just can’t keep their hands off super

Thursday, May 11, 2017

By Paul Rickard

Despite calls for a bit of stability with the super system, the pollies just can’t keep their hands off it. Tuesday night’s budget brought another four changes. While two well telegraphed are, in the main, positive initiatives, it shows that super remains a moving feast.

Here is a rundown of the changes, plus, with just 50 sleeps until 30 June, the actions you should consider taking before the system fundamentally changes. And if you put a substantial sum into super, you don’t have to invest it now into the share or property markets. If you are concerned about the markets, SMSF members could invest it in cash or a term deposit, while members of an industry or retail super fund could select a lower risk investment option.

1. Downsizing 

Persons aged 65 or over who downsize by selling the family home will be able to make a non-concessional contribution of up to $300,000 from the proceeds. These contributions won’t be subject to meeting any work test, will be in addition to the current cap and won’t be subject to the $1.6m balance test for making non-concessional contributions. If a couple, then potentially $600,000 could be contributed.

The only qualification is that it must be the sale of your principle residence owned for the past 10 or more years.

While the measure doesn’t address issues with the pensioner assets test, transaction costs, and perhaps more importantly, the availability of suitable properties, it should prove popular with self-funded retirees who can then invest their savings in a 0% or worst case 15% taxing environment.

2. First home super saver scheme

At the other end of the housing market, first home buyers will be able to make voluntary salary sacrifice contributions into super, and withdraw these together with associated earnings for a first home deposit.

Up to $15,000 per year and $30,000 in total can be contributed. While it will count within the concessional cap of $25,000 per annum, both members of a couple can take advantage of the measure.

Normal taxing arrangements will apply to these contributions. Like other salary sacrifice contributions, from a person’s pre-tax income, and then taxed at 15% when it hits the super fund. Inside the fund, earnings will be taxed at 15% pa.  On withdrawal, taxed at marginal tax rates, less a 30% tax offset. This means that the maximum tax rate will be 17% - most will pay just 9%.

From a member’s point of view, this will be really easy to implement. No new account required, just instruct your employer to salary sacrifice and pay to your super fund. On the other hand, super funds won’t like it one bit because there will be extra administration required to keep account balances separate and apportion earnings.

Despite comments that “$30,000 doesn’t really give you much of a deposit for the Sydney or Melbourne markets”, this measure will prove to be popular when first home-owners realise that it is a “no-brainer”.

3. Discouraging SMSFs from borrowing

While the Government hasn’t gone as far as some have argued and stopped SMSFs from borrowing, it is introducing measures that will make it less attractive.

From 1 July, the outstanding loan balance on a limited recourse borrowing arrangement (LBRA) will be included in a member’s total superannuation balance. For example, if a single member SMSF owns a property worth $2m which is supported by a loan of $1m, only the net assets of $1m is currently counted in a members total superannuation balance. From 1 July, the loan will be included, meaning that the total super balance would be $2m. Once your balance exceeds $1.6m, you can’t make any additional non-concessional contributions.

Further, the repayment of principle and interest on the loan from a member’s accumulation account will count against the transfer balance cap of how much can be transferred into the pension phase.

There will also be changes to the rules around non-arm’s length transactions between related parties to make sure that they are done on a commercial basis.  

4. Only 50 sleeps to go!

Here is a quick re-cap on the super actions to take between now and 30 June, when the biggest change to super in nearly a decade takes effect.

Bring forward salary sacrifice arrangements

The concessional contributions cap will be reduced from $30,000 to $25,000, or for those who were 49 or older on 1 July 2016, from $35,000 to $25,000. Concessional contributions includes your employer’s contribution (the compulsory 9.5%), plus any amount you salary sacrifice, or if self-employed, any amount you claim a tax deduction for.

If you are making salary sacrifice contributions, you will need to review these from 1 July to make sure that you are under the new cap. Also, as this is the last year of the higher cap, the obvious strategy is to see whether you can utilise the full cap in 2016/17. If cash flow permits, accelerate salary sacrifice amounts this year, or if self-employed, make the full contribution prior to 30 June.

Make non-concessional contributions

The non-concessional cap reduces from $180,000 to $100,000. Non-concessional contributions are your own personal contributions which you aren’t able to claim a tax deduction for. 

The other change is that if your total superannuation balance is over $1,600,000, you won’t be able to make any contribution at all. This is a new constraint to apply from 1 July 2017. Super balances will be measured each June 30 (i.e. your balance at 30 June 17 will determine whether you can make a non-concessional contribution in 2017/18). 

Of course, to make a non-concessional contribution, you need to have the cash on hand. SMSF members can also consider in specie transfers, which must be done at market value and can’t include certain assets such as a residential investment property (it can include shares, managed funds and business real property). 

If you are selling assets to generate cash, or transferring in specie, these will count as disposals for capital gains tax purposes. You may also have to pay stamp duty, for example, on business real property. 

Access the bring-forward rule

With the change in the non-concessional cap to $100,000, the limit under the "bring forward" rule, which allows people who are under 65 to make up to three years of non-concessional contributions in one year, will fall from $540,000 to $300,000. So, if you want to get a large amount into super, do it before 30 June. And as the limit applies per person, if you have a partner, then you can effectively get up to $1,080,000 in super. From 1 July, this will only be $600,000.

If your total super balance is between $1.5m and $1.6m, your limit (under the bring forward rule) will still only be $100,000, and if your total super balance is between $1.4m and $1.5m, your limit will be $200,000. 

Remove any excess pension balances

The law relating to the transfer balance cap of $1.6m requires anyone who has more than $1.6m in the retirement phase of super (that is, in assets supporting the payment of the pension) to remove the excess, either by a lump sum withdrawal, or by rolling it back into the accumulation phase of super. The measurement date is 30 June 17.

Transitional relief is available if your balance is between $1.6m and $1.7m - you will have until 31 December 2017 to comply. If you have more than $1.7m, you are required to comply by 1 July.

From a tax point view, it will usually make sense to roll the money back into the accumulation phase as the 15% tax rate is still concessional. However, if you are not utilising your personal tax free threshold of $18,200, then from a tax point of view, withdrawing some or all of the excess as a lump sum and investing it in your own name will deliver a better outcome.

Capital gains tax relief is available if you are required to comply with the new transfer balance cap. This won’t be needed if you are making a lump sum withdrawal (as the asset would still be in the 0% pension state when sold), but may be required if the funds are being rolled back into the accumulation phase

Check whether you want to keep your TRIS

The investment earnings of assets supporting transition to retirement income streams or pensions (TRIS) will be taxed at 15% from 1 July, rather than the current 0%. As this removes the key financial incentive to have a TRIS, you will need to consider one of three choices:

  • keep the TRIS, in which case, continue to make minimum withdrawals of between 4% and 10% of the account balance each year;
  • roll the TRIS back into the accumulation phase; or
  • If circumstances allow, consider permanently retiring.

ImportantThis content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

| More

 

Sydney Airport is a long-term sell

Thursday, May 04, 2017

By Paul Rickard

It shouldn’t come as any surprise to share investors that Sydney Airport has turned down the opportunity to build and operate a second airport for Sydney at Badgerys Creek. It was never going to say “yes”. 

Sydney Airport (ASX Code: SYD) is an annuity-style infrastructure stock trading on an aggressive distribution yield of just 4.75%, geared to the eyeballs with debt, and with very predicable cash flows and growth drivers. For this company to outlay $6bn to develop an airport where revenues won’t commence until 2026 (at the earliest) and the cash flow break even scenario is in the “never-never” was just too much of an ask. Managing the development risk, the airport operating risk, plus the prospect of dilutive capital raisings to part fund the development and operation, would have cruelled the Sydney Airport stock price.

But by saying “no” - the only realistic choice available to the Directors of Sydney Airport - the stock is moving into long-term sell territory. Perhaps sooner than many investors might think, the market is going to worry about potential “competition” risk. And it is not exactly a cheap stock.

A strong rebound in 2017 

Sydney Airport shares have rebounded strongly in 2017. When the yield on 10-year US treasury bonds surged to 2.5% pa in the immediate aftermath of President Trump’s surprise victory last November, and Australian bond yields followed suit, stocks which were highly geared like Sydney Airport were hit hard. Its share price fell from over $7.00 to $5.85 at the end of January, before rising back over $7.00 as US bond yields stabilised around 2.3% and “armageddon” in the bond market was averted.

Sydney Airport (SYD) - May 16 to May 17

Source: asx.com.au

Yesterday, Sydney Airport closed at $7.05. With a forecast distribution of 33.5c for FY17, this puts Sydney Airport on a distribution yield of 4.7% pa. As this carries no franking or other tax advantages, many would describe this yield as pretty unattractive. 

Growth drivers

Of course, Sydney Airport is able to point to a strong track record of growing distributions. Over the last five years, distributions have grown at a compound annual growth rate (CAGR) of 9.8%.

It has done this by growing revenue at a CAGR of 7%, driven by an increase in passenger numbers from 36.9m in FY12, to 41.9m in FY16. EBITDA has also grown at a CAGR of 7%, with lower interest expenses allowing Sydney Airport to further increase distributions to shareholders.

So far in 2017, passenger numbers are up by 2.2% compared with the corresponding period in 2016. Importantly, growth in higher yielding international passengers is up by 5.7%.

Looking forward, Sydney Airport sees continuing opportunities to grow passenger numbers, particularly with international passengers from Asia due to Sydney’s status as the main gateway to Australia and an Asia/Pacific business hub, and the growth in the outbound Chinese tourist. It says that 35% of landing/departure slots remain available at Kingsford Smith, while the introduction of larger aircraft by airlines will contribute to increased revenue per slot. It cites the example of Heathrow, which has demonstrated continued traffic growth despite no increase in landing slots.

What do the brokers say?

The major brokers are, according to FNArena, largely neutral on Sydney Airport, with two buy, four neutral and one sell recommendations. They see the stock as a little overvalued, with a target price of $6.63, 6.0% lower than the current share price.

They forecast a distribution of 33.8c in FY17, rising to 36.1c in FY18 (a growth rate of 6.8%). For investors, this translates to a forecast yield of 4.8% for FY17 and 5.1% for FY18. Individual recommendations and target prices are as follows:

My view

In the medium term, Sydney Airport should be able to grow passengers, increase revenue and most importantly, increase distributions. The latter may not grow at 9.8% pa, but something in the order of 5% to 7% may be achievable. Further, its monopoly as Sydney’s only commercial airport won’t be under any attack until at least 2026.

However, markets like to anticipate events well before they actually occur. The chances are that as development on the second airport ramps up, markets will fret about the competitive risk and factor this into the share price. And it won’t just be investors who worry about competition. 

Sydney Airport has net debt of $7.7bn. While this has an average maturity stretching into late 2023, as the debt comes up for renegotiation, banks, bond holders and rating agencies will increasingly consider whether a competitive threat could arise. It just takes one bank or rating agency to believe that the threat is credible and possibly material, and Sydney Airport will find that it is paying higher interest charges.

And if bond yields start to rise again, which seems inevitable as the growth momentum in the US continues and the Federal Reserve tightens monetary policy in response, Sydney Airport and other “bond proxy” stocks will come under pressure.

Sydney Airport is not a buy. For holders, time is on your side, but don’t wait too long to sell.

| More

 

Super downsizing has legs

Thursday, April 27, 2017

By Paul Rickard

Reports out of Canberra that the Government may be considering changes that would allow retirees to contribute the proceeds from downsizing the family home back into super, notwithstanding the cap on super contributions and other restrictions, should be supported in principle. Linking superannuation with housing, both integral retirement assets, is perfectly logical policy.

According to the Australian Financial Review, retirees would be able to top up their super with the net proceeds from downsizing, notwithstanding the $100,000 cap on non-concessional contributions, the $1.6m cap on the total amount of super in the retirement phase, and the need to meet work tests if over 65. The Government sees this as a measure that would free up more homes for buyers and improve housing affordability, as demand from retirees would shift towards lower-cost apartments, shared living and assisted accommodation options. 

There are two key reasons why many retirees are reluctant to downsize. The most important one is the lack of suitable housing options preferred by retirees. These include villa-style dwellings with a few square metres of garden, ground floor/low level apartments close to neighbourhood shopping centres but not on six lane highways, and modern, village-style assisted accommodation. Retirees generally want to downsize to an area that is close to family and friends, and more often than not, close to where they currently live. It is not uncommon to hear the tale that a retiree just can’t find anything suitable to downsize to, and in some cases, the downsizing actually involves an “upsizing” in cost. 

There is also the impact that downsizing can have on eligibility for the aged pension. The family home remains exempt from the pensioner assets test, but if it is sold and a less expensive home is purchased, the net proceeds crystalized will be counted as an asset. This doesn’t matter whether the asset is cash or invested in super.

Following changes to the asset test that commenced in January, a homeowner couple can have $821,500 in assets (excluding the family home) and still get a part pension. For a single, the cut off is $546,250 in assets. While home contents, motor vehicles, personal savings and gifted assets are key categories, the largest asset that impacts eligibility is increasingly superannuation balances.

Apparently, the Government isn’t proposing to make any changes to the pensioner assets test, so downsizing would still impact retirees who can, or intend to, access a part pension. This group is more than 70% of senior Australians - so the Government’s policy change would only apply to a smaller group of “wealthier” homeowners.

That said, it is a step in the right direction. With super tax free in the pension phase, the opportunity to make additional contributions should be an attractive financial incentive to consider downsizing. How it is administered or policed is another matter!

Support for accessing super to buy first home

Linking superannuation with housing makes sense to me, as both are integral to a comfortable retirement. It is just as important to own your own home as it is to accumulate superannuation savings, otherwise the superannuation savings are directed to paying rent in addition to meeting living expenses. Own your own home, require less superannuation. Don’t own your own home, require more superannuation. Hence, I have never understood why so many commentators are opposed to letting first homeowners access part of their superannuation savings.

It is interesting to note that according to Newspoll, 42% of Australians are in favour of the idea and 49% are opposed. A narrow margin, but closer than many might have expected.

And this comes after a concerted effort to ridicule the idea, from people such as the “father of superannuation”, Paul Keating, the Head of the Financial Systems Inquiry, David Murray, and of course, nearly every super fund and industry lobby group.

Paul Keating and David Murray’s arguments should be considered, but ignore anything that the super industry says. This is pure self-interest. With $1.5 trillion dollars in super investments being charged an average of 80 basis points, this generates a revenue pool of $12 billion per annum for the industry. That’s right - Australians are paying $12 billion each year in fees to their super managers. This is an industry with a huge gravy train to protect.

I have argued that letting young Australians access their super is foremost about making super more relevant to this demographic, and secondly, about improving housing affordability by helping to close the deposit gap. Access wouldn’t be open slather and would come with a stringent rule set, and importantly, the money would not be lost to the super system forever. When the house was sold, the monies would go straight back to the super fund.

If you would like to review my ideas on how such a scheme could work, click here. And for the record, the same Newspoll showed that 52% of 18 to 34 year olds support the idea - it's only us oldies who oppose it!

| More

 

MORE ARTICLES

Brambles delivers a modest surprise

BHP too quick to dismiss break-up proposal

Only 85 more sleeps until super D-Day!

Forget the Productivity Commission, here's how to find the best super fund!

TPG - executing on strategy, but out of favour

Super charging the housing market

Product Road Test - Investing in Urban Renewal through URB

Product Road Test - Investing in Urban Renewal through URB - Outbrain

Housing affordability is bad news for investors

Baying for blood at WorleyParsons

Not wowed by Woolworths

Health insurance premiums should be falling, not rising

The Switzer Dividend Growth Fund

New NAB offer should suit yield seekers

The super bull market

Making LICs accountable to their shareholders

Healthscope or Ramsay?

Does TPG stand for 'too pricey for growth'?

Don't bet on Boral

Banks are back in favour

Can you do anything about the pension changes?

3 'sick' healthcare stocks to consider

Coles and Woolies draw level

Challenger shoots for the stars

Can the ‘expensive defensives’ get cheaper?

Banks 2 - Politicians 0

It’s not about Trump, it’s about Clinton

Solving the super debate is not that hard

Ramsay Health Care - sellers beware!

Wesfarmers faces some tough challenges. Is it a buy?

BHP - please hang onto your cash!

CommBank can do better

RIO’s result sound, but still a bet on China

Woolies is no long-term buy ... yet!

Is 7.3% a big enough yield for this IPO?

Why can't Aussies be more like Americans?

Will the Government ditch the super changes?

Think Brexit was bad? Watch out if Shorten gets in!

Have you heard the good news about super?

7 super actions to take before June 30

Medibank is in good health - time to take profits?

Flying into headwinds?

First aid for Primary? The Chinese are coming!

Will the paint run dry for Dulux?

Super changes have a long way to run

Property the big winner from ScoMo’s super slug

Is Woolworths a buy yet?

Top 20 must perform for Aussie market to go higher

ASIC and the ABC should hang their heads in shame

Is Nine a buy?

Banks on the nose

Hard yards at Woolworths

An end to TTR pensions?

Preparing for the ‘super’ budget

Downsides in cutting the capital gains tax discount

Coles and Bunnings power ahead - shame about the coal!

Not much fizz with Coca-Cola Amatil

Axing Masters is just the start to fixing Woolworths

Packer should come clean about his intentions for Crown

CommBank back to form

Packer should come clean about his intentions for Crown

Aussie market needs commodity prices to bottom

Axing Masters is just the start to fixing Woolworths

Investing for your kids or grandchildren – Part 3

Investing for your kids or grandchildren – Part 2

Investing for your kids or grandchildren

A tale of 2 stocks

NAB's Christmas gift

Slater & Gordon on trial: lessons for investors

Time to go Jac

Changing super taxes is bad politics

Santos: Another victory for the short-sellers

Short selling is out of control

NAB’s results - messy and disappointing

More super changes on the way

Westpac shocks market with interest rate hike

Macquarie shines for shareholders

A cool spring lies ahead for the property market

Putting money into super can be a dumb idea if you are under 40

Peer to peer lending – so much hype!

Woodside is still a ‘gonna’

Commbank can – only just

Super caps and taxes – “helpful ideas”?

BHP – the new income stock?

Gold loses its glitter

Banks breathe a sigh of relief

Doing your tax doesn’t have to be so taxing

Double digit returns for many super funds

Flying into trouble

The price is still not right at Woolworths

Nine bombs – but is it the new yield stock?

The market goes cold on Medibank – buy at $1.75

AGL - cooking with gas!

It's time! Let’s have an inquiry!

Plan now to access the age pension

Woolworths – the price is down

ASX in a pickle over guidance

Labor’s super thought bubble

Pensioners in the cross hairs

Iron ore glut demands answers from BHP and Rio