Mark Draper

Mark Draper

Tuesday, 03 April 2018 06:28

Trump and Trade War Risks

Written by Shane Oliver - Chief Economist AMP

 

Introduction

After the calm of 2017, 2018 is proving to be anything but with shares falling in February on worries about US inflation, only to rebound and then fall again with markets back to or below their February low, notwithstanding a nice US bounce overnight. From their highs in January to their lows in the last few days, US and Eurozone shares have fallen 10%, Japanese shares are down 15% (not helped by a rise in the Yen), Chinese shares have fallen 12% and Australian shares have fallen 6%. So what’s driving the weakness and what should investors do?

What’s driving the weakness in shares?

The weakness in shares reflects ongoing worries about the Fed raising interest rates and higher bond yields, worries that President Trump’s tariff hikes will kick off a global trade war of retaliation and counter retaliation which will depress economic growth and profits, worries around President Trump’s team and the Mueller inquiry, rising short-term bank funding costs in the US and a hit to Facebook in relation to privacy issues weighing on tech stocks. The hit to Facebook is arguably stock specific so I will focus on the other bigger picture issues.

Should we be worried about the Fed?

Yes, but not yet. The risks to US inflation have moved to the upside as spare capacity continues to be used up and the lower $US adds to import prices. We continue to see the Fed raising rates four times this year and this will cause periodic scares in financial markets. However, the Fed looks to be tolerant of a small overshoot of the 2% inflation target on the upside and the process is likely to remain gradual and US monetary policy is a long way from being tight and posing a risk to US growth.

What’s the risk of a global trade war hitting growth?

In a nutshell, risk has gone up but is still low. This issue was kicked off by Trump’s tariffs on steel imports and aluminium and then went hyper when he proposed tariffs on imports from China and restrictions on Chinese investment into the US and China threatened to hit back. It looks scary and is generating a lot of noise, but an all-out trade war will likely be avoided.

First, the tariff hikes are small. The steel and aluminium tariffs relate to less than 1% of US imports once exemptions are allowed for and the tariffs on Chinese imports appear to relate to just 1.5% of total US imports. And a 25% tariff on $US50bn of imports from China implies an average tariff increase of 2.5% across all imports from China and just 0.375% across all US imports. This is nothing compared to the 20% Smoot Hawley tariff hike of 1930 and Nixon’s 10% tariff of 1971 that hit most imports. The US tariff hike on China would have a very minor economic impact – eg, maybe a 0.04% boost to US inflation and a less than 0.1% detraction from US and Chinese growth.

Second, President Trump is aiming for negotiation with China. So far the US tariffs on China are just a proposal. The goods affected are yet to be worked out and there will a period of public comment, so it could be 45 days before implementation. So, there is plenty of scope for US industry to challenge them and for a deal with China. Trump’s aim is negotiation with China and things are heading in this direction. Consistent with The Art of the Deal he is going hard up front with the aim of extracting something acceptable. Like we saw with his steel and aluminium tariffs, the initial announcement has since been softened to exempt numerous countries with the top four steel exporters to the US now excluded!

Third, just as the US tariffs on China are small so too is China’s retaliation of tariffs on just $US3bn of imports from the US, and it looks open to negotiation with Chinese Premier Li agreeing that China’s trade surplus is unsustainable, talking of tariff cuts and pledging to respect US intellectual property. While the Chinese Ambassador to the US has said “We are looking at all options”, raising fears China will reduce its purchases of US bonds, Premier Li actually played this down and doing so would only push the $US down/Renminbi up. It’s in China’s interest to do little on the retaliation front and to play the good guy.

Finally, a full-blown trade war is not in Trump’s interest as it will mean higher prices in Walmart and hits to US goods like Harleys, cotton, pork and fruit that will not go down well with his base and he likes to see a higher, not lower, share market.

As a result, a negotiated solution with China looks is the more likely outcome. That said, trade is likely to be an ongoing issue causing share market volatility in the run up to the US mid-term elections with Trump again referring to more tariffs and markets at times fearing the worst. So, while a growth threatening trade war is unlikely, we won’t see trade peace either.

Australia is vulnerable to a trade war between the US & China because 33% of our exports go to China with some turned into goods that go to US. The proposed US tariffs are unlikely to cause much impact on Australia as they only cover 2% of total Chinese exports. The impact would only be significant if there was an escalation into a trade war.

Should we worry about Trump generally?

Three things are worrying here. First, it’s a US election year and Trump is back in campaign mode and so back to populism. Second, Gary Cohn, Rex Tillerson and HR McMaster leaving his team and being replaced by Larry Kudlow, Mike Pompeo and John Bolton risk resulting in less market friendly economic and foreign policies (eg the resumption of Iran sanctions). Finally, the Mueller inquiry is closing in and the departure of John Dowd as Trump’s lead lawyer in relation to it suggests increasing tension. The flipside of course is that Trump won’t want to do anything that sees the economy weakening at the time of the mid-term elections. But it’s worth watching.

What about rising US short term money market rates?

During the global financial crisis, stress in money and credit markets showed up in a blowout in the spread between interbank lending rates (as measured by 3-month Libor rates) and the expected Fed Funds rate (as measured by the Overnight Indexed Swap) as banks grew reluctant to lend to each other with this ultimately driving a credit crunch. Since late last year the same spread has widened again from 10 basis points to around 58 points now. So far the rise in the US Libor/OIS spread is trivial compared to what happened in the GFC and it does not reflect credit stresses. Rather the drivers have been increased US Treasury borrowing following the lifting of the debt ceiling early this year, US companies repatriating funds to the US in response to tax reform and money market participants trying to protect against a faster Fed. So, it’s not a GFC re-run and funding costs should settle back down.



Source; Bloomberg, AMP Capital  

Is the US economy headed for recession?

This is the critical question. The historical experience tells us that slumps in shares tend to be shallower and/or shorter when there is no US recession and deeper and longer when there is. The next table shows US share market falls of 10% or greater. The first column shows the period of the fall, the second shows the decline in months, the third shows the percentage decline from top to bottom, the fourth shows whether the decline was associated with a recession or not, the fifth shows the gains in the share market one year after the low and the final column shows the decline in the calendar year associated with the share market fall. Falls associated with recessions are highlighted in red. Averages are shown for the whole period and for falls associated with recession at the bottom of the table. Share market falls associated with recession tend to last longer with an average fall lasting 16 months as opposed to 9 months for all 10% plus falls and be deeper with an average decline of 36% compared to an average of 17% for all 10% plus falls.

Our assessment remains that a US recession is not imminent:
 

  • The post-GFC hangover has only just faded with high levels of confidence driving investment and consumer spending.
  • US monetary conditions are still easy. The Fed Funds rates of 1.5 - 1.75% is still well below nominal growth of just over 4%. The yield curve is still positive, whereas recessions are normally preceded by negative yield curves.
  • Tax cuts and increased public spending are likely to boost US growth at least for the next 12 months.
  • We have not seen the excesses – debt, overinvestment, capacity constraints or inflation – that precede recessions.


We have not seen the excesses – debt, overinvestment, capacity constraints or inflation – that precede recessions.


Falls associated with recessions are in red. Source: Bloomberg, AMP Capital.

What should investors do?

Sharp market falls are stressful for investors as no one likes to see the value of their wealth decline. But I don’t have a perfect crystal ball so from the point of sensible long-term investing:

First, periodic sharp setbacks in share markets are healthy and normal. Shares literally climb a wall of worry over many years with numerous periodic setbacks, but with the long-term trend providing higher returns than other more stable assets.

Second, selling shares or switching to a more conservative investment strategy or superannuation option after a major fall just locks in a loss. The best way to guard against selling on the basis of emotion after a sharp fall is to adopt a well thought out, long-term investment strategy and stick to it.

Third, when shares and growth assets fall they are cheaper and offer higher long-term return prospects. So the key is to look for opportunities that pullbacks provide.

Fourth, while shares may have fallen in value the dividends from the market haven’t. So the income flow you are receiving from a well-diversified portfolio of shares remains attractive.

Fifth, shares often bottom at the point of maximum bearishness. And investor confidence does appear to be getting very negative which is a good sign from a contrarian perspective.

Finally, turn down the noise. In periods of market turmoil, the flow of negative news reaches fever pitch. Which makes it very hard to stick to your well-considered long-term strategy let alone see the opportunities. So best to turn down the noise.

Tuesday, 27 March 2018 06:17

ALP's Shameful Imputation Proposal

Roger Montgomery talks

Wednesday, 21 March 2018 11:24

Robbing Granny in the name of Paul

Written by Dr Don Hamson (CEO Plato Asset Management)

 

When I was first asked to comment about the ALP’s proposed scrapping of franking credit refunds my response was I was “flabbergasted”. “Flabbergasted” that the party whose Treasurer Paul Keating created franking credits would cut those benefits accruing to retired workers, “flabbergasted” that the Leader of ALP Opposition who earns over $375,000 a year would begrudge retirees receiving around $5000 a year on average, “flabbergasted” that the ALP would be offering tax relief to low- and middle-income Australians whilst pulling benefits from the lowest earning individuals who don’t even earn enough to pay tax, and finally “flabbergasted” that it is claimed that “this change only affects a very small number of shareholders”.

Having had time to reflect on this change, read through the fine print and discuss it with a number of people within the industry – and I thank those clients for their thoughts – my views have changed somewhat, but not necessarily in a positive sense.

“ Firstly, this change only affects a very small number of shareholders who currently have no tax liability and use their imputation credits to receive a cash refund.”

“1.17 million individuals, and superannuation funds”

Bill Shorten speech to Chifley Research Centre as quoted by SMH “Labor to target rich retirees in budget fix” 13 March 2018.

Discriminatory policy

We think this is a very discriminatory policy. Whilst we are happy that charities and not-for-profits are exempted from the changes, we are not so happy that the likely worst affected are the very lowest income earners with small holdings of Australian shares.

It is also discriminatory between different types of superannuation funds. Members of mature superannuation funds are discriminated against versus members of less mature funds. The most mature of funds are Self-Managed Superannuation Funds (SMSFs) whose members are all retired, and they would receive no franking credit refunds. The least mature or growing funds are funds largely dominated by younger accumulation phase members with a relatively small proportion number of pension members. These growing funds will be paying significant net tax to the government since the vast bulk of their fund members are in accumulation phase, paying 15% tax on fund earnings together with contributions tax. It is our understanding that pension phase investors in these least mature funds would still be receiving the full value of franking credit refunds under this proposal. The growing fund won’t be getting a refund of tax from the government, but within the fund pension members effectively get a full refund via offsetting (reducing) some of the net tax payable at the overall fund level. A $1m pension phase member of a growing fund would receive full value for franking credits, but the same $1m pension phase investor would not if they were to establish an SMSF. This proposal is clearly discriminatory, and if implemented would favour growing funds such as many industry funds, over SMSFs.

But we don’t believe this discrimination is restricted to SMSFs. Any superannuation fund dominated by pension phase investors will likely stand to lose the value of some or all of franking credits. Mature and often closed defined benefit funds would fit into this category. Some of these funds may be fine in financial years with good investment earnings, but may lose some franking credits in years with low or negative investment earnings where tax payable on accumulation phase earnings and contributions are less than the value of franking credits. We know of a few funds that are government or industry based which may likely be immediately impacted should these changes be implemented.

Industry ticking time bomb

We believe this change may ultimately impact a much greater number of Australians at some stage in their life than the current 1.17 million individuals targeted by this change. Whilst the proposed changes will primarily currently impact mature pension phase SMSFs and low income investors, we believe as the superannuation industry matures as a whole, as more and more members of pooled superannuation funds migrate to pension status, the loss of franking will likely start to impact a growing number of government, retail and industry funds. And these changes would then impact the returns and fund balances of pension phase members of those funds be they rich or poor.

Approximate $5000 a year impact

We estimate that denying the refund of franking credits will reduce the returns for pension phase SMSF by approximately 0.5% pa, meaning a retired couple with a $1m superannuation balance would be $5000 worse off each year, or a retired couple or individual with a $500,000 superannuation balance would lose $2,500. Now this might not sound a lot, but $50-$100 per week makes quite a difference for a retiree. It might mean being able to eat out once a week, take an annual domestic holiday, afford the expensive running costs of air conditioning or cover the cost of a cataract operation.

“$50-$100 per week makes quite a difference for a retiree.”

Our estimate of the impact of scrapping imputation credits is based on our submission to the Tax Discussion Paper entitled “Foreigners set to gain at the expense of Australian retirees?” (April 2015). We based our estimate of the impact of imputation assuming an average SMSF exposure to Australian shares, and the franking credit yield of the S&P/ASX200 Index. Investors with higher allocations to Australian shares, or allocations to higher yielding Australian shares could earn even higher levels of franking credits and would thus stand to lose more.

Impacts the lowest earning individuals who don’t even earn enough to pay tax 

Treasury’s analysis of ATO data indicates that 610,000 Australians in the lowest tax bracket (earning less than $18,200) would be impacted by this proposal, with a further 360,000 individuals impacted in the $18,201 to $37,000 tax bracket. Given this, I should not have been surprised that someone like my mother, who recently passed away, would have been significantly negatively impacted by this change. My parents worked hard all their working life, judiciously investing savings into the share market, managing to save enough to largely self-fund their retirement. They retired prior to the implementation of compulsory superannuation, so their share investments were held outside superannuation. My mother lived off the earnings from those shares, but she rarely earned enough to actually pay income tax, but I can assure you that she dearly valued the franking credit refunds which boosted her modest retirement income. When she was well they enabled her to take the odd holiday, and when she wasn’t so well, they helped pay the medical expenses.

Closing the gate after half the horse has bolted?

In introducing the proposals, Bill Shorten used an example of an extreme franking credit refund of $2.5m to a single SMSF in the 2014-15 financial year. This example is now well out of date and passed it’s used by date. The current government has introduced a $1.6m per person cap on pension phase superannuation which we estimate halves the problem. Perhaps a better way to eliminate the few extremely large franking credit refunds would be to either limit the total amount people can invest into super (not just the amount in pension phase) or limit the maximum franking credit refund per person. Let’s not make just about everyone’s retirement tougher because a few individuals have managed to take full advantage of the system.

Other Impacts

There are other impacts likely to arise from this change should it ever come to pass. Whilst members of defined benefit superannuation funds may not be directly impacted, the organizations’ that underwrite those benefits may need to increase their funding if the expected pension phase investment return assumptions are reduced. Banks and insurance companies may need to reconsider their capital positions in light of the potential impact of these changes on income securities.

Pension fund trustees may need to alter asset allocations. Some might argue that reducing exposure to the very concentrated Australian share market might be a good thing, but it will very much depend on where the money goes to. As well as Australian shares, SMSFs have a strong preference for Australian property, and we are not so sure allocating more money to a fairly expensive domestic property market is necessarily a good thing. Increasing exposure to global shares makes more sense, particularly since SMSF seem under-allocated to global shares compared with industry and retail fund allocations.

We also believe that any changes will likely impact the financial advice that investors receive, particularly investors in mature SMSFs.

Value of financial advice

Tax changes provide financial advisors and tax professionals the opportunity to add value for their clients. Pension phase SMSFs might likely restructure in a number of ways. They could move their pension assets into growing industry or retail funds to continue to receive the effective value of franking. Or they could look to “grow” their own SMSF, by adding say their children who are in accumulation phase as members, but there are constraints to this within the current SMSF rules.

Sadly, the 610,000 lowest income earners who would be affected by this change are probably least able to seek advice and least able to restructure their assets.

Don’t act too soon

We also discourage people from acting too soon on this proposal. It is the policy of the opposition. Not only do they have to win the next election, they would need to win over sufficient cross bench senators to make this change to the law. And even were it likely to happen, companies may act to flush out franking credits prior to any change coming into effect – buybacks and special dividends may come with a flurry in that case.

Conclusion

Overall, we don’t see this as good policy. It’s discriminatory. Whilst positioned as a “taking from the rich to give to the poor” policy, it’s actually 610,000 of the lowest earning individuals who will likely feel the most relative pain. It also discriminates between different types of superannuation funds, impacting the returns and fund balances of pension phase members of SMSFs, but not the returns and fund balances of pension phase members of growing funds such as many industry super funds. We also think that as the superannuation industry matures, and many more members of funds retire, these changes will likely impact members of many of the more mature government, industry, and retail super funds, not just SMSF members. If passed, this policy may become a ticking time bomb for many, many Australians.

Franking credits provide a very valuable increment to the income of all defined contribution retirees be they rich or less well off, as well as to very low income investors outside the super system, and surely we all hope to retire comfortably one day.

 

Mark Draper recently met with Andrew Clifford (Platinum Asset Management) to talk about the change in CEO at Platinum Asset Management and what it means for investors in Platinum funds.

Below is a podcast of the discussion and also a transcript.

 

 

 

 

Speakers:  Mark Draper (GEM Capital) and Andrew Clifford (Platinum Asset Management)

Mark:  Here with Andrew Clifford, Chief Investment Officer, or currently Chief Investment Officer of Platinum Asset Management, soon to be Chief Executive Officer of Platinum Asset Management.

Andrew, thanks for joining us.

Andrew:  Good morning. It’s good to be here.

Mark:  Shooting this in Adelaide, too, by the way. So, welcome to Adelaide, Andrew.

It was announced to the market recently that the joint founder of the business, alongside of you, Kerr Neilson, who is the current CEO of Platinum Asset Management is going to step down as CEO, still stay within the business.

I just want to talk about that this morning for our Platinum international investors.

Are you able to give us an overview? What does this actually mean for the business?

Andrew:  I think what people should understand is that we’ve built over the last 24 years, a very deep and experienced investment team. I think also it would be good for people to understand just exactly how the process works internally to understand the role, how Kerr’s changing role affects us.

Across that team, one of the things that we think if very important in coming up with investment ideas is that there’s a very thorough and constructive debate about investment ideas. If you put someone in the corner of a room and leave them to their own devices for four weeks to look at a company, on average through time, they’re not going to come up with good ideas, they’re going to miss things.

Part of our process is that the ideas, even from the very beginning, should we even be looking at this company or this industry, is something that is thoroughly debated all the way along.

We have five sector teams and also our Asia team. These are teams of sort of three to five people and they’re working away, coming up with ideas, debating them internally before they’d even presented to the portfolio managers for a potential purchase.

Then what happens is we have a meeting around that and you get all the portfolio managers for whom that is relevant and the idea is further debated and one of the things to understand about the process is we’re not trying to all come to some lovely agreement about whether this company is a good idea. We’re trying to work out what’s wrong with it.

Then ultimately, what happens after all of that, invariably there’s more questions to follow up and work to be done, but what happens is then each of the portfolio managers make their own independent decision on whether to buy that company or not.

The important role of the portfolio manager, as I see it, is everyone always thinks of them as these gurus who are making a decision about buying this stock or investing in this idea, and certainly they have that final responsibility. But I actually think their most important role is leading that discussion and debate.

Indeed, what happens in the places, that you can see that if an idea comes through to buy a certain company, if I buy it and Clay Smolinski doesn’t or Joe Lai doesn’t, when it’s an Asian stock, or Kerr does, but he buys 3% in the fund and I buy half a percent, there’s some kind of difference of opinion there that needs to be further debated and discussed. We have particular meetings where we do that.

I give this all as a background to say that there’s a very—

Mark:  It’s a bigger process.

Andrew:  —deep and proper process there.

Mark:  It’s not one person pulling the strings.

Andrew:  That’s right, absolutely. When it comes to Kerr and his role, Kerr will continue to be part of the investment team, he will continue to work away on investment ideas, which is his love. When you do this job, you’re never going to stop doing that.

He’ll still be there working away on this idea or that, as pleases him. Also, he will be looking at the ideas other people are putting forward because that’s what excites him.

He will still be part of our global portfolio manager’s meeting, which is the meeting of the most senior PMs, where we actually debate those ideas, where those differences of opinion are occurring amongst the PMs.

He’s still there going to be doing that and as Kerr would say, the demands of being a—of running a global portfolio, are not inconsequential in terms of the time and effort. What he is hoping to be doing is then being able to take that time where he doesn’t have to think about absolutely everything we’re doing to focus on what he believes are the really good ideas.

It is a change, but it may not be as significant as it sounds to people.

Mark:  I think the interesting thing from my perspective is that it’s not like Kerr is resigning from the company, selling all his shareholdings and just walking away. This is very much—sounds like a planned event. He is still going to be in the business, he’s just moving out of the CEO role so he can focus on the investment side and still remain contributing to the company. Is that…

Andrew:  Yeah, I mean, absolutely. Because I think it’s one of these things is that you, as I said, you can’t really retire from investing. You’re going to be doing it one way or the other. This is a great way for him to continue to do what he loves doing and it’s great for the rest of the organization to still have that input from him. It’s something that the younger members of the team will value because he will, as he does today, he’ll walk across the floor to talk to someone about what they’re working on and be quizzing them on that idea.

Because along with that idea, all those sort of more formal processes of how an idea comes to life, there’s also the discussions in the kitchen when you’re making a cup of tea and what have you.

He’s going to remain there as a full-time employee and part of the investment team.

Mark:  What’s he likely to do with his shareholding? Because he does own a significant amount of Platinum Asset Management. I think he said publicly in the press that he’s just retaining them. Is that—

Andrew:  Yes, so it’s hard for me to talk for him, so I can really only repeat what he has said, which is that I think at the moment there’s no intention to sell any of the stock at this stage.

Mark:  Going back to the funds for a second, what are the changes to the management of the funds and with a particular focus on the Platinum International Fund, which is the flagship fund, and also Platinum Asia. Probably the easiest one to start with is Platinum Asia.

Andrew:  Really, for Platinum Asia, there’s no changes in the management of that. Joe Lai has been running that in its entirety for a number of years now.

What you would expect with what we’ve done with Asia previously, with myself and Joe, when I used to run that, he started at 15% of the fund and progressively moved up to half and then the whole fund. That’s something—this is all part of both the development of individual members of the team and also building in that succession planning across the firm.

While there’s no intention to change that today, at some point in the future, you would expect that we will bring in another portfolio manager to run a small part of that fund and then build that up through time.

Mark:  I think that’s really interesting because Joe started out having a smaller amount of that fund, got built up, and then is now running all of it. The Platinum International Fund is not too dissimilar to that, in that Clay Smolinski, who has been with Platinum for quite some considerable time and is a very high quality investor, he’s currently managing 10% of the Platinum International Fund.

Andrew:  Yes.

Mark:  What’s going to change in that respect?

Andrew:  Clay’s also been running the un-hedged fund for a number of years now.

Mark:  Which has performed really, really well.

Andrew:  It’s performed very well, as the European Fund did, or continued to, even after Clay left, but is also—he did a very good job running that.

What’s going to happen is Clay will take 30% of that fund and what you again might expect at some point in the future, that is a third portfolio manager will be brought in there. One of the reasons for not doing that—a lot of people ask us why we’re not doing that today and it’s simply that these types of changes now, five years ago, didn’t attract a lot of attention, these days, the research houses are very focused on these changes. We’ve already given them quite a bit to think about in the last month. So, rather than make yet another change at that point, we want to leave that for a point in the future.

But people might be interested, across the range of our funds, that besides moving to that 30%, we will essentially bring—

Mark:  And then you manage 70%?

Andrew:  I manage 70%.

Mark:  You’re currently managing around half?

Andrew:  40.

Mark:  40, so you got a lot and so does Clay.

Andrew:  But some of our other funds that are similar mandates, this is not so much relevant for Australian investors, but our offshore uses product will also be 70/30. I will take over the management of Platinum Capital, whereas Clay will take over the management of—

Mark:  Platinum Capital being the listed investment company?

Andrew:  Listed investment company, yes.

Mark:  We have some invested in it.

Andrew:  But then also there are funds, the Platinum Global, which is the in fund, that its mandate is much more similar to the un-hedge fund, so Clay will take over that.

Mark:  Right.

Andrew:  They’ll be changes in other funds as well.

Mark:  Yeah. You touched on research houses. One of the things—and this is probably more relevant for Platinum Asset Management investors, rather than investors of the funds, but it strikes me that one of the key things is what the research houses say about you in their capacity as acting as a gatekeeper between you and financial advisors, like us.

What’s been the reaction of the research houses, Morningstar, Lonsec, etc.? What’s their reaction been to this, Andrew?

Andrew:  As you can imagine, we were on the phone to them, in for a meeting within 24 hours.

Mark:  You’re very much on the front foot, I must say, with that.

Andrew:  Yes. Both Morningstar and Zenith have reaffirmed the writings across our fund, so there’s been no change there. I don’t really want to speak for them either. They’re very independent in their views and their positions can be read. But essentially, I think, this was not unexpected in their minds and they’ve reaffirmed those writings, but as always, they’re watching carefully to see how we go.

Mark:  As always.

Andrew:  As it stands today, while we’ve had feedback from Lonsec, we don’t know what their final decision is at this stage.

Mark:  I do know Morningstar were out in the press last week, I think, saying they think that the management of Platinum Funds just continues as is. They were actually quite supportive in the press.

Andrew:  Yes. And I think that came on the back of the one that had that we won the Morningstar, not just the fund manager, the International Fund of the Year, but we also got the Fund Manager of the Year Award, which means that’s won against the entire, you know, all comers who are doing product across the range. And they assured me that was decided before any of the decisions anyway, but it was actually very nice timing to win that at that point for the organization and the investment team because it really recognizes what has been a period of very strong performance.

Mark:  Yes.

Andrew:  After a period where actually we didn’t think our performance was that poor, but in a relative sense, we had lagged the market for a while, by a very small margin, but I think that it was very nice to win that aware at that point.

Mark:  Absolutely.

Andrew:  We stuck to doing things the way we’re doing and the end result has been good. As I say, I’m not one to normally get too excited about awards, but it was a lovely time to get it and at this point in time as well.

Mark:  Congratulations, by the way for that. The track record, so Clay and yourself are running the flagship fund. There’s no changes to Platinum Asia. The track record of Clay and you has been really good over a long, long period of time. Are you able to provide any context around that? I know that’s actually a hard question.

Andrew:  This is the thing, I go back to where we started and talk about the process that is there, and I don’t want to take away from Clay’s excellent record, but here’s the thing, over our 24 years of history, we’ve had 14 different portfolio managers running money. Every one of them, their long-term record was one of out performance. That’s quite extraordinary. I don’t think you find that many easily, in any market.

Now, of those 14, 10 are still with us. 2 of them were other founders who have stepped aside. But I look at this say, this is the system. If I have a flippant response to people when they worry so much about the role of the portfolio manager because if I’m sitting here, I have 30 people in the office bringing me great ideas. If they only bring me great ideas, because they’re well thought through and well argued out,  then all I need to do is buy every one of them or flip a coin and buy every second one, whatever it is.

Now, there’s more to it than that. But the job of running money becomes easy when you’re supported by a strong team.

Mark:  The main message really here is that. This is very much a team business and it’s a big team. You’re probably one of the deepest teams in the country, in international equities.

Andrew:  I think in the country, very easily and across probably all investment teams in terms of depth of experience and what have you, I mean, there will be other people globally who have similar histories.

But, you know, I think the thing that we see when we talk to clients overseas, is that the things that differentiate us very strongly, not any one of these things, but a collection of all of them, is that we’ve been going for a while, 24 years. We’re managing a substantial sum of money with 27-odd billion Australian dollars. Very defined investment approach and extraordinarily deep team, and a long-term record of out performance. You’ll find that people who have got four of the five or three of the five, but there aren’t many.

What I should say, I think one of the things that stands out with overseas clients is when we say we construct our portfolios independently of the MSCI Index, is that we genuinely do. There are many other people who say they do.

Mark:  Say they do and they don’t. [Laughs]

Andrew:  But they still end up with—and some of those who’ve got great records, but they still end up with 45% in the U.S., even though they say they’re not doing that, which interests us. We genuinely are—

Mark:  You’re true to label though, aren’t you? You’re very much true to label. What you say you’re going to do, you do.

Andrew:  We do. I think that maybe sometimes in Australia that’s not valued quite as much as it could be because we’ve been around a long time and people know us. But I think it is—there’s no one else we know of that can show all those attributes.

Mark:  Our position, Andrew, is that we know the depth of your management team at Platinum Asset Management, and you individually have been managing that team for the last five years officially, I believe, in any case.

Andrew:  Officially, yes. Unofficially, for longer than that. [Laughs]

Mark:  Yeah, that’s right. [Laughs] From our perspective, nothing has really changed other than it’s a change of role for Kerr, but he’s still in the business. We’re still positive on Platinum Funds, clearly.

Have you got any last thing that you would like to say for our Platinum investors or PTM shareholders?

Andrew:  I think the other thing that people ask about is, I’m taking on this additional role of CEO and what are the—how much of a workload, how does that—I guess the fair concern is how does that detract from the investing side of things?

Again, I think that not everyone will be aware of just how strongly our organization, that investment team is supported by the other functions. Liz Norman, who was there on day one and I think most clients and financial planners in this country know her. I make the joke, I walked into the Morningstar Awards and everyone is saying, “Hi, Liz. Who are you?”

Mark:  [Laughs]

Andrew:  But you know, he’s run all of that part of the business for 24 years, does an extraordinary job. On the other parts of the business, the accounting, legal, compliance, tax, we had a great founding CFO, Malcolm Halstead. He left the business a few years ago, but he built an extraordinary team of people. There’s all these boring things people wouldn’t know about, portfolio accounting and registry, but these are very important functions because when they go wrong, they can create havoc and they can cost—well, they never cost the clients money but they’ll cost—

Mark:  They cost the business and it’s a management distraction.

Andrew:  It costs the business money and a lot of distraction and we have an incredibly strong team there, now led very well by Andrew Stannard, our current CFO.

When it comes to the role of CEO, the reality is that Liz and Andrew and their teams, they run the business. We want an investment person as CEO because ultimately the CEO makes the final, critical decision on important things and we want those decisions taken from a perspective of is this going to impact the investment process? You can have all these great ideas, we should have this product, we should do this, we should open an office in New York, we can have all the great ideas in the world, but ultimately, they need to be run through the filter of how does this impact the way the investment team functions.

All of those things, those sort of decisions, can impact and hurt that and that’s why I’ve taken on that role. In reality, yeah, there will be times where there’s more to do, but in fact, the way it’s worked, is Kerr and I have already long divided those responsibilities. So, most of the accounting and compliance-type discussions where it’s come through to the management committee, which is Andrew Stannard, Liz, Kerr, and myself, they’ve tended to be my area and Kerr is focused more on the client side of the business. I’ve been part of those discussions for 24 years, so it’s not like I have to all of a sudden get on top of, or how does this work or how does that work? I’ve been there the whole time.

There will be some time into that, but I don’t believe that it will be substantial.

Mark:  Good answer. Andrew, all the best for the new role as CEO and I know you’ve been there forever [laughs], so all the best for the transition. Thanks very much for making the time to talk to us about it.

Andrew:  Thank you.

[End of Audio]

Transcription by Fiverr.com bethfys

Wednesday, 14 March 2018 19:18

Shorten's tax grab from retirees

The ALP has proposed that if it wins Government at the next election it will scrap cash refunds that are currently paid to investors with surplus imputation credits they receive from shares that they own which pay franked dividends.

Bill Shorten claims that only the wealthy will pay the tax, clearly continuing his class warfare with ‘the big end of town’.

He also said “a small number of people will no longer receive a cash refund but they will not be paying any additional tax”.

With all due respect to a potential future Prime Minister, this is rubbish! 

The Australian reports today that Treasury analysis of official tax data shows the largest group of people to be hit by Labor’s $59bn tax grab will be those receiving annual incomes of less than $18,200, the majority who receive the Age Pension.

In fact the likely number of people hit by this proposal is estimated at well over 1 million, bringing into question the ALP’s definition of small.

The current effective tax free threshold for a retiree couple over age 65 is around $29,000 each, courtesy of the Seniors Australian Tax Offset and of course the $18,200 tax free threshold that applies to everyone.

Therefore any retiree who’s taxable income is less than that, is currently not paying tax and at risk of having their surplus imputation credits retained by the ATO.

The whole point of dividend franking – introduced by a Labor treasurer Paul Keating of course was to stop the double taxation of dividends. 

Dividends have to be paid by companies out of profits which have already paid company tax.  In the old pre-Keating world those dividends would then be taxed a second time as personal income.

Under the Keating change you would get a ‘credit’ for the company tax paid on the dividend, you would then still be taxed at your full marginal tax rate on the underlying income out of which the dividend was paid.

Critically, if your marginal tax rate was lower than the 30% company tax rate, you still paid “too much” tax.  That is why Peter Costello legislated the cash return of that overpayment in 2000.

If the ALP proposal becomes law, this would result in high income earners gaining the full benefit of dividend imputation but retirees and low income earners being discriminated against and unable to use the tax credits.  In other words retirees would become one of the few groups in the country to pay double taxation on their dividends.  The very people the ALP are alleging to protect are those most likely to lose from this proposal.

So how much do retirees (including those with Self Managed Super Funds in pension phase) stand to lose from this proposal?.  The table below sets out different levels of investment in fully franked dividend paying investments and the corresponding potential loss of income for retirees.(assuming retirees are below effective tax free threshold)

Investment Level

Dividend Rate (fully franked)

Franked Income

Imputation Credit

Cut to Retiree income under ALP proposal

$100,000

5%

$5,000

$2,142

$2,142

$200,000

5%

$10,000

$4,285

$4,285

$300,000

5%

$15,000

$6,428

$6,428

$400,000

5%

$20,000

$8,571

$8,571

$500,000

5%

$25,000

$10,714

$10,714

$600,000

5%

$30,000

$12,857

$12,857

GEM Capital is not opposed to tax reform, but we are opposed to leaders using the tax system as a political wedge for political gain that disadvantages the retiree sector.

We are deeply concerned that a potential future Government can propose in an incredibly short time frame, in a retrospective manner, such a drastic reduction for retirees’ income.  Retirees have limited capacity to increase their earnings through employment which makes them a very vulnerable segment of the community to sudden changes in Government policy.

GEM Capital will be contributing to media articles in the coming weeks on this issue and will also be talking with politicians of both sides of politics with a view of broadening their perspective on the issue and at the same time represent the interests of retirees.

Feel free to share this article with anyone you believe may be impacted by this proposal.

Wednesday, 14 March 2018 19:12

Shorten's tax grab from retirees

The ALP has proposed that if it wins Government at the next election it will scrap cash refunds that are currently paid to investors with surplus imputation credits they receive from shares that they own which pay franked dividends.

Bill Shorten claims that only the wealthy will pay the tax, clearly continuing his class warfare with ‘the big end of town’.

He also said “a small number of people will no longer receive a cash refund but they will not be paying any additional tax”.

With all due respect to a potential future Prime Minister, this is rubbish! 

The Australian reports today that Treasury analysis of official tax data shows the largest group of people to be hit by Labor’s $59bn tax grab will be those receiving annual incomes of less than $18,200, the majority who receive the Age Pension.

In fact the likely number of people hit by this proposal is estimated at well over 1 million, bringing into question the ALP’s definition of small.

The current effective tax free threshold for a retiree couple over age 65 is around $29,000 each, courtesy of the Seniors Australian Tax Offset and of course the $18,200 tax free threshold that applies to everyone.

Therefore any retiree who’s taxable income is less than that, is currently not paying tax and at risk of having their surplus imputation credits retained by the ATO.

The whole point of dividend franking – introduced by a Labor treasurer Paul Keating of course was to stop the double taxation of dividends. 

Dividends have to be paid by companies out of profits which have already paid company tax.  In the old pre-Keating world those dividends would then be taxed a second time as personal income.

Under the Keating change you would get a ‘credit’ for the company tax paid on the dividend, you would then still be taxed at your full marginal tax rate on the underlying income out of which the dividend was paid.

Critically, if your marginal tax rate was lower than the 30% company tax rate, you still paid “too much” tax.  That is why Peter Costello legislated the cash return of that overpayment in 2000.

If the ALP proposal becomes law, this would result in high income earners gaining the full benefit of dividend imputation but retirees and low income earners being discriminated against and unable to use the tax credits.  In other words retirees would become one of the few groups in the country to pay double taxation on their dividends.  The very people the ALP are alleging to protect are those most likely to lose from this proposal.

So how much do retirees (including those with Self Managed Super Funds in pension phase) stand to lose from this proposal?.  The table below sets out different levels of investment in fully franked dividend paying investments and the corresponding potential loss of income for retirees.(assuming retirees are below effective tax free threshold)

Investment Level

Dividend Rate (fully franked)

Franked Income

Imputation Credit

Cut to Retiree income under ALP proposal

$100,000

5%

$5,000

$2,142

$2,142

$200,000

5%

$10,000

$4,285

$4,285

$300,000

5%

$15,000

$6,428

$6,428

$400,000

5%

$20,000

$8,571

$8,571

$500,000

5%

$25,000

$10,714

$10,714

$600,000

5%

$30,000

$12,857

$12,857

GEM Capital is not opposed to tax reform, but we are opposed to leaders using the tax system as a political wedge for political gain that disadvantages the retiree sector.

We are deeply concerned that a potential future Government can propose in an incredibly short time frame, in a retrospective manner, such a drastic reduction for retirees’ income.  Retirees have limited capacity to increase their earnings through employment which makes them a very vulnerable segment of the community to sudden changes in Government policy.

GEM Capital will be contributing to media articles in the coming weeks on this issue and will also be talking with politicians of both sides of politics with a view of broadening their perspective on the issue and at the same time represent the interests of retirees.

Feel free to share this article with anyone you believe may be impacted by this proposal.

Tuesday, 27 February 2018 22:36

NBN faces irrelevance

NBN faces irrelevance in cities as competitors build faster, cheaper alternatives

Allan Asher, Australian National University

Malcolm Turnbull is now connected to the National Broadband Network (NBN) at his Point Piper home on a 100 megabits per second (Mbps) plan, it was revealed in Senate Estimates yesterday. But only because his department intervened to avoid delays affecting other customers.

And while the Prime Minister might be happy with his NBN connection, that’s not the case for the 2.5 million customers waiting on a connection through their pay TV or cable service who have been left in limbo.

Lauded in the 2009 Commonwealth Budget as the single largest nation building infrastructure project in Australian history, the NBN is at risk of becoming an expensive white elephant in our cities. Years of political interference, poor technology decisions and a monopoly business attitude have damaged the brand.

Rather than meeting its objective of connecting 90% of homes and workplaces with broadband speeds of up to 100 Mbps, the NBN is looking more like a giant sponge. It soaks up public infrastructure dollars and returns high prices, long delays, unacceptably slow data speeds and service standards that are now the subject of an ACCC investigation.

As a result, a growing number of competitors are bypassing the NBN by undercutting prices and beating performance standards.


Read more: The ACCC investigation into the NBN will be useful. But it's too little, too late


Adelaide bypasses the NBN

The latest challenge to the NBN came after South Australian Premier Jay Weatherill denounced the “very poor NBN outcome” and last week announced A$35 million in funding for an Adelaide fibre network alternative if he is reelected in March 2018.

The plan was warmly welcomed by Mighty Kingdom, an app and games developer who told the ABC, “I don’t have what I need to get me to the rest of the world.”

This follows news announced last year that Adelaide City Council is working with TPG to deliver an NBN-alternative broadband service to local businesses. The service promises fibre internet up to 100 times faster than the NBN, at lower prices, and with no installation costs for city businesses or organisations.

Lord Mayor Martin Haese said:

This technology will be a game changer for the city of Adelaide. It will be a boom for local businesses and other organisations, but will also attract business from interstate and across the globe.


Read more: The NBN: how a national infrastructure dream fell short


NBN alternatives for Melbourne homes and businesses

Meanwhile two aggressive startups in the Melbourne market are hoping to take a serious bite from NBN’s lunch.

Lightening Broadband is connecting homes and businesses using microwave links capable of delivering both 100 Mbps download and upload speeds. That’s better than the comparable NBN Tier 100, which offers 90 Mbps download and 30 Mbps upload speeds.

The company is constructing microwave transmitters on tall buildings, connected to the telco’s core network using microwave links. Customers within a two-kilometre radius share a microwave transmitter, requiring a dish on their roof.

Another telco start-up, DGtek is offering its customers a full fibre alternative service.

Upon its launch in 2016, DGtek’s founder David Klizhov said:

“Ideally the NBN would have worked if it was fibre to the home, but it’s taken quite a lot of time and we thought that we could have a go at the Australian market using technology that’s been implemented already overseas.”

DGtek uses Gigabit Passive Optical Networks (GPON) and runs it directly into tightly packed homes with the dense population of inner Melbourne. As a sweetener, DGtek offers free internet service to government organisations – such as schools and hospitals – in areas they service.

The threat from 5G and other new technologies

New entrant competition is not the only threat to NBN Co. Optus and Telstra are both launching 5G services in 2019. This represents a quantum leap in wireless technology that could win away millions of current and potential NBN customers.

While Vodafone CEO Inaki Berroeta has said that 5G is unlikely to replace the NBN in Australian homes, Optus Managing Director of Networks Dennis Wong recently told BIT Magazine:

Everyone has heard of concepts like self-driving cars, smart homes, AI and virtual reality, however their full potential will require a fast and reliable network to deliver. Seeing 5G data speeds through our trial that are up to 15 times faster than current technologies allows us to show the potential of this transformative technology to support a new eco-system of connected devices in the home, the office, the paddock and in the wider community.


Read more: 5G will be a convenient but expensive alternative to the NBN


5G is not the only technological game changer facing the NBN. iiNet in Canberra has launched its Very-high-bit-rate Digital Subscriber Line (VDSL2) as its own superfast network.

According to iiNet, it is made up of fibre and copper and provides a faster connection than ADSL and most NBN plans. The network is independent from Telstra and differs to NBN in that iiNet’s VDSL2 network uses its own copper lines.

Levelling the field for smaller players

The huge capital requirements of rolling out telecoms infrastructure has always acted to deter more competition in the Australian market. But following a regulatory decision of the ACCC in 2017, smaller entrants can now enjoy cost-based access to some of the largest networks – including Telstra, TPG and Opticom – allowing them to better compete both with the big telcos, and with the NBN.

By providing access to superfast broadband access service (SBAS) and the local bitstream access service (LBAS), new entrants will be able to sell NBN-like fixed line superfast broadband wholesale.

So where to for the NBN?

Yesterday the government released a working paper forecasting that demand for bandwidth will double for households with high internet usage over the next decade. The report also suggests that the NBN is equipped to meet those needs.

The ConversationHowever, cost, technology and customer service problems continue to threaten the commercial success of the NBN. Without a radical rethink, it is doomed to fail its initial mission.

Allan Asher, Visitor, Regulatory Institutions Network (RegNet) & Chair of Foundation for Effective Markets and Governance, Australian National University

This article was originally published on The Conversation. Read the original article.

Tuesday, 13 February 2018 09:08

5 Lessons from the market correction

 DSC8761

Mark Draper (GEM Capital) recently contributed to an article that was published in the Weekend Financial Review in February - titled "5 Lessons from the correction".

We have permission from Fairfax Media to bring you the article on our website.

 

Thank goodness the week is over. The S&P 500 index in the United States suffered its two biggest points falls in history, while the local benchmark plummeted nearly 5 per cent in two days and then fell 52 points on Friday.

The falls seemed all the more dramatic because they followed such a long period of market bliss.

In the midst of the mayhem, it was easy to forget that the decline followed huge gains in stock prices last year.

But it is worth remembering just that. The S&P/ASX 200 rose from 5733 points to 6065 in 2017 and is now sitting at 5838. Its US equivalent surged 25 per cent last year, and on Thursday night closed at 23,860 – still 21 per cent higher than at the start of last year. So equity investors haven't done too badly.

It is also worth remembering what caused the crash and how short term – or long term – those causes might be.

The immediate catalyst was US jobs figures, which showed wages growing faster than expected and weekly jobless claims hitting a 45-year low, raising the prospect of higher inflation and interest rates.

Analysts also pointed to a deteriorating US federal budget as a secondary factor.

But some economists argue the wages data contains anomalies and could well be revised next month. Some also suspect the jobless figures might be overstated because data for several states were estimated.

Further, one of the presidents of the Federal Reserve, James Bullard, cautioned against drawing parallels between good news on the labour market front and higher inflation. The relationship had broken down in recent years and may now be non-existent, Bullard said in a speech.

It also appears that algorithmic trading programs exacerbated the sharemarket falls in the US, at least in the early part of the week. Algorithms are set up to react to certain conditions. A fall of, say, 5 per cent in the index, may trigger the machine to sell.

Reports out of the US suggest that many of the algorithms that sold equities on Monday were "selling short". In other words, they sold stocks to buy them back cheaper at a later date.

Still, this is not to say that stockmarkets – which have been turbo-charged by ultra cheap money since the global financial crisis – are off the hook. Experts say investors would be wise to learn the lessons that have been offered up this week. Here are five of them.

1. Make sure you are not a forced seller

Regardless of where financial markets are in the cycle, investors need to ensure they are not in a position where they have to sell stocks – which can happen if equity markets remain in the doldrums for a couple of years.

"Not being a forced seller and having cash set aside to get through difficult market periods is probably the best advice I can give," says Mark Draper of GEM Capital in Adelaide.

Being forced to sell can arise for several reasons.

Retirees may need to sell assets to finance their lifestyle, savers may be parking money in the sharemarket to buy property or investors may have borrowed to buy shares and face demands for loans to be repaid.

Download the full article by clicking on the icon below

 

 

We are planning to add Montgomery Investment Management to our recommended list of investments early in 2018.  In particular we are impressed by their Global Investment team who have had an impressive track record since the fund began a few years ago.

The Montgomery Global Fund is listing on the ASX on 20th December 2017 and is a portfolio of high quality global companies aiming to pay a half yearly income distribution of 4.5%pa.  We will have further details on this fund in the new year.

In the meantime, here is a sample of how Montgomery Investment Management think about investing in a comprehensive report that makes excellent reading over the Festive Season.  The articles are written by the investment team at Montgomery Investment Management, rather than a marketing spin doctor and are very informative. 

 

To read the report simply click on the picture of the report below.

Some of the content in this edition include:

1. How the changes in the $AUD impact global facing businesses

2. Why do Montgomery's own Facebook

3. Should you own Wesfarmers?

And many more articles.

 

Thursday, 07 December 2017 10:24

Reversal of Money Printing (QE)

Dom Guiliano (Magellan)

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