28dfvdfv by ymuuiui

SHARES THE NEXT 10-BAGGER

THE BETTER INVESTMENT $550K HOUSE OR $120K GRANNY FLAT

OCTOBER 2017 $7.95 ISSUE 205 www.moneymag.com.au

@MoneyMagAUS

SMART BETA 10 MOST-ASKED QUESTIONS

Paul Clitheroe “WHY MY CREDIT CARD TRAVEL INSURANCE MADE ME LAUGH”

WHY

PAGE 10

NEGATIVE GEARING STILL WORKS Cash ﬂow plans for low and high incomes: earn up to $19,165 - BRYCE HOLDAWAY

PHIL RUTHVEN IMMIGRANTS TAKE OUR JOBS: 17 MYTHS BUSTED

VITA PALESTRANT MINIMISING DEATH TAX ON SUPER

PAM WALKLEY THE RULES AROUND CHASING YIELDS

SAM HENDERSON HOW TO GET OFF THE MONEY-GO-ROUND

017 AUST 4 50

UDE&GUARA

Aust ralia’s

o.1 N weekly

EW WEE

mag

BACHELOR MATTY J

Nic & Ke their do

FIRST BABY P

E T MB R 25 01

George finally reveals his bundles of joy! MIE OLIVER’S EST EVER INGREDIENT NNERS

‘Wh FERGIE &JOS

ATTY J

THAT T

Nic & Keith share their double joy!

TERRIBLE AKE!’

HILD

TWIN BABY BOYS!

woman he’s in love with

FIRST BABY P

eorge finally reveals his bundles of joy! AMIE OLIVER’S EST EVER INGREDIENT NNERS

ROYAL LO CHILD SCAN

‘I’M CHARL SECR SON

‘WHERE ARE YOU, PRECIOUS LITTLE BOY?’ W ll am Tyr e l’s mum’s angu sh

iPad, iPhone, Android, Google, Samsung, Laptops, Desktop computers, Windows Phones & tablets

UNIT OVERSUPPLY BARGAIN BUYS

CHINA & IND CATCHING TH

FLIPPIN H MES H

SEPTEMBER 2017 $7.95 ISSUE 204 www.moneymag com au @MoneyMagAUS

BULLETPROOF WAYS TO SAVE SCOTT PAPE

smart choices r every budget

TURNING TEENS INTO INVESTORS ROSS GREENWOOD

INVES

MAXIMISE DIV R E PROCEEDS A L LITHER

EXPERT PI K

XT BOOM

PTEMBER 20 7 7 5 SSUE 204 ww moneymag com a

HERE

EXCLUSIVE TEST!

ys as an

Import Aussie! v

PLUS

PERFECT RETIREMENT PORTFOLIO NERIDA COLE

THE ROAD G bolts plates nto Hamilton’s 740kW racer

FLIPPING HOMES HOW YOU CAN STILL PROFIT

YOUR ANNUAL INVESTM ENT GUIDE

E DIVORCE

GUIDE TO RE

P UL L TH ROE

EN KINGSLEY

SHARE INSIGHTS: WHY 2ND LEVEL THINKERS BEAT THE BUSINESS OF DYING: GOODBYE FOR AS LITTLE S $15 HEALTH INSURANCE: YOUR 10 KEY QUESTIONS ANS ERED

NN ST

HOTSPOTS M RGA ET OMAS

German invader takes on Holden’s home grown hero

Is it worthy of the Commodore badge?

nside Toyota s inal days as an Aussie manu ac urer

PERFEC PORTF

PLUS

THE ROAD OH WHAT A SHA G bol s p ates nto Ham lton s 740kW acer

S THE BUSINESS OF DY NG: GOODBYE FOR AS LITTLE AS $1500 HEALTH INSURANCE: YOUR 10 KEY QUEST ONS ANSWERED

READ YOUR FAVOURITE MAGAZINES ON ANY DEVICE! More than forty titles available!

M SHARES MA CUS AD EY

Chefs’

An army marches on its stomach, sure, but in restaurants staff meals are about more than mere fuel. We visit top Sydney and Melbourne restaurants before service to find out what’s for dinner.

Food SPR NG OADED

asman a s Agr r an i chen has ran hed out rom ook ng sch ol o es au ant w th ery as y re ul s

106

PHOTOGRAPHY BEN DEARNLEY. STYLING EMMA KNOWLES

Travel

tables

SEP Restaurant awards

LIFE IS SWEET

P AY NG WI H FIRE

Sweet nvy s an apt ame or A s air Wi e s ake y Be env ous no more We b ng you a t ste o his b st

Dave Pynt Au sie chef t Si gapo e s Burn Ends l gh s up he ba b e or a oal ﬁ ed menu m de or pr ng

POKE Hawa i s A i n nﬂe ted bowl o raw ﬁsh sa ad on i e ma es or sma t ca ual pr ng mea s

114 124 Features

134

CHEFS’ TABLES

UP IN SMOKE

LUCKY STREAK

We visit restaurants in Sydney and Melbourne before service to see what’s on the menu for staff dinner.

In his new book chef Aaron Tu ner chronicles the f l of his restaurant L am and his return o cooking at Igni

Dav d Chang s ood maga ine Lu ky Pea h bu ned b ig t and s rong As t c oses Amel a Le te w ig s t up

Reading White Heat with Marco Pierre White: how does the epoch-deﬁning cookbook of the ’80s stand up today?

SAPPHIRE AND GOLD

DUE SOUTH

HONG KONG FOR ONE

enn f r Byr e ak s he S lk Ro d nd di cove s he v v d i to y f Uzbek s an and ur m ni tan

For a as e of ex r me w l ern ss n xt eme comf rt He en Ande son t kes a h ke in Sou h Aus r l a

Fl ing olo on your next r p to Hong Kong? A t ad t on of tab e sha ng ma es the c y a h ven for one ange s

144

154

162

MARCO ON MARCO

TOP OF THE CLASS Pull up a chair with fork at the ready and dig in to the 2018 Gourmet Traveller Restaurant Awards.

114

A st ir W se s atz ie

GROSSI FLORENTINO “All the staff from the Grossi sites at the top of the city (Ombra, Grossi Florentino, Grossi Grill and Arlechin) get together at 4.30pm every day. Most days it’s an Italian meal such as chicken on the spit, pasta or risotto, but on Saturdays we’ve devised a roster for the chefs to each have a turn creating a dish from their own culture. We’ve had Korean, Malay and Vietnamese, and a couple of Italian meals and it’s becoming a bit competitive. Sta nourished, but sta nourishment. A g Guy Grossi, exec Bourke St, Melbou

SEPTEMBER 25, 2017. AUST $4.50

Australia’s

o.1 N weekly mag

BACHELOR MATTY J

Nic & Ke h share their do le joy!

‘I MADE A TERRIBLE MISTAKE!’ Meet the woman he’s really in love with

BES VALU CA

FIRST BABY PICCSS!

60 0 smart choices for every budget

ge finally reveals bundles of joy!

i c GS

NZ $10 95 ( n G

m/Whee sAust al a Ava lab e On Th

NEW WEEKLY

T O B E R 2 0 1 7

$10

ND A THE NEXT BOO

ERE TTO O

EXCLUSIVE TEST!

IImport Aussie!

VESTT

Ge erman invader takes on Holden’s home-grown hero

IIs it worthy of the Commodore badge?

MAXIMISE D VORCE PROCEEDS AUL L TH ROE

W th

JAMIE OLIVER’S BEST EVER 5 INGREDIENT D DINNERS

FL PP NG HOMES HOW YOU CAN STILL ST PROF T

YOUR ANNUAL INVESTM ENT GUIDE

AUS

ERT PICKS

TH NEW HOTSPOTS

GU DE TO RENTVEST NG

$1Ok PA FROM SHARES

BEN I GS EY

M RCUS PADLEY

M RGA ET OMAS

E IOUS Y?’ rell’s uish

ROYAL LOVVE CHILD SCANDAL

‘I’M CHARLE SECR SON’’

R THE ROAD OH WHAT A SHA Ins de Toyota’s fina days as an Auss e manufacturer

THATTORE THEMAPART

m in love with Chris’

PERFECT RETIREMENT PORTFOL O ER DA OLE

PLUS

A G bolts plates nto Hami ton’s 740kW racer

PROPERTY THROUGH SMSFs SAM H ND RSON

SHARE INSIGHTS: WHY 2ND LEVEL TH NKERS BEAT THE MARKET THE BUSINESS OF DYING: GOODBYE FOR AS LITTLE AS $1500 HEALTH INSURANCE: YOUR 10 KEY QUEST ONS ANSWERED

Read ANYWHERE, ANYTIME on ANYTHING! Search for your favourite magazines on these Apps and websites.

Apple, the Apple logo and iPad are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.

CONTENTS

Why negative gearing still works

Medical cannabis investor Harry Karelis

You should know the facts to make good decisions

INTERVIEW

COVER STORY

ON THE COVER 10 34 48 60 62 68 71 79 82

MYTHS BUSTED

UPFRONT 6 8 10 12 16 20 24 26 30 33

Paul Clitheroe on travel insurance Why negative gearing still works 17 myths busted Get off the money-go-round House or granny flat Smart beta questions Chasing yields Minimising super death tax The next 10-bagger

Editor’s letter Our experts In your interest: Paul Clitheroe News & views In brief Interview: Alan Deans Ask the experts Ask Paul Smart spending Paul’s verdict

MY MONEY 44 46 48 52 55 56 57 58 58 60 61

Gold Star cars: Wheels team Extra income: Chris Guillebeau Reality check: Phil Ruthven Health care: Beth Quinlivan Banking: Effie Zahos Family money: Susan Hely Small business: Anthony O’Brien What if...: Annette Sampson The challenge: Maria Bekiaris Crisis: Sam Henderson Life matters: Heidi Armstrong

Disclaimer: The information featured in this magazine is general in nature and does not take into account your objectives, financial situation or needs. You should consider the appropriateness of the information having regard to your own circumstances. Before making an investment, insurance or financial planning decision you should consult a licensed professional who can advise you of whether your decision is appropriate. Bauer Media does not have an interest in the promotion of any company, investment or product featured in this magazine.

trilogy enhanced cash – yield, stability and access, made easy.

4.30%pa

“there aren’ t many areas of my life in which i am conservative. my finances are one of them.” – ian healy

equivalent net return paid monthly as at 31 august 2017

www.trilogyfunds.com.au ⁄cash-money

discover more

1800 230 099 info@trilogyfunds.com.au

*For the month ending 31 August 2017, investors of Trilogy Enhanced Cash received a distribution return equivalent to 4.30% per annum (net of fees, costs and taxes, and assuming no distribution reinvestment) calculated daily and paid monthly in arrears. Please note this is past performance information for the month of August 2017 only, and is not a reliable indicator of future performance. Past performance information should be considered only as part of a balanced review of all the features, benefits and risks associated with Trilogy Enhanced Cash. Trilogy Funds Management Limited ACN 080 383 679 AFSL 231425 is the responsible entity of Trilogy Enhanced Cash ARSN 614 682 469 and has issued a Product Disclosure Statement and Information Booklet both dated 5 April 2017 (PDS) available at www.trilogyfunds.com.au/cash. You should read the PDS carefully, including the risks section, as the PDS contains full details about investing in Trilogy Enhanced Cash, and you should also seek personal advice from a licensed adviser on your financial objectives, situation and needs before making a decision to invest. Applications can only be made on the Application Form accompanying the PDS. Investments involve risk which can lead to loss of part or all capital. Investments in Trilogy Enhanced Cash are not bank deposits and are not government guaranteed.

OCTOBER 2017, ISSUE 205

DIGITAL FUTURE

THE NEXT 10-BAGGER

A $550K house v $120K granny flat

The new ways to interact with your super

How to identify shares set to grow

WHAT’S BETTER?

PROPERTY 62

66 68 71

IN EVERY MONTH

7 87 90

Privacy notice Databank The hot seat

e r NOBAR mm1 0 1 6 _ c o v

SHARES THE NEXT 10-BAGGER

205 OCTOBER 2017 $7.95 ISSUE www.moneymag.com.au

INVESTING

Cash flow: Mark Story House or granny flat Real estate: Pam Walkley

Superannuation: Susan Hely Picking winners Smart beta 10 most-asked questions Income: Pam Walkley Rules around chasing yields Super: Nicola Field New technology Cryptocurrency: Maria Bekiaris Four-step guide to buying bitcoin Super: Vita Palestrant

80 82 84 85 86

Strategy: Greg Hoffman Retail opportunities Future winners: Graham Witcomb Uncovering stocks with potential Outlook: Hans Kunnen Value.able: Roger Montgomery This month: Marcus Padley

1 0 : 0 0 T1 6 : 5 9 : 3 6 + 2 0 1 7 - 0 9 - 1 8

ENT THE BETTER INVESTM GRANNY FLAT $550K HOUSE OR $120K

SMART BETA NS 10 MOST-ASKED QUESTIO

Paul Clitheroe

@MoneyMagAUS

“WHY MY CREDIT CARD TRAVEL INSURANCE MADE ME LAUGH”

PAGE 10

WHY

NEGATIVE GSTILLEAWORRKSING

high incomes: Cash ﬂow plans for low and E HOLDAWAY earn up to $19,165 - BRYC

PHIL RUTHVEN TS IMMIG IMMIGRAN TAKE OUR JOBS: 17 MYTHS BUSTED

SAVINGS & GIVEAWAYS

VITA PALESTRANT G MINIM MINIMISIN DEATH TAX ON SUPER

PAM WALKLEY RULES THE RU AROUND CHASING YIELDS

SAM HENDERSON HOW TTO GET OFF THE MONEY-GO-ROUND

6 14

Subscribe and get your first three issues for $6 – a saving of 74%!

A 12-month subscription to Money magazine for our Letter of the Month! 10 copies of our Book of the Month – Keep Your

SMSF Simple – to be won.

DIGITAL & PRINT SUBSCRIPTION

Six copies of Side Hustle by Chris Guillebeau up for grabs.

Win one of 10 copies of Phil Ruthven’s Fast-Changing World.

SAVE 46%

PAGE 91

MONEYMAG.COM.AU MONEY OCTOBER 2017 5

FROM THE EDITOR

Negative gearing turns positive

roperty yields are low, capital growth is at risk, APRA continues to slap limits on investor lending and banks have increased interest rates. Throw in the changes to depreciation perks and the clipping of investor wings and you may be wondering, “Is negative gearing a strategy that still works?” Bryce Holdaway, who crunched the numbers for this month’s cover story for households on two different incomes, says “yes”. Now while you’d expect somebody who makes a living out of the property market to say yes, his reasoning has little to do with tax perks and more to do with time. As he says, ultimately, negative gearing is not so much a strategy; it’s a tax outcome that represents a moment in time. It’s a means to an end. His two plans show exactly when you

Feedback

To send a letter to the editor, write to Money, GPO Box 4088, Sydney NSW 2001 or email money@bauer-media.com.au

Letter of the month

Future looks sweet for extended family

For all inquiries and letters, please include name, address and phone details. Letters may be edited for clarity or space. Because of the high number of letters received, no personal replies are possible. R

S TURE FUND S INFRASTRUCPERFORMER THE SUPER

202 $7 95 SSUE au JULY 2017 mag com www money

1 7 _ C ov e r _ NOB A

0 1 0 : 0 : 4 4 + 4 : 0 7 1 9 T 1 - 0 6 2 0 1 7

PICKS ESTATE TOP 10 REAL HOTSPOTS THE

ES BIG 4 BANK SHAR ON THE VERDICT

AUGUST 2017 www money$7 95 ISSUE 203 mag com au

“ASK THE EXPERTS” TO SAFE PLACE INVEST THAT PAYS MORE THAN A TERM DEPOSIT

AUS @MoneyMag

▼

$40k

UNIT OVERSUPPLY BARGAIN BUYS

CHINA & INDIA CATCHING THE NEXT BOOM

BULLETPROOF WAYS TO SAVE SCOTT PAPE

INVEST

TURNING TEENS INTO INVESTORS ROSS GREENWOOD

PLUS

PROPERTY THROUGH SMSFs SAM HENDERSON

TO FALL?

RETIREMEN T NCOM CASH IN E ON YOUR HOME

@MoneyMag AUS

ASK PAUL OVERCOME THE FEAR OF DEBT + RETIRE ON $80K PA

EQUITY

ASK THE EXPER BUILDING TS WEALTH YOUR FOR GRANDKIDS

WITHOUT MA KI G EXTRA CO & HIGH RIS NTRIBUTIONS K STRATEGIE YOUR S ANNU PLUS

$EXPERT 10k PICKS

PERFECT RETIREMENT PORTFOLIO NERIDA COLE

A-RE Ts ARE THEY SET

$5K i $50,00nt0o

WHERE TO

E CH

AGED CAR

2 0 1 7 - 0 7 1 7 T1 6 : 3 1 : 0 5 + 1 0 : 0 0

goals. We are now in the process of upgrading by purchasing our second family home and renting out our renovated property (positively geared). When life gives you lemons, it’s time to make lemonade! Thanks to the ideas in Money magazine, we have made educated decisions and created a stable financial future for our extended family. Deborah, SA

AL INVESTME NT GUIDE

SEPTEMBER 2017 $7 95 SSUE 204 www moneymag com au @MoneyMagAUS

REG OFFMAN BUILD NG A SHARE PORTFOL

My husband and I have a two-year-old son and recently inherited two additional children full time (with no additional financial support). As we were halfway through our first home renovation, my husband and I made the decision to live off one income to finish the renovation and support two distressed young children. Despite the potential for a financial struggle, we studied our budget closely and pushed through with our financial

FLIPPING HOMES HOW YOU CAN STILL PROFIT

a year

ON • REFUNDS CREDITS FRANKING BEST THE • SET UP IP STRUCTU OWNERSH

TURN

SMART GIES STR EVRERAYTINECOME BRACKE FO▼

ALIBABA, BUY, HOLDFACEBOOK, TENCE OR SELL NT

EFFIE ZAHOS LESS PAY 1% ON YOUR & HOME LOAN GET 1% MORE SAVING ON YOUR

LOW

NOBA o v e r 1 7 _ c mm0 7

can expect your net cash flow to turn from negative to positive. On the topic of real estate, Mark Story compares the returns of granny flats and investment properties. Depreciation can certainly have a big impact on your returns. In his examples, the weekly cost of a $550,000 house is reduced from $121 to $37 while the $120,000 granny flat is cash flow positive at $124pw. But as we’re reminded, rely on depreciation (or any tax perks for that matter) and you’re rolling the dice if laws change. Although it’s a serious topic, Paul Clitheroe’s column on credit card travel insurance certainly made me laugh. If you’ve been reading his columns over the past year you’ll know he’s been travelling a bit (drawing down some of his super, I suspect). Not sure what prompt-

SUSAN HELY HOW MUCH YOU SHOULD BE PAYING SUPER FEESIN

TERRY RYDER AFFORDABLE NEW PROPER HOTSPOTS TY AUSTRALIA AROUND

MAXIMISE D VORCE PROCEEDS PAUL CLITHEROE

THE NEW HOTSPOTS MARGARET LOMAS

GUIDE TO RENTVEST NG

$1Ok PA FROM SHARES

BEN K NGSLEY

MARCUS PADLEY

SHARE INSIGHTS: WHY 2ND LEVEL THINKERS BEAT THE MARKET THE BUSINESS OF DYING: GOODBYE FOR AS LITTLE AS $1500 HEALTH INSURANCE: YOUR 10 KEY QUESTIONS ANSWERED

How to get Money Subscribe to the print or digital edition

Call: 136 116 Online: magshop. com.au/moneymagazine

6 MONEY OCTOBER 2017

Like father, like son

Mother knows best

My wife snapped this photo of my fivemonth-old son Christian Michael taking a keen interest in daddy Money magazin subscription. It’s never too early t start setting up for your child’s future and setting good money habits once they’re old enough. Danny, email

I’m surprised none of the contributors to your feature in the September 2017 issue of Money gave the obvious response to the question, “What is the best advice your father ever gave you?”. It’s “Listen to your mother”, of course. Chris, WA

Educational adventure I recently purchased Effie Zahos’ book The Great $20 Adventure from Magshop. As a primary school teacher, I knew this message of financial literacy should be imparted early in their education. However, I had reservations about the book’s relevance and

ed him to read the fine print on his card cover but thank goodness he did. He now knows that for his next walking expedition he needs to book a guide with a gun. (See page 10.) As we were heading to the printers, AustralianSuper announced that insurance was now an “opt-in” for younger workers rather than an automatic inclusion. As a mother of a 16-yearold who has a super fund and no debts or financial commitments, this makes complete sense. Even she questioned the usefulness of having to pay for insurance. AustralianSuper estimates that the exclusion of insurance premiums before turning 25 would save members an average of $9000. No doubt other major super funds will follow.

If you cannot control your emotions, you cannot control your money. WARREN BUFFETT

Follow Money on Facebook facebook.com/MoneyMagAUS

Follow Money on Twitter

Efﬁe Zahos, Editor, Money magazine

twitter.com/MoneyMagAUS

Visit Money online Check out our website and while you’re there sign up for our free weekly email newsletter. You’ll get our top money stories plus exclusive finance tips.

moneymag.com.au

its ability to engage the children but I read it to my year 2 class nonetheless. I was surprised! The students were completely engrossed in the text, which then led to quality discussions afterwards. I will revisit the text later this year to reinforce its important lessons. Additionally, the year 5 student that I tutor read the book to me and was equally engaged. I recommend this book to all primary aged students (and their teachers). Garry, NSW

PRIZE WORTH WINNING Each month we’ll award one letter a 12-month subscription to Money magazine. Write to: Letters, Money, GPO Box 4088, Sydney, NSW, 2001 or email money@bauer-media.com.au

Money is published by Bauer Media Pty Limited (ACN 053 273 546), part of the Bauer Media Group, 54-58 Park Street, Sydney NSW 2000. The trade mark Money is the property of Bauer Consumer Media Limited and is used under licence. Printed by PMP Moorebank 31 Heathcote Rd, Moorebank NSW 2170 IMPORTANT DISCLAIMER The information provided in this magazine has been obtained or derived from sources believed by Money magazine to be reliable. However, Money does not make any representation or warranty, express or implied, as to its accuracy or completeness. We recommend persons making investment decisions contact their ﬁnancial advisers. Bauer Media Limited, its related bodies corporate, and their directors and employees, do not accept any responsibility arising in any way (including negligence) for errors in, or omissions from, the information provided in Money magazine.

PRIVACY NOTICE This issue of Money is published by Bauer Media Pty Ltd (Bauer). Bauer may use and disclose your information in accordance with our Privacy Policy, including to provide you with your requested products or services and to keep you informed of other Bauer publications, products, services and events. Our Privacy Policy is located at www.bauer-media.com. au/privacy/ It also sets out on how you can access or correct your personal information and lodge a complaint. Bauer may disclose your personal information offshore to its owners,

joint venture partners, service providers and agents located throughout the world, including in New Zealand, USA, the Philippines and the European Union. In addition, this issue may contain Reader Offers, being offers, competitions or surveys. Reader Offers may require you to provide personal information to enter or to take part. Personal information collected for Reader Offers may be disclosed by us to service providers assisting Bauer in the conduct of the Reader Offer and to other organisations providing special prizes or offers that are part of the Reader Offer. An

opt-out choice is provided with a Reader Offer. Unless you exercise that opt-out choice, personal information collected for Reader Offers may also be disclosed by us to other organisations for use by them to inform you about other products, services or events or to give to other organisations that may use this information for this purpose. If you require further information, please contact Bauer’s Privacy Officer either by email at privacyofficer@bauer-media. com.au or mail at Privacy Officer Bauer Media Pty Ltd, 54 Park Street, Sydney NSW 2000. MONEY OCTOBER 2017 7

OUR EXPERTS

Who is your biggest inspiration? The Money team EDITORIAL Chairman & chief commentator Paul Clitheroe Editor Effie Zahos Deputy Editor Maria Bekiaris Art Director Ann Loveday Designer Heather Armstrong

PHOTOGRAPHS Getty Images ADVERTISING NSW, WA & SA Vince Lam (02) 9282 8906 Victoria Christine Lester (03) 9823 6382 Queensland Judy Taylor (07) 3101 6636

Senior Sub-editors Bob Christensen, Debbie Duncan, Janice Hogg

PRODUCTION Controller Rosanna Quinzon

Senior Writers Susan Hely, Pam Walkley

Advertising Production Dominic Roy

Online Content Producer Sharyn McCowen

MARKETING Brand Manager Georgia Mavrakakis

CONTRIBUTING WRITERS Heidi Armstrong, Chris Guillebeau, Alan Deans, Nicola Field, Ross Greenwood, Sam Henderson, Greg Hoffman, Bryce Holdaway, Hans Kunnen, Roger Montgomery, Anthony O’Brien, Marcus Padley, Vita Palestrant, Beth Quinlivan, Phil Ruthven, Annette Sampson, Mark Story, Graham Witcomb CONTRIBUTING ARTISTS Frances Andrijich, Simon Casson, Reg Lynch, Jim Tsinganos, John Tiedemann

8 MONEY OCTOBER 2017

EFFIE ZAHOS

HANS KUNNEN

GRAHAM WITCOMB

Effie is Money’s editor and author of The Great $20 Adventure. Effie says: “Pick ups from my son’s tutoring lessons often turn into discussions about French economist Thomas Piketty and author Satyajit Das. Both remind me to stop spending and that the worst is only ever around the corner.”

Hans is chief economist at Compass Economics. Hans says: “Geoff Walker, an actuary with State Bank NSW, was my investment inspiration. He took me through the maths of conservative gearing into the sharemarket. He explained ‘the long game’ and the interaction between dividends and interest costs.”

Graham is a senior analyst at Intelligent Investor. Graham says: “Charlie Munger, not for who he is, but for something he said that seems to solve almost every financial, health and relationship problem I encounter: ‘The surest way to get what you want is to deserve what you want.’”

CHRIS GUILLEBEAU

PAM WALKLEY

ALAN DEANS

Chris is a blogger, speaker and author of several non-fiction books including Side Hustle. Chris says: “I’m fortunate to have an amazing community of Side Hustle School listeners. Every day I hear about their successes, challenges, and next steps. This feedback helps me do better work!”

Pam was founding editor of Money and is now a senior staff writer. Pam says: “John Maynard Keynes, a renowned economist, inspires me because he tried to fix widespread unemployment and unregulated capitalism, both of which caused hardship for many.”

Alan is senior partner at Last Word Corporate Communications. He worked for 30 years as a journalist and editor. Alan says: “Max Walsh reads prolifically, and always has a fresh take on the major economic events of the day. He’s not afraid to call out governments, corporations, bureaucrats and investors when they stuff up.”

Subscriptions Thea Mahoney MANAGEMENT CEO Paul Dykzeul Chief Financial Officer Andrew Stedwell Commercial Director Australia Paul Gardiner Syndication inquiries: acpsyndication@ bauer-media.com.au ISSN 1444-6219

Should you invest in a house or a unit? A house or a unit? Each have their pros and cons, though we advise each LQYHVWRU DFFRUGLQJ WR WKHLU LQGLYLGXDO ó QDQFLDO VLWXDWLRQ DQG LQYHVWPHQW JRDOV

Long term their capital growth is better. Tenants are typically stable families that provide secure income, reducing the risk of you covering any shortfalls due to vacancy. However, houses are more expensive so you need a bigger borrowing capacity to afford them.

Units

When it comes to growth versus cashﬂow, we don’t believe you have to sacriﬁce one for the other. We believe real wealth is created by compound growth. The way to achieve this is to identify and hold growth focussed assets with little or no cost to hold.

Getting emotional about investments is the biggest mistake investors can make. Buy effective investments as opposed to properties that you ‘like’ or can drive past every day. These typically end up being more expensive to hold and besides buying well and having a great property manager, mean your investment runs smoothly. To remove all emotion from the decision, we follow our proven M.A.P process; Market > Area > Property. If you’d like more information about how this works contact OpenCorp today on 1300 OPEN CORP. Michael Beresford Director of Investment Services OpenCorp

1300 OPEN CORP

To learn more about our M.A.P. process and why following a proven system is crucial when investing for long-term gain, claim your free book on Property Investing below!

Valued at $27.99 opencorp.com.au/moneyoct

AT $

.99

So, what’s the answer?

Remove emotion from any property investment purchase

Claim your FREE book on Property Investing

Units are usually more affordable via the lower price point. They’re cashﬂow focussed so rental yields tend to be better. When coupled with tax beneﬁts, holding costs are lower and this is appealing for investors on lower incomes. The trade-off is that they are in abundance and oversupply prevents solid capital growth. As new blocks are built, tenants can simply shift into a newer property which increases your vacancy risk and impacts your ability to increase rents consistently.

The growth in equity will allow you to afford the deposit and costs for your next property — and the next property after that. What is fundamental is ensuring that your investment is working for you passively while growing in value and maintaining a positive cashﬂow position.

VALU

Houses

FREE BOOK

IN YOUR INTEREST Paul Clitheroe

Check the fine print on your credit card insurance policy – you could be in for a shock

learly it makes sense to understand your insurance. Income protection policies in particular are fraught with danger but this month I want to focus on a very important policy that affects millions of us: travel insurance. Between us we buy about 10 million international airfares a year. We Australians are about the wealthiest people on the planet so we travel a lot. Like many readers of Money, I use an upmarket credit card for my travel insurance. Yes, it costs us a pretty high annual fee but Vicki and I direct all our spending onto it, we pay it off in full inside the interest-free period and understand the benefits it offers and how to use them. But I have to plead guilty about not fully reading the fine print. Sure, I get the basics. We have to pay a minimum of $250 on the card towards a part of every trip and with a hire car it has to be 100% of the cost. Given the outcry about policies not paying out, and with a trip coming up, I thought I had better get my act together and read the full policy. It was not as bad as I feared but some of the “we will not pay you” conditions did surprise me. Others made me laugh. First up, car hire. Our credit card policy gives us a maximum of $150,000 for accidental damage, above any amounts that exist in the rental company contract. I have not been ticking the “extra insurance” box in the contract as I knew I was covered for the excess in an accident. But it had not

10 MONEY OCTOBER 2017

occurred to me that if I ran into a Ferrari I had a problem. Unless I take extra cover, I have only $150,000 in damage cover to my car and a vehicle or vehicles I hit. I guess my hire car is typically worth $40,000 or so, meaning I am pretty safe as long as I hit cars worth under $110,000, which seems like a reasonable bet. But I am not a betting person. I’ll be taking extra cover in future. I also see that if I am not on a bitumen-sealed road I am not covered. Where the policy is pretty good is snow skiing. Most policies will not cover you if skiing off a groomed run. Ours does not have an exemption as long as you are in the boundaries of the resort. If you are not, this is deemed an “extreme sport”. Fair enough.

Strangely, I could have gone scuba diving but not paddling in a canoe Where it is a bit odd is that you are covered for scuba diving to 30 metres but not a simple canoe paddle, horse riding, whitewater rafting, go-karting or rock climbing. But mountain biking and hot air ballooning, which we do enjoy, are not covered and nor is bungee jumping. Mind you, I wouldn’t cover that if I was an insurance company. It was a shock to discover the exemption

for “trekking”. We do enjoy a good trek but we have no cover under our policy. We are covered if “walking”. I guess we need to go with tour operators offering a “walk” not a “trek”! Interestingly, we would not have been covered during our recent “walks” at Spitsbergen in the Arctic. An exemption is if walking with a “guide carrying a gun”. That made me laugh: you are insured if the guide does not have a gun for the walker’s protection. I suspect the insurer reckons you are in more danger of the guide accidentally shooting you than being attacked by a polar bear, which is probably right! We are also not covered if walking above 4000 metres, so to my embarrassment we were not covered during the last six days of a recent walk up Mt Kilimanjaro. So with our card cover we can ski “offpiste” and but not have a canoe ride. We can dive to 30 metres but not go for a walk if it is called a trek. And we really must avoid hitting expensive cars. I also note we are not covered by any act of terrorism. I do appreciate there are some pretty small risks here, and part of life is taking risks we understand. But at least I now know where I need to buy extra cover. My advice is very simple: read your insurance policy before you book your trip. Paul Clitheroe is Money’s chairman and chief commentator. He is also chairman of the Australian government’s Financial Literacy Board and a best-selling author.

8.00%pa

Current net rate, paid monthly

Because you have more important things to worry about.

find out more

1800 230 099 info@trilogyfunds.com.au trilogyfunds.com.au/tmit-money * Net rate paid to investors with Allocated Units calculated daily and paid monthly in arrears for the month ended 31 August 2017. Net rates are net of management fees, costs and tax, and assumes no reinvestment of distributions. The rates of return equivalent to 8.00%pa are not guaranteed and are determined by the future revenue of the Trust. For the month ended 31 August 2017 Investors held Cash units for an average of 2 days but historically this time period has been much longer. Cash units were paid a net rate of 1.25% p.a. calculated daily and paid monthly in arrears. Past performance is not a reliable indicator of future performance. IMPORTANT: This advertisement is issued by Trilogy Funds Management Limited ACN 080 383 679 AFSL 261425 (Trilogy Funds) and does not take into account your objectives, personal circumstances or needs nor is it an offer of securities. The Trilogy Monthly Income Trust ARSN 121 846 722 is a registered pooled mortgage fund and investments can only be made on the application form accompanying the Product Disclosure Statement (PDS) dated 1 September 2017 issued by Trilogy Funds and available from www. trilogyfunds.com.au/tmit. The PDS contains full details of the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making a further investment. All investments, including the Trilogy Monthly Income Trust, involve risk which can lead to loss of part or your capital. Trilogy Funds is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed adviser who will conduct an analysis based on your circumstances. Investments in the Trilogy Monthly Income Trust are not bank deposits and are not government guaranteed. The figures in this advertisement represent returns on units characterised as Cash and Allocated units under the previous PDS dated 17 October 2017. From 1 September 2017, these unit characterisations are no longer applicable. Please see the PDS dated 1 September 2017 for further detail.

NEWS&VIEWS

THIS MONTH

THE BUZZ

Do your bit to plug super’s $2.85bn gap Check that your employer is making the correct contributions

he tax office last month released its estimate of the gap in superannuation guarantee (SG) payments by Australian employers – that is, the difference in the amount that should have been paid compared with what was actually paid. The ATO estimates the gap is 5.2% ($2.85 billion) of the total estimated $54.78 billion in super that employers were required to pay in 2014-15. An estimated 650,000 Australians each year are affected by SG non-compliance. By law your employer is required to pay 9.5% of your salary into your superannuation account, at least quarterly. If they are not, you could face negative consequences when you reach retirement: people affected by SG non-compliance

lose on average around $3750 a year and for a 25-year-old a oneoff loss of this size could equate to a $13,500 loss at retirement. If you have any doubts about whether your super is being paid correctly, these steps can help you resolve the issue: Speak to your employer Ask your employer if they have been making SG contributions for you and, if so, how much they have been paying and which account details they are using. If your contributions have been going into a fund that you no longer use or check, you may wish to consolidate your super. Contact your super fund If you do not have your most recent member statement, you can contact your super fund to find out the timing and amount of your last

payment. You can also create an account on the tax office’s myGov service to see details of all your super funds, including any that you may have lost track of or forgotten about. Lodge an inquiry with the ATO If you have checked with your employer and fund, and are still not sure that your employer is paying you enough (or any) super, you can lodge an unpaid super inquiry with the tax office. You will need to provide your employer’s ABN and contact details, along with information on your current employment arrangement and details of the period of lost super. The ATO will investigate and provide you with updates via letter. Glen McCrea, chief policy officer, the Association of Superannuation Funds of Australia

ON MY MIND CALENDAR OF EVENTS Thursday, October 5 Balance of trade Wednesday, Oct 11 Westpac consumer conﬁdence Friday, Oct 13 Consumer inﬂation expectations Thursday, Oct 19 Unemployment rate

12 MONEY OCTOBER 2017

Bitcoin is too hot to touch

itcoin is up about 300% this year. Ethereum is up 3700% (it was up 5400%). Cryptocurrency is hot. Too hot in my opinion. It is showing all the signs of an overhyped bubble. Bitcoin looks very similar to the dotcom bubble but, interestingly, despite that bubble’s spectacular burst, with stock prices crashing and many companies going to the wall, two decades later the internet has fundamentally changed the way we work and play. Cryptocurrencies are built on a platform called blockchain. Blockchain is a technology

that underpins bitcoin but it is not limited to cryptocurrencies. It is a way of creating a record that is almost impossible to tamper with. It therefore becomes a source of truth, enabling parties who don’t know each other to engage in transactions with confidence and trust. It is being considered for a large range of applications, including share registries, land registries, banking applications, crypotocurrencies and more. While the cryptocurrency boom could well blow up, in 20 years we may look back and realise that the development of blockchain has fundamentally changed the way we do things. Chris Batchelor, CFA, market commentator

NEWS BITES You can now use Afterpay to book flights through Jetstar. Currently the service is only available for domestic flights for transactions between $200 and $1000 booked eight weeks or more in advance of travel. There is a service fee of $10 per transaction. It may be extended to international flights down the track. ETF Securities Australia has launched an ETF focusing on robotics, automation and artificial intelligence (AI) technologies. The ETFS ROBO Global Robotics and Automation ETF (ASX: ROBO) will track the ROBO Global Robotics and Automation Index (RAAI), which consists of 83 stocks from 12 high-growth sub-sectors. Performance figures for the index show it returned 18.2% annualised over three years to August 31. There is a 0.69% management fee. In a deal aimed at boosting electric vehicle take-up, Macquarie Group’s leasing arm, with Clean Energy Finance Corporation support, will offer electric vehicle leases at a 0.7% discount to the standard rate. It is estimated about 1200 vehicles will be financed under the arrangement.

More of us buy now, pay later

ou might have noticed some new logos appearing at checkouts recently, both online and in stores – logos for “buy now, pay later” services such as Afterpay, Openpay and zipMoney. You might be one of the increasing number of consumers who have used one of these services. As the name suggests, buy now, pay later is all about spreading the cost of a purchase over time. Afterpay is probably the biggest of the services and claims to account for 5% of online retail sales and 20% of online fashion purchases. It enables you to split the cost of your item into four equal

85%

instalments to be repaid fortnightly over eight weeks. Use of buy now, pay later services is certainly increasing – according to RFi Group’s research, of Aussies buy a round of drinks when out with 16% of Australian consumers have friends but 81% would rather buy their own, now used one of these services. If you are thinking of giving buy according to a survey by ME. About 64% think now, pay later a go, make sure you they spend more than they otherwise would when do your homework to fully understand involved in a shout. So why do it? Well, 42% what your obligations are. The best feel expected to participate, 39% don’t place to head is the provider’s website, want to look tight and 26% think where you will be able to find all the it would be un-Australian information you need. to refuse. Alex Boorman, research director, RFi Group

MONEY OCTOBER 2017 13

NEWS&VIEWS

THIS MONTH BOOK OF THE MONTH

TAX TIP

APP OF THE MONTH

Beware CGT in divorce transfer

SAFESWISS COST: FREE OS: IOS, ANDROID

KEEP YOUR SMSF SIMPLE Barbara Smith & Ed Koken Major Street Publishing RRP $34.95

hether you already have a self-managed super fund or are thinking about starting one, you’ll find lots of useful information in this book by tax and super experts Barbara Smith and Ed Koken. It covers everything from setting up and managing an SMSF and selecting investments at accumulation phase through to what you should be doing in retirement phase. It also looks at the changes that kicked in on July 1 because, as it points out, keeping up with the changing rules is one of the key tasks when running an SMSF.

Ten readers can win a copy. In 25 words or less, tell us your best tip for keeping your SMSF simple. Send entries to Book of the Month, Money, GPO Box 4088 Sydney, NSW 2001 or email money@ bauer-media.com.au. Don’t forget to include your name and postal address. Entries close November 1, 2017.

afeSwiss is a free private messaging app similar to WhatsApp and Viber and, like its competitors, it allows for encrypted voice calls and text chat as well as offering a group text chat feature. One of its biggest selling features, though, is that its latest update makes sending an attachment to the wrong person a thing of the past. “The new feature does away with the embarrassment and business risks associated with accidentally sending an attachment or file to the wrong person, implemented in a super-secure mobile messaging environment,” says SafeSwiss. Push-to-delete allows you to delete messages, files, photos and videos you’ve accidentally sent on your device, the recipient’s device, or both. SafeSwiss lets you sign up without a phone number or email for additional privacy. You can also set a self-destruction timer that wipes the message on both devices after the specified time.

ith one in three Australian marriages ending in divorce, a factor that separating couples need to be aware of is tax. As part of any financial settlement there will usually be a split of assets. This means that legal ownership of some assets will change, which would normally be a trigger for a capital gains tax event. In most cases, where an asset subject to CGT is transferred between spouses as a result of a marriage breakdown, a CGT rollover will apply – this has the effect of disregarding any capital gain or loss arising from the transfer. The receiving spouse is treated as if they had always owned the asset and is liable to CGT on the full capital gain when they ultimately dispose of it. The marriage separation rollover is automatic. You cannot choose whether or not to apply it. For tax purposes, it is important that any financial arrangement is formalised by a court order, maintenance agreement or binding agreement. Avoid “informal” private agreements; for the rollover provisions to apply, the asset must be transferred under a formal agreement or settlement. If the transfer is agreed as part of a private agreement, the normal CGT rules will apply. This means that the assets will be treated as being sold at their market value by the disposing spouse (triggering a capital gain if the market value is greater than cost) and will be acquired at market value by the receiving spouse. MARK CHAPMAN, DIRECTOR OF TAX COMMUNICATIONS AT H&R BLOCK. MCHAPMAN@HRBLOCK.COM.AU

SNAPSHOT Bank of mum and dad steps in How Australian parents are helping their kids onto the property ladder (% of parental lenders*) Allow child to live at home rent-free

43%

Contribute money towards deposit Acting as a guarantor

41%

Buying a property on behalf of, or as a partner of, the child

Source: Mozo.com.au

14 MONEY OCTOBER 2017

Own savings

66%

Cutting back expenses

26%

Home equity

% 13%

Assisting with repayments

How Australian parents are financing their contribution to their children (% of parental lenders*)

The national average lent to children is

$64,206

Delaying retirement Selling assets

13% 9% 4%

*Some parents provided multiple forms of assistance, resulting in percentage exceeding 100.

IN BRIEF

MY MONEY

INSURANCE

Income protectio v trauma Josh Callaghan n, general manager, wealth, Canstar

•

our It’s important to note that income income protection premiums is your most can be more than twice the important cost of trauma policies, even asset, yet it is often overlooked. after factoring in the tax Many of us don’t prepare deduction that comes with for the impact that illness or income protection insurance. Knowing that income disability can have on our ability protection can be quite to earn an income for a period expensive, you could consider of time. trauma insurance as an Income protection and affordable option. Trauma trauma insurances are two insurance will not pay out in as products designed to protect many circumstances as income us against such financial losses. protection insurance but it does Here are a few important facts to help you understand offer some peace of mind with them better: cover for upfront expenses. Income protection insurance Income protection and commonly insures 75% of your trauma have some overlap gross income in the event of in what is covered but are prolonged illness or disability not substitutes for each that prevents you from other. If anything, working. trauma insurance AVERAGE In comparison, is a reasonable PREMIUM1 trauma insurance addition is an immediate, to income one-off lump protection cover. Income pro In rotection sum payment to Ultimately, $87 a moonth cover financial affordability, Traum ma needs and is only occupation $42 a month m h paid if you meet one and personal of the specified medical circumstances will conditions in the policy. determine what levels Due to the risks of and type of cover AVERAGE PREMIUM1 certain occupations are relevant to and barriers you, which is to re-entering something the workforce to speak to a Incom come protecti ection for some jobs, financial adviser m $132 a month income protection about. Trauma Tr ma insurance $38 a month premiums vary Source: Canstar. 1Premium by occupations, with for a 30-year-old. All white-collar occupations considered. Income protection professionals paying the least based on stepped premiums covering 75% of and blue-collar occupations $70,000 annual salary. Trauma based on stepped paying the most. premiums for cover of $250,000.

•

Ripp ped off by ticke et resellers atch out if you’re buying tickets for a concert or sporting event because yyou could be ripped off if you deal with a reseller. “Ticketss purchased in Australia from resale sites such as Viagogo, Ti k t Ticketmaster Resale and StubHub were sold higher than face value in 83% of cases, had hidden fees tacked on in 68% of cases and were for the wrong seats in 8% of cases,” says the consumer group Choice. “But four out of five Australians who purchased a ticket from these resellers believed they were buying it from an official vendor, in part because of how they were marketed and because of the design tactics used by these sites.” The Australian Competition and Consumer Commission (ACCC) is taking Viagogo to court for misleading consumers. The watchdog has received 473 contacts about Viagogo from Australian consumers this year year.

•

TOP PROMOTIONAL BONUS SAVINGS ACCOUNTS RaboDirect 3.05%pa advertised rate, 1.8%pa without bonus; EasyStreet Fin Services 3%pa advertised rate, 2%pa without bonus; HSBC 3%pa advertised rate, 1.6%pa without bonus; Bank of Melbourne, BankSA, St.George Bank (NSW) 3%pa advertised rate, 1%pa without bonus. Source: Canstar as at 13-Sep-17.

16 MONEY OCTOBER 2017

•

males

•

females emale

The ACCC offers these tips for consumers buying tickets to an event: Buy your tickets from an authorised ticket seller to ensure you get seats you what, aren’t paying more than face value and actually get a real ticket. Don’t trust search results alone as a ticket seller who has come up first may be a reseller who may have paid to be at the top of the list, or even a fake ticketing website. If you pay for tickets with a credit card and you do not receive what you paid for, you can ask your bank or credit card provider for a chargeback.

• • •

COMPILED BY MARIA BEKIARIS

X MORE MONEY STORIES ON P40-61

AFFORDABILITY

$400,000 house is a dying breed

t perhaps comes as no surprise that buying a property for less than $400,000 has become harder and harder. Research by CoreLogic shows that across Australia in the year to June 2017, 31.2% of house sales and 37.3% of unit sales were for less than $400,000. That is a big drop from 10 years ago when the figures were 62.4% for houses and 68.9% for units. You are more likely to find a property for less than $400,000 in regional areas, where 52.0% of houses and 60.5% of units that sold in the 12 months to June 2017 were priced below $400,000. Unfortunately, things are likely to get worse.

CoreLogic research analyst Cameron Kusher says he anticipates that over the next 12 months the proportion of properties that sell for less than $400,000 will decrease even further. “Although the federal government attempted to address the issue in the budget this year, in order to improve housing affordability clearly there is much more work to be done on both supply and demand drivers of the market,” he says. “A greater supply of stock which could potentially reduce prices would at the very least be a good start. However, the supply needs to be supported by sufficient infrastructure and employment opportunities.”

COMBINED REGIONAL AREAS Annual % of sales below $400,000 100% 90% 80% 70% Houuses 60% Units 50% Jun92 Jun97 Jun02 Jun07 Jun12 Jun17 Source: CoreLogic

COMBINED CAPITAL CITIES Annual % of sales below $400,000 100% 80% 60% 40% Houses 20% Units 0% Jun92 Jun97 Jun02 Jun07 Jun12 Jun17

TOP LOW-RATE HOME LOANS

Nathan Birch, director, BInvested

COMPILED BY MARIA BEKIARIS

big mistakes people make is renovating to their personal taste and not considering the market. Whether you opt for carpet or tiles should depend on local demographics, not your personal preferences. It’s important to understand who you’re doing the renovation for and tailor it accordingly. With cosmetic renovations, which are less likely than structural jobs to result in overcapitalising, there are

X MORE PROPERTY STORIES ON P62-65

Source: CoreLogic

Renovating to rent or sell

PROPERTY

IN BRIEF

two paths you can take: renovating to rent or to sell. TO RENT: You can keep it simple and opt for cheaper materials. With hundreds of rental properties to manage, I’ve chosen to stick with one paint colour – Whisper White – for all the walls and ceilings of each of my properties, both saving me money and simplifying the process if one of them needs a new coat of paint. Always opt for darker shades of carpet for a rental property, as this is often the first thing to be destroyed by tenants.

TO SELL: I look at the same type of cosmetic renovations – carpets, paint, tiles and so on – but with some added finishing touches. A feature wall, for example, and lighter carpets can make a house feel more like a home. When selling you want people to connect and to envision themselves living there. There’s no rule of thumb when it comes to how much to spend, but if you’re not sure that you’ll see a return on your investment, don’t do it.

Homestar Finance 3.44%pa, 3.45%pa AAPR1; Reduce Home Loans 3.44%pa, 3.45%pa AAPR; Mortgage House 3.49%pa, 3.49%pa AAPR; Freedom Lend 3.49%pa, 3.50%pa AAPR; Homestar Finance 3.49%pa, 3.52%pa AAPR. Source: Canstar as at 13-Sep-17, ranked by AAPR. 1AAPR on $250,000 loan for 25 years.

MONEY OCTOBER 2017 17

INVESTING

IN BRIEF

DISCLOSURE

Fees can no longer be hidden

TOP SUPER FUNDS, AUSTRALIAN SHARE OPTIONS, BY 1-YEAR PERFORMANCE Catholic Super, 10.69%; CFS-FC Persl, 10.24%; BT Lifetime Super Emp., 9.91%; Telstra Corp Plus, 9.72%; CareSuper, 9.43%. Source: SuperRatings as at 31-Jul-17.

18 MONEY OCTOBER 2017

hen you invest through a super fund or another type of managed investment, the true cost of your fees and charges is made up of the explicit headline fees plus any indirect costs such as investment manager charges. The financial regulator ASIC is concerned that funds may not be declaring the full value of these below-the-surface costs and is introducing new rules to make sure they do. For example, your fund might use

an investment manager that declares a very low investment fee only to divert some of the gross investment income to cover their internal costs. Or your fund uses a multi-manager that subcontracts other investment managers without disclosing to the super fund these second-layer fees. But these are fees by another name and from now on super funds have to include all these amounts when they tell you how much their total fees and charges are. ASIC estimates its new disclosure rules could see funds increase their reported fees by an average 0.23%.

The subtlety is that the crediting rates that fund members and investors receive in their accounts won’t change because they were actually paying these higher fees all along. These new rules came into force this month. But as common sense as they seem, ASIC has created a lot of confusion due to the way the new fee rules work if your super fund uses a platform or if it has a lot of investments in unlisted property and infrastructure. If your latest investment statement tells yyou yyour fees have jjust gone up, now you know why.

Join the funding crowd

etail investors are now officially able to invest in start-ups and small businesses through crowd-sourced funding (CSF). From September 29 you could invest up to $10,000 a year in a company and you’ll get equity in the form of shares.

Only companies not already listed on a stock exchange can raise funds using CSF. If you want to invest in a company offering shares through a CSF website you must apply through that website, explains the MoneySmart

website. It suggests you check that the com mpany has listed its offer o on a website that is run by an intermediary witth an Australian financial services licence (AFSLL). You have a cooling-off p period of five business dayys to change your mind iff you

decide the investment isn’t for you, says MoneySmart. MoneySmart

COMPILED BY MARIA BEKIARIS

XMORE INVESTING STORIES ON P66-79

Alex Dunnin, executive director, research and compliance, Rainmaker Information

SMALL CAPS

Four ‘musts’ for your portfolio John Abernethy, managing director, Clime Group

ut-of-favour and cyclical stocks offer opportunities for investors who have the stomach for it and can anticipate a rebound but we believe there is a better option. The micro- and small-cap segments of the market are structurally inefficient due to relatively low commission potential and limited trading volumes keeping stockbrokers away, and lower levels of liquidity preventing larger institutions from meaningful participation. Having a diligent selection framework is critical, with a focus on key factors such as competitive positioning, future prospects, balance sheet strength, cash flow characteristics, profitability profiles, quality of management and valuation. Nick Scali (ASX: NCK) is a leading furniture retailer with a huge

SMSFs swing to index funds

COMPILED BY SUSAN HELY

uided by financial planners, self-managed super funds (SMSFs) have cut back on direct shares in the past 12 months. A year ago, financial planners recommended that 22% of direct shares make up an SMSF portfolio. But this has dropped to 18% in 2017, according to Investment Trends and Vanguard’s SMSF report for 2017. Financial planners have increased SMSF investments in unlisted index funds from 7% last year to 11%, and in listed exchange traded funds from 8% to 10%. Managed accounts, often run by financial planning firms, have jumped from 5% to 10% this year.

nationwide store footprint (currently 45 with a long-term target of 75 across Australia and New Zealand). While earnings have more than tripled since 2012, the equity base has roughly doubled. This demonstrates a strong return on equity and implies quality management and a business with a high-quality, self-funded growth profile. Collins Foods (CKF) is a leading restaurant operator, manager and administrator. Its core business is the operation of almost 200 KFC stores across Australia and Germany. It has established a sufficient pipeline for organic growth in both regions, which, combined with a discount to future value, presents a promising longer-term opportunity. Elanor Investors Group (ENN) is a multi-level investment manager whose segments include funds man-

agement, hotels, tourism and leisure, real estate and special situation investments. Along with diversified exposure and high-calibre management, Elanor continues to display growth in recurring income with an attractive yield of 7.1%. Folkestone (FLK) is an emerging asset manager and property developer with a platform that encompasses the management of a listed A-REIT, income-focused property syndicates and a substantial multi-sector development pipeline. We believe Folkestone, led by a quality management team that owns a substantial stake in the business, can deliver strong growth in earnings per share over the coming three years.

IN BRIEF

XMORE SHARES STORIES ON P80-86

HOLD COCA-COLA AMATIL The Intelligent Investor James Greenhalgh RECOMMENDATION

BUY

HOLD

SELL

below $5.00

up to $7.50

above $7.50

SELL at $8.04 Source: Intelligent Investor; price as at 30-Aug-17 close of business

t’s a big call to say the market’s wrong. But here goes: the market’s got Coca-Cola Amatil wrong. The brokers have forecast Amatil will deliver earnings per share of around 56¢ in 2019. Our view? It simply won’t happen. The largest division, Australian Beverages, is groaning under the weight of accelerating revenue declines. The trends are negative and getting worse.

Despite cutting prices, Australian Beverages volumes fell 4% in the first half. “Still” volumes fell a whopping 9%. Perhaps the best we can say about Amatil is that it’s unlikely to go bankrupt any time soon. Don’t be lured by the prospective 2017 PE ratio of 15 and yield of 5.7%. These are only reasonable if you believe management’s medium- and long-term targets. We don’t. SELL.

TOP A-REITS BY THREE-YEAR TOTAL RETURN Blackwall Limited (BWF) 55.37%pa; Rural Funds Group (RFF) 43.20%pa; Asia Paciﬁc Data Centre Group (AJD) 28.58%pa; Arena REIT (ARF) 27.84%pa; Blackwall Property Trust (BWR) 23.25%pa. Source: ASX as at 31-Aug-17.

MONEY OCTOBER 2017 19

INTERVIEW

STORY ALAN DEANS

Medicine man

20 MONEY OCTOBER 2017

Fact file Harry Karelis Investor in medical cannabis growth stocks AusCann and Zelda Therapeutics; lives in Mount Pleasant, Perth, age 47. Wants to visit as many countries as his age and has a few to go; managed private equity medical and tech funds. His advice to readers is get a good financial adviser. First job, kitchen hand at KFC.

in sleep disorders, with its own sleep labs. “Picture a controlled environment where you have a relaxing night’s sleep with 24 leads attached to your brain, your lungs, your heart, your limbs and a camera monitoring your night’s sleep,” says Karelis. “We will be monitoring pretty much everything that is going on, including blood. This will be a randomised, crossover, placebo-controlled trial. That means the gold standard. If we show that our medicine works under those conditions, then it works.” More trials are planned next year on autism, insomnia and breast cancer. If successful, then approval is needed from strict state regulatory bodies despite the

federal government now classifying cannabis as a Schedule 8 drug, along with opioids. Karelis is confident the trials will work because Zelda has unique access to the results of medical cannabis treatments from a Californian company, providing a short cut for their tests. Knowing the chemical fingerprint that works is valuable, because a patent can be registered on the type of plant and the dosage. The company would then license production of cannabis oil and its marketing. Drops would be administered under a patient’s tongue. The restrictions are still too much for some. Entertainer and cancer sufferer Olivia Newton-John recently called for it to

FRANCES ANDRIJICH

t’s less than a year since cannabis was legalised for medical purposes, and investors haven’t let the grass grow beneath their feet. Australia already ranks among the countries with the highest number of recreational users. The history of cannabis cultivation here dates back to the First Fleet, when settlers brought along seeds to make hemp. Now the aptly named weed is at the centre of a growth industry aimed at treating many common ailments. Let’s get one point straight. The marijuana that is smoked is not the same stuff that could soon ease itching from eczema, let insomniacs sleep or improve cancer treatments. The plants look similar but they have vastly different chemical make-up. Cannabis contains 113 types of a compound called cannabinoid. Just one of those, THC, brings a state of euphoria. Plants can be bred to have thousands of different concentrations and combinations of each compound, giving them the potential to treat many different ills. No one compound works alone. They all do, creating what is called an entourage effect. Now that it’s legal, the challenge is to test exactly which plants have which effects. Harry Karelis is doing just that. Before the year is out, a company he chairs, Zelda Therapeutics, will start its first clinical trial in partnership with the University of Western Australia on formulations to treat insomnia. The university is a leader

be more readily available. She is believed to have raised the matter directly with Prime Minister Malcolm Turnbull. Perth has a hub of cannabis experts, in part centred on Zelda, AusCann and their teams of experts. It is also home to a funding base. Karelis says there are about 40 people in the cluster he is involved with. They work within 10 minutes of the CBD and regularly brainstorm. “We talk about who we have met, what new information is relevant, where we go next, who do we do it with, etc. We have tentacles in Canada, California, Chile, Germany, Spain, Denmark and Israel so we know what is going on. We are getting bombarded with

ideas all the time from people wanting to do the next big thing.” His entrepreneurial spirit developed at an early age. At 11 he took his first job at KFC and stayed for five years. “I was involved in two new store openings, so I moved around the system. I learned that if you worked hard, you made money. And you should save money and try not to blow it. The younger you are when you start building that nest egg the better. Resist the temptation to go boozing every weekend with your mates, and you can get ahead without too much effort.” His biggest mistake, he says, was getting caught up in the hype of investing. “Most

people think that when the music stops they can sell their shares. They might lose 5%. But when that happens, there are no buyers. If you are holding a position, that’s it. You don’t lose 5%, you lose 95%. It’s important not to get caught up in the hype. Things don’t go vertical forever. You will definitely see this in the cannabis space. It will go in waves, and we are in a bit of a wave now. But it will go up to a level and then it will go down a bit, and then go sideways for a bit. But don’t get sucked into the thought this is going vertical, and double and double. “When I first joined the financial services industry as a research analyst for a stockbroker, there was a diamond boom on. MONEY MO EY OCTOBER 2017 21 2

INTERVIEW

There were some companies off the north-west of Australia that wanted to mine diamonds from the sea floor. I was a young guy, and everyone else was driving Ferraris and making tons of money. I thought, here is my chance. It was T+10 settlement back then. You could buy a share and pay for it 10 days later, if at all. I remember on a Monday, the young guys said let’s go into these stocks. On the Tuesday we doubled our money, and the Wednesday we quadrupled our money and on the Thursday again. It was just going vertical. We all thought we were clever. T+10 was approaching so we decided that we didn’t want to pay for the shares. We will sell them. But the whole world was thinking the same thing. From something like a $100,000 profit – I don’t remember the exact numbers – I ended up making a $10,000 loss. You get sucked up in the hype.” Corporate finance remained his strong card, albeit with a medical focus. With an undergraduate degree in biochemistry and microbiology, Karelis pursued an MBA. With that, he managed investment funds that focused on medical technology. One big success was backing a former Australian of the Year, Dr Fiona Wood, who is renowned for developing the spray-on skin that saved many burns victims after the 2002 Bali bombings. Karelis was a director of that company, Avita Medical. He has since focused on “doing my own thing, looking for interesting projects and working with interesting people”. He meets regularly with a tight group to discuss investments. At one gathering in 2014, a friend suggested he investigate medical cannabis. His initial reaction was that it was crazy. But at his friend’s urging he did it. “I started googling, and the penny dropped. This is an ancient medicine that 22 MONEY OCTOBER 2017

“You don’t know what street cannabis has been exposed to – it is potentially poisonous” is being rediscovered. It was legal for 3000 years and illegal for 70 years. The more I looked the more I realised there was a real medical effect.” Investors now are encouraged by UK medical cannabis pioneer GW Pharmaceuticals, which is valued by the Nasdaq stock exchange at $US2.6 billion ($3.3 billion). Its main product is a mouth spray that treats multiple sclerosis tremors. In Karelis’s view, it charges too much. His plan is to reduce the cost of cannabis medicines by having clinical trials to test the best dosages then making medicines, rather than investigating how the treatments work. That can take years, be very costly and be unnecessary. Medical trials on autism

patients and breast cancer sufferers are in the works. The plan is to be selling treatments at affordable prices within a couple of years, once products are registered. It is likely they could be sold in Australia, Canada, Chile and Germany. Cannabis crops will be grown in different regions of Australia, because different strains of the plant grow best in different climates and soils. One type might thrive in the tropical heat and thin soils of the Kimberleys, and another in the cooler climes of the Margaret River. The model for success in cultivating different strains is like the wine industry where pinots grow best in cool regions and chardonnays in warmer ones. Big reds often like rocky soil. Cannabis earned its nickname, weed, because it can grow almost anywhere but Karelis says that is not good enough for medical use. “Cannabis is a very efficient scavenger of heavy metals from the soil. If that cannabis has been grown in the back of a wrecking yard and sucked up lead from the soil, that will go into your body. Same thing with pesticides or chemicals. That is a big difference between medical and street cannabis. There is different chemistry. And you don’t know what street cannabis has been exposed to. It is not medicine. It is potentially poison.”

FRANCES ANDRIJICH

Work in progress ... Karelis initially thought the idea of medical cannabis was crazy, but when he looked into it “the penny dropped”.

3.20

5.20 6.00 %*

7.00

13 80 10

www.latrobefinancial.com

ASK THE EXPERTS

CASE STUDY

RICHARD WHITFIELD

Where to buy my first home If a good saver looks slightly further out, he should ﬁnd an affordable property that suits his needs NAME: David Purdie STATUS: First home buyer. QUESTIONS: What are the affordable, up-and-coming suburbs of Brisbane where I can buy a house for $450,000 to $500,000? ANSWERS: Buy a freestanding house situated in an area that can provide community and amenity and cater for a good lifestyle. There are some fabulous suburbs in your price bracket such as Chermside, Zillmere and Banyo. Keep your money in cash and term deposits as you will buy a property in a year or so. Keep an eye out for the passing of the government’s legislation to allow first home buyers to save for a deposit within their super fund – the First Home Super Saver Scheme – which could be financially beneficial. avid Purdie is on track to have a 20% deposit for a house in Brisbane by early next year. The 27-year-old, who will receive his permanent residency at the end of the year,

24 MONEY OCTOBER 2017

has a good full-time job in technology sales. He is a keen saver who keeps his expenses low and doesn’t have any debt. David would like to buy a property, preferably a house, that is within a 10-kilometre radius of the centre of Brisbane in the $450,000 to $500,000 price bracket. He wants a minimum of two bedrooms and will live in it. He is prepared to buy a fixer-upper but not a dump. But the Brisbane property market – particularly apartments – is patchy. Apartments are under pressure from an oversupply. If David avoids buying an

“Should I continue investing in shares until I buy, or increase super?”

apartment, what sort of house should he buy? What are the up-and-coming Brisbane suburbs that he can afford? What sort of annual growth (or over, say, a decade) is reasonable to expect in the Brisbane market? David has $10,000 invested in an exchange traded fund, Vanguard Australian Shares Index, which tracks the S&P/ASX 300. He would like to buy the Vanguard Australian Property Securities Index ETF. “My knowledge of investing is quite low,” he says. “My question is where should I put my money? Should I continue investing in shares until I can buy a property, increase super or perhaps something else?” David has all his insurance organised, with life, TPD and salary continuance cover. He is in an IOOF super fund and wants to bring out his UK pension, then merge it with his Australian pension. Is there any advice on how to do this as the rules have recently changed?

It’s better to be safe than sorry with the deposit

Fabulous spots that will grow

CATHERINE SHARPLES-RUSHBROOKE

MARGARET LOMAS

Catherine is manager at Advice Services Australia. She is a certiﬁed ﬁnancial planner and a self-managed super specialist.

Margaret is the founder and director of Destiny Financial Solutions and the author of nine books on property.

he decision on where to “park” your money until you buy your property is largely driven by how long it will be invested. As David is almost there with saving for his first home deposit and has a short time frame (within the next 12 months) I would prefer to see him place his savings in a cash and/or fixed-interest based investment such as a high-interest bank account or even a term deposit. As interest rates are low, this option may seem a little boring; however, it’s better to be safe than sorry. If David parked the money in shares or property and there was a market dip within the next 12 months, it would mean that he would have less money for his deposit. When investing in property or shares you really need a longer time horizon to ride out any dips in the market (for example, five-plus years). Given David’s age and goal of saving for his home deposit within the next 12 months, I’d normally steer clear of increasing super contributions as the money is preserved (that is, stuck in the fund) until you meet a condition of release (for example, retirement when David turns 60). Having said that, in the last federal budget the government proposed a scheme that will allow first home buyers to save for a home deposit within their super fund – the First Home Super Saver Scheme. At the time of writing, the legislation had not yet been finalised. The government has created a calculator that can assist you with working out the potential benefit of the scheme relative to saving the same amount in a standard deposit account (see budget.gov.au/estimator). There are differing schools of thought on whether it is worth investing once you have a mortgage or whether you should direct surplus cash to repaying it as soon as possible.

At Advice Services Australia we provide advice that is personalised for each client depending on their circumstances, needs and goals – so we would need to ask some more detailed questions to advise David on whether he should direct surplus cash towards repaying his mortgage, investing in a portfolio or salary sacrificing to super. One of the advantages of directing surplus cash to repaying your mortgage rather than investing is that you get a guaranteed return on your funds equal to your mortgage interest rate. If you were to invest these funds elsewhere you would need to get an after-tax return equal to your mortgage interest rate to break even. One of the advantages of investing surplus cash flow is that you are starting to build a more diversified portfolio which will hopefully grow over time (although there is no guarantee with investment markets). One of the advantages of salary sacrificing to super is that, based on David’s salary, he will get an immediate tax saving for directing funds to super rather than receiving them in his personal name (although once the funds are in super they are subject to strict cashing rules). As for the pension, unfortunately, due to changes in UK legislation in 2015, it is unlikely that David will be able to transfer it to Australia. At present only fund members over the age of 55 are able to transfer their UK pension to Australia, and only under very strict conditions. There are hefty tax penalties for not adhering to these rules. I would recommend that David seek advice from an adviser in the UK to ensure that any underlying investments within the UK pension scheme are invested appropriately and that he watches this space to see if the rules change.

t’s critical that before you invest your money anywhere you learn as much as you can about how to invest well to protect yourself from mistakes – and from spruikers, whose best interests are not with you! And so my first piece of advice is to get hold of a few good books and learn how to recognise the growth drivers necessary to result in a growing property. While you’re saving, you can also be gaining a great education. When you buy your own home, it is an asset free of capital gains tax. Therefore the necessity to see a good gain over time is not quite as paramount as it would be if you were an investor who is likely to lose around 25% of any gain to tax. When you sell the property to trade up, you are able to take all of the profit you make and either invest it in the next property or use it somewhere else. And so, rather than simply focusing on the best areas for growth, which may or may not be where you would be prepared to live, you must consider buying a place that provides you with that balance between obtaining a good lifestyle for your own needs and getting a property that will grow to enable you to upgrade at some stage in the future. In Brisbane you have rightly identified that the apartment market carries some danger. In addition to increased supply in the pipeline, much of the stock is of a lower quality and I predict that there will be many issues in the future around building sustainability. So your money will be better placed in a freestanding house in an area that can provide community and amenity and cater for a good lifestyle. You have said that you want to buy within 10km of the CBD but limiting yourself to this is not necessary. It’s simply not true that property within 10km of a CBD performs best – in fact, at times the reverse can be true and in Brisbane such property has already grown to the point where the best period of capital gain may be behind it for the foreseeable future. If you extend out to 15km there are some fabulous suburbs that have the growth drivers of major transport infrastructure upgrades, gentrifying communities, improving household incomes and a strong family demographic. These areas should be the next ones to move in the growth stakes, and with $450,000 you should be able to buy in quite easily. Think Chermside, Zillmere and Banyo and you should be able to pick up something in your price range that doesn’t need too much work. Zillmere in particular also offers large blocks which, down the track, could have a second dwelling added to allow you to also get into the investment space with what would amount to a free block of land. MONEY OCTOBER 2017 25

ASK PAUL

Q &

A Before investing any money Kim needs to ...

Sort out the relationship NEED PAUL’S HELP? Send your questions to:

Ask Paul, Money magazine, GPO Box 4088, Sydney NSW 2001 or money@ bauer-media.com.au. Sorry, but Paul can’t personally answer your questions other than in the Q&A column. By submitting your question to Money, you consent to having your question and the response you receive from Paul published in the print and digital edition of Money.

26 MONEY OCTOBER 2017

I am 46 and have recently separated from my husband. We have two children aged six and nine who are still living with me in the family home but who will also be spending plenty of time with their dad once he moves into new accommodation. The separation is amicable and at this stage all our ﬁnances are still shared. I earn about $80,000 a year and my husband about $90,000. My super is around $110,000 and my husband has about $135,000. Our family home is worth about $975,000 with a mortgage of $275,000. We have two investment properties: a recent purchase worth $315,000 with a mortgage of $285,000 and the other worth about $750,000 with a mortgage of $500,000. This second property is neutral after tax, and the plan is for my husband to move into it, which will leave us out of pocket about $25,000 a year. All loans are currently interest only, with an offset account attached to our principal place of residence. We have access to about $335,000 in equity in our home loan as a buffer/investment money, with which we were planning to buy another

property. But that is now not going to happen. What should my focus be now? Is investing some of the $335,000 in shares a good or bad idea? Or do I need to play it safe and make some changes. Sorry to hear about your separation, Kim, but glad it is amicable. Quite frankly, I don’t want you to do anything right now. Amicable is a great thing in a separation but I certainly do not know, and you may not know at this stage, whether this a temporary situation or whether it will move to a divorce and a financial settlement. If the separation is permanent, it will be hard for you to make investment decisions until you have a financial settlement. Unfortunately, things do not always go smoothly as assets are separated. Equally, assuming you will keep your finances shared in a longer-term separation does not seem realistic to me. If either of you “re-partner” it could be rather complex. Personal relationships come before money. Fortunately, you have been very successful at building assets, meaning both of you would be in a strong position. But unless I am missing something, my view is that you need to sort out the longer-term nature of your relationship first.

Abigail is doing well but ...

Loan rate is a rip-off

I am a 39-year-old with no dependants and apart from my home loan I have no other outstanding debts/loans. I earn $60,000 a year (including super contributions) and the value of my property is roughly $270,000. I have $10,000 in a savings account and I also have $17,000 left on my CBW home loan with a variable 4.79% interest rate. My aim is to pay off my home loan as soon as possible, then purchase another property (and rent out my current one). Should I put the $10,000 from savings into my home loan, then start a new savings plan to build a deposit for the next property? First up, Abigail, 4.79% on a home loan, in particular when you have good equity in your home, is a crappy rate. You could save 1% with another lender. I know moving is very unlikely with so little left on your mortgage but go to your lender and make it clear you are unhappy about being ripped off and certainly would not borrow from them again. I would be very surprised if they did not move you to 4% or a bit lower very quickly. Then my view is that you start looking. If you see something you like, at a decent price, I have no problem with you buying with a level of debt you can afford before your mortgage is paid off. Make sure you will still be OK if interest rates rise, which they will at some stage.

Trevor’s next step is to ...

Top up super to the max

We are debating our next move and I hope you could help with some clarity. My wife (41) and I (48) earn around $200,000 between us. We have our home, which is valued at $900,000 with a $639,000 interest-only loan (set up as an interest-only investment property if we need to move) with $250,000 in an offset account. We have two young kids in primary school. We also have: • An investment property in Melbourne valued at $700,000 with an interest-only loan of $454,000, renting for $465pw, now turned cash positive after ﬁve years. • A joint self-managed superannuation fund with $440,000 in shares, and combined $130,000 cash and $100,000 in industry super (for life insurance) and an overseas fund. • $30,000 under my wife’s name as an emergency fund in an online easy access account. • $500,000 in shares in my name, and my wife has $125,000 in shares in her name, with dividends of around $30,000pa. What is my next move? Do I continue to save into my offset account, pay down the home loan, buy more shares in my wife’s name or invest through the SMSF. Or is there anything I am missing? I would like to retire by 60 if possible.

Hi Trevor, good job on building assets. Let’s do a quick summary. You have equity of $510,000, including the offset account, in your home; about $250,000 in the investment property; $670,000 in super; $625,000 in shares; and $30,000 in cash, so a net wealth of $2.085 million. You plan to work for about another 12 years, taking you to 60. The key to stopping work is a fully owned home but you also need investment assets such as super. With about a decade to go, first up I’d be topping up my super fund to the maximum deductible amount of $25,000 each. Of course, it all depends on your budget but if you have surplus income beyond this it would be great to pay more into your home loan. Clearly you are good savers and I suspect both of these things are possible. Over the next decade or so if you clear your mortgage and add between you some $750,000 to super, this along with the compound returns on your super balance will put you in a great position. Pretty obviously, how much you want to spend when you stop work is a fundamental question. If you want to take a look at your projected position when you wish to stop work, go to a planning tool, such as the one you will find on the MoneySmart website. I do like this site. It is run by our regulator ASIC, meaning it is not some sort of sales tool. So give it a try – I think you will find it a valuable use of your time. MONEY OCTOBER 2017 27

ASK PAUL

Q &

Lachlan seeks best way to ...

Fund early retirement

I am 58, working part time and looking to retire fully later this year. I have $1.2 million in UniSuper accumulation, currently mostly invested in the growth option. My wife (54) hasn’t been working for some time – she has $100,000 in super and $200,000 in a bank account currently earning 2.7%. What is the best way to ﬁnance my time up to age 60 after I cease work in a few months. Is it more advantageous to live off the $200,000 until then and switch to retirement mode at 60, or to go immediately into retirement and start drawing down on my super?

Matt has the deposit for a well-located property, so ...

Overcome the fear

I am a 29-year-old working as a civil engineer. I have worked around Australia in ﬂy in, ﬂy out construction and managed to save $200,000. I lived with my parents on my six-day breaks, which helped me save money. I am now permanently living in Sydney earning $87,000pa plus super and looking to start renting a place with my girlfriend. I have an $8000 HECS debt, own my car and have no bank loans. I have always wanted to invest in property but have been quite hesitant as FIFO work has its end date and also I didn’t want to risk my savings on a poor property investment decision. I am hoping you can provide me with some advice on what would be the best way forward. Wow, $200,000 in savings at 29! Matt, I know the life of a fly in, fly out worker is not an easy one and you have worked really hard to save this money and I am

28 MONEY OCTOBER 2017

very impressed. Given the effort you have put in, I share your concern about losing it. But you should not allow this fear to stop you from getting ahead. First, forget about the HECS debt – it is the cheapest and best loan in town. It will get paid off in time out of the additional tax levy on your salary. Next, chat to a lender or two about your capacity to borrow given your big deposit and your new salary. In terms of losing the money, if you buy a well-located property at a reasonable price and you allow for bad things such as no tenant for a while and you have income protection insurance in case you have an illness or accident outside work, plus you factor in interest rates rising, it is pretty hard to see how you would lose your money. Sure, at some stage property values will fall but if you hold a good, well-located property for 10 years or more I, and every other expert I know, will be hugely surprised if you lose money.

I could give you a pretty complex answer, Lachlan, but if I was in your situation I’d keep it simple and proceed as you suggest. You will find that UniSuper has given you a yearly return way above the 2.7% rate on the $200,000 in your wife’s name, so I’d be using that first. However, I am a bit troubled in saying this. I assume you own a home and that you have carefully planned the capacity of your available capital to fund your retirement, at the standard of living you wish to have, for decades to come. So, given I am short of some key information, my suggestion is to seek detailed professional advice before proceeding.

Michael’s wife has two superannuation accounts but ...

Old-style fund may be more generous

My wife is 37 and has $87,000 in a GESB West State untaxed super fund for government employees and works two days a week as a midwife. She has recently ceased working for a public hospital and now works in a GP clinic and consequently is ineligible to have the superannuation guarantee paid into the GESB fund. So, she had no other option than to open another super fund (with good advice from Money’s Best of the Best edition). These untaxed funds are not being offered to new members so we are keeping it open for now. We can’t decide if she is better off keeping both super funds and periodically rolling into the untaxed fund but incurring double account fees. Or should

we just close the GESB fund and lose the tax-free beneﬁt but only have to pay one lot of account fees? Hi Michael. GESB Super (Government of Western Australia) can’t give me any specific information about your wife’s fund under our privacy laws, which is quite appropriate. But it looks to me that she is in one of its older government employee funds, which are no longer available. I suspect that if this is the case you may have to pay tax if you choose to roll into another fund. As I don’t understand the details of your wife’s fund with GESB, whether it leads to a defined benefit or a pension, or what the rules or costs in the fund are, I am pretty hamstrung. But I can tell you that the reason these old funds have all been closed to new

members is that when they were established it just did not occur to anyone that life expectancy would increase so dramatically. With much longer lives, these early, mainly government funds are, with hindsight, far too generous and unaffordable for future taxpayers, so they have been closed. So a starting point for me is that I would never take anyone out of an old government-based fund without a close look at the rules and benefits. I have no doubt that GESB would be delighted to go over the benefits of the fund your wife is in. Your idea of having all your super in one fund is spot on but at times “old” funds are so generous you would be mad to take the money out. Make a time to meet with GESB and go over your wife’s fund, rules and benefits. I think you will find you will be leaving it where it is. MONEY OCTOBER 2017 29

SMART SPENDING

THIS MONTH

Destination: Croatia

Coastal beauty ... clockwise, from above, view from Hvar fortress; a sweet local speciality; cooling off in the clear waters off Solta island; a portal at the Cathedral of St Domnius at Diocletian’s Palace.

Five things to do

2. Visit: Diocletian’s palace, a UNESCO world heritage site and one of the most impressive monuments from Ancient Rome. Built in the 4th century AD for the Roman emperor Diocletian’s retirement, the grand marble palace is now the old town of Split, housing shops, apartments, restaurants and bars. It has beautiful churches, a cathedral and monastery. Book a 75-minute walking tour or extend it

30 MONEY OCTOBER 2017

for a further 45 minutes if you want to cover more ground. Several Game of Thrones scenes were filmed here. 3. Eat: at the Makrovega bar for lunch or dinner, and don’t miss the splitska cake (dried fruit, nuts and vanilla cream) at the Luka ice-cream cafe. 4. Take: a boat from Split to the peaceful island of Hvar where you can swim off the local dock and beaches. Eat flatbreads topped with local fresh figs, cheeses and ham at Fig cafe and bar. For panoramic views, walk up the hill to the French fort built by Napoleon’s troops. 5. Snorkel: and swim in the crystal-clear, blue waters of the nearby Blue Lagoon and eat freshly caught seafood at the local taverna. The boat from Split also stops at the small, beautiful island of Solta. ISABEL VAUGHAN

FAZA BIJAKSANA/GETTY

1. Stay: in Split, a buzzing Croatian coastal city perched on the shimmering turquoise waters of the Adriatic coast, with a backdrop of dramatic mountains. Hang out in the maze-like streets of the old town, with ancient ruins, historic sites, bars, cafes and restaurants at every turn. Book accommodation downtown, away from the austere Soviet-style suburbs. It’s well worth taking a side trip to the historic city of Trogir, set within medieval walls on a tiny island. If you want to avoid the summer crowds, travel in the shoulder season.

DRIVING PASSION

WINE SPOTLIGHT

Hybrid SUVs break the gas guzzler tag

ybrid vehicles are becoming more common on our roads and while the Toyota Prius is the best known there are a growing number of electrified SUVs that are hard to differentiate from conventional models. Large vehicles such as SUVs benefit from hybrid technology because the electric motor helps reduce fuel use and boost power. Some of these are plug-in hybrid electric vehicles (PHEV) with batteries that can be charged while parked, allowing them to cover modest distances without consuming a drop of fuel. There are several hybrid SUVs available in Australia, including relatively affordable models such as the Nissan Pathfinder Hybrid, Mitsubishi Outlander PHEV and Lexus NX300h ($56,100) through to the Lexus RX450h, Volvo XC90 Inscription Hybrid ($120,900), Mercedes-Benz GLE500e ($124,900) and Range Rover Sport SDV6 Hybrid ($187,900). Expect plenty more by 2020 once the strict new Euro 7 emission standards come into effect. DAVID BONNICI, WHICHCAR.COM.AU

2016 Devil’s Corner Sauvignon Blanc $20

$44,490- $50,490- $90,160 $69,190 $55,490 $108,610 Nissan Pathﬁnder Hybrid

Mitsubishi Outlander PHEV

There are 2WD and 4WD variants, with the latter with range-topping creature comforts. Both feature a 2.5-litre four-cylinder supercharged petrol engine and an electric motor. Pros: The lithium ion batteries are charged by the engine and regenerative braking, which harnesses and stores the kinetic energy caused when the vehicle slows down. Cons: The reduction in fuel use isn’t as dramatic as it is with plug-in hybrids. nissan.com.au

The two variants, the LS and Exceed, are AWD and feature a 2.0-litre four-cylinder petrol engine and two electric motors powered by lithium ion batteries. Pros: It can travel up to 54km on batteries alone when fully charged and has a combined fuel economy rating of 1.7L/100km. Cons: The need to fit batteries under the floor means the PHEV has only has five seats. mitsubishimotors.com.au

Lexus RX450h The RX450h range uses the same 3.5-litre V6 as the non-hybrid RX350 but in this case it is augmented by a pair of electric motors that increase power to 230kW, shaving 0.3sec off the 8.0sec 0-100km/h time. Pros: Improved fuel economy, with a hatchback-like 5.7L/100km compared with 9.6L/100km in the non-hybrid RX350. Cons: Polarising looks. You pay for the privilege if you want the range-topping Sports Luxury. lexus.com.au

EXTRAVAGANCE

On the ball Have some fun with this You and Me table tennis table, which can double as a dining table.

How much: Starts at $5345 for standard size. Where to buy: ajar.com.au

This is a terrific sauvignon from Brown Brothers’ Tasmania label. It’s beautifully made and quite delicious. This is a restrained sauvignon blanc that has positive bright flavours – ripe tropical fruits of guava and lychee – and a finish that is crisp, clean and fresh.

SPLURGE 2015 Kooyong ‘Haven’ Pinot Noir $75 Mornington Peninsula’s Kooyong has five pinots including three impressive single vineyard wines. My favourite of these in 2015 is the Haven. It has a dramatic bouquet that is intense and voluminous with bright raspberry, strawberry and mulberry aromatics, enticing you into its silky smooth texture and gentle lingering finish. PETER FORRESTAL

MONEY OCTOBER 2017 31

SMART SPENDING

THIS MONTH SMART TECH

Three accessories to put on your must-have list

s I poked around my home to research this month’s column, it struck me how personalised the idea of “essential” tech is. Aside from everybody’s central devices – your notebook, smartphone and so on – what accessories are truly must-have in your own daily workflow? For me, I’d find it hard to part with innumerable things. From an ergonomics perspective, a good, large monitor at head height – paired with a quality desk chair – is vital, so I don’t strain my neck looking down at a laptop display. Then there’s audio. I can't handle tinny notebook speakers, so a small 2.1 sound system is a crucial accessory. A surge protector is a great idea to protect your equipment from power spikes, and then there are protective laptop and tablet sleeves, noise-cancelling headphones to shut out distractions, wi-fi networking add-ons ... the list is endless. But if I were to limit it to just three key tech must-haves, they’d probably be a good phone case, a backup drive and a spare battery – basically, a comprehensive insurance policy to guard against Murphy's law happening at the worst of times. PETER DOCKRILL

What is it? OtterBox Defender How much? $69.95 (for iPhone 7) Pros: If you drop an unprotected phone onto hard ground, there are three key possibilities: the screen or casing shatters (likely), the whole thing dies (unlikely), no damage results (unlikely). So a shock-absorbing case is pretty much mandatory, and the Defender’s “triple-layer defence” gives good protection. Cons: Defender is probably overkill for most people, in terms of expense and ruggedness. But any case is better than none. otterbox.com

What is it? Samsung T5 Portable SSD How much? From $199 (250GB) Pros: Once upon a time external hard drives were big, bulky things that required their own power supply. Then they became miniaturised. But the real cutting edge is SSD, which is lightweight and has no moving parts. Samsung’s T5 squeezes up to 2 terabytes of data into a creditcard-sized package. Cons: SSD is light, power-efficient, fast ... and expensive. That 2TB model costs $1249 but it’s an ultra-convenient backup for all your digital data. samsung.com/au

GIVE IT UP

The Australian Women’s Health Diary 2018 What is it? Now in its 20th year the Australian Women’s Health Diary is an annual initiative from Breast Cancer Trials (formerly known as the Breast Cancer Institute of Australia). As well as being a practical diary it includes health information for women of all ages plus a handy budget planner.

Where your money goes: Funds raised from the sale of the diary go to clinical trials research into breast cancer treatment and prevention strat-

32 MONEY OCTOBER 2017

What is it? Cygnett ChargeUp Ultra Portable Power Bank How much? $129.95 (20,000mAh) Pros: We’ve all been there. You’re trying to finish up some work on the train ... and bam! You hit 0% battery. It’s a common occurrence, and it’s so easy to avoid. There are oodles of battery banks but larger units like this Cygnett offer enough charge for notebooks in addition to mobile devices, and a pair of USB ports means you can charge two gadgets at once. Cons: Costly, but so’s running out of juice. cygnett.com

WEBFIND

egies. Over the past 19 years the diary has raised $13.3 million and last year alone the profit was $1.08 million. Bre eeast cancer is the in women in most common cancer ca Australia and New Zealand. How to donate: You can buy the diary for $18.95 from newsagents, Woolworths supermarkets, Avon representatives, online at magshop.com. au or breastcancertrials.org.au or by phoning 1800 423 444.

HARDTOFIND.COM.AU Looking for a unique item that would make a great gift? Then this site is a must. It has a range of products, including items for the home, jewellery, artwork and fashion, from independent craftspeople and manufacturers in Australia and around the world.

Paul Clitheroe PAUL’S VERDICT

Mortgage is zero, so now it’s time to invest

Paul’s verdict: Either top up super through salary sacrifice or buy a property Keep up the savings discipline and apply good old-fashioned common sense

ongratulations Melissa – a great job in getting your mortgage down to zero. In fact, with a $38,000 mortgage and $40,000 in your redraw account you are one of the few people I know with a positive mortgage. The bank owes you! You have also made a very good start to a really good super balance for when you stop work. I really don’t think I need to ask if you do a budget. Clearly you manage your cash flow carefully to have achieved this outcome. Sure, you may have won the lottery but I doubt it! I think that, like me, you would be fully aware that a big lottery win is about 12 million to 1. Mind you, entering a lottery is a brilliant way to donate extra tax dollars to the government. However, your words suggest someone who runs their cash flow really well. That, of course, is the key to success with money. It is quite aggravatingly simple but too few of us do it. Just spend less than you earn and apply the surplus to owning decent assets such as property and shares. Now to your next step. You actually do know a fair bit more than you say. You have owned a property for a long time and I have little doubt

SIMON CASSON

’m a single 43-year-old earning $60,000pa and have $38,000 left on my mortgage. I have $40,000 available in my redraw account, $115,000 in super but no investments. I have been focusing on paying off my mortgage but now feel I should be investing to create some income for my future. I have been thinking about buying an investment property but know little about investing in property or shares. What would you suggest? Melissa

that you have seen it grow in value. You also own shares through your super fund and you will have seen the benefits of that. So let’s go with a pretty simple but also pretty effective plan. First, why don’t you top up your super using salary sacrifice? On the top part of your income – the amount from $37,000 to $60,000 – you will be paying around 35% tax, including the Medicare levy. Any money you direct your employer to put into super, up to $25,000 a year, is taxed at 15%. There is an instant 20% benefit to you. A dollar you earn in this tax bracket gives you about 65¢ to invest. The same dollar in super gives you 85¢ to invest. Super is simply a tax vehicle that invests in areas such as property, shares, infrastructure and interest-earning investments such as bonds. You can make decisions here by selecting growth, balanced or conservative type options. At your age, it makes sense to go for a growth type option. You have decades for your super fund to grow in value, so short- to medium-term ups and downs are not really a big deal. Do remember that the $25,000 maximum for tax-deductible contributions includes your boss’s compulsory contributions. As you own a property already and you should have share exposure inside your super fund, I am quite ambivalent about whether you max out your super, buy an investment property or do a bit of both. Super is a simple choice due to the tax breaks and the simplicity. You basically just need to keep an eye on how

it is going and ensure you are in a good fund with low fees. But a well-located investment property is also a perfectly sensible option. However, there are some key rules. First, take a close look at your budget and chat to a lender or two to work out your borrowing capacity. Then you need to plan around the bad stuff. How will it impact you if and when interest rates go up? Would you be OK if you could not find a tenant for a period of time? What would your rent be and, of course, the tax benefits to you from negative gearing, which is any loss you may have after interest on your loan and costs of running the property are deducted from the rent you get? I would also want you to spend plenty of time looking at properties in an area you know. Avoid property-selling seminars like the plague. With property, you need to be your own researcher and make your own decisions. Finally, don’t take too much risk by overborrowing. You are in great financial shape; keep up your financial discipline and apply good old-fashioned common sense to investing.

ASK YOUR QUESTION If you have a question, email money@bauermedia.com.au or write to GPO Box 4088, Sydney NSW 2001. Questions need to be 150 words or less and you must be willing to be photographed. Readers who appear on this page will receive a six-month subscription. MONEY OCTOBER 2017 33

COVER STORY

WHY

NEGATIVE GEARING BRYCE HOLDAWAY

The regulators and banks have made life tougher for property investors. But all the uncertainty makes it a good time to consider this powerful way to create long-term wealth 34 MONEY OCTOBER 2017

s negative gearing a strategy that still works? It’s a timely question. Let’s face it, property yields are low, capital growth is in question, the regulators want to slap limits on investor lending and the banks have responded with higher interest rates. Throw in the changes to depreciation perks and the removal of the travel allowances and it’s enough to make the 1 million or so Aussies who run a property investment at a loss – and those thinking of going down that route – to ask the big question. I would argue yes, because ultimately negative gearing is not a strategy; put simply, it’s a tax outcome that represents a moment in time. Like a business owner who makes a loss in the start-up phase to ultimately make profits and build value over the medium to long term, so too does a property investor consider making a loss for only as long as it takes to build a big enough wealth base so that they too can move into positive-gearing territory, which will provide them with the self-funded retirement outcome they desire. Negative gearing is a means to an end, not a permanent way of life. So, in my view, the real question here is whether residential property still remains a good investment because the taxation benefits you receive through negative gearing are temporary but, if done correctly, the impact of the capital growth and rental income from building your portfolio will be lasting. But before we ponder that question, let’s look at exactly what headwinds property investors face.

Winter has come

The Australian Prudential Regulation Authority (APRA) this year introduced restrictions that have impacted lending for investment purposes. APRA is the prudential regulator of the Australian financial services industry, overseeing banks, credit unions and building societies to protect the financial wellbeing of the community. It is in this protective role that it has implemented new regulations as part of an ongoing response to what it describes as an environment of high housing prices, high and rising levels of household debt, slower income growth and historically low interest rates. As a result, the banks have adopted the APRA recommendations as follows: Deposits – increased need for larger deposit as most lenders will no longer accept a loan-to-value ratio (LVR) greater than 90% for investors. Interest only – for most lenders, for any borrowing above an 80% LVR, interest-only facilities are no longer available, regardless of loan purpose. Furthermore, the bank’s loan book cannot have more than 30% in interest-only lending. Investor lending – no more than 10% growth in

• •

•

investor lending year on year for each lender. Interest rate – increased rates for interest-only lending to be higher than for owner-occupier lending. New debt – tightened servicing requirements to increase assessment rates on new debts. Existing debt – assessment rate on existing debt to be considered principal and interest even if paying interest only. Postcode restrictions – some lenders have managed their risk by limiting lending on select postcodes. Rental income – some lenders have further discounted rental income assessment from the standard 80% to 75%, and in some cases by as low as 60%. Exceptions – if applications don’t meet policy then it’s simply unacceptable, with lenders unwilling to step outside strict lending policy to provide “exceptions”. This is in contrast to owner-occupier lending where they’re still happy to consider policy exceptions on a case-by-case basis. No investor lending – some lenders are pulling out of the investment lending game altogether. As well, the recent federal budget proposed the following changes that will affect any property investors who exchanged after 7.30pm AEST on May 9, 2017: Depreciation – the government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties. Essentially, this means property investors can only claim depreciation on dishwashers, fans and other fixtures they’ve paid for themselves. Previously, investors who bought established properties could continue to claim depreciation on items they acquired as part of the purchase. Travel claims – all travel deductions relating to inspecting, maintaining or collecting rent for a rental property will be disallowed. This applies within your own state as well as interstate. Property investment is essentially a game of finance, just as much as it is a game of bricks and mortar, so these lending changes are significant. APRA will get what it wants as it achieves a desired slowdown in investor lending but I don’t think that is a bad thing, as neither investors nor owner-occupiers want an unstable property market. Equally, the hit to cash flow from the reduction in depreciation and travel allowances is not ideal. However, if Melbourne and Sydney were to keep on charging ahead as they have been over the past few years, then we would have set ourselves up for some pain in the future. Measures to avoid that are warranted.

•

• • • •

•

Property investment is a game of ﬁnance just as much it is a game of bricks and mortar

•

MONEY OCTOBER 2017 35

CASE STUDY

COVER STORY

Rachel STRATEGY: GOOD YIELD AND STEADY GROWTH

he’s a 30-year-old single who is renting and earning $65,000 a year. Currently her yearly bills, including rent, and lifestyle expenses are $23,000 and $15,000 respectively. For Rachel to invest in property, it’s important to preserve her monthly cash flow based on her income so the strategy here is to look to buy her a higher-yielding property for $300,000 with a capital growth target of 4.5% a year and a gross yield of 5.5%.

Rachel has saved $15,000, which is not sufficient to get into property. However, her parents are prepared to go security guarantor so that she can borrow the full amount plus the additional 6% acquisition costs, thereby avoiding mortgage insurance and also allowing her to get interestonly lending. The table shows that for the first eight years Rachel will rely on negative gearing as her pre-tax cash flow will be negative. But in year nine it will turn positive and

RACHEL’S CASH FLOW

instead of receiving a tax benefit from negative-gearing benefits she will be contributing to the tax revenue. Therefore, the tax outcome will shift from negative gearing to positive gearing and she will use the post-tax surplus to further reduce the debt. For Rachel, investing in this property will contribute to her overall wealth the longer she holds it, as after 20 years it has a net cash flow position of $17,964 and her wealth has increased modestly (see table).

STATE OF WEALTH

PROPERTY RENTAL ANNUAL LOAN INTEREST TOTAL VALUE INCOME EXPENSES AMOUNT EXPENSES COSTS

GROSS CASH FLOW

TAX BENEFIT PAYABLE

NET CASH FLOW

YEAR

VALUE

EQUITY

$300,000

-$18,000

$300,000

$15,180

$5669

$303,000

$19,504

$25,173

-$9993

$2998

-$6995

$465,891

$147,891

$313,500

$15,863

$5856

$296,684

$19,081

$24,937

-$9074

$2722

-$6352

$723,514

$405,514

$327,608

$16,577

$6050

$289,896

$18,618

$24,668

-$8091

$2427

-$5664

$342,350

$17,323

$6251

$282,373

$18,106

$24,357

-$7034

$2110

-$4924

$357,756

$18,102

$6459

$274,080

$17,543

$24,002 -$5899

$1770

-$4129

$373,855

$18,917

$6673

$264,976

$16,926

$23,599 -$4682

$1405

-$3278

$390,678

$19,768

$6895

$255,025

$16,253

$23,148

-$3380

$1014

-$2366

$408,259

$20,658

$7125

$244,182

$15,520

$22,645

-$1987

$596

-$1391

$426,630

$21,587

$7363

$232,407

$14,726

$22,089

-$501

$150

-$351

$445,829

$22,559

$7609

$219,655

$13,866

$21,475

$1084

-$325

$759

$465,891

$23,574

$7863

$205,869

$12,938

$20,800

$2774

-$832

$1942

$486,856

$24,635

$8126

$190,986

$11,936

$20,062

$4573

-$1372

$3201

$508,764

$25,743

$8398

$174,953

$10,858

$19,257

$6487

-$1946

$4541

$531,659

$26,902

$8680

$157,721

$9701

$18,381

$8521

-$2556

$5965

$555,583

$28,113

$8971

$139,234

$8460

$17,432

$10,681

-$3204

$7477

$580,585

$29,378

$9273

$119,435

$7133

$16,406 $12,972

-$3892

$9080

$606,711

$30,700

$9585

$98,265

$5714

$15,300 $15,400

-$4620

$10,780

$634,013

$32,081

$9908

$75,667

$4201

$14,109

$17,972

-$5392

$12,580

$662,544

$33,525

$10,242

$51,576

$2589

$12,832 $20,693

-$6208

$14,485

$692,358

$35,033

$10,588

$25,928

$874

$11,462 $23,571

-$7071

$16,500

$723,514

$36,610

$10,946

$10,946 $25,663

-$7699

$17,964

YEAR

Assumptions: interest rate 6.5%; rental growth 4.5%pa; 32.5% tax rate; zero depreciation; occupancy rate 92%pa; ongoing holding cost 1.5% of property value per year

36 MONEY OCTOBER 2017

WHY NEGATIVE GEARING STILL WORKS

Why invest in property?

But despite these speed bumps, investing in property remains an attractive proposition for building real wealth in the long term. There are many reasons but here are a few to remind ourselves why: Big market – according to CoreLogic, Australian residential real estate is valued at $7.3 trillion, with over 9.8 million dwellings, an LVR of 23.4% with outstanding mortgage debt of $1.66 trillion. The opportunities to build wealth in this market are substantial with a very strong secondary market given it forms an essential human need. To put its size in context, Australian super is next biggest with $2.3 trillion and Australian listed stocks at $1.8 trillion. Self-funded retirement – the growing awareness that superannuation alone will not be enough and the constant changes to the rules. As well, the uncertainty around the amount of government pension that will be available and the desire to be less reliant on the government makes it attractive to create a self-funded retirement through property. Leverage – this is very appealing for a property investor, as the ability to control a larger asset and get the compounding benefits of the larger value is the single reason why we choose property over any other asset class. Combine leverage and compounding with an investment-grade property and the results are life-changing. Low volatility – particularly in the capital cities and surrounding areas where the demand exceeds supply. While property performance is never consistent and linear, investment grade property rarely loses value quickly or in high proportions. Simplicity – it’s tangible and easy to understand. After all, it’s an essential need: shelter. Control – unlike other investments, you’re in full control of your property investment; you can make all the decisions and have control over all your returns. You can add value to your investment without having to seek approval from a large company or fund manager. Government backed – let’s be honest, the collapse of the housing market would be a disaster for the government of the day at the ballot box, so protecting this very important asset class is not only in the national interest but politically underpinned. Alternatives – they often appear harder to understand, are riskier or are perceived as a poorer return on investment. An investment-grade property offers better performance than money in the bank.

•

• • •

•

The fundamentals

To build a portfolio that weathers any storm, it’s important to ensure that you get the fundamentals right from the beginning. This enables you to positively plan your financial future while creating a safety net to defend your portfolio from external factors outside your control.

The first fundamental for any property investor is asset selection. Picking a poorly performing asset whose value doesn’t grow or, worse, falls is by far the biggest derailer to any portfolio. So it’s important to know that not all property makes for a great investment. Therefore, knowing the difference between investment-grade property versus investment stock is a priority. This point alone is what determines your ultimate success or failure as a property investor, as mistakes are often hard to recover from. I see too many investors who think it’s simply about putting their name on a title and magically it will go up in value. The law of supply and demand exists in the property market as it does in any market, so ignore this fundamental at your peril. The second fundamental is to correctly finance the property. I mentioned earlier that property investing is a game of finance so getting a borrowing capacity is simply not enough. You must get a borrowing strategy that takes into account not only the current purchase but also planning for any future purchases. Providing a buffer as well as ensuring that the banks are not dictating the terms through crossing the security will give you the agility to navigate whatever the market throws at you. Third, investing in property is all about time in the market. Savvy property investors see short term as being 10 years and long term as being 20-plus years. The power of compounding is brilliant but only if you give it time to work its magic. The most successful investors we’ve ever interviewed on our podcast or met in person are those who have been investing for more than 20 years and navigated through many cycles, and their portfolio size reflects the patience they’ve shown to accumulate. The interest on the original purchase price is now equivalent to their kids’ lunch money! If you hold for the long term, your reliance on the negative-gearing benefits well and truly diminish over time. And, finally, to the common question of “When should I buy my next investment property?” The answer is the same no matter what the market sentiment is. Assuming you’re a long-term investor (not a speculator) then it’s simply “when your cash flows allow”. If you have planned your cash flows appropriately, taking into consideration your medium-term needs (growing family, changing jobs, 12-month sabbaticals, job security), not just the here and now, then if you have surplus cash flow above your needs then you should consider adding a property to your portfolio. It’s as simple as that. The growth of median house prices in the capital cities for the past 35 years has not been a straight line – and in some cases it goes down – but the overall trend is up and this further reinforces the benefits of playing the long game. OK, let’s see all of this put into action with two case studies: Rachel on the previous page and Matt and Jayne on the following page.

If you hold for the long term, the interest on the original purchase price is equivalent to the kids’ lunch money

MONEY OCTOBER 2017 37

CASE STUDY

COVER STORY

Matt and Jayne STRATEGY: STRONG GROWTH AND AVERAGE YIELD

hey are married with one child and both in their early 40s. They have a household income of $200,000 and family home worth $750,000 that is mortgage free. They also have $15,000 in savings as they have focused on paying off their home loan. Currently their yearly spendings on bills and lifestyle are $30,000 and $40,000 respectively. Given their strong monthly surplus and strong cash flow, they are in a position where they can go for a growth asset, so

we are suggesting they purchase a property for $900,000, chasing a 7% capital growth rate and a 3% yield. They would structure their lending so that they can release equity from their own home to fund the 20% deposit plus 6% costs while getting a standalone loan of 80% for the investment property. This will ensure that they also avoid mortgage insurance and get interest-only lending. From the table below, you can see that the news is very bright. While they are chasing a growth asset, it does mean that their

MATT & JAYNEâ&#x20AC;&#x2122;S CASH FLOW YEAR

negative gearing benefits are lasting one year longer than Rachelâ&#x20AC;&#x2122;s as a result of the lower yield on this type of property. However, in the 10th year it shifts from a negatively geared scenario to a positively geared scenario and this positive cash flow will also help pay down the debt. For Matt and Jayne, it is clear that the overall contribution to their wealth from investing in this property could be significant. The net cash flow position after 20 years is $19,165 and their wealth has increased significantly (see table).

STATE OF WEALTH

GROSS TAX PROPERTY RENTAL ANNUAL LOAN INTEREST TOTAL CASH BENEFIT VALUE INCOME EXPENSES AMOUNT EXPENSES COSTS FLOW PAYABLE

NET CASH FLOW

YEAR

VALUE

EQUITY

$900,000

-$54,000

$900,000 $24,840

$15,413

$939,000

$59,723

$75,135 -$50,295

$19,112

-$31,183

$1,700,436

$816,436

$963,000

$25,958

$15,904

$894,995

$56,739

$72,642 -$46,685

$17,740

-$28,945

$3,482,716

$2,528,716

$1,030,410

$27,126

$16,411

$846,738

$53,456

$69,866 -$42,740

$16,241

-$26,499

$1,102,539

$28,347

$16,935

$793,534

$49,841

$66,776 -$38,429 $14,603 -$23,826

$1,179,716

$29,622

$17,475

$735,070

$45,876

$63,351 -$33,729

$12,817

-$20,912

$1,262,297 $30,955

$18,034

$671,018

$41,545

$59,579 -$28,624 $10,877

-$17,747

$1,350,657 $32,348

$18,611

$601,305

$36,837

$55,447 -$23,099

$8778

-$14,322

$1,445,203 $33,804

$19,206

$525,629

$31,730

$50,936 -$17,133

$6510

-$10,622

$1,546,368 $35,325

$19,821

$443,620

$26,201

$46,023 -$10,698

$4065

-$6633

$1,654,613

$36,915

$20,457

$354,912

$20,225

$40,682 -$3768

$1432

-$2336

$1,770,436 $38,576

$21,113

$259,121

$13,777

$34,890 $3685

-$1400

$2285

$1,894,367 $40,312

$21,791

$155,840

$6,829

$28,621 $11,691

-$4443

$7248

$2,026,972 $42,126

$22,491

$44,644

$673

$23,165 $18,961

-$7205

$11,756

$2,168,861

$44,021

$23,215

$23,215 $20,807

-$7906

$12,900

$2,320,681 $46,002

$23,962

$23,962 $22,040

-$8375

$13,665

$2,483,128 $48,072

$24,734

$24,734 $23,338

-$8869

$14,470

$2,656,947 $50,236

$25,532

$25,532 $24,704

-$9388

$15,316

$2,842,934 $52,496

$26,356

$26,356 $26,141

-$9933

$16,207

$3,041,939 $54,859

$27,207

$27,207 $27,652 -$10,508

$17,144

$3,254,875 $57,327

$28,087

$28,087 $29,241

-$11,111

$18,129

$3,482,716 $59,907

$28,995

$28,995 $30,912 -$11,746

$19,165

Assumptions: interest rate 6.5%; rental growth 4.5%pa; 37% tax rate; zero depreciation; occupancy rate 92%pa; ongoing holding cost 1.5% of property value per year

38 MONEY OCTOBER 2017

WHY NEGATIVE GEARING STILL WORKS

FACT FILE YIELD V GROWTH Strong rental returns from a property might be great but in the long term a property with higher capital growth will give you a better result than one with a good rental return. Let’s take a look at how they compare. PROPERTY 1 Purchase price: $600,000 Capital growth: 7%pa Rental return: 4%

This too shall pass

From these two case studies you can see that over 20 years you need the negative-gearing benefits in the early stage of accumulation but over time you end up paying tax from the surplus rents, which offsets the negative gearing benefits. That’s why we need to encourage education about the benefits of long-term investing, not short-term speculation. As a footnote to these two illustrations of real-life property investing, in terms of strategy, with all else being equal, chasing capital growth is our preference over chasing yield. As the fact file on the right demonstrates, ultimately the income from the “growth” property exceeds the income from the “yield” property, and over time the wealth base is significantly higher too. After 30 years Property 1 is worth $2,621,314 more than Property 2. For Rachel, her circumstances dictated that we focus more on yield because cash flow is tight but Matt and Jayne had better cash flow so therefore could chase a growth asset. So when we ponder the question of whether investing in property and negative gearing are still worthwhile in the current market, it’s important to keep all this in perspective. A quick history lesson will remind us that there have been speed bumps in the past that we have faced and withstood. Negative gearing was abolished in

1985 and reintroduced in 1987, the GST was introduced in 2000 with huge uncertainty for investors following the major change in tax scales, we weathered the Asian financial crisis of 1997 and of course most recently we were faced with the GFC. It may be winter now but it doesn’t mean that summer will never come again, and if you have an investment-savvy mortgage broker to help you navigate the finance waters as well as a long-term strategy, then it’s simply part of the constant “white water” that is property investing, as it’s never “clear water”. But now could be a terrific opportunity to acquire great assets while the market is uncertain. If anything, hopefully the changing landscape will discourage short-term thinkers and encourage people to have a long-range perspective. So when faced with the ever-present white noise of the markets, I often find comfort in the words of the greatest long-term investor of our time, Warren Buffett, who tells us to be fearful when others are greedy and greedy when others are fearful. M

After 30 years Equity: $3,967,353 Income: $170,742

PROPERTY 2 Purchase price: $600,000 Capital growth: 4%pa Rental return: 7% After 30 years Equity: $1,346,039 Income: $130,983

Bryce Holdaway is partner of specialist property investment advisory firm Empower Wealth, co-host of The Property Couch podcast, co-author of The Armchair Guide to Property Investing and co-host of Location Location Location Australia, on Foxtel’s The Lifestyle Channel. MONEY OCTOBER 2017 39

MY MONEY GOLD STAR CARS

Guide to best buys STORY WHEELS STAFF

Buying and running a car can put a big strain on the budget so Money has teamed with Wheels to ﬁnd the best value in three categories: young couples/ singles, family and premium

40 MONEY OCTOBER 2017

lthough a car is usually the second most expensive purchase we ever make, it’s often one that’s approached on anything but an objective basis. Car companies are past masters at getting us to spend with hearts rather than heads, so Money has partnered with the experts at Wheels magazine to focus on car buying with a wholly objective financial perspective. While sorting the diamonds from the duds is a Wheels cornerstone, sifting through the new car market to separate the value picks from the money pits is the work of the annual Gold Star Cars awards. The devil, as we’re reminded each year, is the insidious disease that is depreciation, which makes up the biggest chunk of the cost of owning a new car in the first few years. All cars lose value the moment they’re driven from the showroom, and quickly thereafter. A good one will lose only about 30% off its new price in three years, while a poor one will retain only 30%. Yet a new car doesn’t stop at depreciation in its quest to empty your wallet. There are fuel, insurance, servicing and things that cunningly fail just outside the factory warranty. A turbo-diesel will cost more but typically use less fuel than an equivalent petrol engine, but which one is less costly to run might depend on the day of the week,

with our research indicating that while diesel prices are reasonably stable, unleaded prices can be higher or lower than them depending on the price cycle. With an emissions cloud hanging over diesels, then there’s the question mark over which will be worth more at resale time. And can hybrids or electric cars justify their typically higher price tags in energy savings? Insurance costs tend to increase with car size, price and performance; however, there are certainly examples of equivalent models with wildly different premiums. Call us cynical but six-month service intervals are surely a means to rake in dollars, rather than a genuine technical requirement. Or is it that the unique conditions in Australia call for a service twice as often as is required for the same model overseas? Hmm … thankfully most cars work on a schedule of a service once a year. The advent of the five- and seven-year warranty has given brands with traditional three-year, 100,000km warranties something to think about. Those rare models that can combine decent depreciation, moderate fuel and insurance bills, a long service interval and/or a more generous warranty than their classmates rise as Gold Star Cars. We applied a further filtering process to come up with the Gold Star Cars to match three profiles for Money.

In association with

NOVATED LEASES

here businesses want to offer an extra incentive to employees, salary packaging is a popular solution. Mark Chapman, director of tax communications at H&R Block, says the typical way to salary package a car is by way of a novated lease. This allows an employee to buy a new or used car and have their employer take care of the lease repayments. The employer makes repayments to the leasing company out of the employee’s pre-tax salary, which reduces the employee’s taxable income. “Unfortunately, such arrangements also give rise to a car benefit under the fringe benefits tax (FBT) rules and employers typically look to pass some or all of this cost on to employees,” says Chapman. “As the current FBT rate is 47% there may be little benefit in salary packaging a car unless you pay tax at the highest rate. However, you can usually make post-tax contributions to your employer towards the running costs, which reduces the FBT.

Gold Star criteria Class ceiling

Purchase price

There is no upper limit on the price of cars eligible for Gold Star Cars analysis. The fact that the money lost in three years on the biggest depreciator for 2017 would buy you 19 of the winning sub-light cars illustrates how the figures tend to take care of themselves at the top end of town.

Most new-car buyers set out with an approximate budget in mind but the real cost of owning the car is depreciation, which is where purchase cost is factored into our value equation.

Depreciation The biggest cost of ownership for most new cars. Of the 2787 cars number-crunched, Glass’s three-year retained value figures ran from 29% for the Great Wall V240 ute to 73% for the Audi TT-RS and Porsche 911 Carrera and GTS.

Fuel Annual fuel cost calculated based on ADR (Australian Design Rules) combined-cycle consumption figures. These aren’t real-world representative but they let us compare cars. Annual distance travelled is taken as the Australian Bureau of Statistics average of 13,716km (for the 12 months ended June 30, 2016) and fuel prices on the day were used.

Insurance Annual comprehensive insurance estimates are provided by Budget Direct Insurance for a 35-year-old male living in Chatswood, NSW. Rating 1 for life, clear driving history, no finance, private use and vehicle garaged at night. Estimates include a 15% online discount.

Real cost It’s relatively easy to put a number on the three-year cost of depreciation, fuel and insurance, so the total of these running costs equates to 80% of a car’s score.

Service Service is scored based on frequency. A longer interval may result in less expense – and it will certainly mean less hassle – so takes the maximum 10 points.

Warranty A seven-year warranty gives greater peace of mind compared with a three-year warranty. However, it’s impossible to put a hard cost on what the extra cover is worth – it only translates into an actual cost saving if something fails and it’s fixed without charge. Warranty accounts for 10 points of 100.

Total score The addition of the real-cost score out of 80 and the warranty and service interval scores out of 10 gives a total of 100. It’s displayed in each table and, because each car references the cheapest overall model, the difference in value through the classes is clear in the spread of scores from more than 90 to just over 40 in our choices.

Assumptions and T&Cs: Annual comprehensive insurance estimate provided by Budget Direct Insurance for a 35-year-old male living in Chatswood, NSW, rating 1 for life, clear driving history, no ﬁnance, private use vehicle garaged at night. In order to purchase insurance you will need to obtain a premium quote and answer underwriting questions. Estimate includes 15% online discount. Insurance is arranged by Auto & General Services Pty Ltd AFSL 241 411, 13/9 Sherwood Rd, Toowong, Qld 4066 trading as Budget Direct on behalf of Auto & General Insurance Company AFSL 285571. Because we don’t know your ﬁnancial needs, we can’t advise if this insurance will suit you. You should consider your needs and read the Financial Services Guide and the relevant Product Disclosure Statement available at www.budgetdirect.com.au/ car-insurance before making a decision to buy insurance. Insurance not available in NT.

MY MONEY GOLD STAR CARS

If funds are tight or you’ve just graduated from your P-plates and don’t want to foot a huge insurance bill, these are the ﬁrst cars that ought to be on your shortlist

YOUNG COUPLES/SINGLES Kia Picanto S WINNER The cheapest car to run in Australia is the Kia Picanto S. Only grabbing a bus, an Uber or a GoGet are among the less costly transport alternatives to the baby Korean. If you’re intent on new-car ownership and want to do it at minimum cost, with a degree of driver appeal, then the Picanto is it. The model is offered in the single ‘S’ spec and opting for the five-speed manual saves you $1500 upfront and a further $120 each year at the bowser. The depreciation here is about $2500pa, which is as good as it gets for a new car, and the Kia kicks on with the brand’s generous seven-year warranty, a handy 12-month/15,000km service interval and bargain-basement annual Budget Direct insurance premium.

INSURANCE: FOUR THINGS YOU SHOULD KNOW

Find out what your policy includes at no extra cost. Examples are free car rental for up to 14 days if your car is stolen, cover for personal property in the car, and accommodation/ travel expenses if you’re over 100km from home. Understand the exclusions. For example, if the car is driven by an unlicensed driver or someone under the influence of drugs or alcohol, you might not be covered. If you are insuring a new car, ask whether you get newfor-old replacement in the event of total loss. This will mean that if your car is written off in the first 12 (or 24) months, the insurer will replace it with a new one including all the on-road costs. Understand the difference between agreed and market value. With an agreed-value policy your car is insured for a set amount. With a market-value policy the value is determined by what it would cost to buy the same make and model in similar condition.

3 2ND

3RD

Mazda2 Maxx

Hyundai i30 Active CRDi DCT

Mazda’s well-established driver and ownership appeal are reflected in its 55% Glass’s resale figure, which sees it shed just under $8000 in the first three years. From this cracking start the mid-spec Mazda hatch – which gets a cheeky 2kW and 2Nm boost over the entry-level Neo – powers on with good economy on plain old unleaded, a generous 12-month or 10,000km service interval and cheap-as-chips annual insurance at $701. The only misstep is in the warranty stakes. Three years might be OK now but it’ll start seeming ordinary as five-year warranties become the norm. If there was a judge’s pick for the car in which value and fun squarely align, the Mazda2 Maxx manual hatch would be it. Ideally, as CarShowroom suggests, with a safety pack fitted.

The arrival of the PD series has seen the Hyundai i30 come of age, bringing new-found style, quality and driver appeal, while our analysis suggests the model’s long-held value credentials carry into its new chapter. The stout 54% three-year resale reflects the model’s – and the brand’s – wide appeal and hard-earned reputation for reliability, and it no doubt helps real-world values that a three-year-old i30 will have two years’ warranty left. With a sharp $26,000 price tag for an Active-spec turbo-diesel with a seven-speed dual-clutch box, the i30 is off to a flying start. At 4.7L/100km it’s miserly at the bowser and the five-year unlimited kilometre warranty and 12-month/15,000km service interval put it ahead of most of its rivals in the small car category.

YOUNG SINGLES & COUPLES KIA PICANTO S MAZDA2 MAXX HYUNDAI i30 ACTIVE

PRICE $14,190 $17,690 $25,950

ECONOMY FUEL COST/ (1/100KM) YEAR 5.0 5.2 4.7

$747.52 $777.42 $808.39

GLASS’S RESALE 46% 55% 54%

THREE-YEAR SERVICE INT. INSURANCE THREE-YEAR WARRANTY GOLD STAR DEPRECIATION (MONTHS) ESTIMATE1 O’SHIP COSTS (YEARS) SCORE/100 $7662.60 $7960.50 $11,937.00

12 12 12

$620 $701 $772

$11,765.17 $12,395.77 $16,678.18

7 3 5

In order to purchase insurance you will need to obtain a premium quote and answer underwriting questions. See page 41 for assumptions and T&Cs.

42 MONEY OCTOBER 2017

In association with

93.3 83.6 67.4

MAKE YOUR CAR PAY ITS WAY

FAMILY Mitsubishi

Outlander LS WINNER Entry-level, seven-seater medium

ou can ease the financial burden by turning your car into a money spinner. Consider joining a ride-sharing service such as Uber. Comparison site Finder says drivers earn an average of $35$40 an hour (before Uber’s 25% cut). Your car needs to be less than 10 years old, have air-con and four doors, and be in great shape. Or become an Airtasker and deliver parcels or, if you have a van, move furniture. Airtasker says it’s possible to earn up to $5000 a month. If you’d rather let the vehicle do the hard yards, rent it out through sites like Car Next Door, and pocket $25-$40 a day, or up to $100 daily for vans, utes and premium cars. According to Car Next Door, it’s possible to earn up to $7000 a year. If your car is a head-turner (for the right reasons) you can register it with a casting agency. It’s possible to earn $1000 or more a day if it is selected for an advertisement, film or television.

FAMILY

SUVs such as the Nissan X-Trail, Holden Captiva 7 and Mitsubishi Outlander LS made pricier large seven-seaters work hard to earn a place on the podium, and the latter carried its circa-$10,000 price advantage all the way to the top. Priced at just over $30,000, the Outlander has a reasonable 48% three-year resale forecast. Among rivals in this class, the Hyundai Santa Fe can match the Mitsubishi’s five-year warranty, and the Kia Sorento can trump it, and the new Honda CR-V sevenseater can go close to the 6.6L/100km combined cycle economy, but no model can match the broad cash-saving credentials offered by the Outlander.

Looking for space, quality and running costs that won’t pull too tight on the family purse strings? Here are three very different vehicles that all deliver a convincing return on investment

3RD

2ND Kia Sportage GT-Line

Holden Commodore Evoke 180

Another entry for Kia, helped into the top three by the impressive seven-year warranty. We can see the benefit of spending up on a high-end medium SUV. The typical owner spends plenty of time ferrying the kids around so they might as well enjoy it, and in kitted-out form these mid-size, high-rise wagons are a nice place to be. More importantly, the upper versions get all the safety fruit, such as autonomous emergency braking. The Kia’s $45,990 sticker is typical and its 53% three-year resale about average. The standout performances, meanwhile, include that brand’s generous warranty, the pleasingly low $783 annual Budget Direct insurance and the handy 12-month service interval. The diesel isn’t the most economical in its class but 6.8L/100km is decent enough.

For our local Lion, going out at the top of its game beats fading into obscurity hands down. Not only is the VFII a superbly fine-tuned version of a locally developed legend that’s been around for more than a decade, it still stacks up as great value. The entry-level Evoke V6 starts by being a bit less costly than its podium mates, backing that with slightly better resale. Predicting the actual future values of the last Aussie-built, rear-drive Commodores is potentially tricky. Will used values slump when the new model arrives? We think so. But will they rise again long term? Ditto, though perhaps more for a mint SS-V than a base car. Meantime, the big Holden’s strengths lie in lowcost insurance, reasonable annual fuel cost and an odd nine-month service interval.

PRICE

MITSUBISHI OUTLANDER $30,500 KIA SPORTAGE $45,990 HOLDEN COMMODORE $35,490

ECONOMY FUEL COST/ GLASS’S THREE-YEAR SERVICE INT. INSURANCE THREE-YEAR WARRANTY GOLD STAR (1/100KM) YEAR RESALE (%) DEPRECIATION (MONTHS) ESTIMATE1 O’SHIP COSTS (YEARS) SCORE/100 6.6 $986.73 48% $15,860.00 12 $821 $21,283.19 5 55.4 6.8 $1169.59 53% $21,615.30 12 $783 $27,473.07 7 48.5 8.3 $1240.89 36% $22,713.60 9 $787 $28,797.26 3 40.0

In order to purchase insurance you will need to obtain a premium quote and answer underwriting questions. See page 41 for assumptions and T&Cs.

In association with

MONEY OCTOBER 2017 43

MY MONEY GOLD CARS

Shopping at the upper end of the market can easily trip up even the most ﬁnancially savvy. Here are three badges with clout that deliver champagne motoring on the proverbial beer budget

PREMIUM WINNER

Audi A1 Sportback 1.0 TFSI

Just as downsizers stepping from big, early century homes in the suburbs are choosing flash innerring apartments and townhouses, those stepping from medium and large cars are opting for designer babies such as the Audi A1 Sportback rather than pedestrian small hatches. Around $30,000 on-road might seem a lot for an entry-level light car but feel the quality and absorb the inherent value. With a sweet, 1.0-litre turbo triple, Ingolstadt’s smallest model uses just 4.2L/100km, which makes it the least costly to fuel of any 2017 Gold Star car. The insurance is reasonable for a premium machine, at $776, and the 12-month service interval will save hassle as well as a few bucks.

2ND 3RD BMW 318i Sport Line

Mercedes-Benz E200

We don’t generally associate 1.5-litre, three-cylinder engines with the BMW 3 Series sedan, but the downsized turbocharged engine is, in this case, Munich’s ace in the hole. The zesty little powerplant is borrowed from the Mini range but some tradition clearly persists, as in this case it drives the rear wheels. The numbers stack up convincingly, with a 5.4L/100km fuel economy performance and Budget Direct insurance pegged at a reasonable $981 a year. It has a 56% three-year resale forecast. Like most of its premium rivals, the 318i is sold with a three-year, unlimited kilometre warranty. After the initial 12-month service, servicing is condition-based, with the car’s onboard diagnostics deciding when it needs a freshening at the shop. All in, it’s a class act.

The battle for premium large honours in the Wheels Gold Star awards proved an old-fashioned fight between Germany’s big three, with Mercedes-Benz ultimately presenting a sharper proposition than BMW or Audi. The entry-level Benz E200 started on the right foot with a lower purchase price and a slightly stronger resale than the BMW 520d, to shed about $1000 less of its value in each of the initial years. The total cost each year? Erm … about $15,500. Ouch. But that’s big luxo cars. The E200’s 135kW, 6.5L/100km 2.0-litre turbo petrol sees it strike a happy middle ground of driver appeal and economy. Condition-based servicing, meanwhile, could let the Merc go two years between check-ups but that would depend on the sort of driving you do.

PREMIUM AUDI A1 BMW 318i MERCEDES-BENZ E200

FINANCING THE DEAL

ars depreciate rapidly so it makes sense to minimise finance charges. But paying in cash won’t always score you a discount. Car retailers worked out long ago that they can make more money by offering finance. But if you don’t have the folding stuff, head to lenders like Heritage Bank (5.14%) or First Option Credit Union (4.99%) for waferthin rates on personal loans secured by a term deposit. When it comes to traditional car loans, credit unions, building societies and customer-owned banks are highly competitive. Check out the likes of IMB (5.99%) and BCU (5.90%) plus non-bank lenders like carloans. com.au (5.44%). Dealer finance can seem like an easy option. However, the best deals (we’re talking near-zero interest rates) tend to be reserved for self-employed borrowers with an ABN. Don’t overlook your home loan as a source of finance. If you’re ahead with repayments, redraw may be an option.

ECONOMY FUEL COST/ GLASS’S THREE-YEAR SERVICE INT. INSURANCE THREE-YEAR WARRANTY GOLD STAR (1/100KM) YEAR RESALE (%) DEPRECIATION (MONTHS) ESTIMATE1 O’SHIP COSTS (YEARS) SCORE/100 $27,300 4.2 $744.86 55% $12,285.00 12 $776 $16,847.58 3 64.0 $54,900 5.4 $957.68 56% $24,156.00 12 $981 $29,972.04 3 40.0 $91,100 6.5 $1152.76 49% $46,461.00 24 $1343 $53,948.28 3 31.4

PRICE

In order to purchase insurance you will need to obtain a premium quote and answer underwriting questions. See page 41 for assumptions and T&Cs.

44 MONEY OCTOBER 2017

In association with

MY MONEY EXTRA INCOME

Set up a side hustle STORY CHRIS GUILLEBEAU

With this four-step strategy you can turn a bright idea into a proﬁtable business

ou need a side hustle. In this day and age, it’s not just nice, it’s necessary. Even if you love your job and have no plans to quit, a second – or third – income can bring you security and a backup plan. Oh, and it can also be fun … because a side hustle should be something you look forward to spending time on, not something that’s a chore. When I use the phrase “side hustle”, I don’t mean a part-time job that drains your energy after you’re already tired from your day job. I mean an asset you create that has the potential to produce passive income. Here’s an example. For the past seven years, Mike Benkovitch in Sydney has earned an average of $800 a month from a project he made long ago and has hardly updated since. This is an audio system that helps medical students memorise the human anatomy. When they purchase Mike’s course, the students learn faster and get better grades. Meanwhile, Mike gets paid month after month. How can you create a success story of your own? It all starts with an idea.

STEP 1 Find an idea

Ideas for viable side hustles come through the power of observation. Mike knew that there were a lot of medical students, and that memorising anatomy was particularly complex. His side hustle was an experiment that took off – it took a few months to create it in his

46 MONEY OCTOBER 2017

spare time, and once it was out he refined it for a while before walking away to pursue other projects, leaving it to produce income on autopilot. Curiosity is a valuable skill for side hustlers, and it’s a skill that can be developed. As you go through your day, look for problems and think about what kind of solution someone could create for those problems. Then think about how to turn that solution into a product or service that people can pay for.

STEP 2 Prepare to launch

Make a long list of everything you need to get going. Much of the time you’ll need a website. A website doesn’t need to be fancy or expensive; plug-and-play platforms like WordPress and Squarespace will do just fine. You can register a domain and set up a basic landing page in an afternoon. Beyond the basics, you’ll need to create specific deliverables for your hustle: a scheduling calendar for coaches or consultants, a payment system for ecommerce sites, an email list where interested site visitors can sign up to learn more, and so on. By getting specific on exactly which tools you’ll need, you won’t waste time trying to install every app or fancy feature.

STEP 3 Launch your idea

An idea on its own doesn’t have much value. To actually make money you’ll need to transform your idea into an

offer. An offer includes three elements: a promise, a pitch and a price. What, exactly, are you selling? Why should people purchase or pay for it? Then, when they’re ready to do so, how will they do so? Next you need to get the word out. “If you build it, they will come” is a pipedream. You have to let them know! Make a list of five people who will help you get the word out. Ask them for specific help, whether through sharing a post on Facebook or connecting you with a popular blogger who accepts guest posts. Don’t spend much money but consider investing a small amount in Facebook ads to see how strangers perceive your new offer. Feedback from potential customers is more valuable than advice from friends.

STEP 4 Regroup and refine

Only when you launch your offer into the world will you truly know how people will respond to it. You can’t just ask them about it in advance, because they won’t always give accurate answers. Most new side hustlers think that one of two things happen when you launch an idea: it’s either a huge success or a miserable failure. But much of the time the initial outcome falls somewhere in the middle: your idea works, sort of. It doesn’t completely flop but you’re also not going to retire to the beach anytime soon. That’s OK. No plan survives contact with the battlefield. Once your offer is out, pay close attention to see what needs to be tweaked. If it’s working, great; do more of

that. If it’s not, go back to step one and choose another idea. By reducing risk (not investing a lot of money and starting quickly), your costs of failure are low. You need a side hustle and there’s never been a better time to start one. The costs are low. The rewards are high. It’s like a hobby, except that instead of draining your wallet, this hobby makes deposits in your bank account. What are you waiting for? M

You need to get the Win a copy word out. C “If you build it, they will come” is a pipedream

hris Guillebeau is the bestselling author of The $100 Startup, The Happiness of Pursuit and other books. His latest book, Side Hustle, presents the 27-day plan in more detail. He also hosts the Side Hustle School podcast, where every day he shares a story of a different person who starts an income-generating project without quitting their day job. For your chance to win one of six copies of Side Hustle tell us in 25 words or less what side hustle you’d start. Send your entries to money@bauer-media.com.au or Money magazine, GPO Box 4088, Sydney, NSW 2001. Entries close November 1, 2017.

MONEY OCTOBER 2017 47

MY MONEY REALITY CHECK

Urban myths busted Facts can ruin a good story but they are essential for making good business and economic decisions STORY PHIL RUTHVEN

merican corporates on the New York stock exchange have been the world’s most profitable, on a weighted-average basis, in the post-industrial age over the past half century. The average American company’s profitability has been four times the long-term bond rate, which continued through the GFC and beyond. In contrast, Australian companies’ average profitability on the ASX has only been twice the 10-year bond rate, apart from during the recent short-lived mining boom. (See chart 1.) One of the reasons for this discrepancy, perhaps the most important, has been that American corporates spend more on information than any other nation –

48 MONEY OCTOBER 2017

indeed, twice the gross domestic product (GDP) share of the world’s most developed nations. Evidenced-based decisions beat guesswork and gut feel. Facts usually ruin good stories, at work and in our social life. But rumours, scuttlebutt, scandals and old wives’ tales can be very believable, and we tend to believe a lot of them until they are debunked. After all, they are interesting, entertaining and often comforting. But when leading a business or governing a nation, it is safer to make evidence-based decisions, which leads to a number of myths that should be given overdue rebuttal. So what are some of these surviving or new myths, beginning with several that are social urban myths rather than business-related fallacies?

don’t last as long 1Marriages as they used to

Not true. The average length of a marriage has stayed around 20 years for three centuries. That there are more divorces and separations these days is due to the fact that we live over twice as long as people did in the early 1800s (when the average lifespan was 38 years) and have time for a trade-in, if you have a mind to. In the olden days, you married at 18, lived another 20 years together and then went to God before you were 40, on average. There just wasn’t enough time for a divorce.

Crime is on the rise, especially murders

No, it isn’t. Not only is the murder rate in Australia one of the world’s lowest, at under two per 100,000 each year, it has fallen to record lows over the past five years.

is the No. 1 cause 3 Speeding of road-based deaths

No, things like distractions, falling asleep and intoxication are. Speed is usually somewhere around the second to fourth most common cause.

We need a big population 4 to compete in a globalising world

No, we don’t. Some 18 of the world’s top 20 countries with the highest standard of living have a population lower than Australia’s 24 million, and most are less than a third of our population. Only the US and Germany are more populous countries in the top 20.

Australia’s population is getting to the limit of our carrying capacity

That’s good for a laugh right around the world, especially in high-density Asia. Our population is so thin we could only just touch hand to hand around the coastline. Indonesia’s population, on a fraction of our land, could do so 11 deep and China, with only a slightly bigger land mass than us, could be 52 deep. On our present growth rate, we will have a population of over 40 million in 2050 and over 75 million by 2100, and still have one of the world’s lowest population densities.

Immigrants take our jobs

No, they don’t. They more often take jobs we don’t like. And if a migrant family arrives, they create demand for more jobs than they can fill for at least five years, in terms of the necessary infrastructure and annual consumption expenditure.

will run out of 7 Australia workers due to ageing

No, we won’t. Being too young a population, as we were in the 19th century, was a worse problem; and to get

enough workers to support the population, we needed children to start work at under 15 years of age, often as young as 11 to 13. As this century unfolds, working beyond 65 and up to 75 or more – often on a part-time or casual basis – is realistic for a workforce that emphasises brains, not brawn. And the only way to wear the brain out is to stop using it.

There won’t be enough jobs 8 due to technology, robots and artificial intelligence

Yes, there will be. We are good at creating jobs. Over the past five years we have created eight times more jobs

1. AUSTRALIA’S CORPORATE PROFITABILITY TO 2015

Return on shareholders funds (after tax) 30% 25%

Despite the fall in ROSF, the Top 30 still averaged four times the bond rate

Largest 30 listed - US

20%

Resources price boom

15% 10%

Largest 30 listed - Australian

5% 0%

Source: IBISWorld 2016

2. AUSTRALIA’S NEW AND LOST JOBS

By industry, ﬁve years to June 2016, share of total basis Personal & other services 3.6% Arts & recreation 1.4%

Agriculture 1.5%

830,000

Mining 8.1%

Australia created 8 times more new jobs than it lost

Construction 6.5% Retail 5.0% Transport 5.4%

Health 30.2%

New jobs

942,200

Finance & insurance 1.3% Rental & real estate 1.6%

Hospitality 7.1%

Prof & tech services 13.4% Admin & support 1.7%

Education 7.9%

Net new jobs

Govt & safety 5.3%

Info media & telcos 5.4% Wholesale 44.4%

Lost jobs

112,200 Utilities 2.5% Manufacturing 47.7%

Source: ABS, IBISWorld 2016

MONEY OCTOBER 2017 49

MY MONEY REALITY CHECK

than we have lost. Yes, eight times! There are millions of jobs in the making to replace those lost through technology and digital disruption, to be added to our current 12 million jobs. (See chart 2.)

The claim that we are too highly taxed is one of the most pernicious lies being trundled out by both sides of politics

We are now working harder 9 and with not enough time to scratch ourselves

Not true. For males in the year 1800, it used to be a 65-hour week for 25 years, starting at 13 years of age to complete 80,000 hours of paid work, only to die at an average age of 38. Now it is still 80,000 work hours in a lifetime but at a pace of less than half those hours per week for longer (more than 50 years). Remember we now have two months off a year through vacations, public holidays and sick leave. We have more discretionary and leisure time than at any time in history. (See chart 3.)

3. WORK AND LEISURE OVER TIME

Life expectancy (thousands of hours) 1000 Leisure time Education Sleep Unpaid work Travel to work Paid work

900 800 700 600

46% 44%

400 300

It always was unaffordable for the newlyweds and the poor, so what’s new? Interestingly, the debt servicing ratio (interest payments as a share of disposable income) for mortgage and other debt is currently at the lowest rate in four decades. (See chart 4.)

43%

500

29%

32%

27%

23%

rich are getting richer 11The and the poor getting poorer

200 100 0

24%

22%

20%

1788

1838

1888

Source: IBISWorld 2016

16%

12%

10%

1938

1988

2038

2088

Year born

4. HOUSEHOLD DEBT SERVICING RATIO

Percent of household disposable income, to F2016 (year end June) 16% 14%

Other (loans, credit card debt) Mortgage

12%

No, they aren’t; there has been hardly any change since the beginning of our new century here in Australia.

12 We are too highly taxed

No, we aren’t. This is one of the most pernicious lies being trundled out by both sides of politics in Australia: blatant scaremongering and politicking. We are actually one of the lowest-taxed developed nations at 28% of GDP. The average among developed countries is around 37% and many nations are nudging 50% of GDP.

greatest mining boom 13 The in our history is now over

10%

Firstly, it isn’t our greatest boom: that was in the 1850s, when the industry reached almost 18% of our GDP – led by gold – versus the current one at just over half that share. And the boom isn’t over; production volumes are still growing and may do so well into the 2020s but boom prices are over. (See chart 5.)

8% 6% 4%

need to cut costs 14 We to balance the budget

2% 0%

is now 10 Housing dangerously unaffordable

78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Source: ABS, IBISWorld 2016

50 MONEY OCTOBER 2017

Yes, let’s regress back to the days when there was no or inadequate support for single mums, the unemployed, the elderly, the disabled or other disadvantaged citizens.

Let’s not stop till we get back to the “good old days” when taxes were much lower and may the devil take the hindmost in terms of the people left behind. I don’t think so. But, yes, we should get better value for our taxes than we do. One fifth of our GDP is produced by governments, and that sector’s productivity has been negative for decades.

We need to make material things to create basic wealth

No, we don’t. A wealth-creating industry is one that produces products that customers and the market want and are prepared to pay for, regardless of whether these products are goods or services. Agriculture, mining, manufacturing and construction are all service industries anyway. Humans didn’t create the raw materials on which they are based; God did and they are free. No one has ever been game to take the credit for creating our natural resources, least of all economists and our Bureau of Statistics. The term “goods industry” is an historical construct to separate tangible from intangible products. The economy and its wealth is built on value adding, so wealth creation has only ever been the result of labour, depreciation of capital, indirect taxes and profit going into a product, not the God-given free raw materials. Agriculture these days creates just 2% of our GDP, and manufacturing less than 6%. In 1960 these two industries were 38%, not 8%! Yet we have a standard of living nearly three times higher than at the end of the industrial age in the mid-1960s. If anything, it is our “service” industries propping up some of the “goods” industries in this new century.

Nuclear is the world’s 16 most dangerous energy ever used

Wood probably kills more people per kW of energy produced (logging, chopping, asphyxiation, fire). Nuclear energy almost certainly has been the safest energy source on the basis of deaths per kW of energy.

could become 17 Australia the food bowl of Asia

If only ... but we don’t have enough water. That said, we will probably increase our output fivefold this century as we did in the 20th century but that will only be enough to feed 5% of Asia’s population at the end of the 21st century. But despite these myths, are things really getting better? You bet. Just look at our progress in chart 6. And the best is yet to come. M

5. MINING INDUSTRY LIFECYCLE

Value added share of GDP (current price basis) 20% By the end/bottom of the 6th cycle around the mid 2040s or earlier, 80% of industry output is expected to be energy minerals (LNG, coal seam gas, oil, uranium and coal)

2nd Cycle Gold

18% 16% 14% 12%

3rd Cycle Gold & Coal

6th Cycle Energy +

10% 8% 4th Cycle Gold

1st Cycle 4% Quarrying & Coal 2%

5th Cycle Energy, Iron Ore & Gold

0% 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020 2040 2060 Source: ABS, IBISWorld 2016

6. AUSTRALIA’S AGES OF ECONOMIC PROGRESS

GDP at F2016 constant prices, 1788-2016 onwards $2000bn $1800bn $1600bn $1400bn $1200bn

Hunting Agrarian age age Hunting Trapping Fishing Crafts Religion

Agriculture Mining Banking Commerce

Industrial age

Manufacturing Construction (30-50%+ of GDP)

$1000bn The major utility is transport

$800bn

Infotronics age Enlightenment age? Quaternary service industries

Quinary service industries

ICT Digital Era (post2007)

Imbedded intelligence Neural network programs Electronic “guardian angels”

The major utilities are electricity and telephony

$600bn $400bn

Other new technologies

$200bn $0bn

1800

1840

1880

1920

1960

2000

2040

2080

Source: IBISWorld 2016

Win a copy Phil Ruthven is the founder of IBISWorld, an international corporation providing online business information, forecasting and strategic services. This is an extract from his book FastChanging World (Wilkinson Publishing, RRP $44.99). We hav 10 copies to give away. For your chance to win tell us in 25 word or less a money myth you have busted. Send your entries to money@bauer-media.com.au or Money magazine, GPO Box 4088, Sydney, NSW 2001. Entries close November 1, 2017. MONEY OCTOBER 2017 51

MY MONEY HEALTH CARE

Narrow the gap STORY BETH QUINLIVAN

Greater transparency is the key to reducing out-of-pocket expenses in a complex and costly health system 52 MONEY OCTOBER 2017

or anyone who has a hospital stay looming on the horizon and who is also watching their healthcare costs, a recent series of reports by health insurer Medibank Private and the Royal Australasian College of Surgeons (RACS) makes for interesting reading. Australia has standards of healthcare that are among the best in the world but what the Medibank/RACS reports show is that individuals are paying dearly for that care and that health is now a major budget item. Using data from the past two years, the reports detail costs and out-of-pocket expenses – as well as other information on complication rates – for common surgical procedures. Medibank, like other insurers, reimburses medical expenses according to the details of the policy – you can’t

claim on obstetrics, for example, unless it is specifically covered by your policy. Also like other insurers, Medibank covers doctors’ fees if the doctors participate in their “no gap” or “known gap” contracts. If the doctor’s fees are more than the amount the fund has agreed to reimburse, then the “fee gap” is paid by patients. On some procedures detailed, most patients escaped out-of-pocket expenses. With colonoscopies, for example, patients paid an out-of-pocket fee to the medical specialist in 9% of cases (averaging $272). But that was low compared with other common surgery. People having a hip replacement paid out-of-pocket expenses to the surgeon in 42% of cases, and in 77% of instances for the anaesthetist, for diagnostics and for an assistant surgeon. Out-of-pocket expenses varied across states – they were charged in 95% of procedures in the

ACT, 79% in NSW, with lower rates in Tasmania and South Australia. The actual level of out-of-pocket fees was certainly not trivial: up to $5000 for the surgeon and up to $2500 for other medical services. The challenge for households, considering these significant fees on top of their health insurance premiums, is what to do. Health costs have for years been rising at a greater rate than inflation, partly driven by technological advances and the raft of new treatments now part of normal medical care. Australians already pay more out of their own pocket for health than most countries in the world. Of the OECD countries, only Ireland, Switzerland and US pay more for health out of their own pocket. But health is different from other spending. People who are very effective at managing other areas of their budget have been hesitant about even discussing health costs. Health can be highly emotional; decisions about treatments sometimes have to be made quickly and at difficult times. Australia’s health system is a complicated mix of public and private, layered with tax rebates, tax penalties, safety nets and more. Information is confusing and in many cases not easily available. So can consumers, without impacting on the quality of care they receive, better manage their health spending and minimise out-of-pocket fees? The first point to make is that aside from the Dr Google instant experts, the vast majority of people acknowledge that their doctors and other health professionals are the ones who have the expertise and are therefore best placed to advise on health matters. But there is still a role that consumers can play to get better value out of their health spending and keep a lid on their costs.

Get the facts, ask questions

The major challenge in trying to understand and manage costs is information. Different doctors, hospitals and health funds all have their own levels of costs and reimbursements, and people need to find that out themselves. There is no single source of clear, comprehensive information. That, says Leanne Wells, chief executive officer of the Consumers Health Forum, is completely unacceptable given the very large costs of health insurance and outof-pocket costs for many private medical services. She believes there should be an independent, authoritative website where people can easily check and compare costs. In the absence of easily accessible information, she says people should be prepared to take time to assess needs and healthcare costs, particularly if you have a chronic illness. For private medical services, ask for written cost estimates not just from the doctor/specialist but for associated costs including anaesthetics and diagnostics.

The Consumers Health Forum suggests also asking the GP to provide two or three specialists’ names, and check what each charges and how much would be covered by your health insurance policy. “When you’ve been referred to a specialist for potential hospital treatment, I’d recommend that patients plan ahead with a list of questions to take into a specialist consultation,” says Linda Swan, the chief medical officer for Medibank. “Being told difficult or distressing news can often lead to people forgetting what they wanted to ask. “If you’re unsure about a recommended treatment or fee, ask for a second opinion,” she says. “You can call your insurer and ask for some advice – what you’re covered for and what you’re not, and whether there are other surgeons in your area who participate in gap-cover schemes.” Increasingly GPs are being asked to advise on specialist fees alongside the health plan. Bastian Seidel, president of the Royal Australian College of General Practitioners, says making patients aware of potential out-of-pocket expenses is important and many GPs routinely do this now. Putting the onus on patients to do their own research, at potentially difficult times, is also not the answer, he says. “A patient diagnosed with prostate cancer should not have to be making these decisions. They should be able to have a GP to advise them.” And that would be easier if fees were publicly disclosed. “If you see your GP, the fees are public and absolutely clear,” says Seidel. “It is very difficult for patients and GPs if specialists’ fees are not open and transparent. I can’t see any reason why the Australian Medical Association and all the colleges wouldn’t publish a standard procedure fee. Develop a good long-term relationship with a GP, and it is in their interests that referrals are optimal.”

Public and private options

Almost 50% of Australians have private health insurance but that does not mean that it is in your best financial interests to use your private insurance for all your healthcare. If you are admitted to a public hospital, for example in a medical emergency, you will typically be asked if you have private insurance and, if so, encouraged to use it. This allows the hospital to claim reimbursement from the health fund, and obviously that is helpful to hospital budgets (which are always tight). But whether this is in your financial interests or not depends on whether everything you will be treated for is covered in your policy, and whether you will be left with out-of-pocket gap charges. In many areas of Australia, especially rural, you won’t have much in the way of choice – there is only a public hospital. In which case there may still be value

PATIENT CHECKLIST Patients should always ask their doctor about fees, and the fees of other doctors involved in their care, before going to hospital as a private patient. This includes asking: What are your fees? Are there any fees for other doctors? Will I have any out-of-pocket costs? Is your fee an estimate only? Can I have an estimate of your fees in writing? If the cost changes, when will you let me know? What if I need a prosthesis? Should I contact my health fund?

• • • • • • • •

Source: Australian Medical Association

MONEY OCTOBER 2017 53

MY MONEY HEALTH CARE

in having private insurance because it can provide choice of doctor (assuming there is more than one) and potentially faster access to treatment. But maybe not. In many public hospitals, public and private patients share rooms and have the same doctors. Consumer Health Forum’s Wells recommends that, where feasible, people should check what specialist services they need in advance of use. “As an example, many people pay out thousands of dollars for private obstetric charges when public hospital and support services are comparable to what is available privately. For other elective procedures which may have lower degrees of urgency, such as joint replacement and cataracts, check what services and waiting times apply in local public hospitals. Even if you already have private insurance, private gap costs may mean public hospital care would save you considerable sums.”

Review your policy

Health insurers face ongoing criticism about the complexities and cost of their policies, and there is never a shortage of reports of people who pay premiums for years only to discover the first time they need hospital care that their policy doesn’t provide adequate cover. The consumer group Choice in July urged the government to simplify health insurance after a survey found nearly half of Australians found the process of finding a suitable policy difficult. “One of the biggest areas of difficulty for consumers is uncertainties about what their private health insurance might cover,” says Wells. “It is worth having a clear idea of exactly what is covered and any excesses involved, and to check this every year. “These issues can become highly fraught for people who suddenly face the need for surgery and at that time of anxiety learn that their insurance does not cover what they thought it did. Assess thoroughly what type and level of health insurance you need and can afford, using comparator sites [the government site privatehealth.gov.au is recommended] and ensure you

have in writing the health cover you have decided on and where it may differ from default policies.”

Costs and quality

The Medibank/RACS reports detailed the cost variations for procedures across states and across the profession. Health insurer NIB offers similar data on fees for prostatectomy. In 2016 about 50% of specialists were performing the surgery and charging less than $3000, which was within NIB’s gap cover contract, so there were no out-of-pocket expenses. But 25% of doctors’ fees were upwards of $9500 for the procedure – obviously leaving hefty out-of-pocket costs. The question is: what do you get for that extra money and do surgeons who charge high fees deliver better outcomes? “There is absolutely no evidence anywhere in the world that higher charges translate to better outcomes,” says Mark Fitzgibbon, chief executive of NIB. While he says there is enormous difference in prostate surgery outcomes between the good and not-so-good doctors – in terms of medical complications such as urinary incontinence and impotence – that data is not collected and published in a way that would be useful for people and their GPs when making specialist choices. So NIB is working with other insurers to develop the Whitecoat website, which is pitched as the TripAdvisor of health. The website is live but at the moment is more useful as a directory of allied health practitioners with a small participation of doctors and specialists. Fitzgibbon is confident that within 12 to 18 months Whitecoat will have patient-reported experiences and outcomes, and generally provide information that people can use to help in choosing doctors and understanding the financial implications of their choices. Outcomes are a current major topic of discussion for the medical profession, and consumers seeking better value from their health spending will hopefully see more information provided not just by insurers but by the government in future. M

Research before surgery pays off

hen it became clear late last year that Lorraine Bonnet would need a hip replacement, she did what she does with anything new – that is, do her research. Once armed with information about surgery options (her preference was anterior hip replacement), as well as input from her GP and other doctors along the way, she felt comfortable making decisions. The two orthopaedic surgeons

54 MONEY OCTOBER 2017

she consulted about the procedure had excellent reputations. Both provided her with fee estimates. They were outside gap cover schemes with one at $7000plus and one just over $5000, so Lorraine did pay significant out-ofpocket expenses. “It was a toss-up between the two, and the difference in fees wasn’t really a factor,” she says. “There were some complications

with this surgery, and I wanted to go to the best place. But I also made the decision which would fit in with my lifestyle, and I also knew people who had the same surgeon and they had a great outcome.” For Lorraine, it has also been a good outcome. She was at the Byron Bay Bluesfest within two months and is able to live a normal active life. “I can do everything I did before – except run!”

WHERE TO GET HELP

•

healthdirect. gov.au provides comprehensive information on local health services, including free services.

•

privatehealth. gov.au has a comprehensive guide to private health insurance funds.

•

whitecoat. com.au, set up by three of the major health insurers, has a directory of allied health services and some doctors but is aiming within the next year to have a comprehensive database of doctors, including patientreported outcomes and experiences.

•

surgeons.org/ news/surgicalvariance-reports for reports from Medibank/Royal Australasian College of Surgeons.

Efﬁe Zahos BANKING

Cards with all the trimmings Christmas is coming ... and special debt deals are up for grabs

pecial credit card deals – everything from cashbacks, fee waivers and bonus points to discounted Uber rides and smartphone screen insurance – are flooding the market. Just in time for our Christmas binge! Research by comparison site RateCity reveals there are now 54 cards on the market trying to grab a slice of the profitable Christmas action. They include the American Express Explorer credit card. Apply online and spend $1500 in the first three months and you’ll receive 100,000 membership rewards bonus points. If discounted Uber rides appeal, then Westpac’s Altitude card offers $20 off every third Uber ride on each new card (total redeemable value of $250 during the offer period which ends December 31, 2017). Other tempting deals include the Coles fee-free Mastercard. Sign up for this card and you can expect free delivery if you spend on the card, plus collect one flybuys point for every $2 spent. With around $32 billion already owing – an average of about $4200 per cardholder – we really don’t need any incentives to sign up for more plastic. But, and this is a big but, if you can play your cards right, now is certainly a good time to upgrade. “The average Australian spends almost $19,000 per card every year on plastic, so it’s little wonder credit companies are offering attractive deals to bring in new customers,” says RateCity’s money editor Sally Tindall. “Of course, you need to make sure you read the fine print.” The two big traps with choosing a credit card based on trimmings alone are interest rates and fees, which can be as high as 24.99%pa and $1200pa respectively. “Cards offering bonus rewards and a raft of sweeteners often have a high annual fee attached; that’s how they make their money,” says Tindall. There are 31 cards on the market with no annual fee at all, so make sure you shop around before signing on the dotted line.”

WHAT’S AVAILABLE

If you’re looking for deals that will make the most of your spending over the holidays, then Canstar’s picks (see panel) make great sense. They may not have those super-quirky perks but they can appeal to those who need a little more time to pay off their debt. And that’s the catch for most cardholders with interest-free days. While your card may offer you 45, 55 or up to 62 days interest free, this doesn’t mean you have up to 62, 55 or 44 days interest free on every purchase you make. The total comes about through the monthly billing process (generally 30 days), plus the time between the end of your monthly billing period and the due date, which is generally 25 days if you have, say, a 55-day interest-free card. So if you make a purchase later in the monthly billing cycle, you’ll have fewer interest-free days. If you repay your balance in full by the due date, no interest will be charged. If you don’t pay in full, interest will be calculated from the day the purchase was made – meaning there are no interest-free days.

If you want a low-cost card plus time to repay your purchases … Get: Bankwest Breeze Mastercard: 0% for 13 months, standard rate 12.99%, annual fee $79. If you want a card that will help you repay your Christmas debt in a structured way … Get: Westpac Low-Rate Visa: Purchase rate 13.49%, annual fee $59. Have up to eight SmartPlans (repayment plan for your credit card) on your card at any one time. Large Purchase SmartPlan is available to help you pay off a “big-ticket” item costing $500 or more that you bought on your card in the past 30 days. Get a 1.5% discount on purchase rate on low-rate cards (excludes Westpac Lite Card). If you want to maximise rewards points … Get: American Express Platinum Edge. Purchase rate 20.74%, annual fee $195. Earn three points per $1 at major supermarkets, two points at major petrol stations and one point on standard purchases. Great for entertaining or road trips. Plus $200 travel credit each membership year.

But there are some friendly cards, according to Canstar, that calculate interest from the date the statement is issued, rather than from when the purchase is made. To help you make your payments on time, ensure the statement period starts a couple of days after your payday to allow for weekends and public holidays. Some banks allow you to change your statement period to match your pay cycle. It’s worth asking your issuer if it can do this. The biggest trap with these types of cards is not repaying the balance in full by the due date or by using them for cash advances. Finance expert and author of The Great $20 Adventure, Money’s editor Effie Zahos, appears regularly on TV and radio. She started her career in banking.

MONEY OCTOBER 2017 55

FAMILY MONEY Susan Hely F

Hard job choosing a career At 14 or 15, it’s hard for kids to know what they want to do in their future working life

elping your high school children sort out a career path isn’t always straightforward but it is essential for their eventual financial independence. Many kids find choosing a career overwhelming with only six in 10 knowing what they want to do, according to a new study of 14- to 15-year-olds by the Australian Institute of Family Studies (AIFS). It found that they can have unrealistic expectations about their future. This can lead them to drop out of university, with around one in three Australian university students not completing their studies within six years. Teenagers need good information from parents, schools and career experts to help identify the range of jobs that suit them and the pathway to achieve their aspirations, says Jennifer Baxter, senior research fellow at the AIFS. “Some may need help to modify their plans to suit their skills and the nature of the labour market.” Most schools shine a light on careers when students are 14 or 15. In Canberra, with its innovative Pathways career program, it is much earlier. Kids spend time with a career adviser going through different options and it can be a valuable exercise as it helps them identify a range of suitable jobs and what they need to study to get there. But, on the other hand, careers advisers’ advice can throw up jobs that the students have no interest in. Parents also often get in the way of what their kids want to do. They might have a strong sense of what they would like their

56 MONEY OCTOBER 2017

kids to study but they have to accept that the decision is largely up to them. “We’ve heard too many stories about students who have changed courses, dropped out because they made the wrong choices about what to study, students who didn’t realise there were other entry pathways or who started a course with next to no idea of what they were signing themselves up for,” says Simon Birmingham, federal education and training minister. With university fees going up and the government planning to reduce the income threshold for HELP repayments to $42,000 from July 2018, it can be a costly exercise to change university courses. While you want your kids to follow what they are interested in, you also want them to get a job. AIFS found that there is a big disconnect between what kids want to do and what jobs are available: 60% of 14- to 15-year-olds aspire to a professional or managerial job but this figure is very high for a sector that employs only 35% of the population. The study also reveals big gender differences that are limiting job prospects, particularly for girls. While both boys and girls are attracted to medical and science

professions as well as design, planning and architecture, AIFS found that boys often want to work in engineering or transport, information/communications technology or construction. Girls rank being educators, lawyers and social professionals such as counsellors among their top choices. Boys are much more likely than girls to want a trade or technical job, such as a mechanic or builder. Girls are more likely than boys to want a job in personal services, such as hairdresser or beautician. One in 10 boys and girls say they would like to work in a job that involved sports or performance arts. Run through the options with your children and, rather than asking them what they want to be, find out what they are interested in. For example, if you ask them if they want to train as an electrician, they may find it hard to get excited. But if they told you they are interested in alternative energy and installing solar panels and batteries, one career path would be an electrician’s course. Susan Hely has been a senior investment writer at The Sydney Morning Herald. She wrote the best-selling Women & Money.

Anthony O’Brien SMALL BUSINESS

Key role of a super fund There are advantages – and traps – in having your SMSF own your premises

wning the premises where you run your small business may help boost your retirement savings if you have a self-managed super fund (SMSF). But you have to get on top of the rules. Usually there are restrictions preventing SMSFs from investing in assets owned by related parties, such as fellow fund members or relatives. These restrictions don’t apply to “business real property”, which is generally an interest in land or buildings used exclusively by one or more businesses. If you’re a mechanic it might be the garage you work from, or if you’re a GP your surgical rooms. Whether it’s a shop, office or surgery, your SMSF can own this asset and lease it to your business. “Business real property is an asset that is often owned inside a self-managed super fund by small businesses,” says Andrew Heaven, an AMP financial planner. “It can be legitimately leased back to your business on commercial terms and is the only asset exempt from the related party rules, in the context of running your own super fund.”

Tenant and landlord

Having more investment control is a major advantage of owning your commercial premises within an SMSF, according to Heaven. “For example, you’re vertically integrating your business model in that you rent your commercial premises from your SMSF at a market rate,” he says. “Likewise, you don’t run the risk of being unexpectedly removed as a tenant.” There is another benefit to leasing premises from your SMSF. “The rent you pay is effectively boosting your retirement saving,” says Tim Howard, advice technical consultant at BT. “It’s a way of making additional contributions to superannuation outside the caps. The rent is also concessionally taxed at 15% when it goes in, which is much lower than the corporate tax rate of 27.5% for small business owners.” The capital growth on a shop or office

held within an SMSF is concessionally taxed when it is sold. “If you sell the property when you’re entirely in pension mode, then the capital gains tax rate will be zero,” says Heaven. If your business develops credit issues or becomes bankrupt, premises held within your SMSF will generally be protected. “Because the asset is owned by your super fund, it generally won’t be affected by any issues with the business,” says Howard.

Is it right for you?

Before using your super to buy your place of business, weigh up how much you have in super. That said, it is possible for an SMSF to borrow money to buy a commercial property. However, the loan to value ratio (LVR) for SMSFs seeking to borrow for a commercial property is around 70%, says Tony Haworth, executive director at AAP Finance Brokers. The LVR can vary slightly based on the property’s location. The business must be financially capable of paying the rent to the SMSF, as this is non-negotiable, adds Heaven. Cash flow for the fund is also critical where the fund has borrowed to buy the property. “Fund trustees had better make sure that they’ve got enough rent coming in, and/or employer contributions, or personal contributions within the $25,000 cap that would allow them to service any debt.”

Financial risks

A commercial property is a lumpy asset that might tie up a lot of your

superannuation, and that’s an investment risk, warns Howard. You also need to think about what will happen when the time arrives to hang up the work boots. “When you decide to take an allocated pension, such as when you retire, there are cash flow issues that must be considered. If all your super is invested in a capital asset such as a commercial property, and you’re not getting the required rent from it, you need to think about how to fund your pension and loan repayments if some debt remains on the property,” says Howard. There are succession planning issues, too. “You can’t keep the property within the super fund indefinitely. If your children take over the business, that asset will ultimately have to come out of the SMSF,” he says. Differing SMSF member ages, contrasting retirement plans of business owners and life expectancy can create additional layers of complexity that make the holding of a business premises within an SMSF problematic, notes Howard.

Avoid white elephants

Some experts believe that owning a business premise is a flawed retirement strategy, says AMP’s Heaven. “They argue how can a business owner know what square metreage rate or staffing needs will be required for the next 15 years? You might outgrow that space and then you are left with a white elephant.” Yet for barristers, medical specialists and other professionals who don’t intend scaling up their businesses, owning their own premises through an SMSF is a worthwhile strategy. “It is a perfectly legitimate argument to say, ‘I’ll take my little 100 square metres and I’m quite happy to just stay within that space as part of my business plan,’ ” says Heaven. Anthony O’Brien is a small business and personal finance writer with 20-plus years’ experience in the communication industry.

MONEY OCTOBER 2017 57

WHAT IF? Annette Sampson W

The tax office looks at your car expenses Take care: whatever method you choose, you must be able to substantiate a claim Don’t look now, but …

That’s exactly what it’s doing. The tax office recently warned taxpayers it was paying close attention to work-related car expenses this year. In particular, assistant commissioner Kath Anderson says it will be looking at “standard” deductions to ensure they can be justified. “Some people think they are entitled to a standard deduction for car expenses using the cents per kilometre method but this is not the case,” she says. “While it’s true you don’t need written evidence for claims of up to 5000 kilometres per year, you do need to be able to show that you were required to use your car for work, and how you calculated your claim.”

Common pitfalls

Anderson says a common mistake is claiming car expenses for travel between your home and place of work. These

costs are not deductible, as they are not directly related to performing your work duties. One exception is where you have a good reason for claiming – such as being required to transport bulky tools or equipment to work. However, even then you must be able to prove your employer required you to do so, and there was no safe place to store them. Anderson says the tax office audited a railway guard whose claims were much higher than others in the same occupation. He had claimed car expenses to and from work because he had to transport bulky tools in his car. His employer told the tax office storage facilities for these items were available at work. It was the employee’s own choice to carry them back and forth. So his claim was denied and he had to pay $2000 for tax owed plus interest. In another case a school crossing safety officer claimed for carrying his safety sign

to and from work. However, it turned out the sign was stored on the school premises so the claim was denied. Anderson says another pitfall is double dipping, or claiming expenses that your employer has already paid either through reimbursement or through a salary sacrifice arrangement. One audit found a manager who claimed $3800 in car expenses did not actually own his car. It was held under a novated lease arrangement where the employer leases the car on the employee’s behalf. The claim was disallowed and the taxpayer was hit with a penalty.

THE CHALLENGE Maria Bekiaris

Save $1K before Christmas Topping up your spending money could be easier than you think epending on when you’re reading this, there would be no more than 11 weeks or so until Christmas. The festive season is an expensive time and the costs can certainly add up. Our challenge this month is to save and make an extra $1000 between now and Christmas to help fund the additional spending. Let’s start with a few simple saving challenges. One that has been making

58 MONEY OCTOBER 2017

headlines lately is saving every $5 note that you come across. Any time a $5 note hits your wallet, you take it out and put it towards your savings. Surely you’ll come across at least two $5 notes a week between now and Christmas. TOTAL SAVING: $110. We all know that giving up your daily takeaway coffee and bringing in your own lunch to work is a smart way to save, but if you find it too hard to do every day, why

DID YOU KNOW? More than 3 million people made a work-related car expenses claim in 2015-16, totalling around $8.5 billion. Many of these were right at the limit that doesn’t require detailed records. BEST-CASE SCENARIO Commissioner Kath Anderson says the tax office has no issue readings of work-related with people claiming under the cents per kilometre method trips and the reasons and expects most claims may be legitimate. But it wants to for the journey, and the remind taxpayers there is no such thing as a free ride. business-use percentWORST-CASE SCENARIO age over this period. If you have made an incorrect claim you may be liable for You can claim costs interest and penalties as well as any unpaid tax. such as fuel based on THE WILD CARD your actual receipts or As with all tax office crackdowns, not everyone estimates based on the who claims will attract attention. You are more odometer readings at the likely to be targeted if your claims are start and end of the period unusually high for someone in you used the car during the your occupation. year. Where the car is used for both business and private use, expenses must be apportioned. The tax office has a car expenses calculator at ato.gov.au. Simply enter “work related car expenses calculator” in the search field to find it.

Methods of claiming

From July 2015 the options for claiming car expenses were reduced from four possible ways to just two. Under the cents per kilometre method you can claim 66¢ per kilometre travelled for work purposes in 2016-17 up to a maximum limit of 5000 kilometres. This is the method being targeted by the tax office, as you don’t need written evidence to substantiate your claim. However, you do need to be able to show how you worked out your business kilometres such as being able to produce diary records of work-related trips.

The alternative is the logbook method. This is more generous in that you can claim things such as running costs and the decline in the car’s value (but not capital costs such as the purchase of the car or loan repayments) rather than being limited to 66c per kilometre. However, you are required to keep a logbook and odometer readings for at least 12 continuous weeks showing how you used the car. This logbook is valid for five years. The logbook must show the odometer reading at the start and end of the logbook period, the total kilometres travelled, the start and finishing times and odometer

not simply aim for just one no-spending day each week. Assuming you buy one takeaway coffee and lunch and a few other small extras, you could save $20 a week. TOTAL SAVING: $220. Take the time to shop around and see if you can score a better deal on anything you are paying for on a regular basis including insurance, mobile phone plan, internet service, gas and electricity as well as any banking products. I’d be surprised if you didn’t save at least $150 by shopping around. TOTAL SAVING: $150. On the flipside, instead of cutting back, let’s look at simple ways you can make some extra cash.

The most obvious way to make some extra money is to get rid of any unwanted items. As they say, one man’s trash is another’s treasure, so you can declutter and make some extra cash as a result. October is the perfect month as there is a national Garage Sale Trail on the weekend of October 21-22. Last year the average household sale made $379. TOTAL SAVING: $380. There are quite a few ways you can make some extra cash by renting out everything from your tools to a room in your house and anything in between. Check out Open Shed, Spacer, Car Next Door and Airbnb to name just a few. Let’s say you can make an

The golden rules

Anderson says there are three golden rules to stay out of trouble. First, you have to have spent the money yourself. Your employer can’t have reimbursed you. Second, the claim has to be directly related to earning your income and, third, you need some type of records to prove your claim.

Annette Sampson has written extensively on personal finance. She was personal finance editor with The Sydney Morning Herald, a former editor of the Herald’s Money section and a columnist for The Age. She has written several books.

extra $50 a week using one of these platforms. TOTAL SAVING: $550. If you’re happy to put in a bit of extra work, again we turn to the share economy. You can boost your budget by signing up to drive people around in an Uber, pet sit using sites like Mad Paws, or do odd jobs on Airtasker. Let’s say you make $50 a week. TOTAL SAVING: $550. With these simple ideas, we have put an extra $1960 into our pockets between now and Christmas – almost double the $1000 that was our original goal. You don’t have to do them all to meet the goal of $1000, so pick the suggestions that appeal to you most and you could be $1000 richer by December 25.

MONEY OCTOBER 2017 59

CRISIS MANAGEMENT Sam Henderson

Stuck on the money-go-round WHEN FINANCES ARE GOING NOWHERE

•

Do you get the feeling that you’re just treading water financially? Don’t think you’re alone. In February, the ME household financial comfort report suggested that 25% of Australians have less than $1000 in available savings to draw upon in the event of an emergency. Here are some tips to help you get off the “money-go-round”.

ith stagnant wages growth, rising housing and health costs, and utility prices going through the roof, we seem to be spending more on essential household items and less on discretionary goods. Savings continue to be under pressure and the fact is that many Australians will be underprepared in the event of an emergency. So how can you possibly get ahead in such circumstances?

Do a budget

In my last book, The One-Page Financial Plan, I made some suggestions that may help you. The most important is the simple process of awareness through a budget. By creating a budget, as mind-numbing as that can appear, it can change your life because you become more aware of where you and your partner are spending your money. You can download my budget spreadsheet at hendersonmaxwell.com.au/freestuff.

Get on the same page

It’s very difficult to maintain your budget if you have a partner, potentially a nonMoney magazine reader, who isn’t on the same page as you. I’ve seen figures indicating that around 60% of couples argue over money, so expressing yourself in a constructive and respectful manner can literally pay dividends. We spend so much time finding partners who share our values, and financial values are just as important when it comes to maintaining a comfortable and stress-free lifestyle.

60 MONEY OCTOBER 2017

Ask for a pay rise

Another simple money hack is to ask for a pay rise. While many people in government jobs or regulated environments won’t have the freedom to do this, in private enterprise you can often turn on the charm and demonstrate your value to your beloved employer, with a little kicker if things go well. A small pay rise, or a series of rises over time, can allow you to plan your financial life with some clarity and confidence.

a financial planner to help you navigate the big issues. An investment in yourself is the best investment you can ever make because it can pay a lifetime of dividends and give you the best returns. Never underestimate your value and potential.

Start your own business

Education can elevate you to different pay levels, provide career opportunities or even allow you to start your own business. It has long been a catalyst to achieve a better life and millions of people have invested in themselves to create opportunities.

While we’re told many businesses fail in their first few years, many go on to flourish and create a lifetime of wealth for their owners. Many of my best and wealthiest clients are business owners who have created a flow of income from making the most of an opportunity in business. Sure, there are risks and I’d expect you to do your homework but the returns from successful small and medium businesses far exceed those of employees many times over.

Look for a new job

Break the inertia

Invest in yourself

Sam Henderson is CEO and senior financial adviser at Henderson Maxwell and host of Foxtel’s Sky News Business program Your Money Your Call – Retirement. He is also the author of three best-selling books.

Educate to elevate

With low unemployment in Australia at the moment, there are always plenty of employers looking for good staff. If your current boss won’t pay you well, then there’s a strong chance someone else will pay a premium for a good employee just like you! Don’t get stuck in a rut and accept the same job conditions; do something about it and change your life at the same time. There are plenty of opportunities out there just waiting for you!

If you’re still struggling to see the trees through the forest, then hire a life coach or

The money-go-round is not a nice place to be. By taking action and pursuing an opportunity you can write your own financial and life story. Don’t just accept the status quo or get caught in a state of inertia; there’s always something you can do to improve your situation and there are plenty of people to help you if you’re struggling to do it alone. Good luck and grab the bull by the horns!

Heidi Armstrong LIFE MATTERS

Keen teens blaze the trail We all need to encourage young people to consider starting their own business

hoosing a career is one of the most difficult and stressful decisions a young adult can face. At the ripe old age of 17 we expect teenagers to know what they want from life and to make choices that will impact their future and finances. But the problem with this is that the options available to teenagers are usually limited to tertiary or TAFE education. So what if your passion sits outside a traditional course or job offering? As a young adult I faced these same dilemmas but, unlike so many others, my father encouraged me to consider running my own business as a career option. Now while his idea that I open my own knitting shop (those who know me are laughing out loud right now!) wasn’t my cup of tea, it did open my eyes to the possibilities. I’ve no doubt that my own drive to be self-employed stemmed from this open conversation with my dad back when I was just a teenager. It’s no longer necessary for young adults to limit themselves to traditional job or study avenues. In the past, it was widely believed that university study was the safest and best option for career advancement. This is not always the case. According to the National Institute of Labour Studies at Flinders University, nowadays fewer people gain full-time employment after completing tertiary study. And despite the drop in graduate employment, the number of students commencing is higher than ever, increasing from 20,000 in 2008 to 27,000 in 2014. With the job market changing, now more than ever it’s time to encourage our kids to be proactive and pursue their passions through a business of their own.

Getting started

Technology has changed the way we live and work and opened a new realm of professional possibilities. The internet has been the biggest game changer, completely transforming the way we conduct business. With access to a wealth of information, instant communication worldwide and platforms on which to market and sell your services, it has never been easier to start your own business. Despite this, becoming a “business owner” isn’t a widely accepted profession for school leavers. Without encouragement from parents and their schools it’s difficult for teens to know this is an option. The good news is we’re starting to see some teens blaze the trail for their peers. The recent success of teen entrepreneur Morgan Hipworth, who opened his own doughnut business in Melbourne, has been widely publicised. Examples like these show teens that it’s possible to turn your passion into a business, even if you’re a teenager. But we need to keep this momentum going and turn being a business owner into the norm. The federal government has started doing exactly that. The Department of Employment now offers a number of initia-

tives to help encourage young entrepreneurs. They include the New Enterprise Incentive Scheme, which provides training, mentoring and income support to budding business kids, and the Exploring Being My Own Boss workshops, which give job seekers an insight into starting a business. It’s the responsibility of parents to help kids explore these options and encourage them to look into every opportunity. To learn more about the Encouraging Entrepreneurship and Self-Employment Initiative visit employment.gov.au.

Return on investment

When it comes to starting a business, financial factors can seem like one of the biggest roadblocks. But, the funny thing is, we have few hesitations in encouraging young people to go to university or TAFE despite the hefty costs. The average undergraduate university degree can cost from $15,000 to $33,000 a year. For a standard three-year degree that’s as much as $99,000 in fees. And with the federal government’s recent increases, this will only get higher. Given these facts, investing in a business that could have faster and greater returns doesn’t seem that risky. It’s in the best interests of the economy and individuals that more people pursue business ownership. It’s time for all Australians, young and old, to start encouraging each other to take risks and be brave. After all it’s from little steps like these that big things can grow.

Heidi Armstrong is finance expert for Money to Love, TV and radio presenter and thought leadership award winner.

MONEY OCTOBER 2017 61

PROPERTY CASH FLOW

When a granny is welcome STORY MARK STORY

ith skyrocketing capital city property prices resulting in more families housing multiple generations under one roof, it’s hardly surprising that granny flats are an increasingly common feature across our suburbs. But beyond family matters, the housing affordability crisis also creates opportunities for those wanting to leverage the dormant value in their backyard through a “secondary dwelling”. With rental returns reducing as property prices increase, especially in Sydney and Melbourne, the argument for building granny flats has clearly gained traction. However, to establish whether building one in your backyard makes investment sense it means thinking through the complete picture properly, factoring in your personal financial situation and doing the all-important number crunching (see table “House v granny flat” on page 64). For starters, any comparison between a granny flat and an investment property must recognise that while the former is typically a yield play, the latter has greater capital growth potential. Given its capacity to deliver both yield and capital growth, Gavin Hegney, of Hegney Property Group, suggests those with $100,000 to 62 MONEY OCTOBER 2017

Weigh up today’s cash ﬂow with future capital growth when comparing backyard granny ﬂats with investment properties

invest and access to bank finance should and would, in a perfect world, do better with an investment property. However, if you’ve only got $100,000 to invest, he says a granny flat could, under the right conditions, be a smart way to start an investment portfolio without having to borrow large amounts of money. While it’s not investing per se, Steve Waters, of the Right Property Group, says owner-occupiers who borrow more to build a granny flat could use the extra (rental) cash flow to reduce their non-deductible debt a lot earlier. He says the faster you pay down non-deductible debt, the sooner you can move forward financially, and for baby boomers this could mean passive retirement income. “If it’s costing you 5% to get a return of 10%plus, a granny flat can help you do this,” says Waters. “It also helps mitigate risk if you’re planning to go from two incomes to one.”

UNINTENDED CONSEQUENCES Damian Collins, of Momentum Wealth, recommends that investors benchmark the yield from a granny flat against cash in the bank and fixed interest rates. Given that granny flats are not growth plays, he says

Who can build a granny ﬂat?

investors need to receive a 7%-8% uplift in the yield – ideally 12%-plus – to compensate for potential lack of capital appreciation. Based on a $120,000 investment, a 12% yield (about $300 in weekly rent) for a one-bedroom granny flat in a capital city looks highly achievable. Assuming you can command the yield you need, Collins urges investors to honestly assess why they’re attracted to a granny flat option; whether they can achieve/maintain the necessary uplift in yield; and, if they’re owner-occupiers, how comfortable they would be sharing their backyard with strangers. Similarly, he says a granny flat may not be the best use of a backyard if your block has promising subdivision potential. “Remember, while the granny flat won’t be worth much after 30 or 40 years, it’s the land value that will deliver future capital growth,” says Collins. While a return of 12%-plus may look compelling, Hegney also cautions against overcapitalising. For example, with valuers gun-shy of overvaluing properties these days, there’s greater investment risk if a $100,000 granny flat – which you’ve borrowed against equity in your home to build – only achieves $50,000 in additional value. “It’s important to remember that the

Honestly assess how comfortable you would be sharing your backyard with strangers

he governments of NSW, Western Australia, the Northern Territory, Tasmania and the ACT allow residents to rent out granny flats to generate extra income. Current development approvals typically average between six and eight weeks, while private certification can be as fast as 10 days. However, it’s a misnomer, argues Metropole’s Michael Yardney, to assume that your local council will automatically allow you to build a granny flat, just because your state government is OK with your renting one out. “Councils that allow granny flats tend not to be in high capital growth areas,” says Yardney. “Often you’ll have to use this strategy in outer and lower socioeconomic locations that tend to deliver below-average capital growth.” Regardless of whether they’re freestanding or an extension of the main dwelling, granny flats can’t be rented out to non-family in Queensland, Victoria and South Australia. However, there’s nothing to stop enterprising owner-occupiers in these states building granny flats for themselves, and renting out the main house.

cost of a granny flat won’t automatically add significant value to the total value of your property,” says Hegney. Adding further insult to a 50¢ return on every $1 invested, warns Waters, is when a clumsily conceived one-bedroom granny flat creates an eyesore in the backyard. This could impinge on the resale potential of your quality four-bedroom home. Assuming the original house is also tenanted, you could also have to reduce the rent if you’re suddenly taking away half the backyard, warns Hegney. To avoid these outcomes, Hegney says investors could contemplate buying a property with a granny flat or secondary dwelling that’s already been tastefully incorporated into it. If you are considering a property with a granny flat, he recommends looking for one on a corner block where both dwellings have separate street access. Michael Yardney, director of Metropole Property Investment Strategists, says going into a granny flat investment with your eyes wide open means you have to be comfortable with running a mini-business. When crunching the numbers with your accountant, he says it’s also important to recognise that market conditions can turn quickly. As well as dealing with tenants, he says investors should also allow for loss of income during vacancies, unexpected maintenance costs and the cost of hooking up the granny flat to utilities. “If you’ve got $100,000 to spend on a granny flat, you could generate a much better return by putting it towards an investment-grade property or asset,” says Yardney. MONEY OCTOBER 2017 63

PROPERTY CASH FLOW

$550,000 HOUSE V $120,000 GRANNY FLAT HOUSE

GRANNY FLAT

ANNUAL EXPENSES

$35,000

$11,000

ANNUAL INCOME

$25,0121

$18,2002

PRE-TAX CASH FLOW

-$9988

$7200 3

TOTAL TAXATION LOSS TAX (RATE 37%) ANNUAL CASH FLOW WEEKLY CASH FLOW 1

-$21,838

$20004

$8080 refund

$740 paid

-$1908

$6460

-$37

$124 4

Based on $481pw. Based on $350pw. Depreciation $11,850. Depreciation $5200. The depreciation deductions have been calculated using the diminishing value method. Source: BMT Tax Depreciation

Similarly, while the granny flat will receive a depreciation deduction, Yardney reminds investors it will also incur capital gains tax (CGT) when the property is sold, and this is one of many factors to consider.

NEW HOUSE

GRANNY FLAT

To illustrate how the numbers might work in practice, Money magazine has constructed a real-life example that compares building a new house for $550,000 versus a granny flat for $120,000 on an existing property as an investment (see table).

• The investment house

Based on some preliminary research, within the area our fictitious investor is looking to buy, a new house will receive an annual income of $481 a week or $25,012 annually. BMT Tax Depreciation estimates the expenses for the house, including interest on the loan, council rates, insurance, repairs and maintenance, at a total $35,000 annually.

$37. In the granny flat scenario, the investor is able to reduce their taxable income and therefore the amount of tax they will need to pay on the property to just $740 for the year. A weekly cash flow of $124 is therefore achieved for the granny flat. Based on these numbers, the investor will benefit from an additional $161 in cash flow by choosing to build a granny flat compared with a new house.

CASH FLOW RECIPE In summary, the investor who opted for the new house is out of pocket $1908 annually, while the granny flat owner receives an after-tax cash flow of $6460 annually. That’s a good outcome, but Bradley Beer, with BMT, reminds investors that the capital growth on the future sale of the new house will invariably outperform the future sale of the property with the granny flat in the backyard. Admittedly, the depreciation will maximise within the first five to seven years. But Beer also reminds investors that with deductions on the structural elements continuing for 40 years, the cash flow outcomes won’t change considerably. But given that there are two sides to the cash flow recipe, Waters reminds investors that while a granny flat on the right property in the right area will contribute to capital growth, the opposite is also true. On the wrong property you could potentially be cutting out a percentage of your future market when it comes to selling. “If you rely on depreciation to support this cash flow, you’re also rolling the dice if future tax laws change,” warns Waters. “That’s why you should always do your numbers on a cash-in cash-out basis, before-tax dollars, and allowing for a vacancy rate of 20% is also a good idea.” M

WHAT YOU CAN BUILD

n addition to having a separate entrance, a selfcontained granny flat must have its own bathroom, kitchen, bedroom/s, laundry area and living space. While each state has its own criteria, generally granny flats must also be: Built on a property zoned for residential use and at least 450 square metres in size. The only granny flat on the property. Owned by the same person who owns the primary dwelling. A maximum living space of around 60 square metres. Have separate and unobstructed pedestrian access.

• • • • •

• The granny flat

By comparison, the investor could expect to receive $350 a week in rent for a granny flat ($18,200 a year).Astheborrowingamountonthegrannyflat is lower, estimated expenses for this property, based on BMT Tax Depreciation’s numbers, are expected to total $11,000 annually. The investor will be able to claim around $11,850 in depreciation deductions for the house or $5200 for the granny flat.

DEPRECIATION FACTOR As our scenarios show, the investor’s tax situation will be quite different should they decide to build a granny flat compared with a new house. In both scenarios, claiming depreciation will boost weekly cash flow. By claiming depreciation on the house, their weekly cost of holding the property is reduced from $121 to 64 MONEY OCTOBER 2017

On the wrong property, a granny ﬂat could cut out part of your market when you sell

Pam Walkley REAL ESTAT TE

When the reno bug bites Moving is expensive but be careful not to overcapitalise if you stay and upgrade

as your dream home become a nightmare as your family has grown and your space seems to have shrunk? Have you discovered that one bathroom and one living area are no longer adequate? So how do you decide whether you renovate or relocate? If you still love where you live it’s certainly worth exploring the upgrade option, especially when moving costs – including the stamp duty slug, which can be as high as $43,000 on an $800,000 property – can easily equate to 10% of the price of your new home. For example, if that’s $800,000, the $80,000 you save by not moving will be a boost to your renovation budget. By staying put you also avoid the stress of a move and the adjustment required to live in a new location. And you’re more likely to end up with a home that exactly suits your needs and desires. Not surprisingly, very high moving costs have seen more people stay put. House turnover, already the lowest for nearly 25 years, is still falling, according to the Reserve Bank. And renovation lending has reached a seven-year high, according to ABS figures. One home loan lender, ME, has seen loan applications grow by 48% and 25% for cosmetic (an average of $40,000) and structural renovations ($400,000 average) respectively over the six months to June 2017. If you want to stay put it’s crucial you have the space to upgrade your home to suit your family’s needs. Local councils have rules about how much building they will allow on individual plots and this can be confusing. Often the best strategy is to employ an expert, such as an architect or other design professional, to work out what is possible and how to make your space, both old and new, work best for you. This will cost you but as someone who’s undertaken renos both with and without an expert, I’ve always found it to be money well spent.

Unlisted funds shine

ustralian unlisted property funds performed strongly in the year to June 2017, delivering a total return of 25.3%, according to data from the Property Funds Association. This compares with a return of -5.3% for listed property over the same period. Five-year annualised returns were 21.1% and 14.4% for unlisted and listed property respectively. Both outperformed all other investments over this period, including local and international shares, fixed income and cash. Certainly it’s easier to find and invest in listed property but two big unlisted managers, Charter Hall and Centuria, had unlisted funds open at the time of writing. Charter Hall’s include its $1.2 billion Direct Office Fund, currently paying annual income of 6.25% with quarterly distributions. Minimum investment is $20,000. Centuria’s Diversified Property Fund returned 19.52% to June 2017, including income of 5.03%. Minimum investment is $10,000 and distributions are paid monthly.

Once you have decided the extent of your upgrade, and had it approved, you need to get a handle on what it will cost you. To avoid spending more on the renovation than the value it adds to your home, research the market in your area to make sure your improvements will fit in, says Patrick Nolan, head of home lending at ME. For example, it’s not a good plan to end up with a four-bedroom, two-bathroom home in an area that is more popular with young singles than families. “Put your hard-earned cash to work where it will deliver the greatest benefit,” says Nolan. “High-quality kitchen and bathroom renovations almost always add value to a property because they have broad appeal. The same can’t be said of outdoor spas or swimming pools, which can be high maintenance.” Many people pay for their renovations by drawing on the equity they have built up in their property using a home equity loan, says Nolan. Equity is the difference between the value of your property and the amount you owe on it. For example, if your home would sell for $800,000 and your mortgage balance is $500,000, your equity is $300,000. If you don’t have a lot of equity – and remember you have to maintain 20% to avoid expensive mortgage insurance – you could use a personal loan to pay for a cosmetic makeover. The advantages of buying a new home include getting a place that suits you from day one and avoiding the stress of living in the dusty, noisy and uncomfortable environment that usually accompanies a renovation. And you have the certainty of knowing what your financial commitment will be; remember, renovation costs often blow out. Pam Walkley, former property editor with The Australian Financial Review, has hands-on experience of buying, building, renovating, subdividing and selling property.

MONEY OCTOBER 2017 65

INVESTING SUPERANNUATION

Picking winners

STORY SUSAN HELY

Funds rely on highly paid experts to select the best investments. But members don’t always enjoy the rewards

n advantage of having your super with a large fund is the expert team who pick the investments. They are highly qualified, experienced and do it full time. But how much extra value these experts bring to a fund’s performance is debatable. In addition to their internal investment staff, most funds also employ external asset consultants who recommend which outside investment managers should be hired or fired. The consultants are in constant contact with investment managers, reviewing their processes and performance, and know when there are key personnel changes. Asset consultants have a huge influence, as they are the gatekeepers for billions of dollars of assets. There is a high degree of concentration in the Australian super system, with four main consulting groups: JANA, Frontier Advisors, Towers Watson and Mercer. As asset bases grow, super funds have expanded their in-house capabilities, employing asset consultants as chief investment officers or members of the investment committee or investment team. One way to see how successful the asset consultants are at picking good managers is to look at individual asset classes such as Australian or international shares. Super members can often choose to put their retirement savings in individual asset classes and make up their own portfolio, or they can invest in the diversified options such as balanced, growth or conservative. Members of many funds can increasingly choose to put their money into direct options including shares, term deposits and exchange traded funds that cover broadbased indexes such as the S&P/ASX 300 (Vanguard Australian Shares Index) or the S&P/ASX 200 (State Street Global Advisors). When it comes to performance, the Australian shares investment option of the typical large super fund has returned 7.3%pa over three years, after fees and tax, based on SuperRatings numbers, compared with the S&P/ASX 300 after-tax benchmark of 7.2%pa – virtually in line. Worth noting is that super funds report performance after fees and tax, and so it needs to be compared with a benchmark that is also after tax. The

66 MONEY OCTOBER 2017

fund’s fees include what it pays its investment managers as well as asset consultants, plus the cost of its own investment staff. The overall fee at the fund level is about 0.7% on average, around double the investment manager’s fees. Australian equities are unique in that the after-tax index performance is above the pre-tax result because of franking credits. If investment options aren’t outperforming, what about the underlying managers? The typical Australian shares manager over the three years to June 2017 (the median manager in Mercer’s investment manager survey) returned 7.8%pa on average compared with 6.6%pa for the S&P/ASX300 index before tax and fees. So the typical Australian shares manager is ahead by 1.2%pa over that period. Even with fees of 0.3%-0.4% that still leaves a good slice of active return. Australian shares managers do tend to outperform the index, in contrast to what happens in the US. But the fund member choosing the Australian shares option isn’t seeing this outperformance. Somehow the fund’s hiring and firing process seems to allow performance to leak away. A recent study in the US looked at how expert the asset consultants are. There, big pension funds’ investment managers also underperform non-recommended managers by about 1%pa, according to a study published in The Journal of Finance in the US in 2016. While past performance was a factor, the researchers found that the manager recommendations were also biased to how well managers presented themselves. This was characterised by the skills of their salespeople, the slickness of their presentations and the quality of their investment reports. Investment managers often say their best opportunities are under-researched companies that their competitors have ignored. But it seems that consultants in this study were biased to obvious choices. The performance problem occurs when funds, acting on the advice of their consultants, try to choose the best managers. The Australian and US figures show that the managerselectionprocessistrickyandcanshredwhatever advantage the managers would have been expected to achieve. It could be just as effective, and cheaper, to have invested in an index fund in the first place. M

TOP 5 AUSTRALIAN SHARE OPTIONS OPTION SIZE

PRODUCT RATING

FEES1 $50k

1-YR RTN

RANK

3-YR RTN (%PA)

RANK

Catholic Super – Australian Shares

$89m

Platinum

$469

16.9%

10.6%

13.7%

MLC MKey – MLC IncomeBuilder

$95m

Gold

$688

14.0%

7.6%

13.5%

Kinetic Super – Australian Super

$59m

Gold

$411

15.2%

8.5%

13.2%

FUND INVESTMENT OPTION

5-YR RTN RANK (%PA)

StatewideSuper – Australian Shares

$134m

Gold

$418

14.9%

9.0%

13.0%

REST – Australian Shares

$268m

Platinum

$462

14.0%

8.2%

13.0%

RANK

5-YR RTN (%PA)

RANK

TOP 5 INTERNATIONAL SHARE OPTIONS FUND INVESTMENT OPTION

OPTION PRODUCT SIZE RATING

FEES1 $50k

1-YR RTN

RANK

3-YR RTN (%PA)

OnePath Integra –OnePath Global

$29m

Silver

$990

13.5%

14.7%

18.2%

StatewideSuper – International

$54m

Gold

$468

19.5%

13.7%

17.3%

CareSuper – Overseas Shares

$97m

Platinum

$478

18.6%

12.5%

17.1%

Plum – International Shares Index

$37m

Platinum

$478

14.7%

12.0%

16.7%

UniSuper Accum (1) – International

$342m

Platinum

$351

18.4%

13.5%

16.6%

Source: SuperRatings. Based on ﬁve-year returns after fees and tax. 1Annual fees (including member, admin and investment) on a $50,000 balance at June 14, 2017.

IT PAYS TO KEEP IT SIMPLE

ome super funds do achieve strong outperformance over time. For example, Catholic Super has scored the highest performance for Australian shares over one year (16.9%), three years (10.6%pa) and five years (13.7%pa). The reason it has done so well, according to Garrie Lette, the fund’s chief investment officer, is that asset selection is outsourced to high-conviction boutique managers who have relatively modest amounts under management, rather than big-brand managers. “We understand that they go through difficult investment periods but we don’t panic. We are in for the long term,” he says. “They have rewarded our loyalty and patience. Every manager has had a difficult time but they have come good.” Lette has worked as an asset consultant with Mercer and has been advising Catholic

Super since 1993. He joined as CIO in 2010. Catholic Super has $8.5 billion under management across all investments. It has seven Australian share managers in the balanced option: four large cap, two small cap and one “better beta”. The balanced pension option has three Australian equity managers. “We don’t over-engineer things but stick to the ‘keep it simple’ philosophy,” says Lette. Getting the blend of managers right is key. It is important to have managers that will perform well in different markets. “When one is doing poorly, another may be doing well,” he says. AustralianSuper has one of the biggest amounts in the Australian shares investment option, at over $2 billion. It spreads the assets across 15 Australian equity managers. It was ranked 10th over five years by SuperRatings.

Hostplus, which has 18 Australian share managers, was ranked ninth. One of the reasons there are so many investment managers is that boutique managers have a cap on funds under management. They won’t keep taking large amounts of funds. Typically super funds have large-cap specialist share managers and smallcap specialists. Some have a value style of investing, others a growth style or an absolute return style. Some super funds are increasingly expecting their equity managers to invest along sustainable lines, as it is important to members. “All of our active managers have built-in sustainability in their processes,” says Lette. “But we don’t insist on excluding any investments such as fossil fuels but expect our managers to be aware of the risks.”

MONEY OCTOBER 2017 67

INVESTING SMART BETA

THE EXPERTS

Chris Brycki, CEO, Stockspot

Gain an edge

A growing number of fund managers are looking at alternative strategies to boost returns

10 MOST-ASKED QUESTIONS Michael Elsworth, general manager alternatives & specialised research, Lonsec

Dugald Higgins, senior investment analyst, Zenith Investment Partners

Anshula Venkataraman, analyst manager research, Morningstar

68 MONEY OCTOBER 2017

What is smart beta?

Smart beta is all about index construction, which refers to which stocks (or other assets) make up an exchange traded fund (ETF) and their relative size within that index. Where traditional market-capitalisation-weighted ETFs (such as the Vanguard Australian Share Index) consider that market size incorporates “all factors”, smart beta ETFs put more focus on some factors over others. Some common smart beta factors include growth versus value, small cap versus large cap or fundamental factors like dividends. CHRIS BRYCKI

What are the risks?

All smart beta ETFs are taking bets on certain market factors being more important than others. High-dividend and fundamental smart beta ETFs have a bias towards value stocks. Equal-weight ETFs have a bias towards small companies. The risk of smart beta ETFs is that the factors they’ve selected don’t perform. Smart beta strategies are often marketed as being able to “beat the market”. However, the truth is often a lot more murky. Many have only outperformed from backtesting over a select historical time period and perform poorly after they launch. Others, like equal-weight ETFs, only outperform because they are taking more risk. Investors should be careful of smart beta ETFs that charge significantly more in fees than market-cap-weighted ETFs as that’s likely to harm their returns. Our [Stockspot] 2017 ETF report shows that most smart beta ETFs underperform the broad market ETFs after fees, which is why we don’t typically recommend them to clients. CHRIS BRYCKI

Smart beta providers talk a lot about transparency. Why is that important? There are two key ways strategic beta ETFs provide transparency, similar to their market cap peers. The first is that, given the exchange traded structure, investors have access to the full holdings of strategic beta ETFs. The second is that investors have access to the price of the ETF, or the net asset value (NAV) or

indicative net asset value (iNAV), throughout the day. This is unlike traditional unlisted funds that are only priced at the end of the day. Greater transparency allows investors to make more informed decisions, and in an increasingly regulated and competitive environment the industry continues to face pressure to improve transparency. This gives ETFs an advantage over active managers. ANSHULA VENKATARAMAN

How would smart beta ﬁt into a portfolio with other investments?

The smart beta funds in Australia are designed to capture the performance of certain factors. The type of factor will determine the role it can play in a portfolio and the funds it can be blended with. Australian or global smart beta equity funds generally sit within the growth component of a balanced portfolio and can be used to blend with other core (market-cap-weighted) exposures, such as the S&P/ASX 200 Index or S&P 500 Index as part of a core-satellite approach. A challenge with Australian smart beta strategies is lack of diversification in the marketplace. Australian smart beta portfolios generally take more stock- specific risk than their global counterparts. The return to an Australian value portfolio might depend more on specific developments of a particular company rather than what has happened to “value” more broadly. These stock-specific effects tend to wash out over time but can have a big impact on shorter-term returns. And for smart beta portfolios that rely on diversification to harness factor returns, this makes Australia a challenging universe. This argument does not invalidate the use of factors in Australia. However, investors need to be aware of the largest positions and understand how much stock-specific risk the investment is taking. MICHAEL ELSWORTH

I’ve heard about factors when people talk about smart beta – what does that mean and what is the difference between a single factor and multi-factors? Factors are what drive risk and return in a portfolio. Factor investing is all about targeting these drivers. These can encompass strategies that pursue an economic or technical factor to deliver a different outcome to a marketcap-weighted strategy. There are many different factors used in ETFs, including fundamentals such as value, momentum, quality and low volatility, as well as factors such as dividend tilts and modified market cap strategies (equal weight etc). Given that single factors are cyclical and prone to periods of underperformance, multi-factor investing seeks to blend factors to reduce cyclicality and provide better balance. DUGALD HIGGINS

Is smart beta like investing in an active fund?

All index funds, by definition, are passive investments. This includes smart beta. There’s no fund manager making investment decisions and all buying and selling is done according to a strict set of rules. However, smart beta gives investors the ability to tilt their portfolios towards certain styles by weighting their portfolio differently. Often active fund managers have similar style tilts in their portfolios – like towards value, growth, small or large companies. Smart beta aims to combine elements of passive index investing and active fund management to deliver the best of both worlds: transparency, broad diversification and ability to tilt your portfolio to certain types of stocks, all at a low cost. CHRIS BRYCKI

Greater transparency allows investors to make more informed decisions ... and this gives ETFs an advantage MONEY OCTOBER 2017 69

INVESTING SMART BETA

Not all smart beta ETFs are designed to beat the broader market ... they merely deliver a different outcome based on their rules Understand how factors perform in various situations to set performance expectations. DUGALD HIGGINS

What do I need to consider when comparing smart beta options?

When comparing, consider the factor exposure of your existing portfolio to determine what you need and your goals. Your objectives will drive which factor(s) to capture. From there, identify and group ETFs by their factor tilt (dividend, alternative weight, fundamental etc) and examine the resulting risk characteristics such as diversification, volatility and turnover levels in each ETF. Measure these characteristics against both the broader market and how they will complement (or detract) from your portfolio. Finally consider costs, both in terms of fees, trading costs and efficiency. Remember that certain factors may exhibit a low correlation with one another while others may be highly correlated. Also, while individual factors may outperform market cap strategies over the long term, they can often underperform in different shorter-term environments. 70 MONEY OCTOBER 2017

How much should I pay for a smart beta product?

Most smart beta products track a customised or rules-based, nondiscretionary and transparent index. The amount of work involved on behalf of the issuer is not as complex or labourintensive as that of an active manager. Therefore, the starting point should be the cost of a broad-based market-cap-weighted index fund plus a small fee for the intellectual property associated with the index rules and methodology. Smart beta product fees typically range from 0.30% to 0.50% a year compared with active management fees for long-only products of 0.80% to 1.2%pa. MICHAEL ELSWORTH

Have smart beta ETFs performed better than index ETFs?

Itâ&#x20AC;&#x2122;s hard to bucket all strategic beta ETFs together. There are a number of strategic beta strategies available in Australia, ranging from dividend screened/weighted to qualitydriven products. Products can also be split by asset class, though Australian and global equity products dominate the local market.

Performance will vary across these groups relative to market cap ETFs as a result, and this is what we have observed. Within large cap Australian equities, for example, most dividend screened/weighted ETFs lagged their market cap counterparts over the two years to August 31, 2016. However, these products made a strong comeback as value stocks rebounded over the year to August 31, 2017, beating traditional passive portfolios. ANSHULA VENKATARAMAN

What are some of the bestperforming smart beta ETFs available? Smart beta ETFs are driven by the underlying asset class as well as their strategy and factor tilt. The strongest performers tend to do best alongside their respective asset class exposures. The top five performers (by total net return) for the 12 months to July 31, 2017 are shown in the table. It should be remembered that not all smart beta ETFs are designed to beat the broader market. They are merely designed to deliver a different outcome under the parameters of their rules-based approach. DUGALD HIGGINS To find out why you should consider investing in a smart beta ETF, and the available strategies, visitmoneymag.com.au/smartbetaquestions. M

TOP 5 SMART BETA ETFS 1-YR TOTAL NET RETURN

FUND NAME (ASX CODE)

EXPOSURE/FACTOR

ETFS S&P 500 High Yield Low Volatility (ZYUS)

US equities/dividend

17.34%

VanEck Vectors Australian Resources (MVR)

Australian equities/modiďŹ ed market cap

15.28%

ETFS S&P/ASX 300 High Yield Plus (ZYAU)

Australian equities/dividend

15.03%

BetaShares FTSE RAFI Australia 200 (QOZ)

Australian equities/fundamental

13.67%

Russell Australian Value (RVL)

Australian equities/fundamental

13.49%

Source: Zenith Investment Partners. For 12 months to July 31, 2017

INCOME INVESTING

STORY PAM WALKLEY

Your hardearned savings will waste away in a term deposit. Thankfully, there are other diversiﬁed investments that will provide a decent income

Hungry for yield R ecord low interest rates are great if you’re paying off a mortgage or reducing debt but for those who need to live off investment income, including retirees, it’s been very hard. Leave your money in a bank account – where deposits up to $250,000 are guaranteed by the federal government – and your spending power goes backwards. But the alternative – shares and other better-paying investments – incurs more risks. Term deposit rates have plummeted over the past year, with the average rates for terms between one month to five years falling between 0.47% and 1.05% in the year to June 2017, according to research from Canstar (see table). Having a spread of different types of assets, including some cash, is the key. Diversifying your portfolio will help to buffer the risks involved.

HOW LOW CAN YOU GO? TERM

JUNE 2016

JUNE 2017

DIFFERENCE

30 days 60 days 90 days 180 days 270 days 1 year 2 years 3 years 4 years 5 years

2.45% 2.55% 3.00% 3.30% 3.10% 3.05% 3.10% 3.20% 3.10% 3.20%

1.62% 1.70% 2.18% 2.25% 2.10% 2.40% 2.55% 2.66% 2.63% 2.73%

-0.83% -0.85% -0.82% -1.05% -1.00% -0.65% -0.55% -0.54% -0.47% -0.47%

Source: canstar.com.au. Based on an amount of $25,000. Rates are current as of June 20, 2016 and June 20, 2017. MONEY OCTOBER 2017 71

INVESTING INCOME

Retirees not wanting to erode their capital too quickly should consider having some of their funds in the sharemarket, particularly dividend-rich Australian stocks. It’s important to remember that share investing is not short term and you need to use money that you can lock away for at least three to five years. Nobody wants to have to sell when share prices are falling because they need the cash. The Australian market is unique in that there are many companies that pay healthy dividends and also enjoy franking credits, meaning you can do much better than the measly returns from term deposits. But for many, choosing the right stocks is far from easy, so it’s worthwhile considering a managed fund, exchange traded fund (ETF) or listed investment company or trust (LIC/LIT) set up to maximise yields. Fund managers recognise this and have been busy developing new investment vehicles for yield-hungry investors.

Risk-adjusted returns

First off the block are two listed investment trusts. These have a simpler structure than LICs and are similar to a property trust, except they invest in other types of assets rather than office blocks or shopping centres. LITs are a model that’s entrenched in the UK market but has not taken off in Australia, where about $33 billion has been raised by LICs. The MCP Master Income Trust (ASX: MXT) aims to provide investors with income from Australian corporate loans. Its target return rate is the Reserve Bank cash rate plus 3.25% net of fees (4.75% currently). Distributions are paid monthly. It’s the first ASX-listed investment trust to cover corporate lending, providing investors with exposure to a portfolio that reflects activity in the Australian corporate loan market, diversified by borrower, industry and credit quality. The trust initially will have exposure to over 50 individual investments with a near-term target of 75 to 100 individual investments. Andrew Lockhart, MCP’s managing partner, says the trust presents a unique opportunity for investors to access an ASX-listed fixed-income investment. “The trust offers investors exclusive access to the highly attractive risk-adjusted returns available in the corporate loan market, historically only available to regulated local and international banks. “Fixed income is a vital component of a balanced investment portfolio. Fixed-income investments offer predictable cash income with low risk of capital loss. We anticipate the trust will resonate strongly with retail and self-managed super fund investors, who have traditionally had low allocations to this asset class.” Between 2000 and 2016, Australian corporate bonds generated a median return of 6.7% a year, with a high of 11% in one year and a low of 3%, with only cash offering lower volatility of returns. 72 MONEY OCTOBER 2017

Nobody wants to have to sell when share prices are falling because they need the cash

Another new listed investment, the Magellan Global Trust (MGG), aims to provide investors a target cash distribution of 4% a year from a portfolio of 15 to 35 of the world’s best companies. “We believe it is important that Australian investors diversify a meaningful portion of their equity investments into global equities,” says Hamish Douglass, co-founder, CEO and CIO of the Magellan Fund Group and portfolio manager of the new LIT. “The available investment universe in Australian equities is relatively narrow and, in our opinion, remains heavily dependent on the ongoing economic success of China, the domestic economy and the large Australian banks. Companies such as Alphabet [the owner of Google], Apple, Microsoft, Nestlé, PayPal and Yum! Brands are world leaders in theirfieldsthathavenoequivalentsontheASX.Australians are familiar with these names because we use their products and services all the time.” The trust aims to invest at a discount to its assessment of each company’s underlying intrinsic value. “We believe investing in such a portfolio should generate attractive investment returns over time while reducing the risk of a permanent capital loss,” says Douglass. Distributions will be paid twice a year and MGG has specified its initial payments to provide unitholders with certainty. It will pay 3¢ per $1.50 unit each half year (starting in December 2017) in the first two years and after that set a 4% annualised yield based on a rolling 24-month net asset value and announced six months in advance.

“Smoothing” strategy

A feature of the Magellan trust that might not win favour with investors is a decision to cap “cash” distributions and force unitholders to reinvest “excess” distributions, says investment analyst John Kavanagh, from The Rub, an online publication aimed at retail investors. Under normal circumstances, trusts pay out all income and realised capital gains to unit holders, says Kavanagh. But in years when the net income or net capital gains earned by the Magellan trust exceed the distribution target, the excess will be required to be reinvested as additional units through the distribution reinvestment plan (DRP). Investors usually like to make their own call about whether they reinvest their returns and some might see this condition as a deal-breaker, says Kavanagh. “Another possible concern for investors is that when ‘excess’ distributions are reinvested they will not qualify for the DRP discount of 5% that Magellan is offering.” A spokesman for Magellan told The Rub that the aim of the distribution strategy is twofold: to give investors a consistent and predictable yield through a “smoothing” mechanism and to use the DRP to support the unit price and thus avoid the problem of having the trust

trade at a discount to its net asset value. One aspect of theMagellanfloat that was applauded by investment analysts was its decisiontocoverthe cost of listing, typically about 2.5% for a LIC, to enable the trust to trade without a discount on debut. With MGG due to list on the ASX on October 18 we willsoonknowifthisstrategyworked. Another new LIC, VGI Global Investments (VGI), also absorbed all establishment costs so that the securities would trade in line with their net asset value upon listing rather than a discount, as is usually the case. VGI Partners, a high-conviction global equity manager based in Sydney and New York, is looking to replicate the methodologies employed by its unlisted VGI Partners Master Fund via the new LIC. It will invest both long and short in global equities. The portfolio managers will also employ a currency hedging strategy while aiming to deliver strong risk-adjusted returns. Unlike the previous products outlined in this article this LIC is not aimed at providing regular income. “Delivering a high dividend is not a primary objective of the investment strategy or the manager,” says the prospectus. “Theinvestmentstrategy’sprimaryobjectivesarefocused on capital preservation and generating superior risk-adjusted returns over the long term. As a result, there may be extended periods where the company does not pay regular franked dividends to shareholders.” Traditionally VGI managed capital for high-net-worth investors with the minimum application amount for their unlisted fund sitting at $1 million. The new LIC offers retail clients rare access to an investment vehicle managed by a team with a long track record. The methodology has been successful, returning an annualised 14.6%, since it was established about 8½ years ago, outperforming the MSCI World Index (AUD), which returned 10.7%pa over the same period. Another investment in the pipeline aimed at providing income as well as growth is Roger Montgomery’s first exchange traded managed fund (ETMF) to be quoted on the ASX. “The fund will mirror our very successful Montgomery Global Fund, offering access to extraordinary global companies not available through much larger global funds,” says Montgomery. The fund will also target a minimum annual distribution yield of 4.5%. The Montgomery Global Fund, which was established in July 2015, returned 6.99%pa in the two years to July

2017, outperformingitsbenchmark, the MSCI Total Return Index, by 3.88%pa. Longerestablishedproducts forinvestorsseeking income include the Vanguard Australian Shares High Yield ETF (VHY) that had a total returnof11.42%fortheyear to July 31 and an average fiveyear return of 10.54%pa. RussellInvestments’HighDividend Australian Shares ETF returned 9.82% in the year to July (5.35% distribution return) and 11.06%pa over five years (5.69% distribution return). And two big dividend-seeking LICs, Clime Capital (CAM) and Wam Capital (WAM), are yielding 5.6% and 6.1% respectively. Because ETFs, LICs and LITs are listed on the ASX they are very liquid and you need only $500 to start investing in them.

Unlisted universe

There’s a lot more choice with managed funds but for some investors it’s too much, and the complications of buying and selling can also be a turn-off. Some managers have ASX-listed versions of their funds, called mFunds, but there are far fewer of these. As an example, the Legg Mason Martin Currie Equity Income Trust has been a good long-term performer, returning 5.61% net over the year to July 31, 8.73%pa over three years and 13.25%pa over five years. The minimum investment is $30,000. Mortgage funds are another investment generating higher returns than term deposits but these have had a chequered history so it’s important to choose carefully. LaTrobe’s 12-month term account (formerly the Pooled Mortgages Fund) has won Money magazine’s Best Mortgage Fund award eight years in a row. LaTrobe was one of a handful of mortgage fund managers that made it through the GFC and it’s been in business for over 60 years. You can access this fund with a minimum of $1000 and all money is invested in cash or loans secured by first mortgages in Australia. It’s paying 5.2%pa and distributions are monthly. Yield-hungryinvestorsareembracingP2P(peer-to-peer) lending, even though it’s relatively new in Australia. RateSetter, locally owned but part of the RateSetter group founded in the UK in 2009, enables you to start with as little as $10 with lending terms of between a month and five years. Interest rates you receive vary but at the time of writing they were 3.8% for one month, 5.2% for one year, 7.8% for three years and 9% for five years. M

FOLLOW THESE RULES

•

Don’t leave all your money in the bank.

•

Invest in a diversity of incomeproducing assets so you don’t have all your eggs in one basket.

•

Research the products you buy carefully; if you don’t feel equipped to do this seek professional help.

•

For many investors choosing individual shares is too hard; pick managed funds, ETFs, LICs or LITs with a track record of constructing income-producing portfolios.

MONEY OCTOBER 2017 73

INVESTING SUPER

STORY NICOLA FIELD

Smart thinking

Super funds turn to technology to encourage members to take an active interest in their savings

74 MONEY OCTOBER 2017

he days when you only heard from your super fund once a year via a statement in the mail are over. Funds are investing in digital technologies that help members stay in touch with their retirement savings anywhere at any time. The push to expand digital services is a plus for our retirement nest eggs. Despite the nation’s collective super savings reaching $2.3 trillion, many Australians remain out of touch with their super. Two out of five people don’t know how much they have in super, and the system is awash with $14 billion in lost or unclaimed super. Many in the industry hope digital services will change all this, and it seems interest in digital tools among members isn’t limited to tech-savvy millennials. Andrew Howard, chief operating officer of REST Industry Super, which has introduced a number of digital service options, says: “We are seeing strong take-up across the full spectrum of our members.”

ority. Employer-paid super contributions are frozen at 9.5% until July 2021, when they go to 10%, and growing numbers of baby boomers are reaching preservation age and starting to draw on their nest egg. It’s putting pressure on super funds to foster member loyalty and grow their funds under management. In response, funds have started to invest heavily in digital services. A study by IQ Group found virtually all super funds allow members to join and switch investment options online. The vast majority provide online retirement calculators and around 70% have the capability to let members search for lost super via the fund’s own website rather than heading to the tax office site. Even the traditional super statement is no longer a one-size-fits-all document. Many funds give members the option to receive statements via email and SMS. REST has gone a step further, providing interactive statements with the capability to let members consolidate their super.

Key drivers

Streamlined services

According to Howard, several broad trends are driving the push to digital service channels. “Smartphones have been with us for a decade, putting the power of a supercomputer into consumers’ hands,” he says. “This has fuelled expectations that consumers can have services delivered online or over the phone, allowing them to do what they want, when they want. Superannuation funds are not immune to this expectation.” While younger fund members have grown up expecting nothing less than digital services, Howard says their ranks are being swelled by those workers who have benefited from compulsory super for the full 25 years since its inception in 1992. “These fund members now have a good chunk of money invested in super, so they take a keen interest in their retirement savings.” From the funds’ perspective, the cost of new technology has fallen over time while the capabilities have increased. “This makes it both more achievable and more attractive to introduce digital service options,” says Howard. For large funds like REST, which has around 2 million members, digital service channels can provide a cost-effective way to stay in touch with existing and prospective members as well as employers. As well, there’s another factor behind the race to embrace digital service options. After years of managing super’s strict compliance regime and bedding down the “simpler super” system, funds are now well placed to focus on consumer engagement. And in today’s highly competitive market, improving member engagement has become a top pri-

Other digital channels are still emerging. Live web chat is available with just one in four funds, and a fraction of funds provide online advice. However, where these services are available, members can enjoy a streamlined customer experience. REST has invested in a virtual agent known as Roger. “Roger is an automated response mechanism that handles customer inquiries made via the website’s search function,” says Howard. He says Roger manages 6000 to 7000 inquiries each week and 23% of people surveyed say Roger saved them a phone call. REST members can also engage in live chat through a pop-up on the website that allows visitors to connect with the service team in a manner similar to SMS messaging. “We handle about 2000 of these chats each week,” says Howard. While convenient for members, the downside of digital tools is the potential for funds to lose the human touch. “It is critical that digital options incorporate a mechanism that allows a real person to intervene,” says Howard. “Roger, for instance, recognises the point where people are not getting an answer and that’s when the chat option pops up, or an offer is made for a call from our service team.”

Impressive app functions

One area where super funds still have a way to go is mobile apps. More than 80% of funds have optimised their website for mobile but the availability of apps is far from widespread. In Canstar’s 2016 super rating report,

INSIDE 2017 & 2018 SUPER CHANGES SMART STRATEGIES FOR YOUR 20s, 30s, 40s & 50s PLUS YOUR WEEKLY BUDGET FOR RETIREMENT

SPECIAL EDITION

ISSUE 5 $9 95 www moneymag com

YOUR 2017

SUPER GUIDE

• 16 THINGS YOU SHOULD KNOW • BOOST YOUR SUPER LESS TAX • ACTION PLAN AND PAY FOR CASUAL WORKERS • ACCESSING YOUR SUPER AT RETIREMENT • HOW WORST FUNDS THE SWEET MUCH YOU REALLY NEED • THE BEST & SPOT: AGED PENSION + SUPER

PAUL CLITHEROE Your super questions answered

+ SUSAN HELY How much you should be paying in super fees

LOOKING FORWARD FOCUSING WHAT NEEDS TO BE DONE IN ON DRAWDOWN: RETIREMENT PHASE Fahy,

Our experts Alex Dunn n, Martin

Kirby Rappell

SUPER GUIDE 2017 This is just one of the articles you’ll find in our third annual Super Guide, which is on sale now and includes everything you need to know about superannuation. You’ll find: A lowdown on the changes that were introduced in July. A 10-point checklist for different ages: 20s, 30s, 40s and 50-65. How to handle volatility. Smart ways to boost your super. How much you need to retire. How to manage your super at retirement.

• • • • • •

Plus lots more. Get your copy now from newsagents or online at magshop. com.au – simply search for “super guide”.

MONEY OCTOBER 2017 75

INVESTING SUPER

only 13 out of 67 funds classified as suitable for those building their super offered an app to members. However, where they are available the range of functions can be impressive. KineticSuper(whichismergingwithSunsuper) introduced an app in 2016 that allows members to view their balance, update contact details and change investment options as well as check and change insurance cover and view or change account beneficiaries. ANZ Smart Choice super offers its Grow by ANZ app, which provides details of super alongside a member’s banking, shares and insurance. AMP’s Flexible Super links to the My AMP app to track super balances and contributions, monitor investments and start the ball rolling to combine accounts. Niche fund GROW Super, a newcomer, has an app with an interesting twist, allowing members to round up everyday purchases to the nearest $1 or $5 with the spare change going to their super account. It’s an effortless and financially pain-free way to give super savings a boost. More recently, apps are helping to combat the problemofemployersdodgingtheircompulsory super obligations. Most workers assume their employer is doing the right thing, especially if they see a figure for super contributions on their payslip. But that’s not always the case. A 2016 report by Industry Super Australia and building industry fund Cbus estimated that around 30% of workers are not receiving part or all of their compulsory super, with employers failing to pay at least $5.6 billion in compulsory contributions in 2013-14 alone. On this basis, if left unchecked, unpaid super and lost earnings on those contributions could reach more than $66 billion by 2024. In July 2017, the nation’s largest industry fund, AustralianSuper, released an updated app that allows members to receive alerts when their employer’s super contributions arrive in their account. “Itisreallyimportantthatpeoplereceivewhat they are entitled to, and with the technology we have it is easier to check your super,” says Shawn Blackmore, AustralianSuper’s group executive, member experience and advice. “Alerts will pop up on a mobile device saying that your super has been paid. Obviously if you don’t receive an alert it’s a cue to contact payroll to see where your money is. People can take things into their own hands by using the app to track their super, rather than relying on the tax office to discover any issues.” 76 MONEY OCTOBER 2017

Although in its infancy, digital advice can offer a win-win to both members and funds essed the flipside of app that caters to the cially small businesses, which comprise 97% of Cbus’s employer base. “The app allows for new employees to be added to an account, setting up of monthly payments and updating administrative details for employers,” says David Atkin, CEO of Cbus Super. Contributions can be made with the tap of a screen, PDF receipts can be generated and business details updated at any time.

The next frontier

One of the big leaps forward in digitisation has been the willingness of funds to develop a voice in social media. As a guide to the turnaround, of the 35,000 online conversations about superannuation in early 2014, fewer than 100 involved the big super funds – the dominant topic was self-managed super. But IQ Group’s research shows social media is now very much a part of member engagement, with three-quarters of funds surveyed currently having a presence on Facebook, Twitter and LinkedIn. The next big frontier for digital customer service is online advice. A survey by industry

bodyASFAfound80%offundsseedigitaladvice as an absolute must but to date only 20% are investing in it. REST Industry Super is among the funds dipping its toes in this pool, offering online advice that members can use to review and implement investment choice. “Over the horizon we’re likely to see the use of artificial intelligence (AI) for decision-making,” says REST’s Howard. “AI can involve rules-based engines and could have applications in providing advice for things like claim assessments for life insurance held in super.” Even though digital advice may be in its infancy in the super environment, it can offer a win-win to both members and funds. According to ASFA, 70% of members who engaged with digital advice were on track for a comfortable retirement, and funds offering digital advice were achieving higher rates of member retention. Howard believes it’s too early to say whether members who use digital tools will achieve bigger super balances. But the rewards of improved member engagement are already being felt. “We know that any time a member connects with us, even if it is for something like nominating a beneficiary to inherit their super, that member is likely to stay with us for longer. It’s all about responding to people’s interest in super when they have that interest, and this is what digital service options allow us to do.” As technology develops, it’s a case of watch this space for innovations that can encourage us to take a more active role in our super. It can even make digital service options another factor to weigh up when you’re choosing a fund, or deciding if your current super fund is the best choice for your long-term goals. M

SPECIAL EDITION ISSUE 5 $9.95 www.moneymag.com.au

INSIDE 2017 & 2018 SUPER CHANGES SMART STRATEGIES FOR YOUR 20s, 30s, 40s & 50s PLUS YOUR WEEKLY BUDGET FOR RETIREMENT

YOUR 2017

SUPER GUIDE

• 16 THINGS YOU SHOULD KNOW • BOOST YOUR SUPER AND PAY LESS TAX • ACTION PLAN FOR CASUAL WORKERS • ACCESSING YOUR SUPER AT RETIREMENT • HOW MUCH YOU REALLY NEED • THE BEST & WORST FUNDS THE SWEET SPOT: AGED PENSION + SUPER

+ PAUL CLITHEROE Your super questions answered

SUSAN HELY How much you should be paying in super fees

LOOKING FORWARD FOCUSING ON DRAWDOWN: WHAT NEEDS TO BE DONE IN RETIREMENT PHASE Our experts Alex Dunnin, Martin Fahy, Kirby Rappell

ON SALE NOW

INVESTING CRYPTOCURRENCY

How to buy bitcoin STORY MARIA BEKIARIS

o you’re thinking about investing in bitcoin but how do you actually do it?

1. Set up a digital wallet

The first step before buying any crypto-currency is to set up a digital wallet. This will be a relatively secure place to store your bitcoin and also is the “address” you need to provide when you’re buying and selling cryptocurrency. Although providers may be able to store your bitcoin on their exchange, it is recommended that you transfer your bitcoins to your own personal wallet as that will probably be more secure. There are a number of different types of wallets. There are software wallets that you can install and download onto your desktop or online wallets, which are essentially browser based, or you could get one for your mobile. Popular wallets include Bitcoin Core, Xapo and Mycelium. (See bitcoin.org/en/wallets/ mobile/android for a longer list.) For larger amounts you may opt for a “hardware” wallet such as Trezor or KeepKey, where you can store your info on a USB. They are safer because even though you can transact online, they are stored offline, making it harder to hack.

2. Choose a trading platform

You’ll need to set up an account with a trading platform that will let you buy and sell cryptocurrencies. When shopping around for a trading platform make sure you compare the fees, as there can be a big difference between sites. You should also take into account 78 MONEY OCTOBER 2017

A four-step guide to acquiring and storing the virtual currency

the exchange rate. Some will let you trade in Aussie dollars, which you might find useful if you don’t want to worry about the conversion rates, but buying and selling in US dollars is more common. It’s also a good idea to make sure there’s plenty of volume on your chosen trading platform to minimise possible liquidity issues if you want to sell. BTC Markets is the biggest exchange in Australia and lets you buy in Aussie dollars. Other exchanges include CoinJar, BitcoinAustralia, CoinSpot and CoinLoft. You’ll probably be asked for proof of identification such as a driver’s licence, passport or proof of age card.

3. Fund your account

After you have set up an account with your chosen platform and have gone through the verification process, you’ll need to add funds to your account so that you can make a purchase. Depending on the provider, you might be able to make a direct electronic transfer, pay using POLi or make a cash deposit at a bank branch.

4. Make a purchase

You have your digital wallet, have opened a trading account and have deposited cash; now the only thing left to do is to make your purchase. At the time of writing, one bitcoin would set you back $4787 but you don’t have to buy a whole bitcoin – you can buy a fraction. The smallest amount will vary between platforms. CoinTree, for example, says it accepts purchases of $200 or more while Bit Trade Australia has a minimum order size of $50. It is a good idea to start small. M

Vita Palestrant SUPER

Taxed to death death benefit tax applies, it’s on everything in the fund other than your non-concessional contributions.” Tax payable on the taxable component is at a rate of 15% plus the 2% Medicare levy. Lewis says even if the benefit is paid through the deceased’s estate, the adult son or daughter are still subject to the death tax but not the 2% Medicare levy. One common strategy to minimise the tax is to withdraw an amount from super and recontribute it as a non-concessional contribution. By doing this you are converting the taxable component into a tax-free component. But the rules are complex. Generally, once you are 60 and retired (it doesn’t have to be permanently) you can access your super tax free. At 65 and over, retirement isn’t a requirement but to be eligible to make contributions you must meet a work test. Laura Menschik, a certified financial planner and director of WLM Financial Services says: “Let’s say I’m over 65, I’m still earning a reasonable income, I could draw out $100,000 and recontribute that back as a non-concessional contribution and it goes in tax free. That’s one way of reducing the taxable component.” The non-concessional contribution could also be made to your spouse’s account, especially if you are close to exceeding the $1.6 million super cap. “It might be a strate-

There are strategies to ensure your children get the maximum benefits

any baby boomers have accumulated big balances over the 2½ decades since super’s inception. Their super may be approaching, or even exceed, the value of the family home. But unlike the home, which is free of death taxes, super’s 17% death tax applies to adult children. There are, however, strategies to reduce its impact. But first you need to understand which beneficiaries will be taxed, how they will be taxed and what you can do about it. Basically, no tax is payable on death benefits given to a spouse, de facto, same-sex partner, someone financially dependent on you, a child under 18 (or older if a financially dependent student), or someone you have an interdependency relationship with. The rest get taxed. “All your money going into super is broken down into a taxable component and a tax-free component,” says Colin Lewis, head of strategic advice at Perpetual Private. “Your taxable component is made up of all your pre-tax contributions: your employer’s super guarantee, any salary sacrifice you make, or any contribution you have claimed a tax deduction on. All the earnings in the fund form the taxable component. “The only portion that is tax free is your after-tax non-concessional contributions. So when we are talking about how much

INDIVIDUAL AGED 65 OR MORE QUALIFYING FOR THE SENIOR & PENSIONER TAX OFFSET (SAPTO) EFFECTIVE TAX-FREE THRESHOLD

NON-SUPER INVESTMENT PORTFOLIO 2.5% RETURN

5% RETURN

8% RETURN

Single

$32,279

$1,291,160

$645,580

$403,487

Couple (each)

$28,974

$1,158,960

$579,480

$362,175

Couple (separated by illness – each)

$31,279

$1,251,160

$625,580

$390,987

Source : Perpetual Private

gic plan to even out both balances,” says Menschik. It all comes down to whether you’re eligible to take out a lump sum and then whether you are eligible to recontribute it, says Lewis. “You have to be mindful, first of all, if you are eligible to recontribute, that is, put the money back into super – you are under 65, or over 65 and meet the work test. And secondly, how much can you put back in. You’ve now got to be careful of lower non-concessional contribution caps, which have dropped from $180,000 to $100,000. “People who have over $1.6 million in super are also no longer able to do the recontribution strategy. If your total super balance is $1.6 million or more, then you can’t make an after-tax contribution to super,” says Lewis. Other strategies involve pulling money out of super. “If a person has an injury or illness, it might be a heart attack and they are towards the end of their life, the best strategy for a whole host of reasons is to sell down the portfolio and transfer all the benefits out of super to their personal bank account. It’s then paid out to the beneficiaries as per the distribution of their will and there is no tax,” says Menschik. Or you could leave everything to your spouse. “From a tax viewpoint if you’ve got a spouse and adult kids and you want them all to benefit, you’re better off giving it to your spouse and letting them pay it out tax free,” says Lewis. “The issue comes when you’ve got blended families. Can you trust your spouse to pay whatever you wished for the children of your former relationship?” And if you don’t have a huge amount in super it might be simplest to withdraw it. Lewis says a couple over 65, qualifying for the senior and pensioner tax offset, can earn $28,974 a year each tax free. See table. Given the complexity of the rules, it’s vital you get professional advice first. Vita Palestrant was the editor of the Money section of The Sydney Morning Herald and The Age and has won several prestigious journalism awards here and overseas.

MONEY OCTOBER 2017 79

SHARES STRATEGY

Risky rivers of gold STORY GREG HOFFMAN

Online retailers are hot, traditional retailers are not. There may be an opportunity here ...

he arrival of amazon.com in Australia has been making plenty of headlines recently. And shares in kogan.com have doubled over the past 12 months. At today’s price, investors are valuing each $1 of Kogan’s sales at $1 in the sharemarket. By contrast, each $1 of sales registered by “old world” retailer Myer is valued at less than 30¢ by investors. And earlier this year fashion company OrotonGroup paid $4.5 million for 30% of The Daily Edited, a website that sells embossed and personalised leather goods, stationery and accessories. Oroton was valuing The Daily Edited at almost $15 million, or about as much as its expected total sales for the financial year. In other words, a similar valuation yardstick to Kogan’s. So what might the sales figures (below) from another Australian online retailer imply for its valuation? Now what if I told you that investors were recently valuing this business at around $68 million? That might seem reasonable – or even attractive – in the context of the valuations being placed on the likes of Kogan and The Daily Edited. So what’s the name of this mystery online success story? The figures are from Specialty Fashion Group (ASX: SFH), which owns a number of fashion chains including Millers, Katies, Crossroads, Autograph, City Chic and Rivers. Those mightn’t sound like hot online retail propositions. And their degree of success in selling online varies from 3.9% of total sales for Millers (which targets more mature consumers, like my 75-year-old

AN ONLINE SUCCESS STORY SALES GROWTH ON PRIOR YEAR 80 MONEY OCTOBER 2017

2013

2014

2015

2016

2017

$21.9m

$31.2m

$51.2m

$72.8m

$83.7m

50%

43%

64%

42%

15%

mum) up to an impressive 29.4% of total sales for City Chic (bold fashion items for plus-sized women at higher price points). Throw it all in the mix, though, and Specialty Fashion has a nicely growing online retail operation. And for a valuation of $68 million (at 30¢ a share), today’s investor receives not only the online business but a network of more than 1000 stores. In fact, online sales represented just 10.4% of total sales last financial year. Now, I am not drawing a straight line between the likes of Specialty Fashion, which has deep roots as a traditional retailer, and Kogan, which has been online-only from the get-go. The former faces many challenges while the latter seems to be in a growth “sweet spot”. But the difference in valuation per dollar of sales serves to highlight a yawning gulf between online retailers that are currently popular with investors and most traditional retailers, which are deeply out of favour. Such wild distinctions are always worthy of further investigation for investors seeking value. So let’s go back to the start. The first two Miller’s Retail (as it was then known) stores opened back in March 1993. The chain grew quickly to 147 stores by the time it listed on the ASX in May 1998 and its valuation at listing was about $66 million. Here we are almost 20 years later and the valuation is roughly the same. And that fact highlights both the opportunity and the risk. You can see in the table below a comparison of a few key statistics from the year of listing with this year. You can see that the company now has more than

PROFIT SAYS IT ALL 1998

2017

162

1043

SALES

$95.5m

$807.7m

OPERATING PROFIT

$8.2m

$4.5m1

STORE NUMBERS

2017 operating proﬁt adjusted for one-off items

six times as many stores and almost eight-and-a-half times the total sales. The problem comes when we hit the bottom line. Despite a far larger top line, the company’s operating profit has almost halved since it first listed. Put in terms of the profit margin, it has fallen from 8.6% to 0.6%. That razor-thin number is probably not sustainable. It needs to increase or the company could fall into the financial danger zone. The opportunity is for management to improve the profit margin. Specialty Fashion may never see a margin of 8.6% again because the retail landscape has become much more competitive. But at today’s price, investors don’t need a full return to the glory days to do well. At a 3% profit margin, based on last year’s sales, Specialty Fashion would be making an operating profit

of $24 million. At 4% (less than half of 1998’s profit margin), the figure would be $32 million. And numbers of that magnitude could justify a valuation of double the current share price or more.

What chance a turnaround?

So what is the likelihood of the company delivering those kind of profit margins over the next three years? I think it has a decent shot, perhaps 50% or so, with a roughly 30% chance of bumbling along at closer to current meagre levels of profit and perhaps a 20% chance of getting into serious trouble, resulting in nasty or total losses for investors. A key part of achieving better margins will be improving results from Rivers, the rural-focused clothing and footwear chain that started as a shoe manufacturing business in the mid-1980s. Specialty Fashion acquired it in late 2013 when Rivers was struggling and the purchase price looked cheap. But it turned out to be a case of you get what you pay for. A three-year turnaround plan was put in place but now, four years on from its acquisition, Rivers is yet to make a meaningful contribution to Specialty Fashion’s bottom line. At the time of acquisition, Rivers had 160 stores and management estimated annual sales at $180 million. The latest store count is 148 and I estimate sales at around $155 million (management doesn’t provide much chain-by-chain information, so I could be off by $10 million or so here). I believe those sales are made at an operating loss. I think the turnaround potential in Rivers alone is $5 million or more per year. I arrive at that by assuming that Rivers is making an operating loss of $2 million or $3 million at the moment and that management could achieve perhaps a 2% profit margin on $155 million in sales. It might take a couple more years but, if it were achieved, it would make a nice impact on the bottom line by converting a current seven-figure loss into a profit of the same or greater magnitude. Closing unprofitable stores and warehouses and growing online sales should all help. The recent strong Aussie dollar should improve margins, too. Most of the products sold by Specialty Fashion come from China and are effectively paid for in US dollars. But I’m not starry-eyed about the situation. Management has said that the current financial year has begun with “challenging trading conditions”. I consider this a risky turnaround and, as such, have invested less than 2% of the portfolios I manage in the stock. A total wipeout is possible but, if all goes to plan, I’ll be selling out for more than double my entry price in three years. M Greg Hoffman is an independent financial educator, commentator and investor. He is also non-executive chairman of Forager Funds Management. Disclosure: Private portfolios managed by Greg Hoffman own shares in Specialty Fashion. MONEY OCTOBER 2017 81

SHARES FUTURE WINNERS

Find the next STORY GRAHAM WITCOMB

Buying high-quality companies, and holding them for the long term, is the surest way to hit the jackpot

t’s every investor’s dream: to find a stock that doesn’t just double your money – or even triple it – but increases your investment tenfold. It may take decades or just a few months depending on the situation, but there are plenty of examples on the stockmarket: Flight Centre (ASX: FLT), Cochlear (COH), ARB Corp (ARB), REA Group (REA), CSL (CSL) and Ramsay Health Care (RHC) to name just a few. What do these corporate rocket ships have in common, and is it possible to identify them ahead of time?

Quality counts

The companies above all have one thing going for them: they’re high-quality businesses. What we mean by high quality is that they have good management, usually little debt and lots of earning power. Most importantly, though, they have sustainable advantages which insulate them from competition – things such as economies of scale, strong brands, government licences and patented technology. High-quality companies tend to give pleasant surprises rather than disappoint, and it’s worth allowing them more leeway as their share prices rise. Just as you might bag a profit in a low-quality stock at the first opportunity, with high-quality businesses it’s worth trying to cling on – high-quality companies tend to find new, creative ways to deploy their capital and can earn good returns over the long haul. Ironically, ultra-low quality stocks might also be fertile waters to hook your next 10-bagger but only under certain conditions, which we’ll get to in a moment.

Time is money

“The biggest thing about making money is time,” Warren Buffett has said. “You don’t have to be particularly smart, you just have to be patient.” Sydney Airport (SYD) is a reminder that patience pays. We liked the stock from the get-go, making our initial upgrade all the way back in 2002 when it first listed at $1. We’ve held on ever since. The stock has risen sevenfold since then, to just under $7.50 at the time of writing, and returned more than 10 times the initial purchase price including dividends. But Sydney Airport is really a lesson in grit – investors endured four 20% falls and one 60% plunge on the way to that return. Most 10-baggers don’t happen overnight and there will probably be speed bumps along the way; 82 MONEY OCTOBER 2017

you need to sit on your hands, particularly if you own a high-quality stock, and just let them run.

Value of a different kind

For most investors, targeting high-quality stocks and holding them for the long term is the surest way to land a 10-bagger. As always, though, buying with a margin of safety is key; even the best companies will turn into lousy investments if you pay too much for them. So far, we’ve only talked about high-quality companies. But if you filter for all the stocks on the ASX that have 10-bagged, you’ll find they tend to fall into one of two camps: high-quality stocks held for the long term but also low-quality stocks that were significantly undervalued at some point, such as NRW Holdings (NRW), Ausdrill (ASL) and Reverse Corp (REF).

10-bagger SYDNEY AIRPORT

Share price, weekly $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 Low: $0.82 $0.00 03

High: $7.68

Close $7.43

Source: Bloomberg

FLIGHT CENTRE

Share price, weekly $60.00

Close $47.91 Highh: $$544.778

$50.00 $40.00 $30.00 $20.00 Low:

$10.00 $1.22 $0.00

97 99 01 03 05 07 09

To be clear, we’re not talking about run-of-the-mill undervaluation – to turn a poor company into a phenomenal investment, you need to purchase the stock when it’s ridiculously, obscenely cheap. Reverse Corp, for example, went up 15-fold between April 2013 and April 2014, but it started that period with a total market cap that was less than its cash in the bank minus its total liabilities (a so-called “net net”). It had plenty of problems but investors were essentially buying a dollar for 30¢. If you’re going to try this method, be prepared for a lot of bad news, volatility and your fair share of bankruptcies. To buy things this cheap, the company’s collapse usually seems imminent. For this reason, high-risk speculative stocks – even when purchased with a large margin of safety – should only ever make up less than 10% of your portfolio. Failure is the norm.

On the low-quality route, be prepared for bad news and volatility

All the careful analysis in the world won’t guarantee you’ll find the next 10-bagger, and even if you do you’re likely to reduce your holding as the stock rises so that it doesn’t become an unsafe portfolio weighting. Nonetheless, if you own a collection of high-quality businesses, bought when they were undervalued, and hold them for the long term, your brokerage statement should eventually show plenty of green. M Graham Witcomb is an analyst at Intelligent Investor, owned by InvestSmart Group. This article contains general investment advice only (under AFSL 282288). To unlock Intelligent Investor stock research and buy recommendations, take out a 15-day free membership. Disclosure: Staff associated with Intelligent Investor may own the stocks mentioned. MONEY OCTOBER 2017 83

Prices in charts as at close of business, 14-Sep-17.

Source: Bloomberg

OUTLOOK Hans Kunnen

Polish your portfolio There’s no silver bullet to galvanise the sluggish sharemarket

y blood type is B positive. It’s also my approach to life and investing. But here’s the catch. Being positive is not enough. As we move towards the tail end of 2017, the standard drivers of economic and sharemarket growth remain in place. The population is growing, firms are reinvesting good proportions of their profits, new products are being developed, interest rates remain low and global growth is picking up. There’s plenty to be positive about. So why is the Australian sharemarket stuck in the mud? And what will pull it out? More on this later. What’s not so positive? The Commonwealth Bank shooting itself in the foot does not help. Low wage growth and sluggish retail sales do not help and loss-making offshore ventures also hold some companies back. Commodity prices can also be a bit of a lottery with doubts over economic growth in China. Strong economic growth in Australia tends to see most companies do well. However, sluggish growth requires more effort from company management and share investors. Do the companies you invest in have a vision, a plan to generate product for clients and returns for shareholders? What is their outlook? With reporting season now behind us and dividends set to flow, there’s plenty of information “out there” to ponder. If you’re happy with set-and-forget then there’s little to do, but if you want to polish up your portfolio and ditch the dross now is a good time to act. Regardless of investing style, we all face the impact of major global economic events and geopolitical hiccups. The month ahead holds plenty of both. Will the sabre rattling surrounding North Korea calm down or flare up?

84 MONEY OCTOBER 2017

What will US budget and tax negotiations look like now that its debt ceiling has been temporarily lifted? Will the US face another government shutdown in January? And who will be the Fed chairperson next year? Resolution of any of these issues would support global sharemarkets and lift sentiment towards the Australian market. And vice versa! The US Federal Reserve meets in late October. There is likely to be rate speculation and debate over unwinding the Fed’s asset holdings. My guess is there will be no rate hike in late October/early November and more “market calming” detail on its asset sales program.

But what pulls us out of the mud and when will it begin? Hard as I try, it’s difficult to be overly positive in the short term. But let’s give it a go. Low interest rates are likely to persist in Australia. Inflation remains low and the Reserve Bank is under no pressure to lift its cash rate. Given our high level of debt, it would require only a small hike in rates to slow economic activity. Low interest rates will support the sharemarket and keep business borrowing costs under control. During 2017, we’ve seen an upturn in business investment intentions. Growth in business investment is generally a forerunner to increased sales and increased earnings. Given that we’re coming off a massive resources investment boom, an upturn in non-mining investment is very encouraging. On top of this, Australia is also undergoing a surge in infrastructure spending. But hold on. That song sounds familiar! The RBA and economists have been saying this for years! True. We are all playing a “long game”. Keep in mind that the US and European economies fell harder during the GFC. Their rates were pushed down close to zero and less. The US economy has been gaining momentum for several years, and then voters elected a government that promised very stimulatory policies. There is no silver bullet for the Australian market. I’m not holding my breath for a surge in the All Ordinaries above 6000. It will come but, in the meantime, polish your portfolio, reflect on global events and encourage your local member of parliament to work on policies that will create jobs. Hans Kunnen is the chief economist at Compass Economics. He is also the author of Borrow + Build, a primer on borrowing to invest in the Australian sharemarket.

Roger Montgomery VALUE.ABLE

SECTOR CONSTRUCTION

A chance to rebuild profits Hurricane repairs in the US may help offset a slump in the apartment market here

just 2½ years the loans originated in July 2015 (46% of which were interest-only) will need to be refinanced and many borrowers will be forced onto principle-and-interest mortgages with an associated increase in repayments of as much as 40% – even if interest rates don’t rise. Finally, a slump in approvals in recent months suggests a slump in the near future for construction activity in Australia.

But having said all that, hurricanes Harvey and Irma could prove a boon for international builders and building supply companies because Texas and Florida account for 14% and 10% respectively of the total US market for housing approvals.

❶ James Hardie

❷ Boral

❸ CSR

ASX code JHX James Hardie is Price $17.23 an international 52wk ▲ $23.20 manufacturer of 52wk ▼ $17.17 building products. Texas Mkt cap $7.6bn accounts for almost Dividend 41¢ 15% of revenue and Dividend yield 2.4% the renovation market PE ratio 21.24 accounts for 60% of its North American revenue. ■ HOLD The US storms will initially have a negative impact on sales. Production disruption could also impact revenues and sell-side analysts will lower their forecasts. If floodwaters are slow to recede and the company misses expectations, then a share price reaction may be an opportunity for those who believe in the company’s participation in a subsequent rebuilding boom.

James Hardie share price

Boral share price

CSR share price

$23

$7.50

$5.50

$7.00

$5.00

$6.50

$4.50

$6.00

$4.00

$5.50

$3.50

$22 $21 $20 $19 $18 $17

D F17

D F17 A

ASX code BLD Since reporting its Price $6.70 full-year results, 52wk ▲ $7.14 the share price has 52wk ▼ $4.93 fallen almost 10%. Mkt cap $7.9bn Investors appear to Dividend 24¢ be concerned about Dividend yield 3.6% the modest earnings PE ratio 22.95 growth anticipated by the company for the ■ HOLD Australian division. But Boral Australia has also announced a series of price increases across concrete and cement, which, if combined with solid, persistent volumes associated with the government-announced infrastructure projects, may prove that revenues are less negatively impacted than some believe.

D F17 A

Roger Montgomery is the founder and CIO at The Montgomery Fund. For his book, Value.able, see rogermontgomery.com.

ASX code CSR CSR is the company Price $4.41 behind Gyprock 52wk ▲ $5.24 plasterboard, Bradford 52wk ▼ $3.38 insulation and Monier roof Mkt cap $2.2bn tiles, among many others. Dividend 26¢ Since it announced its Dividend yield 5.9% results, management has PE ratio 12.51 upgraded its expectations for housing, citing “solid” ■ HOLD demand compared with “steady” previously. But don’t read too much into semantics. Price rises (about 35% for plasterboard) are expected to offset energy cost increases of circa $20 million this financial year. While high-rise apartment building (12% revenue exposure) may be softening, management suggests single family housing is relatively stable.

MONEY OCTOBER 2017 85

Prices in charts as at close of business, 14-Sep-17. Prices in charts as at close of business, 15-Sep-17.

ecently, Australia’s richest man and its biggest apartment developer, the property billionaire Harry Triguboff, cited slowing foreign investor interest as a reason for his observation that “the slowdown in the apartment market is worsening”, adding the number of new apartments sold had dropped and prices had fallen about 10% over the past six months. Separately, investment bank UBS reported the results of a survey of almost 1000 Australian mortgage holders who borrowed in the 12 months to August 2017, noting: “Our 2017 survey found factually accurate mortgage applications fell to just 67%. There are now about $500 billion in ‘liar loans’ on the banks’ books.” Meanwhile, interest-only mortgages increased from around 35% of total originations in 2013 to a peak of 46% in June 2015. APRA’s decision to cap the proportion of new interest-only mortgages at 30% of total originations for each of the banks from July 1 this year means that in

THIS MONTH Marcus Padley T

Our most precious asset In a hectic, technological world, time is short – so don't waste it

e are all flying through life. Busy, busy, busy. Important things to do. So very important. Can’t talk, can’t stop, can’t go, can’t come, can’t make it, can’t do it. Busy. We all have our own reasons. I write an average 6600 words a day, 250 days of the year. That’s 1.65 million words per annum. The average length of a novel is 60,000 words. I write 27½ novels a year. Excuse me, then, if I’m a bit busy. Then there are four kids who demand a little bit of attention. We all worry about money but the truth is that the most precious gift you can give anyone these days, especially your family and kids, is time, and all this technologydriven rushing about that’s going on has elevated its value to immeasurable heights. Simply turning up, ringing up, listening and being there is now the biggest compliment you can ever pay anyone. I remember a story about one of Kerry Packer’s birthday guests famously saying when asked whether they had bought a birthday present, “I’m here, that’s enough isn’t it?” It is. The next time someone turns up on your doorstep give them a big hug and say “Thanks”. Time. The most valuable asset on earth and the most generous of gifts. Use it or lose it. Make it or waste it. With this in mind I am going to tell you how to save time in the financial markets, because when it comes to the stockmarket there are a lot of things that waste your time. They include: PowerPoint presentations. PowerPoint has empowered even the most unimaginative, reclusive, bland but credentialled introverts to present “well”. It is that good. Which is bad. Clickbait. I really hate the way clickbait journalism has degraded the integrity of financial content, which is now being written for the internet not for the reader. It’s an insult having to title my article “10 things that waste your time” but it is a necessity in a search-engine world. Media talking heads. We may look good

• •

•

86 MONEY OCTOBER 2017

stock is irrelevant. Whether you are in profit or loss has absolutely no bearing on the future share price. So be detached. Take a profit as quickly as you would take a loss and vice versa. A client once said to me, “Telstra owes me five dollars”. No it doesn’t, it’s not your brother-in-law. Economists and strategists from big institutions. They are all biased to optimism. They have to be. They have a mission: to keep the clients of their large-product-selling wealth management companies happy and invested. They do that by generating a perception of control and certainty while over-emphasising the market’s relentless rise in the long term. They cannot afford to speak their minds and they simply cannot tell anybody to sell, ever. Macro crap. We all spend too much time spent worrying about Janet Yellen and Philip Lowe. Knowing when interest rates are going to rise or fall pales into insignificance compared with stock picking. Worrying about macro crap would be time better spent deciding what to buy and when. Broker research. 90% is marketing and sucking up to a company, the rest is independent advice. Read it with your eyes open to the corporate purpose. Consensus estimates. You will never make money out of knowing what everybody else already knows and is already in the price. The only thing that moves share prices is the unknown and the unexpected. If BHP hits its consensus forecasts the share price doesn’t move. So to make money out of stocks you have to predict the unexpected. Stockmarket gossip forums. A good idea but the reality is that they are too short term and anonymous and because of that are mostly lacking integrity. Next time let’s look at something more positive, things that don’t waste an investor’s time, your time. There are a few.

•

and put on a good show but we have no more ability to predict the future than you do. Take it for what it is, an entertainment, a show. But we are not clairvoyant. Anyone injecting urgency into the investment process. There is no rush when it comes to the core purpose of a stockmarket investor: picking stocks over long periods, not snagging a lucky rise tomorrow. Being urgent is really rather pathetic. Warren Buffett emulation. Sorry, but you are not Warren Buffett and you cannot do what he does or someone would be doing it for us and we would all be billionaires. So stop pretending you can. Correlations. Some stocks don’t need to be researched in detail. They are driven by one or two major drivers and you just have to get those right. Fortescue Metals and the iron ore price, to name just one. In-depth research is pointless. Human emotions. They do nothing for the investment process. Don’t let them get in the way. There is no “liking” or “hating” stocks. What you feel about a stock is irrelevant. Think like Spock. Be an algorithm. Dispassionate analysis is the goal. The price you paid. What you paid for a

•

• •

•

• •

•

Marcus Padley is the author of the daily stockmarket newsletter Marcus Today. For a free trial of the Marcus Today newsletter please go to www.marcustoday.com.au

he data in these tables compares some of the most popular super funds. They are a mix of industry funds, master trusts and government funds. Industry funds are set up by employer associations and unions; many are offered publicly, some have restricted membership (NP). Master trusts (corporate and personal) are set up by banking, insurance or financial planning groups. All performance figures are after all fees, charges and tax applied to the fund have

been deducted. The table here shows performance of fundsâ&#x20AC;&#x2122; balanced options. But most super funds offer many other choices of investment mix. The data is provided by SuperRatings, a totally independent Australian superannuation research company. It is the leading source of superannuation information to the Australian media and is renowned for its timely commentary and opinions on the various superannuation funds available.SuperRatings assesses over

250 superannuation funds and products. SuperRatings takes into account risk-adjusted investment performance, fees, insurance, service delivery, education, financial planning facilities, employer support, fund governance and flexibility of the options. The judging is mainly quantitative but does include qualitative assessment. Calculators, fund comparisons, fund ratings, news and expert opinion can be found at www.superratings.com.au.

Best super funds: balanced options RANKED BY 5-YEAR RETURN RANK1

3 -YEAR RTN (%PA)

11.0%

9.4%

11.7%

9.7%

9.5%

8.7%

11.3%

9.4%

11.2%

9.3%

10.9%

9.3%

10.9%

8.8%

10.9%

9.1%

8.0%

10.8%

8.8%

7.7%

10.8%

9.0%

8.1%

10.7%

8.7%

8.8%

8.0%

10.7%

8.8%

Platinum

6.8%

8.4%

10.6%

8.9%

Corp

Platinum

8.6%

7.0%

10.6%

9.0%

Catholic Super Balanced

Industry

Platinum

9.1%

8.8%

10.6%

9.0%

Equip MyFuture Balanced Growth

Industry

Platinum

8.5%

7.8%

10.6%

8.9%

TYPE

2017 RATING

1-YEAR RETURN

HOSTPLUS Balanced

Industry

Platinum

Cbus Growth (Cbus MySuper)

Industry

Platinum

AustralianSuper Balanced

Industry

Platinum

9.4%

8.7%

CareSuper Balanced

Industry

Platinum

9.5%

8.6%

Intrust Core Super MySuper

Industry

Platinum

9.5%

8.5%

UniSuper Accum (1) - Balanced

Industry NP

Platinum

5.9%

8.1%

AustSafe Super MySuper (Bal.)

Industry

Gold

9.2%

VicSuper FS Growth (MySuper)

Industry

Platinum

9.3%

Sunsuper for Life Balanced

Industry

Platinum

9.9%

Energy Super Balanced Option

Industry

Platinum

BUSSQ Prem. Choice Bal. Growth

Industry Personal

Telstra Super Corp Plus Balanced

FUND

RANK1

5-YEAR RTN (%PA)

RANK1

7-YEAR RTN (%PA)

RANK1

REST Core Strategy

Industry

Platinum

8.2%

7.1%

10.4%

8.8%

First State Super Growth

Industry

Platinum

9.1%

7.6%

10.4%

8.5%

HESTA Core Pool

Industry

Platinum

8.5%

7.5%

10.2%

8.7%

Aon MT Corp Ess Bal. Growth Active

MT-Corp

Gold

6.1%

6.5%

10.1%

8.0%

Vision SS Balanced Growth

Industry

Platinum

9.0%

7.6%

10.0%

8.6%

MTAA Super My AutoSuper

Industry

Gold

8.4%

9.0%

10.0%

7.6%

SR50 Balanced (60-76%) Index 1

7.6%

7.2%

9.7%

8.0%

Rankings are made on returns to multiple decimal points.

SuperRatings indices median returns 1 YEAR

3 YEARS

5 YEARS

7 YEARS

SR25 High Growth (91-100%) Index

10.2%

8.3%

12.3%

9.1%

SR50 Growth (77-90%) Index

8.2%

7.5%

11.0%

8.6%

SR25 Conservative Balanced (41-59%) Index

5.3%

5.6%

7.4%

6.8%

SR50 Capital Stable (20-40%) Index

3.9%

4.6%

5.7%

5.6%

SR25 Secure (0-19%) Index

2.0%

2.5%

3.0%

3.4%

SR25 Property Index

6.7%

9.5%

9.9%

9.4%

DATABANK

YOUR GUIDE TO SUPER DATA

WHAT THEY MEAN Rank Superfundshavebeen rankedbyfive-yearreturns. Returnsarenetofmaximum fees.Highbalancesmayqualify forlowerfeesandthusbetter returns.Rankingsforone-,threeandseven-yearreturnsshowthe performanceoftheparticular fundcomparedwithpeers. NPmeansmembershipofthe fundisrestricted. Pr meansperformanceresults arepreliminary. ReturnsareasatJuly31,2017. SuperRatings rating Platinum are best value for money funds; Gold are good value for money; Silver, reasonable value; Bronze are below average in performance and features; and Blue are bottom of the ladder.

Percentages in brackets indicate proportion of growth assets.

MONEY OCTOBER 2017 87

YOUR GUIDE TO MANAGED FUNDS DATA

DATABANK

he data in these tables provides information on several asset classes – Australian equities, international equities and multisector funds (sometimes called balanced funds). Funds have been ranked by size or performance as listed on the top of each table. The returns published are net (after) the annual management fee but do not take into account any transaction (entry/ exit) fees an investor may have to pay. The returns are before tax.

Morningstar, a leading global provider of investment research, supplies our managed funds data. Funds smaller than $10 million and with a minimum investment of more than $25,000 have been filtered out. Morningstar relies on the fund managers to supply data monthly; if updates have not been provided, a fund may be omitted. Morningstar has developed a star rating system to helps investors identify quality funds. Morningstar calculates and

publishes star ratings for over 7000 funds monthly using the latest fund performance data. Funds less than three years old are not rated. The ratings are not for predicting future performance. Take a look at "What they mean", on page 89 on the right, for an explanation of the star ratings. For more news, research and video content on investing, as well as screening and portfolio management tools on managed funds, ETFs, stocks and credit securities visit morningstar.com.au.

Top 5 retail multisector funds by size Name

APIR Code

ICR %pa

Start Date

Minimum Investment

Size

1-year return

5-year return (%pa)

Star Rating

Advance Balanced Multi-Blend W

ADV0050AU

0.79%

23-Mar-98

$5000

$2519m

7.53%

8.34%

★★★

Advance Growth Multi-Blend W

ADV0085AU

0.94%

18-May-04

$5000

$1807m

8.84%

9.35%

★★

10-May-10

Summit Select Income Generator

IPA0074AU

Nav

Schroder Real Return CPI+5% W

SCH0047AU

0.90%

1-Jul-10

North Select Income Generator

IPA0075AU

0.79%

10-May-10

$1000

$1776m

3.82%

8.05%

★★★

$25,000

$1746m

4.34%

5.89%

★★

$1000

$1738m

3.82%

8.05%

★★★

5-year return (%pa)

Star Rating

Top 5 retail Australian share funds by size Name

APIR Code

ICR %pa

Fidelity Australian Equities

FID0008AU

0.85%

Perpetual Wholesale Industrial

PER0046AU

Nav

Minimum Investment

Size (A$m)

1-year return

30-Jun-03

$25,000

$5435m

4.83%

11.43%

★★★★

24-Dec-96

$25,000

$2111m

5.35%

11.55%

★★★★

Start Date

Schroder WS Australian Equity

SCH0101AU

0.92%

1-Jul-02

$25,000

$1794m

14.84%

9.57%

★★★★

Ausbil Australian Active Equity

AAP0103AU

0.90%

31-Jul-97

$20,000

$1649m

9.16%

11.17%

★★★★

Pengana Australian Equities Class A

PCL0005AU

1.57%

18-Jun-08

$20,000

$1363m

3.06%

11.00%

★★★★

Minimum Investment

Size (A$m)

1-year return

5-year return (%pa)

Star Rating

Top 5 retail international share funds by size Name

APIR Code

ICR %pa

Start Date

Platinum International Fund

PLA0002AU

1.54%

30-Apr-95

$10,000

$10,220m

17.99%

17.79%

★★★★★

Magellan Global

MGE0001AU

1.66%

29-Jun-07

$10,000

$9128m

10.04%

17.48%

★★★★★

Orbis Global Equity Fund Retail Class

ETL0463AU

3.49%

Walter Scott Global Equity

MAQ0410AU

Nav

State Street International Eqs Idx Tr

SST0013AU

0.18%

1-Dec-15

$10,000

$5691m

15.74%

Nav

18-Mar-05

$20,000

$2139m

7.57%

15.56%

NAv ★★★★

1-Jul-97

$25,000

$2053m

10.27%

17.48%

★★★★

Top 5 retail multisector funds by 5-year performance

88 MONEY OCTOBER 2017

Name

APIR Code

ICR %pa

Start Date

Australian Ethical Divers Shrs Whols

AUG0019AU

NAv

Fiducian Ultra Growth

FPS0014AU

NAv

5-year return (%pa)

Size

1-year return

23-Jan-12

$87m

3.36%

14.96%

★★★★★

1-Dec-08

$139m

5.77%

14.80%

★★★★★

Star Rating

BT Class Inv Split Growth

BTA0012AU

NAv

12-Mar-84

$210m

13.21%

14.39%

★★★★★

Perpetual Wholesale Split Growth

PER0066AU

NAv

17-Mar-99

$22m

8.66%

13.81%

★★★★

Australian Ethical Divers Shrs

AUG0004AU

NAv

1-Sep-97

$194m

2.05%

13.47%

★★★★

Top 5 retail Australian share funds by 5-year performance Name

APIR Code

ICR %pa

Start Date

Size

1-year return

5-year return (%pa)

Star Rating

Bennelong Concentrated Australian Eq

BFL0002AU

3.90%

30-Jan-09

$203m

10.08%

19.72%

★★★★★

Macquarie High Conviction

MAQ0443AU

3.20%

29-Nov-05

$307m

15.90%

17.48%

★★★★★

Spheria Opportunities

WHT0025AU

1.50%

22-Jun-10

$19m

11.61%

15.32%

★★★★★

Grant Samuel Tribeca Alpha Plus

ETL0069AU

Nav

18-Sep-06

$118m

4.12%

15.06%

★★★★★

Lazard Select Australian Equity W Cl

LAZ0013AU

1.15%

7-Jun-02

$141m

16.47%

14.88%

★★★★★

Top 5 retail international share funds by 5-year performance Name

APIR Code

ICR %pa

Start Date

Size

1-year return

5-year return (%pa)

Star Rating

CFS FC W Inv-PM Capital W Glb Companies

FSF0798AU

1.21%

24-Feb-06

$15m

20.84%

23.30%

★★★

PM Capital Global Companies

PMC0100AU

3.34%

28-Oct-98

$329m

21.57%

21.49%

★★★

Antipodes Global Fund - Class P

IOF0045AU

1.51%

28-Jun-94

$1995m

13.32%

21.35%

★★★★★

Acadian W Global Eqty Long Short

FSF0788AU

1.27%

20-Jan-06

$25m

12.23%

20.90%

★★★★

Arrowstreet Global Equity

MAQ0464AU

Nav

18-Dec-06

$787m

14.34%

20.10%

★★★★★

Top 5 funds by 1-year performance Name

APIR Code

ICR %pa

Start Date

Size

1-year return

5-year return (%pa)

Star Rating

Folkestone Maxim A-REIT Securities

COL0001AU

NAv

17-Oct-05

$27m

-1.07%

15.27%

★★★★★

APN Property for Income No. 2

APN0004AU

0.97%

20-May-05

$53m

-3.18%

13.61%

★★★★

APN Property for Income

APN0001AU

0.95%

7-Jul-98

$146m

-3.21%

12.62%

★★★★★

Fiducian Property Securities

FPS0007AU

NAv

1-Feb-97

$107m

-4.18%

13.66%

★★★★

Zurich Investments Aus Property Secs

ZUR0064AU

0.81%

28-Feb-00

$122m

-4.80%

14.48%

★★★★

Bottom 5 funds by 1-year performance Name

APIR Code

ICR %pa

Start Date

Size

1-year return

5-year return (%pa)

Star Rating

ANZ Property Securities

ANZ0030AU

2.45%

4-Nov-88

$15m

-8.67%

10.36%

★★

CFS FC Inv-CFS Property Securities

FSF0251AU

1.69%

13-May-02

$13m

-8.17%

11.75%

★★

SG Hiscock Professional Property

CSA0115AU

1.00%

12-Oct-99

$35m

-8.13%

12.60%

★★★

CFS FC Inv-BT Property Investment

FSF0250AU

1.69%

13-May-02

$14m

-8.11%

11.51%

★★★

CFS FC Inv-CFS Index Property Sec

FSF0662AU

1.13%

7-Sep-04

$16m

-8.10%

12.17%

★★★

Value of $10,000 by asset class Growth of $10,000 August 2012 - August 2017 Equities $15,918 Property $17,907 Small Companies $16,782 Multi-sector $14,274 International Equities Cash $11,142 Australian Fixed Interest $11,888 Mortgage $10,935 International Fixed Interest $12,706 $10,000 $14,000 $18,000

$21,180

$22,000

Disclaimer: © Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), a subsidiary of Morningstar, Inc., without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information at www.morningstar. com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. The Morningstar Rating is an assessment of a fund’s past performance – based on both return and risk – which shows how similar investments compare with their competitors. A high rating alone is insufficient basis for an investment decision. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser.

WHAT THEY MEAN APIR is the identification number of the fund. ICR: Investment cost ratio, which includes the annual management fee paid to the fund manager as well as indirect costs such as the performance fee. Returns are as at August 31, 2017. Morningstar Rating ★★★★★ very good performer ★★★★ good performer ★★★ average performer ★★ poor performer ★ very poor performer NAp Not applicable NAv Not available The bar chart shows the five-year growth of $10,000 invested in different asset classes at the end of August 2012 until the end of August 2017.

MONEY OCTOBER 2017 89

THE HOT SEAT

“Buying a cassette tape from my uni bookshop was the best $10 I ever spent” What was your first job?

If you had $10,000 where would you invest it?

I was flipping burgers at Hungry Jack’s, Bull Creek, in Perth when I was 15. I would clock on at 5.30pm every Saturday night and work right through doing the clean-up shift until 2am. It was my first exposure to negotiation as I had to get my parents to agree to let me stay out that late in the first place!

I would invest it into a property in my portfolio that was in need of a kitchen renovation and a fresh coat of paint. Not only would it improve the value of the property but it would improve the yield as well as provide some tax deductions from the depreciation.

What’s the best money advice you’ve ever received?

What would you do if you had only $50 in your bank account?

Apart from investing in property, to park all surplus cash into an offset account. This is a game changer. You effectively earn income at a rate equivalent to your mortgage interest rate (which is better than what the banks are offering for your deposits). Instead of paying tax on the interest income, you’re reducing an expense and therefore not subject to tax. It also allows you to control your cash for whenever you need it rather than going cap in hand to the bank to try and get it back.

I’ve actually been close to this situation before so I’d do what I did then and back myself, roll up my sleeves and get to work! I’d build a community of people to add value to, and serve their requirements and develop solutions to solve their problems. It’s very easy to build and nurture a tribe online with little cash outlay, and I’d be confident to get back on my feet quickly.

What’s the best investment decision you’ve made? Buying a cassette tape from my university bookshop in 1993 called How to be a Winner by Zig Ziglar. I was 18 at the time and at a very impressionable point in my life, and it set me on the path to continued personal development and self-education, which has served me very well with my investing and business life since. Best $10 I’ve ever spent!

What’s the worst? I bought a block of land in Corindi on the NSW north coast, with the intention to build a holiday house on it. That introduced me to emotional investing! It was a poorly considered decision, which I lost money on when I eventually sold it, not to mention the cash drain caused by its lack of income.

Bryce Holdaway Bryce Holdaway is partner of specialist property investment advisory firm Empower Wealth, co-host of The Property Couch podcast, co-author of The Armchair Guide to Property Investing and co-host of Location Location Location Australia, which is on Foxtel’s The Lifestyle Channel. He put together our cover story this month on why negative gearing still works.

Do you intend to leave an inheritance? Absolutely. My goal is $3000 a week passive income from my property portfolio with the debt fully retired. This allows me to enjoy the fruits of my efforts during my lifetime but also be in a position to pass on the portfolio to the boys, Jack and Samuel (now 4 and 6), when we’re gone. Also, instead of giving them pocket money for chores (which they are just expected to do to help out the family), we’ll offer them money for reading books and giving me a summary at the end. This way they can inherit our thirst for learning and self-education.

What more can be done to improve housing affordability? I think high-speed rail to connect lifestyle locations outside the major capital cities is a great solution to ensure those wanting to get on the property ladder can do so but not at the expense of those already on the ladder through reduced prices. If I can have lifestyle on the weekends, with access to a capital city job market in under an hour during the week, then that’s a good result for all.

What is your favourite thing to splurge on?

Finish this sentence: money makes ...

Great food! I’m gluten and dairy intolerant so it’s not that straightforward for me to find commercial options to cater for my food allergies. But I’m more than happy to drive across town or spend extra cash on places that can serve my tastebuds well whilst making sure I don’t pay for it the next day!

... a terrific friend but a terrible enemy. Whilst money isn’t the root of all evil, the “love of” money is! I’ve seen way too many wealthy people who are unhappy and experiencing poor personal relationships and health. Money can make life easier but only if it comes with the wisdom to know that there’s more to life than money alone!

90 MONEY OCTOBER 2017

PRINT & DIGITAL PACKAGE Get 6 print issues + 6 digital issues for ONLY $44.99 SAVING 46% Keep them both or give one to a friend

Or just 11 digital issues FOR ONLY $39.99 - SAVING 39%

Visit magshop.com m.a au/moneydigita al or call 136 116 and qu uote X1702MO OD Terms & Conditions: Savings based on single issue digital edition price of $5.99 and single issue printt edition price of $7.95. Offer available until 31/12/2017. If you do not want your information any organisation not associated with this promotion, please indicate this clearly when you subscribe. For terms and conditions visit magshop.com.au and forr our Privacy Notice visit bauer-media.com.au. Apple, the Apple logo and iPad are trademarks of Apple Inc., registered in th he U.S. and other countries. Subscription automatically renews unless u cancelled.

Combining your super is now just a few clicks away

Visit rest.com.au to get started If you’ve been working for a while, chances are that you have more than one super account. This could mean that you’re paying multiple fees, which over time can add up to thousands of dollars! By combining, you’ll ﬁnd it easier to manage and to grow your super through savings on multiple fees.

Things to think about Speak to a ﬁnancial adviser to check how switching might affect your insurance, beneﬁts and any exit fees in your current fund.

Product issued by REST. Go online for a PDS to consider before deciding. This information is provided by the issuer Retail Employees Superannuation Pty Ltd ABN 39 001 987 739 as trustee of REST (Retail Employees Superannuation Trust ABN 62 653 671 394). Issue date: September 2017