QAV Weekly Update 2023-08-08

 

Cameron  00:09

Wel­come back to QAV, Tony. This is episode 631. We’re record­ing this on the first of August. You’re in the great metrop­o­lis of Wag­ga Wag­ga again this week.

 

Tony  00:23

I am, yes. The great metrop­o­lis. The over­cast, cold metrop­o­lis of Wag­ga Wag­ga. 

 

Cameron  00:23

How’s the Gulf in Wag­ga Wag­ga this week? 

 

Tony  00:31

Don’t know yet. We’re play­ing tomor­row and Thurs­day, I arrived here last night. 

 

Cameron  00:35

All right. Where else? What else is news, TK, before we get into stuff? Any­thing else you want to report?

 

Tony  00:40

In my life or in the stock mar­ket? 

 

Cameron  00:42

Yeah, in your life? What’s going on? 

 

Tony  00:45

I’ll save it for after-hours, but I’ve been down at Cape Schanck. I spent some time with Alex, which was nice. Love­ly. She’s busy paint­ing for her first Afford­able Art Show.

 

Cameron  00:56

Cool.

 

Tony  00:58

Went to the MCG a cou­ple of times to watch foot­ball, which was good fun. Caught up with some friends.

 

Cameron  01:04

Did you get a new Star­link?

 

Tony  01:06

I think it’s been deliv­ered to Syd­ney. I’ll take it down there next time. 

 

Cameron  01:11

I read a report the oth­er day. Did you know that Elon Musk, since 2019, has been send­ing a rock­et into space every week with a dozen or so satel­lites on it. He now has over four-and-a-half-thou­sand satel­lites in space, which is more than 50% of all the satel­lites in space, are now owned by Star­link, Musk, one of his oper­a­tions. His plan in the next few years is to get them up to forty-two-thou­sand satel­lites around the Earth. They said there’re already so many satel­lites now that it’s start­ing to affect astronomers’ abil­i­ty to see the night sky. He’s going to increase that by ten­fold in the next few years, and they’re all going to be flash­ing a big bright X logo to pro­mote… Just think about that. Like, we’ve been putting satel­lites into space since the 50s. He, in four years, has put up the major­i­ty of them, in the last few years. I guess it pays to buy your own rock­et com­pa­ny.

 

Tony  02:12

Yeah. Well, they’re small­er. Aren’t they only shoe­box sized, each satel­lite. Yeah. But yeah, but what, I mean, my issue is that is how reli­able is it all, because my Star­link bust­ed, and I called the guy who installed it after muck­ing around for a while myself and going online and try­ing to get help and things which was hope­less. And he said, “yeah, every­one’s hav­ing trou­bles, mate. Just send them an email and we’ll send you a new one.”

 

Cameron  02:36

Right? 

 

Tony  02:37

Yeah, not very good.

 

Cameron  02:39

That’s good cus­tomer ser­vice, though, if they’re replac­ing it. It’s like Apple cus­tomer ser­vice. You take in your iPhone, “yeah, just have a new one.” 

 

Tony  02:44

No, for sure. It’s good that way, but they can’t be mak­ing much mon­ey if he’s send­ing up all those satel­lites with rock­ets and then basi­cal­ly giv­ing away the equip­ment because it breaks.

 

Cameron  02:55

You have to won­der what he’s going to do when he’s got forty-two thou­sand of them up there, what his plan is, apart from Star­link. 

 

Tony  03:01

Earth­’s going to look like Tran­tor. Isn’t Tran­tor the mid­dle of the Foun­da­tion where it’s been so over devel­oped, it’s got a big iron cir­cle around it?

 

Cameron  03:13

Mm-hmm. Well, maybe, you know, they’ll cap­ture the sun­light beam­ing back down to earth as ener­gy but you have to pay nine­ty-nine bucks a month to get your sun­light. 

 

Tony  03:23

To charge your car. 

 

Cameron  03:24

Any­way, let’s talk about the mar­ket. I did our port­fo­lio analy­sis this morn­ing. We’re still up, you know, two-and-a-half times the index since incep­tion. It’s been sort of a flat week for us. Our port­fo­lio was down 0.41% over the last week, but old mate TRS was the stock of the week. It was up sev­en, which is inter­est­ing. I saw that this morn­ing, I was like, oh, I won­der what that means for where the mar­ket thinks the econ­o­my is going when the Reject Shop is up 7% in a week. But then today, CCP took a 15% hit. They came out with their results, and appar­ent­ly the Aus­tralian econ­o­my is doing much bet­ter than peo­ple thought. Chan­ti­cleer wrote about it in the finan­cial review: “Why this 15% share price plunge is good for the econ­o­my. Investors pun­ished dis­tressed lender Cred­it Corp after it revealed very good news for the rest of us. The num­ber of Aus­tralians who can’t pay their bills is hard­ly the inter­est rate ris­es. The num­ber of Aus­tralians strug­gling to pay their cred­it card bills is small and show­ing few signs of growth despite repeat­ed inter­est rate ris­es, the soar­ing cost of liv­ing, and a soft­en­ing econ­o­my. Cred­it Corp boss Thomas Bere­gi, whose busi­ness buys books of dis­tressed cred­it card and per­son­al loans cus­tomers off the banks, says the Aus­tralian con­sumer is still in real­ly good shape, with few bor­row­ers either in arrears or default.” That come as some­what of a sur­prise to you, Tony?

 

Tony  05:02

What does come as a sur­prise is that Thomas Bere­gi does this every year, if not every half, and then the share price reacts accord­ing­ly. So, he is a clas­sic under-promiser and over-deliv­er. So, you know, the results came out today, and good on Cred­it Corp: they’re always first cab off the rank. So, can’t be too hard to have the results out a month after the shut off of the books. But you know, every­one drags their feet except for Cred­it Corp. Any­way, he’s first out, he always says con­sen­sus fore­cast is too high. “We had a good year, prof­its up 10%. Blah, blah, blah. But gee, next year is look­ing tough.” It’s been like that for at least fif­teen years. He’s been around for a long time, and every half I see him do it. So, I’m quite relaxed about Cred­it Corp and the results. I’ll just watch it rebound, because it tends to do this. This is prob­a­bly an indict­ment of the fund man­agers who fol­low it. Sure­ly, if you’re fol­low­ing this com­pa­ny, you’ve seen Bere­gi and his pat­tern over the years, and you know that he’s going to come out and say, “we’ve had a good year, but the future looks bleak.” And that resets the share price, and then he out­per­forms and the share price booms. That’s been the modus operan­di for a long time. So, yeah, I’m think­ing that it’s a buy­ing oppor­tu­ni­ty when Cred­it Corp drops like this, not a must sell.

 

Cameron  06:33

Some­body asked on the Face­book group if you would rule one it or just hold on, and would you make an excep­tion because of the cir­cum­stances? I replied, “Tony nev­er makes an excep­tion with the rules except for when he does.” 

 

Tony  06:50

Yeah, cor­rect. Well, it’s still above my rule one price. 

 

Cameron  06:53

Yeah, mine too.

 

Tony  06:54

And it’s still above its three-point trend­line, so it’s sell price. If it keeps going down, sure there might be some­thing that the ana­lysts pick up on that I don’t see. But I think it’ll rebound.

 

Cameron  07:04

Yeah, Chan­ti­cleer did­n’t men­tion that he does this all the time, either. You would think that the Finan­cial Review would have some sense of his­to­ry. But you know, no one remem­bers his­to­ry, Tony, it’s one thing that I’ve learnt.

 

Tony  07:15

Yeah, true. But also, too, I mean, I think cred­it Corp is more than just cred­it card bad debts as well. They do util­i­ty com­pa­nies; they now offer loans to peo­ple because they’ve got a great cred­it pro­file for them after work­ing with them to repay bad debts. They’re in the US. So, you know, it’s not just cred­it cards. Because cred­it cards would prob­a­bly be a wor­ry, because I haven’t seen num­bers recent­ly, but I think they’re in decline around the world as things like After­pay have come in and young peo­ple in par­tic­u­lar have worked out that it’s not a great deal to put some­thing on a cred­it card and pay 21% inter­est on it. So, that kind of busi­ness mod­el is still around, but it’s not as strong as it used to be. But Thomas Bere­gi, he’s nev­er called that out as a prob­lem for them. So, I think he’ll be fine.

 

Cameron  08:05

Aren’t Aus­tralian house­hold debt lev­els a record high, and the high­est in the world?

 

Tony  08:11

For mort­gages, yeah, I guess it’s all debt. But a large part of that would be hous­ing mort­gages, I would have thought.

 

Cameron  08:16

Right, and I’m look­ing at an arti­cle here from a few years ago, and it says cred­it card debt only makes up 1.9% of all house­hold debt. 

 

Tony  08:25

Makes sense. Because rough­ly half of the peo­ple who have a cred­it card nev­er pay debt, they’re just what they call revolvers. They pay their bal­ance off every month and col­lect the points, which is pret­ty much what I do. And then you know, redeem. Go and buy some­thing with the points when you’ve got enough. A flight or some­thing. So, yeah, it’s a strange busi­ness mod­el. It’s been suc­cess­ful in the past, prob­a­bly gonna be suc­cess­ful in the future, but it’s prob­a­bly not grow­ing at the rates that it used to grow at. 

 

Cameron  08:52

Right. 

 

Tony  08:53

But any­way, back to your orig­i­nal point. The Reject Shop. I think they just changed their CEOs. Would that be behind their recent share price rise per­haps? But yeah, peo­ple might be expect­ing that they’ll do well, giv­en a reces­sion. Dis­cre­tionary retail has been drop­ping lead­ing up to the report­ing sea­son. I expect to see a rebound because, you know, sur­prise, sur­prise, the econ­o­mist who can pre­dict the future say we may not go into a reces­sion now. So, the dis­cre­tionary retail­ers that have been hard hit might actu­al­ly start to bounce back from their share price lows, and The Reject Shop might be caught up in that. But yeah, I take your point, the econ­o­my’s look­ing bad, so the Reject Shop will do well. But then Cred­it Corp should do well, and it’s not. It’s strange, and it’s prob­a­bly just indica­tive of the mar­ket. No one can real­ly pre­dict what’s going on. I read anoth­er arti­cle in today’s Fin Review where I think it was now the major­i­ty of the econ­o­mists in the US have changed their tune. It’s not going to be a “dif­fi­cult land­ing” or a reces­sion over there. It’s going to be okay. And they’re all say­ing, “oh, we should have been in stocks this year.” You know, don’t trust crys­tal ball gaz­ers, I guess, is the learn­ing out of all this.

 

Cameron  10:04

Well, there was an arti­cle on July 17 in the Finan­cial Review. It says, “dis­count giant Dol­lara­ma seeks bar­gain at The Reject Shop. Despite eco­nom­ic head­winds, there’s been no lack of activ­i­ty in the local retail sec­tor, and prof­it warn­ings from some of the coun­try’s high­est pro­file brands, from Har­vey Nor­man to Best and Less and Adairs, have not dulled inter­est in Aus­tralia from one major over­seas retail­er, Canada’s Dol­lara­ma, the Mon­tre­al head­quar­tered dis­count chain. Sources told Street Talk that Dol­lara­ma had approached The Reject Shop, the ASX list­ed dis­count retail­er whose largest share­hold­er is bil­lion­aire busi­ness­man, Raphael Geminder’s Kin Group. Assist­ing the Reject Shop with those dis­cus­sions was UBS,” they added. So, maybe they’re in the mid­dle of an acqui­si­tion play. 

 

Tony  10:52

Yeah, that’s pos­si­ble. Could be a takeover play as well. Yeah. My sense is it’s going to be some­thing like that, rather than peo­ple fore­cast­ing what’s going to hap­pen to the econ­o­my.

 

Cameron  11:01

Right? Yeah, well, their share price has jumped since that arti­cle came out on July 7, coin­ci­den­tal­ly. They were trad­ing at $4.50 on July 17, they’re now trad­ing at $5.30. So, you know, it’s been a cork­er cou­ple of weeks. So, thank you, Dol­lara­ma for that lit­tle boost to our port­fo­lio. 

 

Tony  11:22

If it’s even true.

 

Cameron  11:23

I’m sure it has noth­ing to do with get­ting the sto­ry out there. Hey, speak­ing of things that are true. A cou­ple of weeks ago on the show, some­body asked the ques­tion about dif­fer­ing wheat prices. We had the wheat price on Stock Doc­tor, we had a wheat price on trad­ing eco­nom­ics. Can’t remem­ber who asked it, might have been me, might have been some­body else, might have been Alex, I don’t know. I went back to Stock Doc­tor and asked them about it, and they came back to me a cou­ple of days ago say­ing, “our devel­op­ment team have found an error in our data. There was a drop in the val­ue of our feed from 636 to 162 on the 29th of March ’21. Sev­er­al oth­er com­mod­i­ty prices are affect­ed, such as cop­per and heat­ing oil.” ’21. 

 

Tony  12:09

Cop­per, real­ly? 

 

Cameron  12:10

That’s two and a half years ago, the val­ue of their com­mod­i­ty prices took a hit, and we land­ed on to it a cou­ple of weeks ago. So, well, two points there. Num­ber one don’t rely on Stock Doc­tor’s com­mod­i­ty prices for wheat, cop­per or heat­ing oil. Sec­ond­ly, if we do ever spot dis­crep­an­cies-because remem­ber, we were on the show going, “what’s going on here,” and you’re like, “yeah, I can’t make sense of it.” Well, we should trust our gut and always go back to Stock Doc­tor and say, “hey, what’s going on here?” Because it just might be that their data is funky, as it was in this case.

 

Tony  12:48

While I think of it too, and we’re talk­ing about data. A cou­ple of years ago, I had to dive into Cred­it Cor­p’s data because the oper­at­ing cash flow on Stock Doc­tor dif­fered from the oper­at­ing cash flow in their annu­al report, which I think one of our lis­ten­ers may have point­ed out, actu­al­ly. Stock Doc­tor came back and said, yeah, this is one of the few stocks they actu­al­ly manip­u­late the data for before they release it. I for­get now what the actu­al detail was. They took a view that some­thing was not being report­ed as oper­at­ing cash flow and it should’ve been. It was being report­ed some oth­er way. 

 

Cameron  13:21

Right? 

 

Tony  13:23

I for­get now. And they thought that it was account­ing stan­dards that did­n’t real­ly apply or should­n’t apply, or did­n’t reflect what Cred­it Corp was doing, so they manip­u­late the data. You just remind­ed me of that, and before any­one rais­es the ques­tion and says, “hey, I’m using Stock Doc­tor and Cred­it Corp does­n’t appear on my buy list,” that’ll be the rea­son why.

 

Cameron  13:43

Well, it was Sam, actu­al­ly, that high­light­ed the wheat price dif­fer­en­tial to us. I just looked it up. So, thank you, Sam, for that. And yeah, a cou­ple of good exam­ples there where if we spot an error… This is why we always DYOR. What do they say? If you see some­thing, say some­thing, they used to say for pae­dophiles. I dun­no. 

 

Tony  14:05

Was­n’t it aban­doned lug­gage at air­ports or some­thing?

 

Cameron  14:07

It could have been. Maybe aban­doned by pae­dophiles. Speak­ing of which, RIP Pee­wee Her­man today.

 

Tony  14:14

Oh, real­ly? Oh no. I thought you were gonna say Sinead O’Con­nor. 

 

Cameron  14:18

RIP Sinead O’Con­nor. And more pow­er to her for tak­ing the heat that she took in 1992. I don’t think Pee­wee Her­man was a pae­dophile just to be clear, but he did get bust­ed with some child pornog­ra­phy on his com­put­er twen­ty years ago, one of the two scan­dals that he had to face down. But much beloved by Amer­i­cans of my wife’s gen­er­a­tion. She absolute­ly adores Pee­wee Her­man, and so does Fox. Fox has watched all of his shows and his movies. We were just watch­ing one of his movies about a week ago. He appeals to cer­tain kinds of crazy kid like Chris­sy was in the 80s and Fox is now. Cer­tain­ly, a unique char­ac­ter, he was. Does­n’t mean much to Aus­tralian audi­ences, I think, because we did­n’t get him or Mr Rogers, all those things. But for Chris­sy, yeah, very, very deep feel­ings for Pee­wee Her­man. Well, my only oth­er news sto­ry for today, Tony, from the Finan­cial Review again: “Shares crush year of the bond and biggest sen­ti­ment shift since 1999.” And this is a sto­ry out of Lon­don, July 30. “All the chat­ter back in Decem­ber was that 2023 was to be the year of the bond, and for a brief moment or two in the first quar­ter that call in the eco­nom­ic doom and gloom that under­pinned it look right. It is now being over­run, though, by an avalanche of demand for shares that has unleashed a furi­ous ral­ly across the globe. In a sign the gains are prob­a­bly far from over, it has also made investors more hope­ful about stocks rel­a­tive to bonds, that at any point since sen­ti­ment trad­er mod­els began com­par­ing them twen­ty-four years ago. ‘As sen­ti­ment, tech­ni­cals, and risk of the reces­sion got pushed fur­ther out, we moved from being under­weight stocks to over­weight,’ said Nathan Thooft, Glob­al Head of asset allo­ca­tion at Man­ulife Asset Man­age­ment in Boston.” And the man vot­ed to have the best sur­name. “He has reduced his cred­it expo­sure in favour of an equi­ty over­weight.” So, weren’t we just talk­ing like last week about investors pulling their mon­ey out of the share mar­ket and putting it in bonds.

 

Tony  16:29

Yeah, that’s right. And even the week before, I think, you had an arti­cle say­ing that some­one thought the share mar­ket was­n’t pay­ing enough as div­i­dends now or as a return now, because you can get risk free 4% or 5% in the bond mar­ket, and there­fore why take the risk of get­ting 9 or 10% cap­i­tal appre­ci­a­tion in the share mar­ket. And then they’ve all come scur­ry­ing back to the share mar­ket. So, hon­est­ly, I have often thought the most — what can I say? It’s appen­dix of the share mar­ket, is the asset allo­ca­tor. Seri­ous­ly. They get paid a squil­lion dol­lars to sit there and go, “get bonds this year and 51% shares. No, no, no, no, no, no, no, no. 48% bonds and 52.” But it’s sil­ly. Work out what’s going to be the best asset class long term, put all your assets there. But these guys get paid to try and read a crys­tal ball about whether they should be in bonds or shares or some oth­er assets. And no one ever goes back and says, “how did you go?” They nev­er got held to account. The fund gets held to account if it does­n’t per­form. But these asset allo­ca­tors, I mean fair dinkum, they may as well work for the RBA. That’s a kind of hocus pocus detailed report. Just ignore it. Just stay, as we’ve said, as I’ve said many, many, many times, just stay ful­ly invest­ed. Don’t wor­ry about try­ing to pre­dict the future. You might suf­fer some set­backs for a while, but, you know, over time the esca­la­tor goes up in the share mar­ket. So, there’s no point try­ing to time it. 

 

Cameron  18:04

You know, I often think I’m so grate­ful that I have QAV to edu­cate me about this stuff. Because if I was going by arti­cles I read in the Finan­cial Review… Like, one week its shares are butt, buy bonds. The fol­low­ing week it’s don’t wor­ry about bonds, invest in shares. Come one. What am I sup­posed to, peo­ple? 

 

Tony  18:25

Yeah, and it is dri­ven by news events. I don’t know how many fund man­agers there are around the world, but they all put out a press release talk­ing about the minute allo­ca­tion changes to their port­fo­lios. It keeps the Fin Review in print, in newsprint, but it’s com­plete­ly use­less infor­ma­tion.

 

Cameron  18:41

And if you look at the Aus­tralian share mar­ket, look at the All Ordi­nar­ies, I mean, it’s had a pret­ty good cou­ple of months. I mean, three months, real­ly. I mean, we’re above where we were back at the begin­ning of May. It dropped over the course of May, though, since the begin­ning of June its way up. Dropped again at the begin­ning of July but has been up con­sis­tent­ly since then. But it’s been pos­i­tive over the last three months. It almost feels like we’ve turned a cor­ner in over­all sen­ti­ment of the share mar­ket. But again, who knows. But it just goes to what you always say: stay invest­ed. You nev­er know when the mar­ket turns around until you can look back at it with some, you know, ret­ro­spec­tive glass­es. 

 

Tony  19:24

Cor­rect. And, you know, I won­der how much of these changes to asset allo­ca­tions have peo­ple going, “shit. We’ve missed the turn­ing point in the mar­ket. Quick, jump in because it’s up 10%.” Which is just, you know, a clas­sic late to the par­ty sort of invest­ing style. It’s a strange way to do it.

 

Cameron  19:41

The All Ords is almost back to where it was six months ago. Start­ed Feb­ru­ary at 7709, it’s cur­rent­ly 7654. It’s been a chop­py ride, but, you know, with the bot­tom of the mar­ket in the last six months in March at 7085, it’s, you know, way up since then. So, you know, all the peo­ple that capit­u­lat­ed in March, April, May, June, have missed out at this stage on a very nice run. Any­way.

 

Tony  20:13

Yeah, and they’ll be back. Run anoth­er 10–20%, they’ll come back.

 

Cameron  20:17

Yeah. Hel­lo, Alex. What do you have for us today as our offi­cial read­er of ques­tions?

 

Alex Kynas­ton  20:25

Yes. Thank you. I have a ques­tion from Jeff. So, he says, “Good morn­ing, kung fu mas­ter Cam. I hope you and your fam­i­ly are doing well. A pod­cast ques­tion. From a begin­ner or alter­na­tive­ly hands off invest­ment per­spec­tive, there is often talk in invest­ment cir­cles about the val­ue of ETFs. A great place to start or alter­na­tive­ly for set and for­get invest­ing. Why does there seem to be no dis­cus­sion about LICs or maybe LITs? I lis­tened to Mar­cus Padley and also equi­ty mates finance pod­casts. While these pod­casts are very high lev­el (no sys­tem) they will often talk about the val­ue of ETFs. Same with Mar­ket Index and Nab­trade newslet­ters. LICs and LITs def­i­nite­ly secret squir­rel stuff. I remem­ber TK talk­ing about includ­ing LICs in his will. Lin­da and I did sim­i­lar when we redid our will. Is it because of per­for­mance, fees, unfranked div­i­dends, some­thing else, all of the above? Just check­ing and always learn­ing more. QAV is def­i­nite­ly the right place for that. Thanks again to you and TK for all your great work. I add my QAV sub­scrip­tion to my port­fo­lio of sol­id invest­ments. Jeff.” 

 

Cameron  21:31

Oh, that’s nice, Jeff. 

 

Tony  21:32

Yeah. Thanks, Jeff. Yeah, I mean, we’ve spo­ken about this before over the years, but it’s worth revis­it­ing, I think. So, the cou­ple of ques­tions in there. Why do peo­ple kind of focus on ETFs rather than LICs, or some­times LITs? Until I talk about the dif­fer­ence between LICs and LITs, I’ll just refer to them as LICs. That’s kind of a gen­er­al name for them. ETFs suit index style invest­ing, because their fees are very, very low. There’s enough expe­ri­ence in run­ning them now that they can make an index and they run quite cheap­ly. So, that’s real­ly what they good for. Where­as an LIC tends to be for an active man­ag­er, so that they can raise some mon­ey and then invest it. They’ll charge high­er fees because they’re doing more work, both them­selves and in terms of vis­it­ing com­pa­nies and analysing reports and data and then buy­ing and sell­ing shares. So, their fees are always high­er. And gen­er­al­ly, they charge per­for­mance fees as well, which ETFs don’t. So, often­times, it’s the old 2 and 20 mod­el, though, no one charges 20% these days that I know of. It’s usu­al­ly around 1–2% for man­age­ment fees, and then usu­al­ly about 10%, some­times a bit more, about per­for­mance of the LIC. Why are those two struc­tures that way? Why are they evolved that way? Well, the big dif­fer­ence between ETFs and LICs is that LIC is what’s called a closed end fund. So, in oth­er words, if you’re rais­ing mon­ey, if you’re start­ing an LIC, you raise all the mon­ey, you put it into a fund, and then you issue shares to peo­ple. And if they want to sell their shares, they find some­one else to buy them, which is what the stock mar­ket does for them. An ETF, which is an open-end­ed fund works dif­fer­ent­ly. So, if you buy shares in an ETF, they’ll go out and take your mon­ey and buy more shares for the index fund that they’re run­ning. And if you sell shares in an ETF, they’ll have to sell under­ly­ing shares to pay you out. So, the rea­son why LICs tend to attract active fund man­agers is because when the mar­ket turns down, even though the share price for the LIC might drop as peo­ple sell shares, the under­ly­ing funds aren’t changed. They can just sim­ply sit there and ride it out and then start to rein­vest when the mar­ket looks like it’s turn­ing up again, where­as an ETF will get small­er and small­er and small­er as the mar­ket drops and peo­ple get scared, and they sell the stakes in the ETF. So, that’s prob­a­bly the main rea­son why LICs and ETFs have evolved for one to be pas­sive and the oth­er be active. That closed end­ed fund thing is a big deal, and that’s why I pre­fer LICs, because I’d rather see the funds stay intact when the mar­ket’s turn­ing down. Again, the same dis­cus­sion we had before about always being invest­ed, because if you’re an ETF and you’re sell­ing as the mar­ket drops because peo­ple are redeem­ing, it’s the worst time to sell. You don’t want to sell when the mar­kets drop­ping, you want to sell at the top if you can, but you cer­tain­ly don’t want to sell at the bot­tom. So, that’s a prob­lem I think with ETFs. But hav­ing said all that, if all you want to do is invest in an index fund then an ETF is the way to go, because they gen­er­al­ly charge about a quar­ter of 1% as a man­age­ment fee, so there’s not too much fric­tion on the index like returns. And the ETF mar­ket now is so large. It’s large­ly dri­ven, pio­neered by the US, but now in Aus­tralia as well. You can pret­ty much buy an ETF for almost any sort of index you want to, like a tech index or the Aus­tralian index, or the NASDAQ or com­mod­i­ty index, like gold, or what­ev­er, and it won’t cost you very much to invest in those things. So, that’s attrac­tive to some peo­ple as well, who might decide that they want to invest in tech stocks, but don’t want to do the work to work out which ones to buy. They just by them all and pay a low fee to do it. So, both ETFs and LICs have ben­e­fits. The oth­er thing to say then, is the dif­fer­ence between LIC’s and LITs. So, List­ed Invest­ment Com­pa­nies ver­sus List­ed Invest­ment Trusts. The com­pa­nies are com­pa­nies, and when they have a tax event — so they’ve earned income, either through div­i­dends or sell­ing shares — they pay com­pa­ny tax at the com­pa­ny tax rate of 30%. And being a com­pa­ny, it’s up to the direc­tors as to when and how much they pay out in prof­its, or pay out in div­i­dends, of their prof­its. Where­as a List­ed Invest­ment Trust being a trust means that you don’t own shares in a com­pa­ny, you own units in a trust. And just like a fam­i­ly trust, if any­one out there has one, they will know that every year all of the income is dis­trib­uted in a trust struc­ture. And so, there’s no abil­i­ty to con­trol the flow of the prof­it out of the trust. It just has to all go. And then once you receive it, and if they’ve earned frank­ing cred­its, they also get dis­trib­uted to the unit trust hold­ers. And then it’s up to them as to what their tax rate is, depend­ing on whether it’s a per­son­al tax rate, which could be high­er, could be low­er, or whether the super­an­nu­a­tion fund or some­thing else has bought the units in the Trust for them. So, again, there’s swings and round­abouts with both of those. I tend to favour, again, List­ed Invest­ment Com­pa­nies, because hav­ing that dis­cre­tion to con­tin­ue to pay div­i­dends, even if they don’t have the prof­its to sup­port them — like they can dip into reserves and retain prof­its if they want to, if direc­tors feel that it’s a bit of a one-off bad year this year and they’re going to still pay a div­i­dend, they can do that. Where­as, a List­ed Invest­ment Trust, if it earnt no mon­ey that year, you don’t get the income from it. So, it’s more volatile from that respect. And you might get a lot of income one year which you did­n’t plan on, and that could push you into a high­er tax rate as well. So, there are impli­ca­tions for that kind of dif­fer­ence in the struc­ture. So, I pre­fer LICs because they’re closed end­ed and they don’t have to sell in a down­turn, and because the direc­tors can decide when and how much to pay div­i­dends, regard­less of how much mon­ey they made that year. They obvi­ous­ly can’t pay div­i­dends if they’ve got no retained prof­its and they made no mon­ey that year. But gen­er­al­ly, a well-man­aged List­ed Invest­ment Com­pa­ny will keep retained prof­its to get it through the duller years so they can still keep pay­ing div­i­dends, much the same as any sort of list­ed com­pa­ny that’s well man­aged will do as well. So, that’s the dif­fer­ence. ETFs are the flavour of the month, and you know, if we think about the invest­ment lad­der, buy­ing an index fund is often­times peo­ple’s first step into the share mar­ket, and they may go no fur­ther because it’s a great way to invest for the long term. If you’re like Alex’s age, you can buy an index fund and hold it for the rest of your life, and you’ll get at least the mar­ket return. Or if you’re putting it into your Will, if you have kids who may not under­stand invest­ing, it’s not a bad thing to do as well. That’s what War­ren Buf­fett is doing, although I don’t think he calls it an ETF, he calls it an index fund, which they do in the States. So, yeah, ben­e­fits for both. I’m attract­ed to the closed end struc­ture of an LIC, and also, too, because they’re man­aged by active man­agers the good ones do out­per­form the mar­ket, and we’ve had Wash­ing­ton Soul Pat­tin­son’s on before. I’ve spo­ken about Wil­son Asset Man­age­ment and their sta­ble of LICs. Of recent times, even though they claim a good long-term per­for­mance, of recent times they’re more focused on pay­ing out a high div­i­dend ratio, which will suit retirees for exam­ple. I think last time I had a look it was about 7% plus frank­ing cred­its, so their cap­i­tal appre­ci­a­tion has­n’t been that great. But they cer­tain­ly do a good job of giv­ing retirees a real­ly good, franked div­i­dend to live off.

 

Tony  21:40

Would Berk­shire be an LIC, an exam­ple of an LIC?

 

Tony  26:22

No. Good ques­tion, actu­al­ly. It’s gen­er­al­ly seen as a con­glom­er­ate because it actu­al­ly owns oper­at­ing com­pa­nies as well. So, the sec­tion of Berk­shire Hath­away which just buys shares on the US stock exchange, which is only I think about a quar­ter of their busi­ness, yeah, you could spin it off as an LIC. That’s the same sort of thing. But they do own the rail­roads and insur­ance busi­ness­es, etc., so it’s more like a Wes­farm­ers. They’re a con­glom­er­ate. 

 

Cameron  30:03

Yeah. Okay. Fair point. All right, Alex, it’s time for you to take a test now. Are you ready? 

 

Alex Kynas­ton  30:10

Yep, I’m ready. I have a ques­tion.

Cameron  1:41:15

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