Ask Alan: 1 August 2019

Welcome. Thanks for joining me, I’m glad to see you with Ask Alan this week, it’s great to see you and I’ve just been looking at the questions – tons of questions this week, so we better get stuck straight into it. Don’t forget, the advice here is general only in nature and may not be appropriate for you, so please bear that in mind. If you’ve got any questions as we’re going along, I’ll get to them, that’s for sure. There’s so much going on at the moment, you might have seen last night the Fed cut interest rates but managed to piss everyone off at the same time. I don’t know how they managed that.

I mean, they basically did what the market was expecting but appear to have done it grumpily or at least reluctantly and persuaded everyone that that’s the only rate cut they’re going to do, so as a result the markets all fell. The US market fell by more than 1%. The US Dollar jumped up. The Australian Dollar fell. And so everyone’s now in a bit of disarray, wondering what the hell is going to happen now. I’ll deal with that in some detail as you’d expect in my weekend briefing on Saturday, so please keep an eye out for that. Anyway, let’s get into the questions.

John says, if you were given $10,000 dollars, how would you invest in ASX?

I presume you don’t mean ASX, the listed company, ASX, but the stock exchange. Really, it depends on what you want to do, John. If you just wanted to have a set and forget plan, to invest $10,000 dollars and forget about it for 10 or 20 years, then the thing to do would be to put it into an ETF, an exchange traded fund, because of the low fees, and then you won’t have to worry about it, you get the market return. But if you were interested in actually having some fun or to invest in companies that you wanted to follow and obviously you take more risk that way but at least you make decisions about it and can invest in companies that you’re interested in. The thing to do would be to look around, think about companies that you perhaps know, perhaps companies you work for or use.

Perhaps you go to JB Hi-Fi, you might like that company. I think it’s kind of always a good idea if you’re starting out to invest in companies that you might know something about, either because you work there or have worked there or because you use them in some way, I do think that’s a good idea. Alternatively, if none of those companies appeal to you, you could have a look at the companies that I interview in Eureka Report. There’s about three or so interviews per week of CEOs and they’re always quite interesting and maybe some of those companies kind of appeal to you. You wouldn’t want to put the whole $10,000 into one company on the grounds that you shouldn’t always put all your eggs into one basket. You might want to put $2-3,000 into a few companies and see how they go. That’s what I would probably do.

Bruce says, a discussion suggestion – there’s a lot of talk about inflation or the lack thereof, how desirable inflation is. Personally, I don’t get it – Me neither, Bruce. It used to be a bogey here, why do we want our currency to devalue, international reasons? Wages? Wage rises? Prices rising commensurately or money circulates but little if anything is gained in real terms. Is it a pseudo form of economic growth to satisfy the proponents of infinity growth, like claiming growth when there is just an increased population. Yet, I hear predictions that if Australia abandons increasing inflation, the AUD, will head skywards faster than a North Korean rocket. Probably all a misunderstanding on my part, but it sure invites discussion.

It certainly does, Bruce. Countries, including Australia, generally want their currency to go down because that helps exporters and it leads to jobs. Obviously it doesn’t help travellers. There’s currency movements cut both ways. If a currency goes up it makes the population a bit more wealthy, they can get to spend more money overseas. Get to buy imports better, import prices come down. If the dollar goes down it makes everyone a bit poorer and it makes imports go up in price, increases inflation, but it helps exporters and they kind of tend to employ more people. A central bank that’s trying to improve an economy always tries to get currencies down and that’s what a lot of countries are doing at the moment, actually.

I agree with you that getting inflation up is not much of an idea. I mean, particularly, what’s the point of 2% or 2.5%? It doesn’t really make sense to me. I had a couple of graphs on the news last night, one of rent which is growing at the slowest pace for 46 years, and also – what was the other thing – other prices are going down. What the reserve bank wants is for us to go up some more. I don’t think that’s a great idea. I don’t think it’s pseudo growth. If the currency comes down it actually does encourage exports and it does lead to greater economic growth, so it’s not quite the same as increased population which is pseudo growth in my opinion. But, I don’t know whether that answers your question, Bruce, but you’re right, it’s a discussion point and thanks for that.

John says, Hi Alan, what do you feel is the best way to invest in Australian small-caps? Some say via a low cost ETF, others say via an active manager, e.g. Smallco, Fidelity, Colonial First State, etcetera… And others say via a small-cap LIC. Should you do all three?

I don’t think you should do all three. There are some small-cap ETFs, they’ve got lower costs, they’re worth investigating. Obviously, what’s happening there is you just get the index. In general, you probably get the small ordinaries index and it’s worth understanding what that actually is. The small ordinaries index refers to companies that are in the ASX 300 that are not in the ASX 200. I think the largest in the small ordinaries index is about $9b worth of market cap, so not very small. You’re only getting the smallest 100 companies in the ASX 300. There’s more than 2,000 companies listed on the ASX – about half of those, possibly a third of those, are un-investible. But there’s probably 1,000 small-caps that you’re missing out on if you only invest in the ASX 300 or ASX small companies ETF.

I don’t think there are any ETFs that invest in the number 300 through to number 1,500, which I would call truly small caps. So, in order to get access to them, you do have to invest in an active manager. The two ways to do that, as you point out, is to invest in an unlisted active manager and you listed a few there, there are obviously many more. There’s a business called Microequities which is run by Carlos Gil. Not this year, but the recent best performing small-cap manager was Bennelong Concentrated Equities Fund and that’s done quite well. InvestSMART has a small-cap small companies fund which is run by Alex Hughes here, he’s a terrific young investment manager and the InvestSMART fund has underperformed in recent times but there was an investment committee meeting yesterday which I attended and Alex presented to that and I think his portfolio looks pretty good now, so I think it’s worth having a look at the InvestSMART small companies fund. It isn’t listed but there is an intention to list it – it needs to be a certain size. I can’t remember the size but it needs to be a certain size before they can list it, so there’s that.

But there are other small-cap LICs (listed investment company) around. One that I’m invested in is Thorney Opportunities Fund, run by Alex Waislitz. And there’s another one that I’ve invested in called Bailador Technology Investments, and they invest in second stage start-up businesses and they’ve been doing okay. So, as you say, you can find the listed ETFs on the ASX website, just kind of google ASX ETFs and you’ll find the list there. You can go through there and have a look at the LICs and the ETFs. There’s a whole list of LICs and they should identify themselves as small-cap. Depending on how much you’ve got, you could put some of your money into an ETF to give you a kind of solid base, and then perhaps put some money into some active managers as to whether you go for unlisted or listed, depends a bit on the performance and the fees. I think the best thing to do is just look at their performance, it’s usually on their website, look at their performance and pick the best performing.

Col says, Alan, Evan Lucas described current monetary policy as a put play. It sounds like the RBA is just hoping for good times but hedging their bets, can you explain further?

I should have asked Evan about this, but I think what he means by put play is that the central banks, not just the RBA but central banks in general, are in a sense providing a put option for investors in the market because they are supporting the price, they’re cutting interest rates in order to ensure that prices either don’t go down or go up and that’s in a sense, providing everybody with a put. It was called the ‘Greenspan put’ in the old days, which is to say that he would rescue long investors, getting them out, having a put option to sell their shares at some point when they cut the interest rates to get the prices up. Unfortunately it kind of hasn’t worked today because the Powell put has broken down. The Federal Reserve Chairman, Jerome Powell, has cut interest rates but he’s done it in such a way that the markets have gone down. I wonder whether the put play is breaking down a bit. We’ll have to see how it goes.

Is the RBA just hoping for good times but just hedging their bets? Well, of course the RBA’s hoping for good times, they’re hoping to engineer it with very low interest rates. I don’t think it’s going to work, however, I think we’re in the business now of diminishing returns.

Steve says, G’day Alan, I do a lot of technical analysis on the ASX and recently have become interested in the daily advanced decline ratio. However, I have googled extensively and have been unable to find any results, do you know how to access them?

I don’t, I’m afraid. You might need to buy access to a service like Iress or something, they’re quite expensive though. Can I suggest that some of the best data on the stock exchange comes from Morningstar, which you might find somewhere on Morningstar, advanced decline ratios. But apart from that, you’d need to get Bloomberg, which is a couple of thousand dollars a month. Iress, which is $700-800 a month, or Thomson-Reuters which is over $1,000 a month. These are all quite expensive services. Apart from that, I’m sorry, I don’t know, Steve.

Sue says, Dear Alan – I won’t read all of the question because it’s a long question about STW, which failed to pass on imputation credits in the final quarter. This is the State Street ASX 200 ETF, code STW.

This has come up before, Sue’s asked the question, we’ve done a bit on it. It is an amazing thing that this ASX 200 ETF did not pay dividend franking, did not frank its distribution in the June quarter. It was zero per cent franked, which is amazing. We asked them questions and they’ve subsequently said, ‘We’re very sorry, it’ll never happen again.’ Sue’s asked a series of questions which are good questions and they kind of boil down to, what’s happened to the franking? Are they just going to sit on it, what are they going to do? Are they going to compensate investors or what? I think these are good questions, so we’ll put it to them. I must say, Sue, we had trouble tracking them down. I mean, we had to end up talking to someone in Hong Kong and they were either out in the street protesting or having their windows broken. I don’t know. They were just hard to get hold of. It was a nightmare trying to get them to talk.

Peter says, Hi Alan, in addition to subscribing to Eureka Report, I’ve been a subscriber to the stock valuation tool, Skaffold, more recently known as shareanalysis.com. Skaffold was originally setup by Roger Montgomery but I understand there has been a change of ownership. For the last two months at least, shareanalysis.com has been offline while the system is supposedly being upgraded. I’m not happy about this lengthy downtime and doubting the value of my forward paid subscription. Do you have any knowledge about the state of play with this tool, who the current owners are and any recourse available for unhappy customers?

Yes, there have been two changes of ownership, in fact. Roger sold it to a bloke named Peter Leodaritsis and he has since sold it – I think he changed the name to shareanalysis.com – and then he sold it to another company called Spitfire, which is a Sydney based fintech start-up that also owns a business called Wealthtrac, and I rang them up thanks to your question to see what’s going on. They said, the reason it’s offline is because they’re changing their data feed from fact set to S&P QI.  Anyway, they’re switching data feeds and it’s taken them two or three months to do it and it’s offline. They expect it to come back online today, in fact. Let me have a look – shareanalysis.com – nope, still offline. So, not online yet, Peter. He said, if not today, then tomorrow. We’ll see.

They’re going to reprice it too. It used to be $880 a year under Peter Leodaritsis’ ownership and this guy I spoke to whose name was Cameron, said they’re going to rethink the pricing and nobody will miss out. He said that people would have their subscription term extended, so there you are. But if you’re unhappy, Peter, can I suggest you just subscribe to Intelligent Investor. It’s not the same product, obviously. Skaffold, and now, shareanalysis.com, is a database of information about ASX listed companies, including ratios and so on. There’s a few of those services about, there’s Climb’s one and there’s Lincoln Stock Doctor, started by Merv Lincoln and now owned by his son, Tim.

They’re the ones I know. Skaffold was the other one which Roger started, and they’re all pretty good. The thing is, what they don’t do is tell you what to buy, and that’s what Intelligent Investor does, it gives you recommendations and detailed analysis by human beings. It isn’t just a data feed. There’s eight human beings analysing companies and giving recommendations. There’s also a whole lot of data as well. I mean, it’s not the same data, it’s not quite as deep and all that stuff, but if you look on the Intelligent Investor website and InvestSMART, there’s tons of data and there’s recommendations. That’s something you should perhaps think about is all I’m saying. I’ve told you what I know about shareanalysis.com and it should be online soon and they’re terribly sorry, but there it is.

Juliette says, Hi Alan, I’m interested in your opinion on shares in Marijuana producing companies in Australia?

Well, Juliette, I do think that medicinal marijuana and CBDs is going to be a business, it is going to be an industry. It’s relatively early but this stuff, the cannabiniols in hemp, the ones that don’t make you high, are efficacious. They do help stuff, they do help things and they do turn into medicines. There is going to be an industry in it. There’s also an industry separately in a lot of American states and in Canada for marijuana that people smoke to get high, so it is being legalised gradually everywhere as a drug to take like alcohol, and so that’s a business as well in addition to medicinal cannabis. But like a lot of early industries, there’s a lot of crooks and shonks involved and it’s a bit hard to tell which is which.

I’ve interviewed a few of them. Interviewing someone over the phone for 20 minutes, it’s very difficult to tell whether they’re a crook. Most of the time they don’t sound like it, it’s fine. It’s just one of those – it’s a bit of a wild west industry at the moment, it’s also very volatile. However, it is going to turn into an industry. I do think money’s going to be made here, some people are going to make some money and companies are going to do well. There’s one that put out an announcement today I saw called Botanix. I have interviewed them in the past, if you search the website you’ll be able to see the interview. I did think that they were pretty straightforward. It’s possible that most of them are not crooks, they’re just trying to get somewhere and trying to do their thing, and not all of them will make it. That’s the thing, even honest people go broke, of course. It’s one of those situations where it’s going to be difficult for a little while to figure out who’s who in the zoo and who’s going to make money and who’s not. If you’re going to invest in it, it would require a fair bit of research to be careful, to be sure.

Peter says, Hi Alan, I’m holding shares in the IVF company, Virtus Health (VRT) and Po Valley Energy Group (PVE). They’ve had a bit of a run recently, are you able to comment on that and them?

Probably best if I do an interview with them. I note that Po Valley Energy has had a bit of a run, it’s gone from 3.5 to 6 cents. It’s still a small company. They put out a presentation which looks pretty good. They’ve got a fair bit of gas. They’re an Italian gas business, they’ve got gas onshore and offshore. There’s advantages to being in Italy because you’re close to the markets, there’s no real sovereign risk issues, and they’ve raised a bit of cash, as to whether it will get them producing gas fields, I’m not sure. The best thing would be if I could do an interview with them, so they’re on the list. Kiera, put them on the list!

Gerard says, I have a fair bit of my super just sitting in cash at present. My financial advisor has advised I put a sizeable chunk, 6% of total super, into a global government bond fund. Is now the right time to be doing this if you think the bond market is a bubble?

Well, Gerard, I don’t know your circumstances, I can’t give personal advice, general advice only. But if my financial adviser advised me to put money into a government bond fund at the moment I’d probably sack them and find someone who’s not an idiot, because I do think the bond market is a bubble. I think that this is not the time to be investing in government bonds. That’s what I reckon. But I mean 6% is not a big allocation. He’s not telling you to put 20-30% of your money into government bonds, so 6% is a small allocation. I don’t want to put him down. I mean, I’m sure he’s not an idiot and you wouldn’t have him as an adviser if he was. And he’s the person who knows your circumstances, not me, so you need to bear that in mind.

The question relates to your particular circumstances, it may be that 6% of your money in a government bond fund at the moment is a good idea because it is defensive and if held to maturity these government bonds are safe and you get your investment. I presume he’s not telling you to invest in negative yielding government bonds, because that guarantees a loss. But obviously, the interest rate on government bonds is very, very small at the moment, 1.6%. But nevertheless, the money’s safe, it’s AAA. I do think the bond market is in a bubble and I wouldn’t put any of my own money into government bonds, however as I say I don’t know your circumstances and I’m sure your financial adviser has a reason for saying that.

Gavin says, Hi Alan, when industry super funds calculate their returns, do they exclude contributions made during the year, add back withdrawals which should be less than contributions? Also, is it before or after tax? Just trying to make sure we are comparing apples with apples.

Yes, indeed, Gavin, and it’s a good question. The answer is, it has to be after tax, but not always. In my view, it ought to be after tax, but you need to look at the fine print and make sure it is after tax, because some of them do a bit of before tax reporting. Obviously, it’s got to exclude the net contributions because otherwise it’d be completely meaningless. So, yes, excluding net contributions should be after tax. Sometimes it’s not, you need to look at the fine print.

Michael says, Hi Alan, thanks for alerting us re Hostplus new direct investment offerings in last Saturday’s briefing. Where can I find answers as to whether the new offerings include interest in towers under construction, particularly those with a significant unsold component or with definite problems? Thanks again for your guidance.

I presume you mean apartment towers and not mobile phone towers, but talking about apartment towers you just have to ask them. Just to remind you and the other viewers, Hostplus has opened up its pooled trust to SMSF investors, in fact non-super investors in general, to come in via six investment options that they’ve provided at the moment. One is a balanced option, one is an ETF balanced. One is diversified infrastructure and the other is IFM, which stands for Industry Funds Management, which is an infrastructure fund that the industry funds own and a specific property trust which is also an industry fund owned thing called SPRT – I think that’s it. That’s a bit like IFM, except it invests only in property and a diversified property portfolio.

So, there’s six portfolios. What is in the two property ones, the SPRT one and the diversified property, I don’t know. I imagine there are some apartment towers in there but I’m not sure, they might be entirely commercial. Can I just suggest you check out their website, see if that’s spelt out – because I didn’t look at it. And if it isn’t and you’re not satisfied, just give them a call, they’ll be happy to help you, I’m sure. They’ll be all over you, in fact, Michael, so don’t worry.

Yvonne says, why is the Reserve Bank acting with ignorance. Unaware unintended consequences lowering the CR cash rate when recent low productivity, mental health related.

I don’t know, Yvonne. You’ve thrown me a little curveball there throwing in the terms mental health, don’t know what you mean by that and the extent to which low productivity is mental health related, I don’t know. I presume you think it is and you’re maybe onto something there, we should have a look at it but I don’t really know what to say to that. Thank you very much for the question and thanks for joining me on Ask Alan this week. It’s been great seeing you and I’ll be back next week at this time, 1 o’clock. Remember, the livestream today was general advice and may not be appropriate for you.