Ask Evan: 27 June 2019

Hello and welcome to another ask Evan for another week.  Thank you so much as always for tuning in and thank you to all of you that have sent your questions in already.  As always, this is live so you can choose your questions through to us right now.  I do have my producer, she's watching very carefully and we'll be able to put them on as I go through.  As always, please also remember that this is all general in nature, none of it that should be taken as any form of personal advice, InvestSMART does not know your personal financial scenario.  Therefore, everything that we discuss in this opening forum, it should not be seen as any form of personal advice.  It is just general in nature, only.  Lots of questions to get through this week as I already alluded to, and again, thank you so much for those of you that sent through.

First question that comes in is from Ted and it says, “Hi Evan.  I'm always wary of placing market orders for stocks.  When are the market orders a good idea?  Also, what dictates the strike price and I'm not complaining, but if I offer or buy a stock at a particular price, why do I sometimes get it cheaper? 

Okay.  That’s a whole range of questions around actual basically the technicals of overall market function and it's, there's a whole way to look at it.  So I'll answer it a couple of ways.  First one was around market pricing, so the best way to answer that is that if you believe and have done your investigations, you've gone through your overall understanding of a stock and you want to buy it for argument's sake, then going in at market price just gets you straight in.  It means that you're not worrying about trying to finesse.  Trying to is what we sometimes refer in an industry with jargon, penny pinching. 

It's just about basically going, I want to buy this stock.  I see that over the next three to five to ten years, whatever it is in terms of your timeframe that it will go up and that's why I'm buying in.  So I don't actually really care about what exact price I'm trying to sort of finesse here.  I just want the market and in I go and that's why you'll go in at whatever the ask price is and you'll get the market filled up to the amount of volume you're putting through.  So again, that also dictates your price at market.  If you're, let's say for argument's sake, putting in a thousand shares and the initial bid, or sorry, the initial ask has only 500 shares, you may have to go into the next price point to get yourself completely filled.  That's a little bit, again, technical on the back of it, but that's how market pricing works. 

Strike price is different.  A strike price actually fills into another product, which is something called an option or anything that tends to be on leverage.  They have strike prices and that's a different sort of scenario to what we just discussed with the market price.  And that therefore is if you were to say I wanted to buy an option in let's say BHP for the idea that you're going to buy BHP at for argument’s sake $33 in 30 days time.  That $33 is what we call a strike price and that is the price that you will pay to buy.  If you're buying a call, for example, I am going a little bit too far here, but that's a strike price.  It's not you know, $32.60 if that's what BHP is and you wouldn't actually be able to buy it on that scenario because it's actually under and out of the money.

It would be more around you are locking in the price that you are going to pay now for a future date and that's the best way to explain what a strike price is and then the next question, the last part of it was that why do I sometimes get it cheap if you're buying at a certain price?  Again, this is sort of falls into the market price as well.  Again, let's look at, BHP as a good example.  Let's say you want to buy them at $35 and the current price is 33 then, clearly you're above the offer price that's being put out there.  You are going to therefore buy them not at $35 but at 33 you may also find that if you put an order in in the morning at what we call the match time, so before the open at 10:00 AM at 9:50 you can start putting orders into the market.

And again, let's say you put an order into BHP for $33 this time, but BHP opens at $32.60 that's what you'll get, $32.60 because your price was above the opening price and away you go with the price that you got there at $32.60 and off you go.  It's the same with the close.  So if you put the market price in, if you put, sorry, your order price in at four o'clock when the market actually shuts and then it has a closed period to 4:10 the same principle applies.  If you were going in again BHP, the example at $33 it shuts at $32.50 this time you'll get $32.50.  So Ted I hope that answers your question.  If you do want more information around how actual sort of those mechanical workings of the actual market day to day do come about, by all means please write in to us.  I'm happy to go through that with you.  There are other things to look at as well, but in the main that's the way I look at it.  There are limit orders or market orders.  Most people go from market as I said, because they're more looking at not trying to finesse price but actually going forward.  I'll leave that there. 

The next question actually comes from Michael and apologies, Michael, I know you've written into me a couple of times and I've sort of run out of time to get you so I'll put that one to you today and again, apologies I missed you over the last week.  I'd like to get your opinion on unlisted property funds and what one do you think is the best to enter into? 

I can't unfortunately answer that last part of the question.  Obviously that would be probably alluding to advice but let's look at unlisted property.  It is an interesting one.  Falls somewhat under the managed fund scenario.  It is different.  This is unlisted property gives you that advantage of if you are an independent retail investor, which we most intend to be.  If you do want exposure to larger scale, particularly commercial property, getting that rental income, looking for possible upside in the capital return that comes with these big projects, unlisted property gives you that example and gives you that advantage.  It does therefore mean that you can look at getting into projects also around you know, retail property development on a larger scale with a smaller pool of funds.  Now that is the pros of them. 

The cons of them are there are two types there are closed and opened unlisted property and closed is the one I'd highlight straight away.  Closed funds do have a timeframe, so they tend to be between five and seven years and once your money is in you cannot get it out until the fund is wrapped up at the end of that timeframe.

Now you do, depending on who you go with, you can get, you know, quarterly or yearly distribution too, but in the main it all tends to come back.  You at the end of the actual product itself.  That's the pros and cons of closed one and again that would be probably somewhat answering the back half of your question, have a look at how you want that to be structured.  If you're going down this route, Michael, which is do you get and want to have those quarterly, yearly distributions to you, and that therefore is okay that you can't get your funds out until the end of the fund. 

The other one is an open fund now opens are much more diverse.  They can and do tend to have up to 20% of listed a property in their funds so they are the REITs on the ASX.  They are much more liquid.  Again, they can actually continue to grow their portfolio also on the unlisted side and that therefore is also an interesting question around how that would work for you.  It is a bit more liquid and therefore does mean that you can actually get in and out a bit easier as well.  So that is unlisted property.  There are a whole range of players out there from very big investment banks, places like Macquarie, they offer them.  You can also have those that are shown into you know, smaller, smaller spaces and smaller managers.  There's a whole range of them out there.  Please by all means go and do your research and go from there.  But that's the best way to answer that question. 

Next question I've got here comes from Paul.  “Both my wife and I are in pension mode and we are building up capital outside of super.  We would like to give some of this money to our seven year old grandchildren to invest the ideal investment would be to provide no income and lots of growth in the next 10 years or so so that when they do have to pay tax as children, we can cash it in at a time when they have a low marginal tax rate, et cetera, et cetera.  What sort of investments would you suggest? 

The international ETFs, gold spring to mind for what Paul is looking at.  First part of that question, Paul, actually I want to sort of more go down the eyes of I'm really glad that you're looking at this from the point of view of building wealth and building it on a longer term basis because you're right, your grandchildren at the age of seven are quite young.  They very much therefore have time on their side and therefore understand completely why you're looking at growth.

Growth can be reached in a whole range of ways too.  It doesn't have to be just going down one international ETF or down gold because realistically they are probably two different things in the scenario.  Gold is more of a safe haven asset store of value despite what's going on right now.  And I'm sure there's a lot of you out there that have seen gold basically break out of US$1300 US an ounce.  It's now $1400 and going higher still and then the Aussie dollar version of it, it's gone through AUD$2,000 an ounce.  It's more around, you can actually get growth by getting, ETFs is certainly one way of doing it.  Giving yourself a high growth portfolio that has a term of seven plus years in its outlook and returns to you high single digits, probably more likely low double digit growth and you can compound that.

Any sort of income, dividend distributions, et cetera you can roll up, and that would probably be one way to look at it.  In terms of the tax implications, we always tell you to go and talk to your accountant and have a look at that.  Your child will fall under some form of tax implications even if they are seven, eight or you know, going up into 18 years old.  Yes, it will be a lower level of tax, but the government will still find you a way of having capital gains tax.  That is what you're still doing for them and that therefore is something always to be aware of and you know it's a learning curve for them to understanding that when you do go into the big wide world, tax unfortunately as part of what we have to do to live in this country and that's completely fair enough.

I would look at it again though from the point of view, Paul of I'm really impressed that you are looking to actually get your grandchildren into the market, getting them to understand about how compound growth, how equities work, how actually growing your wealth comes from outside of just getting a wage and that is I think the other way to answer this is that that's the most impressive part of this.  Get them involved.  Let them understand that yes, they can't actually touch it to whatever the age that you're going to give it to them – 18, 21 it's up to you obviously, but I think that's the best way to look at it.  Go to those high growth portfolios or indeed, you know, got it yourself go into international equity ETFs.  Go into even Australian equity ETFs by all means, but the main overtake I've gotten from that and the way to answer it, it's not really answering your question, I understand.  But the way to answer it is you're actually getting your grandchildren to understand how wealth is created. 

Next question comes from June.  How do I invest in health stocks through my super, I have an employee super fund but choose to invest in Aussie shares.  Do I need portfolios outside of my current super provider? 

I won't tell the people who that is June.  So you're in an industry super fund and that's what I can tell from what you've got here with who you're with.  They do have and some of these industry super funds do have specialised funds that you can look at, but in the main they tend not to, and the one that you've got here suggests they don't, you can look at high growth portfolios.  If that's what you're looking at with regards to health, which is obviously a growth part of the market, but you've almost answered the question yourself with part of your question which is do I need a portfolio outside of it?

Most likely judging by the fact that you want to go almost specifically into health and that therefore means that you may have to look at possibly SMSF.  Again, you need to sort of probably consult your accountant to understand the fees and charges that come with SMSF.  You do need a certain size in your super but probably before it becomes advantageous to do so.  Or as you alluded to, you look at doing it personally outside.  I understand super is a beautiful thing from a tax perspective.  It has a very, very low tax point for CGT for returns, et cetera.  And that's why it obviously would be beneficial if you could do it inside that and that doesn't mean you can't, but if you are looking at going into that space and you do and have done your own research into health and there are certain health care stocks you want to be invested in, then the opportunity cost is probably the way to look at this.

Is the opportunity that you see in it that strong that you can offset the possible implications of tax?  Is it going to offset the possible implications of your overall position because it's going to grow to a level that you believe it's going to do?  That's actually part of the answer and I think that is one way to look at it and I'm actually with you health care has been an incredible driver over the last 5 to 10 years.  The other thing about it, it doesn't matter who falls into government here in Australia or overseas health spending over the next five to 10 to 15 and even over the next five decades is only going to increase across the globe.

We're ageing as a population globally and the spend of GDP across not just Australia but in the major developed economies is growing rapidly.  10.4% of GDP here in Australia is spent on health in the US it's 14.  Now the majority of that is to practitioners.  I understand, but still if you look at it from the point of view that biomedical pharmaceutical spaces occupy between 15 and 20% of that pie, it's a heck of a lot of money going into a very, very interesting space.  So June that's the best way I can sort of answer that question for you and get you to look at it.  I think that's the way I would probably go towards it.

Next question coming in, apologies, I don't have who this person is.  Two years ago I reduced my super fund pension account to just under $1.6 million by moving some money back into superannuation accumulation despite no contributions and making the minimum 6% payout each year the pension account has grown and now stands at $1.8 million.  Is this tax free or is the balance over 1.6 taxable? 

First and foremost, I'm not a tax accountant and I'm not a tax expert so therefore I can't properly answer it for you.  What I would tell you to do though is that this kind of material is on the ATO website for everybody to see and I can bring that up actually now and having a look at it.  It's one of the first things that actually appears comes down to when you did this.  Now you did say you did this two years ago, so it may happen that way.

I just want to quickly read out what the ATO has here in front of me with regards to those caps.  So if you started with a pension with $1.6 million in the financial year, 17-18 and the value of that pension grew to let's say $1.64 million, which is the example the ATO gives.  You can roll that money into a new fund without breaching your cap.  However, if you start a pension with 1.6 in 2017-18 and the value of the pension goes down over that time and you use it to live on, you can't top up your pension account, you will still be able to access other super amounts by taking these lump sums back.  So there is fairly interesting information on the ATO website.  It probably is the best way to answer that question, but the right answer is to actually talk to your accountant in terms of how that is and where that currently sits.

I think that's probably the best way to do it and apologies, I can't answer that any further than already there. 

Next question comes through from Sharon.  Again, all the talk is about cryptocurrency and it has been very strong recently.  How do we invest in cryptocurrency? 

Okay, Sharon.  So cryptocurrency as you probably saw through 2017 was a very, very strong, very much sentiment driven fad.  And that is not an exaggeration.  I'm going to be completely honest.  Cryptocurrencies from my point of view are not a currency.  They are not a fair currency.  They are not backed by assets.  They're not backed by a government or a central bank.  And therefore what happened in true cryptocurrency world was pure speculation because you have a closed system.

So bitcoin is the best example.  There is 21 million bitcoins issued and that is it.  You cannot increase the actual overall closed system that is bitcoin and that is why you are now going back towards US$13,000 per bitcoin because there is so little on offer and therefore a small movement in the market can jump it up as much as it has been, which is almost 300% this year.  It is, as I said, wildly speculative and the reason I don't like using it as a term currency, how can you transact with a currency that can have hyperinflation and hypo inflation inside 24 hours?  How can you transact for buying, for instance, a cup of coffee, which should cost you $4 for instance in Australian dollars that tomorrow could cost you almost $7 in cryptocurrency which has you know, 0.1 or one coin in bitcoin or it could fall the complete other way and you get it 300% off.  It's not a currency it's a speculation tool, so just have that in mind.

The reason it's probably come to the fruition in the last couple of weeks particularly is because of Facebook introducing Libra.  Libra is going to be an interesting concept.  The difference between Libra and what we all probably know what the idea cryptocurrency is, or at least from 2017 is that this won't necessarily be closed and it's actually going to be backed by assets.  Facebook along with 21 consortium partners including visa, including MasterCard, places like Uber as well, eBay’s involved are actually going to have things like US treasuries.  There will also be assets behind it, gold, et cetera, to give it some form of value.  Now you can debate the merits of it, because clearly Libra is going to have some regulation risk put all over it.  But the difference here is at least the value looks like holding much more stably than what is going on in a true cryptocurrency.  So that's the answer to the first part of why it's probably there and what we think of crypto.

How do you invest in it?  Well that's an interesting question.  The word invest is not one I'd probably use.  You can certainly speculate on it.  Now you can do that in several ways.  You can sign up to, basically to a lot of wallets.  There are platforms out there that will do that for you.  I don't want to mention who they are, but they're not hard to find online.  And then you can open a digital wallet and buy in as you see fit.  You can also go through providers that provide leverage of them and that's even more risky in terms of it.  So I want to very clearly say this straight out Sharon cryptocurrency in the traditional form.  And that's a really strange thing to be saying, it's only two years old is a speculation tool.  Yes, people have made a lot of money from holding onto it during that period.

A lot of people lost a heck of a lot of money as well and it moves incredibly fast, so just have that as a big, big caveat to when you go into it, if you do.  Next question I have here is what's the point of cash in a portfolio?  It's a very long question.  I just want to cut this down.  So the overall point of it is why do portfolio managers hold cash in their portfolio?  Some of it's 2% some of it's 1% et Cetera, et cetera.  All varies down to who it is now, yes.  The argument here that's been made and I completely somewhat agree with it, is that surely the idea of cash in terms of return over the last five years has been pretty poor and it has, you can't deny that and what's going on right now in markets is also making cash pretty unattainable in terms of actually any form of return.

Inflation though is not as bad as probably what it was.  There are a whole range of reasons.  Mandates tend to be, part of it is that some funds have to be mandated to hold for you know a certain amount of cash on their overall portfolio for x reasons.  Some obviously have to do it for actually making sure that there is some liquid cash to be able to pay out fees or some form of transactions.  Now the argument can be that that is coming down to 1% certainly what we are doing here and that will all change from July 1 so please keep an eye out in your PDSs if you are invested in our portfolios, but cash is technically an asset class.  You therefore should have some exposure to it if you are managing a fund, but you're right in the current conditions and in the current market, a lower cash balance is clearly advantageous because the return on cash is clearly in the negative with the market the way it is.

Next question that I've got here comes from Warren.  Warren's actually got a couple of questions and just for the sake of time I'm going to pick out probably the first two.  In the event that a sharp fall begins to become apparent and or looming in say equities, how does a fund manager react to this impending event?  As in do they lighten their percentage in equities in a given portfolio, for example, you've obviously used ours, being the core growth portfolio, or do they just counter the potential event and simply let things stay as it is and ride out it for the long term view? 

Probably the first way to probably answer that is partly the last part of your question is somewhat of the answer.  So with regards to our core growth portfolio, that is a passive fund that is designed to basically follow and track the market.  So what would happen in the core growth portfolio for example, is that if we did see the market move down in international equities, we would move with them.  So we are trying to basically replicate to benchmark and replicate the market.  So it's probably not the best way to answer the overall question because we want to give you the market.  That's the way it is and therefore the second part of the question is the answer.  On a longer term view, the core growth portfolio is designed to give you returns of the market over seven plus years. 

The front part of it is where you get active management and yes, if active managers start to see a looming event, they may start to lighten their load and now we are starting to possibly see that particularly in some of the global investors they are showing signs that some of them are lightening their load in their exposure to US equities.  Some have also started to lighten their load to Asia.  Interesting thing around those two markets is that we have the G20 meeting this weekend and the possibility that the president Xi and also president Trump meeting could actually see a possible tie up and starting to the end of the US China trade war issue.  And that would possibly be a market upside inside China and also the US.  

Now again, the whole view of the answer to this question is how the manager sees longer term.  Are they managing actively for here and now or are they managing for a five, 10, 15 year return?  If it's the latter, they may even see the current events or future pullback in the market as a buying opportunity to actually add to their portfolio.  So all of that is the way to answer that question. 

Second part of the question actually that Warren asks is around us and that's around INES in regards that one of ours here, which is Graham Witcomb, has actually given reasons why to avoid ethical investing.  Whereas Nathan, our portfolio manager for INES, which is our ethical fund, has clearly shown that he's invested into it.  The one thing I would want to say very clearly about us here at InvestSMART is that we are and want to have as many diverse views as we can.  Clearly this shows that Graham and Nathan don't necessarily see eye to eye and that is fine.  We think that's actually a positive thing because it therefore means that there are checks and balances inside of it.  Graham actually sits inside of Nathan's team.  He's one of the analysts and therefore he is deliberately pointing out certain risks that he sees and that's what he should be doing and making sure that therefore Nathan is managing INES as best as he can.  The second part of that question though is around fair, which is the beta shares ETF versus INES and you've probably almost answered that question yourself Warren which is why are they different and why should I go on one or the other.  INES is an actively managed fund.

As I said, Nathan is the one that's fund managing this.  He is clearly doing all the bottom up fundamental research, making sure it fits inside our ethical overlay to therefore go in to the active fund.  He needs to therefore make sure that he is getting that growth above the market.  Whereas the fare from beta shares is an ETF and therefore it's replicating the ethical market index that they have that benchmarked to and that is the difference.  So yes, there will be a little bit of a price difference between INES, but there should also be a performance difference between the two of them.  Warren, I hope that answers your questions. 

Coming from the next question.  I've also got a question here again around tax and just before I go I'm almost having to wrap up.  If there are any questions out there please by all means write them in now.  I will get to them as fast as I can.  You've probably got a couple of minutes before we move on.  

But the last question I've got here comes from a person called Mr Blend.  Again, very long question.  Probably just want to drill it down into the last bit of it which is why would we diversify into other assets such as shares, ETFs and looking to basically making sure that they have a general overall return for what they currently hold?

And I think we've probably answered this question a couple of times over the last couple of weeks.  Diversification is the answer possibly to that question.  You are again looking to make sure that if we're going through the question that Warren gave before which is that we see a downturn, your portfolio is able to look through volatility.  It's able to look through possible downturns where growth tends to basically move up and down at a much, much faster rate in both directions than more defensive assets. 

If you've got a proper blend of them around your timeframe and around your risk profile, you'll be able to look through market events quite easily.  You'll therefore be able to have income if that's what you've designed yourself to do or have market opportunities.  If you're looking for growth with pullbacks that you've designed yourself to do as well.  That can answer that overall question but it is about looking at it from that point of view.  Diversification is absolutely key because it therefore means that you can look through those points of view.  It also gives you and should be thought of again that in the lead up to retirement.  If that's the question that's come here from Mr Blend which is you are making sure that you are adding to your overall position.  That also helps you is that in times of downward you can therefore blend yourself down average price down that therefore as the market returns in future prices that you've obviously got yourself a better return.

It's the same on the top of the market.  Don't worry if you're hitting the top of the market, your timeframe is seven plus years.  Your overall average price is what you need to look at and I think that's the best way to answer that question.  I know it was quite a lot longer than that, but just in the interest of time, I just want to keep it there. 

I've got one more question and I'm going to leave it on this one because I think that's the way it is.  What is your outlook for going forward with regards to rates and what could happen over the weekend with the G20? 

First part of that question.  Next Tuesday the RBA meets again there is growing expectation that rates will be cut by another 25 basis points.  It'll be the first back to back rate cut that we've seen from the RBA since the start of the GFC and that in itself is quite an interesting story.  There is actually even growing belief that we could see three of them in a row.

So August is therefore also in play to see rates fall .75 of 1% whatever happens.  It is clear the RBA is stimulating the economy.  It is clear the RBA will cut rates whether it's July or August, it will happen again and they are a little bit concerned about the slowdown that has happened in the last half of FY19.  That is clear.  What is also interesting that's coming out of all of this is that there is starting to be green shoot signs that it's starting to turn around and that's the other thing about this which is going to probably most likely come to fruition in more numbers in October, December or probably more likely February, March next year.  So there is signs to be okay with it.  But just be aware things are falling.  It therefore will probably be a positive for equities.  We've seen since the GFC that falling monetary policy is certainly one way of actually stimulating growth and growth in wealth and that tends to be the easiest way because it is liquid being the equity market.

So the question that I've been getting a lot of the last couple of weeks is yes, the economy is slowing down and yes, the RBA is cutting rates.  What does that mean for me?  Well, it could mean two things.  Yes, it could mean you could go into property because property prices have obviously become more attractive with a lower rate of borrow, but also it's likely that equities will continue their current trend and what we've seen in the past around that space.  The other part of that question was around the G20 this weekend, does President Xi's and Trump's meeting mean a significant shift?  Probably not.  Feels more political than it feels actually structural.  There's still a long way to go in that space and that's the only other part of this is that what is being impacted by this whole us China trade war isn't necessarily physical numbers that you can see on economics.

It's confidence and particularly in business confidence, capex and future capex has been significantly hit by this in the US and even here in Australia.  And that's where you needed to change and why we needed to probably come to the end as fast as we possibly can because until business starts spending, that's when you’re actually going to see a change around it in the economy and that's when the RBA’s want of getting employment moving and therefore wages moving will actually filter through. 

So with that, there's no more further questions.  Thank you so much.  As always for tuning in to ask Evan.  If you do have any questions, please go onto the ask Alan page, there’s a big box there, put your question in for it and please remember to put your name at the end.  We'd love to say thank you to you for putting your name into it.  Click into the send there.  We'll pop it up into our list here to go for next week. 

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