Eureka Correspondence

Eureka recommendations, Mint Wireless, First Home Saver Accounts, bonds, and ETFs vs LICs.

Reviewing Brendon’s top 20 recommendations

Hi there, I notice the list of Top 20 recommendations in the Uncapped 100 are listed as under review and this is confirmed when I click through each stock symbol link, although UBI is listed as buy (the only ‘inconsistency’ I could find after clicking through most stock symbols in the list). Can you confirm if all this is correct, and perhaps indicate the status of review of these Uncapped 100?

I am currently reviewing my portfolio which contains a number of theses recommended stocks, and would be particularly interested to know if UBI is in fact the only current Buy that is not subject to review (given the price drop in recent days).

Brendon Lau’s response: UBI has been downgraded to a “hold” following its very disappointing release of details on the “sunset” clause for LifeScan. You can read about this in more detail here. While we have discontinued the Uncapped 100, we are working on the process of updating our calls on the top 20 recommendations. The newly instated share recommendations page will be updated as that happens.

The PayPal threat to Mint Wireless

Hi Brendon, surely it’s time to remove Mint Wireless (MNW) from your list. PayPal also has a card reader, as well as contactless payment solutions, and is way too big a competitor for MNW to take on. Best hope might be for a takeover offer from a prospective PayPal competitor, though I believe NFC has already made card based solutions obsolete. Phone to phone is already feasible, just a matter of the gatekeepers (Visa, MasterCard) haggling to protect their turf.

Brendon Lau’s response: Thanks for your question. The potential arrival of PayPal and Square in the Australian mobile credit card market is a clear threat to Mint Wireless. This is why I commented in my article on January 31 that the clock is ticking for the company and it needs to establish a market leadership position before 2016.

Alan Kohler’s weekend briefing also covered Mint Wireless and you can watch the interview we did with Mint’s chief executive, Alex Teoh , here.

Bonds for beginners

The available bond ETFs for investors were discussed in the Eureka Report in the article New indexing: strategies for bond ETF investors on April 16. See figure 1 in this article. The diversified bond ETFs include the following: the Shares UBS Composite Bond ETF, SPDR S&P/ASX Australian Bond Fund , and the Vanguard Australian Fixed Interest Index ETF.

A good source of information for beginners can be found on the ASX website. There is an “Understanding Bonds” booklet that can be downloaded and also under “Bond Market Update” you can find the latest market data in a report called “Market Update for all bonds traded on the ASX”.

For a simple explanation: A bond is a loan made by the investor (who buys the bond) to the company issuing the bond. Instead of borrowing money from a bank, the company is borrowing money from bond investors and replaying interest to the investor for the loan of their money. This differs to shares, in which the shareholders are effectively owners of the company and are paid dividends for that investment.

First home saver accounts and superannuation

Hi, I have two questions for Bruce. I have been contributing into a First Home Saver Accounts for five years. It has a reasonable balance, at least compared to the average First Home Saver Account. It appears that this scheme has been axed in the recent budget. My plan was to save in the account for the seven years, then buy a house, but given the changes I was considering either putting the amount saved ($40K) into my superannuation, or maybe an investment property. I don’t own a house, but have invested, saved and been lucky enough to move to Western Australia and earn a good income with minimal living expenses. Could Bruce please examine the changes to the first home saver account and some possible options for using this money?

My second question concerns transferring superannuation after death. Is it correct that there is a 21.5% tax on superannuation transferred to beneficiaries who are not financial dependents?

Bruce Brammall’s response: The whole First Home Savers Account scheme winds up in a little over a year anyway, at which time you will be able to withdraw the money like it was in a regular bank account, which is exactly what they will become on July 1, 2015. At that time, you’ll be able to withdraw it without penalty. I don’t know how old you are, but I’m assuming in your 20s, so forfeiting that much money to super when you will probably still wish to buy a home seems a little over the top. Depending on your other plans, it might be best to wait until it “vests” in a year’s time and then have it paid out and hold it as regular savings for a deposit on your first home. It wouldn’t be “wrong” to forfeit it all to super, but I’m not sure if that’s even an option to do that anymore under the axing of this program. If you’re earning good money, it might make more sense to consider salary sacrificing to super, while taking the FHSA money to potentially purchase your first home with.

If you’re over 18, you’re unlikely to get your dad’s super tax free, unless you can meet a dependency condition. However, if the money is no longer in superannuation at the time of his death, then there is no tax to pay. Generally, the best option is to pull the money out of superannuation as close as possible to death. Obviously, this can be tricky and involves risks, as you don’t necessarily know when you’re going to die. But if someone starts to become frail, it might well be worth considering pulling the money out of super and paying tax on just the earnings for their remaining life than paying large wads of it as a superannuation death tax. This may also have implications for Centrelink payments at the time. There are other ways to potentially lighten the tax load, if he is young enough, such as by withdrawal and recontribution strategies. You should encourage him to speak to a financial adviser.

Comparing ETFs and LICs

With the recent publicity about listed investment companies (LICs), I would be interested in a comparison of the pros and cons of investing in them compared with exchange-traded funds (ETFs) – would this be possible in a future issue? I am sure many other subscribers would also be interested.

Editor’s response: Thanks for your letter. As Scott Francis says in the article Passive aggressiveBuffett’s new principle, the advantages of ETFs are that they avoid the higher costs of active investing, as well as timing and selection mistakes. Investors can choose across a range of industries and sectors.

With LICs, however, you are paying for management expertise via higher fees. While ETFs tend to track a certain benchmark or security, LICs usually actively invest, concentrating funds into stocks they believe have better outlooks.

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