Eureka Correspondence

Eureka's share recommendations, the seniors card changes, market neutral strategies, and more.

The value in share recommendations

I looked with interest at the new share recommendation feature - it seems to be very useful.

However, one thing did stand out for me. Of the active recommendations, 12 were ‘buys’, six were ‘holds’ and there was only one ‘sell’. Really? Does that truly reflect the state of the current market where few people would argue convincingly that is under-priced?

I would hate Eureka Report to be in a position where it cannot fearlessly recommend selling underperforming or overvalued stocks. If I was seeking that position, I would engage a stockbroker.

Tim Gow

Editor’s response: Thanks for your letter. Currently our analysts are concentrating on great companies which we believe offer exceptional growth potential. If the outlook for any of the companies we cover changes enough to warrant a downgrade, our analysts won’t hesitate to do so.

However, we don’t see the value to our subscribers in initiating coverage with sell recommendations.

Changes to the seniors card

We have a SMSF and are currently drawing a pension from it at the rate of $60,000 per annum (we are both over 65).

With the proposed changes to the Commonwealth Seniors Health Card, will our pension payment be taken into account in regard to the $80,000 ceiling when the changes come into effect from January 1, or will the balance in our fund be used to deem out income? Hope you can clarify this for us.

Geoff Ervin

Bruce Brammall’s response: Thanks for your question. My understanding of the intention of the budgetary measure (but let’s wait to see the legislation) is that pensions that are in place before January 1, 2015 will not be assessed for the Commonwealth Seniors Health Card. But if you make changes to your pension after January 1, 2015, your pension account will be deemed based on the value of the pension fund. It will not depend on your pension drawings, but on the deemed amount of the account. This is why I said in my recent column Planning for pension changes that, if you want to make adjustments to your pension, do so prior to December 31, 2014.

Market neutral strategies

The article by John Abernethy Is the yield game changing? prompts me to offer the following approach to finding useful yields. Buying two different types of exchange-traded funds can produce a capital stable investment if one fund is an All Ordinaries based fund and the other is the BEAR fund (available through Betashares). One should go up by 2% (for example) while the other goes down by around 2% – the net result being that the portfolio stays at the same value.

What’s the point? You get the distribution twice a year if you’re in the SPDR S&P/ASX 200 fund (STW) or four times a year if you’re with the iShares MSCI Australia 200 fund (IOZ) or similar. If you sell the STW after ex-date and buy IOZ till close to the next STW ex-date you get both distributions (plus their FCs), less a small amount associated with brokerages. This can be somewhere in the 5% plus or more range for a yield. It beats fixed deposits by quite a margin. There will be some times when distributions will be lower due to a period of declining market value, but that will be when the BEAR shares will produce a distribution (it doesn’t normally do so in a rising market) to make up for any drop in XAO-related yield.

Do you have any thoughts on such an approach?

Paul McColl

John Abernethy’s response: Thanks for your letter. I do not have any specific thoughts but what I think you are describing is potentially offered by a “market neutral” fund.

Such a fund runs a long and short portfolio that attempts to generate a consistent monthly return without market risk.

Watermark Fund, managed by Justin Braitling (who writes for Eureka Report), is an example of a listed investment company that is a market neutral fund.

If you refer to ASX announcements and the PDS of Watermark then I think you will find an investment profile similar to what you propose.

Liquidity problems with unlisted property trusts

In response to Max Newnham’s suggestion to consider unlisted property trusts, it is remiss to neglect the issue of selling an investment in an unlisted property trust. These trusts are notorious ‘crab pots’ – they are easy to get into but hard to get out of. After the GFC many of them were frozen and redemption of such an investment took many years.

Name withheld

Editor’s response: Thanks for your feedback. Since Max’s article we have written another article on unlisted property trusts which warns subscribers about the sector’s pitfalls, including lack of liquidity. You can find it here.

Portfolio management software

Being a long-time subscriber to Eureka Report, I have read many interesting articles over the period, however one subject that never seems to appear is portfolio management software for those who choose to manage and account for their own investment portfolios.

Any web search will uncover a list of products making claim to such, however I have found most, if not all, to be wanting on one aspect or another. It would be of interest to see if your subscribers have had similar results, or if someone has found a commercially available product that would operate on a Windows small business network and manage all aspects of investment and taxation for Australian conditions. Maybe Eureka Report could find that “Eureka” product to support all the information the publication provides to astute investors with strategies and advice to grow their wealth.
Name withheld

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