Eureka Correspondence

Choosing the right super product

I am an individual balanced investor with a "balanced" risk portfolio (approximately 50% growth). I am currently reviewing managed funds, supers and exchange-traded funds with a financial advisor.

In regards to managed funds, my advisor is pushing me to a wrap account so that I can have access to wholesale funds, but I am worried that my overall costs will be higher. Wraps have been getting a bit of bad press from what I can gather. Do you think it is better to go for retail funds and no wrap, or wholesale with a wrap. We are considering the Vanguard Balanced Index fund and the North Index Moderately Defensive fund. I am also concerned as the wrap is a product that he is tied to (North), so I am not sure that this is in my best interest.

In regards to super, my advisor is again pushing me towards a fund within a wrap, but I like the look of Australian Super (conservative balanced) and ING Direct Living Balanced, as the administration costs are fixed, which will have a significant effect on my returns in the future as my fund grows. The costs of funds within a wrap seem high.

I know that you can't advise me directly, but I just want a general view of your thoughts on the above please. I have looked through your site and can't get a feel for which way to go. Do you have any articles which might help with this?

Bruce Brammall’s response: Thanks for your email. There’s nothing inherently evil about wraps and full-service platforms. They do a pretty reasonable job of collating everything for the retail investor and at an increasingly reasonable cost, as competition forces price down. If you want a little more information, please see my column Tapping into super wraps, which outlines a bit about what they do and what their advantages are. The alternative is to manage everything yourself (with either non-super investments, or through a SMSF). If you’ve got the time, go ahead. Since I wrote that column, if anything, wrap and platform pricing has come under further pricing pressure.

Now, as for your concern about going to see an adviser licensed by a major provider and being recommended into a product owned by the parent, then we are touching on the ongoing issue of vertical integration and independence, which is back in the news in recent weeks. Clients who go to see an AMP/Macquarie/MLC/Colonial (or whatever at a major group) adviser are more likely than not to be recommended to take up an AMP/Macquarie/MLC/CBA (or whatever) product.

It is my opinion that for investors seeking independent advice, it is less likely to receive it from the 80-90% of Australia’s advisers who are directly owned or licensed by one of the major product manufacturers (insurers, platforms or fund managers). It’s partly why ASIC has announced it wants to implement “restricted licences” to advisers who are owned/licensed by those major product providers. And also why those licensees are terrified of it happening.

As for Australian Super or any other fund, it is far more important to get invested in the right sort of assets (and get the right sort of insurance, if necessary) than to try to choose the right super platform, which too many people choose based on performance. Whether or not an investor should be in a “balanced” this, or a “balanced” that requires delving deeper into what exactly those balanced funds are invested in. Look beyond performance to the asset classes they are actually invested in.

An update on inflation linked bonds

Could you provide an update or summary on true inflation linked bonds (ILBs)? I’m referring to a true bond, not a hybrid, but I want to include those issued by corporates not just the government.

My understanding with these is that both the dividend is based on the inflated value of the bond for the quarter and that the final return price is the inflated value not the face value – is this always correct? In that last aspect they may differ significantly from hybrids? Are any of the converting preference shares ILB's by another name? The terminology and jargon around the fixed interest products is all a bit opaque.

Where are the true ILBs and what are their properties? How can I find them easily on the ASX? What foreign ones are worth considering – particularly when considering the consensus Eureka view of the world?

Steve Davidson

Rosemary Steinfort’s response: In my article Four ways to fight inflation I covered ways to protect against inflation using listed securities or easily accessible options. ILBs are traditional inflation protection securities. Government issued ones are listed on the ASX and corporate issues can be bought through a broker (they are unlisted).

The most common form of ILBs are capital indexed bonds (CIBs). Exchange-traded Treasury indexed bonds (TIBs) are CIBs which I mention in my article. TIBs are ASX-listed. Issuers of CIBs in Australia include: The Australian Office of Financial Management on behalf of the Commonwealth Government, Queensland Treasury Corp, TCorp, Commonwealth Bank, Envestra, Praeco, Rabobank and Sydney Airport. 

Indexed annuity bonds (IABs) are the other type, which are unlisted. Issuers of IABs in Australia include: NSW Schools, Melbourne Convention Centre and Australian National University.

The major government issued ILBs offered overseas are Linkers in the UK and TIPS in the US.  Although diversifying globally makes sense it is difficult with bonds and also interest rates in the UK and US are lower than here so returns would be lower.

Applying for Challenger’s hybrid issue

You have an article regarding Challenger capital notes (see Challenger’s hybrid issue stacks up) and I have tried to apply after reading this article, which has the prospectus and supposedly application form.

After finding the address of the relevant site, when I logged in I found that this application is only available to current shareholders. Is this the case?
Boris Feldman

Rosemary Steinfort’s response: I spoke to Challenger and they have told me that because the offer was oversubscribed by the broker offer they will not be doing a general offer now.