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The Experts

Andrew Main
+ About Andrew Main

About Andrew Main

Andrew Main has spent 35 years in journalism and stockbroking, which took him from Perth to Sydney, Paris and London. He was Business Editor of The Australian between 2007 and 2009.

He was a joint winner of the Gold Walkley Award, Australia's top journalism prize, in 2003 for a series of articles on errant stockbroker Rene Rivkin's Swiss bank accounts and he has published two books, one on the collapse of HIH insurance and the other a biography of Rivkin. He had a regular spot on ABC 702 for five years in Sydney explaining the mysteries of finance to a mid-morning audience.

More recently, he has also been a regular commentator on Sky Business

Questions remain as bank chief executives face criminal cartel charges

Wednesday, June 06, 2018

Old stockbrokers must be spluttering into their gin with amazement as they watch the ACCC’s cartel case against ANZ Bank, Deutsche and Citigroup over the bank’s $3 billion raising in August 2015.

Meanwhile, six high profile executives, including ANZ group treasurer Rick Moscati and a former head of Citigroup, face criminal charges laid by the Commonwealth director of Public Prosecutions in the next few days, with court hearings due to start on July 3. 

The point of the case is that the ACCC believes the six indulged in cartel behaviour by declaring that the $2.5 billion institutional element of the issue had been “raised” when in fact the underwriters were still carrying 25.5 million shares out of the 80.8 million on offer, because they hadn’t found takers for them. 

“ANZ completes $2.5billion Institutional Equity Placement” was the deathless heading on the announcement sent to the ASX on the morning of Friday August 7 2015. 

That, ladies and gentlemen, is what has happened since time immemorial in the share broking business in the case of a rapid institutional placement, which is what this was. The two key words you need to remember are Underwriting and Shortfall.

An extra curiosity is that a third underwriter, JP Morgan, appears to have been given a free pass because it reported the other three, including its long term client ANZ, to the ACCC. Something has clearly changed in the way that underwriting shortfalls are being perceived. 

The old hands can see with adamantine clarity what happened: the underwriters were left with the stock because at $30.95 it was not being offered at much of a discount to the previous close of $32.58, five per cent to be precise. 

The standard wheeze for fund managers is to pick up stock in a placement at a better discount than that, sell off an equivalent number at market and then chalk up the capital gain. That didn’t happen here because the issuers were being so mean with the pricing that the usual exercise wasn’t worth it.

But has there been a dastardly crime committed? That’s up to the legal process but what we are really looking at here is a test case, because until now no one has ever seriously challenged the way underwriting has historically worked. 

As with the production of sausages, it has long been the case with failed share issues that you are really better off not knowing the intimate details of what goes on behind the scenes. 

What has invariably happened in the past is that if the raising is not going to plan, the various underwriters have got together and decided their strategy for offloading the shares without upsetting the market. 

In this instance it looks as though they dumped the stock as soon as they could once a trading halt was lifted on the morning of Friday August 7. 

The 25.5 million shares were probably part of the 32 million that went through the ASX on that day, pushing the stock price down to $30.14, which was 81 cents below the issue price and a whopping $2.44 or 7.4 per cent below the previous close, on August 6 of 2015.

When the word cartel comes up for discussion around financial markets, most people think back to the Visy-Amcor case, where the two packaging companies were forced to cough up $95 million in March 2011 after admitting to the ACCC that they had collaborated illegally between 2000 and 2004 not to compete on customers, and to push prices up. In that instance Visy copped most of the penalty, as it was Amcor that fessed up.

It was all based on a quiet lunchtime chat between Visy founder Richard Pratt and Amcor CEO Russell Jones at a pub in Richmond, Melbourne, in 2001.

Unlike the uncontested Visy case, this one is understood to have featured a very un-private video meeting involving ANZ, Deutsche, Citi and JP Morgan, no doubt discussing how to manage the shortfall without cruelling the share price. 

The six named defendants are all planning to plead not guilty. 

So we can look forward to the public spectacle of the irresistible force of the Rod Sims’ ACCC meeting the immovable object of the traditional underwriting process. 

In the ACCC corner, the law says that if different organisations act in concert to control the price of a good or service, then that’s cartel behaviour.

In the investment banking corner, they would say that this is how underwriting sometimes has to work. In such instances, if the underwriters fess up with full transparency to the existence of a shortfall, the stock price goes into a dive, so instead they are compelled to hold the stock and tell the market the issue is done and dusted. 

Which it sort of was. That announcement to the ASX was probably legally correct, since the underwriters did indeed own the stock. What’s clear in this case is that the entire market knew the investment banks were long the stock. 

While a leak is always a possibility to explain why word got out, the more prosaic explanation comes from the fact that the deal was done as an “accelerated book-build” with a floor price of $30.95. And as soon as the ANZ said the deal had been done at that price, wise heads would have known that demand for the issue had never got off the $30.95 launching pad. Any serious demand for stock would have pushed the book build price upwards from there, but it didn’t happen. 

Conclusion? We’re in new territory here. Underwriting has always been a cloak and dagger business in which the full facts seldom get an early airing unless an issue has gone off well. 

But if the ACCC gets its scalps on this one and traditional methods of quick equity raising become outlawed, how else will it be possible to stage a quick-fire institutional placement in the future?

What is concerning is that such a question is of no concern either to the ACCC or the legal system, even though it is the bedrock of what we now seem to call the investment banking industry. That is a real worry.   

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Royal commission: Business lending under scrutiny

Wednesday, May 23, 2018


It’s early days in the third round of hearings at the Banking Royal Commission but I’d hazard this comment: the banks haven’t had to endure quite the same level of flogging they got in the previous rounds. 

That notion will probably be blown up in a shower of sparks in the coming days, but I offer you a couple of important points offered on Monday by Michael Hodge QC, the baby faced assassin who has been point man in the latest Royal Commission hearings into dodgy lending practices by the banks. 

One, he noted in his opening remarks on “Responsible lending to small businesses” that small businesses actually like the fact that there are fewer regulatory controls over that form of bank lending than there are over mortgage lending. 

The parade of case histories being paraded in front of the public is a fairly extensive horror show about what happens when things go wrong and guarantors’ homes get repossessed, and of course they tend to reflect badly on the banks. Around 87 per cent of small business loans are secured over homes so even a small percentage of dud loans could and does play out very badly in the public eye. 

Hence the painful case of Carolyn Flanagan, the frail and near-blind western Sydney resident who acted as guarantor for her daughter’s business venture that failed. Lender Westpac subsequently allowed her to keep living in her house but the public exposure of the case dominated yesterday Tuesday’s media coverage. 

That raises the issue of how many parents stand guarantor for their children, often with minimal understanding of what’s at stake, and neither the bank nor the children explain the risks fully. 

Another related statistic is that at June 30 last year there were just under 2.2 million businesses in Australia classified as small, or 97.5 per cent of all businesses.

Hodge said,  “A bank is generally subject to fewer obligations in determining the appropriateness of a business loan when compared with the making of a home loan.  That is the case even for loans to small businesses.  And that is, as we will explain, the approach that is desired by significant voices in the small business community. 

He went on to make the important point that “The concern is that to impose responsible lending obligations on banks when lending to small businesses would dry up or further dry up the provision of credit to small businesses.”

For a lawyer, that’s talking pretty clearly. He’s saying that if we tie the banks up in knots over small business lending, they will just turn the tap off.

Anyone considering the crackdown the Commissioner may recommend should bear that firmly in mind.

The other point Hodge foreshadowed, and we won’t get to it for a few days yet, was to blow up a couple of negative theories about CBA’s behaviour when it took over Bankwest in 2008 for an lowball initial figure of $2.1 billion.

Bankwest had for most of its life been the Rural and Industries Bank of Western Australia, nicknamed the “Rough and Ignorant”, so you can assume it had a patchy lending book. And once the Bank of Scotland took it over in 1995, things got worse rather than better.

The problem for Bankwest was that it could either stay in WA and get skinned by the usual boom and bust economy, or head over to the “Eastern States” and pick up all the high risk exposure that the established banks chose to ignore. 

Bankwest went east and picked up a lot of property exposure, some of which went bad in 2008. 

One of the theories about why CBA foreclosed a number of Bankwest loans following the purchase in 2008 was that such a move would allow CBA to use “clawback” provisions to reduce the $2.1 billion purchase price. 

The second theory was that CBA put dodgy looking loans into default in order to reduce its need for regulatory capital. 

Hodge gave CBA a free pass on both theories, pointing out their flaws in his submission to commissioner Ken Hayne before the cross examinations even began. 

He said that in the case of the “clawback” provisions, most of the loans it clawed back were already in default, with receivers appointed et cetera, before the relevant clawback date had occurred.

Plus, he noted, by the time the supposedly dud loans had been netted out against a number of improved loan situations, CBA ended up actually paying a bit more, some $26 million, than the originally struck price of $2.1 billion.

And he had no trouble blowing up the notion that foreclosing on loans would improve CBA’s tier 1 capital position. 

He said the theory was that CBA made a decision to do that in February but that in fact at that time CBA didn’t need to shore up its tier 1 capital, since at 7 per cent it was actually the strongest of the Big Four banks. 

Plus, he said, impairing and provisioning a bank’s loan portfolio serves to reduce, rather than improve, its tier 1 capital ratio.

However, the CBA is not quite in the clear yet. It’s going to face questioning in coming weeks over whether it acted fairly in calling in loans whose repayments, in many cases, were not in arrears.

Bearing in mind that the Bankwest purchase was in retrospect something of a  steal, the strong buying the weak for a knockdown price, and the deal added a reputed $15 billion to CBA’s market capitalisation, the bank will have a number of curly questions still to answer.


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The future of the advice caper

Wednesday, May 09, 2018


It’s going to be a close race to see whether the big banks split off their advice arms before Royal Commissioner Ken Hayne suggests that doing something like that might be a good idea anyway.

Quite frankly, it’s going to be about as easy for the big banks to sell their advisory businesses at the moment a it is to find a buyer for a pair of Sydney taxi plates. 

Remember them? They hit just over $420,000 a pair in April 2011 and now you can pick them up on Gumtree for a bit north of $155,000 (unrestricted, make me an offer, no time wasters etc) thanks to the depredations caused by ride sharing services such as Uber. 

The good news for the banks is that there’s no Uber lurking in the wings to demolish their financial advisory lunch. 

But then again, there’s no obvious scramble of candidates looking these advisory businesses over with a view to making a bid. 

We know for instance that CBA wants to float out Colonial First State Global Asset Management and we’d read that at one point AMP and Henderson were looking at it, but that was before the recent AMP unpleasantness. 

The catch is the same reason why Commissioner Hayne is likely to reduce the advisory businesses’ value even further by the time his Royal Commission is finished: most of the value in the bank-owned advisory operations is in grandfathered commission streams. 

Industry insiders say there are hundreds of billions of dollars trapped in costly, often underperforming, legacy products, earning the institutions an enormous annuity income stream at a juicy but almost certainly unsustainable profit margin. 

As one put it, this has happened “because institutions are incentivised to keep clients in out-dated funds rather than transfer them into better solutions”. 

“Legacy creates a culture of protecting margin at all costs.”

All of which suggests he is going to shine a strong light on grandfathering, which was one of the concessions made to the banks when the Future of Financial Advice (FoFA) legislation was voted through the Parliament and became law in 2013. 

What was meant to happen was that as all new clients were to be put into un-conflicted arrangements with their advisors, or what is known as “fee for service”, then the old grandfathered commission arrangements would fade away. 

They’re fading, but very slowly, because old fashioned advisors are leaving their old clients with the same asset allocation strategies as they have had since before FoFA came in. Because if they put the client into a new product now, they can’t charge commission. 

Anthony “Jack” Regan, the AMP executive who was parachuted in to sort out the “fees for no advice” mess at the Royal Commission, said in evidence that AMP still gets about 60% of its revenue from grandfathered advice arrangements, and that’s five years after FoFA became law. 

(By the way, he almost certainly got his nickname from the old British cops and robber’s series “The Bill” in which the hard bitten Scotland Yard detective Jack Regan was played by John Thaw. In his most recent episode, this Jack Regan was the one getting the rough ride.) 

Putting aside the woes of AMP, clearly the Commissioner is going to recommend that grandfathering should be got rid of sooner rather than later. 

And that’s what is causing the real scramble for the exits. Quite apart from the fact that the salad days of owning wealth arms are over for the big banks, because FoFA banned commissions on sales of new products, there’s the looming problem of how you value a commission stream that’s about to dry up. 

That’s what’s really for sale: a promise of money in the future when that money flow may shortly be legislated to a halt.

The good news, for the banks, is that their wealth arms may well become more profitable, in an operating income sense, once they are split off and made properly independent. 

Retirement savers will rush the doors of any organisation that can show it is more independent than most, although it’s really hard to be fully independent. 

And even that’s not a perfect badge of honour. Sam Henderson’s, Henderson Maxwell advisory business can claim to be independent, but in his case it meant that 84 per cent of his clients were being tipped into a fund he controlled. Thanks for coming, as they say. 

So where will ordinary mortals go for advice? 

Commissioner Hayne’s got a job in front of him in terms of what he’s going to recommend, since the Federal Government will almost automatically take up his recommendations holus-bolus. 

The big risk is that, if he cracks down too hard on the advisory industry there will be a big number of savers left without competent advice, and that would be an even bigger disaster than what we’ve seen at the Royal Commission. 

Ponder on that for a moment. 

Most particularly, let’s remember those big players which got such a scorching at the Commission are busy remediating the clients who were ripped off. Big players have deep pockets. 

I’m not for a moment suggesting we should carry on as before. We’ve never needed a change in the conflict of interest rules as much as we do now. 

But there is logic in having large institutions play a major role in financial advice. 

If Mr and Mrs Average can’t get honest advice when they walk into a high street bank, where else are they going to get it? 

Bear in mind that accountants may only advise on the setting up and winding up of SMSFs, and there will probably be a short term net exodus from the ranks of Licensed Financial Advisors because of the looming requirement that by January 1 2024 all advisors should have a relevant university degree.

In the long run we will have better financial advisers, but there will be some stresses and strains in the short term.  And that’s before we see what the Commissioner recommends.


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We needed a Royal Commission earlier

Thursday, April 26, 2018


I am hereby joining the conga line of commentators and captains of the banking industry who now admit they were wrong to say we wouldn’t need a Royal Commission into the Banking system. 

I took that position back in November on the basis that surely the vast bulk of the bad news was already out in the market, and that there wasn’t a common thread of villainy running through from insurance, through money laundering, to dodgy advice.

I wrote in this column to explain my view that “Cock-ups and inept evasions? Yes, they are legion, but conspiracies are much thinner on the ground.” 

Boy, how wrong I was. What better word is there than conspiracy to describe what happened (didn’t just possibly happen) when our best known and respected life insurer AMP lied to ASIC not once but 20 times over a period of years to conceal the fact that it was charging clients for advice they weren’t getting? Until about a year ago! 

It always looks like an excuse when you try to justify getting something so wrong but as I look back, I never would have imagined that the management at AMP could have been so obtuse as to do all that obfuscation.

This was in a situation where as I understand it, regulator ASIC had been at them for two years, with 18 reviews conducted and literally thousands of pages of documents. We also know that AMP finally reported itself to ASIC on the issue in May of last year. 

What we don’t know is exactly how much of this AMP ‘fessed up to before the proceedings began, but that’s just history now. It’s out in the open now, its full horror displayed, and the last year appears to have been spent by Australia’s longest established and best known life company in attempting a cover-up.

I’ve been watching the Royal Commission and I dips my lid to the very canny way its hearings have been put together. 

I had assumed that it would be difficult for the Commission staff to run what is effectively a two layer inquiry, one looking at the institutions and one examining  case studies of bad advice to individuals,  but it’s all now looking like a maelstrom of often criminal behaviour .

The common thread has been that clients have been put at the absolute bottom of the pile, after being relieved of startlingly sized annual insurance premiums made up mostly of startlingly sized commissions to advisers offering startlingly bad advice. 

How on earth can a Westpac adviser tell a potential SMSF trustee that they can buy a Bed and Breakfast establishment to run themselves, and park it in their SMSF? One of the central tenets of the SMSF regime is that you can’t put your home into an SMSF, which was the clients’ plan. 

I was concerned that we were going to be listening to a lot of legal wrangling about dealer groups, platforms, structures and reactions to complex legislation, which can usually be relied upon to send listeners to sleep.

Instead of which, the Commission has assembled what is almost a charge sheet  based on all the most easily understood atrocities and fired them out in one brain- addling salvo, like one of those old Russian truck mounted rocket launchers, for us to contemplate in the cold, clear light of day.

Charging “orphan” clients an annual advice fee when their adviser has left or otherwise moved on? That was the AMP wheeze which to date has seen the company’s Chief Executive Craig Meller fall on his sword, and that will absolutely not be the end of it.

Please note that the in house counsel, former Clayton Utz partners Brian Salter, has gone “on leave” pending the outcome of the proverbial review of what went on, and it was a supposedly “independent” report by Clayton Utz that was massaged by AMP staff before being presented to the board.

Then there’s the CBA wheeze of charging advice fees from dead people, based no doubt on the knowledge that few executors will be able to identify exactly what payment has gone where, and why.

So, where is it all going to lead?

There’s a lot of talk that the vertical integration model is going to be banned: if a bank or insurer is devising a financial product there’s a lot of logic in putting  tight controls between them and the organisation that sells the product. 

But if it does get dismantled and the Big Four banks and AMP find they can’t still keep their Wealth Management businesses, there’s going to have to be something else allowed in its place. 

Given the complexity of our superannuation system, it’s just not realistic to expect people to make their own arrangements. 

So, who are they going to trust? Robo-advice has one massive advantage in that it’s not conflicted, but it will only work in the most plain-vanilla sets of financial circumstances. Accountants are only allowed to advise on the setting up and dismantling of SMSFs and around 70 per cent of Australia’s licensed financial advisers have a connection of one sort of another to the banks. 

It’s not quite the proverbial omelette but it will still need quite a lot of unscrambling. Clearly the financial advisers will have a role to play, as they should, and the sooner they separate themselves from any obligation to recommend any specific products to their clients, the better. 

And I haven’t even started on ASIC. To judge by the fact that they were comprehensively stonewalled by AMP despite knowing there was a problem with fees being charged for no advice, tit looks as though couldn’t do a lot. 

It’s clear there was a shortage of enforcement powers available to them aside from demanding restitution of the affected clients, which they have done.

They can also disqualify people from the industry, not that we’ve seen much of that in this case, they can demand Enforceable Undertakings and they can start civil proceedings with a view to getting people banned. After which, in many cases, the miscreants persuade the Administrative Appeals Tribunal to overturn the banning order.

But what they can’t do is basically charge people. That’s a job for the Director of Public Prosecutions, which has a limited budget in deciding which cases to pursue.

ASIC raises about $700 million a year in licence fees and fines, which is significantly more than it costs to run. It ‘s all very well increasing the potential penalties for breaches of the law, as Treasurer Scott Morrison has just announced, but what is really needed is for the regulator to be able to launch more criminal actions in the first place.

Nothing, absolutely nothing, appears to focus the minds of corporate types so much as a prospect of going to jail. Six months or five years? It doesn’t greatly matter. The cell door makes the same metallic noise as it closes.


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The reality of our stalled super contribution

Wednesday, April 11, 2018


Nobody likes being compared to a frog in boiling water, or I assume not, but that’s what’s happening to employee superannuation scheme members in relation to the percentage of their salary that their employers are tipping into their superannuation accounts. 

Essentially that number, which started back in the Paul Keating era with a forgone wage increase of three per cent, is now at 9.5 per cent but it’s been stuck there since 2014 and on current form will remain there for another three years, or seven years altogether, until July of 2021.

Those readers whose businesses have to make that compulsory contribution, or Superannuation Guarantee (SG) as it’s officially called, are probably glad to hear this but I’d argue that until the contribution starts to go up, the day when our retiring workers are going to be financially self sufficient in retirement is going to sit just on the horizon as a form of mirage. 

And for as long as that is the case and they don’t have enough put by, they’ll be reliant on the age pension to a greater or lesser degree, and we taxpayers will be footing the bill. 

So what’s with the boiling frog analogy?

The key point about the unfortunate amphibian is that if you put it in a water filled pot at room temperature and start to heat it, Mr Kneedeep won’t think to jump out until it’s too late. 

The same gradual distortion’s going on at the moment with ordinary workers’ super contributions: because they’re not increasing unless the worker’s pay goes up. Many of those workers won’t accumulate enough super to stand on their own financially by the time they retire, and by that time it will be too late. 

There’s a lot about the ALP’s policies on Super I don’t much like, mostly because their pursuit of real or imagined fat cats penalises much bigger numbers of ordinary savers, but one of their sounder efforts was back in 2010 when they decreed that by July 2019 the SG would climb from the then 9 per cent to 12 per cent. 

The current Coalition government initially postponed that proposal by three years to 2022, then stalled it again by a further three years, such that it won’t hit 12 per cent until July 1 of 2025. That’s a six year postponement, which in frog boiling terms is a mighty long time.

Back on July 1 2014 that delay meant nothing, as both sides of Parliament were agreed on 9.5 per cent, but as of now the SG would have been 1.5 per cent higher, at 11 per cent, had Labor been in power. 

So what? 

The Financial Services Council’s 2018 pre-budget submission uses a University of Canberra NATSEM report to note that even just a two year delay in getting to 12 per cent would knock $39,000 off the total of retirement savings that a person planning to retire over the next decade would ordinarily hope to accumulate.

And of course the effect is more significant for people just starting out in the workforce, because of the snowballing effects of compound interest.

“Employees aged 15 to 24 will benefit from the increase in the SG to 12 per cent by the reform adding $150,000 to their retirement savings at age 65,” it states.

Overall, it says, “the delay to the increase in the SG to 12 per cent will result in a cumulative impact of around $40 billion less in super savings in the system over the next seven years.”

It throws in a few other demographic bombs, quoting the 2010 Intergenerational Report as saying that:

One, the ratio of working aged people relative to retired people will halve from around 5 times today to 2.7 by 2050. 

Two, between 2010 and 2050, the proportion of Australians aged between 64 and 84 will double, while the proportion of people aged 85 and over will quadruple and…. 

Three, the proportion of Australians of working age will fall by seven percentage points to 60 per cent of the total populace in 2050. 

Of course it’s a bit simplistic to cheer for increased compulsory employer contributions when there are so many other moving parts in Super. 

Someone has to pay for it, and employers will have a raft of arguments explaining what a burden it already is. 

They would note that most workers would sooner have a bit more cash in hand by way of a pay rise, than the less tangible benefit of having a bigger super account when they retire in what may be a decade or so’s time. 

Which is why a lift to SG would probably have to be legislated to take the place of any CPI-liked wage increases. Sometimes the Government has to act in people’s best interests.

But employees already have the option of making a pre-tax salary sacrifice, up to $25,000 a year, if they want to build up their nest egg any faster than the obligatory minimum. 

There are plenty of people in the Coalition who don’t actually like superannuation, seeing it as an unnecessary drag on the economy, a burden on employers and an exercise in Nanny State interference in people’s lives. 

But one of the telling quirks in the voter perception of all this is that our Federal Politicians and Public Service already enjoy an SG of 15.4 per cent, as pointed out by demographer Bernard Salt in the latest Weekend Australian Magazine

To quote Bernard, “how can politicians carry on about the unsustainability of today’s retirement concessions and retain a straight face?”He notes correctly that politics is a shaky business but suggests things are not a lot different in the private sector these days. 

“No one’s job is guaranteed and no one’s job should be underwritten by an overly generous superannuation scheme that is out of whack with that of the average worker.” 

He might have over-egged things with his comment about “overly generous” but it’s the old example problem come back to haunt us.

For as long as we have to put up with that Canberra based approach of “don’t do as I do, do as I say,” there will be a lot of entirely justified resentment among that embattled and proportionately shrinking cohort of people called ordinary wage earners.

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Could Labor's tax plan push us onto the pension?

Wednesday, March 28, 2018

How much do you reckon home owners are going to need to stash away for their  retirement as a couple to leave them better off than if they were reliant on the Age Pension?

If you assume they were getting 5% from their super account and the Age Pension per couple is a bit over $35,000 a year, they'd need to have a super account with just over $700,000 in it.

That is approximate, but it’s a pretty scary number because that means if you have any less in the jar, there is a growing set of evidence that you'd be better off spending your super and going on the pension. More on that later.

And that mismatch issue is something that opposition leader Bill Shorten and shadow treasurer Chris Bowen should have in the back of their minds as they rail against fat cats dodging tax and collecting refunds from the Tax Office, because those supposed cats don't have enough taxable income to offset the deductions that dividend franking allows.

Yes, there are people out there who have been getting something of a free ride in having no taxable income but lots of assets, including shares paying fully franked dividends. The Grattan Institute notes that at the moment, a rich retiree could be pulling down $180,000 a year in franked dividends and paying no tax at all. 

I distinctly remember a captain of industry telling me in an awestruck voice that his non-working wife was enjoying refunds of franked dividends from her share portfolio, with the air of a man who couldn't quite believe the Tax Office's largesse.

But The Grattan Institute has also noted that this proposal would see 33 per cent of the new tax paid by high wealth households (who one assumes can afford it) and 60 per cent paid by Self Managed Super Funds, which in most cases don't have so much room to move. No wonder they're making the most noise, although Labor has now walked back slightly from the original proposal. 

Labor originally said this move would save $59 billion over ten years but in the last 48 hours has signalled that it would exempt existing age pensioners from the dividend imputation shake-up, and would "grandfather" any Self Managed Super Fund with one or more members in pension phase as at March 28.

That would at least make life easier for pensioners at the bottom of the pile and would only cost the government $700 million over the ten years, cutting the notional saving to $55.7 billion.

(I say notional, because savers always react to changes in the rules. Most relevantly here, some will give up their plan to be self-funded and go on the pension, thus reducing the savings.)

The new amended Labor plan won't cover off on the many couples of Self Managed Super Fund trustees who are not yet in pension phase.

Treasury figures suggest that there are around a million Australians with taxable income of less than $37,000 a year who may be affected, and you would be mad to assume they are all fat cats. That's the point: some have clever accountants but a far bigger number of others are struggling to set themselves up as self-funded retirees.

A couple of points here. One, as many wiser heads than mine have been pointing out, that money those people are getting had tax paid on it by the company in the first place, so it's a refund of what would otherwise be double taxation. In simple terms, it's their money.

Two, and this is really important, if the Government (Coalition or Labor, take your pick) is serious about reducing retirees' dependence on the Age Pension, they are going to have to wake up to that old capitalist notion of Incentive.

While Australia's compulsory superannuation system is getting closer to full maturity every day, it still has not got there, partly because the "snowball" of compound interest started pretty small with a compulsory 3 per cent a year employer contribution in 1992 . But also it's because most experts believe a 15 per cent employer contribution is going to be needed in the long run.

What rankles many people is that federal politicians and the public service get that 15 per cent already, while most workers are still in the foothills at 9.5%. The government has been aware of this problem and employers are going to be moved up gradually up to 12 per cent by July 1 2025.

So the workers will still be three per cent short of the pollies and the public service even then, assuming of course that the latter don't get a further leg up in the interim.

In short, we're in a world where it's going to take a while before most workers' super is going to be enough to take them off the public purse.

Conventional wisdom says that only 20% of retirees are genuinely self-funded and not still reliant on a part or full pension. Recent numbers from ASFA, the Association of Super Funds of Australia, indicate that it's now moved up to 25%, and that by 2025 it will be up to 40%. 

But before you cheer, be aware that by that time around 20% of people aged 67 will still be in paid employment, which is almost double the current level.  

The big bogey in all of this for anyone aiming to be self-funded in retirement is what's called the savings trap, whereby individuals at the top end of the pension cohort, with super savings of say $440,000, currently end up enjoying a bigger income stream than those who have saved up $800,000, because the latter don't qualify for any kind of pension.

And by the way, there's been a lot of criticism about how the family home is exempt from the means test that determines pension eligibility. That might look like a scam but there's really only one way in which retirees can benefit from their tax-free home, and that is by selling it. Until then, that capital gain is just a book entry.

The right-leaning Institute of Public Affairs put out a note last week criticising the proposed Labor move, which is no great surprise, but added a solid point about how unfair it is to change the rules affecting investment systems that require a long time frame.

"Retrospective legislation is widely regarded as a transgression of the rule of law because it is arbitrary and inconsistent with rea¬son¬able expectations of the affected parties," it said.

Politicians, please note.

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What was behind Blackmore's fall?

Wednesday, March 14, 2018

It’s not every day that a share price drops by $23.50 after an apparently supposedly upbeat half year result, but there was a fair bit more to Blackmores Ltd.’s recent interim results to suggest that there are still risks out there for the China-oriented group.

The stock dropped from $159.50 to $136 a share on February 22, despite the news that the complementary medicine group’s net profit after tax was up 20 % on the previous corresponding at $34 million, with group net sales up 9% at $287 million.

The interim dividend of $1.50, fully franked, was a 15 % improvement on the $1.30 paid out previously.

The share price has failed to bounce since, closing yesterday at $129.50. Bear in mind, if you will, that the stock price ran up to $175 a share in early January, so while it looks expensive, it is off $39 or almost 22 % below its peak.

Speaking historically, the stock ran up to $217.98 on the last day of December 2015, which smacks of window-dressing and short covering but it’s still a real number.

So what’s happened? FN Arena’s Rudi Filapek-Vandyck tagged the latest half year result as being one of the “notable disappointments” of the profit season, in amongst the naughty corner inhabitants such as Domino’s Pizza, Myer, QBE Insurance, Ramsay Health Care and Super Retail.

His main criticism seems to be that there was an earlier excess of optimism among investors and analysts about the China story, with Credit Suisse walking back, as they say in the White House, from a note in October putting a price target of $150 on the stock, up from $95 previously.

Perhaps they were just relieved that CEO Christine Holgate, poached by Australia Post during 2017, was quickly and efficiently replaced by Chief Operating Officer Richard Henfrey as of September 30.

The broker has now dropped its Blackmores recommendation from Outperform to Neutral and shaved $20 off the target price to $130 a share, half a dozen dollars below where it is now.

As Rudi put it, the Credit Suisse analysts had previously rated Blackmores’ growth prospects up there with the likes of Treasury Wines Estates and they  “now suggest Blackmores will still grow, but it won’t be at a spectacular rate.” “They also observe competitor Swisse seems to be performing better.”

Morgans has a Hold recommendation on the stock at current levels but has moved its price target up from $102.50 to $125.00.

They say the Blackmores brand is strong and is leveraged to favourable industry dynamics but is fully valued at these levels, that latter comment being what you say when your target is below the current share price.

So the only broker suggesting you buy the stock is retail specialist Ord Minnett which retains an “accumulate” rating and a sunnier target of $150 a share.

It says the half year net profit just reported was broadly in line with forecasts and that the long term demand profile of the company’s products and positioning of its brands is very strong.

A poke around the earnings numbers suggests that Blackmores is not enjoying anything like the straight-line sales growth that it enjoyed in 2013-5. The total reported sales of $287 million for the latest half were only a bit over 1% above the $283 million enjoyed in the first half of 2015-6.

And how’s this? Management’s claim of  “improved pricing stability and promotional rebates following the implementation of a program of reductions through the period” sounds a lot like a bit of calm following expensive promotion and price cuts.

It’s also worth remembering that Blackmores is a well-known name, but from my understanding doesn’t make any of its products in-house, so one of its key management issues is inventory. Too much, and it eats its head off in the warehouse, too little and the stockists start to scream.

“Continuity of supply has been a challenge in the second quarter as suppliers have struggled to respond to the Group’s increased requirements” is management-speak for what looks a lot like the latter circumstance.

The China numbers for the half were reassuring, with sales up 27 % to $74 million. This was despite the fact that many Chinese consumers now buy direct from Blackmores online, with their purchases not being counted in that $74 million number.

The best day is Singles Day in November 11, a sort of rebuttal of Valentine’s Day that celebrates young Chinese people’s single status. Blackmores offers 136 separate lines though the dominant e-commerce channel Alibaba and according to management, sales of Blackmores products on that day surpassed those achieved in the prior year after only two hours and 10 minutes.

You didn’t ask, but I gather 25 % of the lines handled by Alibaba are in vitamins, 11 % are fish oil and five % are anti-ageing. I leave the reader to speculate what the other lines are.



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What a US doomsday 'expert' has revealed about Australia

Wednesday, February 28, 2018

It's worth bending an ear to prophets of financial doom because that’s what keeps markets balanced. If we were all bullish, we’d have been rooned, as farmer Hanrahan said in the poem, years ago. 

But there’s an entertaining twist about the current Australian tour by US economist and demographer Harry Dent.

Harry’s pushing a new book entitled “Zero Hour,” which is about what he says will be the “greatest political and financial upheaval in modern history."

That’s a big headline, but it’s not wonderfully informative, because we all know markets have regular busts of the sort seen around the world in 1987, in Asia in 1997 and again in 2008 with the Global Financial Crisis.

The twist is that he sees Australia as being less affected than most other developed countries if there is a major global economic bust, with the understandable exception of a likely drop in property prices.

He bills himself as a demographer and his core thesis is that as the Baby Boomers around the world ease back on spending, and the youngest is now 57, we’re headed for an inevitable slowdown.

Where’s he’s a bit exposed is that last time he was here in 2014 he predicted a major bubble-burst in the Australian property market which has not happened.

He also predicted that we would be economically drowned by a China-created tsunami that would wipe Australia out.

That hasn’t happened either, although a property bust and/or a China bust are certainly possibilities. And of course the latter would most certainly have dramatic negative effects in our economy.

But it must he hard work for a demographer peddling gloom in a country like Australia because he knows that Australia’s better placed than almost any other developed country to control its demographics, most particularly the growth rate of its population. 


Given the positive demography of Australia, his messages of doom are going to scrabble for traction. 

As he put it in an interview with Peter Switzer last week,  “no longer are demographic trends pointing up in the developed world except for Australia - lucky you guys.” 

He was basically saying we can avoid at least some recession and most importantly, support an ageing population, by bringing in young and well educated migrants from around the world. Very few other countries have that option.

This was just before the Tony Abbott-versus-most people argument about population growth burst on the scene, with Abbott calling for a halving of immigration because of issues such as strained infrastructure, unaffordable housing and crime in Melbourne caused by young men of African heritage. 

That got jumped on by Immigration minister Peter Dutton and others, leaving the former Prime Minister in a minority, if a noisy one.

He had a raft of online supporters, many of whom could spell, cheering on some or all of the points he had made.

So that’s where we sit now: Harry Dent concedes that we should be able to dampen the effects of any global recession by taking in more migrants, and lots of people in Australia who have been stuck in traffic are blaming the migrants already here.


While I understand the critics’ arguments, I believe that they are being short sighted.

Melbourne based journalist and author George Megalogenis made a strong  argument in his 2015 book “Australia’s Second Chance” in which he noted that most economic stagnation or recession in this country has tended over the last century to occur whenever there was a cutback in immigration. 

He sees carefully managed migration as a massive long term positive.

And CEDA, the Committee for the Economic Development of Australia, is with him.

“The simple fact is migration has contributed substantially to the growth of Australia and will continue to do so into the future,” explains CEDA.

 It recently conducted research that found annual permanent migration could double over the next 40 years and deliver “significant per capita economic benefit.”

Where I sit, those growing pains are real enough but they are not insuperable. They can all be picked off, one by one. 

Creaking infrastructure? Fix it. Governments and corporates can still borrow at historically low rates to build extremely efficient railways and at some point in the next 50 years a Very Fast Train or network of VFT’s will allow more people to live outside Australia’s big cities and commute into them, assuming of course they will still need to commute. 

And cars? It may be that car sharing finally takes off and all those car parks will be more than slightly redundant.

Water management will of course be difficult, as ours is the driest continent, but that one’s not insuperable either. Re-use, desalination, anti-evaporation measures and irrigation management strategies in the southern half of the continent will go a long way to increasing Australia’s potential population capacity. Meanwhile the tropical zone gets enough rain each wet season to support infinitely greater populations, as our neighbouring countries to the north have shown for centuries. 

House prices? There have been major scams with overseas investors using their children as nominees to buy established properties, but properly administered legislation favouring Australian residents, a legislative bias towards owner occupiers and a clearly articulated policy on interest rates will go some way to reducing that problem. 

The irony there is that it’s those very low interest rates which have got buyers excited about how much they can afford to borrow, rather than what properties might actually be worth. If rates are ratcheted up carefully, the bubble will deflate by itself, or prices will at least plateau.

Criminal gangs among migrant communities? We’ve seen this before in Sydney’s Cabramatta with Indo-Chinese gangs, 25 years ago, and now it’s better known as a foodie destination. 

There are always stresses and strains when migrant groups contain bigger percentages of refugees, because in many cases there’s a lack of male role models, because in many cases they are either not around, or, worse, dead. 

It must have been a total horror for the owner of a Melbourne jewellery shop having it smashed up by baseball-bat wielding thugs, as happened recently in at least one case, but that’s no argument for putting the brakes on the economic potential of your country. As a percentage of the migrant population, the villains are a rounding error. 

So when Australia has a massive inbuilt advantage that even a professional bear such as Harry Dent is prepared to concede, we might as well use it.

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IPOs the big winners of 2017

Wednesday, February 14, 2018

If you’re still hiding under the table with a coal scuttle on your head after the recent global share market lurch, it’s quite understandable.

You may not be in the mood to hear a bullish tale about the Australian share market, but try this:

The 113 new floats that came into the market in 2017 managed an average end-of-year return of 61.6 per cent. 

If you look at the smaller IPOs valued below $50 million, the number was even higher at 69.8 per cent.

Meaning, if you bought them when they were issued and held them until the end of the year, that is how far ahead you would be.

Those stats come from the OnMarket group, which is involved in around one third of new floats in Australia, but keeps records for all of them.

By comparison, the ASX 200 index was up seven per cent over 2017, and we won’t bother discussing what’s been happening to it in the last few days. If you’d been on a roller coaster you would have hurt your nose and your neck.

Of course, most new floats don’t pay dividends like the blue chips do, so we’re not comparing apples with apples, but that giant differential in price performance cannot be ignored.

So, what’s going on? In very simple terms, the high franked dividend paying stocks in Australia have become what the professionals call a crowded trade, whereas the smaller end of the market is doing exactly what it is meant to do: raise capital to allow companies to expand.

Because we haven’t seen a big raft of giant floats in the last few years, the Initial Public Offering (IPO) market in Australia hasn’t garnered the attention that it perhaps deserves.

In 2017, there was only one seriously big float, the Magellan Global Trust, which soaked up $1.5 billion in October.

Indeed, it wasn’t a big year for floats in value terms, raising a total of $6 billion versus $8.3 billion in 2016, and a similar number in 2015.

Back in 2016 there were 96 new floats whose end of year equivalent return was 25.4 per cent.

That number grew slightly to 113 last year, so it’s the dramatic lift in returns to 61.6 per cent that really grabs the attention, coming in more than twice as strong.

There are of course a number of issues you need to face if you are looking at trying to get anything like that return.

One is that it’s hard to get set in the full range of floats, so there’s a theoretical element to it. This is not meant to be a plug for OnMarket but they facilitate access to new floats and as I said, they get access to about a third of them.

Two, small cap stocks are less liquid than large cap stocks, meaning they are hard to get into and out of. And if there’s a major bust such as 1987 they tend to get even less liquid. In trader talk they become “seller, no buyer’.

Their prices can also suffer from volatility. If you’ve got 100,000 of a small stock to sell and there’s only 20,000 on the buy side, you are going to have to drop your price.

It’s also true that there are more duds at the small end of the market.

But that 61.6 per cent figure takes all of that into consideration.

Which sector did best? Possibly not the ones you would expect.

Consumer staples did best with an average end of year return of 106 per cent, followed closely by materials (that’s mining to you and me)which moved ahead by 97.8 per cent.

Admittedly the staples represented less than one per cent of the total funds raised, and the materials category was only worth 4 per cent of that total.

The lion’s share of the money raised went to financial issues, which picked up 68.7 per cent of if, and meanwhile they had the least inspiring average end of year return at 17.8 per cent.

That said, 17.8 per cent is still more than twice the ASX200, even after allowing for dividends.

One of the secrets of the “scattergun” approach to new floats is that while a successful one can grow your investment several times over, you can only lose 100 per cent of your original investment.

An example from the winners is Ardea Resources Ltd, a cobalt play that listed at 20c in February and ran up to around $2 late last year. It’s slipped back to around $1.30 in recent weeks but if you’d got in at the float, that’s six times your in price.

Medicinal cannabis was almost as popular as cobalt. Two of the top 10 listings in 2017 were medicinal cannabis stocks, Cann Group Ltd and The Hydroponics Co Ltd, both managing an end of year return of just over 8 times, while infant formula group Wattle Health Ltd enjoyed a similar return.

Most have of course lost ground in the recent market reverse, but for instance Wattle Health is now around $2.30 after peaking at $2.50 a couple of weeks ago. It was below $2 for most of January so it’s by no means been a collective slide.

It’s clear that being trendy helps a great deal, but this reinforces the point that while you can only lose your original investment, you can make several times that amount on the best performers.

The next point is that to get a good average outcome, you do have spread your bets.

Ben Bucknell, a principal of OnMarket, notes that there is an inherent premium of about 25 per cent if a stock is listed, compared with it being unlisted.

“It’s called the liquidity premium,” he says.

Another potential positive at listing time is that issuers of new floats also have to leave enough on the table, in terms of potential upside, to make it worthwhile for investors to subscribe.

“Having a successful float also has the benefit of attracting the same investors back for a future float,” he says.

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BlackRock CEO calls for social responsibility

Wednesday, January 31, 2018

You may not have heard of Larry Fink, but he’s set the cat amongst the financial pigeons by telling corporate CEOs a few days ago that there is more to life than just making a profit.

What separates Larry from the mob is that he’s the founder of the US giant fund manager Blackrock, which sits on a $US6.3 trillion pile of investors’ money and turned in some gobsmacking profit numbers for the 2017 calendar year.

Take your pick from an annual fully diluted Earnings Per Share figure of $US22.60, or maybe $US367 billion of net capital inflows during the year. That’s right…billion.

It makes all the difference to the social responsibility/profit debate when someone on the touchy-feely side is clearly a guru on the profit side as well.

What Fink did was to send a letter out to the CEOs of the companies that BlackRock invests in, warning them ever-so-politely that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.’’

The social responsibility debate is an old one but it’s well worth having, and Fink’s better placed than most to kick it along.

Not surprisingly, his letter got a reaction. Bloomberg columnist and investment banker Matt Levine noted that Blackrock’s a giant provider of index funds (via its iShares arm), so it has to own companies it doesn’t approve of.

“Pick your least favourite public company – guns or tobacco or oil or opioids or Facebook or whatever you think is doing most harm to society- and BlackRock Inc is among the top five holders.”

“Fink’s threat…rings a bit hollow since BlackRock’s index funds can’t sell.”

US fund manager Adrian Day was quoted by Barron’s magazine as saying Fink’s social purpose has no grounding in economics, adding that in the case of a public company, to what extent should the board spend shareholders’ funds on their favourite causes which shareholders might, or might not, support. 

In that view there’s more than a touch of economist Milton Friedman, who memorably wrote  in 1970 that “the social responsibility of business is to increase its profits”.

Others have chortled that companies which pulled out of oil and gas investments on moral grounds have missed out on the recent lift in oil prices, thus imperilling shareholder returns. And that some funds and companies which have highlighted ethical behaviour have underperformed.

But none of that takes away from the fact that Larry Fink has a good point.

He admitted that the index funds (which account for the majority of BlackRock’s FUM) cannot readily sell out of a company whose policies it doesn’t like, but they can engage with the company and vote their shares.

The New York Times notes that BlackRock spent the last two years needling energy giant EXXON over its policy of not letting independent directors meet with shareholder such as Fink. Exxon recently changed that policy, in clear reaction to BlackRock’s criticism, which included voting against the appointment of two directors.

BlackRock also supported a shareholder proposal last year to increase EXXON’s disclosures on climate change, partly because the company’s stated policy until that time had prevented the company from getting a full understanding of its long-term policy and its risk exposure.

In the letter, Fink said BlackRock’s responsibility “goes beyond casting proxy votes at annual meetings: it means investing the time and resources necessary to foster long term value.”

That’s the underlying area where he’s on ideologically and economically safer ground: long term investing usually creates more wealth and pays bigger dividends than short term.

It’s a tough one. The motor car was initially greeted as a wonderful invention just after 1900 but now it’s often seen as a scourge, particularly in cities.

That helps to remind us that there are shades of grey in the debate.

Our prime minister Malcolm Turnbull’s just sailed into a manure storm over his government’s intention to make Australia one of the top ten arms exporters in the world.

Given that Australia currently holds 0.3 per cent of the world market, there was a fair bit of “good luck with that” expressed by military experts.

Clearly there’s a moral argument if we’re packaging up nerve gas, but we’re not. Most of Australia’s arms exports are in the nature of fast patrol boats, which we hope will save lives, or Bushmaster-type armoured vehicles designed to save the lives of troops inside them.

Or what about the coal versus renewables debate? We know where it’s heading, as renewables costs keep dropping and Co2 emissions keep coming, but how soon can Australia switch off its last coal fired power station? Not as soon as activists want, but opting out of owning coal mines is unlikely to speed the process up, as the coal reserves will outlast the demand.

Just looking back at the oil industry, was it always a villain? Absolutely not. Its discovery in Oklahoma in 1859 was widely greeted as a positive, particularly by opponents of whaling, given that it was whale oil that had mostly fuelled oil lamps until then.

It was Saudi oil minister Sheikh Yamani who memorably noted in the 1980s that the Stone Age did not end for want of atone, and the Oil Age will go the same way as demand eventually dips below supply.

Was it right to own oil shares early in the 20th century? Is it right now? And what are the alternatives?

At least Larry Fink’s got us thinking about that, and other questions.

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Can Kathmandu climb higher?

Are more leisurely times ahead for Ardent?

BHP bounces back to profit, boosts dividend

Toll and traffic growth drive Transurban profit

Shriro could snag sales with celebrity BBQ range

Gold has tanked, so what next for Perseus?

Can Bellamy's be nursed back to good health?

Is Apollo Tourism and Leisure a buy?

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Will Fairfax keep its growing Domain?

Will Nintendo catch profits with Pokemon Go?

Austal contract hits choppy waters

Is Metcash ready for a new sensation?

Is IAG in a storm?

Is it time to short the big banks?

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