If you have a wisp of grey in your hair, or actually once owned a wireless, duck. You’re under attack. First Australian retirees and self-managed super funders were blamed for locking out Australia’s first home buyers from ever owning a property. Now they’re accused of distorting not just the share market, but the entire capital allocation of the country. In the spirit of The Daily Reckoning‘stradition of defending the underdog, the misunderstood and the downtrodden, we rise in defense. Wrinklies, unite!
The Australian reported this week on a recent Credit Suisse paper saying, ‘Self-managed super funds are now so dominant in the Australian equity market that they are distorting the way big companies juggle decisions about dividends and capital investment. "SMSF’s are retarding investment, employment and growth in Australia."‘.
The crux of the matter, according to the article, is SMSF trustees prefer cash in the hand over potential capital gains, and company boards are hostage to this ‘new market paradigm‘. Money that could fund new investment is paid out, never to be seen again (apparently). There’s a suggestion that SMSFs have bid up Australia’s big dividend payers into some sort of mini-bubble. Why? Because of low choice for reasonably secure yields and because they ‘identify‘ (whatever that means) with companies like the Big Four banks and Telstra. The conclusion for investors is the idea you can front run the SMSF herd by looking for high dividend yields and dividend per share growth, rather than earnings.
In our experience, SMSF trustees are a bit more savvy than all that. But it seems to us, too, that it’s the RBA that distorts the market, not retirees. A quick detour to China is needed here. Stay with us. The Wall Street Journal reported this week that five star luxury hotels are doing the previously unthinkable: they’re deliberately dropping stars and downgrading their properties. Why? Because of the government crackdown on Chinese bureaucrats’ luxurious spending. They’re following the money.
So it seems to us, with interest rates to savers at near historic lows and the rightful income savers should be earning handily transferred to debtors, retirees are doing the same thing: following the money. And right now the money is in dividend paying shares. They may very well be in a bubble. We don’t know. But the RBA will have engendered it, not SMSFs. As to the economy, we think Telstra’s dividend policy is just slightly less important than the true engine of growth and job creation: growing businesses and entrepreneurs.
According to Credit Suisse, SMSFs account for 16% of the equity market, about $220 billion of assets. We’d expect that number to grow too, if management fees stay as outrageous as they are. The Age reported recently that ‘almost half the investment returns made by Australian savers over the past five years has gone on management fees…the average management cost of a balanced fund at 1.91 per cent. The basic management fee that is: before any establishment fees, contribution fees, exit fees, switching fees, performance fees, financial planner fees and buy/sell spreads.‘
The key figure is assets under management. They’ve grown from $250 million in 1990 to $2.1 trillion today. But the average Aussie is paying the same. Somebody is taking a big chunk of the pie — and it’s not you. We’re sure there’s plenty of money in there that could fund jobs (and dividends), instead of supporting Australia’s vested interests.
And of course, let’s not forget that you pay tax on your nominal return, not your real return. We can’t forget inflation at work too. Dan Denning ran some numbers in Scoops Lane this week:
‘The financial industry always uses the rule of 72 to illustrate the power of compound interest and promote the idea that time is always on your side. If you just let time and compounding do your work for you, you’ll get rich without doing any work.
‘But with negative interest rates, how long would it take you to lose half your money? Well, let’s say that a flat cash rate and rising inflation gives you negative real rates of 3% a year. The rule of 72 in reverse means that it would take you 24 years to turn $100,000 into $50,000. Inflation is an efficient little thief.
‘Now let’s say the real rate of inflation is 5%. Using the same rule, now it takes just 14.4 years to see your capital halved. Sound unrealistic? The trouble with inflation is that it never stays on target. It’s always an overachiever.‘
So we raise a glass to Australian retirees and SMSF-ers for this coming Australia Day. We should count ourselves lucky they have a damn dollar left to buy a few shares at all.
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