Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Sunday, 25 March 2012

Should we really care about super fees of 1-2%?

I read some years ago in a few US books that mutual fund managers take around 60% of your money - and thought it was the most ridiculous thing I'd ever heard.


More recently, I've come to understand what they meant.


With fund management fees averaging out at 1-2% in Australia, this can make a massive difference to your ability to grow your super balance.


Seek out funds with management fees of around 0.5% p.a. if you can.  They do exist, and there is no compelling evidence that a higher fee equates to a better fund performance.


Just be wary of whether your fund charges an exit fee (some just charge an admin fee, others a cheeky 2-5% of your balance - a con really, but it was there in the small print when you signed up, so...).


Check out this table as to what you might be getting charged as a fee:



Balance of fund
Fees at 1%
Fees at 2%
50,000
500
1,000
100,000
1,000
2,000
150,000
1,500
3,000
200,000
2,000
4,000
250,000
2,500
5,000
300,000
3,000
6,000
500,000
5,000
10,000
1,000,000
10,000
20,000


And now check out the difference 2% might make to a $100,000 balance over 45 years (no extra contributions included here, for simplicity).



Year
6% compounding return
8% compounding return
0
100,000
100,000
10
179,084
215,892
20
320,713
466,095
30
574,349
1,006,266
40
1,028,572
2,172,452
45
1,376,461
3,192,045

It is quite clear that while the effects of a 2% management fee only appear to make a marginal difference in the early years of building a retirement lump sum, over a working lifetime the potential difference is absolutely staggering. 

It's the money that is NOT allowed to compound its growth that makes all the difference.

If you have a balance that runs in to six figures, you might like to consider managing your own super (though you will have to pay auditor and tax compliance fees).

Sydney Super Saturday

The biggest auction weekend of the year so far in Sydney, this weekend.

Auction clearance rates nudged over 60% for the first time in a long while, with over 300 properties going to auction.

I'm sometimes asked why I care about auction rates - simple reason is that they are a good leading indicator of the direction of values.

Just as with share markets, the direction of market sentiment is vital. The great hedge fund managers like A.W. Jones worked this out some decades ago - increasing values, increased sentiment, a positive feedback loop.

And with (some) US commentators predicting a 60% drop in Sydney prices (I strongly disagree, by the way, with the massive population growth we have in Sydney) I do like to keep a close eye on developments.

Next big news is the CPI result (inflation) for the next quarter. A low reading would see the RBA cut interest rates again.

Amusingly, Solomon Lew suggested that the RBA have totally mismanaged the mining boom and should cut rates by 50-75 basis points in April.

That won't happen, but it is amusing as Lew used to be a board member for the RBA for some 5 years.  Of course, he has his own vested interests now as a company Chairman.

The interest rate direction is crucial as the overwhelming majority of mortgages in Oz are on variable rather than fixed rates, though there has been some move towards fixed rates.

With vacancy rates in inner/middle Sydney below 1%, I'm not seeing nay 60% property crash just yet anyway.

***

Just in Kuala Lumpur today, posting this from the awesome Petronas Towers.  Predictably very humid here.

Going on to Penang tomorrow and then Phuket, before Sri Lanka and India.  Busy schedule!

Was particularly amused to discover that Graham Taylor has been on board the QE for the last couple of weeks, before he alighted at Singapore. He hasn't changed.

I'll try to ping up a couple of pics in a day or two.


Tuesday, 20 March 2012

Hedge funds (and the customers' yachts)


Hedge funds attract the brightest minds and finest fund managers.  Hedge fund rely on manager skill (known as ‘alpha’) to target better returns than you would get from simple market exposure (‘beta’).

Here are some of the strategies they use: long-short positions, statistical arbitrage, convertible arbitrage, distressed debt transactions, commodity trading, fixed income arbitrage, fund activism (buying a stake in a company then pestering management to act in their interests), merger arbitrage, directional macro trends…

In other words, they’ll do anything that gains an edge.

Disadvantages of hedge funds

Less regulation.  This can be a plus, of course, as funds are free to target great returns.  But also they may act irresponsibly – see ‘Madoff’ below.

Risk. In targeting big returns, hedge funds may gear up and bet the ranch on one of their ideas.  Great if it works (John Paulson made $15 billion for his fund betting on the subprime crisis and reportedly pocketed $3-4 billion himself).

Not so good when they make a wrong call though (cf. Bear Stearns who placed a major bet on bonds related to the mortgage market in 2007).

Fees. Like your super fund, a hedge fund will probably take a percentage of assets under management, but they will also take a performance fee.  A stonking performance fee in some cases – from 10% up to 40% of profits after an initial performance hurdle.

Madoff

The Bernie “made-off” Madoff scandal saw investors lose out (Madoff managed money on behalf of some funds) when it transpired that the he was running a Ponzi scheme – incumbent investors were being paid using the funds of new entrants to the fund.

Would a smart and informed investor have avoided Madoff’s antics?  Maybe. 

Madoff used an unknown firm of auditors – a tiny, two-partner firm.  Major red flag for that.

He also seemed to have achieved the Holy Grail of high returns with suspiciously low volatility. Red flag.  And, in general, many sceptical Wall Street investors wouldn’t touch him.  Red flag.

But, investors would have told you in the early years that Madoff’s fund was great.  So you could well have been caught out.

Some investors diversify the risk by buying a fund of funds (where a manager allocates your capital across a range of hedge funds), but then, isn’t this just adding yet another tier of fees in to the equation?

Yachts

A hedge fund sceptic might ask you to remember the old joke:

A hedge fund CEO takes a 12 year old boy down to the harbour and says: “And this, lad, is where our managers moor their yachts!”

Boy: “Cool.  Where are the customers’ yachts?”

Wednesday, 14 March 2012

Averaging down: how it can be done effectively


The term dollar cost averaging – the practice of paying the same amount in to an investment at regular intervals – has had a very bad press since 2008.

The reason for this is quite simple.  Numerous financial advisors urged their clients to continue plunging funds in to sinking investments through the financial crisis in the vain hope that they would ‘come good’, with some disastrous consequences.

The problem with this was that some of the so-called blue chip companies went bust under mountains of debt, or, at best, performed extraordinarily badly, and clients lost vast sums of investment capital.

An example of a company that was mistakenly seen as a safe bet was General Motors.  Investors felt that because the company maintained its dividend payments to the bitter end, it must have been a sound investment. 

Not so - the company was effectively funding the dividend payments with billions of dollars of debt that ultimately could not be serviced.  Analysts recognised this and the bleak outlook was reflected in the plummeting value of its stock price. A painful lesson.

Index funds

An advantage of averaging in to an index fund is instant diversification.  By holding a stake in an index of companies, you can be certain that your investment will never amount to nil.

Of course, there is nothing too exciting about index fund performance – by definition you can only match the return of the market to which the fund relates – but at least you will not be charged extortionate fund management fees for the privilege of your investment.

In an investment or index with a long-term upward trend, averaging works because your dollars buy more units when the market is cheap and fewer when it is expensive.  It’s always fascinating to look at historic share index charts – for example, note how the worldwide stock crash of 1987 now appears to be a tiny blip on the long-term relentless march upwards.

Investors are believers in the concept of reversion to the mean.  Markets will become expensive and cheap periodically, but over time will oscillate around a median fair value, which in an inflationary environment will increase over time.

With regards to index funds, as Buffett says:  “When dumb money acknowledges its limitations, paradoxically, it ceases to be dumb.”

The Australian markets have been relatively subdued of late due to the strength of the Australian dollar which has discouraged foreign investors.

Consequently, the market is trading at earnings ratios significantly below the long term average of 14-15 times earnings. 

Tuesday, 6 March 2012

Investing in ART?


Art can be a profitable asset class in which to invest, provided you know what you are doing.

Of course, the most difficult thing when it comes to investing in art is knowing what value to place on a piece.

Company share prices can be valued with reference to current and expected future dividends.  Works of art don’t pay dividends. 

Institutions typically steer well clear of investing art so there is not an equivalent reliable quoted market to reference.

That said, institutions could invest in art.  In the years following 1974, the British Rail Pension Fund, exasperated with repeated UK financial crises and diabolical market returns (the fund clearly wasn’t “getting there”) poured more £41 million into more than 2,500 works of art, redeeming them for more than £170m over the next 14 years. 

This resulted in an annualised return of 11.3% (and outperforming inflation by 3.7% per annum) – a genuine success.  Sadly, British Rail had less success with its core competency: getting trains to their destination on time.

John Maynard Keynes* observed that a successful investor is something like a beauty pageant judge – they are not necessarily looking for the prettiest competitor, rather the competitor that the average opinion expects to be the prettiest.  This observation is particularly pertinent when it comes to investing in works of art.

An artist’s brand is important.  Having a piece sold by Sotheby’s or Christie’s is an important validation and can result in increased values of existing and future works.  Likewise, should a celebrated collector purchase an artist’s work, this represents a key seal of approval and outperformance may ensue.

Two clever dudes with Japanese sounding names (i.e. I can’t remember them…OK, I’ve just looked it up: Moses and Jiangping Mei) attempted through many hours of painstaking research to show a link between statistical indicators (for example, the number of scholarly references made to an artist) and sustained outperformance of art work values.  A thorough and detailed thesis concluded that…umm…uhh…there is no such link.

Summary: if you enjoy art and know something about it, go for it and invest.  Otherwise, use common sense and buy shares in outstanding companies that pay you dividends.

***

*John Maynard Keynes was a truly great man, one of Britain’s most intelligent ever economists and the predecessor of Warren Buffett in more ways than one. 

At the helm of the Cambridge University Chest Fund, Keynes was a focus investor many decades before anyone knew what a focus investor was.  

Keynes noted that it was better to invest in a few outstanding ventures rather than diversifying into a swathe of 15-20 investments in which one has no particular confidence.  Like Buffett, Keynes was also a genius of the pithy quote. 

When asked whether distressed investors suffering from loss aversion should take comfort in ‘reversion to the mean’ and the long term trends and results of the markets he duly noted that: 

“The long run is a misleading guide to current affairs.  In the long term we are all dead.”

References: Peter Stanyer, Guide to Investment Strategy (Profile Books, London, 2006)

Saturday, 3 March 2012

Is the Sydney property market picking up again?

Not sure yet, but do check out tonight's auction results.

Last 3 weeks' clearance rate results:

11 Feb - 52.5%
18 Feb - 54.5%
25 Feb - 56.6%

Mortgage approvals have undoubtedly spiked over recent months, but the auction clearance rates are more of an acid test...watch this space....

Friday, 2 March 2012

How to minimise property holding costs


I was chatting to a mate who lives on Sydney’s prestigious north shore the other day about the funding of property investment and how it can be done.

Property in Australia currently tends to drain funds from you in the form of holding costs (interest rates in the UK and elsewhere are presently so low the reverse tends to be true – investment properties there tend to be positively geared).

In Australia, 3 year fixed rate mortgages are available from around 6.00% at the moment, which is very reasonable, but even so, repairs and maintenance, vacancies, strata fees, council tax, letting agent fees and other costs tend to result in a negative cash flow.

However, here are 12 straightforward strategies you can use to minimise or even negate a draining cash flow:

1 – Invest in an area with a high rental yield – in Australia, this tends to mean regional centres and more remote areas away from city centres.  Capital growth can tend to have an inverse relationship to rental yield, so the compensating result may be lower growth

2 – Put down a big deposit – putting down a 25 or 30% deposit is great tactic if you can afford to do so.  I’ve used this strategy several times; it reduces the mortgage required and thus the resultant negative cash flow

3 – Perform a cosmetic renovation - and then increase the rent.  Adding an extra bedroom or subdividing is a particularly effective strategy

4 – Pay down some of the mortgage debt – again, great if you can afford to do it…

5 – Invest in units rather than houses – units can generate 5-6% rental yields which tends to be higher than the yield of houses

6 – Avoid units with pools, gymnasia and 24 hour concierges – as these tend to result in high strata fees
7 – Invest overseas – such as in the UK where interest rates are currently very, very low.  There can be disadvantages to this strategy too

8 – Manage the property yourself – good in theory, but if you are investing in property to give yourself more time, this can be counter-productive

9 – Buy at the right price in the first place – using smart negotiation skills

10 – Find a cheaper property with a tenancy problem – and solve the problem!

11 – Claim all depreciation benefits – sounds obvious, but many people don’t do it.  Engage a surveyor to prepare a depreciation schedule; this may cost you around $500 initially, but the tax savings will save you this many times over

12 – Use an accountant with extensive property experience – don’t’ try to shortcut by using a local accountant with no experience as this is penny wise…but extremely pound foolish!