Welcome to the Autumn Edition of the Cambridge Private Wealth Newsletter.
I hope this meets you all well. The cold has commenced but unfortunately my wife won’t let me fly north (maybe Noosa?) for the coming winter. As a Queenslander I dread the cold, however I will say we had a fantastic summer and an extended one it seems. All in all, as I have said to many of you, I am positive on life and what it can bring. I remain a very lucky person to be alive with the ability to come home to a loving family and (now) a dog.
Despite the positivity on life, I am certainly not positive on markets (NB – I am sometimes positive on them believe it or not). The manipulation in the form of Quantitative Easing continues but this is ending, with interest rates rising. Below are some frightening areas to read about. Needless to say, stay defensive.
Always welcome any calls of enquiry. Stay safe and happy in the meantime.
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Jeremy Grantham – 79 year old founder of GMO
This is a gentleman who likes avoiding crashes for investors. Go figure. He has previously identified the Japanese bubbles (shares and property) in the late 80’s (easily remembered when they owned the Gold Coast and a second later they were gone!) and didn’t invest client funds into the tech boom and bust of 1999/2000.
Most recently he believes the current markets are in the final stages of the ‘great bubble’ bursting.
He stated that he overheard a lady who wanted to sell her home because of the slow but steady growth rate and put it all into equities as it was returning double digits year on year. This commenced an alarm bell in Grantham’s ear about the state of the markets. This reminds me of the story of the shoe shine boy. This was a story back in the Winter of 1928 when Joe Kennedy was offered a stock tip from the shoe shine boy once he finished shining his shoes. He then thought it was time to sell when this occurs. We know what happened soon after this.
Grantham wrote in October 2017:
“…since 2016, the S&P500 has displayed one way traffic. The index rises interminably, and volatility continues to decline, and that’s despite fake news at Facebook, the incineration of cash at Tesla, Russian intercession in US elections, Chinese debt issues, the threat of a nuclear attack or even missiles flying over Japan. Every day the market keeps going up.”
Grantham also wrote something very relative to some conversations I have had:
“In normal times its reasonable to believe clients are concerned about how well a manager can handle a downturn. But in a bubble, forget it. Clients care much, much more about underperforming all their friends on the golf course”. As humans we certainly have short memories.
From my perspective, having gold as a counter measure, high grade debt and high levels of cash reserves is necessary at this time.
(Source: Some of the information above was sourced from ‘Jeremy Grantham says beware of the market melt-up’ – by Roger Montgomery. Note here that Montgomery Funds do not invest in Gold and the holding of this is my opinion only).
Stock Focus – Evolution shares
As stated, I am an advocate of gold shares within a portfolio. Since the commencement of the negative market returns around 3 months ago, this share (and other gold shares) have been outstanding and held up portfolios.
Evolution Mining is a leading, growth-focussed Australian gold miner. Evolution operate five wholly-owned mines – Cowal in New South Wales; Mt Carlton, Mt Rawdon, and Cracow, in Queensland; and Mungari in Western Australia. In addition, Evolution holds an economic interest in Ernest Henry, in Queensland, that will deliver 100% of future gold and 30% of future copper and silver produced from an agreed life of mine area. Outside of the life of mine area Evolution will have a 49% interest in future copper, gold and silver production from Ernest Henry.
When looking at these miners, one area we need to look at is the All in Sustaining Costs (AISC). The AISC is the total cost of getting the gold to sale. It takes into account the pertinent costs of mine maintenance (on-site mine and administrative costs, royalties and production taxes, by-product credits, permitting costs, smelting, refining, and transport) as well as behind-the-scenes costs that aren’t often associated with on-site mining but still factor into overall expenses. These include corporate general and administrative costs, sustaining exploration and study costs, sustaining capitalized stripping and underground mine development, and sustaining capital expenditures, to name a few.
Evolution has an AISC of between $820 and $870 an ounce. In Australian dollars Gold can currently be sold for above $1,700 an ounce.
Since early January, the ASX 200 has dropped around 4.7%, with Evolution shares increasing around 23%. Having held these in a total portfolio, it has held up the poor performing shares.
AMP Financial Planning – Royal Commission
You would have heard a lot about what’s happening at the royal commission. The latest, as I write this, is with AMP Financial Planning who have admitted charging clients for no service.
When I first started in financial planning over 20 years ago, disclosure, review, portfolio construction, knowledge of advisers and so on was inadequate. I am sure most of you remember the AMP or MLC adviser knocking on the door and selling you (or trying to) an Endowment or Whole of Life policy. The promises of early retirement and riches drew people in, but returns were unrealistic and any proof of fees was hard to find or not available. I remember my Mum and Dad bought each of my 3 older brothers endowment policies, but not me. Being the youngest is tough, but I’m not bitter (ok maybe a little bit to be honest as they got the AMP shares as well which I hope they sold immediately).
In the initial stages many advisers did not have degrees and many were simply salesman. Since then, the industry has moved forward amongst the scandals, and continues to have issues. Of course, issues are not confined to financial planning, but this should not act as any defence.
Money (or greed) often drives behaviour. This has been seen in financial planning firms such as Storm Financial and also within the banks. Whilst working with the banks I witnessed behaviour that made my blood boil, but the “known knowns” were quickly dismissed or swept under the carpet. Any opposition to what was happening was quickly shut down and the process of selling more product continued. Young ladies and men, relatively fresh from university, were put in positions of pressure from middle management to reach certain revenue targets, and due to inexperience have, as a result given terrible advice. I think you all know my opinion on banks.
On the positive, most planners now have a good education and the moral compass to do what is decreed as the right thing for the client. These advisers can make a big difference to people’s wealth and protection of this wealth. The current Royal Commission can only be a positive for financial planning (and banking) in the future. Lets just hope the morality of people can override the greed.
My expectation from the Royal Commission is:
- Higher education standards for planners (already happening).
- Banks increasing the technology spend with part of the focus on online broker tools. My personal opinion is that many of the simple home loan mortgage brokers will be redundant in 5 to 10 years, and the process of home loans and comparisons will be very simple and automated (already available of course).
- Banks forced to cease the vertical integration model and open up their Approved Product lists. This simply means that they will offer more insurers than just the in-house insurer and more investment platforms for clients to choose from across the industry.
- As I’ve stated and as is happening, the continuation of branch closures throughout Australia. This has happened with me with ANZ shutting down, and has honestly been very inconvenient (not even an ATM remains).
- Little to no loan growth for a fair while as lending constraints tighten. This could reduce property prices more than otherwise would have been the case (opinion only).
The unfortunate part of the Royal Commission is that most of the poor behaviour and advice will not be exposed.
As always, if there are any issues or you have concerns about your situation or anything to do with the Royal Commission please call and I can give my opinion.
Cambridge Private Wealth Pty Ltd (ACN 607 806 244), Authorised Representative and Credit Representative of Charter Financial Planning, Australian Financial Services Licensee and Australian Credit Licensee.
General Advice Warning – This newsletter contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider you financial situation and needs before making any decisions based on this information.