UK banks move into Virgin territory

By Blog, Portfolio

The stock in focus this month is CYBG (CYB). CYBG is a full service UK bank previously owned by NAB. After years of underperformance CYB was demerged in 2016.

It operates under the brands Clydesdale Bank, Yorkshire Bank and more recently B Brands. Despite serving nearly three million customers and having a branch network of over 200 branches and business banking centres, CYB struggled to grow its footprint nationally and has been largely confined to Scotland and the north and midlands of England.

This led to a major strategy shake-up. In June 2018 CYB purchased Virgin Money, an iconic brand with strong credit card and mass mortgage product capability in different geographical markets. The combination with CYB’s retail and SME customer base made strong strategic sense.

The complementary nature of the business means that substantial cost savings are targeted with expectations of annual net cost savings of 200 million pounds by 2022, enabling the Bank to significantly reduce their cost to income ratio.

The other exciting opportunity for management is to lever the other aspects of the Virgin group to enhance the experience for Bank customers and to begin to build an ecosystem which incorporates the other Virgin brands that UK consumers are using including Virgin Atlantic, Virgin Mobile and Virgin Media.

However, in the short term there are macro factors impacting the UK economy, specifically regarding Brexit and the political and economic uncertainty this is creating.

After talking to CYB and other UK focused firms, most businesses in the UK are in a holding pattern until this situation is resolved. With the new PM in place, this resolution, while still unknown, is closer to happening.

While any solution will probably lead to short term volatility, the long runway for the process means that authorities and policy makers are prepared to provide the support the system needs to overcome these short term issues. We therefore see this as an opportunity to purchase businesses at a good level for the longer term.

Quick Snapshot

  • CYB will change its name and branding to Virgin Money from late 2019.
  • The newly combined entity will have 9 billion pounds of deposits and 7 billion pounds of lending.
  • The flagship product, the Virgin Money personal account, will launch in the third quarter of this financial year.

Are Term Deposits Defensive?

By Blog, Uncategorized

By Leon De Wet – Elston Portfolio Manager

At first glance the answer may seem obvious, but is it? That depends on what an investor is looking to protect against. There is no doubt that term deposits offer capital stability and given the government deposit guarantee, are virtually risk-free. So, through the lens of protecting the capital value of one’s investment, they are undoubtedly defensive.

Should the question however be framed in the context of providing income, the answer is quite different. According to data from the Reserve Bank of Australia, over the past 10 years the average rate on a 1-year retail term deposit has more than halved from 3.70% to 1.80% at the end of June 2019. For a retiree seeking a stable income stream, term deposits have not been defensive.

In contrast, the dividend yield on the S&P ASX200 Index at 4.55% (before franking credits), is broadly in-line with the average yield over the past 10 years and near the middle of the 4.0-5.0% dividend yield range. In essence, over the past decade the interest derived from term deposits has been more unpredictable, and lower, than the dividends derived from a broadly diversified portfolio of Australian companies.

This does not imply that term deposits should be avoided. They may well be justified in a diversified portfolio. Careful consideration however needs to be given to the role they are intended to serve, and the possible unintended consequences of being defensive, particularly in the context of longevity risk.

Are grocery shop owners off their trolley?

By Blog, Uncategorized

With the rise of e-commerce, you might be tempted to think that the traditional grocery shop is on the way out. But is it? While certainly facing a competitive threat, bricks and mortar grocery stores also have a couple of important advantages over the pure online retailer.

  1. Margins – grocery retailing is fundamentally a low margin business making cost control critically important. Running an online business is however typically costlier, mainly due to increased distribution costs and depreciation of the capital investment needed in IT systems and logistics.
  2. Fractionalisation of costs – physical stores tend to incur a greater proportion of fixed costs, primarily due to the rents paid. This means that brick & mortar grocers can increase their profit by more from every additional dollar of revenue generated than online grocers which incur a greater proportion of variable costs.

To help overcome these challenges a pure online grocer can of course levy an annual subscription and/or add a delivery fee, but in doing so it is likely to eliminate a pool of potential customers. Given that the delivery economics however work best if drivers spend the bulk of their time bringing groceries into homes from trucks rather than driving kilometers between homes, the loss of potential customers is clearly something best avoided.

Franking Matters

By Blog, Uncategorized

In a low rate environment, the income or cash flow that an investment provides is important, particularly if you rely on this income to fund your living expenses. While comparing options, you must of course consider their investment horizon and the associated capital risk of the underlying investments over this period. But equally, you must not forget the potential for that income to grow over time.

To illustrate the vastly different potential outcomes over the long term, consider the analysis below from AMP Capital, when contrasting the results in 2016 from having invested $100,000 in December 1979 in either:

i) a one-year term deposit or ii) the Australian share market.

The term deposit would still be worth $100,000 and paid roughly $2,450 in interest, while the shares would have grown to $1.12 million in value and paid $51,323 in dividends before franking credits.

Are you eligible for the franking credit rebate?

Given the dividend imputation system in Australia, which effectively allows companies to pass on a tax credit to their shareholders for tax already paid, the effective after-tax dividend income received by investors may in fact have been more than outlined above. This would certainly be the case for an SMSF investor in pension phase whose income is tax exempt, and as such can take full advantage of the franking credit rebate to supplement their income.

The proviso is that if the investor is entitled to $5,000 or more of franking credits, they must have held the shares for at least 45 days (not counting days of purchase or sale, so in effect 47 days) to be eligible to receive the refund.

Residential property: can it fund your retirement?

By Blog, Uncategorized

If your family is like many Australian families, when you get together for Christmas this year, you might find that the conversation turns to property. As a nation, we have a love affair with residential property, and booming capital city prices of late have done little to change this. We might feel good when the value of the family home goes up, but does this mean we should be relying on residential properties to fund our retirement?

There is no doubt that many people have done well by investing in the Sydney and Melbourne markets. However, capital growth does not pay the bills in retirement. It is income and cash flow that become important, when work income stops.

What does the data say?

Data provided by the Core Logic RP Data Home Value index shows that the average gross yield for capital city properties is just 3.25%. In Sydney, it is lower than the national average at 3.08%, and in Melbourne it is a paltry 2.9%.

This means that $1 million spent on a rental property in Melbourne would be expected to generate $29,000 a year. From this, investors would need to pay costs such as rates, insurances, agent’s fee, body corporate, maintenance and land taxes (depending on the state). This could easily account for $10,000 or more a year, meaning that the net yield is below 2%.

On this basis, a retiree looking to fund a comfortable lifestyle (considered to cost about $60,000 pa) would need to have over $3 million invested in property. By comparison, a $3 million investment in a diversified Australian share portfolio is expected to produce $152,700 of gross income (before any fees and charges).

Income is only part of the equation though. Surely recent capital growth in property would compensate for the low income? Residential property has performed well, although the exceptional rates of growth have been confined to small pockets of the country. Nationally, the average growth rate for the 12 months to 31 October was 6.6%.

While this is a very solid return, by comparison, the top 50 companies on the Australian Stock Exchange grew in value by 10.1%.

Is your money accessible?

While growth is good, retirees often need access to money in excess of their regular income needs. If all your money is tied up in a property, the entire property needs to be sold, as it’s not possible to sell off a bedroom. The sale of a property can also take some time and comes with significant costs. If a gain is made on the sale, there would also be capital gains tax to consider.

It pays to diversify

For many investors, a sensible investment in property can form part of a well-diversified strategy for creating wealth. But to focus only on this investment to the exclusion of all else is foolhardy. Investors need to ensure that they assess each investment on its true merits, rather than making emotional decisions.


Bitcoin – Bubble or a Brave New World?

By Blog, Uncategorized

In recent times, we have seen the rise of so called ‘crypto-currencies’ such as Bitcoin and Ethereum, which have put themselves forward as alternatives to traditional stores of value and currencies. As these and other crypto-currencies gain in profile and popularity and are accepted as a form of payment, it is timely to look at the methodology behind these ‘assets’ and ask – are they a fad or something more?

What is Bitcoin and how does it work?

At its core, Bitcoin is a form of decentralized digital payment system. In a traditional payment system, a clearing house, such as a central bank or financial institution, contains a centralized ledger that tracks asset movement between individuals and institutions within the financial system. Before one individual can transact with another, the assets must effectively pass through this clearing institution. With a ‘distributed ledger’, the record is held and verified by many different institutions and parties throughout the system. This eliminates the need for a central registry to record and certify asset ownership before that ownership can transfer from one party to another and ultimately enables peer-to-peer transactions using a public record, called a ‘blockchain’.

Understanding the security issues

Using blockchain technology, every transaction is verified back to its source, so for example, if A wants to transfer bitcoin to B, the transaction is presented online and represented as a ‘block’. This block is then referred to every party in the network and then compared to the ledger. If the transaction is valid, it is approved and the block is added to the chain, with the bitcoin moving from A to B. In theory, this means that B can securely transact with A, confident that they are truly the possessor of the bitcoin, without having to go through a centralized third party, such as a bank.

Another positive worth mentioning is that because of the distributed nature of the ledger, if one node gets hacked or destroyed, the rest of the nodes still contain the accurate ledger. Of course, this is only true to the extent that the network is isolated. There have been issues with security when bitcoin and other crypto-currencies have interacted with a traditional monetary system, such as exchanges.

Despite this potential weakness, these exchanges have been vital when it comes to increasing the popularity of cyber currencies. However, the vast majority of transactions remain speculative in nature, where traders are buying bitcoin in the hope of selling them at a higher price, rather than using them as a store of value. The value of bitcoin has been extremely volatile, and there’s still a long way to go before they can be considered a traditional asset.

Is there a future for cyber currency?

Notwithstanding its various shortfalls, there are a number of situations where some form of cyber currency and transactions using blockchain technology may have application. Payments in third world countries where there is a lack of a robust banking system and a dearth of cash available is one such application. In the not too distant future, cyber currencies may also provide a viable alternative for people looking for a more instantaneous international transfer of assets, compared to the current slow and expensive international payment system.

While the development and progress of these cyber currencies is interesting from a financial and technological point of view, it is still early days. There is more than a hint of a bubble around them, particularly with some of the newer ‘initial coin offerings’. This is probably best summed up by a recent new cyber currency to be offered to investors – UET, which stands for ‘Useless Ethereum Token’. On their website they state, “Is this a joke, is this a scam? No, it is real and 100% transparent – you are literally giving your money to someone on the internet and getting completely useless tokens in return!”. UET raised over $US5,000 in its first 12 hours. While this may not be a large amount on money, this kind of behavior may suggest that it is a bubble after all.


Retirement Planning? A Tailored Financial Plan is The Key to Success

By Blog, Uncategorized

For most Australians, the definition of retirement means different things to different people. Whereas previously to retire meant a departure from paid employment, nowadays lifestyle factors affect our work-life cycle and, for some, retirement has morphed into a combination of semi retirement, career change, lifestyle change and travel.  Whichever is the best fit for your individual circumstances, targeted retirement planning is mandatory to ensure you are able to comfortably accommodate your goals and aspirations.

A recent media release from the Australian Bureau of Statistics (March 2016) announced Australians are intending to work longer than ever before. In the survey conducted in 2014-15, 71 per cent of persons intended to retire at the age of 65 years or over, up from 66 per cent in last survey result of 2012-13 and 48 per cent in 2004-05. For those in the labour force who intended to retire, the most common factor influencing their decision was financial security.

Planning for Retirement

At Elston, we understand that financial security begins with a customised financial plan. We work with our clients to develop the right long term structure so they’re not forced to sell assets at a loss at retirement. We encourage clients to structure their wealth so they have the flexibility to work as much or as little as they like, while improving their long-term capital preservation and sustaining their living requirements for retirement.

Navigating the different options available can be challenging. How do you generate a passive income stream? Where should you invest? What are the latest changes to taxation and other regulations relating to superannuation? Our advisers offer up-to-date advice on a range of retirement planning solutions in alignment with your individual circumstances, assets and liabilities; your short and long term financial goals; and your ideal retirement plan. Some of these options include:

Self Managed Super Funds (SMSFs)

A self-managed super fund (SMSF) provides greater flexibility and control over your investments and financial future. With many Australians unsure where their superannuation is invested in traditional industry and retail funds, and many delivering average, or below average performance, the benefits of an SMSF make it an attractive component of a long term retirement plan.

SMSFs are proving to be a solid investment vehicle, with the Australian Taxation Office touting them as a viable way of saving for retirement. Indeed, an SMSF must be run for the sole purpose of providing retirement benefits for the members or their dependants. The difference between an SMSF and other types of funds is that the members of an SMSF are usually also the trustees. This means the members of the SMSF run it for their own benefit and are responsible for complying with the super and tax laws.

Superannuation Funds

With traditional super funds professional, licensed trustees are responsible for managing the fund and bear the compliance risks. While some allow control over the mix and risk level of your super investments, generally you are unable to select specific assets your super will be invested in.

If an SMSF isn’t a good fit for your current financial situation, there are many options available for leveraging and maxmising your traditional superannuation fund.  Additionally, you can make your own contributions, organise a salary sacrifice arrangement, or take advantage of eligible government superannuation co-contributions.

The right advice – the right plan

Everyone has unique goals, limitations and assets; and accessing the right financial advice is as important to your retirement plan as the structure you use. An experienced financial planner will use a ‘big picture’ approach, taking the time to discuss your personal circumstances and identify your goals, before matching you with a plan designed to actualise your retirement goals by harnessing your financial potential.

Control your wealth – control your future

Retirement dreams are never a one-size-fits-all ideology, and retirement planning is never a one-size-fits-all financial solution. Whether you dream of caravanning around Australia, spending more time with the grandchildren, cruising the world, or taking on part-time or hobby income streams, you need the financial security to embrace your dreams with confidence.

To control your wealth is to control your future. Whether it’s building wealth through an investment strategy, or tapping into the benefits of an SMSF, Elston can help you achieve financial security with a customised retirement plan.

Door Closing On Super Opportunities

By Blog, Uncategorized

“Our lives are defined by opportunities, even the ones we miss.”  – Eric Roth

For anyone who wants a comfortable retirement, 1 July 2017 is a very important date, as this is when the majority of the government’s proposed super changes are likely to come into effect.

Although it seems like super is constantly under attack, it is still the most effective way to provide for retirement. It remains a tax-free retirement option, and the only legal way to ensure you pay no tax on ‘decent’ retirement incomes.

In fact, super is so good that the government is looking to reduce how much we can use it. One way they are doing this is by reducing the contributions you can make. Among the various proposals is a significant restriction on Non Concessional Contributions (NCCs).

What are NCCs?

An NCC is an amount that is transferred into super from after-tax monies. Over the years, it has been a very effective way to move money from you own name (where it could attract tax in retirement) into super (where it can be tax-free).

Commonly, this might occur when you receive an inheritance, take a redundancy, sell a business or realise a sum from a property sale. NCCs can also be used when you transfer an existing investment (such as a share portfolio or a commercial property), into a self-managed super fund for tax purposes.

What is changing? Currently, anyone eligible can put $180,000 worth of NCCs into super each year. And if you’re under 65, you can make three years’ worth of NCCs in one hit – allowing $540,000 to be put into super. However, from 1 July 2017, these rules will be amended so that:

  • The annual limit is reduced to $100,000
  • The three year ‘bring forward’ limit is reduced to $300,000
  • Once you have $1.6m in super, you can no longer make NCCs at all.

These are significant changes that will greatly reduce your ability to move large sums into super.

Make the most of this window of opportunity now!

Thankfully, a window of opportunity still exists for you to move large sums into your super. While the current rules are still in place, it is possible for a couple to put over $1 million into super. Once the rules change, this opportunity will be lost forever. So now is the time to act.

If you fit into one or more of the following categories, you may be impacted by this rule change:

  • You are 50 plus, with super of $750,000 or more
  • You are aged 62 or older
  • You will have more than $1.3 million in super as at 30 June 2017
  • You have significant assets (like cash, shares, managed funds, properties) outside of super – which you may be better off having inside your super.

What’s the next step?

With only months until this change becomes law, urgent action may be needed before this opportunity is lost forever.

Can you afford the retirement you want?

By Blog, Uncategorized

One of the most common questions we are asked by clients planning for retirement in the next 5 or 10 years is ‘How much do I need?’ Compared to those who retired 20 or 30 years ago, future retirees need to plan for longer life expectancies and lower investment returns. In the past, investments of $1 million may have allowed for a very comfortable retirement, but this may not be enough in the future.

When addressing the cost of retirement, it’s important to consider the lifestyle you wish to lead. As a starting point, we often consider the ASFA Retirement Standard.  Under this measure, for a couple to have a ‘comfortable’ retirement, an amount of $59,236 is required ($43,184 for a single person).

Our experience at Elston, however, is that many retirees like to be more active than what’s allowed for by the ‘comfortable’ ASFA standard. For example, many retirees like to budget for an annual overseas trip, adding around $20,000 pa to the cost.  Other costs such as helping the kids, home renovations, car upgrades and health care needs should also be considered. For these active and involved retiree couples, the annual cost of retirement can easily reach $80,000 pa or more.

Does the cost of living really fall as you get older?

Experience also tells us that the cost of living doesn’t always fall that much as people age. The 2015 Intergenerational Report noted that many more Australians will now live beyond the age of 90. We are also likely to remain healthy longer, with many over 80s enjoying active lifestyles, including travel.

In fact, the ASFA calculations show that for a retired couple aged 85 years, the cost of a comfortable retirement today is only $5,000 pa less than it would be for a 65 year old couple. A similar gap applies to single retirees.

Increasingly it will be up to retirees to fund retirement themselves. While an Age Pension safety net is always likely to be there, the income it provides will be far less than the amounts above. Pension changes on 1 January 2017 will also reduce access to part pensions.

How much do you need to self fund your retirement?

The question of how much investment is needed to self fund your retirement is a difficult one. Post the Global Financial Crisis, global investment returns have been subdued. This has caused concern as to whether old rules of thumb will hold true in the future. Certainly, if recent low returns continue for an extended period, it will mean the amounts that a person needs to fund retirement will be larger.

This said, we should never base our long term assumptions for the future on the short term past. Interest rates are unlikely to stay at today’s levels forever; just as they didn’t stay at the heights they reached in the late 1980s. However, we also cannot assume that the significant growth in asset prices of the last 30 years will be repeated in the next 30.

Individual factors need to be considered

Ultimately, how much you might need will depend on a range of factors including your desired lifestyle, the legacy you want to leave, the possibility of accessing the age pension, how long you might live and your risk profile.

While it is definitely possible to live a nice life on less, many people aspire to have a retirement that is active and filled with adventure, choice and freedom. To guarantee certainty around this requires significant capital, so it’s important to set goals and start planning early.


The World (and $1 million) Is Not Enough

By Blog, Uncategorized

In the financial world, there are often quoted ‘rules of thumb’. A common one is: “If you own your home and have $1 million invested, you’ll be right for retirement.”

Sounds reasonable, but is it true?

We have examined the idea that an income of $60,000 for a retired couple is often considered sufficient for a comfortable lifestyle. We suggested that for those aspiring to have more, income above $80,000 was probably closer to the mark. So how much invested capital is needed to produce this? The answer to this question is a difficult one.

Post the Global Financial Crisis, investment returns have been subdued. Just take a look at the income that 5 year government bonds currently produce.

Country5 year bond yield
United States1.10%
Great Britain0.40%

So, do old rules of thumb still apply?

While other asset classes can produce better income, low returns have caused concern as to whether old rules of thumb will continue to hold true.

In the United States, there has been a rule of thumb that has stood more than 20 years. This says that a retiree can afford to draw 4% of their initial investment in the first year, increasing with inflation annually. The theory goes that if this rule is followed, the retiree’s capital is guaranteed to last at least 30 years.

This was based on a 1994 study that examined returns on a portfolio over periods going back to 1929. The assumption was that the portfolio owned 50% in US Bonds and 50% in US shares. The testing showed that even in the very worst 30 year period, the retiree would not run out of money, if they stuck with the 4% rule.

Given the low US Bond yield, some US commentators are suggesting that the 4% rule should become a 2.85% rule. This would mean a retiree with $1 million can only afford to spend $28,500 per year. It would also indicate that to reach the suggested $80,000 retirement income, a retiree might need as much as $2.8 million invested!

Should investors lower their expectations?

At SB Wealth, we don’t agree that investors should set their return expectations quite this low. It is unwise to assume that the current (extreme) situation will persist forever. Interest rates are unlikely to stay at today’s levels; just like they didn’t stay at the heights reached in the 1980s.

Typical Australian retirees often have what is referred to as a ‘balanced asset allocation’. This is made up of 30% in cash and bonds, and 70% in shares and property. In the current environment, an average gross income of 4.10% would be produced using this strategy. This is not as conservative as the 50/50 split used in the US study.

We should also consider that over the long run, the shares and property in such a portfolio should allow the income and capital to grow with inflation. With these assumptions, to have $80,000 pa indexed to inflation with money lasting 30 years, you might need at least $1.565 million. This assumes no age pension is available.

What’s your ‘magic’ number?

If we come back to our original question – is $1 million enough, the answer is – it depends. Rules of thumb make good discussion points for articles, but actually should never be used to plan a retirement. Instead, you need to consider your personal situation and goals.

Factors such as desired lifestyle, the legacy you want to leave, the possibility of accessing an age pension, how long you might live, and your comfort with investment risk, all play a big role. So, while $1 million may be plenty for some, for others it will simply not be enough.

To better understand your number, speak to our adviser today.