Aussie Firebug

Financial Independence Retire Early

Nothing written below is financial advice. The below questions and answers are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions.

Question


Dear Aussie Firebug,

I would like to get your thoughts on managed funds, and whether you think there could ever be a good actively managed funds out there? I know they can’t compete with the fees of index funds, but the appeal of an automatic savings plan might be tempting for some people. And some funds state they can outperform the index.

What do you think about Platinum Asset Management’s claim that 20k invested in 1995 would be worth 300k now? They have an impressive graph on the front page of their site, showing the fund far outperforming the MSCI all-world index over the long term (www.platinum.com.au). A closer look at more recent performance shows it has failed to beat the index over the last few years, however.

Would you ever consider an actively managed fund or recommend them for certain people? Or do you think the average person is better off buying ETFs in 5k blocks? Thanks for all your wisdom so far, love the blog!

-Luke from Melbourne

Firebug’s Answer


Hi Luke,

You can get an equivalent of an automatic savings plan by signing up with a fund provider such as Vanguard and scheduling your BPAY payments into an account. But honestly, is it that hard to make a trade once a month?

Most managed funds say they can beat the index… but most don’t.

Over the last 15 years, 92.2% of large-cap funds underperformed a simple S&P 500 index fund. Or to put it another way, the odds of you beating the index is about 1 out of 20 when picking an actively managed equity mutual fund. This example is from a US study but the results are not much better domestically with around 67% of Aussie managed funds underperforming.

Platinum Asset Management fund has certainly had a decent return since inception. But let’s take a closer look.

If we look at their Platinum Capital Limited fund (ASX:PMC) for the last 5 years we get this

PMC1

10.64% is certainly not a bad return. In fact, if we didn’t know any better, we might applaud the masterful investing by Platinum and be very happy we choose them to invest our money.

But luckily we are a bit more caution in the FIRE community. This is an international fund let’s remember. So how does it stack up against an international ETF I wonder 🤔?

Without knowing what inside this managed fund, I’ll pick an ETF that seeks to track a similar index (MSCI World) when comparing performance.  Let’s take
State Street Global Advisors international ETF WXOZ – SPDR S&P World Ex Australia Fund for the same time frame.

 

WXOZ

Oh… what’s this… a simple ETF that tracks an index with a management fee of 0.30% has outperformed an active managed fund by over 3%.

Hmmm… I wonder what sort of management fees Platinum charge for this subpar result. Let’s check their site

Managemnt fees

KOBE

Brah… Are these dude really charing a performance bonus?…

And they are so lucky that VGS has not been around for 5 years to compare. Because that bad boy has a management fee of just 0.18% and would have beat both of them.

Point is, these funds are trying to beat the market and the statistic tells us that very few can successfully do it over the long term when fees are factored in. Maybe Platinum will beat it, maybe they won’t. What’s not to say that they rely internally on a few very talented people? What happens when they leave or move on? What happens if they start to get it wrong? A management change?

I understand that looking at their past performance can be tempting but I’m a big believer in not trying to beat the index and simply riding the ups and downs while paying a tiny management fee to do so.

I’m not a fan of actively managed funds but they can play there part (some LICs are technically active managed). It’s the large management fees that I don’t like.

-AF

 

Question


Hi Firebug,

Thanks for your work. I wanted to ask about Trusts.

You’ve mentioned that you and Mrs. Firebug own your ETFs within a Trust structure.

Having spent some time reading, I understand the benefits of a Trust to be both asset protection (against personal liability, bankruptcy, etc) and tax efficiency (namely by income splitting). These sound great. I wondered if you could speak in generality from your own experience about the following:

* Costs.
* The practicalities of making contributions, and distributions.
* Having a non-spouse listed as a beneficiary.
* Any other complexities you’ve discovered since starting one.

Cheers for all of your effort for the community,

Harry

 

Firebug’s Answer


Hi Harry,

You’ve pretty much nailed the benefits of buying assets in a trust (asset protection and distribution for tax efficiencies).

Here are my current fees for my trust:

  • $1,700 once off cost back in 2014 to create the trust with a corporate trustee
  • $254 Asic company renewal costs (yearly)
  • $121 annual corporate review by professional account (yearly*)
  • $900 statutory reporting requirements including appropriate
    reconciliations and adjustments of general ledger and preparation of Financial
    Reports and Income Tax Return for Trust by an accountant (currently yearly*)

*The Asic renewal fee is something I will always have to pay but the other fees are avoidable once I feel comfortable doing them myself. I have gone through an accountant for the last couple of years to make sure everything is done correctly but the plan is to lodge my own returns once the portfolio is 100% shares.

So right now that’s a yearly cost of $1,275 to run my trust and lodge tax returns.

Loaning money to the trust is very straightforward and you just need to make sure you are good at record keeping.

I have not had to make a distribution yet as I have two negatively geared properties within the trust that offset the dividends inside. This was a mistake in hindsight to have the properties in there. My original plan was to have 5 fully paid off properties in the trust and distribute the rental income in the most tax efficient manner. But that strategy changed. The worst part is that I lose my franking credits while they are in there 😭😭😭. I have plans to sell them in the future so it’s not the end of the world but it was a mistake.

My partner is in the trust deed and the way it’s written means that basically all my family + extended family can be beneficiaries. They write it in a way from what I’m told that opens it up to almost everyone you would ever need to distribute to. But since I haven’t had to make a distribution yet I guess I won’t know until then.

When I first started learning about investing and setting up your structure in general, I was attracted to the trust structure because it was different and seem a bit of a mystery to most people. I thought you had to do things differently in order to get a different result, such as retiring early. I was really into reading about the different tax laws and the book ‘Trust Magic’ was like discovering a hidden treasure chest.

However! My thirst for all the tax loopholes and hidden efficiencies has really wanned in recent years and if I’m being honest, creating and investing in a trust is adding a layer of complexity that is really unnecessary for people wanting to achieve FIRE in Australia. Especially with our imputation credits (franking) system.

If I were to start again, I wouldn’t bother with it.

Now I’ve already invested considerable time and money into having my assets within the trust. So I’m going to ride it out and I should start to see tax efficiencies within the next few years. I’m lucky to have two retired parents who don’t rely on the pension who I can distribute to which should mean no tax on distributions until the trust starts to earn over $72,800 (4 people with distributions of $18,200).

-AF

 

Question


Hi FB,

I have been reading a fair bit of your content and noticed you mention Mr Money Moustache a few times, so I checked his blog out too. You’re both entertaining writers and you have given me a better insight into a few things I was struggling with.

However, I do have two questions for you.

1) You show your Cash as a hefty 15% in your Net Worth. breakdowns (per July 2018), which I have of course read about emergency funds etc, but MMM says he only holds a few thousand as uninvested Cash. What is your reasoning behind this? Do you feel that your liquid assets would not be easily accessible enough if you needed cash quickly?

2) This may sound silly at first, but hear me out. Why do you count Super as a part of your Net Worth? As it’s inaccessible until 65+, and the idea is to achieve FIRE long before this, isn’t that more of a long game preservation move? Would it not be better invested in something you can access at your goal retirement age of say 45?

Cheers,

Jess

Firebug’s Answer


Hi Jess,

  1. I keep around 6 months living expenses of cash as an emergency fund plus around $5K per property for emergencies like repair work or tenancy vacancies. But yeah I did have a bit too much cash just sitting around. I actually have put in over $20K within the last couple of weeks. Part of me wants to hoard cash and wait for this tantalising GFC 2.0 crash that everyone keeps talking about… But as we have learnt time and time again, it’s very hard to time the market and this is not how I want to invest.Time in the market > Timing the market!
  2.  

  3. Firstly I would like to clarify that Mrs. FB and I do not add any extra Super to our accounts through SS. What you see in our updates is simply what our employers have put in. If it were up to me, I’d invest everything outside Super because as you’ve mentioned, it’s not going to help me retire early. I did take it out for a few updates and had questions about it, so I put it back. It’s technically part of my net worth and I will use it at some point so it’s staying in for now.

-AF

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