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
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.
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
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,
- 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!
- 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
I think whether you need a trust or not comes down to your individual circumstances. If it’s just you, or just you and a partner with no plan for kids then sure just keep it simple. But there are a lot of scenarios where it’s going to lead to a lot of tax savings which will more than cover the cost of running in the trust. If you’re planning on having kids and one of you is going to be out of the workforce for a long period of time, or if you’re planning on one of you retiring while the other one keeps working, if you’ve got non earning family members you can distribute to etc, then you can save yourself a lot of money and either reach your FIRE number faster or have a higher income when you do reach FIRE.
Totally agree. And I’m in that camp.
But simplicity is a beautiful thing and the majority of people will get spooked at the first sign of confusion.
Can a trust help you reach FIRE quicker? Absolutely.
Is it necessary? Nope.
Agree with the simplicity point and trusts, at first glance, can seem confusing and hard to understand (speaking to an accountant and/or self education goes a long way). They do provide a huge amount of flexibility (as Aussie HIFIRE has detailed). One scenario I might add is distributing to a Corporate Beneficiary (where you/ your spouse) are on a higher MTR and recycling the CB earnings (i.e. dividends) back into the trust year on year. Eventually when you scale down your working hours and find yourself with a much lower non-investment income (or perhaps no non-investment income at all) you can start living off the accumulated trust $$$’s via distributions from the trust (saving quite a bit in tax otherwise than if dividends were taxed at your higher MTR year in year out)
I love Platinum Asset Management.
I’m currently adding funds to their Platinum Asia Fund (PAXX) to add to my exposure to Asia (which I beleive to be undervalued and lots of room for growth). They are fronted by Kerr Neilson who has been in the business for a long long time and his track record speaks for himself.
Platinum are transparent with their investing decisions and keep investors up to date with their methods of investing. Their communication on the current environment (especially Asia and the US) is top class and they respond well when challenged. Also you can find all their portfolios on their website quite easily to get a better understanding of “what’s inside”.
Their MER of 1.10% is higher than most ETF’s but I am paying for someone to keep an eye on my assets in regions I know nothing about. Sometimes pouring money into overvalued ETFs like VTS is not that smart, because when things go south you are not in control. Here is a good example of this http://i63.tinypic.com/143kso1.png
I don’t know what the problem with their out performance fee is? It’s a hedge against them doing well, I am more than happy to pay the fee if they beat the market.
Great podcast once again, and it’s better to be in the market than sitting on the sidelines missing out on returns!
DINGO xxx
Hey Dingo,
My question to you.
Why are you happy to pay management fees of 1.10% PLUS performance fees when you can get a better return with a lower feed ETF option? The statistic backs up that the majority of managed funds will underperform the index over the long term.
Their returns are impressive. No doubt about it. But what happens if Kerr Neilson moves on? What happens if some n00b replaces him?
Do you subscribe to the hypothesis of index investing in general?
Why, why not?
One thing to remember with trusts and asset protection is that in the books of the trust the net trust assets normally equal the initial settlement sum which is $10 or a similar amount. This is due to the assets shown in the books of the trust being almost equal to trust liabilities, which are generally the beneficiary loan accounts. This does ignore capital growth which is normally not captured in the financial statements, as the assets are normally shown at cost.
Loan accounts come into existence both from you contributing funds into the trust to buy investments, and from profit distributions that have not been paid to beneficiaries. These loan accounts are assets belonging to the beneficiaries, and therefore are available to creditors in bankruptcy.
This can largely negate the asset protection of a trust, however there is a solution. If you gift these loan account assets to the trust by way of a “deed of gift” they become part of trust capital and are no longer owed to beneficiaries. If you ever need to withdraw this trust capital you can do a capital distribution. The funds in the trust are then protected once the 2 year bankruptcy lookback period has passed.
Great points about what to look for when comparing managed funds and ETFs in terms of fees. I also enjoy your honesty about the mistakes you have made over the journey too. Its refreshing. The Kobe gif too haha 🙂 Very helpful thread cheers.
a great episode and i’m looking fwd to the one on investing for kids. have you looked into the proposed trust changes by Labor which will force a flat tax rate of 30% to distributions? (except for possibly disabled beneficiaries – no explanation of how you can prove disability). a podcast into the general proposed labor changes might be interesting to ppl as many changes will affect investors e.g. the cut to cgt discount to 25% and no more franking credits refunds.
Hi Aster,
Those changes will affect me greatly. But I’m not so convinced that they will actually go through. Always big talk of big changes until they are actually elected. Majority of wealthy people have their assets in a trust. I don’t think they are going to change the rules so they can make less money.
Franking credits refunds on the other hand only affect a small number of investors and definitely not the super wealthy. Those changes have a much higher chance of going through.
Let’s just wait and see what happens. I have my doubts
Hi Firebug
You commented before about trusts. Can you please tell us more about put your funds into the trust? You mentioned above that ‘loaning money to the trust is very straightforward’. We just earn a wage (and I assume you do too). When your wage gets paid into your account, do you then merely transfer it into your trust one and then proceed to buy shares? Is it that simple?
Looking forward to your article on ETF v LIC’s.
Cheers, James
In a nutshell yes.
You set up an account under the trusts name and buy shares (or any assets) in that accounts name. When you transfer your own money into the trusts account you are either loaning the trust money or gifting it money. There is a difference (have a google). You need to record this information (I use a ledger) so at the end of the year, you know how much the trust owes and when a distribution is paid out how it affects the ‘books’ for the trust. Some accounting work is needed by either yourself or a professional.
ETF vs LICs is dropping either today or tomorrow 🙂
Hi mate
Came across your blog few days ago and
Mind=blown
I’m in early 30’s, about to buy a first home. Living in Brisbane
Will probably build one to get FHOG and stamp duty exemption
Will just buy ETFs from rest of the money in wife’s name since she’s hardly earning anything
Is this good strategy?
Who’s name I should buy it under especially I need to sell it in 10-15-20 years time ?
Are you referring to the house or ETFs under your wife’s name?
If you’re planning to live in the house and sell later without turning it into an investment property…you won’t pay capital gains tax regardless of whose name you buy in.
As for the ETFs. If you’re confident that your wife will be in the lower tax bracket, investing in her name can work. However!
Labour has proposed the removal of franking credit refunds next year. Which would mean that if you invested in your wife’s name, you might lose out on some franking credits. Maybe a 50-50 split would be more appropriate…