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EYE-BALL’s Herman on – The All Ordinaries is a totally misleading index – and Australia’s lack of domestic Savings…

October 2, 2012

 

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Links to Previous ‘Herman’ Posts:


18th Sept – A Microcosm of Our Democracy – Auburn City Council elections.


28th Aug – – 2012 Overture – The Northern Fall (Autumn) –


17th Aug:  – A Political Alternative – Australian Community Party –


Aug 6th:   – Shang Yang’s good governance – or is it good faith?


July 21st:   –  Micro Economics – Thoughts and opinions on the Energy Debate!!!


July 18th:   –  A Chronology of Farce – and of a Government who Wonders Why Their Opinion Polls are so low.


July 4th:   –  2012 Overture – The Northern Summer Arrives –


June 16th:   2012 Overture – The Greek Elections


June 2nd:   Creative Destruction …


May 26th:   White Collar Crime – Craig Thomson and Peter Slipper … or just Federal Parliament?


May 17th:   The 2012 Overture Act III


Apr 23rd:   An update on the French Presidential elections and other


Apr 21st:   A Philosophical Appraisal of Social Economic Index… to Capture Wider Social Well Being.


Mar 26th:   The 2012 Overture – A Crappy New Year – Part III.


Feb 14th: Democrazy Part XV – Clinging to Power.


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Title:
The All Ordinaries is a totally misleading index and
Australia’s lack of domestic Savings!
| Author: EYE-BALL’s Herman | 2nd Oct 2012 |
Please note well:-

THE FOLLOWING DOES NOT CONSTITUTE INVESTMENT ADVICE. IT IS AN HISTORICAL LOOK AT STOCK MARKET PERFORMANCE intended for economic debate. Readers should seek independent advice, the author does not work in the securities markets.

Doug McLeod wrote in his working platform for the Australian Community Party on Superannuation –

“The foreign purchase of Australian assets does not usually bring in technology, but creates a demand for Australian dollars which keeps the dollar high, damaging our industry.  The appropriation of Australia’s wealth by the professional classes seriously depletes our national savings leaving a capital deficit which has to be met by overseas borrowing.”

See link{link to article on Doug McLeod’s policy platform – The Australian Community Party}

Hypothesise momentarily that the All Ordinary index has grown since 1992 (20 years) by somewhere approximating 4.85% compounding annually. The mathematic that underlies the index is extremely complex. It excludes dividends. It is difficult to assess total return on stocks. That 4.85% represents an average capital growth.

In 1992 Australia introduced the Superannuation Guaranty Levy. What is the income accumulation factor on those savings?

If you search the major fund managers like BT or MLC, the product offerings are so wide and diverse it is very difficult to comprehend. Moreover as the fund managers use such information as advertising it a minefield in itself. SunSuper makes available 5 years of daily unit prices. All my calculations are based on financial years ie 1st July to June 30th. Their five years do not match my analysis.

Below is a table of randomly selected Australia’s leading stocks 10 year all in performance. From July 2002 to June 2012.  Note well that it stops on June 30 this year and does not include such factors as Twiggy Forrests (Fortescue’s) recent refinancing problems. There are several recent gyrations ignored.

Core prices were sourced from Yahoo Finance. At times certain stocks did not pass the smell test. Example News Corp had a major restructure in late 2004 where an excessive dividend was paid in Jan 2005. The dilution of the stock split and dividend lead to there being an apparent negative stock return and total return. Substantial further analysis is required to derive meaningful data.

Capital Growth is;

The price on July 1st 2012 divided by the price on July 1st 2002 giving a 10 year return, then decompounded to achieve a long term capital growth factor.

Growth adjusted for dividends is;

Similar but where the price on July 1, 2002 is adjusted for dividends and stock splits. Implied Dividend is the difference between Capital Growth and Growth adjusted for dividends. Imputation adjustment is the likely tax credit assuming dividends are fully franked. Therefore Total return is Growth adjusted for dividends plus Imputation adjustment.

Interestingly my randomly selected portfolio had an average capital growth of 3.17% where the all ordinaries index grew at 3.24%. If I were to exclude Fortescue because in 2002 it was a penny dreadful, whereas by 2012 it was a producer and had paid dividends my portfolio would underperform the All Ordinaries (approx 0.5% portfolio growth).

Real Estate Investment Trusts (REIT’S) do have tax benefits attached, but they are different to imputation credits. In the case of GPT, Westfield I have ignored them.

By excluding GPT, Fortescue, Westfield, Consolidated Media and Newscorp I have an average 5% return for dividends on historical prices and that attracts a further 2% imputation credit. In the case of Cons Media they are a high div stock and that in part explains why the base is corrupted in this study. The statistical bias of this exercise worries me. The 10 year period takes in 5 massive bull run years prior to the GFC, and the 3 years of churning post GFC. Dividend yield will always be a major consideration in construction of a portfolio.

In the light of all this I needed to attempt to find an accumulation index to attempt to marry like with like. Failing that I revert to my basic assumption that Total return on Stock investments over the long run is Capital Growth plus approx 4% dividend yield plus imputation benefits.

While this experiment is really quite a dismal failure, the process is thought provoking.

Before coming to any conclusions dealing with the fund manager performance above are two funds that I was able to marry to my study period. Those numbers are sourced from their websites. I would suggest any reader take some time to look at their own Fund manager performance in the light of this analysis.

Once more it is difficult to make any meaningful supposition. State Super underperformed over the 10 year horizon compared to BT but have outperformed since GFC. Other than the period July 2007 to June 2009 BT earned their fees.

Doug’s proposition that self managed super invested in ASX top 50 stocks will save the fund managers fee and thereby increase the domestic savings ratio is very questionable. 25% of the stocks studied had a negative total return, whereas 33% had an inferior return to market performance.

The entire exercise has had me ponder several variables. Superannuation is essentially taxed at 15% on entry, 15% on income and in theory 15% on retirement (exit). Retirement benefits can be reduced by purchasing an annuity. Annuities are very inefficient and based on historical life tables. (hysterical). Normal tables (logics) simply do not apply to financial outcomes. Franking Credits were introduced by Treasurer John Howard to address double taxation of stock investment incomes and Australia’s poor record in long term saving.

The concept was broadened and standardised by Treasurer Keating. Then Keating introduced the Superannuation Guarantee Levy, largely paid for by salary sacrifice of indexation pay rises. Keating then introduced the entry tax on superannuation contributions. Similar economies like Canada and NZ have similar policies. But they are not employed in most other G20 economies.

No fund manager worth their salt should pay incremental tax on superannuation fund investment income. In theory franking credits attached to stock dividends should be used to offset taxation liability on other investment classes like bonds or rent streams. Imputation logics skews investment decisions away from other investment classes. It also adds many levels of complexities. For example the dividend policy of BHP’s shares listed in London or South Africa compared to those listed in Australia. Totally unrelated share investment in turn creates excessive speculation and that in itself skews returns. Imputation has exacerbated this. The entire complexities create the need for specialist investment advisers and fund managers.

The entry tax on superannuation is the most hideous attack on savings.
Real Estate investment is simply much easy to comprehend. A house that sold for something like $40,000 in inner city Sydney in 1972 is now worth somewhere approximating $1,500,000. Two units in similar districts were priced at maybe $12,000 and now would be worth approximately $750,000 each. Rents are reflective. Constantly yielding about 5 -7% gross.

A head teacher from a high school was telling me emphatically that when he is forced to make a decision on his State Super at age 60, take the lump sum and buy a unit. Whether you gear it or not is immaterial. If you can gear it, buy two. Your children will inherit the property, under an annuity only your spouse derives any residual after your death. (His wife also works in the education system). Another couple who worked in the education system now receive an annuity and lament that is why we have no assets (the wife in that case is now on the Board of trustees at UTS – a handy little side income/hobby).

In a perfect world eliminate franking credits. Cut taxation on Superannuation entry to zero. Cut taxation on investment earnings of super funds to zero. Tax superannuation benefits on retirement that exceed 75% of median incomes. Make up the shortfall to government revenues on a broadly based consumption tax. What would be the balancing number, GST goes to 13%? Well don’t stop there, cut all payroll taxes and stamp duties on investment and increase GST again. And apply GST to all purchases including on line. It all sounds much like John Hewson before the election of 1993.

GST has been a dismal failure as it currently stands. The cash economy is simply flourishing. Why do mechanics insist on being paid cash? Builders still pay half their labourers in cash, and they don’t have superannuation or other normal entitlements. Your average plasterer or painter can not afford holidays most struggle just to pay the rent!

I haven’t even started on family trusts! Maybe I should leave that debate to Francois Hollande and Barak Obama. I am enjoying watching it unfold. The rioting in Madrid and Athens is not enjoyable. It is terrible.

What was Doug saying about the professional classes?

“The appropriation of Australia’s wealth by the professional classes seriously depletes our national savings leaving a capital deficit which has to be met by overseas borrowing.”

Believing in sanity is itself insanity.


EYE-BALL’s ‘Herman’ …


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  1. david the pragmatist
    October 2, 2012 at 5:35 pm

    What a total crock of meaningless shite!
    The savings ratio is the highest it has been for decades, your analysis of the All Ords is garbage. Rights issues and opton structures spoil any comparative value theory, not to mention bonus issues, share buybacks and in specie transfers.
    Your system for super and tax is purely socialistic/communistic and again takes all sorts of incentives away from wealth creation.
    This article is written by someone that lives in mediocrity and has given up on anything better that others may have.
    I suspect people like the writer should be very greatful that he/she receives a disability or age pension because in many other societies they would just be allowed to die.

    When things become too hard and people are reduced to writing shit like this, then maybe thats the best alternative.

  2. October 2, 2012 at 7:40 pm

    What an opinionated little gnome … all pumped up with feisty opinions of his own.

    Everyone seems to forget the right to an opinion and the right to express that opinion. Healthy debate is good – but degenerative mudslinging with intent to talk down is nothing more than how our politicians behave. It’s contagious and indicative of a larger problem.

    Sadly – decency is missing and the power of wit has evaporated. All this commentator has offered is insight into his own warped intelligence and his lack of respect for the opinion of others. I’m sure he could have said what he wanted to say had he taken the time the think before he expressed his bile.

  3. October 2, 2012 at 7:42 pm

    Then the other option was to say nothing – there was a time when the rule of thumb was that if you couldn’t say anything positive, then the rule was you did not say anything at all.

  4. Gerry Hatrick
    October 3, 2012 at 1:34 am

    Particulary Pragmatic.

    What a crock of meaningless shite!

    From this day forward, to be referred to “David the Emotional”. “David the downright Rude”. David the Narcissist.” “David the Bigot”. “David the Misanthropist Nutjob”.

  5. The Parable
    October 3, 2012 at 1:53 am

    Maybe tou are looking for David the Malevolent.

  6. david the pragmatist or whatever you want to call me
    October 3, 2012 at 7:29 am

    What a warped little group of hippocrites. This whole blog profile is full of the most personal and insulting remarks from everyone that expresses a contra opinion to the current Prime Minister.
    The commentators that have expressed their opinions after mine have made no reference to what I said as much as the delivery of the message.
    Herman’s comments can be very good and well researched, on this occasion I felt I wasted my time reading what I thought was a crock of shit. If Herman or any other blogger cannot take critism of this ilk then they need to review why they are doing what they do.

    The old saying that if the heat in the kitchen is too strong, then get out!

    As for the morons that critised my response ” come on guys lift your game” you didn’t give me anything to even correct you on. In other words your responses were meaningless! and not even worthy of the type of protective spin that our political parties use when protecting there own!

  7. The Parable
    October 3, 2012 at 11:40 am

    “you didn’t give me anything to even correct you on” intones arguing for the sake of arguing, or needing to hear your own grandiloquent voice.

    This is not John Cleese’s Department of Official Arguing, it is intended to promote alternative views, those views otherwise diminished through mainstream media.

    There is little point in even trying to discuss projecting.

  8. Miss Prissy
    October 3, 2012 at 11:58 am

    Play nicely please! Any boy found taunting David, can expect severe punishment. You all know he can give it but not take it!

    A lot like Julia and her dildo …

  9. The listener
    October 3, 2012 at 2:50 pm

    The fact is that what David the Pragmatist has said is what most independant thinkers would say when adjudging this site.
    Its seems there is a little group of sycophants that support each other on this site and if someone is honest enough to give a true opinion, they don’t like it.
    Miss Prissy did you name yourself or was it one of your colleagues, it seems to me you may have a gender issue and your real name could be Mr Prick….ly.

  10. brian
    October 4, 2012 at 2:39 am

    This Malevolent is not only deluded but delusional.

    A clear case of cyber bullying. Denying free speech. Narcissistic Personality Disorder that remains untreated. Many things that include particularly “requiring constant attention and positive reinforcement – surrounds himself with sycophants”.”Imagining unrealistic fantasies of success, beauty, powers of intelligence” “lacking empathy and disregarding the feeling of others”.

    Truly all so sad.

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