#superannuation

Add the Dutch to the $15.8tn pension shortfall

Negligence. No other word for it. Unrealistic assumptions coupled with a race to the bottom on interest products has meant the top 20 nations have a $15.8 trillion unfunded liability in pensions. CM wrote of the crisis awaiting US public pensions a while back.

It seems the Dutch are the latest bunch of pensioners to reach for the pitchforks at the prospect of having their retirement severely cut back. Shaktie Rambaran Mishre, chair of the Dutch pension federation (representing 197 pension funds and their members), said contributions might have to rise by up to 30% over the next few years to ward off the prospect of having to cut the pensions of 2 million retirees. That will go down a treat.

Zerohedge noted the lower Dutch risk-free rate is not low enough, and as a result about 70 employer-run pension funds with 12.1m members had funding ratios below the statutory minimum at the end of September, according to the Dutch central bank. And here lies the rub: if funds have ratios below the legal minimum for five consecutive years or have no prospect of recovering to a more healthy level, they must cut their payouts.

Can you imagine all of the Dutch who were looking forward to taking a round the world cruise to celebrate 40 years of hard work to face the reality that they’ll only be able to take a cruise down the Amsterdam canals.

This is an utter disgrace. You’d have to be asleep at the wheel as a regulator not to recognize expected returns on funds were so unrealistic as to beggar belief. Actuarial accounting lets you get away with it.

Yet the evil pensions funds will be the villains even though the supervisor left these children alone with a box of matches. Just watch them come home and act surprised that the house has burnt down.

We’re getting a taste of the remedy from the State of Illinois. It is issuing bonds specifically to help plug the gap. Rhode Island has gone the other way – take a 40% haircut or risk having nothing. Way to go!

It is worth factoring the longer term risk of the fall in consumption that this will ultimately have if even a slither or $16tn is no longer recycled into the economy.

The irresponsibility of socially responsible investing

United Nations Sustainable Development Logo

Socially Responsible Investment (SRI) has been heavily pushed by members of the Australian Council of Superannuation Investors (ACSI) for a while now. Apart from cynically cashing in on the generally higher fees generated by these “woke” funds, the returns have been nothing much to write home about. As Milton Friedman once said, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.

If we look at YTD, 1 or 10-year performance all of the SRI portfolios as indicated by published performance (listed on their websites) of local ACSI members, they have “underperformed” the benchmark index. One outperformed in the 5-year category. Hardly anything to crow about. So as much as they might feel warm and fuzzy for turning these funds into virtue-signalling investment vehicles, the outcomes for the monies entrusted to them is far from ideal. While investors should bear ultimate responsibility for where they deploy retirement funds, do they realise how much money they are torching by believing in this nonsense?

So why do these funds try to bully top-performing companies to conform to their irrelevant ideals which on the face of it do not appear to be working? If one reads through the fine print, many superannuation administrators pat themselves on the back that they are aligning portfolios to the United Nations Sustainable Development Goals (SDGs). If one wants to champion best in class ethics, the UN is the last place anyone should look. Just look at the unethical scandal that occurred at UNAIDS. 

It doesn’t take a rocket scientist to work out what these SDGs are – eliminating hunger, wiping out poverty, promoting gender equality, good health, clean water and sanitation, affordable clean energy etc. All wonderful things in and of themselves, but surely if the market agrees with them,  shouldn’t share prices reflect that?

Friedman spoke of free-market economics, “Well, first of all, tell me: Is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course, none of us are greedy, it’s only the other fellow who’s greedy. The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus [including the UN]. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history, are where they have had capitalism and largely free trade. If you want to know where the masses are worse off, worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by the free-enterprise system.

In Australia,  it would seem that many high performing companies, that aren’t ‘compliant as they should be‘, are being pressured to increase diversity, women on boards and all manner of meaningless benchmarks preached by the ACSI and its members.

Take the 30% Club which pushes to have 30% women on boards. While this started in the UK in 2010, it has spread across multiple jurisdictions including Australia. The 30% Club emphatically quotes from a McKinsey study,  “Companies in the top quartile for gender diversity on their executive teams are 21% more likely to experience above-average profitability than companies in the fourth quartile.” What this study doesn’t say is that the bottom quartile of companies maybe just poorly run, in spite of the genitalia of the board.

Don’t mistake the most important point to be made. If a board is best served by all women, you won’t hear a peep from investors if they can produce the best results. As soon as we start to try to enforce gender quotas, performance becomes predicated on chromosomes rather than capability. What next? Ensure fair representation of LGBT on boards? Religions? Races? Disabilities? Where does it stop when all that matters is ability that produces performance?

Take a look at the disaster that has befallen PG&E in recent times. In the interests of pandering to all these irrelevant SDGs, it can tell you the exact breakdown of the diversity of its workforce but can’t tell you the status of much of its infrastructure, some which have been directly responsible for the devastating wildfires in California. The company was forced into Chapter 11 bankruptcy. Did diversity help shareholders? If one’s house is on fire, do we worry about identity? Or who has the skillsets to put out the blaze the fastest? QED.

Yet our woke investors keep pushing these trends. IFM Investors waxes lyrical about its climate change, 30% Club and carbon disclosure project. Good for it. It has a choice. It should live by the sword and die by it. If that is what it wishes to focus on why not allow the free market to; a) decide whether superannuation holders want to deploy funds in such a manner and b) let corporates decide if SRI is good for their businesses.

Yet, the latest push by these socialist fund administrators is to ensure that companies conform to the ‘Modern Slavery Act.’ Are these people for real? Who are they to try to enforce federal law? Talk about self-imposed authority. It is a safe bet that 99%+ corporates listed on the ASX behave are compliant in this regard because if not the punitive outcomes will be severe.

Moreover, if some of these funds own stocks like Tesla in their international portfolios, perhaps they might consider such a hip and trendy investment has an indirect connection to child-slave labour in DR Congo where 70% of the world’s cobalt is mined to go into the Li-ion batteries.

There is one absolute truth in finance. In good times, any mug CEO can be successful. It is only when markets turn sour that the “quality” of decent management is truly appreciated in how they successfully manage to mitigate risk in an ugly downturn. In a difficult market climate, only the fittest survive and if companies have strayed off the reservation to appeal to investors, it will soon become self-evident in the results.

As we stare at the precipice of a potentially deep global recession, the previous paragraph will be all that matters. Because those corporates too busy hitting diversity targets, installing genderless bathrooms and ensuring they have double-checked all employees have complied with Earth Hour will be slaughtered when markets take a pounding.

These SDG focused funds will soon see that they are part of one giant herd and as performance starts to suffer in this crowded trade, the stampede toward the exit will reveal just how irresponsible the push to ram through such irrelevant metrics at the very companies who caved in was.

As a contrarian investor, the best investments will be in exactly those companies that shun(ned) this foolhardy exercise and forged a path in the spirit of Milton Friedman. Afterall they understood what it really means to be “free to choose.” So back up the truck in tobacco, mining and fossil fuel stocks on any pullback. After all, mean reversion will see these stocks outperform if nothing else.

Don’t forget Harvey Norman (HVN). How could it be that the company is worth 4x the combined value of Myer and David Jones, the latter two businesses focused on pleasing the United Nations rather than customers?  Hmmm.

Isn’t that the ultimate ready reckoner for these SDG funds? The market is always right. If the performance of the funds deployed isn’t making the grade, don’t attempt to force the best of breed to comply to your self imposed standards. Embrace companies that follow their lead. Not the other way around. It begs the question, what on earth are people who should believe in free markets doing to thwart it functioning efficiently?

Perhaps investors have the clearest indication of socialist activism by the very requirement to join the club. “ACSI drives strong ESG performance in companies in which our members invest because ESG creates long-term value…We use our collective impact to influence companies and financial markets in the interests of our members as long-term investors…Commitment to these beliefs is a pre-requisite for membership of ACSI.

Never has it been a more sound decision to set up an SMSF.

The McTurnbull Burger – 2017 budget that says ‘waistline be damned!’

mcturnbull

Remember the Big Mac jingo? “Two all beef patties, special sauce, lettuce, cheese, pickles,  onions on a sesame seed bun?”  Well the 2017 budget From the Coalition might as well be called the super sized McTurnbull Burger. Two all thief parties, special porkies, levies, fees, spun on a $600bn dollar bomb. While the government needed to introduce a vegan budget of lentils, tofu and alfalfa to get the country’s nutrition properly sorted they’ve said waistline be damned. Morgan Spurlock couldn’t keep up with this super sized meal. As my wise sage Stu told me last week, “About as well-timed as Mining Super Profits tax – ding ding ding – top of the banking cycle just called by inept bureaucrats”

If people wanted a tax and spend party they’d have voted Labor. In a desperate attempt to supersize the meal they’ve made of the economy since Turnbull took office the debt ceiling will be raised. Wage growth has slowed for the past 5 years from 4% to under 2% according to the RBA. Throw higher Medicare on top why not?!. Cost of living is soaring. So let’s look at the extra calories they’ll inevitably load on the taxpayer.

1) Let’s tax the big 4 banks. That’ll work. What will they do as responsible shareholder owned organizations? Pass those costs straight on to the tapped out borrower where 1/3 mortgagees already under strain and 25% odd have less than a month of buffer savings. NAB already jacked interest only loans 50bps.

2) allowing retirees to park $300,000 tax free into super if they downsize their empty nest. Wow! So sell your $5mn waterfront property so you can park $300k tax free into superannuation. Can see those Mosmanites queue up to move to Punchbowl to retire. Hopefully the $1mn fibro former council shack the Punchbowl pensioner flips will mean they can move to a $500,000 demountable in Casula in order to free up the property market for the first home buyer who is getting stung with higher interest rates, .

3) Australia has a property bubble. The Reserve Bank has recently had an epiphany where they’re afraid to raise rates to crash the housing market and they can’t cut because they’ll fire it up more. Allowing creative superannuation deposit schemes (max $30,000 per person & $15k/year) to help with a deposit only doubles down on encouraging first home buyers to get levered up at the top of the market using a system designed to build a safety net for retirement. When governments start abusing sensible policies in ways it was never designed for then look out for trouble down the line. This doesn’t help first home buyers it just pushes up the hurdle to enter.

4) Australia’s credit rating is on the block. Australia’s main banks are 40% wholesale financed meaning they have to go out into the market unlike Japanese banks which are almost 100% funded by their depositors. Aussie banks could see a rise in their cost of funds which the RBA could do little to avoid. That will put a huge dent in the retail consumption figures.

5) speaking of credit cards. Have people noticed that average credit card limits have not budged in 7 years. If banks are confident in the ability of consumers to repay debt, they’d let out the limits to encourage them to splash out! Not so – see here for more details.

6) Infrastructure – I live in the land of big infrastructure. Jobs creation schemes which mostly never recover the costs – especially regional rail. The Sydney-Melbourne bullet train makes absolute sense. We only need look at the submarines to know that waste will be a reality.

7) small business – tax concessions of $20,000 not much to write home about. Small businesses thrive on a robust economy which is unlikely to occur given the backdrop. Once again this budget is based on rosy assumptions and you can bet your bottom dollar Australia won’t be back in surplus by 2021.

Some  media are talking of Turnbull & Morrison stealing the thunder of the Labor Party, providing a budget more akin to their platform. Sadly I disagree that this legitimizes Turnbull. It totally alienates his base, what is left of it. Tax the rich, give to the poor. Moreover voters see through the veneer. The stench of the Coalition is so on the nose that without ditching Turnbull they have no chance of keeping office. Labor is not much better and One Nation and other independents will hoover up disaffected voters by effectively letting the others dance around the petty identity political correctness nonsense.

In the end the McTurnbull Burger meal will look like the usual finished product which resembles nothing like the picture you see on the menu. A flattened combination of squished mush, soggy over-salted fries and a large Coke where the cup is 90% ice. Yep, the Coalition has spat between your buns too. This is a meal that won’t get voters queuing up for more. Well at least we know Turnbull remembers that smiles and selfies are free after all ‘he’s lovin’ it‘! After all virtue signaling is all that matters. All this to arrest some shoddy poll numbers which will unlikely last more than one week.