No images? Click here 18 May 2020 SYNSTRAT INVESTMENT STRATEGIES WITH RESPECT TO COVID-19 BUSINESS CORRECTIONAttention: Dentists and Veterinarians having Self-Managed Superannuation Funds Recent Share Purchase Plans and Entitlement Offers Depending on what shares you own in your super fund or portfolio, you will have received recommendations to take up offers over recent weeks. Examples of recent Offers either completed or still being processed on behalf of Synstrat clients include:
Other offers for shares less widely held by Synstrat clients were sent to the affected clients with our recommendation for us to implement on clients behalf. Why did we recommend clients take up these offers? The simple answer is that the prices being offered are discounted compared to the current market price which may be already depressed due to the Covid-19 crisis and the uncertain time frame of economic recovery. Some of the above offers are yet to complete and the benefit of participation in these offers is as follows: The Cochlear offer has been completed with new shares being issued at a cost of $140. The recent market price of Cochlear is $186. That means for every share taken up in the offer, clients have received a capital gain of $46. The National Bank offer is yet to complete but based on recent prices the capital gain for each share is $2.02 or 12.5%. The QUBE Holdings offer is yet to complete but based on recent price the capital gain is 53 cents or 21.4%. The Ramsay Healthcare offer is yet to complete but based on recent price the capital gain per share is $5.18 or 8.5%. The Bapcor offer is yet to complete but based on recent price the capital gain is 71 cents or 13.9%. The Losers The losers are shareholders who do not take up the offers and the value of their shares are diluted since all of the offers are non-renounceable. The current market prices are, in some cases heavily discounted to the normal trading range of the shares before Covid-19. There may be other share purchase plans and entitlement offers in the months to come. We are careful to recommend only those offers that we consider to be worthy of participation. Do Shareholders have to participate? The answer is no, there is no requirement to participate in any offer. However, the issue of new shares at a discount to the market price dilutes the value of all existing shares in a company. The bigger the offer and the discount, the more dilution occurs if you don’t take up the offer. If you don’t wish to extend your shareholding in a particular stock, rather than passing up the offer, we recommend that you sell an equivalent value of shares at the higher market price and take up the offer at the lower offer price. That way you receive the benefit of the discounted offer without using cash. For example, if you only have $10,000 worth of NAB shares, you can sell your shares and take up $10,000 of the offer. If you have the cash available, it pays to take up the total offer and sell shares you don’t want after they have been allocated. How does Synstrat benefit from these offers? Client superannuation funds or investment portfolios are billed twice yearly as per administration and advice agreements. There were no brokerage or other costs for those participating in the above offers. Synstrat receive no financial benefit other than our normal administration and advice fees. We will disclose any financial benefits we receive for recommending an offer where such a benefit exists. These offers are an important part of our normal advice function. We only provide specific advice to clients who have administration and advice agreements with us. Covid-19 changes to outlook Covid-19 has changed the outlook for some businesses long term. In such cases we have advised their sale. For example, Sydney Airport is going to have far less aircraft movements post Covid-19 because international travel will be severely curtailed long term. Stockland Group stapled securities will be significantly affected by downward pressures on shopping centre rents and by reduced demand for house/land packages in its residential developments. Of course, there are a number of other businesses which are adversely affected. However, there are some businesses which will survive and thrive. It was the case that the Global Financial Crisis changed the investment landscape and some businesses, such as Babcock and Brown, ABC Learning and Allco were found to have structural weaknesses not previously disclosed. However, around the bottom of the share market during the Global Financial Crisis the four major banks plus Macquarie Group Limited, Rio Tinto Limited and Wesfarmers Limited had massive capital raisings which were heavily discounted. Those of our clients who had shares in those companies massively benefited by buying shares at heavily discounted prices and riding the recovery. Going further back into history, the 1987 global stock market crash effectively destroyed the business model of the 1980’s entrepreneurs including Robert Holmes à Court, John Elliott, Alan Bond, John Spalvins, Christopher Skase, Abe Golberg, Laurie Connell, Bruce Judge and others who had built their empires on high debts and multi-layered leverage. When the market collapsed and they could not on-sell investments to other entrepreneurs, they were trapped into an environment of rising interest rates. Some went into exile, some went to jail, some went broke and some were bankrupted. However, following the 1987 stock market crash many good businesses survived including some over indebted businesses which were sold by the liquidators of the enterprises associated with people on the above list. The lesson is that major events such as the 1987 global stock market crash, the Global Financial Crisis and COVID-19 virus change the investment outlook long term. Some businesses survive and thrive while some are severely damaged. Listed Investment Companies Whilst there are some longstanding listed investment companies (LIC’s) such as Argo Investments which have been around for many years and which have quite reasonable management expense ratios, many of the more recently established LIC’s are so heavily laden with fees that their management expense ratio suggests that they should be avoided. What is the point of owning a bunch of shares inside an LIC which has a management expense ratio of between one and a half and two per cent per annum when the reality is that the same shares or similar shares can be owned directly through a superannuation fund without loading in those extra costs year after year? The belief that managers of listed investment companies will outperform the market is largely a myth – most do not. Famous American investor Warren Buffett, head of Berkshire Hathaway, had a well-publicised bet with a hedge fund promoter to the effect that they would each put up half a million dollars invested in long term securities and the winner would donate the losers bet to a charity of choice. Buffett bet that a low cost indexed fund representing the Standard and Poor’s 500 companies would outperform a combination of any four hedge funds that the other side wished to nominate. One of the four nominee hedge funds disappeared entirely, the other three dramatically under performed over time. What Buffett was demonstrating was that managed funds, which included hedge funds, are so loaded up with costs that over a long period of time they cannot outperform the broad market. You can read all about that on the internet. Best wishes to all dentists and to all veterinarians, GRAHAM MIDDLETON and ROGER ARMITAGE Disclaimer The information contained herein is of a general nature and no specific action should be taken without individual advice. Speak with Synstrat staff as appropriate. Prepared by Synstrat Management Pty Ltd for clients of the Synstrat Group. Synstrat Management Pty Ltd is the holder of Australian Financial Services Licence No. 227169. ABN 57 006 295 325 Dentists and Veterinarians other than those who have administration advice agreements with the Synstrat Group must take their own professional advice. The Synstrat Group provides Accounting, Financial Services, Business Advice, and Financial Advice. Prepared by Synstrat Management Pty Ltd for clients of Synstrat Group. 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