Question of the Week

Questions of the Week

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Question 1. I’m considering investing in either Westpac Capital Notes 6 or Commonwealth Bank PERLS XI. Which do you consider will deliver the best returns over the five-year investment period?

Answer (by Paul Rickard): They both pay the same distribution of a grossed up 90-day bank bill plus 3.7% pa. Commonwealth Bank PERLS XI are a little shorter in term to the call date than the Westpac Capital Notes 6. If both investments are redeemed (as anticipated) on the mandatory redemption date, you will get your $100 back. There is no capital gain.

If I had a preference, I would probably opt for the Commonwealth Bank PERLS XI. That said, assuming no change in the credit quality of either of the Banks, the returns over five years should be the same.

Question 2. I’m looking at purchasing an Australian index fund for my SMSF. What would you recommend? Would it be better for one with an income component? And for the US market, which ETF would you recommend?

Answer (by Paul Rickard). I’d probably go for VAS from Vanguard, as it tracks the S&P/ASX 300. IOZ and STW both track (the marginally narrower) S&P/ASX 200. If you want an income bias, you could consider an active ETF, such as SWTZ. For investing offshore through locally listed ETFs, I’d look at IVV from iShares. This tracks the S&P 500.

Question 3. I don’t think the BHP buyback for super funds in pension phase is necessarily a no brainer as suggested:

  1. The shares sold don’t qualify for the special dividend (whatever that may be);
  2. The franking component of the buyback is not received for nearly 12 months (when a tax return is lodged); and
  3. If you want to repurchase the shares sold, you’ll have considerably less cash (14%) with which to purchase them and I guess the shares’ cost would rise, due to an expectation of the special dividend and less shares held overall.

Would you please comment on my above thoughts? I’m more concerned about the number of shares held, which therefore generate continuous income in the future.

Answer (by Paul Rickard)

  1. Yes, shares sold in the buyback won’t qualify for the special dividend. The latter will be around US$1 (about A$1.39) per share and have franking credits of A$0.60. After the shares go ‘ex-dividend’, the share price will fall by approximately the dividend amount.
  2. Yes, when you receive the cash refund depends on when you lodge your SMSF annual return. Potentially, this can be lodged from July 2019;
  3. Yes, you will have (until receipt of the cash refund) less cash – approx. 14% less. When you get the cash refund, you will have considerably more.

Still a ‘no-brainer’ in my mind.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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