Question 1: If I have $250,000 in a bank account in my personal name and $250,000 in a bank account in my SMSF, and they are in the same bank. Are both amounts covered under the Australian Bank Government Guarantee?
Answer: Yes, both are covered as they are considered to be separate account holders. That is, your personal account for up to $250K, and your SMSF’s account for up to $250K. The Guarantee is provided through the Financial Claims Scheme or FCS, which is administered by the bank regulator, APRA. The following answer and case study is provided:
“The trustee of an SMSF that holds a deposit account for that SMSF with a bank, building society or credit union, is treated as an account holder under the FCS. Where an SMSF has a number of individual trustees, the trustees are collectively treated as an account holder. The $250,000 limit applies in relation to the SMSF as a whole. The FCS protection is extended to the trustee (or the individual trustees together) for the benefit of all the members of the SMSF.
Case study
Eliza has a joint account (held with one other person) with $90,000 and a self-managed superannuation fund (SMSF) account, for which she is a co-trustee, that contains $220,000. Both accounts are held at the same building society. For the purposes of the FCS, there is a different account holder for each of these two accounts – Eliza in her personal capacity as an individual and Eliza in her capacity as co-trustee of the SMSF. Consequently, Eliza is protected under the FCS for $45,000 in her personal capacity (comprising her half share in the joint account), and, together with her other trustees, for $220,000 in her capacity as co-trustee of the SMSF.”
Question 2: With the likelihood of higher interest rates, do you think the various property vehicles, both listed and unlisted, will see their share price dive, and is it a good time to move out or at least lighten?
Answer: If interest rates go up materially, it will no doubt affect the valuations of property trusts – listed and (in due course) unlisted. They are considered to be “bond proxies”, so the market will sell listed REITs if bond yields move higher. We saw this in January when the real estate sector lost 9.53% – not the worst performing sector, but higher than the overall market’s loss of 6.35%.
Capitalisation rates are more important than interest rates, and some argue that these are still holding strongly. But if interest rates do increase materially, I would be a little wary about exposure in this sector.
Question 3: In view of the current rise in interest rates this year and beyond, is it feasible to expect the current prices of fixed interest ETFs such as VGB (Vanguard Australian Government Bond Index Fund) and VAF (Vanguard Australian Fixed Interest Index Fund) to recover?
Answer: If bond yields go higher, the prices of VGB and VAF will fall. I think that at some stage, the US Treasury 10-year bond will test 2.0% and our bond yields will follow. Hence, I wouldn’t buy these securities.
With fixed interest, a key data point is the duration of the fund or bond. Both VGB and VAF are long duration funds – VGB is 6.2 years and VAF is 5.8 years – so both are exposed to higher bond yields. Conversely, if bond yields fall, they will increase in price.
I prefer VAF to VGB because it includes some investment-grade bonds and has a slightly higher yield to maturity and shorter duration. I hold VAF in a portfolio – but would only go overweight if I expected bond yields to fall.
For now, keep the duration on fixed interest portfolios short.
Question 4: What tender discount do you expect for the Westpac off-market share buyback, which closes on Friday 11 February?
Answer: I expect that participants will want at least a 10% nominal gain – that is, their effective selling price in the buyback is more than 10% higher than the current market price. Based on a Westpac share price of $20.00, the effective selling price for a 0% taxpayer who tenders at a discount of 4% is $22.57.
The discount will ultimately be determined by the enthusiasm or not of the institutional super managers, and at $3.5bn, it is a reasonably sized buyback. So, I am guessing that it will be 4% or lower.
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 regards to your circumstances.