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Present Value of Future Cash Flows

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craft said:
As McLovin posted, Total Assets/Funds Employed(debt+equity)




You have provide the long hand proof here – the ratio is much quicker.
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So it is. For some reason I completely misunderstood McLovin's suggestion.

Apologies guys!

So to calculate Fund's employed for DTL (or any company for that matter) you just add together Debt + Equity?

Call me silly, but I always do it long hand (Total assets - indeterminible life intangibles - non interest bearing debt - excess cash) with company specific adjustments if I feel there is a need. I don't know why but it feels more accurate to me. Provisions and deferred tax assets and liabilities and such book entries I usually do not take into account unless they are really material, either. I find doing it long hand like that is so much easier to make adjustments if need be (and especially easy to follow if I ever need to revisit my calculations ). I guess both figures are going to be in the ball park at the end of the day.
 
craft said:
Howard Marks latest memo.

http://www.oaktreecapital.com/MemoTree/On%20Uncertain%20Ground%2009_11_12.pdf

As always, a thoughtful read on risk.
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The parts on perception are very pertinent, and would be useful to remember for all conditions (and of course useful in other walks of life). I like the question that he asks that goes something along the lines of: "Are conditions really uncertain now or were they always like this but we did not perceive them to be?" It is hard to answer this, even for people who have been through a few cycles, because memories of experiences and moods fade incrementally over time. The human mind is very susceptible to the illusion of motion as seen through the filter of time!

Thanks for the interesting read.
 
V

I have a super accounting question for you.

Bill M in another thread that I better not sidetrack any further, talked about switching within a superfund, which re-ignited a question I haven’t answered for myself yet.

How does the tax work in these big superfunds. Switching seems to have no effect on the value of an individuals account but the changes must affect the fund as it buys and sells the assets and pays out tax relating to relised gains/losses.

Now I know they handle tax through accruals – but is there a big averaging process going on? Are people who stick solidly to one asset class subsidising the tax implications of those that switch regularly ? And what happens with the benefit of turning 60 and being able to realise longer term (though most funds don’t seem to do long term) gains tax exempt – does that benefit go to the person involved or is it spread?

I don’t know but I’m guessing the pooling of tax probably means you don’t necessarily get the same entitlement from a big fund as you would a SMSF. Some win some lose. – Right or wrong?
 

I can confirm that the super fund im with (I need to be careful because I now work for them ) factors the individual results of taxation into the wider 'pool'. Essentially all tax is factored into the returns distributed and reported to the individual members on a unit price basis within any specific investment option ... at least thats how we do it.

I believe they had an issue previously within the fund where excess taxation was set aside for one of the investment options. Upon realisation of this the 'spare' tax funds were re distributed into the options unit price (they did it in one hit and it was actually quite a considerable hit ... 10% or so )
And what happens with the benefit of turning 60 and being able to realise longer term (though most funds don’t seem to do long term) gains tax exempt – does that benefit go to the person involved or is it spread?
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There is no benefit for the individual. As you have observed, the more people chop and change within their super funds investment options the more 'friction' (cost to the investment option) they create.
 
I've never worked in corporate superannuation - so I don't actually know the specific workings of them.

But I know that different funds have different structures. When you talk about averaging, in terms of weighting and pools, you are referring to a master trust.

This works similarly to a unit trust. Each member who has superannuation in such an account owns a certain amount of units in the trust. Tax is calculated as a whole for the entity, and is paid on a per unit basis, I believe. Only contributions tax is member specific. Although, clearly they would need to do this on a weighted average basis because people are making contributions and switching in and out of these investments all through-out the year.

I believe that these funds most likely keep a large enough liquid asset component (ie. cash) to deal with people who constantly switch in and out of funds. Most funds also charge a switching fee, which probably helps in part to pay the tax and reduces the cross-subsidisation by other members??? I am not really sure on this and I have no idea how material the taxation consequences of member switches are.

Pension accounts are held within a separate master trust. When you start a pension in these big funds they transfer you into one of these. I do not think that these funds pay tax at all. But you are right, compared to a superannuation fund who has held say a property for 20 years, when a member switches into pension mode, they still hold the property and will not have to pay capital gains tax on the gain (as long as they stay in pension mode). There seems to be no longevity of asset holdings in master trust accounts, so the long-term tax benefit of superannuation would be diminished to an extent.

As far as I know master funds are more cost-effective to run because everything is calculated and invested in at a fund level, rather than an individual level. So you should be paying less fees. Industry funds usually work in this way, I believe.

Alternatively there are a whole raft of products in retail funds that are referred to as "Wrap investments" - the pool of investments in these are member specific. A member puts cash into their Wrap account and it is invested as per their own individual decisions (or as per their adviser). Taxation is calculated on a member level in Wrap accounts. So effectively if you are worried about cross-subsidisation you would be able to avoid it by using a Wrap product.

The link below might help explain the difference:

http://www.wealthtrac.com.au/Assets/61/1/L6344_0812_Wealthtrac_Wrap_FlyerWEB.pdf
 


I might be misunderstanding something here (I use a family SMSF, so have pretty much zero experience with retail super), but if the wrap account is invested into unit trusts (managed funds) which distribute tax liabilities to unit holders on an equal basis then wouldn't any CGT event from individual unit holders redeeming their units be spread across all unit holders, albeit at the unit holders own tax rate?

I guess what I'm saying is that the actions of person A can create a tax liability for person B, even in a wrap product, right?
 
You can also hold managed funds or similar unit trust investments in your personal name, a company or an SMSF as well. I would think your observation, if it is true, would be just as valid for those vehicles as it would be for a superannuation Wrap product?

Managed funds (and superannuation master trusts) are heavily audited, so you would only hope that they would have a formula or a system so that much of the inequality of what Craft and yourself are asking about is avoiding.

If I get a chance I will ask some people I know that have worked for companies such as Mercer.
 
Thanks guys for your posts and PM’s

The more I think about this area the more I like the transparency of SMSF’s for the long term holding of equities.

I’m sure that a lot of effort and cost goes into trying to keep things equitable but it just seems a very complex job to me. R&Rs indication of a 10% adjustment is probably testimony to the difficulty.

The big point for me is the tax treatment at the transition into pension phase. The wiping of the Deferred Tax Liability on your 60th birthday is potentially a huge benefit if you are in a SMSF. Yet it seems your account balance in a large fund doesn’t budge one point on that day. I guess it’s all swings and round abouts based on actuary estimates and so forth – but expenses from complexity and ‘friction’ through member switching etc must all add up. (not to mention the glossy comunications, the efforts to grow members/merge and other bells and whistles...blah blah blah )

I think SMSF’s are the best thing since sliced bread and when you think about incidental benefits like we are talking about here and if you have a bent towards the long term and DIY – I suspect a SMSF becomes viable even at fairly modest balances.
 
Craft - I trust that McLovin passed on some of the same information that he shared with me.

Completely agree - the closest alternative to these benefits (and could be a better option for those not as sophisticated) is a Wrap account that allows you to buy shares (probably limited to ASX 300) and term deposits as well as managed funds. If you did not invest in the managed funds, I do not see why you would be at a tax disadvantage at any stage compared to someone who is using a SMSF. All tax in a Wrap account as I understand it is levied on the individual and not pooled at all. But of course your investment options and flexibility is somewhat limited.
 
craft said:
Here’s an Ironic post for a stock forum.

The best way to think about investments is to be in a room with no one else and just think.


http://www.youtube.com/watch?v=aL766NK2ynw


I think he’s trying to tell me something.
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There is a lot of wisdom in the bolded part alone... a life-time full of it.

There is also this from an arguably wiser source (even more estranged from the normal stock market banter):

http://en.wikipedia.org/wiki/Golden_mean_(philosophy)

The purpose of the link is to remind myself, and maybe others, that you need not run from one excess to another (ie. going from one extreme "watching price action all day" to "ignoring the market altogether" or better yet from "wasting too much time on chat forums" to "locking yourself in your room"! )

Sorry there is a bit of cheek in my comment - I hope others find some enjoyment and meaning in there some where.
 
craft said:
Here’s an Ironic post for a stock forum.

The best way to think about investments is to be in a room with no one else and just think.


http://www.youtube.com/watch?v=aL766NK2ynw


I think he’s trying to tell me something.
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So good. Call me a fawning Buffetologist but I can't get enough of the bloke.

On the other hand, I can't help but always see the inconsistencies between what he has done and what he says. He admits that for 40 (!) years he was involved in arbitrage plays which requires, in his own words, to be constantly on the phones.

Yet surely this was a complement to his business-picking skills rather than a distraction - it gave a breadth of business knowledge and attunement to relative (mis)pricing.

Am I just finding shapes in shadows here or does anybody agree?
 

Are these actual returns or have you just made some assumptions and arrived at those returns? If they are assumptions that have been arrived at non-mechanically, how did you manage to retrospectively do this without only picking winners?...

The third and final step is to perform detailed analysis on the companies that passed through the first scan.
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Hi McLovin

The performance charts relate to hypothetical returns, with the portfolios updated each year.

Actual client returns are also outperforming the market but don’t go back as far.

Kind Regards
 


This thread has been enlightening. I had some knowledge about unit trusts but had never really thought about the long run tax consequences of super funds; the DTL been cleared at 60. Ves, out of curiosity, and I'm pretty at sea on all things that aren't SMSF super, but what's the running costs of a wrap account? When they were first introduced, iirc, they were primarily the domain of the HNW investors. But they seem to be for all and sundry now. I guess that's a as more and more HNW's have moved their money in to SMSF those wrap products needed to find new customers.

The only thing that worries me about super is that the government might change the tax treatment before I get to 60.
 
Andrew Newman said:
Hi McLovin

The performance charts relate to hypothetical returns, with the portfolios updated each year.

Actual client returns are also outperforming the market but don’t go back as far.

Kind Regards
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Thanks Andrew, what I'm actually asking is how can you perform step 3 of your analysis retrospectively and without bias?
 
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