Direct Indexing for SMSFs: What You Need to Know Podcast

Direct Indexing for SMSFs: What You Need to Know Podcast Transcript

Welcome back to SMSF Mate’s daily podcast. This is our general advice warning. We are required to warn you that any advice has been prepared without taking into account your objectives, financial situations or needs and because of that you should before acting on the advice consider the appropriateness of the advice having regard to your own objectives, financial services and needs. Where the advice relates to the acquisition or possible acquisition of a financial product you should obtain a product disclosure statement, PDS relating to that product and consider the PDS before making any decision about whether to acquire the product. Now let’s get into it.

Tim: Today, we’re talking about direct index investing and what that is. We’ve got a special guest on the line. Damien, how are you?

Damien: Not so bad. Thanks for having me on.

Tim: No worries. Thanks for coming and in the studio my name’s Tim and I’m with?

Gareth: Gareth.

Ashwin: And Ashwin.

Tim: All right.

Gareth: We’re here to learn today because we don’t know anything about what Damien’s going to tell us about. We’re going to ask lots of stupid questions.

Tim: There’s no such thing as stupid questions.

Gareth: And Damien is going to answer all of them. Aren’t you Damien?

Damien: Yes, absolutely.

Tim: All right so Damien, what is direct index investing and how could it potentially be used within an SMSF as an investment.

Damien: I’m guessing you guys know a bit about ETFs and sort of index funds where basically you buy a little bit of everything. You’ve got the ASX 200 and you buy lots of BHP and a little bit of the stock that’s at number 200. You sort of get an average return coming from it. That’s obviously taken off over the last few years as fees have come down. That’s been hugely popular.

What direct indexing is doing is effectively letting you invest in that portfolio but then customize it. I often liken the investment industry, it’s a bit like the old car industry in terms of saying if you want to go with a managed fund or with somebody who’s doing active investment you basically have any color you want as long as it’s black. You basically get exactly what they’re giving or you can turn around yourself and say okay, I actually I just don’t want anything to do with carbon in my portfolio is saying well, you can go and build it all yourself from scratch. Here’s all the parts. There nothing really, hasn’t really been anything in between. That’s what we’re trying to provide with direct indexing is this ability to say take a portfolio that somebody else has put together that you know has been built well and got all the characteristics you’re looking for and then just make a few tweaks. The car analogy…

Gareth: Damien, did I understand you right? If I want to pick the ASX 200 but I don’t want Rio or Woodside or BHP in there then I can have the ASX 197.

Damien: The products we have right now is we’ve got an ASX 25 and a global hundred. That’s a global 40, sorry, which is similar to those types of ones so we’re basically the top 25 stocks in Australia. You don’t want Rio in it, you can knock Rio out. We’ve got 50 different screens we run. I guess Australia is probably, the companies in Australia tend to be a bit simpler and a bit sort of more involved in just particular indexes or businesses but once you get into some of the global stocks it can get pretty wild in terms of what all the different permutations and combinations. Part of this came because we look at some ethical funds and we’d have people go well, I feel strongly about climate change. I want to do something in my portfolio about climate change for example. Then they’d say okay, I’m going with an ethical fund just a minute.

I don’t have drinking in there. I don’t get any alcohol. I don’t need smoking. I don’t want to get any gambling there. They’re my favorite past times. I don’t want to, I don’t want to avoid everything or all of a sudden I’m not buying any companies involved in the manufacture of meat because I’ve decided I don’t want carbon in my portfolio. It’s like no, I wasn’t saying it for that. It’s not sort of a, I don’t want to be all in on the green but there are some certain elements that I’d like to sort of kick out of my portfolio.

Gareth: Damien, can you sort of tailor the ratio of those? Can you say well in your ASX 100, I don’t want these three stocks but I want to go really strong on these three or is it even?

Damien: Look, we’ve got some ones we’re doing. We’re sort of in there our first generation of this in Australia. This is the portfolios we’re running where we can add in extra stocks into it, yes. We can and we’ve got as I said 50 different screens that sort of range from things like let’s say war is a good example. You’re saying well, do you want to knock out anything to do with war? That’ll knock out like say Boeing or things like that or do you just want to get rid of the worst offs. We try and put a few different flavors in it. That’s sort of our version one.

As we go, as we develop this product going forward is that’s absolutely the tough stuff. We do want to add in where we can start saying well, it’s one thing people can come to us right now and say okay, I want a global portfolio and can I have some extra Microsoft and Apple and a little bit of Tesla but what we’d actually like to do is start. As time goes on we’ll add more features where we can actually say well, let’s give you a basket of those. You don’t actually have to tell us exactly the stocks. We can manage that basket of a few extra tech stocks all or something to do with batteries or something like that.

Gareth: I guess the real benefit for someone trying to manage their self-managed super fund is probably a reduction in time, compliance, reporting because I can kind of give you a rough cut. I can get 80% of what I want without having to go through and pick those 50 stocks individually, put in buy orders, manage them so on and so on. Is that really kind of the main benefit?

Damien: Exactly. I mean, we sort of, our company name’s Nucleus and the idea behind that was that’s sort of the core of your portfolio is you can say okay, look I want to run my SMSF. Do I want to go out and have to buy 50 or 60 stocks or actually I’m happy to have somebody else have an index for a lot of that and then I’ll go and pick out the five or six stocks that I really like and I’ve really got a strong feeling around and sort of surround that sort of nucleus or core of your portfolio with some of your favorite stocks rather than feeling like I’ve actually got to go out now. I’ve got a self-managed fund because I wanted to take a bet on some things I know about but all of a sudden you’re also in charge of diversifying your entire portfolio and having to do all these other things. You might not, the less fun parts I guess of investing but still very important to manage that at the first part.

Gareth: Are there minimum entry requirements? Do you need minimum 50 grand, 100 grand? What’s the sort of entry points for most people?

Damien: For these ones we start from ten thousand dollars and then working the way up from there. We do have and it depends on which portfolios you want to jump in. The Aussie one we can and or the government bond ladder that we’ll have one sort of for government bonds which is similar type of thing. That’s obviously got some lower investment amounts and the Aussie as well. The global, at the moment, we’ve got a minimum of 40,000 to invest in that one but…

Gareth: It sounds quite accessible. It’s not specifically aimed at sophisticated investors with half a million dollars in super. Anyone can have a relatively smallish parcel.

Damien: Yes, absolutely.

Gareth: Buying an ASX 100 set of stocks with 10 grand can be quite difficult because you’ve got minimum entry requirements.

Damien: That’s right. We do, we run some, we run all the trading sort of in the background. We group together people’s trades and so the Aussie trades cost 89 cents to trade plus 0.05%. They’re all very cheap trades. Done that sort of institutional trading costs. You get sort of benefit from those. We do monitor sizes. We do all that for you in the background in terms of saying well, we’re not going to go out and if you deposit a hundred dollars into the account let’s say. We’re not going to go buy $5 worth of shares for you and have that cost a dollar of trade. You’ve lost 20%. We need to make sure you’re trading reasonable amounts. All that sort of gets done for you in the background.

Gareth: Damien, no doubt you charge millions of dollars for this service.

Damien: We wish. Look, this started, I actually run active funds as well. The active funds we charge a bit more for but this, the passive, we sort of set these up quite like active funds that we’re running. Our clients love the features of being able to go and choose their own their fixes. It’s not a science. It’s people’s own opinions about what they like and don’t like. For these passive ones where the direct indexing ones where all we’re doing is buying the index. We charge 11 basis points for the bond funds and 17 basis points for the equity funds. That’s for the investment side of it. Then there is a management, a fee that goes to. Most of our clients go into premium which charges 33 basis points. starts at 33 and then goes down to zero depending, once you’ve got over a million dollars.

Gareth: Depending on volume.

Damien: Yes, depending on the size. It’s sort of, I guess you think about the starting say for an equity portfolio from around about half a percent. They can go down to 0.2% if you’ve got lots and lots in the strategy.

Tim: Interesting. I mean so I guess if we compare it to other products like in the same I guess selection category or tier if you will. You mentioned more active investment funds that you manage or others manage. Typically an active fund, you’re paying for that activity and that alpha or attempted alpha if you will. Those generally cost more. It sounds like yours…

Damien: Active funds are about 1% for ours and then our passive ones about half a percent. That’s where they start from and then fall down from there depending upon what the, how much you’ve invested.

Tim: Cool. Really it’s kind of, it sounds to me like you’re getting all the cost benefits like the operational cost benefits of an ETF but the ability to customize it and perhaps add a bit more flavor, your own sort of flavor to each one.

Damien: Absolutely. To me this is where the industry’s going. I mean before I worked here I worked at Schroeder’s. What would tend to happen is smaller clients would turn up with a few million dollars. They get put into the unit trust which is where sort of everyone sits and just put into those. Then big clients might turn up with half a billion dollars or something like that. They’d say and what they say to these people, the big clients is oh okay, you can have a separately managed account and we’ll manage, if you want to run your portfolio ex-tobacco is a very common one in the Australian funds management. Okay, we’ll buy all our usual stocks but we won’t buy tobacco stocks. They would put them in a separate managed account and run that all separately.

That’s where I sort of went well, just a minute. Technology costs has been coming down, all these platform costs coming down, you don’t need half a billion dollars to do it. We can do that for somebody with 50 grand and that was where sort of the inception of these, the funds we created work to really sort of try and give people that opportunity to customize things without having to feel like they had to rebuild the entire car themselves.

Gareth: Well, I think it really connects well with the whole idea of the self-managed super fund. Like a lot of people want to do self-managed super funds because they want a bit more control than what they get from the retail, general super market. If you use a mainstream bank broker, you may be paying quite a large amount per trade and it means buying $500 worth of shares or a thousand dollars’ worth of shares in something as you said 5% or 10% straight off the bat you’ve lost.

Damien: Just the hassle of having if you’ve got a stock portfolio full of 30, 40 stocks and they’ve all got jammed and the dividend is being paid and they’ve got stuff like that.

Gareth: There’s a lot of accounting and compliance work and so on.

Damien: Yes so hopefully we can sort of shield people from a lot of that but still give you the opportunity because we are transparent. You can see every single stock that’s in your portfolio. You can see what you’ve got, how much you own. Another common one we do is no Aussie banks. Some people that’s a philosophical thing but for a lot of people as well because they already own the Aussie banks. What they’re doing is effectively saying okay look, I want to have this diversified portfolio, a bunch of Aussie stocks but I’ve already got the bank. I don’t want to sell the ones I have for the likes on capital gains or whatever it is. I want the direct holdings for that. Set me up on an ASX fund but I don’t own any banks because I’ll earn them myself. With the transparency part you can really see what’s in there and how it sort of all fits together with the rest of your portfolio.

Gareth: Beautiful. Damien, perfect customer for you. Who’s that?

Damien: We’d like to think we’re, it’s the person who has probably one, on the way, in all the way out of I guess of managing entire portfolio themselves. I think it’s a person who’s got it there, tried to run a big diversified portfolio and go on actually you know what? I really just wanted to run my self-managed super fund because I want enough control over the stocks I like but I didn’t want to have to do all the boring stuff of running the diversification. They sort of say that to us here’s 20% to 80% of my money and you run the diversification part and I’ll do the parts around it.

The other one we find quite popular as well is we do, we can do this not within an SMSF as well. It’s the people who want to get an SMSF that might not have enough money for it yet and so it sort of gives them the sort of step into saying okay well, I can actually do some customization through what we’re doing within super. Then once they’ve sort of built up enough money now they can get an SMSF and get even more customization for it.

Ashwin: On an accounting question Damien, with the premium accounts and the transactions of that, do they feed into like the self-managed super fund accounting software’s?

Damien: There’s a couple different platforms where we can supply it on. Premium is the main one with especially for the super side and they feed into all the typical platforms. They do an annual so we sort of, people sort of go into two parts. One is literally just take the Premium annual summary which says here’s what your capital gains were and your capital losses and various amounts of dividends. You can just sort of plug those six or seven numbers in or you can go back to the full here is all the transactions and set up your own, if you want to do your own part to minimize your tax or maximize your taxes paid in any one year or something like that.

The other benefit as well we do have some family grouping. I spoke about some of those, how the fees sort of cap out after a million dollars. There’s no extra fees. If you do have friends and family and stuff like that who are investing on the Premium platform as well. Then everyone sort of goes into that one, you can add all the accounts together to work out, to bring your fees, your average fees down as well.

Gareth: I guess if anyone wants to sort of get in touch with you, I guess they can go over our website. They can email hello@smsfmate.com.au and we can hook you guys up. I assume Damien, you’re open to new customers.

Damien: Yes, absolutely. Look, most of the time we set up online calls. You can go in and book a spot with us if you want to speak to a financial planner otherwise you can call in on our number to speak if you’re already set to go. We do do a bit of robo advice on there as well. If you’re not quite sure what’s the split between say equities and bonds that you’d like you can sort of have a run through our robo advice path. That will actually come out and say okay, based on what you’ve said we recommend you go whatever it is, 70% equities and 30% bonds or whatever. Obviously you don’t have to accept those and you can go through and choose whatever you like but we do try and add a few tools in just to try and help people along in terms of the, to us it’s a knowledge game. We want people to feel confident. It’s all about transparency. You can see everything that’s going on.

We’re happy to tell you exactly what we’re doing, exactly what we’re buying. If you want to do it yourself, you’re happy to do it yourself. We’re not sort of out here trying to say there’s a secret sauce to it but there’s obviously a lot of, we can get the benefits of lower trade costs and just managing those, all the corporate actions and managing all the, getting the right weightings when stock increases in weight in the index or decreasing in weight. We’re sort of on that and making the trades without people having to worry about it.

Tim: That’s actually a great point because I guess if you were doing, managing a portfolio yourself Damien, I mean I guess like obviously rebalancing and managing your risk, all those other things, dividend, reinvestments and all that.

Gareth: It’s a lot of time commitment and software as well. If you are going to get charting software, accounting software.

Tim: Absolutely. It’s a full time job and to sort of have that oversight at what seems to be a fairly reasonable cost. It seems interesting to me.

Damien: I have a financial planner who used to joke. He always get people who roll into retirement and say oh look, I just retired, quit my job and I’m going to spend a lot of time investing. Then once they’d been at it for a few years, they realized actually you know what? I’ve got grandkids and I want to go on holidays. There’s all these things going on. I don’t have to look after my portfolio 24/7 but if I can give a chunk to somebody and know that’s sort of covered. Here’s five or six stocks I really care about and I’m happy to keep an eye on and I’m paying a lot of attention to whatever it is, self-driving or lithium or pick whatever the main is that they can focus on that without having to feel as if they’re retired. Also now the full-time job trying to manage a portfolio.

Gareth: Just last recap it was Aussie stocks only right? There’s no access to US or global stocks.

Damien: We have global as well.

Gareth: Okay.

Damien: Global and Aussie. The trades are a little bit more expensive. The stocks is $2.70 on the global trades but it’s still not talking, we’re not talking…

Gareth: We’re not talking 29.95.

Damien: That’s right. Look, I think yes, we’ve got a global fund and an Aussie fund and a bond ladder. The government bond ladder is effectively pretty much 12 bonds but then one of them rolls off and we stick it on the other end. We’re not trying to manage the, we’re not trying to go long bonds or short bonds or whatever. It’s just saying here’s a simple bond fund that you can sit in there and it just runs. Easy to buy in and buy out. You can see all the direct holdings again of everything that’s in your portfolio and what they do.

Ashwin: Very interesting.

Ashwin: Thanks a lot Damien. I think this is a great thing for SMSF listeners to weigh up when they’re looking at alternatives or as part of their portfolio. I think it’s a great idea and great concept to come up with.

Damien: Thanks guys. I mean certainly overseas, it’s going to take off and it’s where this sort of first up and running in Australia.

Gareth: Well, that’s classic Australia. Twenty years ago is now happening today.

Damien: I’m pretty sure we won’t be the last. People do like to customize things. I think that’s why SMSF’s are so popular in their own right. Hopefully we’ll see this whole industry will grow.

Gareth: Thanks Damien.

Tim: Awesome. Thanks Damien. By the time this episode is up on our website now we should have a bit of an article, a bit of a write-up from yourself. We’ll have all the, I guess technical information there and also your details if people want to get in touch. Check that article out on our website and we’ll go from there.

Damien: Thanks. Excellent. That’s good guys.

Thank you for joining us once again. If you’re interested in our waffle about self-managed super funds feel free to join us on smsfmate.com.au or search SMSF Mate in Spotify.

General Advice Warning

Damien Klassen

Nucleus Wealth

Damien is an experienced investment manager, skilled in equity research, quantitative finance, asset allocation and a range of computer languages. He is currently Head of Investments at Nucleus Wealth, and has previously worked in quantitative research, asset allocation strategy, data management and as a financial services analyst among other roles.

Damien completed a Maths and Finance (Hons) degree at the University of Technology Sydney.

You can find out more about Damien or connect with him on Linkedin here: https://www.linkedin.com/in/damienklassen

Or visit his website here: http://www.damienklassen.com/ValuationDashboard/

Show More

Gareth Lane

Concise Digital

Gareth Lane is a successful entrepreneur, businessman, and owner of the digital marketing and web agency Concise Digital, based out of Perth, Western Australia. Concise Digital have solved over 60,000 digital / web problems for clients since 2005. Gareth is one of the founders of SMSF Mate.

Gareth is passionate about helping small businesses be more successful online by avoiding the pitfalls of digital marketing. He regularly runs live talks, workshops and meetups discussing Google, social media and all things digital marketing.

Gareth studied Business and Commerce at Curtin University, and has held board positions for a number of organisations, including serving as the President of the Western Suburbs Business Association and as a non-executive member of WA Business Assist. A true entrepreneur at heart, he started his first business at 13 and has created and run multiple successful businesses since.

Gareth enjoys good food, great wine and time in the sun when he’s not at his computer helping other businesses get ahead!

You can find out more about Gareth or connect with him on Linkedin here: https://www.linkedin.com/in/garethconcise/

Or visit his websites here: https://www.concise.digital/ or https://www.garethlane.com/

Show More

Ashwin Ramdas

Eventum Consulting

Ashwin is an accountant and educator based in Perth, Western Australia. He is passionate about helping family owned businesses and startups. He is one of the founders of SMSF Mate and you’ll regularly see him on our podcast!

Ashwin is a managing owner and director of Eventum Consulting, a multidisciplinary firm helping clients with finance, succession planning and their tax needs. He also served as a lecturer in taxation and small business at the Central Institute of Technology, and has worked as an accountant at a number of well-known tax specialists.

Ashwin studied a Diploma of Business Education and a Bachelor of Commerce in Financial Accounting, Managerial Accounting and Corporate Finance, both at Curtin University, WA.

Ashwin is passionate about technology, and sees it as an enabler for his clients to grow truly sustainable and profitable businesses.

You can find out more about Ashwin or connect with him on Linkedin here: https://www.linkedin.com/in/ashwin-ramdas-72442919/

Or visit his website here: https://eventum.com.au

Show More

Kind words from Aussies managing
their own self funded futures

  • SMSF Mate is a unique website because it has ideas about how to approach SMSFs, insurance and other financial topics that come straight from first hand experience. It's much more useful than what you find on all the other financial websites that just offer generic info that you could easily get on the ATO's website. It's also nice to know there's no financial incentive behind the information, it's legitimately there to help people understand self-managed super funds and how to get the most out of them, not to get an affiliate commission from a broker or other financial services provider. The investment product information is also incredibly useful, I've never seen this kind of functionality on any other website that let's you look at such a wide range of products, sort by what info is most interesting or important to you, and subscribe to updates for different funds and financial products all in one place. Definitely worth checking out if you own or are considering an SMSF!

    David G, Self-Employed, SMSF Owner
  • SMSF Mate provides a unique insight into superannuation and financial topics in a way that is easier to understand than conventional websites. The colloquial nature of the site makes it easy to understand and they often speak about complicated topics in lamens terms so I can wrap my head around them. The investment product information is a great way to research funds that I am interested in investing in with my SMSF and there is a lot of helpful information on the site for better structuring my investment portfolio. In comparison to other websites which offer similar information, SMSF Mate excels as the information is free to access whereas many other sites charge a subscription fee for the same thing. Overall, I think SMSF Mate is a great resource for SMSF trustees and is worth looking at for a variety of super-related topics. Thanks.

    Tim B, Business Owner, SMSF Trustee