Magellan Global Trust Offer

The Magellan Global Trust offer (ASX Code: MGG) is open with the new fund to be listed on the ASX hoping to attract minimum subscriptions of $250m. There is no maximum set for the offer and it may end up being $1 Billion or more. Magellan’s very strong brand in the retail funds sector and the increasing appetite by retail investors for international investments should ensure the success of the offer.

Investors in existing Magellan vehicles may be eligible for an additional 6.25% in loyalty units under a priority offer. Magellan Group will pay all upfront costs of the offer so that the net asset value of the Trust on day one will be equal to the subscription price of $1.50 per unit.

The general offer is closing on 22 September and the priority offer is expected to close on 29 September with the units to commence ASX trading on 18 October 2017.

MGG will be a listed investment trust (LIT) with a portfolio managed by a subsidiary of Magellan Financial Group. The investment mandate is somewhat different to existing Magellan funds, such as the popular Magellan Global Share fund (MGF). The proceeds of the offer will be invested in a concentrated portfolio of 15-35 international equities in accordance with Magellan’s existing investment philosophy and global investing strategy.

Magellan uses fundamental analysis to identify companies that have strong competitive advantages and seeks to buy them at a discount to intrinsic value. Magellan has said it will target a cash distribution yield of 4% p.a. With dividend yields on global stocks averaging around 2.4%, this means they will be relying upon some realised capital gains and potentially a component of the distribution will be a return of capital invested if there are insufficient realised capital gains to make up the difference. A management fee of 1.35% will apply with a performance fee applicable if returns exceed the dual benchmarks.

The Manager’s key focus is to deliver long-term average total returns similar to MGF with a strong focus on downside risk mitigation and the preservation of capital. The Manager will consistently pay a cash distribution of 4% p.a. which will appeal to some investors, such as retirees, but less so to investors more focused on capital growth. Retirees will also be attracted by the capital preservation focus.

From a portfolio perspective, the Trust is expected to have significant overlap with the MGF and to initially have a sizeable exposure to the North American and European markets as well as material exposure to the technology sector on account of the Manager’s emphasis on companies with sustainable long-term competitive advantages. The active currency hedging of the Fund means that there is the potential for both positive and negative incremental returns from changes in the value of the AUD against other currencies. Also, the Fund can hold up to 50% cash at any time.

Historically, Magellan has generally outperformed in flat or falling market environments, with materially lower drawdown risk due to the focus on capital preservation. The high conviction and concentrated nature of the mandate could mean that returns and volatility vary considerably to both its benchmark and other global share funds.

Removal of Capital Gains Tax Exemption on Main Residence for Foreign Residents

The government has released draft legislation removing the capital gains tax (CGT) main residence exemption for foreign residents. This change captures Australian citizens who become non tax residents for a period while living overseas, such as on a work transfer to Singapore or London.

Foreign residents, including expats, may be liable for significant tax when they sell their former home while a foreign resident for tax purposes. A foreign resident will be assessed on the full capital gain or loss that arises from the sale of their property (usually deemed to be when the contract of sale is signed) even where it was their main residence prior to moving overseas. Transitional rules will apply in some circumstances until 30 June 2019.

Under the proposed new rules, property owners who are foreign residents at the time of the CGT event are prohibited from applying the main residence exemption. Individuals who have periods of non-residency during the ownership period will still qualify for the main residence exemption if they return to Australia and regain residency status for tax purposes before selling.

It is important to note that residency status for tax purposes can be different to an individual’s immigration or citizenship status. For example, an Australian citizen or permanent resident can be a foreign resident for tax purposes.

Regaining tax residency before selling will be advantageous as under the proposed new rules, only property owners who are foreign residents at the time of the CGT event are prohibited from applying the main residence exemption. Individuals who have periods of non-residency during the ownership period will still qualify for the main residence exemption if they return to Australia and regain residency status for tax purposes before selling.

The “six year absence rule” will continue to apply i.e. an individual can treat a dwelling as their main residence after they stop living in it for up to six years if it is used to produce income e.g. the property is rented out.

These proposed changes also have implications for deceased estates as the removal of the main residence exemption also applies to deceased estates. The main residence exemption does not apply if the deceased person was a foreign resident at the time of their death. If the deceased was an Australian resident for tax purposes at the time of death, the main residence exemption accrued by the deceased for the dwelling continues to be available to the beneficiary(ies) of the deceased estate that are bequeathed the property. However, in some circumstances there may be tax consequences if the beneficiary who inherits an ownership interest in the dwelling is a foreign resident at the time of the CGT event.

Note also that from 1 July 2017, purchasers of Australian property where the purchaser has reason to believe the vendor is a foreign resident, are required to pay 12.5% of the purchase price to the Commissioner. This amount will be withheld from the payment the purchaser makes to the vendor.

Bitcoin, Ethereum and other crypto (digital) currencies

I have to confess that I don’t really understand so called digital or crypto currencies like Bitcoin which seemingly are primarily used to speculate but can be used to pay for services. Consequently I won’t invest in them – too risky for me! While the underlying blockchain technology is potentially very important and will come into widespread usage, that doesn’t make Bitcoin a good investment.

I take some comfort in the fact that one of the world’s leading bankers, Jamie Dimon the CEO of JP Morgan, has said Bitcoin is a “fraud” and that he would fire any JP Morgan employee trading Bitcoin for being “stupid”.

Bitcoin has soared fourfold this year, spurred by greater acceptance of the blockchain technology that underpins the new exchange method.  Nevertheless, it looks like a speculative bubble to me.

Dimon’s comments and China’s attempt to ban Bitcoin trading caused Bitcoin prices to fall substantially last week. However, demonstrating just how volatile Bitcoin trading is, the price has rebounded substantially since. This should be considered a speculative tool, not an investment or store of wealth.

CommInsure

CommInsure was in the news for the wrong reasons earlier this year regarding denial of some claims based on what have been described as outdated medical definitions.   In response, CommInsure has recently clarified 23 medical definitions, improved five medical definitions and added one new definition for ‘relevant medical specialist’.

Under CommInsure’s Upgrade provision, it passes back (applies) these new medical definitions and other improvements to all existing clients who have upgradable policies – policies issued on or after 1997. CommInsure have also passed back the new medical definitions to old Trauma policies issued before 1997. These are positive developments for policy holders.

Also, it has been announced that CBA will sell CommInsure with large insurer AIA Group the acquirer. Existing policies should be unchanged. The primary reason for the sale is reported to be the low return on the assets employed in the business. NAB sold most of their stake in MLC Insurance for the same reason and MLC’s pricing has improved subsequently so this may prove to be a positive development.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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