Is the ASX Shrinking?

In this episode, Remo Greco explores whether the ASX is shrinking, what’s driving changes in the Australian market, and what it means for investors. A look at the future of the ASX and the impact on investment decisions.

Transcript

SPEAKER_00 0:00

The Talk Investing podcast and blog discusses investment advice from our previous podcasts and radio shows by Remo Greco and Marco Melado. Learn all things around retirement and investing.

SPEAKER_03 0:17

The Australian Securities and Investment Commission has released a new discussion paper and it's been analyzing the public markets which have been shrinking over the last decade and comparing it to private markets which have been rising and really trying to analyse: is this a good thing? Should we be worried? What sort of risks are there associated with this? Or is it just cyclical? So it's come up with some conclusions. And share market specialist Remo Greco is here to explain more. Hello, Remo.

SPEAKER_01 0:48

Good morning, Lisa.

SPEAKER_03 0:49

And anything we share here is general in nature and doesn't take into account your personal circumstances, financial situations, or needs. So, Remo, what has been the trend over the last decade with our public markets?

SPEAKER_01 1:02

So public markets generally have been shrinking for a variety of reasons. So public markets are share markets, let's, for example. So companies have been more reticent to come to market and list. Remember, last time we were on, we talked about the reason for share markets is for companies to be able to raise equity capital. Get some money. Get some money to grow their business. And what's happened is getting that money has become really easy out outside of the share market because there's platforms, lots of uh aggregators of of money out there, people who can match a buyer and a seller, being a company that needs money with some group of investors that would like to put some money in. And you can think about this. Uh in the US, where these markets um have been shrinking really rapidly. So in the US is a thing called the Russell 5,000 index. It only has three and a half thousand shares in a companies in there, because some more companies have been really reluctant to come to market. So one thing is scrutiny, right? The moment you come to the ASX market, everyone knows what's going on. A lot of rules, you've got to put out an annual report. So there's those things. Number two is is that you've got pesky shareholders like us that ring up and say, hey, what's go going on? Or you've got agitators, you've got superannuation funds, you've got people that are ganging up on you, all those sorts of things.

SPEAKER_03 2:24

And I hear that the nature of companies, because they've changed to be more technology focused, um, there are reasons why technology companies don't find the public stock exchange that attractive, because if they're in a growth phase, they would rather be taken over. There's that aspect.

SPEAKER_01 2:44

And there's also that most of these companies in their early phases are losing buckets of money. So you stand up every quarter and you go, hey, we're done really well. We've lost another billion, so we're going really well. So those sorts of things are difficult. So you can see that something like an Uber didn't become listed on the U.S. share market for like 15 years after it was created.

SPEAKER_03 3:04

And it's hard to value, I think, isn't it?

SPEAKER_01 3:06

And there's plenty of money searching for those sorts of investment opportunities behind closed doors. So what's happened since then, you've got uh a clamouring of mums and dads, retail pu public, who say, hang on a tick, why can't I own Uber shares 10 years ago? Why do I have to wait for them to list on the US stock market before I can buy it? And Uber value has gone from nothingness to 50 billion, and then I have to pay fifty billion. What's the bit in the middle? And they go, well, you're not sophisticated enough and you're stupid, and all those sorts of things come in. So, you know, you know, our our environment that we work in, our industry has a voracious appetite to make sure we part with your money, right? So we'll find an avenue to get that.

SPEAKER_03 3:50

And so we get to something called private markets. So let's explain what are private markets.

SPEAKER_01 3:56

Okay. So this is really where investments or assets aren't traded. Okay. So what the or what ASIC is particularly worried about here is private market for loans to companies. So this is where private credit. Private credit, right? So private credit funds have been around a long time. I've given you the story of Uncle Enzo, had the fruit shop, you know, fifty years ago, you needed money, go to see Uncle Enzo, you'd have the money in the freezer, you paid it back, right? That's a private loan. If he wanted to sell that loan, he couldn't do it. He had to wait for you to pay it back. Now, over the years, banks, commercial banks around the world, have become less and less inclined to lend to companies because the regulators want you to lend to households and real estate, primarily residential real estate, which has seemed to be a more safe option. The GFC focuses a lot of people's minds about what happened with banks extending credit for people who don't deserve it, and we nearly had a collapse of the financial system. Trevor Burrus, Jr.

SPEAKER_03 4:59

So there's an alternative. So who is this private credit?

SPEAKER_01 5:02

So family offices and and those sorts of groups of people that had lots of wealth would get phone calls from money.

SPEAKER_03 5:08

If you want to explain family office for people who might not know, so it's basically high net wealth.

SPEAKER_01 5:12

High net wealth.

SPEAKER_03 5:13

Families.

SPEAKER_01 5:14

Families who had you know accumulated a lot of money over the years. They might have a mate of theirs that ring and go, Hey, I've got a business that needs some money, but the bank is giving me a hard time. I need the money for five years. I can't repay anything in the first year because I need all that cash to grow my business. So I need some different terms and some different policies around my loan to suit my business. And the bank will always go, no, this is the term sheet, these are the bits and pieces, and so you can't get funding from traditional sources.

SPEAKER_03 5:45

Doing on the money, we have Remo Greco, who is our share market specialist, and you're with Lisa Leong. And we're talking about the decrease in public markets, so those listed companies, and the increase in private markets. ASIC has written a discussion paper because it's actually concerned, and it is said that it is concerned about this decline over decades and this increase in private markets. For anyone listening who might be going, this sounds really technical. Why should they care? And it's got to do with superannuation.

SPEAKER_01 6:13

Okay. Most super funds and most investment that you may put your money in today may have an element of this. In fact, it's a growing element, and that's really what ASIC is all about here.

SPEAKER_03 6:23

And industry superfunds like Australian Super and Australian Retirement Trust have around 22 percent of your money in private markets since 2024. So they are increasing their exposure to private markets. So then why should we care? Why should people care about this?

SPEAKER_01 6:39

Okay. So private markets, the element of private markets is an asset or a loan that can't be traded. It just sits there until it gets repaid or matured. So what ASIC is worried about is if there's some stress in the financial system, how do you get your money out, right? And most institutions go, well, we don't worry about that because the way we plan our portfolio is we know we can't sell them, we'll sell something else. This is the trick that ASIC is worried about. If you are in Ost Super, for want of a better name, okay, we're not just singling out OstSuper, but any industry funds or a big fund that has a lot of money in an asset that can't be traded, let's say something happens in the world where all the people who are members of that fund say, you know what, I want my money back, or I'm going to roll my my superannuation to somewhere else, like my self-managed fund or something. How do I get my money out? So ASIC are worried that a big fund will go, hmm, I can't sell those loans or those assets that are not marketable. I need to sell stuff that's marketable, which is public market. So they go and flog the shares, even though that might be a bad idea, even if they're getting a really lousy price. And what's happening is if you stay in that fund, you're copying all that bad news in because other people want their money out. And so ASIC are pretty smart about this. They're going, okay, we don't want to disadvantage someone who perhaps is asleep at the wheel and doesn't understand what's going on in favor of someone who says, I'm getting out. So there's those aspects. And then generally is what about if you don't even know about OSUP or you've got your little portfolio and you're beavering away, you wake up in the morning and the share market is down ten percent because something's going on. And you go, well, hang on, that sounds like a rigged system here. And I think that uh unintended consequence is what is worrying ASIC. I would argue that that um these unlisted assets need to get listed at some point, and so there's a a big push to get that done to provide some liquidity. There's that aspect. The other thing is ASIC is just signalling out big, bad, ugly, large investors, they can look after themselves. But for the poor retail investor who doesn't understand perhaps the nuance, it's really difficult for them to have some expectations.

SPEAKER_03 8:58

Well, they're looking at the bandwagon that is private credit and private markets and thinking I want in on this. And apparently it's a lot easier to get in on it as well. Trevor Burrus, Jr.

SPEAKER_01 9:08

It is. So what why would people do it? What you're doing is you're saying I'm giving up the opportunity to sell these assets whenever I want for a better return. And those returns are pretty good. Uh for domestic or Australian uh private markets, say in credit or loans, you might get seven or eight or nine percent returns. Trevor Burrus, Jr.

SPEAKER_03 9:28

Wow. But you're in there for eight to ten years.

SPEAKER_01 9:30

Well, they say that, but those loans generally are three or four-year loans and they're always maturing. So there is an element of liquidity. But the expectation of mums and dads or retail investors, people that perhaps don't appreciate what that means, is that you may not be able to get your money out when you want. But in return, you get those higher returns. In Europe and America, those returns are a lot higher. They're double digits. And my question has always been to the industry is why do we accept lower returns in Australia compared to overseas? And when I talk to the overseas guys, they have a wry smile on my mouth and go, you know why? Because you guys will accept it, and therefore you just get dished up. So as a policy, we tend not to be investors in domestic private assets like that. We think overseas is a better sophisticated market to be in.

SPEAKER_03 10:20

We're going to go to the phone lines and the text lines with your questions for Remo Greco. We've been talking about the decrease in public markets, the increase in private markets, the asset discussion paper, but we welcome any of your general questions as well. So let's go to Simon. Hello, Simon.

SPEAKER_05 10:38

Yes, good morning, ladies and I wanted to uh question pretty much the entire rationale of what Reno was suggesting. I mean the stock movement is a thing.

SPEAKER_03 11:22

So you're saying that private markets are better.

SPEAKER_01 11:39

Rem I. Yeah, uh look, I agree with your sentiment there. I think that's uh an interesting uh take on it. And quite right, once the company has raised money on the ASX, it just goes and does its business and away you go. It does create wealth, it creates revenue and dividends, and investors uh will crave for that. On the other side, the private markets, this is the issue that ASIC is worried a little bit about. If in a private market, if I have a loan, a group of loans, to a number of companies, and those loans are sitting there for the next two or three years, the price of those loans or the value of those loans is, well, whatever the loan is. ASIC is saying, what happens if one of those companies starts to find some financial difficulty? Is that loan really worth a hundred cents in the dollar, or should that loan be written down a little bit to reflect reality? And at the moment, the debate is, yeah, okay, well, who's going to do that? Is the manager of that product going to ring and find out some b some bloke with a propeller on his head to value that loan? Maybe. Will there be some methodology to do it? There's lots of methodologies. Will he choose the one that's in his favor? Possibly. So poor investors like you and I might be sitting there going, how do we know the value of those assets if they don't trade? Let me explain it this way. You think you know the value of your house, but really your house is ri is almost a one item that that doesn't replicate anywhere else. In other words, it's an it's an individual item. You really don't know the value of your house until the day you put it for auction, let's be frank. So if there's a whole collection of those things in your investment, what is the true value of it? And so ASIC is saying, when everything's fine, no one questions it. When things get a bit crook, what is the value and how do you know? You may not know until three years down the track when maybe you get your money back, or the cheque comes in, and instead of getting $100 back, you get eighty and you go, hang on the tick, I gave you a hundred, and they go, Yeah, but uh the loans didn't all uh get repaid. Well, when did you find out about that? Oh, last year. Did you have a duty to tell me? Well, yes, but when we got the value to come in, he said, nah, she'll be right, we'll get our money back. This is the transparency that seems to be occupying ASIC's mind. You really are not sure what the value is. Now, the to be pretty blunt, this market is pretty sophisticated, so you can't really cheat your way through it. But ASIC is saying, big, ugly pension funds, they can work out the value of the assets. They have a feel for it. But how can a retail investor truly understand that? And they're just saying, look, knock yourself out, guys, go and do it. But just be aware that sometimes these things don't go according to plan, and what are your expectations? And I guarantee you, a retail investor going to these products thinks, this is fine, she's apples, I'm getting my money back. And ASIC is saying, maybe check your expectations at the door and just say, you're getting a higher return, why you're getting a higher return? Inevitably, these products do really, really well. We've road tested a lot of them. They're pretty good, they're run by very reputable people. But we're big and ugly to go and do digging and check under those rocks to see who's good and who isn't. But can a retail investor truly do that? I don't think so. And I think ASIC is right to say get an advisor, look at these products pretty carefully. A bit like what you would do when you buy a share. Do a bit of research, that's all.

SPEAKER_03 15:03

Thank you so much for your call, Simon. And you could really hear in Simon's voice that reflection of the frustration, I guess, maybe that might be investors might be feeling in the public stock market, and therefore maybe a little bit of an example of why private markets are seemingly increasing.

SPEAKER_01 15:22

They are. Look, private markets sound sexy. You think about it. Uh vintage cars, uh a cellar full of wine, Bitcoin, all these things, right, that don't well, Bitcoin now trades extensively, but there's lots and lots of other things which sound really sexy to be in, but you really don't know what the values are. The beautiful thing about ASX, whether you like it or not, Simon, is every second there is someone pouring over that share price to try to find out what the real value is. He might get it wrong, but there's enough people involved to sort of force that to come to the surface really quickly. And I think ASIC is saying, we don't really have that scrutiny here, so just think about it. The people that have these products and market understand this. Make no mistake, they understand it. But what ASIC is worried about is what are the expectations of a retail client as to what this product really is. Education and a bit of advice will go a long way.

SPEAKER_03 16:16

Speaking of education, uh the discussion paper I'm referring to is Australia's Evolving Capital Markets, a discussion paper on the dynamics between public and private markets. It's been released by the Australian Securities and Investment Commission, ASIC, and we are discussing that today. Um, because some really interesting trends here. A question on the top of the text queue here. How do businesses find these private lenders?

SPEAKER_01 16:41

Yeah, okay. So these private lenders pride themselves in having very big networks of accountants, lawyers, those sorts of things. I mean you think about it. Often you would get a lawyer that would be able to find money for your home loan if you can't get a normal loan from a bank. How does he do that? Scratches, goes to the golf club, whatever. His his circle of influence is what does it. Today, not only family officers, but the large groups around the world who have lots and lots of tentacles that can zero in on small or medium-sized companies who aren't listed who need money. And what happens is that once you lend to one of these businesses, particularly those that are growing well, you tend to go back again and again over time as you grow. Because you know what? The guy that lent you the money, he understands me. He understands my business, he understands the different things I need to do in terms of when I can repay. I get flexibility. And banks don't give a lot of flexibility, they have a sort of one size fits all, and banks want to bank the big end of town.

SPEAKER_03 17:48

Remo Greco with you, uh Share Market Specialist, Lisa Leong, and Mitch has called in. Hello, Mitch.

SPEAKER_02 17:54

Uh good morning. Um for the first 15 years of my working life, I didn't draw a salary because I was in a religious order teaching at a boys' school there nearby in St Kilda. So now close to retirement, uh I just want a safe balanced place to put uh the few funds I have. Uh it's ironical that many of the lads I taught, they're all successful in business law, even some are successful stockbrokers. Um so the question is uh would something like AFIC or GEROR, because they have a basket of shares be a good option?

SPEAKER_01 18:32

Yeah, these are old style investment companies that have been listed for a long time. Australian Foundation Investments is AFIC, and DeGeraWara is like a sister business to them. I think they were either they were created or very closely created by JB Weir in the very old days, so you know, pretty reputable group. So essentially what you're doing is you're buying a share in a company called Australian Foundation or DeGeraWara, and in that company is investments. Like they just own a whole lot of shares, different shares, and they manage that portfolio, and they've done that for a long, long time. They're very prudent, uh they tend to be, you know, very high quality, there's a reasonable dividend, they understand about dividend, and they have a pretty good annual report and some stuff on the website that teaches you about investments the old-fashioned way, which I think is some really good guiding principles. It's not sexy, it's not going to be found on Twitter or any of these sort of places. But you know what? These businesses have been around for such a long time, and they just know what they know. And I have enormous respect for these sorts of investments. So for someone like you, I think the way they think and the way they would write about their investments would resonate really well for you, Mitch.

SPEAKER_03 19:48

Thank you, Mitch. And this question from Sally then Remo on our text line. Good morning. Our financial advisor has recommended we invest a significant amount of money in various funds slash ETFs using Hub24 platform. Can you tell me a little about this platform?

SPEAKER_01 20:06

So platforms are just literally a piece of technology which enables a fund manager, sorry, an advisor to access certain investment products really easily. So uh you may find that a portfolio is created for you as a client, and in there would be some shares or ETFs, exchange traded funds, and there might be some unlisted funds. There might be some funds in infrastructure or in fixed interest or in all sorts of things. Those funds are not publicly traded. How do you access them? The old-fashioned way is you'd ring up the guy that has the fund and he'd send you a 60-page document to fill out, and then you'd send it back with a cheque, and then maybe two weeks later you find out. Today what happens is is your funds sit on that platform and your advisor just presses the button and says tick for these sorts of funds, and it all happens automatically. It's very simple, straightforward, and it means that it all sits on one platform so they know exactly what you own. So they're all the good benefits I've just said. But I'm about to say a few things which perhaps may make people a bit unpopular. I've never used a platform in my life, and I have a little bit of problem with them because I'm a bit uncertain about the way the fees are constructed on these platforms. I'm also a little bit concerned about the products that are on those platforms. I think some of them might have some money that comes back to the people that run the platform. I'm not sure. The last bit is that cash on that platform is given a you get an interest rate for the cash, so it might be one or two per cent, but actually the cash rate is three or four per cent. And that's how they make some of their money. Look, there's pros and cons, and people have to get paid for their work, don't get me wrong. But in my general feeling, I don't think retail public are aware of just what those pros and cons are. It's very convenient for the advisor, very inconveni very convenient for your affairs generally, but there are some pros and cons. I think you've got to ask the question, what are all the fees? And I would say explain them to me like I'm a horse or a golden retriever, right? Make it really simple to try to understand what you what you're paying for. But generally, these platforms are very convenient. And convenience means there might be a cost behind it.

SPEAKER_03 22:20

Thank you, Remo. Um now this question on the text line I think was referring to the last caller we had. How much is the base level of investment into these products? Was it is that the Yeah, good question.

SPEAKER_01 22:35

So in in these sorts of products like private credit and private equity in these funds, they can get down to $25,000 minimum investments for retail. Um and so they are now becoming very accessible for for everybody. Um that's really why ASIC have raised the issue is that if you open up these sorts of products to everybody, just let's just find out exactly what your expectations should be and what are the risks.

SPEAKER_03 23:02

All right. And Wendy is here. Hello, Wendy. I have some American shoes.

SPEAKER_04 23:07

And I have received paperwork from America uh wanting a gold medallion. Um and I'm wondering what the hell I do because Australia doesn't have anything related to gold medallion. Um, and uh they're they're wanting paperwork signed um, you know, for a gold medallion.

SPEAKER_01 23:29

Okay, so Wendy, what we're talking about here is in America they want to they want to make sure that you can be identified as the owner of those shares. Right. There's a bit of a trick here. A couple of things you do. I I've done this before, it's quite expensive and quite cumbersome. A couple of things I would do is I would ring the share registry of where those shares are registered and ask them about it. If it's computer share, I've got a feeling it might be. Computer share have some information on their website about how the medallion system works. If you're confused about that, Lisa, could I ask for Wendy perhaps to give me a call or leave her number here and I'll I'll get her through this. Yeah, great.

SPEAKER_03 24:07

So Wendy uh Remo will give you a call about that, just to understand the intricacies of medallion guarantees. All right. Well, thank you so much, everyone, who has called and texted in and thanks for explaining the primary.

SPEAKER_01 24:24

There's there's lots of good reasons to be involved in here, but let's start with some good education to begin with. Thanks, Lisa.

SPEAKER_03 24:30

Thanks, Remo. Remo Greco, there, financial advisor with San Lamb Private Wealth.