Ren’s 2024 portfolio, ETF question & expert stock pitch: Australian Financial Group

Bryce: [00:00:12] Welcome to Equity Mates Investing, the podcast where we explore what's possible in the world of investing. If you've joined us for the first time, a huge welcome. My name is Bryce, and today we're looking at Ren's portfolio setup for 2024 and a dig deep on that one. Answering a community question on knowing what ETF to buy and bringing in Luke Larative to chat about Australian Finance Group. To chat through it, As always I'm joined by my equity buddy Ren. How are you? 

Alec: [00:00:40] Bryce? I'm very good. I'm good. Very excited for this episode. And as always, before we start a reminder. 

Bryce: [00:00:53] Love. It's a reminder this is general advice only. All information on this show is for entertainment and education purposes. 

Alec: [00:01:01] Yes. Now, before we get into it, we do have the Equity Mates Community survey live. The link is in the show notes, across our socials. This is your chance to really help us shape the future of equity mates. There's also a chance to win 500 bucks. That's not bad. But it really does help us know what we're doing well, where we can improve and what we should do next. So, please, if you've got 5 or 10 minutes, if you're commuting to work, just please hit it. 

Bryce: [00:01:29] It closes in like three days. So if this is the first time you're hearing it, take the opportunity while you're listening to this to complete it should take no more than sort of 5 to 10 minutes. That would really help us. 

Alec: [00:01:41] Now, Bryce, as you mentioned in your intro, we're going to start with my portfolio set up for 2024. You've been just asking me like, Ren, what are you going to do this year? I need to know. Please just tell me. I said save it for the podcast. 

Bryce: [00:01:57] I know what you're doing. I could do this segment. 

Alec: [00:02:00] That would be interesting. But I have had a how to, I guess, like a review of my portfolio and think about how I'm going to invest for the year ahead and how I'm going to manage my money. And I thought I'd come on and share a little bit of that. So I really subscribe to I think the personal finance experts would call it the pay yourself first methodology and correct me if that's just completely wrong, but what I do is when I get paid, I have a whole bunch of automatic transfers setup that go to, well, now the mortgage. But also spending account, you know, all that stuff, investment accounts. So the way that I've set it up this year is the money that I have allocated to investing, two thirds of that is going to go to my core. And then one third is going to go to satellite investments.

Bryce: [00:02:53] Core being low cost index ETFs.

Alec: [00:02:55] Yeah. So core being that like set and forget. as you said low cost index ETFs stuff that you never need to sell. And you just dollar cost averaging to time and time and time again. Yeah. And that's just going to give you the market's average return. And then the satellite portfolio is the part of my portfolio where I'm trying to beat the market. And so that could be individual stocks. Active fund managers thematic ETFs. And sue me, crypto. So I'll start with the core and then we'll get to the sexy stuff in the satellite. So core I've split out across five ETFs. So Aussie, let's see if I can remember this. Off the top of my head. Aussie is Vanguard Australia ETF US is iShares estimate 500. Europe, betashares Europe UK Betashares Footsie 100. And then Asia. Vanguard Asia Ex-japan. So that gives me like a global spread like Australia, US, Japan, Europe, UK, some parts of the world that I'm not getting, but that's a pretty good start. Now the obvious question is why don't I just do one ETF like one? Why don't I do VDHG, vanguard diversified high growth or betashares diversified, high growth die off? My reasoning is those ETFs are great and I could do them. But the geographic weighting in those ETFs is something that I don't love. So it's about 70% US stocks. And that's because the US has killed it. They've outperformed and they're bigger. And you know over the last like 20 years being overweight the US would have been a good move. So there's nothing wrong with that. But for me personally, I prefer having a sort of even split across the different parts of the world. And I have a general view that, like US, outperformance isn't going to last forever. 

Bryce: [00:04:54] It's just also not true diversification. If 70% of all. 

Alec: [00:04:59] Now, now, to be fair, proponents of the one ETF portfolio would say, but as other parts of the world outperform, they become bigger weights in the ETF. So in that sense, it is kind of truly diversified. But, I, I know where you're coming from.

Bryce: [00:05:13] I know you're still getting out weighted exposure. 

Alec: [00:05:15] Yeah, yeah, yeah, yeah. So, I prefer to have that sort of equal exposure around the world. So that's my call. Yeah. Now, we should say very clearly, even though we've played the not financial advice sting earlier, those five ETFs work for me. This strategy works for me. It may not work for you and your goals. So think about it yourself. Get professional advice if you want. Don't just blindly follow two idiots you hear on a podcast. But with that said, so that's that's my core. About two thirds of my money goes there. One third goes to my satellite now. About a third of that third income is going into crypto at the moment. Sue me, it feels like Bitcoin's going to, move this year. Well it already is moving this year. And so I've sort of gone overweight dot to what I normally would be investing there. 

Bryce: [00:06:09] Yeah a lot riding on the halving.

Alec: [00:06:12] Yes. Yeah. But not not a, not a lot in the sense that like my financial future. Right. 

Bryce: [00:06:18] Yeah. Yeah. 

Alec: [00:06:19] Like if that halves, you know, if I lose money on crypto like I have going in eyes wide open. And then the rest I save up. So that satellite, I have an automatic transfer just to a savings account. And then I'll just transfer it when there's something interesting. Well, there's, and, you know, transfer it to a broker or a crypto exchange or whatever when there's something that I think is worth investing in. So that's me. What are your thoughts?

Bryce: [00:06:49] How are you approaching your offset account?

Alec: [00:06:52] So. Well, so Alice and I are each transferring a little bit more than we need to each pay cycle. 

Bryce: [00:07:01] For the mortgage. Yeah. 

Alec: [00:07:03] So the idea being that, like, over a fortnightly pay cycle, that buffer will slowly just increase. Yeah. And you know, if there's. Yeah. Yeah. I think it's also like then you if there are an interest rate rise or two where transferring. It's not like we're going to need to then do other transfers because it's like we've got that buffer already. Yeah. 

Bryce: [00:07:27] Do you put your savings for your one third investing? 

Alec: [00:07:32] No I'm putting it in savings. Yeah. Yeah like I could. But you know it's a, it's the mortgage is a the size of the mortgage and yeah. Yeah. The amount that it's putting away for the satellite investments. Yeah. 

Bryce: [00:07:46] So I gotcha. Yeah. It's not gonna move the needle. No, I like that. I think it's a very clear strategy. If you haven't listened to Get Started Investing, this is something we speak a lot about on Get Started Investing, the core and satellite approach. And I mean, the whole book that we've written. 

Alec: [00:08:03] Well, that yeah, that's more just. 

Bryce: [00:08:05] Yeah, Don't Stress, Just Invest put sort of the numbers around the power that a core portfolio like this can. You know what it can turn into over a long period of time. And then I, you know, I'm in crypto as well and and have that sort of probably my splits a little bit higher than yours. 

Alec: [00:08:26] To crypto. 

Bryce: [00:08:27] To. Yeah, I'm like 80-20 crypto. Big belief in Bitcoin halving.

Alec: [00:08:34] Yeah. Yeah I know you're joking. But a lot of people would say. 

Bryce: [00:08:37] I am definitely joking. I am not doing any DCA into crypto. I just went to like lump sums. Last year and that's it. I'm just like that's that I'm happy with that. If it go if it doubles from here, great. If I lose a bit, not so great. But I'm not going to add any more to it, I don't think. But I follow a very similar approach with the split. What I mean, it's more what I'm doing more of this. I probably do about 80% that goes into ETF core rather than 60%.

Alec: [00:09:08] Yeah. Yeah. Okay. Cool.

Bryce: [00:09:10] So to close out, one thing I want to discuss over the coming weeks is the role that active management will play. In our portfolios, because in the office as well, a couple of the guys are interested in the opportunity in small caps. 

Alec: [00:09:26] Well, someone literally messaged us this morning asking us to recommend Small Cap.

Bryce: [00:09:32] I know you're thinking about it. If not, have already pulled the trigger. And I know you do have exposure to active management, so I don't want to go into it now, but let's put it as a note to pick up in a couple of weeks. The role that active management is going to play in our portfolio. And then how are we going to do that? 

Alec: [00:09:49] Let's put a pin in that, because that's a great transition point, because, we've got a question from the community that we're about to get to that isn't about active management, but it's actually about ETFs. So let's get to that question. 

Bryce: [00:10:10] All righty. Well it is community question time. If you'd like to ask us a question, all the experts that come on the show hit us up at equitymates/contact. This one has come in from Christina. Her question is how do you decide which ETF to buy? I keep hearing it depends on your objectives, but struggling to decipher what it means amongst the different ETF options. I'm just an average gal in my mid 30s that is decided on investing over home ownership, but I'm overwhelmed by the ETF choices that Vanguard have between diversified, Aussie equities, low fees, high performance international equities, even lower fees, even high performance. Where do we start? 

Alec: [00:10:52] It's a good question and it is so overwhelming these days, I think. By latest count, there's over 300 and ETFs on the ASX. Yeah. And those are index ETFs, the thematic ETFs, the active ETFs, all with different objectives and different investing styles. And that's why people say it depends on your objectives. Because you can buy ETFs that own almost any asset these days. And not all ETFs are created equal. Certainly not all ETFs are charged equally. So there is a lot to decide. And without knowing, this is the challenge with answering this question. Without knowing what your objectives are. It's hard to give general advice, but I would say as a starting point, generally, if you are in your 20s or 30s and you're thinking about having more money when you're in your 50s or 60s, you can start with just an ETF that tracks the global stock market. And as we mentioned a couple earlier in this episode, the Vanguard diversified high growth or betashares over diversified high growth would be my starting point for your research without knowing your personal circumstances, just as, I just want to get started and get going. 

Bryce: [00:12:17] Yeah, I think the giveaway piece of information here that would help with this for Christina is the fact that she's chosen investing over home ownership. And I think for me, that is, you know, you want to now be building wealth and you don't want to be playing around with ETFs that are volatile or sort of on the higher risk spectrum. If you're choosing to build wealth over a long period of time, then you want to find products that are exactly the two that you just mentioned there that match that objective, low fee, broadly diversified, and, you know, taking that market return, and something that you don't have to constantly be thinking about. I think that's a good place to start. And I think everything she's spoken about here, she's looking at the right things, performance and fees, like, those are two things that you want to be looking at. I think for me, fees is one where if you are genuinely going to be investing for 40 years, think about this phase that you're going to be paying.

Alec: [00:13:15] Yeah. Now, if the question wasn't, I have decided on investing over home ownership, but rather I have decided to invest to accelerate my way to home ownership. Then I think the answer would be different, because if you've got, you know, if you're halfway to a deposit and you want to buy in the next three years, investing in the stock market is probably isn't the right decision, because the risk that your home deposit goes backwards in the short term rather than forwards is there. And so in that case then you could look at ETFs that are a little bit less risky. So you know there are ETFs that buy bonds and give you more secure yield. Or even if you want to take less risk than not there's like high yield cash. But if you do that, you might as well just put it in a high interest savings account. You can get 5.5% these days. So I think that's why people say it depends on your objectives and that's why I mean that's why financial advisors make their money because they can consider your objectives and get you the right product. But I think in general, if you just want some stock market exposure, if you want those, like base level building blocks to your portfolio, globally diversified, low cost ETFs, the place to start. And to that are listed in Australia that are quite popular. Vanguard diversified high growth. Betashares diversified high growth.

Bryce: [00:14:43] Yeah. Now, Christine, if you're listening and you would like us to connect you with a financial advisor to help you work through this, shoot us an email. Otherwise you can, hit us up at equitymates.com/advise. And there's a form there that anyone can fill out, and we'll be able to connect you through to some financial advisors to help with whatever situation that you're in. So keep the questions coming. Thank you so much to Christine. Now, we're going to take a short break. And then on the other side we're bringing in Luke Larative from Seneca Financial Solutions to do a stock pitch on Australian Finance Group. We'll be right back. Welcome back to the Equity Mates Investing podcast. We've just covered off the news and the community question from Christina. But now we are joined in the studio by an expert for... That's it. It is time for our stock pitch segment. And we have in the studio Luke Larative live from Seneca. Luke, how are you? 

Luke: [00:15:46] I'm dazed and confused about that. 

Alec: [00:15:48] Some people say we went too hard on the baseball theme there, but I think we got it right. 

Bryce: [00:15:53] Yeah. Now, you would know, Luke, from our most recent equity mates chat. He came in and did paint my portfolio. We're getting you in now to talk about stocks in your portfolio or on your watchlist. 

Alec: [00:16:08] Wait. Actually, we should have just flipped the table and done it. What? You review Luke's portfolio. 

Luke: [00:16:12] I can bring my show back. I'm happy to. I'm happy to do. I can do my show back at you guys. All right, well, we can do that anytime you like. 

Alec: [00:16:19] We'll pencil that in for a future episode. We've also got to get Luke to review our portfolios at some point. So a few episodes anyway. 

Bryce: [00:16:27] It's pretty perfect last year.

Alec: [00:16:30] But that's not what we're doing here today. Luke, you're joining us to talk about one company. That has caught your eye. It's a company with a very generic name, Australian Financial Group. Let's try. So what does it do? 

Luke: [00:16:50] Finance AFG. As a code on the ASX, they are Australia's largest, mortgage broker aggregator, essentially. So, if you're a mortgage broker in Australia and you, part of the idea of, you know, maybe licensed by AFG, but even if you're not, you got your own license, you might use their mortgage aggregation platform. So all the loans from all the lenders or in Australia come into a platform, and they can sort by all the different characteristics and try and find the brokers can try and find the right mortgage or loan for you, that it will take all kinds of different financing, whether it's asset financing, business loans, everything right for kit and caboodle. But as you can imagine, aggregating and charging mortgage brokers a small fee, is quite a low margin business. So the reason why we're interested in this is over time, AFG have become essentially a non-bank lender. So I started out by taking other people's money from the banks at a wholesale rate and retailing it for a margin. It's called a white label loan. And then now what they've actually done is gone and raised off balance sheet finance through a securitisation warehouse, which if you've been investing in like buy now, pay later or any of that stuff, you know, that's where they kind of get their money from and they are actually taking the credit risk and lending that money out, through their own home loan product. So, you know, we think the business is poised to have a period of expanding margins and some pretty strong growth. And that's why we don't like it. 

Bryce: [00:18:14] On one of the previous episodes we've done, we're talking about CBA, and they are expecting their loan book to come under a little bit of pressure this year. 

Alec: [00:18:22] Well, there's two there's two pressure points. One is that, there's a competition that is hot for mortgages. So. Right. And one of the big for acting irrationally according to the other three. So like. 

Luke: [00:18:34] All of them, I'd argue. This story for another day. 

Alec: [00:18:37] But then the second thing is, Matt Coleman came out and said he expects a big uptick in arrears this year in arrears. 

Bryce: [00:18:42] Yeah. So how do you think about that? The macro environment at the moment.

Luke: [00:18:46] Yeah, it's really important. And it's really important to why AFG is trading. you know 11 times earnings. So you know we've had a period for the last couple of years now with high using unprecedented but unprecedented levels. 

Alec: [00:19:00] I mean, it has been on price.

Luke: [00:19:02] On levels of, levels of competition for mortgages in this country. So that's put everyone's margins under pressure and has put AFG's volumes under pressure. They've got a very disciplined, credit assessment process. And Ben and I, I've spent a lot of time sort of going through that and making sure we're really comfortable with the way that they lend money. And and we think the CEO and CFO in the team there have done an excellent job in selecting people to lend money to. So I'm not too stressed about even though yeah, that'll be probably some areas take up and like whatever. I'm not actually too worried about that for what I would define as a sort of high quality institutions. I think it may be an issue at other institutions who are more aligned with growth, and more keen to, to grow the number of lines they write, because as a result, the more more money you lend out, the riskier and riskier it gets. So, I'm not too worried about that side of the ledger. The volumes is what's important. But I think as this rationality plays out, AFG because of the size of the business, a relatively small company can asymmetrically win as that competition eases. So whilst you might see, you know, net interest margin stabilise at the big four banks, I think you can see them blow out somewhere, somewhere like AFG, just because of the nature of the work they're doing. So I think it's just going to open up more niche corners of the market for AFG winning. And and. It's that sort of core to our thesis. 

Alec: [00:20:20] So on that, point of, you know, you've done the work on the management and the way that they're lending and you've got comfortable with them relative to their peers. How have you done that? Like what's the research process? Like, you know, for a lot of retail investors we can't speak to management. They don't take our calls. So. Okay. Yeah. I was wondering that, so, they do. 

Luke: [00:20:45] Yeah, I remember those guys. It's really. It isn't it? Is nice. Dave and Luca, actually seeing them, next week after their results, but, I think, yes, one can get them to explain it to you. That's a good point. Does it make sense to, like we're an AFG credit rep? We're not. We're not using our license with them at the moment. We have used them as an aggregator before. So I've actually used the platform. We've actually been through it. We've written lines for clients through it. So I think having a practical use, I mean, like same when I was an early investor in Zepp and like, you know, same with them. Opened an account and I bought some stuff, you know, so like, you know, it was those sort of things for me as a business owner practically using products and practically testing stuff out and how it works, and then going back to management and asking them questions and then asking the people who supply them or use them, or other other brokers who use them. When do you get loans but knock back, how did you go with this business owner, blah blah blah blah blah. That sort of third party feedback as well. Yeah. It is really important. So whether it's talking to staff, talking to management, using the product yourself or talking to customers and suppliers, I think it gives you over time, if you're doing that consistently over time, gives you a really good picture of how any business is operating. And that's kind of how we've owned AFG for a while. This is now first, you know, it's not new to us. This is why it builds so much confidence and comfort with it. 

Alec: [00:22:04] So whenever we talk mortgages or any player within the housing ecosystem in Australia, the question that's front of mind for me is, is this just a play on Aussie house prices like is how tied is their fortunes to the macro environment. And like let's say something that's completely out of the company's control. You know, the government got serious about capital gains and negative gearing or, you know, something something happened with house prices. Like is that detrimental to the thesis or is it sort of not as exposed to the actual just macro price of a house? 

Luke: [00:22:41] I think it's exposed to to lending volumes for sure. And, you know, part of why I think now is a good time to be investing in this company is we have seen pretty good volumes coming out of reporting sales. And I think, you know, 5% growth, you know, out of judo, sorry, market's pricing in 5% growth that we got, I think 8 to 10% growth in their result recently. Volume were surprisingly strong in the in the major banks, you know, relative to markets expectations. So I think that maybe that people are too bearish on AFG. And everyone's kind of forgetting that if the trends in their business more broadly, which are less white label loans and, more originated warehouse loans, the margin difference there is like, you know, ten x. So, yeah, you know, it's a it's, it's a significant thing. So you've got, you know, 70 plus percent of loans in this country. In our written through mortgage brokers, AFG is the largest mortgage aggregator in the country. You've got a list when you go on to the platform, you know, a list of loans to choose from. Yet the turnaround times at the big four banks is, you know, wakes and AFG will turn around 24 hours for 48 hours. So, you know, for a broker who's looking for volume and looking for things to turn over, if the rates are competitive and the customers happy to use it, well, they're going to put it there. And that's margin for AFG. So, you know, my view is pretty simple. More money is going to AFG every year to look for a loan and the likelihood of that loan being and AFG loan goes up. Now those trends already are occurring in the business. You can already see it in the data. So it's just really a case of saying, well, if the macro gets just not worse. Stabilises get a bit better. This business has like a lot of leverage to that, if that makes sense. Whereas a Commonwealth Bank doesn't have the same sort of leverage. 

Alec: [00:24:28] Yeah. So that's the macro risk. The other risk that comes to mind is why did you stop using them?

Luke: [00:24:36] We never thought we'd have a mortgage broker. We don't. Yeah, yeah. So I had a guy in Perth who was a financial planner, a mortgage broker, and he's gonna run his own family business now. So, I lost my mortgage broker, and I haven't really had one.

Alec: [00:24:47] Okay. Fair enough. Okay.

Bryce: [00:24:50] Off the Hook. Yeah. Nice. Well, Luke, thank you for, thank you for that AFG Australian Finance Group. Adding it to the watchlist. Not a buy hold sell recommendation, but. 

Luke: [00:25:02] We think it's cheap too. I'm okay having to stand behind it like it's.

Alec: [00:25:05] A good business. Okay. From looking up from the. Yeah. 

Bryce: [00:25:08] That's what I heard. 

Bryce: [00:25:08] That was.

Bryce: [00:25:09] Generally. 

Alec: [00:25:10] Nice. Yeah. Yeah yeah. 

Luke: [00:25:11] But yeah. Like we, I think it's a good company. It's like a 5% dividend yield 11 times earnings. 

Bryce: [00:25:16] Awesome. Yeah. 

Alec: [00:25:17] Well. 

Bryce: [00:25:18] Well, stick around, because in an episode or two's time, Luke will be back with another pimp my portfolio as well. So very keen to. 

Luke: [00:25:25] Get better steam on that. 

Bryce: [00:25:29] Hey This one's pretty good. Yeah. 

Alec: [00:25:30] No. Yeah. All feedback is welcome. We're going to keep optimising them throughout the year. Equity markets.com/contact. If you want to submit your portfolio for Luke to have a look at if you want to give us feedback on things or if you want to have a chat to Luke about your portfolio, not on the podcast. You can also go to equitymates.com/contact or equitymates.com/advise and fill out the form there and have a chat to Luke. So plenty of ways to speak to Luke. Some may say too many, but we say just not enough 

Bryce: [00:26:03] Luke, always a pleasure. 

Luke: [00:26:05] Thanks guys. 

Bryce: [00:26:05] And that brings us to the end of our show today. As Ren said, yeah, you can hit us up in many ways, but equity mates.com/contact is the main way. Ren, always a pleasure chatting stocks. We'll pick it up next week.

Alec: [00:26:15] Sounds good.