A Bigger Picture: My review of Malcolm Turnbull’s autobiography

Readers of my Switzer articles will get from me two detailed analyses of the Eden-Monaro by-election, the first when nominations have just closed, the second after polling day. In the meantime, I make my prediction: as ever the laws of electoral history will prevail. The new member will be Labor’s Kristy McBain, currently mayor of Bega Valley shire. Had he stood I think Giovanni Dominic Barilaro could have won. More on him in my next article.

My wife sent off to the publisher of Malcolm Turnbull’s autobiography, A Bigger Picture, to get an early copy. On sale in bookshops on Monday 27 April, mine arrived on Thursday 30 April – and I have been reading it since. So, what do I think of it?

First, I want to distinguish between the book and my view of Turnbull as Prime Minister. To accompany my article here of 23 May 2019 “Will history view Morrison as a great PM?” I had a table of our 30 Prime Ministers ranked in order of greatness as judged by me. Of the past four post-Howard Prime Ministers, I had Julia Gillard at number 17 and described as “High average”, but Kevin Rudd (18th), Turnbull (19th) and Tony Abbott (20th) are described as “Low average”. The book does not change my mind on that. Nor does it change my view that the Liberal Party in September 2015 made the right decision to replace Abbott by Turnbull and in August 2018 again made the right decision to replace Turnbull by Morrison.

While he was PM, people would ask me whether I was disappointed by Turnbull. My reply was to quote my mother’s dictum: “He who expecteth little shall not be disappointed.” I said the same about Abbott during his term, likewise with Rudd.

In respect of my view that the Liberal Party made the right decision to replace Turnbull with Morrison I say that as a man who is wise after the event. I admit posting this article on Switzer on 25 October 2018 “’Keep Turnbull’ I told them”.

I found Turnbull’s book very interesting to read and useful for me in my own writings. In my opinion it is the best of the post-prime ministerial autobiographies.

There have been many reviews very critical of Turnbull’s prime ministership and the reviewers take their dislike of Turnbull out on the book. I don’t intend to do that – but I make minor criticisms, none-the-less.

Turnbull has repeated private conversations and that is something of which many are critical. I take a different view. Private conversations can be a first rough draft of history – and I think this book is a good contribution to history – with Turnbull’s spin, to be sure. Those who are still living can dispute Turnbull’s version of conversations if they wish.

There is an observation he makes in the chapter “Diplomacy, disloyalty and turning the corner on debt”. It should be recorded for historians: “The deepest animosity was between Cormann and Dutton, on the one hand, and Julie Bishop and George Brandis on the other.” That tells me something I always knew to be the case. In the cabinet his greatest supporter was Brandis, the second greatest Bishop.

Here, then, is my first criticism of the book. Turnbull cannot resist making a clever put down of every person of significance. For example, it is recorded on page 649 that Brandis had written him “a very warm and wise letter a few days after the coup.” Then on page 650 he reproduces the whole letter – and it is very constructive critical of Turnbull beginning with: “Your fatal mistake was, of course, to trust Dutton.”

However, Brandis followed that with this: “If I may say so, I, and others, warned you many times that he was stalking you. . .” Turnbull’s comment on that is to write: “George’s criticism has considerable merit although I don’t recall his warning me about Dutton ‘many times’. It never occurred to me that Dutton, let alone anyone else, would consider himself a viable candidate for leader or that we’d do better with him at the helm.” My criticism is not that I disagree with Turnbull. It is that he should not dispute with his best friend about the number of times the warning was given.

My other criticism of the book relates to the index. Two members of my family are mentioned favourably in the book, my elder brother Alastair on pages 17, 18 and 20 and yours truly on page 304. He is recorded in the index, but I am not. So, I counted the number of people mentioned in the book but not in the index and there are 28 such people.

To have my family mentioned favourably in the book certainly disposes me well towards the book and its author. However, that is not the reason for my good disposition. It is that I am writing a book myself and I found his chapter “The element of surprise: proroguing the parliament” very useful. Certain omissions from it make it spin but that does not diminish its value to me. I have no doubt that there will be plenty of other political historians who find this book a valuable reference to keep in the library. (Malcolm Mackerras is Honorary Fellow of Australian Catholic University. [email protected])

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Super funds need to lift their game

News from prudential regulator APRA that, in the first week, more than 650,000 people had applied to access their super early, is a slap in the face to the super industry. It demonstrates what an appalling job the industry has done in making superannuation relevant to young adults and communicating the benefits of super as a long-term investment strategy.

Under the Government’s COVID-19 assistance package, those getting the JobSeeker payment, or who have had their working hours cut by 20% (or a sole trader where turnover is down by 20%), can access part of their super tax free. They can withdraw up to $10,000 before 30 June and up to another $10,000 after June 30.

Applications are made electronically to the ATO, and if eligible, are then sent to the relevant super fund to process. The scheme opened on 20 April, and in the first week alone, 665,310 Australians took the initiative to take money out. In most cases, unassisted and unadvised.

To its credit, APRA is collecting and publishing weekly statistics on the number of early release applications, average size and how long it is taking the super funds to process the applications. In the first week, it reported that of the 665,310 applications received, 162,879 applications had been paid amounting to $1.30billion in benefits at an average size of $8,002. The good news for recipients is that the super industry in this instance is being quite responsive, with applications being processed on average within 1.6 business days of receipt.

From next Monday, APRA will expand the reporting to include fund-level data for the 161 super funds. Public “naming and shaming” will keep the pressure on industry laggards, so that all funds are meeting APRA’s target to pay early-release requests within 5 business days of receipt.

But back to the horrifyingly high number of applicants. While there is no doubt that COVID-19 is causing severe financial hardship for many Australians, the fact that so many are choosing to tap into their super, despite it being the most tax effective form of saving, is an indictment on a bloated and out of touch industry.

Take these examples of how out of touch the super industry is:

If a young adult saw the numbers in the table below, I reckon that they would only access their super as a last resort, and if they did, they would consider it as a ‘temporary” withdrawal and aim to repay it as soon as they could.

These show the impact on a person’s super balance at retirement following an early withdrawal of $20,000. The balance is impacted by the projected investment return and the number of years to retirement age.

Impact on Retirement Super Balance – early withdrawal of $20,000

For example, a 47 year old woman who has 20 years to go to her retirement at age 67. Assuming that the super fund can earn a return of 6.5% pa over the 20 years (after taxes and all fees), by withdrawing $20,000 now, her retirement super balance would be $70,473 lower than it otherwise would have been. An extreme, but possible example, is a 27-year-old man in a high growth fund that is expected to earn an average return of 8.0% pa. His retirement super balance will be a massive $434,490 lower if he takes out the $20,000 early.

The super industry needs to lift its game. It needs to get much better at communicating the long-term benefits of super, much better at responding to members needs for information and reporting, and much better at being “relevant” to young adults. It cannot do anything about “retirement” being an eternity away for younger Australians, but it can work on ideas that promote super as a compulsory savings system yet help members achieve their more immediate lifetime goals.

The super industry must do better.

Where there's a will, there's a way

The future of medicine

It is my opinion that over the next 5 to 10 years the delivery of medicine will change dramatically. The pharmacist of the future will become the pharmacist of the past. Many years ago, before the incredible sophistication of the pharmaceutical industry, many pharmacists compounded medications in their own facility.

I foresee a situation where a person will go to the doctor following a full assessment of their own genome. A treatment plan will be formulated based on the person’s own genetic abnormalities and predispositions. Rather than taking a number of separate pharmaceutical pills and, for those so inclined, vitamin supplements, the doctor will administer a personalised prescription for the person. This will be taken to their pharmacist and, using nanotechnology, all of these therapies will be delivered within the one small pill, taken once daily.

The technology would be advanced to the point where each separate medication within the nano-pill would be released at the appropriate time into the circulation. We are well aware that computer technology power doubles every 18 months and the advances in nanotechnology appear to be mirroring this.

On a separate, but similar, note, the University of Pittsburgh has released recently in the Journal of Investigative Dermatology, a fingertip patch with 400 microneedles for vaccine delivery for live or attenuated vaccines.

The microneedles are made from three-dimensional sugar structures incorporated into what is known as a multicomponent dissolving microneedle array. Interestingly, this not only induces an antibody response but also improves the cellular response better than standard vaccines given via injection. It appears from the preliminary studies that this will induce a strong and long-lasting immunity. The researchers trialled this in mice administering a live adenovirus with encoded antigens and a specific immune stimulant to enhance the local immune response.

In the last few weeks, researchers at the University of Oxford in England have started a trial of a vaccine for the Coronavirus. It may be that, in the very near future, rather than the needle jab, we are using these micro patches instead for all vaccines. 

Researchers from Harvard University in the USA are also working on a similar patch technology for the management of diabetes. The patch not only delivers insulin through the skin but also measures real-time blood sugar levels. 

At present, the vast majority of insulin-dependent diabetics need to constantly prick their fingers to monitor blood sugar levels and then inject themselves on multiple occasions throughout the day. Again, over the next few years, the management of diabetes will be revolutionised by the use of these micro patches.

For many chronic conditions affecting millions of people, especially over the age of 50, the future of chronic medical management is very bright. When I started medical school in the 1970s, our medical and surgical therapies were modestly effective and I have seen a revolution in the management of chronic illnesses, such as cardiovascular disease and cancer, over the past 40 to 50 years.

With these extraordinary advances mentioned above, which are only a portion of what we will see over the next decade, the future of medicine is looking very bright indeed.

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NAB’s share purchase plan is a no brainer – let’s hope Directors make it fairer

National Australia Bank is the latest of the 20 ASX200 companies to raise capital during the Covid-19 crisis. On Monday, it tapped institutional investors for $3,000m through a placement at $14.15 per share. Now, it is the turn of the more than 570,000 retail shareholders through a share purchase plan (SPP).

The SPP is set to raise a further $500m. NAB shareholders will be able to apply for up to $30,000 of new shares at a price no higher than $14.15 per share. In fact, it will be the lesser of $14.15 and the average trading price on the ASX in the week leading up to the closing date, less a further 2% discount. The offer closes on Friday 22 May.

Despite scary headlines like “Bank loan losses could top $35bn”, If you have the cash, it is a “no brainer” to take part in the SPP. Firstly, it is being offered at a big discount to the current market price (11.5% lower than yesterday’s ex-dividend adjusted closing ASX price of $15.99). Secondly, it is coming at a discount to NAB’s book value of $17.34. Although I am no huge fan of this measure, buying bank shares below book value has historically proven to be a pretty sound strategy. And thirdly, retail investors are provided with “market protection” over the offer period. If they decide they do not really want more NAB shares, they can sell existing shares now at a higher price and replace in the SPP, or make that call after the offer closes and in all likelihood, get out without any real damage.

And as for the scary headline, the answer is that no one, including the banks, really knows. This number was an analyst’s forecast of potential lending losses by the major banks over the next 3 years due to the Covid-19 crisis. All we have to go on is the $800m provision from NAB announced on Monday and the $1.6bn provision from Westpac announced on Tuesday. These numbers were based on probability weighted forecast of scenarios modelling economic growth, unemployment and house prices over the next few years. Interestingly, most of the damage is coming from housing loan defaults – residential and commercial.

The issue for retail shareholders is that the SPP is currently only $500m in size. If 25% of NAB shareholders elect to take part, this means an average allocation of just over $3,500 each. If 50% of shareholders take part, an average allocation of just $1,754. Just like the Cochlear SPP, which I wrote about last week, NAB retail shareholders are being screwed.

Fortunately, Cochlear Directors relented to shareholder anger and after the SPP closed, increased it from a miserable $50m to $220m – an increase of 440%. But it was still subject to a scale back, with bids for $417m received!

Let’s hope that NAB Directors follow suit and increase the size of the SPP, because it is set to be massively oversubscribed.  With retail investors owning about 40% of NAB, on an equity basis, it potentially needs to be as big as $2bn.

These raisings highlight that in the rush for companies to strengthen their balance sheets, retail shareholders are being heavily discriminated against. Most of the 20 companies that have raised capital (see table below) have conducted an institutional placement followed by a SPP to retail shareholders, rather than the fairer entitlement offer structure.

Capital Raisings by ASX 200 Companies since Covid-19

The entitlement offer or APNEO (accelerated pro-rata non-renounceable entitlement offer) is fairer in that the offer is made in accordance with each shareholder’s current holding. Webjet had a 1:1 entitlement offer (meaning that a shareholder could purchase 1 new share for every 1 share held), so if you owned 2,000 shares you were able to purchase 2,000 new shares, if you owned 1,000,000 Webjet shares, you could purchase 1,000,000 new Webjet shares. No shareholder ran the risk of being diluted. Fair to all.

And as can be seen from the table above, Flight Centre, Webjet, Oil Search, Kathmandu, G8 Education and Reece have conducted fair entitlement offers. Regrettably, household names such as NAB, Cochlear, QBE and Lend Lease have listened to their investment bankers and chosen to let their retail shareholders down.  

There is an argument that entitlement offers are less predictable and harder to underwrite (particularly where retail shareholders are concerned), but that is after all why investment bankers charge their high fees. On equity grounds, there is no argument. SPPs are manifestly unfair.

NAB shareholders should be screaming about the inequity of this capital raising. Let’s hope that the NAB Directors get the message and increase the size of the SPP.

Switzer takes a jump to the left!

We checked the pulse of house price falls thanks to the Coronavirus

Will Cochlear address the elephant in the room?

Shareholders in Cochlear, the global leader in implantable hearing solutions, will be asking their Directors a lot of tough questions at the company’s next AGM. This follows a panicked capital raising that has angered both institutional and retail shareholders.

Institutional shareholders are angry that a UK fund manager, Veritas Asset Management, was allocated more than one-third of the placement. It invested $304.5m to buy 2.18m shares at a price of $140 per share, and is currently sitting on a paper profit of over $90m.

Retail shareholders are angry in that they are being fed “the scraps” of the issue and will be heavily diluted. While $880m was allocated to institutional investors, only $50m has been set aside for retail investors through a share purchase plan. More than 33,000 shareholders will be competing for a pool of 357,000 shares – an average of 11 shares each. Assuming 25% of shareholders participate (which is an absolute no brainer because it is $41 in the money), they will get an allocation of about $6,000 each. If 50% participate, they will get an allocation of $3,000 each.

The only winner (apart from Veritas) it seems is JP Morgan who underwrote the institutional placement and will receive a fee of close to $20m.

To be fair to Cochlear, it was the first of the 17 ASX 200 companies that have raised capital in the Coronavirus period of shutdowns. It came to the market on 25 March, saying that it expected a significant impact from Covid-19 for an uncertain period. Together with funding almost $500m in damages awarded against Cochlear following an adverse judgement in a patent infringement case in the USA, debt was expected to push above the Board’s comfort level. The company was taking “pre-emptive and decisive action to ensure it remains strongly capitalised during the current market uncertainties and to position the Company for the future”.

The placement, representing about 10.9% of Cochlear’s existing issued capital, was arranged at a price of $140 per share – a discount of 16.7% to Cochlear’s then share price of $168.00. While not an extraordinarily large discount, on the high side compared to other recent issues. By comparison, fellow health care leader Ramsay Health Care announced a $1.2bn placement yesterday (representing 12.9% of its issued capital) at a discount of just 10.6% to the market price.

And if you look at the market reaction, the discount was too high. Cochlear resumed trading after the placement on 27 March at $163.48 and it has been one way (higher) since then. No wonder institutional investors are peeved.

Of the 17 raisings by major companies, 11 have been conducted using the structure  Cochlear applied (an institutional placement and subsequent share purchase plan for retail investors), while 6 have chosen to use the much fairer accelerated pro-rata non-renounceable entitlement structure (APNEO). Webjet, Flight Centre, G8 Education, Oil Search, Kathmandu and Reece make up this list.

Because the offer under APNEO is made on an entitlement basis in accordance with each shareholder’s current holding (for example, Webjet had a 1:1 entitlement offer meaning that a shareholder could purchase 1 new share for every 1 share held), a shareholder can’t be diluted if they choose to invest.

The offer is made at a fixed price and institutions get to go first (which always occurs whilst the stock is in a trading halt). Those entitlements that are not taken up are typically auctioned to other institutional investors. The stock comes out of the trading halt and then retail investors get their chance to invest. Same fixed offer price, same entitlement ratio, but with a two-to-three week settlement period.

This structure has some disadvantages in that it doesn’t readily lead to bringing in new investors, retail demand can be hard to predict, and it can be a little harder for the underwriter. But that’s why they are getting paid the big bucks.

And although the maximum investment in share purchase plans has been recently increased from $15,000 to $30,000, if the company isn’t making many shares available, applications by retail investors get heavily scaled-back. While It might be a little strong to say “robbed”, some shareholders are materially disadvantaged.

The questions shareholders want the Cochlear Board to answer are:

Cochlear’s SPP closes today. It should be massively oversubscribed. Perhaps the Board will hear the message from shareholders and increase the size (which it has the discretion to do so). For equity reasons, let’s hope so.

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