Damien These is 32 years old and single. He is a civil engineer who was born in England but was brought up in South Africa. He and his two brothers went to boarding school because his parents travelled a great deal due to his father’s mining construction job. Damien went to the University of Witwatersrand to complete his undergraduate education. He later travelled to England to complete diploma studies at the Imperial College, which helped him to specialise in concrete constructions. This specialist education placed him in high demand in the engineering field, especially in remedial engineering. After some time back in South Africa, he decided to migrate to Australia because he thought the political situation in Australia was attractive when compared with the state of affairs in South Africa.
Damien owns his own house, which he bought immediately on arrival with the help of a mortgage loan, and his car, and has about $20,000 in financial assets. He recently received a cash bonus from work after the successful completion of a large infrastructure job where he was called upon to determine why the driven piles were cracking in new sections of a major toll road and why the older sections were showing possibly dangerous cracks. He used the bonus to finish paying off the house.
He now earns over $120,000 p.a. gross and has put in place a salary-sacrifice scheme whereby he sacrifices $500 per fortnight to superannuation. He says he has the ability to save at least $25,000 p.a. although this normally doesn’t occur as he tends to spend a lot on travel and entertainment.
Damien’s father returned to England after his mother died quite early in life, and has recently died. After the sale of their father’s house and the settlement of his estate, Damien and both his brothers each received a lump sum of the equivalent of A$250,000.
Damien wonders if he should buy another house and rent it out, buy shares or purchase units in a managed fund. He doesn’t know a lot about investing and due to work commitments, doesn’t have a lot of time to devote to managing his finances. He has been looking around casually for an investment house, but is not sure whether he is ready to be a landlord. He has seen two reasonably priced houses near the local university which he could buy, ‘do up’ a bit and rent out to students. He has been told that there is a good return to be had by doing this, but he is still unsure. With regard to investment in managed funds, his father always told him indirect investments were no good because ‘you lose control’ and the managers are only doing it for the fees.
Damien comes to you for advice. After some discussion and answering the standard questionnaire, together you decide that he has a fairly high tolerance for risk.
a. Given Damien’s age, risk tolerance, financial position and personal preferences, what sort of asset allocation would you recommend? What are the arguments for Damien investing through an indirect investment (managed funds) as against via a direct investment?
b. With regard to Damien’s thought of buying an investment property, what financial concept(s) would he be neglecting if he did this, even if a property deal appeared on paper to be a good investment option? On this basis, would you therefore recommend that Damien should not invest into property at all?
c. What are the arguments for and against investing into a property company listed on the ASX, such as Westfield, as compared to investing into an unlisted property managed fund.
d. A friend has suggested to Damien that he could borrow against his home to invest into shares. He asks your view on this. What is your opinion? What benefits and risks does this strategy bring?
e. If Damien decides to invest some of the inheritance into an unlisted property managed fund, what factors should be considered in deciding which particular fund he should invest into?