Latest financial insights

In its latest 3Q21 trading update, Zip Co (ASX:Z1P) demonstrated yet another strong quarter, with group revenue, merchants, and customers all experiencing a substantial 10%-20% increase on the previous quarter, showcasing consistent growth trends.

Quadpay's Standout Performance

Quadpay, Zip Co's US-based business, emerged as the star performer, exhibiting impressive sequential growth in revenue, transactions, and customers. With an annualized transaction volume reaching US$2.8bn, Quadpay's resilience stood out in the seasonally weakest quarter.

Credit Quality and Global Expansion

Maintaining sound credit quality, Zip Co's net bad debts reduced from 1.93% to 1.78%, underscoring a healthy global merchant pipeline. The company is making strategic strides in global expansion, with initial merchant signings in the UK, a soft launch in Canada, and strategic investments in BNPL players in South East Asia and Eastern Europe.

Performance Analysis

Dominance in the US Market

In what is typically its weakest quarter, Zip Co's Quadpay reported impressive sequential growth, with substantial increases in revenue (+16%), transactions (+7%), and customers (+19%). Quadpay's merchant base witnessed a remarkable 55% sequential growth.

Solid Results in ANZ

Zip Co's results in the Australia and New Zealand (ANZ) region, while meeting expectations, revealed a 61% year-on-year increase in transaction volume. However, the sequential decline of 8% aligned with seasonal trends.

Forecasts and Outlook

Minor adjustments to sales and profit margin forecasts led to a modest 2%-4% downgrade in Zip Co's FY21F/FY22F earnings per share (EPS).

Investment View

Despite the adjustment, Zip Co continues to execute well, delivering strong growth metrics across the board. The company's ambitions to become a global payments player position it for long-term upside, especially considering its significant discount to Afterpay Ltd (ASX:APT) in the EV-to-sales multiple.

This comprehensive performance overview reinforces Zip Co's resilience and strategic positioning in the dynamic buy now, pay later (BNPL) landscape.

Key Takeaways:

• Investing directly into listed shares gives you full control over tax consequences, timing, and portfolio rebalancing.
  
  
• Managed funds provide access to diversified portfolios and specialist management, making them ideal for investors who prefer convenience.
  
  
• Tax benefits such as franked dividends and capital gains management are important considerations when choosing your investment strategy.
  
  
• A combination of direct investing and managed funds may provide the best balance of control, diversification, and professional management.

Comparing Managed Funds vs Investing Directly

Is it better to invest directly into listed securities or into unlisted managed funds? There is no correct answer as it depends on your personal investment needs and objectives and, importantly, which strategy you are comfortable with. For personalised guidance, you can find a Morgan's adviser to talk you through your options today.

The Benefits of Investing in Shares

Why Are Shares So Popular?

• Shares have historically outperformed all other asset classes over the long term.
  
  
• Shares can provide long-term capital growth.
  
  
• Shares can provide a strong and growing income stream.
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• Tax benefits might be available via franked dividends. More on tax-efficient investing can be found in Morgans wealth management resources.

What Can Change?

Change has been a major component across investment markets over the last 50-odd years. From the 'Black Monday' crash in 1987, to 18% interest rates in the late 80s and early 90s, through to the 1997 Asian crisis, the tech and internet stock boom and bust in 2000, and of course the GFC in 2008.

More recently, investors are experiencing the impact of Coronavirus. In this respect, COVID-19 has affected life in general, not just investment markets, making its disruption extraordinary. For ongoing market insights, see Morgans research articles.

Key Points to Remember

Shares are often considered risky due to potential short-term performance volatility. Over the long term, however, shares have provided consistent investment returns.

Dividend Yield & Imputation Credits

Many dividends paid to shareholders include 'imputation credits'. The imputation credit and resulting tax benefit available from the dividends means the actual return from a stock needs to be "grossed up" to reflect its true value.

A common mistake investors make is to compare bank rates with dividend yields. The cash rate is fully assessable whereas the dividend yield includes the imputation credits, so this tax concession should be taken into account. A 5% dividend yield would provide a similar return to a 7% bank rate. 

Other Tax Issues

By investing directly into listed securities, the investor controls the tax consequences of that investment. Investments are bought and sold at the investor's discretion rather than a fund manager’s discretion. Capital gains and losses can be managed to suit the investor's tax position.

In contrast, fund managers usually turn over stocks within their investment portfolios (particularly Australian Equity funds) regularly. Distributions from managed funds include realised and unrealised capital gains or losses and are displayed as 'total return'. The investor has no control over the tax management of these distributions.

This lack of control often drives investors to favour direct share investing over managed funds.

Access

Direct shares provide flexibility and liquidity. The ASX allows Australian investors to easily purchase or sell shares, or rebalance portfolios in a timely and cost-effective manner. 

The Benefits of Investing in Managed Funds

A managed investment combines an individual investor's money with thousands of other investors to form an investment fund. Specialist investment managers then invest the pooled money on investors' behalf.

Benefits of Managed Funds

• Trained investment specialists: Constantly research and monitor markets for the best opportunities.
  
  
• Convenient and efficient: Paperwork, administration, regular fund performance updates, annual tax statements, and guides.
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• Diversification: Managed funds make creating a truly diversified portfolio easier. For more diversification strategies, check out our Wealth Management services.

Structure

Most managed funds are structured as unit trusts. When invested, the investor buys units in the fund. The unit price reflects the value of the fund's investments. If the value of the fund's investments rises, the unit price also rises; if it falls, the unit price falls.

Access

Managed funds provide access to assets normally not available to individual investors (e.g., international and emerging markets). Investing internationally via managed funds can provide greater diversification and investment opportunities than investing only in the Australian sharemarket.

Redemption is slower than selling listed shares. Fund managers must value all assets at prevailing market prices. Depending on unit prices at redemption, an investor may be forced to sell more units to achieve a specific dollar value, affecting the portfolio's remaining value.

Dollar Cost Averaging & Compound Growth

Investing in managed funds allows investors to reduce their cost base via dollar cost averaging. This means purchasing units at differing prices regularly (often via a regular savings plan), which averages out the overall investment cost.

Reinvesting fund distributions provides a 'compound interest multiplier' effect. Capital benefits from compounding as distributions earn interest.

Diversification

Diversification of an investment portfolio across all asset classes allows an investor to 'hedge their bets'. By spreading the exposure and investing in different assets an investor can create a portfolio that can minimise to some degree the losses that may occur in one asset sector with gains in another.

The overall effect is that volatility is moderated, and investment returns can smooth out over time.

Investing in managed funds allows the investor to diversify funds over a basket of assets that may otherwise not be accessible. This is a key strength of funds as investors can spread their investments across a range of asset classes rather than having exposure to just one class.

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The ‘Fee’ Factor

Having a team of specialist investment managers comes at a cost, as does the benefit of having an effective administration and reporting system. Fund managers can charge entry, exit, ongoing management and even performance fees.

Index fund managers traditionally charge lower fees than active fund managers as they have lower portfolio management costs. Retail funds are more expensive than wholesale funds, typically charging between 1-1.50% pa more.

An investor can access the cheaper wholesale funds, however, they must either have a larger initial investment (generally, from $20,000 up to $500,000), or they can invest via a platform (wrap) structure, which then charges its own administration fee.

It is this level of cost and complexity of fees that turn many investors away from investing in managed funds. Additionally, the level of fees charged by a fund manager can have a significant impact on the overall return of the investment, particularly over the long term.

So that like-for-like performance comparisons can reasonably be made between different funds, fund managers are required to display performance data as after-tax returns or 'net of fees'.

In Conclusion

The winner is the investor who invests in a manner best suited to their goals. Whether direct investing or via a managed fund, or a combination of both, understanding what you are investing in and why is the most important factor. For a full overview of investing options, see A Guide to Investing or speak with a Morgans adviser to design a strategy tailored to your needs.

One of the key advantages of investing in direct shares is the flexibility and liquidity it provides.

The ASX provides an environment for Australian investors to easily purchase or sell shares, or rebalance portfolios, in a timely and cost-effective manner.

FAQs

1. What are the main differences between investing directly and via managed funds?
Direct investing gives control over timing, tax, and portfolio adjustments. Managed funds provide professional management and diversification. 

2. Can I combine direct investing and managed funds?
Yes. A combined approach may provide the best balance of control, diversification, and access to specialist management. 

3. How do fees differ between managed funds and direct investing?
Managed funds charge administration and management fees, while direct investing usually has brokerage costs. Index funds and wholesale funds are often cheaper. 

4. Are there tax benefits to direct investing?
Yes, including franking credits and control over capital gains. See Morgans wealth management for more information.

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In the realm of financial analysis, Zip Co (ASX:Z1P) has recently disclosed its 1H21 financial results, stirring interest among investors and analysts. While the reported NPAT loss of approximately A$453 million reflects various one-off items, including a net revaluation of Quadpay (-A$306m) and performance shares issued due to met hurdles (~-A$64m), a deeper dive reveals an underlying loss of ~A$114 million, surpassing previous estimates due to increased expenses (-A$30m).

Strong Momentum in the US Market

Despite these financial intricacies, Zip Co's strategic investments to foster growth have exceeded expectations. Notably, the company is gaining significant traction in the United States market, indicating a promising trajectory.

Key Highlights and Achievements

Positive Developments

• Revenue Growth: Revenue stood at A$160 million (+131%), driven by robust year-over-year (yoy) Total Transaction Value (TTV) growth of 141% to ~A$2.3 billion.
• Effective Risk Management: Net bad debts were well-contained at 1.93%, down from 2.24% in the prior corresponding period (pcp).
• Operational Milestones: Australia remains cash Earnings Before Interest, Taxes, Depreciation, and Amortization (EBTDA) positive, achieving Cash EBTDA breakeven.
• Expansion Initiatives: Zip Co's entry into the UK market, accompanied by collaborations with prominent brands, signals a promising market entry strategy.

Quadpay Performance

• ‍Rapid Growth: Quadpay witnessed rapid growth in 1H21, with TTV reaching A$973 million and customer base expanding to 3.2 million, both reflecting over 200% growth compared to the pcp.‍
• Capital Efficiency: The net transaction margin for Quadpay remains above 2%, contributing to enhanced group capital efficiency and improved revenue yield.

Australian Market Dominance

• ‍Market Leadership: Zip Co's BNPL app emerged as Australia's most downloaded app in December 2020 and January 2021, underscoring its dominance in the domestic market.‍
• Robust Growth Metrics: Key performance metrics such as revenue and customer base witnessed substantial growth, ranging between 40% to 60% for the half-year period.

Areas of Concern

• ‍Increased Marketing Costs: Marketing expenses surged over fourfold (~A$26m compared to A$6m in the pcp), attributed to Quadpay integration, product launches (e.g., Tap and Zip), and heightened brand activities.‍
• Leverage Compression: Zip Co's high growth phase may lead to near-term compression in its cash EBITDA performance, evident in the 1H21 figure of A$0.2 million.

Revised Forecasts and Investment Strategy

Considering the evolving landscape, adjustments to forecasts are imperative. The FY21F/FY22F EPS is revised downwards by over 50% to account for current-year one-offs and increased investment across forecasted periods. Furthermore, a transition from a Discounted Cash Flow (DCF) valuation to a blended DCF/Price-to-Sales (PS) methodology has been made, resulting in a revised price target.

Navigating Towards Global Payments Leadership

Despite the challenges and adjustments, Zip Co maintains a significant PS discount compared to Afterpay (APT), indicating substantial growth potential. As the company continues to execute its strategy towards becoming a global payments leader, investors remain optimistic about its future prospects. With a strong foothold in the Australian market and promising growth trajectories in the US and UK markets, Zip Co stands poised for further expansion and market dominance in the evolving landscape of Buy Now Pay Later (BNPL) services.

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.

Key Takeaways

• Investing in a child’s name can trigger penalty tax rates of up to 66% if structured incorrectly.
• In many cases, holding investments in an adult’s name as trustee is more tax-effective and flexible.
• Certain children and income types qualify as “excepted persons” and are taxed at adult rates.
• Ownership, control and conditions attached to investments determine who is taxed, not just whose name is on the account.
• Getting advice early can help families avoid unnecessary tax, Centrelink and future CGT issues.

Why Invest for Your Children?

Raising children is one of the biggest expenses parents will incur and although in most cases the emotional rewards offset the costs, it is still a smart move to put money aside for when the bills roll in, to pay for the children’s education or simply to give them a good start later in life.

However, investing for children can be costly for the adult if he or she is not aware of how the investment is treated in relation to tax. Investing in a child's name can attract a tax liability of up to 66%.

In this update we discuss the more common issues surrounding investing for minors. (Note, we are not tax advisers and recommend specific tax advice is sought from a qualified accountant or tax agent before entering into any arrangement.)

Children and Tax Rates

There are very few options to invest directly in a child’s name without being hit with a punishing tax bill. Child tax rates are designed to deter parents from sheltering income in their child’s name in order to reduce their own marginal tax rate.

Excepted Persons and Excepted Income

Not all children are subject to the punitive tax rates. There are several categories of minors who are referred to as excepted persons and are taxed at ordinary rates.

These include people:

• Who are working full-time, or who have worked for more than three months and are intending to work full-time
• Entitled to a disability support pension or rehabilitation allowance; or someone entitled to a carers allowance to care for them
• Permanently blind or disabled
• Entitled to a double orphan pension
• Unable to work full time because of a mental or physical disability

Certain sources of income are also considered excepted income and are taxed at ordinary rates. This includes:

• Employment income
• Compensation, superannuation or pension benefits
• Income from a deceased estate
• Lottery winnings
• Income from a business or partnership
• Income from a property transferred to the minor as a result of the death of another person, family breakdown or to satisfy a claim for damages for an injury they suffered

Testamentary Trusts and Estate Planning

Tip

A common strategy is to establish a testamentary trust to hold assets and distribute income to minor children who have inherited monies from a deceased estate.

The primary reason being that income distributed from a testamentary trust is taxed at adult marginal tax rates, rather than the penalty rates applicable to minors.

Consider, however, that income derived from the direct investment of capital proceeds received via a deceased estate also receives the same taxation treatment.

This may be a simpler and cheaper alternative to establishing a testamentary trust as the tax outcome is the same.

Ownership of the Investment

In most instances, it is generally more effective for the investment to be in the name of the person putting the money forward, such as a parent or grandparent (as trustee for that child).

This is due to the fact minors are generally prohibited from entering into legally binding contracts and ownership arrangements.

As a result, where money is deposited into a bank account or other investment for a child, it is not unusual for an adult parent or guardian to act as a trustee on the child’s behalf.

For example, the parent of Tommy Smith is Bill Smith. The investment may appear in this name: Mr Bill Smith <Tommy Smith a/c>. It is important to note that this is not a formal legal structure. Bill Smith is the legal owner of the asset.

This type of informal trustee arrangement does not generally involve the establishment of a formal trust deed or other legal document.

A formal trust can be established for the child (or a larger family group) but this involves significant establishment and ongoing legal and financial costs.

These can be warranted when the assets are of reasonable value and income from them may take a child into the highest marginal tax rate.

Advice and assistance on the establishment of any trust structure should be sought from a solicitor or accountant qualified in this area.

Tax File Number (TFN) Considerations

If a Tax File Number (TFN) is not provided at the time of investing, tax at the top marginal tax rate (47%) can be withheld from investment earnings (excluding franked dividends).

Whose TFN should be quoted depends on how the investment is structured:

• If the investment is in the child’s name, the child’s TFN is used
• If held by an adult as trustee, the adult’s TFN is used
• If held via a formal trust, the trust’s TFN is used

Ownership and Tax Implications

If it is established the adult ultimately owns the investment, earnings will be included in the adult's assessable income and taxed at their marginal tax rate.

For grandparents, this may affect eligibility for concessions such as the Senior Australians Tax Offset, Low-income Tax Offset, and Medicare levy. It may also impact Centrelink benefits due to asset testing and deeming rules.

When assets are later transferred into the child’s name, there may be gifting and capital gains tax implications.

The ATO provides guidance on ownership issues in its fact sheet Children's share investments, which focuses on who controls the investment and who benefits from the income.

The ATO cautions:

“If there are large amounts of money or a regular turnover, you might need to examine the ownership of the shares further.”

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If a condition is placed on the investment (e.g. the child must attend university or reach a certain age), ownership may rest with the adult for tax purposes.

Strategies for Adults Investing for Minors

Consider whether the child’s investment is likely to generate income above the tax-free threshold over time.

• If no, income may be treated as belonging to the child, but all income must be used solely for their benefit
• If yes, consider a trustee with a low tax rate, a formal trust, or investment structures such as insurance or education bonds

Keeping clear records is essential.

The Value of Dollar-Cost Averaging

Parents and relatives often invest for children through lump sums or regular savings plans.

Regular investments benefit from dollar-cost averaging, where investments are made at different market prices over time, reducing the average cost.

Speak to a Morgans adviser about regular savings facilities and long-term investment strategies tailored to your family.

Get Professional Support

Structuring investments for children involves tax, ownership, estate planning and long-term strategy considerations. Morgans advisers work with families to design investment solutions that align with financial goals while managing tax and compliance risks.

To discuss the most effective way to invest for your children, contact a Morgans adviser near you or explore Morgans’ broader wealth management services.

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FAQs: Investing for Your Children

Is it better to invest in my child’s name or my own?

In most cases, investing in an adult’s name as trustee is more tax-effective due to penalty tax rates applied to minors.

Can children legally own investments?

Minors generally cannot enter into legally binding contracts, which is why adults often hold investments on their behalf.

Do children need a Tax File Number to invest?

Yes. A child can apply for a TFN at any age, and failing to provide one can result in tax being withheld at the top marginal rate.

What happens tax-wise when the investment is transferred to the child later?

There may be capital gains tax and gifting implications depending on ownership and control of the asset.

Should I get professional advice before investing for my child?

Absolutely. Tax, trust structures and Centrelink implications can be complex - professional advice helps avoid costly mistakes.

• Heading into February results, we examine key strategic themes across earnings trends, the cyclicals rotation, yield security, rising AUD impacts and resources.
• In our Reporting Season Playbook (accessible by Morgans clients) our analysts preview the results for 184 stocks under coverage that report this February, calling out potential surprise and disappoint candidates.
• Key tactical trades into results include Sonic Healthcare, NextDC, Origin, Zip Co, Eagers Automotive, and Virtus.

Dampened expectations leave room for upside surprise

Investors have a lot to feel optimistic about as the economy continues to defy expectations (our chief economist Michael Knox is calling for a sharp V-shaped recovery) but analysts’ earnings and dividend forecasts are yet to capitalise the recent good form.

We think there is a risk of surprise in company results that have significant leverage to the recovery.

Domestic cyclicals outperforming overly fearful market expectations was a dominant theme in August and analyst previews of the 184 stocks under Morgans coverage suggest this trend will continue in February.

Our analysts expect that 28% of stocks covered have reason to respond positively to February results.

Various moving parts requires careful portfolio positioning

Investors need to position tactically into February results. Overall, we expect outlook commentary to be better than what was provided in August and we think the outlook for dividends has improved markedly.

But while the recent good form in the economy will benefit segments of the market (retailers, banks, resources), elevated valuations and currency headwinds will temper the performance of others (healthcare, offshore industrials/fintech).

We discuss key strategic questions:

1. Can cyclicals deliver expected EPS upside surprise?
2. Where’s the best source of secure yield?
3. Will currency moves complicate the FY21 earnings picture?
4. Do recovery expectations match reality?
5. Does the resources rally have further to run?

Commodities/resources upside

An overweight exposure to resources shapes as one of the strongest sector allocation ideas for 2021.

Commodities tailwinds include improving post-COVID GDP growth, ongoing central bank stimulus, tight supply, and the weaker US dollar.

The best opportunities in the sector are in lagging energy and gold sectors.

Best tactical calls heading into results

In our Reporting Season Playbook, our research team previews expectations for 184 stocks reporting in February, including 52 where we expect positive price reactions, and 11 where we expect negative reactions.

We also profile the best looking tactical buys and notable stocks to avoid/trim. In this list we prefer larger stocks and those that overlap with the Morgans Best Ideas and the Morgans Equity Model Portfolios.

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.

Every day, you’ll read stories about people who’ve struck it rich (or simply got lucky) by taking a punt on the latest hot opportunity. It might be a stock that’s tripled in value, or the latest digital currency that’s being heavily promoted online.

It doesn’t matter which; all you know is that somewhere, somebody’s making a stack of money, and it’s not you.

You might even think you’re missing out, particularly if your investments are still recovering from the downturn last year.

You could be tempted to throw caution to the wind, and have a dabble in something hot.

Let’s just pause for a moment, and consider the difference between speculating and investing. One way to describe speculating is taking big risks, hoping you’ll get a big payoff.

That’s not what investing is about. Investing is about managing risks, not embracing them.

Manage the risk

One of the best ways of reducing investment risk is to spread your portfolio across a number of different investments, and types of investments.

It's the old 'don’t put all your eggs in one basket' theory, and it’s stood the test of time as an important way of smoothing investment returns and reducing risk.

The main investment classes – cash, fixed interest, property and shares – all carry different levels of risk, and all have provided different returns over time.

Historically, shares have been the best performer. But those returns have varied from a 30% gain in a good year, to a 50% loss in a bad year.

And nobody can predict which types of investments will perform best in the future.

At the other end of the spectrum, cash is safe (and there’s a government guarantee on bank deposits of up to $250,000).

But the return? In most accounts, it’s close to zero. If you take into account inflation, your bank return can actually be negative. If you hedge your bets, and spread your portfolio across cash, fixed interest, shares and property, there’s the potential for losses in one class of investment to be offset by gains in another.

You won’t get the peak returns of the share market in a boom year, but neither will you experience large losses.

Overall, your risk is lower, and your returns will be more consistent.

What is strategic asset allocation?

Strategic asset allocation is the process of choosing the mix of investment types that will meet your investment objectives, while minimising risk. And the best asset mix for you will depend on your investment timeframe, and how comfortable you are with risk.

There’s no one fixed asset allocation – it will vary between individuals.

A younger investor hoping to build wealth for the future might be comfortable with a high exposure to shares.

Somebody approaching retirement might be more cautious and balance their exposure to shares with higher levels of cash and fixed interest.

Setting a target asset allocation adds some discipline to your investment strategy.

It means sticking to a process that will optimise your returns, rather than chasing the hot opportunities that could make you rich (or broke).

Rebalance your portfolio annually

Just as there's no thing as a 'set and forget' investment, your asset allocation needs some attention from time to time.

At least annually, you should consider 'rebalancing' your portfolio. In any year, some of your investments will perform better than others.

Let’s suppose your original allocation to shares was 40% and the market has a good year. You might find shares now make up 50% of your portfolio. Rebalancing involves reducing your exposure to shares back to 40%.

In other words, you’re taking profits from assets that have performed well, and topping up your other investments.

Is your current asset allocation right for you?

If you’re not sure whether your current asset allocation is right for you, or you think it might need rebalancing, talk to your Morgans adviser or contact nearest Morgans office.