Risk is often an investor’s primary concern when investing, but risk is a broad term so understanding the varying forms of risk is important to every investor.
Over the next few weeks I’ll highlight what risk can entail, using some real world examples.
Given the topical nature of legislative risk at the moment it seems an appropriate starting point.
Legislative risk is when a particular investment can be impacted by changes in laws and regulations.
The Federal Court decision on Shree Minerals’ iron ore mine is an example of legislative risk.
The potential for ongoing wrangling over the status of Nelson Bay leaves no certainty for shareholders as approvals can quickly be met with court challenges.
Though in the case of Shree, it is a tightly held and thinly traded company, suggesting Shree investors are probably well aware of the legislative risks.
The government’s recent changes to Fringe Benefits Tax have also highlighted the dangers of legislative risk, specifically for investors in salary packaging company McMillan Shakespeare.
McMillan’s car leasing business appeared to rely heavily on a tax loophole where salary sacrificed vehicles were declared as being used ‘mostly’ for business use.
However, Credit Suisse noted the basis for much of McMillan’s business, “the current system provides a tax concession to those who mainly use their vehicles for private use because by default, it assumes a large portion of business use”.
In other words, McMillan did well when employees didn’t have to maintain a log book to justify the business usage of their vehicle.
McMillan had been a fantastic growth story, but shareholders were heavily exposed to a tax area long rumoured to be subject to change.
The reaction to the announcement suggests McMillan won’t do as well if employees are forced to justify business usage.
McMillan suffered a 15% drop on July 16 before a trading halt was called and subsequently fell nearly 50% when trading recommenced on July 25.
That’s legislative risk for you.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances. Looking for the top financial adviser in Australia? We think we’re it.
