Investment Magazine - February 2011 by Conexus Financial Pty Ltd

investment February 2011

investment & Technology for institutional Investors

Changing tracks the future of equity investing Hedge FoFs attempt redemption

Custody fragments worldwide

Small-cap interrogations

the complete solution: Custody • Accounting • Tax • Performance • Compliance Cash Facilities • Securities Lending • Foreign Exchange Master Manager • Passive Currency Overlay • Tax Parcel Optimisation

contents

February 2011 Investment Magazine 03

news

investment magazine

05_ The Big Australian spurs big merger year 05_ New ‘guinea pig’ for Superpartners 06_Buy flood risk at your peril 07_Hastings brushes off Batsakis departure 10_NGS Super’s foray into China A-Shares 12_Perpetual debuts mortgage trust for instos

cover story 16_Changing tracks Something has gone wrong in the last decade as equity markets boomed, crashed and in the end went nowhere. Does this mark the death of the great equity cult? SIMON MUMME and GREG BRIGHT report

special report 34_Broadened and fragmented: custody in 2011 The Australian custody and investment administration market will increasingly become one of global platforms and unbundled services. MICHAEL BAILEY reports

features 24_Elementary, my dear Wilson PHILIPPA YELLAND reports

26_What drives Australia’s lowerreturn future By Frontier Investment Consulting

28_Hedge FoFs adapt to new world order GREG BRIGHT reports

33_Funds at longevity, adequacy crossroads PHILIPPA YELLAND reports

02 05 regulars

08_Fiduciary Investing 13_Public Knowledge 14_Editorial 15_Reflections 41_Absolute Returns Survey 45_Long-Only Survey 47_FSC Viewpoint 49_AIST Viewpoint 50_Unbalanced

location location

Securities services Securities services wherever you need them wherever you need them HSBC the world's world's leading leading HSBC is is one one of of the HSBC is one of the world's leading providers of securities securities and and providers of providers of securities and fund well-positioned fund services. services. We're We're well-positioned fund services. We're well-positioned to global, regional regional and and to meet meet your your global, to meet your global, regional and local teams in in 50 50 markets markets local needs needs with with teams local needs with teams in 50 markets across the Middle Middle East, East, across Asia-Pacific, Asia-Pacific, the across Asia-Pacific, the Middle East, Europe and and the the Americas. Americas. Europe and the Americas.

location location

In Australia, our dedicated team are In Australia, our dedicated team are able to offer award winning custody able to offer award winning custody services and a range of fund services services and a range of fund services for alternative products, all tailored for alternative products, all tailored forthe thelocal local market. for market. For more information contact: For more information contact: John Butler John Butler Head of Client Management Head of Client Management HSBC Securities Services HSBC Securities Services Telephone:+61 +612 29006 9006 5340 Telephone: 5340 Email:johnebutler@hsbc.com.au johnebutler@hsbc.com.au Email: AndrewBastow Bastow Andrew HeadofofSecurities SecuritiesServices, Services,Australia Australia Head Telephone:+61 +612 29006 9006 5563 Telephone: 5563 Email:andrewbastow@hsbc.com.au andrewbastow@hsbc.com.au Email:

location location

hsbcnet.com/hss hsbcnet.com/hss

HSBC Securities onon behalf ofof the HSBC Group, which may bebe carried outout by by different HSBC legal entities according to local regulatory requirements HSBCSecurities SecuritiesServices Servicesprovides providesfund fundadministration, administration,custody custodyand andrelated relatedservices servicestoto tothe thefund fundindustry industry on behalf of the HSBC legal entities according to local regulatory requirements HSBC fund administration, custody and related services the fund industry behalf the HSBC Group, which may carried different HSBC requirements and some not bebe deemed toto market funds to to thethe public. Awarded Best Sub-Custodian Bank in 2008, 2009, 2010 andand BestBest Domestic andsome someservices servicesmay maynot notbe beavailable availablein incertain certainlocations. locations.The Theinformation informationcontained containedherein hereindoes doesnot notand andshall shall not be deemed Bank in 2008, 2009, 2010 Domestic and available in certain locations. The information contained herein does not and shall not deemed market funds public. Awarded Best Sub-Custodian Domestic Custodian ABN 006 434 162 AFSL 232595. AllAll Rights Reserved. Aug 2010. Custodian2009, 2009,2010 2010ininAustralia Australiaby byThe TheAsset Assetmagazine. magazine.Issued Issuedby byHSBC HSBCBank BankAustralia AustraliaLimited Limited ABN4848 48 006 434 162 AFSL Custodian by The Asset magazine. Issued by HSBC Bank Australia Limited ABN 006 434 162 AFSL 232595. Rights Reserved. Aug 2010.

news

February 2011 Investment Magazine 05

The Big Australian spurs big merger year By Michael Bailey

BHP Billiton’s tender to consolidate its four separate superannuation funds is a harbinger for a year in which fund mergers will dominate discussion. The resources giant’s efforts to create a single, $3 billion-plus fund for its group will join several mergers already in due diligence or underway, including First State Super and Health Super’s proposed $28 billion union (due June 30), equipsuper and Vision Super’s $9 billion get-together (due 2013), the Brisbane-centric marriage of LGSuper and City Super ($5.5 billion and due June 30) and another Queensland merger in ESI Super and SPEC(Q), a $3.6 billion merger originally due in April but now delayed a few weeks by the flooding in that State. Having a common chairman in Bob Henricks eased the way for

the ESI-SPEC merger, as did the decision to combine the entirety of both boards initially, and reduce the numbers as directors’ existing terms expired. Other proposed mergers are in the ‘maybe’ file. An AuscoalMaritime Super merger looks doubtful after a two-year gestation period, but much will depend on the outcome of a steering committee meeting this month. Meanwhile Westscheme, a $3 billion fund keen for greater economies of scale, is said to be talking to AustralianSuper, having seen Sunsuper-led efforts for a merger of ‘state’ funds fall apart. It’s understood that RFPs for a consolidation of BHP Billiton’s $3 billion-plus suite of funds were sent late last year, and are due by this month. The Deloitte superannuation practice has been hired to assist, and partner Wayne Walker and director

Michael Gomersall will review the responses. The largest of the four schemes, the BHP Billiton No.1 Fund, has outsourced its investment management, member administration and trusteeship to Russell Investments for many years, continuing a relationship which began before Russell purchased Towers Perrin last decade. BHP Billiton’s ‘No.2’ super fund is a legacy of its 2005 takeover of Western Mining. Member admin is outsourced to Plum, and investment management to Plum’s fellow subsidiary of National Australia Bank, MLC. A third scheme springs from BHP Billiton’s ownership of South African-based manganese producer Samancor, and is outsourced to OnePath, the corporate and retail super provider now wholly owned by ANZ Bank. A fourth scheme relates to

BHP Billiton’s Worsley Alumina joint venture, and is outsourced to the Mercer Super Trust. Warren Chant was the consultant behind the decision last February by the $1.1 billion corporate fund of OneSteel, formerly a part of BHP, to fully outsource to the Russell Super Solution Master Trust. BHP Billiton is not the only big super tender in play – January 17 was the last day for responses to a tender which will decide the administrator of the PSS Accumulation Plan, for federal public servants not lucky enough to be part of a defined benefit scheme. The Department of Finance decided to separate the administration of the accumulation and DB schemes, keeping existing provider ComSuper dedicated to the latter funds. The tender is being run by SuperRatings in conjunction with KPMG.

New ‘guinea pig’ for Superpartners By Michael Bailey

Cbus will no longer be the ‘guinea pig’ for Superpartners longdelayed administration platform, with Queensland industry fund Aust(Q) becoming the new test bed on the basis it’s a self-confessed ‘simple’ scheme with no member investment choice. Cbus insists the change, which should see Aust(Q) be the first on to Superpartners’ ElectSP system in the first half of 2011, followed by Cbus in 2012, was made at the behest of the administrator. Cbus, which was supposed to be live on ElectSP by July 2009, is one of the five industry fund shareholders of Superpartners

which originally tipped $70 million into the system replacement project. Last year, Superpartners bought from Synchronised Software the source code for CapitalX, the platform on which ElectSP is based, and the shareholders contributed an extra $150 million so that the administrator (in ongoing partnership with Tata Consulting Services) could make changes necessary for 20 legacy systems to be replaced. Clients with more complex product offerings, such as AustralianSuper, are scheduled to receive ElectSP in 2013. Aust(Q), with only 21,000 members, $175 million under management and no investment choice, should present less

implementation challenges than other prospective sites. Its single default balanced option will make data migration in particular much simpler, according to chair Bob Henricks. All of the ‘default’ accounts held by Superpartners are currently administered on its proprietary ‘R2’ system, but as soon as a member makes an investment choice, an account must also be established for them on Bravura’s old ‘Superb’ system. Pension accounts are administered on a different system again, Bravura’s Calibre. This was meant to be swept away by ElectSP, but pensions have emerged as a difficulty in the project, so Calibre will now remain and be upgraded

“while a different long-term solution is sought” according to AustralianSuper’s general manager of operations, Glenn Palmer. The existing administration arrangements were “stable’ and AustralianSuper was not concerned at the revised 2013 delivery date for ElectSP, Palmer said, although he admitted the fund would rather have the new system now. “In terms of ease of launching new products, and a workflow system which will give everyone total visibility of every piece of paper that comes in to the fund, the new system will be a massive leap forward,” Palmer said.

news

06 Investment Magazine February 2011

Invest, but at your own peril By Simon Mumme

The torrential flooding across eastern Australia in January may rank as the most costly natural disaster to have ever hit Australia, but it will not impact the catastrophe bond universe. As Investment Magazine went to press, the floods had killed 20 people and were expected by authorities to incur up to $5 billion in damage and cut projected economic growth by 1 per cent, or $13 billion, this year. The floods could also become Australia’s most costly insured event, with an expected $4 billion in claims arising from damaged parts of Brisbane and $2 billion from Rockhampton alone, according to AIR International, a specialist catastrophe risk modelling firm. “If accurate, this would rank among Australia’s most costly insured events,” stated Guy Carpenter, a reinsurance broking company. At presstime, the Insurance Council of Australia confirmed it had received more than 7,000 claims worth $365 million – excluding industrial and mining claims and the impact on Brisbane. But the impact on reinsurers, the primary issuers of catastrophe bonds, remained unclear as flood cover was not standard in many buildings and contents insurance policies in Australia, the broker stated. According to AIR International, residential flood cover in Australia varied considerably by insurer and location, and while most commercial policies included flood coverage, agricultural crops were generally uninsured. Because of this inconsistency, and the difficulty in modelling the

Brisbane flooding, 2011 ... the summer flooding in Brisbane. The inconsistency of flood insurance in Australia means the risk is not packaged into catastrophe bonds

expected insurance costs of floods, reinsurers have not been compelled to transfer their flood risk to catastrophe bond managers. The deepest catastrophe bond markets are typically developed economies where insurers have deep penetration and are vulnerable to disasters that are high in magnitude and low in frequency, like US hurricanes, Japan earthquakes and windstorms in Europe. These liabilities are too large for any collection of reinsurers to cover unless they transfer some of this risk to the capital markets. Many disasters that make headlines – the Queensland floods, the Christchurch earthquake and the Air France A380 plane crash – can be adequately covered by insurers and reinsurers, said Ryan Bisch, an alternative investments specialist at Mercer Investment Consulting. “With big earthquakes and hurricanes, there aren’t enough reinsurers to cover it,” Bisch said. “Cat bonds tend to get issued in areas where traditional reinsurance capacity is full.” To gain traction in the

catastrophe bond market, the potential magnitude, frequency and insurance cost of the events must be accurately modelled. When a hurricane approaches the coast of Florida, for instance, modelling experts begin gauging its strength and predicting when and where it will make landfall, Bisch said. They also calculate an expected level of destruction and insurance losses. But since flood risk is more difficult to model, and can be absorbed by insurers and reinsurers, it is rarely the major peril in a catastrophe bond. But it can be packaged alongside risks like US hurricanes and Japanese earthquakes as a diversifier. In the final quarter of 2010, Swiss Re issued US$170 million in a series of three catastrophe bonds to mitigate its exposure to US hurricanes and California earthquakes – with Australian earthquake risk thrown in as a diversifier. The reinsurer included the low-probability event to make the market more comfortable with further exposure to US hurricanes

and earthquakes. The US$2 billion in catastrophe bond issues in late 2010 – which brought total issuance for the year to US$4.8 billion, making it the second strongest year on record – saw the return of these diversifiers, or “non-US peak cat” instruments, according to Willis Capital Markets & Advisory. The return of diversification was welcomed by the market, Willis stated. A soft traditional reinsurance market, supported by an excess of capital, was able to absorb most global catastrophe risks at prices well below those in the catastrophe bond market. “As a consequence, ILS supply has been dominated by the peak US perils of hurricane and earthquake, where traditional reinsurance supply is more limited,” the brokerage stated. But for superannuation funds, catastrophe risk is uncorrelated to equity and credit risk, so diversification within the catastrophe bond universe is not really needed.

news

February 2011 Investment Magazine 07

Hastings brushes off Batsakis departure By Michael Bailey Hastings Funds Management has rejected claims that the departure of its head of alternative debt, George Batsakis, cruelled around $400 million of commitments to a junior debt fund it continues to raise. Batsakis left in December 2010 after four years with the Westpac Bank-owned Hastings, a couple of months before a new long-term staff incentive scheme was due to come into force, confirmed Hastings FM chief executive Steve Boulton. In addition to being chief operating officer of the listed Hastings High Yield fund, Batsakis had also lead the global fundraising effort for the Hastings Infrastructure Debt Fund No.3, a Europe-focussed vehicle which was announced a year before his departure. At the time, Hastings said that junior debt securities issued by infrastructure businesses in developed markets would bridge the “sizeable funding gap” which had emerged in the asset class, and expected €50 billion in investment opportunities over the ensuing five years. Market sources said that $400 million of commitments to the fund were in jeopardy following Batsakis’ departure, out of a total fundraising target of $1.1 billion. European clients, in particular German pension funds, were in the most advanced stages of due diligence. Boulton said last month that no written commitments had yet been received, and while he admitted that Batsakis’ departure had caused some disruption to the fundraising process, he claimed there were “four or five other key individuals who

are well-known to our potential clients for the fund”. Chief among them is Steve Rankine, a long-term Westpac employee who runs Hastings’ UK office, and assumed the role of acting chief operating officer of Hastings High Yield Fund upon

Batsakis’ departure. Some Hasting clients were confused over Rankine’s precise status when a report from the manager’s unlisted Utilities Trust of Australia last month referred to him as the “head of alternative debt”. However, Boulton said the

word “acting” had been omitted in error, and that a global search to permanently replace both facets of Batsakis’ role continued, with an announcement expected in early February.

We can help you realise your vision. As a leader in global securities services, J.P. Morgan is passionate about serving your needs through our unwavering focus on service delivery, technology and innovation. Our commitment to your vision is vital to your business needs and to our being the best global service provider for you. Expertise and excellence are the hallmark of our people. We can help you realise your vision, achieve your business goals,

Global Custody Direct Custody Middle Office Securities Settlement & Clearing Foreign Exchange Fund Accounting Compliance Reporting Services Performance Measurement & Analytics Securities Lending Alternative Investment Services Transition Management Collateral Management Cash Management Escrow

To find out more log on to www.jpmorgan.com.au/tss, or contact: Sydney

Nick Paparo at nick.x.paparo@jpmorgan.com

the FSA for investment business in the U.K. JPMorgan is a marketing name for Worldwide Securities Services businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. ©2010 JPMorgan Chase Bank, N.A. All rights reserved.

fiduciary investing

08 Investment Magazine February 2011

Ethics: a differentiator among investors The CFA qualification gives the MBA and the Master of Finance a run for their money as the designation most coveted in financial services. MICHAEL BAILEY spoke to the visiting global president and CEO of the CFA Institute, John Rogers.

he certificate one gets upon qualifying as a Chartered Financial Analyst (CFA) is apparently so large that only one printer in the world has been wired up to produce it. A gigantic diploma befits the outsized level of effort required

Commitment.

to become a CFA. Candidates’ knowledge of a 7000 page curriculum is tested in three exams , totalling 18 hours, over three years. Only about 40 per cent of those who sit the first CFA exam pass it, and while the success rate rises slightly over the next two exams,

Relationships.

As Australian superannuation funds and investment managers strive to improve transparency, efficiency and service, Citi stands uniquely placed to help meet these needs. From traditional long-only strategies to alternative multi-management platforms, we provide advice and execution to help deliver what the market demands. Our suite of services and products are integrated across the entire investment value chain and include: Transition Management: Voted Best Transition Manager in Asia by Global Investor, 2009, and used by 7 out of the 10 largest superannuation funds in Australia in 2009. Prime Finance: Voted #1 Prime Broker in Australia by Global Custodian, 2009, with the ability through Prime Custody to protect long assets by segregating them from broker-dealer accounts. Custody and Fund Administration: Top Rated in Asia by Global Custodian, 2009, and voted #1 Fund Administrator of the Year in Asia Pacific by International Custody and Fund Administration in 2009. That’s why funds worldwide choose to partner with Citi. And that’s why Citi never sleeps. For more information, contact: Martin Carpenter

John Gregory

Michael Jackett-Simpson

Custody and Fund Administration

Prime Finance

Transition Management

+61 2 8225 2411

+61 2 8225 6424

+61 2 8225 6146

martin.carpenter@citi.com

john.gregory@citi.com

michael.jackettsimpson@citi.com

This advertisement was authorised for use in Australia by Citigroup Pty Limited (ABN 88 004 325 080, AFSL No. 238098). © Citigroup Global Markets Australia Pty Limited (ABN 64 003 114 832, AFSL No. 240992), a non-bank affiliate of Citigroup, is a Participant of the ASX Group and the Sydney Futures Exchange Limited and is regulated by the Australian Securities & Investments Commission. ©2010 Citigroup Inc. Citi, Arc Design, and Citi and Arc Design are registered service marks of Citigroup Inc. Citi never sleeps is a service mark of Citigroup Inc. CITI0315/IM

still only 49 per cent of hopefuls become eligible after their third test. Such high failure rates give credence to John Rogers, the Invesco veteran who became global president and CEO of the CFA Institute in 2009, when he says he wants to do more than simply grow the number of CFAs. “We’re a non-profit, missiondriven organisation that wants to make a positive difference to the world,” he says. Visiting Sydney this month, coincidentally the day after Shawn Richard of Astarra infamy pleaded guilty for his part in a $126 million superannuation fraud – Australia’s largest – Rogers stressed the big role that ethics plays in the CFA charter and curriculum. “There is no other financial services qualification that puts the emphasis on ethics that we do,” Rogers contends. “The MBA program does not have to teach anything about it, and that’s not right.” Indeed, ‘Ethics and Professional Standards’ is one of seven topic areas in the CFA curriculum, alongside ‘Quantitative Methods’, ‘Economics, Financial Reporting and Analysis’, ‘Corporate Finance’, ‘Analysis of Investments’, and ‘Portfolio Management and Analysis’. However, Rogers admits there is no way that greed, nor its consequent fraud and misrepresentation, can ever be eliminated. “The best thing we can do is increase the likelihood it will be detected, and that takes a lot of different hands on the oars.” He says there needs to be more audits, both internal and external, and more incentive for people to “blow the whistle” on bad behaviour.

the ideas and techniques driving institutional funds qualification has been shedding its “institutional” image over the past few years, with the demand from sophisticated retail investors for better financial advice meaning more financial advisers now seek the designation. As a result, the CFA Institute has in the past few years begun advertising in publications perceived to have a high-net-worth

February 2011 Investment Magazine 09

audience, including The Economist, the Financial Times and The Times of India.

investment strategy consultant, its growth has been strong. Indeed, part of John Rogers’ visit involved a dinner at which some of Sydney’s 105 successful new CFA applicants for 2010 were recognised. They were among the 145 applicants who gained the designation in Australia last year.

CFA catching on in Australia

The largest CFA society in Australia, Sydney, now has more than 1000 members and according to its president, Brindha Gunasingham, an independent

John Rogers ... caveat emptor

“I think there is a big role for self-regulatory organisations in that regard.” It is still a case of ‘caveat emptor’ for investors, but the CFA Institute is doing what it can to increase financial literacy, Rogers says. The CFA societies in many of the 155 countries where the qualification has a presence help to organise the annual CFA Institute Global Research Challenge, which gathers students, investment professionals and public companies in a “real world” competition. The CFO of a company partnered with a particular CFA society will brief participants in the challenge directly. The participants, usually students within university economics and finance faculties, then prepare an analysis of the company, also drawing on all public information. The managing director of the CFA Institute’s Asia-Pacific operations, Ashvin Vibhakar, says many students have told him they learned more from the challenge than from the entirety of their university courses up to that point. The CFA designation remains something of a long-term aspiration for these students – qualifying still requires four years of “eligible” work experience, which basically means it must involve analysis feeding into an investment decision-making process, or the teaching of same. Rogers says the CFA

Research is in our DNA. And in our alpha. Fundamental, bottom-up research has been at the core of the Janus investment process for over 40 years. Our intensive, first-hand approach to evaluating companies enables us to invest with conviction in our best ideas and to seek consistent results for our clients. Janus’ research team managed Global Research Growth strategy has delivered positive alpha relative to our benchmarks over every sector since inception.

Global Research Growth strategy has delivered alpha across every sector. Sector Performance Highlight Strength of Research 20%

Janus Global Research Growth Equity Representative Account

18.3%

MSCI World Growth Index 15.1%

15%

MSCI All Country World IndexSM

11.3%

10%

8.7% 6.8%

7.9%

9.0% 9.0%

8.6%

6.8%

5.8%

5.2%

4.0%

3.2%

9.8%

5.0%

4.4%

0% -0.3%

-0.8%

-5%

Communications

Consumer

Energy & Utilities

Financials

Health Care

Industrials & Materials

Technology

Since Inception Annualised Total Returns (01/04/05 - 31/12/10) Performance of Janus Global Research Growth Equity sector teams, as of 31 December, 2010. There is no assurance that the investment process will consistently lead to successful investing. Base returns do not include fees. They reflect the underlying securities’ close-of-day share price and may differ from actual returns due to equity only analysis and end of day valuation. Base return measures the impact on the relative performance from selecting stocks within a particular group. Source: Janus, Wilshire Atlas

For more information please contact: John Landau

john.landau@janus.com

03 9653 7488

Issued in Australia by Janus Capital Asia Limited (ARBN 122 997 317), which is incorporated in Hong Kong, is exempt from the requirement to hold an Australian financial services licence and is regulated by the Securities and Futures Commission of Hong Kong under Hong Kong laws which differ from Australian laws. This document does not constitute investment advice or an offer to sell, buy or a recommendation for securities, other than pursuant to an agreement in compliance with applicable laws, rules and regulations. Janus Capital Group and its subsidiaries are not responsible for any unlawful distribution of this document to any third parties, in whole or in part, or for information reconstructed from this presentation and do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regards to the results obtained from its use. As with all investments, there are inherent risks that each individual should address. Past performance is not a guarantee of future results. There is no assurance that the investment process will consistently lead to successful investing. For wholesale client use only. DL0111(1A)0511.Aust.Ad

news

10 Investment Magazine February 2011

NGS Super makes foray into China A-Shares By Miranda Ward

For Tim Hughes, investment counsel at NGS Super, China’s rise is the most important change in the global economy since the industrial revolution – but the challenge for investors is working out how to profit from it. Investing directly in the Chinese A-Share market was one way to meet this challenge, Hughes said, which led NGS Super to appoint HSBC Asset Management and Bernstein Value Equities to invest an undisclosed sum of money in the market for the fund. NGS Super’s time horizon for investing in A-Shares was nothing less than three-to-five years, said Hughes, and the fund would have to accept the volatile nature of the

market in the short-term and hope their managers can take advantage of it. “The Chinese share market, overall, is the equal secondlargest in the world and is grossly underrepresented in the MSCI [World] Index because most of it’s not actually easily accessible to foreign investors,” Hughes said. “We couldn’t get exposure to all that growth without investing domestically in the China share market.” The surge of new money pouring into emerging markets has caused some investors to worry that valuations were becoming excessive. But was all of this capital moving into China? According to Hughes, no: less than 5 per cent of the China

A-Share market was owned by foreign investors, with Chinese retail investors dominating the market. “The China A-share market is not well researched at all by foreign brokers,” Hughes said. “It is fairly well researched by domestic brokers but their focus is very, very much short-term and trying to find the next top thing rather than focussing on the longer term value opportunities that are there. So in terms of focusing on what’s important to investors, the market is very under-researched.” Asia, excluding Japan, was a problem for investors due to its low weighting in the global equity benchmarks, according to Asian equities specialist Kerry Series. This did not allow investors

to gain enough exposure to Asia if they had invested through global equity funds, said Series. “So while the world is rebalancing to Asia and economies are rebalancing to Asia, I don’t think the investors have started,” he said. According to Hughes, investing directly into the Chinese A-Share market provided super funds with meaningful diversification because it exposed them to large sectors in the Chinese economy that weren’t accessible any other way. Now that China was beginning to move away from an export-oriented focus towards an economy more dependent on internal consumption, Hughes said opportunities would continue to emerge.

Opportunists to Australia Opportunity Australia, hosted by Conexus Financial in conjunction with the Australian Government, was held in San Francisco, New York and London in October 2010. Attended by more than 230 funds management firms, the events inform offshore managers about business opportunities in Australia. The events were sponsored by Commonwealth Bank, Lumina, Shed Enterprises, Henry Davis York and Perpetual. In 2011, Opportunity Australia will be held in Los Angeles on November 1, New York on November 3 and London on November 15. For more photos, visit www.conexusfinancial.com.au/events 1

1. Australian Consulate General, San Francisco, Nigel Warren, Nuveen Investments’ Scott Draper, Sheridan Lee from Shed Enterprises 2.Nigel Warren 3.NSW State Super’s Don Russell 4HESTA’s Rob Fowler 5.Vanguard’s Jeremy Duffield, Don Russell, James Gruver from BNY Mellon

news

February 2011 Investment Magazine 11

Super funds get up to monkey business By Miranda Ward

Superannuation fund members need a greater understanding of their basic finances in order to be lead more successful lives, according to Matt Linnert, co-founder of specialist financial education company Innergi. Linnert, who will be speaking this month at the FEAL Fund Executive Forum, believed the more engaged individuals became with their finances the less demand they placed upon governments for financial help – especially when it came to retirement. “One of the cornerstones for a person to be financially successful, at least in the Australian marketplace, is for them to make the most of the superannuation that they hold,” he said. As part of the private consulting business’ vision – to reduce individual, family and organisational stress by growing individuals’ financial confidence and competence – Innergi provides financial education and engagement solutions to professional advisers, superannuation funds, employers and individuals. Linnert has helped financial professionals better understand the behaviour of their clients or members by categorising them among four individual inner ‘money personalities’ – owl, dolphin, monkey and Labrador. The animals do not bear any significant relevance to peoples’ financial habits – they simply provide a fun means of categorising members by identifying general behavioural traits. Innergi has developed a questionnaire of 41 questions to determine traits that relate to each type of ‘inner animal’. The questions are based on a theoretical framework that identifies six

different core behavioural preferences. According to Linnert, once these traits are combined it was possible to start deducing predictable personality traits, allowing professionals to better understand their members and clients.

“If a super fund can be assisted to engage their members, I think it’s good for the super funds – it’s good for the member and, through that, it’s good for the whole Australian community,” said Linnert. There are a few super funds already using this model to understand their clients, Linnert

said, however it was too early to tell if the model substantially increased member engagement. The FEAL Fund Executive Forum will be held on Thursday February 10 at Sebel Pier One in Sydney.

news

12 Investment Magazine February 2011

Perpetual debuts mortgage trust for instos By Philippa Yelland

Perpetual has debuted what it claims is the country’s first mortgage trust for institutions, and has attracted $175 million to the senior-debt, first-registered mortgage fund with a target return rate of 4 per cent gross return. Despite the recent troubled history of mortgage trusts, Perpetual’s Richard Brandweiner was upbeat about this fund’s chances, and said the fund’s inflows came equally from the fixed-income and alternatives’ allocations of the investing funds. Perpetual had also launched its secured private debt fund No. 2 as a mezzanine-debt second-registered mortgage fund with a target return rate of 10 per cent which closes at the end of next month. In contrast to the older-style mortgage trusts – some of which had daily liquidity – Perpetual’s trusts would be closed-end with three- or four-year timeframes. “The closed-end nature of the fund means that investors commit to lock in their funds for the terms of the loans, meaning that there is no need for daily liquidity,” said Brandweiner, who is Perpetual’s group executive for income and multi-sector investments. “The removal of any mismatch between the liquidity of the underlying assets and the liquidity needs of all investors is also important in avoiding the challenges that traditional mortgage funds have faced.” This closed-end structure contrasted with just-thawing mortgage trusts such as Australian Unity’s Mortgage Income Trust and Wholesale Mortgage Income Trust, and the almost-frozen Balmain Mortgage Trust (formerly Mariner).

Richard Brandweiner ... Australia-first trust

The other safeguard for investors, Brandweiner said, was that the quality of lending was critical. “No two shares are the same in the same way that no two loans are the same,” he said. “The experience of our investment team in applying our lending criteria has been an important element in avoiding poor loans.” The mortgage team is comprised of head of mortgages Marion Kraemer (at Perpetual for 21 years and with 36 years’ experience in the industry), and two portfolio managers: Melvin Seeto (eight years at Perpetual, 16 years in the industry) and Andrew Polley (16 years, and 25 years). Brandweiner said Perpetual had a 45-year history in this market in Australia, having launched one of the country’s first mortgage funds in Australia in 1966. “This is one of the oldest managed funds in Australia still existing,” he said. Brandweiner was pleased with the response to the No. 1 firstregistered fund because it was very new to the market. “It took some time to educate the insto market as to what this is about – instos were new to direct commercial mortgage lending. “We’ve been in discussions for the past six to nine months and the

offer closed at $175 million, which we see as really good interest. It’s the first time that the insto market has invested (in mortgage trusts) to our knowledge, and we had very good recommendations from asset consultants.” Perpetual went to market saying that “once we’ve lent it out we’ll be back for new raisings”, Brandweiner said. “I see this as a journey for the market as well as us. Within the first week of having money, we had $80 million of applications come in – but we don’t rush this lending process. A lot of those won’t pass our quality filters.” So, why would Perpetual be lending if banks were not? It was not to do with the quality of the loans, said Brandweiner. “In many respects the banks are at capacity in commercial loans because commercial lending has a higher risk-weighting,” he said. “We don’t do property development, it’s income-producing only loans. We don’t need to take risk to get attractive returns.” Banks were lending below $5 million or above $50 million, he added, with Perpetual being in the $5 million to $30 million space. This was an evolution of smallticket commercial lending which in the 1960s was the domain of solicitors who would bring three or four clients together and do ‘club deals’ – with Perpetual doing these on behalf of them. Institutionally, there was never a big demand for mortgage trusts because they were seen as retail funds, but post-GFC “returns for credit risk were incredibly attractive”, Brandweiner said. “With residential mortgagebacked securities or corporate bonds, you were getting a very attractive return for the level of risk you were taking,” he said.

For example, residential mortgage-backed securities were trading at, in some cases, 87 cents in the dollar and yielding 500bps above cash, he said. “This was for triple A securities that were extremely good-quality, lending to Australian home owners who have an amazing track record of paying people back. You didn’t need to take any risk. “In the past 12 months, those spreads contracted significantly and now those publicly traded assets are no longer yielding the very attractive returns they were, and the instos know that so they’re starting to look at private markets where the dislocation between supply and demand and liquidity is still there.” Liquidity flooded back to traded markets but there was still a mis-match in private markets, and instos had recognised that the easy trade of assets was over, so an opportunity had opened, he said. Interest in No. 1 fund had come from industry and corporate funds, high-net-worth individuals, and HNW advisory groups. No pure retail funds invested because the minimum investment was $5 million, Brandweiner said. “We wanted to do an initial raising to prove the case in a market that has never touched it before. We hope to come out with a series of tranches while the opportunity exists and we’re talking with a number of retail investors to see how we can make that work for them.” Brandweiner talked up the No. 2 mezz debt second-registered mortgages fund: “We’ve done mezz debt for five years. Our balanced fund has exposure to a mezz mortgage pool and in the past five years it’s been the best-performing asset class of anything in our balanced fund.”

public knowledge

February 2011 Investment Magazine 13

Making news in January 2011 Everything that happened in the worlds of superannuation, funds management and investment administration last month… AMP Capital Investors bought the ‘Packer bunker’ at 50 Park St, Sydney, acquiring the 12-storey building from Consolidated Media Holdings for its Select Property Portfolio No.3. It also owns 54 Park Street, next door, and will consider combining the two properties in the future. Plan For Life, a data provider for Australia’s managed fund and life insurance industries, including the eagerly-awaited ‘inflow and outflow’ reports, was bought by Asset International, a global group with a similar business model. Citi predicted global equities would

“grind higher” in 2011, backing the MSCI All Country World benchmark to finish this year at 360 from its current level at around 330. It advised investors to buy the dips, but not chase the rallies too hard, because the “grind higher” always climbs a wall of worry – the worrying revolves around sovereign credit risks in this cycle.

for the alternative assets industry. There were 811 private equitybacked exits throughout 2010, with an aggregate exit transaction size of US$203bn. “In particular, this year has been notable for a surge in both North American and European deals, with North American deal flow in 2010 more than double that witnessed during 2009, and European deal flow in 2010 almost three eVestment Alliance’s database times the value of deals seen in the of Australian funds managers has region in 2009,” said Preqin analyst been moved on to the InvestorManuel Carvalho. It’s yet to be seen Force reporting platform, as part of if the increase in activity will transa global data partnership between late to fundraising from institutional the two organisations. investors, which hit the doldrums of just US$225 billion globally in 2010, The barbarians are cashing in – the the lowest total since 2004 and a far fourth quarter of 2010 broke all the cry from the near US$700bn seen in records for private equity exits, with 2007 and 2008. 265 occurring globally and realising a total value of US$71.8 billion, ac- The Australian Institute of cording to Preqin, a data provider Superannuation Trustees (AIST)

reminded super fund members affected by flooding across Australia that they may, depending on their circumstances, be able to seek early access to some of their superannuation. CEO Fiona Reynolds said the rules for early release of super were necessarily strict, but there were grounds under which members could qualify for early-release including ‘severe financial hardship’ and ‘compassionate grounds’. Its financial doldrums will actually be good for Ireland’s standing as a fund domicile, according to RBC Dexia’s managing director in the country Padraig Kenny. “To the extent that economic conditions in Ireland have reduced labour market, real estate and other pressures on costs, and increased labour market flexibility without compromising

Continued page 14

Stay out of the shadows The Apostle Loomis Sayles Senior Loan Fund aims to combine an attractive yield over a full market cycle with controlled risk. As Loomis Sayles conduct their own in-depth credit research, they can position the Fund to minimise unnecessary risk that erodes the Fund’s yield. This means that some of the most important decisions they make are which investments to avoid. To stay out of the shadows, call us on (02) 8224 2900 or visit www.apostleam.com.au.

THE NAME BEHIND THE NAMES Issued by Apostle Asset Management Limited (“Apostle”) (ABN 60 088 786 289) (AFSL No. 246830). Offers of units in the Apostle Loomis Sayles Senior Loan Fund (the “Fund”) will be made in the disclosure document issued by Apostle, which is available by contacting Apostle. You should consider the disclosure document and whether or not the Fund is appropriate for you before making an investment decision. This information and the Fund are not intended for retail clients.

editorial

14 Investment Magazine February 2011

Long shadows loom over the recovery

he phrase ‘double-dip’ hasn’t been prevalent in the business media for at least a couple of months. But the threat of another global, synchronised downturn is still real. Australia’s booming commodities market and solid banks spared us from the worst of the financial crisis, but it was a different story overseas, where stimulus and bail-out packages within recession-hit economies have spawned a new threat. By shifting burdensome private debt onto the public balance sheet, the sovereign debt problems of the US and Europe will loom over global markets for years to come. It has brought an unfamiliar phenomenon to the developed

investment magazine

February 2011 - Issue 69 Editor: Simon Mumme simon.mumme@conexusfinancial.com.au Journalists: Michael Bailey michael.bailey@conexusfinancial.com.au Philippa Yelland philippa.yelland@conexusfinancial.com.au Miranda Ward miranda.ward@conexusfinancial.com.au Business Development Managers: Sean Scallan (Advertising) sean.scallan@conexusfinancial.com.au Laurence Jarvis (Events) laurence.jarvis@conexusfinancial.com.au Head of Design: Saurav Aneja Publisher: Greg Bright Printing: Sydney Allen Printers Mailhouse: D&D Mailing Subscriptions: Jessica Brown

jessica.brown@conexusfinancial.com.au

Subscriptions are $99 inc GST per year (11 issues) Investment Magazine is published by:

Conexus Financial Pty Ltd Level 1, 1 Castlereagh St, Sydney GPO Box 539 Sydney NSW 2001 Ph: 61 2 9221 1114 Fax: 61 2 9232 0547 Exclusive Media Partner of

Circulation 3942

Simon Mumme

world: a sovereign debt crisis. Since 2002, the US has been operating in budget deficit, its net debt has grown to 59 per cent of GDP, and the IMF has forecast US net debt to balloon to 85 per cent of GDP by 2015.

The US has operated in a downward debt spiral for many quarters, according to AMP Capital Investors (AMP CI), and will continue to do so – despite recent macroeconomic data that its economy is improving and some upbeat growth forecasts. In Europe, Germany is the major worry. Its net debt as a percentage of GDP has increased steadily over the past 20 years to 56 per cent, and its large economy is exposed to the threat of contagion from the smaller ones it has bailed out, Greece and Ireland, and those it might also have to, Portugal and Spain. In contrast to the sovereigns’ malaise, the corporate bond sectors in the US and Europe are well

into the recovery phase out of the financial crisis. In the US, net corporate debt has fallen to the lowest levels in more than a decade – but this has been overshadowed by spiralling US national debt, which is creating systemic risk. AMP CI categorises the US and Europe as operating in a credit ‘downturn’, typified by credit contraction and corporate deleveraging. In the long recovery ahead, how capably these economies tame their excessive public debts will be crucial if a double-dip recession is to be avoided.

Public Knowledge - making news in January 2011 Continued from page 13

of the mandate from MLC – never known as a generous fee-payer – leaves Contango with a total of $900 million under management, and allowed CIO Stephen Babidge to action his plan to leave the firm. His role as Contango’s lead portfolio manager Bravura Solutions inked a for the MLC mandate had five year deal with Schro- previously prevented him der Investment Manage- doing so. ment’s Luxembourg offshore fund servicing hub, Separately-managed making Bravura’s ‘GFAS’ account provider HUB24 platform its core system said it added 13 new for transfer agency (better non-unitised portfolios known as unit registry in to its menu, with feeds Australia). from well-known funds managers such as Aviva MLC finally confirmed it Investors and Clime Aswas terminating its longset Management joining standing mandates with portfolios from research Lazard Asset Managehouses Lonsec and ment and Contango Asset Morningstar, which are Management, redistribut- more accustomed to rating the assets among the ing funds managers than eight remaining Australian competing against them. equity managers. The loss HUB24’s Darren Pettiona quality, Ireland’s competitiveness as a fund domicile has significantly improved,” he said last month, adding that Ireland’s low level of corporate tax (12.5 per cent) was unlikely to change.

said he was confident there would be a shift in the balance of power to funds management groups supporting non-unitised options. “It could even be as dramatic as the growth experienced by wholesale managers versus retail managers throughout the 1990s,” he said.

its fund ratings contract amid signs incumbent Standard & Poors faces a tough battle.

Steve Schubert, the ‘face of Russell Investments’ for many after a career which began at Towers Perrin in 1988 and followed large clients like BHP Billiton over to RusPerpetual Investments sell ownership in 2004, announced that Chris resigned in December Ryan, an Asian funds to lead a Mercer team management veteran most liaising with major clients recently consulting to which use a cross-section Citibank, would be its new of the group’s services. chief executive replacing David Deverall. The board of Frontier Investment Consulting will Exclusive to I&T news consider creating a CEO role, to allow managing Colonial First State’s director Fiona TraffordInstitute of Advice, the Walker and her deputy, centre of knowledge for Kristian Fok, more time to Commonwealth Bankspend with clients. affiliated dealer groups representing $35 billion under advice, is tendering

reflections - Greg Bright

February 2011 Investment Magazine 15

Will Cooper and a dopey Government cost Australia?

he Government’s announcement before Christmas that it would accept the main Cooper Inquiry recommendations and move towards proposed legislation this year has set the scene for an intensification in lobbying by industry groups. The Government has promised further consultations in the process but these will be less formal than in the inquiry process. Meanwhile, funds managers are preparing themselves for an extended period where lower costs will be a key component of their adapting business models. Putting aside the continuing fee-for-service evolution in the retail advice market, the central plank of the costs issue for super funds and their managers is MySuper. MySuper will force all super funds to have a low-cost default option. Both ASFA and AIST have argued against this, but their arguments have primarily focused on the extra administrative burden for funds, and with little-or-no evidence that it would actually benefit members. One suspects, too, that the main game for them is to have the SG successfully lifted to 12 per cent, which will be the major political issue. Let’s think about the second

Greg Bright

part of that: little-or-no evidence that MySuper would actually benefit members. Warren Chant, of fund researcher Chant West, was the first to point out last year that the best-performing super funds of the past 10 years tended to have higher management fees. A few others have chimed in. From the legislative standpoint, this will be a classic case of the devil perhaps being in the detail. How does one properly define “low-cost”? Chant West has long railed about how different funds disclose their fees and charges differently, and standardisation of this would, indeed, be a good thing. Crucially, will a fund need to disclose, somehow, the costs of management fees based on

performance? No-one has a problem with that for historical performance, but it is difficult to see how a generally applied “low-cost” option could adequately estimate what the current or future total costs will be. So, the industry has assumed that MySuper will lead to widespread indexing, because it is clearly “low-cost”, as defined by current and future management fees. Vanguard and the other index providers are obviously looking forward to the new environment. Who cares if you are paying very low management fees if you get very low returns? That is not in the members’ interests. And then there is the whole indexing versus active management debate, which has raged for the past 20 years and will probably do so for the next 20. The interesting part of that debate is now not whether or not to index but, rather, what to index against. Cap-weighted indexes have serious risks attached and potentially enormous opportunity costs. Even the indexers don’t recommend them for whole portfolios. At the extreme, the member can get caught in a market bubble and lose a big chunk of his or her assets when the bubble bursts. As an aside, some

high-alpha managers are talking about withdrawing their Australian presences. Australia was already a low-fee place for global managers compared with Europe and Asia. If capacity is an issue, as it is for all high-alpha managers, why would you bother to be in Australia? Recent research and discussions about asset allocation are also very interesting. Risk premiums and risk parity approaches, rather than the traditional way of looking at asset allocation, are being widely debated. But of course not by the Australian Government nor its appointees. If MySuper goes ahead and if it is awkwardly defined by the legislators, the losers will be the members who are least equipped to know what they are doing. They are the members who cannot see that a static traditional asset allocation, so-called “balanced”, so-called “low cost”, index fund is unlikely to deliver an optimum net return. John Nolan, the founder of JANA, Australia’s largest asset consulting firm, who remains one of the most influential thinkers in the industry despite having moved from asset consulting to funds management, has often said: the only thing that matters is what the members “eat” – and that’s after-fees and after-tax returns.

customisation: It’s not just a trend; it’s been part of our philosophy for over 10 years

Securities Lender of the Year 2010 & 2008

Securities Lender of the Year

info@eseclending.com +61 2 9220 3610 www.eseclending.com

Global Custodian Securities Lending Survey Awarded Top Rated & Best in Class 2010 & 2009 in $10B+ I 2008 in US

Securities Finance Trust Company, an eSecLending company, and/or eSecLending (Europe) Ltd., authorised and regulated by the Financial Services Authority, performs all regulated business activities. eSecLending (Asia Pacific) - ABN 16 134 096 147, AFS Licence 333334, is an office of Securities Finance Trust Company (incorporated in Maryland, U.S.A.), the liability of the members is limited.

BENEFICIAL OWNERS SURVEY

#1 Rankings - 2011, 2010, 2009, 2008

16 Investment Magazine February 2011

cover story

Changing Tracks the future of equity investing

cover story

February 2011 Investment Magazine 17

Equity investments are the largest made by superannuation funds, and for good reasons. The equity risk premium, believed to be an ongoing phenomenon in listed markets, suits the needs of accumulation funds and â&#x20AC;&#x201C; even better â&#x20AC;&#x201C; active management promises to beat this embedded return. Or so we thought. Something has gone wrong in the last decade as markets boomed, crashed and in the end went nowhere. Does this mark the death of the great equity cult? SIMON MUMME and GREG BRIGHT report.

cover story

18 Investment Magazine February 2011

or the past 10 years, global equities have not delivered any returns to investors. Depending on the currency of origin, most have endured negative outcomes. For the past 10 years the world’s largest equities market, the US, has also delivered zero or negative returns. What’s going on? Even before the global financial crisis, the lacklustre performance of major markets since the technology bubble burst in 2000 caused some people to wonder whether the great equity cult of the past 50 years was coming to an end. The equity risk premium, a key phrase in the investment professional’s vocabulary, was starting to sound odd. Where was the premium? Of course the risk premium – the return from equities over the risk-free, or cash, rate – has not gone anywhere. It’s just that the risk-free rate is so low, particularly in the US, it seems that there’s no more equity premium. The returns from bonds, until the past few months anyway, have been so high that everything else has been negative or negligible. And to make matters worse, equity market turnovers have dropped and expected returns from the three main styles of investing – value, growth and momentum – have become almost impossible to predict. Even if some active managers can consistently beat the market and even if pension funds and their advisers can correctly select those managers in advance, it doesn’t matter much if the market itself is not delivering on its embedded risk. Back in 2002, the late investing legend Peter Bernstein and champion of fundamental indexing Rob Arnott declared the 5 per cent equity risk premium, which is “embedded in the collective psyche of the investment community” was gone.

If there is a differentiator for quants, it is not the word, ‘quant’. The inputs that go into quantitative mechanisms differ just as widely as in the fundamental world. Lumping them together because they have an F9

the financial crisis, held by all the investment professionals interviewed by Investment Magazine for this story. “The main lesson for investors is to reduce equity exposure when prices have been high, and when earnings have sustained abovenormal growth,” Marshman says. But over the course of market cycles, investors should realise that equity returns have a natural ceiling: real earnings’ growth, the primary driver of equity returns, is about 1 per cent below the rate of growth of gross domestic product (GDP).

button is not a realistic way of categorising of these products” Their study, What Risk Premium Is “Normal”?, which focused on the US market, argued the lofty real returns and high dividend yields that had driven the premium had diminished, and their revival was not likely any time soon. Without unprecedented economic growth, or a massive boost in corporate earnings as a percentage of the economy, they argue that real stock returns would be about zero. Maybe even less. But in Australia, many investors are not jaded by the uninspiring equity returns of the past decade. “There has been ample evidence around the world of decades of poor returns from investing in equities. This last decade is just one of those periods,” says Ken Marshman, head of investment outcomes at JANA Investment Advisers. “However, over the longer-term, equities have delivered superior returns compared to other asset classes.” Such is the steadfast belief in equity investing, which seems to have been reinforced by

Rob Prugue ... momentum’s slow down

“We should never expect too much from equity returns, given that fundamental rule,” he says. The financial crisis has improved his outlook for equities. It took the heat out of market valuations, and spurred a charge into government bonds. “That strategy will reverse at some stage, providing a source of demand for equities,” he says. In the 10 years to December 2000, the S&P/ASX 200 returned 13.9 per cent, according to data from Mercer. It gained 8.4 per cent in the decade ending in December 2010. Jeff Rogers, CIO at the $13 billion multi-manager ipac, overlooks the recent “bad patch” to

say that at current valuations, an equity risk premium of between 6 and 7 per cent still exists. Investors just need to wait longer to experience it. “When we say equities will beat bonds in the long-term, what we’ve allowed our clients and maybe ourselves to believe is that the longterm is five-to-seven years.” A more realistic expectation could be as long as 20 years, he says, for the incremental gains made by equities over cycles to deliver a substantial premium above bonds. “The real learning is that 10 years isn’t long enough to be considered long-term.” While ipac’s expectation of how much return is embedded in markets remains unchanged, it puts the heat on investment professionals: “How much valueadd can we expect from managers?” At the $17 billion Sunsuper, CIO David Hartley is similarly focused on managers’ abilities. He looks at the gains that can be made through buying and selling decisions rather than paying too much attention to broad market returns. “If you buy a good stock cheaply, it almost doesn’t matter what happens – you’re going to make money out of it. It depends on where the market is at the time, and what you pay for it. “The equity risk premium is not the primary factor that we look at. We’re more inclined to look at what GDP growth is going to be, what share of that is going to be earned by the listed markets and what we might be able to sell that for in 10 years’ time. “You’re looking at earnings growth. That translates into a premium, which can translate into a price/earnings multiple. You then ask if this valuation makes sense, given the environment.” This environment for investment is in flux. The financial

cover story

February 2011 Investment Magazine 19

The ancient Chinese philosophy of yin yang, in which seemingly contradictory forces – good and evil, success and failure – are interdependent and David Hartley... mindful of the vicissitudes of investing

crisis brutally ended the debtfuelled growth of major Western economies and made emerging markets more competitive. The macroeconomic shockwaves accompanying this have brought investment markets into a period of great uncertainty, says Rob Prugue, head of Lazard Asset Management in the Asia-Pacific. The long reign of price momentum as the dominant factor driving equity returns is over, he says, and investors now face a directionless market. In the past, when secular returns were strong, price momentum was conducive to further gains, but now markets are trendless and subject to the impacts of big macroeconomic changes. But has this shift been reflected in equity strategies, or even equity benchmarks?

in turn give rise to the other, applies to investment: the success of a strategy sows the seeds of its decline “As we move into this period of uncertainty, of a directionless market, some people are challenging the validity of market capitalisation-weighted indexes as a benchmark, particularly since they have a bias towards price momentum,” Prugue says. “If the financial crisis catapulted us into this regime of uncertainty, then strategies which implement price momentum are likely to be more vulnerable going forward.” In this new world, one thing is clear – “the next 20 years won’t look

like the last 20 years” – so it is time for equity managers and investors to adapt. Quants under fire

Investors’ reactions to this change has been mixed. Some got on the front foot early on in the crisis and bought equities – even small-caps, the riskier and lessliquid type – but most spent time with asset consultants reviewing their investment beliefs and objectives, effectively waiting out the storm. As equity portfolios incurred steep losses, the merit of active management was naturally called into question. Some big funds, such as QSuper and UniSuper, increased their passive allocations coming out of the crisis. “You’d be crazy to say the crisis didn’t test your belief in active management,” acknowledges Hugh Dougherty, head of manager research at Towers Watson. Out of all active strategies, quantitative equities drew the most fire. Since the financial crisis, JANA Investment Advisers has, in the main, scaled back its allocation to quantitative equities managers. Marshman says the investment philosophy behind quant strategies has not been fatally wounded, but weaknesses in the application of these ideas have been exposed. “We continue to believe that

the basic premise for quantitative management is sound, which is buying value, quality and following shorter-term trends and turning points in both earnings and price.” This bias towards value, quality and momentum has been rewarded consistently over the past 80 years, he says. “However, in the crisis they were not, mainly due to large flights of money into and out of different asset classes and sectors as a result of the unusual actions taking place in markets, in policy actions and across economies.” Not knowing for how long this uncertainty and “choppiness of markets” will persist, Marshman sees JANA’s move to pull money from quant strategies as prudent. This decision has also been made by the $18 billion REST, a JANA client, which has terminated all of its quantitative Australian equity exposure and marginally reduced its international quant exposure. This decision followed some “lengthy introspection” about the role of quant strategies in the portfolio, says Damian Hill, CEO at the fund. Even though REST believes quant has a place in its domestic equity portfolios, it also has a time. “We don’t think the time is in the current environment. Many [quants] were whipsawed by the financial crisis,” he says. “While

cover story

20 Investment Magazine February 2011

Bringing down Goliath: small-caps’ victorious decade Small-cap equity managers in Australia have a solid case to put to investors. Not only has the median small-cap manager outperformed the largeand small-cap equity benchmarks in the decade to December 2010, it has beat the median all-cap manager in all time periods. The median small-cap manager returned 13.5 per cent against the 9.5 per cent gained by its all-cap competitor in the 10 years to December 2010, according to Mercer data (see figure 1). Its rolling returns over the past 10 years also saw it easily outpace the large-cap and small-cap benchmarks (see figure 2). And in a further boost to the sector, for the first time in the last decade, the rolling 10-year return of the Small Ordinaries index rose above the ASX 200. The Australian small-cap index has historically generated underwhelming returns. But because it is the more inefficient and diverse part of the market, says Hugh Dougherty, head of manager research at Towers Watson, it provides rich opportunities for skilled active managers. “That part of the market is where the benchmark changes a lot. Companies are always listing, there is a lot of turnover in the opportunity set,” he says. But the sector also harbours big risks. It usually serves as the exit door for struggling large- or midcap companies that have fallen down the market capitalisation rankings. Before going bust, these companies live out their final days as outperforming small-cap stocks ascend the index. Managers must exercise skill to avoid the companies on their way to bankruptcy, and also speculative stocks with misleading prospects. Mercer’s Australian equities specialist, Derek Mock, says the alpha generated by small-cap managers has been persistently high in spite of the number of new entrants in the past five years. “Small-caps don’t always outperform large-caps, but it’s worth investing in an active small-

Figure 1 Selected equity market indexes and Mercer medians For periods ending December 2010

1 year

3 years

5 years

10 years

S&P/ASX 200

1.6

-5.0

4.3

8.4

Mercer all-cap median

1.3

-3.8

5.5

9.5

S&P/ASX Small Ordinaries

13.1

-5.9

5.5

9.3

Mercer small-cap median

16.5

-0.6

10.6

13.5

Source : Mercer

cap manager because of the alpha opportunities. Active managers have experienced long periods of strong alpha, when even thirdquartile managers have beaten the benchmark.” David Aylward, co-founder and managing director at Tribeca Investment Partners, has managed small-caps with the firm for more than 12 years. He says small-caps can still persistently deliver alpha, although there are cycles when smaller companies as a whole will outperform or underperform large caps for various periods. “There is a cyclical element, but we say that that is difficult to pick,” he says. “We believe clients are better off with a permanent allocation and then trying to get the alpha in the small-cap market through a quality manager, which is persistent.” The two major reasons why smallcap alpha is persistent are the opportunities to gain an information advantage. “Information arbitrage really does exist. Managers who are skilled in picking stocks can have that information advantage,” he says. “We did some work a while ago which showed that once you get past stock number 20, the [broker] forecasting errors are much greater.” Since there are very few global small-cap managers, international investors do not provide much competition, Aylward says. And retail investors, who tend not to have the same buy and sell

Figure 2 Rolling 10 Year Returns - Australian Equity Large Cap versus Small Cap and and the Cap Median Rolling 10-year returns - Australian equity large-cap versus small-cap theSmall small-cap median 25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

ASX 200

SmallOrds

Median Small Cap Manager (Mercer)

Source : Mercer

disciplines or research capabilities as professional managers, make up a higher proportion of the smallcap market compared with large caps. JANA Investment Advisers recommends that clients move into small-caps if the sector offers a price premium over large-caps, and if managers who can prove their ability to buy good companies cheaply have capacity available. For clients, active small-cap investments have provided a source of general fund outperformance, says Ken Marshman, head of investment outcomes at the consultant. But he issues a warning: “Small-caps can also provide periods of extreme disappointment.

Smaller companies tend to have less secure top-line revenues, and do suffer both in terms of revenues, profits, availability to credit and, finally, to overall market sentiment, making the sector quite volatile at times.” He illustrates the point by saying the surging performance of smallcaps in recent months has been driven by the dominance of mining stocks, “many of which are still to generate a dollar of bottomline earnings” and are essentially speculative bets.

cover story there are these macro factors that swamp their underlying signals, now is not their time to be in the fund.” Quants don’t have any lifethreatening problems, reckons Lazard’s Prugue. “My beliefs in quantitative management haven’t changed. My criticism of how we place quantitative managers has changed. “In the past, asset consultants used to have value, core and growth managers – and then another bucket called ‘quant’,” the former researcher says. “Just as there are many different styles of fundamental, there are many styles of quantitative. “If there is a differentiator for quants, it is not the word, ‘quant’. The inputs that go into quantitative mechanisms differ just as widely as in the fundamental world.

February 2011 Investment Magazine 21

Ken Marshman ... keeping the equity faith

“Lumping them together because they have an F9 button is not a realistic way of categorising their products.” The crisis has brought an end to investing in quant purely to diversify from fundamental equity strategies, says Towers Watson’s Dougherty. “Will we see allocations

to quant for the sake of quant? I think not. But if you’re offering something better than the market, you’ll show up on the radar.” Sunsuper spares itself the trouble of deciding how to deploy quant managers in its equity portfolios: besides a hedge fund mandate with GMO, the big fund doesn’t invest quantitatively. “Talk to quants,” Hartley says. “They say they’ve got proprietary models, but by and large the factors and models are pretty much the same from one manager to the next.” This becomes dangerous if quants believe, to any substantial extent, that they are alone in following signals. “They’re effectively betting on the probability they can be quicker than others. The danger is, the smart people are looking at the next level and can predict what

other quants are going to do and taken advantage of that.” The recent criticism of quants is not the first time that Don Hamson, managing director at the boutique Plato Investment Management, has been forced to defend his trades. The questions he has fielded since August 2007, when the performance of quantitative managers fell more or less in unison – ‘What happened with quants?’, ‘Why did they get it wrong?’, ‘Is quant dead?’ – were put to him during the last period of investor disillusionment with mathematical models, the recession of the early 1990s. But this time, quants have underperformed for longer. “The question is: are our models broken, or is it a cyclical issue?” Hamson asks. To find out, he looked deeper into historical data, and learned that

Financial software solutions that deliver

Bravura Solutions Limited ABN: 15 111 148 826

Sonata. Your next generation software solution The next generation in wealth management software offers an integrated solution for superannuation, investment administration and life insurance. Sonata combines over 15 years of leading software with the advantages of modern architecture. A scalable, flexible solution, Sonata automates and streamlines common processes, delivering competitive advantage through operational cost savings and efficiency. The result is a solution that couples tried and tested functionality with the benefits of modern technology.

7559

For more information on how our wealth management products can streamline your business email info@bravurasolutions.com

cover story

22 Investment Magazine February 2011 in terms of the underperformance of value and momentum factors, the financial crisis was comparable to the turmoil experienced in the Great Depression. The failure of these factors, relied upon by many quants, was not unprecedented: investors needed to look back further to find a historical parallel. Over time, momentum has delivered. It has also hurt. “We need to be aware of the negative skewness of that factor, because it can blow you away,” Hamson says. In some part, quants’ poor performance was due to their participation in crowded trades. But it was the macroeconomic shockwaves from the crisis and its aftermath that overcame models, Hamson says, as momentum and volatility drowned value and earnings revisions signals. The inability of company analysts to update corporate earnings forecasts as the market fell didn’t help either. When Hamson asked them why the information flow had stopped, he was told that CEOs had stopped talking to analysts. This has encouraged him to rely less on analysts’ information. It should be noted that analysts weren’t too concerned with earnings forecasts: in a sign of the times, they wanted to know whether companies’ balance sheets were strong enough for them to live another day. In addition to developing some independence from analyst information, Plato aims to develop a method of identifying large and prolonged downward trends in momentum. This can be done, he says, because quant is flexible. “You can implement any strategy as long as you put it into mathematical terms.” Processes must evolve, but not change radically: momentum, value and earnings revisions have performed well for years, Hamson says, and should not be discarded

[and] can be found in Australia, the US and Europe and in emerging markets.” The yin yang of funds management

Jeff Rogers ... if active managers can’t deliver over a 10-year period, when can they deliver?

after a period of underperformance, however steep it has been. For investors to single out quant processes as the only victims of the crisis is somewhat myopic. “Nearly all active strategies had periods of underperformance through the GFC,” says JANA’s Marshman. The “outright turmoil” in markets and the collapse of justifiably cheap companies troubled value managers, he says, and the boom in resources stocks was not something they could enjoy. Growth managers, meanwhile, were hit hard in the early stages of the crisis but went on to recover from overselling. The relative winners throughout the period are thematic strategies, which followed the resources theme and subsequently developed a tilt to emerging markets. However, in Marshman’s opinion, quality as a theme was insufficiently rewarded. “This appears to be a direct result of the quantitative easing policies of the US. However, in our view, this leaves a great opportunity for active global managers in the future.” It explains JANA’s focus on finding quality in markets today, which means investing with fundamental stock analysts targeting “sound companies” that are “well-managed [and] with largely secure top-line revenues”. “Today, such quality can be acquired relatively inexpensively

Investing in uncertain and choppy markets is tough. Big deal. For active managers to argue they are true alpha sources, their returns need to be uncorrelated. “The fact the market was down-to-sideways shouldn’t be an excuse for active management,” says ipac’s Rogers. They should not need a good market over a decade, upon which they can apply leverage, to deliver good returns. Sure, at the beginning of the decade, valuations soared at the fullness of the dotcom bubble, and the financial crisis later dealt investors another market rout. “But if someone is saying, ‘I’m an alpha manager’, and you give them 10 years and they can’t deliver over 10 years, over what kind of period can they deliver?” Rogers asks. This scrutiny of active managers is valid. But it is also within a super fund CIO’s remit to know when managers’ performance streaks are over. Hartley draws on the ancient Chinese philosophy of yin yang, which states how seemingly contradictory forces – like good and evil, success and failure – are interdependent. Such forces only exist in relation to each other, and each in turn gives rise to the other. In an investment context, this means the success of a strategy also sows the seeds of its decline. “Growth managers think they’re going to outperform by picking the fastest-growing stocks. That works until people aren’t as disciplined and pay too much for companies.” Once known, successful investment strategies can breed their own mediocrity by attracting imitators who arbitrage away the original opportunities, or by attracting too much capital. To

achieve further success, investment methods and ideas must evolve. “You need to be conscious of what a manager’s competitive advantage is, and what sustains that competitive advantage,” Hartley says. “And if that starts to disappear, you need to recognise that and take effective action. While the questioning of active strategies during the crisis was warranted, any radical overhaul or dismissal of any style that has performed well over cycles is not justified. “The GFC has been an unusual one-in-100-year event,” Marshman says. “We do not think that investors should shape their future investment strategies purely on the events of the past three years.” Marshman says JANA clients have benefited from their active equity mandates since June 2007. The strategies have beaten passive benchmarks. However, since the period has been “highly volatile” in its delivery of alpha, an understanding of the strategies and the resolve to see them through is needed. Throughout the decade, JANA has advised clients to actively allocate to equities at levels of between 45 per cent and 75 per cent of total portfolios. Funds which implemented these views benefited from the exposures, Marshman says. “However, the path has not been smooth.” “Much of the performance of individual stocks is due to market sentiment rather than fundamentals of company earnings. In the long run, it is the fundamental earnings that determine the returns for investors, but market sentiment can deviate from the fundamentals significantly in terms of both quantum and time period.” Today, the consultant is neutral towards the asset class, and reasons that a 50-to-55 per cent allocation, encompassing Australian and global

cover story equities, is appropriate. “There are many stocks and sectors today that are trading at a considerable discount to their net tangible assets. This environment has not existed materially for decades. It may be that it will take time for such value to be rewarded in share price action, but that is the nature of owning companies,” says Marshman. There’s another factor which may impact on returns from equities in the future, which is more emotional than technical. That is the increasing disquiet around the world over executive remuneration. Peter Ryan-Kane, an asset consultant in Towers Watson’s Singapore office, gave a series of presentations in Australia in 2009 in which he took a 20-year view of asset allocation strategies for super funds. A key prediction was that listed equities would be a significantly lower proportion of total fund assets in the future. One of the questions he raised was: will investors continue to be happy to be taking the last piece of a business’s earnings, that is, dividends? After lenders? After management? After investment bankers and other advisers had all taken their cut? In the future, he pondered, there would be a much closer alignment between a super fund’s investment strategies and the actual lives of the members. Members live in the real world whereas most funds invest primarily in financial assets. Financial assets – the prime category being listed shares – make up something like 10 per cent of total world assets. If members are annoyed because the management of those listed shares are paying themselves far too much money, then surely they will withdraw their investments. They will be more

likely to invest in ‘real assets’ or to want to have much greater control over the investee business, like private equity managers try to do, or Warren Buffett. Derek Mock, an Australian equities specialist at Mercer Investment Consulting, warns that equity strategies should not be chosen with the financial crisis at the front of mind. “Don’t design a portfolio through the rear-vision mirror. You might have hurt a lot, but look forward, and ask: ‘What are we exposed to? What are our risks? Is the portfolio, in aggregate, too aggressive or defensive?’” After determining clear investment objectives, investors should then consider portfolio construction by taking style, size and risk budgets into account. Managers meeting these criteria should then be chosen and blended accordingly. Clients should then get closer to their managers to gain some insight into how their behaviour changes during different market conditions, such as periods of market stress – are they contrarian, or do they seek the safety of largecaps? Gaining a clear understanding of investment goals is the most important part of any strategy, says Towers Watson’s Dougherty. “The only people that would have changed their views dramatically over the past few years were those that had the wrong structure. If you had a fundamentally sound and wellreasoned investment strategy it would have been tested, but it wouldn’t have changed.”

Another reason why you should nominate AUSfund as your ERF!

2010 award winner from BOTH

SuperRatings & Heron Partnership

To nominate AUSfund as your ERF please contact us on: Phone: Visit: Email:

03 9657 4303 unclaimedsuper.com.au info@ausfund.net.au

You should read AUSfund’s Product Disclosure Statement (PDS) and consider whether this product is appropriate for you. Research commissioned by AUSfund, undertaken separately by The Heron Partnership and Super Ratings. *Past performance is not a reliable indicator of future performance. Industry Funds Investments Ltd (ABN 17 006 883 227; AFSL 229881; RSE L0000413) as Responsible Entity for AUSfund, Australia’s Unclaimed Super Fund (ABN 85 945 681 973, RSE R1000795).

24 Investment Magazine February 2011

manufacturing

Photo: Rick Gates

manufacturing

February 2011 Investment Magazine 25

Elementary, my dear Wilson Having a private investigator’s licence is a definite advantage in the competitive world of small-caps funds management. PHILIPPA YELLAND talks with the man behind the magnifying glass.

t is elementary, dear reader, that Drew Wilson will sleuth out the best way to investigate small companies which are potential investments. “It occurred to me that there was more to doing background checks than just Googling,” says the affable Canadian. “So I Googled for a course on how to do it in a systematic way.” And he found it: a Certificate III course run by the Australian School of Security & Investigations, leading to a Commercial and Private Inquiry Agents Licence. For Wilson PI, none of this is rocket science. “It’s a competitive advantage,” he confides. “It’s part of fundamental analysis. In formalising it, it gets done. And, if it’s not done, then it’s my failure.” As managing director at Atom Funds Management, he shares responsibility for the boutique’s $62 million in client money with CIO David Shearwood and portfolio manager George Raftopulos. But if Wilson aspired to a full private investigator’s licence, he would have to work as a supervised subcontractor for an investigator with a master’s licence. That isn’t too appealing. He’d rather apply his new skills to the less-researched realm of the equity market. These skills have benefitted Wilson’s corporate fact-finding missions, and therefore Atom, he says. “We were looking at investing in a company which had passed

our initial screening. Sometimes the alarm bells don’t go off. But, I found out that the company hadn’t shipped as many units as it claimed to have, and we called off the deal.” But it’s not all cloaks and daggers, or posing with Holmesesque calabash pipes. Atom’s research model is an interesting one. When Wilson and Shearwood were setting up the fund in early 2006, they faced huge costs in employing analysts in Australia. “Before we even had any clients, we had 1,600 Australian companies to look at and we thought: ‘How can we do this – even a junior analyst costs $100,000 a year in Australia?’” Wilson remembers. So they applied the thesis of Thomas L Friedman’s book, The World Is Flat, and journeyed to India in early 2006. There, Wilson and Shearwood met well-educated analysts who were willing to work for a quarter of the cost of their Western counterparts, and so Atom’s subsidiary was opened in July in Bangalore, the country’s Silicon Valley. But this was not the US model of “data monkeys” merely inputting data, Wilson says. Atom bought data in Australia, stored it in Sydney and then had their Indian subsidiary staff run the information through pre-populated screens and then tested against human intelligence. The results would be analysed, assumptions changed, and screens run across the conclusions. Then – enter stage right – Wilson PI appears. “What I do is not rocket science,” says Wilson selfdeprecatingly. “It’s something every manager does. We’ve just formalised it a bit more.”

The course taught me how to plan an investigation. It taught me strategy – otherwise you jump on Google and stick in a person’s name Ironically, the investigative course gives Wilson no more power than any private individual. In fact, the NSW Commercial Agents and Private Inquiry Agents Act 2004 expressly states that the licence provides no additional power, authority or immunity. “As far as I can tell,” Wilson says, “the purpose of the licencing is to ensure standards are maintained within the industry, so it’s more of a compliance regime than anything else. The purpose of the licence is to protect the public from PIs.” So, now to the obvious question is: ‘why do it’? “The course taught me how to plan an investigation. It taught me strategy – otherwise you just jump on Google and stick in a person’s name. “I learnt about many sources of information: ASIC, Yellow Pages, and skip-tracing services,” he says. For Wilson, the ASX’s company announcement site is usually his first port of call. “The technique is to put together a timeline of releases,” he says. As well, there’s an ‘Investigators’ Forum’, an online area for PIs, “where you can ask a question and someone with more experience will tell you where to look”, he says. “The process is a qualityassurance gate,” Wilson says. “Once it fails, you move on. I don’t write a 10-page report on what I’ve found.”

Most PIs work on insurance claims and infidelity cases, but Wilson sees the potential for a company specialising in financial services’ cases. Musing on the possibilities, he dwells on the possibility of “a firm specialising in background checks and financial investigations for the wealth management and investment banking industries. I would love to run a company like that…” But he quickly adds that the Atom small-cap fund is sticking with the small-, micro-, and nanocap equities. There were cloaks, but no daggers, during the PI course, with a three-day covert ‘tailing’ simulation in which Wilson was tracked. Yes, he threw off the team trailing him; but yes, he too lost his target. “Tailing a person is a lot more difficult than you think,” he laughs, adding that he hasn’t donned his deerstalker cap during office hours. “I don’t use my licence for work – just the skills I’ve learned,” he says. Some of his best information sources are journalists, Wilson concedes, because typically they’ve written stories about the companies that Atom is considering investing in. “I’ll phone a journalist and ask them about someone or a company. I never hide who I am.” But, ever the sleuth, Wilson adds that “just because newspapers say it, that doesn’t make it right. We always then try to verify the information to get a feasible explanation.” At the end of the interview, Wilson exits, stage left, to see his auditor … allegedly. But, he picks up the fedora near his desk and smiles enigmatically as the lift doors open.

manufacturing

26 Investment Magazine February 2011

What drives Australia’s lower-return future Australia’s powerful investment

the past five decades. Meanwhile, the impact of changes in P/E valuations has varied, with changes in this ratio negatively impacting overall returns in the past decade (and through the 1970s). But the contrast with the US market over the past decade is striking. While both markets have suffered from P/E compression – a falling P/E ratio – over this period, the Australian market was still able to post a positive return, boosted by the powerful performance of earnings.

Figure 1: Rolling 10-year Australian and global equity market returns January 1991 — December 2010

returns have been driven by the rising terms of trade throughout the commodities boom and generally low rate of inflation. But have the good times gone? Robert Hogg, senior consultant at Frontier Investment Consulting, assesses how major forces determining the performance of domestic asset classes will influence returns in the years to come.

ustralian asset classes have boosted superannuation fund returns over the past decade. This makes it instructive to look at what factors have driven these returns historically, and what this means for likely future returns in domestic equity, fixed income and bond markets. Australian equities

Australian equities had a stellar run versus international equities over the past decade, and it is well known that the key factor driving our market has been the very robust performance of Australian resources companies. This performance has been underpinned by the sharp increase in Australia’s terms of trade, led by Chinese demand for Australian resources, and the related sharp increase in the prices of bulk commodities such as iron ore and coal (see figure 1). The increase in Australian exports to China has had a significant impact on the relative importance and profitability of the companies involved. Indeed, of the S&P/ASX 200 Accumulation Index’s 163.3 per cent return for the 10 years to 31 December 2010 (not annualised), BHP Billiton contributed 27.2 per cent, while a holding of BHP Billiton, Rio Tinto and Woodside Petroleum

Source: DataStream

Figure 2: Trends in Australian inflation and bond and cash yields September 1969 to December 2010

Australian bonds and cash

Source: DataStream

Figure 3: Unlisted property – sources of returns Rolling 12 months (to September 2010)

Source: Investment Property Databank

contributed 39 per cent. These individual stock contributions to the market’s overall return were broadly in line with individual underlying earnings trends: for every year over the past decade, the earnings produced by BHP Billiton (or occasionally Rio Tinto) have made the largest single

contribution to the market’s overall earnings. Disaggregating the impact of dividends, earnings growth and change in price/earnings (P/E) valuations on total market returns across the entire market shows that earnings have contributed positively to its overall return in each of

Over the past 20 years, the return from Australian government and corporate bonds was in the high single digits, with similar returns produced by offshore markets. Meanwhile, trends in Australian inflation have driven the returns from domestic bonds and bank bills: since domestic inflation has trended lower over the past 20 years, yields on both Australian bonds and cash have also trended lower (see figure 2). It is a similar story worldwide, as global inflation has trended lower over this period for many reasons including the increasing use of inflation targets by central banks. The decline in inflation that has, in turn, driven a decline in market yields, has driven substantial capital gains in bond markets. The 1980s were characterised by a period of high inflation, and corresponding high interest rates meant the coupon return was the most significant driver of fixed interest returns during this period. In contrast, during the early 1990s, a period of disinflation prevailed in Australia, and the contribution from capital returns became relatively more important. Over

manufacturing the past decade, yields have been steadier and lower than in previous periods but are still the main driver of returns.

subsequently fell in 2009-10. This is consistent with the way property markets generally move, with the cap rate change generally leading the change in rental growth.

Australian Property

Over the past 25 years, the return from unlisted Australian property has been driven by the return from income: 7.5 per cent each year, compared with 2.2 per cent each year from capital gains (see figure 3). The largest influences on capital returns have been the period on either side of the early 1990s recession, and the period before and during the global financial crisis. Income returns have been steadier, but have generally trended lower since the early 1990s (as has been the case for other yielding assets such as cash and bonds) albeit with some retracement as capital prices fell in the aftermath of the crisis. Related to these trends in capital and income returns has been the trend in both capitalisation (cap) and discount rates – which are both related to cap and discount rates in other assets, such as bonds. Apart from the recent impact of the financial crisis, these variables have both trended lower in the past two decades. Cap-rate compression is effectively margin compression and could be considered in a similar way to the expansion of P/E ratios in equities. This has contributed to property returns, as the weighted average cap rate in the Investment Property Databank (IPD) survey has fallen from 9.3 per cent in June 1994 to 7.5 per cent in September 2010. This margin compression is similar to what has been experienced in the last 20 years in Australian equities. The negative returns from property in 2008-09 were due mainly to cap-rate expansion, rather than a fall in rents, which

Looking forward

The key influences underpinning the performance of Australian asset classes over the past few decades have been Australia’s rising terms of trade and the trend toward lower inflation. Now that these two factors are reflected in market pricing, it seems unlikely that prospective returns will be as robust, in nominal terms, as the past few decades. The following factors suggest that returns may be more modest in coming years: • The majority of the boost to earnings from rising terms of trade has likely occurred. The terms of trade are already at a very elevated level with further significant gains unlikely. It is more likely that the terms of trade will decline in coming years as Australian commodity supply catches up to Chinese commodity demand. • The boost to asset valuations from the disinflationary cycle has likely already had its greatest impact. We are probably at the end of the disinflationary cycle and, although we do not expect a significant rise in global inflation any time soon, lower inflation rates are likely to occur only if we move into a very serious recession. • The current lower level of income yields for bonds and property mean there is less prospect for robust returns from this component of returns going forward simply because we are today at a lower starting point. Yields rising from here would likely cause significant capital losses. • The current ‘fair’ value of equities suggests there is only limited scope for a sustainable rerating of equities valuations.

BIS Shrapnel Business Forecasting Conferences March 2011 Having rebounded post-GFC, Australia’s economy stalled over the second half of 2010. The re-emergence of problems overseas, rising local interest rates and a bout of caution by households and businesses has led to concerns that private demand will not come through in time to fill the gap left as government stimulus winds down. We think 2011 will see a resumption of growth, driven by healthy fundamentals. There remain market anomalies which present opportunities for investment. Download the full programme and speaker info from www.bis.com.au Brisbane: 15 March Sydney: 17 March

■

Melbourne: 22 March Adelaide: 24 March

■

Stamford Plaza

The Westin Hotel Sofitel on Collins

■ ■

Intercontinental

Perth: 25 March ■ Hyatt Regency Economic Outlook* 9.00 – 12.30 Luncheon 12.30 – 2.00 Building & Property 2.00 – 5.00 *Accredited by Financial Planning Assoc of Aust for 3 points of Continuing Professional Development. Accred #4642

One session $770 or Full day including luncheon $1,665

www.bis.com.au

28 Investment Magazine February 2011

manufacturing

Hedge FoFs adapt to the new world

Richard Keary ... ‘no evidence big managers are better’

There has been a lot of speculation recently about whether the hedge funds of funds (hedge FoFs) business model will survive the wash-up of the financial crisis. But many FoFs are changing what they offer investors – not just better transparency and lower fees. GREG BRIGHT spoke to Richard Keary, chief executive of the Australian arm of international FoF manager FRM about the trends.

ichard Keary has been active in hedge FoFs since the 1990s. He was the biggest supporter of local hedge fund talent using

managed accounts long before the market clamoured for the transparency in managed accounts. He brought out one of the early offerings to the Australian market – of Grosvenor Capital – when working for the former Rothschild Australia and then oversaw its development at BT Funds Management after the Westpac associate acquired Rothschild. Now he is helping FRM (Financial Risk Management) through its evolution as an FoF manager, building bespoke groups of funds for very large institutional investors. FoFs of all sorts – not just hedge funds – suffered more than most managers during the financial

crisis. Notwithstanding generally good performance compared with the markets, doing what they were supposed to do, redemptions were heavy through 2008 and 2009 for hedge FoFs. Investors queried transparency, liquidity and the double set of fees. Since then, flows have returned, transparency and liquidity have been improved, or at least better explained, and fees have come down. And some super funds which want to make better use of their scale are looking to build their own FoF-like structures. The interesting question is: how do they do this? Keary says that investors such as super funds have the right to

choose what to outsource and what to insource in all their investments, including alternatives. “There are fundamental activities that have to be resourced and the question is whether these can be acquired on acceptable terms to the investor.” Do pension funds have, or build, the internal capability, do they rely on their trusted asset consultant or engage new specialist consultants, or do they do a deal with a FoF to get exactly what they want? There is no right or wrong answer to those questions. Keary points out that the current world economic environment is very unusual in the lack of consensus among genuinely

manufacturing clever people on the outlook, particularly whether inflation or deflation is the greater threat. He also points out that, before the recent uptick in bond yields, the real risk-free rate of return on US 10-year bonds was about zero. And the zero return to equity (both US and MSCI global indexes) for the past 10 years has come with a real volatility of about 25 per cent. The global hedge fund industry is back up to about US$1.6 trillion, according to researcher HFR last September, but still shy of 2007’s peak of about $1.8 trillion. And much of the recovery in assets is due to performance rather than new money flows. Keary says: “In general, investors have not come rushing back to hedge funds and new investors have been slow adopters since the crisis. Net inflows turned mildly positive in the second quarter of last year. “We see that inflows in the first half of 2010 appear to have been going almost exclusively to ‘mega funds’ of more than $5 billion in assets, whereas the rest of the industry has been, on average, flat.” Figures from research house HFR show that the top 30 funds by assets control 30 per cent of all hedge fund assets, compared with 20 per cent of all assets five years ago. The top 5 per cent of funds, or managers, control 75 per cent of assets. “This leaves about 6,000 hedge funds around the world fighting over just 25 per cent of the total spoils,” Keary says. “And surprisingly, the pace of concentration seems, if anything, to have increased since the financial crisis in 2008.” The nature of the hedge fund universe has changed dramatically in the past 10-or-so years. Much of it is now channelled through fiduciary investors, such as pension

funds, sovereign wealth funds and endowments, whereas in the early 1990s, when the industry started to take off, much of the funding came from high-net-worth individuals. Keary says: “Fiduciaries have multiple due-diligence teams requiring the fund to pass tests on multiple levels. Return expectations have dampened, high absolute return aims have been replaced by LIBOR-plus-something modest with low volatility and low correlation.” Increasingly, at least since the GFC, super funds with hedge fund allocations are looking for their managers to not allow the fund to blow up through poor execution, to play it safe. And they assume that the big brand-name managers are more likely to deliver in that regard. But are they? One thing is sure: there is no evidence that the big managers outperform smaller ones. As in the long-only space, the evidence is that, by and large, the more assets under management that a manager has, the less likely it is to outperform either the benchmark or smaller peers. “I’m not saying that big managers are ‘bad’. It’s just that there’s no evidence that they’re better,” Keary says. The risk side of the equation is not so clear. There is a perception that large managers don’t carry as much risk as smaller ones. With increased transparency and with fiduciaries and their in-house management playing a greater role in the system this perception is also open to question. Keary says: “When we think about the hedge fund universe we see opportunity with what we call mid-cap managers. If we think about equity market volumes, they are in decline. So, it makes intuitive sense that managers which can generate good returns on smaller

February 2011 Investment Magazine 29 deal sizes may have the flexibility to prosper in this environment. Further, there is more chance to influence outcomes with these managers than with the mega-cap managers.” FRM has done some conceptual work – without live examples – which indicates that there is a sweet spot for alpha generation in between the overcrowded large end of the deal activity and the less-crowded but less-liquid small end. This is where hedge FoFs come into their own. They are the only players which have the resources to research and gain access to smaller hedge funds. Even a medium-sized FoF such as FRM, which has about $9 billion under management, has an internal team of more than 160 professionals. Not even the big global asset consultants can match such specialist hedge fund research

resources. Nor can they develop managed account structures the way firms such as FRM are. Keary says that FoFs which now offer their services to build individual portfolios for clients are not really competing with the asset consulting fraternity. “Consultants still set policy. But we have a competitive advantage in manager selection and the rest of the process,” he says. “So as large investors work through the in source/outsource decisions there is no doubt that the deepest resources in manager research, operational due diligence, portfolio construction, execution, monitoring reside in the FoF model. The question is can fiduciaries acquire those resources on terms that represent value for money to the investor? The only way to find out is to ask.”

Evolve Advanced software solutions for Trust & Estate, Private Client and Fund administration

• Unit Registry & Fund Valuations • Specialist Trust, Estate & Private Client software • Microsoft DynamicsTM NAV core technology • Flexible multi-currency general ledgers • CGT and advanced Tax Reporting • Global Document Production • Automated ﬁnancial statements

SERVICING CLIENTS IN: AUSTRALIA • BAHAMAS • BERMUDA • CAYMAN • GUERNSEY • HONG KONG • ISLE OF MAN • JERSEY • LONDON • LIECHTENSTEIN • LUXEMBOURG • MAURITIUS • MONACO • SINGAPORE • SWITZERLAND

www.touchstone-apac.com

distribution

30 Investment Magazine February 2011

Hermes’ message: don’t be investment banker ‘wannabes’ Funds managers should get back to their roots, renew their long-term aim of delivering riskadjusted alpha and stop being ‘investment banker wannabes’. SIMON MUMME reports.

aker Nusseibeh, the investments chief of the £32 billion ($51.3 billion) BT Pensions Scheme’s funds management arm, says the pensions industry should focus on the more realistic aim of generating sustainable risk-adjusted returns instead of trying to shoot the lights out, time after time. The head of investments at Hermes Fund Managers, which is fully owned by BT Pensions, says the ability to generate risk-adjusted returns is not rare. And when discerning investors appoint active managers to deliver it, they should demand more conviction. The average information ratio across the industry was 0.5, he says, and “if you’re taking active fees, you need between 0.5 and one, and I’d like it to be near one”. With the exception of its quantitative-plus team, Hermes

Saker Nusseibeh ... funds management now a ‘buyer beware’ service

aims to be a house of active managers consistently delivering risk-adjusted, “sustainable” alpha across its equities, alternatives, unlisted assets and engagement services. In doing so, the manager is working to bring back an older style of institutional asset manager and client relationship. Nusseibeh says: “20 years ago, when I started in the business, [managers] said they looked after people’s pensions. If you talk to funds managers today, they talk about highly specialised products. “If you look at the crisis of

unts Acco d e anag ly M e t a r Sepa

Man age d Fu nds

2008, sub-prime and easy credit were not the reasons why [it happened]: the crisis happened because funds managers abrogated their fiduciary responsibility to clients. “Funds managers knew that credit default swaps were reinsurance. Any funds manager worth their salt knows reinsurance needs an asset base. Even when investment banks were selling this rubbish, why didn’t [managers] speak out?” Over the years, managers’ sense of responsibility has been lost, so that “if you sell a client a product, then it is ‘buyer beware’.” He says the “crusading” nature of these comments is justified: “Funds management is an honourable profession – you’re looking after people’s retirement money. Not rich, but hard-working people.” He adds the payout to many of the BT Pension Scheme’s defined benefit members is about £8,000 each year. “Somehow the industry got sucked into becoming investment banker wannabes.”

ASX Shar e Reg istry

When institutional appetite for high returns overpower the aim to deliver risk-adjusted return, it often originates within clients and is then encouraged by managers, he says. “But if clients forget what longterm returns mean, it is our job to remind them. “If I believe that an asset class is over-valued, and you want to invest in it, I should say: ‘This is the wrong time – you should take money out’.” It’s not difficult for Hermes to operate this way. It has to. Its owner, which supplies £18 billion of its £25 billion in funds under management, demands this feedback and long-term view. With a stable pension fund owner and little pressure to raise assets or deliver big returns quarterin, quarter-out, Hermes is able to replicate this relationship with other investors. Nusseibeh also believes the role of the funds management CIO should change from a manager of investment staff or asset allocator to an internal consultant to clients.

ds r Fun Supe t i f e n ed Be Defin

Indu stry Sup er F und AUSTRALIA’S LEADING INDEPENDENT FUND ADMINISTRATOR s

Whether you are a stockbroker, fund manager, super fund trustee, CFO or adviser dealer group, MainstreamBPO may s s be able to help you with your administration needs Fund d n d u e F d Tra per ange e Su t h a c r x o E Mand Corp ates www.mainstreambpo.com

For more information please contact: Martin Smith or Byram Johnston on (02) 9247 3326

Executive Education for professionals in the superannuation and financial services industry

FEAL and Melbourne Business School have developed a unique postgraduate program for executives in the superannuation and financial services industry. Comprising eight residential modules, students earn a Graduate Diploma in Organisational Leadership and credit towards Australia’s most acclaimed MBA program.

Join us for the next program module:

Advanced Negotiation 10 –15 April 2011 Melbourne Business School – Mt Eliza Centre for Executive Education

For more information contact FEAL on 02 9299 6648 or visit:

www.feal.asn.au www.feal.asn.au

Presented in partnership with

presented by

investment

in association with

magazine

Post - Retirement Solutions for Super Funds

strate g ies for M ember R etention

Thursday 10th March 2011 Sofitel Melbourne on Collins

Andrew Boal (managing director, Towers Watson) and Martin

This 3rd annual conference will feature an unprecedented group of

•

industry experts to discuss the critical issue of how superfunds can

Stevenson (partner, Mercer) on why the industry much change its

retain members as they approach and enter retirement; helping them to

mindset from accumulation to ‘whole of life’ Wade Matterson (practice leader, Milliman) on the implications of

address retirement income adequacy by mitigating risks such as market,

•

inflation and longevity.

developing a ‘full-service’ business model

The agenda will feature: •

Phil Gallagher (manager retirement and income modelling unit,

Federal Treasury) on the Government’s research and modelling •

Jeremy Cooper (chairman of retirement income, Challenger) on

how trustees can better help members •

Professor Michael Sherris (Australian School of Business,

PLUS sessions on investment and liquidity issues, and case studies on member retention and intra-fund advice from: •

Maritime Super – Peter Robertson, CEO

•

Cbus – Sean Leonard, executive manager product strategy

•

Equipsuper – John Farrington, manager retirement services

University of New South Wales) on funding lifetime annuities and whether a private-public model might be the most efficient

This conference is a must for senior super fund executives who have an interest in keeping up to date with the latest developments in member retention strategies For further information or to book tickets visit www.conexusfinancial.com.au/events or call (02) 9221 1114

distribution

February 2011 Investment Magazine 33

Funds at longevity, adequacy crossroads Longevity and adequacy in a post-financial crisis world are crucial challenges that supereannuation funds must surmount, according to industry experts. PHILIPPA YELLAND reports.

ustralia’s leading academic in the longevity debate, Professor Michael Sherris, says the Federal Government has a crucial role in supporting the development of a life annuity market. “This is due to private market constraints, as well as the capital costs of guarantees, longevity-risk uncertainties, and efficient hedging of inflation,” he says. “The most efficient result will be a public-private model with long-term risks supported by government through offering deferred life annuities.” The provision of financial advice, often considered as being essential in retirement planning, is a minefield into which only a few funds have ventured, says Robbie Campo, manager –strategy at Industry Super Network. “Limited financial advice is proving to be useful to members with relatively uncomplicated finances, and is also leading to more demand for more traditional financial planning services in the long-term,” she says. Campo is an expert on what has prompted funds to consider offering intra-fund advice and what feedback they have received from members, as well as the problematic issues of liability. A group of industry experts and analysts, including Jeremy Cooper and representatives of Cbus and Maritime Super, will be speaking about longevity,

Robbie Campo ... liability issues

adequacy and strategies for member retention at the third annual PostRetirement Solutions for Super Funds conference, run by Conexus Financial, publisher of Investment Magazine, March 10 at the Sofitel on Collins in Melbourne. The retention of members on the cusp of retirement is becoming a major problem for funds, says John Farrington, manager – retirement services at Equipsuper. In 2005, the fund realised that it was losing its high-net-worth members, he says, and set out to develop specific strategies to keep them. These included: deploying individual account managers, full financial advice services through a separate company, running seminars on purposeful retirement and, as an additional sweetener, birthday cards. Farrington says the fund now keeps 85 per cent of its retiring members and 75 per cent of their assets. But the challenge to woo and retain the 15 per cent who do leave still remains. Jeremy Cooper, Challenger’s chairman – retirement income and former head of the influential Super System Review, says the immediate challenges in managing longevity, market and inflation risks for

retirees mean that trustees cannot wait for the government on this. Funds can address these problems for members, who are moving from accumulation and the use of their human capital into the decumulation phase, which relies on their financial capital, he says. Wade Matterson, practice leader, Milliman Actuaries, says the move into providing postretirement services will go well beyond investment products and asset allocation. “Understanding the nature of retirement together with the needs and goals of members will determine who is successful and who is not,” he says. He says funds need to develop a full-service model and compete in an increasingly competitive market. Martin Stevenson, partner at Mercer, says the industry’s mindset must change. “Australia has a superannuation system that is, in many respects, a world-leading best practice. But post-retirement income is one of the weakest parts of the system,” he said. Mercer has studied what is missing from the post-retirement mix and how optimum whole-oflife solutions can be developed. “The mindset of the superannuation industry must change,” he says, “to move away from the previous focus on accumulation to a more ‘whole of life’ approach including more tailored solutions for retiring or retired members.” Data from the major Australian public sector super schemes shows that 65-year-old males can now expect to live to 85.4 years, which is higher than the 2005-07 Australian Life Tables’ projection of 83.5 years that covers the general population. This longevity is now putting

pressure on the funding of Australia’s retirement system, says Mercer’s managing director, David Anderson. At present, the paid workforce’s contributions to super funds comfortably exceed those funds’ payments to retirees – but the difference is about 5 per cent only of total system assets, Anderson warns. In fact, he says, “investment income is already more material to the growth of the superannuation system than contributions by and on behalf of fund members”. Mercer’s research shows that, putting aside the proposed SG increase from 9 per cent to 12 per cent, the gap between super contributions and benefits taken by retirees is expected to narrow, with crossover in 15 years’ time. “Investment earnings and losses aside, we will then have a declining system in real terms,” says Anderson. The solution requires three approaches: maximise super savings, delay retirement, and improve retirement funding options and products. Andrew Boal, managing director at Towers Watson, says that at the fund level, funds must improve their offering to members to improve retirement outcomes for the individual. “Is there an opportunity for longevity pooling within funds and how would it work?” he says. “What are the issues related to lifecycle or target-date investing and what is the impact of the size of the account balance? How do funds provide income guarantees?” he asks. For conference program and registration, go to http://guest.cvent. com/d/7dqtvb

34 Investment Magazine February 2011

special report

February 2011 Investment Magazine 35

Broadened and fragmented

Custody in 2011 The Australian custody and

We’re starting to

investment administration market will increasingly become

see some examples

one of global platforms and

where Australian

unbundled services. MICHAEL BAILEY reports.

funds managers are

he days of selling funds managers the ‘securities services’ concept – which bundles investment administration and custody – could be numbered in Australia, according to the chief of a major domestic custodian. The business Andrew Bastow runs in Australia might be called HSBC Securities Services (HSBC SS), but unlike competitors with a similar moniker, HSBC SS offers domestic custody only in Australia, leaving it to others to run middleand front-office services. There is a good reason why HSBC SS has not entered the administration fray here – it is the Australian sub-custodian for a number of global custodians, most notably State Street, which is also in the investment administration and master custody businesses. It would be rude to compete. HSBC SS does offer its global hedge fund administration platform to Australian absolute return managers, which generally have a global investment horizon, and therefore fit with Bastow’s wish for HSBC to be a “window to the world” for its clients here. But there are no plans to enter the broader investment administration market, which looks

keeping one party as custodian, and selecting someone else to be their Jane Perry ... JP Morgan doing more ‘direct custody’

as if it might be starting to fragment in any case, according to Bastow. “We’re starting to see some examples where Australian funds managers are keeping one party as custodian, and selecting someone else to be their administrator. This is a very common model in Europe, but it’s not happened in Australia because ‘securities services’ has been sold as a bundle of both those things. The question has to be asked whether that has diluted the value-add of both strands of the service,” Bastow says. The HSBC SS executive did not name any names, but presumably when he says this he is thinking about Queensland Investment Corporation (QIC), which during 2010, while retaining National Asset Servicing as its core custodian, investigated the outsourcing of middle-office risk measurement and portfolio valuation services, as well as unit registry and unit-pricing functions.

administrator. This is a very common model in Europe, but it’s not happened in Australia because ‘securities services’ has been sold as a bundle of both those things QIC has never announced anything formally, but it’s believed that Northern Trust, which last October announced it had added an Australian investment accounting capability to its global operating platform, was the beneficiary of this move to break up ‘securities services’ as we’ve come to know it. Northern Trust’s roll-out of a platform palatable to Australian taxpayers, and therefore closer to becoming truly ‘global’, was part of an industry-wide trend to players broadening out their offerings.

National Asset Servicing (NAS) is acutely aware that, despite its dominant position in domestic and master custody for Australian investors, it is the last locally owned bank competing in a field where global scale is becoming paramount. And so, NAS moved to consummate its long partnership with Bank of New York Mellon through the latter taking an equity stake. JPMorgan Worldwide Securities Services, meanwhile, focussed on the local issue of shoring up its sub-custody offering, completing the migration of the ANZ Custodian Services business in November, a year after originally acquiring the second-last locally owned sub-custodian. The transfer added 20 per cent to its Australasian assets under custody and swelled its workforce by 150 people, with “close to 100 per cent” of ANZ Custodian Services staff coming across, according to the CEO of JPMorgan WSS’ Australasian business, Jane Perry. The move was part of JPMorgan’s strategy to do more ‘direct custody’ – its term for domestic or sub-custody – in local markets around the world, starting with Australia, New Zealand, Taiwan and India in this region. Nick Rudenstine, a custody and clearing executive at JPMorgan WSS, explained the strategy thus: “This is an important element of the firm’s plans and priorities for

36 Investment Magazine February 2011

international growth. JPMorgan already offers global custody and clearing solutions in the countries in which we are looking to expand. We have extensive relationships with many of the clients with which we want to grow this business, particularly those with cross-border investment flows and those with domestic business in the target markets. We believe we can also add new clients seeking local custody and clearing services and grow these relationships across the firm.” State Street, meanwhile, is looking for an increase in local relationships of the superannuation kind. A few years after announcing its intention to once again seek the custom of Australian superannuation funds – reasoning

SPER0066_CT_HPC_147x202.indd 1

that they had become more sophisticated and funds managerlike in their demands. The US bank has forged a fruitful relationship with Non-Government Schools Super Scheme, and late last year enjoyed the big breakthrough it craved, wresting away REST Super from its long-term partnership with JPMorgan WSS. The chief operating officer of State Street Australia, Paul Khoury, had been foreshadowing the REST deal to would-be recruits to the ‘superannuation unit’ that State Street is building to strengthen its proposition in the market. The former operations manager at legalsuper, Anthony Mian, is one of the notable recruits to the unit so far. The investment operations

special report chief at the time State Street signed with NGS Super, Jo Townsend, is now in the same role at REST Superannuation. State Street’s gargantuan effort to win the business was spearheaded by veteran business development manager, Chris Field. The global aspirations of Australian-based funds managers are a focus for RBC Dexia Investor Services, which has picked up several clients here for its Dublinbased administration service for UCITS, the European funds passport which has also gained popularity among investors closer to home in markets such as Hong Kong. Aubrey Capital Management, the Edinburgh-based global equities shop with a significant

minority stake owned by Australia’s Treasury Group, was the latest client announced last December. The local chief of RBC Dexia Investor Services, David Travers, said he was confident in the future of Dublin as a fund administration domicile, saying it was doubtful that the European Union would force the economically-troubled Irish to increase its corporate tax rate, thereby damaging one of its most successful industries. RBC Dexia also has an eye to the growing exchange-traded fund market, on December 15 revealing it would provide custody and fund administration to BetaShares, a Canadian-backed provider of ETFs giving synthetic exposure to the ASX 200 Resources and Financials sectors.

18/01/11 4:49 PM

special report

February 2011 Investment Magazine 37

TOFA: it wasn’t all for nothing Some in the financial services industry still wonder how they ever got caught up in the Taxation of Financial Arrangements (TOFA) legislation. Some lament that the Australian Custodial Services

investment administration market, DST knew that its HiPortfolio system – still the weapon of choice for most of Australia’s major custodian/fund administrators – had to be ready for the new regime. “This was the biggest change to

Australia’s investment tax regime that many of my colleagues had seen in their working lives; you’d need to go back to the introduction of capital gains tax for something comparable. So since 2008 there have been 35,000 hours of

development contributed to the project from us, and a further 5,000 from members of our advanced user group (AUG),” Rhind reports. Those AUG members on the record as now being live for TOFA on HiPortfolio include

Association was not more successful in its lobbying for exclusion from obligations seen as primarily aimed at corporate finance. However now that TOFA has been live for more than six months, some indirect benefits are being hailed by practitioners. MICHAEL BAILEY reports.

TOFA

might have been in force for eight months as you read this, but according to David Rhind, the solutions manager for asset servicing at DST Global Solutions (DST), the new tax reporting regime’s true acid test will not occur until after June 30, 2011. “Nobody will really know how successfully TOFA has been implemented until July, when 2010/11 reports are submitted to the Australian Tax Office (ATO),” he says. “That being said, the ATO would already have received some provisional reporting under the TOFA regime, and we’re very pleased with how it’s all been going. Of course the work is far from over, because changes to the regime will no doubt be made as unintended consequences are discovered.” DST has been working towards implementing TOFA, the new Taxation of Financial Arrangements legislation, since 2008, when the Government, under then Assistant Treasurer Nick Sherry, first released industry discussion papers on the changes. As the 10-tonne gorilla loomed in front of the Australian

Our innovative technology is fast and accurate. So are the investors who use it. In this market, speed and accuracy have never been more critical. Fortunately for you, Northern Trust’s innovative, fully integrated technology provides access to timely data for faster, better decisions on a rapidly moving global stage. Northern Trust Passport®, for example, is a market-leading, customisable portal that gives you instant access to data and lets you drill down on demand. That’s just one of the many reasons why InformationWeek has named us One of the Top 100 Technology Innovators for five years running. To learn more about our latest innovations, call Paul Cutts at +613 9947 9302 or paul_cutts@ntrs.com.

Asset Servicing | Asset Management | Wealth Management © 2011 Northern Trust Corporation. Northern Trust operates in Australia as a foreign authorised deposit-taking institution (foreign ADI) and is regulated by the Australian Prudential Regulation Authority and the Australian Securities & Investments Commission (AFS Licence No: 314970).

38 Investment Magazine February 2011 BNP Paribas Securities Services, JPMorgan Worldwide Securities Services, NAB Asset Servicing and Suncorp Life. Within the TOFA Act, there are six methods of bringing tax gains and losses to account, supported by a balancing adjustment to arrive at a final result when the taxpaying entity ceases to hold the arrangement. Four of these methods are optional and the remaining two occur by default. “We found the default compounding accruals method to be the most complete in relation to the assets managed by our clients,” Rhind says. He points out that the four elective tax-timing methods – hedging, financial reports, fair value and foreign exchange retranslation – can be accommodated within the compounding accruals approach. Rhind predicted that where TOFA could make the most impact is around capital gains tax (CGT) discounts for profits made on equities. Where a taxpayer holds equities at fair value (for accounting standards purposes) their entry into TOFA needs to be carefully thought through, as an inappropriate entry could result in the loss of the CGT provisions for discounting. A major challenge for HiPortfolio clients that emerged in

special report

TOFA has forced [checking of data quality] to become more stringent than it was, and ultimately it will reduce the need for costly and timeconsuming re-works in the lead-up to tax reporting time, says DST’s David Rhind TOFA’s first six months was caused by the winning of new custodial contracts. How could the newly appointed service providers to bring assets held by the departing custodian into line with TOFA? “Historically, when assets were transferred between custodians, the ‘losing’ custodian could basically participate in the novation and then say ‘my responsibility finishes tonight’. TOFA makes that more complex – you need historical information on a portfolio’s valuation to be able to predict forward information…You [also] need to understand cashflows in relation to a purchase, as those

David Rhind ... 2010/11 reports to the ATO will be TOFA’s true test

cashflows affect future cashflows in relation to accruals.” The potential for large grey areas to emerge during a transfer of assets was recognised early on by Paul Toepfer, the head of fund operations at State Street Australia. “One of the issues being looked at is dealing with approximations where historical data is not available. Estimations require assumptions, but how will this be communicated to the ATO?” Toepfer asked last year. The answer, according to DST’s Rhind, will only really become clear after June 30 this year. Rhind is philosophical about the impact of TOFA on the funds management industry. He acknowledges that compliance with TOFA has been a costly exercise –

costs that will ultimately be borne by investors – but he points to some downstream benefits. “It is true to say that the TOFA legislation was really aimed at investment banking and corporate finance, where deals are done in a way that’s not as tightly regulated as funds management. “But there are still many comparative advantages and intangible benefits to be gained from becoming TOFA-compliant, particularly for those who got in early. A big intangible benefit I see is the scrutiny it has placed on data quality in relation to reports. TOFA has forced it to become more stringent than it was, and ultimately it will reduce the need for costly and time-consuming re-works in the lead-up to tax reporting time,” he says. “TOFA has helped place the quality gateways much earlier on in the process.” With TOFA now live, the industry barely drew a postimplementation breath before the next challenge emerged on its horizon – a proposed new regime for the taxation of Managed Investment Trusts went ex-submissions last November, but will subject to government consultation with the industry in the early part of this year.

PaRtneRing with you foR 60 yeaRs Asset Servicing has nurtured Australia’s growing financial institutions by providing core custody services for 60 years. Richard Coia, Managing Director, Sales, Asset Servicing, T: 03 8641 1633, E: richard.coia@nab.com.au Brad Bowler, Head of Product Sales, Asset Servicing, T: 03 8641 1267, E: brad.d.bowler@nab.com.au the complete solution: Custody • Accounting • Tax • Performance • Compliance • Cash Facilities Securities Lending • Foreign Exchange • Master Manager • Passive Currency Overlay • Tax Parcel Optimisation

special report

February 2011 Investment Magazine 39

How to ‘master’ the service of super fund investment teams Master custodians face a big challenge in supporting their super fund clients’ moves into the direct funds management space, writes BRUCE RUSSELL of Shoreline.

Custodians who have a track record in servicing investment managers may believe that it’s a

well-documented trend in the Australian market is the increased “internalisation” of investment management activities by superannuation funds. This is often driven by the desire to gain increased oversight and control over investment assets to ensure alignment with the overall risk and return objectives of the fund. Further, there is the belief that, when compared to the management

simple case of importing these services to super funds. This attitude is dangerous fees paid away to external investment managers, significant cost savings can be achieved by developing internal capability.

Whilst the investment business case for developing internal investment manufacture may be clear, the operational implications can often be significant and represent both a threat and an opportunity to custodians servicing these funds. Custodians who have a track record in servicing investment managers may believe that it’s a simple case of importing these services to super funds. This attitude is dangerous as it fails to recognise the key differences between investment managers and super funds. The following outlines Shoreline’s view of the key differences and the challenge

and opportunities this presents to custodians. 1.Differing investment data requirements

Investment managers are typically engaged to manage assets at an individual portfolio level in accordance with their particular investment or product mandate. Accordingly, there has historically been little need to view investment asset information from a total enterprise or ‘house’ view. Consequently, the portfolio data delivered by custodians is typically at an individual portfolio or product level with limited requirement to ‘roll up’ this data into consolidated

finely tuned funds administration Through the Composer™ and ComposerWeb™ platforms, GBST’s market leading software solutions to administer wraps, managed funds, structured and retirement products deliver agility and scope within a single, client centric, innovative system.

www.gbst.com

special report

40 Investment Magazine February 2011 structures to enable an overall view of portfolio positions. Further, many investment managers retain their own data repositories and are not dependent on their custodian for this information. Unlike investment managers, super funds are responsible for the management of the entire fund’s assets. Many of the investment activities in which the funds are involved, such as the implementation of tactical asset allocations or the equitisation of cash balances, require visibility of the entire fund’s assets, often down to a security level.

more robust data management solutions, such as an enterprise data warehouse to deliver reporting and data to the super fund clients.

Risk testing procedures such as VAR and simulation testing, while being considered at the cutting edge of investment management processes, represent commonplace activities for super funds

2.Enhanced investment risk reporting requirements

Bruce Russell

Further, as this information is used to support investment management processes, the ability to ‘slice and dice’ this information to meet the specific needs of the investment professional is a key requirement. Systems historically deployed by custodians to provide investment reporting, such as investment accounting systems, are typically structured in terms of the ‘portfolio level’ view required by investment managers. Whilst this has been largely adequate to meet the requirements of investment managers, it is unlikely to be sufficient to address the data requirements of super funds and may require the deployment of

By operating as an agent, investment managers have been primarily motivated on achieving investment returns at a product level. As long as they complied with the rules of the investment mandate, they have traditionally had relatively unsophisticated market risk reporting requirements. In many cases risk reporting has been deployed as a front office decision support tool, with limited involvement from the middle or back office. Super funds, conversely, operate as an investment principal and as such carry a direct ‘balance sheet’ exposure to market risk. Whilst achieving investment returns is also a key business driver, the ability to manage investment risks is a fundamental requirement and requires the fund to actively monitor and manage its market risk exposures. Risk testing procedures such as value-at-risk (VAR) and simulation testing, while being

considered at the cutting edge of investment management processes, represent commonplace activities for super funds. To save funds from going down the path of deploying expensive and complex risk management systems, it is our view that market risk reporting should be a core component of any custodian offer to this market. 3. Reliance on custodian expertise

A number of custodians have built their administration service offering to the market off the back of large scale outsourcing of functions from investment managers to their organisations. Accordingly, custodians have been able to leverage the knowledge resident within investment managers, with the key focus being on the transfer of knowledge from the investment manager to service provider. Where services have not been transitioned, there has not been the need for custodians to develop knowledge over these processes, so there is still limited knowledge by custodians over some front and middle office activities that have remained insourced. Where super funds are developing internal investment management capability, there may be limited knowledge resident within the organisation with respect to operational processes required to support investment management functions. To bridge this gap, super funds may look to their custodians to supply this expertise, noting this may extend to operational processes outside the scope of outsourced functions. Whilst this likely requires custodians to ‘tool up’ their current knowledge base, it also allows them the opportunity to define processes that align to their standard operating model.

4. Leveraging custodian technology to support investment processes

Most investment managers have existing technology to support investment processes such as portfolio management and dealing. Custodians are expected to provide the required data to support the ongoing operation of these systems. Where super funds have made the decision to insource investment management they will often not have front office systems in place, and will need to select and implement these platforms. Depending on the system selected, this often represents a challenge to custodians insofar that many systems require data to be provided that cannot be easily supplied by custodians without a significant change to their model. Further, the super fund may not have the expertise required to select and implement this system, resulting in a protracted transition period. In these circumstances, it is our view that the super fund and custodian should consider whether there is the opportunity for such systems to be supplied by the custodian even where this represents a departure from a traditional outsourcing model. For example, the provision of dealing systems is not something that custodians would typically offer to the market but is something that could be sought by super funds, particularly those entering the investment manufacturing space.

Bruce Russell is a director of Shoreline, a specialist firm providing management consulting advice and implementation services to the investment industry.

performance

February 2011 Investment Magazine 41

Europeans eye Australia for Asia exposure Australian hedge funds returned 0.95 per cent in November 2010, taking the year to date performance to 5.72 per cent.

erformances of the various hedge fund strategies ranged from 9.05 per cent (YTD) for fixed income to 1.39 per cent (YTD) for fund of fund – low volatility. Standard deviation for all strategies fell to 11.53 per cent on average, compared to 11.85 per cent three months earlier. The top three performing funds (YTD) were 36 South Regent Fund SPC (96 per cent), 90 West Global Basic Materials Fund (54 per cent) and Naos Small Companies Fund (51 per cent). However, their annualised standard deviations were also high at 79 per cent, 23 per cent and 28 per cent respectively. Of the top 10 best performing funds (YTD), half used investment universes that dealt with resources or Asia. This result ties in with my recent international roadshow where I found that more and more sophisticated investors

Damien Hatfield

(e.g European family offices) are looking at Australian managers to benefit from our country’s growing relationship with China, Asia in general, and India. These offshore investors are quite interested in placing money with our local hedge fund managers but the lack of clarity in tax, particularly withholding tax, is a stumbling point. Withholding tax is levied at 8 per cent on ‘revenue’ streams. The issue is whether a trading gain by a hedge fund manager is assessed as ‘revenue.’ To date, these gains have not been assessed as such, resulting in some uncertainty.

For example, one of the major accounting firms previously required that the potential withholding tax liability be included in the audit of a particular hedge fund. However, I understand that the accounting firm no longer requires this. A number of hedge managers who are keen on attracting international investors have had meetings with the Australian Tax Office and Treasury to seek clarity on this. The good news is that on December 17, the Board of Taxation released its discussion paper on the review of the taxation treatment of collective investment vehicles in Australia. The key objective of the review is to recommend changes that would remove tax impediments to international investment in Australia. Submissions to this discussion paper are due by February 28 this year. For an Australian-based manager trying to win offshore investment, the most common structure currently being used is a Wholesale Unit Trust Feeder (or Retail) into a Cayman LLC as the hub. The Aus-

Any manager with an open fund, open to investors in Australia, is eligible to submit performance data. Information to data@tripleapartners.net

As of October 31, 2010

Return (1 month) 3.08% 1.44% -5.13% 1.77% 1.99% 4.04% 0.94% 2.86% 3.57% 5.44% 1.95%

Damien Hatfield is a director of Triple A Partners Australia

Report Compiled in association with

Dow Jones Credit Suisse Hedge Fund Indexes Dow Jones Credit Suisse Hedge Fund Index Dow Jones Credit Suisse Hedge Fund Index Convertible Arbitrage Dow Jones Credit Suisse Hedge Fund Index Dedicated Short Bias Dow Jones Credit Suisse Hedge Fund Index Emerging Markets Dow Jones Credit Suisse Hedge Fund Index Equity Market Neutral Dow Jones Credit Suisse Hedge Fund Index Event Driven Dow Jones Credit Suisse Hedge Fund Index Fixed Income Arbitrage Dow Jones Credit Suisse Hedge Fund Index Global Macro Dow Jones Credit Suisse Hedge Fund Index Long/Short Equity Dow Jones Credit Suisse Hedge Fund Index Managed Futures Dow Jones Credit Suisse Hedge Fund Index Multi-Strategy

sie manager should use as the base currency, US$, with Euro and A$ share classes. The hedging policy needs to be looked at closely as we see quick falls in the A$ from time to time and you need to be careful of a margin call on the hedge position. In addition, an Aussie manager could use a UCIT III structure. This is particularly of interest if you want to market into Europe or the Independent Financial Advisor route in Asia. UCIT IIIs are selling like hot cakes. We met a high-end distributor in Geneva recently on a roadshow and we were told that they are getting significant inquiry for Australian assets via UCIT structures. These developments suggest the road ahead, for local hedge and traditional fund managers trying to win offshore investors, is being upgraded ... hopefully into a freeway for money inflows!

Return (3 months) 5.54% 4.16% -10.08% 4.29% 0.97% 6.76% 3.50% 4.65% 6.82% 5.98% 5.01%

Return (1 year)

14.25% 14.61% -17.28% 14.27% 2.13% 15.89% 16.54% 17.32% 12.08% 15.32% 12.78%

Annualised Return (3 years) 4.49% 5.67% -7.76% 1.49% -12.76% 6.32% 2.53% 9.31% 3.53% 10.93% 3.81%

Annualised Return (5 years) 7.98% 7.40% -4.43% 8.59% -4.05% 9.61% 4.15% 11.80% 7.65% 9.39% 7.25%

Source: Credit Suisse Hedge Index LLC. The performance shown is for illustrative purposes only and does not represent performance of any Credit Suisse investment. Performance shown is in AUD and net of underlying manager fees.

performance

42 Investment Magazine February 2011

This report is produced in association with Triple A Partners Australia. Any manager with an open fund, open to investors in Australia, is eligible to submit performance data. Information to data@tripleapartners.net

Hedge Fund performance Survey Fund Name

November Performance %

Year To Date %

Annualised (M) Annualised (M) Compound Standard Return % Deviation %

2009 Return %

2008 Return %

2007 Return %

Inception Date

Cash Based PM Capital Enhanced Yield Fund

0.50

6.64

7.19

2.50

10.96

Macquarie Special Events Fund

1.33

4.97

12.05

5.91

41.32

MM&E Capital Trust 2

0.30

2.43

6.49

4.81

7.48

0.83

6.05

Mar-02

-5.11

12.70

Oct-03

-5.98

3.40

Jul-04

Event Driven MM&E Capital Trust 1

Pengana Asia Special Events Fund

RAB Cross Europe Fund Ltd Class B (USD)

0.62

0.40

1.21

2.77

5.58

0.04

7.32

7.65

7.39

4.32

5.02

5.72

7.13

14.27

1.05

-4.89

3.56

-0.94 0.29

2.07

Jul-02

Jul-08

Nov-98

Fixed Income HCAP Diversified Fund (AUD)

Kapstream Wholesale Absolute Return Income Fund

QIC Global Fixed Interest Alpha Fund (AUD - Onshore)

RAB European Credit Opportunities Fund Ltd-Class B (USD) Ramius Global Credit Fund Ltd - Class B

-0.87

14.03

14.81

8.27

0.41

0.74

9.09

5.26

0.43

-0.96

0.49

6.25

7.78

6.71

9.23

1.04

11.41

16.44

16.66

2.76

3.28

-1.74

24.18

79.01

0.69 7.77

7.04

46.35

-28.86

13.60

7.67

2.41

11.21

9.03

2.79

Dec-09 Jun-07 Jul-05

Jul-01

Oct-09

Global Macro/Commodities/Futures 36 South - Cullinan Fund SPC

3.46

36 South - Regent Fund SPC

9.96

96.18

51.34

7.10

5.17

4.74

36 South - Dresden Green SPC Active Global Commodities Fund (AUD$)

Antipodean Capital Global Currency Strategy

Apeiron Global Macro Fund - Class A (EurekahedgeHF) Argus Dynamic Multi-strategy Program Ascalon H3 Commodities Fund

Attunga Agricultural Trading Fund (EurekahedgeHF) Attunga Metals Trading (Offshore) Fund

Attunga Power & Enviro (Offshore) Fund Attunga Power & Enviro Fund AWJ GSF

BlackRock Asset Allocation Alpha Fund - Class D BlackRock Global Ascent Fund* Blue Sky World Inc. (Class A)

Commodity Strategies - Long Only

Commodity Strategies Ltd â&#x20AC;&#x201C; Global Commodity Fund Long-Short Excalibur Absolute Return Fund

Global Trading Strategies (Cayman) Fund

GMO Systematic Global Macro Trust - Class B

3.89

-0.53

5.43

-2.12

3.20

5.06

5.88

9.70

11.78

7.00

1.37

14.84

-8.32

-2.19

11.17

25.73

4.38

11.28

16.15

8.84

7.30

-14.18

0.03

-0.15

-0.89

0.14

10.94

2.26

8.90

13.54

-3.52

13.55

12.09

2.41

18.23

23.70

0.41

2.10

0.95

-1.03

-0.12

-4.52

9.40

-1.18

20.59

12.29

16.08

14.74

20.86

-1.23

7.66

-0.55

-3.03

0.58

6.05

RTM Absolute Return Fund

Taurus Precious Metals Strategy

-6.93

-4.27

Kohinoor Series Two Fund

RAB Special Situations Fund (USD)

15.77

7.21

13.30

6.57

RAB Octane Fund Ltd. Class D (USD)

8.66

27.30

8.48

4.05

RAB Energy Fund - Class B-1

12.03

21.39

25.14

-1.04

MGH Investment Fund Ltd

44.85

10.75

15.46

Kaiser Trading Fund 1X SPC

6.95

9.38

20.82

25.08

12.29

19.12

Merricks Capital Soft Commodities Fund

21.07

4.95

22.93

Macquarie Commodity Alpha Segregated Portfolio

75.75

12.72

14.36

Kaiser Trading Fund 2X SPC (EurekahedgeHF)

-3.95

14.69

21.82

3.80

Investment Science Alliance SRA-16 Fund

22.66

-5.33

1.15

-2.58

Investment Science Access SRA-16 Fund

34.54

18.31

10.69

-8.65

Headland Global Diversified Fund

41.19

17.09

10.62

-3.65

-0.12

5.71

8.48

H3 Global Strategies Fund

-8.20

86.79

8.68

7.50

4.92

-6.75

-3.78

-0.98

-0.41

20.79

22.08

12.23

8.42

Graham Proprietary Matrix-10V Portfolio (USD - Offshore)

-1.58

16.89

-13.25

0.98

20.32

12.74

H3 Global Commodities Fund - Class AUD

17.99

13.00

14.48

45.44

10.47

10.14

1.42

19.51

27.78

0.23

-2.50

3.60

13.04

-1.80

Graham K4D-15V Portfolio (USD - Offshore)

27.01

14.81 11.85

2.02

18.43

Graham K4D-10V Portfolio (USD - Offshore)

6.75

9.73

58.57

15.29

12.05

0.30

19.64

34.42

4.18

-0.55

Graham Discretionary-6V Portfolio (USD - Offshore)

-1.70

4.25

5.12

23.77

15.00

0.20

15.21

-8.43

2.58

-3.38

10.77

Sep-07

12.54

16.18

1.63

-8.07

13.63

-2.45

0.87

Jun-09

18.77

1.41

-1.85

-5.69

13.20

9.40

13.35

3.90

35.63

16.90

-2.53

14.55

1.61

9.96

6.88

7.87

51.80

6.02

-4.32

8.39

15.49

13.78

-1.85

10.93

13.38

7.70

20.35

43.23

18.65

24.47

86.90

-8.36

15.00

37.99

3.33

28.71

35.38

12.34

12.42

54.12

33.87

23.08

3.78

-1.60

-2.60

-2.55

4.99

4.06

-0.20

6.60 8.90

-5.71

10.51

20.91

-0.98

11.57

8.49

3.58

12.89

5.41

6.52

0.92

20.47 9.65

5.65

11.38

12.28

5.21

11.76

-7.78

15.28

19.54

1.83

8.68

7.44

73.29

7.05

8.04

16.61

-21.67

10.03

11.86

-31.12

16.86

8.69

6.57

7.00

4.94

-60.11

-69.76

4.96

9.45

Sep-06

Dec-99 Feb-06

Feb-06 Oct-96

Feb-08

Apr-08 Feb-10 Jun-08

Aug-06 Mar-10 Jun-06

Feb-03

Feb-06

Dec-99 Oct-07 Jul-06

Nov-06 Feb-06

Sep-03

Feb-95

Feb-95 Jul-99

Nov-05

May-08 Nov-06

Nov-07

May-10 Apr-04 Oct-06

Aug-05 Sep-07 Jan-08

Jan-03

Jun-04 Jul-00

Jul-03

Sep-05

Feb-10

Long/Short Equity 90 West Global Basic Materials Fund (AUD - Onshore)

49.03

-11.90

Jul-08

performance

February 2011 Investment Magazine 43

Hedge Fund performance Survey Fund Name

November Performance %

Agora Absolute Return Fund

-1.27

Allard Growth Fund

Allard Investment Fund

AR Capital Management The Ascot Fund

Aviva Investors High Growth Shares Fund BlackRock Equitised Long Short Fund*

BlackRock International - Alpha Advantage Equity Fund* Blue Sky Japan - Class A USD

Cadence Capital Limited (EurekahedgeHF)

Hayberry Australian Equity Fund (EurekahedgeHF) Herschel Absolute Return Fund (EurekahedgeHF) Jaguar Australian Leaders Long Short Unit Trust

K2 Asian Absolute Return Fund (EurekahedgeHF)

K2 Australian Absolute Return Fund (EurekahedgeHF)

K2 Select International Absolute Return Fund (EurekahedgeHF)

-0.45

12.24

13.92

-0.33

-10.48

13.31

7.93

11.81

12.33

2.02

2.34

15.40

-2.55

0.61

4.23

7.77

Platinum International Brands Fund

-4.24

-3.07

11.66

1.32

-31.34

0.07

0.69

-0.78

0.04

-0.58

16.46

8.00

13.78

12.50

9.05

11.98

5.83

26.32

44.71

7.15

13.78

8.30

4.48

20.80

0.67

-1.23 3.61

5.44

16.49

22.21

18.20

-2.40

7.01

11.37

20.29

1.20

17.16

13.72

-0.90

5.34

-2.75

5.38

-1.99

-1.46

PM CAPITAL Australian Opportunities Fund AUD

-0.20

2.29

10.82

-5.59

9.43

RAB Europe Fund Ltd-Class A (EUR)

RAB Global Mining and Resources Fund Ltd. Class B (USD) Ramius Value & Opportunity Fund, Ltd. Sixtina Falcon Fund

SPARX Long-Short Fund Ltd - USD Summit Water Equity Fund, L.P. Tribeca Alpha Plus Fund

WaveStone Capital Absolute Return Fund (EurekahedgeHF)

1.97

6.72

2.47

14.75

-2.12

-6.84

-3.99

1.86

0.58

-1.19

-9.92

11.28

5.20

18.91

16.19

3.36

7.61

4.32

3.67

-0.67

-1.23

Atrium Australian Equity Market Neutral Fund

-0.50

-3.34

BlackRock Australian Equity Market Neutral*

-1.53

1.98

-8.16

9.89

8.98

11.40

10.36

10.35

9.01

-29.09

12.65

43.50

-30.85

20.48

28.81

174.85

-63.59

21.69

12.29

-8.92

-15.68

-9.23

34.82

13.78

22.68

62.30

20.32

156.64

22.21

52.98

17.62

28.11

15.09

40.04

8.66

-25.96

-58.04

11.71

19.73

19.37

30.98

13.55

20.51

19.54

16.16

4.32

11.23

27.88

12.93

50.25

5.77

9.95

-32.87

49.13

-25.01

-2.93

-29.30

-7.79

7.88

9.74

22.23

9.01

13.44

Plato Australian Shares 130/30 Composite

0.37

-3.70

17.82

10.51

Prodigal Equity Relative Value Fund (EurekahedgeHF)

-5.44

14.11

8.33

-2.30

13.87

-15.75

0.50

PM CAPITAL Absolute Performance Fund AUD

-22.44

7.65

-3.46

Platinum Unhedged Fund

22.53

13.09

-2.60

-0.29

-28.35

2.07

Platinum International Technology Fund

6.50

16.36

-18.61

26.92

3.89

0.30

41.03

28.81

-5.45

-3.27

-33.97

31.92

38.48

-24.26

-34.73

82.39

40.77

23.84

-35.08

31.71

-1.00

Platinum Japan Fund - AUD

6.53

25.47

Jul-03

-17.97

11.13

Platinum International Fund

Platinum International Health Care Fund

7.10

12.99

0.50

-4.61

12.80

10.38

20.26

6.36

16.62

10.12

5.01

-1.40

8.83

4.90

51.37

-24.87

28.86

15.56 26.07

-1.43

45.37

Mar-04

5.24

-45.91

-18.32

-7.40

31.15

3.27

3.37

0.02

-14.77

-2.17

30.71

-20.67

4.38

31.94

-43.12

29.06

60.64

12.57

8.91

76.52

16.89

-6.95

-42.02 -47.84

-16.20

12.20

13.68 1.35

12.30

-20.80

6.33

-45.49

5.90

7.30 9.41

0.43

-5.95

-11.95

18.42

55.95

-38.99

29.60

9.80

12.85

5.36

37.18

-8.43

-20.71

Inception Date

9.78

16.89

-32.84

53.45

2007 Return %

-28.83

43.54

13.93

17.56

13.18

4.98

20.01

24.39

14.38

12.76

49.20

24.37

20.99

1.39

5.47

15.98

1.89

4.82

13.74

Platinum European Fund

14.35

-2.59

Naos Small Companies Fund (EurekahedgeHF)

Platinum Asia Fund

-13.82

5.95

-0.83

Pengana Global Resources Fund

25.45

11.27

MM&E Capital Takeover Target Fund (AUD - Onshore)

Optimal Japan Fund USD

9.77

-3.13

-1.12

OC Concentrated Equity Fund

-12.23

0.45

12.06

2008 Return %

23.99

13.32

0.60

2009 Return %

8.60

13.84

Macquarie Australian Equity Income Fund

Naos Absolute Return Fund (EurekahedgeHF)

7.80

16.82

-0.10

Mathews Velocity Fund

-5.36

Annualised (M) Annualised (M) Compound Standard Return % Deviation %

-1.80

Lanterne Arran Fund (EurekahedgeHF)

Lanterne Strategic Asia-Pacific Fund (EurekahedgeHF)

Year To Date %

7.02

28.35

Jan-96

Aug-05 Dec-99

Dec-01 Sep-07 Jun-00

Oct-05

Feb-03

May-06 Mar-03 Sep-99 Oct-99 Jan-05

Aug-04 Jan-02

Apr-04 Jul-06

Aug-05 Feb-05

Feb-05

Dec-03 Oct-99

Mar-07

Mar-03 Jul-98

May-00

May-95 Nov-03

May-00 Jul-98

Feb-05 Jan-08

Nov-98 Jan-00 Jan-08

Nov-99

Nov-07 Oct-02

Feb-10 Jun-97 Jan-99

Sep-06

Market Neutral Equity Bennelong Long Short Equity Fund(NET) Fortitude Capital Absolute Return Trust Macquarie Asian Alpha Fund

Macquarie Global Multi Events Segregated Portfolio Pengana Australian Equities Market Neutral Fund Plato Australian Shares Market Neutral Fund QIC Asia Pacific MArket Neutral

Taurus Global Resources Hedge Fund Limited

2.87

1.37

-3.84

Sep-01

17.81

20.77

3.25

9.58

3.08

5.91

12.05

9.48

-0.92

13.37

-5.24

-2.76

14.84

-1.90

9.96

10.10

27.22

25.05

2.06

16.82

23.65

13.08

0.24

Oct-09

12.75

14.34

-0.54

-1.16

21.81

1.68

1.56

3.76

8.75

9.07

4.72

0.60

7.51

1.51

0.72

6.45 7.16

18.01

6.62

8.49

5.16

6.00

5.66

-6.29 -9.47

28.45 19.21

8.41

4.08

8.96

7.89

4.63

Jan-03

Mar-05 Oct-05 Jan-07

Sep-08

Aug-07 Jul-09

Feb-10

Multi-Strategy BlackRock - Multi Opportunity Fund*

1.50

13.55

9.52

4.96

13.06

-1.33

7.04

Jul-04

E.I.P. Overlay Fund

0.52

2.24

9.55

6.75

8.34

17.31

22.90

Jun-02

E.I.P. Aleph Fund (EurekahedgeHF)

Merricks Capital Multi-Strategy Fund

2.37

3.72

5.97

7.72

9.32

6.99

7.25

5.71

9.48 7.36

5.29

Apr-09 Jan-08

performance

44 Investment Magazine February 2011

Hedge Fund performance Survey Fund Name Prodigal Absolute Cayman Fund

November Performance %

Year To Date %

0.92

10.03

Annualised (M) Annualised (M) Compound Standard Return % Deviation % 12.20

14.17

2009 Return % 57.39

2008 Return % -20.38

2007 Return % 8.50

Hedge Fund of Funds

Inception Date Jun-07

Global Low Volatility Aurum Investor Fund Ltd (EurekahedgeFOF)

-0.09

0.31

7.97

7.64

8.48

-6.28

5.58

Sep-94

Lyxor Global Arbitrage Fund Ltd Class (USD)

-0.47

2.46

2.76

3.25

3.49

-1.91

5.46

Jul-06

Aurum Isis Fund Ltd (EurekahedgeFOF)

0.12

1.39

7.42

3.30

7.46

-4.90

9.82

Global Macro Focus Special Opportunities Fund Ltd

FRM Sigma Fund PCC Limited - Class A Ramius RTS Global Fund

6.02

-3.27

-2.13

1.01

10.67

2.14

Apr-98

2.44

16.43

Jul-10

2.86

6.23

Mar-10

12.08

15.10

-10.19

33.23

19.98

Nov-05

Long/Short Equity APAM Absolute Equity - Asia Fund

Attalus Long-Short Equity Fund Ltd AWJ Fund

BNP Paribas - Fauchier Partners Absolute Equity Trust BT Total Return Fund (EurekahedgeFOF)

Coastal Hedged International Equity Fund (AUD - Onshore) Focus Europa Fund

HFA International Shares Fund HW

NZAM Global Fund Ltd (Class AUD - AUD - Offshore) Penjing Asia Equity Fund - Class A

0.48

-3.40

4.76

12.06

-3.98

-0.91

-1.85

10.26

6.77

8.79

0.51

1.92

5.45

-0.41

0.77

0.51

0.72

0.46

-0.03

0.07

1.50

5.36

5.43

2.21

5.80

1.36

6.65

5.86

2.77

8.72

5.90

4.33

6.85

7.98

10.76

18.56

May-06

-9.71

28.63

Jul-00

-18.12

17.24

5.53 3.15

9.84

8.33

13.41

6.60

4.98

5.15

-8.61

8.92

-16.09

5.90

4.63

-19.33

2.64

8.17

-4.76

11.16

2.93

Feb-01 Jan-10

Jan-01

Oct-04 Jan-97

Apr-01

Dec-09

2.26

-3.10

13.57

25.09

-30.84

2.31

Oct-07

-0.46

0.69

5.55

5.00

12.54

-21.42

12.40

Feb-00

0.52

4.66

3.44

7.27

17.72

-12.86

3.98

Sep-07

Multi-Strategy Attalus Multi-Strategy Fund Ltd

Aurum Multi Strategy Dollar Fund Ltd.

BNP Paribas - Fauchier Partners Absolute Return Trust

CCP Global Inefficiencies Fund Segregated Portfolio (USD) CCP Strategic Fund (USD)

Coastal Magnum Diversified Performance Fund (AUD - Onshore) Focus Opportunity Fund Focus Select Fund Ltd.

FRM Absolute Alpha Fund PCC Ltd Diversified

-0.32

-0.05

0.23

0.31

0.28

0.15

0.00

FRM Absolute Alpha Fund PCC Ltd Opportunistic

-1.20

GMO Multi-Strategy Trust

-1.09

HDF Fixed Income Alternative Class A USD

-0.01

FRM Credit Strategies Fund PCC Ltd - Class A HDF Eurovest Class A USD

HDF Xiphias International Class AA USD HFA Diversified Investments Fund HW

Liongate Multi Strategy Fund - USD Class Lyxor Diversified Fund Ltd Class (USD)

Ramius Alternative Replication Fund Ltd

Select Alternatives Portfolio (AUD - Onshore)

1.09 0.73

-0.31

0.13

0.76

-0.52

-0.38

0.80

3.04

3.95

2.92

-0.23

2.09

5.98

1.97

1.22

1.84

7.18

3.07

7.64 1.73

-1.84

8.83

2.51

-30.02

21.53

5.81

7.49

8.21

-14.73

11.32

13.42

-23.47

6.56

5.91

5.81

6.52 6.64

1.83

3.52

-9.63

8.50

11.40

1.79

2.14

4.06

-5.99

10.83

10.06

4.97

3.93

10.74

0.57

5.07

3.33

5.21

4.80

4.39

9.52

3.37

0.31

6.13

5.68

11.32

7.92

15.32

5.14

5.29

6.26

-11.86

-20.96

16.68

-2.74

14.14

6.46

12.84

-14.88

8.89

14.76

-22.43

7.39

6.94

-19.68

5.70

3.35

-2.01

8.11

7.07

19.05

5.12

3.64

6.19

4.61

8.43

8.66

18.52

-15.56

-28.79

-9.99

-6.71

16.71

18.30 5.37

7.06

7.93

9.27

9.37

17.71

10.63

2.25

7.87

12.53

-15.60

9.64

Jan-07 Jul-07

Jun-06 Jul-00

Jul-96

Aug-04

Nov-02

May-98

May-06 Jul-03

Jan-00

Jan-97

Oct-05

Apr-01

Apr-04 Jul-06

Oct-09

Apr-04

Specialist CCP Greater China Fund Segregated Portfolio (USD) Penjing Asia Market Independent Fund - Class A Focus Recovery Fund Ltd.

2.26

6.00

5.98

10.09

16.63

-20.06

25.22

Apr-07

0.46

3.74

7.34

5.54

19.51

-13.43

10.16

Mar-03

-0.03

2.48

3.66

3.53

12.27

-3.88

Strategy Average Event Driven

Fixed Income

Global Macro / Commodities / Futures Long Short Equity

Market Neutral Equity

Multi-Strategy

FoF Global Low Volatility FoF Global Macro

FoF Long/Short Equity FoF Multi Strategy FoF Specialist

0.77

3.16

1.47

6.91

12.26

7.65

10.04

-0.15

1.39

6.05

0.22

2.06

-0.10 1.29 0.53

9.05 6.21

1.81 7.90 0.21

0.03

0.90

4.61

3.29

4.07

8.18

11.30

11.12

9.51

5.16

14.25

9.14

18.44

4.12

15.88

-4.72

15.07

37.70

-22.20

6.13

9.93 8.16

7.55

10.65

7.77 19.13 0.22 12.81 4.73

6.48

12.59

-10.19

4.85

6.37

9.83

5.66

5.43

14.24

5.79

5.16

-3.33

5.75

15.37

1.32

7.30

-4.36

33.23

6.95

19.98

8.54

-12.09

6.39

16.14

-12.46

12.23

11.53

19.00

-7.80

12.81

-14.15

11.92

11.14

TOTAL Average

0.95

5.72

9.66

Oct-07

performance

February 2011 Investment Magazine 45

Long-Only Survey International shares - 31 December 2010 COMPANY NAME

1 Y RETURN

3 Y RETURN

Australian shares - 31 December 2010

5 Y RETURN

Marathon

9.7 (1)

-3.9 (4)

1.5 (2)

Fidelity Global

7.2

-5.9 (11)

-0.3 (6)

Alliance Global Thematic

6.2 (3)

Investec Global Equity

5.5 (4)

Magellan

3.8 (5)

Goldman Sachs

3.8

(2)

-8.9 (23)

-1.2 (9)

3.4 (1)

(6)

-7.3 (14)

-0.8 (7)

-11.0 (37)

-2.5 (13)

Investec Global Strategic

3.6 (7)

Schroder Global Active Value

3.0 (8)

-4.3 (6)

Perennial

2.2

(9)

-9.2 (25)

-3.9 (24)

Investec Global Aggressive

1.6 (10)

-9.4 (27)

-1.4 (10)

Wellington Value

1.1 (11)

BlackRock

1.0 (12)

-7.8 (17)

-0.9 (8)

Altrinsic Concentrated

0.9 (13)

-6.2 (12)

-4.3 (28)

Wellington Growth

0.8 (14)

-13.5 (41)

-4.8 (32)

BlackRock High Conviction (Class D)

0.8 (15)

-7.9 (18)

-1.6 (11)

1 Y RETURN

3 Y RETURN

Independent

COMPANY NAME

9.8 (1)

0.9 (2)

Bennelong

7.6 (3)

Bennelong Concentrated Macquarie High Conviction Lincoln

PM Capital Perpetual

Aviva Investors Elite SG Hiscock

JCP- Bmark Based Macquarie

Aviva Investors Schroders

1 Y RETURN

Legg Mason

Zurich

8.3 (1)

-0.1 (3)

7.4 (12)

-3.4 (34)

5.2 (37)

-5.2 (53)

5.7 (30)

1 Y RETURN

3 Y RETURN

5 Y RETURN

Inflation-Linked Bonds

Australian Bonds

7.2 (8)

7.8 (13)

6.0 (10)

International Bonds (Unhedged)

8.3 (6)

6.2 (7)

Cash

7.2 (9)

8.0 (10)

7.1 (11)

6.3 (17)

7.0 (12)

UBS

7.2 (13)

6.1 (23)

6.1 (9)

6.0 (11)

-2.0 -9.8 10.9 0.1 -0.4 -20.9 6.0 7.4 7.5 5.4 -6.7 1.3

International Bonds (Hedged)

4.7 5.2

-4.5 7.9

-9.5 5.8 4.4 0.4 5.7

5.3 (13)

6.9 (13)

8.1 (9)

6.1 (8)

6.6 (15)

8.4 (5)

6.3 (5)

8.2 (7)

-0.9 (10)

Listed Property

7.8 (12)

6.8 (14)

4.1 (12)

6.8 (1)

Schroders Tyndall

7.7 (7)

-3.9 (45)

0.4

7.2 (10)

Colonial First State

-1.1 (12)

4.2 (11)

10.4 -5.4

ING

BlackRock (ex Merrill Lynch)

4.3 (10)

International Shares (Hedged)

7.8 (6)

8.2 (8)

8.4 (4)

6.6 (2)

Unlisted Property

7.8 (7)

1.5 (1)

4.8 (9)

4.3

6.5 (3)

Perpetual

6.6 (16)

6.3 (6)

8.6 (3)

9.4 (1)

4.8 (8)

5.3 (36)

-1.0 (11)

1.6 -5.0

8.1 (4)

8.8 (2)

-2.8 (28)

6.0 (7)

-3.4 (35)

Australian Shares

International Shares (Unhedged)

7.9 (5)

Goldman Sachs Core Plus

INDICES

5.2 (14)

Perennial

Suncorp

5 Y RETURN

6.8 (16)

8.1 (3)

Macquarie

8.5 (4)

6.6 (6)

3.2 (15)

8.2 (2)

Russell

AMP Capital

3 Y RETURN

-0.5 (8)

6.8 (5)

Market indices - 31 December 2010

Australian Bonds - 31 December 2010 COMPANY NAME

6.9 (4)

3.4 (14)

GS Aust Quant

11.0 (1)

9.6 (2)

3.6 (13)

Herschel

5 Y RETURN

6.4 (4)

Returns are gross of tax and ongoing fees Investor index: Australian Bonds Investor Index. Created 19th January 2011.

Essential information for the astute investor The tables shown are an extract from the Sector Funds Performance Survey which compares more than 390 specialist sector funds. If you want to measure your investment performance against your manager peers and your performance benchmarks, then contact Peter Gee by email at peter.gee@morningstar.com or call him directly on (02) 9276 4540.

More useful survey information Morningstar provides a wide range of wholesale investment manager research survey results and analytical software via subscription for investment managers and superannuation fund trustees. These include regularly updated surveys of industry performance indicators; asset allocations; industry sector and market capitalisation allocations; performance tables for diversified and specialist funds; and fee comparisons for pooled funds and individual accounts.

DISCLAIMER ÂŠ Morningstar Australasia Pty Ltd (Morningstar) ABN: 95 090 665 544, AFSL: 240892 (a subsidiary of Morningstar, Inc). All rights reserved. The data and content contained herein are not guaranteed to be accurate, complete or timely. Neither Morningstar, nor its affiliates nor their content providers will have any liability for use or distribution of any of this information. To the extent that any of this information constitutes advice, it is general advice that has been prepared by Morningstar without reference to your objectives, financial situation or needs. Before acting, you should consider the appropriateness of the advice and obtain financial, legal and taxation advice before making any financial investment decision. Investors should obtain the relevant product disclosure statement and consider it before making any decision to invest. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/fsg.asp

investment magazine

present

Opportunities in a

Rebalancing World The 14th Annual Investment Administration Conference February 15, 2011, Hilton Sydney Australia’s largest fund administration, custody and technology conference returns in 2011 for its 14th year. This senior industry gathering will examine the key challenges and opportunities facing the industry, as the global financial system post-GFC trends toward ‘re-regulation’ and a new balance of economic power. Tailored to senior executives and operational heads from fund management companies, superannuation funds and other investment management organisations, the program offers a selection of local and international expert guest speakers.

The program will feature: • Jonathan Pain (author, The Pain Report) on the rebalancing global economy and its implications for Australia. • Global regulation and why the industry needs to pay attention to IOSCO, Dodd-Frank and Basel III – a panel discussion with Drew Vaughan (principal, Dymond Foulds & Vaughan), Ged Fitzpatrick (senior executive leader, ASIC), Pierre Jond (head of Australia & New Zealand, BNP Paribas Securities Services) and Sarah Wood house (head of wealth management, Deloitte). • Chris Ryan (managing director, Citi Securities and Fund Services Asia) on regional opportunities for fund managers and how to get it right. • Insource or outsource? How the industry is changing and the drivers behind operating model reviews – a panel discussion with Paul Cutts (managing director, Northern Trust Company), Marian Azer (principal, Mercer), Mark Neary (managing director client

• • •

relations, Milestone Group) and Lincoln Wong (chief operating officer, PIMCO). Ian Banks (head of securities services & treasury - Asia Pacific, HSBC Bank) on the fund administration and custody business in Asia, regulation and the return of hedge funds. The DIY boom, private banking and opportunities for the industry – a discussion with Greg O’Sullivan (head of sales, State Street global Services) and Andrea Slattery (CEO, SMSF Professionals Association of Australia). Master custody: past, present and future – a panel discussion featuring Leigh Watson (executive general manager, asset servicing – National Australia Bank), Graeme Arnott (chief operating officer, First State Super), Peter Curtis (senior investment man ager, AustralianSuper) and Kyle Ringrose (general manager, investment operations – Qsuper).

PLUS breakout stream featuring: • • • • • • •

Alternative trading venues; driving down trading, settlement and clearing costs The rise of alternative investments and operational implications After tax investing: in search of the benchmark Holy Grail The future for ETFs in Australia Platform convergence and the challenges of e-commerce for superfunds Achieving greater efficiency and automation in managed funds Increasing efficiency in corporate actions

This conference is a must for senior executives and operational heads from fund management companies, superannuation funds and other financial services groups that manage investment products.

To book tickets visit www.conexusfinancial.com.au/events or call (02) 9221 1114.

FSC viewpoint

February 2011 Investment Magazine 47

A big Australia needs big thinking Australia has led the world in

Solving the

developing innovative solutions to an ageing population, and

sustainability and

the challenge is to continue this

infrastructure concerns

tradition in dealing with the policy issues of a Big Australia

that are associated with

as they arise, writes JOHN BROGDEN, CEO of the FSC.

a Big Australia will not

Australia, like many developed countries in the world, has an ageing population. Over the next 40 years, the proportion of the Australian population that is of working age is expected to fall, with only 2.7 people of working age to support each Australian aged over 65 by 2050. This compares to five working people to each Australian aged over 65 today and 7.5 in 1970. Some developed countries are facing an ageing crisis. Slow growth rates in demand and falling ratios of workers to age pensioners are having significant negative impacts on countries such as Japan, Italy and Greece. Australia is fortunate that successive governments have made hard decisions to deal with Australia’s ageing population that have put us in a strong position relative to the rest of the developed world. The commissioning of the first Intergenerational Report (the IGR) in 2002-03 to consider the Commonwealth’s fiscal outlook over the long-term led the world in dealing with an ageing population. The numbers in the third IGR published last year remain alarming, but less so than they were in the first IGR. Rather than a quarter of the population being aged over 65 by 2050 as stated in the first IGR, Treasury now projects the proportion will be 20 per cent. There are two reasons for Treasury’s more optimistic forecasts on population. First, it

be easy

John Brogden

underestimated the 21st century mini-baby boom in Australia – or as demographer Bernard Salt puts it, the baby boom echo. The baby bonus and the echo of the baby boomers both contributed to higher levels of fertility in Australia than was expected. A second contributing factor is the larger than expected migration inflow since 2003. Rather than the 90,000 a year intake Treasury had estimated in the 2003 IGR, Australia accepted an average of 244,000 migrants a year over the three years to June 2009. High levels of migration are good for Australia. Migration tends to reduce the rate at which the population ages since migrants are generally younger than the average age of the Australian population. Around 89 per cent of migrants are aged under 40 compared to 55 per cent of the existing Australian population. Migration also assists in providing skilled and unskilled labour. Without substantial migration there is upward pressure on wages as business competes for a shrinking pool of labour, ultimately driving up inflation. We need unskilled as well as skilled labour. Currently the policy is too focused on skilled labour

alone, but this ignores the fact that labour shortages exist at all skill levels. Increasing population, whether through higher fertility or higher net migration adds to economic demand, improves the tax payerto-retiree ratio, takes pressure off the tax base and puts downward pressure on inflation. To quote the IGR: “A key lesson from international experience is that countries with low population growth or declining populations such as Japan and Italy face lower potential rates of economic growth than countries with relatively healthier population growth.” The current IGR assumes a steep reduction in net migration from 244,000 to 180,000 a year. While it is good that the level of migration remains above the postWorld War II long run average, we must maintain strong migration levels which are appropriate for our ageing population and labour needs. We cannot let environmental arguments for a stagnant population outweigh the need to deal with the economic impact of an ageing population. Nor should we surrender to the debate on current underinvestment in infrastructure as an argument against a “Big Australia”. It is ludicrous for our poor infrastructure to dictate our population. British economic

historian Niall Ferguson, on his visit to Australia in August last year, summed it up when he stated: “The idea that traffic jams in Sydney are an argument against continued migration is a silly one.” The solution is greater and smarter investment in infrastructure to meet our population, not a lower population to match our crumbling infrastructure. The argument that “migrants rob jobs” is dead. In the 10 years to 2008-09, Australia’s net migration totalled 1.7 million. Over the same period our unemployment rate fell from 6.6 per cent in 1999-2000 to 4.9 per cent in 2008-09. And why do we continually concede that migrants will move to the crowded eastern coast? An aggressive, realistic and properly funded regional development strategy will populate rural and regional Australia and be received with open arms. There have been many predictions in history of the end of civilisation due to population growth. Now, as then, technological and societal change will give us the answers to environmental or infrastructure challenges presented by a Big Australia. Solving the sustainability and infrastructure concerns that are associated with a Big Australia will not be easy. However, these problems are not insurmountable. The challenge for policy makers is to find solutions to these problems while maintaining strong population growth. So far, Australia has led the world in developing innovative solutions to an ageing population. The challenge to governments is to continue this tradition and deal with the policy issues of a Big Australia as they arise.

Responding to the Challenge 28 – 30 March 2011 Gold Coast Convention and Exhibition Centre

Australian Institute of Superannuation Trustees Ground oor, 215 Spring Street, Melbourne VIC 3000

Tel: +61 3 8677 3800 Fax: +61 3 8677 3801

Email: cmsf@aist.asn.au Web: www.aist.asn.au

AIST Viewpoint

February 2011 Investment Magazine 49

Stronger super: the devil’s in the detail CEO of AIST, Fiona Reynolds, says efficiently implementing TFN identification and agreeing on universal data standards are the first steps in demonstrating to the Government the super industry is ready for, and able to implement, change.

inally the wait is over. After 18 months of looking at the super system, we now know what the Federal Government has planned for the industry and when it is going to be delivered. We might whinge about the amount of work that is ahead of us, but we can’t complain that the Government is not listening to us. Jeremy Cooper has reason to be pleased with the extent to which the Government listened to his panel, with 139 of his 177 recommendations picked up - including many of the key (but thankfully not all) recommendations on SuperStream and MySuper. There may be a wealth of detail in the Cooper Report and the Government’s response but make no mistake, the implementation of these changes will fundamentally change the face of superannuation. Together with the increase in SG contributions to 12 per cent,

Fiona Reynolds

a better, stronger, more memberfocused system will emerge... eventually! In the meantime, everyone at AIST and many other parts of the super industry are rolling up their sleeves and getting ready for the very extensive consultation process the Government has put in place. This will include an overarching consultative group and four subgroups - for SuperStream, MySuper, SMSFs, and governance. These groups will have all the recommendations divided between them, be given terms of reference and a timetable, and sent out to work. First out of the blocks will be a number of SuperStream issues that are critically important building blocks for an improved super system. The Government has said

it wants Tax File Numbers to be used as primary superannuation account identifiers from July 1, 2011. Simple as it seems, this idea has been around for a long time - it has been a part of ALP policy for almost a decade and AIST was encouraging an expanded role for TFNs back in 2002 when we ran the “Lost Super Week” campaign. So it’s terrific to see this finally happening. With all these things, of course, the devil is always in the detail, and turning this idea into reality will be a challenge for the ATO, administrators and everyone else in between. Managing privacy issues, properly resourcing the ATO, and providing real time online TFN verification are some of the key issues. But once in place and the industry has a set of protocols as to how funds and administrators can better use the TFN, it will make the job of tracing lost super and reducing duplicate accounts much easier - it’s also the key building block for considering account consolidation in the future. The other simple idea, which has also been kicking around for some years without getting off the ground, is that of universal data standards. AIST will recommend to the SuperStream

subgroup looking at this issue that the Government establish a Superannuation Standards Authority. An authority with a mix of industry leaders, technicians and consumer representatives who would be appointed by the Government to consult, design, implement, and then monitor a set of standards to be used across the industry. Super funds have been tolerant of data from employers in every shape and size. This might have initially helped get employers on board with super, but this diversity has ultimately become a millstone. It needs to be addressed now, but as the Government said in its response to Cooper, consideration will only be given to mandated electronic payment systems when the industry can show that it’s got its backoffice in order. By efficiently implementing TFN identification, and agreeing on universal data standards, we will be able to show that we are well on the way. The important thing though, is that we now have a framework that, once implemented, should make superannuation a lot easier for members to navigate.

It’s a new year and time for a new qualication with AIST. Upgrade your RG146 into a Diploma in 2 easy steps: • •

Complete the Insurance for the superannuation industry module Complete the Investments for the superannuation industry module

Note. If you completed your RG146 qualication prior to 1 July 2009, you are required to complete AIST’s RG146 Upgrade course before completing the Insurance and Investments modules. Australian Institute of Superannuation Trustees Ground oor, 215 Spring Street, Melbourne VIC 3000 AIST_QuaterPage_Feb.indd 1

Tel: +61 3 8677 3800 Fax: +61 3 8677 3801

Email: info@aist.asn.au Web: www.aist.asn.au 14/01/2011 9:15:45 AM

unbalanced

50 Investment Magazine February 2011

the lighter side of a serious industry

Get your receipts in order, and your I&T News mentions Here’s a good reason to disclose everything to Investment Magazine and I&T News: the Australian Tax Office uses them in its audits. We know this because the subject of one of our stories once told us about an interesting phone call he had from Canberra’s finest. The auditor wanted to know why this individual was claiming a lump sum he’d received was a redundancy, rather than a termination payment which would attract a higher tax rate. “We’ve read the story about you in I&T News, and it makes no mention of downsizing,” said the beancounter. So the next time we reported on our man’s former firm, we took care to mention he had been retrenched – which in any case was the truth. A subsequent appreciative phone call indicated that the ATO matter had been resolved to his satisfaction. Still, it’s good to see the Tax Office looking under every rock when it comes to safeguarding consolidated revenue – with flooded cities to fix and a National Broadband Network to install, Australia’s gonna need every cent of it.

When super partners fall out A press release from Synchronised Software doesn’t usually send pulses racing – except among the member admin fanciers here at Investment of course. But our interest was piqued a little more than usual late last year, when we received two releases from the software vendor in as

many days. They were both about Capital 10, the latest version of the super admin system that Synchronised Software has been shipping out of Box Hill since 1990. Problem was, the first release basically said how much better Capital 10 was than Capital X, the new platform which SyncSoft built for the industry fund-owned administrator, Superpartners. Well, not ‘better’ exactly, just easier to transition to – being built on the same architecture as Capitals 1 through 9, it does not require member administrators to convert any data or recreate existing business rules, as Capital X does. But it seems somebody at Superpartners didn’t appreciate this bit of free publicity. A revised version of SyncSoft’s press release lobbed into our inbox the next day, with all mention of Greg Camm’s outfit removed. Not surprising, really, given the implementation of Superpartners’ brand-spanking ‘ElectSP’ system, built on Capital X, is 19 months behind schedule as you read this.

UBS, the arbiter of fashion, revises its dress code Style is not really the forté of the Swiss so it may come as no surprise that the London arm of the Swiss investment bank UBS got itself into a pickle after it released a 44-page dress code for employees late last year. The code, which included compulsory red ties for men and advice on acceptable stockings and lingerie for women, was widely ridiculed in the City. Now, it seems, UBS has withdrawn the booklet and has stated it will produce a less formal slimmed

down version, according to the news service Associated Press. A spokesman was quoted this week as saying: “We’re reviewing what’s important to us.” This has allowed the notoriously aggressive London press the opportunity to revisit the original code. Some highlights are: • For female employees, the code spells out how to apply makeup and what types of perfume are advisable. They need to avoid showing different-coloured roots if they dye their hair and also avoid wearing black nail polish. • In the sensitive underwear department, skin-coloured is preferable to dark knickers. • Men are told how to knot their red ties and advised to get a haircut at least monthly. They should avoid unruly beards and earrings. • For both sexes: glasses “should always be kept clean – on the one hand this gives you optimal vision, and on the other hand dirty glasses create an appearance of negligence”. The consumption of garlic and onion were also frowned upon, although we’re not sure that eating fondue is any kinder to one’s breath. The spokesperson admitted that people had made fun of UBS over the code but said it did not cause the firm any reputational damage.

And we thought red ties were a socialist thing…

Business continuity planning: officially not boring The annual meeting to revise and update a business continuity plan used to be seen as a boring chore by most. After all, disaster recovery can be a pretty academic concept when the building’s not on fire or under water. Queensland Investment Corporation would beg to differ, of course. On the morning of Tuesday, January 11 it was one of the first organisations in Brisbane’s CBD to invoke its ‘BCP’, and it’s credited that action for the seamless way it has been able to maintain client portfolios throughout the Queensland floods crisis. QIC staff were evacuated from the Brisbane headquarters (at Central Plaza Two on Eagle Street) even before building management closed down the tower, which eventually got water up to its basement level. A significant number of investment staff were able to work remotely from home, while those that couldn’t set up in QIC’s two disaster recovery sites in the higherground suburbs of Taringa and Windsor. QIC said its portfolio managers had been able to continue trading. Even the manager’s extensive Queensland real estate and infrastructure assets were largely spared, with the Grand Central and Garden Town shopping centres in Toowomba experiencing only minor damage and closing down for just a few days. QIC also chipped in a sizeable $100,000 to the Premier’s Flood Relief Fund.

Big enough to be powerful. Small enough to be agile.

At Martin Currie we call ourselves ‘The Big Boutique'. This means we combine the strength and resources of a large company with the focus and agility of an employee-owned boutique. From our headquarters in Edinburgh, we manage A$18 billion in active equity portfolios for clients around the world.* Our short lines of communication and collegiate culture ensure swift decision-making. We also believe in being close to our clients, which is why we have teams in London, New York, Shanghai, Melbourne, Singapore and Zurich. In 2008 we made a long-term commitment to Australia by opening a Melbourne office under Kimon Kouryialas. We now manage over A$750 million for investors in Australia and New Zealand.*

Global equities Our expertise in global equities has made this a focal point of our business. The Martin Currie Global Alpha Fund, an Australian-regulated unit trust, is our flagship strategy.

This offers an unconstrained portfolio of our 30–45 best stock ideas outside Australia – a distinctive solution from an experienced and highly rated team.

Emerging markets Over 50% of Martin Currie’s funds under management are invested across Asia and emerging markets. This includes over A$5 billion in China, where we have 15 years’ experience and one of the best-resourced teams in the business. Emerging markets are increasingly important to both the global economy and our clients. To build on our strengths here, six more emerging-markets specialists joined us this year. Kim Catechis, a highly rated emerging markets specialist with 23 years’ experience, leads our expanded team – which is one of the most experienced and deeply resourced in the world. For more information about Martin Currie's services, contact Kimon Kouryialas on (03) 9653 7314, by e-mail on kkouryialas@martincurrie.com, or visit www.martincurrie.com/auinstitutional

It’s a question of conviction

* Assets as at 30 September 2010. This advertisement is issued by Martin Currie Investment Management (MCIM). MCIM is registered in Scotland (no 66107), registered office Saltire Court, 20 Castle Terrace, Edinburgh EH1 2ES. Martin Currie Investment Management Limited (“MCIM”) is exempt from the requirement to hold an Australian Financial Services Licence under the Corporations Act 2001 in respect of financial services provided to Australian wholesale clients by virtue of the application of ASIC Class Order 03/1099. MCIM is authorised and regulated by the UK Financial Services Authority (“FSA”). The FSA’s regulatory regime differs from the Australian regulatory regime. This document was prepared/issued by MCIM. Equity Trustees Limited (“EQT”) (ABN 46 004 031 298) AFSL 240975 is the Responsible Entity of the Martin Currie Global Alpha Fund (ARSN 130 718 419) (the “Fund”). This document is only provided for information purposes and does not contain investment recommendations nor provide investment advice. We strongly encourage you to obtain professional advice and to read the Fund's product disclosure statement in full before making an investment decision. Units in the Fund will only be issued upon receipt of a completed application form accompanying a current product disclosure statement. MCIM, EQT and their officers, employees, agents and affiliates may have an interest in the Fund and may receive fees from dealing in the Fund. For investors outside Australia, it is your responsibility to find out about, and observe, all applicable laws and regulations of any relevant jurisdiction. If you, or your client, plan to buy shares, you must find out the legal requirements for doing so as well as any applicable exchange control provisions and tax implications.

Which wealth management solution can help to

streamline your business with end-to-end exception based processing?