Money Management (November 10, 2011)

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Vol.25 No.43 | November 10, 2011 | $6.95 INC GST

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SG INCREASE FLAWED BY TAX LINK: Page 4 | ROUNDTABLE – FOFA UNFOLDS: Page 12

Devil in the detail of FOFA legislation

By Mike Taylor THE Federal Government has injected enough complexity and uncertainty into its Future of Financial Advice legislation that it may not be possible for the industry to implement it by 1 July next year.

That is the bottom line assessment o f k e y p a r t i c i p a n t s i n a Mo n e y Management roundtable in the immediate aftermath of the Assistant Treas u re r a n d M i n i s t e r f o r F i n a n c i a l Services, Bill Shorten, introducing the first tranche of the legislation to the House of Representatives.

Matrix Planning Solutions managing director Rick Di Cristoforo made clear during the roundtable that he believed the Government had created confusion and complexity by moving away from the original exposure draft of the legislation.

“By not listening to the industry...

they’ve put in a piece of legislation that is actually not possible to be implemented by 1 July 2012,” he said.

“I know we’ve all got questions about when this thing gets implemented, but even with it in its pre-exposure draft f o r m , we h a d q u e s t i o n s a b o u t t h e implementation,” Di Cristoforo said.

“I’ve now got questions about how every single company in this industry actually coordinates together a piece of data on a piece of paper for a new client, when all the pieces of data are in disparate places.

“They simply can’t be put together – what we’re seeing in the industry right now – and I know that’s not a view of just Matrix, that’s a view of every single person I’ve spoken to,” he said.

Colonial First State’s Nicolette Rubinsztein said she believed the Finance In d u s t r y Co u n c i l o f Au s t ra l i a h a d written to the Government questioning the Government’s legislative timetable

Rick Di Cristoforo and seeking more transition time.

Pre m i u m We a l t h Ma n a g e m e n t general manager Paul Harding-Davis s u g g e s t e d t h e t i m e f ra m e s b e i n g imposed by the Government were also likely to be causing consternation

amongst some of the industry superannuation funds seen as the Government’s own constituency.

“Given how long it’s going to take for final details, for final passage – how few months are left for the industr y to wrestle with this – it’s kind of alarming, particularly when you think about the sorts of changes you’re asking platform providers and super fund administrators to make,” he said.

“I find myself a little intrigued, too, about the implications of that – across some of what the Government might argue are their own constituencies – in terms of the effort they would have to go to, to produce this information and to put in place those processes in that same space of time,” Harding Davis said.

“I would have thought that some of them would be alarmed by what they’re being asked to accomplish,” he said.

Roundtable transcript begins page 12.

Opposition puts heat on Brokers expanding industry fund watchdogs financial services presence THE Federal Opposition is maintaining pressure on Australia’s two financial services regulators, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) to reveal how they are handling the activities of industry superannuation funds.

In what Money Management understands to be a reflection of the concern held by key Coalition parliamentarians about the amount of influence being wielded by some senior Labor Party/union officials, the regulators have been asked a series of questions on notice going to the heart of how they handle industry funds.

Much of the activity directed towards the regulators has been generated by Tasmanian Liberal Senator David Bushby, but the Shadow Assistant Treasurer, Senator Mathias Cormann, has also raised the issues during Senate Estimates.

In a series of questions on notice directed to APRA, Bushby has asked how many enforcement actions the regulator has

By Chris Kennedy

David Bushby under taken in the last three years “in relation to flawed unit pricing and asset valuation practices in superannuation funds”.

“And without naming the entities concerned, what were the outcomes for each (fines, court action, disqualifications, asset freeze, enforcement undertakings etc)?”, Bushby said.

Bushby has also asked how m a ny fo r m a l a n d i n fo r m a l actions APRA has taken in relation to unresolved conflict of Continued on page 3

THE overlap between mortgage broking firms and other segments has raced ahead in 2011 as companies search for diversified revenue streams in a gloomy financial environment, and more diversification is on the way.

The opportunity to retain clients rather than risk losing them under another referral arrangement if they go elsewhere for other services is also a factor, according The Selector Group director Brett Abikhair.

“It’s about protection – it might have been driven by protecting your client base, but it’s all about helping that one person with as many things as you possibly can,” he said.

Two weeks ago one-stop-shop Yellow Brick Road Holdings (YBR) announced it would be venturing into funds management, teaming up with Coolabah Capital to create a vertically integrated joint venture called YBR Funds Management.

YBR said the move was aimed at helping it diversify its cash flows and moving up the product value chain by offering a range of low-risk, high-return, high-liquidity cash and fixed income products.

YBR itself is only four years old, but has branched from mortgage offerings into services including financial planning, accounting and insurance.

Mortgage aggregator Vow Financial launched financial planning division Vow Wealth Management – a joint venture with The Selector Group’s financial planning arm Wealth Selector – in May this year.

The service is promoted to Vow’s broking clients via a referral arrangement, and Vow chief executive Tim Brown said the group is trying to capture as many opportunities as it can at that point of the mortgage transaction.

Vow currently has two joint ventures in place, and plans to launch two more between now and January, expanding further to a total of six joint ventures in 2012, Brown said. The group also plans to launch Vow Legal in 2012, and eventually other services including accounting, Brown said.

Abikhair said mortgage commissions were cut by 35 to 40 per cent during the global financial crisis, but the work involved in getting a loan processed doubled as banks passed that work back on to the brokers – making broking a far less profitable business.

The Selector Group – which is currently made up of mortgage, financial planning, real estate, and leasing services – eventually rolled into financial planning practices to leverage off its broking relationships, and that’s how the business has grown, he said.

“I think the industry is headed down this [diversification] path because at the end of the day if you’ve got a relationship with a client, that’s what it’s all about. If you’ve got a relationship, why can’t you do 10 things for them? Most clients will tell you that’s what they want,” he said.

“I think that’s the natural progression of the industry – it’s a matter of when. When is the Yellow Continued on page 3

Editor

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FOFA stampede could turn uglier

T

he financial planning industry has been undertaking some intense lobbying in recent weeks in the hope of extracting some key amendments to the Government’s Future of Financial Advice (FOFA) legislation – but one of its key objectives must be to achieve a longer timetable for implementation.

As the roundtable published in this week’s edition of Money Management makes clear, the complexity of the changes being pursued by the Government are such that few companies operating in the financial planning industry are likely to be able to meet a 1 July, 2012 deadline.

W h a t i s m o re, t h e G ov e r n m e n t cannot suggest that the industr y’s inability to meet the deadline is a result of tardiness. Rather, it is the product of the Government’s own approach to FOFA and the manner in which it has prolonged the exercise and created layers of uncertainty.

The very fact that the legislation is being introduced to the Parliament in a series of tranches is evidence of the degree to which companies are being asked to accommodate impor tant legislative change without the benefit of

“

If the Assistant Treasurer and Minister for Financial Services, Bill Shorten, cannot demonstrate to the key stakeholders the final shape of his legislation, then he cannot expect to impose on them the cost and energy of meeting an unrealistic timetable.

”

being able to see a final picture.

If the Assistant Treasurer and Minister for Financial Services, Bill Shorten, cannot demonstrate to the key stakeholders the final shape of his legislation, then he cannot expect to impose on them the cost and energy of meeting an unrealistic timetable.

There is some evidence to suggest that the Government’s timetable is driven in

part by its belief that it is confronting a narrow window of opportunity to introduce the FOFA legislation. With the polls consistently indicating a change of Government at the next federal election, a number of key figures within the industry superannuation funds have also indicated they are conscious of getting the FOFA changes in place in the belief that the Coalition would be reluctant to alter everything.

This was also something clearly evident in the attitudes of the roundtable participants, a number of whom indicated that if the Gillard Labor Government did not run its full term, contingency arrangements would need to be put in place.

With the number of Parliamentary sitting days for 2011 already running short and with the FOFA legislation having been directed to a Joint Parliamentary Committee, the minister has plenty of reasons to accommodate the concerns of the industry by extending the timetable for its introduction.

Sensibly, the industry should not be expected to commit to anything without being aware of the entire picture.

– Mike Taylor

S&P

FUND AWARDS

2011 AUSTRALIA

2 — Money Management November 10, 2011 www.moneymanagement.com.au

News

Inconsistencies in Shorten’s SG age limit message

By Chris Kennedy SHADOW Assistant Treasurer Mathias Cormann has questioned why Assistant Treasurer Bill Shorten said he was abolishing the age limit for superannuation guarantee (SG) contributions when the new superannuation amendment bill itself states the limit will only be raised by five years.

“Is Bill Shorten dishonest or just incompetent?” Cormann asked in a statement.

“The legislation he introduced into the Parliament is clear. It is not removing the age limit at all. Instead Bill Shorten’s legislation only increases the superannuation guarantee age limit from 70 to 75.”

Cormann said this was in line

with Labor’s policy at the last election, but has now been tied to “the deeply flawed, unfair and ill-conceived mining tax,” which was never a part of Labor’s SG age limit policy prior to the election.

In the relevant section of the Superannuation Guarantee (Administration) Amendment Bill 2011 posted on the Treasury website, the bill proposes to: “Omit ‘70’, substitute ‘75’” from the passage relating to the age limit for SG contributions.

The bill also states that the amendments apply to superannuation guarantee: ‘for quarters starting on and after 1 July 2013’.

But in his speech to parliament, now posted on the Treasury website, Shorten stated,

“…this bill abolishes the superannuation guarantee age limit.”

Cormann said Shorten’s speech misled Parliament, and created the impression he was acting to implement Coalition policy to abolish the age limit which the Coalition took to the last election.

In an explanation to Parliament, Shorten said, “My second reading speech for the Superannuation Guarantee (Administration) Amendment Bill yesterday states that the Bill will lift the SG limit to 75. It also states that after strong representations from the Labor backbench and the crossbench – the member for Lyne and the member for New England – the Government has decided to remove the age limit

Mathias Cormann for superannuation contributions altogether,” he said.

“The Government will introduce our own amendments to the Bill to achieve this in a sustainable and prudent way

that provides sufficient lead time for employers and older Australians to adjust,” he said.

A representative from Shorten’s office told Money Management the reference to the age limit being abolished in the Bill was an error in the speech writing process that was clarified in Shorten’s second reading of the speech, which stated: “However, as a result of strong representations from members of the Labor caucus and cross-bench – including the Member for Petrie, the Member for Blair, the Member for Lyne and the Member for New England – I have decided to remove the age limit for superannuation guarantee contributions altogether”.

Opposition puts heat on industry fund watchdogs Continued from page 1

interest issues in relation to super fund governance during the past three years, and what were the results of taking such action.

The Tasmanian has also asked APRA about its policy on super fund directors who hold multiple directorships in the super fund sector, and inquired about how many occasions on which the regulator has raised the issue with a fund which had a director in such a position, and with what results.

With ASIC already having been placed on notice to explain whether the recent rash of industry superannuation fund television advertisements are compliant, Money Management understands its approach to the advertising campaign will be subject to further questioning and scrutiny in Parliamentary committees.

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Brokers expanding financial services presence Continued from page 1 Brick Road [model] going to become the norm? It’s not an ‘if ’. You’ll find consolidation in the mortgage broking industry – there’s a lot of one-man bands – they’ll move towards bigger groups as the planning industry has,” he said.

Mortgage and Finance Association of Australia chief executive Phil Naylor said the different licensing arrangements and regulatory environments would present an issue for firms looking at diversifying, which meant it would likely only occur in larger and better resourced groups.

Diversification within

Tim Brown the broking industry has been a trend for a while now and there is clearly a search for alternative streams of revenue, as well as a tendency for broking and planning to move closer together, he said.

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This material was produced in the United Kingdom. www.moneymanagement.com.au November 10, 2011 Money Management — 3

News

SG increase flawed by tax link Planning industry

By Mike Taylor

THE Federal Government should not have linked increasing the superannuation guarantee to 12 per cent to the imposition of the Mineral Resources Rent Tax. That is the bottom line of a roundtable held last week by Money Management’s sister publication Super Review, with key participants saying that “superannuation should be treated as superannuation and nothing else”.

NGS Super trustee John Quessy said that linking the superannuation guarantee increase to a tax carried with it the risk that another Government would remove that tax and therefore the increase to the SG. “To make retirement savings dependent on some tax that is popular with the Government at the moment but might not be popular with some other Government in the future means it could subsequently be reversed,” he said.

“That could kill the tax and therefore the superannuation,” Quessy said. “And if you’re serious about superannuation, you treat it as superannuation.”

Pillar Administration chief executive Peter Beck said he agreed with Quessy’s assessment, but said he also understood the Government’s need to find a way of funding the rise in the superannuation.

“The Government’s problem has been finding ways of funding this, but as an industry we should not express an opinion on where they get the funding from. We should push very hard for the SG contribution being increased and

welcomes SG raise

By Chris Kennedy

Peter Beck they should find the funding,” he said.

Association of Superannuation Funds of Australia general manager of policy David Graus said his organisation agreed there should be no link between a tax and the superannuation guarantee.

“We totally agree it shouldn’t be linked, there is enough justification (to increase the SG) on its own,” he said.

“ASFA’s research shows that it should go ahead on a standalone basis,” Graus said.

Deloitte partner Russell Mason said the industry needed to be mindful that 12 per cent would not be enough to fund retirement and relieve pressure on the superannuation guarantee, and that further increases would be required in the future.

THE financial planning industry has welcomed the Government’s proposal to raise the superannuation guarantee from 9 per cent to 12 per cent.

Assistant Treasurer and Minister for Financial Services and Superannuation Bill Shorten last week introduced to parliament the Superannuation Guarantee (Administration) Amendment Bill 2011, which proposes to use income from the mineral resources rent tax to fund the increased SG and increase the age limit for SG contributions.

Both Financial Planning Association (FPA) chief executive Mark Rantall and Association of Financial Advisers (AFA) chief executive Richard Klipin pointed to the country’s ageing population as a key reason why an increase in the SG was necessary.

“Without an increase in the superannuation guarantee, Australians will need to extend their working life to be able to retire on an adequate income, or will have to rely on the age pension,” Rantall said.

“By 2047, 10 years after maturation of the superannuation guarantee system, 75 per cent of the population will still be on some form of the age pension. It is critical that this national issue is addressed now.”

He said the FPA also supported removing the age limit for SG contributions, and the Government should encourage all Australians to accept responsibility to save for retirement.

Klipin congratulated Shorten on what he described as “an important step forward” and

Richard Klipin relieving what could potentially become a crippling tax burden in the future. Financial advisers are well positioned to help people deal with larger superannuation balances and work with them to meet their retirement goals, he added.

The amendment bill was also widely welcomed by the superannuation sector, including Association of Superannuation Funds of Australia chief executive Pauline Vamos; Australian Institute of Superannuation Trustees chief executive Fiona Reynolds; Self Managed Super Fund Professionals’ Association of Australia chief executive Andrea Slattery; chief executive of $42 billion industry fund AustralianSuper Ian Silk; REST Industry Super chief executive Damian Hill; and Challenger’s chairman of retirement income and former Super System Review chair Jeremy Cooper.

Industry funds struggling to retain high-balance members

By Tim Stewart

Russell Mason

THE vast majority of industry fund members who receive external financial advice move their money into a retail fund or a self-managed superannuation fund (SMSF), according to Deloitte partner Russell Mason.

In his discussions with an industry fund chief executive, Mason learned that 95 per cent of members who get external financial advice end up leaving the fund on retirement.

Industry fund members who seek external advice tend to be those with higher account balances who are

nearing retirement, Mason said.

However, people rarely have all of the facts about their industry fund at their fingertips when they choose to move, he added.

“I’ve seen people move out of funds because they thought they couldn’t have an account-based pension,” he said.

Deloitte research into the shape of the superannuation sector over the next 20 years, co-authored by Mason, has found that SMSFs are set to far outstrip other superannuation sectors by 2030.

To prevent the leakage to SMSFs and the retail sector, Mason said it

was up to industry funds to educate their members about the features they could offer.

“Many industry funds are starting to look at offering things that mimic SMSFs. A couple of the big funds have ASX200 options where you can pick the stocks you want to be in,” he said.

But industry funds can’t afford to take the high moral ground when it comes to advice, he warned.

“They need to be able to answer questions such as ‘Am I in the right fund?’, ‘What’s the best option for me?’, and ‘Am I contributing enough?’,” Mason said.

More complex issues would require the services of a licensed financial planner, but the basic questions should be answered by superannuation funds, he said.

He added that advisers needed to do more research into the services offered by industry funds – particularly as the financial planning industry moved to fee-for-service.

However, he stopped short of calling for industry funds to appear on Approved Product Lists (APLs).

“If they’re not on recommended lists, they should at least be researched and given the opportunity to appear on APLs,” Mason said.

ANZ posts strong profit, but Wealth struggles

By Milana Pokrajac DESPITE posting a solid profit of $5.36 billion, ANZ Banking Group’s wealth management division struggled over the past year, according to its full year results posted on the Australian Securities Exchange.

ANZ Wealth’s net profit after tax was 16 per cent lower year on year, sliding down

from $412 million in September 2010 to $345 million in September 2011.

The group had largely attributed this decline to volatile market conditions, negative investor sentiment and increased insurance costs caused by catastrophic weather events.

Strong new business growth was apparently offset by adverse general insurance claims around the Queensland floods,

4 — Money Management November 10, 2011 www.moneymanagement.com.au

Hurricane Yasi and New Zealand earthquakes.

Recent reports have shown that three out of the big four banks have had their wealth management divisions struggle over the past year, with BT Financial Group being the only one to have performed well.

Despite the profit decline, ANZ has announced plans for expanding the ANZ Wealth division in Australia.

“We are improving our Wealth proposition and enabling greater presence for the wealth management and insurance offerings within bank branches and online (eg, EasyProtect, 50+ Life),” the banking group stated.

ANZ’s proposed final dividend of 76 cents per share fully franked brings the total dividend for the year to $1.40 per share, 11 per cent higher than for 2010.

News

Australian investment managers outperform

By Mike Taylor GOOD performances and the strength of the Australian dollar have helped advance the global rankings of Australian investment managers, according to new research released

by Towers Watson.

Indicating Australia’s position relative to other major economies, the research found that assets managed by Australia’s largest investment managers increased significantly relative to their global peers last year.

It found that in Australia growth over the

year had mostly been driven by market and organic growth. Similar to the global trend among investment mangers, growth had also been boosted by merger and acquisition activity, but also by the Australian dollar which had appreciated by 14 per cent relative to the US dollar.

Commenting on the research, Towers Watson head of research in Australia Hugh Dougherty said the strong performance by Australian fund managers and the strength of the Australian dollar had meant that all managers who were on last year’s list had

moved up the rankings.

He noted that in US dollar terms, total assets of the Australian top 500 managers grew by 49 per cent from US$568 billion to US$847 billion. For the first time since the global financial crisis, total assets of Australian managers in the top 500 list surpassed pre-GFC levels of US$691 billion set in 2007.

Dougherty said there were now 18 Australian managers in the research, more than any time previously and around 50 per cent higher than in 2009.

He said the largest Australian manager was Macquarie which ranked 69 overall, up from 116 in 2008 – something that was partly due to its acquisition of US manager Delaware.

The other Australian managers on the list are Commonwealth Bank, AMP, NAB, QIC, Westpac, Industry Funds Management, Challenger, Perennial, Platinum, Maple-Brown Abbott, IAG, Charter Hall Group, Balanced Equity Management, Lend Lease, Northcape Capital, JCP Investment Partners and Paradice Investments.

Independents offer less certainty on FOFA AMID efforts to extract amendments to the first tranche of the Government’s Future of Financial Advice (FOFA) legislation, the Financial Planning Association (FPA) has relaunched the do-it-yourself package designed to help members lobby parliamentarians.

The focus of the lobbying continues to be on key independents including Andrew Wilkie and Rob Oakeshott, as well as members of the Parliamentary Joint Committee to which the Government’s legislation has been referred.

However, Money Management understands that while Oakeshott earlier this year signalled his concern about the implications and costs associated with the two-year ‘opt-in’, he has proved harder to pin down on the issue in recent meetings with planners.

“He is willing to talk and listen, but he is playing his cards pretty close to his chest,” one source said.

The chairman of the PJC, Labor backbencher Bernie Ripoll, last month told the Association of Financial Advisers’ national conference on the Gold Coast that while the FOFA legislation had moved beyond the original bipartisan recommendations of his committee, he was comfortable with the outcome.

By comparison, Opposition spokesman on financial services Senator Mathias Cormann has signalled Coalition members of the committee will be arguing for specific changes to legislation.

Both FPA chief executive Mark Rantall and the chief executive of the Association of Financial Advisers Richard Klipin have said the FOFA legislation currently before the Parliament is unacceptable in its present form.

Rantall said today that the PJC had afforded planners an opportunity to restate their concerns. www.moneymanagement.com.au November 10, 2011 Money Management — 5

News

BT drives strong Westpac result

By Mike Taylor A STRONG performance by BT Financial Group helped drive Westpac to a strong full-year finish.

The big banking group announced to the Australian Securities Exchange (ASX) that it had reported a 10 per cent increase in statutory net profit to $6,991 million, on the back of a 7 per cent increase in cash earnings of $6,301 million, rewarding investors with a final fully franked dividend of 80 cents per share.

The degree to which BT’s performance has driven the Westpac result was highlighted by chief executive Gail Kelly, who referenced it as a “highlight”, saying there had been a strong “uplift in the cross-sell of wealth and insurance products which contributed to a 9 per cent increase in cash earnings for

Gail Kelly BT Financial Group”.

“The division welcomed over 70,000 new customers onto the BT Super for Life platform over the year, and our insurance cross-sell has continued to increase from already high levels,” Kelly’s announcement said.

The ASX announcement also noted that the St George Banking Group had improved momentum through the year, lifting cash earnings by 12 per cent.

It said growth had been achieved through depth of customer relationships, which was reflected in a strong cross-sell, particularly in insurance and superannuation.

The Westpac chief executive said the global operating environment was clearly evidencing weakness with sovereign debt issues across the Eurozone and weak growth in the US. “International events have weighed heavily on consumer and business confidence in Australia and are contributing to a softer outlook,” Kelly said. “Nevertheless, Australia remains well placed to continue to grow, and has the policy flexibility to respond to global conditions as required.”

OmniWealth branches into accounting and legal

By Chris Kennedy FINANCIAL planning group OmniWealth is adding accounting and legal services, hoping to attract more planners to the firm.

OmniWealth managing director Matthew Kidd pointed to the current round of proposed legislative changes as a factor in the decision. He said the company goal was to provide clients with a single

optimum solution and to support its advisers.

The arrangement would enable the group to provide clients with consolidated accounting services, as well as a spectrum of financial advice concerning mortgage, property investment and legal solutions, the group stated.

OmniWealth said the overall operation will now encompass dealer services, financial planning, mortgage and finance, accounting and audit, legal and property investment.

MF Global placed into administration

By Andrew Tsanadis THE Australian Securities and Investments Commission (ASIC) has announced that MF Global Group has been placed into administration, affecting a number of companies in Australia.

The companies affected by the announcement are MF Global Australia Limited, MF Global Securities Australia Limited, and Brokerone Pty Limited.

Deloitte Corporate Reorganisation Group Partners Chris Campbell, David Lombe and Vaughan Strawbridge were yesterday appointed voluntary administrators of the three companies.

According to ASIC the activities affected by the announcement are equities, futures trading, futures clearing, and contracts for difference (CFDs). The regulatory body was also advised by ASX 24 that grain futures and wool futures would not open and all trading on MF Global futures and equities has been halted.

“As voluntary administrators, we have taken control of the assets of the three companies and begun the task of assessing the positions of each, including their over-thecounter derivative positions such as CFDs,” said Campbell.

“We are commencing a process to reconcile all client positions as at the date of appointment to determine monies owed to each client.”

“The total process will take some time, but we will advise customers of their position as soon as possible,” he said.

ASIC’s release follows the announcement made by MF Global Holdings Limited and its finance subsidiary, MF Finance USA Incorporated that it would be filing for a Chapter 11 Bankruptcy Petition in the United States Bankruptcy Code.

Planners need to review their business structure - Johnstone SEQUENTIAL Project Services has announced that its new targeted review product is now being used by AMP Financial Planners Association (AFPA), Hillross Advisers Association (HAA) and General Insurance Advisers Association (GIAA) to help their members adapt to the current financial industry environment.

According to Sequential, the Business Insights program is helping licensees plug the

holes in their businesses which have been left by market changes and regulatory reform.

Sequential managing director Adrian Johnstone said planners are often committed first to servicing their clients before considering the effect that market changes and regulatory reform will have on their business.

“Their businesses are leaky boats because they’re spending such large amounts of time worrying about compliance and they’re not

getting the time they need to worry about their businesses and servicing their clients,” Johnstone said.

As part of the independent review undertaken by Sequential, Johnstone said he often sees a lot of the operational processes being double-handled, such as clerical duties that an administrator could undertake.

Johnstone said as a result of market changes, business owners are now – for the

first time in most cases – starting to ask some serious questions about running a compliant business. Owners are typically not well equipped to review their practice themselves because they are too emotionally connected, he said.

“They (practice owners) feel their business needs help but they can’t see where.

Businesses are not structured against the new world,” he said.

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For information on the Five Oceans World Fund visit www.5oam.com The Lonsec Limited (‘Lonsec’) ABN 56 061 751 102 rating (assigned May 2011) presented in this document is limited to ‘General Advice’ and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the Fund Manager for rating the product(s) using comprehensive and objective criteria.

Challenger Managed Investments Limited ABN 94 002 835 592, AFSL 234 668 (CMIL) is the responsible entity and issuer of interests in the Five Oceans World Fund ARSN 117 060 769 (Fund). This advertisement is not intended to be financial product advice and does not take into account any person’s investment objectives, financial situation or needs. Accordingly, investors should consider these matters, the Fund’s product disclosure statement (PDS) and its appropriateness to them before making an investment decision. The PDS is available from www.challenger.com.au and should be considered prior to making an investment decision. Five Oceans Asset Management Pty Limited ABN 90 113 453 160 , AFSL 290 540 is the Fund’s appointed investment manager.

6 — Money Management November 10, 2011 www.moneymanagement.com.au

News

Govt targets multinational tax rules

By Tim Stewart THE proposed changes to transfer pricing rules will ensure multinational corporations operating in Australia pay the correct amount of tax on their income, according to Assistant Treasurer Bill Shorten.

‘Transfer pricing’ refers to the practice by multinational corporations of buying or selling products and serv-

ices from one part of the firm in a different country. These transactions affect the profit firms make in each country, and consequently the amount of tax they are required to pay.

The changes to Australia’s taxation laws will bring Australia into line with international best practice when it comes to transfer pricing, Shorten said.

“International thinking on transfer

pricing has moved on since the current transfer pricing rules were inserted in the income tax law,” Shorten said.

He added that recent court cases had suggested Australia’s laws were “out of kilter” with international norms.

“While there is a strong argument that tax treaty rules already operate independently of the domestic rules, the Government

has decided to put this beyond doubt to promote consistency between Australia’s rules and the international approach,” he added.

A consultation paper on the proposed changes to the Income Tax Assessment Act 1936 is available on the Treasury website. Submissions are open until 30 November 2011, but further comments will be sought during the legislative drafting process.

Bill Shorten

OneVue seeks institutional investor

By Milana Pokrajac PLATFORM provider OneVue is looking for an institutional investor to acquire a minority stake in the company, which it says would benefit OneVue’s distribution expansion plans.

OneVue chief executive officer Connie McKeage said the decision was not financial, but one which would raise OneVue’s brand awareness in Asia.

“We plan on delivering products in Asia and we need a global company as a backer, so potential clients will know who we are,” McKeage said.

“No matter how many well known Australian institutions are backing you, it means little to Asian investors,” she added.

OneVue has appointed PricewaterhouseCoopers Securities to help the platform provider select a minority shareholder by February 2012.

The prospective shareholder would acquire 1015 per cent of OneVue’s stake and would ideally have a large presence in Asia.

Meanwhile, Australian institutions such as Australian Unity Investments and Aviva Investments continue to be key unit registr y par tners of OneVue, McKeage said.

“The larger the organisation, the greater it was perceived that having an institutional brand on the register would benefit OneVue’s distribution expansion plans, hence the decision by the board to proceed in acquiring a minority shareholder,” she added. www.moneymanagement.com.au November 10, 2011 Money Management — 7

News ASIC clarifies insurance phone sales requirements

BTIM’s solid profit

By Mike Taylor BT INVESTMENT Management (BTIM) appears to be weathering recent market volatility and cautious investor sentiment in good shape, reporting just a one per cent decline in net profit after tax of $30.5 million for the year ended 30 September.

It said the result excluded the oneoff transaction expense associated with the acquisition of J O Hambro Capital Management, which would have seen statutory net profit after tax declining by 23 per cent to $16.9 million.

Commenting on the result, BTIM chief executive Emilio Gonzalez said it was sound against the backdrop of

volatile markets driven by concerns over European sovereign debt and a deteriorating global macro-economic environment.

“In a difficult environment, BTIM has maintained its underlying profitability with a continued focus on costs whilst continuing to invest for growth,” he said.

Gonzalez said the company had made significant progress on a number of strategic initiatives, in particular the recent JOHCM acquisition which had not resulted in any mandate losses or in any funds being placed on hold.

The BTIM Board declared a final fully franked dividend of 10 cents per share, taking total dividends for the year to 16 cents per share.

ASFA backs laws targeting phoenix company directors

By Tim Stewart

THE Association of Superannuation Funds of Australia (ASFA) has backed moves by the Government to make directors of ‘phoenix’ companies personally liable for any unpaid superannuation contributions.

A phoenix company is a firm that closes down with a number of unpaid debts, only to reopen with a new name and the same directors.

Under the new laws, the Australian Taxation Office (ATO) will be able to pursue a director whose company is three months behind in its Pay As You Go withholding or its superannuation guarantee contributions without issuing a director penalty notice.

Pauline Vamos ASFA chief executive Pauline Vamos said it was important to quickly close off any loopholes in the system to safeguard the integrity of superannuation.

“It is vitally important that all Australians receive the superannuation contributions they are entitled to,” Vamos said.

“The average person is not on a high wage and for most, the only way they can achieve dignity in retirement is by putting a small amount away over the long-term and benefiting from compound interest,” she added.

Superannuation balances are affected any time there is a break in contributions, Vamos said.

“We support any move to close down activity undertaken to avoid paying Australians their entitlements,” she added.

According to the ATO, there are about 6,000 phoenix companies in Australia.

By Milana Pokrajac

Emilio Gonzalez

GENERAL insurance providers will now be able to send their product disclosure statements (PDSs) to retail clients after the quote is given, following the class order relief introduced by the Australian Securities and Investments Commission.

These product providers were previously required to give a PDS to a client at or before the time the quote is provided, due to the fact a quote may constitute “offer to issue”.

However, the regulator was concerned about the inability of product providers to supply quotes during telephone calls solicited by clients.

Under the relief, the client can choose to receive the PDS, and if they do, the general insurer or intermediary must give a PDS as soon as practicable after the quote is given.

“This means that the PDS can be given after the telephone call,” the regulator stated in its announcement.

The relief, however, does not apply to telephone calls not facilitated by the client.

Jail for property promoter A QUEENSLAND property investment scheme promoter was last week sentenced to jail in the Victorian County Court on charges preferred by the Australian Securities and Investments Commission (ASIC).

The man, Gabrial Neil Pennicott, who was a former director of Sunset Capital Pty Ltd, was described as a property investment scheme promoter.

He was sentenced to more than four years jail on six charges of dishonestly using his position as a director or officer of various companies contrary to section 184(2)(a) of the Corporations Act, four charges of dishonestly obtaining property by deception contrary to section 81 of the Victorian Crimes Act, six charges of dishonestly obtaining a financial advantage by deception and seven charges of attempting to obtain a financial advantage by deception.

According to ASIC, the transactions related to transferring shares between companies he controlled at artificially inflated prices so as to change the

balances of inter-company loan accounts between the companies. It said the book value of these transactions was $2,465,000.

ASIC said Pennicott had also been charged with transferring and attempting to transfer shares at artificially inflated prices to repay and attempt to repay amounts owed to lenders to a company he controlled in lieu of repaying the monies owed and transferring shares at artificially inflated prices to himself and another person in lieu of being repaid amounts owed to them and then transferring the same shares to another company controlled by him.

Catastrophe bonds provide diversification for portfolios

ASIC accepts EU from Sydney auditor

CATASTROPHE bonds help companies to reduce the risk of loss from extreme events and are a useful source of diversification for investors, according to van Eyk Research. van Eyk said catastrophe bonds are designed to spread or reduce the risk of loss related to potential catastrophes and, in return for offsetting this risk, investors are offered a very attractive yield.

According to van Eyk, if the catastrophe does occur on a grand scale, investors risk losing a substantial amount of the principal placed on the bond. The research house believes investors are overpaid for taking on this risk. van Eyk refers to the Swiss Re Global Cat Bond Total Return Index as an example of the benefits of catastrophe bonds. Swiss Re research revealed that the index has declined just 0.46 per cent in the first half of 2011, and has generated steady

By Andrew Tsanadis

returns from January 2002 to March 2011, despite periods of significant natural disasters worldwide.

An Aon Benfield Securities report showed 45 per cent of catastrophe bonds on issue are exposed to hurricanes in the United States. van Eyk has warned investors against concentrating their portfolio exposure to these geographical events because they risk experiencing significant drawdown if a major natural disaster like a hurricane makes landfall. van Eyk stated that the catastrophe bond market is approximately US$25 billion, and the research house expects it to grow over the next decade, driven by increased population density, building cost inflation and concentration risk, and the growing popularity of such bonds with investors.

8 — Money Management November 10, 2011 www.moneymanagement.com.au

THE Australian Securities and Investments Commission (ASIC) has accepted an enforceable undertaking (EU) from Trood Pratt & Co auditor Peter Lockyer.

The EU follows an investigation by the regulatory body concerning Lockyer’s audit of the financial reports of Elderslie Finance Corporation Limited for the financial years ended 30 June 2006 and 2007 and that of Grenfell Securities Limited for the financial year ended 30 June 2008, ASIC stated.

The regulatory body stated that it was particularly concerned with Lockyer’s failure to ensure that a qualified audit report was issued, after the respective financial reports for both companies failed to comply with various accounting standards. ASIC was also concerned that the audit report itself may not have been conducted in accordance with various auditing standards.

Under the EU, Lockyer has undertaken to request that the regulator cancel his registration as an auditor within seven days of ASIC’s acceptance of the EU and to never re-apply as an auditor. He must also provide a copy of the EU to anyone who engages him to perform any audit work outside of what only a registered company auditor can perform.

SMSF Weekly Auditor requirements challenge regional Australia

By Mike Taylor NEW auditor registration arrangements are proving a real challenge for accounting practices in regional areas, according to Institute of Chartered Accountants self-managed superannuation fund (SMSF) specialist Liz Westover.

Westover said a recent tour of NSW regional areas had revealed that many auditors were older partners in regional accounting firms who were then faced with difficulties in adequately implementing succession planning.

"Not only can it be difficult to find audit staff, but it is becoming almost impossible for regional practitioners to satisfy the requirements to become Registered Company Auditors," she said.

"Unfortunately, they will rarely be able to gain the required experience in large listed audits unless

they have worked in larger, often city-based firms."

Westover said she was concerned that as the requirements for the registration of SMSF auditors were being finalised, a similar problem could be triggered.

"SMSFs continue to grow in number and they all require an annual audit," she said. "We need to be careful that the new provisions don't make it so prohibitive to become a registered SMSF auditor that it then becomes difficult for SMSF trustees to find a suitable auditor, particularly in regional areas."

Westover said the objective of SMSF auditor registration was to ensure competent auditors carried out quality audits, but there was a need to be careful not to over-regulate to the point of stifling the industry.

Trustee caution urged on charitable donations SPECIALIST self-managed superannuation fund company Cavendish Superannuation has warned trustees to take care w i t h re s p e c t t o c h a r i t a b l e donations.

Cavendish Superannuation head of education David Busoli said care was needed in circumstances where some trustees

had received communications from organisations which facilitate the transfer of small parcels or shares, or dividends to nominated charities.

“As individuals, they can do what they wish with their personal assets, but as trustees, they are not able to donate superannuation

assets,” Busoli said.

“If a trustee member wishes to donate some shares or allocate dividends to a charity, the assets or monies must first be paid out to the member as a fund benefit subject to preservation rules. The individual member may then make the donation personally.”

BGL adds actuarial provider to SMSF software

By Chris Kennedy SELF-MANAGED super fund (SMSF) software f i r m B G L Co r p o ra t e So l u t i o n s h a s a d d e d Bendzulla Actuarial to its actuarial certificate providers.

In May this year, BGL upgraded its service to allow integration of an actuarial certificate into an administrator’s SMSF software.

The firm’s Simple Fund software automatically provides the data and supporting documents to Bendzulla Actuarial, which then provides the

certificate to the client, BGL stated.

Actuarial certificates provide administrators with the percentage of income that is exempt from fund income tax for members receiving a pension, and this percentage is saved in the appropriate place in the software, according to BGL. BGL managing director Ron Lesh said the firm would add further actuaries to the certificate process in the coming months.

Since incorporating the actuarial service, more than 1,800 certificates have been obtained through this process, according to BGL.

10 — Money Management November 10, 2011 www.moneymanagement.com.au

ATO ruling triggers succession issues

By Damon Taylor

WHILE the Australian Taxation Office’s (ATO’s) recent draft ruling regarding auto-reversionary pensions has already highlighted the importance of effective succession planning within self-managed super funds (SMSFs), it is also an opportunity for advisers to take stock of their current succession planning practices, according to DBA Lawyers director Daniel Butler.

“Advisers are frequently asked to assist with SMSF succession planning assignments for their clients,” he said. “And more often than not, they will be approached by advisers with the query ‘I’d like to update Mr X’s pensions to make them reversionary’, or ‘Mrs Y needs a BDBN (Binding Death Benefits Nomination) drafted’.

“However, in order to appropriately plan for Mr X and Mrs Y’s SMSF succession upon their death or loss of capacity, there are a number of things that must be considered.”

Butler said that as a first port of call, the SMSF’s deed needed to allow for other supporting documentation to be put into place.

“The SMSF members should then consider having a sole-purpose corporate trustee appointed, with mechanisms in the company constitution that allow for the smooth succession of directors,” added Butler. “Thereafter, things such as wills, enduring powers of attorney, pension documentation and BDBNs should all be reviewed and considered.

“They need to be checked to ensure that they are consistent with one another and are in accordance with their clients’ goals,” he continued. “For example, a

Daniel Butler BDBN may state that a member’s superannuation benefits are to be paid to their legal personal representative. However, that member’s will may not take their superannuation benefits into account.”

According to Butler, when an adviser’s client asks them to start a pension or BDBN, the adviser should be thinking about a range of other aspects.

“The reversionary nomination is now an important decision and has an impact on clients’ estate planning,” he said. “Advisers such as accountants, financial planners and lawyers should hopefully be able to formulate strategies that can be applied across all of their clients.

“Such a strategy should not necessarily restrict clients’ succession planning choices, but rather ensure that the adviser is demonstrating that they have the client’s best interests at heart by thinking outside the square - and that the client will have a rocksolid SMSF succession planning position at the completion of the engagement.”

InFocus BANK REPUTATION SNAPSHOT

8 % NAB Best reputation with corporate clients

6 % Westpac Best reputation with institutional customers

15 % CBA Best reputation with retail banking customers

Meeting of FOFA minds unlikely in Canberra Much attention has been directed towards the manner in which a Parliamentary Joint Committee will handle the Government’s Future of Financial Advice legislation but, as Mike Taylor reports, the likelihood of a bipartisan approach is very remote.

F

inancial planners should not become too optimistic about the capacity for the Parliamentary Joint Committee (PJC) on financial services delivering any outcomes capable of altering the shape of the Government’s Future of Financial Advice (FOFA) legislation.

While it is true that the PJC chaired by Labor backbencher Bernie Ripoll managed nearly two years ago to deliver the original bipartisan report that gave rise to the Government's FOFA agenda, the likelihood of bipartisanship or any meaningful change to the first tranche of the FOFA is remote.

The Government and particularly the Assistant Treasurer and Minister for Financial Services, Bill Shorten, have too much at stake to allow Labor members of the PJC to support any of the changes which might be pursued by members of the Coalition for and on behalf of the financial planning industry.

Indeed, the most likely outcome from the PJC will be two reports – one generated by Government members and likely supported by the Greens and another, dissenting analysis, generated by members of the Coalition Liberal and National parties.

The benefit that will flow to the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) is that reference of the FOFA legislation to the PJC gives them an opportunity to restate their concerns about issues such as the two-year ‘opt-in’ and the almost retrospective imposition of comprehensive product disclosure requirements.

The two organisations have also lost no time in ramping up the lobbying campaign they began earlier in the year aimed at convincing

parliamentarians in all states – but particularly the independents – of the flaws in the Government's approach.

As was the case earlier in the year, the mostvisited independent has proved to be Port Macquarie-based parliamentarian Rob Oakeshott, largely based on the belief that he earlier this year signaled he held some reservations about the benefits of opt-in.

Similarly, a good deal of lobbying has been directed towards Tasmanian independent Andrew Wilkie.

However it is axiomatic of the delicate balance in the House of Representatives and the relationship which exists between the key independents and the Government that Oakeshott’s attitude towards ‘opt-in’ and other elements of the FOFA legislation in November, 2011 is somewhat changed from that which prevailed in June.

While no one is suggesting that financial planners should not continue lobbying Oakeshott, Wilkie and other key parliamentarians, the industry's cynics suggest that the independents may yet seek to use their support or opposition to FOFA as a bargaining chip for their own agendas. Wilkie in particular is seen as a single-issue politician.

However the degree to which the lobbying efforts of the financial planning industry have made their mark was indicated by Bernie Ripoll when he addressed the Association of Financial Advisers’ annual conference on the Gold Coast last month.

Ripoll remarked about the manner in which his Parliamentary colleagues had complained about the number of visits they had received from financial planners

and the issues which had been raised.

While the PJC chairman indicated that he was entirely supportive of the Government's FOFA approach, he acknowledged that the level of lobbying undertaken by financial planners on the issue had made some of his colleagues uncomfortable.

Notwithstanding the likelihood that the PJC will fall well short of adopting a bipartisan position on the FOFA bill, the FPA last week relaunched the do-it-yourself lobbying kit with which it armed members earlier this year.

FPA chief executive Mark Rantall said that whatever the outcome, he believed the reference of the FOFA bill to the PJC represented an important opportunity for the industry to restate its points.

This was a view echoed by AFA chief Richard Klipin, who said his organisation and its members had never ceased making representations with respect to its concerns about the FOFA legislation.

While the PJC appears unlikely to adopt a bipartisan position with respect to the FOFA legislation, it will give financial planners a clear signal as to how the bill is likely to be treated in the House of Representatives.

If the only members of the PJC recommending amendments to the legislation are sitting on the Opposition benches, then the Government will know that its bill is likely to be passed intact.

If, however, a majority of members on the PJC support the position adopted by the Coalition, amendments become a certainty.

What must be remembered, however, is that the legislation to be considered by the PJC is only the first tranche, with at least two further packages expected in coming months.

Source: The Bank Reputation Index – Daymark Public Relations and East & Partners

What’s on

ASFA National Conference & Super Expo 2011 9-11 November 2011 Brisbane Convention & Exhibition Centre www.superannuation.asn.au/ asfa2011-conference

SMSF’s – Stronger Super Reforms (Breakfast) 10 November 2011 Amora Riverwalk Hotel, Richmond, Victoria www.spaa.asn.au/events.aspx

Procure to Pay 2011 15-17 November 2011 The Sebel, Sydney www.procure-to-pay.com.au

FPA 2011 National Conference 17-18 November 2011 Brisbane Convention & Exhibition Centre www.fpaconference.com.au

Insto FX Congress 30 November 2011 Sheraton on the Park, Sydney www.intrepidminds.com.au

www.moneymanagement.com.au November 10, 2011 Money Management — 11

Roundtable

FOFA: living life by ava-tranche With both tranches of the Future of Financial Advice draft legislation now released, participants in a Money Management roundtable discuss the good, the bad and the ugly coming out of the Government’s proposed package.

Present Mike Taylor, Money Management Mark Rantall, FPA Richard Klipin, AFA Nicolette Rubinsztein, Colonial First State Gerard Doherty, Fidelity Rick Di Cristoforo, Matrix Paul Harding-Davis, Premium Wealth Management MT The legislation, the bill, was b r o u g h t d ow n l a s t w e e k a n d i t contained a couple of surprising things. I think one of the foremost amongst these, from talking to people like Mark and others who watch this very closely, was the fee disclosure requirements which, when you read them, seem very, very onerous and very t i m e - c o n s u m i n g – a n d t h e re’s a n element of retrospectivity about them.

So, I guess kicking off with that, I’d like to ask the panel how they feel the industry will deal with something like that in the event that the legislation goes through unamended.

I’ll kick off with you Mark, because I know that you’ve been at the coalface on this one?

MR That particular piece of legislation was in terms of expanding fee disclosure to be retrospective, with existing clients to be captured rather than new clients, as opt-in is proposed to capture. It certainly was a surprise to the whole industry. It seemed to be a last-minute inclusion.

We’re n o t q u i t e s u re w h y i t w a s included at the last minute, but we’ll work through the details of that through consultation.

What it does mean, however, is that now that it’s embedded in the draft legislation and that legislation will be debated, it can only be removed by the government through ongoing consultation at the political level.

In terms of the effect that it will have on financial planners, the form of the fee disclosure is quite onerous and it has a number of different components.

The first component is to let clients know what fees have been charged in

Rick Di Cristoforo and Paul Harding-Davis the past (the previous 12 months), what services were on offer during the previous 12 months, and what services the client availed themselves of during the previous 12 months.

In addition to that, the fee proposed for the next 12 months has to be outlined in dollar terms. The services that are provided for that fee have to be outlined as an estimation by the financial planner, the services that will be t a k e n u p by t h e c l i e n t h a v e t o b e outlined.

So this is not a small piece of work that’s being required of the financial planners when that has been allocated back to their existing client base. This

12 — Money Management November 10, 2011 www.moneymanagement.com.au

fee disclosure could run to a number of pages, and whilst the proposal as it stood was to be implemented for new clients, financial planners might have had half a chance to progressively implement this piece of legislation in unison with opt-in – even though we don’t support opt in as a legislative requirement.

But now, effective from the 1 July if this legislation is passed, the entire client base of a financial planner will have to be sent this notice – and we think that’s excessive. The reason we think it’s excessive is that we support full disclosure to clients of fees and charges. Full disclosure of fees and

charges are made in a statement of advice and full disclosure of fees are also made at the product level, whether it be from a platform or from an individual product. And if an adviser is being paid via a cash management account, well clearly there’s full disclosure there on annual statements. So we just think this is additional red tape, additional work for no consumer benefit, and this will explode the cost of opt-in legislation.

So we’re quite concerned about it and we’ve taken a strong stance against it.

NR Well what’s frustrating is that they haven’t taken on board any of the industry’s feedback about how impractical

Roundtable that actual notice is. It’s one thing having an option of having the client sign a piece of paper; it’s another thing producing a piece of paper that has the prior year’s fees, the future fees, all of the services – and you think about how you actually do that.

You’re going to have to get the information off the platform, possibly off multiple platforms if your client is on multiple products. And then you’re going to have to – the deliverer is going to have to – put the services on.

I think it’s going to be very costly for the industry to build that in with previous clients. At least with future clients you could have actually managed their arrangements in such a way that you knew you were going to be able to get more of that information together, but when it’s for existing clients that’s going to be very, very difficult.

RD There’s a couple of points this

raises as far as overall implications are concerned. One of them, at the highest level, is that effectively a clause was moved from what was 962 Division A down to 962 Division C, effectively removing the grandfathering.

The presumption was always that the industry would work on a forward basis with future clients on a new process.

That’s the first thing. The next implication is by removing the grandfathering you’re effectively applying this to what we classify as C and D clients across the industry.

How the thought process around a fee disclosure is consistent with access to advice is beyond me. There is no compatibility between the overall aim of access to advice.

And the third thing – and this is not from a Matrix perspective but from consultation with a number of players in our industry including consultants who are supposed to be helping the overall

industry do its job – is they’ve said in no uncertain terms the data doesn’t exist.

So by not listening to the industry, as Nicolette has rightly said, they’ve put in a piece of legislation that is actually not possible to be implemented by the 1 July 2012. I know we’ve all got questions about when this thing gets implemented, but even with it in its pre-exposure draft form we had questions about the implementation.

I’ve now got questions about how every single company in this industry actually coordinates together a piece of data on a piece of paper for a new client, when all the pieces of data are in disparate places.

They simply can’t be put together with what we’re seeing in the industry right now, and I know that’s not a view of just Matrix, that’s a view of every single person I’ve spoken to.

NR And the Finance Industry Council of Australia have now written a letter to

to put in place those processes in that s a m e s p a c e o f t i m e. I w o u l d h a v e thought that some of them would be alarmed by what they’re being asked to accomplish.

MT Richard, the question really is looking at the bill, which has now been introduced, had to say particularly about fee disclosure – and the impact that has on planners and the cost imposition, I guess, on planners. I’m just wondering, as you’ve just really entered the room, I just wonder what your take on it is from the AFA’s point of view?

RK Oh look…great concern, great concern that it’s been, if you like, tossed in at the last moment; great concern about what it’s going to mean, as people around the table have said, in terms of just practice activity. It adds another layer of uncertainty, this is almost like the joker

Nicolette Rubinsztein, Gerard Doherty and Mark Rantall

“

By not listening to the industry they’ve put in a piece of legislation that is actually not possible to be implemented by the 1 July 2012.

– Rick Di Cristoforo

”

Government questioning the timing, asking for more transition time.

PH Given how long it’s going to take for final details, for final passage, how few months are left for the industry to wrestle with this? It’s kind of alarming, particularly when you think about the sorts of changes you’re asking platform providers and super fund administrators to make.

I find myself a little intrigued, too, about the implications of that across some of what the government might argue are their own constituencies – in terms of the effort they would have to go to to produce this information, and

in the pack that’s tossed in at the last moment. Is it a negotiating point? Is it now new policy? Is it now new policy on the run? Where’s the evidence for it? It kind of brings into question what the whole thrust is here, because the playing field keeps on shifting.

Big businesses and small are making big decisions about getting ready, because the 1 July, 2012 deadline really hasn’t changed – and it’s entirely unreasonable for the landscape to shift that dramatically in the space of weeks. I’m not sure whether it’s been tabled, but it’s our understanding that the legislation is Continued on page 14

www.moneymanagement.com.au November 10, 2011 Money Management — 13

Roundtable I worry [that] we sound like we’re objecting to fee “disclosure on a retrospective basis; it’s quite the contrary, what we’re objecting to is a radical change in the form of that disclosure at the last minute.

– Paul Harding-Davis

”

PH Before I have to head off, I think it’s really important when we discuss this and we use the term ‘retrospective disclosure’ to constantly reinforce the fact that there has been extensive fee a n d c o s t d i s c l o s u re i n p l a c e a n d prescribed fee and cost disclosure for years.

The reality is the level of information t h a t i s re q u i re d t o b e g i v e n t o a n investor or a customer of a financial planner is already highly prescribed and very comprehensive. So I worry [that] we sound like we’re objecting to fee disclosure on a retrospective basis; it’s quite the contrary, what we’re objecting to is a radical change in the form of that disclosure at the last minute.

The fact is there has been comprehensive and rigorous fee disclosure, in fact arguably some of it’s almost hard for the consumer to understand

involved in answering this question, but in all the circumstances do you b e l i e ve t h e g ove r n m e n t h a s b e e n honourable in the manner in which it’s gone about this legislation in terms of where it started with Ripoll and how it’s got to where it is today which is the bill that was introduced to the House last week? Were they honourable, were they transparent in how they got to where they’re going? It’s a very noisy silence.

MR Well I’ll lead off, I don’t think this is a matter of being honourable or not, I don’t think it’s a matter of behaviour. I think there was a robust process that has taken a long period of time, which is appropriate for the extent of changes that are being made. I mean FOFA is not just about opt-in, there are other ramifications of FOFA.

Nicolette Rubinsztein Continued from page 13 going to be referred to the Parliamentary Joint Committee [PJC]. I’m not sure if you guys have spoken about that.

There’s therefore a process that’s going to now happen within the PJC. That’s no doubt going to take some time. And it almost feels as though we’re back to the start of 2009. If we’re going back to the PJC (which is where we started), it feels like: what’s the last three years of really hard labour, hard yards, dramatic landscape change, what’s it all been for, if you like? So yeah, as an opening set of comments, that’s where I sit.

MT Gerard, you’re coming at it from a slightly different perspective?

GD Yeah, well look, as an industry participant I agree with Richard. There’s been, I think, a long arduous process that we’ve gone through, and this sting in the tail at the last minute is very frustrating and very concerning.

We’ve heard consistently that the dialogue from the government is, ‘We want to give more Australians access to advice’, (but we keep putting up more barriers for people who want to be in t h a t b u s i n e s s by i n t r o d u c i n g t h i s continual complexity).

So for all industry participants it’s not a good thing and I don’t think it’s ultimately a good thing for investors. I think it will produce another set of paperwork that people won’t understand, that’s the sad thing. I don’t think it will achieve – well, I don’t know what the desired

outcome is – but it won’t achieve what the normal person would think it would achieve, which is to make an investor better informed. I just don’t think it will.

MR Well I’m glad you’ve raised that, because given that both the ISN and Choice have come out with such strong support for this particular retrospective initiative around disclosure documents, you know, they’ve lobbied hard to have this addition at the last minute to the legislation that’s been tabled – given this, I just question why they would want to do this when we fully support disclosure in all its forms, when that disclosure is already there on people’s annual statements in terms of fees and charges.

When we’ve gone through, as everybody says, an arduous consultation process over many years and many months, then to have this sort of thrown in at the last minute – you know, you can only draw the conclusion that the ISN is trying to put in place a more difficult operating environment for advisers to suit their own ends.

Where the ISN is a wealth management conglomerate consisting of part of a group called Industry Super Holdings which has a bank – ME Bank – it has a wealth management company with $39 billion under management and a financial planning company turning over $265 million a year, you know, I think the question needs to be asked: what are the motives of supporting such an initiative when the vast majority of the industry had already lined up behind a position only to have it overturned at the last minute?

14 — Money Management November 10, 2011 www.moneymanagement.com.au

Mike Taylor because there’s so much of it prescribed in a Product Disclosure Statement. The average PDS must cover three or four pages on fee disclosure, and I question most ordinary individuals’ interest level in wading through three or four pages in amidst 40 or 50 or 60 others, but the reality is the disclosure has been extensive and it’s been consistent and it’s been prescribed by all of those parties for some time – and willingly adhered to by everybody I know in the sector.

MT Well let me throw probably a little bit of a controversial question at you on this and I’ll understand why some people may wish not to be

There are lots of other parts of legislation and tranches to come through that we haven’t seen yet, and from the Financial Planning Association’s point of view we broadly support the thrust of the FOFA reforms. We have had for some time in our code of professional practice a best interest duty. We had for some time the removal of commissions, and we’ve had for some time the avoidance of conflicted remuneration. And we’ve had for some time the avoidance of any soft dollar opponents.

We support higher standards and we support higher education. We don’t think RG146 is an appropriate level of education for financial advice.

Roundtable So, you know, the disappointment with this is: after two years of consultation where our association broadly suppor ts the major ity of the FOFA reforms and the new direction that we’re taking for the benefit of consumers, to have a piece of legislation which incorporates two pieces of policy – one of them a bi-annual renewal statement, and the other a retrospective disclosure statement which is excessive.

It is disappointing to see that the broader industry has not been listened to on this subject and that legislation is still being tried to be pushed through, because I think without it there’d be general industry support and professional support to make sure that we improve standards for the benefit of consumers.

That’s the disappointing aspect, and I can understand that due process has been undertaken. It’s the result of that due process in relation to specific parts of this legislation that has now been tabled that is a disappointing result.

NR Staying off the honourable, not honourable: I think there’s been a sort of decline in trust, and now just if we look at the way that we’re going to build optin from a platform point of view we will probably do the IT build in two separate sections, almost on the expectation that the Labour Government will not be elected next time around.

So we will build the ability to capture the client information and the fee information in the first instance. Then the next build, which only needs to happen in two years time, will provide the ability to produce the statements. But I think that’s indicative of people’s view of the government.

MT It’s a pity he’s had to leave us, but Paul Harding-Davis I think last week was suggesting, as have others, that in some ways the net outcome of FOFA is a bit of a back-to-the-future where the banks and the major institutions are going to be dominant in the advice space.

I guess we can see Count Financial, you know, get the offer from the Com Bank, and understandably given all the things there’s a move there that will probably get signed off. Rick is here and he announced yesterday that in fact Matrix is looking for investment.

So I just wonder whether really what Paul had to say last week, about the way in which vertical integration is kind of where it’s all being pushed, is what’s really happening – and ultimately is it a good thing, is it a bad thing? Rick I’m going to ask you first because…

RD Of course, why not? I think we’ve got to be very careful to separate the decision that an individual company makes around its own strategy versus what goes on in the macro environment. I can only speak for Matrix that we would make decisions based on what our own internal capabilities and our own internal views are about what the future looks like.

So I can honestly say FOFA had no impact on the announcement. However

Richard Klipin and Rick Di Cristoforno

“

There’s two sorts of people you meet in financial planner land: there’s the older guys who are feeling really frustrated with the ways the rules are changing, and the other guys who are saying ‘bring it on’.

– Rick Di Cristoforo

”

I think that what you see when you see FOFA, in terms of the overall industry consolidation, is the beginning of a very large, unintended consequence.

Now whether or not you think that vertical integration, industry consolidation, companies like Matrix – for whatever reason making the decisions that we’ve made – is a good or bad idea, we will end up with an industry that looks different. We would arguably, as I’ve always argued, end up with an industry that has less dynamic competitive pressure.

By definition that seems to not be consistent with the best interests of the community and clients overall. So for the purposes of FOFA and its impact on the industry at large, rather than specifically related to Matrix, you know I’ve said publicly it is a real shame because it’s creating changes in the industry for certain players that would not otherwise make decisions.

And Nicolette, that is exactly the sort of conversation I’ve been having with other people over the past few weeks.

You’re in a large organisation, people often talk about independent-owned

licensees – and I’m not going to go into any of that – but the reality is if you’re in a very large institution with a very large platform that you’ve spent X amount of millions of dollars developing, and you are seriously considering building two different systems effectively to deal with the ‘what-if-they’re-in, what-if they’reout’ scenario.

If that isn’t a waste of money I don’t know what is – but you’ve got no choice, and that to me is another unintended consequence. I don’t think we really think the Treasury ever thought, ‘let’s just make Colonial First State and ANZ and all these other companies build dual systems for disclosure and fees’. It’s ridiculous. So I think what we’ve seen is just the beginning of one of the many of what could be very large unintended consequences.

NR Sorry, just to clarify, we’re not building two systems, we’re actually just splitting the build.

RD But let’s put it this way, that has a cost to it.

NR It’s easier to do it all in one go.

RD Exactly, so at the end of the day, if we’re talking about something that’s most efficient, you would not be doing it a particular way, and I don’t know anybody in our industry that can honestly say that they’re looking at the future and going, “I’ve absolutely been able to choose the optimum path”, if they are they’re lying, to be perfectly honest. How can they possibly be telling the truth, because you’re having to do things that have been manufactured by a piece of law.

NR I think FOFA does favour vertical integration obviously, but I think the iPhone market will be alive and well. I don’t think anybody would predict the complete decline of the IFA market, and yeah, you know we were looking at Count, we’ve looked at them for years so we would have done it with or without FOFA. We’re still very interested.

We get 50 per cent of our inflows from the IFA market, so we’re very focused on making sure it continues to thrive. I think without doubt you can crosssubsidise within vertical integrated businesses.

GD I think there’s no doubt that vertically integrated players will dominate over the next few years and I think there are three influences.

One is the global financial crisis, which has seen incredible consolidation of banks and insurance companies and it’s also driven consolidation in large industry funds that are getting larger. The consolidation in the industry funds I think is something we should be very mindful of. It’s happening at a hell Continued on page 16

www.moneymanagement.com.au November 10, 2011 Money Management — 15

Roundtable

Paul Harding-Davis and Mark Rantall Continued from page 15 of a pace. So that’s partly driven by the global financial crisis.

I think the Cooper Review and the advent of MySuper is another reason to drive consolidation – so difficult financial times, Cooper Review and now FOFA is the third thing that makes for consolidation. So we’ve gone from the 80/20 rule almost to the 90/10 rule, a small number of very large players who are integrated and who will be able to dominate, because they have the scale to be able to deal with these things.

It’s also happening during a difficult period for investors where sentiment is down and flows of the managed investments are down. But I agree, I think in the future there will be a new IFA world.

I think it will be a different bunch of guys. It won’t be the entrepreneurs who grew up through the 1980s, like the Matrix guys who did a wonderful job building businesses on the rules that were there at that time.

But there’ll be a new bunch of guys and I meet those guys. There’s two sorts of people you meet in financial planner land: there’s the older guys who are feeling really frustrated with the ways the rules are changing, and the other guys who are saying “bring it on”.

I can see great opportunity and I think as confidence re-emerges in investors and markets become more bullish, then those entrepreneurs will be able to build businesses in the new game. So you’ll get this small number of large players – and then a number of small players breaking out again. In 10 years time I think you’ll probably have a more robust IFA market than today,

“

I think the challenge for the product providers is that the current industry business model relies on quality advice leading to some kind of product outcome. Well if you break that nexus, how do you end up with flows, how do you maintain that relationship which I think spins out the whole advice offer?

– Richard Klipin

”

quite significantly, building new business models.

RD If you’re running a business at the moment and you’re that sort of original entrepreneur, if you haven’t already addressed the idea around succession you’re probably five years too late anyway. So I suppose the argument is FOFA obviously focuses the mind, but realistically in organisations again like Matrix you have to make it a part of your job to ensure that people have generational shift, for example we’ve got second and third generation in now.

So y o u’re m ov i n g t o d o t h a t a n d there’s an element of people who obviously have frustration, who say, you know, “this is a pain” as rules change. I t h i n k w e’v e a l l g o t t h o s e [ p e o p l e ] regardless of how much time we’ve got.

At the same time we’ve got some people who are saying, “this is just another way of doing business”. In fact there are people within businesses

16 — Money Management November 10, 2011 www.moneymanagement.com.au

w h e re o n e p a r t o f t h e b u s i n e s s i s predominantly – let’s call it commission-based – and the other part of the same business is utterly fee-for-service, and that happens within even the smallest of businesses now. So there’s opportunities attached to it, but you know obviously what we’re here to talk about is an impost that’s put upon the industry for no apparent benefit and not in alignment with the stated goals of what the Government was saying.

RK There’s also an emerging issue, not in the advice world I think but in the fund insurance world. Advice is now the commodity – that is, advice is not about the product side, and there’s now countless examples where the role of adviser is not to end up being a product destination but to manage cash flow, get the strategy right and so on.

So I t h i n k t h e c h a l l e n g e f o r t h e product providers is that the current i n d u s t r y b u s i n e s s m o d e l re l i e s o n

quality advice leading to some kind of product outcome. Well if you break that nexus, which is clearly where FOFA is heading, how do you end up with flows, how do you maintain that relationship which I think spins out the whole advice offer?

Which is why the scaled advice, intrafund advice piece opens up the opportunity, as do the incubators of directto-market gain and so. That opens up the area of channel conflict or potential channel conflict, but also opens up the issue of what is advice.

Because, advice to date [may have been], you know, quality advice, end-upin-a-product proposition and away you go, but there are other things that are called advice, or ‘advice lite’ or scaled advice that ends up in a product proposition, so then we end up in this blurry land again of does advice equal sales or advice equals advice?

The question if you’re running a funds insurance super business is how do you make sure that you continue to do – so if yo u l i k e f e e d t h e b e a s t o r f e e d t h e factory and keep it humming when your distribution channels have a change of focus into providing advice irrespective of whether there’s a product sale made or not.

I know product providers are absolutely addressing those issues, but I think it does change the landscape and in some ways, in the same way the economics of the advice models are in change, so the economics of the product provider model also have to be in change. So it’s kind of interesting up-line impacts. Ripoll and FOFA was never about that stuff, it was always about giving good advice so the storm doesn’t happen again.

MM

OpinionEuroDebt Euro debt dance just an old Argie tango There is a striking similarity between what debt-ridden European countries are going through now and what some Latin American countries were going through more than a decade ago. As Dominic Rossi writes, past events point to a bleak economic future.

T

he prospect of a sovereign default in Europe evokes memories of 2008 and the collapse of Lehman Brothers. For me, a better parallel is 10 years earlier. Today’s drama has all the hallmarks of a classic Latin American crisis, only this time the Latins are in southern Europe.

The Russian default of 1998, itself an echo of the previous year’s Asian Tiger crisis, sent Latin America into a tailspin that took five years to stabilise. Countries many thousands of miles from Moscow, and with few trade links, were caught up in the crisis, their leaders, such as Argentina’s then president Carlos Menem, at first either unwilling or unable to comprehend the impact a Russian default might have on their own creditworthiness. The crisis roamed from one country to the next, causing havoc in financial markets and led to a range of support measures from the International Monetary Fund (IMF).

For Russia read Lehman Brothers. For Argentina, read Greece. For Menem, read Papandreou. For Brazil, read Italy. For IMF, read IMF. There are differences, but the combination of surging sovereign yields, frail banks, ever-larger IMF-backed stabilisation plans, austerity, no growth, falling equities, volatility and bewilderment are common to both episodes. The lesson of the 1990s’ crisis is to prepare for the worst because it will happen. Countries that did, such as Brazil, recovered; those that didn’t, such as Argentina, still struggle.

The role of the private sector was key to the recovery in those Latin economies.

Latin American governments, led by Brazil, adopted a range of financial and economic policies that sought to promote private sector involvement in economic recovery. Asset sales, price liberalisation and fiscal consolidation focused on expanding the private rather than the public sector. I do not recall the Brazilian central bank ever buying government bonds.

In southern Europe today, it is not clear what role the private sector is expected to play in economic recovery. The European Central Bank’s (ECB’s) policy of purchasing sovereign debt is stabilising sovereign yields but it has an unintended consequence, encouraging the banking system to offload its bond portfolios and abandon southern Europe, with dire consequences for economic growth. In the next few months, the extent of the recession in continental Europe will become clear and debt dynamics will further deteriorate. This is not what policymakers are assuming. But what else should we expect? We should pursue policies that seek to encourage private sector finance in southern Europe rather than offer it a means of escape.

The lessons Before southern Europe can return to growth we need private sector involvement and finance. The experience of the Latin American crises can guide us in Europe today.

First, governments in southern Europe need to commit to primary surpluses (budget surpluses before interest payments) and halt the drain on private sector resources. Fifteen years ago, developed countries (and the IMF) demanded that emerging countries such as Brazil run large primary surpluses to stabilise their debts. It is hardly surprising that similar calls are heard from emerging economies now that roles are reversed.

Second, the ECB should stop buying sovereign bonds. The purchases should be replaced with a Brady-style plan that ‘incentivises’ the banking sector to renew its lines of credit to southern Europe, while simultaneously lowering the overall debt

burden. (The Brady plan was a US-sponsored strategy that emphasised debt forgiveness.) The creation of a 30-year zero-coupon ‘Trichet bond’ would collateralise the principle of new Greek sovereign securities, which would be the centrepiece of a debt-swap plan. The swap – old Greek securities for new – would simultaneously reduce the overall quantity of Greek sovereign debt and extend its duration. Banks would enter the swap voluntarily as the discount to the old bonds would be more favourable than current prices and the new securities would be backed by the Trichet bonds. The Greek government would be responsible for all coupon payments, maintaining fiscal discipline.

Third, banks will require more capital to absorb the financial impact of the debt swap. Accounting standards could be relaxed temporarily to facilitate this, but there will be calls for fresh capital.

Equity markets may not be prepared to provide this capital at current share prices, but European banks can sell their non-European subsidiaries to local competitors. They can sell off nonbanking businesses. Some troubled banks can be sold to foreign banks in their entirety. US and European banks scooped up much of Latin America’s banking system 15 years ago.

It is difficult to see an end to this crisis in southern Europe, but it can be solved if policies are crafted to encourage private sector involvement. At the moment, the private sector is disengaging from southern Europe and the ECB’s purchasing of sovereign bonds is accelerating the process. This can only mean that economic growth will continue to disappoint.

Dominic Rossi is global chief investment officer, equities at Fidelity Worldwide Investment.

www.moneymanagement.com.au November 10, 2011 Money Management — 17

The Messenger

In praise of uselessness One of the great risks to the world’s economy is the irresponsible actions of central bankers, according to Robert Keavney. He argues they will give pain, but no gain.

I

n April 2007, after the Reser ve Bank of Australia (RBA) had lifted rates, the Sydney Daily Telegraph displayed a large photograph of the face of RBA Governor Glenn Stevens on its front page, with the caption “Is this the most useless man in Australia?”.

We need not give much credence to the implied view that interest rates should never go up. However, I wish to go further, and offer high praise to Governor Stevens. What has he done to deserve such praise? Not much – and that is the point. This is an article in favour of a healthy passivity by central banks.

The head of RBA does not appear to suffer delusions of grandeur; he does not seem to believe he is a superman called on to save the world or even capable of such a task; he does not suffer manic depression when it comes to interest rate settings. All in all, he seems a man of the past, when central bankers were prudent and considered, and limited themselves to worrying about the stability of the banking system and trying to contain inflation within reasonable limits and not too much else. In other words, Governor Stevens appears to have not lost his mind.

This stands in clear contrast to the behaviour of Federal Reserve (Fed) Chairmen Alan Greenspan and Ben S. Bernanke. What the inflation markets should be most worried about is inflation of the egos of American central bankers.

The god of markets This began during the period called the ‘Great Moderation’, though it should have been called the ‘temporary bubble of the late 1990s’. For a period, Wall Street applied the nickname “God” to Fed chairman Alan Greenspan. The rationale for this idiotic sycophantism was that many market participants believed that the then prevailing bull market was caused by the Fed’s interest rate settings. And it was expected

that, at the first hint of a downturn in equity markets, Greenspan would slash rates to send markets back to their upward trend – the “Greenspan put”.

History has shown this expectation to be drivel. It was just another version of “this time it's different.” Subsequently, as markets fell, rates were cut all the way to virtually zero – yet equity markets have remained weak. Nonetheless, during the boom, central bankers began to be seen as all powerful in managing the economy. Then, Ben Bernanke assumed the ‘all powerful’ seat of Fed chairman.

Bernanke clearly believes the Fed should take a leading role in managing t h e e c o n o m i c c r i s i s, a n d t h a t i t i s equipped to do so. Thus, we have seen rates reduced to near zero, Quantitative Easing (QE) 1 and 2, Operation Twist, etc. Further, Bernanke tells us that the Fed has many other arrows in its quiver.

It is all vanity; all froth and no beer; all pain with no gain.

Rational expectations “Ra t i o n a l e x p e c t a t i o n s a re w h e re people in the economy and investors actually think a little bit, and cannot simply be repeatedly fooled, misled, and hoodwinked by policymakers and central bankers to believe things that constantly contradict the evidence, the reality, history, and rational thought.”

These words are from Erik Metanomski, chairman of Lanyon Asset Management. From the beginning of the global crisis, Metanomski foresaw that the panic of authorities would lead them to take extreme actions, which would ultimately prove counterproductive. He has been warning of this – whenever he could get a podium – since 2007. Unfortunately, he is being proved correct.

As Metanomski points out, most of the ‘rescues measures’ implemented by the Fed were implemented without any historical evidence of their effectiveness.

To the contrary, in many cases history suggested they would be ineffective.

18 — Money Management November 10, 2011 www.moneymanagement.com.au

Consider the example of zero quantitative easing. Japan engaged in quantitative easing on a grand scale for a half decade from March 2001. It has been an abject failure.

Seemingly, the Fed philosophy is “It didn’t work in Japan so it must work here.”

QE failed in Japan and America for the same reason. The economy was constrained by lack of consumer demand.

Consequently, businesses and consumers were not borrowing. QE made significantly greater funds available for borrowing.

This proved pointless in the face of lack of demand for loans.

Richard W. Fischer, president and chief executive officer of the Federal Reserve Bank of Dallas, has dissented from the view of the majority of his colleagues on the Fed. In a speech on 17 August 2011 called Connecting The Dots, he argues: “I have posited both within the Federal Open Market Committee and publicly for some time that there is abundant liquidity available to finance economic expansion and job creation in America.

The banking system is awash with liquidity. It is a rare day when the discount windows – the lending facilities of the 12 Federal Reserve banks – experience significant activity. Domestic banks are flush; they have on deposit at the 12 Federal Reserve banks some $1.6 trillion in excess reserves, earning a mere 25 basis points – a quarter of 1 per cent per annum – rather than earning significantly higher interest rates from making loans to operating businesses. These excess bank reserves are waiting on the sidelines to be lent to businesses.

Non-depository financial firms – private equity funds and the like – have substantial amounts of investable cash at their disposal. US corporations are sitting on an abundance of cash – some estimate excess working capital on publicly traded corporations’ books exceeds $1 trillion – well above their working capital needs. Non-publicly

held businesses that are creditworthy have increasing access to bank credit at historically low nominal rates.”

The point being made by Fisher is that there is no shortage of funds available for borrowing, so how can it make any difference to make more funds available? The problem is over-indebtedness and consequent lack of demand. The Fed, like the Bank of Japan, tried to address this by facilitating more borrowing. It is like using fire hoses to assist in an area suffering floods.

The Fed has greatly weakened its balance sheet for no enduring benefit to the economy. The money base has been greatly expanded, for no purpose.

If Bernanke had a realistic assessment of his and the Fed’s capacity, he would go to Congress and the President and admit that there is nothing the Fed can do. Unfortunately, American central bankers are not so modest, or realistic, about what is in their powers.

You expect politicians to make decisions which make them look good in the short-term without consideration of the long-term consequences, but you don't expect it of central bankers.

However, this is happening in America.

They should take lessons from Glenn Stevens. Restraint is a laudable attribute for central bankers.

(It should be noted that the Australian economy has not been put under stress like the US. If that should occur, it is to be hoped that the RBA does not become infected with the American disease.)

Before leaving this subject we can note the wild swings in US interest rate settings over the past decade. Fed rates have fluctuated over a 6.2 per cent range over the past decade. This is about 2 per cent more than the range in Australia. The Fed has been manic depressive in its interest rate management.

Somehow the Fed managed to set rates at their cyclical peaks as America headed towards recessions in 2000 and 2007. This was entirely counterproductive.

Everyone, it seems, is calling on the Europeans to fix their “situation – as if it could be fixed by a political decision. ”

Meanwhile, in Europe…

Julia Gillard has called for the Europeans to get their act together and fix the situation. Angela Merkel must be trembling.

Everyone, it seems, is calling on the Europeans to fix their situation – as if it could be fixed by a political decision.

A significant number of European nations have debts which seem beyond their capacity to repay. Many European banks are significantly exposed to those nations’ bonds and their banks. This puts the European banking system at risk. Euro countries are prevented from using tools such as allowing the currency to depreciate or printing money. How can this be ‘fixed’ by politicians?

Only after we give up the illusion that

there is a good fairy who can wave a magic wand and make everything better will the world be ready to accept the necessity of going through substantial pain and suffering before a new normalcy emerges.

History repeating Oliver Marc Hartwick, research fellow at the Centre for Independent Studies, wrote an interesting article in the Third Link Newsletter (October 2011) on the History of European monetary union. The Euro is not the first time European countries have adopted a common currency.

In the Nineteenth Century, Belgium, Switzerland, Italy, Greece, Bulgaria, Spain and Serbia either adopted the French franc or linked their currencies to it. This

became known as the Latin Monetary Union (LMU). In that era of gold backed currencies, the LMU was based on having identical amounts of gold and silver in their coins.

You won’t be surprised to learn that the currency union failed and was disbanded in 1927.

In 1908, one country was expelled for cheating with the gold content of its coins.

One guess as to who it was? Greece!

History repeating – lessons not learnt.

Hartwick reports new evidence which suggests that France insisted on the adoption of the euro as a condition for its support for the unification of East and West Germany.

This, it was hoped, would prevent Germany from becoming the dominant nation in Europe. This hope has been disappointed. As have all the hopes for the Euro. If the Euro survives, Germany will be calling the shots.

Robert Keavney commentator.

is

an

industry

www.moneymanagement.com.au November 10, 2011 Money Management — 19

Managed Funds vs ETFs

Old school or good old?

Managed funds are supposedly a non-transparent and expensive way of investing, while ETFs are increasingly touted as low cost investment saviours. Graham Hand outlines how similar the two investment products are when compared on a like-forlike basis and highlights the features that can set a managed fund apart.

E

xchange Traded Funds and m a n a g e d f u n d s a re v e r y similar. In fact, “ETFs are listed managed funds” according to the Australian Securities Exchange (ASX) ETF Fact Sheet. They are both open-ended funds which co-mingle assets and try to achieve a stated investment outcome.

Both investment options can be classified into two broad categories: index funds and actively managed funds. The former tracks the performance of an underlying index, while the latter aims to outperform a stated index through active management. Although actively-managed ETFs are common overseas, they are not yet listed in Australia.

When comparing ETFs with managed funds, many financial commentators compare index ETFs to

active managed funds, and claim significant cost savings for ETFs. This is a misleading comparison, since most of the cost difference comes from active versus index management, not managed funds versus ETFs. There is a legitimate debate worth having on the merits of passive versus active investing, but that is a separate discuss i o n . Fo r a n i n v e s t o r t o m a k e a n informed decision, the comparison needs to be like for like – index ETFs versus index managed funds. So how do (index) ETFs and managed funds really compare?

The primary difference between the investments is the access mechanism.

ETFs are by definition exchange-traded, which in Australia means they are traded on the ASX, whereas managed funds are usually accessed through a

20 — Money Management November 10, 2011 www.moneymanagement.com.au

platform provider who offers index f u n d s i n i t s ra n g e o f i n v e s t m e n t options. An ETF’s price is confirmed at the point of execution on the ASX, while for an index managed fund, the cost is determined based on the Net Asset Value (NAV ) price at the close of business on the day the investment is made.

E T F p r ov i d e r s a p p o i n t m a rk e t makers who endeavour to keep the bid/offer prices close to the NAV. They do this by arbitraging (that is, making a profit on) any price discrepancy between the listed price and the NAV. If an investor buys an ETF at a premium to its NAV, the investor faces an additional cost of investing in the ETF. Likewise, if an investor sells an ETF at a discount to its NAV, they also face an additional cost. At the point of purchase, the investor does not know

the NAV of the ETF, and their only guide is the movement of the corresponding index. For a managed fund, while intraday pricing is not offered, the investor can be sure the investment or redemption will be processed at the NAV less the spread (see Table 1).

Other key differences between index ETFs and managed funds are the cost of access, the ongoing management cost, and the services each product provides to clients. On the cost issue, an index ETF tends to be marginally (around 0.12 per cent per annum) c h e a p e r t h a n a n e q u i va l e n t i n d e x managed fund. This difference is a payment for the additional services offered by managed fund providers, including consolidated investment and tax reporting, portfolio management tools such as auto-rebalancing and

Table 1

A comparison of index ETFs and index managed funds Australian shares

Name

International shares

ETF

Index managed fund

ETF

Index managed fund

SPDR S&P/ASX 200i

Colonial First State

iShares S&P Global 100ii

Colonial First State

Wholesale Index

Wholesale Index Global

Australian Share

Share

Paperwork

If an account with a broker exists no

If an account with the fund manager exists

If an account with a broker exists

(initial investment)

paperwork is required. Otherwise, standard

no paperwork is required. Otherwise an

no paperwork is required. However, a

no paperwork is required. Otherwise an

paperwork must be complete to open a

application form must be completed

W8-BEN form should be completed

application form must be completed

brokerage account Paperwork

If an account with the fund manager exists

post trade

No paperwork required

No paperwork required

W8-BEN form must be updated regularly

Minimum size as set by a broker or the ASX

$5,000 or $1,000 with a regular investment

Minimum size as set by a broker or the ASX

No paperwork required

(ongoing investment) Minimum investment

plan. $500 for subsequent investments Ongoing management

0.286% paiii

$5,000 or $1,000 with a regular investment plan. $500 for subsequent investments

0.41% paiv

0.400% pav

cost

0.52% pa (hedged version also available for the same cost)vi

Transaction costs

The greater of $29.95 or 0.30% brokeragevii

0.15%

The greater of $29.95 or 0.30% brokerageviii

0.15%

Investment price

Bid/offer at point of trade – market makers

NAV price as at close of business on day of

Bid/offer at point of trade – market makers

NAV price as at close of business on day of

aim to keep the bid/offer close to the NAV

investment

aim to keep the bid/offer close to the NAV

investment

Liquidity

Proceeds of sale are received on T+3 in line

Proceeds deposited to the account of investor

Proceeds of sale are received on T+3 in line

Proceeds deposited to the account of investor on

with exchange settlement process

on the evening of T+1

with exchange settlement process

the evening of T+1

Investor must keep record of purchases

Tax reporting provided by managed fund

Investor must keep record of purchases

Tax reporting provided by managed fund provider

and sales and calculate tax parcels

provider

and sales and calculate tax parcels

Tax reporting

Additional services

Consolidated reporting, portfolio management

Consolidated reporting, portfolio management

provided to the investor

tools such as autorebalancing and regular

tools such as autorebalancing and regular

investment plans, and access to a client

investment plans, and access to a client services

services centre

centre

This fund has been selected as it represents approximately 40% of the ETF market in Australia. The Vanguard Australian Shares Index ETF has an ongoing management cost of 0.15% and is the least expensive Australian shares index ETF on the market.

This fund has been selected as it is the only ETF which has an investment universe which covers all developed markets. There are less expensive ETFs which invest only in the US market which has little investor interest in Australia. iii Source: ASX Exchange Traded Funds Product List – August 2011. iv Cost of product on the Colonial First State FirstChoice Wholesale platform. Includes platform cost. v Source: ASX Exchange Traded Funds Product List – August 2011. vi Cost of product on the Colonial First State FirstChoice Wholesale platform. Includes platform cost. vii CommSec internet brokerage. If certain conditions are met, brokerage can be $19.95 up to $10,000, $29.95 up to $25,000 and 0.12% above $25,000. viii CommSec internet brokerage. If certain conditions are met, brokerage can be $19.95 up to $10,000, $29.95 up to $25,000 and 0.12% above $25,000. i

ii

regular investment plans, access to a client ser vices centre, and market newsletters.

In addition, the potential benefit gained by an ETF investor from the lower ongoing management fee can be outweighed by the brokerage costs paid to purchase and sell an ETF. Brokers generally charge a minimum fixed dollar brokerage rate on trades of less than $10,000 – a figure which may represent a high proportion of the invested amount, particularly for those who make regular contributions. For example, a brokerage charge of $29.95 on a $1,000 investment represents around a 3 per cent transaction cost, and although the brokerage rate falls for larger investments, a typical rate of at least 0.3 per cent applies for trades over $10,000. To transact on an index managed fund, an investor will pay a spread of approximately 0.15 per cent.

Tax treatment can also differ. All of the ETFs listed on the ASX which provide exposure to non-Australian equities markets are US-domiciled.

Consequently, investors in these vehicles are subject to 30 per cent US withholding tax on their distributions. This

“

Comparing index EFTs and index managed funds reveals a number of similarities, yet there are some notable differences that need to be carefully considered prior to the making of an investment decision.

”

figure can be halved to 15 per cent if an investor completes and lodges a W8BEN form with the US Internal Revenue Service and ensures this form is periodically updated to maintain the application of the lower tax rate. While an equivalent managed fund is subject to the same requirement, the paperwork is handled by the fund, thus alleviating the investor of the administrative burden.

Other possible tax related burdens that can affect investors in US-domiciled ETFs include US estate tax, which

comes into effect upon the death of the investor, and US generation-skipping transfer tax, which may come into play if the investment is transferred to a grandchild at death. These do not apply to index managed funds.

It is also important to note that if a superannuation investor wishes to invest in an ETF, it’s a requirement that superannuation is held in a trust structure which is compliant with the Superannuation Industry (Supervision) Act. The only way an investor can do this without using a platform is by establishing a self-

managed super fund (SMSF) or a small APRA fund. There are a wide range of issues that must be addressed in determining whether an SMSF is appropriate for a particular investor. These issues include administration requirements needed to maintain accounting and tax records, which increase the complexity and cost for the client, as well as a wide range of trustee responsibilities, which some investors may not be well equipped to handle.

Comparing index ETFs and index managed funds reveals a number of similarities, yet there are also some notable differences that need to be carefully considered prior to making an investment decision. The investor and adviser should determine if they value the additional services offered by the managed fund provider and whether those services justify the minor difference in ongoing management costs.

They should also ensure they factor in the upfront brokerage costs – especially if they are dealing in small parcels.

Graham Hand is Colonial First State’s general manager of funding and alliances.

www.moneymanagement.com.au November 10, 2011 Money Management — 21

ResearchReview

Research Review is compiled by PortfolioConstruction Forum in association with Money Management, to help practitioners assess the robustness and disclosure of each fund research house compared with one another, given the transparency they expect of those they rate.

This month, PortfolioConstruction Forum asked the research houses: In the short term, we often see dramatic differences in the performance of hedged vs unhedged international equities portfolios. How much (if any) of an international equities allocation should be hedged, assuming a 10-year investment timeframe?

LONSEC Lonsec believes that on a strategic basis, an unhedged exposure to global equities is appropriate over the long term (ie 10 years or more) because: 1. Over the long term, the risk and return characteristics of hedged and unhedged global equities are broadly similar; 2. Unhedged global equities are less correlated to Australian equities than hedged global equities, therefore offering superior diversification characteristics to a portfolio; and 3. Most investors will have some exposure to hedged assets within their portfolio, including global fixed interest, global property securities and global listed infrastructure.

Risk and return While hedged global equities may benefit from a yield pick-up due to interest rate differentials between the Australian dollar and the underlying currency exposure of the portfolio, this is expected to be largely offset by the

cost of hedging. As Figure 1 highligts, the long-term average return and volatility for hedged and unhedged global equities have been similar. Of course, over shorter periods, there will be material deviations between the two.

Diversification Figure 2 shows the 10-year correlations of unhedged and hedged global equities relative to other asset classes. Unhedged correlations are lower in all cases except relative to Australian fixed interest and cash. Specifically, unhedged global equities are less correlated with Australian equities, which is important given

Figure 1 Global equities – 20-year rolling annual return and volatility MSCI World Index MSCI World Index Unhedged A$ Hedged A$

Australian equities are a dominant allocation within most growth-oriented portfolios.

However, in the short term, currencies may be volatile and it may be appropriate to complement a long-term strategic allocation to unhedged global equities with global equities products that have

an active currency overlay. There are a large number of unhedged global equities funds with active currency hedging strategies which aim to reduce the impact of currency volatility on investment returns. This is an effective way to introduce further diversification to a portfolio.

Figure 2 Global equities – 10-year correlations MSCI World Index Unhedged $A

MSCI World Index Hedged A$

Australian Equities

0.58

0.86

Emerging Markets

0.69

0.77

Australian Listed Property Global Listed Property Direct Property

0.46 0.47 0.09

0.56 0.74 0.02

Global Listed Infrastructure

0.55

0.80

Australian Fixed Interest

-0.18

-0.44

Global Fixed Interest

-0.32

-0.15

Return (%pa)

7.3

7.3

Diversified Income

0.34

0.74

Volatility (%pa)

17.5

17.9

Cash

-0.02

-0.28

Source: Bloomberg, MSCI; June 2011

22 — Money Management November 10, 2011 www.moneymanagement.com.au

Source: Bloomberg, MSCI; June 2011

appropriate level of currency hedging needs to be dynamic.

MORNINGSTAR

MERCER Mercer believes retail investors should consider currency over both the long and medium term. (In addition, active currency managers may be appointed to implement tactical or short-term currency management. These managers fall within the alternatives absolute return grouping.)

For Australian investors deciding the strategic or long-term level of hedging, there are essentially two competing considerations: 1. Fully hedged positions have outperformed unhedged positions historically.

2. Currency exposure provides diversification benefits for risky assets.

The strategic currency position needs to be assessed at the total portfolio level by balancing these competing considerations.

In general, a higher currency exposure will benefit higher growth portfolios by reducing the volatility of a portfolio’s total returns – ie the diversification benefits of currency increase with the holding of risky assets.

However, there are practical considerations at the asset class level. Mercer recommends fully hedging the currency exposure of high-income, lowervolatility assets, such as global fixed interest. Unlisted, illiquid assets are better left unhedged at the manager level because hedging can result in

short-term liquidity issues.

To implement the desired level of currency exposure for the portfolio, larger institutional clients can use a specialist foreign currency overlay manager. For retail clients, the hedged/unhedged mix for global equities may be used as a balancing item to achieve the desirable level of exposure for the overall portfolio, after taking into account foreign exchange exposure from any unhedged global assets.

Mercer has assessed different risk profiles to determine the level of currency exposure that minimised the variance of a portfolio’s historical returns. As expected, the results depend on the profile’s growth/defensive splits. As a general rule, we recommend a strategic currency exposure for the portfolio equal to about 30 per cent of listed equities (Australian equities, global equities, AREITs, GREITs, listed infrastructure). Refer to Figure 3.

Like all investment decisions, the currency hedging decision should not be a set-and-forget position. As seen in recent years, the Australian dollar can move within a wide range and can deviate significantly from estimates of its long-term fair value. This presents investors with medium-term risks and opportunities.

Consequently, Mercer believes that the

The past 10 years are often referred to as a ‘lost decade’ for Australian investors in unhedged global equities. The spectacular rise of the Australian dollar, which more than doubled in value over the period, significantly eroded returns for unhedged investors. Past performance regularly dominates portfolio construction decisions, but it’s critical to also think beyond performance.

Rewind 10 years and many fund managers provided global equity funds with tactical currency funds or a set 50:50 hedged/unhedged currency strategy. The currency allocation within global equities was decided by the fund managers. This has now changed, and in a big way. The vast majority of global equity funds offered now come in fully hedged or unhedged versions and the active decision has transferred from the fund manager to the investor. Why? Forecasting currencies is a notoriously difficult exercise to get right consistently.

The Australian dollar can have a large bearing on short-term returns, so Australian investors can’t just ignore the currency implications when investing overseas. However, it may come as a surprise that the returns from hedged global share funds over the 10 years to 30 June, 2011 were much more volatile than those from unhedged global equities.

Currency hedging may have protected the quantum of returns, but the ride was a more volatile one, especially during periods of distress such as 2008.

Attempting to ‘time’ specific currency inflection points is a pointless exercise, though timing can’t be ignored entirely.

Given the A$/US$ cross-rate in 2011 was trading in a band between US$0.95 and US$1.09 – a large range, but less than in 2008 when it fell to US$0.61 – these large differences can impact investors’ objectives. Australia’s role as a proxy for global growth has been underpinned by our dependence on exports to burgeoning emerging nations such as China. Hence, because the Australian dollar is widelytouted as a commodity currency, when global growth expectations decline the Australian dollar typically suffers sharp falls.

Morningstar believes risk is too frequently overlooked when making the hedging decision. The risk side of the investment equation is an element which investors and fund managers alike frequently neglect in favour of focusing on returns. Over the long haul, we believe foreign exchange movements should wash out of the returns from offshore investments, and that’s before considering the costly exercise of adjusting hedging exposure. But, as discussed above, the pro-cyclical nature of the Australian dollar makes

Figure 3 Currency hedging guidelines Conservative

Mod Conservative

Balanced

Growth

High Growth

21.5%

37.5%

54%

73%

85%

Portfolio target currency exposure

6%

11%

16%

22%

26%

% of global equities unhedged (approx)

85%

75%

70%

70%

70%

Allocation to listed equities*

Source: Mercer

it susceptible to sharp sell-offs. Currency valuations at the investor’s point of entry also matter.

As a result, Morningstar’s strategic asset allocation has adopted an unhedged global equities position. However, our model portfolios do have a tactical currency hedging element through the manager selection framework. A number of funds have been chosen for their ability to tactically allocate to currencies whether in an alpha-seeking process or from a risk control perspective. Morningstar believes this is an effective way for advisers to efficiently manage the currency exposure in global equities.

STANDARD & POOR’S The high volatility of the Australian dollar in recent years has resulted in currency gains and losses impacting on investment portfolio returns. As a result, many now question how to manage global equities’ currency exposure and whether to employ a fully hedged, partially hedged or unhedged position in portfolios.

Pending a client’s risk and return objectives, S&P typically suggests a currency unhedged global equities position for accumulators’ portfolios and a combination of hedged, unhedged and actively managed exposure for income stream recipients.

For accumulators making regular contributions, the impact of the volatile Australian dollar on investor returns is negligible over the long run. It also has a high correlation to global growth and hence when growth declines (as in recent months), equities and the Australian dollar typically fall in value, but an unhedged position provides a buffer due to gains from the Australian dollar depreciation. In addition, the earnings of Australian companies are impacted significantly by the value of the Australian dollar, and diversification benefits are typically achieved by diversifying a portfolio’s exposure to any one currency. Hence for the long-term accumulator portfolio, S&P typically suggests a currency unhedged global equities exposure.

However, the risks change for portfolios where contributions are no longer being made. Income stream recipients, for example, are in the phase of their lives where they are employing the reverse of dollar cost averaging (selling units regularly for income payments) and can be significantly impacted by the volatile Australian dollar. During the 2000s, investors faced low returns from global equities which were compounded for unhedged portfolios due to the long-ter m upward trend in the Australian dollar, with the end result that unhedged portfolios not only endured poor returns from underlying assets, but also experienced losses from unhedged Australian dollar exposures as the Australian dollar rose, benefiting from the huge growth in demand for resources from 2003 onwards. Hence, for investors no longer contributing to portfolios, we suggest considering 50 per cent unhedged, 25 per cent hedged and 25 per cent actively managed.

Continued on page 24

www.moneymanagement.com.au November 10, 2011 Money Management — 23

ResearchReview investing, which again relegates currency to the too-hard basket, as value can be difficult to define for currencies given they have no yield. The closest thing to a long-term valuation metric is purchasing power parity (PPP), which suggests Australian investors should have more exposure to other currencies as the Australian dollar looks overvalued (Figure 4). This suggests a fully unhedged position is better as risks are now biased towards Australian dollar weakness.

On the other hand, those with a 10-year investment time-horizon with a sole focus on returns and a strong belief in the continued rise of Asia would believe in a strongerfor-longer Australian dollar and the benefits of a hedged position.

In fact, Figure 5 suggests the long-term history of the Australian dollar could justify a range-bound, bullish or bearish trend, depending on the time-horizon chosen .

Paradoxically, the short-term justification for holding overseas currency exposure is easier to analyse as there is a relative degree of certainty about its correlation with other assets. The Australian economy and share market are leveraged to Asian economic growth and, by extension, global economic growth and share market performance. This is a fundamental reason why the Australian dollar has become a lightning rod for the risk-on/risk-off trade that has dominated markets (see Figure 6).

Given this relationship, the timing of potential downside risk is also very important. The benefits of overseas currency exposure are likely to accrue

Continued from page 23 Back testing analysis shows the optimal currency hedging position over the last 20 years would have been 40 per cent hedged and 60 per cent unhedged – and hence, it makes sense to have a combination of hedged and unhedged global equities exposure in a portfolio.

Also, not only have hedging strategies protected investors when the Australian dollar is on a long-term upward trend, but have also aided returns in recent years due to Australian investors being paid to hedge portfolios (ie the carry trade).

Using active currency management in a portfolio can significantly reduce the impact of Australian dollar volatility on portfolio returns by balancing the exposure to hedged and unhedged global equities, pending the Australian dollar valuation. However, in practice, this approach is extremely difficult to manage and is usually outsourced to a fund with separate currency management expertise.

Ultimately, there is no optimal hedging strategy for all investors as risk and return objectives plus stage-of-life will impact on which strategy is most appropriate to employ.

VAN EYK It is fairly widely accepted that predicting currency moves is difficult if not impossible (although currency managers may dispute this). There is also an increasing recognition of the benefits of long-term, valuation-based

Figure 4 Australian dollar outlook 1.4 1.2 1 0.8 0.6 0.4

exactly when needed most – because Australian dollar weakness is very likely to coincide with highly negative returns from the rest of portfolios.

In summary, if an investor has a very high degree of conviction about the positive outlook for Asia over the next 10 years and is unconcerned about volatility, a fully hedged global equities position will maximise an investment strategy predicated on those beliefs. If not, it may pay to retain some insurance in the form of offshore currency exposure, primarily the US dollar, which remains the world reserve currency and liquid haven in times of stress. Those without a definitive view may opt for an arbitrary 50 per cent hedge – but perhaps the question should be whether to look for more currency diversification elsewhere in the portfolio?

tions for Australians investing in international shares should not be the same for hedged and unhedged positions. That is, investors generally have to choose between less risk and lower returns from unhedged investing, versus higher returns and higher risk of hedged investing. A higher return expectation for hedged exposures is backed by theory, as the assumed return from hedging is the difference between long-term interest rates (driven by longer-term growth rates) and therefore if domestic interest rates (and growth expectations) are higher than rest of world, this should provide positive returns from hedging. Based on this analysis, we currently have slightly higher expectations for hedged exposure to international shares based on the positive interest rate differential between Australia and other developed countries.

Furthermore, this analysis also implies that the optimal level of hedging required should be linked to the risk profile of the investor. Based on forward-looking risk and return expectations for hedged and unhedged international shares, combined with analysis of correlations with other sectors, Zenith believes growth profile investors (70 per cent growth assets) will benefit from adopting a 5050 approach when hedging the foreign currency exposure of their international shares exposures. While on face value this may appear a simplistic approach, growth profile investors would have maximised Sharpe Ratios with a 50/50 exposure over the 20 years to 2010. A 50/50 approach also provides some insurance from an event risk perspective, which may lead to a large appreciation or depreciation of the Australian dollar.

For those in lower risk profiles, a lower than 50 per cent hedged exposure makes sense based on their lower risk/return expectations (and vice versa).

ZENITH INVESTMENT PARTNERS Campbell, Serfaty-de Medeiros and Viciera (2009) investigated the correlations of foreign exchange rates with stock returns over 1975 to 2005. Their research supports the view that the Australian dollar is positively correlated with local currency returns on global equity markets. This positive correlation is consistent with fundamental drivers: global economic growth drives equity and commodity prices in the same direction. The Australian dollar typically falls when global equity markets fall, cushioning poor performance. The opposite is also true – the Australian dollar typically rises when equity markets rise. The end result is a smoother return pattern for unhedged investors relative to hedged investors.

Zenith believes these findings should be considered when constructing international shares portfolios, as they imply that Australian-based investors will be able to reduce risk by not being fully hedged to the Australian dollar.

While from a risk minimisation perspective being unhedged is the optimal outcome, total return expecta-

In association with

Actual AUD:USD Exchange rate Implied PPP Conversion Rate (OECD)

0.2

Figure 6

Hedged vs. unhedged global equities

Implied PPP Conversion Rate (IMF Forecast)

0 20 15

20 10

20 05

20 00

19 95

19 90

19 85

19 80

170

150 Source: RBA, van Eyk

130

Figure 5 Australian dollar trade weighted index 110

130 90

110

50 year cycle

90

de cli ne

M ay 20 10

M ay 20 00

M ay 19 90

M ay 19 80

M ay 19 70 Source: RBA, van Eyk

24 — Money Management November 10, 2011 www.moneymanagement.com.au

MSCI World Hdg AUD

Source: MSCI

Jun 2011

Feb 2011

Jun 2010

MSCI World NR AUD

Oct 2010

Feb 2010

Jun 2009

Oct 2009

Feb 2009

Jun 2008

Oct 2008

Feb 2008

Jun 2007

Oct 2007

Feb 2007

Jun 2006

0

Oct 2006

10

Feb 2006

50

5 - 10 year cycle

Jun 2005

30

70

Oct 2005

50

Se cu lar

Feb 2005

70

Rising inflation will impact portfolios – what are you doing about it?

As emerging markets wages increase significantly, the core CPI of many developed world economies will rise, and potentially force some central banks to revisit interest rate settings.

Positioning portfolios for the prospect of rising inflation is therefore critical.

G

lobalisation delivered enormous productivity benefits over the past decade, as the world’s labour-intensive productive capacity shifted to lower cost developing nations. These productivity gains have been a major contributor to moderate inflation outcomes in developed nations in recent times. From December 1999 to March 2011, nominal gross domestic product in the US, UK, and Australia grew at 4.1 per cent, 4.2 per cent and 6.9 per cent per annum respectively, while CPI grew at just 2.3 per cent, 2.1 per cent, and 3.2 per cent per annum, respectively.

With global inflation highly likely to increase due to rising food prices, rising energy prices, and increasing costs of tradable goods, it is unlikely globalisation will continue to deliver global productivity gains over the next 10 to 15 years.

Drivers of global inflation Rising food prices Rising food prices are one of the most potent sources of current and prospective inflation. As people move up the wealth curve, calorie and protein intake rises from subsistence levels, and real food prices increase, unless there is an increase in the quantity of land under cultivation and/or an increase in agricultural productivity.

The shrinking availability of arable land as the world urbanises suggests that increasing land under cultivation will be extremely difficult. Further, agricultural productivity gains have slowed from close to 3.5 per cent per year in the early 1970s to below 1.5 per cent in 2011, despite fertiliser use more than doubling. Food prices have already risen significantly.

After a flat period in the 1990s, food prices rose at 9.7 per cent per year in nominal returns and 7.7 per cent in real terms over the past decade.

Between 2005 and 2007, the world consumed 6.5 trillion calories per year and this is forecast to increase to 8.7 trillion calories per year by 2030, and 10.2 trillion calories per annum by 2050. Much of this increase emanates from Brazil, Russia, India, and China (BRIC), which are forecast to increase annual calorie intake by close to 1 trillion calories per annum over

Figure 1 Inflation (%)

the next 20 years. The world’s already stretched agricultural capacity will be challenged to cope with a 35 per cent increase in demand for food over the next 20 years, let alone a 57 per cent increase in demand over the next 40 years.

The impact of higher food prices on wages in developing countries – and thus inflation on rich world imports – is dramatic, as food occupies such a high proportion of household consumption expenditure. Consumers in the BRIC nations allocate 25 per cent, 28 per cent, 33 per cent and 35 per cent respectively of their household budget to food, compared to 7 per cent in the US, and 11 per cent in Australia. Food price increases will result in wage stress in the developing world, and advanced economies should expect much higher inflation in import prices over coming years.

Rising energy costs A 2010 study by ExxonMobile forecasts annual energy demand amongst nonOECD nations to grow by 46 per cent by 2020 and a further 17 per cent between 2020 and 2030, increasing annual global energy demand by 23 per cent and 11 per cent respectively, despite improved energy efficiency and government policy initiatives moderating future demand in the OECD countries. The same study noted that these increased energy

demands will grow annual oil and coal demand by close to 20 per cent and gas by over 60 per cent over the next 20 years.

Oil, coal and gas are finite resources.

While alternative options are providing sources for meeting the world’s energy needs, these are less efficient with higher costs of production that must eventually be passed on to consumers. And despite production expanding through alternative sources, oil and gas production is still well below 1970s production peaks. With these supply restraints, energy prices are highly likely to increase.

Increasing costs of tradable goods According to an April 2011 IMF working paper, for every 1 per cent shock to food prices, there has been a 0.15 per cent increase in non-food prices in rich world areas, and a 0.30 per cent increase in nonfood prices in poor countries.

The impact of inflation on portfolios One of the major challenges is managing the impact of significant global inflationary pressures on portfolios. Inflation eats it way into real returns, as shown in Figure 1.

Investors must seek assets that will protect them from inflation. While it is clear that the returns of long-dated bonds with a fixed coupon will suffer when inflation increases, the impact on stock returns has

Effect of inflation on returns Annual nominal return (%)

10-year NOMINAL return after tax (%pa)

10-year REAL return after tax (%pa)

2

8

5.6

4.18

4

8

5.6

2.21

6

8

5.6

-0.69

Source: Magellan Asset Management. Note, assumes a 30% tax rate on return.

been debated widely.

One theory that has received attention is the Fed model. It asserts that, in the long run, the forward earnings yield of a stock market should equal the yield on long-term government bonds. The logic is simple – with stocks and bonds competing for a place in portfolios, any relative mispricing will be arbitraged away and thus, in the long-term, yields on stocks and bonds should be equal. A more practical approach is to add a risk premium to the bond yield to arrive at an equilibrium stock market yield. With inflation expectations the primary driver of long-term government bond yields (assuming the issuer carries zero default risk), an increase in inflationary expectations will cause the required earnings yield on the stock market to increase – or, for the inverse of the earnings yield, Price-Earnings ratio, to fall.

Empirically, there is strong support for the Fed model. Asness (2002) showed a significant negative relationship between inflation and PE ratios. Over the 1965 to 2001 period studied, E/P (the inverse of P/E) had a correlation with inflation of 0.81.

But there is one major flaw with the Fed model. Stocks are at least partially real assets, as their cashflows and dividends have the ability to grow with inflation. It is the ability of companies to increase cashflows that govern their performance in inflationary times. Investors should seek to invest into companies that have pricing power that allows them to at least maintain prices in real terms (even in inflationary environments), an ability to at least maintain volumes, and low capital intensity, thus reducing the impact of inflation on capital expenditures and working capital.

Such companies are extremely rare, as capitalism tends to compete away these desirable advantages. Hence, a passive index approach to equities is fraught with danger during inflationary times.

Yet a portfolio focusing on companies that exhibit these characteristics is one of the few ways an equity investor can be relatively confident that their investments will provide adequate defence in inflationary times.

This is an abridged extract from a paper presented at the 2011 PortfolioConstruction Forum Conference.The full paper is available at www.PortfolioConstruction.com.au.

Matthew Webb is an investment specialist at Magellan Asset Management.

In association with www.moneymanagement.com.au November 10, 2011 Money Management — 25

Toolbox Super, volatility and rollovers Anna Mirzoyan takes a look at the ways in which market volatility may affect superannuation rollovers.

I

n times of volatile markets, extra caution needs to be taken when rolling money from one superannuation fund to another – specifically in relation to the impact that action may have on the tax-free component amount and the non-preserved benefit amount.

Not considering how these amounts are impacted by volatile markets could permanently affect the amount of those components, which could impact the amount that can be withdrawn or the amount of tax payable on future withdrawals.

Tax components within superannuation From 1 July 2007 superannuation benefits are made up of tax-free and taxable components.

The tax-free component is the sum of the: • Contributions segment – this consists of all non-concessional contributions made after 1 July 2007, and • Crystallised segment – this is a fixed dollar amount calculated on 30 June 2007 consisting of the concessional component, post-June 1994 invalidity component, undeducted contributions, capital gains tax exempt component and pre-July 1983 component.

The taxable component is the value of superannuation interest less the tax-free component.

From 1 July 2007 the proportioning rule is used to calculate the tax-free and taxable components of a superannuation benefit that is paid as a lump sum, which will be used to commence a superannuation income stream or rolled over to another superannuation fund.

Proportioning rule A superannuation benefit in an accumulation phase is valued just before the benefit payment is made to obtain the proportions of the lump sum or rollover.

This percentage of tax-free and taxable components is then applied to the superannuation benefit being paid or rolled over to another fund.

For example, if the balance of member’s superannuation interest was $100,000 ($40,000 tax-free and $60,000 taxable) and the amount was to be rolled over to another fund, the proportioning rule would apply.

Therefore 40 per cent of the rollover benefit would be tax-free and 60 per cent would be taxable.

The effect of volatility on super tax components The effect of volatile and falling markets on superannuation tax components depends on whether the fund is in accumulation phase or pension phase.

In pension phase, the components are calculated at the commencement of the pension, therefore the percentage of the

tax-free and taxable components in the pension phase will not be affected by negative markets.

However, as explained above, in the accumulation phase the components are not based on a fixed percentage, but rather calculated using the proportioning rule.

Therefore if the value of an accumulation account falls so that its value is less than the tax-free amount of the contributions segment, the tax-free component may be permanently reduced once the proportioning rule is triggered and the money is rolled to a new superannuation fund.

It is important to note that this reduction would not be permanent if the proportioning rule is not triggered.

There are a number of strategies to consider when the dollar amount of the tax-free component is temporarily reduced.

These include: • Waiting until the fund’s balance recovers before the money is rolled over to another superannuation fund • Making an additional concessional contribution before the money is rolled over • Rollover other superannuation benefits to the fund.

Let’s have a closer look at these scenarios based on the case study below.

Case study John makes an initial non-concessional contribution of $150,000 to a new superannuation fund on July 1, 2011. Since that date the fund has had negative earnings of $30,000 and no other contributions.

If John rolls over his entire benefit of $120,000 into another superannuation fund, by applying the proportioning rule the tax-free component of the new fund would be $120,000. As such, if the new fund’s balance subsequently grows to $150,000, the tax components would be $120,000 tax-free and $30,000 taxable.

Strategy consideration 1 – retain the benefit until the balance recovers If John retains his benefit in the current superannuation fund, the contributions segment of the tax-free component will remain at $150,000, although the account balance would only be $120,000. If the balance of John’s fund grows to $150,000, the entire benefit of $150,000 would be tax-free, as any investment earnings will form part of the tax-free component until the account balance recovers to $150,000.

As such, by retaining the benefit in his current superannuation fund John is able to recover the tax-free amount of his superannuation interest.

Strategy consideration 2 - make a concessional contribution If John makes an additional concessional contribution of $30,000 to superannu-

26 — Money Management November 10, 2011 www.moneymanagement.com.au

ation, after deducting contributions tax of $4,500, the net amount added to his superannuation account would be $25,500. The new balance in his superannuation fund would be $145,500 ($120,000 + $25,500), which is less than the amount of the tax-free contributions segment of $150,000. Therefore, the new balance of $145,500 would be tax-free.

In effect, John’s concessional contribution has been reclassified from being taxable to tax-free. If the money was then rolled over to another superannuation fund, the amount of the tax-free component in the new fund would be $145,500.

Strategy consideration 3 – rollover another fund into the current fund If John rolls over $100,000 of taxable benefits from another superannuation fund to his current fund, this would make the balance of John’s fund $220,000 ($120,000 + $100,000) and consist of $150,000 of taxfree and $70,000 of taxable components.

In effect, $30,000 of the taxable component has been converted into a tax-free component.

The effect of negative markets on nonpreserved amount within superannuation If the superannuation fund has negative earnings in a certain period, superannuation rules require that these losses are first offset against preserved benefits. If the negative earnings exceed the member’s preserved benefits, the excess is then offset against restricted nonpreserved benefits, then against unrestricted non-preserved benefits. Where this happens, the reduction is permanent.

The time at which the reduction is made will depend on the fund’s trust deed or when transactions occur.

For example, John’s superannuation benefit of $100,000 consists of an unrestricted non-preserved amount. Due to a fall in markets the benefit has fallen to $80,000 at the date the fund’s earnings are credited to his account. This means that John’s unrestricted non-preserved benefit has been permanently reduced from $100,000 to $80,000.

Summary In times of volatile markets, extra caution needs to be taken when providing strategy advice to clients regarding their superannuation funds. Importantly, where the impact on the tax-free and non-preserved components is not considered, this may affect the amount of tax that may be payable and the amount that could be accessed – and unfortunately be a lost planning opportunity.

Anna Mirzoyan is the technical services consultant at Fiducian Portfolio Services.

Briefs BOUTIQUE absolute return investment manager Kardinia Capital is of fering a long/shor t Australian equities capability to institutional investors.

The Bennelong Kardinia Absolute Return Fund was established in August 2011 and is managed by portfolio managers Mark Burgess and Kristiaan Rehder, in partnership with Bennelong Funds Management.

Kardinia said that the fund has long/short objectives of achieving double-digit annual rates of return, without compromising on capital protection.

“Core to the strategy is long-term fundamental stock selection to create a high-conviction portfolio of between 20-50 stocks,” Kardinia stated.

CMC Markets has upgraded its CMC platform for contracts for difference.

The CMC Tracker was launched i n Au s t r a l i a i n S e p te m b e r, a n d according to CMC represents a leap forward in traders’ capacity to customise charts.

The char ting software enables users to highlight specific situations or combinations that are relevant to their individual trading strategy.

The platform then saves these customised chart settings, increasing ef ficiency and providing traders with quick access to past analysis i n f a s t - m ov i n g m a r ke t s , C M C stated.

“Time is at a premium for every trader, and the more features a platform provides, the more time traders have to focus on managing their trades,” CMC chief market strategist Michael McCarthy said.

EATON Vance Management (EVM) has launched an investment fund for institutional investors.

The Eaton Vance International (Australia) Senior Loan Fund will be marketed in Australia as a wholesale investment vehicle, EVM said.

E V M I n te r n a t i o n a l m a n a g i n g director Niall M. Quinn said the company had identified Australia as a n o p p o r t u n i t y to p ro m o te i t s i nve s t m e n t ex p e r t i s e i n f i xe d income, floating-rate and equity asset classes.

Ac c o rd i n g to E V M d i r e c to r o f bank loans Scott Page, Australia’s compulsory superannuation guarantee had accumulated a national savings pool of approximately $1.4 trillion.

“We have developed the fund s p e c i f i c a l l y fo r t h e Au s t r a l i a n market to provide Australian institutional investors access to a broad spectrum of floating-rate investment,” Page said.

Appointments

Please send your appointments to: andrew.tsanadis@reedbusiness.com.au

ABERDEEN Asset Management has appointed John Manning as investment manager and senior credit analyst, and David Choi as assistant investment manager.

Choi previously worked for NSW Treasury Corporation where he had portfolio dealing and management responsibilities.

Manning was most recently Roy a l B a n k o f S c o t l a n d’s director of credit strategy for Australia and New Zealand and has more than 22 years industry experience.

Co m m e n t i n g on the appointments, Aberdeen head o f Au s t ra l i a Fi x e d In c o m e V ictor Rodriguez said that Manning’s credit analysis skills were highly respected in the Australian market, while Choi’s experience was well suited to Aberdeen’s rates strategy team.

KENYON Partners has appointed Paul Tynan as associate director.

Co m m e n t i n g o n Ty n a n’s appointment, Kenyon managing director Alan Kenyon said Tynan had almost 30 years experience and a well-rounded knowledge of the financial services industry.

He was most recently chief

executive officer of boutique financial planning business Retire Care Personal Wealth Management, where he will re m a i n a c h a i r m a n o f t h e board.

Before that, Tynan was south regional manager for AMP Adviser Services, responsible for distribution in Perth, South Australia, Victoria and Tasmania.

Between early 2001 and 2003, he spent time in the UK a s A M P ’s p l a t f o r m s a l e s manager.

B R AV U R A S o l u t i o n s h a s a p p o i n t e d Ro l a n d Sl e e a s managing director for Asia Pacific.

Reporting to Bravura’s chief executive officer Tony Klim, Slee will be responsible for accelerating growth, developi n g n e w l i n e s o f b u s i n e s s, implementing major change programs and leading merger and acquisition activity in the region.

Commenting on the appointment, Klim said Slee is highly regarded as a leader, thinker and communicator within the information technology industry.

Prior to his new role, Slee was Oracle Corporation vice president, representing Oracle’s

Move of the week BANK of Melbourne Private has announced the appointment of Jonathan Ayres as its first head.

Commenting on the appointment, BT Financial Group general manager of private wealth Jane Watts said that Ayres has a proven track record in wealth management, particularly in private banking, strategic financial advice and servicing high net worth clients.

Ayres spent more than 10 years in senior roles at National Australia Bank (NAB), including time as head of financial planning for NAB Private and as a regional executive. He was most recently a senior investment specialist with NAB Invest.

software development organisation in Asia Pacific and Japan.

He also led the company’s banking industr y solutions team for Asia Pacific and middleware business.

F U T U R E Pl u s Fi n a n c i a l Services has announced the appointment of Elvio Bechelli as chief financial officer.

The former St George Bank CFO will be a member of Future Plus’ executive management team and commenced his duties on 7 November.

Future Plus managing director Madeline Dermatossian said Bechelli would be respon-

Opportunities FINANCIAL PLANNER Location: Far North Coast, NSW Company: Terrington Consulting Description: A financial services firm is seeking an experienced and established financial planner.

The firm has excellent brand and market reputation and you will be rewarded with a highly competitive salary package and incentives. You will also have access to research, professional facilities, established systems and an opportunity to grow your portfolio.

In this role you will be engaged in a range of financial services offerings, including stockbroking, strategic planning, superannuation, SMSF, insurance, portfolio management and fixed interest.

You will have several years experience delivering to a diverse range of clientele.

You will also have proven sales skills and networking capabilities.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au.

CLIENT SERVICES MANAGER Location: Adelaide Company: Terrington Consulting Description: An Adelaide-based financial

Jonathan Ayres

sible for growth strategy for the company as it repositions itself as a third-party administrator for superannuation funds.

Bechelli has over 20 years experience in financial service s, w i t h m o s t o f t h a t t i m e s p e n t w i t h re t a i l d o m e s t i c banks. His other experience includes income tax compliance, APRA reporting, statutor y repor ting, proper ty and procurement.

TYNDALL Asset Management has announced the appointment of Matt Russell as head of institutional business.

Russell joined Tyndall after the funds manager became part of Nikko Asset Management as an independent fund manager. He was previously Colonial First State Global Asset Management’s head of institutional business development and consultant relationships and held senior positions a t Pe r p e t u a l L i m i t e d a n d Intech.

Tyndall said Russell has extensive business development experience in both institutional and corporate superannuation areas, with knowledge of asset classes ranging across fixed income, credit and Australian equities.

For more information on these jobs and to apply, please go to www.moneymanagement.com.au/jobs

services firm is looking for a relationshipfocused and highly professional client services manager.

In this role you will be assisting the planner to maintain and build client relationships; become the key contact for clients; provide administrative support as needed; prepare financial planning documentation and client reviews; and manage compliance procedures.

You will have experience with financial planning processes and have the ability to maintain client relationships. Previous experience using Xplan or similar planning solutions would a distinct advantage.

To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au.

BUSINESS DEVELOPMENT OFFICER – AGRICULTURAL FOCUS Location: Wagga Wagga and Riverina, NSW Company: Terrington Consulting Description: An established Australian bank is seeking a business development manager as part of a significant expansion across key locations.

You will be capable of driving growth, building brand equity and providing holistic and tailored solutions.

You will have a solid understanding of credit risk and the ability to manage longterm relationships.

Commercial lender or BDMs within aligned industries are encouraged to apply.

To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Emily at Terrington Consulting – 0422 918 177 / (08) 8423 4466, emily@terringtonconsulting.com.au.

BUSINESS SERVICES ASSISTANT MANAGER Location: Adelaide Company: Terrington Consulting Description: A second-tier fringe accounting firm is seeking a business services assistant manager.

In this role you will lead a team and train and mentor junior staff members. You will also be involved in budgeting and performance analysis, client relationship management and growth.

The successful candidate will be at the assistant manager level in business services accounting and have experience with SMEs. Preferably you will be CPA or CAqualified or near completion.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Jack at Terrington Consulting

– 0422 918 177 / (08) 8423 4466, jack@terringtonconsulting.com.au.

MANAGER BUSINESS SERVICES Location: Adelaide Company: Terrington Consulting Description: A financial planning firm specialising in tax planning and risk management is seeking two experienced professionals to join the management team of their middle market business services division.

The two positions available are titled manager and assistant manager, and your responsibilities will involve managing a team with the provision of taxation services including compliance and advisory.

In both roles you will be servicing a range of clients from various industries and structures, including family businesses and small private companies.

You will be offered extra employee benefits, pathways for professional development and generous remuneration packages.

Successful candidates will be CA or CPAqualified and have several years experience in a business services or professional accounting capacity.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Jack at Terrington Consulting – 0422 918 177 / (08) 8423 4466, jack@terringtonconsulting.com.au.

www.moneymanagement.com.au November 10, 2011 Money Management — 27

Outsider

A LIGHT-HEARTED LOOK AT THE OTHER SIDE OF MAKING MONEY

“

Spanish fly OUTSIDER is star ting to wonder what it is about the policy gig over at the Association of Superannuation Funds of Australia (ASFA).

Outsider hears that ASFA's current policy chief, David Graus, is about to head off for a year of R&R in South America learning Spanish, and no doubt doing other interesting things.

And, if Outsider’s ageing memory serves him correctly, that means ASFA will have had at least three policy chiefs since incumbent chief executive,

Out of context

Pauline Vamos took the helm.

Of course, these are testing times for those working in the superannuation industry and Outsider has some sympathy for anyone who has had to deal with issues ranging from SuperStream to auto-consolidation.

If appearances and attitude are any indicator, Outsider believes Graus will enjoy some time in South America. No one would ever describe the ASFA policy chief as a cowboy, but there is a lot of the gaucho about him.

“You are the game footsoldiers of a war on chaos that each year and each decade is fought anew …

I don’t want to overpraise you, but good on you.”

Minister of Financial Services and Superannuation Bill Shorten

Over 50s golf club swingers

OUTSIDER tips his hat to Fiducian managing director, Indy Singh, for his strong support of the annual Fiducian Legends golf tournament.

Singh, an ardent golfer not scared to take a lesson, threw his support behind the Legends a couple of years ago with the tournament being held at his home club, Killara.

While there are some who might question what value a multi-faceted financial services house such as Fiducian gets out of sponsoring a seniors golf tournament, Outsider can vouch that it attracts just the sort of clientele a financial planner would be pleased to meet.

Apart from a bunch of professional golfers aged over 50, the Legends attracts well-heeled golf fans also aged over 50. Indeed, a close examination of age/wealth demography told Outsider Singh may have identified a financial planning client sweet spot.

Outsider must confess to having participated as an amateur in the Legends tournament and found himself playing alongside the brother of Morningstar chief, Anthony Serhan – one George Serhan.

For what it’s worth, Outsider will stick to committing acts of journalism – because he sure won't earn a living as a golfer.

Don’t feed the investment managers OUTSIDER was given a tour of Tyndall Asset Management’s new digs in Sydney l a s t we e k , a n d h e wa s s u i t a b l y impressed.

The rows of traders staring at flashing screens lined up with his expectations, and the boardroom contained the highest ceiling this side of the Sistine Chapel.

That said, he must confess to a degree of scepticism about his host’s claims that the view of George Street from the boardroom was akin to downtown New York. As it happens, Outsider will be visiting the east coast of the US of A next week, so he will reserve judgement.

But what really captured Outsider’s eye was the narrow ‘observation’ room

that separates the boardroom from the conference room. Tyndall has created a space for clients to observe fund managers and strategists engaging in lively debate – behind the safety of two inches of glass, of course.

Outsider has always wondered how investment managers behave in their natural habitat. It must be at least as enter taining as a trip to the zoo, he reckons.

Upon first entering the observation room, Outsider asked his host if the glass walls were in fact one-way mirrors, lest eye contact was made with one of the species investus managerus. His host was not amused.

28 — Money Management November 10, 2011 www.moneymanagement.com.au

has a soft spot for the Taxman.

“… Between one day and three months …”

Soros Fund Management chairman George Soros gets specific on the shelf life of the Eurozone’s new debt deal.

“Prince Charles is going to have to exercise his hand.”

Deloitte's Wayne Walker on what an ageing Australian population means for the next monarch.