Money Management (July 19, 2012)

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Vol.26 No.27 | July 19, 2012 | $6.95 INC GST

The publication for the personal investment professional

www.moneymanagement.com.au

NEW DEALER GROUP MODEL: Page 12 | DECONSTRUCTING ‘REAL RETURN’ FUNDS: Page 22

Cautionary tale in trail book sale

By Chris Kennedy A MELBOURNE-BASED financial adviser has hit a hurdle in his purchase of a large book of clients, with two of the fund managers involved in the purchase requesting confir mation of client approval before they will transfer trailing commissions over to the adviser.

The adviser, who did not wish to be named, has purchased several trail books in the past. He made the most recent acquisition shortly before switching licensees – although the new dealer group is owned by the same institutional owner as the previous licensee.

He purchased the book for $650,000, and although the majority of clients were largely invested in a platform which has transferred revenue over, some of the money is tied up in Macquarie Structured Products as well as Synergy personal choice super and investments.

Both Macquarie Funds Group and Synergy have requested assurances that all clients involved in the book had approved the transfer, but the adviser says

Peter van der Westhuyzen that with many of the products in the book sold as much as 20 years ago, many of the clients will be uncontactable. He adds that he has purchased the revenue legitimately and should not be obliged to contact clients individually.

Macquarie said it would accept signed confirmation from either the adviser or the prior dealer group that all clients

Aqua II floating retail

By Andrew Tsanadis

WITH the Australian Securities Exchange (ASX) considering the final look of its new listed managed fund service, questions remain over whether Aqua II will attract wholesale fund managers to make the leap into the retail realm.

If supported, the service could spell the end of the expensive and complicated paper-based settlement process, which OneVue chief executive Connie McKeage said could potentially make it worthwhile for wholesale managers to target retail investors.

“Part of the reason they haven’t bothered with retail is that they would have to invest a lot of resources in increasing their profile. Another key part to that is the need for greater distribution,” she said.

Through the automated settlement service, fund managers will have access to those distribution channels – traditionally a point against trying to market to retail investors, McKeage added.

“It might be worth it for the first time for people who are good performers in the market to consider being in the retail market, because all of a sudden it’s less expensive to go in, other people Continued on page 3

approved of the transfer.

Macquarie Specialist Investments executive director Peter van der Westhuyzen could not comment on the specific example. However, he said in general, client approval would usually be required for a transfer to a new adviser, although there might be exceptions, such as where a licensee approved the transfer.

“Because there are so many different arrangements in place in the market, the key point comes back to that in the absence of anything specific, we would want the individual client to provide us with the transfer instruction,” he said.

Macquarie would always try and find a balance between fulfilling its legal obligations and making it an efficient administrative process for all involved, he added.

Synergy cited Privacy Act concerns as the reason for the assurance that clients had been contacted, and indicated it would contact the impacted clients directly. Synergy could not be reached for comment by Money Management’s print deadline.

Gold Seal director Claire Wivell-Plater

said she was unsure of the legal ramifications of the request, and whether the fund managers were legally able to refuse to transfer the revenue over to the adviser if that adviser had the appropriate releases from the previous licensee.

However, she said it is not a usual arrangement in this type of transaction.

“It’s certainly flying in the face of current industry practice,” she said.

With hundreds of similar transactions still being completed in the industry, if client consent was required in order to reassign trail commissions, it could have major implications for future sales, she added.

The adviser said that if the situation involved the major platform with 450 of the clients in the book generating around $25,000 per month in revenue, then he would be under pressure to make his bank repayments and meet his financial commitments.

“Surely they can’t retain the commissions where I’ve purchased the income stream and I’m not changing the funds or investment options?” he asked. “And if so we should know that before we buy practices.”

AGRIBUSINESS

Cropped harvest AGRIBUSINESS has been a dirty word in the financial services world ever since 2009, when a number of high-profile projects collapsed, costing investors millions of dollars.

The size of the sector has deteriorated rapidly since, with retail inflows falling to about $35 million in 2010-11 from a $1 billion peak in 2008.

Of the four projects left in 2012, one has been withdrawn and the future of another has a big question mark hanging over it.

Financial advisers don’t seem too enthused by agribusiness’ tax effectiveness, with most of the money coming from overseas-based institutions.

One of the big frustrations for firms operating agribusiness managed investment schemes is the lack of interest Australian superannuation funds have historically shown in this sector as an asset class.

But there have been suggestions that the industry has got its business model backwards and needs to set it straight if it wants to see more money flowing through.

Meanwhile, the financial services regulator has worked on ways to improve disclosure in a bid to prevent history from repeating and to ensure investors have a better idea of what they are getting into.

Although this move was met with a somewhat cynical response – mostly coming from research houses – the industry generally supported the improved disclosure benchmarks.

For more on agribusiness, turn to page 14.

Editor

Reed Business Information Tower 2, 475 Victoria Avenue Chatswood NSW 2067 Mail: Locked Bag 2999 Chatswood Delivery Centre Chatswood NSW 2067 Tel: (02) 9422 2999 Fax: (02) 9422 2822 Publisher: Zeina Khodr Tel: (02) 9422 2198 zeina.khodr@reedbusiness.com.au Managing Editor: Mike Taylor Tel: (02) 9422 2712 mike.taylor@reedbusiness.com.au News Editor: Chris Kennedy Tel: (02) 9422 2819 chris.kennedy@reedbusiness.com.au Features Editor: Milana Pokrajac Tel: (02) 9422 2080 milana.pokrajac@reedbusiness.com.au Journalist: Tim Stewart Tel: (02) 9422 2210 Journalist: Andrew Tsanadis Tel: (02) 9422 2815 Journalist: Bela Moore Tel: (02) 9422 2897 Melbourne Correspondent: Benjamin Levy Tel: (03) 9527 7392 ADVERTISING Senior Account Manager: Suma Donnelly Tel: (02) 9422 8796 Mob: 0416 815 429 suma.donnelly@reedbusiness.com.au Senior Account Manager: Jimmy Gupta Tel: (02) 9422 2239 Mob: 0421 422 722 jimmy.gupta@reedbusiness.com.au Adelaide Agent: Sue Hoffman Tel: (08) 8379 9522 Fax: (08) 8379 9735 Queensland Agent: Peter Scruby Tel: (07) 3391 6633 Fax: (07) 3891 5602 PRODUCTION Graphic Designer/Production Co-ordinator – Print: Andrew Lim Tel: (02) 9422 2816 andrew.lim@reedbusiness.com.au Sub-Editor: Marija Fletcher Sub-Editor: Daniel Winter Graphic Designer: Ben Young Subscription enquiries: 1300 360 126 Money Management is printed by Geon – Sydney, NSW. Published every week, recommended retail price $6.95 Subscription rates: 1 year A$280 incl GST. Overseas prices apply.

All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the Editor. © 2012. Supplied images © 2012 Shutterstock.

Opinions expressed in Money Management are not necessarily those of Money Management or Reed Business Information.

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Saving clients from themselves

L

ast week’s release of an Australian Crime Commission (ACC) report revealing the degree to which Australians had fallen prey to investment scams should be strongly noted as underlining what can, and too often does, happen to self-directed investors.

Over much of the past decade, financial planners have suffered a good deal of collateral damage from the collapse of groups such as Westpoint and Timbercorp, even though there has been widespread acknowledgement that many of the affected investors were either self-directed or seeking tax breaks on the advice of their accountants.

Indeed, it is fair to say that had any one of the victims of the scams referred to in the ACC report sought the advice of a financial planner, they would have either avoided or minimised the losses they ultimately incurred.

Notwithstanding the fact the ACC report suggested the most common victims of the frauds tended to be men aged over 50 who were highly educated and financially literate, the millions of dollars lost suggests these people were nonetheless naïve to the realities of the investment markets.

2 — Money Management July 19, 2012 www.moneymanagement.com.au

“

There needs to be an acknowledgement that changing remuneration models and imposing best interests tests will not protect investors from blatant acts of criminality.

”

It is also worth noting that the trustees of self-managed superannuation funds were noted as being particularly exposed to such scams.

Nor, it seems, did the traditional Australian Securities and Investments Commission admonition that “if an investment seems too good to be true, then it probably is” appear to have resonated with the victims of the scams – or at least, not until after they had been burned.

What often seems to be overlooked by the critics of the financial planning industry and

those who would seek to ‘industrialise’ the planning process is the value of the close, personal relationships often forged between planners and their clients.

Also often overlooked is the educational element of those relationships and, perhaps most importantly, the development of trust.

Simply put, it seems highly unlikely that an investor who had a longstanding and consultative relationship with a financial planner would have exposed themselves to a scam investment if they had sought the advice of their planner.

Amid all the debate around the Future of Financial Advice (FOFA) bills and the continuing discussion around formulating the consequent amendments, there needs to be an acknowledgement that changing remuneration models and imposing best interests tests will not protect investors from blatant acts of criminality.

Indeed, if one thing has not been discussed enough in the debate around FOFA, it is that very often one of the most valuable skills a financial planner can bring to a relationship is saving clients from themselves.

– Mike Taylor

News

BT and Count Financial battle it out ATthe same time as Westpac/BT has outlined the structure of its new BT Select financial planning offering, Count Financial has moved to target what it believes is unrest among existing Westpac/BT Securitor advisers by offering them the opportunity to switch dealer groups.

However, BT Financial Group general manager, advice, Mark Spiers has hit back, saying the Count approach sought to belittle the importance of planners and what BT was seeking to achieve in a “dislocated and fragmented market”.

The move by Count came as BT Select managing director and former DKN chief Phil Butterworth outlined the strategy behind BT Select, which involves growing “a

community of like-minded professional practices as part of the aggressive growth of BT Financial Group’s multi-branded advice business”.

Butterworth was at pains to stress that BT Select would not be a dealer group, but rather a service provider with a suite of offerings entailing planners having a choice of licensing arrangements, as well as access to a suite of services including practice management solutions.

Butterworth acknowledged that, as part of the BT Select recruitment process, transition payments would be made, but he denied the payments already made to some Count advisers were of the scale published in the media.

However, Money Management

Aqua II floating retail Continued from page 1

can look after the infrastructure and there’s distribution,” she said.

Recently involved in industry talks with the ASX, Aurora Funds Management director of institutional distribution Alistair Davidson said the new system would work best as another opportunity for the business to distribute its investment products.

Although brokers are all for having the opportunity to sell more products, he said fund managers will still need to market their managed funds to brokers’ clients.

“The ASX have got a good settlement system and if it makes it easier for people to buy things, sure, but you still have to persuade them to buy them,” Davidson said.

From a self-managed super fund (SMSF) perspective, Investment Trends senior analyst Recep Peker said he suspects Aqua II would not necessarily encourage retail investors – particularly SMSF investors – from investing in a managed fund.

He said they are “antimanaged fund” because they want to avoid paying high fees and want greater control over their assets, regardless of whether investing is made more direct or not.

Wealth Insights chief executive Vanessa McMa-

obtained a letter from Count Financial chief executive David Lane directly targeting Securitor advisers and pointing out the scale of “transition payments” paid to former Count advisers to join both Securitor and Magnitude.

The letter refers to “significant sign-on payments in excess of $500,000” and says “we believe that such payments, if they are not accompanied by similar payments to existing advisers, fail to sufficiently recognise the loyalty and growth potential of existing adviser firms”.

The letter then goes on to say, “if you feel your contribution to your licensee has not been recognised or rewarded, I would urge you to consider what action you should take”, adding that Lane would “love to have a chat with you on how

Phil Butterworth Count can help grow your business”.

Asked to comment on the letter, Lane confirmed its existence and said it reflected a number of calls from existing Securitor planners received by Count.

“Those planners have seen the reports of the sums paid to Count

and they have indicated they are concerned they’ve been left out,” he said.

“We believe what has happened has created a set of ‘haves’ and ‘have nots’ and what we are offering is to treat these planners with equality,” Lane said.

Speaking for BT, Spiers said he was disappointed by the Count approach because it sought to place a focus on BT when the issue was much broader and involved much larger issues.

“The focus on BT is unwarranted and belittles the critical role of planners in making their decision to move,” he said.

“Focusing on us misses the point that planners are making decisions about what will work for them in the future,” Spiers said.

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Equities AMP Capital Australian Equity Concentrated Fund is rated ‘A’ by van Eyk. Property

Vanessa McMahon hon said the real winners from Aqua II would be smaller, boutique fund managers who don’t use a platform to distribute their products.

“With most fund flows coming from platforms, boutiques are beholden to platforms at the moment,” she said.

“To be able to have another distribution channel is surely only going to help,” McMahon said.

According to Ian Irvine, head of customer and business development at the ASX, there is some consideration from managers that they will be put in touch with previously unseen selfdirected investors.

“Now fund managers have to weigh up in their mind the efficiencies that an automated message service may provide – it may deliver them cost savings, but they are dealing with more customers,” he said.

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www.moneymanagement.com.au July 19, 2012 Money Management — 3

News

Finance wages to rise in 2012, says Hays

By Bela Moore

AUSTRALIANS will continue to command higher salaries than their international counterparts – with the finance sector predicted to continue its recovery, according to Hay Group’s Australian Salary Index 2012.

Hays expects Australian salaries to increase by an average of 4 per cent across all industries in 2012, as the finance sector regains ground post-GFC. Bonus payments were back to pre-GFC

levels for finance, Hays said.

Those with specialist knowledge or industry-specific technical skills commanded a much higher premium, with incentivised pay on the rise, the report said.

The link between company performance and incentives has strengthened, Hays said, with 37.9 per cent of executive and senior management total pay slated as bonuses in 2012, up almost 8 per cent.

But fixed annual reward moved 3.9 per cent, still 1.5 per cent shy of pre-GFC levels

and 0.3 per cent behind the overall industrial and services market.

“Sectors such as financial services are showing increasing signs of resilience, with this sector experiencing a 5.7 per cent increase in Total Annual Reward over the last 12 months,” said author of the report and senior Hays consultant Steven Paola.

Insurance however, had a tough time retaining talent, as the sector was placed in a pool of industries that delivered wages between 3 and 10 per cent lower than the national average.

Hays pointed to rising cost-of-living pressures, a tightening of the employment market and skills shortages in technical roles as the causes of global wage discrepancies.

The report said Australia was in a good position to retain local talent and attract overseas workers due to high wages compared to other developed and emerging economies.

But the largest pay increases have been in the resources sector, which has undone the myth that capital city workers attract higher wages, Hays said.

S M S F A Money Management supplement

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New FOFA implementation group for AFA

By Mike Taylor

Need for like-for-like SMSF, industry and super fund comparisons

SMSF

Richard Klipin

Jimmy Gupta (02) 9422 2239 jimmy.gupta@reedbusiness.com.au

THE Association of Financial Advisers (AFA) has signaled it will be establishing a Future of Financial Advice (FOFA) implementation working group aimed at assisting members to accommodate regulatory changes as they are finalised by the Australian Securities and Investments Commission (ASIC).

Establishment of the group was confirmed by AFA chief executive Richard Klipin, and has come amid continuing concern at the pace with which ASIC is building the regulatory framework around the FOFA legislation.

There is particular concern that the regulator has yet to detail arrangements around the key issue of the grandfathering of volume bonuses – something which will impact the commercial models underpinning many financial planning practices.

As well, there is concern that the proposed 1 July 2013 implementation date for the provision of fee disclosure statements means planners will already need to be compiling the information for some affected clients.

Klipin said the FOFA implementation working group would be inclusive of licensees and was intended to ensure an appropriately coordinated approach to both understanding and meeting the new regulatory standards.

News

‘Activeness’ dips across large-cap sector

By Andrew Tsanadis FINANCIAL advisers should rethink the benefits of value-style share funds as active management falls across the Australian large-cap share funds sector, according to Morningstar’s latest sector wrap.

While focusing on investment style has produced strong results for large cap investing in recent times, the spread between styles narrows over the long-term, Morningstar stated.

FOS complaints jump

By Chris Kennedy THE Financial Ombudsman Service (FOS) received 9,590 complaints in the first quarter of this year – almost one third more than the first quarter of last year, according to FOS statistics.

There has been a steadily increasing trend since the first quarter of 2011 when 7,415 complaints were received, despite a slight dip in the fourth quarter.

Half the complaints related to credit (4,810) and almost one third to general insurance (2,814). Complaints relating to payment systems, deposit taking, investments and life insurance together made up less than 20 per cent of complaints for the quarter.

A significant number of disputes were closed over the same period, although it lagged behind the number of new disputes.

The 8,734 disputes closed in the first quarter of 2012 were up 5 per cent on the previous quarter and up 20 per cent on the January-March 2011 quarter.

Three quarters of resolutions resulted from an agreement between the financial services provider (FSP) and the applicant, and the remaining quarter were resolved by FOS’ decision.

Almost half of these (11 per cent of total resolutions) were deemed to be outside the FOS’ terms of reference.

Of the remainder, 6 per cent of resolutions were discontinuations (where the complainant discontinues the dispute or fails to respond to communications). Five per cent of total resolutions were by FOS decision in favour of the FSP, and just 3 per cent of resolutions were by FOS’ decision in favour of the applicant.

“Value-style fund managers adopt various processes which deliver varying outcomes,” the review stated.

“Investors and advisers therefore need to be mindful of the underlying holdings to ascertain the likely path of returns and whether or not a particular strategy fits with an overall portfolio and risk profile.”

According to Morningstar, there has been a fall in the “activeness” of large-cap Australian share funds over the past 12-15

months, due largely to a number of fund managers whose portfolios have become “meaningfully less different than the index”.

Understanding the role of an investment strategy in a portfolio is critical, and simply assembling highly-rated managers can duplicate style exposures and reduce diversification, the review stated.

Morningstar added that advisers should favour funds with discounted base fees, high watermarks that cannot be reset, and longer crystallisation periods.

As part of the sector wrap, Morningstar awarded four strategies a gold rating, 12 a silver rating, and 23 a bronze rating.

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www.moneymanagement.com.au July 19, 2012 Money Management — 5

News

Vow drives wealth management offering forward

By Andrew Tsanadis MORTGAGE aggregator Vow Financial has continued the growth of its wealth management offering with a new joint venture in Melbourne.

With two financial planning practices in Sydney and another in Perth, Vow chief executive Tim Brown said the firm was also in negotiations to add a branch in Brisbane.

He said wealth management had been a significant revenue-maker for the business over the past 12 months,

with most clients looking for income and life protection solutions.

“We’re also finding commercial finance is in growing demand because banks are squeezing their clients on rates at the moment and pushing up the margin on their commercial products,” he said.

Vow has set up a specialist committee of commercial mortgage brokers to help its residential brokers close business deals in situations where they wouldn’t normally have that level of experience and knowledge, Brown said.

Tim Brown

Record global ETP inflows in first half THE first half of 2012 has seen the strongest inflows into exchange-traded products (ETPs) in a first half in history, according to BlackRock.

ETPs attracted net new assets of more than $100 billion during the first half of 2012, increasing assets in global ETPs to $1.68 trillion, according to BlackRock’s ETP Landscape Industry Highlights.

The $105 billion increase was a 16 per cent rise on the $90.6 billion seen in the first half of 2011, BlackRock stated.

There was particularly strong demand for exposure to income-producing assets, with the largest portion of

inflows seen in fixed income products. The $42 billion flowing into fixed income ETPs was more than double the $19.6 billion in the first half of 2011 and included $15.5 billion into investment-grade corporate bond ETPs. Fixed income was followed by developed markets equities ($40.5 billion). Almost three quarters of those flows were into North American equities, with European equities seeing a slight net outflow.

Emerging markets equities accounted for $15 billion of net inflows and commodities $5 billion.

Remodel fees now: Elixir

By Chris Kennedy

FINANCIAL advisers have been urged to remodel their fee structures now to allow them to have their new pricing models up and running by the time Future of Financial Advice (FOFA) legislation takes place on 1 July 2013.

Elixir Consulting has released the second edition of its Adviser Pricing Models Research Report, and managing director of Elixir Sue Viskovic said over half the advisers in the 433 financial advice businesses surveyed estimated it took them over six months to create their pricing model.

Ninety-five per cent estimated it took them a year or more to implement it, meaning that for advisers who are still refining their model or are yet to create it, “our message would be to start increasing their focus as a matter of urgency”, she said.

More advisers are charging fees now compared to when the first edition of the research was released in 2009, while many are just now refining or determining their pricing models, Viskovic said.

The research found that advisers who undertook a robust process charge 27-30 per cent more than those who did not apply a robust process to their fee model – suggesting that advisers who did not put adequate time into their charging model may be undercharging for their services.

“It is of concern to note that if advisers don’t price effectively, they may charge too little for their advice – which will have disastrous long-term consequences on their business sustainability. It’s important to invest the time to do it properly,” she said.

“We would counsel against a business simply copying another’s pricing model and implementing it. However, sharing ideas, experiences and understanding different fee structures has proven to be very helpful to many advisers,” Viskovic said.

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News

Market volatility and media coverage influencing super switching

By Mike Taylor

THE investment volatility currently being experienced across the globe is unprecedented and is likely to continue, according to new analysis released by the Association of Superannuation Funds of Australia (ASFA).

What is more, the superannuation body has warned that the heightened volatility when combined with media coverage can give rise to switching by superannuation fund members.

In a discussion paper examining the need for further academic research into the superannuation sector, ASFA says the volatility of investment markets following the global financial crisis has made many people question whether the asset allocation strategies of many superannuation funds are appropriate, particularly for baby

boomers approaching retirement.

“One of the things we do need to appreciate is that the level of investment volatility we are experiencing at the moment is unprecedented,” it said, citing a report by Professor Amin Rajan – ‘Market Volatility: Friend or Foe?’ (a global survey of 289 asset managers, pension plans, pension consultants and fund distributors, managing total assets under management of $25.2 trillion) – which predicts that volatility will continue, with 78 per cent of respondents to the survey anticipating prolonged turbulence.

“According to the report, the last four years have been the most volatile in the history of equity markets, with price fluctuations of 4 per cent or more in intra-day sessions occurring six times more than they did on average in the previous 40 years. Extreme spikes in

market volatility and asset class correlations have been common,” the ASFA analysis said.

It said some causes of the global volatility were known, with the de-leveraging of the “mother of all debt bubbles in the West” being the primary cause.

However, it said other factors contributing to volatility included high frequency trading (HFT), which caused the 2010 markets’ ‘flash crash’.

The ASFA analysis pointed out that by 2010, HFT accounted for over 70 per cent of equity trades in the US. It also pointed to the role of the media, saying the focus on investment volatility had the potential to unnerve investors.

“ASFA’s anecdotal feedback is that while the number of switches made by superannuation fund members at times of heightened market volatility is low in absolute numbers, it is significant in terms of the size of individual account balances,” it said.

“The challenge for superannuation funds is to manage volatility risk, both in absolute terms through asset allocation and by communicating to members at the same time as they are receiving messages from a variety of sources that focus on the downsides of investments,” the ASFA analysis said.

SPAA wants super pension stream clarified

By Bela Moore

Graeme Colley

THE SMSF Professionals’ Association of Australia (SPAA) has called on the Australian Taxation Office (ATO) to clarify when a superannuation income stream begins and ends.

Although a response was expected last month and numerous submissions made on the issue, the ATO has yet to come clean, according to SPAA. SPAA is requesting clarification on what constitutes the provision of a pension in a fund and the tax implications it carries.

“It has the potential to impact significantly on members’ benefits. Certainly there is the potential for significant additional income tax to be paid if the trustees get it wrong,” SPAA

director for educational and professional standards Graeme Colley said.

He said the link between tax law and SIS legislation had always been tenuous and a lag in finalising the draft ruling had exacerbated the issue.

Colley said if the ruling was backdated to 1 July 2007, it could be very costly for those who had misinterpreted the law.

“Larger public offer funds that are in this boat may end up with a larger tax bill to pay. They may need to amend their systems and reduce the balances of members to pay the additional tax. This may impact unfairly on members who are new to the fund or those who have been in pension phase for a shorter period than the backdating requires,” he said.

New boutique manager open for business

By Milana Pokrajac TWO former Hunter Hall global equity portfolio managers have formed a new boutique funds management business, Morphic Asset Management.

Morphic is a global equities manager founded by Jack Lowenstein and Chad Slater, formerly of Hunter Hall, who will be its joint chief investment officers and part-owners.

With Perpetual Trust Services as its responsible entity, the boutique has also come out with its first product, Morphic Global Opportunities Fund (MGOF).

MGOF will be targeted at both wholesale and retail investors and will invest in global equities, the firm has announced.

Morphic will be majority owned by the founders and staff, with

the other large shareholder being a private equity fund established by Innova Portfolio Management and available on the e-Clipse UMA platform.

Innova and the e-Clipse UMA Platform are majority owned by a financial planning dealer group Fortnum Financial Group.

The two founders have been joined by research manager Tim Cheung and risk manager Geoff Wood.

“Despite market chaos, equities are one of the few ways to protect wealth, and so if you combine research with flexible hedging strategies, then global equities are going to represent the wisest diversification of capital risk in current times,” Mr Lowenstein said.

Minimum investment in MGOF is $10,000, with minimum additional investments of $5000.

ASIC bans unlicensed Sydney ‘adviser’

By Tim Stewart

A SYDNEY man described by the Australian Securities and Investments Commission (ASIC) as a “financial adviser” has been permanently banned from providing financial services.

An investigation by the regulator found that Ropati Broederlow (of Punchbowl, NSW) advised clients to deposit funds into a trust account run by RN Property Pty Ltd – of which he was the sole director.

Broederlow solicited deposits of more than $150,000 from over 20 clients between August 2010 and July 2011, telling his clients the funds would be used to purchase a house.

When clients called for the return of their money, “both RN Property and Mr Broederlow failed to use the funds on their clients’ behalf or refund the invested money,” ASIC stated.

Broederlow was also the sole director of Yourefund Pty Ltd, which has had its credit

8 — Money Management July 19, 2012 www.moneymanagement.com.au

cancelled by ASIC because the regulator believes Broederlow “is not a fit and proper person to engage in credit activities”.

ASIC Commissioner Peter Kell said the licensing system “provides important rights and protects people and their money”.

“Anyone giving investment advice or selling financial products without holding a licence may be breaking the law, and ASIC will continue to pursue these offenders,” he said.

Retail investors re-evaluate hedge funds

By Andrew Tsanadis

AS the market continually fails to meet the highs of pre-2008, fed-up retail investors are increasingly looking to equity hedge funds for higher returns, according to Australian Fund Monitors chief executive Chris Gosselin.

Although hedge funds are more widely available in the wholesale market, retail investors are often willing to bear the complexity and higher fees associated with an absolute return fund in search of a more positive return outcome, he said.

“There’s a lot of focus on fees, but you should be looking at net return, and if the net returns aren’t good enough you should be questioning the performance of the fund manager or the sector you’re invested in,” Gosselin said.

At the moment, more defensive, market neutral strategies are performing better than some of the more index-concentrated funds that might only have 10 or 20 positions and have large exposures to individual sectors, according to Gosselin.

“There’s certainly a move to say there needs to be some flexible asset allocation within equities,” he said.

“The problem is there’s a huge blanket view that says ‘avoid equities, go to cash’ just because of risk. I think that’s logical but not sensible,” Gosselin said.

A financial adviser’s concern about the risk of hedge funds should be mitigated by taking into account the type of sector or fund manager they’re invested with rather than turning their back on them altogether, he said.

News My Adviser launches accountants’ package

By Milana Pokrajac DEALER group My Adviser has announced the launch of a specialist package for accountants, which it claims will go beyond the proposed legislation.

Under the proposed removal of the accountants’ exemption, accountants will have to obtain a limited Australian Financial Services Licence if they wish to continue to provide advice around self-managed superannuation funds (SMSFs) and superannuation. “[The package] offers professional indemnity (PI) insurance to accountants and will also allow them to provide some strategic advice to clients on SMSFs, including on basic deposit products and cash management accounts,” said Philippa Sheehan, managing director of My Adviser.

The new offering will include a flat-fee pricing model and the option of a weekly payment for PI insurance, in addition to ongoing support and education for accountants.

With the Institute of Chartered Accountants estimating that up to 10,000 accountants will be looking to take advantage of the current legislative changes to move into the sphere of SMSF advice, Sheehan said there was a significant opportunity for accountants to license themselves sooner rather than later.

“We feel very strongly that accountants should be able to get the correct licensing easily. We have no links with any bank or insurance company, and we see this as a competitive advantage as institutional aggregation continues in the industry,” Sheehan added.

ATO managing 1.4 million debt cases

By Mike Taylor

THE Australian Taxation Office (ATO) has acknowledged the degree of debt it is managing exceeds $14 billion.

The Commissioner for Taxation, Michael D’Ascenzo, has told a recent conference the ATO is managing around 1.4 million debt cases with a total value in excess of $14 billion dollars.

As well, he said that every quarter the tax office was managing thousands of overdue activity statement payments.

Explaining the ATO’s use of analytics to assist in managing the debt problem, D’Ascenzo said some cases resolved themselves while others required further action by the agency.

“A suite of debt models predicts a taxpayer’s propensity to repay a debt, and their capacity to pay,” he said. “Using income tax return data, we are able to risk score over one million companies across all industries, all corporation types (public, private) and all sizes, as measured either by assets or number of employees.”

D’Ascenzo said the combined scores enabled the ATO to determine the necessary support or compliance strategy required.

“Those who are predicted to finalise their debt on their own – people with a predicted high propensity to pay – do not need to be bothered by us unless they are in need of assistance,” he said. “On the other hand, we try to engage early with taxpayers who have a low propensity and a high capacity to pay.”

Michael D’Ascenzo

Treasury Group adds boutique fund manager

By Andrew Tsanadis TREASURY Group (TRG) has entered into a partnership agreement with Singapore-based equity manager Octis Asset Management.

As part of the agreement, TRG has acquired a 20 per cent equity stake worth $224,000 in Octis, with an option to increase that by a further 10 per cent if new funds-flow goals are met.

The initial stake was funded from working capital and the strike price of the option will be dependent upon the “prevailing net asset backing at the time the options are exercised”, TRG stated.

TRG chief executive Andrew McGill said the company had been interested in diversifying into alternatives and would be looking to grow the Octis business both in Australia and overseas.

The latest addition to TRG follows an announcement in May, when the group acquired a 30 per cent equity stake in Melbournebased boutique manager Evergreen Capital Partners.

“We have been very impressed by TRG’s performance in partnering boutique fund managers and are very confident of the synergies created with our partnership,” said Octis chief executive Jerome Feracci.

Octis currently has $50 million in funds management.

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www.moneymanagement.com.au July 19, 2012 Money Management — 9

News

Perpetual looks to offload Lenders Mortgage Services

By Chris Kennedy

Geoff Lloyd

PERPETUAL has reached a conditional agreement to sell its Perpetual Lenders Mortgage Services (PLMS) to First Mortgage Services (FMS) affiliate FAF International Property Services (Australia), according to a statement to the Australian Securities Exchange (ASX).

Perpetual described the announcement as a “first major update on the implementation of

its Transformation 2015 strategy”, which was announced on 25 June 2012. The strategy aims to “significantly simplify the company’s corporate structure, refocus its operational activities and capture new opportunities for growth,” Perpetual stated.

“The sale allows us to refocus our corporate trust business on corporate fiduciary services,” said Perpetual chief executive and managing director Geoff Lloyd.

Although PLMS is “competi-

tively well positioned” it fits better within a company that can add scale and technological innovation, Lloyd said.

“A sale also gives us the best opportunity to maximise PLMS’ value for our shareholders,” he added.

Perpetual did not disclose the terms of the sale or the conditions that would need to be met for the sale to proceed, but said the transition was not expected to be material to Perpetual’s net

profit after tax.

FMS is a subsidiary of USbased First American Financial Corporation. PLMS has around 280 full-time staff (as at 31 May 2012). Completion of the sale is expected to occur before 30 September 2012, according to the ASX statement.

The operations team within the PLMS business is expected to remain in place following completion of the acquisition, according to FMS.

Sophisticated fraudsters ClearView snaps up six practices in July targeting savvy investors

By Tim Stewart

AUSTRALIANS have lost $113 million to sophisticated investment fraud since January 2007, and the victims have predominantly been financially literate and highly educated men.

The Australian Crime Commission report into ‘Serious and Organised Investment Fraud in Australia’ was published jointly with the Australian Institute of Criminology, and is based on the efforts of the multi-agency Task Force Galilee.

Task Force Galilee is comprised of 19 agencies, and is focused on combating serious and organised investment fraud aimed at Australians.

The frauds use sophisticated techniques to solicit investment in non-existent or essentially worthless securities, according to the report.

The most common victims of the frauds tend to be men aged over 50 who are highly educated and financially literate. Victims also tend to be small business owners, self-funded retirees and individuals who are socially isolated.

“Technological ‘grooming’ of the potential investor combined with personal contact over weeks, even months, is used to convince victims of the legitimacy of the investment,” according to the report.

Most of the frauds base their operations overseas, although recent investigations have identified operations based in Australia, said the report.

The average amount transferred by victims of these types of frauds is $18,174, with a range between $9 and $1,293,390, according to the report.

“Investors are also encouraged not to become complacent. Due diligence is required even if an investor has a financial adviser because they may also be unaware of the fraud,” said the report.

CLEARView Wealth has recruited six new financial practices in July, bringing the total number of advisers in the dealer group to 78.

The number of advisers operating under the ClearView licence has increased by 21 since 31 December 2011, according to a statement by the company.

The six practices recruited in July are the Leverington Financial Group, Peter Howard Insurances, MBA Financial Group, The Insurance and Superannuation Centre, The Financial Clinic (Victoria) and Centre of Wisdom.

The life insurance side of the business has also grown, with life insurance new business premiums up $5.2 million for the 12 months ended 30 June 2012, according to ClearView.

In addition, the group’s recently launched life advice product LifeSolutions has been added to the Approved Product Lists of 14 dealer groups since 2 April 2012, said the statement.

ClearView managing director Simon Swanson said the “positive acceptance” of the LifeSolutions suite of products, along with strong life insurance premium growth, “reflects the early success of our strategy in the retail life advice segment”.

Rough trot for active fixed interest managers

By Bela Moore

ACTIVE managers had it tough in the first half of 2012 as issues in the periphery of Europe continued to wreak havoc on fixed interest markets, according to Standard and Poor’s (S&P) half-yearly fixed interest peer group review.

S&P analyst David Erdonmez said performance had not recovered since 2010, when all managers targeting the UBS Composite Bond Index had achieved above-benchmark returns.

S&P downgraded a number of global fixed interest funds at the end of 2011, blaming their poor performance on market volatility, short duration and overweight credit calls.

Duration continued to dictate S&P’s

10 — Money Management July 19, 2012 www.moneymanagement.com.au

core offerings in 2012, along with managers’ ability to predict future paths of interest rates. Credit-based offerings had been susceptible to widening spreads in a risk-off environment, the report said.

Bentham Asset Management and PIMCO were the only global fixed interest funds to receive five-star ratings, which they also managed to hold throughout 2011.

S&P awarded Tyndall Investment Management, PIMCO, Colonial First State Global Asset Management and AMP Capital Investors five-star ratings for their Australian fixed interest offerings, while OnePath’s Wholesale Diversified High Yield Trust and Wholesale Diversified Fixed Interest Trust remained on hold.

David Erdonmez The only notable team change, according to S&P, was the addition of former INGIM staff members Rachel O’Connor and credit analyst Thomas Wu to the UBS Asset Management team.

SMSF Weekly

Outsourcing SMSF admin grows in popularity

By Milana Pokrajac OUTSOURCING business processes for self-managed superannuation funds (SMSFs) is growing in popularity, but cutting costs is not the biggest motivator.

According to a survey conducted

by Sundaram Business Services, which offers SMSF administration services itself, freeing up time and

solving staffing issues are other major reasons why accountants and other businesses consider outsourcing SMSF back-office functions.

But labour arbitrage is not the only motivator, with most of Sundaram’s clients retaining staff numbers, according to head of Asia Pacific Harish Rao. “The motivation is usually being able to have a more flexible back

SMSF trustees becoming more strategic

By Damon Taylor

SELF-managed superannuation fund (SMSF) trustees are becoming more strategic within their portfolios to ensure recent downturns are not adversely affecting their retirement goals, according to Capital CFDs. SMSFs have been allowed access to contracts for difference (or CFDs) since 2007, and according to Ashley Jessen, head sales trader at Capital CFDs, this change has given trustees a cost-effective and efficient tool for hedging, as opposed to traditional methods such as options.

“If a SMSF holds 2,500 ANZ shares, then traditionally you would need to understand options, time decay and strike prices in order to get insurance or protection over your ANZ shares,” he said. “Whereas, trading the much simpler CFD over ANZ allows you to trade short 2,500 ANZ share CFDs without having to worry about strike prices, time decay and time expiry.

“This is essential during market downturns, such as recently when ANZ fell just over 12.5 per cent in 13 days,” Jessen said.

Instead of being exposed to a 12.5 per cent drop in ANZ, Jessen said that an SMSF investor positioned via such an “insurance policy” could have positioned themselves to limit that downside for minimal outlay.

“This explains the growth of CFD

office processing arrangement, one that is scalable to fluctuating business demands and offers faster turnaround times,” Rao said.

“Attracting staff for the repetitive back-office functions can be problematic for firms, since professional accountants generally want to spend more time on client development and higher value-added work,” Rao added.

Macquarie enhances term deposits for SMSFs

By Mike Taylor

trading by SMSF trustees to ‘short’ their own portfolios to protect the value of the core portfolio in case of a market slide,” he said.

Yet for Jessen, the equally important point to consider is that most CFD providers recommend that SMSF trustees use CFDs as an efficient insurance policy, or hedge, only. They do not, for instance, recommend trading for speculation.

“Experienced investors who understand leverage and who are looking to use CFDs for risk protection are well advised to consider this technique further,” Jessen said. “Eurozone announcements that spook investors and drive markets down are all too common nowadays, so investors need to consider all the tools available to limit their downside and protect their profits.”

MACQUARIE Adviser Services has enhanced its product offering for self-managed superannuation funds (SMSFs), introducing an upgrade to the functionality of its term deposits.

The company announced the upgraded functionality reflected recent research by Investment Trends confirming a third of SMSFs intend investing in term deposits in the next 12 months – up from 27 per cent in 2011.

The company said the enhancements were aimed at driving efficiencies for financial planners through the introduction of an online maturities capability and data-feed improvements.

It said the updates would help streamline the administration required in managing the term deposit component of clients’ investment portfolios.

Commenting on the product upgrades, Macquarie Adviser Services head of cash product Peter Forrest said they were intended to deliver simple yet effective enhancements to Macquarie’s broad range of cash management solutions, especially for SMSFs. “Managing term deposit maturities can be a laborious process for both advisers and their clients, with the traditional process requiring significant paperwork in a limited timeframe,” he said. “By introducing an online capability and enabling clients to allow their adviser to manage instructions on their behalf, we have reduced the time burden on both parties, simplifying the whole maturities process.”

www.moneymanagement.com.au July 19, 2012 Money Management — 11

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Agribusiness

Cropped harvest The retail agribusiness sector is a shadow of its former self, with planners staying away in droves. Tim Stewart takes a look at a sector with a serious image problem.

WHEN most planners and investors hear the term ‘managed investment scheme’ and its accompanying acronym, ‘MIS’, their thoughts inevitably drift towards tax-effective agribusiness schemes – many of which have failed spectacularly in recent years.

But an MIS is really just any pooled investment with a unit trust structure and a responsible entity, according to Ze n i t h s e n i o r i n v e s t m e n t a n a l y s t Dugald Higgins.

“When people hear ‘MIS’ all they think about is things like Great Southern and Timbercorp. It’s been a big bugbear of mine for almost a decade,” Higgins says.

So how does a typical agribusiness MIS differ from, say, a property trust?

For starters, they tend to be tax-effective, says Higgins. That is, they require a product ruling from the Australian Taxation Office (ATO) every year in order to allow investors to claim a tax deduction on their investment.

But it’s not only agribusiness schemes that have sought product rulings from the ATO. Film schemes, certain types of bonds and some structured products have also been granted product rulings in the past, says Higgins.

However, the bulk of product rulings are for agribusiness projects, Higgins admits. In 2006, the ATO issued 165 such rulings; by the time the 2011-2012 financial year rolled around, that number had fallen to 24.

The second way agribusiness schemes differ from typical MISs is that they tend to not operate under a unit trust structure – investors have contractual rights instead, says Higgins.

There are a number of agreements between the investor, the responsible entity and the investment manager in place instead of a direct unit trust structure, Higgins says. The reason behind the agreements is to remove the ability

Key points z

Inflows into the retail agribusiness sector deteriorated rapidly since the 2008 peak. z Of the remaining four projects in 2012, one has been withdrawn and another is in doubt. z The sector is frustrated by the lack of interest institutional investors have historically shown in agribusiness. z Additional disclosure benchmarks have been welcomed by the industry. of the investor (typically referred to as a ‘grower’) to come in and harvest their crops themselves, Higgins adds.

Finally, not all agribusiness schemes are tax-effective, says Higgins. He points to two Rural Funds Management products, StockBank and RiverBank, as examples of non-tax-effective agribusiness products.

The state of play At its height in 2008, the retail agribusiness sector repor tedly saw annual inflows above the $1 billion mark above.

It is difficult to estimate the current inflows into the retail market, but one industr y insider put the market at $35 million for the 2010-11 financial year – with 2011-12 on track for around $15 million.

While there were around 80-90 new schemes being offered at the height of the tax-effective agribusiness boom, there were only four retail offers in 2012: t h e T F S Sa n d a l w o o d Pro j e c t 2 0 1 2 , AACL’s Grain Co-production Project, the WA Bluegum Project 2012, and Lowell Capital’s Premium African Mahogany 2012 Project.

Of those four projects, the AACL project is not going ahead due to lack of retail funding (money is currently being returned to investors, according

14 — Money Management July 19, 2012 www.moneymanagement.com.au

to the company) and the future of this year’s Premium Afr ican Mahogany project also appears to be in doubt.

The dramatic fall-off in the sector began in 2009 when a number of highprofile schemes collapsed – and the poor investor sentiment following the global financial crisis has also played a role. “ T h e t a x - e f f e c t i v e s c h e m e s a re labouring in an environment where such schemes are a dirty word for much of the investment community – both financial planners and investors alike,” says Higgins.

While the (albeit, relatively small) inflows into the remaining tax-effective schemes suggest that there are some advisers continuing to recommend agribusiness to their clients, there are not many dealer groups around that will admit to including such a scheme on their Approved Product List (APL).

All of the dealer groups contacted by Money Management denied having any agribusiness products – tax-effective or not – on their APLs. One dealer group that was badly burnt by the high-profile collapses is Professional Investment Services (PIS).

Former PIS managing director Grahame Evans told Money Management in May last year that agribusiness would have to be “well diversified” with “substantial funds under management” and institutional ownership to complement retail investors before the dealer group reconsidered the sector.

Who’s left?

The companies that survived the spate o f a g r i b u s i n e s s c o l l a p s e s a re n ow relying primarily on wholesale investment rather than the retail MIS sector.

T F S Sa n d a l w o o d g row s In d i a n s a n d a l w o o d ( Sa n t a l u m a l b u m ) o n behalf of its investors in the Kununurra, a tropical region of Western Australia.

According to the TFS website, Indian sandalwood is “renowned for its fragrant and medicinal properties” and has “a wide range of uses in the global fragrance, incense, worship and carving industries”.

Strong demand for the product has led to the deforestation of Santalum album in India, Indonesia and Timor – leading TFS to believe that the scarcity of the product will result in a relatively high selling price.

But considering the company has yet to conduct a commercial harvest of its product, how can it be certain that what it eventually produces will be identical to wild Indian sandalwood growing overseas?

Agribusiness

T F S Sa n d a l w o o d c h i e f f i n a n c i a l o f f i c e r Q u e n t i n Me g s o n s a y s t h e company has conducted tests with European fragrance houses and Indian buyers using sample harvests of trees grown in the Kununurra.

“It’s right in the middle of the specifications for Indian sandalwood oil.

We’d be very surprised if that’s not the case across the board,” he says.

“Our unknown is more: ‘What will be the yield?’ Our yield estimates have always been off the back of our forester’s formulations and so forth.

But there’s no real information there to get information on, being the pioneers,” Megson says.

The first commercial harvesting of the product is likely to begin in some form in 2013, he adds.

“Our first plantings were in 1999. The first PDS [Product Disclosure Statement] was for 15 years in the ground.

Technically, the first har vest of the project would be in 2014, but…we’re investigating doing some or all of our first harvest next year,” Megson says.

The retail 2012 TFS project ended up raising $9.3 million in 2011-12 – up 30 per cent from last year.

But the amount was eclipsed by the wholesale investment into the project, which came primarily from overseas, says Megson.

To provide some context, the total funds raised last year will be used to plant 1,500 hectares of Indian sandalwood – and only 88 hectares of that will come from the retail MIS offer ing, according to Megson.

“In an ideal world we’d love retail/MIS to be higher…but we’ll never be reliant on it like we were back in 2008 and before. Our first wholesale investor came in 2009-10,” says Megson.

But “notwithstanding what’s gone on” in the sector in recent years, Megson reckons TFS Sandalwood is a case study for “what MIS can do as a positive”.

“We’re the pioneers and world leaders in a very valuable plantation that prob-

ably wouldn’t have gotten off the ground without MIS,” says Megson.

Going against the grain One of the biggest surviving agribusiness schemes, AACL, has withdrawn its 2012 Grain Co-production Project following a lacklustre retail MIS take-up.

AACL executive manager for capital raising, Rob Melville, said his company acts as an intermediary between investors and farmers to grow grain.

“The investors own the grain, and they contract the farmers to grow it for them. There’s a profit-sharing mechaContinued on page 16

www.moneymanagement.com.au July 19, 2012 Money Management — 15

Agribusiness Continued from page 15 nism to incentivise the farmers to do the best job they can,” says Melville.

All of the grain grown by the farmers is then pooled in each project, and the investors get the proportionate share depending on how many units they own, he says.

“This year’s capital raising due to the market circumstance didn’t warrant taking on the project over five seasons,” says Melville.

The 2012 project was not viable because AACL’s fee income is very small, and the expenses to run the project are very high since the company needs to monitor the farmers’ performance, he says.

This year’s project was also hampered because the ATO’s closing date for the scheme was 10 June, Melville adds.

“I’m getting calls ever y day from investors and planners about whether we have the project open and whether investors can invest,” said Melville, speaking at the end of June.

A lot of potential investors contact AACL “late in the day” after going to their planners with an urgent issue, he adds.

“People sometimes don’t become aware of their tax position until there is a review done in May/June of their tax position,” says Melville.

He says that AACL as a business needs to review the manner in which it raises investor capital in the future.

“

Just because you give someone a heap more information doesn’t necessarily make things better.

- Dugald Higgins

”

Dugald Higgins Like TFS Sandalwood, the majority of the investment into AACL comes from the wholesale market.

“I’ve been spending a fair amount of my time over the last 12-18 months or so travelling and exploring wholesale opportunities around the world,” says Melville.

The take-up by Australian institutional investors has been particularly frustrating, he adds.

“It’s extremely disappointing, because there has been little to no interest [by

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Australian institutional investors] to have any exposure to agriculture generally,” says Melville.

Australian Agribusiness Group (AAG) founder and managing director, Marcus Elgin, says he’s been “knocking on the door” of Australian superannuation funds for eight years.

“Our firm is investing money for our clients by buying real farms, improving their performance, and running them – either on an active or a passive basis,” says Elgin.

W h i l e A AG i s n o t a t a x - e f f e c t i v e scheme, it has been heavily involved in the sector and conducted research on it in the past.

“This year we did a very small amount of research [on MIS schemes] and we have an agenda item for our next board meeting as to whether or not we do any at all next year,” says Elgin.

One of the big frustrations for people l i k e E l g i n i s t h e l a c k o f i n t e re s t Australian superannuation funds have historically shown in agribusiness as an asset class.

Australian institutional investors tend to view farmland as the “alternative of alternatives, way out there with stamp collecting and art”, says Elgin.

This sort of attitude is in stark contrast with overseas institutional investors, who tend to view farmland as either part of a property portfolio or “one of the first things they think about in the alternative [portfolio]”, according to Elgin.

“Timberland and farmland are the two things [overseas investors] think of as the first of alternatives. Before they start thinking about venture capital and other private equity type plays,” says Elgin.

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Agribusiness Continued from page 16 die – that’s a fairly strong motivating factor,” Elgin says.

You’re doing it wrong Ru ra l Fu n d s Ma n a g e m e n t ( R F M ) founder and managing director David Bryant reckons the problem with the agribusiness industry is that it’s got its business model backwards.

“Typically, when a fund manager says ‘we’re going to start an agricultural i n v e s t m e n t f u n d’ t h e y ra i s e s o m e capital, buy some farms and hire some guys with big hats and then start running the farms,” says Bryant.

“If you really look at what your investment is, you’ve actually bought a property investment that has a business operated on it. Now, would you go and buy an office tower and then establish and operate businesses yourself in that office tower?” he asks.

Frank Lowy wouldn’t attempt to run a Chinese restaurant in one of his shopping centres himself, says Bryant – he’d rent the space out to a Chinese person.

He’s equally scathing when it comes to the tax-effective MIS space. RFM only ever went to market with one tax-effect i v e p r o d u c t , i n 2 0 0 6 , w h i c h g re w almonds, he says.

“We only did one tax-effective scheme, and when we did it we discovered what a tawdry industry it was,” he says.

“The buying of business extended to lunches that went all day and into the night. That aspect of it we found a bit repulsive,” says Bryant.

“By 2 0 0 6 t h e i n d u s t r y w a s v e r y competitive, such that the large taxeffective operators effectively bought business – they bought market share.

They did that by offering high commissions and very favourable loan terms to potential investors. In fact, the loan terms were such in some cases that I would have thought they were noncommercial.

“These big tax-effective MIS businesses were using shareholders’ funds to buy market share so they could report ever-increasing MIS sales,” says Bryant.

The way Bryant tells it, these types of businesses are even dodgier than your typical Ponzi scheme.

“Ponzi schemes work on the basis that you use the investment income that you earn on investments to pay high rates of return to initial investors.

“But these MIS companies never even got any investment income, so they were using shareholders’ capital to pay high rates of return. It was like a substandard Ponzi scheme,” he laughs.

“Almost everything about them is bad. There are thousands of Australians who have personal loans with Bendigo Bank and the CBA, for example, that they’re struggling to pay off – yet the investment they originally made has been vapourised,” says Bryant.

Even if planners wanted to recommend their agribusiness schemes to their clients, they face a pretty major stumbling block: after the string of high-profile collapses, barely any insurers are willing to provide professional indemnity cover for agribusiness schemes, says Bryant.

“There wouldn’t be a dealer group in

Australia that has professional indemnity insurance to cover them for [agribusiness schemes],” says Bryant.

Dugald Higgins says Zenith has heard anecdotal evidence from some planning groups that insurers have taken a “hard line” on agribusiness MISs. “We have heard that while there is that blanket ban approach, some groups who approach the insurers individually have been able to get them to rescind that, but it’s very much on a case-by-case basis,” says Higgins.

But agribusiness hasn’t been the only asset class to get the stern treatment, with insurers taking a tough line on anything illiquid, Higgins adds.

Increasing disclosure The Australian Securities and Investments Commission (ASIC) updated its regulatory guidance on agribusiness MISs in January, introducing five new disclosure benchmarks that will apply to the schemes effective 1 August 2012.

According to ASIC’s senior executive leader for investment managers and superannuation, Ged Fitzpatrick: “Responsible entities of agribusiness schemes must ensure people better understand what they are getting into before they invest. ASIC’s priority is ensuring investors and financial consumers are confident and informed before investing in these schemes.”

David Bryant Bu t Hi g g i n s i s s c e p t i c a l t h a t t h e i m p r ov e d d i s c l o s u re w i l l e n d u p protecting investors in the future.

“We’ve seen a consistent theme where [MIS] managers come out and say ‘we think we’re financially solvent’. And then [investors] look at that and say ‘that’s great!’,” says Higgins.

“The problem is that a lot of the time, managers bullshit,” he says.

He points to the fifth disclosure benchmark of ASIC’s Consultation Paper 133,

which requires that managers demonstrate that they are solvent and have sufficient funds to continue.

Before the original guidelines became mandatory, the MIS scheme Rewards Group voluntarily complied with the benchmark by effectively saying ‘we think we’re fine’, according to Higgins.

“Weeks later they were insolvent. You can definitely see instances of people who looked at that prospectus and said ‘oh well, they say they’re fine, so I’m going to believe them’. It’s just not that simple,” says Higgins.

“Just because you give someone a heap more information doesn’t necessarily make things better,” says Higgins.

While Higgins is all for improved disclosure for investors, he worries that retail investors will have trouble reading between the lines and end up mistaking information for safety.

“You go into a standard Australian equities fund, and if one day the management gets up and walks out and you decide ‘that’s it, I don’t agree with this anymore’, you just put in a sell order on it and three days later you’re gone. With these things, if you’ve got a 25-year Radiata pine scheme like Willmott, well you’re strapped in there for the ride,” says Higgins.

“Everyone’s got a hard enough time seeing the future 10 minutes down the road let alone over a 25 year period,” says Higgins.

MM

Agribusiness: weighing it up Zenith analyst Dugald Higgins lists the pros and cons for investors considering an exposure to the agribusiness sector.

Pros

Cons

• Agribusiness as an alternative asset class has a low correlation to mainstream assets like equities, property, fixed income and cash.

• All investments are only as good as their structure. You can’t make poor assets better through structuring, but you can make good assets useless if the structure isn’t right.

• Thematic drivers like global population growth, changing dietary patterns and rising affluence make grains, oilseeds, dairy and protein (meat) look attractive.

• Most forms of agribusiness operations involve long-dated, relatively illiquid assets like forestry and, as such, many funds can either have low liquidity with very shallow secondary markets or nil liquidity.

• There can be tax benefits for investors with the right characteristics, but investment in an agribusiness MIS must not be considered purely for tax reasons.

• Agricultural investments are characterised by a wide variety of risks associated with climatic and environmental influences, manager risks to operations and risks posed by natural disasters.

• It must be considered as a way of bringing effective diversification to an investment portfolio first, and as a tax planning measure a distant second.

• Use of high levels of borrowing by the fund manager and the investor (if using personal gearing) significantly increases dangers.

18 — Money Management July 19, 2012 www.moneymanagement.com.au

• High level of counterparty risk with the responsible entity and the investment manager. We would suggest that these risks are generally higher in agribusiness tax-effective schemes than for other asset classes.

China

Lifting the bamboo curtain Everyone would like to know more about China’s impending new leaders – not just the Chinese but people across the globe. So what can we expect? Linda Jakobson writes.

A

n uncomfortable truth is that people, especially those in parliamentary democracies like Australia, do not want to think about their prosperity being dependent on the (hopefully wise) decisions made by leaders of the Communist Party of China (CPC). We say that we are reliant on trade with China, or that China's continued economic growth is crucial to the world economy.

But we do not go as far as to say that our well-being hinges on the skills and foresight of a group of men who make decisions secretly and who are not accountable to anyone really, except possibly each other.

And, to add insult to injury, these men, at least publicly, claim to uphold the principles of Marxism and Mao Zedong.

An equally awkward truth is how little we know about the men who will take the helm in China. The views of the leaders at the pinnacle of power and the processes by which they reach their positions remain obscure. We still do not even know the exact dates of the next CPC Party Congress that will conclude with the new leadership walking onto the podium to the applause of some 2,200 Party delegates. Presumably this meeting will be held in late October or November.

What we do know, barring the unlikely event of an horrific crisis, is that China's top leader will be Mr Xi Jinping and his righthand man will be Dr Li Keqiang. Xi will be appointed head of the CPC and head of the all-powerful Politburo Standing Committee later this year, and he will become President of the People's Republic of China (PRC) in March 2013 at the annual meeting of the National People's Congress, China's parliament. Li will presumably become the second-ranked member on the Standing

Committee and become Premier of the PRC in 2013. Xi, who turns 60 next year, studied chemical engineering as an undergraduate.

Li Keqiang, who has a doctorate in economics, turns 57 next year. Both Xi and Li have been specifically groomed for the top leadership positions for the past five years. As CCP Standing Committee Party members and in the roles of Vice-President (Xi) and Vice-Premier (Li), they both have considerable experience.

But who in addition to Xi and Li will be on the Politburo Standing Committee is not known with any degree of certainty.

We do not even know for sure that will it be a nine-member committee as is the case at present, or if membership will be reduced to seven, in order to make decision-making more effective (or because the present nine members cannot agree who should be the eighth and ninth members, as is also plausible).

However, because of term limits and age limits, we know that besides the existing members Xi and Hu, nearly all of the remaining Standing Committee members will be new.

Xi as a person is certainly different from Hu Jintao, China's current top leader, who is known for his cardboard-like stiff public persona. People who have spent time with Xi tell me he is 'comfortable in his own skin'.

He communicates easily with people and, together with his famous singer wife, they will be an entirely different 'first couple' than China has ever had before.

Does a new group of leaders mean that there is chance for policy change?

It could. Party Congresses have previously marked, broadly speaking, the start of a new direction in Chinese economic policies.

Twenty years ago, following the 1992 Party

“

There is reason for modest optimism that China's new leaders will embark in a new direction to transform growth so that it is more driven by the markets.

”

Congress, Jiang Zemin (President and Party General Secretary) and in particular, Zhu Rongji (Premier), pushed forward a wave of liberalisation that led to China's entry into the World Trade Organization in 2001.

Jiang Zemin was known for his probusiness stance, and paved the way for private ownership of property, business and wealth to finally (in 2004) be protected by the Constitution. Ten years ago, after the 2002 Party Congress, the new leaders Hu Jintao and Wen Jiabao made 'inclusive growth' a policy goal. This led to a reduction in the number of levies imposed on rural residents, an expansion of social welfare programs, and more support for state-owned enterprises.

It is possible that Xi and Li will be more committed to free-market principles. Many interest groups in China, some of which are vital for the Communist Party to be able to wield power, advocate that the new leaders

muster the political will to rein in the dominant state sector and push harder to genuinely foster innovation.

The problems in China's current economic model are widely understood among top officials in China. Moreover, various policy solutions have been identified and thoroughly researched. China must reduce the dominance of state enterprises, lower barriers of entry to the private sector, free up markets for land, labour and capital, and strengthen the fiscal system.

These were the recommendations made by a report (China 2030) issued jointly in February this year by the World Bank and China's Development Research Center, an influential institution under the State Council. Li Keqiang was closely involved in the work of this report and is said to support these recommendations.

Xi Jinping, in turn, is known to have endorsed policies that supported the private sector in his two previous posts as head of two provinces with rapid economic growth, Fujian and Zhejiang.

The current vice premier, Wang Qishan, is another strong candidate who is relatively familiar to economists and policymakers abroad. He is known to be an effective technocrat and troubleshooter. His present portfolio includes finance and trade and he is considered to be a supporter of pro-market policies and is supposedly close to central bank governor Zhou Xiaochuan.

In sum, there is reason for modest optimism that China's new leaders will embark in a new direction to transform growth so that it is more driven by the markets – ie, consumers and the private sector.

Linda Jakobson is East Asia program director at the Lowy Institute for International Policy.

www.moneymanagement.com.au July 19, 2012 Money Management — 19

Credit law

What you might have missed Kathryn Wardrobe outlines some of the finer details of the new credit legislation which might have slipped through the cracks.

N

ational Consumer Credit Legislation has been upon us for some time, and by now Australian Credit Licence (ACL) holders and representatives should be well versed in their key compliance and responsible lending obligations.

However, as is the case with any new reforms, the credit legislation has been evolving since its inception and is set to continue to do so in 2013.

Recent changes to the credit legislation have been well documented, so much of what follows will not be all that new to many readers. However, in practice we are seeing that some of the finer details of these changes have slipped through the cracks.

So, here’s what you might have missed.

Credit disclosure documents As we all know, the commencement of the requirement to provide credit disclosure documents for credit assistance providers (being the credit guide, quote for providing credit assistance credit contract or lease disclosure proposal document and preliminary assessment), was postponed three times to its eventual start date of 2 October, 2011.

Regulations released during the second half of 2011set out further requirements as to the form and content of the credit disclosure documents. Some important changes are: • The credit guide of a credit assistance provider must now state if a commission is payable by the licensee to third parties for the introduction of credit business, and include a statement that the consumer may, on request, obtain a reasonable estimate of such commission and how it is worked out.

What you may have missed: if the licensee pays commissions to third parties, the credit guide must also include information about the classes of persons to whom such commissions are payable. Simply stating ‘third parties’ will not suffice.

• Credit disclosure documents can be combined where appropriate, provided that the content requirements of each disclosure document are still being met.

Given the timing requirements for provision of these documents, this predominantly saw credit guides and quotes being combined, and credit or lease disclosure proposal documents and preliminary assessments being combined.

20 — Money Management July 19, 2012 www.moneymanagement.com.au

Previously, the Australian Securities and Investments Commission (ASIC) had said that dual credit and financial services licensees could combine their disclosure documents where appropriate. This, together with the Regulations, saw many dual licensees combining their Financial Services Guide (FSG) with their Credit Guide/Quote, and their Statement of Advice (SoA) with their credit proposal documents/preliminary assessment.

What you may have missed: if you are a dual credit and financial services licensee combining disclosure documents, ensure that the different terminology of the regimes is not being confused. We commonly see terms such as ‘credit advice’ and ‘credit product’ being used in combined documents for what should be ‘credit assistance’ and ‘credit contract’.

• Credit disclosure documents can be provided to consumers electronically. More specifically, the regulations set out that the credit disclosure documents can either be sent to a consumer by electronic communication, or made available to the consumer on the licensee’s information system (ie, website). This saw many licensees move to providing the credit

disclosure documents solely by email.

What you may have missed: credit disclosure documents can only be provided to a consumer electronically if the consumer consents. Before the consumer can consent, they must be told that: – Paper documents may no longer be given; – Electronic communications must be regularly checked; and – Consent may be withdrawn at any time.

Have you properly obtained the consumer’s consent?

• The requirement for licensees to display their ACL number on required documents commenced on 1 April 2012. The required documents are not just the credit disclosure documents, but also advertisements that relate to the provision of regulated credit (see below for more on advertising).

What you may have missed: ASIC clarified that when the licensee’s ACL number is to be displayed, it must be displayed as ‘Australian Credit Licence number 12345’, not ‘ACL 12345’. However, if a licence number is referred to in a document more than once, it will be sufficient for the full description of the licence to be used once,

working out the amount of the fee or charge; and – State how frequently the fee or charge is to be paid; and – Describe the circumstances when the fee or charge will or will not be payable.

Further, the maximum amount of each fee or each charge, if known, must be expressed in dollars or, if unknown, in one of the alternative ways set out in the regulations.

What you may have missed: any of the above! Use this list as a checklist to ensure that your quote is compliant. Also, the regulations state that the document must include a statement that clearly identifies the amounts as a quote.

• The regulations clarify that a quote is not required if the licensee does not impose fees or charges on consumers for credit assistance and the licensee’s credit guide includes a statement to that effect.

What you may have missed: the legislation does not require credit representatives to provide a separate quote to that of the licensee. However, credit representatives are required to provide their own credit guide and the licensee’s credit guide.

Advertising credit products and services

and the abbreviated form to then be used in the remainder of that document.

• The extent of information about fees and charges required in the quote for providing credit assistance, and the manner in which such information is to be included, was expanded. The Act already states that the quote must include the maximum amount of fees and charges payable by the consumer to the licensee and what the amount relates to, including: – The licensee’s fees for providing credit assistance; – Charges that will be incurred by the licensee for matters associated with providing credit assistance; and – Fees and charges that will be payable by the licensee to another person.

The Regulations add that these fees and charges must be described as follows: – Identify the fee or charge as payable to the licensee for the licensee’s services, or for payment to another person on the consumer’s behalf; and – Include a clear explanation of the type of fee or charge; and – If the fee or charge is not a fixed amount – explain the method used for

In June 2012, ASIC released its Consultation Paper CP 178 Advertising credit products and services (CP178). In February 2012, ASIC released Regulatory Guide 234 Advertising Financial Products and Advice Services (RG234). CP178 proposes to update RG234 to give additional guidance on specific issues relating to advertising of credit contracts and credit services.

CP178 proposes the following additional guidance which will be relevant for credit assistance providers: • Restricting the use of certain terminology: CP178 states that terms such as ‘independent’, ‘impartial’ and ‘unbiased’ may create a misleading impression about the relationship between a credit service provider and third party. Although the use of these terms is not prohibited by the credit legislation, care should be taken in using these terms where a credit service provider receives a commission, or has a conflict of interest.

What you may have missed: the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 includes a ban on credit assistance providers using these terms.

• Nature and scope of credit assistance: RG234 states that advertisements should not create an unrealistic expectation about what the service can achieve. CP178 proposes to extend this general principle to credit assistance specifically by stating that credit assistance providers’ advertisements should be clear about the scope of the service that will be provided to the consumer.

What you may have missed: CP178 states that a credit assistance provider should not promote that they are a ‘broker’ if they are only affiliated with one lender.

The consultation period ends on 6 August 2012, and an updated RG234 is expected to be released in October 2012.

What you may have missed: ASIC’s current RG234 is for promoters of financial

products and financial advice services. The reference to financial products in RG234 means financial products as defined in the Australian Securities and Investments Commission Act (ASIC Act). A financial product under the ASIC Act is defined as including a credit facility, being the provision of credit which is not limited to consumer credit. Therefore, even if you only provide or arrange commercial or investment credit, you should be following the existing guidance in RG234.

Training requirements In December 2011, ASIC issued an updated Regulatory Guide RG 206: Competence and Training (RG206) which detailed ASIC’s revised policy on training requirements for representatives who provide credit assistance in relation to a loan secured by real property. Prior to December 2011, this was referred to as mortgage broking assistance.

The updated RG 206 changed this to ‘home loan credit assistance’ and distinguishes between: • Independent home loan credit assistance: home loan credit assistance where the licensee is not the credit provider; and • Other home loan credit assistance: home loan credit assistance in relation to credit products provided by the licensee.

The requirements for those who provide independent home loan credit assistance remain unchanged (Cert IV Finance/Mortgage Broking) in addition to 20 hours of continuing professional development (CPD).

For those who provide other home loan credit assistance, there is now no minimum training requirement. Instead, the licensee must be satisfied that the representative: • Is able to deal with consumers appropriately; • Has adequate understanding of the

assistance providers: • First, the bill defines reverse mortgages and introduces additional responsible lending requirements for credit assistance providers who provide credit assistance in relation to a reverse mortgage credit contract. These include showing to the consumer projections as to the value of the land which is the subject of the reverse mortgage credit contract, and giving the consumer a reverse mortgage information statement.

• Second, the bill introduces the concept of a small-amount credit contract. According to the bill, a small-amount credit contract is not provided by an authorised deposit-taking institution (ADI), is not a continuing credit contract, is for two years or less and for an amount of $2000 or less.

Credit assistance providers: – Must not provide credit assistance in relation to a small-amount credit contract, or enter into a small-amount credit contract, if the licensee knows, or should know, that the consumer is a debtor under another small-amount credit contract; and – Must not provide assistance to increase the limit of a small-amount credit contract.

• The bill also introduces remedies for unfairness and dishonest conduct by credit assistance providers. This is intended to make credit assistance providers, as opposed to the credit provider, more accountable. The bill does not define unfair and dishonest conduct, but provides a list of circumstances to be considered, including whether the consumer was at a special disadvantage and whether the credit assistance provider’s conduct with the consumer involved a technique that manipulated the consumer, and should not in good conscience have been used. The more such circumstances are present in a

The bill introduces remedies for unfairness and “dishonest conduct by credit assistance providers. ”

range of home loan products and their characteristics; and • Understands the economic environment impacting home loans.

What you may have missed: ASIC’s updated RG206 also extended ASIC’s view of what can be counted as CPD. ASIC states that: ‘Generally, we do not regard private study as adequate for the purposes of meeting the CPD requirements unless it involves audio or visual material specifically designed for this purpose’.

2013: Future developments The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 was passed by the House of Representatives in June 2012.

The bill makes some significant changes to the National Consumer Credit Protection Act. The following are relevant to credit

particular situation, the more likely the conduct is to be unfair and dishonest.

• Finally, the bill restricts the use of the following terms by credit assistance providers: – Independent; – Impartial; – Unbiased; or – A term of similar import.

The restriction does not apply if the credit assistance provider does not receive any commissions, gifts or benefits and operates free from conflicts of interest.

What you may have missed: the commencement dates for key provisions of the bill have been postponed to 1 March 2013.

Kathryn Wardrobe is a lawyer at Holley Nethercote Commercial and Financial Services Lawyers.

www.moneymanagement.com.au July 19, 2012 Money Management — 21

ResearchReview

Same, same but different 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, and given the transparency they expect of those they rate.

This month, PortfolioConstruction Forum asked the research houses: Are multi-asset class “real return” funds significantly different to the multi-sector funds of old? What is the appropriate use of real return funds in a portfolio?

STANDARD & POOR’S Both strategies, multi-asset or multi-sector, have generally the same underlying assets.

It is largely the degree of asset allocation dynamism which is different, and can result in portfolio asset allocations and performance that are significantly different, particularly over the shorter term.

In markets where risk premia are normally distributed (equities, outperforming bonds, and outperforming cash), there may not be a significant difference in the asset allocation or the return of these two types of funds. However, in a market where risk assets are rallying strongly, the traditional strategy will be rebalancing out of growth assets and into income assets to maintain the prescribed strategic asset allocation (SAA). The multi-asset real return fund has no such requirement, but may be rebalancing in reference to the achievement of the return target. The same drivers apply in a falling market.

The investment timeframe for real and absolute return funds is longer than one year. Typically, the timeframe is three years or more, depending on the return target – that is, they can have periods of negative return across shorter timeframes. The significance of the difference is more likely to be manifest in shorter periods where return differentials between the two strategies could result from significantly different asset allocations, particularly where market conditions are volatile. Real return funds are also not without their risks – for example, in cases where the manager fails to add value through their asset allocation calls, or potential relative underperformance in strong market conditions.

A real return fund aims to achieve a targeted return with a lower level of absolute return volatility than a traditional multi-

sector fund. Assuming that the real return fund’s manager can add value through active asset allocation calls, the portfolio construction options will be dependent on the individual’s investment belief and need.

Selecting a real return fund means adopting the fund’s investment philosophy, investment policy, and consequently, portfolio construction methodology. In a core-satellite application, it becomes problematic to blend single asset-class funds with a real return product as the overall portfolio construction is then being co-managed by the real return manager and the adviser. But using a real return fund as a stand-alone investment creates manager risk in relation to manager skill and the business in general.

Similarly, adding a real return strategy can have implications for a traditional SAA investment philosophy as the asset allocation at the margin is governed by the real return manager and potentially impedes the effectiveness of the asset-class rebalancing policy.

Ultimately, the appropriate use of a real return product/strategy, or any other for that matter, is the role it plays in meeting client needs. The proposition of real return and objectives-based portfolio construction clearly has application for pre- and postretirement clients less able to recover capital losses due to the effect of drawdowns (pension payments) and inability to replenish capital.

S&P Fund Services has advised that their business activity will cease as at 1 October 2012, but meanwhile, it is ‘business as usual’ and PortfolioConstruction Forum is satisfied with the integrity of the analyst opinion provided.

VAN EYK RESEARCH As the question implies, modern diversified funds are also, or should be, real

22 — Money Management July 19, 2012 www.moneymanagement.com.au

return funds, in essence. Many still have a CPI-plus objective. It is also true, however, that a combination of static asset allocation and overemphasis on peer group comparisons has meant that the focus on prospective real returns has fallen by the wayside. Do the recent crop of real return funds really take investors back to the future as standalone investment solutions? Or should they be seen as complements to the incumbent, relatively static modern diversified funds – perhaps as part of the alternatives allocation?

To be seen as a useful alternative investment, they would have to be providing something different to the existing portfolio in terms of downside protection, correlation or return drivers. Analysis of performance over the past two years suggests that, on the face of it, this has not been the case – at least, recently. There are two prominent real return type funds that have performed in a markedly similar manner to certain peer groups over the past two years. While we shouldn’t overly focus on peer group comparisons, benchmarks are still worthwhile to see whether a particular fund is performing differently to its peers (as opposed to making sure that all products conform to peer group norms).

A cursory glance at the underlying investments within most of these funds suggests that while they are investing in similar assets, they are doing so in quite different proportions. And that is where most of the difference lies. Nominally, the asset allocation looks very different, but the risk factors are again similar (especially in the risk on/risk off environment). In most cases, they are probably more efficient in risk/return terms, although the real difference is in the ability to change weights freely over time based on valuations and expected returns. These products performed relatively well during

the global financial crisis (GFC) because they have typically been much more active and, importantly, forward-looking in terms of asset allocation. Anyone taking an objective view of expected returns just prior to the GFC should have adopted a similar positioning. It is debatable whether less active products using a more static asset allocation always offer value for money, but their very homogeneity does offer some advantages in terms of ease of communication – we know what to expect from a so-called balanced fund. Furthermore, like a stopped watch, a static asset allocation will be right every so often. More equity-centric strategies are probably much more ‘right’ (for the

funds within a portfolio.

The wide asset allocation ranges of these funds can make the management of a client’s overall portfolio asset allocation difficult as the real return fund can change asset allocation dramatically if the manager deems the environment dictates such moves. A relatively small allocation to a real return fund (say 10%) can have quite a large impact on a client’s overall asset allocation, outside the control of their adviser.

In theory, the new multi-asset class real return funds could be used as the total solution for a client seeking a specific return. But they are unlikely to be used in this way by advisers as it threatens their role, and in addition, the majority of these funds are currently single manager funds, so using one exclusively as a portfolio solution would introduce single manager risk.

Alternatively, these funds can be used as a core holding within a portfolio to underpin the portfolio’s return, complemented with some smaller exposures to satellite funds. However, this approach dilutes the certainty of the real return target of the fund. Another option is to use a real return fund as part of the alternative allocation within a portfolio to provide an absolute return component to the portfolio.

LONSEC

next five years) than they were five years ago.

In summary, van Eyk doesn’t think these products make a particularly good alternative complement to traditional portfolios, but they do set a good example in terms of setting asset allocations based on forwardlooking metrics without all the peer group baggage. Whether they are good products for individuals depends on the extent to which the client wants to outsource asset allocation policy (and take on a bit more manager risk).

ZENITH The new generation of multi-asset class, real return funds are different from the well-

established, diversified funds of old in a number of ways.

They have much broader asset allocation ranges allowing the manager much greater flexibility in what asset classes and investments the fund invests in in order to achieve its real return objective. They generally have a greater ability to allocate to alternative asset classes or investment strategies such as equity long/short, infrastructure, commodities (soft and hard), CTA (commodity trading advisor) and global macro.

There is also a much greater focus on risk and current and forecast volatility of asset classes, given the more defined investment objectives of these funds over

specific timeframes. As such, managers attempt to manage the ongoing volatility of the fund to assist in achieving that defined return and timeframe objective more so than is the case with older style diversified funds.

The need for large and potentially frequent asset allocation changes in the real return fund investment process tends to lend itself better to single manager funds rather than multi-manager funds where the ability to change asset allocation quickly via physical changes in external managers underlying mandates is not possible.

However, it can be challenging to determine an appropriate allocation to real return

Multi-Asset Class Real Return (MARR) style funds seek to overcome some of the issues encountered by traditional diversified funds post the GFC. MARR funds invest across a broad spectrum of investment opportunities, including large and small cap equities, fixed income, REITs, direct mortgages, private equity, commodities, distressed debt, inflationlinked bonds, hedge funds, global high yield, etc. These funds generally seek to add value through flexible asset allocation and do not conform to a traditional SAA framework.

Instead, asset composition changes over time to meet the fund’s objective. This includes the ability to ‘go anywhere’ – a fund may be completely divested from a particular asset class in periods of severe market stress. It also allows for more opportunistic investing in new asset classes as opportunities arise.

Importantly, these funds recognise that investors in the accumulation phase are interested in growing their wealth in real terms. Investors typically have little interest in benchmark relative performance as a benchmark delivering negative returns is not considered a good outcome. MARR funds aim to limit the extent and severity of drawdowns and deliver a real rate of return above cash or inflation, regardless of what benchmarks or peers are doing. As a result, these funds exhibit a strong focus on capital protection and minimising volatility and tail risk.

MARR funds should not to be confused with hedge funds. While they are less constrained than traditional diversified funds, they are not unconstrained in the truest sense. These funds generally don’t use gearing and won’t employ shorting at the asset class level.

However, MARR funds rely heavily on the asset allocation skill of the manager. These Continued on page 24

www.moneymanagement.com.au July 19, 2012 Money Management — 23

ResearchReview Continued from page 23 funds introduce a far greater degree of business risk, as there will be periods of time when the funds may significantly underperform more traditional diversified funds, which can be uncomfortable for managers if investors start to redeem. Liquidity management also becomes more important, with the flexible investment approach requiring the ability to sell out of assets in a timely manner if required.

Conventional portfolio construction approaches are challenging for this type of strategy. There are two primary ways to use MARR funds when constructing portfolios.

Firstly, they can be used as a diversified core to which satellites can be added, depending on whether an investor is in the accumulation phase (growth satellites) or retirement phase (income satellites). This approach suits investors who are believers in the flexible asset allocation approach.

Secondly, they can be used in an alternatives allocation – while these funds are not actually classified as alternative assets, planning software and compliance regimes within some dealer groups do no cater for such flexible approaches, with most retail dealer groups preferring an SAA approach. For such groups, an alternatives allocation may be the most appropriate.

MERCER Unconstrained multi-asset class funds offer exposure to traditional and/or alternative asset classes, with absolute return performance targets and often with a more dynamic approach to varying exposures to asset classes. The development of such funds has evolved from problems that have been associated with more traditional multi-sector funds which often suffered from too much exposure to a particular asset class at the wrong time. They have also evolved from the historical shortcomings many investors experienced with hedge funds during the GFC in terms of liquidity, fees and performance. The multisector funds are often known and marketed as new age balanced funds.

There is no standard multi-asset class fund. Typically, these funds combine both alpha and beta as sources of return, although beta returns are expected to form a large part of return contributions (unlike the case for, say, hedge funds). The asset allocation can be reasonably static, or can be altered tactically by the manager. Asset allocation decisions can be implemented via direct investments (stocks or bonds or managed investments) or derivative contracts. And, managers can use in-house or external investments to achieve their target exposures to asset classes.

These funds can be used to reduce equity risk by allocating some of an investor’s equity exposure to multi-sector funds. This maintains equity risk but reduces volatility. They can also provide access to alternative assets where the multi-sector fund has a material exposure to alternatives. They can provide more dynamic asset allocation where the investor prefers such an approach but isn’t able to easily implement it.

These funds can fit into a number of already established asset classes, being equities, multi-sector or alternatives.

However, it is important to be aware of the ways in which the returns of unconstrained multi-asset class funds and other asset classes can be correlated.

We believe that multi-asset class funds can play a part in some investors’ portfolios and that they address some of the main weaknesses which traditional balanced funds suffer. We expect them to be used increasingly by investors and would expect that over time, the number and variety of offerings will increase.

MORNINGSTAR Objective-based investing differs from traditional SAA approaches to investing, primarily because objective-based approaches have as their principal focus selection of the most appropriate asset class or mix of assets to meet a particular objective, usually a target return over inflation. Risk, return, and correlation characteristics are secondary considerations.

Objective-based approaches aim to allocate assets more flexibly than traditional approaches, generally have a shorter timeframe, and generally do not have a set SAA from which to deviate.

24 — Money Management July 19, 2012 www.moneymanagement.com.au

Recent market volatility and poor returns from growth assets have played into the hands of this new type of strategy.

Additionally, returns from the majority of multi-sector fund managers are generally clustered in a narrow range, meaning that there is little obvious differentiation between traditional approaches on performance alone. In a SAA-directed approach – the main alternative – the multi-sector fund investor is exposed to the direction of the underlying markets in which the fund is invested. In objectivebased investing, the more significant factor is the fund manager’s skill at positioning the portfolio effectively, given prevailing market conditions.

This kind of flexibility provides both opportunities and risks. The investor is essentially relying on the fund manager’s judgements, as the portfolio is likely to be concentrated heavily in certain areas.

However, it has proved exceptionally difficult for the average fund manager to add excess value over relevant measurements over the medium to long-term using this method. A recent study by our US colleagues of more than 100 objective-based funds’ performance from October 2007 to December 2011 showed that not only did the average strategy fail to produce better

returns than a passive 60/40 stock/bond split, but also it exposed investors to greater volatility, reducing risk-adjusted returns.

Astute investors can add value over time – although not necessarily all of the time – by tactically varying asset allocations.

However, given objective based strategies’ market timing risk, we believe that they should only be used as supporting players in investment portfolios, rather than as core holdings. For example, the Schroder Balanced Fund – the manager’s more traditional multi-sector offering – had a 10% allocation to the Schroder Real Return strategy as at July 2012. An investor’s underlying asset mix could change quite significantly and rapidly if they had a heavy allocation to such strategies in their portfolio, potentially creating a mismatch between the most appropriate asset allocation for their particular circumstances and the actual underlying exposures. Although SAA-based multi-sector strategies have had a tough time of late, they remain viable options if executed efficiently and costeffectively, while their objective-based counterparts should play only a minor role in portfolios.

In association with

Toolbox

Live and let give Paul-Surinder Singh explains how the planning industry – in particular, risk advisers – can benefit from philanthropic investors.

I

n the financial year 2008-09, individual taxpayers in Australia claimed just over $2 billion worth of deductions for gifts made to charities (charities and deductible gifts, Australian Taxation Office (ATO) report 2010). Though the global financial crisis and the recent turmoils of the world economy may have taken some sting out of charitable giving, Australians remain committed to improving the wellbeing of humanity and the community.

This presents a tremendous opportunity for the planning industry, in particular risk advisers, who often come faceto-face with clients that would like to leave behind a legacy for a charitable cause.

Let’s consider this oppor tunity through a case study

Case study David is aged 51 and has two teenage children. His wife of 15 years, Elizabeth, was diagnosed with breast cancer some time ago and passed away recently.

Consequently, breast cancer is a cause closer to David’s heart, and on a recent visit to his financial planner David expressed his desire to be able to help the Jane McGrath Foundation. David has indicated that his longer term goal is to leave a legacy of $500,000 to provide some funding for research and prevention of breast cancer. However, ideally he would like not to dip into his children’s inheritance. David is currently on the top marginal tax rate.

Clearly, life insurance is a solution for David. It will allow him to create an asset of $500,000 by paying only a fraction of the cost in premiums. In line with David’s wishes, the proceeds of the life policy may then be gifted to the Jane McGrath Foundation upon his death.

More importantly, buying a life policy will mean that David will not have to dip into his children’s inheritance to fund his charitable aspirations. The real challenge, however, from a planning perspective, will be to structure the advice in a way that will provide David, his estate, and the Jane McGrath Foundation the best possible financial outcome.

Tax issues to consider Premiums for a life policy (death only) are generally not tax deductible, unless held inside superannuation. With the same token, the proceeds are not assessable income for income tax purposes.

There are, however, circumstances under which a life policy may be subject to capital gains tax (CGT). CGT exemp-

tions for life policies are contained in the Income Tax Assessment Act 1997 (ITAA) s 118-300. It specifies that capital gain or loss from a life policy is ignored if the proceeds are paid to one or more of the following recipients: • The original beneficial owner of the policy; • An entity that acquired the interest in the policy for no consideration; or • The trustee of a complying superan-

nuation fund.

In other words, it is possible to beneficially assign a life policy (death only) to a person other than the life insured, including those persons who are not relatives of the life insured, without any CGT consequence to the beneficiary upon receipt of the insurance proceeds.

This can provide significant strategic advantage from a tax perspective, which we will explore bit later in the article.

Gifts of $2 or more made to certain institutions, bodies or classes of them are tax deductible. These institutions are referred to as ‘deductible gift recipients’ or DGRs. DGRs are those institutions that have either been endorsed by the Australian Taxation Office (ATO) or those that are specified in the tax law.

ITAA Div 30, s 30-1 to 30-320 specifies, Continued on page 26

www.moneymanagement.com.au July 19, 2012 Money Management — 25

Appointments

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

FORMER acting Multiport managing director Libby Roy has been named director corporate superannuation at AMP Financial Services.

She will be responsible for driving the company’s corporate superannuation strategy across sales, distribution, marketing, product, pricing and investments, reporting to AMP Financial Services managing director Craig Meller.

WEALTH management firm Infocus Money Management has announced the appointment of Giulio Russo as head of business development.

He has over 20 years of experience in banking and financial services, most recently serving as strategy manager for BT Financial.

Before that, he was head of business development for wrap and superannuation products with Macquarie Adviser Services.

Infocus managing director Darren Steinhardt said Russo’s professional skills will be essential as the group meets key objectives in its planner network and alliance partners over the coming years.

This includes further expanding the group’s national presence into New South Wales, Steinhardt said.

Giulio Russo

and the United States, including general manager of American Express Travel across the AsiaPacific.

Libby Roy Prior to her tenure at Multiport, Roy served as general manager of financial planning at ipac, in charge of the firm’s 150 financial advisers.

Altogether, she has over 17 years’ experience across a number of industries in Australia

responsible for the analysis of syndicated loans and special situation corporate debt.

Prior to joining Bentham, he was an investment analyst with Marathon Asset Management with a focus on European distressed and high yield credit opportunities.

Calvin Niu will step into the role of portfolio analyst and associate, maintaining portfolio risk systems and providing quantitative risk support to the portfolio management team.

Move of the week

Bevan Towning will step into the role of chief executive - platform for Mirvac Group.

He will be a part of the executive leadership team and report directly to managing director Nicholas Collishaw.

Collishaw said the executive change will allow the group to build on its success in capital partnering and grow its core activities in investment and development.

Before joining the group, Towning held a number of leader-

ship and senior management positions in real estate funds management and asset management with Grocon Investment Management, Challenger Financial Services and Colonial First State Property.

He also served as head of property at Lend Lease Corporation, with responsibility for General Property Trust Real Estate assets.

a practice development manager.

She has also previously been involved in business development and compliance roles at Asgard, Sealcorp and Lend Lease Group.

Matt Walsh, head of Lifeplan, said Elfverson would help identify and implement strategic solutions to allow its advisers to add value to their clients.

Lifeplan Funds Management has appointed Rachel Elfverson as business development manager for Queensland.

With over 20 years’ experience in the banking and financial services industry, she most recently worked at BT Financial Group as

Bentham Asset Management has made two new hires to its investment team as the firm seeks to meet a growing demand from retail investors for credit investments.

Daniel Saldanha has been appointed a senior credit analyst and associate director and will be

Opportunities MORTGAGE BROKER Location: Adelaide Company: Terrington Consulting Description: A leading finance broking firm is seeking a mortgage broker or banking professional with mortgage financing experience.

In this role, you will conduct interviews with prospective customers, manage bank relationships and liaise with internal stakeholders, specifically financial planners.

A holistic suite of banking products and services will be available to the successful candidate to ensure a competitive product offering.

It is essential that the incumbent have extensive experience in mortgage broking or residential/business lending within the banking industry.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact George at Terrington Consulting – 0499 118 147, www.terringtonconsulting.com.au

RELATIONSHIP MANAGER Location: Western Australia Company: Terrington Consulting Description: An Australian-owned bank with plans to expand its business across regional Australia is seeking a senior relationship manager to join its Geraldton team.

Daniel Saldanha He was previously a credit risk analyst at QBE Insurance Group Australia working within the corporate partner division to design financial modeling for corporate portfolio risk.

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

The role is well suited to an agribusiness or commercial banker who is capable of building a network of referrals.

In addition, you may be required to manage an assistant and encourage and drive the flow of business propositions from existing retail networks.

On a day-to-day basis, the relationship manager will be responsible for providing tailored solutions to existing and prospective agribusiness customers.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Emily at Terrington Consulting – 0499 771 742, www.terringtonconsulting.com.au

COMPLIANCE AND TECHNICAL MANAGER Location: Sydney Company: Patron Financial Advice Description: A financial services company is seeking a compliance and technical specialist to join its Sydney team.

Joining two other senior recruits, the successful candidate will work closely with the general manager to manage the AFSL and advice compliance and risk mitigation.

You will also be required to review various investment offerings, manage the APL and model portfolio and coordinate the investment

review committee.

It is essential that you have had a successful track record with a life company, fund manager or AFSL in a compliance manager, adviser, risk or audit office capacity. Advanced DFS is also an essential requirement.

Knowledge of financial planning software, research houses and a broad knowledge of fund and investment products will be a distinct advantage.

To find out more and to apply, visit www.moneymanagement.com.au/jobs

CLIENT RELATIONSHIP MANAGER Location: Melbourne or Sydney Company: Unified Healthcare Group Description: A leading health information solutions provider is looking for a client relationship manager to grow existing relationships with key accounts.

Your responsibilities will include developing and implementing account plans for key strategic accounts, providing senior stakeholders with resolutions to issues and complaints, growing revenue in line with a set budget, and managing the business report pipeline and ensuring data is accurately entered into the CRM system.

You will report to the executive manager business development and work closely with the executive managers of operations and finance.

To be considered, you will need at least five years experience in client relationship management, experience in product and service line development, client relationship development and experience with complex sales solutions.

To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Amanda at UHG – jobs@uhg.com.au

BUSINESS BANKER Location: Perth Company: Terrington Consulting Description: A financial institution is seeking an experienced business banker to develop new business and service existing clients within the SME segment.

The successful candidate will drive sales growth through their strong referral network as well as internal stakeholder relationships.

It is highly desirable that you have had a strong track record in business lending and a good understanding of business financials.

Complex residential lending or relevant business development experience will also be looked upon highly.

To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Emily at Terrington Consulting – 0499 771 742, www.terringtonconsulting.com.au

www.moneymanagement.com.au July 19, 2012 Money Management — 27

Outsider

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

Tough luck, son of Outsider RECENTLY, Outsider was lucky enough to hear the exploits of one of his younger colleagues who competed in a 10km Tough Man event complete with muddy perils to separate the men from the mice.

His young colleague explained how he heroically ascended 16foot-high walls and crawled for several metres, face- and bellyfirst, through muddy trenches while barbed wire glistened inches above his head.

To the amusement of Outsider, the "tough bloke" came out the other side of the ordeal a little worst for wear, and ended up missing a couple of days work thanks to a nasty rope burn on the back of his leg.

“I’ve always wondered and reflected upon why women live longer than men, but perhaps there will be wiser heads in this room that will be able to shed some light on that.”

Assistant Treasurer and Minister Assisting for Deregulation, the Hon. David Bradbury, asks for womanly insights from a delegation of Asian Pension funds - 99 per cent male.

Top guns: How the West was transitioned OUTSIDER has always been a Gary Cooper fan, and so he likens current relations between BT Financial Group and Colonial First State/Count Financial as being something akin to that great movie classic High Noon.

Indeed, he likes to imagine BT Select's Phil Butterworth and Count's David Lane as gunslingers facing off in the main street of Hadleyville, New Mexico, while Securitor and Count planners sing the plaintive words of Do not forsake me oh my darling.

Of course, Outsider is not sure which of Butterworth and Lane is the marshal and which is the recently released inmate, Frank Miller, seeking revenge. He senses a number of financial planners will be making suggestions about appropriate casting.

Given Butterworth is domiciled in Melbourne while Lane lives in Sydney, Outsider has always worried about how he could conspire to have

Outsider goes undercover WHILE recently attending Citi Transaction Service’s Executive Pension Summit, Outsider had the pleasure of meeting Assistant Treasurer and Minister Assisting for Deregulation, the Hon. David Bradbury.

Well, perhaps it was less of a meeting than an attempt by Outsider to shadow the minister and glean any private-type information the Hon. may have been unwilling to proffer to delegates, but nevertheless – a pleasure.

After lauding the Gillard

government’s progress on superannuation and the like, the Hon. Mr Bradbury took some happy snaps and wouldn’t you know it, Outsider found himself in the same elevator.

His minder began talking about how great the speech had been, didn’t Mr Bradbury think?

But alas, Outsider, unable to hide his girth and his well-worn reporter’s cap, must have been spotted, and Bradbury remained tight-lipped until he was released from the elevator.

28 — Money Management July 19, 2012 www.moneymanagement.com.au

“

Out of context

Outsider could never quite understand the mentality that drives young men to prove their manhood by competing in such barbaric games.

At least financial professionals have the decency to enter charity bike rides to scratch their competitive itch (albeit in notso-decent lycra attire).

Now, Rugby Union – there is a true gentleman's game.

Although back when Outsider was still very much in the thick of the game, he recalls having to explain to industry folk around town why he happened to be sporting two black eyes.

Perhaps the (hobbling) young journo is more like Outsider than he first thought.

the two protagonists face-off in the main street – but that dilemma was solved when your venerable correspondent visited the Westpac fortress in Sydney's Kent Street.

Sitting chatting to Butterworth, Outsider noticed that he was gazing down on the Commonwealth Bank's new digs near Cockle Bay, and he figured any duel could be held on neutral ground – the boardwalk fronting the eateries along King Street Wharf.

Unlike the movie, Outsider knows that neither man will emerge the winner because of the number of financial planning businesses that have already run away with the gold shipment.

It is also worth remembering that although Frank Miller is killed in High Noon, the marshal was also wounded, notwithstanding the fact he was comforted by Grace Kelly who ultimately ended up in Monaco. Maybe life really will imitate art.

“I know a lot of people are looking at us and going, poor bastards. Oh, that we should be such poor bastards for the next three years!”

Bentham Asset Management’s managing director Richard Quin has fingers crossed for further returns after the company’s success during the credit crunch.

“We want to try and be a little bit upbeat today.”

ASFA President Pauline Vamos turns her Stronger Super frown upside-down at an ASFA conference in Sydney, even if just for the day.