Money Management (June 14, 2012) by Cirrus Media

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Vol.26 No.22 | June 14, 2012 | $6.95 INC GST

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Industry wants answers on intrafund advice By Bela Moore CONFUSION appears to be the outcome of the Government’s failure to answer questions about the provision of intrafund advice in the latest tranche of Stronger Super draft exposure. Although financial planners balked at the idea super funds would be exempt from some of the Future of Financial Advice provisions and the super industry has been pushing for leniency in tackling members’ personal finance issues, both sides have demanded the Government nail down issues surrounding intrafund advice. King and Wood Mallesons partner Michelle Levy said the industry was expecting tranche three of the Stronger Super draft exposure to answer questions raised in the Cooper Review about compulsory intrafund advice. Trustees are looking for relief from the obligations around personal advice, she said. “It’s not a rule about giving intrafund advice. It’s not permission to give intrafund advice. It

doesn’t require you to give intrafund advice, and if you choose to give intrafund advice it’s not offering you any relief,” she said. “All it really does is show that where you do give advice it’s got to be charged to the members [to whom] you’re giving the advice,” Levy said. Margaret Stewart, general manager of policy at the Association of Superannuation Funds, said the draft exposure raised more questions than it answered. “The way that the exposure is drafted it could read as though that (product advice) was ongoing advice, which then pulls it out of the intrafund space and you have a whole set of obligations around ongoing advice,” she said. Stewart said intrafund advice should extend to transitioning from an accumulation to a retirement product under the same trustee and was an area that also needed clarity. Corporate Superannuation Specialist Alliance president Douglas Latto said the provisions left a “massive, open-ended

Move to direct equities is on By Tim Stewart

DISILLUSIONMENT with the funds management industry and a hunger for transparency among clients is fuelling a move towards direct equities. Gold Seal director Claire WivellPlater said she is helping planners vary their licences in order to “expand the level of discretionary management they’re doing”. “We’re seeing a trend towards advisers being more intimately involved with asset selection and using direct equities rather than managed investments,” she said. According to MultiPort technical services director Phil La Greca, the shift away from managed funds is inevitable given the ongoing volatility of markets. “People want to know: ‘Why is my fund doing so badly? Is it because I’m being charged a fortune, or is it because I’ve picked bad assets?’” he said. The costs involved with managed investments are a big deterrent for self-managed superannuation fund (SMSF) trustees who already have a layer of costs associated with the upkeep of their

fund, according to SMSF Professionals’ Association technical director Peter Burgess. “For some trustees it defeats the purpose of having an SMSF if you’re just going to invest in a managed fund,” he said. Instreet managing director George Lucas said his firm is looking to acquire private stock broker firms in order to partner with advisers in the direct equities space. Instreet already sits on the investment committees of several dealer groups, and is in the process of finalising its direct equities offering for planners. Lucas put the growing interest in direct equities down to technology changes, the growing popularity of SMSFs and an increasing desire for transparency. When it came to technology, planners can now buy advanced software off the shelf, rather than having to use something like the BT platform, Lucas said. La Greca said advisers who want to go direct tend to have three avenues in front of them. Firstly, they can acquire an Continued on page 3

Michelle Levy question” about how to charge for all the services it provides. “They’re not part of intrafund advice, but those services still have to be delivered and the big question is how can we be paid to deliver those services if it’s not part of intrafund advice?” he said.

Latto said funds will find a fair and reasonable way of legally rewarding advisers for those services, while Stewart said some industry players would struggle with how to charge for things like general and practical advice. The ambiguity of charging for intrafund advice has left a lack of consistency, with particular confusion around whether to charge a dollar or percentage amount, Latto said. “I can assure you all the fund providers would be speaking to their legal people trying to get their interpretation of what’s there, but I’m already seeing different interpretations from different firms,” he said. He said it was unfair to charge a fee to the membership base, which would be inequitable if charged at a percentage. Stewart was confident the next tranche would bring clarity, but Levy said it was unlikely to be helpful. “I think they’re [trustees] probably not going to get anything. You might get some statements from ASIC in its regulatory guide about what trustees can do,” she said.

DIRECT PROPERTY

Cleaning up the act THE two biggest problems for direct property during the global financial crisis were gearing and illiquidity. At the same time, issues related to manager capability and asset quality have not helped the sector either. But industry experts claim direct property has cleaned up its act, with gearing leverage being in the 35-50 per cent range, with much higher quality assets and distribution focused on real income. There has also been an increased focus on getting retail investors to understand and accept the liquidity limitations of the asset class, with fund managers doing the same. Another thing working for the sector at present is the lack of volatility compared with equities or even listed property. However, the sector is only seeing “early adopters” – such as larger dealerships, boutique advice groups and sophisticated direct investors – getting on board. While Australian direct property appeals to foreigners, the industry is yet to see a notable increase in interest from domestic investors. But despite the slow uptake, most players in the sector are optimistic the solid fundamentals would bring this asset class to prominence. For more on direct property, 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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Swimming with sharks

mid the fall-out from the collapse of Trio Capital has come the suggestion that financial planners should be required to warn clients establishing self-managed superannuation funds (SMSFs) that they are entering a higher risk environment than that which pertains to funds regulated by the Australian Prudential Regulation Authority (APRA). Under questioning during Senate Estimates last month, Australian Securities and Investments Commission (ASIC) commissioner John Price suggested that the regulator’s surveillance of planners had indicated that clients entering into SMSFs were not being appropriately warned of the risks of theft or fraud. Price then added that, of course, planners were under no statutory obligation to provide such a warning. Price’s answers to the Senate Estimates committee were being given the context of the collapse of Trio Capital and the fact that SMSF trustees did not have access to the same compensation which was provided to members of a number of APRA-regulated funds. That compensation was paid for via a levy raised against other APRA-regulated funds. But the very fact that both SMSFs and

2 — Money Management June 14, 2012 www.moneymanagement.com.au

would seem to be “noThere prima facie reason for either the Government or the regulators to impose a particular obligation on planners to suggest that SMSFs are any less safe than APRA regulated funds.

”

APRA-regulated funds were caught up in the Trio collapse should stand as evidence that both sectors were exposed to equal risk – with the only difference being that one sector had access to an industry-financed compensation scheme. Contrary to the assertions of the Minister for Financial Services and Superannuation, Bill Shorten, the SMSF trustees who suffered losses as a result of the Trio collapse were not “swimming outside the flags” – far from it. They were, in fact, swimming on a patrolled beach where the lifesavers in the form of ASIC and APRA had dozed off.

While it is to be hoped that any thorough financial planner would point out to a client that SMSFs are not covered by the same compensation arrangements as APRAregulated funds, there would seem to be no prima facie reason for either the Government or the regulators to impose a particular obligation on planners to suggest that SMSFs are any less safe than APRA regulated funds. In fact, those suggesting that such an obligation should be imposed might care to reflect the degree to which the superannuation balances of members of the MTAA Super Fund were undermined by poor decisions and for which they will not be compensated. Rather than seeking to impose yet another obligation on planners, the Government and the regulators would be better served examining ways in which the compensation available to members of APRA-regulated funds can be equitably extended to SMSF trustees. Of course, this should all be done at the same time as recognising that the collapse of Trio Capital was the result of blatant fraud rather than any particular failings on the part of planners. – Mike Taylor

News Bendigo Wealth phone advice service doubles

Industry stalwart Alan Kenyon retires

By Chris Kennedy

FINANCIAL services stalwart Alan Kenyon has retired from the industry, moving to New Zealand for personal reasons. The succession planning arrangements at Kenyon Partners have kicked into place, with the ownership of the business transferring to former associate director (now chief executive) Paul Tynan and chairman Vince Vosso. In a letter to members, Kenyon said Vosso will take over control of Kenyon Par tners’ Australian operations from 25 June 2012. Tynan moved into the role of chief executive on 24 May 2012, and will be the primary contact for any queries relating to the change of ownership and direction.

BENDIGO Wealth’s scaled advice phone service, launched in February, has doubled its roster from five wealth consultants to 10. Bendigo Wealth’s head of wealth markets Alex Tullio said that number should increase to 12 by the end of this month and the group is now working on further recruitment in Sydney and Melbourne. The next intake of consultants will also include advisers who can give full advice over the phone, which will particularly assist customers in remote locations, she said. Tullio attributed the rapid take-up of the service to pentup demand from customers who were looking for simple piece-by-piece advice rather than full holistic advice, particularly in rural areas where the bank does not have a financial adviser positioned (currently Bendigo has around 470 branches and 68 full service advisers). Bendigo Wealth’s senior manager, strategic partners and wholesale, Diego Del Rosso said the main driver of the demand had so far been superannuation-related. “Conversations are around the appropriateness of exiting their super fund, and consolidation is a big part of that conversation,” Del Rosso said. Tullio said an added benefit of having those more

Diego Del Rosso holistic conversations was that there are some who will have more complex needs, so in one way the service is vetting customers who can then be referred to a full service adviser if needed. Tullio said the service is mostly being promoted through branches and financial planners in the field, while there has been some interest from the independent financial adviser space as well. Del Rosso said Bendigo Wealth is currently in talks with a couple of groups around providing a solution for their C and D or low super balance customers, potentially running campaigns for them via the wealth consultants team. “We’re working through just how that’s going to work and we’re talking to one group in particular where we could potentially pilot that with their customer base,” he said.

By Tim Stewart

“Vince and Paul will continue to build on the Kenyon Partners foundations as the leading mergers and acquisitions specialists in Australia, focusing on the financial services industry,” said Kenyon. “[Kenyon Partners] will continue to provide a highly personal service – understanding that every b u s i n e s s i s d i f fe r e n t – a n d develop strategies to suit business, personal and stakeholders’ needs,” he said. Tynan said he had had a long c a r e e r w i t h i n A M P, a n d u n t i l recently was the chief executive of a boutique financial planning practice “until Alan asked me to come over for his succession plan last year”. “Vince has been very successful – he’s owned four financial

Alan Kenyon planning businesses in the past. He sold them all through Alan. Three were inside RetireInvest and one was independently licensed,” Tynan said.

Move to direct equities is on Continued from page 1

authorisation to advise and deal in securities from the Australian Securities and Investments Commission. “That’s the simplest approach. You make recommendations on the basis that you will place the orders on the client’s instructions – but that’s where the time-sensitive stuff comes into play,” La Greca said. Alternatively, the adviser can become a responsible entity and set up what is effectively a managed investment scheme (MIS) with a managed fund structure, La Greca said. But there is limited transparency for the client with the MIS model, he said. “The client doesn’t see what the manager’s doing … they don’t know which assets he’s bought or sold, or how frequently he’s turning them over,” he said. Finally, advisers can go about adding a managed discretionary account (MDA) authorisation to their licence, said La Greca. “This has bits from both worlds. It looks very similar to an MIS, but the difference here is it’s transparent to the clients who will see the underlying assets,” he said. According to Wivell-Plater, MDAs have complex compliance requirements – but they’re all upfront, removing the time-sensitivity issue. “The only ongoing obligation is to report to the client quarterly and annually,” she said. www.moneymanagement.com.au June 14, 2012 Money Management — 3

News

ASIC confirms involvement in 11th-hour FOFA deal By Mike Taylor

Peter Kell

THE Australian Securities and Investments Commission (ASIC) has confirmed it was consulted on technical issues around opt-in and codes of conduct at around the same time the Financial Planning Association (FPA) was said to be negotiating with the Industry Super Network (ISN) around last-minute changes to the Future of Financial Advice (FOFA) legislation.

Confirmation has come from ASIC commissioner Peter Kell, who told Senate Estimates that while he could not recall the details “there were some late consultations with ASIC about some aspects of that change”. Kell had been specifically asked by the Opposition spokesman on Financial Services, Senator Mathias Cormann, whether ASIC was consulted about the last-minute amendment which, on the face of

it, resulted from “a last-minute agreement between the ISN and FPA and the Minister for Financial Services and Superannuation, Bill Shorten”. Asked for further detail by Cormann about subsequent statements he had made about opt-in being a part of codes of conduct, Kell said what he had outlined was that ASIC would be looking towards “a provision that broadly achieved the same sorts of

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outcomes as the opt-in requirement as part of a code if the applicant wanted that code to satisfy the ‘obviate the need’ issue”. “We do not have a fixed view on exactly how that should be implemented, but at this stage we wanted to send a signal to industry that they were going to have to give some careful thought to that, and we are also obviously obtaining advice ourselves on how that will work in codes in practice,” Kell said.

Planners not loyal to platforms By Milana Pokrajac

DESPITE the satisfaction with platforms reaching a nine-year high, a new survey suggests 40 per cent of financial planners would happily switch providers for lower fees. Furthermore, 18 per cent of planners would switch platforms for better features. This is according to Investment Trends’ April 2012 Planner Technology Report, which was based on a survey of 1,412 financial planners, concluded in April. “There is a very strong relationship between satisfaction and switching behaviour,” said Investment Trends senior analyst Recep Peker. “Relative to their market share, platforms with lower overall satisfaction ratings from their users lose a higher proportion of planners to other platforms,” he added. The same report found satisfaction with platform providers has reached a nineyear high, with Asgard Infinity eWRAP receiving the highest rating, closely followed by Colonial First State’s (CFS’) FirstChoice and FirstWrap. Peker said the result followed around $130 million invested in new technology by platform providers. “The platform industry has made significant improvements – the greatest areas of improvement being integration with planning software, BDM and dealer support, and admin fees,” Peker said. BT Wrap, CFS FirstChoice and Macquarie Wrap continue to lead in terms of marketshare, with recent figures showing BT Wrap administered close to 50 per cent of all funds.

News

APRA flags consultation on investment level performance By Mike Taylor

THE Australian Prudential Regulation Authority (APRA) has said it will be beginning consultations with the financial services industry about producing superannuation fund performance data capable of allowing consumers to compare funds at investment option level. The regulator has made its intentions clear during Senate Estimates, with APRA deputy chairman Ross

Jones confirming the data which would be published would go “far beyond” what was currently being used for prudential purposes. Investment level performance compiled by APRA would be directly relevant to planners assisting their clients and meeting best interests obligations. “The consultation process will occur in the second half of this year. It will certainly go beyond what we have,” he said. “It will most definitely pick up

investment options. It will also provide more granular information than is currently available. It is information that goes beyond the standard prudential purposes,” Jones said. Under questioning from Tasmanian Liberal Senator David Bushby, Jones acknowledged that it might not be possible to look at the around 14,000 investment options currently available in the superannuation sector. “It may well be that we do not go down to every single investment

option. It may well be that we choose the top 10 or 20 or something,” he said. “We will need to look at and discuss with industry the merits,” Bushby said. “If you are going down to the circumstances where a particular fund has hundreds of investment options, it may not be in the fund’s interest to supply all that information in terms of cost. It may well be that our systems are not capable of processing it,” he said.

Ross Jones

‘Closed shop’ in default funds acknowledged THE Productivity Commission has signalled it will be recommending vastly more transparency be injected in the process of selecting default superannuation funds under modern awards. At the same time, the Productivity Commission has confirmed it is prepared to consult with the competition regulator – the Australian Competition and Consumer Commission – about what some people had referenced as the “closed shop” aspects of the current default fund arrangements. Giving evidence before a Senate Estimates committee last week, Productivity Commission deputy chairman Mike Woods referred to submissions received on the default fund issue and said that across virtually all submissions “there is recognition that transparency could be increased”. He said this applied not only to the criteria used for selection, “but the process by which those funds are then considered for nomination in awards could improve by way of having greater transparency and having clearly defined criteria”. Under questioning from the Opposition spokesman for Financial Ser vices, Senator Mathias Cormann, Woods agreed that was not an open, transparent, merit-based selection process. He also agreed with Cormann’s contention “that the current process is a closed shop type arrangement”. The Productivity Commission indicated it would be issuing its interim report on the default fund arrangements later this month.

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News

Referral system won’t threaten SuperStream to cost industry accountants’ independence: IPA an additional $250 million By Tim Stewart THE Institute of Public Accountants’ (IPA’s) affiliation with MLC and AMP/AXA will not threaten its members’ independence, says IPA general manager Vicki Stylianou. IPA members will be provided with online referrals to financial planners from the two institutions as part of the IPA’s Financial Services Package. “A lot of our members say ‘I don’t want to be thrown into [MLC and AMP/AXA] products’, but it is very much not just their products,” Stylianou said. She pointed out that very few of the products on the two groups’ Approved Product Lists were manufactured in-house. “Something like two out of 3035 of the products are theirs. That was one of the things we looked at very closely, because it was one of the biggest concerns of our members,” Stylianou said. Institute of Charted Accountants (ICA) head of superannuation Liz Westover said it was “unfortunate” that a lot of accounting firms had

“gone down the path” of establishing their own referral systems with financial planners. “A lot of accountants say to me that they want to maintain their independence. They don’t want to be affiliated with a financial planning dealer group because it might muddy the waters,” she said. Many accountants tend to have relationships with financial planners away from their practices, she added. “But even when you refer off to a financial planner, the funny thing is (and if I had a dollar for every time this happened to me) the number of times they come back with that plan and say ‘what do you think?’” Westover said. As the law currently stands, Westover said, accountants cannot tell their clients what they think of the plan – they can only advise on the tax aspects. The ICA has been lobbying the Government for a replacement to the accountants’ exemption (which allows accountants to advise on the set-up and closure of self-managed superannuation

will be levied in addition to the annual Australian Prudential Regulation Authority (APRA) levy which amounted to $46.8 million in 201112,” he said. However, Bragg said the FSC had reservations about the lack of detail surrounding the levy in terms of the expenditure, transparency and application. In essence, they seek: 1. Detailed information on the allocation of expenditure; 2. Transparency of executing expenditure; and 3. A consistent approach on the levy mechanism as applies to the current APRA arrangements for the superannuation industry. Bragg said the FSC’s issue was not whether cost recovery should occur, but on expenditure of levied monies and the manner in which they are raised from the industry. “As an existing mechanism for levying superannuation funds exists through APRA, we believe consistency is paramount,” he said. “This is particularly the case as the present arrangements are applied in an equitable, transparent and efficient manner.”

By Mike Taylor

Liz Westover funds) that gives accountants broader scope to provide basic “strategic” advice themselves, Westover said. For example, she said, accountants should be able to advise their clients to contribute an extra $20 per week into their superannuation – rather than having to refer the client to a financial planner. “Getting your clients to spend several thousand dollars [on financial advice] to get potentially $20 a week into superannuation doesn’t make sense,” Westover said.

THE introduction of the Government’s SuperStream initiative is likely to cost members of the Financial Services Council (FSC) around $250 million, and the organisation wants assurances that the money will be appropriately administered by the Australian Taxation Office (ATO). In a submission to the Parliamentary Joint Committee reviewing the Government’s Stronger Super legislation, the FSC’s senior policy manager Andrew Bragg said the FSC had undertaken a new assessment of FSC superannuation providers to determine the cost of the SuperStream exercise. “We estimate that FSC members will incur capital costs of approximately $250 million to deliver SuperStream,” he said. “This is in addition to the budgeted $467 million cost which the industry will incur for the ATO to build public sector capability.” Bragg said that $121.5 million was due to be levied in the 2012-13 financial year, which commences in four weeks. “This is a significant sum which

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News

ASIC continues to target planners over Trio collapse By Tim Stewart THE Australian Securities and Investments Commission (ASIC) is taking ongoing regulatory action against a number of financial planners who “breached the law” in relation to Trio Capital. To date, nine individuals have either been banned from providing financial services, been prevented from managing corporations, voluntarily removed themselves from the financial services industry, or been

Life insurers pay out $4 billion in 2011 THE 10 biggest life insurers paid out just under $4 billion in claims in 2011 – up 11.4 per cent from 2010, according to research conducted by The Risk Store. The amount of money paid out in claims has increased by 96 per cent since 2006, said Risk Store managing director Peter Wincott. “The industry does pay claims, contrary to the current affair programs we often see where the bad insurer doesn’t pay out,” Wincott said. “Four billion dollars is a significant amount of money, and if it wasn’t paid by the life insurance industry it would have to be found from somewhere – either from the community or social services,” he said. Only around 2.4 per cent of claims are knocked back by insurers, Wincott added. “That’s due to three things: non-disclosure, non-payment of premiums (they’ve let the policies lapse) or fraud. It’s a tiny amount. The majority of claims are genuine claims and they get paid,” he said. Wincott said his members tend to print off the key findings of the report in colour and laminate them, as a tool to use with clients who are “recalcitrant cynics” when it comes to the life insurance industry. “[Advisers] can just pull this out … and say ‘actually, this is from an independent source, this is what was paid last year’,” he said. The number of advisers who don’t know how much is paid out by the life insurance industry each year is “amazing”, Wincott said. “It’s as much an education tool for our members as it is a marketing tool,” he added.

prevented from acting as a registered auditor, according to ASIC. Trio investment manager Shawn Richard is the only individual to have been jailed. Richard is serving a sentence of three years and nine months, with a minimum of twoand-a-half years to be served. But when it comes to the alleged “ultimate controller of the Trio group”, Jack Flader, the regulator has admitted there is currently “insufficient evidence” to prove a breach of Australian law.

According to the Parliamentary Joint Committee report into the collapse of Trio Capital, Flader – an American citizen – was at one stage a resident of Hong Kong and is currently believed to live in Thailand. ASIC said it would provide information relating to Flader to the Australian Federal Police and the Australian Crime Commission, adding that it continued to liaise with overseas regulatory agencies in relation to Trio. The regulator is also investigating the conduct of the individuals who were respon-

sible for the failure of the ARP Growth Fund. “ASIC’s investigations indicate the reasons ARP Growth Fund’s losses appear different from those of the Astarra Strategic Fund – another Trio fund. “To date, the documents in ASIC’s possession show the ARP Growth Fund failed following substantial investment in an offshore fund that had exposure to collateralised, leveraged credit default swap agreements. The investments failed during the global financial crisis,” said ASIC.

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News ASIC offers relief for intrafund asset transfers By Bela Moore

Reverse mortgage planner market contracts

voluntary transfer provisions, although the process involved greater scrutiny of each company’s due diligence and project plans. Trustees must provide the pros and cons of any transfer of assets to another trustee company, investment strategy details, how the transfer would take place and other regulatory approvals. Similar details were needed for the compulsory transfers of assets; in particular, the details of partial transfers which had legal ramifications, ASIC said. ASIC said it would consult with the Australian Prudential Regulation Authority (APRA) before cancelling any trustee’s AFS licence, but non-APRA regulated trustees could lose their licence to ASIC without a hearing. Trustees who lost their licence would need to “take all reasonable steps” to alert clients to the cancellation and transfer process which ASIC would determine on a case-by-case basis. ASIC was given the power to approve the transfers in May 2010 via amendments to the Corporations Act, and released a consultation paper in January this year. “The limited feedback received was supportive of the proposals,” they said.

THE Australian Securities and Investment Commission (ASIC) has recognised trustees’ desire to save costs under the national regulatory framework for trustees, releasing approval criteria for the transfer of assets to a single Australian Financial Services (AFS) licence. ASIC said the national regulatory framework made it possible for trustee groups with subsidiaries previously under State and Territory jurisdiction to use voluntary transfer provisions to reduce their number of AFS licences. Under the criteria, trustees seeking an intrafund transfer of assets will need to provide ASIC with details on shareholders, the ultimate holding company, and the proposed management and organisational structure before and after the transfer. A host of other information including reporting, fee and staffing levels as well as physical premises and client ‘best interest’ will also need to run the gauntlet before receiving ASIC approval. ASIC said the client’s best interest would drive the determination of arm’s-length transfers under the same

A SHRINKING financial planner channel for reverse mortgages hasn’t stopped the market from growing, according to Deloitte bank partner James Hickey and Senior Australian Equity Release (SEQUAL) chairman John Thomas. The market grew 10 per cent over the 12 months to 31 December 2011, while the financial planner and broker channels decreased collectively to 26 per cent of settlements compared to approximately 50 per cent pre-GFC, according to Hickey. He said financial planners weren’t utilising reverse mortgages because the broker market hadn’t been pushing the product and current lenders worked predominantly through their own channels. Deloitte’s yearly study of the Australian reverse mortgage sector to 31 December 2011 commissioned by SEQUAL showed 42,000 Australian reverse mortgage loans and $3.3 billion funds. Hickey said the volume of new lending remained stable at 22.5 per cent over two years to the end of the study but had not reached the same levels as 2006/07 because non-bank players were unable to source attractive prices from the wholesale securitisation market. Thomas said two bank lenders and a handful of non-bank lenders, mainly credit unions, currently offered reverse mortgages. He said five members were loaning while nine were passive members with outstanding loans, compared to 22 active members in the products’ prime, he said. Hickey said banks provided most of the $317 million settlements over the 12 months, which

S M S F A Money Management supplement

May 31, 2012

P R O F E S S I O NA L

Comparing apples with apples

94 per cent of borrowers had drawn on a “needs basis” in lump sums as access to products such as “lines of credit” pushed income out. Although the planner channel accounted for little individually, the numbers didn’t reflect brokers underwriting for products from planners’ leads, they said. Hickey said the level of tailoring in planners’ assessments of needs explained the difference in brokers’ and planners’ average settlement size, which was $79,750 compared to $54,000 for direct channels. Both said reverse mortgages deserved more merit for the benefits that drawing on home equity can provide retirees. Thomas said the majority of settlements were used for home improvements, which were often funding stay-at-home aged care. He said he expected usage would continue to increase alongside Australia’s ageing demographic.

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News Coalition commits to resuming 2007 policy approach By Mike Taylor THE Federal Opposition has committed to making Australia a regional financial services hub in the event it regains office at the next Federal Election. The Opposition spokesman on Financial Services Senator Mathias Cormann, who made the commitment, said a future Coalition government “will pick up where we left off back in 2007”. “That is, we will work with all relevant industry stakeholders to leverage our skills and the strength of our domestic financial services sector to increase our exports of financial services and to make Australia one of the genuine financial services hubs in the Asia-Pacific region,” he said. Cormann said economic research by Access Economics had shown that lifting

finance and insurance exports as a share of Australian GDP from the current 2.9 per cent to 5 per cent would lead to an eventual $3.7 billion stimulus to the Australian economy. “According to the same research, if we were able to lift this export share to 10 per cent it would translate into a $13 billion boost to our economy,” he said. The Opposition spokesman said the impact of such a move would also spread beyond funds under management. “When fund managers domicile a fund outside Australia, we miss out on the revenue that would otherwise be derived from the broader range of complementary and enabling services that underpin the funds management industry including custody services, technology providers, legal, accounting, compliance and risk monitoring services,” Cormann said.

Bravura integrates Garradin with Class Super By Andrew Tsanadis

IN a joint initiative with Class Financial Systems, Bravura Solutions has integrated its Garradin investment management software with self-managed super fund (SMSF) accounting solution Class Super. With automated daily feeds being sent between the two platforms, Bravura said administrators for SMSFs are now able to deliver clients more comprehensive investment updates. The data feeds include information on a portfolio’s cash transactions, share and managed fund trades, as well as income payments and expenses, according to Bravura. The platform integration has also reduced manual data entry and helped to speed up the delivery of end-of-year tax lodgement and auditing, Bravura added.

Darren Stevens As Garradin is designed as a single platform that allows multiple processes to be integrated, Bravura global head of product Darren Stevens said the venture with Class Financial Systems was “a logical strategic move for us”.

Sixth Commonwealth Financial Planning adviser banned IN the latest outcome of its investigation into Commonwealth Financial Planning, the Australian Securities and Investments Commission (ASIC) has accepted an enforceable undertaking (EU) from former Commonwealth FP employee Joe Chan. ASIC was concerned that between 20 December 2006 and 1 October 2010 Chan had falsely classified client files, encouraged clients to purchase insurance by advising them that he would

waive the adviser service fee, and provided false information in statement of advice documents. At the time, Chan was the servicing planner for former Commonwealth Financial Planning adviser Don Nguyen, whom ASIC banned from providing financial services for seven years in March 2010. Under the EU, Chan has agreed not to provide financial services in any capacity for a minimum of two years, and must adhere to strict supervision requirements

for six months should he decide to reenter the financial services industry. The action against Chan is the latest in a string of decisions since the regulator accepted an EU from Commonwealth Financial Planning on 25 October 2011 requiring the company to review its risk management framework and address deficiencies. A month ago, ASIC banned former Commonwealth Financial Planning adviser Jane Duncan for three years,

while Anthony Awkar was permanently banned after an investigation found that he had forged the signatures of four of his clients, along with conducting other dishonest activities. In April Christopher Baker was banned for five years and in January Simon Langton was banned for two years. In total ASIC has accepted enforceable undertakings from six former Commonwealth Financial Planning advisers, including Chan.

Financial professionals look set for modest boost to salary

Jane McNeill

CURRENT market conditions look set to stay put for a long time to come, but forward-thinking employers in the banking and financial services industry are going ahead with hiring and salary plans. That’s according to the results of the 2012 Hays Salary Guide, which found that financial professionals can expect a moderate salary increase over the coming 12 months. Rather than waiting for a “silver bullet” and hoping for global markets to change, businesses need to

develop practices to meet the “new normal”, said Hays Banking director Jane McNeill. According to the report, 51 per cent of financial services employers increased salaries between 3 and 6 per cent last year, while another 10 per cent gave an increase above 6 per cent. Despite this, 30 per cent gave increases of less than 3 per cent, while 9 per cent gave no increase at all. Looking forward, 43 per cent of employers intend to increase salaries between 3 and 6 per cent when they

10 — Money Management June 14, 2012 www.moneymanagement.com.au

next review, 5 per cent will increase salaries above 6 per cent, 42 per cent will increase less than 3 per cent and 10 per cent will offer no increase at all, Hays stated. Despite a number of high profile redundancies, hiring activity in early 2012 has picked up and has continued throughout the first half of 2012, the survey found. Employers are taking a particular interest in temporary and part-time workers in order “to combat fluctuating workloads and to overcome

internal permanent hiring freezes”, McNeill said. “Overall, banking remains an employer’s market with the number of available candidates increasing. The one exception is for highly specialist and high performing candidates, who remain in short supply,” McNeill said. Businesses with an efficient sign- off and interview processes will be better placed to attract and retain these talented individuals, she added.

SMSF Weekly

SMSF trustees might have to acknowledge risks By Mike Taylor AN Australian Securities and Investments Commission (ASIC) official has acknowledged that the regulator could vary the standard licensing conditions applying to financial advisers to require them to point out that self-managed superannuation funds (SMSFs) carry a higher level of risk. Under questioning during Senate Estimates about the fall-out from the collapse of Trio Capital, ASIC commiss i o n e r Jo h n Pr i c e s a i d t h e re w a s currently no regulatory obligation on either planners or accountants to outline the risks of theft or fraud which might attach to SMSFs. â&#x20AC;&#x153;In terms of what we have done in relation to financial adviser surveillance arising out of Trio, ASIC has done an extensive surveillance in that area,

including on the question of whether or not specific risks of theft and fraud were pointed out to investors,â&#x20AC;? he said. â&#x20AC;&#x153;The answer is that we did not find either documentary or written evidence that those risks of theft and fraud were provided by financial advisers to clients, nor is it general industry practice to do so, nor is there a specific legislative provision that requires it to be done,â&#x20AC;? Price said. Howe v e r, u n d e r q u e s t i o n i n g by committee members, Price said ASIC could seek to vary its standard licence conditions to put such a requirement in place. â&#x20AC;&#x153;That would mean that new people who applied for a licence in relation to self-managed superannuation would need to provide that sort of a warning,â&#x20AC;? he said. â&#x20AC;&#x153;But, in relation to existing advisers

w h o h a d a l i c e n c e, w e c o u l d o n l y change their existing licences to require them to give such a warning after we had given them an opportunity for a hearing and after they had a right to appeal that decision,â&#x20AC;? Price said. ASIC chairman Greg Medcraft said one of the suggestions ASIC was going to make was that there should be a written acknowledgment at the time somebody is setting up a SMSF â&#x20AC;&#x153;that basically they are not covered for theft or fraud and that, in fact, not only should they sign a written acknowledgment when they set it up but every two or three years they should actually sign a new acknowledgment, as they do with the nominated beneficiary for a fund, and acknowledge that, in fact, they have no coverage for theft or fraudâ&#x20AC;?. â&#x20AC;&#x153;I think it is, frankly, quite important that Australians who have self-managed

Accountants not pushing SMSFs: Westover By Tim Stewart THE idea that self-managed superannuation funds (SMSFs) tend to be pushed on clients by accountants is more of a perception than a reality, says Institute of Chartered Accountants (ICA) head of superannuation Liz Westover. The wording of the accountantâ&#x20AC;&#x2122;s exemption only covers the set-up and closure of SMSFs, so the perception is that â&#x20AC;&#x153;if thatâ&#x20AC;&#x2122;s all they can talk about, that must be what theyâ&#x20AC;&#x2122;re recommendingâ&#x20AC;?, said Westover. â&#x20AC;&#x153;I talk to a lot of [ICA] members about this, and they tell me they will always act in the clientâ&#x20AC;&#x2122;s best interest,â&#x20AC;? she added. Many clients have already made their mind up to establish an SMSF by the time they talk to their accountant, Westover said. â&#x20AC;&#x153;Youâ&#x20AC;&#x2122;d be surprised how many times Iâ&#x20AC;&#x2122;ve had clients come to me having already made the decision to set up an SMSF. It wasnâ&#x20AC;&#x2122;t a recommendation by me. They say: â&#x20AC;&#x2DC;I want to set up an SMSF â&#x20AC;&#x201C; can you help me do it?â&#x20AC;&#x2122;â&#x20AC;? she said. Under the current legal framework, accountants are not authorised to advise against the

set up of an SMSF if they think it is inappropriate for the client, Westover added. â&#x20AC;&#x153;It would have been very difficult for me if I knew it was not appropriate for them,â&#x20AC;? she said.

Greg Medcraft super clearly acknowledge that basically they do not have that protection,â&#x20AC;? Medcraft said.

Concerns around CFD rules By Damon Taylor

THE Australian Securities and Investment Commission (ASIC) has revealed that there is a large percentage of over-thec o u n te r ( OTC ) d e r i v a t i ve providers who are not following appropriate client money procedures, according to Capital CFDs. Following MF Globalâ&#x20AC;&#x2122;s collapse and recent ASIC surveillance, Andrew Merry, managing director of Capital CFDs, said that the discover y that more than 30 per cent of providers had failed to comply with client money laws was a very real concern. â&#x20AC;&#x153;After MF Globalâ&#x20AC;&#x2122;s collapse, it is disheartening to read that there are a large proportion of providers who are not complying with the most impor tant procedure in running a company â&#x20AC;&#x201C; the protection of client money,â&#x20AC;? he said. Merry pointed out that Section 981D of the Corporations

Act stated that client money held by an OTC derivative licensee can be used for the purpose of meeting obligations in connection with margining, guaranteeing, securing, transferring, adjusting or settling dealings in derivatives by the licensee (including dealings on behalf of people other than the client). However, Merr y said that when Capital CFDs had entered the Australian market, it had been stunned to find that the Corporations Act allowed operato r s to u s e c l i e n t f u n d s to finance operational costs, which is clearly not in the in interest of the client. â&#x20AC;&#x153;We brought with us the UK practice of quarantining client monies and not using it for any operational purposes at all, including the hedging of client positions,â&#x20AC;? Merry said. â&#x20AC;&#x153;I believe we are getting closer to having this standard applied across the industry, with Treasury considering a change to the law.â&#x20AC;?

...AFTER TIME. THATâ&#x20AC;&#x2122;S PERPETUALâ&#x20AC;&#x2122;S AUSTRALIAN SHARE FUND. /É&#x201E; -+ /0 'É&#x201E; )1 ./( )/.Ć&#x2021;É&#x201E;*0-É&#x201E; 3+ -$ ) É&#x201E; ,0$/$ .É&#x201E;/ ( ( & É&#x201E; /$1 É&#x201E;$)1 ./( )/É&#x201E; $.$*).É&#x201E; . É&#x201E;*)É&#x201E; É&#x201E;0)$,0 $)1 ./( )/É&#x201E;+-* ..É&#x201E;/# /É&#x201E;# .É&#x201E; )É&#x201E;/-$ É&#x201E; ) É&#x201E;+-*1 )É&#x201E;*1 -É&#x201E; '' ( -& /É&#x201E; 4 ' .É&#x201E;.$) É&#x201E;ĹłĹťĹ¸Ĺ¸Ć&#x2020;É&#x201E; # É&#x201E;.0 ..É&#x201E;*!É&#x201E;*0-É&#x201E; ++-* #É&#x201E; ) É&#x201E;. )É&#x201E;$)É&#x201E;/# É&#x201E;+ -!*-( ) É&#x201E;*!É&#x201E;/# É&#x201E; 0./- '$ )É&#x201E; # - É&#x201E; 0) Ć&#x2030; - )& É&#x201E;$)É&#x201E;/# É&#x201E;/*+É&#x201E;,0 -/$' É&#x201E;*1 -É&#x201E;ĹłĆ&#x2021;É&#x201E;Ĺ´Ć&#x2021;É&#x201E;ĹľĆ&#x2021;É&#x201E;ĹˇĆ&#x2021;É&#x201E;ĹšÉ&#x201E; ) É&#x201E;ĹłĹ˛É&#x201E;4 -.Ć&#x2020;* $.$/É&#x201E;222Ć&#x2020;+ -+ /0 'Ć&#x2020; *(Ć&#x2020; 0Ć¤ 0./- '$ ) ,0$/$ .É&#x201E;/*É&#x201E;Ĺ¨) *0/ (*- Ć&#x2021;É&#x201E;*-É&#x201E; *)/ /É&#x201E;4*0-É&#x201E; -+ /0 'É&#x201E; É&#x201E;*)É&#x201E;ĹłĹşĹ˛Ĺ˛É&#x201E;Ĺ˛Ĺ¸Ĺ´É&#x201E;ĹšĹ´ĹˇĆ&#x2020;

1 $' ' É&#x201E;*)É&#x201E;(*./É&#x201E;+' /!*-(.É&#x201E;$) '0 $)"Ć&#x2C6; Ć&#x152;É&#x201E; ." - Ć&#x152;É&#x201E; É&#x201E; 1$" /*Ć&#x152;É&#x201E; É&#x201E; *-/# Ć&#x152;É&#x201E; É&#x201E; - + Ć&#x152;É&#x201E; É&#x201E; - + Ć&#x152;É&#x201E; .$. Ć&#x152;É&#x201E; É&#x201E; $-./ - + Ć&#x152;É&#x201E; ) ).2 Ć&#x152;É&#x201E; ,0 -$ É&#x201E; - + Ć&#x152;É&#x201E; '/# * 0. Now on Colonial First State FIRSTCHOICE

units in the fund. Past performance is not indicative of future performance. *Source: Mercer Investment Performance Survey of Wholesale-Equity-Australian-All Cap ending March 2012. Quartile rankings / returns after fees. Fund ranked is the Perpetual Wholesale Australian Fund. www.moneymanagement.com.au June 14, 2012 Money Management â&#x20AC;&#x201D; 11

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Like their foreign counterparts, Australian bonds seem to have gone from risk-free return to return-free risk. Matthew Drennan explains why bonds are not the safe haven, despite the stampede for the safety of this asset class.

e a re f a m i l i a r w i t h t h e concept of return-free risk in foreign markets, but now Australian bonds too seem to have caught the disease. Driven by a combination of renewed concern about countries exiting the Euro, an inability to agree on refinancing shaky European b a n k s a n d c a p p e d o f f by v a c i l l a t i n g concerns about the degree of slowdown in China and the continuing local circus masquerading as a Parliament, investors are stampeding for the "safety" of bonds. While this has been one of the bestperforming asset classes over the last 12 months, it is in my view difficult to see them as the safe haven many are claiming. Let's look at these drivers in turn.

Get your money for nothing and your risk for free Australian 10-year yields touched a record low of 2.86 per cent recently following negative headlines from pretty much every major region in the world. To put this in perspective, it means that after allowing for inflation, investors are prepared to lend to our minority government for no return. You know people are really scared when they are prepared to lend you money for nothing. Sadly, for overseas investors, this seems like a great deal compared to the risk they must take to lend to some peripheral European countries, or the negative returns on offer from stronger nations such Germany. Another way of putting the enormity of this move into perspective is to look at the pace of change in the outlook. As recently as March this year, our 10-year bonds were trading at a yield well above 4 per cent, and that oracle of economic forecasting the Reser ve Bank of Australia (RBA) was warning of inflation risks. (Chalk up another great call for our policy makers. I bet some of them actually believe the official unemployment rate of 4.9 per cent too). With the official cash rate at 3.75 per cent, the market is implying that the RBA will need to cut rates sharply in coming months. The justification for the stampede to

12 — Money Management June 14, 2012 www.moneymanagement.com.au

bonds is that at least your capital is safe and not being eroded by those nasty equity markets. Valuations are on the back burner as fear trumps greed. Unless investors are planning on holding these bonds to maturity, there is a real risk of capital loss sometime in the future as the fear dissipates and the RBA moves to push interest rates back up to more normal levels. If you were smart enough to buy bonds 12 months ago – great – but jumping in now is a whole different story. Why wouldn't you just buy overnight cash or 90-day bills? I don't get it.

What kind of a world do we live in where a bunch of second-tier European countries steal all the press? The focus on contagion from Europe fascinates me. Apart from scary headlines, what is the real linkage with us? Presumably this relates to the fact that it's a big export market for China and we, of course, supply the raw materials that fuel this production. The most recent concern stems from the fall in the Chinese Purchasing Managers Index to just 50.4. (anything below 50 signals a contraction in manufacturing activity). This is not great news but, as I have often argued, China has the centralised control and financial firepower to ensure its gross domestic product growth remains around 8 per cent or higher. Again the naysayers will argue that this is well shy of the 11 per cent figure generated last year. True, but did you really think it would be allowed to stay at such unsustainable levels, and more importantly, did you base your investment decisions on that dubious assumption? In addition, China is fast moving to a much more internally driven economy based on domestic consumption. This will increasingly insulate it (and us) from the vagaries of the Eurozone dramas. Is the increasing likelihood of a Greek or even a Spanish exit really a cause for so much concern? The world seemed to muddle along reasonably well before the Euro Bloc formation.

Back to the Future IV? I’ve lost count of how many false starts we have had in the Australian equity market recovery story. Suffice to say it would have long ago been disqualified from any Olympic sport. After looking like it had broken out of the trading range and climbing higher, the Australian equity market is back on the mat (yet again) with the rest of the global stock markets. This is despite the fact that we have not recovered to anywhere near the same extent of the US market, for example. Much of this no doubt is attributable to the (until recently) high Aussie dollar. If it continues to head south because our interest rate spread is less attractive and some of the steam comes out of the speculative bubble in resources as China slows and the supply response over the last five years begins to impact, then suddenly the landscape for investment returns alters dramatically. Those long-suffering investors in global equities will start to recoup some of the losses brought about by the rising Aussie dollar, which more than offset attractive gains in foreign equity markets over recent years. Foreigners will be attracted to Australia once more because prices appear more reasonable and the dividend yields remain extremely attractive. Two mainstream examples. First Telstra, which is trading on an undemanding price-to-earnings (PE) ratio of under 13x and generating a dividend yield of 7.6 per cent. The other is Westpac (yes, I know the banks have some issues, but “tell ‘em the price son”), which is on a PE of under 10x and is yielding 8 per cent. Could we at long last see some upside in local equities over the next 12 months? Stranger things have happened. One thing is becoming increasingly clear. When the bull market arrives, the bounce is likely to be extremely rapid, with interest rates so low and base money supply so plentiful. Matt Drennan is a business and financial markets commentator.

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include some of the fastest trade settlement and most powerful reporting capabilities of any platform in the market. Better yet, FirstChoice is designed to help manage your business and your clients through the upcoming industry reforms. So start using our award winning FirstChoice kit. Contact your Business Development Manager today for transition services. Call 13 18 36 or visit colonialfirststate.com.au/satisfaction

2012 Wealth Insights Service Level Survey

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Direct property

Cleaning up the act

During the GFC, direct property had a number of issues related to manager capability, asset quality, illiquidity and gearing. However, the sector has cleaned up its act, writes Freya Purnell. AUSTRALIAN direct property is attracting suitors from around the globe, with a number of different categories of institutional investors attracted by what this asset class has to offer. Among the buyers are Singapore real estate investment trusts (REITs) such as Ascendas, K-REIT, YTL Starhill Global REIT and CDL Hospitality

REIT, which are buying property to be housed in REITs and listed on the Singapore stock exchange. “They are able to make yield-accretive acquisitions in Australia – they can borrow at 2 per cent in Singapore and buy in Australia, so it’s a great carry trade for them,” says Andrew Cannane, head of corporate client services with The Trust Company.

14 — Money Management June 14, 2012 www.moneymanagement.com.au

Direct property Key points z Australian direct property appeals to

foreigners, but local investors remain shy. z Sector cleans up its act after GFC experience. z Biggest downside to direct property at present is lack of liquidity. z Investors urged to select carefully before jumping in.

Regional sovereign wealth and pension funds such as China Investment Corporation, Malaysia’s Employee Provident Fund, Singapore’s GIC and the Korean National Pension Service are also buying direct stakes in property – either in consortia, separate account mandates or directly. But the biggest push is coming from global private equity firms with headquarters in South East Asia – including Aviva Investors, Blackstone, Goldman Sachs, LaSalle, Heitman, Grosvenor and Pramerica – “all buying property in Australia to fulfil global account mandates for core prime property,” Cannane says. “They have been extremely active.” Not to be forgotten are the Canadian pension funds – with the CPP Investment Board recently buying a 50 per cent stake of Northland Shopping Mall, and PSP

teaming up with GIC to privatise the Charter Hall Office REIT. “There has also been a significant amount of platform acquisition – you’ve had the likes of ING Industrial Fund privatised by the Goodman consortia, you’ve had Blackstone take out Valad, Trinity take out LaSalle, the Charter Hall Office REIT privatised, Red Cape taken out by Goldman Sachs, York and Varde, MSREF by Orchard, and even confirmation that Ascandas and Accor have bought the Mirvac Wholesale Hotel Fund,” Cannane says. This enthusiasm for Australian direct property certainly seems unmatched locally – which Cannane attributes to a sense of pessimism that foreign investors don’t see. “I think they are able to extract themselves from the day-to-day and focus on the fundamentals, which are still very strong. They are seeing unemployment less than 5 per cent, GDP [gross domestic product] at 3 per cent, vacancy rates all sub-10 per cent and yields holding up extremely well – they are seeing Australia as a great place to invest,” he says. So why are Australian investors still so shy of direct property? As Atchison Consultants managing director Ken Atchison points out: “The actual property market itself in the commercial areas of office, retail and Continued on page 16

www.moneymanagement.com.au June 14, 2012 Money Management — 15

Direct property Continued from page 15

HOTSPOTS OVER THE NEXT 12 MONTHS

industrial has been reasonably stable. The issue for investors has been with the investment managers.” As in so many other areas of the investment markets, the GFC has left a lasting legacy on this segment. The train wrecks that littered the direct and listed property landscape – including Centro, MFS, Opus, Orchard, and Becton – are not easily forgotten by investors, leading to ongoing caution. “People are quite wary about whether the manager is capable of delivering on the investment proposition,” Atchison says. The current global uncertainty certainly isn’t helping matters, and equity has been hard to come by.

Ken Atchison

“

For investors that were putting all their money into term deposits and getting 6 per cent, that’s now down to 5 per cent. All of a sudden a commercial property that’s yielding 7 or 8 per cent is a bit more attractive. - Ken Atchison

”

Kevin Prosser, research manager, direct assets at Lonsec, says equity raisings for direct property funds have been down significantly over the last few years, with $155 million in capital raised in 2010 compared with $460 million in 2009. This rebounded slightly to $180 million in 2011. On the upside, Prosser believes there are much more clear-cut investment propositions that have the potential to come to market. “Fund managers have made the move to clearer structures, there’s not as much

Commercial property

Residential property

The difficulty in getting new property development projects off the ground over the last five years has not just had implications for investors, but also for the supply of property across the board. “The banks have been incredibly wary about funding new property developments. New property supply is getting quite restrained, because I can’t see the banks changing their attitude in the next 12 months,” Atchison says. “That actually has a benefit for investment in property development. If you have sufficient equity capital and it is supplemented by some debt, the investment property will stack up quite attractively.” Geographically speaking, the resource-based states are expected to be the best performers over the next 12 months, with Perth and Brisbane benefiting from strong employment growth underpinned by infrastructure spend and demand for resources. Across the nation, the office sector is not swamped with supply, says Atchison. “Rental yields in the sevens or even higher is an attractive starting point when you are looking at prospectively higher returns over time.” Again, Perth and Brisbane could be the pick of the office markets, with extremely strong growth. “Perth has a huge supply shortage, and Brisbane looks like the next market to take off,” Olde says. “Melbourne has been quiet, but it is late in the cycle and they are going to strengthen again.” Industrial property which is focused on warehouse and logistics is also expected to perform well, according to Stacker, as a beneficiary of the growth in online retail. Industrial generally should be expected to provide yield as opposed to capital gain, and choosing the right location is vital for selecting a strong performer. “Industrial property is all about logistics, and that is about distribution and access to infrastructure – be it road, rail, airport and seaport – to move goods efficiently,” Atchison says. As retailers struggle, retail property has also suffered over the last 12 to 18 months, and this poor showing is expected to continue over the rest of 2012. Across the country, Queensland and Western Australia are looking promising, according to Olde, and “sub-regional and regional centres are starting to take off again”.

With a growing population and the Australian Housing Council forecasting a huge shortage in the national supply of housing, there are considerable opportunities in this sector, particularly as the Federal Government recently endorsed the continuation of the National Rental Affordability Scheme, which aims to deliver an additional 50,000 dwellings by June 2014. “There’s an opportunity there to participate in direct property in a smarter tax-effective way through new wholesale and institutional funding structures,” Olde says. Atchison says that although there are pockets with more than adequate supply, rental growth should drive investment returns more than price increases. BIS Shrapnel forecasts released in early June show how critical it is to understand the supply and demand factors in play, as well as the development pipeline, when selecting a property market to invest in. While investor demand following the GFC resulted in nearrecord supply for both inner Melbourne and inner Sydney apartments, BIS Shrapnel suggests this could now push the Melbourne market into oversupply in 2013/14 and 2015/16, resulting in rising vacancy rates and lower rents – and therefore lower returns for potential investors. New apartment supply in inner Sydney is rising at a slower pace than Melbourne, but it won’t be sufficient to erode rental demand. Despite high construction over the next two years, inner Sydney will still have a deficiency of apartments in place by 2016, which will continue to support rental growth and further price growth over the next two to three years. BIS Shrapnel also reported that although low tenant demand and high vacancy rates in the inner Brisbane apartment market had led to fears of an oversupply, increasing investment in coal seam gas projects in regional Queensland will lead to an influx of white collar professionals into this market, creating a flood of demand. With the pipeline of new apartment construction not expected to flow through to supply until 2013/14, rising tenant demand will cause the rental market in inner Brisbane to tighten considerably, resulting in improved yields.

smoke and mirrors, and a lot of the banks are coming to the party in terms of their margins – we’re back to levels that aren’t profiteering,” he says. “So those factors mean that people can put deals together if they think they can raise the equity.” However, Prosser says although managers are clearly trying to get projects off the ground, many don’t come to fruition because of issues with bank funding or equity raising. While some of the open-ended funds are renewing or raising new equity to expand internally

16 — Money Management June 14, 2012 www.moneymanagement.com.au

or purchase additional assets, new offerings are in the minority. Atchison believes that very few new direct property investment opportunities have come to market because of the reluctance of platforms to support syndicates, due to liquidity issues. “That makes life very difficult for investment managers in creating products that will suit investors. Platforms are saying syndicates no longer work – I’m not convinced that investors share that opinion, but if most of your investors are

on-platform, then it can’t be done,” Atchison says. However, there are perhaps some small signs that things are starting to change, with the latest round of interest rate cuts shifting the focus of investors from term deposits to higher-yielding propositions. “For investors that were putting all their money into term deposits and getting 6 per cent, that’s now down to 5 per cent. All of a sudden a commercial Continued on page 18

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Direct property Continued from page 16

property that’s yielding 7 or 8 per cent is a bit more attractive,” Atchison says. Over the last six months, the capitalisation rates for quality assets have stabilised and are actually firming, though B-grade properties remain stationary, Prosser says, largely driven by international and institutional investors. Robert Olde, president of the Property Funds Association, which represents the unlisted retail and wholesale property fund sector that has around $36 million in investor funds, adds that flows to unlisted wholesale property funds are now surpassing those to listed property funds. “Right now you should be looking at an effective hedge against the uncertainty that we are seeing in the Australian and global equity markets,” Olde says. But retail investors are not necessarily buying it. “A lot of the mum and dad investors, they are not coming back yet to the market. We are seeing it in the sophisticated wholesale market – they are putting their funds into direct property. But I think that’s the indicator and the driver for the retail space to get confidence and start to come back,” he says.

TIPS FOR ADVISERS CHOOSING DIRECT PROPERTY Forrester Cohen chief executive officer John Moore provides advisers with some recommendations on how to help clients choose the right direct property opportunities.

1. Start with the end in mind Think about timeframe, the purpose of the investment (is it for capital growth? cashflow?), the required return, and the investor’s risk profile.

2. Consider demographics when looking at residential investments Population trends can be a great predictor of capital growth. Each city has its own microeconomic climate where growth can continually outperform nearby areas – for example, in Melbourne, Prahran is popular with limited new apartment supply, while Docklands gets more apartment blocks on top of struggling demand.

valuation,” Stacker says. While the downside of a direct property investment is its lack of liquidity, with funds usually requiring a five- to seven year commitment, if investors are allocating no more than 10 to 15 per cent of their portfolio to the asset class, liquidity should not be an issue. But gaining access to these investments in the first place might be. Without $10 million-plus up an investor’s sleeve, it’s impossible to DIY, so they have to choose a managed fund – either a diversified option or a single property fund. Many of those interested in direct property funds such as those offered by Centuria Property Funds, according to chief executive officer Jason Huljich, are high net worth investors going direct, which accounts for around 30 per cent of their enquiries, with the remaining 70 per cent coming through planning groups and private banks.

“

We are definitely in the market now where not all property is doing well. It is very market-specific. - Richard Stacker

”

3. Use the right research Advisers need to refer to useful data to make a clear-cut decision, rather than real estate agent opinion or meaningless data on median house prices and average rents. Sources of data need to be interpreted through trends analysis to predict future results.

4. Get the risk profile right With uncertainty at the front of investors’ minds, advisers need to understand more about the risk profile of their clients to be able to address their concerns and deliver what is required.

5. Consider costs

Richard Stacker

The holding costs of older properties are greater than new buildings, with higher maintenance costs and more time required to oversee maintenance work – diluting cashflow. Reduced cashflow could be an issue for people holding investment property in retirement.

The clean-up crew There’s no question the sector has had to clean up its act and improve the quality, transparency and risk profile of what it is offering to win over banks, investors, and even investment managers, who were reluctant to repeat past experiences. During the GFC, there were issues with manager capability and asset quality, but the two biggest problems were gearing and liquidity. Olde says among PFA members, gearing ratios are averaging around 45 per cent in the retail space and 16 per cent in the wholesale area – though some might argue that gearing levels are being dictated by lenders who have drawn a line in the sand. Richard Stacker, chief executive officer of Charter Hall Direct Property, also says leverage in direct property funds is now much more likely to be in the 35 to 50 per cent range, with much higher-quality assets and distribution focused on real income. On the issue of liquidity, he says there were definitely mismatches previously. “The distributions that people were

paying were probably more than the actual income or cashflow coming from the properties. They were offering liquidity in what was probably an illiquid asset class, in the short-term anyway,” he says. Olde says while fund managers in direct property accept the liquidity limitations of the asset class, they now have to ensure investors recognise and accept those limitations as well. “We are not going to be pushed back into providing liquidity mechanisms when we know they don’t exist. Our fund managers absolutely recognise that we have to be completely transparent and honest with our asset class. For investors and managers, our space has realigned our investment offerings back to the core strength of direct property – and that is that they are illiquid.” Olde says that while illiquidity is often framed as a negative, its advantage is actually the “steady as she goes” quality – the perfect antidote to the volatility of equities. “Part of what we need to achieve now is a re-education that you have to accept

18 — Money Management June 14, 2012 www.moneymanagement.com.au

the illiquidity if you want the stability. We are not there yet.”

Pros and cons of direct property Property generally ticks the box of having a low correlation to other asset classes, but the key selling point for direct property at present is yield. And at between 7 and 9 per cent with some tax deferral benefits on top, it’s not to be sniffed at. “It’s paying close to 100 per cent income, so it does have a very good yield when you compare it to term deposits, with the spread 3 to 4 per cent above term deposit rates,” Stacker says. “That’s certainly before you take into account any type of growth that might come through off the back of rental increases.” Another point in direct property’s favour is the lack of volatility compared with equities or even listed property. “They are investing in the same thing, except with listed properties you are open to vacancies and what happens in the market, versus with an unlisted property, what people are going to pay for the initial asset and what happens to the

Stacker says Charter Hall has seen interest from “early adopters” over the last two years, with larger dealerships, boutique advice groups, and sophisticated direct investors getting on board. “The average investment is a lot higher than we have seen historically,” he says. “The sentiment is improving. Particularly after the last rate cut, people are now just starting to focus on that yield proposition that it provides.” Huljich says investors are currently interested in “commercial and some value-add industrial” property, but they are also showing a clear preference for single-asset funds. “They like the simplicity and transparency of that structure – they know the building they are investing in, the tenants and the risks, instead of being in a big diversified fund.” And in fact, of the few new funds that are coming to market at present, several are of the single-asset variety – for example, the Cromwell Ipswich City Heart Trust, a single-property syndicate for a commercial office/retail building in Queensland, and the Charter Hall

Direct property Direct 144 Stirling Street Trust, a syndicate for an A-grade office building in the Perth CBD. Atchison says these types of syndicates are being brought to market and raising capital, but they are still thin on the ground, and they are raising much less than in the past. “We are talking $50-$100 million in capital raisings, not the billion dollars that was being raised in the past,” he says. As an off-platform investment, syndicates are most likely to attract selfmanaged superannuation fund (SMSF) investors. Direct property fund managers like Centuria and Charter Hall are also seeing strong interest from SMSFs, with 60 per cent and 80 per cent of their investor bases respectively being SMSFs. Stacker says they are also seeing both more SMSFs investing, and an increased amount of investment on a year-on-year basis.

What’s ahead Despite the sluggishness affecting the direct property sector at present, most are optimistic the solid fundamentals will bring this asset class to prominence. Olde believes the wholesale market leaning more towards direct property funds at the expense of listed property trusts is a good sign that the retail investor will also be won over about the sector’s outlook. “On the market dynamic side, we are going to see less pressure on the invest-

Robert Olde ment markets going forward. We have got a strong resource sector which has pulled the investment market through, and going forward, it’s going to be a huge opportunity for the construction of Agrade and B-grade offers in commercial properties to absorb all that demand,” Olde says. However Stacker sounds a warning that investors should select carefully before jumping in. “We are definitely in the market now where not all property is doing well. It is very market-specific.” MM

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

Global economy

Shifting centre of gravity The global economy’s centre of gravity is shifting before our eyes and advisers need to be ready to talk about the new risks and opportunities with their clients. Craig Swanger explains.

hen Galileo discovered the force of gravity in the 1600s, it is probably quite unlikely that he would have thought the theory would be used in relation to the global economy more than 400 years later. Just as Galileo’s revelation set the wheels in motion for future scientific discoveries, today we are witnessing a profound new change o f d i re c t i o n – t h i s t i m e, i n g l o b a l economic affairs. The stuttering developed economies and growing developing economies are together shifting the global economic centre of gravity. This is creating new opportunities and risks for investors through what are commonly being referred to as the emerging markets. As research from the London School of Economics demonstrates, we can plot this changing centre of gravity. In the 1980s, the global economic centre o f g ra v i t y w a s s o m e w h e re i n t h e Atlantic between the US and Europe. More than 20 years later, and this would now be more accurately placed near Cairo and shifting eastwards, as the vast economies of the emerging markets such as India and China continue to grow. By 2050 this map will most likely be focusing on South-Western China.

A new economic vocabulary Simultaneously, while the economic centre of gravity is shifting, so is the language we are using to describe these emerging economies. From BRICs [Brazil, Russia, India and China] and MIST [Mexico, Indonesia, South Korea a n d Tu r k e y ] , t o C A R B S [ Ca n a d a , Australia, Russia, Brazil and South Africa] and CIVETS [Colombia, Indone-

“

Access to investments in emerging markets can be an attractive proposition for Australian investors who are looking to tap into the growth opportunities of this new economic world order.

”

ment has been far from uniform between nations. For centuries, global gross domestic product was dominated by population. Multiply low productivity by a large enough population and a country will lead the world in economic size. Indeed, as recently as 1820, China’s economy was estimated t o h a v e b e e n l a r g e r t h a n We s t e r n Europe and the US combined. The rapid and sustained development of the West saw economies with smaller populations such as Germany, the UK and the US vault ahead during the 19th and 20th centuries, as productivity advanced significantly. Now, as emerging market nations start a similar economic development project, we see the rapid return of the most populous nations as leading economic powers – again, India and China.

Playing catch-up

sia, Vietnam, Egypt, Turkey, South Africa], a new vocabulary is emerging to capture this changing economic environment. BRICs is perhaps the most common emerging market grouping currently in u s e, a n d i n c o r p o ra t e s t w o o f t h e nations that are probably the most well recognised for tipping the balance – India and China.

A path well travelled The path of rapid economic develop-

20 — Money Management June 14, 2012 www.moneymanagement.com.au

It is all very well being able to identify the ‘new players’ on the pitch, but the real game challenge begins when it comes to thinking about how a relatively poor country is going to close the gap with more developed nations – how does it do it and how difficult is the process? There are a variety of development models and historic examples provided by developed countries that were once considered poor. Provided other factors are equal, poorer countries should grow more quickly than richer countries, because they can follow the lead of developed nations and achieve ‘catch-up growth’. Japan’s Meiji period of industrial revolution (1868–1912) provides one such example of ‘catch-up growth’. However, the most prominent current

example is China. There are some clear advantages that can be enjoyed by many emerging markets that make this game of catchup a bit easier. Developing countries have the ability to borrow the pre-existing know-how and skip to the latest technology, and are not constrained by outdated infrastructure, which requires expensive reinvestment or innovation to move forward. Developing nations

consumption patterns change. China’s 48 per cent urbanisation rate is well below Western economies, which have rates closer to 80 per cent. Those making the move to cities are attracted by better job opportunities and higher incomes. This urbanisation has also been associated with a rapid improvement to per capita income levels. During the next 20 years, 600 million people around the world are expected to shift from low social economic status to the middle class. Of that number, half are in China. We believe the vast size of the population making this transition will have a profound impact on global demand for many key resources, services and markets.

Rebalancing economies and portfolios?

can also reap huge gains by simply moving the underemployed from agriculture to manufacturing, while developed nations – typically with a higher proportion of their workforce in the s e r v i c e s e c t o r – m u s t i n n ova t e t o enhance productivity from already high levels. However, while these advantages may make the job of economic development sound easy, it is not all plain

sailing. Virtually all of these ‘advantages’ are a reflection of a very low starting point. Social, health and political issues often hold back or derail development. Catch-up growth eventually reaches an inflection point, after which a difficult transition is required.

People power Combine their large populations with industrialisation, urbanisation and

increased consumption and you will easily understand why India and China are becoming today’s new leading economic powers. The productivity improvements that result from converting a workforce from an agricultural to an industrial focus are accompanied by broader societal and infrastructure impacts. As the population moves from country to city, the energy needs, infrastructure requirements and

As the world’s economy rebalances and shifts towards the emerging markets, investors are keen to understand the impact and, of course, the opportunities that are emerging for them. Hi s t o r y h a s p rov i d e d a g u i d e t o economic development. Developed economies have shown us the path and pitfalls faced by countries attempting to move from low to higher income status. This is not lost on those emerging economies, which enjoy several advantages in following the developed economies before them. While many countries have been able t o t ra n s i t i o n f r o m l ow t o m i d d l e income, relatively few have carried on to high income. It is evident that the relationship between economic growth and share market gains is not as simple as intuition would suggest. Investors do not need to invest in emerging markets and their domestic assets to be able to invest in their g r ow t h . T h e y c a n i n v e s t i n g l o b a l sectors, such as resources, logistics and construction services which will benefit from urbanisation and industrialisation. As consumption and spending patterns change, farmland, for example, also provides exposure to the benefits of the increased demand for food. The Australian economy is relatively small, and just two sectors – finance and mining – make up nearly twothirds of the Australian Secur ities Exchange index. For this reason alone, access to investments in emerging markets can be an attractive proposition for Australian investors who are looking to tap into the growth opportunities of this new economic world order. As we are all aware, with any new opportunity comes new risk, but just as Galileo’s experimentation led to new discoveries, this is no doubt an area which many investors will dip their toe into. For advisers, this means being on hand to talk about the risks and opportunities with clients as they attempt to make their own investment discoveries. Craig Swanger is Macquarie’s executive director, banking and financial services group.

www.moneymanagement.com.au June 14, 2012 Money Management — 21

Behavioural finance

Monkey see, monkey do The urge to do as others do is a powerful force on our investment decision-making, yet most of us are barely aware of it, according to Tom Stevenson.

onforming to the group or to societal norms is a critical part of what it means to be human; a primitive instinct, deeprooted in our brains, which primes us to stay in the safety of the herd. Because there is comfort to be found in the herd, we are often guilty of rationalising away our sheep-like behaviour. Experiments show that we actually feel better when we are in the herd and not out on a limb on our own. But in investment there is also danger in conformity because herding in investment markets can push up the values of certain investment sectors or stocks to extreme levels, causing bubbles that invariably end badly. The urge to conform is incredibly powerful. To demonstrate the point, psychology pioneer Solomon Asch carr ied out a range of revealing conformity experiments in the 1950s which are still widely discussed today. His experiments showed that people are

actually willing to make basic cognitive errors in order to go with the flow.* Asch placed individual participants in groups where all the others (called ‘confederates’) were in on the experiment. The task was to judge the length of a vertical line against three comparison lines and say which was equal in length to the original. The genuine participants were asked last within the group. After a couple of rounds where the confederates answered correctly, they deliberately answered incorrectly to apply group pressure to the participant. In total, about one third of the subjects who were placed in this situation went along with the incorrect majority. Incredibly, 75 per cent of the genuine par ticipants conformed to the wrong answer at least once. Fortunately, Asch not only discovered that many people slip into conformity easily, he also revealed it doesn’t take much to snap them out of it. In later experiments, Asch planted a rational

22 — Money Management June 14, 2012 www.moneymanagement.com.au

rebel in the crowd who went against the group when they were incorrect. Critically, having just one right-thinking person contravene the group made the genuine participants eager to express their true thoughts and also take a stand. This is an important finding for any decision-making group and the reason that some chief executives give their opinion last. If they didn’t there would be a real danger that everyone would simply agree with their view if stated at the outset. The advantage of speaking early is hugely influential because first impressions really do count. Consider these two individuals: Alan: Intelligent, industrious, impulsive, critical, stubborn, envious Ben: Envious, stubborn, critical, impulsive, industrious, intelligent Chances are you viewed Alan more favourably than Ben, because the initial positive traits affect the way you think about his latter traits. His impulsiveness is more than compensated for by his

intelligence. The reverse is true of Ben – he is envious and stubborn and intelligence only serves to make him more dangerous. This is the “halo effect” – our impressions of people and things can be strongly influenced by our initial or overall sense of them. Investments can have a halo effect too – if they performed well for a time when we first bought them, we may be inclined to view them favourably even though conditions may have changed and we might now be better off in an alternative. Asch proved that playing devil’s advocate has real psychological backing. When it comes to investing, investors should make the time to analyse their decisions and explore the opposite view to their own, particularly if they find they are acting in a consensual way common to many other investors. This conscious and deliberate attempt to be contrary and go against the herd can be highly effective in investment. While the crowd is often r ight in

momentum-driven markets, there are countless examples of the herd being wrong-footed at market turning points. The widespread dash into technology stocks in the late 1990s was a classic case of herding behaviour. The more extreme valuations became, the more the crowd was trying hard to make different-sized vertical lines look the same height. The market was making a collective cognitive error in its overly optimistic assessment of prospects for dot.com stocks, many of which had achieved very little. Cynics went against the flow, re-examining the value of these shares using tried and tested fundamental measures based on actual earnings, eschewing an array of fanciful new valuation measures such as “eyeballs per page”. Of course, taking the contrary view proved to be highly successful. Identifying bubbles is straightforward in retrospect, but a little more challenging at the time when investing emotions are running high. The economic historian Charles Kindleberger helpfully identified five discrete phases of a bubble. Stage one is displacement, where the introduction of a new technology (such as railways or the internet) or growth dynamic takes hold. This is often when the “smart money” gets in. Stage two is the boom, when a highly persuasive narrative takes hold (e.g, “the

the portfolio manager from the straitjacket of “theReleasing benchmark removes the obstacles to them investing in their ‘best ideas’ based on an absolute assessment of the risks and rewards. ”

internet will change everything”). This phase is often accompanied by access to cheap credit. Stage three is euphoria where the boom becomes over-extended; new investors are sucked in with the lure of easy gains but often little understanding of the risks. The rational underpinnings of the boom are now stretched. Stage four is crisis where insiders begin to sell, and prices fall back precipitously. Stage five is revulsion where investors capitulate and prices tend to overshoot on the way down. This phase is often accompanied by the kind of political backlash and suggestions for regulatory reform that we have seen in the wake of the credit crunch. T h e re a re s o m e p ra c t i c a l s t e p s

investors can consider to reduce their exposure to stock market bubbles. For instance, there is some persuasive evidence that stock market capitalisation indices tend to over-reflect the thinking of the herd. This is because their reliance on price means that they systematically give higher weight to glamorous, overvalued stocks. Hot sectors take a higher weight in the index as they grow, making subsequent reversals in those sectors more painful. For instance, in 1996, the IT sector accounted for around 10 per cent of the overall market cap of the S&P500 Index. By 2000, it had trebled to a massive 33 per cent, making an investment in the S&P500 a fairly concentrated bet on US technology. The subsequent correction

saw this figure fall back to 14 per cent by the mid-2002. Investing actively and strategically to avoid such concentrations when risks begin to outweigh rewards is critical. Yet, the issue with market capitalisation indices also raises some questions about the value of benchmarking. This is why many fund providers and investors are increasingly moving towards the unconstrained funds, which are managed without reference to a benchmark. Unconstrained funds can offer a genuinely different approach to investors. Releasing the portfolio manager from the straitjacket of the benchmark removes the obstacles to them investing in their ‘best ideas’ based on an absolute assessment of the risks and rewards. An unconstrained approach can be seen as a deliberate attempt to move away from the index-tracking herd. As Sir Jon Templeton – one of the greatest investors of the twentieth century – said: “It is impossible to produce a superior performance unless you do something different from the majority”. * Source: Asch, S. 1958. Effects of group pressure on the modification and distortion. Tom Stevenson is the investment director at Fidelity Worldwide Investment.

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www.moneymanagement.com.au June 14, 2012 Money Management — 23

Emerging market debt

An evolving opportunity Piers Bolger believes that emerging market debt will continue to grow in prominence and provide an alternative debt solution to developed market economies.

ith ongoing global uncertainty and the need for developed market economies to grow their balance sheets in order to provide financial stability, bond markets have rallied extensively over the past two years. This is a trend that could continue for some time. Given this backdrop, emerging market bonds have increasingly become a source of opportunity for investors to consider as an alternative, and additional fixed income investment to developed market investments within a broader fixed income portfolio. Emerging market sovereign issuers have a long history of involvement in international capital markets through the issuance of US dollar or other major currency denominated bonds to fund their domestic operations. Emerging market debt was historically a small percentage of global bond markets as primary issuance was limited, data quality was poor, markets were illiquid and economic and political crises were often a regular occurrence. However, since the advent of the Brady Plan in the early 1990s, emerging market debt issuance has increased dramatically, albeit the sector continuing to be more prone to crises than other debt markets – eg, Mexican crisis in 1994-95, East Asian cr isis in 1997, Russian crisis in 1998, and Argentine economic crisis in 2001-02. However, over the past decade improvements in macroeconomic fundamentals, institutional structures and governance have enabled emerging market central banks to significantly increase the issuance of major currency and local currency bonds. Accordingly,

market bonds “areEmerging now considered a strategic holding for an ever-expanding circle of investors.

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demand has been particularly strong from domestic buyers such as local banks, as well as from pension plans experiencing rapid expansion. For emerging market governments and institutions, the issuance of local currency debt has reduced exposure to external risks, as well as addressed financing imbalances that have been at the centre of past emerging market crises. Over the past decade, emerging market countries have actively pursued policies of lowering their external debt burden through buybacks and reduced hardcurrency refinancing. Several emerging market countries have even achieved the status of net external creditor. Issuers have become less dependent

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on foreign capital flows, thus improving both policy flexibility and creditworthiness. The extension and deepening of local currency yield curves has also been an equally important development for domestic investors and essential for asset/liability matching and efficient portfolio management. Going forward, the development of local currency capital markets establishes a much stronger foundation for pricing of corporate bond issues. Investor interest in local currency emerging market debt was also led by the rapid improvement in the macroeconomic fundamentals of emerging countries. Among the major exportdriven economies, foreign exchange

reserves have increased tremendously through central bank isolation of trade flows. These reserves provide the means to stabilise the exchange rate and avoid the cycles of hyperinflation and currency devaluation that had kept risk-averse investors out of the asset class. In countries like China and Brazil, central banks have also funded counter-cyclical fiscal policy which has helped to maintain positive growth as developed markets contract. Such stimulus spending is particularly important and useful in emerging market economies. These countries have huge infrastructure and development needs, which means that governments

growth. During the past 12 months we continued to see the demand for US Treasuries as ‘safe haven’, given the degree risk aversion across all financial markets. The extra yield of emerging market bonds over US treasuries (the yield spread) has widened to reflect increased refinancing risks. However, despite the intensity of the financial crisis in Europe and the slowdown in global growth, the finances of these countries remain relatively robust, and emerging market countries (to date) have not experienced the same levels of default and contagion that many investors expected. Consequently, given the relatively strong fundamentals, emerging market bonds are now considered a strategic holding for an ever-expanding circle of investors.

Having borrowed too “much, Western nations are in danger of being caught in a Japan-like deleveraging and deflation trap.

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can spend on productive projects that will fuel future growth and investment. Emerging market governments have also made significant headway in a number of areas such as the strengthening property rights, controlling fiscal spending and the free float of currencies. Many emerging market countries have also come to realise the importance of an independent central bank with a transparent and clear inflation-targeting monetary policy. Another significant positive development has been the expansion of domestic economies and the growth of the middle classes. These ‘new’ markets provide an important source of diversification that continues to suppor t

emerging market growth in spite of weak demand externally. Diversification away from solely producing primary commodities or manufacturing for export has reduced contagion risks and lowered exposure to developed market contraction. The bursting of the debt bubble in 2007 and the resulting deterioration in public finances across the developed world has led to a reappraisal of sovereign and credit risk, particularly in an emerging market. Nevertheless, the global financial crisis showed that the emerging market hadn’t wholly shed the need to attract foreign capital in order to finance infrastructure development and economic

In regard to achieving an exposure to emerging market debt, there are effectively two ways: 1. US dollar bonds; 2. Via local emerging market currency. Emerging market US dollar bonds are essentially a credit asset, typically offering a yield pick-up over US Treasuries as compensation for taking on additional risk. As outlined, emerging market sovereign issuers have seen a steady improvement in their creditworthiness in recent years due to large-scale structural reforms, including sound fiscal and debt management. Their credit profiles compare favourably to sovereign borrowers in the developed world – many of whom are likely to feel the effects of the credit crisis for years to come. Through US Dollar bonds, investors have access to a higher number of sovereign credits. However, with greater variety comes a higher-risk credit profile. Most of the 26 countries that raise debt exclusively in US Dollars are lower-rated, expor t-dependent nations whose economies are at an earlier stage in their transition to developed market status. The average credit rating of emerging market dollar bonds is BB+, compared to A+ for local sovereign bonds. In terms of market weighting, Latin America and Russia make up more than a third of the sovereign dollar bond index. This comes at the expense of Central and Eastern Europe – a region far better represented in local bond indices. Such differences in country and credit composition

can have significant investment implications. As developing economies have grown over the past decade, the volume of US dollar denominated corporate bonds outstanding has doubled to well over $200 billion. Investors can choose from issuers based in any one of 19 countries operating across numerous industry sectors, including banking, consumer goods, industrials, mining, utilities and telecommunication services. Around 80 per cent of this debt is investment grade, reflecting marked improvements in the way emerging market corporations manage their balance sheets. Emerging market corporate bonds can also offer a way for investors to benefit from a number of secular trends shaping the global economy. Increased infrastructure spending in the developing world is one of these. Many corporate issuers are companies that stand to gain from governmentdriven programs to improve transportation, power and water infrastructure. Another way of gauging how effectively emerging market debt can bring diversification to a portfolio is by analysing their correlation profiles. Although the credit crisis has caused many previously uncorrelated asset classes to move in lock step, both local and US dollar emerging market bonds have maintained their historically moderate correlation with most mainstream securities – particularly developed market fixed income. Overall, the most notable aspect of investing in emerging market debt is that developing economies have, by and large, evolved into a group of reformminded nations that generally boast high rates of growth and robust public finances. It is due to such developments that emerging market debt – comprising US dollar bonds, local currency debt and corporate bonds – is increasingly viewed as a mainstream (and growing) asset class. Debt, deleveraging and deflation will be the recurrent themes in the Western world in the years ahead. Having borrowed too much, Western nations are in danger of being caught in a Japan-like deleveraging and deflation trap. The best that central bankers will be able to do is to commit to low short-term interest rates for a very long period of time. This will continue to provide opportunities for emerging market debt, and for investors to consider it as part of an overall fixed income exposure. Accordingly, BTFG Research believes that emerging market debt will continue to grow in prominence and provide an alternative debt solution to developed market economies. However, while the return opportunities may be attractive, we recommend that only those investors that appreciate the risks involved in investing in emerging market debt consider it as part of a broader investment and portfolio configuration. Piers Bolger is head of research and strategy, advice and private banks at BT Financial Group.

www.moneymanagement.com.au June 14, 2012 Money Management — 25

Toolbox Insurance in super and CGT exemptions Jeffrey Scott outlines potential implications of the Government’s decision to make minor extensions to the CGT exemptions for insurance policies inside super.

he Government will make minor extensions to the capital gains tax (CGT) exemptions for certain compensation payments and insurance policies, backdated to 1 July 2005. After waiting more than seven years for a definitive answer, Treasurer Wayne Swan provided clarity in the 20122013 Federal Budget. While this issue may have only received a couple of lines in the Budget, it will have a significant impact upon superannuation funds that offer total and permanent disablement ( TPD) insurance to their members. The change will mean that CGT will not apply where a taxpayer receives compensation, damages, or certain insurance proceeds indirectly through a trust. This will ensure that the taxpayer has the same CGT outcome as a taxpayer who receives such proceeds directly.

Background The original question was raised with the National Tax Liaison Group in 15 March 2005. At the time, the Tax Office believed that the proceeds of a TPD policy held by a superannuation fund trustee, to the extent that such proceeds are received on a member's total and permanent disablement (not on death), were assessable under the CGT provisions. All parties agreed that CGT would not apply where there is an insurance policy on the life of an individual and the recipient of the proceeds is either 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 superannuation entity for the income year in which the CGT event

happened. Thus, a death-only policy would not attract CGT when it is paid to a superannuation fund. The ATO stated that under the Life Insurance Act 1995 (section 9), a life insurance policy is a contract of insurance that provides for the payment of money on the death of a person, or on the happening of a contingency dependent on the termination or continuance of human life. The termination of life is not a consideration under a TPD policy; thus the ATO would not grant a CGT exemption under this section of the Tax Act. The industry and professional bodies made a counter-argument. A capital gain or capital loss you make from a CGT event relating directly to any of these is disregarded: (a) compensation or damages you receive for any wrong or injury you suffer in your occupation; (b) compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally. They argued that TPD benefits paid to a superannuation fund should be exempt as it is compensation for an injury or illness. The ATO disregarded the counterargument, as the individual did not

CPD Quiz This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development. Readers are invited to submit their answers online: www.moneymanagement.com.au For more information about the CPD Quiz, please contact Milana Pokrajac on (02) 9422 2080 or email milana.pokrajac@reedbusiness.com.au.

directly receive the compensation for the injury or illness. The trustee of the superannuation fund received the compensation (insurance proceeds), and then distributed the insurance proceeds to the members as stipulated in the trust deed. Many industr y and professional bodies suggested that the ATO’s interpretation was contrary to the intention and context of the legislation. The bodies argued that any TPD proceeds received by superannuation fund trustees are effectively received on behalf of the beneficial owner/s of the policy (the members) and hence should be exempted from CGT under section 118-37 ITAA 1997.

Potential implications The ATO’s original 2005 interpretation had potentially serious implications for the funding of total and permanent disablement risk in superannuation funds. Let’s look at an example. The trustee agrees to provide $1 million worth of TPD insurance cover to its members. The trustee agrees with an insurance company to pay premiums that provide $1 million of cover to each of its members. Upon the member meeting the definition under the TPD insurance contract, the insurance company pays the trustee of the superannuation fund $1 million. As the TPD proceeds are a capital gain to the superannuation fund, CGT would be levied against the fund at 15 per cent. The fund would have to pay $150,000 to the ATO, and the trustee will be underinsured by $150,000 (the tax amount). As the trustee agreed to provide $1 million worth of TPD cover to its member,

1. For funds that offer TPD insurance to members, where will CGT no longer apply? a) Where a taxpayer receives compensation indirectly through a trust b) Where a taxpayer receives damages indirectly through a trust c) Where a taxpayer receives cer tain insurance proceeds indirectly through a trust d) All of the above

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26 — Money Management June 14, 2012 www.moneymanagement.com.au

they would need to find alternative sources of funding to meet the shortfall in this obligation (likely reducing investment returns to other members). Alternatively, the trustee may have realised the potential CGT liability prior to entering into the contract with the insurance company. They could have promised the members $1 million in TPD cover, but taken out contracts with the life insurance company for $1,176,471 on each member, so then net amount after CGT would remain $1 million ($1,176,471 x (1 – 0.15) = $1 million. Tax rate inside super is a maximum of 15 per cent, and CGT could be reduced to 10 per cent within superannuation). This alternative would guarantee the correct amount being paid to the member at claim time, but the premiums would also cost up to 15 per cent more.

Impact from the May 2012 Budget announcement TPD proceeds paid from insurance companies to superannuation funds will no longer be liable for CGT, when ultimately passed along to a member. Superannuation funds will potentially save hundreds of thousands of dollars in CGT liability. This is a positive amendment to an unintended consequence of the original legislation. Superannuation funds will not be liable for CGT on TPD insurance proceeds that are intended for members. We now eagerly await the amendments to the legislation. Jeffrey Scott is the executive manager of InsuranceTech at CommInsure.

2. The tax rate inside super is a maximum of 15 per cent. What rate could CGT be reduced to within super? a) 5 per cent b) 7.5 per cent c) 10 per cent 3. True or false: TPD proceeds paid from insurance companies to superannuation funds will no longer be liable for CGT.

Try our interactive CPD Quiz, available in the Money Management iPad® edition FREE from the App StoreSM. iPad is a trademark of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.

Appointments

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

Angela Cavuoto as assistant accountant.

Move of the week VAUGHN Richtor has been appointed chief executive of ING Direct Australia and will step into position when current CEO Don Koch departs in August. Koch – who will take on the role of CEO of ING Bank Italy – has overseen the expansion of ING Direct's business restructure and its expansion into transaction banking. He will also step down from the executive board. Richtor previously held the CEO role from 1996 until 2005 when he oversaw the launch of ING Direct in Australia. He currently sits on the company's board and will manage the Australian business while continuing to be responsible for ING retail banking in India, Thailand and China. ING Direct stated that the appointment of Richtor reflects the importance of the Australian market in the Asia region.

As part of its growth plans for its executive advice offering, Plan B has appointed Kieren James as business development manager – executive advisory services.

Jeff Philips

MLC has appointed Marc Cassidy as state manager (Victoria) for MLC Advice Solutions. Currently serving as state m a n a g e r ( V i c t o r i a ) , M LC Mortgage Solutions, Cassidy will be responsible for leading the advice solutions in delivering practice management services to advisers in Victoria and Tasmania. With more than 16 years banking and finance experience, MLC stated that he has a deep understanding of the mortgage broking and financial

planning markets. MLC are currently seeking a re p l a c e m e n t f o r t h e n ow vacant management role at MLC Mortgage Solutions.

Bennelong Funds Management has announced the appointment of former Antares executive Jeff Philips as chief financial officer. In his new role, he will lead Bennelong's finance team with responsibility for the reporting, compliance and product

management functions of Bennelong and its boutique businesses. Most recently serving as Antares' chief operating officer, Philips' previous employers include Brand Finance, National Custodian Services, Morgan Stanley and PricewaterhouseCoopers. As part of the expanded finance team, Hamish Wood – a former finance manager with GLG Partners – was recently appointed by Bennelong to the role of group finance manager, along with Nicole Hammond as senior fund accountant and

Kieren James Se r v i n g a s a t e c h n i c a l a d v i s e r w i t h Pl a n B ove r a decade ago, James' new responsibilities will be to strengthen Plan B's partnerships with companies in order to provide strategic financial advice to their

Opportunities COMPLIANCE MANAGER Location: Melbourne Company: Lloyd Morgan Australia Description: A national financial services company is looking to hire a compliance manager for a 9-month maternity leave vacancy. In this role, you will be the principal compliance resource providing compliance advice across the areas of financial planning, superannuation and lending. These responsibilities include developing compliance strategy and processes, matters concerning licensing and regulation, conducting field audits and reporting. To be considered, the candidate will have a demonstrated background in the financial services or funds management industry in an auditing or compliance capacity. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Liz at Lloyd Morgan Australia – (03) 8319 7835, lmedwin@lloydmorgan.com.au

SENIOR FINANCIAL ADVISER Location: Adelaide Company: Terrington Consulting Description: A full-service financial

executives and staff. He has 12 years' experience in financial planning and was p re v i o u s l y a p r i va t e c l i e n t adviser at Shadforth Financial, providing specialised advice to high net worth clients. Prior to this, he spent eight ye a r s a s s e n i o r f i n a n c i a l planner and team leader at Outlook Financial Solutions.

Bell Financial has announced the appointment of Brenda Shanahan as a non-executive director amid the departure of director Malcolm Spry. Ser ving in several senior executive and board roles in Au s t ra l i a a n d ov e r s e a s f o r more than 30 years, Shanahan is currently a non-executive director of Challenger, Clinuvel Pharmaceuticals and DMP Asset Management. She also worked at the Australian Securities Exchange and was an executive director of an international stock broking company. Spry has been a director of Bell since shortly after the company's listing and will remain a director of its online broking business Bell Direct.

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

advisory firm is seeking a talented and proven financial advisor to join its team. It is critical that the successful candidate has expertise around superannuation, tax and Centrelink, business and individual risk insurance, as well as experience in dealing with HNW clients. In this role, you must also have the skills to acquire new clients via your own professional network. To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0499 771 629, www.terringtonconsulting.com.au

develop a compliance regime; assist in the client review process, undertake in-depth research, and develop technical strategies. The successful candidate will have a minimum RG146 qualification and DFP. You will also need to be across both financial services and stockbroking and have a detailed understanding of planning strategies, including gearing, superannuation, SMSF, retirement, tax minimisation, risk and estate planning. Experience with AdviserNETgain and/or XPLAN will be a distinct advantage. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0499 771 629, www.terringtonconsulting.com.au

SENIOR PARAPLANNER Location: Adelaide Company: Terrington Consulting Description: A financial planning and stockbroking services provider is looking for an experienced paraplanner to join its Adelaide team. You will need at least two years of experience as a paraplanner to be considered, including working with financial advisers and other professionals to provide a holistic planning service. In this role you will be expected to produce SOA and ROA documents and

FINANCIAL ADVISER Location: Adelaide Company: Terrington Consulting Description: A financial services firm is seeking a technically competent financial adviser to provide solutions in superannuation and wealth accumulation, risk, retirement planning, investment advice and estate planning. The successful candidate will have the ability to build high-quality, long-term relationships with clients.

Advanced DFP and/or CFP accreditation is also essential. To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0499 771 629, www.terringtonconsulting.com.au

SENIOR FINANCIAL ACCOUNTANT Location: Adelaide Company: Terrington Consulting Description: A large corporate body is looking to hire an experienced financial account for a leadership role. The full-time position will require the successful candidate to complete periodend closing procedures (Oracle), general ledger reconciliation, compliance, assist internal and external audit functions and FOREX transaction management. Your primary focus will be to lead an accounting team, so demonstrated experience in managing and mentoring will be essential. In addition, you are required to have tertiary education and be CA/CPA qualified. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Victor at Terrington Consulting – 0499 771 827 www.terringtonconsulting.com.au

www.moneymanagement.com.au June 14, 2012 Money Management — 27

Outsider

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

Climb every mountain…one day IT may come as a great surprise to regular readers of this column that a man who has notched up as many noteworthy achievements as Outsider has yet to scale the summit of Mt Everest. However it is a sad but true fact that this is one life goal that seems to h a v e p a s s e d O u t s i d e r by. A n d although his passion for fairways and single malts seems to be undiminished with his advancing years, his determination to one day scale a nine-kilometre mountain through freezing blizzards does admittedly seem to have waned somewhat. Not so for Greencape Capital portfolio manager Marc Hester, apparently: the Melbourne-based stockpicker recently posed for the attached photo atop the world’s highest peak. Outsider is told Hester’s stay atop the summit stretched to only a few minutes due to the terrible weather

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Out of context

“If you try to turn on your computer in the morning, you’ll have to tell APRA.” The all-seeing, all-knowing APRA brigade legislate on the use of

electronic appliances, says King and Wood Mallesons senior associate Michael Mathieson. that day. The blue sky behind him d o e s n’t l o o k a l l t h a t t h re a t e n i n g , although the icicles descending from

his eyebrows seem to support the notion that it was a tad chilly that day at 29,000 feet above sea level.

Me and my shadow minister OVER the years, Outsider has managed to infect his personal computer with various cyber illnesses by trying to retrieve an iPad he won because he was the one millionth visitor to a certain website, or by installing anti-virus software from a pop-up ad that told him his computer was at risk. But having learned from experience, Outsider knew better than to click on a link sent via a direct message on Twitter by Shadow Minister for Financial Services Mathias Cormann. The message (see picture) read, “Hi someone is posting very bad things about you,” with a mysterious link apparently leading to the nasty gossip about yours truly. While some would argue Outsider should have every reason to believe such a message, he smelled a rat. Gen Y team members were particularly proud when, upon further examination, Outsider noted a number of similar messages in his inbox and concluded (all by himself) that the

“I know I do have New Zealand on my business card, but to date that’s just meant attending a Rugby World Cup.” Ben Heap, UBS Global Asset Management managing director and head of Australia and New Zealand, comes clean about his dealings across the ditch.

shadow minister had had his profile hacked and that the link is probably a fake. So Outsider would like to take this opportunity to inform the shadow minister that changing his password on a regular basis would not be a bad idea (and would probably prevent Outsider installing yet another virus). After all, Outsider felt the message was less than convincing, given that all the nasty rumours about Outsider are actually started by…Outsider.

“I think quite a few people were unaware of them. Having looked at them, they’re actually not terribly helpful but they said that is the place to go for up-to-date information.” APRA’s FAQs may not be useful but at least they’re timely – or so they told Michelle Levy, partner at King and Wood Mallesons and a host of industry reps.

Sexchange in the city OUTSIDER may be a relative newcomer to the Twitterverse – he has been a card-carrying member of the Twitterati for less than a month – but he knows a #hashtagfail when he sees one. His Twitter feed has been somewhat clogged by various accounts affiliated with global consulting firm Towers Watson recently. The tweets tended to contain bizarre references to a conference about “The Wrong Type of Snow” and risk management – followed by the hashtag #TWideasexchange. Now Outsider is as open-minded as the next grizzled veteran of the newspaper industry, but the idea of a sex change does not appeal to him one bit. Why Towers Watson would want to hold a conference on the finer points of gender reassignment is beyond him.

Needless to say Outsider set about doing some serious fact checking on the subject (donning his special ‘reporter’ hat for the task) and quickly discovered that the tweets were in reference to the Towers Watson Ideas Exchange conference, held in Melbourne last week. It turns out the conference was about the inability of British Rail to keep the trains running because the “wrong type of snow” was falling on the tracks – and how that somehow related to the risk management industry. With such admittedly uninspiring subject material to work with, Outsider is unsurprised that the Towers Watson marketing team resorted to double entendres. Or perhaps there is a more Freudian explanation that Outsider would rather not delve into.

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