Money Management (March 8, 2012)

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Vol.26 No.8 | March 8, 2012 | $6.95 INC GST

The publication for the personal investment professional

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INFOCUS: Page 13 | MULTI-ASSET FUNDS: Page 24

Canny planners prepare for post-FOFA world

By Mike Taylor FINANCIAL planners may well be resistant to the Government’s two-year opt-in, but many are already putting in place the paperwork necessary to establish the arrangement with their clients.

Money Management has confirmed that numerous planners and a number of dealer groups have begun moving ahead of the Future of Financial Advice (FOFA) bills actually passing the Parliament to ensure they are ready to become compliant with the new regime.

Guardian Financial Planning executive manager Simon Harris confirmed that Guardian had already moved to assist its planners in ensuring they would be compliant with the new regime.

“It has been a case of planning for the worst but hoping for the best,” he said.

Harris said Guardian had put a program in place to assist its advisers and to provide them with the necessary tools to handle the new regime, including pricing models and other collaterals.

“Some of our advisers have readily accepted the need to be prepared for the changed regime, others are taking a little longer,” he said.

Premium Wealth Management general manager Paul Harding-Davis said that most members of the dealer group were ready to handle the new regime because they already had in place written client service agreements.

However, he said that those client service agreements had been modified to take account of the expected new regime, and would be utilised at each client meeting to provide rolling two-year approval.

“It is simple enough for the clients who regularly come in for face to face meetings but it becomes harder with respect to those clients who are harder to convince to come to regular meetings with their advisers,” Harding-Davis said.

“We don’t yet have a system in place to handle those clients in terms of first letter, second letter, third letter and the whole renewal process,” he said.

Harding-Davis said that opt-in represented a considerable logistical challenge for

Rick Di Cristoforo those clients who did not regularly visit their advisers – and one capable of adding significant cost.

Harris also pointed to the costs involved in getting advisers ready to handle the new regulatory environment.

“We have already incurred significant costs but we are hopeful that the Government will provide a 12-month phase-in to help allevi-

Hedge fund clarity needed

By Andrew Tsanadis

PROPOSED fund disclosure requirements for hedge funds have industry support, but experts say that the guidelines should extend to all complex investment schemes and that a better definition of what constitutes a hedge fund is required.

Released last month, the Australian Securities and Investment Commission (ASIC) is currently seeking submissions on the likely compliance costs of Consultation Paper 174 Hedge funds: Improving disclosure – Further consultation.

While Australian Fund Monitors chief executive Chris Gosselin believes the guidelines are designed to better inform investors on the nature of complex products, he said simpler managed investment schemes (MISs) could potentially be given an advantage over hedge funds in more easily meeting their regulatory commitments.

Under the Government’s Shorter Product Disclosure Statement regime, it was announced that hedge funds would not be included in the arrangement until they could be fully considered in

Daniel Liptak light of the policy intent of the regime.

Despite the shor ter PDS arrangement making it less onerous for simple funds to be compliant, Gosselin concedes that ASIC’s disclosure guidelines are justified because investing in hedge funds can be high-risk ventures.

He argued, however, that the regulator has been focused too heavily on long-short products and pointed out that simple longonly products also carry with

them investment risk.

“What ASIC are focused too heavily on is the Trio Capital debacle, which was the result of fraud rather than poor investment management,” he said.

Zenith Investment Partners head of alternatives research Daniel Liptak agrees that all investment funds should disclose the custody of their assets.

He added that ASIC’s definition of a hedge fund is “deliberately vague” and could potentially create a “catch-all” situation in which the proposed legislation could target products that are not hedge funds.

“As per the guideline’s definition, a hedge fund is anything that is marketed as a hedge fund – effectively all a responsible entity (RE) has to do is say that it is not a hedge fund.”

The uncertainty around what constitutes a hedge fund may also give rise to confusion on the part of investors, added Nikki Bentley, a partner at Henry Davis York and chair of the Alternative Investment Management Association’s Regulatory Committee.

CP 174 states that the RE Continued on page 3

ate the immediate impact,” he said.

Mercer’s Jo-Anne Bloch agreed that existing client service agreements would serve with respect to meeting some facets of optin, but warned that the annual fee disclosure requirements contained in the FOFA bills represented a considerable challenge.

Matrix Planning Solutions managing director Rick Di Cristoforo said any adviser who regularly reviewed their Terms of Engagement and/or services with the client would likely be complying with the principles of opt-in.

“That is one part of Matrix’s FOFA-readiness approach,” he said. “However, the core issue is that the details of compliance with opt-in are unclear. How can any of us be sure until we see the final approved legislation?”

“Compliance with opt in is less problematic when the message/paperwork is prepared and signed off [in whatever form] on time, every time; the problem is when a subset of clients don’t sign off, on time, for any range of reasons, that may or may not be because they are unhappy with their adviser or the fees,” Di Cristoforo said.

Career paths still beckon planners

By Tim Stewart WITH little new business being written, most planning practices are reluctant to take on new staff – but there are still opportunities out there for recent graduates.

Based on her recent discussions with planners, Wealth Insights managing director Vanessa McMahon believes the current environment is looking “grim”. Practices simply don’t need to take on new people the way they used to, she said.

RI Advice chief executive Paul Campbell said his company’s experience has been that practices are getting their businesses in shape in order to reflect the current economic climate.

“What we’re noticing is their production is remaining the same but they’re doing that with fewer people, and they’re a lot more efficient,” Campbell said.

While RI Advice does not have the capacity to run an internship at the moment, the salaried arm of the business, OnePath Finan-

cial Planning, does have a small developmental program, he said.

“It’s a career pathway. The role they can come into involves getting on the phone and just responding to enquiries. Then they become a junior adviser and progress through the ranks,” Campbell said.

For Campbell, the best pathway into the industry remains through the salaried arm of institutions and the big banks.

However, Tupicoffs partner Neil Kendall believes that experience with a smaller practice is the best way for younger people to learn about the advice process.

“The big institutions have an ability to provide training, but in my experience that can be focused more around product knowledge and product sales as opposed to broader advice principles,” Kendall said.

Tupicoffs has a relationship with Griffith University, which runs a Bachelor of Commerce (Financial Planning) program Continued on page 3

Editor

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The value of unbiased umpires

D

id the Australian Securities and Investments Commission (ASIC) intrude too far into the political sphere when it relayed the early, headline results of its most recent shadow shopping exercise to last month’s hearings of the Parliamentary Joint Committee reviewing the Future of Financial Advice (FOFA) bills?

This question was placed squarely before ASIC chairman Greg Medcraft when he appeared before a Senate Estimates Committee, and those who believe that either ASIC or its sister financial services regulator the Australian Prudential Regulation Authority (APRA) are simply unbiased policemen would have been disappointed.

The question was put to Medcraft by the Opposition’s Financial Services spokesman, Senator Mathias Cormann, who asked ASIC’s chairman: “…. whether you see your role as administering the regulatory framework – as being the regulator – or whether you see your role as being an active participant in policy debates”.

Medcraft’s answer was both direct and, for some observers, worrying, in the context of the impact the draft shadow shopping report had on the broader reputation of the financial planning industry.

2 — Money Management March 8, 2012 www.moneymanagement.com.au

If ASIC adheres to the “same rules that apply to the APS, then the policy advice it provides to the Government ought to be frank, fearless and unbiased.

”

“Our focus at ASIC is on our framework, which is making sure that investors are confident and informed, that markets are fair and efficient, and that registering and licensing is efficient and fair,” the ASIC chairman said. “We use the tools at our disposal. Our role, and it is one of those tools, is to provide policy advice to government in the areas of our expertise. That is often what we do; that is our role. Policy is a matter for government and our role is to advise government in relation to policy.”

What Medcraft might properly have added is that ASIC, as a regulator, is a Commonwealth statutory authority and that its personnel ought to be largely governed by the same rules which apply to the Australian Public Service (APS).

And, indeed, if ASIC adheres to the same rules that apply to the APS, then the policy advice it provides to the Government ought to be frank, fearless and unbiased.

Which, in turn, ought to raise serious questions about the advisability and appropriateness of a regulator – tasked with providing frank, fearless and unbiased advice – conveying a draft shadow shopping report to a parliamentary committee in the midst of a heated political debate.

While, as Medcraft asserts, it is true that both ASIC and APRA have a role in providing policy advice, they should be doing so with respect to legal/technical questions rather than with a view to the broader sweep of social or political outcomes.

The financial services regulators ought to consider themselves on notice that amid the current political sensitivity surrounding financial services policy, their best recourse is to the professional objectivity demanded of good public servants.

– Mike Taylor

News

Industry laments failure of PJC

By Mike Taylor THE financial services industry has expressed its disappointment at the failure of the Parliamentary Joint Committee (PJC) reviewing the Future of Financial Advice (FOFA) bills to deliver a unanimous set of recommendations reflecting the industry’s concerns.

The chief executive of the Financial Services Council (FSC), John Brogden, said his organisation was disappointed at the committee’s unwillingness to accept industry concerns and make pragmatic changes to improve the legislation.

At the same time, Association of Financial Advisers (AFA) chief executive Richard Klipin said that with the Government and Coalition members of the PJC having failed to find agreement, his organisation would be calling on the independents in the House of Repre-

sentatives to support key amendments.

“We urge the independents to review the evidence put forward by the industry which reinforced many of our key concerns namely that FOFA, as it currently stands, doesn’t deliver, creates an unlevel playing field that advantages one sector of the industry over another, and will ultimately result in poorer outcomes for consumers,” Klipin said.

Financial Planning Association (FPA) chief executive, Mark Rantall said the FPA was disappointed with the overall recommendations outlined in the PJC’s report on FOFA. “Whilst the report acknowledged some of the concerns raised by the FPA, the majority of the suggestions the FPA made throughout the inquiry, and indeed recommendations made by other representatives of the financial planning industry, have not

been adopted,” he said.

For his part, Brogden said the industry would now increase its efforts to convince the Government of the need to make the legislation workable so that it delivered on the Government’s own objectives of increasing trust and confidence in financial advice, improving accessibility and reducing conflicts of interest.

“The FSC supports the overwhelming majority of the FOFA reforms,” he said. “We want higher standards for financial advisers, we want a best interest duty that puts consumers’ interests first and we want an end to commissions.

“But we need to be able to provide affordable advice, not just to the Australians who receive it now, but most importantly to the millions who do not,” Brogden said. “In its current form, the legislation puts this at risk.”

Mark Rantall

Hedge fund clarity needed Continued from page 1

should provide ‘sufficient information to explain the strategy for selecting which underlying funds they will invest in’.

Furthermore, for each material investment in an underlying fund, the RE should also ‘explain why that particular fund was selected and how it fits with the investment strategy.’

“If you’re a fund of funds you don’t want to give full transparency about the underlying managers, because all

you’re doing is telling your competitors the strategy behind your fund. You can give the disclosure in general terms,” Gosselin said.

The issue of intellectual property has been raised by fund managers more in relation to the disclosure of portfolio holdings of all managed investment schemes, Bentley said.

“Where there isn’t a sufficient time lag or [if disclosure] goes into minute detail, that’s where the intellectual property issue has been raised,” she said.

Career paths still beckon planners Continued from page 1 that consists of one year of full-time study, followed by two years of part-time study coupled with an internship.

Griffith University associate professor Mark Brimble said there was so much demand from planning practices last year that there weren’t enough students to fill the internship places.

Kendall said there are currently two financial planners at Tupicoffs that came through the Griffith program, along with a fulltime paraplanner.

“We will probably take more people this year. Griffith graduates are very good quality, well educated and have strong ethical values, so they are a good fit for us,” Kendall said.

AMP Horizons director Tim Steele said that it was essential for the industry to

Neil Kendall provide people who are keen to become advisers with a clear career pathway.

“We have to evolve as a profession to provide clarity about career paths for really bright people who have done a degree in financial planning,” he said.

He added that it was a “myth that you have to have grey hair to be good financial planner”. www.moneymanagement.com.au March 8, 2012 Money Management — 3

News

Accountants urge SMSF advice ability

By Mike Taylor

ANY device the Federal Government introduces to replace the accountants’ exemption must provide accountants with the ability to provide general financial advice, according to the Institute of Public Accountants (IPA) chief executive, Andrew Conway.

Speaking just days out from an expected announcement by the Minister for Financial Services and Superan-

nuation, Bill Shorten, Conway said the IPA was advocating a licensing solution which recognised the experience and training of accountants and which allowed them to talk about all aspects of superannuation, including self-managed super funds (SMSFs), but not necessarily a specific fund choice.

As well, he said any licensing regime must allow accountants to provide general financial advice.

However, Conway said the changes

evolving out of the Government’s Future of Financial Advice (FOFA) changes were such that accountants should review their business models and consider how any amendments to the accountants’ exemption might impact them.

“Accountants in practice servicing their clients in the SMSF space should consider reviewing their business model and assess how the announcement of the accountants’ exemption is likely to i mp a c t t h e m , t h e i r b u s i n e s s a n d

clients,” he said. “We believe that opportunities exist for those practices willing to make the leap beyond tax and compliance work.

“It is not just about responding to the FOFA reforms; it is about responding to client demands for more holistic, strategic and value-adding advice from their trusted advisers; it is also about responding to the challenges and opportunities in our constantly changing environment,” Conway said.

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Stuart Piper

More diversity needed on fixed income

By Benjamin Levy INVESTORS aren’t diversifying their fixed income portfolio enough and ensuring there is good liquidity, according to MLC Investment portfolio manager for debt assets Stuart Piper.

Speaking at the NAB Private Wealth annual conference in Melbourne, Piper suggested that investors are not using fixed income allocations to their full advantage and are not diversifying enough to provide better returns.

Piper nominated noninvestment grade bonds and credit as two areas that have been neglected when building fixed income allocations.

A globally weighted fixed income allocation outperformed cash by 2 per cent over the past 10 years, so it was disappointing that NAB figures showed allocations to fixed income are approximately 9 per cent, compared to a 30 per cent weighting to cash, Piper said.

Credit has performed even better than that, he added.

The non-investment grade sector has generated incredibly good income and pays high yields, Piper said.

He said that just because lowquality bonds did not provide good diversification and could become illiquid, it did not mean they weren’t good assets.

Piper warned investors to be aware of interest rate risks when putting fixed income portfolios together.

News

FOS’ slim grasp of intra-fund advice disputes

By Mike Taylor THE Financial Ombudsman Service (FOS) has admitted it does not keep specific records relating to the number of intra-fund advice disputes it handles, but it believes they are at a relatively low level.

The absence of specific information about intra-fund advice disputes was revealed in a late addendum to its submission to the

ASIC warned on research payments ban

By Benjamin Levy

RESEARCH house Lonsec has warned the Australian Securities and Investments Commission (ASIC) to resist revisiting a possible ban on direct payments from fund managers to research providers, saying it would ruin the availability of research for advisers.

Speaking at Lonsec’s annual roadshow in Melbourne, Lonsec manager of research strategy Richard Everingham warned that if the regulator decided in future to move against the direct payment model, it would reduce research house competition and reduce the total amount of available research.

Everingham also criticised suggested payment options such as a pure user-pays subscription model as unworkable.

“You won’t pay that [full] cost of research, it is a very intensive activity, and very, very expensive,” he said.

Advisers only value research at one-tenth of the cost of what it actually costs to produce, Everingham said.

Planners would also possibly pass on the cost of research, which would be an anti-Future of Financial Advice move, he said.

Lonsec receives direct payments from fund managers to underwrite the cost of research.

Everingham claimed external market evidence showed the direct payment model did work. Advisers are free to choose which research house to receive ratings from, he said.

Any conflict of interest arising from payments from fund managers to research houses can be managed robustly and effectively, Everingham said.

“This is a conflict we work under, but like in lots of areas of business, it’s not the fact that you’ve got a conflict, it’s how you go about managing it,” he said.

Parliamentary Joint Committee (PJC) reviewing the Government’s Future of Financial Advice (FOFA) bills.

The PJC handed down its report last week, with Coalition members issuing a dissenting report based on continuing differences around opt-in and annual fee disclosure arrangements.

However in the information it provided to the PJC last week, the

FOS admitted “we do not keep records to indicate whether disputes about financial advice relate to intra-fund advice”.

“So we do not have statistics on the prevalence of intra-fund advice disputes”.

The best that FOS could offer was that Investments, Life Insurance and Superannuation ombudsman Alison Maynard “becomes aware of the details of

many of the financial advice disputes we receive”.

“According to Ms Maynard, we only receive a small number of intra-fund advice disputes perhaps three or four a year,” it said.

The FOS said manual searches of its database indicated that three of the disputes it had received since 1 January, 2010, out of 2,235 disputes, had been about intrafund advice.

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News

Shape of FOFA bills in hands of independents

By Mike Taylor THE fate of the Government’s Future of Financial Advice (FOFA) legislation will be decided by debate in the House of Representatives after the Parliamentary Joint Committee (PJC) reviewing the FOFA bills failed to produce a bipartisan report.

The divide between the Government and Opposition members of the PJC was wide, with the Labor members of the committee adhering closely to delivering only minor changes to the FOFA bills originally tabled by the Minister for Financial Services, Bill Shorten.

By comparison, the Coalition made clear it wants opt-in removed and annual fee disclosure made prospective, with the best interests duty amended to specifically allow agreement between clients and their advisers.

The Opposition also wants the ban on risk commissions inside superannuation limited to automatic insurance cover within superannuation funds where individuals have not accessed specific advice, namely in default super arrangements.

However the dissenting report said the Coalition wanted no changes to existing remuneration structures with respect to risk insurance where the consumer accessed specific advice – and it said that should be irrespective of whether that insurance is structured inside or outside super or whether it is an indi-

vidual or a group policy.

The Coalition members of the PJC have produced a dissenting report claiming the two FOFA bills are unnecessarily complex and in some parts unclear. It says they will likely cause job losses in the financial services industry, will enshrine an unlevel playing field amongst advice providers and will cost about $700 million to implement.

The Coalition senators and members want the FOFA legislation deferred until it passes a Regulatory Impact Statement. As well, they want the legislation timed to coincide with the Government’s MySuper changes.

Commenting on the PJC outcome, Opposition financial services spokesman Senator Mathias Cormann said the Coalition supported sensible reforms which increased trust and confidence in Australia’s financial services industry by increasing transparency, choice and competition.

He said the government had failed to achieve the right balance with FOFA because it had failed to comply with its own internal process requirements around best practice.

The differing reports flowing from the PJC process mean the shape of the FOFA bills which advance to the Senate will be decided in debate on the floor of the House of Representatives.

This means the stance of independents Rob Oakeshott and Andrew Wilkie on the key question of opt-in will be crucial.

Default fund arrangements questioned THE Productivity Commission (PC) has made clear that it will be delving deeply into the competition and transparency issues surrounding the selection of default funds under modern awards.

The PC’s direction has been outlined in an issues paper released this week, which also makes clear the degree to which the future of default funds under modern awards is directly linked to the implementation of the Government’s Stronger Super policy, particularly MySuper.

On the question of the current selection process for default funds under modern awards, the PC paper asks three key questions: Is the process transparent? Is it competitive? Is there a level playing field between industry and retail funds? Is there a level playing field between domestic and international funds and should there be? “If not, what are the barriers to transparency and contestability? What are the effects of these barriers on member outcomes?� the PC paper asks.

The document also raises the key issue of whether the industrial judiciary in the form of Fair Work Australia (FWA) should be a part of the process of selecting default funds. “Is there a case for an organisation other than FWA to assess the eligibility of funds against any selection criteria?� the

Fiona Reynolds paper asks. “What should be the role of the industrial parties to the awards?

What should be the role of FWA?�

Commenting on the release of the position paper, the Australian Institute of Superannuation Trustees (AIST) chief executive Fiona Reynolds said the questions raised by the PC highlighted the complex issues that needed to be considered.

She said this included the question as to whether additional criteria were required over and above those for new MySuper funds.

Reynolds said AIST expected to be an active participant in the inquiry and would argue strongly that default fund selection was a matter for workers and employers to decide through the industrial award process.

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News

Five assistant treasurers in five years Tasmanian Perpetual

By Mike Taylor THE Federal Opposition has pointed out that the resignation of Assistant Treasurer Senator Mark Arbib means the Government will have had five people filling the portfolio in the past five years.

The opposition spokesman on Financial Services, Senator Mathias Cormann, said the four politicians to fill the role under Labor in the past five years had been Chris Bowen, Nick Sherry, Bill Shorten and Mark Arbib.

He said that with Senator Arbib’s departure, a fifth person would need to be appointed to the role.

With Prime Minister Julia Gillard expected to announce a further minor Cabinet reshuffle later last week, the impact on the financial services portfolio is expected to be relatively minor, with the Minister for Employment and Workplace Relations, Financial Services and Superannuation, Bill Shorten, expected to remain in his existing roles.

The most likely successor to Senator Arbib in the Assistant Treasurer role is regarded as being the Parliamentary Secretary to the Treasurer, David Bradbury, who declared himself early as a supporter of the Prime Minister in the recent leadership spill.

Trustees signs up for S&P rating

By Chris Kennedy

Mark Arbib

Instos targeting global and passive investments

By Tim Stewart INSTITUTIONAL investors continued the trend of investing away from local markets in 2011 as they sought to diversify their portfolios, according to Towers Watson.

The clients of Towers Watson made 800 manager selection decisions in 2011, which reflected around US$80 billion of assets moved – up 40 per cent from 2010.

Bond mandate selections accounted for US$21 billion, with the allocation to US bonds almost doubling from 2010. Equities mandates accounted for US$24 billion in 2011, with global equities accounting for a third of all equity mandate selections.

Towers Watson global head of investment research Craig Baker said the move to global equities was part of a move by institutions to diversify their portfolios.

There was also an increase in passive investments in 2011, with the Towers Watson clients investing over US$16 billion in the asset class – up 60 per cent from 2010.

“Indexation and smart beta are playing increasingly important roles in investors’ portfolios, as many new innovations provide efficient access to markets at lower cost,” said Baker.

Passive investors could now choose from among a range of options – including insurance and emerging market currency – with the expectation of better riskadjusted returns, he said.

When it came to alternative investments, institutions were choosing to go direct rather than through fund of funds due to a focus on “better fee structure and greater transparency”, said Baker.

MYSTATE subsidiary Tasmanian Perpetual Trustees (TPT) has announced its Select Mortgage Fund has been given a three-star rating by Standard & Poor’s, just two weeks after the ratings house announced it would be withdrawing from local funds research effective 1 October.

Two weeks ago Russell Investments became the first major manager to withdraw its funds from S&P ratings following the announcement. The TPT rating will be valid until S&P’s 1 October cut-off.

TPT general manager of wealth management and trustee services David Benbow said TPT was looking to attract new investors to the fund, including from outside of Tasmania.

“We plan to place the fund on our MyState investment platform for financial planners and dealer groups in different regions, and to leverage the distribution potential in Central Queensland where MyState has recently merged with The Rock Building Society,” he said.

According to TPT, S&P found that the fund had performed well over the past five years, outperforming the fund benchmark and peer group benchmark and maintaining liquidity levels.

S&P also viewed the fund’s investment management capability favourably, TPT stated.

“We are particularly pleased that S&P’s analysis recognises the capability of our investment management and lending teams and the loyalty of our investor base,” Benbow said.

TPT has $930 million in funds under management in Australian and global equities, cash and income funds, mortgages, property and balanced funds.

ASIC prompts AMEX interest policy change

By Milana Pokrajac

Bank satisfaction reaches 16-year high

By Andrew Tsanadis

CUSTOMER satisfaction among Australian banks has grown to its highest level in the past 16 years, but sentiment among business customers still lags behind that of personal customers, according to the latest report by Roy Morgan Research.

The ‘Customer Satisfaction – Consumer Banking in Australia Monthly Report’ for January 2012 revealed that bank satisfaction grew to 79.6 per cent, increasing by 4.2 percentage points over the past 12 months. Home loan customers in particular showed an above-average improvement of 5.4 percentage points.

National Australia Bank (79.5 per cent) took the top spot in customer satisfaction among the four major banks, followed by ANZ (78.6 per cent), Commonwealth Bank of Australia (77.6 per cent) and Westpac (76.3 per cent).

According to the report, NAB

increased its overall satisfaction level by 7.7 percentage points over the past 12 months – spurred on mostly by its 9.5 percentage point improvement among its nonhome-loan customers.

Improving customer sentiment by 4.9 percentage points over the past year, CBA’s result was due largely to its improved performance among its home loan customers, which gained 8.1 percentage points.

According to Roy Morgan, the customer satisfaction survey was

8 — Money Management March 8, 2012 www.moneymanagement.com.au

finalised prior to the well publicised interest rate increases in early February. Based on previous customer reactions to this type of publicity, the research house expects satisfaction to take a negative blow over the next few months.

Despite the gains made by the big four institutions, the smaller banks are still ahead of their larger competitors, with Bendigo Bank and ING Direct reporting satisfaction levels of 89.5 per cent and 89.2 per cent respectively.

The report also revealed that while sentiment among personal customers sits at around 79.6 per cent, business customers recorded an overall rating of 66.1 per cent.

The disparity between the two markets is likely to attract increasing attention by banks, and possibly the Government, due to the role the small-to-medium enterprises have in terms of expanding employment levels, Roy Morgan stated.

AMERICAN Express Australia (AMEX) has agreed to slash its policy of increasing interest rates for credit card customers in default, following concerns raised by the financial services regulator.

According to the Australian Securities and Investments Commission (ASIC), AMEX increased the interest rate on the whole balance where a card holder had defaulted in making their minimum repayment three or more times over 12 months.

ASIC found the increase in rates was up to 6 per cent for a 12-month period, while the policy affected 7.9 per cent of credit card accounts issued by AMEX. “ASIC was concerned that this policy was potentially in conflict with the restrictions on the charging of default interest under the National Credit Code,” the regulator stated.

As a result of the changes, the holders of those accounts would receive a

Peter Kell reduction in interest rate of up to 6 per cent, starting from today.

ASIC Commissioner Peter Kell said the regulator believed the policy intent behind the National Credit Code was to limit the level of increased charges which may be imposed on a borrower in default.

“ASIC welcomes AMEX’s agreement to change its interest rate practice,” Kell said.

News

Expect variable FOFA transitionary arrangements

By Mike Tayor

Bill Shorten

THE Minister for Financial Services and Superannuation, Bill Shorten, is expected to announce variable transition arrangements for the implementation of the Government’s Future of Financial Advice changes.

While the Financial Planning Association has used a submission to the Senate Economics Committee to argue for a 12-month transition period, and Financial Services Council chief executive John Brogden has predicted such an arrangement, Shorten has thus far refused to commit to specifics.

All Shorten has been prepared to say is that there will be appropriate transition arrangements – something which is being interpreted as meaning that at least some elements of the changes will be introduced effective from the original 1 July 2012 start date, while other, more complex elements impacting industry infrastructure will be implemented over time.

Many of the changes impacting planner remuneration are expected to be applied effective from the legislation start date.

As well, with the Parliamentary Joint Committee (PJC) reviewing the FOFA bills tabling its findings late

last week, few people expected the minister to make a definitive announcement on transitionary arrangements until the committee report was made public.

While the Federal Opposition had signalled its desire for the PJC to produce a bipartisan report, Government and Coalition members of the committee were not able to agree on the key issue of optin, giving rise to the a dissenting report.

As well, NSW independent Rob Oakeshott has declared he will not be supporting opt-in when the matter is brought on for debate in

the House of Representatives – something that is likely to result in an amendment which might then be opposed in the Senate.

In the meantime, the head of financial services at Chan & Naylor, David Hasib, has claimed the current leadership challenge within the Australian Labor Party has acted as a distraction to progressing FOFA. “We at Chan & Naylor are already expecting delays of up to 12 months for FOFA reforms and are concerned there will be even longer to wait should this leadership battle become ongoing,” Hasib said.

S&P withdraws ratings on Russell funds AIA Australia reports

By Milana Pokrajac STANDARD & Poor’s Fund Services (S&P) has suffered its first major ratings withdrawal after the announcement that S&P Capital IQ would no longer conduct its services in Australia.

Russell Investment Management has asked S&P to withdraw the ratings on 22 funds managed by Russell, the researcher has confirmed.

This is the first ratings withdrawal request made by a

major client after S&P Capital IQ – a division of Standard & Poor’s that provides web-based analytics and information services – announced it would no longer be conducting local funds research and local wealth management services in Australia as of 1 October 2012.

In January, Macquarie Investment Management asked the researcher to withdraw ratings on its Australian Microcap Fund, while ANZ Group’s conduit Aurora Securitisation had S&P ratings pulled on its ABCP programs in mid-February.

OnePath appoints investment managers

By Chris Kennedy ONEPATH has announced the appointment of new investment managers, name changes to its investment funds, and changes to its diversified investment funds following last year’s acquisition of ING Investment Management (INGIM)

by UBS Global Asset Management (UBS).

ANZ general manager superannuation and investments Craig Brackenrig said OnePath was now partnering with specialist investment managers and taking a more active

role in asset management.

The changes include the acquisition

by ANZ of OptiMix from UBS, which will enable ANZ to bring this specialist capability in-house. ANZ said this would provide greater flexibility for the creation of new products and enhance its research and investment manager selection skills.

The former ING single sector funds will be rebranded to OnePath and will be managed on behalf of OnePath by a select range of specialist investment managers. UBS will manage a number

of funds, including Australian and global shares.

PIMCO will manage diversified fixed interest, Karara Capital will manage small companies, CBRE Clarion will manage global property securities and SG Hiscock & Company will manage Australian securities, ANZ stated.

The single manager diversified funds previously managed by INGIM have evolved into OnePath multi-manager funds that blend the processes and styles of leading active investment managers with index funds, ANZ stated.

European woes create fixed interest opportunities

By Tim Stewart THE “dislocated markets” caused by Europe’s sovereign debt issues are creating opportunities that quality fixed income managers can exploit, according to Zenith.

From an initial universe of 89 funds, the Zenith 2012 Fixed Interest Sector Review awarded nine funds a ‘highly recommended’ rating and 18 a ‘recommended’ rating.

The ‘highly recommended’ funds are the Perennial Fixed Income Trust, the PIMCO EQT Wholesale Australian Bond Fund, the Tyndall Australian Bond Fund, the Macquarie Income Opportunities Fund, the

PIMCO EQT Wholesale Global Bond Fund, the CFS Wholesale Global Credit Income Fund, the Macquarie Master Diversified Fixed Interest Fund, the Schroder Fixed Income Fund Wholesale and the Kapstream Wholesale Absolute Return Income Fund.

Zenith senior investment analyst Steven Tang said the key to receiving a consistent return in the fixed income environment was to “blend” a number of high quality managers who have the “requisite skill” to exploit the current opportunities.

“Dislocated markets provide an abundance of opportunities for quality fixed income managers to

exploit. As seen post the global financial crisis, this can set them up for strong performance once fundamentals reassert themselves and markets become less dominated by macroeconomic events,” Tang said.

However, the fact that sovereign debt is largely held

by European banks adds an extra layer of risk to the current crisis, Tang added.

10 — Money Management March 8, 2012 www.moneymanagement.com.au

“While the largest purchasers of the sovereign debt of any particular European country are usually the banks in that particular country, half or more of the debt of Greece, Ireland, Portugal and Italy is in foreign hands – predominantly in North European hands,” Tang said.

That meant that a distressed sovereign would not only put domestic banks in danger, but would also put many European banks at risk, he added.

“Multiple sovereign defaults would imperil the entire European banking system, throwing the entire region into a severe recession or depression,” Tang said.

strong growth in premiums and assets STRONG growth in local market business has contributed to a record set of results for AIA Group internationally, according to financial results for the year ended 30 November 2011.

AIA Australia announced a 21 per cent growth in premiums and a 27 per cent growth of total assets which it said was driven by its investment in partner- and customer-focused solutions.

The group pointed to a recent Plan For Life report analysing life insurance risk premium inflows and sales for the year ended September 2011 that showed AIA Australia is dominating the group risk market with a quarter of total market share and $831 million of in-force premiums.

However the Plan For Life report showed AIA Australia lagged all other major insurers in terms of individual risk lump sum sales and inflows – an area the group is looking to improve according to AIA Australia chief distribution and marketing officer Damien Mu. Mu points out that AIA’s individual lump sum risk inflow growth of 20.6 per cent was more than double that of the overall market growth of 10.1 per cent, although from an admittedly low base.

The retail market is a priority growth area for AIA Australia, which had increased its retail team in the front and back office by a headcount of 15 above normal growth in the past year, Mu said. The

Damien Mu group would continue to look to strengthen its retail product proposition, he added.

AIA Group overall saw a 40 per cent increase in value of new business (VONB), which the group described as its key performance measure, to US$932 million. AIA Group’s VONB margin grew from 32.6 per cent to 37.2 per cent.

There was a 22 per cent increase in annualised new premiums to US$2,472 million and embedded value of US$27,239 million, up from US$24,748 million at 30 November 2010. Operating profit after tax increased 13 per cent to US$1,922 million and the solvency ratio on the Hong Kong Insurance Companies Ordinance basis more than tripled, which AIA said reflected a very strong capital position.

The group’s final dividend of 22 Hong Kong cents per share recommended brought the total dividend for the 2011 financial year to 33 Hong Kong cents per share.

SMSF Weekly ATO signals changes to SMSF annual returns

By Mike Taylor

Stuart Forsyth

THE Australian Taxation Office (ATO) has signaled it is changing its data collection systems around self-managed superannuation funds (SMSFs).

T h e ATO ’s m ov e w a s f l a g g e d l a s t month in the context of a presentation to the SMSF Professionals’ Association of Australia (SPAA), with the assistant commissioner in charge of superannuation, Stuart Forsyth, saying it was possible changes would be made to the SMSF annual return.

Forsyth said the ATO was engaging industry and stakeholders to explore the design of its data collection, with the focus being on minimising the additional repor ting requirements placed on SMSFs. He s a i d h e e x p e c t e d t h e p r o c e s s would run through to 2014.

Flexibility remains SMSF trump card

By Damon Taylor

ON the back of the second annual self-managed super fund (SMSF) report released jointly by the SMSF Professionals’ Association of Australia (SPAA) and Russell Investments, Plaza Financial principal Peter Hogan said that while gauging SMSF performance may be the million-dollar question, trustees continued to be well served by the nimbleness and flexibility that SMSFs provided.

“What SMSFs do offer trustees, and what is an attraction, is that degree of flexibility in terms of the investments that they make,” he said. “For example, I have a number of clients who have managed funds and managed accounts with fund managers, and for various reasons, but they quite happily tell me that their self-managed super funds are doing quite well compared to the managed funds.

“And the reason for that, of course, is that they’re all sitting in cash or term deposits,” Hogan continued. “They’ve got positive returns!

“And with the way the market is at the moment, a positive return is looking pretty good compared to the ups and downs and swings of the share market that we’ve been through.”

Adding weight to Hogan’s perspective, the data yielded from this year’s SPAA/Russell SMSF report tells a similar story, with most survey respondents citing risk reduction as the key driver of their asset allocation in 2011.

Peter Hogan “So one of the things that self-managed super funds do offer in terms of a return is a higher degree of flexibility for trustees to move the whole of the fund into more defensive assets when they think it’s appropriate,” commented Hogan. “And naturally, that’s as compared to writing off to a fund manager and saying that they want to cash out this investment, which takes a day or two, and then saying that they want to invest in this other investment and that takes a day or two again.

“But when markets improve, they’re e qu a l l y we l l s e r ve d , ” h e a d d e d .

“Because at that point they can again be a little bit more nimble and move back into markets when it’s appropriate as well.”

12 — Money Management March 8, 2012 www.moneymanagement.com.au

Govt holds firm on contribution caps THE Minister for Financial Services, Bill Shorten, used last month’s first meeting of the Government’s Superannuation Roundtable to reiterate its commitment to its changes to concessional contribution caps.

Amid speculation that the May Budget might contain some amendments to the contribution, Shorten said the Roundtable had involved “productive discussions

about the administration of concessional caps for over 50s”.

In doing so, he reinforced that from 1 July this year Australians over 50 with superannuation balances of less than $500,000 would benefit from $50,000 concessional caps.

On the eve of the first Roundtable meeting, the Australian Institute of Superannuation Trustees (AIST) had urged that the Government hold firm to

its 1 July commitment.

Discussing the work of the first meeting of the Roundtable, Shorten said there had been agreement that a priority in the future would be getting better information around the current distribution of tax concessions.

He said the participants had also agreed the Roundtable would further discuss ways to provide a better deal for women in regards to superannuation.

SMSF superMate gains selection SELF-MANAGED super fund (SMSF) software suite, superMate – an integrated administration product provided by Su p e rc o r p Te c h n o l o g y – h a s b e e n selected by Super Concepts, Roberts & Mo r r ow a n d T h e Su p e r G ro u p t o support their SMSF compliance and accounting requirements.

After a detailed review of the solutions available, Super Concepts chose superMate due to its ability to significantly reduce the effort required in providing an end-to-end investment management and compliance service.

Commenting on Super Concepts’ selection of superMate, Kurt Groeneveld, chief executive of Supercorp, said Supercorp was pleased to have been successful in this review and was keen to continue its longstanding relationship with Super Concepts.

“Su p e r Co n c e p t s i s a n o t h e r i n a growing list of high quality, professional SMSF administrators that have recognised the depth and value of the superMate solution,” he said.

David Mendelovits, national sales manager for Supercorp, said he expected Super Concepts’ several thousand SMSFs would be transitioned to the new software over the next few months.

“The new system will then be fully

Kurt Groeneveld operational by July 2012,” he said.

According to Supercorp, The Super Group has also been delighted with the productivity gains that have been achieved with the use of superMate. With the significant growth it is experiencing in its SMSF business, it is also finding it takes very little time for new staff to learn the system and to quickly become highly productive.

InFocus LIFE INSURANCE CONSUMER SNAPSHOT

59 52

%

Little to no research conducted before purchasing

%

Consult friends and family when researching a new policy

FOFA destined for thorough debate Mike Taylor writes that the dissenting reports produced within the Parliamentary Joint Committee reviewing the FOFA bills will ensure the key points are thoroughly debated and possibly successfully amended in the Parliament.

N

o one should be surprised that the parliamentarians who make u p t h e Pa r l i a m e n t a r y Jo i n t Committee (PJC) reviewing the Government's Future of Financial Advice ( F O FA ) b i l l s c o u l d n o t f i n d t h e s a m e consensus that existed in 2010. Opt-in and annual fee disclosure were always going to be the stumbling blocks to bipartisanship.

While the Minister for Financial Services, Bill Shorten, is expected to endorse some of the suggested amendments flowing from the PJC reports, he has made clear both publicly and in private negotiations that his position remains fixed on the issues of opt-in and fee disclosure.

Given the tensions which arose within February's battle for the Federal Parliamentary Labor leadership between Prime Minister Julia Gillard and the man she ousted, Kevin Rudd, the ALP members of the PJC were always regarded as highly u n l i k e l y t o d i s a g re e w i t h Sh o r t e n ' s approach.

Thus, the final shape of the FOFA legislation will be largely determined by the success or failure of amendments moved by the Federal Opposition during debate in the House of Representatives in coming weeks.

This reality underscores the continuing presence of representatives from the Financial Planning Association (FPA), the Association of Financial Advisers (AFA) and the Financial Services Council (FSC) in Canberra over recent days.

Realising that a number of the key issues would be fought out on the floor of the Parliament, the key lobby groups devoted significant time to gaining the ear of the key independents – an exercise that has met with varying levels of success.

What the planning organisations know is that they can rely on Port Macquarie-

b a s e d i n d e p e n d e n t Ro b Oa k e s h o t t supporting an opposition amendment with respect to opt-in and the probable similar s u p p o r t o f Ta s m a n i a n i n d e p e n d e n t A n d re w Wi l k i e a l o n g w i t h Fa r No r t h Queensland's Bob Katter.

Less certain is the view of Tamworth-based independent Tony Windsor, while the Australian Greens appear to have fallen in step with the Government on the FOFA bills.

At least a part of the problem for Shorten in gaining sufficient House of Representatives support for all of the FOFA bills is the growing body of evidence that suggests that it has failed to appropriately gather the necessary evidence concerning regulatory and financial impacts.

This much was made clear in evidence given during Senate Estimates hearings in early February, where representatives from the Department of Finance confirmed that much of the FOFA legislation had failed to meet the requirements concerning Regulatory Impact Statements (RIS).

What might be of greater concern to the independents in the House of Representatives is the fact that once the Government signaled it had made up its mind on where it was headed with the policy, the appropriateness or otherwise of the RIS became academic.

The proceedings during Senate Estimates relating to the FOFA bills and representatives of the Office of Best Practice Re g u l a t i o n a re i n f o r m a t i v e, w i t h t h e exchange with the Opposition spokesman on financial ser vices Senator Mathias Cormann going like this: Senator Cormann: When you say you did not get it to an adequate standard, normally it is a negotiation is it? It goes backwards and forwards, where a department puts up a draft Regulatory Impact Statement to you and you say, “That's not enough”, then they

go back and do some more work and then it comes back.

Mr McNamara: That is right, Senator.

Senator Cormann: But on this occasion they decided not to do that because they had run out of time.

Mr McNamara: They had run out of time.

T h e re w a s a n i n t e ra c t i o n . T h e y w e re preparing it. They had responded to some comments we made. In our view they had not responded enough. Had there been more time, I would have thought they would have been able to get those RISs across the line. They would have been able to get them to an adequate standard, but there was not enough time.

Senator Cormann: It is good process, though, with significant regulatory changes like that which increase costs for business which increase costs for consumers? It is good process to have adequate information about cost benefit before you make a decision, right?

Mr McNamara: That is why we have a RIS process.

Hardly surprisingly, the Coalition members of the PJC pointed to the absence of RIS signoff as being one of the reasons for their dissenting report on the FOFA bills.

Their dissenting report made clear the key points of difference were opt-in, annual fee disclosure and best interests duty.

As well, they have argued that the FOFA legislation should be delayed to coordinate its implementation with the Government's MySuper initiative.

While the Government is not expected to accede to the dissenting points made by the Opposition, the financial planning industry can at least be satisfied that the legislation will be subject to a thorough debate in the House of Representatives and the hope that enough independents will support the amendments they want.

21

%

Customers not confident with their insurance product

10

%

Customers who have changed policy providers in the past five years Source: Ernst & Young's 'Global Insurance Customer Survey

What’s on Super Review Charity Golf Tournament 14 March Roseville Golf Club, Sydney www.moneymanagement.com.au /events

CMSF 2012 Charity Golf Day 18 March North Lakes Resort Golf Club, Mango Hill, Queensland www.aist.asn.au/cmsf-socialevents/charity-golf-day.aspx

M&A Masterclass: Opportunities, Strategies and Risks 20 March Stamford Plaza Adelaide, South Australia www.finsia.com

Financial Services Council Life Insurance Conference 2012 22 March Sydney Convention and Exhibition Centre www.fsclifeinsuranceconf.org.au

SMSF Essentials 2012 27 March Doltone House, Sydney www.moneymanagement.com.au /eventlist

www.moneymanagement.com.au March 8, 2012 Money Management — 13

Hedge funds

Time to shine

Given the new investment environment, flexibility is essential. This might create perfect conditions for the growth of the hedge fund sector, writes Janine Mace.

IN an investment world where flexibility and the ability to respond quickly are increasingly important, fleet-footed hedge funds may be finding their time in the sun has finally arrived.

Although many long-only equity managers found market conditions in 2011 very challenging, several hedge fund strategies revelled in the unsettled conditions. And their nimble response has left traditional long-only managers scurrying to catch up.

Chris Gosselin, chief executive of Australian Fund Monitors (AFM) which tracks the performance of Australian hedge funds, believes adaptability is now an essential quality in the face of ongoing market volatility.

“Traditional long-only managers are moving more towards the hedge fund

approach as they are finding increasing f l e x i b i l i t y i s e s s e n t i a l . T h e y c a n’t perform with one hand tied behind their back,” he says.

“In this type of volatility, long-only is not the way to go, and we are increasingly seeing the blurring of the definition of hedge funds and absolute return funds and long-only approaches. Some managers are taking very concentrated positions with hedging to cope.”

Flexibility is now an essential for successful funds management, Gosselin argues. “Set and forget was great in 2003-07, but in a volatile environment it causes great damage.”

This explains the introduction of more tactical products. “Multi-strategy and multi-asset funds are a response to market conditions and fund managers not wanting to be as locked into the

14 — Money Management March 8, 2012 www.moneymanagement.com.au

Key points z

The new investment landscape favours hedge funds and managers who are not tied to a set asset allocation. z While not turning in stellar results, hedge funds performed better than many other asset classes in 2011. z Given their boutique structure, the main challenge for hedge funds is their inability to accept huge allocation into their strategies . z Experts predict growing interest from high-net-worth investors. market as they were in 2008 and 2009,” he says.

“Active management is completely the way to go at the moment.”

Daniel Liptak, head of alternatives research at Zenith Investment Partners, agrees the new investment landscape favours hedge funds and managers who are not tied to a set asset allocation.

“For the next five years we are likely to

be in a low return environment and so investors need to look elsewhere for returns,” he says.

Elsewhere may mean hedge funds, so traditional managers are not going to be left without an offering.

Several firms have already taken the plunge. In February, Money Managem e n t re p o r t e d Pe r p e t u a l h a d announced plans to build a long/short

Hedge funds

Hedge fund performance Much of the current interest in hedge funds is due to their performance during 2011.

While not turning in stellar results, they performed better than many other asset classes, explains Deanne Fuller, senior investment analyst at Lonsec. “In

approximately US$4 trillion in assets under management (AUM) found 56 per cent of respondents planned to increase their hedge fund allocations over the next 12 months – more than seven times the number planning to decrease their allocation. These findings are backed by reports the US$228 billion California Public Employees’ Retirement System (CALPERS) is likely to increase or maintain its hedge fund investments, which already total around US$5.2 billion or 2 per cent of its total AUM. Institutional investors are not the only ones showing renewed interest, according to Liptak, who has received many calls from direct investors asking which managers to consider. “We are definitely seeing a lot of demand for good quality hedge funds. There is a change to people dipping their toes back into alternatives.”

Nikki Bentley, a partner at Henry Davis York and chair of the Alternative Investment Management Association’s

Key challenges ahead The growing interest is bringing its own challenges for managers.

“There is a capacity problem as local hedge funds cannot accept huge allocation into their strategies,” Gosselin explains.

“This is a major issue for hedge funds, as by definition, they are smaller and boutique. If an institutional investor has $200 million and wants to invest into a $500 million fund, then that is a real problem. Such concentration is a real danger for both the investor and the fund.”

Liptak agrees: “Capacity is the biggest issue for the hedge fund space, and it Continued on page 17

Figure 1 ASX200 v Equity Based Funds 5 Year Cumulative Returns 30% 10% -10% -30%

Equity Based Hedge Funds

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-50%

Growing international interest Offshore, the picture is a little less attractive. According to BarclayHedge – a US provider of alternative investment databases which tracks 1,600 US hedge funds and fund of hedge funds – the sector underperformed the S&P500 in the year to 30 December 2011. Industry assets also declined 7.7 per cent, falling to US$1.64 trillion – their lowest level since February 2010.

In performance terms, only three of the 14 major hedge fund categories t ra c k e d by Ba rc l a y He d g e ( m a r k e t neutral equity, merger arbitrage and fixed income) showed positive returns.

Despite this, the good performance compared to long-only equity managers is translating into fresh investor interest.

A re c e n t Ba rc l a y s Ca p i t a l re p o r t s ur ve y i n g 165 in v es t o rs m an agi n g

Regulatory Committee agrees. “Good hedge fund performance has shown the value of hedge funds to investors,” she says.

“Hedge fund managers are meant to manage the downside r isk and the performance in 2011 has been a good indication of that.”

Liptak believes sentiment towards hedge funds is different in Australia compared to many offshore markets.

“People were very negative on everything post GFC, but in Australia it is not really true of the top hedge funds like Platinum, which hardly saw a drop in inflows.”

Gosselin agrees views are slowly changing. “Hedge funds were really vilified after the GFC but their reputation is improving as once the failed funds – such as Astarra – have been dealt with, their performance can be the focus,” he says.

Fuller is another who sees interest increasing. “Institutional inflows are still solid, but retail funds less so. Anecdotally, we have seen increasing adviser interest, but whether that has resulted in fund flows is still doubtful, especially given term deposit rates in Australia.”

Daniel Liptak

ASX200

Source: www.fundmonitors.com

Figure 2 2011 Distribution of Returns - All Equity Based Hedge Funds and ASX200of Returns - All Equity Based Hedge Funds and ASX200 2011 Distribu on 30% 20% 10% % Return

e q u i t y f u n d i n re s p o n s e t o c l i e n t demand. Caledonia Investments is also gearing up for the March launch of a new long/short equity strategy focused on Asian and Chinese economic growth.

This complements its new global resources long/short fund. “ We a re s e e i n g a n u m b e r o f a n n o u n c e m e n t s t h a t t ra d i t i o n a l managers are launching long/short products to handle volatile markets,” Gosselin notes. “ T h e q u e s t i o n i s, d o l o n g - o n l y managers have the shorting skills to run these funds? Shorting is a very different skill set.”

an absolute sense they have done well, particularly compared to equities – and especially high risk equities such as emerging markets.”

Gosselin agrees the performance was good in a very difficult year. “The hedge fund industry as a whole, on average, was marginally negative in 2011, but the market itself was down 14 per cent,” he notes.

“The overall hedge fund industry in 2011 for the AFM All Funds Index saw a -3.86 per cent return, while the ASX200 had a -14.51 per cent return. The platform was negative, which is never good, but performance was good compared to the underlying market.”

Complicating matters, some hedge fund strategies found the going tougher than others, explains Gosselin. “There has been a wide range of performances over the past 12 months, from plus 31 per cent to negative 37 per cent to the end of December, which is a mammoth range,” he says.

“This creates an issue for financial planners, as there are 200-250 hedge funds in our database with different styles, strategies and sizes. They range from Platinum with $15 billion to an emerging manager with only $5-$10 million.”

Fuller acknowledges there was a broad spread of results. “We have seen a greater dispersion than in previous years due to the risk-on/risk-off market in 2011. However, the result is a good performance given what equity markets have done during the year.”

Although many local hedge funds turned in good results, managers pursuing one investment strategy in particular found conditions to their liking, according to Liptak.

“In the Australian market neutral space, we have seen a 20 per cent plus increase to December 2011. Over the past five to ten years, we have seen around 15 per cent with no liquidity issues or redemption gates,” he says.

With institutions moving to increase their allocations to these funds, Liptak expects to see more market neutral startups this year due to the “wall of dollars that is flowing into these strategies”.

Other strategies are also gaining favour. “Long/short equity funds have also done very well, and we have seen them produce very good numbers,” Liptak notes.

0% -10% -20% -30% ASX200: -14.5% -40%

Range of Funds

Source: www.fundmonitors.com

www.moneymanagement.com.au March 8, 2012 Money Management — 15

Hedge funds Continued from page 15 will be difficult to get access to the good managers – some of which are already closing to new money.”

Fees are also a massive issue at the moment, according to Gosselin. “But in m y v i e w, i t d e p e n d s o n w h a t t h e performance is. If you receive a 5 per cent return net of fees when the market is down 10 per cent to 15 per cent, then I would be happy to pay.”

He also points out the debate over fees has led to questions about the use of fund of hedge funds (FoHF) structures, as these involve two levels of fees.

Fuller agrees the fee question is very divisive, but notes “we have yet to see any significant decline in fees”.

While agreeing the higher nominal fees of hedge funds are an issue, Liptak argues they are often justified. For example, he points out investors in Au s t ra l i a n m a r k e t n e u t ra l f u n d s received $2.54 of alpha for every $1 paid in fees. This compares to $0.05 of alpha for every $1 in fees paid to the average long-only Australian manager.

“The current debate sees investment managers as an industrial input, not as a value add from skill or other IP related activities. It also ignores the outcome for investors,” he argues.

The arrival of new ‘passive’ or beta hedge fund strategies onto the market may provide a partial solution to the fee problem.

“With hedge fund performance, the reality is not all of it is alpha and some of the trades can be replicated, so there is a lot of beta in it,” Fuller explains.

“If more beta market strategies come to market, we will see increased fee pressure in this market space. We expect to see hedge fund beta start to gain traction in the next year or two.”

The entrance of beta strategies also reflects a new-found level of transparency among hedge funds.

“We have been seeing increasing transparency in recent years and it is now excellent. Often monthly performance reports can be two to ten pages long,” Gosselin explains. While he believes hedge fund transparency is now often better than in many long-only funds, pressure remains on liquidity.

“We have seen growing pressure from platforms to increase the underlying level of liquidity in some strategies.

Howe v e r, we b e l i e v e t h e o p t i m u m

approach is where liquidity matches the underlying assets,” Fuller notes.

“Better liquidity can compromise the strategy’s performance.”

Gosselin believes liquidity is improving. “There have been changes to the lock-up and liquidity, and very few funds now have less than monthly liquidity. In retail products, they now have daily liquidity in funds such as Aurora Fortitude and Bennelong.”

Role in client portfolios Gosselin believes market conditions will e n c o u ra g e m a n y h i g h n e t w o r t h investors with allocations of $200,000 plus to move into hedge funds this year.

“Many self-directed investors who have been making their own decisions have been finding conditions very difficult, so they are now looking to use hedge funds’ expertise instead,” he explains.

Figure 3 Correlation Hedge vs ASX 10Worst Best &Months: Worst Correla on of Hedgeof Funds vsFunds ASX 200 - 10 200 Best- & 5 years Months: 5 years to Dec 2011 ASX200

AFM Equity Based Funds

10

Return (%)

5

0

-5

-10

Oc t-0 Ja 8 nSe 08 p M -08 ay Ju 10 nNo 08 v Se -08 pJa 11 nFe 10 bJa 09 n0 Se 9 pJu 10 l-1 Ap 0 r-0 M 8 ar Se 10 p Au -07 g Ap -09 rSe 09 pM 09 ar Oc 09 t-1 Ju 1 l-0 9

-15

Source: www.fundmonitors.com

need to identify the strategy first and then select the “bestYoumanager for that strategy. ” – Daniel Liptak

“They believe this is a market where it is so difficult to make money it is better to give it to a hedge fund.”

While retail investors may be interested, the task for advisers is not an easy one.

“The diversity of hedge fund performance, style and strategy is extraordinary, and that makes it very difficult for the investor and financial planner to sort the wheat from the chaff,” explains Gosselin.

“Fr o m o n e y e a r t o t h e n e x t , t h e performance is very different. In 2008, 23.5 per cent of the AFM universe was positive in the wipe-out, but they didn’t necessarily do well in 2009 and 2010.

The key for financial planners is to find managers which have performed across a range of conditions.”

He also believes high quality, timely research is vital. “In the hedge fund space once a year is not often enough, as managers and per for mance can change quickly.”

Liptak agrees advisers have an important role to play. “In the hedge fund space, manager selection is very important. You need to identify the strategy first and then select the best manager

for that strategy.”

When it comes to portfolio construction, Gosselin favours a blend of managers.

“We recommend not investing in a single fund, but in a blended portfolio.

A tightly blended portfolio helps as no manager is immune to negative months, and you want a slightly different strategy at different times – so if the manager suffers in one month, it is offset by one of the others,” he says.

However, a blended portfolio can be a problem with smaller investors. “The majority, but not all, hedge funds have a minimum investment of up to $500,000, so they are really for sophisticated investors,” Gosselin notes.

For this reason, Fuller still supports the FoHF approach. “A FoHF can be good for retail investors, notwithstanding the high fees, as it is a type of onestop-shop. However, it is not really suitable for bigger investors.”

She believes there is a strong case for including hedge funds in a retail portfolio. “Hedge funds can help smooth out the r ide in this type of investment market, although we acknowledge they are not suitable for all clients.” MM

www.moneymanagement.com.au March 8, 2012 Money Management — 17

Hedge funds

Dealing with scrutiny Ever since first impact of the global financial crisis, both international and domestic regulators have been announcing changes to hedge funds, which would aim at improving disclosure and investor protection. Where are we now? Janine Mace reports.

W

hen an investment sector finds itself under the regulatory spotlight around the world, life can be tough.

Just ask hedge funds. In the wake of the global financial crisis (GFC), Australia and international regulators have been focusing on the sector due to heightened concerns about investor protection, market integrity and systemic risk.

This is despite recognising hedge funds were not responsible for the financial crisis.

As the Australian Securities and Investments Commission (ASIC) commissioner, Greg Medcraft, acknowledges, “it remains unclear what role hedge funds did play … and they may well have been more victims than villains”.

However, this has not stopped regulators acting. In November 2008, the G20 called for greater oversight of hedge funds and referred the issue to the International Organisation of Securities Commissions. It published a 2009 report, Hedge Fund Oversight, which called for hedge fund registration, better oversight and investor disclosure, greater regulatory information sharing and regulatory principles around fund liquidity and redemption policies.

In addition, the Dodd-Frank Act in the US and the European Union’s Alternative Investment Fund Managers Directive have imposed very prescriptive regulations on hedge funds.

These initiatives represent a major change in direction according to Nikki Bentley, a partner at Sydney law firm Henry Davis York and chair of the Alternative Investment Management Association’s (AIMA) regulatory committee. “It seems overseas regulators have gone to the other extreme from preGFC and changed quite dramatically from hedge funds being unregulated to being closely supervised.”

She says the regulatory focus in Australia “is not a huge change as hedge funds have always been regulated like any financial product,” but admits the rapid and sweeping reform of the local financial services industry is making life more difficult.

“There is a lot of regulatory change in the industry coming through – such as the Future of Financial Advice and MySuper reforms – and that is causing further uncertainty,” Bentley notes.

ASIC takes a look For Australian hedge funds, a key development has been the February 2011 release of ASIC’s Consultation Paper 147 Hedge Funds: Improving Disclosure for Retail Investors. It sought feedback on disclosure enhancements aimed at ensuring retail investors have the necessary information to make informed decisions about hedge funds. The paper also discussed how the proposed disclosure guidance would interact with the tailored product disclosure

statement (PDS) requirements for simple managed investment schemes.

According to Medcraft, ASIC believes the use of “diverse investment strategies, complex structures and use of leverage, short selling and derivatives” by hedge funds means they can “pose more diverse and complex risks for investors than traditional funds”.

The hedge fund industry has consulted closely with ASIC on CP147 during 2011, and a final regulatory guide is expected this year.

Most industry observers are relaxed about the likely outcome of the consultation process.

“We don’t expect the regulatory interest to have a major impact on the sector as most of it is about increased disclosure, which is good for retail investors – especially the improved PDS and fee information,” explains Lonsec senior investment analyst, Deanne Fuller.

Bentley agrees the regulatory focus is a positive move. “The hedge fund industry is very supportive of increased disclosure and is generally supportive of ASIC’s approach and feels it was very good.”

Chris Gosselin, chief executive of hedge fund research firm Australian Fund Monitors, is another who sees the consultation process as valuable. “ASIC wants to make sure the industry is transparent and all investors are treated efficiently and fairly,” he says.

“It needs to regulate so consumers are informed and therefore protected, and so that if a fund breaks the rules it is regulated appropriately.”

However, an enhanced disclosure regime may result in higher fees. “All the extra information is available in standard industry

18 — Money Management March 8, 2012 www.moneymanagement.com.au

documentation – so it is not a major impost, but it could lead to increased costs from an expanded PDS and other documentation,” Fuller points out.

While AIMA supports the ASIC initiative, it believes the regulator should have gone further. “The industry felt enhanced disclosure should apply more broadly to other complex products as well,” Bentley explains.

Gosselin agrees a more wide-ranging approach is required. “ASIC also needs to regulate the research industry so its reports are quantifiable, rather than based on a view of the potential performance [of hedge funds].”

Although the sector is largely comfortable with the ASIC consultation, Bentley says there are still some issues to be thrashed out.

“The industry is pleased there will be a carve-out for hedge funds from the shorter PDS regime. However, there is still uncertainty on what a hedge fund is and how it will be defined in the legislation,” she explains.

“ASIC is still grappling with how it will apply its enhanced disclosure approach, and we expect to see another draft regulatory guide and further industry consultation.”

International regulatory developments While the local interest by regulators has been relatively benign, overseas the scrutiny is a different story. The EU Directive, in particular, has caused considerable angst in the hedge fund sector.

“AIMA globally spent a lot of time on it, as there was increasing concerns about what was proposed and it became a very public and political debate. The European system is very different, but it created huge concerns for Australian managers wanting to raise money in Europe,” Bentley explains.

“However, there will now be a time lag before it comes in and it is less strict than it initially was.”

The US reforms are also causing heartburn.

“In the US, the huge volume of regulatory change created huge uncertainty and this had an impact on many hedge fund managers. The local industry is still digesting what the regulatory changes will mean for their operations. For example, previously there was an exemption for overseas managers marketing to a US investor, but now they need to be registered,” Bentley says.

The introduction of the Volker Rule – which restricts US banks from making certain kinds of speculative investments – is also having an impact on the sector.

“We are seeing the start of the implications of the introduction of the Volker Rule on banks’ proprietary desks,” Bentley notes.

“This may lead us to see new boutiques being started by professionals previously working on the banks’ proprietary desks. We are seeing a bit of activity in that area.”

If these regulatory developments were not enough, the rollout of the new Foreign Account Tax Compliance Act (FATCA) regime by the US Government is set to make life even more challenging for hedge fund managers.

From 2013, the legislation imposes significant new information reporting and withholding requirements on foreign financial institutions such as Australian banks and hedge funds receiving US-sourced income.

“Most large financial institutions will have to make system changes, and the risk is it may lead to FATCA rules and standards legislation being rolled out in other countries,” Bentley explains. MM

OpinionTechnical Same

yet different?

OnePath’s technical team takes a look at the super guarantee increase and finds the more things change the more they stay the same.

T

here’s no doubt that superannuation has been subject to never ending change as far back as we care to remember. The pace of that change seems to have quickened as the impact of the Stronger Super changes starts to reach its final stages and we wait to see what will make it into legislation.

The recent announcements by the Government to gradually increase the superannuation guarantee rate from 9 per cent to 12 per cent by 2020, the reduction in the co-contribution, as well as the introduction of the low income earners’ superannuation contribution seem to indicate that the concessions for superannuation are being squeezed yet again – “not more change”, I hear you say.

Depending on your client’s situation, if you take some of the changes in isolation you may come to the conclusion they are worse off, or at best, no better off.

However, when the overall impact of the changes is considered, things may be better than they seem in the longer term.

Let’s compare the increase in the superannuation guarantee and the proposed reduction in the co-contribution.

Superannuation guarantee has been around approaching 20 years and has had a huge impact on the retirement savings of Australians. In many cases, any person who has been an employee during that time has received the benefit of additional retirement savings being accumulated in superannuation for them. Anyone who is less than about age 40 may have received super guarantee coverage for the vast bulk of their working lives as an employee.

The gradual increase in the SG percentage from 9 per cent to 12 per cent of a person’s ordinary time earnings by 2019/20 may not increase the coverage of the workforce, but it will have the effect of increasing the amount being accumulated in super for most employees. The increase in the percentage is: The additional amount being accumulated in super will depend on the current age of the person and any earnings on those amounts until the accumulation has been drawn down. The younger the person and the longer the amount is left in the fund, the greater

the amount available for retirement.

As an example, a person who is age 25 when commencing work today and earning $25,000 per annum will have accumulated approximately another $108,000 by the time they are age 60, and about another $164,000 at age 65 merely due to the increase in the SG percentage. This is based on the salary being indexed at 4 per cent, with income of 3 per cent and capital gains of 4 per cent before tax, with a 20 per cent franking rate.

A person who is age 25 when commencing work today and earning $50,000 today will end up with approximately $217,000 more by age 60 and $329,000 more by age 65 based on the same assumptions. Of course,

Table 1 Year

Rate (%)

2013/14

9.25

2014/15

9.5

2015/16

10

2016/17

10.5

2017/18

11

2018/19

11.5

2019/20

12

Other factors for qualification depended on the person’s occupation and income level. In one year, the co-contribution was doubled. However, over recent years the co-contribution has been reduced, thresholds frozen, and the current proposal suggests further reduction.

The changes will require “a greater level of nonconcessional contributions made to the fund over a longer period.

”

Source: OnePath

a person earning more than these amounts will benefit even more with the increase.

At the other end of the scale will be those 50,000 or so employees who are older than age 70. They will benefit from the new requirement to have SG paid no matter what their age. With the aging population and increased life expectancies, it can only be expected that the number of people over age 70 being provided with SG will increase significantly.

In contrast to the increase in the SG, the co-contribution has had more of a chequered history. It started out from an encouraging base, with the Government matching a person’s non-concessional super contributions at the rate of $1.50 for each $1 up to a maximum of $1,500.

The recently announced proposal to reduce the amount of the co-contribution to 50 cents for each $1 of after tax contributions from 1 July 2012 will reduce the amount accumulating for retirement.

In addition, qualifying for the co-contribution is also impacted by the reduction in the maximum adjusted income at which the co-contribution cuts out to $46,920. These changes have mainly arisen due to the cost of the co-contribution system to the Government and its popularity for those who make after tax contributions to super.

If we assume a person who is 25 years old is currently earning $25,000 p.a. the decease in the co-contribution would mean about $62,000 less in retirement savings at age 60 and about $87,000 less at age 65. For someone who earns $50,000 at age 25, the difference is about $98,000 less at age 60 and nearly $140,000 by the time they reach age 65. The impact is due to the reduction in the upper adjusted income threshold from 1 July 2012. The differences assume the person is able to make after tax contributions of $1,000 in each year and the co-contribution remains constant for the whole period.

Assumptions relating to earnings, indexation and franking are the same as those for the change in the SG rate above.

If the increase in the SG rate is combined with the reduction in the cocontribution, the overall impact is that a person would be better off compared to the continuation of the current system of 9 per cent SG and a maximum co-contribution of $1,000. However, for a person age 25 and earning $25,000 today, the break-even point where the person would be in the same position had the current system remained would not be reached until they reached age 39. For someone earning $50,000, the break-even point would occur at age 36.

What this means, is that the changes to the balance of government support for superannuation concessions and subsidies will require a greater level of nonconcessional contributions made to the fund over a longer period.

By OnePath’s technical services team.

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

OpinionDeath benefit When things go wrong Superannuation is not catching up to the evolution of our society, according to Julie Steed.

T

he pace of change in superannuation is significant. One of super’s most common criticisms is that things are always changing. Yet despite the dynamic pace o f c h a n g e, s u p e r a n n u a t i o n i s i l l equipped to deal with the evolution of our society and family structures.

There are many issues surrounding the payment of death benefits that have the potential to cause additional grief and uncer tainty for super fund members. When things do go wrong with death benefit payments, it is usually during a time when the family members are experiencing personal loss and emotional strain, which adds an additional degree of difficulty to solving problems. Examining ways to improve certainty for members in respect to the payment of their death benefit can add significant value by avoiding unexpected outcomes.

The distribution of death benefits has averaged more than 25 per cent of the Superannuation Complaints Tribunal’s (SCT) case load over the past five years.

Correctly identifying competing beneficiaries and/or using nominations that fall outside of the jurisdiction of the SCT may assist in expediting payments and reducing angst if there is the likelihood of family disputes.

The changing nature of dependants The nature of our family structures and relationships has changed significantly during the modern era in which superannuation has been available to the wider community. In 2004, the treatment of same sex relationships was finally catered for as a result of a private member’s bill which introduced the ability to make a death benefit payment to an interdependent. An interdependency relationship requires that two people have a close personal relationship, that they live together, that one or each of them provides the other with financial support and that one or each of them provides the other with domestic support and personal care. With a few minor exceptions, it is important that all

four of the criteria are met.

Since 1 July 2008, same sex couples have been for mally recognised as spouses as a result of changes in Commonwealth law.

The interdependency provisions have also provided the ability for fund trustees to pay death benefits to the parents of many younger, single people who are living at home. The recent trends of younger people not marrying or having children until later in life has resulted in an increasing percentage of superannuation fund members who have no spouse or child to whom their death benefit can be paid. The rise of compulsory super and minimum insurance levels has compounded this issue.

Interdependency is an area that is often overlooked, and worth exploring with the superannuation fund to see if parents may qualify as dependants of their child.

need to work with “theWeGovernment to bring in appropriate legislation that keeps pace with the changing nature of family structures and superannuation.

”

Blended families Despite the improvements for same sex couples and interdependent relationships, issues with death benefits and blended families continue to present challenges to trustees and advisers.

Often the client will want to use their superannuation to provide an income to their spouse, but then have any residual balance left to children from their first marriage. A self-managed superannuation fund (SMSF) may be able to cater for this type of arrangement, but it is unlikely to be an option in retail, industry or corporate funds.

Clients should consider directing their superannuation to their estate and establish testamentary trusts via their will. This type of arrangement will generally ensure that the benefit is received as intended, however, there may be tax consequences.

Another issue that arises in blended families is in relation to stepchildren.

A stepchild is considered a “child” beneficiary as long as the natural and stepparents remain married, or the natural parent dies. This has long been a principal in family law and was

20 — Money Management March 8, 2012 www.moneymanagement.com.au

recently confirmed as the case for superannuation death benefits in ATO ID 2011/77. The SCT has also used this principal in deciding cases. This means that the stepparent is unable to leave their superannuation benefits to their s t e p c h i l d re n . T h e c h i l d re n m a y, however, still qualify under financial dependency or interdependency.

Identifying dependants Often members nominate people who do not meet the definition of dependant, despite many funds’ efforts to explain the nature of nominations and the legal requirements. An example of this is where a member nominates their parents to be the recipients of their death benefit, however, they are not living with their parents nor is there any provision of financial support – hence, they do not meet the definition of a dependant.

Working with clients to identify their potential competing dependants and

how to best ensure that the desired outcomes will be achieved – can add significant value. Similarly, identifying that a client has no dependants and therefore needs a will in order to choose who receives their death benefit, is also beneficial.

Other dependants Superannuation law permits a trustee to pay a death benefit to a person who does not meet the definition of dependant, in the event that the trustee is unable to locate any dependants or legal personal representative. In many instances, the recipients will be the parents of the deceased. However, many funds will only allow this type of payment for small amounts (under $5,000 – $10,000). For higher amounts, the trustees will invariably require the next of kin to obtain letters of administration and distribute the benefit in accordance with the laws of intestacy.

exception to be granted. In addition, a fund’s trust deed must permit binding nominations to be made. If a trustee accepts a nomination that meets the conditions contained in the SIS Regulations, the trustee is bound to make the payment in accordance with the nomination.

There are two common problems with binding nominations, firstly that they expire after three years, and secondly people not updating their nominations when their personal circumstances change. Superannuation funds have gone to considerable lengths to remind members as to when their nominations expire, however, many members simply let their nominations lapse. In this instance, it is generally up to the trustees to exercise discretion and determine to whom the benefit should be paid.

The second issue is even more problematic. Consider the situation of Joe who separated from his wife and is living with his current de facto, Louise. Louise is pregnant with their first child. Joe made a binding nomination in favour of his wife Carla two years ago. If Joe dies, the trustees of his fund will be required to pay his death benefit to Carla – Joe has a valid binding nomination and Carla meets the definition of a dependant. Louise and Joe’s child will receive nothing.

Nomination types Having identified all potential beneficiaries and to whom the death benefit will be paid, it is essential to have structures in place to ensure that the client’s wishes will be complied with. Identifying situations where tr ustees can make payments to beneficiaries other than as the client wishes can enable clients to make alternative arrangements that will ensure their plans are fulfilled.

When nominating beneficiaries, superannuation funds offer a range of nomination options, including: • Trust deed provisions – directed nominations; • Binding nominations; • ‘Non-lapsing’ binding nominations; • Reversionary pensions; and • Nominated beneficiaries.

Trust deed provisions – directed nominations Members of SMSFs and small APRA

funds (SAFs) are able to incorporate certainty using a clause in the trust deed.

The clause would typically state that if a member nominates a valid dependant the benefit shall be paid to them, but if there is no nomination – or the nomination is invalid – the benefit shall be paid to the estate.

Superannuation law generally prohibits fund trustees from being subject to a direction, however, SMSFs and SAFs are exempt from the prohibition. Accordingly, it is not a breach of superannuation law for a SMSF or a SAF trust deed to stipulate that the trustee shall make a payment to a dependant or to their estate in line with a member’s direction.

Binding nominations Binding nominations are an exception to the rule that no-one other than the trustee can exercise a discretion. The SIS Regulations (Regulation 6.17A) prescribe the nine conditions that must be satisfied for the

The confusing dual use of the term ‘non-lapsing binding nominations’ makes it important for clients and advisers to understand the legal basis under which their nomination is made and any terms and conditions which apply.

Reversionary pensions Upon the death of the pensioner, payments from reversionary pensions revert to the reversionary beneficiary.

These types of nominations generally provide certainty for members. Nominations are made at pension commencement and cannot generally be changed without commuting the pension and commencing a new pension. If the reversionary beneficiary pre-deceases the pensioner, the benefit would ordinarily pass to the pensioner’s estate.

From 1 July 2007, death benefits cannot be paid in the form of an income stream to adult children. Therefore, adult children cannot be nominated as reversionary beneficiaries.

Nominated beneficiaries An ordinary beneficiary nomination is an expression of wishes which is not binding on trustees. As with all other types of nomination, a nominated beneficiary must meet the SIS definition of a dependant.

‘Non-lapsing binding’ nominations

The legal landscape

These nominations are also an exception to the rule that no-one other than the trustee can exercise a discretion.

This exemption permits discretion to be exercised by a party other than the trustee, provided that the governing rules require the trustee’s consent to the exercise of such discretion. Provided certain requirements are met, a member is allowed to exercise discretion as to the recipient/s of their death benefit.

Whilst the use of this provision exempts the trustee from the requirement to exercise discretion, it does not necessarily mean the nomination can’t be disputed by competing beneficiaries.

In addition to the legislation, APRA Circular 1.C.2 provides a framework for this type of nomination. Although there is no legislative requirement, the APRA Circular indicates that a periodic review should occur when there is a change in the member’s circumstances, or at least every three years. This is also consistent with the trustee’s duty to act in the best interests of all members.

Whilst superannuation law is Commonwealth law, the distribution of non-superannuation assets after death is state based law, which varies across the country.

In NSW, the Family Provision laws allow an eligible person to challenge the estate, which may result in the NSW Supreme Court overturning a binding nomination.

The conflict between state based law provisions and Commonwealth superannuation laws provides a system which is structurally flawed and makes advice more complex.

Whilst there is generally merit in having consistent application of laws across the country, the current variation in laws makes harmonisation discussions difficult. When discussions do occur, it is likely the more restrictive terms of the NSW system will be suggested – which many states and territories will firmly resist.

The Cooper Review recently recommended that binding death benefit nominations cease to be valid when certain life events occur (ie, divorce) and that the nominations should subsequently only lapse every five years. Whilst such amendments may assist members avoid a situation where their benefit is automatically paid to an inappropriate dependant, it will not assist trustees who will then be required to undertake the full decisionmaking process.

As always, nothing will provide the security of a comprehensive estate plan – but sadly, this is undertaken by so few.

As an industry, we need to work with the Government to bring in appropriate legislation that keeps pace with the changing nature of family structures and superannuation.

The other ‘non-lapsing binding’ nominations A small number of retail funds have incorporated specific provisions into their trust deed which enable them to accept binding nominations that do not expire. The nomination may require the member to declare that they will always keep their nomination up-to-date to reflect any changes in their personal circumstances. Whilst there appears to be no case law yet, it will be interesting to see how an aggrieved beneficiary will be treated if they can prove that – given a change in the member’s circumstances – the payment to another person is unfair and unreasonable.

Julie Steed is the technical services manager at IOOF Holdings.

www.moneymanagement.com.au March 8, 2012 Money Management — 21

OpinionEuro debt

t u o g n i c n a l a B the losses Can an improving United States offset the problems in Europe? Matt Sherwood writes.

F

inancial markets have started 2 0 1 2 w i t h c o n s i d e ra b l e momentum, with a sustained period of ‘risk-on’ evident in global commodity markets, high-beta exchange rates, global oil prices and global share markets. There has been a distinct pecking order on the rise: Europe has led the rise (with all markets up between 14 per cent and 24 per cent), followed by the United States (up 17 per cent) with Asian and Asia-related markets recording more modest rises (up anywhere between 7 per cent and 14 per cent). The rebound in sentiment has reflected four factors: 1. Market valuations were very low. In late 2011, price-earnings ratios reached one of their lowest levels since the mid-1980s in many international markets, and this provided a potential springboard for prices if data was a bit better than expected.

2. US and Asian economic data has been consistently better than expected. While financial markets have been Europefocused, the remainder of the global economy has been growing at a faster pace than in mid-2011. The US recovery has

consolidated, and Asia is in line for a soft landing with falling inflation enabling policy support, if required.

3. The Greek default has, to date, been orderly – private investors appear willing to take a 70 per cent hair cut on their Greek debt holdings in exchange for broader and longer lasting reforms, including large Greek public service reductions, higher taxes and lower spending.

4. The European Central Bank (ECB) appears to have ring-fenced contagion risk from periphery economies in their government and bank funding markets, through its 0.5 trillion long-term refinancing organisation (LTRO), where the ECB lends funds to banks at 1 per cent for three years. This has seen interbank funding spreads decrease for the first time in a year.

A European quantitative easing (by stealth) The key driver out of these four has been the LTRO program. After eight summits and numerous press announcements in late 2011, Europe seemed to stumble onto this solution, and may not have realised how successful it could be in stabilising

22 — Money Management March 8, 2012 www.moneymanagement.com.au

sentiment. The strange thing about this program is that the German leadership was ardently against a quantitative easing in the second half of 2011.

In a quantitative easing, the central bank prints money (either physically or electronically) and buys bonds off its government, and the government can use these funds to increase spending or fund investment, or both. The LTRO is a quantitative easing, but instead of giving funds to governments, the European Central Bank has lent the money to the banks who have, in turn, bought government bonds. So in essence, Europe’s LTRO plan is a quantitative easing program involving a third party.

Lending quality is the key It is not yet clear whether European banks are using the funds wisely. The LTRO was aimed to strengthen bank balance sheets, but it could have the adverse effect if banks load up on risky assets such as the government debt of stressed periphery economies. This would explain why the 10-year yields on Italian, Spanish and every other Euro member (with the exception of Cyprus) have declined in recent

months and tended to outperform their US and Australian peers.

Borrowing funds and receiving a credit spread can be a good trade, as long as the bond issuer remains solvent. The ECB will offer another round of LTRO at the end of February 2012, and has just eased the collateral rules to encourage smaller banks to participate. However, low interest rates with potential low-quality lending to Portugal, Spain and Italy (all of which were recently downgraded by Moody’s) is not a good combination – especially in stressful times, and there is no clear endgame for this policy. The ECB will need to manage and monitor the situation very carefully, as while it is well intentioned, it could become problematic for markets if periphery bond yields rise.

A return to trend US growth is hard with low savings Recent US data on consumer credit, retail sales and employment growth have been eye-catching, and even the downtrend in housing has stabilised – which has fuelled expectations that the US recovery is selfsustaining and could return to trend in 2012.

administration can keep borrowing from the US Federal Reserve and global investors to fund US consumers. Importantly, the Obama administration is likely to reach the US$16.4 trillion US Government debt ceiling in the 2013 financial year, and under the August 2011 agreement between Republicans and Democrats this will trigger austerity cuts. Given the US Government is subsidising the consumer, this could impact US household income and spending. This suggests sizable headwinds are in place to hinder a return to trend US growth, although a double-dip recession looks as equally unlikely in the absence of a severe negative shock.

third weakest in US history (dating back to 1871), the earnings recovery was the strongest since World War II (with earnings growth peaking at 40 per cent). This larger recovery reflects the size of the losses during the global financial crisis and the growing share of US earnings from Asia and other growth markets.

Earnings growth has since slowed, but is still around the peaks of previous recoveries. Refer to Figure 2.

February’s reporting season is key With subdued local economic data, a strong Australian dollar and continued Eurozone uncertainty, the market has already lowered its expectations for the

In an uncertain market environment, investors will “wonder if there is any upside potential in global share markets. ”

The banks are cost-focused

Figure 1 US Savings (% US GDP) 10.0%

10.0%

7.5%

7.5%

5.0%

5.0%

2.5%

2.5%

0.0%

0.0%

-2.5%

-2.5%

US savings

-5.0%

-5.0%

Savings after mortgage payments

-7.5%

-7.5%

Savings after mortgage payments before transfer payments -10.0% 1977

1981

1985

1989

1993

1997

2001

2005

-10.0%

2009

Source: Credit Suisse as at 10 February, 2012

There are two issues that will make a return to trend growth in the US harder than normal. Firstly, the US savings rate is low. Although the US savings rate (at 4 per cent) is high relative to the past 15 years, it does not take into account mortgage interest payments, which contrasts with national accounting conventions around the world. US savings after interest payments are negative today (which has been the case for most of the past 15 years – see Chart 1).

This means that the US consumer is in no position to borrow more – unless they want to be in a situation where debt is being used to repay debt. In this world, US economic growth will primarily be determined by employment and income growth. Refer to Figure 1.

Austerity will hit US income growth Secondly, the level of household income is being subsidised by the US Government. Indeed, the level of US savings after mortgage payments – but before government handouts (including social security and other support payments) – is around its lowest levels in 35 years. One has to wonder, how much longer the Obama

Figure 2 US Economic and Earnings: Annual Growth (%) 60%

18%

Earnings growth

50%

15%

Economic growth (advanced 6 months)

40%

12%

30% 9% 20% 6% 10% 3% 0% 0% -10% -3%

-20%

-6%

-30%

-40% 1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

-9%

Source: Datastream as at 15 February 2012

US earnings growth remains buoyant Historically, a US rebound is typically associated with annual US earnings growth peaking around 15 per cent – 25 per cent (see Figure 2). Although the prevailing US economic recovery is the

As the 2012 financial year forecasts have been lowered, 2013 forecasts have been rising (partly reflecting base effects), but at 14 per cent they remain optimistic. The main wildcard here is resource prices, and if they can continue to reverse recent price falls, then the market forecast could be achieved. Elsewhere, the assumed expansion in non-resource sector earnings will be challenging if the domestic economy grows sub-trend, and tighter financial conditions are making this task harder.

When the ECB attempts to ease financial conditions in Europe, they tighten them in Australia through the impact on the currency, and the Reserve Bank of Australia has clearly stated that conditions would need to tighten further before domestic rates will be lowered.

2012 financial year from 16 per cent in June 2011 to 4.3 per cent in February 2012, with the largest downgrades occurring in resources (reflecting lower commodity prices) – although financials have also been reduced lately, in light of developments at QBE.

Bank earnings growth is under pressure – primarily due to weak domestic credit growth. The best ways for banks to offset this change is to either increase lending margins (or at the bare minimum stop them contracting further) or to cut costs.

The banks have all announced slight increases in lending rates and broadbased staff reductions (to boost productivity). Although it is tough for the workers, it will be very hard for the banks to maintain their cost base – which was progressively established when credit growth averaged 14 per cent per annum in the 40 years to 2007 – in the prevailing deleveraging environment (where credit growth slowed to just 3.5 per cent in 2011).

Implications for investors In an uncertain market environment, investors will wonder if there is any upside potential in global share markets. While Europe has taken a step back from the brink and the US economy has improved, the prevailing environment is unlikely to reward large and careless exposure to risk.

By the same token though, with term deposit rates now declining and government bond yields remaining near all-time lows, the environment is equally unlikely to reward ‘no risk’.

Importantly, the building blocks for longterm wealth creation (attractive dividends yields and valuations) remain intact. The three factors containing sentiment at present are global macro concerns, the high Australian dollar, and Australia’s high relative interest rates – and these factors appear unlikely to dissipate in the near-term. With markets up for a few months, a further uptick would require macro risks to lessen – which is more likely to occur over the medium term. In this environment, low quality companies or stocks facing sustained structural headwinds are likely to struggle. Consequently, conservative investing (in terms of balance sheets and earnings growth) with a steadfast focus on valuations should serve investors well, as it gives downside protection with upside potential.

Note: This article was featured in Perpetual’s monthly market commentary – Perspective.

Matt Sherwood is head of investment market research at Perpetual.

www.moneymanagement.com.au March 8, 2012 Money Management — 23

Multi-asset funds A change of strategy

As many traditional multi-asset funds disappointed during the GFC, recent times have seen many managers diversify. Deanne Fuller examines the sector.

M

any traditional multi-asset class funds disappointed during the global financial crisis (GFC). They experienced significant drawdowns bought about by being structurally required to hold as much as 70 per cent in equities (35 per cent in Australian equities and 35 per cent in global equities for a typical growth fund) at a time when equity markets were in free fall. Strategic asset allocation benchmarks are designed around long-term historical return, risk (volatility) and correlations expectations. During the GFC, markets behaved nothing like those long-term averages, leading to per verse per for mance outcomes. Investors who thought they were ‘diversified’ were surprised that that was not the case, with bonds and other diversifying assets offering little protection.

Since then, we have seen a number of managers (Ibbotson, Mercer, MLC and Russell) widen their asset allocation ranges and opt for a more dynamic approach to asset allocation. Dynamic asset allocation aims to only take positions over the medium term when markets are extremely over/under valued.

We see this approach to be particularly beneficial when used as a risk management tool (used to protect on the downside when markets are extremely overvalued), rather than specifically trying to generate alpha from the process (market timing bets). Dynamic asset allocation

processes tend to still operate in a constrained environment: + / - 5-10 per cent from strategic asset allocation benchmarks.

Dynamic asset allocation, whilst useful in providing some additional flexibility, does not go far enough for a select group of managers. They argue that markets have entered a period of heightened volatility and the need for flexibility in asset allocation is essential in delivering portfolio risk and return objectives. This includes the ability to ‘go anywhere’, meaning the fund may be completely divested from a particular asset class in periods of severe market stress. It also allows for more opportunistic investing in new asset classes as and when opportunities arise.

These funds aim to limit the extent and severity of drawdowns and deliver a ‘real’ rate of return above cash or inflation.

What sets these funds apart from the traditional multi-asset class funds is the absence of the structural impediments usually associated with strategic asset allocation.

It is not unusual to see a 0–70 per cent asset allocation range around Australian equities for example. Multi-asset class real return funds should not to be confused with ‘hedge funds’, because although they are less constrained than traditional multi-asset class funds, they are not ‘unconstrained’ in the truest sense. These funds generally do not use gearing (MLC Long Term Absolute Return Trust is the

24 — Money Management March 8, 2012 www.moneymanagement.com.au

exception) and will not employ ‘shorting’ at the asset class level.

In a similar vein, multi-asset income funds allow for flexible asset allocations in order to deliver a more reliable income stream to investors. These funds are designed for those investors who have a need for stable and consistent yield, for example retirees. Many fixed income funds currently researched by Lonsec are confined to investing in fixed income securities and are not structured to produce a targeted yield. Instead they are focused on performance against an index or a peer-relative performance. Multiasset income funds are designed to be liquid, invest across a range of incomeproducing assets, and provide a regular, stable income – a level of capital growth to keep pace with inflation and to provide some downside protection.

These new style of funds, while still in their infancy, seek to overcome some of the issues raised post-GFC and are considered to be an exciting development within the space. That said, Lonsec recognises that no one investment style will outperform in all market conditions. Multi-asset real return funds are likely to underperform their more traditional counterparts in strong bull equity markets, but as a trade-off, will potentially provide a much smoother ride for investors. Traditional strategic asset allocation does have its limitations, but provided the underlying assumptions (risk, return, correlations) are revisited regularly, and risk is consid-

ered in its broadest sense (ie, minimising draw-downs, managing liquidity), the traditional strategic asset allocation approach can still be an appropriate way to invest for those who have long term investment horizons.

Diversified Funds While many managers offer solid diversified products, it has proven difficult for one manager to be the ‘best of breed’ across all underlying asset classes at any point in time. Schroders is a notable exception, having consistently rated solidly across all major asset classes over an extended period of time.

A structural limitation of many diversified funds is that they tend to be restricted to a single style within each asset class. The majority of managers will typically have only one capability within each asset class, which will display an inherent style bias (value, growth, etc) consistent with the house philosophy. This can lead to significant underperformance or outperformance depending on market conditions.

Furthermore, it is not easy for a diversified manager to terminate its own investment managers over performance issues or the loss of key investment staff.

Multi-manager funds were originally established to overcome some of the structural limitations associated with diversified funds. In recent years, some of the larger diversified managers (BlackRock, CFS, Schroder, UBS) have sought to diversify their style of exposures within

asset classes, by blending a number of internal capabilities. This has led to somewhat of a blurring of the distinction between multi-manager and diversified funds.

Outflows continue to affect the subsector, with most managers experiencing significant outflows in 2011. When faced with declining funds under management (FUM), it becomes difficult for managers to commit resources, evolve products, and add asset classes, particularly those that may offer good diversification benefits but may be less liquid in nature.

Despite these headwinds, diversified funds continue to play an important role for some investors, particularly those with small account balances. Notably, diversified funds provide a convenient access point to a range of asset classes, with asset allocation determined by experienced professionals. Managers that Lonsec regards highly in terms of capital market expertise include Goldman Sachs, Schroder, and Perpetual. With underlying exposures managed in-house, diversified portfolio managers tend to be closer to the decision-makers at the asset class level, enabling a greater understanding of the particular nuances of an underlying fund.

“

Lonsec believes multiasset income funds will play an important role as investors continue their search for stable yield.

”

Multi-manager Multi-managers share some of the benefits of diversified funds in that they are diversified across asset class; convenient; managed by experienced asset allocation professionals; and provide efficient implementation and rebalancing as well as monitoring. They go further by providing access to underlying funds that may not otherwise be accessible to Australian retail investors, and invest in best-ofbreed managers within each asset class.

Multi-managers tend to be better

resourced than diversified funds, largely due to manager research requiring large teams or the assistance of asset consultants. Objectivity is enhanced, with multi-managers able to more readily redeem from underlying sector specialists if required. In contrast to diversified funds, multi-manager funds have generally evolved more rapidly in terms of incorporating new strategies and dynamic asset allocation approaches.

Multi-managers have, however, often

been criticised for over-diversification and generating index-like returns, diversifying the wrong risk, and being too peer conscious. FUM has grown in this sub-sector, with most managers recording inflows. For the most part, this FUM growth has been at the expense of diversified funds.

Managers with strong manager research capabilities include Advance, AMP, ipac, Mercer and Russell. For the most part, multi-managers are objective about how they select their underlying managers. That said, there are a number of managers who continue to increase their allocations to internal and related parties, potentially comprising the objectivity of the portfolio construction process – particularly when it comes to the removal of underperforming managers.

AMP and Colonial First State hold the largest allocations to internal managers, although MLC is also increasing its exposures to related parties as it expands its NabInvest business.

Multi-asset income and real return funds Lonsec believes multi-asset income funds will play an important role as investors continue their search for stable yield.

For investors who want a real return target, and greater potential certainty in performance outcomes, multi-asset real return funds may be attractive. While most investors have an overall investment objective to target a medium- to longterm return above inflation, few investors specifically manage to achieve this objective. Lonsec sees these funds as playing an important role in filling that gap.

average of close to 15 years experience in both multi-manager and diversified investment teams. The range of average team industry experience is impressive at 10-24 years. Pleasingly, the level of industry experience has continued to rise over recent years across most managers, indicating that where investment team turnover has occurred, managers have tended to fill vacancies with equally experienced candidates.

In terms of size, multi-manager teams (average size of 10) tend to be far larger than their diversified counterparts (average team size of three), due to the labour intensiveness required in undertaking manager research. Multi-asset real return and multi-asset income investment teams tend to be the investment professionals who are managing the more traditional multi-manager or diversified funds within a funds management business.

In Lonsec’s view, on-the-ground coverage, both in Australia and in other regions, is important when researching and selecting managers. As expected, those managers who undertake all their own manager research tend to have large teams (eg, Russell, MLC) whereas those who use third party research tend to have smaller teams (e.g. typically less than six).

Turnover

People and resources

Whilst some minor staff movements within the Multi-Asset Class universe were evident throughout 2011, on the whole, the sector remained relatively stable. The most notable staff changes occurred at manager level, where a degree of corporate uncertainty was evident, in particular INGIM Optimix and AXA/ipac.

Reassuringly, the level of industry experience within the multi-asset class sector is high and generally increasing with an

Deanne Fuller is an investment analyst at Lonsec.

Note: This column is part of Lonsec’s Multi-Asset Class Sector Review. For the first time in 2011, Lonsec bought diversified and multi-asset multi-

Disclaimer: Diversified and multi-manager funds follow a more traditional approach to asset allocation, combining long-term strategic asset alloca-

manager funds together under the one multi-asset class sector review. Furthermore, a number of developments have occurred within the multi-

tion with shorter-term market views (tactical asset allocation), reflected via relatively small deviations (+ / - 2-5 per cent) away from the long-term

asset class sector over the last 12–18 months that have warranted Lonsec introducing two additional sub-sectors to the review – multi-asset

SAA positioning. Throughout the report, this style of investing is referred to as ‘traditional’.

income and multi-asset real return.

www.moneymanagement.com.au March 8, 2012 Money Management — 25

Toolbox Special disability trust improvements Changes to special disability trusts, which have now been legislated, are aimed at improving flexibility and taxation treatment. Harry Rips outlines some of the implications.

S

ince 20 September 2006, parents and immediate family members have been able to set up special disability trusts to meet the care and accommodation needs of an individual with a severe disability. Special disability trusts provide generous social security concessions for both the beneficiary and family members who gift to the trust.

However, their restrictive nature – coupled with taxation pitfalls and other complexities – has resulted in a low number of trusts being established.

In the last three Federal Budgets, the Government announced changes to special disability trusts which have now been legislated. These changes are aimed at improving flexibility and taxation treatment and should result in an increase in the number of trusts established.

Social security benefits Concessions for the principal beneficiary Special disability trust assets held up to the concessional limit ($578,500 from 1 July 2011) are exempt from the social security assets test for the principal beneficiary of the trust. Where the primary residence is held by the trust, it will also be excluded from the assets test. In addition, income or distributions from the special disability trust are not assessable under the social security income test.

Concessions for immediate family members A gifting concession limit of $500,000 (combined) is available to immediate family members who contribute to a special disability trust on behalf of the principal beneficiary. To be eligible for the concession, immediate family members must be at (or over) age, or service pension age, and receiving a social security pension when the contribution is made to the trust.

Tax concessions at last While social security concessions have existed for some time, the Government has only recently implemented changes to improve the taxation of special disability trusts.

trustee at the highest marginal tax rate, plus Medicare levy. Due to the restrictions on how special disability trust income can be spent, it is not uncommon for some unexpended income to remain in the trust. To prevent unexpended income from being taxed at 46.5 per cent, the Government introduced legislation that taxes net income of a special disability trust at the principal beneficiary’s marginal tax rate. This rule is effective from the 2008/09 income year.

Main residence exemption The Government has extended the capital gains tax main residence exemption to include a residence owned by a special disability trust – as long as it is used by the principal beneficiary as their main residence. This measure is backdated to 1 July 2006.

Other changes The following changes have been backdated to apply from 1 July 2006: • A capital gains tax (CGT) exemption on assets transferred into a special disability trust for nil consideration; • Equivalent taxation treatment for trusts established under the Social Security Act 1991 and Veteran’s Entitlement Act 1986; and • A CGT exemption where the principal beneficiary dies and their main residence is distributed to a recipient who subsequently sells the property within two years.

Stamp duty considerations [ital] Some states and territories offer stamp duty concessions for special disability trusts. It’s a good idea to have a specialist confirm stamp duty concessions prior to transferring property into the trust.

Improved functionality measures One of the criticisms of special disability trusts was that trust funds could only be spent on care and accommodation costs.

This was found to be very restrictive when funds were required for other purposes such as medical expenses or maintenance costs. In response, from 1 January 2011 the Government broadened the range of expenses to include: • Medical expenses, including membership costs for private health funds, and maintenance expenses for trust assets and properties; and • Up to $10,250 (2011/12) in a financial year on discretionary items not related to the care and accommodation needs of the beneficiary.

In addition, a beneficiary is now able to work up to seven hours a week in the open labour market.

Tips and traps of establishment Trust income Generally, trust income to which no beneficiary is presently entitled is taxable to the

It is important to follow the correct steps when establishing a special disability trust.

A trust will be assessed under normal rules

26 — Money Management March 8, 2012 www.moneymanagement.com.au

for both social security and tax purposes where a beneficiary does not satisfy the definition of severe disability under the Social Security Act 1991. As such, a beneficiary assessment should ideally be completed before the trust deed is prepared to avoid unnecessary set-up costs.

Special disability trusts can be established through a trust deed or via a will; however, the trust must contain specific clauses in order to be eligible for the concessions. The compulsory clauses can be found in the ‘model trust’ deed available on the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) website.

The rules To qualify as a special disability trust, it must meet the following requirements: • Can only have one beneficiary; • Must not accept any asset transferred by the principal beneficiary or their partner, unless the contribution is funded by a bequest or superannuation death benefit within three years of receipt of the bequest or superannuation death benefit; • Only immediate family members will receive the gifting concession – which includes relatives such as parents, grandparents and siblings; • Trustees must be carefully selected – for example, they must be Australian residents and eligible to act as a trustee of the trust; • The trustee must act in accordance with the terms of the trust. This means investing money with care, applying income appropriately, avoiding unnecessary expenses and seeking professional advice when required; • The trust is allowed to pay for the costs of care (eg, aids and vehicle modifications) and accommodation (eg, modifications to the beneficiary’s residence). Expenditure must be reasonable and discretionary expenses (eg, toiletries, recreation and leisure activities) should not exceed the indexed limit, which is $10,250 for 2011/12; • Third parties must not benefit from the trust’s expenditure. The exception is an ‘incidental benefit’ – ie, benefit of a non-cash nature that is minor and provided on an infrequent and irregular basis; • When the beneficiary dies, the trust terminates and the trust’s assets will vest in the residual beneficiaries as specified in the trust deed.

Failure to meet these requirements can result in the concessional treatment of the trust being stripped, resulting in the trust being taxed under normal trust rules and potentially resulting in deprivation for immediate family members who have contributed within five years from the date of non-compliance.

Conclusion Special disability trusts are an important vehicle to ensure that severely disabled family members are taken care of financially and maintain their social security entitlements. Advisers should consider such structures for eligible individuals in light of recent legislative changes.

Harry Rips is technical services consultant at Count Financial.

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 can submit their answers online at www.moneymanagement.com.au.

1. From 1 January 2011, the principal beneficiary can work for up to: (a) 7 hours a week (b) 10 hours a week (c) 7 hours a fortnight (d) 10 hours a fortnight 2. It is suggested that assessment confirming a person with a disability is an eligible beneficiary for a special disability trust is completed: (a) After the trust deed has been prepared by a qualified solicitor. (b) Before the trust deed has been prepared, to avoid incurring costs in setting up the trust in the event that the person is not assessed as an eligible beneficiary. (c) Within 12 months of setting up the trust deed. (d) A beneficiary assessment is not required, receiving the disability pension is sufficient to determine that the person is an eligible beneficiary.

3. From 2008/09, unexpended income of a special disability is: (a) Taxed at the highest marginal tax rate plus Medicare levy. (b) Subject to flat concessional tax of 15%. (c) Taxed at the beneficiary’s marginal tax rate. (d) Subject to nil tax at all times.

For more information about the CPD Quiz, please contact Milana Pokrajac on (02) 9422 2080 or email milana.pokrajac@reedbusiness.com.au.

Appointments

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

Move of the week PATHWAY Licensee Services – formerly Paragem Dealer S e r v i c e s – has announced the appointment of Ka t e Humphries as general manager.

Humphries has experience in providing support to licensees and planning practices in the financial services industry.

She had previously held senior roles at FSP, DKN/Lonsdale and Zurich in addition to running her own consulting business.

Humphries will work closely with the existing Pathway team.

Paragem founders Ian Knox and Charlie Haynes will continue as directors of Pathway to ensure business continuity.

PERPETUAL Investments has announced a number of key changes to its equities team line-up.

After 10 years on sabbatical, S e a n Cu n n i n g h a m h a s re t u r n e d t o Pe r p e t u a l a s a senior equities analyst and will be focussed on developing a new high-conviction yield strategy.

In regards to the Perpetual Industrial Share Fund, current head of equities Matt Williams will step down from 1 April, 2 0 1 2 a n d b e re p l a c e d by deputy head of equities Charlie Lanchester.

Lanchester will be responsible for 70 per cent of the fund, while the remaining 30 per cent will be managed by senior

analyst Vince Pezzullo.

Williams will remain the portfolio manager of the Australian Share strategy and the Pure Value Fund.

In a six month handover process, QBE Insurance Group has announced that John Neal will succeed long-serving group chief executive Frank O'Halloran from 17 August, 2012.

As the former chief executive officer of specialist c o m m e rc i a l m o t o r i n s u re r Ensign, Neal has considerable underwriting skills.

For eight years he served as chief underwriting officer and chief operating officer in QBE's European operations before

heading to Sydney in 2011 to manage the company's global underwriting operations.

As QBE's current CEO of global underwriting operations, Neal facilitated global forums to drive both strong underwriting discipline as well as operational and cost efficiencies.

Aon Hewitt Wealth Managem e n t has announced the appointment of Prue Petinsky as the new head of product development.

Petinsky, who headed product management for the Asgard platform at BT Financial Group until late 2011, will primarily be responsible for the development of Aon Master Trust.

Her previous roles in the financial ser vices industr y involve distribution, customer service, operations, project management, people management and marketing.

The company has also announced the appointment of Robert Olney as head of practice solutions and Je re m y Lubrano as head of alliances.

While Olney takes on a newly created position to strengthen Aon Hewitt's relationships with its financial advisers, Lubrano

Opportunities MARKETING MANAGER Location: Melbourne Company: Lloyd Morgan Description: An industry superannuation fund is currently looking for a marketing manager to support the administration team.

In this role you will be responsible for strategic planning and budgeting of marketing, implementing marketing campaigns, attracting new members to the fund and assisting management with decision-making and operations.

The successful candidate will have a strong background in superannuation, ideally with an industry fund. You will also have strong marketing and management experience and a business or marketingrelated degree.

This role is a great opportunity to strengthen and further develop your existing marketing, management and operational skills.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Stewart at Lloyd Morgan - (03) 8319 7888, sthomas@lloydmorgan.com.au

AMP HORIZONS ACADEMY Location: Australia-wide Company: AMP Horizons Academy Description: AMP is accepting applications

will be closely involved with the company's alliance partners.

Australian Unity Investments (AUI) has appointed Fiona Dunn as general manager – joint ventures and institutional.

Fiona Dunn Reporting to AUI chief executive officer David Bryant, Dunn moves into her new role following the appointments of Stephen Alcorn as head of institutional and Kara Gilmartin as head of joint ventures. Both Alcorn and Gilmartin will now report to Dunn.

Dunn has more than 22 years' experience in financial services having held a number of senior business advisory roles. She was previously general manager of

Perpetual's wholesale business, and a division director with Macquarie Bank's funds management division.

Commenting on her appointment, Bryant said Dunn had a proven track record building successful businesses, predominantly within the institutional space, and an ability to create and maintain strong business relationships.

Zurich Australia has appointed Paul Bedbrook and Eve Crestani as non-executive directors on the Zurich Investment Management board.

As the former chief executive officer of ING Australia and ING Asia Pacific, Bedbrook has more than 30 years experience in financial services. He currently serves as a non-executive director with Credit Union Australia and a director of the National Blood Authority.

Crestani has more than 35 years experience in financial services and professional services industries, as well as a background in law and management. She currently serves on the board of direct o r s a t Au s t r a l i a n Un i t y , Mercer Investment Nominees and Booking.com.

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

for its 2012 AMP Horizons Academy 12month training program.

The paid traineeship begins with a 10week course at the AMP’s academy in Sydney. Graduating as a competent financial planner, you will be provided with a position in your home state and receive additional on-the-job training for nine months in an AMP Horizons practice. You will be mentored by experienced financial planners throughout the year.

The successful applicants will have a Diploma of Financial Services (Financial Planning) or be RG146-compliant.

You will be rewarded with a fast-tracked career in the company and a competitive training salary.

To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact AMP – 1300 30 75 44

SENIOR PARAPLANNER Location: Adelaide Company: Terrington Consulting Description: A financial planning business is seeking a senior paraplanner to assist their network of financial planners in strategy development and the construction of SOAs. Reporting to the paraplanning manager, you will be responsible for the preparation of SOAs for superannuation, SMSFs,

gearing, investments and risk. As a senior member you will also be involved in the training and development of junior-tointermediate colleagues.

To be successful, you will have excellent technical and interpersonal skills and either have, or be in the process of completing, a DFP or Advanced DFP. To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting - 0404 835 895, myra@terringtonconsulting.com.au

TAX CONSULTING MANAGER / ASSISTANT MANAGER Location: Adelaide Company: Terrington Consulting Description: A mid-tier firm is seeking a tax consulting manager to provide tax advice and consulting services to a diverse client base.

In this role, you will also provide technical support to staff and identify opportunities to improve tax-related client strategies. You will deal with high-level and complex tax issues, provide technical tax planning advice and resolve issues in accordance with ATO and legislative rulings.

To be successful, you will be CA or CPA qualified, possess a solid grounding in ATO legislation, and have experience within a

business services or consulting environment.

Although this is a fulltime position, candidates seeking part-time employment will also be considered.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Jack at Terrington Consulting 0412 690 268, jack@terringtonconsulting.com.au

TECHNICAL PARAPLANNER - SMSF SPECIALITY Location: Adelaide Company: Terrington Consulting Description: A boutique financial planning firm is seeking a senior paraplanner with specialist skills in SMSFs. You will be responsible for producing SOAs using financial planning software, assisting with ASIC and licensee compliance obligations, and researching and reviewing client portfolios.

Experience with XPlan software and a particular interest in, and in-depth knowledge of, SMSFs would be a distinct advantage in securing the position.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting 0404 835 895, myra@terringtonconsulting.com.au

www.moneymanagement.com.au March 8, 2012 Money Management — 27

Outsider

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

Ask me no questions

“

Out of context

“Have a go at using the microphones, we paid a lot of

OUTSIDER thinks he now understands why the Government was so reluctant to refer the issue of default funds under modern awards for review by the Productivity Commission.

He believes that reluctance was based on the old Parliamentary Party maxim that you never ask a question to which you don’t already know the answer.

And, when Outsider last week read the issues paper released by the Productivity Commission relating to its inquiry into default funds under modern awards, it became very clear the Government cannot know the ultimate answer to the question it has asked.

The Productivity Commission’s issues paper raises a number of questions about the

current default funds regime.

Not the least of which is whether, obliquely, the regime may amount to an industry funds monopoly, and whether the industrial judiciary – aka Fair Work Australia – should even be involved.

As well, the Commission has posed the following questions: Is the current process for listing default superannuation funds

in awards transparent? Is it competitive? Is there a level playing field between industry and retail funds?

Outsider may only be guessing, but he feels the questions being posed by the Productivity Commission may have already given rise to some serious discomfort within the boardrooms of a number of industry funds.

Planners in a League of their own WELL, it’s that time of year again – the time when the days grow shorter and cooler, the summer tans begin to fade and we all settle in for another long year of hard graft, hoping that the global markets will be slightly kinder to our battered nest eggs.

And for the sports-mad among us, it’s also the time when our plethora of winter footy codes get underway. By the time you read this, all the rah-rahs in financial services will have witnessed their second round of Super 15s action and those in the southern and western states who may be more closely following the AFL’s NAB cup will also be two rounds in.

And those of us in New South Wales and Queensland with a slightly more blue-collar leaning will have just enjoyed the opening round of the National Rugby League.

It is the last of these that has proved a significant distraction for one of Outsider’s

younger colleagues over the past week, as he spent many a late night hunched over a computer screen attempting to assemble the perfect Rugby League fantasy football team.

You see, it appears that said colleague has been talking himself up around the traps as a bit of a fantasy football guru.

Which seemed all well and good at a variety

of pre-Christmas functions, but come the new season he has now found himself in an industry league alongside 15 financial services types who put their advanced analytical skills to use for a living.

And as this chap searches frantically for pricing discrepancies in the player market and wonders week to week which players to buy, hold and sell, it has apparently now dawned on him that a group of 15 financial services professionals who analyse, buy, hold and sell company stocks on a daily basis may provide stiffer competition than that to which he is accustomed.

For his part, Outsider’s colleague is hoping raw fanaticism provides him with some extra insights and even a competitive edge.

It’s fair to say Outsider eagerly looks forward to reporting on the chap’s progress come September.

Born to be mild OUTSIDER has been around this industry long enough to know, if not entirely understand, the various quirks exhibited by many in the financial services industry.

For example, he knows quite a few chaps who use cycling as an excuse for shaving their legs and wearing lycra.

So it should come as no surprise that Outsider is also aware of three individuals who have a thing for leather and, more disturbingly, throbbing mechanical contraptions between their legs.

Outsider is never afraid to name and shame and so points the finger

at you, Brian Thomas, Lynn Ralph and Ray Griffin.

The trio have once again decided to slip into their leather jackets, jump on their motorbikes (throbbing mechanical device) and make their way to destinations such as Port Macquarie, Coffs Harbour and Gloucester – all for charity.

In fact, their journey will be part of Corners for Kids motorcycle rally, which raises money for the Inspire Foundation and the Create Foundation.

Outsider has it on good authority that the financial services industry raised $600,000 since the

28 — Money Management March 8, 2012 www.moneymanagement.com.au

inception of this event, which only points to the fact that Thomas, Ralph and Griffin are not the only ones enjoying tight leather outfits.

The Corners for Kids charity ride begins in Gosford on Thursday, 8 March. Unfortunately, Outsider had already RSVP-ed for another event – the picnic celebrating the International Day of Women and feminism.

money for those.”

Perennial Investment head of retail funds management Brian Thomas urges the audience to realise their assets at the Perennial annual conference.

“Listening to what the taxi driver told you might not be the right decision for you.”

Pick your experts carefully, according to NAB Private Wealth chief investment officer Philip Kimball.

“You can’t fall when you’re on the floor” BT Financial Group chief economist Dr Chris Caton says the US economy can’t dip any lower.