money management (june 14, 2012)

www.moneymanagement.com.au

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DIRECT PROPERTY

Cleaning up the actTHE two biggest problems for direct property during the global financialcrisis were gearing and illiquidity. At the same time, issues related tomanager capability and asset quality have not helped thesector either.

But industry experts claim direct property hascleaned up its act, with gearing leverage being inthe 35-50 per cent range, with much higher qual-ity assets and distribution focused on realincome.

There has also been an increased focus ongetting retail investors to understand andaccept the liquidity limitations of the assetclass, with fund managers doing the same.

Another thing working for the sector atpresent is the lack of volatility comparedwith equities or even listed property.

However, the sector is only seeing“early adopters” – such as larger deal-erships, boutique advice groups andsophisticated direct investors – get-ting on board. While Australiandirect property appeals to foreign-ers, the industry is yet to see anotable increase in interest fromdomestic investors.

But despite the slow uptake,most players in the sector areoptimistic the solid fundamentalswould bring this asset class toprominence.

For more on direct property, turnto page 14.

By Bela Moore

CONFUSION appears to be the outcome ofthe Government’s failure to answer ques-tions about the provision of intrafund advicein the latest tranche of Stronger Super draftexposure.

Although financial planners balked at theidea super funds would be exempt fromsome of the Future of Financial Advice provi-sions and the super industry has beenpushing for leniency in tackling members’personal finance issues, both sides havedemanded the Government nail downissues surrounding intrafund advice.

King and Wood Mallesons partnerMichelle Levy said the industry was expect-ing tranche three of the Stronger Superdraft exposure to answer questions raisedin the Cooper Review about compulsoryintrafund advice. Trustees are looking forrelief from the obligations around person-al advice, she said.

“It’s not a rule about giving intrafund advice.It’s not permission to give intrafund advice. It

doesn’t require you to give intrafund advice,and if you choose to give intrafund advice it’snot offering you any relief,” she said.

“All it really does is show that where you dogive advice it’s got to be charged to themembers [to whom] you’re giving theadvice,” Levy said.

Margaret Stewart, general manager ofpolicy at the Association of SuperannuationFunds, said the draft exposure raised morequestions than it answered.

“The way that the exposure is drafted itcould read as though that (product advice)was ongoing advice, which then pulls it outof the intrafund space and you have a wholeset of obligations around ongoing advice,”she said.

Stewart said intrafund advice shouldextend to transitioning from an accumula-tion to a retirement product under the sametrustee and was an area that also neededclarity.

Corporate Superannuation SpecialistAlliance president Douglas Latto said theprovisions left a “massive, open-ended

question” about how to charge for all theservices it provides.

“They’re not part of intrafund advice, butthose services still have to be delivered andthe big question is how can we be paid todeliver those services if it’s not part of intra-fund advice?” he said.

Latto said funds will find a fair and reason-able way of legally rewarding advisers for thoseservices, while Stewart said some industryplayers would struggle with how to charge forthings like general and practical advice.

The ambiguity of charging for intrafundadvice has left a lack of consistency, withparticular confusion around whether tocharge a dollar or percentage amount, Lattosaid.

“I can assure you all the fund providerswould be speaking to their legal peopletrying to get their interpretation of what’sthere, but I’m already seeing different inter-pretations from different firms,” he said.

He said it was unfair to charge a fee to themembership base, which would beinequitable if charged at a percentage.

Stewart was confident the next tranchewould bring clarity, but Levy said it wasunlikely to be helpful.

“I think they’re [trustees] probably notgoing to get anything. You might get somestatements from ASIC in its regulatory guideabout what trustees can do,” she said.

By Tim Stewart

DISILLUSIONMENT with the fundsmanagement industry and ahunger for transparency amongclients is fuelling a move towardsdirect equities.

Gold Seal director Claire Wivell-Plater said she is helping plannersvary their licences in order to“expand the level of discretionarymanagement they’re doing”.

“We’re seeing a trend towardsadvisers being more intimatelyinvolved with asset selection andusing direct equities rather thanmanaged investments,” she said.

According to MultiPort technicalservices director Phil La Greca, theshift away from managed funds isinevitable given the ongoing volatil-ity of markets.

“People want to know: ‘Why ismy fund doing so badly? Is itbecause I’m being charged a for-tune, or is it because I’ve pickedbad assets?’” he said.

The costs involved with man-aged investments are a big deter-rent for self-managed superannua-tion fund (SMSF) trustees whoalready have a layer of costs asso-ciated with the upkeep of their

fund, according to SMSF Profes-sionals’ Association technicaldirector Peter Burgess.

“For some trustees it defeatsthe purpose of having an SMSF ifyou’re just going to invest in amanaged fund,” he said.

Instreet managing directorGeorge Lucas said his firm is look-ing to acquire private stock brokerfirms in order to partner with advis-ers in the direct equities space.

Instreet already sits on theinvestment committees of severaldealer groups, and is in theprocess of finalising its direct equi-ties offering for planners.

Lucas put the growing interestin direct equities down to technol-ogy changes, the growing popular-ity of SMSFs and an increasingdesire for transparency.

When it came to technology,planners can now buy advancedsoftware off the shelf, rather thanhaving to use something like theBT platform, Lucas said.

La Greca said advisers whowant to go direct tend to havethree avenues in front of them.

Firstly, they can acquire an

Industry wants answers on intrafund advice

Continued on page 3

Move to directequities is on

RISK FOR FREE: 2 | BEHAVIOURAL FINANCE: Page 22

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

Michelle Levy

Swimming with sharksA

mid the fall-out from thecollapse of Trio Capital hascome the suggestion that finan-cial planners should be required

to warn clients establishing self-managedsuperannuation funds (SMSFs) that theyare entering a higher risk environmentthan that which pertains to funds regu-lated by the Australian Prudential Regula-tion Authority (APRA).

Under questioning during Senate Esti-mates last month, Australian Securities andInvestments Commission (ASIC) commis-sioner John Price suggested that the regu-lator’s surveillance of planners had indicat-ed that clients entering into SMSFs werenot being appropriately warned of the risksof theft or fraud.

Price then added that, of course, plan-ners were under no statutory obligation toprovide such a warning.

Price’s answers to the Senate Estimatescommittee were being given the context ofthe collapse of Trio Capital and the fact thatSMSF trustees did not have access to thesame compensation which was providedto members of a number of APRA-regulat-ed funds. That compensation was paid forvia a levy raised against other APRA-regu-lated funds.

But the very fact that both SMSFs and

APRA-regulated funds were caught up inthe Trio collapse should stand as evidencethat both sectors were exposed to equal risk– with the only difference being that onesector had access to an industry-financedcompensation scheme.

Contrary to the assertions of the Minis-ter for Financial Services and Superannu-ation, Bill Shorten, the SMSF trustees whosuffered losses as a result of the Triocollapse were not “swimming outside theflags” – far from it. They were, in fact, swim-ming on a patrolled beach where the life-savers in the form of ASIC and APRA haddozed off.

While it is to be hoped that any thoroughfinancial planner would point out to a clientthat SMSFs are not covered by the samecompensation arrangements as APRA-regulated funds, there would seem to beno prima facie reason for either the Govern-ment or the regulators to impose a partic-ular obligation on planners to suggest thatSMSFs are any less safe than APRA regulat-ed funds.

In fact, those suggesting that such anobligation should be imposed might care toreflect the degree to which the superannu-ation balances of members of the MTAASuper Fund were undermined by poordecisions and for which they will not becompensated.

Rather than seeking to impose yetanother obligation on planners, theGovernment and the regulators would bebetter served examining ways in which thecompensation available to members ofAPRA-regulated funds can be equitablyextended to SMSF trustees.

Of course, this should all be done at thesame time as recognising that the collapseof Trio Capital was the result of blatantfraud rather than any particular failings onthe part of planners.

– Mike TaylorABN 80 132 719 861 ACN 000 146 921

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

[email protected]

“There would seem to beno prima facie reason foreither the Government orthe regulators to impose aparticular obligation onplanners to suggest thatSMSFs are any less safe thanAPRA regulated funds. ”

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Average Net DistributionPeriod ending Mar '1210,267

By Chris Kennedy

BENDIGO Wealth’s scaledadvice phone service,launched in February, hasdoubled its roster from fivewealth consultants to 10.

Bendigo Wealth’s head ofwealth markets Alex Tulliosaid that number shouldincrease to 12 by the end ofthis month and the group isnow working on furtherrecruitment in Sydney andMelbourne. The next intakeof consultants will alsoinclude advisers who cangive full advice over thephone, which will particular-ly assist customers in remotelocations, she said.

Tullio attributed the rapidtake-up of the service to pent-up demand from customerswho were looking for simplepiece-by-piece advice ratherthan full holistic advice,particularly in rural areaswhere the bank does nothave a financial adviser posi-tioned (currently Bendigohas around 470 branches and68 full service advisers).

Bendigo Wealth’s seniormanager, strategic partnersand wholesale, Diego DelRosso said the main driver ofthe demand had so far beensuperannuation-related.

“Conversations are aroundthe appropriateness of exitingtheir super fund, and consol-idation is a big part of thatconversation,” Del Rosso said.

Tullio said an addedbenefit of having those more

holistic conversations wasthat there are some who willhave more complex needs, soin one way the service isvetting customers who canthen be referred to a fullservice adviser if needed.

Tullio said the service ismostly being promotedthrough branches and finan-cial planners in the field,while there has been someinterest from the independ-ent financial adviser spaceas well.

Del Rosso said BendigoWealth is currently in talkswith a couple of groupsaround providing a solutionfor their C and D or low superbalance customers, poten-tially running campaigns forthem via the wealth consult-ants team.

“We’re working through justhow that’s going to work andwe’re talking to one group inparticular where we couldpotentially pilot that with theircustomer base,” he said.

www.moneymanagement.com.au June 14, 2012 Money Management — 3

News

Bendigo Wealth phoneadvice service doubles

Move to direct equities is on

authorisation to advise and deal in securities from the Aus-tralian Securities and Investments Commission.

“That’s the simplest approach. You make recommenda-tions on the basis that you will place the orders on the client’sinstructions – but that’s where the time-sensitive stuff comesinto play,” La Greca said.

Alternatively, the adviser can become a responsible entityand set up what is effectively a managed investment scheme(MIS) with a managed fund structure, La Greca said.

But there is limited transparency for the client with the MISmodel, he said.

“The client doesn’t see what the manager’s doing … theydon’t know which assets he’s bought or sold, or how frequentlyhe’s turning them over,” he said.

Finally, advisers can go about adding a managed discretionaryaccount (MDA) authorisation to their licence, said La Greca.

“This has bits from both worlds. It looks very similar to anMIS, but the difference here is it’s transparent to the clientswho will see the underlying assets,” he said.

According to Wivell-Plater, MDAs have complex compliancerequirements – but they’re all upfront, removing the time-sen-sitivity issue.

“The only ongoing obligation is to report to the client quar-terly and annually,” she said.

By Tim Stewart

FINANCIAL services stalwart AlanKenyon has retired from the indus-try, moving to New Zealand for per-sonal reasons.

The succession planning arrange-ments at Kenyon Partners havekicked into place, with the ownershipof the business transferring to formerassociate director (now chief execu-tive) Paul Tynan and chairman VinceVosso.

In a letter to members, Kenyonsaid Vosso will take over controlof Kenyon Partners’ Australianoperations from 25 June 2012.

Tynan moved into the role ofchief executive on 24 May 2012,and will be the primary contact forany queries relating to the changeof ownership and direction.

“Vince and Paul will continue tobuild on the Kenyon Partners foun-dations as the leading mergersand acquisitions specialists in Aus-tralia, focusing on the financialservices industry,” said Kenyon.

“[Kenyon Partners] will continueto provide a highly personal serv-ice – understanding that everybusiness is d i f ferent – anddevelop strategies to suit busi-ness, personal and stakeholders’needs,” he said.

Tynan said he had had a longcareer wi th in AMP, and unt i lrecently was the chief executive ofa boutique financial planning prac-tice “until Alan asked me to comeover for his succession plan lastyear”.

“Vince has been very success-ful – he’s owned four financial

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

Industry stalwart Alan Kenyon retires

Continued from page 1

Diego Del RossoAlan Kenyon

News

By Mike Taylor

THE Australian Securities andInvestments Commission (ASIC)has confirmed it was consulted ontechnical issues around opt-in andcodes of conduct at around thesame time the Financial PlanningAssociation (FPA) was said to benegotiating with the Industry SuperNetwork (ISN) around last-minutechanges to the Future of FinancialAdvice (FOFA) legislation.

Confirmation has come fromASIC commissioner Peter Kell, whotold Senate Estimates that while hecould not recall the details “therewere some late consultations withASIC about some aspects of thatchange”.

Kell had been specifically askedby the Opposition spokesman onFinancial Services, Senator MathiasCormann, whether ASIC wasconsulted about the last-minuteamendment which, on the face of

it, resulted from “a last-minuteagreement between the ISN andFPA and the Minister for FinancialServices and Superannuation, BillShorten”.

Asked for further detail byCormann about subsequent state-ments he had made about opt-inbeing a part of codes of conduct,Kell said what he had outlined wasthat ASIC would be lookingtowards “a provision that broadlyachieved the same sorts of

outcomes as the opt-in require-ment as part of a code if the appli-cant wanted that code to satisfy the‘obviate the need’ issue”.

“We do not have a fixed view onexactly how that should be imple-mented, but at this stage we wantedto send a signal to industry that theywere going to have to give somecareful thought to that, and we arealso obviously obtaining adviceourselves on how that will work incodes in practice,” Kell said.

Plannersnot loyal toplatformsBy Milana Pokrajac

DESPITE the satisfactionwith platforms reaching anine-year high, a new surveysuggests 40 per cent offinancial planners wouldhappily switch providers forlower fees.

Furthermore, 18 per centof planners would switch plat-forms for better features.

This is according to Invest-ment Trends’ April 2012 Plan-ner Technology Report, whichwas based on a survey of1,412 financial planners, con-cluded in April.

“There is a very strong rela-tionship between satisfactionand switching behaviour,”said Investment Trendssenior analyst Recep Peker.

“Relative to their marketshare, platforms with loweroverall satisfaction ratingsfrom their users lose a higherproportion of planners toother platforms,” he added.

The same report found sat-isfaction with platformproviders has reached a nine-year high, with Asgard InfinityeWRAP receiving the highestrating, closely followed byColonial First State’s (CFS’)FirstChoice and FirstWrap.

Peker said the result fol-lowed around $130 millioninvested in new technologyby platform providers.

“The platform industry hasmade significant improve-ments – the greatest areas ofimprovement being integrationwith planning software, BDMand dealer support, andadmin fees,” Peker said.

BT Wrap, CFS FirstChoiceand Macquarie Wrap con-tinue to lead in terms of mar-ketshare, with recent figuresshowing BT Wrap adminis-tered close to 50 per cent ofall funds.

ASIC confirms involvement in 11th-hour FOFA deal

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News

By Mike Taylor

THE Australian Prudential RegulationAuthority (APRA) has said it will bebeginning consultations with the finan-cial services industry about produc-ing superannuation fund performancedata capable of allowing consumersto compare funds at investmentoption level.

The regulator has made its inten-tions clear during Senate Estimates,with APRA deputy chairman Ross

Jones confirming the data whichwould be published would go “farbeyond” what was currently beingused for prudential purposes.

Investment level performancecompiled by APRA would be directlyrelevant to planners assisting theirclients and meeting best interestsobligations.

“The consultation process will occurin the second half of this year. It willcertainly go beyond what we have,”he said. “It will most definitely pick up

investment options. It will also providemore granular information than is cur-rently available. It is information thatgoes beyond the standard prudentialpurposes,” Jones said.

Under questioning from TasmanianLiberal Senator David Bushby, Jonesacknowledged that it might not bepossible to look at the around 14,000investment options currently availablein the superannuation sector.

“It may well be that we do not godown to every single investment

option. It may well be that wechoose the top 10 or 20 or some-thing,” he said. “We will need tolook at and discuss with industrythe merits,” Bushby said.

“If you are going down to the cir-cumstances where a particular fundhas hundreds of investmentoptions, it may not be in the fund’sinterest to supply all that informa-tion in terms of cost. It may well bethat our systems are not capable ofprocessing it,” he said.

‘Closed shop’ indefault fundsacknowledged

THE Productivity Commis-sion has signalled it will berecommending vastly moretransparency be injected inthe process of selectingdefault superannuationfunds under modernawards.

At the same time, theProductivity Commissionhas confirmed it isprepared to consult withthe competition regulator– the Australian Competi-tion and ConsumerCommission – about whatsome people had refer-enced as the “closed shop”aspects of the currentdefault fund arrangements.

Giving evidence before aSenate Estimates commit-tee last week, ProductivityCommission deputy chair-man Mike Woods referred tosubmissions received onthe default fund issue andsaid that across virtually allsubmissions “there is recog-nition that transparencycould be increased”.

He said this applied notonly to the criteria used forselection, “but the processby which those funds arethen considered for nomi-nation in awards couldimprove by way of havinggreater transparency andhaving clearly definedcriteria”.

Under questioning fromthe Opposition spokesmanfor Financial Services,Senator Mathias Cormann,Woods agreed that was notan open, transparent,merit-based selectionprocess.

He also agreed withCormann’s contention “thatthe current process is a closedshop type arrangement”.

The Productivity Commis-sion indicated it would beissuing its interim report onthe default fund arrange-ments later this month.

APRA flags consultation on investment level performance

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News

Referral system won’t threatenaccountants’ independence: IPABy Tim Stewart

THE Institute of Public Accoun-tants’ (IPA’s) affiliation with MLCand AMP/AXA will not threaten itsmembers’ independence, says IPAgeneral manager Vicki Stylianou.

IPA members will be providedwith online referrals to financialplanners from the two institutionsas part of the IPA’s FinancialServices Package.

“A lot of our members say ‘Idon’t want to be thrown into[MLC and AMP/AXA] products’,but it is very much not just theirproducts,” Stylianou said.

She pointed out that very fewof the products on the two groups’Approved Product Lists weremanufactured in-house.

“Something like two out of 30-35 of the products are theirs. Thatwas one of the things we looked atvery closely, because it was one ofthe biggest concerns of ourmembers,” Stylianou said.

Institute of Charted Accountants(ICA) head of superannuation LizWestover said it was “unfortunate”that a lot of accounting firms had

“gone down the path” of establish-ing their own referral systems withfinancial planners.

“A lot of accountants say to methat they want to maintain theirindependence. They don’t want tobe affiliated with a financial plan-ning dealer group because it mightmuddy the waters,” she said.

Many accountants tend tohave relationships with financialplanners away from their prac-tices, she added.

“But even when you refer off toa financial planner, the funnything is (and if I had a dollar forevery time this happened to me)the number of times they comeback with that plan and say ‘whatdo you think?’” Westover said.

As the law currently stands,Westover said, accountantscannot tell their clients what theythink of the plan – they can onlyadvise on the tax aspects.

The ICA has been lobbying theGovernment for a replacement tothe accountants’ exemption(which allows accountants toadvise on the set-up and closureof self-managed superannuation

funds) that gives accountantsbroader scope to provide basic“strategic” advice themselves,Westover said.

For example, she said, account-ants should be able to advise theirclients to contribute an extra $20per week into their superannua-tion – rather than having to referthe client to a financial planner.

“Getting your clients to spendseveral thousand dollars [onfinancial advice] to get potential-ly $20 a week into superannua-tion doesn’t make sense,” West-over said.

SuperStream to cost industryan additional $250 millionBy Mike Taylor

THE introduction of the Government’sSuperStream initiative is likely to costmembers of the Financial ServicesCouncil (FSC) around $250 million,and the organisation wants assur-ances that the money will be appro-priately administered by the Aus-tralian Taxation Office (ATO).

In a submission to the Parliamen-tary Joint Committee reviewing theGovernment’s Stronger Super legisla-tion, the FSC’s senior policy managerAndrew Bragg said the FSC hadundertaken a new assessment ofFSC superannuation providers todetermine the cost of the Super-Stream exercise.

“We estimate that FSC memberswill incur capital costs of approxi-mately $250 million to deliver Super-Stream,” he said. “This is in additionto the budgeted $467 million costwhich the industry will incur for theATO to build public sector capability.”

Bragg said that $121.5 millionwas due to be levied in the 2012-13financial year, which commences infour weeks.

“This is a significant sum which

will be levied in addition to the annualAustralian Prudential RegulationAuthority (APRA) levy whichamounted to $46.8 million in 2011-12,” he said.

However, Bragg said the FSC hadreservations about the lack of detailsurrounding the levy in terms of theexpenditure, transparency and appli-cation. In essence, they seek:

1. Detailed information on the allo-cation of expenditure;

2. Transparency of executingexpenditure; and

3. A consistent approach on thelevy mechanism as applies to thecurrent APRA arrangements for thesuperannuation industry.

Bragg said the FSC’s issue wasnot whether cost recovery shouldoccur, but on expenditure of leviedmonies and the manner in whichthey are raised from the industry.

“As an existing mechanism forlevying superannuation funds existsthrough APRA, we believe consis-tency is paramount,” he said. “This isparticularly the case as the presentarrangements are applied in an equi-table, transparent and efficientmanner.”

Liz Westover


News

By Tim Stewart

THE Australian Securities and InvestmentsCommission (ASIC) is taking ongoing regu-latory action against a number of financialplanners who “breached the law” in relationto Trio Capital.

To date, nine individuals have either beenbanned from providing financial services,been prevented from managing corpora-tions, voluntarily removed themselves fromthe financial services industry, or been

prevented from acting as a registeredauditor, according to ASIC.

Trio investment manager Shawn Richardis the only individual to have been jailed.Richard is serving a sentence of three yearsand nine months, with a minimum of two-and-a-half years to be served.

But when it comes to the alleged “ulti-mate controller of the Trio group”, JackFlader, the regulator has admitted there iscurrently “insufficient evidence” to prove abreach of Australian law.

According to the Parliamentary JointCommittee report into the collapse of TrioCapital, Flader – an American citizen – wasat one stage a resident of Hong Kong and iscurrently believed to live in Thailand.

ASIC said it would provide informationrelating to Flader to the Australian FederalPolice and the Australian Crime Commission,adding that it continued to liaise with over-seas regulatory agencies in relation to Trio.

The regulator is also investigating theconduct of the individuals who were respon-

sible for the failure of the ARP Growth Fund.“ASIC’s investigations indicate the reasons

ARP Growth Fund’s losses appear differentfrom those of the Astarra Strategic Fund –another Trio fund.

“To date, the documents in ASIC’s posses-sion show the ARP Growth Fund failedfollowing substantial investment in anoffshore fund that had exposure to collater-alised, leveraged credit default swap agree-ments. The investments failed during theglobal financial crisis,” said ASIC.

Life insurerspay out $4 billion in 2011THE 10 biggest life insurerspaid out just under $4 billionin claims in 2011 – up 11.4per cent from 2010, accord-ing to research conducted byThe Risk Store.

The amount of money paidout in claims has increasedby 96 per cent since 2006,said Risk Store managingdirector Peter Wincott.

“The industry does payclaims, contrary to the currentaffair programs we often seewhere the bad insurer doesn’tpay out,” Wincott said.

“Four billion dollars is asignificant amount of money,and if it wasn’t paid by thelife insurance industry itwould have to be found fromsomewhere – either from thecommunity or social serv-ices,” he said.

Only around 2.4 per centof claims are knocked backby insurers, Wincott added.

“That’s due to three things:non-disclosure, non-paymentof premiums (they’ve let thepolicies lapse) or fraud. It’s atiny amount. The majority ofclaims are genuine claimsand they get paid,” he said.

Wincott said his memberstend to print off the key find-ings of the report in colourand laminate them, as a toolto use with clients who are“recalcitrant cynics” when itcomes to the life insuranceindustry.

“[Advisers] can just pull thisout … and say ‘actually, this isfrom an independent source,this is what was paid lastyear’,” he said.

The number of adviserswho don’t know how much ispaid out by the life insuranceindustry each year is “amaz-ing”, Wincott said.

“It’s as much an educationtool for our members as it is amarketing tool,” he added.

ASIC continues to target planners over Trio collapse

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News

ASIC offers relief forintrafund asset transfersBy Bela Moore

THE Australian Securities and Invest-ment Commission (ASIC) has recog-nised trustees’ desire to save costsunder the national regulatory frame-work for trustees, releasing approvalcriteria for the transfer of assets to asingle Australian Financial Services(AFS) licence.

ASIC said the national regulatoryframework made it possible for trusteegroups with subsidiaries previouslyunder State and Territory jurisdictionto use voluntary transfer provisions toreduce their number of AFS licences.

Under the criteria, trustees seekingan intrafund transfer of assets will needto provide ASIC with details on share-holders, the ultimate holding company,and the proposed management andorganisational structure before andafter the transfer.

A host of other information includ-ing reporting, fee and staffing levels aswell as physical premises and client‘best interest’ will also need to run thegauntlet before receiving ASICapproval.

ASIC said the client’s best interestwould drive the determination ofarm’s-length transfers under the same

voluntary transfer provisions, althoughthe process involved greater scrutinyof each company’s due diligence andproject plans.

Trustees must provide the pros andcons of any transfer of assets to anothertrustee company, investment strategydetails, how the transfer would takeplace and other regulatory approvals.

Similar details were needed for thecompulsory transfers of assets; inparticular, the details of partial trans-fers which had legal ramifications,ASIC said.

ASIC said it would consult with theAustralian Prudential RegulationAuthority (APRA) before cancelling anytrustee’s AFS licence, but non-APRAregulated trustees could lose theirlicence to ASIC without a hearing.

Trustees who lost their licence wouldneed to “take all reasonable steps” toalert clients to the cancellation andtransfer process which ASIC woulddetermine on a case-by-case basis.

ASIC was given the power to approvethe transfers in May 2010 via amend-ments to the Corporations Act, andreleased a consultation paper inJanuary this year.

“The limited feedback received wassupportive of the proposals,” they said.

Reverse mortgage planner market contractsA SHRINKING financial planner channel forreverse mortgages hasn’t stopped the marketfrom growing, according to Deloitte bank part-ner James Hickey and Senior Australian EquityRelease (SEQUAL) chairman John Thomas.

The market grew 10 per cent over the 12months to 31 December 2011, while the finan-cial planner and broker channels decreased col-lectively to 26 per cent of settlements comparedto approximately 50 per cent pre-GFC, accordingto Hickey.

He said financial planners weren’t utilisingreverse mortgages because the broker markethadn’t been pushing the product and currentlenders worked predominantly through their ownchannels.

Deloitte’s yearly study of the Australian reversemortgage sector to 31 December 2011 com-missioned by SEQUAL showed 42,000 Australianreverse mortgage loans and $3.3 billion funds.

Hickey said the volume of new lendingremained stable at 22.5 per cent over two yearsto the end of the study but had not reached thesame levels as 2006/07 because non-bank play-ers were unable to source attractive prices fromthe wholesale securitisation market.

Thomas said two bank lenders and a handful ofnon-bank lenders, mainly credit unions, currentlyoffered reverse mortgages. He said five memberswere loaning while nine were passive memberswith outstanding loans, compared to 22 activemembers in the products’ prime, he said.

Hickey said banks provided most of the $317million settlements over the 12 months, which

94 per cent of borrowers had drawn on a “needsbasis” in lump sums as access to products suchas “lines of credit” pushed income out.

Although the planner channel accounted forlittle individually, the numbers didn’t reflect bro-kers underwriting for products from planners’leads, they said.

Hickey said the level of tailoring in planners’assessments of needs explained the differencein brokers’ and planners’ average settlementsize, which was $79,750 compared to $54,000for direct channels.

Both said reverse mortgages deserved moremerit for the benefits that drawing on homeequity can provide retirees.

Thomas said the majority of settlements wereused for home improvements, which were oftenfunding stay-at-home aged care. He said heexpected usage would continue to increasealongside Australia’s ageing demographic.

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News

Coalition commits to resuming2007 policy approachBy Mike Taylor

THE Federal Opposition has committedto making Australia a regional financialservices hub in the event it regains officeat the next Federal Election.

The Opposition spokesman on Finan-cial Services Senator Mathias Cormann,who made the commitment, said a futureCoalition government “will pick up wherewe left off back in 2007”.

“That is, we will work with all relevantindustry stakeholders to leverage ourskills and the strength of our domesticfinancial services sector to increase ourexports of financial services and to makeAustralia one of the genuine financialservices hubs in the Asia-Pacific region,”he said.

Cormann said economic research byAccess Economics had shown that lifting

finance and insurance exports as a share ofAustralian GDP from the current 2.9 percent to 5 per cent would lead to an eventu-al $3.7 billion stimulus to the Australianeconomy.

“According to the same research, if wewere able to lift this export share to 10 percent it would translate into a $13 billionboost to our economy,” he said.

The Opposition spokesman said theimpact of such a move would also spreadbeyond funds under management.

“When fund managers domicile a fundoutside Australia, we miss out on therevenue that would otherwise be derivedfrom the broader range of complementa-ry and enabling services that underpin thefunds management industry includingcustody services, technology providers,legal, accounting, compliance and riskmonitoring services,” Cormann said.

Bravura integrates Garradinwith Class SuperBy Andrew Tsanadis

IN a joint initiative with Class Financial Sys-tems, Bravura Solutions has integrated itsGarradin investment management softwarewith self-managed super fund (SMSF)accounting solution Class Super.

With automated daily feeds being sentbetween the two platforms, Bravura saidadministrators for SMSFs are now able todeliver clients more comprehensive invest-ment updates.

The data feeds include information on aportfolio’s cash transactions, share and man-aged fund trades, as well as income pay-ments and expenses, according to Bravura.

The platform integration has also reducedmanual data entry and helped to speed upthe delivery of end-of-year tax lodgement andauditing, Bravura added.

As Garradin is designed as a single platformthat allows multiple processes to be integrated,Bravura global head of product Darren Stevenssaid the venture with Class Financial Systemswas “a logical strategic move for us”.

Financial professionals look set for modest boost to salaryCURRENT market conditions lookset to stay put for a long time tocome, but forward-thinking employ-ers in the banking and financial serv-ices industry are going ahead withhiring and salary plans.

That’s according to the results ofthe 2012 Hays Salary Guide, whichfound that financial professionalscan expect a moderate salaryincrease over the coming 12 months.

Rather than waiting for a “silverbullet” and hoping for global marketsto change, businesses need to

develop practices to meet the “newnormal”, said Hays Banking directorJane McNeill.

According to the report, 51 per centof financial services employersincreased salaries between 3 and 6per cent last year, while another 10per cent gave an increase above 6 percent. Despite this, 30 per cent gaveincreases of less than 3 per cent, while9 per cent gave no increase at all.

Looking forward, 43 per cent ofemployers intend to increase salariesbetween 3 and 6 per cent when they

next review, 5 per cent will increasesalaries above 6 per cent, 42 per centwill increase less than 3 per cent and10 per cent will offer no increase atall, Hays stated.

Despite a number of high profileredundancies, hiring activity in early2012 has picked up and has contin-ued throughout the first half of 2012,the survey found.

Employers are taking a particularinterest in temporary and part-timeworkers in order “to combat fluctu-ating workloads and to overcome

internal permanent hiring freezes”,McNeill said.

“Overall, banking remains anemployer’s market with the numberof available candidates increasing.The one exception is for highlyspecialist and high performingcandidates, who remain in shortsupply,” McNeill said.

Businesses with an efficientsign- off and interview processeswill be better placed to attract andretain these talented individuals,she added.Jane McNeill

Darren Stevens

Sixth Commonwealth Financial Planning adviser bannedIN the latest outcome of its investigationinto Commonwealth Financial Planning,the Australian Securities and Invest-ments Commission (ASIC) has acceptedan enforceable undertaking (EU) fromformer Commonwealth FP employee JoeChan.

ASIC was concerned that between 20December 2006 and 1 October 2010Chan had falsely classified client files,encouraged clients to purchase insur-ance by advising them that he would

waive the adviser service fee, and pro-vided false information in statement ofadvice documents.

At the time, Chan was the servicingplanner for former Commonwealth Finan-cial Planning adviser Don Nguyen, whomASIC banned from providing financialservices for seven years in March 2010.

Under the EU, Chan has agreed not toprovide financial services in any capacityfor a minimum of two years, and mustadhere to strict supervision requirements

for six months should he decide to re-enter the financial services industry.

The action against Chan is the latestin a string of decisions since the regula-tor accepted an EU from CommonwealthFinancial Planning on 25 October 2011requiring the company to review its riskmanagement framework and addressdeficiencies.

A month ago, ASIC banned formerCommonwealth Financial Planningadviser Jane Duncan for three years,

while Anthony Awkar was permanentlybanned after an investigation found thathe had forged the signatures of four ofhis clients, along with conducting otherdishonest activities.

In April Christopher Baker was bannedfor five years and in January Simon Lang-ton was banned for two years.

In total ASIC has accepted enforce-able undertakings from six former Com-monwealth Financial Planning advisers,including Chan.

SMSF Weekly

SMSF trustees might have to acknowledge risksBy Mike Taylor

AN Australian Securities and Invest-ments Commission (ASIC) official hasacknowledged that the regulator couldvary the standard licensing conditionsapplying to financial advisers to requirethem to point out that self-managedsuperannuation funds (SMSFs) carry ahigher level of risk.

Under questioning during SenateEstimates about the fall-out from thecollapse of Trio Capital, ASIC commis-sioner John Pr ice said there wascurrently no regulatory obligation oneither planners or accountants tooutline the risks of theft or fraud whichmight attach to SMSFs.

“In terms of what we have done inrelation to financial adviser surveillancearising out of Trio, ASIC has done anextensive surveillance in that area,

including on the question of whether ornot specific risks of theft and fraud werepointed out to investors,” he said.

“The answer is that we did not findeither documentary or written evidencethat those risks of theft and fraud wereprovided by financial advisers to clients,nor is it general industry practice to doso, nor is there a specific legislativeprovision that requires it to be done,”Price said.

However, under quest ioning bycommittee members, Price said ASICcould seek to vary its standard licenceconditions to put such a requirement inplace.

“That would mean that new peoplewho applied for a licence in relation toself-managed superannuation wouldneed to provide that sort of a warning,”he said.

“But, in relation to existing advisers

who had a l icence, we could onlychange their existing licences to requirethem to give such a warning after wehad given them an opportunity for ahearing and after they had a right toappeal that decision,” Price said.

ASIC chairman Greg Medcraft saidone of the suggestions ASIC was goingto make was that there should be awritten acknowledgment at the timesomebody is setting up a SMSF “thatbasically they are not covered for theftor fraud and that, in fact, not onlyshould they sign a written acknowledg-ment when they set it up but every twoor three years they should actually signa new acknowledgment, as they do withthe nominated beneficiary for a fund,and acknowledge that, in fact, they haveno coverage for theft or fraud”.

“I think it is, frankly, quite importantthat Australians who have self-managed

super clearly acknowledge that basical-ly they do not have that protection,”Medcraft said.

Accountants not pushingSMSFs: WestoverBy Tim Stewart

THE idea that self-managed superannuationfunds (SMSFs) tend to be pushed on clients byaccountants is more of a perception than areality, says Institute of Chartered Accountants(ICA) head of superannuation Liz Westover.

The wording of the accountant’s exemptiononly covers the set-up and closure of SMSFs,so the perception is that “if that’s all they cantalk about, that must be what they’re recom-mending”, said Westover.

“I talk to a lot of [ICA] members about this,and they tell me they will always act in theclient’s best interest,” she added.

Many clients have already made their mindup to establish an SMSF by the time they talkto their accountant, Westover said.

“You’d be surprised how many times I’vehad clients come to me having already madethe decision to set up an SMSF. It wasn’t arecommendation by me. They say: ‘I want toset up an SMSF – can you help me do it?’”she said.

Under the current legal framework, account-ants are not authorised to advise against the

set up of an SMSF if they think it is inappropri-ate for the client, Westover added.

“It would have been very difficult for me if Iknew it was not appropriate for them,” she said.

Concerns around CFD rulesBy Damon Taylor

THE Australian Securities andInvestment Commission (ASIC)has revealed that there is alarge percentage of over-the-counter (OTC) der ivat i veproviders who are not follow-ing appropriate client moneyprocedures, according to Capi-tal CFDs.

Following MF Global’s col-lapse and recent ASIC surveil-lance, Andrew Merry, manag-ing director of Capital CFDs,said that the discovery thatmore than 30 per cent o fproviders had failed to complywith client money laws was avery real concern.

“After MF Global’s collapse,it is disheartening to read thatthere are a large proportion ofproviders who are not comply-ing with the most importantprocedure in running a com-pany – the protection of clientmoney,” he said.

Merry pointed out that Sec-tion 981D of the Corporations

Act stated that client money heldby an OTC derivative licenseecan be used for the purpose ofmeeting obligations in connec-tion with margining, guarantee-ing, securing, transferring,adjusting or settling dealings inderivatives by the l icensee(including dealings on behalf ofpeople other than the client).

However, Merr y said thatwhen Capital CFDs had enteredthe Australian market, it hadbeen stunned to find that theCorporations Act allowed opera-tors to use c l ient funds tof inance operat ional costs ,which is clearly not in the ininterest of the client.

“We brought with us the UKpractice of quarantining clientmonies and not using it for anyoperational purposes at all,including the hedging of clientposi t ions,” Merr y said. “ Ibelieve we are getting closer tohaving this standard appliedacross the industry, with Trea-sury considering a change tothe law.”


units in the fund. Past performance is not indicative of future performance. *Source: Mercer Investment Performance Survey of Wholesale-Equity-Australian-All Cap ending March 2012. Quartilerankings / returns after fees. Fund ranked is the Perpetual Wholesale Australian Fund.

...AFTER TIME. THAT’S PERPETUAL’S AUSTRALIAN SHARE FUND.

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Now on Colonial First State FIRSTCHOICE

Greg Medcraft

We are famil iar with theconcept of return-free riskin foreign markets, but nowAustralian bonds too seem

to have caught the disease. Driven by acombination of renewed concern aboutcountries exiting the Euro, an inability toagree on refinancing shaky Europeanbanks and capped off by vaci l lat ingconcerns about the degree of slowdown inChina and the continuing local circusmasquerading as a Parliament, investorsare stampeding for the "safety" of bonds.While this has been one of the best-performing asset classes over the last 12months, it is in my view difficult to seethem as the safe haven many are claiming.

Let's look at these drivers in turn.

Get your money for nothing and yourrisk for freeAustralian 10-year yields touched a recordlow of 2.86 per cent recently following nega-tive headlines from pretty much every majorregion in the world. To put this in perspec-tive, it means that after allowing for infla-tion, investors are prepared to lend to ourminority government for no return. Youknow people are really scared when they areprepared to lend you money for nothing.

Sadly, for overseas investors, this seemslike a great deal compared to the risk theymust take to lend to some peripheral Euro-pean countries, or the negative returns onoffer from stronger nations such Germany.

Another way of putting the enormity ofthis move into perspective is to look at thepace of change in the outlook. As recentlyas March this year, our 10-year bonds weretrading at a yield well above 4 per cent, andthat oracle of economic forecasting theReser ve Bank of Australia (RBA) waswarning of inflation risks. (Chalk up anothergreat call for our policy makers. I bet someof them actually believe the official unem-ployment rate of 4.9 per cent too).

With the official cash rate at 3.75 per cent,the market is implying that the RBA will needto cut rates sharply in coming months.

The justification for the stampede to

bonds is that at least your capital is safeand not being eroded by those nasty equitymarkets. Valuations are on the back burneras fear trumps greed. Unless investors areplanning on holding these bonds to matu-rity, there is a real risk of capital loss some-time in the future as the fear dissipates andthe RBA moves to push interest rates backup to more normal levels. If you were smartenough to buy bonds 12 months ago – great– but jumping in now is a whole differentstory. Why wouldn't you just buy overnightcash or 90-day bills? I don't get it.

What kind of a world do we live inwhere a bunch of second-tierEuropean countries steal all thepress?The focus on contagion from Europe fasci-nates me. Apart from scary headlines, whatis the real linkage with us? Presumably thisrelates to the fact that it's a big exportmarket for China and we, of course, supplythe raw materials that fuel this production.The most recent concern stems from thefall in the Chinese Purchasing ManagersIndex to just 50.4. (anything below 50signals a contraction in manufacturingactivity).

This is not great news but, as I have oftenargued, China has the centralised controland financial firepower to ensure its grossdomestic product growth remains around8 per cent or higher. Again the naysayerswill argue that this is well shy of the 11 percent figure generated last year. True, butdid you really think it would be allowed tostay at such unsustainable levels, and moreimportantly, did you base your investmentdecisions on that dubious assumption?

In addition, China is fast moving to amuch more internally driven economybased on domestic consumption. This willincreasingly insulate it (and us) from thevagaries of the Eurozone dramas. Is theincreasing likelihood of a Greek or even aSpanish exit really a cause for so muchconcern? The world seemed to muddlealong reasonably well before the Euro Blocformation.

Back to the Future IV?I’ve lost count of how many false starts wehave had in the Australian equity marketrecovery story. Suffice to say it would havelong ago been disqual i f ied from anyOlympic sport.

After looking like it had broken out of thetrading range and climbing higher, theAustralian equity market is back on the mat(yet again) with the rest of the global stockmarkets. This is despite the fact that wehave not recovered to anywhere near thesame extent of the US market, for example.

Much of this no doubt is attributable to the(until recently) high Aussie dollar. If it contin-ues to head south because our interest ratespread is less attractive and some of the steamcomes out of the speculative bubble inresources as China slows and the supplyresponse over the last five years begins toimpact, then suddenly the landscape forinvestment returns alters dramatically.

Those long-suffering investors in globalequities will start to recoup some of thelosses brought about by the rising Aussiedollar, which more than offset attractivegains in foreign equity markets over recentyears. Foreigners wil l be attracted toAustralia once more because prices appearmore reasonable and the dividend yieldsremain extremely attractive. Two main-stream examples. First Telstra, which istrading on an undemanding price-to-earn-ings (PE) ratio of under 13x and generat-ing a dividend yield of 7.6 per cent. Theother is Westpac (yes, I know the bankshave some issues, but “tell ‘em the priceson”), which is on a PE of under 10x and isyielding 8 per cent.

Could we at long last see some upside inlocal equities over the next 12 months?Stranger things have happened.

One thing is becoming increasingly clear.When the bull market arrives, the bounce islikely to be extremely rapid, with interest ratesso low and base money supply so plentiful.

Matt Drennan is a business and financialmarkets commentator.

InFocus

Like their foreign counterparts,Australian bonds seem to have gonefrom risk-free return to return-freerisk. Matthew Drennan explains whybonds are not the safe haven, despitethe stampede for the safety of thisasset class.

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*Wealth Insights 2012 Service Level Survey - 883 advisers participated in the survey between February and March 2012. ** Investment Trends Planner Technology Reports 2005–2011 – 490 IFAs (advisers employed by dealer groups with less than 50% institutional ownership) surveyed in June–July 2011. This is general information only and does not take into account any individual objectives, fi nancial situation or needs. Investors should consider the relevant PDS available from us before making an investment decision. Different fees and costs apply to different investment options and may change. Colonial First State Investment Limited ABN 98 002 348 352 is the issuer of the FirstChoice range of super and pension products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. Colonial First State also issues interests in investment products made available under FirstChoice Investments and FirstChoice Wholesale Investments. CFS2068 FPC MM

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Direct property

Cleaning up the act

During the GFC, direct property had anumber of issues related to managercapability, asset quality, illiquidity andgearing. However, the sector has cleanedup its act, writes Freya Purnell.

AUSTRALIAN direct proper-ty is attracting suitors from

around the globe, with anumber of different categories ofinstitutional investors attracted bywhat this asset class has to offer.

Among the buyers are Singaporereal estate investment trusts (REITs)such as Ascendas, K-REIT, YTL StarhillGlobal REIT and CDL Hospitality

REIT, which are buying property to behoused in REITs and listed on theSingapore stock exchange.

“They are able to make yield-accre-tive acquisitions in Australia – theycan borrow at 2 per cent in Singaporeand buy in Australia, so it’s a greatcarry trade for them,” says AndrewCannane, head of corporate clientservices with The Trust Company.

Regional sovereign wealth andpension funds such as China InvestmentCorporation, Malaysia’s Employee Prov-ident Fund, Singapore’s GIC and theKorean National Pension Service are alsobuying direct stakes in property – eitherin consortia, separate account mandatesor directly.

But the biggest push is coming fromglobal private equity firms with head-quarters in South East Asia – includingAviva Investors, Blackstone, GoldmanSachs, LaSalle, Heitman, Grosvenor andPramerica – “all buying property inAustralia to fulfi l global accountmandates for core prime property,”Cannane says. “They have been extreme-ly active.”

Not to be forgotten are the Canadianpension funds – with the CPP InvestmentBoard recently buying a 50 per cent stakeof Northland Shopping Mall, and PSP

teaming up with GIC to privatise theCharter Hall Office REIT.

“There has also been a significantamount of platform acquisition – you’vehad the likes of ING Industrial Fundprivatised by the Goodman consortia,you’ve had Blackstone take out Valad,Trinity take out LaSalle, the Charter HallOffice REIT privatised, Red Cape takenout by Goldman Sachs, York and Varde,MSREF by Orchard, and even confirma-tion that Ascandas and Accor havebought the Mirvac Wholesale HotelFund,” Cannane says.

This enthusiasm for Australian directproperty certainly seems unmatchedlocally – which Cannane attributes to asense of pessimism that foreign investorsdon’t see.

“I think they are able to extract them-selves from the day-to-day and focus onthe fundamentals, which are still verystrong. They are seeing unemploymentless than 5 per cent, GDP [gross domes-tic product] at 3 per cent, vacancy ratesall sub-10 per cent and yields holding upextremely well – they are seeing Australiaas a great place to invest,” he says.

So why are Australian investors still soshy of direct property?

As Atchison Consultants managingdirector Ken Atchison points out: “Theactual property market itself in thecommercial areas of office, retail and


Direct property

Continued on page 16

Australian direct property appeals toforeigners, but local investors remainshy.

Sector cleans up its act after GFCexperience.

Biggest downside to direct property atpresent is lack of liquidity.

Investors urged to select carefullybefore jumping in.

Key points


Direct property

industrial has been reasonably stable.The issue for investors has been with theinvestment managers.”

As in so many other areas of the invest-ment markets, the GFC has left a lastinglegacy on this segment. The train wrecksthat littered the direct and listed proper-ty landscape – including Centro, MFS,Opus, Orchard, and Becton – are noteasily forgotten by investors, leading toongoing caution.

“People are quite wary about whetherthe manager is capable of delivering on theinvestment proposition,” Atchison says.

The current global uncertainty certain-ly isn’t helping matters, and equity hasbeen hard to come by.

Kevin Prosser, research manager,direct assets at Lonsec, says equity rais-ings for direct property funds have beendown significantly over the last few years,with $155 million in capital raised in2010 compared with $460 million in2009. This rebounded slightly to $180million in 2011.

On the upside, Prosser believes thereare much more clear-cut investmentpropositions that have the potential tocome to market.

“Fund managers have made the moveto clearer structures, there’s not as much

smoke and mirrors, and a lot of the banksare coming to the party in terms of theirmargins – we’re back to levels that aren’tprofiteering,” he says. “So those factorsmean that people can put deals togetherif they think they can raise the equity.”

However, Prosser says althoughmanagers are clearly trying to get proj-ects off the ground, many don’t come tofruition because of issues with bankfunding or equity raising. While some ofthe open-ended funds are renewing orraising new equity to expand internally

or purchase additional assets, new offer-ings are in the minority.

Atchison believes that very few newdirect property investment opportunitieshave come to market because of thereluctance of platforms to support syndi-cates, due to liquidity issues.

“That makes life very difficult forinvestment managers in creating prod-ucts that will suit investors. Platforms aresaying syndicates no longer work – I’mnot convinced that investors share thatopinion, but if most of your investors are

on-platform, then it can’t be done,” Atchi-son says.

However, there are perhaps some smallsigns that things are starting to change,with the latest round of interest rate cutsshifting the focus of investors from termdeposits to higher-yielding propositions.

“For investors that were putting alltheir money into term deposits andgetting 6 per cent, that’s now down to 5per cent. All of a sudden a commercial


Continued on page 18

“For investors that wereputting all their money intoterm deposits and getting 6per cent, that’s now down to5 per cent. All of a sudden acommercial property that’syielding 7 or 8 per cent is abit more attractive.”- Ken Atchison

Commercial propertyThe difficulty in getting new property development projects offthe ground over the last five years has not just had implica-tions for investors, but also for the supply of property acrossthe board.

“The banks have been incredibly wary about funding newproperty developments. New property supply is getting quiterestrained, because I can’t see the banks changing their attitudein the next 12 months,” Atchison says. “That actually has abenefit for investment in property development. If you havesufficient equity capital and it is supplemented by some debt,the investment property will stack up quite attractively.”

Geographically speaking, the resource-based states areexpected to be the best performers over the next 12 months,with Perth and Brisbane benefiting from strong employmentgrowth underpinned by infrastructure spend and demand forresources.

Across the nation, the office sector is not swamped withsupply, says Atchison.

“Rental yields in the sevens or even higher is an attractivestarting point when you are looking at prospectively higherreturns over time.”

Again, Perth and Brisbane could be the pick of the officemarkets, with extremely strong growth.

“Perth has a huge supply shortage, and Brisbane looks like thenext market to take off,” Olde says. “Melbourne has been quiet,but it is late in the cycle and they are going to strengthen again.”

Industrial property which is focused on warehouse andlogistics is also expected to perform well, according to Stacker,as a beneficiary of the growth in online retail. Industrial gener-ally should be expected to provide yield as opposed to capitalgain, and choosing the right location is vital for selecting astrong performer.

“Industrial property is all about logistics, and that is about dis-tribution and access to infrastructure – be it road, rail, airportand seaport – to move goods efficiently,” Atchison says.

As retailers struggle, retail property has also suffered over thelast 12 to 18 months, and this poor showing is expected to con-tinue over the rest of 2012. Across the country, Queensland andWestern Australia are looking promising, according to Olde, and“sub-regional and regional centres are starting to take off again”.

Residential propertyWith a growing population and the Australian Housing Coun-cil forecasting a huge shortage in the national supply ofhousing, there are considerable opportunities in this sector,particularly as the Federal Government recently endorsedthe continuation of the National Rental AffordabilityScheme, which aims to deliver an additional 50,000dwellings by June 2014.

“There’s an opportunity there to participate in directproperty in a smarter tax-effective way through new whole-sale and institutional funding structures,” Olde says.

Atchison says that although there are pockets with morethan adequate supply, rental growth should drive invest-ment returns more than price increases.

BIS Shrapnel forecasts released in early June show howcritical it is to understand the supply and demand factors inplay, as well as the development pipeline, when selecting aproperty market to invest in.

While investor demand following the GFC resulted in near-record supply for both inner Melbourne and inner Sydneyapartments, BIS Shrapnel suggests this could now pushthe Melbourne market into oversupply in 2013/14 and2015/16, resulting in rising vacancy rates and lower rents –and therefore lower returns for potential investors.

New apartment supply in inner Sydney is rising at aslower pace than Melbourne, but it won’t be sufficient toerode rental demand. Despite high construction over thenext two years, inner Sydney will still have a deficiency ofapartments in place by 2016, which will continue to supportrental growth and further price growth over the next two tothree years.

BIS Shrapnel also reported that although low tenantdemand and high vacancy rates in the inner Brisbane apart-ment market had led to fears of an oversupply, increasinginvestment in coal seam gas projects in regional Queens-land will lead to an influx of white collar professionals intothis market, creating a flood of demand. With the pipeline ofnew apartment construction not expected to flow through tosupply until 2013/14, rising tenant demand will cause therental market in inner Brisbane to tighten considerably,resulting in improved yields.

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property that’s yielding 7 or 8 per cent isa bit more attractive,” Atchison says.

Over the last six months, the capitali-sation rates for quality assets havestabilised and are actually firming,though B-grade properties remainstationary, Prosser says, largely driven byinternational and institutional investors.

Robert Olde, president of the Proper-ty Funds Association, which representsthe unlisted retail and wholesale prop-erty fund sector that has around $36million in investor funds, adds thatflows to unlisted wholesale propertyfunds are now surpassing those to listedproperty funds.

“Right now you should be looking atan effective hedge against the uncertain-ty that we are seeing in the Australian andglobal equity markets,” Olde says.

But retail investors are not necessarilybuying it.

“A lot of the mum and dad investors,they are not coming back yet to themarket. We are seeing it in the sophisti-cated wholesale market – they are puttingtheir funds into direct property. But Ithink that’s the indicator and the driverfor the retail space to get confidence andstart to come back,” he says.

The clean-up crewThere’s no question the sector has had toclean up its act and improve the quality,transparency and risk profile of what it isoffering to win over banks, investors, andeven investment managers, who werereluctant to repeat past experiences.

During the GFC, there were issues withmanager capability and asset quality, butthe two biggest problems were gearingand liquidity.

Olde says among PFA members,gearing ratios are averaging around 45per cent in the retail space and 16 percent in the wholesale area – though somemight argue that gearing levels are beingdictated by lenders who have drawn aline in the sand.

Richard Stacker, chief executive officerof Charter Hall Direct Property, also saysleverage in direct property funds is nowmuch more likely to be in the 35 to 50 percent range, with much higher-qualityassets and distribution focused on realincome.

On the issue of liquidity, he says therewere definitely mismatches previously.

“The distributions that people were

paying were probably more than theactual income or cashflow coming fromthe properties. They were offering liquid-ity in what was probably an illiquid assetclass, in the short-term anyway,” he says.

Olde says while fund managers indirect property accept the liquidity limi-tations of the asset class, they now haveto ensure investors recognise and acceptthose limitations as well.

“We are not going to be pushed backinto providing liquidity mechanismswhen we know they don’t exist. Our fundmanagers absolutely recognise that wehave to be completely transparent andhonest with our asset class. For investorsand managers, our space has realignedour investment offerings back to the corestrength of direct property – and that isthat they are illiquid.”

Olde says that while illiquidity is oftenframed as a negative, its advantage isactually the “steady as she goes” quality– the perfect antidote to the volatility ofequities.

“Part of what we need to achieve nowis a re-education that you have to accept

the illiquidity if you want the stability. Weare not there yet.”

Pros and cons of direct propertyProperty generally ticks the box of havinga low correlation to other asset classes,but the key selling point for direct prop-erty at present is yield. And at between 7and 9 per cent with some tax deferralbenefits on top, it’s not to be sniffed at.

“It’s paying close to 100 per centincome, so it does have a very good yieldwhen you compare it to term deposits,with the spread 3 to 4 per cent above termdeposit rates,” Stacker says. “That’scertainly before you take into accountany type of growth that might comethrough off the back of rental increases.”

Another point in direct property’sfavour is the lack of volatility comparedwith equities or even listed property.

“They are investing in the same thing,except with listed properties you are opento vacancies and what happens in themarket, versus with an unlisted property,what people are going to pay for theinitial asset and what happens to the

valuation,” Stacker says.While the downside of a direct prop-

erty investment is its lack of liquidity,with funds usually requiring a five- to -seven year commitment, if investors areallocating no more than 10 to 15 per centof their portfolio to the asset class, liquid-ity should not be an issue.

But gaining access to these invest-ments in the first place might be. Without$10 million-plus up an investor’s sleeve,it’s impossible to DIY, so they have tochoose a managed fund – either a diver-sified option or a single property fund.

Many of those interested in directproperty funds such as those offered byCenturia Property Funds, according tochief executive officer Jason Huljich, arehigh net worth investors going direct,which accounts for around 30 per cent oftheir enquiries, with the remaining 70 percent coming through planning groupsand private banks.

Stacker says Charter Hall has seeninterest from “early adopters” over thelast two years, with larger dealerships,boutique advice groups, and sophisticat-ed direct investors getting on board.

“The average investment is a lot higherthan we have seen historically,” he says.“The sentiment is improving. Particular-ly after the last rate cut, people are nowjust starting to focus on that yield propo-sition that it provides.”

Huljich says investors are currentlyinterested in “commercial and somevalue-add industrial” property, but theyare also showing a clear preference forsingle-asset funds.

“They like the simplicity and trans-parency of that structure – they know thebuilding they are investing in, the tenantsand the risks, instead of being in a bigdiversified fund.”

And in fact, of the few new funds thatare coming to market at present, severalare of the single-asset variety – forexample, the Cromwell Ipswich CityHeart Trust, a single-property syndicatefor a commercial office/retail buildingin Queensland, and the Charter Hall


Direct property


“We are definitely in themarket now where not allproperty is doing well. It isvery market-specific.”- Richard Stacker

TIPS FOR ADVISERSCHOOSING DIRECTPROPERTY Forrester Cohen chief executiveofficer John Moore providesadvisers with somerecommendations on how tohelp clients choose the rightdirect property opportunities.

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

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

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

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

5. Consider costs The holding costs of older properties are greater than new buildings, with highermaintenance costs and more time required to oversee maintenance work –diluting cashflow. Reduced cashflow could be an issue for people holding invest-ment property in retirement.Richard Stacker


Direct property

Direct 144 Stirling Street Trust, a syndi-cate for an A-grade office building in thePerth CBD.

Atchison says these types of syndicatesare being brought to market and raisingcapital, but they are still thin on theground, and they are raising much lessthan in the past.

“We are talking $50-$100 million incapital raisings, not the billion dollarsthat was being raised in the past,” he says.

As an off-platform investment, syndi-cates are most likely to attract self-managed superannuation fund (SMSF)investors. Direct property fund managerslike Centuria and Charter Hall are alsoseeing strong interest from SMSFs, with 60per cent and 80 per cent of their investorbases respectively being SMSFs. Stackersays they are also seeing both more SMSFsinvesting, and an increased amount ofinvestment on a year-on-year basis.

What’s aheadDespite the sluggishness affecting thedirect property sector at present, mostare optimistic the solid fundamentals willbring this asset class to prominence.

Olde believes the wholesale marketleaning more towards direct propertyfunds at the expense of listed propertytrusts is a good sign that the retailinvestor will also be won over about thesector’s outlook.

“On the market dynamic side, we aregoing to see less pressure on the invest-

ment markets going forward. We have gota strong resource sector which has pulledthe investment market through, andgoing forward, it’s going to be a hugeopportunity for the construction of A-grade and B-grade offers in commercialproperties to absorb all that demand,”Olde says.

However Stacker sounds a warningthat investors should select carefullybefore jumping in.

“We are definitely in the market nowwhere not all property is doing well. It isvery market-specific.” MM

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When Galileo discoveredthe force of gravity in the1600s, it is probably quiteunlikely that he would

have thought the theory would be usedin relation to the global economy morethan 400 years later. Just as Galileo’srevelation set the wheels in motion forfuture scientific discoveries, today weare witnessing a profound new changeof direct ion – this t ime, in globaleconomic affairs.

The stuttering developed economiesand growing developing economies aretogether shifting the global economiccentre of gravity. This is creating newopportunities and risks for investorsthrough what are commonly beingreferred to as the emerging markets.

As research from the London Schoolof Economics demonstrates, we canplot this changing centre of gravity. Inthe 1980s, the global economic centreof gravity was somewhere in theAtlantic between the US and Europe.More than 20 years later, and this wouldnow be more accurately placed nearCairo and shifting eastwards, as the vasteconomies of the emerging marketssuch as India and China continue togrow. By 2050 this map will most likelybe focusing on South-Western China.

A new economic vocabularySimultaneously, while the economiccentre of gravity is shifting, so is thelanguage we are using to describe theseemerging economies. From BRICs[Brazil, Russia, India and China] andMIST [Mexico, Indonesia, South Koreaand Turkey] , to CARBS [Canada,Australia, Russia, Brazil and SouthAfrica] and CIVETS [Colombia, Indone-

sia, Vietnam, Egypt, Turkey, SouthAfrica], a new vocabulary is emergingto capture this changing economicenvironment.

BRICs is perhaps the most commonemerging market grouping currently inuse, and incorporates two of thenations that are probably the most wellrecognised for tipping the balance –India and China.

A path well travelledThe path of rapid economic develop-

ment has been far from unifor mbetween nations. For centuries, globalgross domestic product was dominat-ed by population. Multiply low produc-tivity by a large enough population anda countr y wi l l lead the world ineconomic size. Indeed, as recently as1820, China’s economy was estimatedto have been larger than Wester nEurope and the US combined.

The rapid and sustained develop-ment of the West saw economies withsmaller populations such as Germany,the UK and the US vault ahead duringthe 19th and 20th centuries, as produc-tivity advanced significantly. Now, asemerging market nations start a similareconomic development project, we seethe rapid return of the most populousnations as leading economic powers –again, India and China.

Playing catch-upIt is all very well being able to identifythe ‘new players’ on the pitch, but thereal game challenge begins when itcomes to thinking about how a relative-ly poor country is going to close the gapwith more developed nations – how doesit do it and how difficult is the process?

There are a variety of developmentmodels and historic examples provid-ed by developed countries that wereonce considered poor. Provided otherfactors are equal, poorer countriesshould grow more quickly than richercountries, because they can follow thelead of developed nations and achieve‘catch-up growth’.

Japan’s Meiji period of industrialrevolution (1868–1912) provides onesuch example of ‘catch-up growth’.However, the most prominent current

example is China.There are some clear advantages that

can be enjoyed by many emergingmarkets that make this game of catch-up a bit easier. Developing countrieshave the ability to borrow the pre-exist-ing know-how and skip to the latesttechnology, and are not constrained byoutdated infrastructure, which requiresexpensive reinvestment or innovationto move forward. Developing nations


Global economy

Shifting centreof gravity

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

“Access to investments inemerging markets can bean attractive propositionfor Australian investorswho are looking to tap intothe growth opportunitiesof this new economicworld order. ”

can also reap huge gains by simplymoving the underemployed from agri-culture to manufacturing, while devel-oped nations – typically with a higherproportion of their workforce in theser vice sector – must innovate toenhance productivity from already highlevels.

However, while these advantagesmay make the job of economic devel-opment sound easy, it is not all plain

sailing. Virtually all of these ‘advan-tages’ are a reflection of a very low start-ing point. Social, health and politicalissues often hold back or derail devel-opment. Catch-up growth eventuallyreaches an inflection point, after whicha difficult transition is required.

People powerCombine their large populations withindustrialisation, urbanisation and

increased consumption and you willeasily understand why India and Chinaare becoming today’s new leadingeconomic powers.

The productivity improvements thatresult from converting a workforce froman agricultural to an industrial focus areaccompanied by broader societal andinfrastructure impacts. As the populationmoves from country to city, the energyneeds, infrastructure requirements and

consumption patterns change.China’s 48 per cent urbanisation rate

is well below Western economies, whichhave rates closer to 80 per cent. Thosemaking the move to cities are attractedby better job opportunities and higherincomes. This urbanisation has alsobeen associated with a rapid improve-ment to per capita income levels.

During the next 20 years, 600 millionpeople around the world are expectedto shift from low social economic statusto the middle class. Of that number,half are in China. We believe the vastsize of the population making this tran-sition will have a profound impact onglobal demand for many key resources,services and markets.

Rebalancing economies andportfolios?As the world’s economy rebalances andshifts towards the emerging markets,investors are keen to understand theimpact and, of course, the opportuni-ties that are emerging for them.

Histor y has provided a guide toeconomic development. Developedeconomies have shown us the path andpitfalls faced by countries attemptingto move from low to higher incomestatus. This is not lost on those emerg-ing economies, which enjoy severaladvantages in following the developedeconomies before them.

While many countries have been ableto transit ion from low to middleincome, relatively few have carried onto high income. It is evident that therelationship between economic growthand share market gains is not as simpleas intuition would suggest.

Investors do not need to invest inemerging markets and their domesticassets to be able to invest in theirgrowth. They can invest in g lobalsectors, such as resources, logisticsand construction services which willbenefit from urbanisation and indus-tr ia l isat ion. As consumption andspending patterns change, farmland,for example, also provides exposure tothe benefits of the increased demandfor food.

The Australian economy is relative-ly small, and just two sectors – financeand mining – make up nearly two-thirds of the Australian SecuritiesExchange index. For this reason alone,access to investments in emergingmarkets can be an attractive proposi-tion for Australian investors who arelooking to tap into the growth oppor-tunities of this new economic worldorder. As we are all aware, with anynew opportunity comes new risk, butjust as Galileo’s experimentation ledto new discoveries, this is no doubt anarea which many investors will diptheir toe into. For advisers, this meansbeing on hand to talk about the risksand opportunities with clients as theyattempt to make their own investmentdiscoveries.

Craig Swanger is Macquarie’s executivedirector, banking and financialservices group.


Conforming to the group or tosocietal norms is a critical partof what it means to be human;a primitive instinct, deep-

rooted in our brains, which primes us tostay in the safety of the herd. Becausethere is comfort to be found in the herd,we are often guilty of rationalising awayour sheep-like behaviour.

Experiments show that we actuallyfeel better when we are in the herd andnot out on a limb on our own. But ininvestment there is also danger inconformity because herding in invest-ment markets can push up the values ofcertain investment sectors or stocks toextreme levels, causing bubbles thatinvariably end badly.

The urge to conform is incrediblypowerful. To demonstrate the point,psychology pioneer Solomon Aschcarried out a range of revealingconformity experiments in the 1950swhich are still widely discussed today.His experiments showed that people are

actually willing to make basic cognitiveerrors in order to go with the flow.*

Asch placed individual participants ingroups where all the others (called‘confederates’) were in on the experi-ment. The task was to judge the length ofa vertical line against three comparisonlines and say which was equal in lengthto the original. The genuine participantswere asked last within the group. Aftera couple of rounds where the confeder-ates answered correctly, they deliberate-ly answered incorrectly to apply grouppressure to the participant. In total,about one third of the subjects who wereplaced in this situation went along withthe incorrect majority. Incredibly, 75 percent of the genuine participantsconformed to the wrong answer at leastonce.

Fortunately, Asch not only discoveredthat many people slip into conformityeasily, he also revealed it doesn’t takemuch to snap them out of it. In laterexperiments, Asch planted a rational

rebel in the crowd who went against thegroup when they were incorrect. Criti-cally, having just one right-thinkingperson contravene the group made thegenuine participants eager to expresstheir true thoughts and also take a stand.

This is an important finding for anydecision-making group and the reasonthat some chief executives give theiropinion last. If they didn’t there wouldbe a real danger that everyone wouldsimply agree with their view if stated atthe outset. The advantage of speakingearly is hugely influential because firstimpressions really do count. Considerthese two individuals:

Alan: Intelligent, industrious, impul-sive, critical, stubborn, envious

Ben: Envious, stubborn, critical,impulsive, industrious, intelligent

Chances are you viewed Alan morefavourably than Ben, because the initialpositive traits affect the way you thinkabout his latter traits. His impulsivenessis more than compensated for by his

intelligence. The reverse is true of Ben –he is envious and stubborn and intelli-gence only serves to make him moredangerous. This is the “halo effect” – ourimpressions of people and things can bestrongly influenced by our initial oroverall sense of them. Investments canhave a halo effect too – if they performedwell for a time when we first boughtthem, we may be inclined to view themfavourably even though conditions mayhave changed and we might now bebetter off in an alternative.

Asch proved that playing devil’s advo-cate has real psychological backing. Whenit comes to investing, investors shouldmake the time to analyse their decisionsand explore the opposite view to theirown, particularly if they find they areacting in a consensual way common tomany other investors.

This conscious and deliberate attemptto be contrary and go against the herdcan be highly effective in investment.While the crowd is often r ight in


Behavioural finance

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

Monkey see, monkey do

momentum-driven markets, there arecountless examples of the herd beingwrong-footed at market turning points.The widespread dash into technologystocks in the late 1990s was a classic caseof herding behaviour. The more extremevaluations became, the more the crowdwas trying hard to make different-sizedvertical lines look the same height. Themarket was making a collective cogni-tive error in its overly optimistic assess-ment of prospects for dot.com stocks,many of which had achieved very little.

Cynics went against the flow, re-exam-ining the value of these shares using triedand tested fundamental measures basedon actual earnings, eschewing an array offanciful new valuation measures such as“eyeballs per page”. Of course, taking thecontrary view proved to be highly success-ful.

Identifying bubbles is straightforwardin retrospect, but a little more challengingat the time when investing emotions arerunning high. The economic historianCharles Kindleberger helpfully identifiedfive discrete phases of a bubble.

Stage one is displacement, where theintroduction of a new technology (suchas railways or the internet) or growthdynamic takes hold. This is often whenthe “smart money” gets in.

Stage two is the boom, when a highlypersuasive narrative takes hold (e.g, “the

internet will change everything”). Thisphase is often accompanied by access tocheap credit.

Stage three is euphoria where the boombecomes over-extended; new investorsare sucked in with the lure of easy gainsbut often little understanding of the risks.The rational underpinnings of the boomare now stretched.

Stage four is crisis where insiders beginto sell, and prices fall back precipitously.

Stage five is revulsion where investorscapitulate and prices tend to overshooton the way down. This phase is oftenaccompanied by the kind of politicalbacklash and suggestions for regulatoryreform that we have seen in the wake ofthe credit crunch.

There are some practical steps

investors can consider to reduce theirexposure to stock market bubbles. Forinstance, there is some persuasiveevidence that stock market capitalisa-tion indices tend to over-reflect thethinking of the herd. This is becausetheir reliance on price means that theysystematically give higher weight toglamorous, overvalued stocks.

Hot sectors take a higher weight in theindex as they grow, making subsequentreversals in those sectors more painful.For instance, in 1996, the IT sectoraccounted for around 10 per cent of theoverall market cap of the S&P500 Index.By 2000, it had trebled to a massive 33per cent, making an investment in theS&P500 a fairly concentrated bet on UStechnology. The subsequent correction

saw this figure fall back to 14 per cent bythe mid-2002.

Investing actively and strategically toavoid such concentrations when risksbegin to outweigh rewards is critical.

Yet, the issue with market capitalisa-tion indices also raises some questionsabout the value of benchmarking. This iswhy many fund providers and investorsare increasingly moving towards theunconstrained funds, which are managedwithout reference to a benchmark.

Unconstrained funds can offer agenuinely different approach to investors.Releasing the portfolio manager from thestraitjacket of the benchmark removes theobstacles to them investing in their ‘bestideas’ based on an absolute assessmentof the risks and rewards. An uncon-strained approach can be seen as a delib-erate attempt to move away from theindex-tracking herd. As Sir Jon Temple-ton – one of the greatest investors of thetwentieth century – said: “It is impossi-ble to produce a superior performanceunless you do something different fromthe majority”.

* Source: Asch, S. 1958. Effects of grouppressure on the modification anddistortion.

Tom Stevenson is the investment directorat Fidelity Worldwide Investment.


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“Releasing the portfolio manager from the straitjacket ofthe benchmark removes the obstacles to them investing intheir ‘best ideas’ based on an absolute assessment of therisks and rewards. ”

With ongoing global uncer-tainty and the need fordeveloped marketeconomies to grow their

balance sheets in order to provide finan-cial stability, bond markets have ralliedextensively over the past two years. Thisis a trend that could continue for sometime. Given this backdrop, emergingmarket bonds have increasingly becomea source of opportunity for investors toconsider as an alternative, and addition-al fixed income investment to developedmarket investments within a broaderfixed income portfolio.

Emerging market sovereign issuershave a long history of involvement ininternational capital markets throughthe issuance of US dollar or other majorcurrency denominated bonds to fundtheir domestic operations. Emergingmarket debt was historically a smallpercentage of global bond markets asprimary issuance was limited, dataquality was poor, markets were illiquidand economic and political crises wereoften a regular occurrence.

However, since the advent of theBrady Plan in the early 1990s, emergingmarket debt issuance has increaseddramatically, albeit the sector continu-ing to be more prone to crises than otherdebt markets – eg, Mexican crisis in1994-95, East Asian crisis in 1997,Russian crisis in 1998, and Argentineeconomic crisis in 2001-02.

However, over the past decadeimprovements in macroeconomicfundamentals, institutional structuresand governance have enabled emergingmarket central banks to significantlyincrease the issuance of major currencyand local currency bonds. Accordingly,

demand has been particularly strongfrom domestic buyers such as localbanks, as well as from pension plansexperiencing rapid expansion.

For emerging market governments andinstitutions, the issuance of local curren-cy debt has reduced exposure to externalrisks, as well as addressed financingimbalances that have been at the centre ofpast emerging market crises.

Over the past decade, emerging marketcountries have actively pursued policiesof lowering their external debt burdenthrough buybacks and reduced hard-currency refinancing. Several emergingmarket countries have even achieved thestatus of net external creditor.

Issuers have become less dependent

on foreign capital flows, thus improvingboth policy flexibility and creditworthi-ness. The extension and deepening oflocal currency yield curves has also beenan equally important development fordomestic investors and essential forasset/liability matching and efficientportfolio management. Going forward,the development of local currencycapital markets establishes a muchstronger foundation for pricing of corpo-rate bond issues.

Investor interest in local currencyemerging market debt was also led bythe rapid improvement in the macro-economic fundamentals of emergingcountries. Among the major export-driven economies, foreign exchange

reserves have increased tremendouslythrough central bank isolation of tradeflows.

These reserves provide the means tostabilise the exchange rate and avoid thecycles of hyperinflation and currencydevaluation that had kept risk-averseinvestors out of the asset class. In coun-tries like China and Brazil, central bankshave also funded counter-cyclical fiscalpolicy which has helped to maintainpositive growth as developed marketscontract.

Such stimulus spending is particular-ly important and useful in emergingmarket economies. These countries havehuge infrastructure and developmentneeds, which means that governments


Emerging market debt

“Emerging market bondsare now considered astrategic holding for anever-expanding circle ofinvestors. ”

An evolvingopportunityPiers Bolger believes that emerging marketdebt will continue to grow in prominence andprovide an alternative debt solution todeveloped market economies.

can spend on productive projects thatwill fuel future growth and investment.

Emerging market governments havealso made significant headway in anumber of areas such as the strength-ening property rights, controlling fiscalspending and the free float of curren-cies. Many emerging market countrieshave also come to realise the importanceof an independent central bank with atransparent and clear inflation-target-ing monetary policy.

Another significant positive develop-ment has been the expansion of domes-tic economies and the growth of themiddle classes. These ‘new’ marketsprovide an important source of diversi-fication that continues to support

emerging market growth in spite of weakdemand externally.

Diversification away from solelyproducing primary commodities ormanufacturing for export has reducedcontagion risks and lowered exposure todeveloped market contraction. Thebursting of the debt bubble in 2007 andthe resulting deterioration in publicfinances across the developed world hasled to a reappraisal of sovereign andcredit risk, particularly in an emergingmarket.

Nevertheless, the global financialcrisis showed that the emerging markethadn’t wholly shed the need to attractforeign capital in order to finance infra-structure development and economic

growth. During the past 12 months wecontinued to see the demand for USTreasuries as ‘safe haven’, given thedegree risk aversion across all financialmarkets.

The extra yield of emerging marketbonds over US treasuries (the yieldspread) has widened to reflect increasedrefinancing risks. However, despite theintensity of the financial crisis in Europeand the slowdown in global growth, thefinances of these countries remain rela-tively robust, and emerging marketcountries (to date) have not experiencedthe same levels of default and contagionthat many investors expected.

Consequently, given the relatively strongfundamentals, emerging market bonds arenow considered a strategic holding for anever-expanding circle of investors.

In regard to achieving an exposure toemerging market debt, there are effec-tively two ways:

1. US dollar bonds;2. Via local emerging market currency. Emerging market US dollar bonds are

essentially a credit asset, typically offer-ing a yield pick-up over US Treasuries ascompensation for taking on additionalrisk. As outlined, emerging marketsovereign issuers have seen a steadyimprovement in their creditworthinessin recent years due to large-scale struc-tural reforms, including sound fiscal anddebt management. Their credit profilescompare favourably to sovereignborrowers in the developed world –many of whom are likely to feel theeffects of the credit crisis for years tocome.

Through US Dollar bonds, investorshave access to a higher number of sover-eign credits. However, with greatervariety comes a higher-risk credit profile.Most of the 26 countries that raise debtexclusively in US Dollars are lower-rated,export-dependent nations whoseeconomies are at an earlier stage in theirtransition to developed market status.The average credit rating of emergingmarket dollar bonds is BB+, comparedto A+ for local sovereign bonds. In termsof market weighting, Latin America andRussia make up more than a third of thesovereign dollar bond index. This comesat the expense of Central and EasternEurope – a region far better represent-ed in local bond indices. Such differ-ences in country and credit composition

can have significant investment impli-cations.

As developing economies have grownover the past decade, the volume of USdollar denominated corporate bondsoutstanding has doubled to well over$200 billion. Investors can choose fromissuers based in any one of 19 countriesoperating across numerous industrysectors, including banking, consumergoods, industrials, mining, utilities andtelecommunication services. Around 80per cent of this debt is investment grade,reflecting marked improvements in theway emerging market corporationsmanage their balance sheets.

Emerging market corporate bondscan also offer a way for investors tobenefit from a number of secular trendsshaping the global economy.

Increased infrastructure spending inthe developing world is one of these.Many corporate issuers are companiesthat stand to gain from government-driven programs to improve transporta-tion, power and water infrastructure.

Another way of gauging how effective-ly emerging market debt can bring diver-sification to a portfolio is by analysingtheir correlation profiles. Although thecredit crisis has caused many previous-ly uncorrelated asset classes to move inlock step, both local and US dollaremerging market bonds have main-tained their historically moderate corre-lation with most mainstream securities– particularly developed market fixedincome.

Overall, the most notable aspect ofinvesting in emerging market debt isthat developing economies have, by andlarge, evolved into a group of reform-minded nations that generally boasthigh rates of growth and robust publicfinances. It is due to such developmentsthat emerging market debt – compris-ing US dollar bonds, local currency debtand corporate bonds – is increasinglyviewed as a mainstream (and growing)asset class.

Debt, deleveraging and deflation willbe the recurrent themes in the Westernworld in the years ahead. Havingborrowed too much, Western nations arein danger of being caught in a Japan-likedeleveraging and deflation trap. The bestthat central bankers will be able to do isto commit to low short-term interestrates for a very long period of time.

This will continue to provide opportu-nities for emerging market debt, and forinvestors to consider it as part of anoverall fixed income exposure.

Accordingly, BTFG Research believesthat emerging market debt will continueto grow in prominence and provide analternative debt solution to developedmarket economies. However, while thereturn opportunities may be attractive,we recommend that only those investorsthat appreciate the risks involved ininvesting in emerging market debtconsider it as part of a broader investmentand portfolio configuration.

Piers Bolger is head of research andstrategy, advice and private banks at BTFinancial Group.

“Having borrowed toomuch, Western nations arein danger of being caught ina Japan-like deleveragingand deflation trap. ”


The Government will make minorextensions to the capital gainstax (CGT) exemptions for certaincompensation payments and

insurance policies, backdated to1 July 2005. After waiting more than sevenyears for a definitive answer, TreasurerWayne Swan provided clarity in the 2012-2013 Federal Budget.

While this issue may have onlyreceived a couple of lines in the Budget,it will have a significant impact uponsuperannuation funds that offer totaland permanent disablement ( TPD)insurance to their members. The changewill mean that CGT will not apply wherea taxpayer receives compensation,damages, or certain insurance proceedsindirectly through a trust. This willensure that the taxpayer has the sameCGT outcome as a taxpayer who receivessuch proceeds directly.

BackgroundThe original question was raised with theNational Tax Liaison Group in 15 March2005. At the time, the Tax Office believedthat the proceeds of a TPD policy held bya superannuation fund trustee, to theextent that such proceeds are received ona member's total and permanent disable-ment (not on death), were assessableunder the CGT provisions.

All parties agreed that CGT would notapply where there is an insurance policyon the life of an individual and the recip-ient of the proceeds is either the originalbeneficial owner of the policy, an entitythat acquired the interest in the policyfor no consideration, or the trustee of acomplying superannuation entity for theincome year in which the CGT event

happened. Thus, a death-only policywould not attract CGT when it is paid toa superannuation fund.

The ATO stated that under the LifeInsurance Act 1995 (section 9), a life insur-ance policy is a contract of insurance thatprovides for the payment of money on thedeath of a person, or on the happening ofa contingency dependent on the termi-nation or continuance of human life. Thetermination of life is not a considerationunder a TPD policy; thus the ATO wouldnot grant a CGT exemption under thissection of the Tax Act.

The industry and professional bodiesmade a counter-argument. A capital gainor capital loss you make from a CGT eventrelating directly to any of these is disre-garded: (a) compensation or damages youreceive for any wrong or injury you sufferin your occupation; (b) compensation ordamages you receive for any wrong, injuryor illness you or your relative sufferspersonally. They argued that TPD bene-fits paid to a superannuation fund shouldbe exempt as it is compensation for aninjury or illness.

The ATO disregarded the counter-argument, as the individual did not

directly receive the compensation forthe injury or illness. The trustee of thesuperannuation fund received thecompensation (insurance proceeds),and then distributed the insuranceproceeds to the members as stipulatedin the trust deed.

Many industr y and professionalbodies suggested that the ATO’s inter-pretation was contrary to the intentionand context of the legislation. Thebodies argued that any TPD proceedsreceived by superannuation fundtrustees are effectively received onbehalf of the beneficial owner/s of thepolicy (the members) and hence shouldbe exempted from CGT under section118-37 ITAA 1997.

Potential implicationsThe ATO’s original 2005 interpretation hadpotentially serious implications for thefunding of total and permanent disable-ment risk in superannuation funds.

Let’s look at an example. The trusteeagrees to provide $1 million worth of TPDinsurance cover to its members. Thetrustee agrees with an insurance companyto pay premiums that provide $1 millionof cover to each of its members. Upon themember meeting the definition under theTPD insurance contract, the insurancecompany pays the trustee of the super-annuation fund $1 million. As the TPDproceeds are a capital gain to the super-annuation fund, CGT would be leviedagainst the fund at 15 per cent. The fundwould have to pay $150,000 to the ATO,and the trustee will be underinsured by$150,000 (the tax amount).

As the trustee agreed to provide $1million worth of TPD cover to its member,

they would need to find alternativesources of funding to meet the shortfallin this obligation (likely reducing invest-ment returns to other members).

Alternatively, the trustee may haverealised the potential CGT liability priorto entering into the contract with theinsurance company. They could havepromised the members $1 million inTPD cover, but taken out contracts withthe l i fe insurance company for$1,176,471 on each member, so then netamount after CGT would remain $1million ($1,176,471 x (1 – 0.15) = $1mill ion. Tax rate inside super is amaximum of 15 per cent, and CGT couldbe reduced to 10 per cent within super-annuation). This alternative would guar-antee the correct amount being paid tothe member at claim time, but thepremiums would also cost up to 15 percent more.

Impact from the May 2012 BudgetannouncementTPD proceeds paid from insurancecompanies to superannuation funds willno longer be liable for CGT, when ulti-mately passed along to a member.Superannuation funds will potentiallysave hundreds of thousands of dollarsin CGT liability.

This is a positive amendment to anunintended consequence of the originallegislation. Superannuation funds willnot be liable for CGT on TPD insuranceproceeds that are intended for members.We now eagerly await the amendmentsto the legislation.

Jeffrey Scott is the executive manager ofInsuranceTech at CommInsure.


Insurance in super and CGT exemptions

Toolbox

Jeffrey Scott outlines potential implications of the Government’s decision to make minorextensions to the CGT exemptions for insurance policies inside super.

CPD Quiz1. For funds that offer TPD insurance to members,where will CGT no longer apply?a) Where a taxpayer receives compensation indirect-ly through a trustb) Where a taxpayer receives damages indirectlythrough a trustc) Where a taxpayer receives certain insuranceproceeds indirectly through a trustd) All of the above

2. The tax rate inside super is a maximum of 15 percent. What rate could CGT be reduced to withinsuper?a) 5 per centb) 7.5 per centc) 10 per cent

3. True or false:TPD proceeds paid from insurance companies tosuperannuation funds will no longer be liable for CGT.

Try our interactive CPD Quiz, available in the Money Management iPad®

edition FREE from the App StoreSM.MONEYMANAGEMENT iPad® edition

iPad is a trademark of Apple Inc., registered in the U.S. and other countries.App Store is a service mark of Apple Inc.

For more information about the CPD Quiz, pleasecontact Milana Pokrajac on (02) 9422 2080 or [email protected].

This activity has been pre-accredited by theFinancial Planning Association for 0.25 CPD credit,which may be used by financial planners assupporting evidence of ongoing professionaldevelopment. Readers are invited to submit theiranswers online: www.moneymanagement.com.au

Appointments


Please send your appointments to: [email protected]

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

COMPLIANCE MANAGERLocation: MelbourneCompany: Lloyd Morgan AustraliaDescription: A national financial servicescompany is looking to hire a compliancemanager for a 9-month maternity leavevacancy.

In this role, you will be the principalcompliance resource providing complianceadvice across the areas of financialplanning, superannuation and lending.

These responsibilities include developingcompliance strategy and processes,matters concerning licensing andregulation, conducting field audits andreporting.

To be considered, the candidate willhave a demonstrated background in thefinancial services or funds managementindustry in an auditing or compliancecapacity.

For more information and to apply, visitwww.moneymanagement.com.au/jobs,or contact Liz at Lloyd Morgan Australia –(03) 8319 7835,[email protected]

SENIOR FINANCIAL ADVISERLocation: AdelaideCompany: Terrington ConsultingDescription: A full-service financial

advisory firm is seeking a talented andproven financial advisor to join its team.

It is critical that the successfulcandidate has expertise aroundsuperannuation, tax and Centrelink,business and individual risk insurance, aswell as experience in dealing with HNWclients.

In this role, you must also have the skillsto acquire new clients via your ownprofessional network.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs,or contact Myra at Terrington Consulting –0499 771 629,www.terringtonconsulting.com.au

SENIOR PARAPLANNERLocation: AdelaideCompany: Terrington ConsultingDescription: A financial planning andstockbroking services provider is lookingfor an experienced paraplanner to join itsAdelaide team.

You will need at least two years ofexperience as a paraplanner to beconsidered, including working with financialadvisers and other professionals to providea holistic planning service.

In this role you will be expected toproduce SOA and ROA documents and

develop a compliance regime; assist in theclient review process, undertake in-depthresearch, and develop technical strategies.

The successful candidate will have aminimum RG146 qualification and DFP.

You will also need to be across bothfinancial services and stockbroking andhave a detailed understanding of planningstrategies, including gearing,superannuation, SMSF, retirement, taxminimisation, risk and estate planning.

Experience with AdviserNETgain and/orXPLAN will be a distinct advantage.

For more information and to apply, visitwww.moneymanagement.com.au/jobs,or contact Myra at Terrington Consulting –0499 771 629,www.terringtonconsulting.com.au

FINANCIAL ADVISERLocation: AdelaideCompany: Terrington ConsultingDescription: A financial services firm isseeking a technically competent financialadviser to provide solutions insuperannuation and wealth accumulation,risk, retirement planning, investment adviceand estate planning.

The successful candidate will have theability to build high-quality, long-termrelationships with clients.

Advanced DFP and/or CFP accreditationis also essential.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs,or contact Myra at Terrington Consulting –0499 771 629,www.terringtonconsulting.com.au

SENIOR FINANCIAL ACCOUNTANTLocation: AdelaideCompany: Terrington ConsultingDescription: A large corporate body islooking to hire an experienced financialaccount for a leadership role.

The full-time position will require thesuccessful candidate to complete period-end closing procedures (Oracle), generalledger reconciliation, compliance, assistinternal and external audit functions andFOREX transaction management.

Your primary focus will be to lead anaccounting team, so demonstrated experiencein managing and mentoring will be essential.

In addition, you are required to havetertiary education and be CA/CPAqualified.

For more information and to apply, visitwww.moneymanagement.com.au/jobs,or contact Victor at Terrington Consulting –0499 771 827

www.terringtonconsulting.com.au

MLC has appointed MarcCassidy as state manager (Victo-ria) for MLC Advice Solutions.

Currently serving as statemanager ( Victor ia) , MLCMortgage Solutions, Cassidywill be responsible for leadingthe advice solutions in deliv-ering practice managementservices to advisers in Victoriaand Tasmania.

With more than 16 yearsbanking and finance experi-ence, MLC stated that he has adeep understanding of themortgage broking and financial

planning markets.MLC are currently seeking a

replacement for the nowvacant management role atMLC Mortgage Solutions.

Bennelong Funds Manage-ment has announced theappointment of former Antaresexecutive Jeff Philips as chieffinancial officer.

In his new role, he will leadBennelong's finance team withresponsibility for the reporting,compliance and product

management functions ofBennelong and its boutiquebusinesses.

Most recently serving asAntares' chief operating officer,Philips' previous employersinclude Brand Finance, Nation-al Custodian Services, MorganStanley and Pricewaterhouse-Coopers.

As part of the expandedfinance team, Hamish Wood – aformer finance manager withGLG Partners – was recentlyappointed by Bennelong to therole of group finance manager,along with Nicole Hammond assenior fund accountant and

Angela Cavuoto as assistantaccountant.

As part of its growth plans forits executive advice offering,Plan B has appointed KierenJames as business develop-ment manager – executiveadvisory services.

Ser ving as a technicaladviser with Plan B over adecade ago, James' new respon-sibilities will be to strengthenPlan B's partnerships withcompanies in order to providestrategic financial advice to their

executives and staff.He has 12 years' experience

in financial planning and waspreviously a pr ivate cl ientadviser at Shadforth Finan-cial , providing specialisedadvice to high net wor thclients.

Prior to this, he spent eightyears as senior f inancialplanner and team leader atOutlook Financial Solutions.

Bell Financial has announcedthe appointment of BrendaShanahan as a non-executivedirector amid the departure ofdirector Malcolm Spry.

Serving in several seniorexecutive and board roles inAustral ia and overseas formore than 30 years, Shanahanis currently a non-executivedirector of Challenger, Clinu-vel Pharmaceuticals and DMPAsset Management.

She also worked at theAustralian Securities Exchangeand was an executive director ofan international stock brokingcompany.

Spry has been a director ofBell since shortly after thecompany's listing and willremain a director of its onlinebroking business Bell Direct.

Move of the weekVAUGHN Richtor has been appointed chief executive of INGDirect Australia and will step into position when currentCEO Don Koch departs in August.

Koch – who will take on the role of CEO of ING Bank Italy– has overseen the expansion of ING Direct's businessrestructure and its expansion into transaction banking. Hewill also step down from the executive board.

Richtor previously held the CEO role from 1996 until 2005when he oversaw the launch of ING Direct in Australia.

He currently sits on the company's board and will managethe Australian business while continuing to be responsiblefor ING retail banking in India, Thailand and China.

ING Direct stated that the appointment of Richtor reflectsthe importance of the Australian market in the Asia region.

Kieren James

Jeff Philips

““IT may come as a great surprise to regularreaders of this column that a man whohas notched up as many noteworthyachievements as Outsider has yet to scalethe summit of Mt Everest.

However it is a sad but true factthat this is one life goal that seems toh a v e p a s s e d O u t s i d e r by. A n dalthough his passion for fairways andsingle malts seems to be undimin-ished with his advancing years, hisdetermination to one day scale anine-kilometre mountain throughfreezing blizzards does admittedlyseem to have waned somewhat.

Not so for Greencape Capital port-folio manager Marc Hester, apparent-ly: the Melbourne-based stockpickerrecently posed for the attached photoatop the world’s highest peak.

Outsider is told Hester’s stay atopthe summit stretched to only a fewminutes due to the terrible weather

that day. The blue sky behind himdoesn’t look al l that threatening,although the icicles descending from

his eyebrows seem to support thenotion that it was a tad chilly that dayat 29,000 feet above sea level.

Outsider


“If you try to turn on yourcomputer in the morning,you’ll have to tell APRA.”

The all-seeing, all-knowing APRA

brigade legislate on the use of

electronic appliances, says King and

Wood Mallesons senior associate

Michael Mathieson.

“I know I do have New Zealandon my business card, but todate that’s just meantattending a Rugby World Cup.”

Ben Heap, UBS Global Asset

Management managing director and

head of Australia and New Zealand,

comes clean about his dealings across

the ditch.

“I think quite a few people wereunaware of them. Havinglooked at them, they’re actuallynot terribly helpful but theysaid that is the place to go forup-to-date information.”

APRA’s FAQs may not be useful but at

least they’re timely – or so they told

Michelle Levy, partner at King and

Wood Mallesons and a host of

industry reps.

Out ofcontext

Sexchange in the city

Me and my shadow minister

Climb every mountain…one day

OUTSIDER may be a relative newcomer to the Twit-terverse – he has been a card-carrying member ofthe Twitterati for less than a month – but he knowsa #hashtagfail when he sees one.

His Twitter feed has been somewhat clogged byvarious accounts affiliated with global consultingfirm Towers Watson recently.

The tweets tended to contain bizarre referencesto a conference about “The Wrong Type of Snow”and risk management – followed by the hashtag#TWideasexchange.

Now Outsider is as open-minded as the next griz-zled veteran of the newspaper industry, but the ideaof a sex change does not appeal to him one bit.

Why Towers Watson would want to hold a confer-ence on the finer points of gender reassignment isbeyond him.

Needless to say Outsider set about doingsome serious fact checking on the subject(donning his special ‘reporter’ hat for the task)and quickly discovered that the tweets were inreference to the Towers Watson Ideas Exchangeconference, held in Melbourne last week.

It turns out the conference was about the inabili-ty of British Rail to keep the trains running becausethe “wrong type of snow” was falling on the tracks –and how that somehow related to the risk manage-ment industry.

With such admittedly uninspiring subject mate-rial to work with, Outsider is unsurprised that theTowers Watson marketing team resorted to doubleentendres.

Or perhaps there is a more Freudian explanationthat Outsider would rather not delve into.

OVER the years, Outsider has managed to infect his personalcomputer with various cyber illnesses by trying to retrieve aniPad he won because he was the one millionth visitor to a cer-tain website, or by installing anti-virus software from a pop-upad that told him his computer was at risk.

But having learned from experience, Outsider knew betterthan to click on a link sent via a direct message on Twitter byShadow Minister for Financial Services Mathias Cormann.

The message (see picture) read, “Hi someone is postingvery bad things about you,” with a mysterious link apparentlyleading to the nasty gossip about yours truly. While somewould argue Outsider should have every reason to believesuch a message, he smelled a rat.

Gen Y team members were particularly proud when, uponfurther examination, Outsider noted a number of similar mes-sages in his inbox and concluded (all by himself) that the

shadow minister had had his profile hacked and that the link isprobably a fake.

So Outsider would like to take this opportunity to informthe shadow minister that changing his password on a regularbasis would not be a bad idea (and would probably preventOutsider installing yet another virus). After all, Outsider feltthe message was less than convincing, given that all the nastyrumours about Outsider are actually started by…Outsider.

A L I G H T - H E A R T E D L O O K A T T H E O T H E R S I D E O F M A K I N G M O N E Y

money management (june 14, 2012)

Documents

intrafund advice shouldextend

intrafund advice itsnot

compulsoryintrafund

dogive advice

boutique advice groups

intrafund space

direct investors

super industry