Money Management (May 24, 2012)

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ALTERNATIVE INVESTMENTS

By Mike Taylor

THE apparent eruption of a financialplanning distribution turf war in theimmediate aftermath of the acquisitionof Count Financial by the Common-wealth Bank has led to warnings aboutvertical integration giving way to thecreation of oligopolies.

A number of key figures in the finan-cial planning industry have expressedconcerns at the extreme figures beingquoted as “sign-on fees” for Count Finan-cial practices joining BT Financial Group.

Those figures have ranged from fivetimes earnings and from $500,000through to $1 million.

BT Magnitude Financial managingdirector Phil Butterworth has deniedsuch figures have been paid, as well asdenying suggestions that the strategybeing pursued by BT Magnitude iscounterproductive.

“There is nothing sinister about whatwe are doing and to suggest otherwise

underestimates the commercial nous ofthe practices involved,” he said.

Butterworth said it was simply a caseof people making decisions relating totheir best interests.

“It is about distribution but it is alsoabout practices making decisions to

inject efficiencies into their businessesand align to scale,” he said.

Butterworth dismissed the phrase“sign-on fee” and said the paymentsinvolved were better described as “tran-sition payments” which assisted incovering the costs of transitioning to thenew arrangement.

He also confirmed that Count Finan-cial firms were not the only ones beingtargeted, with those within other groupssuch as Professional Investment Serviceshaving also been subject to discussion.

However, Paragem managing directorIan Knox said he was becoming uncom-fortable with the reality that the majorplayers “are distorting the advice indus-try by making inroads to planning prac-tices by paying them to become agentsof their licences”.

“I can’t see how any licence-holdercould ever recover that sort of paymentwithout product obligation,” he said.

“I sense we are increasingly movingtoward an oligopoly in advice in

Australia which in the long-term willcome back to bite the planning indus-try,” Knox said. “We’ve had an oligopolyin the platform market for so long andthe result has been limited innovation.

“Do we really want advice to be ownedand licensed by four banks and AMP?”he said.

Premium Wealth Managementgeneral manager Paul Harding-Davisexpressed equal concern, saying he feltan overwhelming sense of déjà vu as theindustry returned to the vertically-inte-grated days of the 1980s.

Referring to the high figures beingquoted with respect to sign-on fees,Harding-Davis said that in the old dayssuch payments were regarded as “loans”,but there seemed to be a blurring of theline between “gifts” and “loans”.

“But what is going on right now ishardly helpful in allowing market diver-sity to occur and it is certainly strength-ening the influence of the major insti-tutions,” he said.

By Andrew Tsanadis

THE rise of the younger, more affluent woman maypresent a golden opportunity for financial adviserslooking to diversify their current client base.

Sarah Riegelhuth, senior strategic financial adviserwith Wealth Enhancers, said she has seen a consider-able increase in the number of so-called young “profes-sional women” actively seeking financial advice in thepast two years.

She said the clients she deals with in this space earnon average $140,000 or more.

According to the Westpac Report on Women’sFinances by Generation, generation Y (Gen Y) womenin general are more focused on their financial situa-tion than past generations.

From a survey of 300 respondents, 18 per cent ofGen Y women were likely to save 20 per cent of theirincome per month, compared to 8 per cent of genera-tion X (Gen X) and 9 per cent of baby boomers.

In addition, 53 per cent of Gen Y women felt to someextent that they needed to delay starting a family dueto financial pressures, followed by Gen X (30 per cent)and baby boomers (15 per cent).

Experience Wealth director Steve Crawford saiddeveloping more meaningful services for young,wealthy women was a unique proposition for any

Advice oligopoly trend may hurt planners

Continued on page 3

Well-off Gen Ywomen a goodadvice market

TRIO CAPITAL COLLAPSE BACKWASH: Page 12 | AGED CARE SYSTEM: Page 25

Vol.26 No.19 | May 24, 2012 | $6.95 INC GST

DESPITE solid performance recordedby some strategies, financial plannersare not exactly jumping back into alter-native investments, having been burntduring the global financial crisis.

However, on the institutional side,super funds like Sunsuper and theFuture Fund have moved quite heavilyinto alternatives in recent years.

So which strategies within the alter-native investment space are popularand which products are still on thenose?

The “hedge fund is dead” mentalityfrom 2008 and 2009 appears to befading away and the new breed ofproducts in this space is having aresurgence.

Industry experts claim hedge fundshave come back stronger and moresophisticated than ever. Despite theapparent image problem due to somenegative experiences, investors can getsubstantial rewards provided they

pick their managers carefully.In the hedge fund space, global

macro strategies are proving success-ful, while market neutral funds havealso performed strongly.

However, there are alternative invest-ment options that are still strugglingafter blow-ups during the global finan-cial crisis, such as fund of hedge funds.

Their structure is not seen asinvestor friendly, has too many layersof cost and is inappropriate for the cur-rent environment, according to someindustry commentators.

Similarly, leveraged beta fundsare very unpopular, primari lybecause of the amounts of lever-age they utilise.

For more on alternativeinvestments, turn to page 14.

What’s hot and what’s not?

Phil Butterworth

With the Parliamentary JointCommittee (PJC) onCorporations and FinancialServices having last week

handed down its final report on thecollapse of Trio Capital, it is worth reflect-ing that the Government's Future ofFinancial Advice (FOFA) legislationcannot be guaranteed to prevent suchfuture events.

Quite simply, the FOFA bills cannot andwill not prevent a recurrence of either thecollapse of Storm Financial or the collapseof Trio/Astarra.

Why? Because governments have neversucceeded in legislating to prevent the sortof willful criminality which gave rise to thelosses incurred by investors hurt byTrio/Astarra – and the simple fact remainsthat the Storm Financial collapse was moreattributable to systemic flaws than anyovert regulatory breaches.

However, it is entirely arguable that thefinancial services regulators – the AustralianSecurities and Investments Commission(ASIC) and the Australian Prudential Regu-lation Authority (APRA) – ought to havebeen more alert to the problems associat-ed with both Storm and Trio.

Indeed, if objective observers were to

examine evidence given to both the PJCand other Senate forums regarding bothStorm Financial and Trio Capital, a themewould emerge with respect to the regula-tors acknowledging a degree of awarenessof impending problems, but choosing tonot to act beyond what they saw as theirnormal brief.

The FOFA legislation has granted theregulators more extensive powers, butthere is nothing in the new laws to suggesteither ASIC or APRA will necessarily actany differently when presented withevidence of the kind they saw in the caseof both Trio and Storm.

Indeed, some have argued that it wasopen to both ASIC and APRA to interpretthe pre-existing regulatory environment ina fashion which would have allowed themto act sooner and prevent the substantialinvestor losses which occurred.

But nor should the financial planningindustry itself be allowed to sidestepaccepting at least some responsibility forwhat occurred with respect to Storm andTrio. Financial services is an industry madeup of people with peculiarly acute anten-nae. Some senior figures were well awareof the problems within both Trio andStorm, and must ask themselves what theycould/should have done.

The degree to which those in the finan-cial services industry should act on suchintelligence will increasingly become anissue as organisations seek to establish aprofession and impose sanctions whencodes of conduct are breached.

While nothing in the FOFA legislationwill prevent a repeat of either Storm or Trio,a combination of industry and regulatorvigilance would go a long way towardsidentifying problems before they actuallyoccur.

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2 — Money Management May 24, 2012 www.moneymanagement.com.au

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Average Net DistributionPeriod ending March '1110,207

FOFA alone won’t stop another Trio

By Mike Taylor

SELF-MANAGED superannuation fund(SMSF) trustees need to consider payinga levy to be able to access the samecompensation arrangements as peoplein Australian Prudential RegulationAuthority (APRA)-regulated funds,according to the Minister for FinancialServices, Bill Shorten.

Reacting on national television to thefindings of the Parliamentary JointCommittee (PJC) inquir y into thecollapse of Trio Capital, Shorten did notback away from his earlier commentsthat SMSF trustees caught up in thecollapse had been “swimming outsidethe flags”.

As well, the Minister continued toapportion a good deal of blame to finan-cial planners who he said had pushed

clients towards the Trio investmentvehicles on the basis of the sizeablecommissions they would receive.

Shorten’s strong line on the need forSMSF tr ustees to contr ibute to acompensation levy, and on financialplanners, came despite the PJC layingconsiderable blame at the feet of thefinancial services regulators – APRA andthe Australian Securities and Invest-ments Commission (ASIC).

As well, the PJC recommended thatASIC fund the pursuit of further actionagainst those involved in the Tr iocollapse.

For its part, the Federal Oppositionhas urged the Government to adopt thePJC’s recommendations, particularly theextension of compensation arrange-ments for those people who were movedout of APRA-regulated funds and into

an unprotected environment as a resultof receiving bad financial advice.

Financial Planning Association chiefexecutive Mark Rantall claimed thePJC’s key findings were “a blunt promptto financial regulators and productmanufacturers to demonstrably liftprotection and disclosure standards inthe interest of protecting Australiansfrom further fraudulent actions andcriminal attacks on their life savings”.

“Today’s findings from the Parliamen-tary Joint Committee review of thecollapse of Trio Capital remind us thatthe client-first principle must apply asan ironclad undertaking by all industryparticipants and those who oversee thesector,” Rantall said.

However, he said the PJC hadacknowledged the collapse of Trio hadnot resulted from a failure of advice, but

rather, “was a premeditated and sophis-ticated fraud which went undetectedover years”.

www.moneymanagement.com.au May 24, 2012 Money Management — 3

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Shorten fingers advisers on Trio

adviser looking to buildon their client base.

“It’s more to do withthe fact these womendon’t want to be financial-ly dependent on a man,”he said.

Crawford – who current-ly works with femaleprofessionals agedbetween 25 and 45 andearning upwards of$150,000 – added thatmany of his female clientshave investment proper-ties and will often ownthem before they find apartner.

“Even the ones that arecoming in with their part-ners, they are the onesthat have instigated theinvestment process.”

Louise Lakomy, princi-pal of investment adviceat Yellow Brick Road, saidshe provides services toyoung, wealthy singlefemales from divorcedsituations, which shesaid are more prevalenttoday than they were 10years ago.

Single professionalfemales in particular willactively seek advice andengage more in the plan-ning process than ayoung male with a similaramount of wealth, Craw-ford added.

“Combine that withrelationships I’ve seenwhere females tend toearn more money thantheir male partners, it’sjust logical that if they’re

the decision-makers,they’re the ones that aremore open to conversa-tion, they’re the ones thatare earning equal or moremoney, there’s so manyreasons to target andbuild your offer aroundthem,” he said.

According to Riegel-huth, word-of-mouthreferrals are really impor-tant for this segment asmost of them will want amore holistic advicemodel that focuses “lesson numbers and delvesdeeper into their person-al goals and real desiresfor their life”.

In addition, mostwomen in this market willtend to avoid plannerswith a “sales-type” modeland prefer to build whatthey feel to be a moregenuine relationship witha potential adviser, sheadded.

Well-off Gen Y womena good advice marketContinued from page 1

Bill Shorten

Louise Lakomy

News

By Tim Stewart

COMPLIANCE consultant ChristinaKalantzis has seen an uptick in thenumber of boutique planners looking to“hand back” their Australian FinancialServices Licence (AFSL) in recent months.

“A lot of my work at the moment ishanding in AFSLs [to the Australian Secu-rities and Investments Commission],”Kalantzis said.

Many of the “small and boutique guys”who have contacted Alexis Complianceand Risk Solutions are looking to sell uptheir client base and become an autho-rised representative of a larger AFSL,Kalantzis said.

“I’ve never had these conversationsbefore with AFSL holders. This is the firstyear [it’s happened]. I’ve had five a monthin the last couple of months,” she said.

While some of the planners approach-

ing Kalantzis have made up their mind tocancel their licences, others are seekingadvice from her “so they know how tomake a decision”.

“Some boutiques are seriously consid-ering what their future’s like and the oper-ating expenses of running a business,” shesaid.

A spokesperson for ASIC said therehave been 180 “voluntary applications tocancel a licence” to date in financial year

2011-12 (as of 10 May). This compares to280 in 2010-11 and 259 in 2009-10.

The process of a licence cancellationinvolves reviewing the internalcomplaints of the licensee and contact-ing the external disputes resolutionscheme, the spokesperson said.

While AFSLs are sometimes cancelledconditionally by ASIC, they are not keptopen for more than a year, added thespokesperson.

FSC deemscompensationschemeinappropriateBy Milana Pokrajac

THE Financial Services Council(FSC) has come out in supportof the so-called St John inquiryinto compensation arrange-ments, which suggested a lastresort compensation schemewould be “inappropriate andcounterproductive” for thefinancial services industry.

St John’s inquiry into com-pensation arrangements –tabled by Minister for Finan-cial Services and Superannua-tion Bill Shorten – found thatretail clients are generally ableto recover compensation forlosses and that it would beinappropriate to introduce alast resort compensationscheme at this time.

St John also suggestedproduct issuers accept agreater responsibility for con-sumer protection.

“The FSC commends thefindings of this independentreport, which recognises thatthe existing Australian regula-tory framework is well devel-oped and already providesmultiple layers of consumerprotection,” said FSC directorof policy Martin Codina.

The report also acknowl-edged that this regime is beingfurther strengthened through aseries of regulatory measures,including the introduction of theFuture of Financial Advice andStronger Super reforms.

Shorten and the broaderfinancial planning industryalso supported the findings.

“The report had acknowl-edged the reality that regard-less of how stringent the regu-lations surrounding theprovision of financial adviceare, there are times wherethings do go wrong, andappropriate avenues for com-pensation need to be avail-able to retail consumers,”Shorten said.

Boutique planners raising the white flag: Kalantzis

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News

By Tim Stewart

PROFESSIONAL indemnity (PI) premiums arehigh because insurers have difficulty identify-ing authorised representatives who havemade fraudulent claims in the past, accord-ing to Vero head of casualty Alex Green.

Responding to the Government-commis-sioned Richard St John report ‘Compensationarrangements for consumers of financialservices’, Green said the actions of a few

“rogue representatives” made PI premiumsmore expensive for everyone.

“Our biggest concern today is fraud andmisrepresentation – the misconduct that isparticularly prevalent through small licenseesand certain authorised groups in largelicensees,” Green said.

Privacy issues prevent insurers from shar-ing information about the dishonest claimsmade by some authorised representatives,he said.

“We know names of authorised represen-tatives who have bankrupted a lot of peoplewho have trusted them. There are no formalrecords or documentation around that,”Green said.

“The authorised representative could turnup in six months time at another dealergroup,” he added.

If there is no formal court case findingagainst an authorised representative whomakes a “false or misleading” claim, the

Australians Securities and Investments Com-mission (ASIC) “cannot know what really hap-pened”, and will not add the individual to apublicly available register, Green said.

Green described the Richard St Johnreport as “measured” and “not a knee-jerk”,but he said it failed to do justice to the prac-tical problems for PI insurers.

“A significant proportion of the losses thatare paid out are due to fraud and dishon-esty,” Green said.

OneVuesponsors andpartners SMSFassociationBy Chris Kennedy

THErecently-formed AustralianSelf Managed Super FundMembers Association (ASMA)has formed a partnership withOneVue which will bothsponsor the group and launchan intermediated consumerplatform for associationmembers.

OneVue offers “an expansiveplatform for self-directedinvestors as well as qualitativeinformation in regards towhere SMSF trustees areinvesting,” said ASMA directorAnna Carrabs, who expectedthe association to grow from2000 to 5000 members in thecoming months.

“OneVue will provide ourmembers with a platform thatcan administer more assetsand liabilities than traditionalproviders, and tools likeWealthVue which gives clientsfull visibility of their financialsituation so they can moreeasily plan for a comfortableretirement and identify advicerequirements,” Carrabs said.

OneVue chief executiveConnie Mckeage said OneVuehad no intention to marketdirectly to investors, but saw theopportunity in extending distri-bution through intermediaries.

While there would always beinvestors working with advisersregularly, there was a growingmarket of self-directed investorssuch as ASMA members whowanted to do it themselves andseek advice on a graduatedbasis, Mckeage said.

Fraudulent PI claims driving premiums up: Vero

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News

Industry funds moveon transparencyBy Mike Taylor

THE organisation represent-ing the majority ofAustralia’s industry superfunds – the Australian Insti-tute of SuperannuationTrustees (AIST) – has calledon them to move to providefull disclosure of trusteedirector and executive payahead of any governmentregulation.

The call has come againstthe background of criticismof some industry funds fromother sectors of the financialservices industry and theFederal Opposition.

However, AIST chief exec-utive Fiona Reynolds said itwas time for super funds totake the next step and notsimply wait for legislationand regulation to arrivebefore the industry.

She said that by calling onits own member funds toadopt the highest disclosurestandards, AIST was hoping

it would raise the bar acrossthe entire industry.

The Financial ServicesCouncil (FSC) in Marchreleased its own corporategovernance standardswhich it said would bemandatory for membercompanies. However,Reynolds said that current-ly many of the super fundsoperated by the large banksand financial institutionsdid not even disclose the

names of their trustee direc-tors on their websites.

“And I challenge anyoneto find out how much theyare paid,” she said.

Reynolds said the FSCguidelines, whilst welcome,fell well short of providingmeaningful disclosure toconsumers.

“Under the FSC guide-lines, only remunerationpaid from the trusts of manyretail funds will be disclosedto members,” she said. “Yetin many cases, this remu-neration is peanutscompared to the remunera-tion some directors receiveas an employee of the trust’sparent company.”

Reynolds said the AISTbelieved the ability to ‘lookthrough’ commercialarrangements was vital tomeeting the superannua-tion industry’s public obli-gations and growing expec-tations around transparencyand disclosure.

Super funds lagging onrollover changesTHE pace of the Government’s leg-islative changes has again causedconcern in the financial servicesindustry, with the Association ofSuperannuation Funds of Australia(ASFA) warning that some superfunds wil l struggle to meet newrequirements around rollover benefitstatements (RBS).

In complaints reminiscent of indus-try concerns around the transition tothe Future of Financial Advice (FOFA)changes, the ASFA submission pointsto a number of funds being unable tomeet the deadline for the changesbecause they do not currently collectthe information required.

The changes have implications forfinancial planners involved in rollingover super balances for clients.

In a submission lodged with the Aus-tralian Taxation Office (ATO), ASFA haspointed to the increased informationfunds will need to provide, but warns ithas concerns “about the ability of manyin the industry to meet the new require-ments from 1 July, 2012”.

“By way of example, two largesuperannuation providers have

advised ASFA that a 1 July 2012implementation date is not possible,particularly given that this documentis only a draft and that the final formwill not be available until mid-June,”the ASFA submission said.

“One fund noted that industry con-sultation commenced in February2012, the month in which its July 2012IT release was signed off,” it said.

Pointing to the timetable and thechanging requirements, the ASFA sub-mission said that it was concernedthat the ATO was only now exposing amore detailed draft of the rolloverbenef it statement to al l superproviders, administrators, softwareproviders and other representatives.

“A more specific concern is that thechanges to the RBS include newfields for data for which there is nocurrent legal requirement for a fundto record or hold, and for which fundshave no legislative detail to facilitatethe systems design,” it said.

“Additionally, there is no advice inthe draft material as to how and whenthese changes will feed through tothe Rollover Data Standard”.

Fiona Reynolds

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News

Planners give main push tocapital protected products

By Milana Pokrajac

FINANCIAL planners play an enormous role in the take-up of capital protected products as the demand comingfrom investors slowly decreases, according to a reportreleased by Investment Trends.

The 2011 Capital Protected Products Report saw themarket in this space decrease by 9 per cent over the pastyear, with a quarter of investors citing inappropriate marketconditions as a barrier to using these products.

“This says that market performance expectations playa key role in driving and hindering investor appetite for

these products,” said Investment Trends analyst KingLoong Choi.

However, financial planners remain persistent in theuse of capital protected products in their clients’ portfolios.

Loong Choi said more financial planners than in 2010recommended capital protected products in 2011, andmore are intending to recommend them in the comingyear.

“Not only are more capital protected product investorsusing advisers – especially financial planners – three out offive investors said that their adviser was involved in theirmost recent capital protected product investment, while44 per cent said they first learnt about this investmentfrom their adviser,” Loong Choi said.

However, one of key reasons that prevents plannersfrom increasing their use of capital protected products istheir desire for simpler structures, he added.

Of product providers, the Commonwealth Bank hadthe highest brand awareness among investors, whileMacquarie was the most recognised brand amongadvisers.

ACCC decision hasimplications for planningBy Mike Taylor

THE competition regulator, theAustralian Competition andConsumer Commission (ACCC),has issued a decision regard-ing membership of industryorganisations which may haveimplications for groups such asthe Financial Planning Associ-ation and the Association ofFinancial Advisers.

The ACCC decided to allow acontinuation of a situationunder which mortgage brokersworking for particular lendingbusinesses are required to bemembers of the MortgageFinance Association of Aus-tralia (MFAA).

The regulator said it haddecided to “allow the protec-tion from legal action for thearrangements to continue”.

Commenting on the regula-tor’s decision, ACCC chairmanRod Sims said the ACCCbelieved the arrangementscontinued to deliver benefitsto the public, notwithstandingthe commencement of anational regulatory regime forthe credit industry in 2010.

He pointed out that theMFAA’s membership require-ments imposed higher educa-tional standards and certain

other professional require-ments on its members thanthe regulatory regime.

“The ACCC considersrequiring MFAA membershipis likely to assist those lend-ing businesses to ensurethat their brokers are of aconsistently high standardand to meet their compli-ance obligations under theAct,” Sims said.

The ACCC’s formal state-ment said that while itacknowledged requiring MFAAmembership restricted choiceof professional association forthe broker – thereby limitingcompetition from other similarprofessional associations – thesmall number of brokersinvolved meant any publicdetriment was minimal.

“Further, the MFAA mem-bership requirement is onlyimposed by two industry partic-ipants,” it said. “There are alarge number of other busi-nesses that individual brokerscan work for if they disagreewith the MFAA membershiprequirement.”

The ACCC initiated a reviewof the arrangements last yearafter receiving a complaintalleging anti-competitivebehaviour.

Emotional bonds hurt valuationsBy Tim Stewart

CLOSE relationships with clientscan end up haunting plannerswhen they decide to exit the indus-try, according to Hunts’ Groupprincipal Anthony Hunt.

If a planner wants to increasethe valuation of their business,they need to demonstrate that itproduces quality earnings that will“still be around in a year’s time” –and that means institutionalisingtheir clients into the business, saidHunt.

“The client [must have] a sensethat they’re not just related to anindividual planner, but they’re actu-ally working with a business that issupporting them,” he said.

While Hunt conceded a personalrelationship with the client wasimportant, he said the “litmus test”would be how the practice wouldcope if the planner took a three-month holiday.

“Would the business just come toa grinding halt, or would it continueto chug along all by itself? How dothe paraplanners and the supportstaff work with the clients? Is therecorporate branding and communi-cation?” he asked.

Earnings can also appear to beuncertain to potential buyers if theplanner is responsible for all of hisclients’ stock selection, Hunt added.

“If they’ve got somebody who’sdedicated to portfolio constructionand developing model portfolios

…that’s another good indicatorthat you’ve got a more corporatisedbusiness and it’s less about thepersonal relationship with theplanner,” he said.

When it comes to the currentstate of practice valuations, Huntsaid “the multiples themselves haveheld up a lot better than people wereexpecting”.

However, the numbers the multi-ple is being compared to – whetherthey are revenue or earnings – arelower than they were pre-globalfinancial crisis, he said.

“The actual cheque that’s beingcut is smaller, but it’s because theraw numbers are lower rather thanbecause the multiples have droppedoff,” Hunt said.

Franklin Templeton cuts fees to target retailBy Chris Kennedy

Franklin Templeton Investments hasadjusted the fee structure on its balancedequity offering as it looks to target retailinvestors.

The fund’s management costs have beenreduced from a flat fee of 0.77 per cent to 0.39per cent with a 25 per cent outperformancefee. The outperformance fee applies whenthe fund outperforms its index – theS&P/ASX 100 Accumulation Index – after theinitial fee has been deducted.

If there is a period of underperformance,this must be clawed back before theoutperformance fee will kick in.

The balanced equity fund was launchedin October 2011, following the firm’s acqui-sition of Australian equities managerBalanced Equity Management, according

to Franklin Templeton director of adviso-ry services Jim McKay.

It has so far received an ‘A’ rating fromvan Eyk and a four star rating from Stan-dard & Poor’s, he said. “We’re also talking todealer groups at the [approved product list]level,” he said.

Franklin Templeton in Australia hasaround $17 billion in assets in a variety ofopportunities, such as institutional fundof funds and other retail investments.Because the fund is new, there are still onlylimited assets in it and, as such, capacitywould not be an issue in the near future,McKay said.

“The fund gives advisers more scope touse active Aussie equity funds than theycould in the past,” he said.

“We think the market overall iscompelling from a long-term perspective.

We think the market is changing; [Future ofFinancial Advice reforms are] bringing costpressures for advisers who are looking forcost-effective and well performing invest-ment alternatives,” he said.

Franklin Templeton is also building outits team to support the changes, whichincluded McKay joining in December 2011with a brief to build out the retail business.They also included the addition of amarketing manager and the appointmentof Stuart Devlin as a key account managerto look after the southern region. The busi-ness is also in the final stages of appoint-ing a key account manager for New SouthWales to look after the northern region.

“We will look to add more businessdevelopment staff through the course ofthis year to build out our sales team,”McKay said.Jim McKay

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SMSF Weekly

Study examines SMSF costsBy Damon Taylor

A STUDY currently beingconducted by the University ofAdelaide may allow both currentand prospective self-managedsuper fund (SMSF) trustees tomake greater cost comparisons,according to Plaza Financialdirector Peter Hogan.

“As part of a Ph.D programthey’re currently running, theAdelaide University is in themiddle of doing a review of thecosts of running superannua-tion funds based on data forabout 25,000 funds,” he said.“And what they’re trying to do is

compare the typical, averagecosts involved in a sel f-managed super fund comparedto an MER (managementexpense ratio) of 1.5 per cent or2 per cent that a managed fundmight charge, and then whatev-er the various charges of theindustry funds are.”

Hogan said that the study wasalso likely to provide prospectivetrustees with a far better guide,not only to the costs involved inan SMSF, but also to what sort ofopening account balance theywere likely to require.

“The $200,000 mark per fundnumber is one that’s been

around for a long time,” he said.“I think ASIC (the AustralianSecurities and InvestmentCommission) was the first topropose it as being a minimumfund size.

“But, realistically, it was doneon some very loose assumptionsand wasn’t as rigorous an exam-ination of the various costsinvolved in running a fund ascompared to what the AdelaideUniversity is attempting.”

According to Hogan, a figureof $200,000 may even turn out tobe too conservative.

“Some of the early indicationsfrom the Adelaide University

study have suggested that maybe$150,000 might be closer to themark,” he said. “However, muchlower than that and you’re clearlygoing to be behind the 8-ballcompared to any other superan-nuation offering out there.”

For Hogan, $200,000 is themagic number for good reason.

“When you get $200,000 ormore in a self-managed superfund, your costs are pretty muchfixed costs,” he said. “So as theaccount balances grow, the ratioof those fees against the incomeearned, the account balance oreven the assets held is signifi-cantly reduced.”

SPAA lamentsBudget elementsBy Mike Taylor

THE SMSF Professionals’ Associa-tion of Australia (SPAA) has acknowl-edged it had been lobbying for thetwo-year delay in the commence-ment date of the concessionalcontributions caps announced inthe Federal Budget.

However, it claims the measure –announced in the Budget – fellshor t of what i t was actual lyarguing for.

It said the Budget measure meantthe concessional contributions capfor all individuals – irrespective oftheir age or superannuation accountbalance – would be $25,000 for thetwo-year period commencing from1 July 2012.

However, SPAA said that while ithad been advocating for a two-yeardelay in the commencement dateof the measure, it had also argued

for a flat $35,000 concessionalcontributions cap to apply to allindividuals over 50 in the interim.

“In SPAA’s view, a two-year defer-ral is required to give the ATO suffi-cient time to establish the databaseof member balances required toproperly assess entitlements to thehigher cap,” it said.

The SPAA analysis said the deci-sion not to raise the concessionalcontributions cap beyond $25,000from 1 July for individuals over 50was disappointing and would makeit diff icult for individualsapproaching retirement – or indi-viduals with broken workingpatterns – to adequately save forretirement.

“It is worth remembering that theconcessional cap for individuals over50 was initially $100,000 when thecaps first commenced on 1 July2007,” the SPAA analysis said.

Who is really paying for super changes?THE Federal Gover nmentneeds to be more transparentabout who is really paying forits changes to superannuation,according to Institute of Char-tered Accountants in Australia(ICAA) specialist Liz Westover.

In an analysis of the Budget,Westover pointed to the addi-tional costs imposed by both theGovernment’s Stronger Superpolicy and the changes includedin the Budget.

She then pointed to theincreased funding directedtowards the regulators to assistin the implementation in thosechanges.

“The Government was quickto take credit for ensuring thatour regulators were givenappropriate levels of supportto do their jobs effectively,”Westover said. “However, uponcloser inspection of the Budgetpapers, I question who is actu-

ally funding the additionalsupport.

“It appears that the majorityof funding provided to theregulators for superannuationand related areas will be offsetby increases in fees and leviesthat will ultimately be paid forby Australian families and wageearners,” she said.

“With the amount of reformstaking place at the moment,additional funding for regula-

tors would cer tainly bewelcomed, but let’s be clearabout where the funding iscoming from,” Westover said.“The Government has main-tained its commitment to aretur n to surplus in thisBudget . How this is beingachieved, however, needs to bemore transparent.

“The Government needs tobe open about who is reallypaying for what.”

ETF growth continuesTHE Australian market for exchange-tradedfunds (ETFs) continues to grow, according toBetaShares’ April review which points to fundsunder management just shy of the recordedhigh of $5.45 billion.

According to BetaShares, growth had beenslow during April, with approximately $7 millionof new money entering the market. And whereMarch’s standout had been international equi-ties, the top performers for the month of Aprilhad been property securities and Palladium.

Drew Corbett, head of investment strategy atBetaShares, said that the shift continued todevelop a trend of gradual switching betweencompeting ETF products as investors con-ducted their due diligence and looked for sim-ilar beta exposures at lower costs.

“We are continuing to see gradual shifts infunds across competing products, not just forbroad market exposures but across commodi-ties and dividend ETFs,” he said. “This hasbeen the same experience in overseas ETFmarkets and is a sign of investor engagementand awareness.”

BetaShares stated that April also marked thefirst full month of trading in fixed income ETFs,and while inflows had started slowly, the expecta-tion was that they would increase as investors

became more familiar with the asset class.“While the beginnings for fixed income ETFs

have been humble, we expect the adoption ofthis new category and other yield products tohelp drive growth in the ETF industry,” saidCorbett. “Finally we are encouraged by asteady increase in trading values which pointsto a positive sentiment and increased activityduring the second half of 2012,” he said.

Peter Hogan

Drew Corbett

Liz Westover

The chairman of the AustralianPrudential Regulation Authority(APRA), John Laker, is one of thehighest-paid people on the

Commonwealth’s payroll. In the wake ofthe Parliamentary Joint Committee (PJC)report into the collapse of Trio Capital, hemight consider his future in the role.

If one thing was made very clear in thePJC report, it was that both APRA and itssister regulator the Australian Securitiesand Investments Commission (ASIC) hadfailed in one of their primary objectives –detecting and eliminating fraud in thenation’s more than $1.3 trillion superan-nuation industry.

The PJC repor t is scathing of theperformance of both APRA and ASIC and,given its findings, the executive team atAPRA should be grateful that it did not callfor someone’s head to be delivered on aplatter.

In fact a precedent exists for senior exec-utives to pay a high price for regulatory fail-ures. In 2003 the then chairman of APRA,Graeme Thompson, paid the price for thecollapse of insurance company HIH.

Indeed, the Labor Opposition at thattime was calling for executive blood, withthe then Opposition finance spokesman,Stephen Conroy, calling for APRA’s boardto resign over the regulator’s “failure to doits job”.

Conroy was quoted back in 2003 refer-ring to the board being responsible forAPRA’s light-touch, self-regulatory model,which had proved incapable of dealingwith corporate greed.

What needs to be understood about thefailings of APRA with respect to Trio is thatthey have had far greater impact than thatof the collapse of HIH. Indeed, the PJCreport last week noted that the collapse ofTr io was far more troubling than thecollapse of Storm Financial.

It said this was because while Storminvolved Austral ian investors beingpersuaded to put their money into invest-ment vehicles which were much higher riskthan was appropriate, Trio had actuallyinvolved fraud.

Just how well APRA performed withrespect to Trio has been the subject ofnumerous questions asked both within thejurisdiction of the PJC and in the broaderSenate estimates process, and the regula-tor has at times been less than clear as towho amongst its most senior personnelhad oversight of Trio.

This lack of clarity was evident in theregulator’s response to a question fromTasmanian Liberal Senator David Bushbyasking which APRA officers were responsi-ble for the review.

The response provided by APRA was arather oblique: “Members of the APRA

frontline supervision team responsible forthese superannuation entities and theirimmediate managers conducted thesereviews”.

Bushby might quite rightly have beenprompted to ask who on the senior execu-tive therefore had oversight of the issue –was Laker involved? Was his deputy chair-man, Ross Jones, involved?

The bottom line for APRA is that thefindings of the PJC on Trio are no lessdamning than the findings of the HIHRoyal Commission. Quite simply, the PJCraised strong concerns about the perform-ance of the financial services regulators incircumstances where it said the Trio fraud“appears to have been designed to takeadvantage of vulnerabilities in the superan-nuation system”, with a key element of thescheme having been to move the funds ofAustralian investors overseas.

“A key finding of this report is that keychecks and balances in the Australianfinancial and superannuation system didnot work to identify the existence of fraud-ulent conduct and to shut it down rapidly,”the PJC report executive summary said. “Itwas left to an alert industry participant touncover the Trio fraud.”

It said that in September 2009, JohnHempton, CEO at Bronte Capital Manage-ment and a former Treasury official, hadwritten a letter to ASIC Chairman TonyD’Aloisio, alerting ASIC to the suspicious-ly smooth returns achieved by the AstarraStrategic Fund in the context of a turbu-lent financial environment.

The PJC report said Hempton’s letterresulted in ASIC launching an investiga-tion into the activities of certain Trio funds.

However it said APRA and ASIC “musttake their share of the blame for the slow

response to the Trio fraud” in circum-stances where APRA conducted f iveprudential reviews between 2004 and 2009,but took no enforcement action as a resultof any of these reviews.

It said ASIC only began its investigationin October 2009 after Hempton’s tip-off.

“The committee also has concerns at thelength of time it took for ASIC to detect thefraudulent activity. It is particularly concernedthat communication between ASIC and APRAwas lacking in the months from late-2008 tomid-2009,” the PJC report said.

“It seems that APRA had not communicat-ed to ASIC its requests for Trio to provideinformation. As a result, when ASICcommenced its active surveillance of hedgefunds in June 2009, it did not seem aware thatTrio was not providing the prudential regu-lator with basic facts about the existence ofassets and their value. This informationshould have been communicated.

“The committee also believes that theregulators missed key events that laid theplatform for the Trio fraud. The first wasthe purchase of Tolhurst from its previousowners in late 2003 by interests associat-ed with Mr (Jack) Flader. The second eventrelated to investments in Trio products viaa pooled superannuation trust calledProfessional Pensions PST (PPPST ). In2004, the tr ustee of PPPST, the Tr ustCompany, was replaced after expressingconcerns at the new investment approachof the interests associated with Trio. Theseconcerns were either not relayed to APRAor did not lead APRA to take action.”

Many unsuspecting Trio investors havepaid a significant price for some glaringregulatory failures. It is not unreasonable toexpect that those responsible for oversee-ing the failures should also pay a price.

InFocus

The last APRA regulatory failure around HIH Insurance saw heads roll.Mike Taylor asks whether the gravity of the Trio Capital collapse ought notto justify similar punishment.

A time for heads to roll?Average number of fansas at March 2012

128,377

AFA Lunch with SenatorMathias Cormann andSenator Arthur Sinodinos25 MaySwissotel, Sydney

SMSF Essentials 201230 MayCentral Pier, MelbourneDocklandswww.moneymanagement.com.au/events

REITs’ Revival: Outlook andInsights5 JuneUniversity of NSW, Sydneywww.finsia.com/events

FSC/Deloitte LeadershipSeries 201214 JuneSofitel, Melbournewww.ifsa.com.au

ACFS Bank Regulation andthe Future of Banking11 JulyCity Convention Centre,Melbournewww.australiancentre.com.au/acfs-events

Source: The Online Circle

Commonwealth Bank of Australia

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Alternative investments

A sheep in wolf’s clothingIn the current investment climate, alternative investments canprovide valuable diversification. So why are investors still notjumping on the bandwagon? Freya Purnell reports.

HEDGE funds. Infrastructure.Commodities. Private equity.

Private real estate. Agriculture.Direct assets such as water. Fund offunds. Insurance linked securities. Cata-strophe bonds. Depending on who youtalk to, all these investments can belumped in under the alternative banner.

So what do these disparate invest-ments have in common? Using a func-tional definition, ‘alternative’ refers toany investment that has a low correla-tion to traditional investments like equi-ties and fixed income.

According to Grant Forster, chief exec-utive of Principal Global Investors, alter-native investments also typically useleverage in their structure, often have anabsolute return objective, and usuallyhave some restrictions around liquidity.

These criteria give some clues aboutthe current position of alternative invest-ments in the Australian retail market. In aclimate where transparency, fees andliquidity are king, alternatives seem to beknocking hopefully at the window, offer-ing valuable diversification benefits, butin a package that investors are unwillingor unable to accept.

A range of options is not really theissue – Daniel Liptak, head of alterna-tives research for Zenith InvestmentPartners, says the company researchesaround 450 different alternative invest-ment opportunities each year – somefrom Australia, others from offshore.

But access to a variety of alternativeinvestment options is a challenge for retailinvestors, given the dominance of plat-

Planners still wary about alternativeinvestments, while some super fundsmove heavily into this sector.The new breed of hedge funds arehaving a resurgence.Fund of hedge funds and leveragedbeta funds remain unpopular.Access to a variety of alternative invest-ment options.

Key points



form-based investing in Australia. Anotherissue is the heterogeneity of the sector –as is the quality of individual investments.

Suzanne Tavill, head of alternativesfor AMP Capital Australia says, “Inprivate equity, for example, your spanof returns between the top and bottomquartile is over 20 per cent. So it matterswho you invest in and when you invest.”

Popular alternatives…To ask what is currently hot in the alter-natives space would be perhaps over-stating things – no individual strategy orfund is setting the world on fire atpresent, for reasons which we’ll comeback to.

But in terms of which alternativeoptions are more popular than others,hedge funds – the new breed, at least –are having a resurgence. The ‘hedgefund is dead’ mentality of 2008 and 2009is no more.

“That’s all gone away, and they’recoming back more strongly. They’remore sophisticated, there is a lot moretransparency,” Forster says.

David Griffith, senior investmentstrategist at BlackRock, says althoughhedge funds have an “image problem”due to some negative experiences,provided that investors choose an insti-tutional quality hedge fund backed bysolid administration oversight and riskmanagement, the rewards are there.

“If you pick the right strategy, they candeliver some very attractive returns –particularly when the returns from equi-ties have been sub-par over the last fewyears,” Griffith says.

He points to the Credit Suisse DowJones Hedge Fund Index as evidence,which shows that the average return fora multi-strategy hedge fund over threeyears is 13 per cent, annualised witharound 5 per cent volati l i ty. Thiscompares with the ASX 200, for example,which delivered three-year returns of2.9 per cent with 15 per cent volatility.

Within the hedge fund space, globalmacro strategies are proving successful.

For example, though it is better knownas a fixed income manager, PIMCO hasbeen running a long/short global macrostrategy for an Australian client for fiveyears, which has produced returns of19 per cent with a correlation to thedomestic equity market of 0.48 per cent.

Joe Bracken, head of macro strategiesat BT Investment Management, says“Global macro is reasonably popularbecause it’s a very liquid strategy, and ittries to incorporate the big picture. Forexample, if you don’t like Europe, thenthe global macro fund is a good way toexpress that view, because we can basi-cally ignore European stocks.”

Ma rk e t n e u t ra l f u n d s h a v e a l s op e r f o r m e d s t ro n g l y, a n d Fo r s t e rb e l i e v e s t h e y c a n b e a p owe r f u lweapon in the arsenal.

“The objective of market neutral is tobe exactly that. It takes out some of thatabsolute volatility you get from theequity market,” he says.

Also popular, according to ScottFletcher, investment specialist forRussell Investments, is listed infrastruc-ture, while Liptak says investors arefavouring commodity trading advisorsand managed futures as well. However,

he believes this is due to their 2008performance, rather than their role inthe portfolio.

“They are good as a diversifier – theyare great to provide some stabilisationduring market routing, but they shouldnot be seen as a return enhancer,” he says.

…and those that are strugglingStill on the nose after blow-ups duringthe global financial crisis (GFC) are fundof hedge funds.

John Wilson, head of PIMCO Australia,says the crisis exposed investments with

excessive leverage and liquidity. “I think they were discredited for good

reason – in some instances where thestructures weren’t terribly investor-friendly,” Wilson says. “Fund of hedgefunds have been seen as having toomany layers of cost in relation to therealised alpha for the underlyinginvestor. In many respects, single strat-egy hedge funds managed by a reputablemanager with scale, breadth andresearch capacity are more appropriatefor the environment we’re in now.”

Similarly, leveraged beta funds arevery unpopular, primarily because of theamounts of leverage they utilise – as areoverly complicated strategies like statis-tical arbitrage and convertible bondarbitrage, because of the difficultyinvestors face in understanding thesetypes of investments and “an unfortu-nate history of locking up”, Bracken says.

Delivering the goodsWhen it comes to performance,Australian market neutral funds havebeen the best performers – in fact,outperforming every other strategy inthe world over the past five and 10 years,according to Liptak. Over the past fiveyears, Australian market neutral fundsdidn’t have a negative year as a collec-tive index, and produced average returnsof 12 per cent per annum – and thatincludes the period of the short sellingban in 2008 and 2009.

This translates to investors receiving$2.54 for every dollar spent on fees in anAustralian equity market neutral strat-egy, while for every dollar paid on feesto an average Australian long-onlymanager, they received 5 cents.

“The participation in excess returns isdefinitely there in the alternative space,”Liptak says. “From a capital preservation,long-term wealth creation perspective, it’sa much better space to be.”

Although traditionally difficult forretail investors to access, private equityhas delivered positive returns. Forexample, the Cambridge AssociatesAustralia Private Equity and VentureCapital Index – which pools data from52 Australian private equity and 19venture capital funds – reported that asat 30 September 2011 the one-yearaverage return net of fees was 4.79 percent, 3.92 per cent over five years and7.41 per cent over 10 years.

Unlisted infrastructure – another diffi-cult-to-access asset class – has alsoshowed decent returns. According toRussell Investments, as at 31 December2011, Australian unlisted infrastructuremanagers delivered net returns of 12 percent over one year, 7 per cent over fiveyears, and 10 per cent over 10 years.

Are planners jumping back in?Historically, alternative investmentshave primarily been the province of highnet worth and institutional investors.

Bracken says on the institutional side,larger super funds like Sunsuper and theFuture Fund have moved quite heavilyinto alternatives in recent years, with thelatter now having more than 16 per centof assets, or around $11.9 billion inassets, allocated to this asset class.

However, in the retail space, somefinancial advisers are still wary about

alternative investments, having beenburnt during the GFC by structureswhich had a lack of liquidity and result-ed in significant capital loss. WhileFletcher believes that investor appetiteis beginning to increase, i t is st i l lhampered by the tough market condi-tions and a focus on basic exposures ata lower cost.

There’s no doubt alternatives can typi-cally be more expensive, and investors’focus on reducing fees may mean theyare shunning some alternative options.

“The appetite has been very stronglyimpacted by the focus on return. Alter-natives are expensive. If there was afocus on return post-fees, then alterna-tives would fare much better in thisdebate,” Tavill says.

Liptak believes that when it comes tooptions l ike market neutral funds,Australian investors are too focused onmanagement expense ratios rather thanlooking at the net-of-fee returns.

This may be short-sighted, giveninvestors are now looking for alterna-tive sources of return and diversifiedrisk in their portfolio because of thelow returns and high volatility equitiesare contributing.

“Financial planners are all trying tosolve the same problem – how do Igenerate good returns for my investorswithout this massive volatility? Alterna-tives appear to be the way that they’relooking to pursue that,” Bracken says.

He has seen a vast improvement in theoptions available to planners, particu-larly over the past two years, and largedealer groups incorporating more anddifferent types of alternative strategiesinto their approved product lists andmodel portfolios.

Even so, there are indications thatinvestor interest might be exceeding theaccess to alternative investments plan-ners have – particularly via platforms.

Liptak says for the first time, individ-ual investors have contacted him askinghow they could access hedge funds –particularly single strategy hedge funds.

“There is a disconnect between whatthey are being offered, and what theyknow is available,” Liptak says.

Tavill is seeing a similar level of inter-est in alternatives.

“We do have a lot of queries from advis-ers who have read about interesting thingsin private equity or infrastructure, andwant to know how they can get exposure.”

But while advisers might have a smallallocation to alternatives as part of amodel portfolio, or even through amulti-manager fund, accessing alterna-tive opportunities directly is much moreof a challenge – as is choosing the rightalternative – without the benefit of alarge research capability.

“The issue is if an adviser wants toplug and play independently, then itdoes become more difficult – it has tobe off-platform and the extent of oppor-tunities is much smaller,” Tavill says.

In response to this demand, AMP islooking to develop some off-platformalternative solutions for advisers,composed of illiquid investments – butthey will have quite a specific investortarget market for these products.

Continued on page 16

“One of the major barriersto investing in alternatives issimply one of education.”- Joe Bracken

John Wilson



“Some of these alternatives naturallysuit advisers with clients that have ahigher account balance, because theyintroduce very different return driverspins into their portfolio, which shoulddiversify all their existing holdings. Ifdone appropriately, it should help themto have a much more stable returnstream over time,” she says.

Mark Sowerby, managing director ofBlue Sky Alternative Investments, saysthat most advisers are reluctant to talktheir clients through individual off-plat-form alternative investment optionssuch as a private equity or real estatedeal. But this may change.

“What most groups are trying to do isget more discretion over the capital theyare deploying so they wouldn’t have togo through that process,” Sowerby says.“As a general rule, it needs to come outof a bucket. We are seeing that the allo-cation is increasing through vehicles likeseparately managed accounts andmanaged discretionary accounts first.”

Blue Sky recently completed a privateequity fund raising of $30 million, andSowerby says a proportion of those fundscame from the financial planning and privatewealth space as off-platform investment.

It’s not just access that is the problemwith alternatives – both perceived andactual risk can also be an issue. Sowerbysays that while equities investors facemarket risk, with alternative investmentcomes manager risk.

Understanding the strategies used inalternatives is another hurdle for advis-ers to overcome.

“One of the major barriers to investingin alternatives is simply one of educa-tion. The problem in a lot of alternativestrategies is that they do tend to be alittle opaque and obscure, and thatworries investors. Planners in particu-lar need to be educated as to how theycan use these alternatives in their port-folio,” Bracken says.

Why alternatives?So why should investors consider alter-natives? To achieve three main objec-tives, according to Fletcher – to enhancereturns, reduce risk, or gain yield fromincome-type exposure.

“One thing we did learn through theGFC is that a diversified alternativeexposure did exactly what i t wassupposed to do, and that was diversifyrisk,” he says. “The risk in the market atthe moment is that as people run to low-cost core exposures, they miss out onthis alternative allocation.”

Bracken also believes that the appealof alternatives lies in their focus on posi-tive and relatively stable returns, notbeing linked to the massive volatility inthe equity markets.

“Investors are looking for that stability ofreturn over time,” he says.

In line with this appeal, Fletcher isseeing higher weightings and morediversity in the type of alternatives insti-tutional and high net worth investorsare investing in.

“At one point, it just used to be thestraightforward liquid side, but you’reseeing more and more into unlisted expo-sures – such as tollways, ports, airports

and infrastructure,” Fletcher says.Zenith has observed a trend to include

long/short and equity market neutralfunds in traditional equity portfolios,with allocations being taken from boththe passive and active equity pools.

“This is to reduce equity risk in the port-folio without having to take on extra riskin the fixed income space, and we areseeing increases in the use of single strat-egy funds in that space,” Liptak says.

Is a focus on liquidity blindinginvestors to alternativeopportunities?Alternative investments – particularlyunlisted varieties – are typically lessliquid than equities and fixed income.With investors and advisers focused ondaily liquidity, some fund managers arearguing that retail investors are missingout on valuable opportunities in thealternatives space – particularly if theyare investing superannuation assets with

a longtime horizon.“A lot of platforms won’t have a product

that doesn’t have daily liquidity. It seemsto me that’s a naïve position,” Wilson says.“Every investor has really got to think hardabout their own situation and work outwhether that liquidity structure is appro-priate for them. If these are genuine long-term asset pools, then why does anyoneneed daily liquidity?”

Tavil l agrees that as a long-terminvestment, alternatives make a naturalfit for a longtime horizon.

“It’s a big pity that the focus on feesand liquidity is detracting from howpeople are able to actually invest in thisspace. Ultimately, what that means isthat it’s a distortion,” she says. “From aglobal perspective, private equity is oneof the best returning asset classes overlonger t ime periods. I do fear thatwithout having some exposure to thatin a portfolio over the long-term, youhave got to hope that your other assetclasses are working very, very hard.”

Griffith says there is definitely a trade-off with more complex strategiesbetween the quality of returns you canexpect from a monthly or quarterlyliquid fund.

“If investors are looking at the long-term, why limit yourself and insist ondaily liquidity when you can actually getbetter returns by investing in a monthlyfund which perfectly satisfies your long-term horizon and you can still accessyour funds on a monthly basis?,” he says.

However, with some recent failuressti l l fresh in their minds, i t seemsinvestors are just reluctant to lock uptheir money for longer periods of threemonths or more.

“That’s just not useful. Pre-GFC, thatmight have been acceptable, but not anymore,” Bracken says.

While this liquidity focus does restrictthe investible universe for clients, Grif-fith says there are still good opportuni-ties – for example, equity long/shortstrategies which can offer daily liquidi-ty and satisfy the needs of platforms.

For this reason, hedge funds are typi-cally the recipient of a higher propor-tion of the alternatives allocation bucketfor retail investors.

“The only reason for that is the focuson liquidity – not necessarily becauseit’s any better, but because it’s easier tosell and explain,” Sowerby says.

Hedge fund havenThe Australian hedge fund industry is oneof the largest in the Asia-Pacific, accordingto an Austrade report released in August2011, with $32.6 billion in hedge fundstrategies managed by more than 85Australian investment managers. Sixty-fourper cent of investment in this sector comesfrom Australian retail and high net worthinvestors, with 19 per cent from Australianinstitutional investors and 17 per cent fromoffshore institutional investors.

Over the next five years, Sowerby believeshedge funds will see the largest amount ofgrowth in the alternative space.

“Hedge funds have the characteristicsthat the financial planning and privatewealth space needs. It’s a nice entrypoint for them to get started in alterna-tives, and it is relatively low risk andtransparent,” Sowerby says.

Continued from page 15

“There also needs to bemore confidence in thetransparency or visibilityinto the actual strategiesand approaches used tomanage those alternativeinvestment programs. ”- Scott Fletcher

Daniel Liptak



apparent transparency and liquidity, but saysthat the restrictions on UCITS funds meansthat some of the best-performing managersare still not available outside the traditionaloffshore hedge fund sector.

From a regulator y perspective, theAustralian Securit ies and InvestmentsCommission’s (ASIC’s) attention as far ashedge funds are concerned is focused ondisclosure for retail investors. The release ofConsultation Paper 174 Hedge funds:Improving disclosure – Further consultationin February this year represented the secondstage of consultation on this issue. The paper

outlines a range of proposed principles andbenchmarks covering disclosures on theresponsible entity, the individuals makingthe investment decisions for the fund, serviceproviders, fund strategies and fund assets,and reflects ASIC’s view that greater disclo-sure provides retail investors with protectionthrough an opportunity to better assess therisks present in a product.

However, some in the industry have raisedconcerns that because this guidance (whenimplemented as regulation) will only applyto investments marketed as hedge funds –other strategies may not be captured.

Growth of alternativesSo what would give rise to growth in thealternative sector? According to Fletcher, it’sa combination of factors – stable marketsover a period of time, and compliance andregulatory safeguards.

“There also needs to be more confidencein the transparency or visibility into theactual strategies and approaches used tomanage those alter native investmentprograms, and education on the part ofadviser so they know and understand therisks inherent in the investments they’rerecommending for clients.” MM

According to a paper byTowers Watson, ‘Hedgefund investing: Opportu-nities and challenges’,released in May 2012,moving for ward, thestructure and vehicleassociated with a hedgefund investment will be asimportant as the invest-ment strategy itself.

Towers Watson warns thatwhile investing in hedgefunds via managed accountscan provide control,ownership, liquidity, trans-parency and customisa-tion for a portfolio, it’s notan ideal solution – therecan be a lack of willing-ness on the part of hedgefunds to run theseaccounts, control may notbe as complete as expect-ed, and costs can be high.Towers Watson thereforerecommends the industryfind some middle groundfor hedge fund investmentbetween going direct andmanaged accounts.

Forster points to theUCITS Alter nativesregime in Europe as a“halfway house” forinvestors in ter ms ofproviding l ight touchregulation on character-istics such as leverage.

The UCITS (Undertakingsfor Collective Investment inTransferable Securities)investment fund regimeimposes standardised cross-border regulations and ahigher level of consumerprotection. Though UCITSfunds traditionally usedlong-only models, hedgefund-like strategies canalso be implementedwithin the framework,provided specific risk limitsare met. As at June 2011,around 5.6 trillion euroswere held in UCITS funds,with total assets undermanagement for alternativeUCITS standing at approx-imately US$115 billion.

“There are now over1,000 of those funds. It’s away that retail investorswho may not be comfort-able with a lack of trans-parency or fixed monthlypricing can invest. Theyusually have weeklypricing, and I think it’s agood halfway house whichwe don’t have here,”Forster says.

With the repeal of theForeign Investment Fundrules last year, Australianinvestors are also able toaccess these UCITS funds farmore easily than previously.

Towers Watson alsonotes the growth of thesefunds because of their

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Normally, giving a client personaladvice triggers the need toprovide a Statement of Advice(SOA). The SOA could be the

means by which you communicate youradvice to the client in the first place. Moreoften, however, the SOA confirms advice youhave already given to the client verbally. Thisis perfectly acceptable under the Corpora-tions Act 2001.

The SOA is typically a lengthy document,and despite the use of templates by manyfirms, takes some time to prepare.

On many occasions, the work involved inpreparing and sending an SOA does notseem worth it. Consider the followingexample:

The client calls their adviser because theyare concerned at the downturn in themarket. The adviser reassures their client,reminds them that the client’s investmentsare based on a recommendation with a long-term investment timeframe and confirmsthat there is no need for the client to changetheir investments at this stage. The call takestwo minutes.

A Record of Advice (ROA) performs afunction similar to an SOA, but is typically ashorter, more informal document, withfewer content requirements than its SOAcousin. It need only be given to the client ifthe client requests it (except for Records ofSmall Investment Advice: see below). In theabsence of such a request, the ROA maysimply be kept among the adviser’s records.For this reason, an ROA can be as simple asa file note. The Corporations Act 2001 andassociated regulations set out various occa-sions on which an ROA may be used in placeof an SOA.

WhenThere are four occasions on which an ROAcan be used. For this reason, it is easier tothink about there being four different kindsof ROA. You need to decide as a businesswhich kinds of ROA will be useful to you onan ongoing basis. This will then determinewhat procedures you put in place, whattemplates you develop, and how you trainyour staff.

Further advice ROA The most well-known kind of ROA is theone you may use when providing“further advice”. The provisions whichgive rise to this kind of ROA are found inregulation 7.7.10AE of the CorporationsRegulations 2001.

This regulation allows you to prepare anROA instead of providing the client with anSOA, where:

• You have previously given the client anSOA setting out their relevant personal

circumstances in relation to the advice setout in that SOA;

• The client’s relevant personal circum-stances in relation to the further advice(determined having regard to the client’sobjectives, financial situation and needs ascurrently known to the adviser) are notsignificantly different from the client’s rele-vant personal circumstances in relation tothe previous advice;

• So far as the basis on which the advice isgiven relates to other matters – the basis onwhich the further advice is given is not signif-icantly different from the basis on which theprevious advice was given.

These are obviously quite broadrequirements and applying them issubjective. We generally advise firms, inlight of their own experience and clientbase, to develop a list of specific situa-tions in which this kind of ROA might beused. For example, one such situationmight be when you recommend a rebal-ance or switch within a platform orservice, but where you remain consistentwith the strategy recommended to theclient in the previous SOA and with theclient’s risk profile.

Factors you might like to consider whendeciding whether this kind of ROA can beused are:

• Changes to the client’s risk tolerance;• Changes to the client’s family situation;• Significant changes to the client’s

income;• Significant client illness or incapacity;• Changes occurring to a product;• Tax considerations;• Risk (attached to the product);• Economic environment;• Regulatory environment;• Significant local or world events.In order to be satisfied that the client’s

circumstances are not significantly differ-ent from when the SOA was given, an adviserneeds to determine if there has been a signif-icant change to the client’s circumstancessince the SOA was provided.

Regardless of checklists, this kind of ROAworks best when advisers using it are well-trained on when and how it is to be used. Areputable firm of financial services lawyersor compliance consultants can be reallyuseful here.

Deposit products and certain other prod-ucts ROAIf you provide personal advice on any ofthe following financial products you don’thave to provide an SOA and can insteadrely on an ROA:

• A basic deposit product;• A non-cash payment facility for making

non-cash payments that is related to a basic

deposit product;• Travellers’ cheques;• Cash management trust interest;• Motor vehicle, home building, home

contents, travel, personal and domesticproperty, and medical indemnity insuranceproducts.

Hold ROAAnother kind of ROA is one which may beused where the adviser recommends thatthe client take no action in relation to theirportfolio – sometimes known as a “hold”recommendation.

There is no need for the adviser or licens-ee to have previously provided an SOA tothe client.

The provisions relating to this kind of SOAare found in section 946B(7) of the Corpo-rations Act 2001. These provisions state thatan ROA may be used where:

• The advice does not recommend or statean opinion in respect of:

o The acquisition or disposal of anyspecific financial product or the products ofa specific issuer; nor

o A modification to an investment strat-egy or a contribution level in relation to afinancial product held by the client; and

• The following people do not directlyreceive any remuneration (other than remu-neration that is currently being received foran earlier acquisition of a product) or otherbenefit for, or in relation to, the advice:

o The adviser;o The corporate authorised representa-

tive (if applicable);o The licensee;o An employee or director of the

licensee;o An associate of any of these.

The term “associate” encompasses abroad array of people and entities – forexample, a body corporate related to theadviser, corporate authorised representa-tive or licensee.

This ROA would be appropriate for theexample provided earlier in this article.

Small investment advice ROA (RoSIA) There is a fourth kind of ROA available foradvice relating to small investment amounts.Advisers may have heard the figure of$15,000 being bandied about in this context.The difficulty with this kind of ROA is thatthe provisions relating to its use are complex.There are different rules for different producttypes, and these vary – particularly when itcomes to working out what is and is notincluded in the threshold for each producttype.

For this reason, many businesses find thecomplexity in working out if this kind of ROAcan be used on any one occasion outweighs

the benefit.As mentioned earlier, unlike other ROAs

which only need to be provided if clients askfor them, RoSIAs need to be given to theclient as soon as practicable after the adviceis given and, in any case, before any otherfinancial service which relates to the adviceis provided.

WhatThere are no hard and fast rules as to whatan ROA should look like.

Many SOAs look similar to one another.This stems partly from the numerousprescribed content requirements pertain-ing to them – for example, the need to havethe title “Statement of Advice” on the coveror near the front of the SOA. It also stemsfrom the fact that the SOA is a documentprepared primarily to be read by the client.

ROAs generally (except for RoSIAs) onlyneed be given to the client if they request acopy of them and have few content require-ments. For those reasons, they need to bereasonably neat and accessible. A client mayask for a copy of the ROA at any time up toseven years after the provision of the adviceto which it relates. You must accede to anysuch request.

Many ROAs are never requested byclients. Accordingly, they can be preparedin a way which fits with your usual record-ing keeping practices for telephone conver-sations and file notes.

Some licensees develop a one-page filenote template which doubles as an ROA. Therole it plays becomes apparent once appro-priate boxes are ticked by the adviser andappropriate content is filled in. It is complet-ed by hand and filed on a physical file.

We have observed one client who uses agrid to record all client contacts and actiontaken (for example, products purchased) asa result of such contacts. Each entry pertainsto one telephone conversation. Whether or


OpinionLegalAdvice on the record

The option of using a Record of Advice has been available toadvisers for a number of years. Samantha Hills clearsconfusion as to why planners would use one, when they canuse it, and what it should look like.

not the entry constitutes an ROA dependson whether the conversation entails person-al advice. If it does not, the entry is merely anote of a conversation – perhaps an execu-tion-only conversation. If it does, the entryis one of personal advice. The column head-ings in the table help to make it clear whichis which.

A further option is to keep ROAs elec-tronically. It is fine to do this and have nohard copy ROAs. This way, an ROAtemplate can mesh in with software usedto record client details and create SOAs.The software system might even assistadvisers in working out whether an ROAmay be used by, for example, providing alink to the previous SOA.

Another option is to email the client toconfirm your advice and make the emailyour ROA. Although you are not obliged toprovide most ROAs to the client unless theyask for them, there is nothing precludingyou from providing them proactively.

The requirements for what must beincluded are set out in regulation 7.7.10AE ofthe Corporations Regulations 2001 andsection 946B(9) of the Corporations Act 2001.

In summary, an ROA must include:• A record of the advice given or brief

particulars of the recommendations made –for example, increase income protectioncover by $X in light of a recent salaryincrease;

• Brief particulars of the basis on which

the recommendations are made – a refer-ence to the client’s circumstances as setout in the SOA is acceptable here, accord-ing to ASIC Regulatory Guide 175 at para-graph 175.202;

• Remuneration and association disclo-sures usually required by an SOA;

• If the advice is to replace one productwith another, brief particulars of the productreplacement information usually requiredin an SOA.

The remuneration and association disclo-sures are:

• Relevant remuneration (includingcommissions) paid to the adviser, corporateauthorised representative, licensee or relatedparties;

• Information about interests, associa-tions or relationships with productproviders.

These things must be disclosed insofar asthey might be expected (by an independentbystander – not the adviser) to be capableof influencing the advice given.

The replacement product informationrequirements are set out in sections947D(2) and 947D(3) of the CorporationsAct 2001. It is:

• Information about the following, to theextent that the information is known to, orcould reasonably be found out by, theadviser:

o Any charges the client will or mayincur in respect of the disposal or reduction;

o Any charges the client will or mayincur in respect of the acquisition orincrease;

o Any pecuniary or other benefits thatthe client will or may lose (temporarily orotherwise) as a result of taking the recom-mended action;

• Information about any other significantconsequences for the client of taking therecommended action that the adviserknows, or ought reasonably to know, arelikely;

• If the adviser knows or is reckless as towhether the client will incur such charges,lose such benefits or experience such conse-quences, but does not know and cannot

reasonably find out what these will be – astatement to the effect that there will or maybe such charges, losses and consequences,but the adviser does not know what they are.

Don’t forgetBeing able to understand and harness theROA provisions requires a good understand-ing of what constitutes personal advice inthe first place.

Consider the following example and seeif you can work out if it is personal advice,general advice, or no advice at all.

You say to a longstanding client, “Bob,I think you should increase your incomeprotection cover.” Your client says, “I’mhappy to leave it where it is right now,thanks, Gerry.”

This is personal advice and might be theperfect occasion for an ROA.

There are numerous organisations whocan provide refresher training to you andyour advisers to enable them to identifywhen they are giving personal advice, whenthey are providing no advice at all, and thoserare occasions when they might providegeneral advice.

FSGIf you are using ROAs, do not overlook yourfinancial services guide (FSG).

At least insofar as ROAs relating to furtheradvice are concerned, you need to putcertain information in your FSG. This is:

• A statement that the client may requesta record of further advice that is provided tothem – if they have not already been provid-ed with such a record;

• Information about how the client mayrequest such a record – for example, by tele-phone;

• The fact that the client must make therequest within seven years of the advicebeing provided.

See, now wasn’t that simple! It’s no wonderit’s so difficult for licensees and advisers tocomply with all their obligations.

Samantha Hills is a lawyer at HolleyNethercote Commercial Lawyers.


Zenith Investment PartnersThe BNY Mellon Global Alpha Fund is a fundthat we rate highly (Highly Recommended),and yet to date it has struggled to gainadviser interest and support and as such,inclusion on platforms.

The BNY Mellon Global Alpha Fund(wholesale offering) is a high quality globalmacro hedge fund that has a return objectiveof 15 per cent per annum (before fees) whiletargeting volatility of 15 per cent per annum.The fund generates returns through active-ly investing within and between globalequity, fixed income, commodities, cash andcurrency markets. It uses a quantitativeinvestment approach that takes positionsbased on a relative value framework – that is,it seeks to buy markets and assets that areundervalued and short sell markets that areovervalued.

Essentially, the manager uses quantita-tive models to identify and overweightunderpriced assets and underweight expen-sive assets. The model’s opportunity set iswide, covering 21 equity markets, six bondmarkets, 22 currencies, 24 commodities, aswell equity versus bond market positions.Equity market and currency opportunitysets include developed markets as well asemerging markets.

The portfolio construction process opti-mises the trade positions derived throughthe security selection models with the aim ofmaximising portfolio returns subject to the15 per cent per annum risk target. Withinthe optimisation process, the expected tradereturns (alpha), volatility and correlation ofeach of the trades is derived and optimisedto produce the most efficient portfolio allo-cation of stocks, bonds, currencies,commodities and cash, subject to tradingcosts. Generally, the more over/under valuedthe models consider the investment to be,the larger the portfolio position size.

A strength is that the fund seeks to gener-ate returns in both up and down marketsand it is not reliant on bull equity marketconditions to do so. As such, the fund repre-sents an excellent all-weather investmentoption rather than just a fair-weather one.

In Zenith’s opinion, many advisers don’tknow how to use or position the fundbecause it invests in a diverse range of assetclasses, does not have specific asset alloca-tion ranges and can hold short positions asa key component of how the manager seeksto generate returns.

Zenith typically utilises alternative funds

within the asset class the fund invests withinportfolio allocations. However, we believeglobal macro funds are one of the few alter-native investment options that require allo-cation within a dedicated alternatives allo-cation within a portfolio. While the fund hasan equity market-like volatility level, it islowly correlated with the other major assetclasses and therefore provides an excellentdiversifier within a portfolio. In addition,given the fund’s active asset allocationnature, it can be used effectively as an assetallocation overlay type product. Forexample, given it aims to achieve an absolutereturn of 15 per cent per annum (beforefees), those seeking to generate a return of1.5 per cent per annum from an overlay orabsolute return component of their portfo-lio would allocate 10 per cent to the fund.

LonsecThe Partners Group Global Value Fund is adiversified fund-of-private-equity-fundsinvesting in a broad range of private equityinvestment opportunities. These include

direct investments, primary investments,secondary investments and listed privateequity. On a look-through basis, the fund isinvested in approximately 1,500 companies.It is also diversified across financing stages(buyouts, venture capital and special situa-tions) and geographic regions.

The fund aims to provide investors withabsolute returns of 10 per cent to 12 percent per annum (after fees) with an expect-ed volatility of approximately 8 per cent to10 per cent per annum over three to fiveyears (although volatility is not specifical-ly targeted).

Partners Group Holding AG is a globalprivate market asset management firmspecialising in private equity, private debt,private infrastructure and private real estateassets. The firm manages EUR 30 billionacross a broad range of funds, structuredproducts and customised portfolios and isheadquartered in Zug, Switzerland, withprivate equity specialists located on theground across the globe, where the deals are,providing better sourcing opportunities and

more in-depth local market knowledge.The firm is listed on the SIX Swiss

Exchange and is majority owned (67 percent) by its partners and its employees.Lonsec has visited the headquarters, metwith the key decision-makers and revieweda number of proprietary systems and data-bases used to manage the fund.

Partners Group employs a top-downprocess to set the long-term target alloca-tion for the fund. Recognising that differentmarket segments perform better duringdifferent stages of the economic cycle, it istilted towards investment types, geograph-ic regions and financing stages that offer thebest relative value opportunities. A commit-ment strategy is also employed, aimed atensuring the fund is close to fully invested atall times.

A comprehensive five-step due diligenceprocess is applied consistently across alldirect, primary and secondary investments.In Lonsec’s assessment, the integrated

Analysing the ratersResearchReview


Research Review is compiled by PortfolioConstruction Forum in association with MoneyManagement, to help practitioners assess the robustness and disclosure of each fund researchhouse compared with one another, and given the transparency they expect of those they rate. This month, PortfolioConstruction Forum asked the research houses: There are many high qualityfunds that advisers don’t typically use in portfolios. What is an example of an “undiscovered fund”– that is, a fund your firm rates highly but which hasn’t yet received material support?


nature of the business allows for the devel-opment of research synergies across marketsegments, a key competitive advantage ofthe fund. Furthermore, over many years,Partners Group has built up an extensiveproprietary database to allow greaterinsights, better valuations and faster imple-mentation and execution of deals.

As a private equity fund, Lonsec consid-ers this product to be best funded fromwithin the growth component of a balancedportfolio. The fund is suitable for high riskprofile investors with a three- to -five yearinvestment time horizon.

It offers potential diversification benefitsthrough low correlations with traditional assetclasses. However, private equity investing isnot without additional risks, and investors’tolerance for alternative asset-specific risks(such as those associated with the use of lever-age, illiquidity and asset pricing frequency)should also be considered.

MercerWe believe Fairview Equity Partners is anexample of an ‘undiscovered fund’.

The universe of highly rated Australiansmall cap managers is somewhat limited,due in part to the fact that many high qualitymanagers place caps on their funds undermanagement at quite conservative levelsand have closed their funds to new investors.The size of funds under management is ofimportance when considering a managerin this sector so as to maintain a competitiveadvantage, particularly where a strategyinvests down the capitalisation scale whereliquidity can be scarce. In addition, investorslooking for quality small cap managers aretypically seeking a manager with a provenrecord in portfolio management and yearsof experience.

However, in some cases this can mean thatsome newcomers to this sector are sidelinedby investors. One such manager we believehas been Fairview Equity Partners (FEP).

FEP is a core, active small cap manager. Itemploys a multi-faceted stock selectionprocess, and is research driven through acollaborative approach combining highlevels of company contact, detailed analy-sis, a robust peer review process, and appro-priate risk controls. FEP capitalises well onthe intensity with which its team of threeapplies themselves to the challenge ofuncovering the undiscovered gems thatmake small cap analysis a rewarding expe-rience for career analysts.

A healthy dynamic exists in the peerreview process that appears to have beenconstructive in generating positiveoutcomes and is reflective of the respect thatexists within the team. Fairview’s three prin-cipals are its only employees; nabInvest is ashareholder (46 per cent), but not a parent.FEP’s principals are entirely responsible formanaging the business, establishing budgetsand managing risk and compliance. Hence,we believe there is a very strong alignmentof interest between the manager and itsinvestors to ensure success for both parties.

FEP fits into a portfolio as a heavily bottom-up fundamental small cap manager. The detailto research is of utmost importance in thissector of the Australian equity market in orderfor the manager to generate significant alpha

on top of the small cap risk premia. Yet themanager’s well-defined risk parameters willprovide investors a level of comfort that theportfolio is well managed with less chance ofnegative surprises to investors.

FEP has an interesting dynamic with themarket. It is not able to claim ownership ofan institutional track record before theinception of this team and is thereforesubjected to a holding pattern mentality bysome observers. We believe, however, itstime in the sun is approaching. With 51 yearsof collective financial market experience, itstriumvirate is amongst the more experi-enced small cap teams in the peer group. Ithas prudent targets for asset growth. A senseof genuine enjoyment of the research chal-lenge is plainly evident and we fully expectthat this, together with the freedom afford-ed by the relatively blank page available tonewer boutiques, will be highly motivating.

MorningstarFranklin Global Growth could be one of thebest funds investors have never heard of. Asat 31 March 2012, Franklin Global GrowthW Fund had a paltry $6.22m in assets, so itis a small fund – but there’s a well-construct-ed team with a great track-record behind it.Thirty-year investing veteran ColeenBarbeau leads the team responsible for thisapproach from New York. She’s been withthe firm since 2004 and put in place thephilosophy and process on offer.

While the fund’s portfolio has a tilt towardshigh-quality stocks, attractive valuation is also

an important element in the selection process.Analysts present their findings and recom-mendations to the management team at theweekly team meeting. All stocks must be ratedeither buy or sell. We like this hardnosed judge-ment – it avoids fence-sitting, demonstratesconviction, and is a distinctive characteristic.The portfolio of about 40 names is based onthe recommendations of the analysts only.Because it is concentrated, analysts are forcedto put their best names forward.

Portfolio construction is just as disci-plined. Stocks are trimmed when they riseabove three per cent, reallocating the moneyto names that have not fared well. While onlya few stocks make the portfolio, important-ly, diversification of investment themes isan explicit part of the process. Barbeau andher team only choose the best names fromeach sector which helps ensure sufficientdiversification and monitoring of risk.

This bottom-up growth strategy is oftenvery different to the benchmark, andFranklin's mandate does not limit non-indexholdings. Over time 20 per cent of the port-folio is typically exposed to these, and theshop can (and will) hold up to 20 per centin emerging markets. The team will lookdown the market cap too – so overall, theportfolio tends to have a mid-cap growthtilt, making it a nice blending option withvalue-focused funds.

Performance has been very strong. Whilethe Australian inception date is late 2008,this approach has been running in the USsince 2004. Growth companies took a

beating during the Global Financial Crisis,and evaporating earnings surprised theteam, punishing returns. Pleasingly, anoutstanding 2009 showed mettle and wasfollowed by a good 2010. Performance in2011 dipped slightly, but this fund has comeback very strongly more recently. Over threeyears, this fund is in the top decile of globalequity performers, over five per cent aheadof the index and peers over this time.

For investors after a differentiated globalequity fund, Franklin Global Growth is agreat option. This approach has a Morn-ingstar Analyst Rating of Silver and is a gutsy,high-conviction option with a mid-cap biasthat we believe would be a valuable support-ing addition to a portfolio.

Standard & Poor’sStandard & Poor's Fund Services rates Temple-ton Global Bond Plus Fund (TGBP) four stars,following our recent global fixed interest sectorreview when we rated it for the first time. Thisreflects our high conviction that the managerwill consistently generate risk-adjusted returnsin excess of relevant investment objectivesand relative to peers.

The TGBP fund aims to outperform theJP Morgan Global Government Bond Indexby 3 per cent to 6 per cent per year, but themanager also employs an absolute returnphilosophy. Investors should be aware of thefund’s high alpha target, noting other fundsin S&P’s global fixed interest peer group oftenstate a performance target of benchmarkplus 1 per cent to 3 per cent.


ResearchReviewContinued from page 21


Dr. Michael Hasenstab has run Temple-ton's Global Bond Plus strategy since 2001.His main support in researching the 65countries within the fund's opportunity setcomes from two other portfolio managersand seven analysts who have regionalresearch responsibilities.

This is a high-alpha seeking strategy thatinvests globally and may include allocationsto both developed market and emergingmarket fixed-income securities and bonds.Furthermore, the fund can invest in signifi-cant active currency positions and subinvestment-grade securities (up to 25 percent). This flexible and relatively uncon-strained approach to portfolio constructionis necessary to allow the achievement of thefund’s sizable alpha target.

The portfolio is constructed to reflect 25to 35 global macro views. Allocations toglobal government and government-relatedfixed-income securities, global currencies,and related derivatives can be used to imple-ment a particular view.

The fund's characteristics make it suit-able as a specialist global fixed interest allo-cation for investors with an investmenthorizon of at least five years. S&P believesthis fund may be suitable as a satellite fixedinterest exposure for investors with a rela-tively high risk tolerance. Investors shouldbe sure they are comfortable with the fund’sflexible and relatively unconstrainedapproach to portfolio construction, which

often results in relatively large performancedifferences to the stated benchmark.

Chasing such a high alpha target is notwithout risks, which was highlighted inSeptember 2011 when the fund experiencedrelative underperformance of 11.4 per cent,as a number of currency movements wentagainst the fund’s positions. Nevertheless,performance - at both a product and strat-egy level - has been strong. The local offer-ing has been available since this particularproduct’s inception on 30 October 2007. To31 March 2012, it has delivered 12.6 per centper year (net) compared to the benchmarkreturn of 9.1 per cent per year.

Overall, this is a quality offering managedby an experienced and well-resourced

investment team that is able to tap into thebroader capabilities of Franklin Templeton,globally. The bottom-up research process islogical and managed within a strong inter-nal risk framework.

S&P Fund Services has advised thattheir business activity will cease as at1 October, but meanwhile it is ‘business asusual’ and PortfolioConstruction Forumis satisfied with the integrity of the analystopinion provided.

van EykOne fund worth considering in the SH20, inthe Australian equities concentrated space.This fund is a growth strategy that typicallyconcentrates its focus on between 15 and25 stocks. As such, there is a fair degree ofbenchmark unawareness, with trackingerror at between 5 per cent and 8 per cent.This strategy had, as at 31 December 2011,$217 million of funds under management(FUM). This qualifies it as a fund that is notheavily owned, therefore it can be morenimble and more easily take advantage ofchanges in stock valuations.

The strategy is managed by Robert Hook,who has successfully steered this strategysince inception in October 2004, althoughwe note that, as with any manager, pastperformance is no guarantee of futurereturns. Hook has shown he can generatealpha in many different environments.Performance has exceeded the strategy’s

benchmark (ASX 300 Accumulation Index)by +8.1 per cent per annum over five years,+3.0 per cent over three years, +4.5 per centover one year and by +7.5 per cent perannum since inception, before the manage-ment expense ratio (MER). This manager’slow FUM has conferred an advantage byallowing it to be more flexible, but even so,this has still been an impressive result giventhe highly volatile and changeable marketsover the last five years.

The manager utilises detailed bottom-upresearch with top-down thematic overlays.The manager has an active, flexibleapproach and has been overweight health,industrial and energy stocks of late. The fundhas been underweight telecoms, consumerdiscretionary and property stocks. Thesebiases reflect the manager’s style of taking along-term view on positive investmentthemes. The manager has typically gener-ated its excess returns at higher volatilitythan the market index. We note that thefund’s three-year rolling beta has fallen inrecent times and now sits at around one.

Although this fund has a number of goodqualities, we would remind readers that thisassessment does not take into account theirobjectives, financial situation or needs, andthat they should seek professional advicebefore making an investment decision.

“These biases reflect themanager’s style of taking along-term view on positiveinvestment themes.”

In association with

The debt part of a portfolio canhave many, often competing,objectives. Security, regularincome, liquidity, cash flow, high

returns and volatility reduction are some ofthe more common.

We believe the primary role of the debtpart of portfolios is to reduce the range oflong-term investment outcomes of theoverall portfolio to an acceptable level.

After we have set the appropriate level ofsecure assets in a portfolio, we can startthinking about meeting cash flow needs.Will we have the funds we need when weneed them? What might we need funds for?We should set aside funds sufficient tomeet these cash flow needs.

Then, we can start thinking aboutreturns. What debt assets give us the bestreturns (after first meeting security andcash flow requirements)?

Finally, we can turn to issues such asvolatility, liquidity and income production.These are second order criteria. If we havemanaged the risk of long-term poorreturns, volatility reduction can assumelesser importance in portfolio design. Simi-larly, if we have set the portfolio to allowfor cash flow requirements (both plannedand unplanned), liquidity and incomebecome of lesser importance.

Step 1 – Determine the split betweenrisky and secure assetsTypically, this decision will depend uponan investor’s psychological tolerance forrisk and their financial capacity to acceptrisk. The end result should be a suggestedallocation to secure or defensive assets. Forthe purpose of this discussion, we willassume that the investor has a long-termallocation of around 60 per cent riskyassets, 40 per cent secure assets.

Step 2 – Determine which fixedinterest assets are secure and whichare riskyIt is important to be absolutely sure thatthe secure assets are just that – secure. Therole of the secure part of the portfolio is toensure that the investor’s minimum objec-tives are met, even in the event that riskymarkets produce poor long-term returns.

We divide debt investments into securedebt – called tier 1 debt – and risky debt,described as tier 2 debt. Only secure debtsecurities should be allocated to the securepart of the portfolio. Tier 2 Debt – an entire-ly valid and useful asset class – should formpart of the risky allocation.

Step 3 – Three bucketsThe cash flow reserve Put aside sufficient funds to meet two yearsof living expenses. For example, if aninvestor was in retirement and needed to

draw 5 per cent of his/her capital base eachyear for living expenses, s/he would put 10per cent of the overall portfolio aside incash and short-term term deposits so that,at the very least, the next two years of livingexpenses were covered. Given our hypo-thetical investor started with 40 per centin secure assets, we now have 30 per centleft to allocate.

The asset allocation reserveThis ensures sufficient liquid funds areavailable to take advantage of opportuni-ties that arise from time to time to buyassets. If a dynamic asset allocationapproach is used, the weighting to the assetallocation reserve will be very high when abearish market outlook means large hold-ings in defensive assets, versus a near zeroholding when at maximum weight riskyassets. If a strategic asset allocationapproach is used, then just enough has tobe put aside to ensure that there is suffi-cient cash to rebalance in the event thatmarkets fall and buying needs to be doneto re-establish the strategic weights.

Assume our hypothetical investor is atneutral weight risky assets right now, andis prepared to go 5 per cent overweight inthe event markets appear very cheap.They could hold about 10 per cent in theasset allocation reserve – around 5 percent to re-establish neutral weights in theevent of a market fall of 20 per cent and afurther 5 per cent to go overweight shouldthey wish.

The long-term debt portfolioWhatever is left goes into the long-term debtportfolio. It is long term in the sense that weshould expect it to remain invested for thelong term, therefore the duration of thesecurities can also be very long term,depending on market conditions. Further-more, this part of the portfolio can be invest-ed in illiquid assets if desired.

For our hypothetical investor, 20 per centof their overall portfolio can be allocated tothe long-term debt portfolio – being the 40per cent overall weight to secure assets, lessthe 10 per cent allocations to each of thecash flow reserve and asset allocationreserve.

What securities?For the cash flow reserve, assets must firstand foremost be secure. After that, theymust be liquid at the time the investor needsthe cash. At its simplest, this bucket could beinvested entirely in cash. Or, if it was invest-ed 25 per cent in cash, 25 per cent in 180-day term deposits, 25 per cent in one-yearterm deposits and 25 per cent in 18-monthterm deposits, there would be sufficientcash coming due every six months to meetthe next half year's living expenses.

The asset allocation reserve is a little trick-ier. Here again, assets must be absolutelysecure and they must also be liquid so thatwhen an opportunity presents, cash is avail-able. That said, if purchases are to be stag-gered over time, having a reserve invested interm deposits with maturity dates matching

the times assets are planned to bepurchased could be sensible.

The role of government bonds in theasset allocation reserve is interesting. Theyhave been negatively correlated with equi-ties for the past five years. What better thanhaving a reserve that increases in value andthus provides more dollars to spend whenthe assets we are buying have fallen inprice?

The long-term debt portfolio has onemajor role – to provide long-term certain-ty to the overall portfolio. So again, it mustbe secure. Where this bucket differs fromthe other two is that it does not have to beliquid. This is the ideal place for a range ofsecurities that don't easily fit elsewhere inthe portfolio. Amongst assets that can beconsidered are cash, term deposits, long-dated term deposits, government bondsand CPI-linked government bonds. All areeligible on the proviso that the assets areabsolutely secure from a credit perspec-tive. We shouldn't mind short-term volatil-ity in these assets if we are absolutely satis-fied that we will get our capital back at theend of the term – because then, the volatil-ity is essentially harmless.

Tim Farrelly is principal of specialistasset allocation research house,farrelly’s, available exclusively throughPortfolioConstruction Forum.


ResearchReview

Building buckets of debtBuilding debt portfolios used to be easy. But it’s much harder now. These days, the debt side ofportfolios should be absolutely secure and designed as three buckets. Tim Farrelly explains.

In association with

Toolbox

It is a well publicised fact thatAustralians are living longer todaythan ever before. As many peopleage, their health and mobility

deteriorates and their ability to be self-reliant decreases. As that occurs theremay come a time in an older person’slife when they are no longer able to liveindependently and will need some levelof assistance.

As such, it is becoming increasinglyimportant for financial planners toconsider what options are available toassist their clients as they or theirclients’ parents are faced with thesechallenges.

Whilst the Government recentlyannounced in the Federal Budget2012/13 fundamental changes to beintroduced to the way aged care isdelivered and financed over the nextfew years, this article looks at currentoptions available to older Australians.These include:

• Remaining in their home with assis-tance;

• Moving into a special residence(retirement village or granny flat); or

• Moving into an aged care facility.

Remaining at home withassistanceIf a person wishes to remain at home,there is a wide range of services avail-able to them, such as Home andCommunity Care Services, CommunityAged Care Packages, Extended AgedCare at Home Program and RespiteCare Ser vices. An assessment andapproval by an Aged Care AssessmentTeam (ACAT ) is required before aperson can access these services.

If a person wishes to remain at homewith assistance from these services,their eligibility for Centrelink benefitswill remain unchanged.

Moving into a special residence(retirement village or granny flat)Residents at retirement villages areusually able to live independently, butwant to be around those with sharedinterests and take advantage ofcommunal facilities.

Granny flat arrangements are gener-ally private arrangements entered intoby a person, usually with a familymember, where the person may pay an“entry contribution” in exchange for the

right of occupancy. In this situation the person’s home-

ownership status and Centrel inkassessment is deter mined by theamount of the entry contribution paidby a person for their right to live in aspecial residence relative to the “extraallowable amount”.

The extra al lowable amount iscurrently $135,000 and represents thedifference between the non-homeown-er and homeowner assets test limits

(i.e, $321,750 - $186,750 = $135,000).

Moving into an aged care facilityPrior to entering an aged care facilitythe individual’s circumstances mustbe first reviewed by an ACAT profes-sional as they determine whether theperson is eligible for low-level or high-level care.

On entering low-level care a resident


Today’s aged care systemand CentrelinkIt is becoming increasingly important for financial planners to consider what options areavailable to assist their clients as they face old age. Anna Mirzoyan dissects three choicesavailable for older Australians.


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

PARAPLANNER/CLIENT SERVICESOFFICERLocation: MelbourneCompany: Security National Financial ServicesDescription: A boutique wealth manager islooking for an experienced paraplanner tosupport senior level planners.

In this role, you will be responsible forpreparing high-level SOAs, liaising with clientsinternally and externally to ensuredocumentation is completed in a timely andaccurate manner, and ensuring all complianceand risk frameworks are in place and managedeffectively.

To be considered for the role you will possessa degree/diploma in financial services, aminimum of 2-3 years paraplanning experience,including the ability to produce complex SOAs,

as well as an aptitude with XPlan software.This position requires a focus on compliance

and an ability to create documents for complexstrategies in a timely manner.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Barbara at Security National FinancialServices – (03) 9510 5400.

FINANCE MANAGERLocation: AdelaideCompany: Terrington ConsultantDescription: A leading South Australian designand construction company is looking for afinance manager to join its team.

Reporting to the general manager, you willhave a commercial focus and developprocesses that will positively impact the

business.Your background should include a broad,

commercial background, qualifications as a CPAor CA and a track record in financial accountingand analysis.

Opportunities exist for the successfulcandidate to progress their career to anexecutive level.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Victor at Terrington Consulting – 0499771 827.

FINANCIAL ADVISERLocation: AdelaideCompany: Terrington ConsultingDescription: A financial planning services firm isseeking an experienced and technically

competent financial adviser.The successful candidate will have

experience in providing advice, particularly inthe superannuation, wealth accumulation, risk,retirement planning, investment advice(including direct equities) and estate planningspace.

You will have exceptional relationshipmanagement skills and a proven track record inbuilding high quality and close relationshipswith clients.

To be considered for the role, you need anAdvanced DFP and/or a CFP qualification.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting – 0499771 629.

LAW firm Lander & Rogers hasappointed financial serviceslawyer Ruth Stringer as apartner to help grow the firm'sbusiness in Sydney.

With more than 20 years’experience in financial serviceslaw, she joins the firm afterspending five years building apractice at Ashurst.

Pior to this, Stringer spent 11 years at Minter Ellison, whereshe helped to establish its super-annuation practice and was afounding member of the firm'sfunds management practice.

NATIONAL accounting firmCrowe Horwath has appointed anew Sydney-based chief execu-tive as part of its growth strategy.

Andrew Macpherson hasaround 30 years’ experience infinancial and managementconsulting, and was previously aregional managing director forAccenture.

“Andrew's appointment ispart of our vision to build ourbank of expertise in the businessadvisory area supporting smallto medium enterprises and highnet worth individuals,” saidCrowe Horwath group chiefexecutive John Lombard.

Since joining the company,Macpherson said he and histeam have restructured thebusiness around three keysegments which will each be ledby a senior principal.

Over the past 12 months,Crowe Horwath's Sydney practicehas recruited 12 new principals.

SCOT T Dundas has beenappointed fund manager for theCharter Hall Retail REIT.

He has 14 years' experiencewith Charter Hall's real estateinvestment trust business and

30 years’ property experience.Charter Hall independent

chairman John Harkness said heand the selection committeeunanimously selected Dundas tolead the Australian reweighted

CQR and deliver on its objectives.Dundas has been acting in a

caretaker role for the REIT sinceJanuary 2012.

TREASURY has added two moremembers to the Government'sFinancial Reporting Council(FRC).

The FRC is the peak bodyresponsible for overseeing theeffectiveness of the financialreporting framework in Australia.

Belinda Gibson was nominat-ed by the Australian Securities

and Investments Commission(ASIC), of which she is currentlydeputy chairman. Her responsi-bilities at the regulator includethe supervision of corporations,as well as ASIC's financial report-ing and audit and insolvencypractitioner teams.

Ian Purchas – who was nomi-nated by the Institute of PublicAccountants – is a principal atRMG Partners Business Solu-tions, and is a registered liquida-tor and an official liquidator ofthe Supreme Court of NSW andFederal Court of Australia.

Move of the weekGREG Della will assume the position ofchief life actuary at Zurich FinancialServices.

He recently returned to Zurich afterspending just under 12 months withCommInsure as chief financial officerand chief life actuary.

Previously, Della worked out of HongKong as Zurich's director of life business,Asia, before returning to Australia ashead of strategic finance and chief lifeactuary, and most recently, acting CFO.

In his new role, Della will be reportingto Zurich CFO Raf Uy. Greg Della

Scott Dundas

Ruth Stringer

““

THOSE who know Outsider knowthat despite his best efforts, thecurrent revolution in technologyand social media has left him slight-ly befuddled.

At some point in the past fewyears, “social media” has shifted –from a means of spamming friendsand family with happy snaps fromyour latest European holiday orendless updates of the uniquelycute things your uniquely adorablebaby did – to something more.

Social media now is apparentlyan essential and dynamic businesstool, providing seemingly endlessopportunities in terms of market-ing, and revolutionising the waybusinesses communicate withcustomers, clients and contacts.

Money Management seems tohave thrown itself into this spacewith vigour despite admittedlyminimal contributions fromOutsider – although Outsider ispleased to announce he recentlysent his f irst “Tweet” (Gen Ymembers of Money Managementwere impressed. Mrs O’s reaction tothe news could best be described as“nonplussed”).

Having previously once been shown

a photo of a friend’s baby on Facebook,Outsider was prepared to raise hisarms in triumph, having officiallymastered everything social media hadthrown at him.

Somewhat prematurely it turnsout, as a recent release from theFinancial Ser vices Council’sconsumer awareness campaignLifewise starkly illustrated. Lifewisereally seem to have their socialmedia act together, and the releaseprompted Outsider to ask: what’s aPinterest? And a Mamamia? Andwhat’s with Flickr and Tumblr – didthe price of vowels suddenly go up?Should Outsider be adjusting hiscopy accordingly?

It’s all enough to make Outsideryearn for his good old-fashionedtypewriter…

Outsider


9

“I am proud of the firm’s effortsover the past several days toaddress our mistakes and pleasedto join the dedicated employeesin our Chief Investment Officetoday.”

You’d almost be forgiven for think-ing JP Morgan was making money

reading this address from new chiefinvestment officer Matt Zames, which

followed the firm’s efforts in losing $2 billion in bad trades.

“They liked to question authority,they liked to smoke weed everynow and again.”

ANZ Wealth’s head of product,marketing and reinsurance Gerard Kerr

makes some sweeping generalisationsregarding the baby boomer generation.

“In our view, it’s not weeks andit’s not months.”

Out ofcontext

For CEOS, nothing like just Being There

How very pinteresting

OUTSIDER is a great believer in theold saying that it's hard to soar likean eagle when you're being led byturkeys, so he did a double-takewhen he last week read some newresearch from Deloitte.

According to the Deloitteresearch – a global survey ofanalysts – market perceptions ofleaders can move share prices.

The research, The leadershippremium; How companies win theconfidence of investors, reveals thatif analysts think you're workingunder a top boss, they're likely togive your company a better rating.

Apparently, the quality of seniorleadership in dealing with toughnew challenges can have a directand measurable impact onanalysts’ assessments of whethercompanies have been successfuland will be successful in the future.

Outsider notes that the report isbased on a survey of leading marketanalysts in the United Kingdom,the United States, China, India,Japan, and Brazil – but notAustralia, which is probably whyOutsider does not feel the need toembarrass any past, current orfuture bosses.

However Outsider does satisfyhimself with the knowledge that therelative capacity of chief executivesis best measured against theirperformance running publicly-listed companies.

Outsider well recalls a former chiefexecutive, known widely amongOutsider's colleagues as ChaunceyGardener – the character in the PeterSellars film Being There – onlycoming to grief when he foundhimself running a publicly-listedcompany. He lasted 14 monthsbefore disappearing from sight withno gardening leave in between.

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

AS someone who typically holds public transport beneathcontempt, Outsider was less than amused to find himselfseated at a bus-stop last week.

In attempt to distract himself from the indignity of thesituation, he took a closer look at the A4 printout sticky-taped to the glass next to him.

Lo and behold, it was an advertisement for the Sydney-based financial planning practice Shaw Financial Services.

After a brief description of the business and a bio of thefirm’s principal, the ad went on to spruik a “Special offer: Getthe Kids out of Home Package” (or GTKOOHP for short).

Along with consolidating super and reviewing debts, theGTKOOHP promises to “Implement appropriate insurances”and “Create a savings for a deposit for a home or investmentportfolio” (sic).

Some of the cynics out there might raise an eyebrow at afinancial planning practice that advertises itself in a similarmanner to someone holding a garage sale.

Au contraire, says Outsider. He was impressed with Shaw’sinnovative, think-outside-the-box marketing strategy.

After all, if Outsider was looking for someone to take careof his financial wellbeing, the side of a bus-stop would be thefirst place he’d would look.

Bus-stop advice a Shaw thing

CBA chief executive Ian Narev isn’t surewhen the Greek economy will recover but itprobably won’t be soon.

Documents

Money Management (May 24, 2012)