ASIC Proposes Health Risk Warning For Retail Investment Products
The Australian Securities and Investments Commission says that investments and financial products should come with warnings in the same way products such as cigarettes come with warnings that they pose health risk.
The corporate regulator has outlined a set of new guidelines designed to regulate the way companies advertise financial products. The guidelines are part of the regulators attempt to crack down on advertising which is designed to market riskier retail derivative products.
Greg Medcraft who is the current chairman of ASIC says that investors should be made aware of the consequences of investments made in riskier financial products.
“I think it’s important that advertising be balanced, particularly in financial products,” he said.
“It’s almost important to have a health warning, but there’s consequences as well with some particular financial products.”
ASIC says it would like to see financial services companies engaging in a more balanced form of advertising.
According to Mr. Medcraft some evidence exists that certain consumers to take decisions based purely on advertising of the financial product.
“What’s important is to make sure that advertising is actually fair and that it’s balanced and that advertisements don’t just talk about the benefits of financial products, but that they do try to address the risks in financial products,” he said.
Mr. Medcraft singled out derivatives aimed at retail investors as a specific area of focus for the corporate watchdog.
“One sector that we’ve had to take a number of actions is in the retail derivative space,” he said.
“And I think often by definition that’s a very complex financial product, so it’s where there is obviously a high need to make sure that consumers do understand what they’re buying.”
The ASIC Chairman called on the Media to police their advertisers and ensure that they followed the guidelines.
“These are best-practice principles and I would expect that most media outlets would want to adopt best-practice principles,” he said.
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Westpac Online Investing Slashes Brokerage Fees
Westpac Online Investing is seeking to increase its market share by the middle of next year, and as part of that plan has slashed its brokerage fees, bringing them into parity with larger rivals Commec and E*Trade.
Previously Westpac Online Investing customers who held cash investment accounts were charged $24.95. Westpac has reduced the brokerage fee to $19.95 according to a report in the Australian Financial Review.
Additionally, Westpac clients who conduct three or more trades every month, will be eligible for a variable bonus rate of 0.9 per cent, taking the total rate to 5.65 per cent.
Currently, Westpac controls about 10 per cent of the online market, compared with about 50 per cent by Commsec and 18 per cent by E*Trade, according to the AFR.
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Super Funds May Be Forced To Jettison Alternative Investments
If measures proposed by the Cooper review of the superannuation industry are accepted by the federal government, super funds may be forced to jettison their alternative investments a research firm says.
Chant West, an industry consultant says that superannuation assumptions made by the Cooper review were an unrealistic reflection of the costs associated with the management of an alternative investment portfolio, which can include private equity, hedge funds and unlisted property.
Ian Fryer of Chant West says the proposals may force superannuation funds, and in particular industry funds, which hold a higher proportion of their assets in alternative investments than retail funds, to divest their alternative investments, much of which have helped those funds to deliver higher returns to their investors and outperform rivals in recent years.
“At the end of the day performance makes a bigger difference to retirement incomes than fees do,” Mr Fryer said.
The Cooper Review has suggested that all large superannuation funds be required to offer a low fee option by 2013 which has been dubbed the MySuper. The recommendation was put forward as a means of reducing the costs of super funds for the vast majority of Australians who do not actively manage their superannuation portfolio.
According to the results of the review the average actively managed balanced fund, with 10 per cent of its assets allocated towards alternative investments attracts an investment fee of 89 basis points of the value of invested assets.
However Mr. Fryer reckons that 200-300 basis points was more realistic.
Mr. Fryer added that though the introduction of the MySuper option would not force superannuation funds to charge a particular fee, disclosure rules would now be stricter, which would mean the many funds would find it simpler to sell their higher cost alternative investments in favour of taking a more passive management approach to their portfolio and having to justify higher fees.
“The expectation will be if you are a big fund and you are not charging this (low fee) then why don’t you get rid of active management and alternatives?”
Mr. Fryer said many retail funds had already launched low-fee super products that matched the industry funds on costs but were passively invested and had few alternative assets.
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Financial Planners Starting To Avoid Managed Funds
The results of a new survey suggest that under pressure from clients, financial planners and advisers have begun to avoid managed funds. According to the results of the report, planners are increasingly investing money directly into equities and other listed investments.
Investment Trends (IT), a market research firm which authored the report said that unlisted managed funds gained ground over the last year, and only half of the cash collected by planners was invested in managed fund, down 62 per cent from the previous year.
The survey which polled 700 planners during April and May suggests that planner’s estimate only 39 per cent of funds allocated would be directed towards managed funds by 2013.
Mark Jones of IT said that nearly 20 per cent of all new money was being allocated towards direct equities investment, and that asset allocation into exchange traded funds, real estate investment trusts and managed accounts has also risen.
“Planners have been gradually increasing their use of direct shares and other listed investments since 2008,” Mr Johnston said. “But this year has seen a dramatically larger shift.”
Approximately one third of planners can be described as high users of direct investment strategies, where client funds are allocated towards equities, ETF’s, with only 7 per cent of inflows from this groups allocated towards managed funds.
“That appears in part to be a response to . . . increased investor fee aversion and dissatisfaction with managed fund performance,” Mr Johnston said.
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E*Trade Posts Second Quarter Profit
E*Trade Financial the online brokerage company has returned to profitability after posting second quarter profits on Wednesday for the first time in three years.
The company has not faired well after its business was negatively impacted by bad loans made by its banking division, which reported its seventh consecutive drop in loan loss provisions.
Net charge-offs, or loans that E*Trade doesn’t think it can collect, were $US225 million ($252m), falling 42 per cent from a year ago.
E*Trade gave its earnings a boost by releasing US$60 million from its loan loss as opposed to adding to it, suggesting that the company now believes it has enough capital to cover any impending losses.
The in improvement in the company’s loan portfolio during the second quarter was the difference between E*Trade reporting a profit rather than a loss.
In an interview with Dow Jones Newswires, E*Trade chief executive Steven Freiberg said: “The most significant dollar change (for the company) has been continued improvement in delinquencies and therefore write-offs and provisions in the legacy loan book.”
Mr. Freiberg took the helm at E*Trade on April 1st, and given the current state of the U.S. economy says the company would probably experience a continued decline into 2011.
A closely followed metric with E*Trade is its daily average revenue trades (DARTs), which it reported as being 170,000, up ten per cent from the first quarter however still 16 per cent below where it was a year earlier. The broker like its rivals benefitted from the “flash crash” on the U.S stock market in May 6.
Mr. Freiberg said, however, that trading in June was “not anywhere near as robust,” adding that the “residual effects of the flash crash have caused more investors to become concerned”.
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Pimco Says Australia Is A Top Investment Destination
One of the largest global managers of fixed income securities, Pimco, says that Australia now offers the most investment opportunities in the developed world.
During one of its regular updates to the global bond markets, David Fisher who runs global product management for Pimco also said there was a “new normal environment”, which looked much different to that of previous decades.
Despite the volatility in Australia caused by former Prime Minister Kevin Rudd’s proposal to tax mining companies, a cooling China and debt concerns in Europe, Australia remains one of the top investment destinations of Pimco.
“Starting with a ladder, we would say those countries with solid fundamentals include in the developed world places like Canada and Australia, not only because they came into the crisis with better conditions … but also because they’re very well exposed to the growth dynamics in the emerging world and particularly through the channel of commodity prices,” Mr. Fisher.
Mr. Fisher also warned that there were risks posed by unrealistic expectations and over priced companies as both America and Australia both enter into critical reporting periods.
Pimco chief Bill Gross surprised global markets when he announced the asset manager had begun investing in equities.
“While we think bonds are priced for a depression, we think that equities are still priced for something more akin to the ‘old normal’ than the ‘new normal’, he said. We think that there’s still some scope for compression in PE ratios and we think that optimism over profit recovery is probably a little bit exaggerated in this environment of very, very weak growth, outside of a few countries such as Australia and Canada and the emerging world. So, on a relative basis, we would say that the returns in global bonds, while not spectacular, are certainly attractive.”
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Jeremy Cooper Defends The Controversial Cooper Review
Jeremy Cooper, the former deputy chairman of the Australian Securities and Investment Commission (ASIC) and author of the controversial government review of the Australian superannuation system, has defended his plan for low cost MySuper accounts.
The accounts are intended as a default for people who do not select a retirement fund.
Mr. Cooper who made his comments during a luncheon organized by the Australian Superannuation Funds Association in Melbourne, said that the criticism that his plan was paternalistic could in fact be applied to the entire concept of superannuation.
The criticism was leveled earlier in the week by the Investment and Financial Services Association.
“It’s acutely paternalistic — it’s saying that if we don’t force Australians to defer some of their wages and salary and put them away for a time, they’re simply not going to save, so we’ll force them, and so that’s how we have to see the system,” Mr. Cooper said.
By cutting fees and improving investor returns, it is hoped that the MySuper account will serve as a benchmark for the rest of the industry to follow Mr. Cooper said.
“Because it’s a compulsory system, we think all workers in Australia are entitled to have super that is as good as a MySuper product,”
Mr. Cooper also issued a denial that the rules which determine fees on the MySuper accounts would result in lower investor returns. Mr. Cooper says that the fund trustees would be both obliged to minimize the cost and maximize investment returns.
Chris Bowen, the minister for Superannuation says that the government intends to move quickly to examine the proposals for MySuper and SuperStream, the proposed revamp of superannuation administration, which he terms as being “largely commonsense”.
“I understand the government needs to provide some direction and some certainty around those proposals so the industry can go forward with some sense of confidence, and I hope to be giving an indication of our response . . . over coming weeks.” Mr. Bowen said.
Mr. Bowen says it was unlikely that the government would make any changes to the superannuation preservation age, which is presently set for 60. Mr. Bowen added that the government would not sponsor any specific superannuation products or mandate compulsory income-style investments for retirees.
Speaking after the lunch, Mr Bowen also rejected claims by IFSA that making a low-cost default fund available to workers would lead to increased apathy.
“There are always people who will be disengaged from super and we need to make sure the fees are as low as possible,” he said.
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Global Financial Market Instability Hits Australian Super Fund Returns
Volatile global financial markets that plunged in the aftermath of the European sovereign default crisis have consumed the highly anticipated bounce in super fund returns.
The drop in financial markets is likely to result in investment earnings falling below double digits for the financial year, ending at about 9.6 per cent.
The recent volatility has seen Australian super funds lose as much as 50 per cent of their valuations which provided the federal government with the impetus to ease rules on capital draw downs from pension funds.
As recently as two months ago, analysts were confidently predicting investment returns as high as 15 per cent. However in the last couple of months valuations have been hammered by renewed fears of the recovery in the global economy, which has produced a string of negative equity market returns in Australia.
The poor performance this year has resulted in lower rolling cumulative returns, with the median five year return now estimated to be 3.7 per cent, according to research firm SuperRatings.
Since the compulsory super was established in 1992, the median balanced fund has returned 6.8 per cent a year, illustrating the fact that a well diversified portfolio does indeed protect investors from catastrophic loss.
Balanced funds have both met and exceeded their long term objectives of outrunning the Consumer Price Index by an annual 3 per cent SuperRatings data shows.
Chant West, another research firm estimates that the median returns for investment funds who hold between 61 to 80 per cent of their portfolio in growth assets is exactly 10 per cent.
Superannuation industry figures look better when taken over the past seven years, but the record has been remarkably volatile.
After a shaky start to the decade, when many Australians fell behind compared to the returns of cash investments in the aftermath of the collapse of the tech bubble, Australians enjoyed a four year period of uninterrupted gains in their super, after which the onset of the first global financial crisis took hold.
Growth funds especially were hit in the financial years 2008 and 2009, posting negative returns of more than 6 per cent and 12 per cent respectively.
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Australian Regulators Warn Brokers To Be Suspicious Of Portfolio Manager Window Dressing
The Australian Stock Exchange, which with ASIC acts as a corporate regulator says it intends to monitor portfolio and mutual fund managers closely, as it seeks to stamp out the practice of window dressing.
Window dressing typically occurs at the end of the financial year and is a deliberate strategy managers engage in of price manipulation which dresses up the performance of the portfolio or fund before presenting the performance to clients or unit holders.
Belinda Gibson, deputy chairwoman of the Australian Securities & Investments Commission (ASIC) says that the practice of window dressing distorts the value of a portfolio at a time when it benefits the manager, at the expense of current and potential investors.
“Investors may not only be looking at their funds performance through rose-coloured glasses — they may also be paying higher performance fees than are necessary,” Ms Gibson said in a statement yesterday.
The regulator is poised to take over responsibility of supervising real time trading on licensed exchanges.
Ms. Gibson added that brokers and other indirect market participants should view clients who place their orders close to the end of business on 30th June with some suspicion that they intend to try to set the closing price for the security higher than it otherwise would be.
ASIC and ASX surveillance teams would be monitoring end of financial year trading and exchanging notes, she said.
Competition Regulator Unlikely To Grant Approval For NAB Acquisition Of APH
According to investment bank Credit Suisse, the proposed acquisition of AXA Asia Pacific Holdings (APH) by National Australia Bank is likely to not be approved by the competition regulator.
Last week, NAB disclosed that it continued to remain in discussion with the Australian Competition and Consumer Commission, and third parties who were interested in acquiring APH’s North investment platform.
NAB hopes that a sale of the investment platform would help allay the competition regulators concerns that the lender would as a result of its acquisition end up dominating the retail investment market, despite receiving no assurances from the ACCC that such a sale would put its fears to rest.
NAB is negotiating with wealth management group IOOF, Bendigo and Adelaide Bank and Perpetual to sell the platform, which is expected to be discounted to attract a buyer.
Analysts at Credit Suisse say they believe any sale and resulting lease back arrangement would make NAB the single largest customer of any potential buyer, which would mean it would have undue influence over the pricing.
“We think that the ACCC will — rightly so — come under a lot of pressure for allowing the transaction to go through under such a scenario,” analysts said.
Additionally, analysts believe that the complexity involved in stripping out the asset from the NAB operation does not make it attractive to buyers.
“Finally, we urge investors not to forget that even if NAB manages to convince the ACCC, it still needs to get Treasury approval which is nowhere near a foregone conclusion in our view,” the analysts said.
Investment bankers say that it is becoming increasingly likely that NAB would have to raise dramatically the planned $1.5 billion capital raising to finance the APH transaction.