• According to the Australian Institute of Petroleum the national average retail pump price rose 0.5 cents a litre last week to 124.3 cents a litre – a three month high.
• The recent Aussie dollar weakness has seen the Singapore unleaded price near four month highs, while the wholesale (terminal gate) price has hit three month highs. Over the next fortnight CommSec expects pump prices to breach a $1.25 litre and rise by 2-3 cents a litre.
• Mobile phone shipments (in effect, sales) sales have surged due to seasonality factors. However a more smooth measure of activity would be a comparison of mobile phone shipments with the same period last year, which shows sales are down 6.5 per cent on a year earlier.

What does it all mean?

• Petrol prices have risen for the second straight week, and are now holding at a three-month high. And there is unlikely to be much good news for motorists in the near term, especially given that the regional oil prices have also reached multi-month highs.
• The recent weakness of the Australian dollar has far outpaced the falls in the Singapore unleaded price. And as a result the Singapore unleaded fuel is trading at near four month highs in Australian dollar terms. Already the higher regional petrol price is starting to filter through domestically, with the wholesale (terminal gate) price rising to three month highs in the past week.
• CommSec expects petrol prices to move higher with the national average price breaching a $1.25 a litre in the next fortnight.
• The data on mobile phone sales is one of the timeliest readings on consumer spending. And given that mobile phones are still a ‘must have’ item, if sales are moving, then it provides a pointer to consumer spending trends.
• Mobile phone sales are largely influenced by seasonal factors, and to get a better reading on trends, CommSec has used a smoothed annual measure. In the three months to October, phone sales have fallen by just over 6 per cent compared with the same period a year ago – a result that highlights that despite confidence levels remaining high, consumers are still displaying conservative attitudes when it comes to spending.
• However when closer attention is paid to the single monthly result mobile phone sales are up 13 per cent compared with October of last year. And while the rise is largely due to seasonality factors, the pickup on the same period last year is encouraging. The sustained improvement in labour market conditions, pick up in equity markets, and rising wealth levels should support consumer activity in the midterm.
• What is required in coming months is a period of interest rate stability to allow consumers and businesses to the higher borrowing costs and in time lift spending patterns.

What do the figures show?

Petrol prices:

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 0.5 cents per litre to 124.3 cents a litre in the week to November 21. The metropolitan price rose by 0.2 c/l to 123.9 c/l, while the regional average price rose by 1.1 c/l to 125.0 c/l.
• Petrol prices across states in the past week were: Sydney (down 0.8 cents to 123.2 c/l), Melbourne (up 0.1 cents to 124.0 c/l), Brisbane (up 1.0 cents to 126.5 c/l), Adelaide (up 1.1 cents to 123.2 c/l), Perth (up 2.6 cents to 122.9 c/l), Darwin (down 0.2 cents to 127.2 c/l), Canberra (down 2.6 cents to 122.2 c/l) and Hobart (down 0.8 cents to 128.0 c/l).
• The national average wholesale (terminal gate) hit an 11-month low of 111.6 cents a litre on October 1. However the terminal gate price has since risen to a three month high of 117.3 cents today. The key Singapore unleaded petrol price rose by US40c (0.4 per cent) to US$93.60 last week. And in Australian dollar terms Singapore gasoline rose by $1.15 (1.2 per cent) over the week to $94.96 a barrel – a near four month high.

Mobile phone shipments:

• Mobile phone shipments: The Australian Mobile Telecommunications Association has reported that 1,077,307 mobile phones were shipped to stores in October (in effect, mobile phone sales), a sharp rise on October sales.
• A more smooth measure of activity would be a comparison of mobile phone shipments with the same period last year. In the three months to October, phone sales have fallen by almost 6.5 per cent on the same period a year earlier.
• After peaking with annual sales of just over 10 million units in the year to May 2008, mobile phone sales have retreated to an annual rate of just under 8.5 million units in October 2010. The annual rate has been averaging close to nine million mobile phone sales since June 2009.

What is the importance of the economic data?

• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum. National average retail prices are calculated as the weighted average of each State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions.
• The Australian Mobile Telecommunications Association releases data on mobile phone shipments each month. The figures collected for AMTA by Informark record the number of shipments, rather than sales. While figures on handset shipments don’t fully translate to sales, they are nevertheless a useful proxy. The data on mobile phone shipments is a guide to consumer spending.

What are the implications for interest rates and investors?

• The higher regional oil prices are filtering through to domestic wholesale prices, pump prices are likely to lift in the near term. Motorists are likely to see petrol prices rise by 2-3 cents a litre over the next fortnight
• The recent interest rate hike is likely to keep domestic activity subdued in the near term. Lending finance is stagnating and a period of interest rate stability will be needed to entice consumers and businesses to increase borrowing levels and in turn boost activity.

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It is surprising how often I receive calls from advisers asking me to explain how Centrelink will treat their client’s family trust or private company, predominantly for Age Pension eligibility.

(This story first appeared in the Journal of Financial Advice , Volume 3, Issue 4, 2010)

In many instances, ‘Mum and Dad’ had a family business for many years that has long since ceased to be a going concern and, but for the large loan account inside the company, would have wound it down a long time ago. In other cases, it is a family investment trust – testament to a wealth creation and/or asset protection strategy set up years ago with their accountant and financial adviser which may have provided some tax benefits and built scale in pooling family investment reserves. Sometimes, however, it is not necessarily Mum and Dad’s family trust or private company but their high-income-earning son or daughter who has set up the structure and asked Mum and Dad to be beneficiaries to help manage tax.

Nevertheless, in all the cases I have looked at, no-one has ever had the forethought, a decade out from retirement, to ask; “Will this impact on our ability to qualify for the Age Pension?”

What are the Attribution Rules?

The attribution rules were introduced from 1 January 2002 and became effective from 30 April 2002. Their purpose was to assess interests in family trusts, testamentary trusts and private companies under both the Income and Assets Tests.  This would effectively remove a ‘Centrelink shelter’ that had allowed many people to qualify for Government assistance who otherwise would have been caught if assets held in these structures had been invested in their own names.

Trusts and Private Companies

Without going into “what is a company?” and ‘“what is a trust?”, details of which I am sure we are all cognisant, consider what Centrelink and the Department of Veterans’ Affairs (DVA) defines as a private company or private trust. According to the Centrelink Financial Information Services (FIS) Fact Sheet FIS022.0905, a private company,

“is a separate legal entity, set up to run a business or to hold investments, registered under Corporations Law, owned by shareholders and managed by its directors who are elected by the shareholders.”

Centrelink will deem the entity as a private company if, at the end of the last financial year, it met any two of the following three criteria:

1.    the consolidated gross operating revenue of the company and any subsidiaries was less than $25 million;

2.    the consolidated gross assets of the company and any subsidiaries were less than $12.5 million;  and

3.    the company and any subsidiaries had less than 50 employees.

Most of the Mum and Dad enterprises I have encountered are certainly within that range, and if private companies hold many millions in Net Tangible Assets (NTAs) it generally means the directors hold significant wealth in their own names and in family trusts and Self-Managed Superannuation Funds (SMSFs), so they will not be looking to qualify for Centrelink anyway.

In terms of private trusts, again referring to the aforementioned FIS Fact Sheet, Centrelink includes family discretionary trusts and testamentary trusts with fewer than 50 ‘members’. Now, trusts generally don’t have ‘members’, they have beneficiaries, or objects (in the case of a discretionary trust). But for the purposes of the attribution rules, a trust with more than 50 members is deemed to be a widely-held trust in the same form as listed (or unlisted) property trusts, managed share trusts and other public trading trusts. In these cases the member’s holding is treated as a financial asset and deemed for income using the normal deeming rates.

The Assessment Tests with regard to Private Companies and Trusts

One of the difficulties faced by many people seeking to apply to Centrelink or to the DVA for financial support, particularly when they become eligible for the Age Pension, is determining how they will be assessed when there are often some seemingly minute and innocuous associations to a private company or trust. For instance, in the examples mentioned above where Mum and Dad are directors of a defunct company that ceased trading many years earlier, or where they are objects of a family trust and have never received a distribution, are they still caught by Centrelink/DVA?

There are two distinct tests that apply jointly to determine the inclusion of assets and income from a private company or trust. These are:

1.    a Source Test; and
2.    a Control Test.

Simply speaking, the Source Test relates to the source of funds introduced to a trust or private company, and the Control Test relates to who is in control of the trust or private company – for instance, directors of the company or corporate trustee, individual trustees, appointors and beneficiaries/shareholders.

By applying the attribution rules, a person applying for Centrelink/DVA support is attributed with the assets or income of the private trust or company and those assets and income are treated no differently to how the person’s own assets and income are treated.

1.    The Control Test

You might think, “Well, the trustee has control of the assets of the trust so it is likely they will be ‘pinged’ by Centrelink/DVA”. And it is true that the director of the private company or the trustee of the trust does have control of the assets. But consider also, apart from the day-to-day management of the trust, who else can exercise effective control of the trust. Centrelink considers that anyone that can dismiss and appoint a trustee, veto a trustee’s decision or change the trust deed is also included; that is, an appointor, principal or guardian. Centrelink will also look beyond the normal trust law auspices where it deems a person might have influence over the trustee, or where the trustee might be expected to act for the benefit of that person.

2.    The Source Test

The Source Test, on the other hand, seeks to attribute capital invested in a trust or company with the person(s) who originally transferred assets (which can include non-tangibles such as services), into the company or trust. If there has been no consideration paid for these assets, then there is necessarily an assumed retention of control by the transferor, unless in the case of a genuine gift.

If, after applying the above tests, a person is attributed with a share of the assets and/or income of a private trust or company, then the person’s share of the market value of the attributable assets, or the portion of net attributable income, will be assessed as being his/hers.

Strategy Considerations

There are some positives and negatives when applying the attribution rules.

Negatives

Many would consider it a negative to be assessed in the first place.  In addition to this, not all deductions allowed under the Tax Act will be allowed by Centrelink/DVA as a deduction to reduce income. These non-allowable deductions can include:

• prior year losses;
• losses from unrelated businesses;
• deductions caught up in the definition of Reportable Employer Superannuation Contributions (RESC); for example – salary sacrifice, and certain capital expenses.

Positives

There are some positive aspects however. On the assets side, a principal residence owned by a family trust will not be assessable. Also, assets are net of liabilities (if those liabilities are attributable to assessable assets). If a person is deemed not to be the controller of the trust of a private company, the person will not have the market value of the assets assessed against him/her, but will be assessed on the actual distributions or dividends (including imputation credits) made by the private trust or company for twelve months after the date of distribution.

However, the strategic advantage of the attribution of private trust/company income comes from the fact that private trusts and companies are not deemed for income, as are other financial assets, such as listed shares, term deposits and managed equity trusts.

This provides for the ability to manage the amount of income that is assessed to the Age Pension applicant. It can also have a positive outcome in planning for aged care as the use of a private trust may be useful in reducing the income-tested fee with only the actual (taxable) income of the trust assessed under the Income Test.

The following is an extract from the Guide to Social Security Law, 4.12.7.10, which contains the general rules regarding the attribution of income to an attributable stakeholder:

‘Attribution of the income of a private trust or private company

• If the assets (1.1.A.290) of an entity are attributed to a person (the attributable stakeholder) then all of the income (adjusted net profits) generated by those assets will also be attributed to them (subject to the percentage of attribution of the assets),
• Income from the entity for an attributable stakeholder will NOT be deemed, actual income will be used and will generally be assessed on an annual basis from the income tax return,
• If the attributable stakeholder(s) choose to distribute entity capital or income to other people, the amounts distributed are to be treated as gifts by the attributable stakeholder and are subject to deprivation (1.1.D.110).

Exception: Distribution of the income of an entity to the partner of an attributable stakeholder is NOT treated as a gift of the stakeholder and is NOT subject to deprivation.
Note: An income support recipient who is an attributable stakeholder of a controlled entity can request a reassessment of their circumstances at any time.’

Therefore, in order to manage assessable income, a non-interest bearing deposit (or an insurance bond purchased by a private trust where there are no withdrawals) will generate zero assessable income for tax purposes. This means that while the value of the insurance bond will continue to be assessed under the Assets Test in full, there will be no assessable income, thus resulting in minimising the assessable income of the trust.

Of course, the benefits of the treatment of income from a private trust or company as opposed to the  deemed income from financial assets needs to be weighed up against the reporting and other associated costs of running a separate investment structure.

But what about the mum and dad with a loan to a defunct company, or the elderly parents who are trustees or minor beneficiaries of their children’s family trust?

Other Options

According to Centrelink, any person who has a loan to a private trust or company will be assessed under the deeming provisions, irrespective of whether he/she is a controller or non-controller. On the surface it sounds fairly black and white. This is, however, where the ‘Special Assessments’ area of Centrelink earns its stripes. In the case where a private company has a debt to the directors that will never be repaid (because the business that the company ran ceased to be a going concern a long time ago), it is worth going the extra step to push pass the initial bureaucracy and appeal the decision. I have seen instances like this where the loan was ignored, pending the winding-up of the company, without the amount being seen as a gift and deemed for a period of five years (as might normally happen).

For beneficiaries or shareholders with minority interests, Centrelink will look at the trust’s history of income distributions, or the company’s history of dividend payments to ascertain a payment pattern. If Mum and Dad are objects of a trust that has been in existence for a long time and have never received an income distribution (and are not deemed to be controllers of the trust or to have been an initial or subsequent source of transferred capital), then Centrelink has, in the past, been shown to disregard the holding, pending surrender of the holding.

In the case of a trusteeship or a directorship that has precluded eligibility for the Age Pension, the trustee or director can relinquish control, that is, resign as the appointor and/or trustee of a trust or, for a company, relinquish all formal roles, directorships and shareholdings. They are, of course, considered to have gifted all the assets held by the trust or company and the deprivation rules will therefore apply where the market value of the amount foregone/gifted, is assessed as an asset for five years and deemed for income.

According to Centrelink, it will accept a genuine resignation has occurred where, in respect of the private trust or company, both the controller and his/her partner:

• relinquish all formal roles and control;
• relinquish all beneficial interests; and
• make a written declaration that they will not exert any control over, or benefit in any way from, the trust or company.

Excluded Trusts

For the purposes of the Centrelink/DVA means test provisions, and in particular the attribution of assets or income of a private trust to an individual, the Social Security (Means Test Treatment of Private Trusts – Excluded Trusts) (DEEWR) Declaration 2008 specifies classes of trusts that are ‘excluded trusts’ for these attribution purposes, including:

• pre-10 May 2000 community and fixed trusts;
• trusts where the sole or dominant purpose of a trust is to receive, manage and distribute property transferred to it by a government body for a community purpose; and
• trusts that hold, manage, or dispose of indigenous-held land for a community purpose or where the sole or dominant purpose of a trust is to receive, manage and distribute income generated from the use of indigenous-held land for a community purpose.

It is also important to note that certain ‘Court-ordered trusts’ and, particularly, Special Disability Trusts, have different treatments again imposed by Centrelink and the DVA. But these issues are beyond the scope of this paper.

Conclusion

There are three important aspects of dealing with private trusts and companies to bear in mind:

1.    Make sure your clients fully disclose all beneficial interests and any trusteeships or directorships they might have.

2.    Know the attribution and deprivation rules and how they will impact on your clients’ chances of qualifying for Centrelink/DVA support before you implement any strategies to maximise their pension amount.

3.    An initial Centrelink assessment should not be taken as the be-all-and-end-all – there are avenues for appeal.

And get some good technical advice!
 

Note: The accreditation for this CPD article is no longer current. Please visit our CPD section for current CPD quizzes. 

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Mr Ripoll was due to discuss the future of the financial planning industry as part of the Hypothetical Beyond 2012: The future of financial planning session.

Mr Ripoll has been asked to remain in Canberra while Parliament is sitting and these dates conflict with the FPA National Conference.

The Hypothetical Beyond 2012: The future of financial planning session will continue as part of the National Conference program and will be run by David Galbally, QC.

Other participants include Justin Hooper CFP®, RLB, Managing Director, Sentinel Wealth Management Pty Ltd, Greg Medcraft, Commissioner, ASIC, Mark Rantall CFP® CPA, Chief Executive Officer, FPA, Annette Sampson, Personal Finance Editor, The Sydney Morning Herald and Steve Tucker, Chief Executive Officer, MLC.

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Recently, trading speeds on stock markets have increased dramatically as technology has been brought to bear on decision making as well as the matching and execution of trades. High speed computers can now gather data, make a decision by applying complex algorithms and execute a trade, all in much less than 1,000th of the time taken to blink an eye.

The growth in HFT over the past 6 years has been extraordinary, and HFT trades now make up more than 50% of all share transactions in the USA.

This article by Charles Duhigg published by The New York Times on July 23, 2009 provides a good example of how HFT operates.

“Stock Traders Find Speed Pays, in Milliseconds.”

“It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like NASDAQ to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and cancelling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares or $7,800 more than if they had been able to move as quickly as the high-frequency traders.
Multiply such trades across thousands of stocks a day, and the profits are substantial. High-frequency traders generated about $21 billion in profits last year, the Tabb Group, a research firm, estimates.”

History

In 1997 the NYSE stopped quoting stocks in eighths of a dollar and moved to increments of 1 cent. This reduced the revenue the market makers earn from the bid/offer spread, so the exchange began paying rebates to high-frequency brokerages if they bought shares at the best public prices.  This provided a financial incentive for the development of the high frequency, high volume, low margin approach that characterises HFT.

Meanwhile, HFT was supported by significant upgrades to trading systems in many exchanges, designed to dramatically cut transactions times.  Going even further, the extremely short period of time that it takes for a piece of information to travel from one computer to another in a network, which is known as “latency”, was shortened even more as exchanges began to rent space right next to the trading platforms in their own data centres. In consequence, many firms can now process an order in less than 3 millionths of a second.

Australia and Asia have been relative latecomers to HFT. Hong Kong is making a significant investment in the required technology, and our part of the world looks like the next region for explosive growth in this area.

It looks as though this growth will continue, with HFT not only spreading geographically but to other markets as well. HFT is now well established and growing in foreign exchange, futures and options markets, and bond markets are also joining in.

Infrastructure

Low latency infrastructure now looks for improvements in the millionths of a second range, and “extremely low latency” is the expression used for the best of it. Low latency provides information, including about competing bids and offers, microseconds faster than higher latency systems.

In Tseung Kwan in Hong Kong, work is underway on a data centre where stocks, futures, options and currencies can be traded on computers metres away from Hong Kong Exchanges’ own systems which are used to handle trades. The cost will be high and milliseconds will be saved, but in the world of HFT, milliseconds are precious.

The concept is referred to as co-location and it is being adopted widely. In Australia, the ASX plans to dramatically expand its co-location services with a new $32 million data centre which is due to be completed in August 2011.

Financial market news is also now being formatted by firms such as Bloomberg so that it can be delivered to, and read and analysed by, computers almost instantaneously after release.  Beyond even that, algorithms are now being designed to interpret stories and to make judgements about the likely effect of those stories on market sentiment.
In 2008 Dow Jones ran ads in the Wall street journal, proud that they had managed to report an interest rate cut by the Bank of England 2 seconds faster than their competitors.  In the world of HFT, 2 seconds is a very long time.

Strategies

Algorithmic trading can be applied to virtually any investment strategy, including pure speculation and trend following, passive benchmarking to replicate an index’s return or  exotically named techniques such as “Stealth”, “Iceberg”, “Dagger”, “Guerrilla”, “Sniper” and “Sniffer.

Typical HFT strategies involve a mix of high turnover of capital, very short holding times, multiple trades each day, very small returns per trade and all positions being closed out at the end of every day.

“Latency arbitrage” is a contentious strategy. It exploits knowledge that the trading system of a particular exchange is about to slow down under a processing load, providing a trader with an opportunity to set up a buy or sell order in advance. The method of ensuring that the processing load is then actually experienced is called “quote stuffing”.

Algorithmic trading strategies often attempt to reduce costs by breaking large orders into several smaller ones which are then placed into the market progressively, a method known as “iceberging”. The algorithm called Stealth tries to find the large hidden orders that hide behind tiny obvious ones (icebergs) and to profit by subverting the intent of the iceberger. In this case, we have a science fiction-like battle of wits between two computers.

Some strategies are called “gaming” because they depend on the programming skills of other traders. “Dark pools” are alternative market-places where trading is anonymous, and most orders are “iceberged”. “Sharks” “ping” small market orders into dark pools, concluding if they are filled that they have discovered an “iceberg”.

Flash Orders

Some markets allow HFT traders to look at orders for very short periods of time (of the order of 30 milliseconds) before they are shown to everyone else. This is enough time, as we have seen, for traders to conduct a transaction and turn a profit by very quickly trading shares they know will soon be in high demand. The aim is to earn small amounts per trade on very large numbers of trades, sometimes millions of times a day.

The markets defend this practice as providing liquidity. Others claim that it allows one trader to probe the market with tiny orders that are immediately cancelled to provide an opportunity others don’t have of gaining insight into the other side’s willingness to pay. On the face of it, it looks like an unfair advantage.

A turning point seems to have occurred on May 6 in the USA, when an event took place which became known as the “flash crash”. Rapidly delivered, computer generated orders were widely held to be responsible for sending the Dow Jones Industrial Average down by 1,000 points in 20 minutes. This has led many commentators to question whether there is any inherent difference between flash orders and the misbehaviour called “front-running”.

Nanex has plotted the flows of orders from HFT traders, and they form very distinctive and unusual patterns which have been given names such as “Bandsaw II” and the “Boston Zapper”.

Polarised Opinion

HFT has supporters and detractors, but the growth seems to roll on in disregard of the arguments for and against.

Fully automated markets such as NASDAQ, Direct Edge and BATS, in the US, have prospered at the expense of less automated markets such as the NYSE, providing a warning to other world markets of the dangers of being left behind.  The expansion of volumes and contraction of margins has led to economies of scale, in turn generating pressure for lower commissions and fees, and mergers or consolidation of financial exchanges.

Finally, HFT seems to benefit from and also cause, in a loop, fragmentation of markets.  Fragmentation produces diverse trading venues with slightly different trading systems, speeds and fee schedules, providing opportunities for traders to exploit the differences through their computer algorithms.

Perhaps the clearest evidence of the changes and fragmentation that dark pools, and platforms like Chi-X Europe are causing is the fact the London Stock Exchange now accounts for only 55% of trading in the stocks that comprise the FTSE 100 index. This should give the ASX and all market participants pause for thought as Australia prepares to ramp up its involvement in this area and alternative exchanges to the ASX are introduced.

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J.P. Morgan Treasury & Securities Services has today announced it has completed the successful migration of direct and master custody clients from ANZ Custodian Services. ANZ Custodian Services was acquired by J.P. Morgan in November 2009.

Completed on time, within one year of the acquisition, this migration has increased the assets held under custody by J.P. Morgan in Australia & New Zealand more than 20 per cent. With more than 150 ANZ Custodian Services staff in Melbourne and Wellington accepting roles with J.P. Morgan, the firm’s footprint has been dramatically increased in these two key financial services hubs.

Jane Perry, CEO of J.P. Morgan Treasury & Securities Services, Australia and New Zealand, said the strategic acquisition of the ANZ Custodian Services business builds on J.P. Morgan’s service offering as the only local firm to provide the full range of global, domestic, direct custody and fund administration services to local and international institutions and fund managers.

“As custody continues to move towards a scale-driven business model, we will continue to ensure that our clients benefit from our integrated solutions, our global platform, and our deep local expertise in the local market. We remain committed to enhancing our on-ground coverage in key Australasian financial centers such as Sydney, Melbourne and Wellington, and further broadening the wide range of innovative solutions available to our clients,” said Perry.

The completion of the ANZ project follows J.P. Morgan’s recent announcement of the expansion of its direct custody and clearing capabilities globally, with the first phase build-out of the offering covering Australia and New Zealand, Taiwan and India in Asia Pacific, along with the United States, United Kingdom and Russia. The firm already offers a globally integrated custody and clearance service backed by a unified technology platform to institutional investors in more than 100 markets.

“Direct custody is a natural extension of our existing business and is part of J.P. Morgan’s expansion plans globally. A direct custody service enables us to meet the needs of clients with cross-border investments in Australia and New Zealand, and to add new clients seeking local custody and clearing services and grow these relationships globally,” she added.

“The migration of ANZ’s Custodian Services clients, combined with our enhanced direct custody network, mark a milestone for the Treasury & Securities Services business in Australia & New Zealand. We are excited about the future opportunities in the direct custody and administration space and we look forward to better servicing the needs of our existing and future clients.”

The provision of direct custody in Australia & New Zealand is part of the Asia Pacific growth plan for the Treasury & Securities Services business, with the firm expanding its local on-ground presence, enhancing its range of market leading products and elevating its client servicing capabilities year-to-date, J.P. Morgan Treasury & Securities Services has hired an additional 500 financial professionals in Asia Pacific to broaden its regional coverage and further develop its partnership with clients. J.P. Morgan Treasury & Securities Services provides solutions to corporate and institutional clients across the region.

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• In recent weeks investors have no doubt found it difficult to sort fact from fiction in the public discussion about company balance sheets. Some commentators have questioned whether banks are generating
  above-normal profits. Others have questioned whether some companies such as BHP Billiton are making profitable use of capital or whether a portion needs to be returned to shareholders. And still others have focussed on the sustainability of high dividend returns from companies such as Telstra.
• To provide a base for the discussion, CommSec has compiled a set of tables on various measures for the S&P/ASX50 – the 50 biggest companies on the sharemarket. The tables are generated from data available from financial research firm, Morningstar.
• In 2010 while major banks’ posted solid profits, their return on equity ratios were largely in line with the average of S&P/ASX50 companies. And their return on assets ratios were at the bottom of the pack. By contrast Telstra reported market-leading return on equity and return on capital ratios in 2010.
• Over the past decade, seven S&P/ASX50 companies had negative shareholder returns including Telstra. Shareholder returns were close to average for CBA, ANZ and Westpac but returns for NAB were below the average of S&P/ASX50 companies.
• Resource companies dominate the results of average shareholder returns over the past decade.

Click here to download this document (pdf)

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John Brogden, CEO of the Financial Services Council, said the findings highlighted the urgency of increasing the Superannuation Guarantee (SG) from 9 per cent to 12 per cent.

“The research shows the longer we delay the move to 12 per cent superannuation, the greater the cost for working Australians,” Mr Brogden said.

The research (undertaken by Rice Warner Actuaries for the Financial Services Council) provides a snapshot of Australia’s progress as a nation towards funding a comfortable retirement. The retirement savings gap is the difference between what is actually being saved through superannuation and what is needed to sustain a comfortable lifestyle after ceasing work.

“An adequate annual retirement income is defined as 62.5 per cent of a person’s last salary. Our research shows 9 per cent superannuation will fail to provide the population with their expectations of a comfortable retirement,” Mr Brogden said.

“The Superannuation Guarantee needs to be at least 12 per cent – this, combined with the Government’s plan to raise the concessional contribution caps for those nearing retirement and the SG age limit, would provide a 30-year-old on average weekly earnings with an additional $108,000 in their superannuation account on retirement.

“Increasing compulsory superannuation also has significant benefits for the Australian economy and the Budget. Higher savings would reduce Australia’s reliance on international investment, lower the current account deficit and ultimately provide a cheaper and more stable pool of funds for Australians to draw on.

“Higher contributions would also lower the tax burden on working Australians as the population ages by reducing the draw on the Age Pension.

“Parliament must support the rise to 12 per cent superannuation if Australians are to enjoy a comfortable retirement,” Mr Brogden concluded.

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Headline developments of the past week

• Worries about Europe’s debt problems and tightening in China were again key issues for investors over the last week, and had the effect of initially pushing share markets down ahead of a reversal later on as some of the fears receded. Europe seems to be moving pretty quickly this time to try and limit the contagion from Ireland to other European countries – in fact, a bailout package for Ireland from the IMF and European Union looks imminent.
• Concerns about an aggressive tightening in China receded a bit after Chinese authorities announced a range of administrative measures to curb inflation. These involved measures to boost the supply of key foodstuffs, subsidies for low income households, temporary price controls on necessities and a crackdown on speculation. While the merits of price controls can be debated, to the extent that China is relying on targeted administrative measures to control inflation it may help take pressure of blunter less targeted measures such as interest rate hikes. However, Friday’s hike in the banks’ required reserve ratio – the fifth this year – highlighted that macro tightening is still on the agenda. The increase in the reserve ratio is necessary to mop up the increase in the money supply being generated by the current account surplus and the managed exchange rate. We still anticipate a few interest rate hikes and a further increase in the banks’ required reserve ratio going forward, but remain of the view that they will not be aggressive enough to crunch the Chinese economy.

Major global economic releases and implications

• US economic data over the last week was all over the place. Housing starts, weekly mortgage applications and a survey of home builders were all soft – but at least still seem consistent with housing activity having found some sort of bottom. Industrial production was flat and manufacturing surveys were mixed – weaker in the New York region but much stronger in the Philadelphia region. Clearly positive though were weekly jobless claims essentially sustaining the sharp fall seen in the previous week, a fall in mortgage delinquencies in the September quarter and a better than expected rise in a leading index for October. Producer and consumer price inflation both came in on the soft side. In fact, core consumer prices have now been flat for three months in a row and the annual rate was the lowest level every recorded (with data back to 1957). Quite clearly all of this provides support for the Fed’s commencement of QE2 – mixed economic indicators suggest that growth is still too low for comfort and inflation is verging on deflation. It is now more than 18 months since the Fed started QE1 and yet there is no sign of the hyperinflation that many were predicting when it was first announced.
• Meanwhile, a forceful defence of the Fed’s latest round of quantitative easing (QE2) by Ben Bernanke provided confidence that the Fed will not be abandoning it, as investors might have been starting to fear given the heavy criticism it has attracted in both the US and globally since first announced.
• In Japan, the big surprise was a rise in annualised GDP in the September quarter of 3.9% driven mostly by strong consumer spending. However, it is hard to see this pace being sustained as consumer spending falls back and the strong Yen constrains exports.
• The pressure from rising food prices on inflation was also evident in Korea which raised its short term interest rate for the second time since the GFC to 2.5%. Further rate hikes are likely next year.  Meanwhile, GDP growth remained strong in Taiwan and Singapore in the September quarter with both growing around 10% year on year, underlining the continued strength in Asia.

Australian economic releases and implications

• In Australia two things stand out from the minutes from the last Reserve Bank Board meeting and a speech by Deputy Governor Ric Battellino. The first is that the RBA does not see any urgency to raise interest rates again: the November move itself was finely balanced; the over and above rate hikes from the banks were probably more than the RBA expected; housing has slowed and consumers remain cautious; and we have seen a renewed intensification of worries about sovereign debt in Europe. However, the second point is that the RBA still retains an inclination to raise interest rates further. This is clearly evident in Ric Battellino’s comments that the challenge going forward will be to manage the economy in a way that contains inflation in the face of the large amount of money likely to flow into the economy in the next few years as a result of the mining boom and that over the medium term inflation is more likely to rise than fall. So putting it all together while we don’t see the next rate hike coming until February at the earliest, in a year’s time the cash rate is likely to have increased to around 5.5%.
• Over the last week though, Australian economic data provided a messy picture. On the one hand car sales and skilled job vacancies came in on the soft side but on the other wages growth on the RBA’s preferred measure showed further signs of acceleration.

Major market moves

• Global share markets had a roller coaster week, initially falling sharply before recovering some lost ground as a bailout for Ireland seemed to be nearing, worries about an aggressive tightening in China receded a bit, economic data and profit news came in better than expected, the successful General Motors IPO helped boost confidence and Fed Chairman Bernanke provided a strong commitment to quantitative easing. While Asian and Australian shares fell over the week, US shares were flat and Japanese and European shares actually rose. Japanese shares now seem to be benefitting from the weaker Yen.
• It was a similarly rough ride for commodity prices and the Australian dollar with initial sharp falls giving way to some recovery as global growth concerns receded a notch.
• It’s interesting to note that despite the gyrations in growth trades such as share markets over the past week bond yields have moved higher. While this may reflect traders unwinding excessively long positions built up through the mid year growth scare and in anticipation of QE2 it is also consistent with a greater degree of confidence in the global growth outlook.

What to watch in the week ahead?

• In the US, October home sales data are likely to slip back a notch after strong gains in September, September quarter GDP growth is likely to be revised up slightly from the 2% annualised pace initially reported and durable goods orders are likely to have remained solid in October. The minutes from the last Fed meeting may also shed some more light on the thinking behind the Fed’s adoption of another round of quantitative easing.
• Various European business conditions surveys for November will be watched to see how well Europe is holding up.
• In Australia, data on construction spending and business investment will help firm up estimates for September quarter GDP growth to be released on 1st December. Capex spending is likely to show a decent rebound after a fall in the June quarter and capex plans are likely to remain strong. Meanwhile, RBA Governor Glenn Stevens’ testimony before a Parliamentary committee on Friday will be watched closely for more clues regarding the interest rate outlook.

Outlook for markets

• After strong gains since late August, shares were vulnerable to a correction, which we have certainly seen over the last two weeks. While it’s too early to say whether we have seen the bottom or not, we continue to expect solid gains in shares into year end and through next year. Shares are cheap, particularly relative to government bonds, the risk of a double dip back into recession appears to have receded, the global liquidity backdrop is highly favourable underpinned by QE2 in the US and the corporate sector is cashed up which is likely to result in a further pickup in merger and acquisition activity, share buybacks and dividends. In the past week we have seen BHP announce a resumption of share buybacks and Nike increase its dividend payout.
• Notwithstanding normal bumps along the way, the $A is likely to head higher as the $US and the euro remain under downwards pressure, interest rates in Australia continue to trend up, and commodity prices resume their rising trend. It’s likely that the $A will settle around $US1.10 in the year ahead.
• Deflation worries, along with central bank government bond purchases in the US and elsewhere, are likely to keep bond yields low in the short term. However, medium-term returns are likely to be poor, reflecting low yields and excessive public debt levels in many developed countries.

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AFA CEO Richard Klipin said the AFA is delighted to welcome Bridges Financial Services, Wealth Managers, Executive Wealth Management Financial Services and SMF Wealth Management on board. The four licensees are home to over 314 Authorised Representatives operating across Australia.

Head of Wealth Management Division, Michael Carter, said it was the AFA’s ongoing commitment to advisers that convinced them to join the association.

“All of our authorised representatives must be members of a professional industry association,” Mr Carter said. “Over the past two years we’ve watched the rebirth of the AFA as an association that truly understands and cares about advisers and one that is delivering a host of beneficial programs to its members.  The decision to join the AFA will give individual advisers within these licensees greater choice as to individual membership with the industry body that they feel can best support them.”

AFA CEO Richard Klipin said the licensees will complement the growing number of quality advisers and planning groups the AFA engages with. “It is part of our ongoing strategy to welcome more licensees to the AFA so that the voice of advisers is heard more distinctly and more strongly in our communities and in Canberra,” Mr Klipin said. “The AFA is and always will be an association which represents only the concerns of advisers, adviser businesses and the clients they serve.”

The AFA now represents about 7000 advisers through its relationships with licensees across Australia and individual members.



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Investing globally has the potential for providing better returns and greater diversity of risk exposure than limiting capital allocations to home markets, according to a new white paper by BNY Mellon Asset Management.

“Investing globally can help investors spread their risks and position themselves to achieve better returns across a range of economic scenarios,” says Curtis Arledge, vice chairman of BNY Mellon responsible for asset and wealth management. “It seems that many investors in developed countries may have not fully appreciated this approach, as studies referenced in the white paper demonstrate an over reliance to home equities.”

Among the trends driving a global investing approach are the rise of emerging countries as growth engines for the world economy, the growing share of global market capitalization outside traditional investment centers such as the United States, and the trend toward truly global companies that derive sizeable portions of their earnings from countries and markets far from their home headquarters.

As well as arguing the rationale for global investing, the white paper addresses the range of perceived risks associated with investing beyond one’s domestic market; including the increased complexity of managing currency translation risk and liquidity concerns, as well as fiscal and political uncertainty in some countries.

An important factor underlying the trend for global investing is the divergence in economic growth between emerging economies and the traditional developed market countries.  “While many emerging market economies were not as severely affected by the financial crisis, the growth in developed economies has been constrained by a deleveraging process that is shrinking the amount of available credit,” says Mitchell Harris, interim head of asset management at BNY Mellon.

This deleveraging has caused sharp performance divergence between asset classes and currencies around the world, as well as heightened volatility, which can be exploited for returns, according to Newton*, one of the BNY Mellon boutiques that contributed to the white paper.

“As individual country risks have changed, every company, sector, and investment opportunity should be considered within a global context to identify long-term winners,” comments Helena Morrissey, chief executive officer of Newton.

Investors who fail to take a global approach could be hurt by the divergence between economic conditions in their home countries compared with those of foreign markets.

“Active global equity managers with deep knowledge of local conditions and future trends, who are able to accurately select companies and countries with the greatest potential for outperforming returns, have been rewarded after and even during protracted bear markets,” adds Kirk Henry, portfolio manager at The Boston Company Asset Management LLC.

Attractiveness of Emerging Markets

The rise of emerging markets has created opportunities for both equities and fixed income investors, according to the white paper. The paper notes that faster GDP growth and better opportunities for increasing productivity are expected to help emerging markets equities out-perform those in developed markets.

Many of the prior barriers that impeded the progress of emerging markets countries have disappeared as the governments of these countries have taken steps to bring inflation under control, liberalize their currency regimes, develop local currency bond markets, amass reserves, and reduce their dependence on external capital, according to the report.

For bonds, BNY Mellon’s fixed income specialist Standish Mellon Asset Management Company LLC says that more effective monetary policy in many emerging countries has helped contain inflation and better fiscal policy has kept indebtedness low, improving sovereign credit quality.  David Leduc, Standish’s chief investment officer, points to the resilience of local currency emerging market debt through the financial crisis. “They were the local equivalent of U.S. Treasuries, a final safe haven during times of stress. Emerging market local currency bonds have the potential to provide investors with good diversification, attractive returns and a type of risk that is not closely tied to the cyclical nature of credit,” he adds.

Alternatives

Real estate and private equity investors can also benefit from taking a global approach.  In real estate, investors can take advantage of widely different valuations across regional markets.  The report notes that many of the most dynamic sectors of the global economy and a number of the fastest-growing emerging market companies are not yet available in the public markets and can be accessed only through private equity.

As the proportion of foreign investment in investment portfolios increases, investors will also need to guard against currency fluctuations that can have a large negative impact on returns, according to Michael Shilling, chief executive officer of Pareto Investment Management Limited, the BNY Mellon currency hedging specialist.

The white paper concludes that with multiple asset classes and investment strategies to choose from, it is clear that there is no one-size fits all approach to global investing but the advantages of an investment philosophy which seeks to leverage global trends and investment opportunities outside domestic markets is difficult to refute.

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