Andrea Slattery

The SMSF Professionals’ Association of Australia (SPAA) has developed best practice guidelines for SMSF limited recourse borrowing arrangements (LRBAs) – with the National Australia Bank (NAB) agreeing to adhere to the two separate guidelines on lending and advice.

SPAA CEO Andrea Slattery says: “NAB is the first lender to sign up for both guidelines, and SPAA is continuing to work with the other lenders in this space. We are hopeful they will follow suit soon and adopt them.”

Slattery says SPAA has been “very conscious” of the concerns expressed about LRBAs by the Financial Services Inquiry (FSI) and the fact a “tiny rogue minority” has been spruiking this borrowing facility, and as such believes there is an urgent need to establish a set of guidelines that will ensure a responsible approach taken to all LRBAs.

“SPAA has always stood for best practice guidelines for the SMSF industry whether it be education, financial advice or auditing. The decision to adopt a similar approach to LBRAs is further evidence of SPAA’s commitment to building integrity for the industry and best practice behaviour for consumers.

“We believe that by publishing these guidelines, and with NAB signing on and other major lenders in the pipeline (the major banks are estimated to have more than 85% of this market), the Government and regulators can have a high degree of confidence that LRBAs are being used appropriately and that the industry has best practice guidelines for lending and advice in place.

“SPAA hopes that other lenders and providers of financial advice will take the opportunity to use the guidelines and make a public commitment with SPAA to adhere to them in their business practices.”

Slattery says two sets of guidelines have been developed for the industry – LRBA lenders’ best practice guidelines and LRBA advice best practice guidelines.

“The lenders’ guidelines are intended to establish banking industry standards that can complement individual LRBA Credit Policy and Practices regarding LRBA lending to SMSFs.

“The advice guidelines are proposed to create a best practice standard of advice that should be provided to SMSF trustees considering the use of LRBAs if they elect to seek personal advice.

“SPAA is confident that adherence to the guidelines by the banking and financial advice industry will ensure that LRBAs are being used appropriately by SMSF trustees, and is intended to encourage self-regulation in the SMSF lending sector whether by lenders or advisers,” she says.

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One third of Australians expect a financial shortfall at retirement: MLC.

Almost one third (31.7%) of Australians expect a large financial shortfall at retirement with a further 25% expecting a shortfall to some extent, according to a special report: MLC Retirement Survey.

Alarmingly only 3.5% of Australians expect to have more than enough money to maintain their lifestyles in retirement.

The survey of 2,000 Australians also found nearly 70% of respondents failed to consider major financial setbacks such as a major illness or unemployment in their retirement plans, with only 8.5% having a well-considered plan for major setbacks.

The level of concern was also evident in the MLC Quarterly Australian Wealth Sentiment Survey which found deposits and paying off debt continues to be the top investment priorities. Additionally, interest in superannuation and direct shares increased over the December quarter.

Despite the cautious outlook for the economy, respondents reported a growing appetite for direct shares particularly from those earning $75,000 to $100,000 per annum.

Key highlights:

• The top three barriers to sufficient retirement savings continue to be major health issues, loss of employment and lack of formal investment plan.
• Women are the biggest worriers when it comes to superannuation with inadequate funds for retirement, losing money, fees and inflation their biggest fears. Over one third of women (36%) indicate they’ll have far from enough money at retirement.
• Men are more optimistic when it comes to their financial situation at retirement with over one third (37.4%) expecting to have enough or more than enough to retire.
• Men aged 18-29 were the most relaxed about their financial situation at retirement.
• Queensland residents gave the least consideration to major setbacks in their retirement plans.
• Western Australian residents have the strongest intention to divest shares, bonds, balanced funds and invest more in superannuation. WA respondents were also the most concerned about retirement risk especially missing investment opportunities.

“It’s encouraging to see Australians thinking more about superannuation but as the survey suggests, there’s still not nearly enough being invested for retirement. Over 56% of respondents expect to have at least some or a major shortfall at retirement,” NAB Wealth Group Executive Andrew Hagger said.

“Wealth is the result of hard work, good decisions and good advice, and MLC strongly believes in the difference advice can make to someone’s life.

“Australians wanting to take control and get active in their retirement savings should seek financial advice to get the help they need to reach their goals,” Mr Hagger said.

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In a telephone conference with several hundred financial advisers, MLC informed advisers that active managers with strong investment processes and strong investment discipline, are more likely to pick up stocks at very attractive prices relative to their medium-term growth
opportunities.

Jonathan Armitage, MLC’s Global equity portfolio manager said: “It’s times like this, where we continue to witness not just market volatility but individual stock volatility, that the critical role of an active manager, in producing strong returns, becomes really clear.

“If you look at the top 10 moves in the Dow Jones index since it was created in its current form back in the 1920’s, over that period, four of them have happened in the last two weeks.

“In the same two week period, we have also seen our managers, some of whom have been holding quite high cash positions which has held them in very good stead in the recent volatility, put that money to work and invest in some high quality stocks,” said Mr Armitage.

“Interestingly, last week we saw a surge in insider buying, not seen since March 2009. It was reported that 50 managers in over 60 companies in the US bought stock in their own companies, last week.

“The point is that an active manager will use this period of uncertainty and volatility to pick up very high quality stocks at what should prove to be extremely attractive valuations for the medium term,” he said.

MLC also launched a brand new online Market Volatility Toolkit, built in response to the market volatility of the last two weeks, which supports financial advisers have conversations with their clients during these uncertain times and provides them with a range of useful tools and the
latest information.

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There is always the danger that commenting on the economic and market impacts of an event such as the Sendai earthquake and the subsequent tsunami can be seen as trivialising the event; somehow downplaying the enormous human suffering. Nevertheless, there are consequences for the economy and for markets that require a considered response, without diminishing our horror and deep sorrow at the human cost of the catastrophe.

As this piece is being written, the official death toll in Japan stands at 3,373, and is expected to climb well above that figure. A series of explosions at the Fukushima Nuclear Power Plant has raised grave fears of a nuclear disaster. In the financial markets, share prices in Tokyo have now fallen by nearly 20% since the close of trade prior to the earthquake. Share prices across the region are also sharply lower today – particularly as  developments at the nuclear plant have worsened. The yen has strengthened against the US Dollar, perhaps reflecting speculation about, rather than actual, repatriation of Japan’s offshore assets.

It is too early for anything more than educated guesses to be made about the short-term negative impact on Japan’s economic performance, not least because the extent of the radioactive leakage from the Fukushima plant is highly uncertain. According to estimates from Barclays Capital, the affected area accounts for over 6% of Japan’s GDP, 6.8% of the population, and 7.2% of Japan’s private sector capital stock. At this point, analyst estimates of the initial adverse impact on GDP are utterly unreliable, as are estimates of the likely boost to measured economic growth that will result from the repair and reconstruction work. That said, it is still worth noting that all such catastrophes produce both an initial adverse impact on recorded economic growth, and then add to measured growth as the recovery work gets underway.The timing and the magnitudes involved are of course uncertain and highly variable.

What follows is our assessment of what the catastrophe might mean for the Japanese, world and Australian economies, and how MLC portfolios have been affected.

For Japan, the broad impact of the disaster on growth is likely to follow the pattern outlined above, however, there are broader issues at work also. Japan’s fiscal position is already dire, and the Government’s share of the reconstruction and recovery effort is likely to put enormous pressure on the nation’s finances. It is highly likely that taxes will need to increase, at least temporarily, to fund at least part of the cost and that is likely to have an adverse impact on private demand, which has been anaemic to begin with.

While Japan is the world’s third largest economy, the global recovery has not depended on Japan for its momentum – the contrary is true. Japan’s recovery has been highly export dependant. As Capital Economics puts it, Japan has been a passenger in the global recovery and not the main driver. The world is still a highly uncertain place, and there were ample issues to worry about prior to the quake and tsunami (peripheral Europe, the Middle East etc.). In saying this, the world economy is perhaps better able to withstand the kind of shocks currently being experienced than it was two years ago.

For Australia, Japan is still a major trading partner – the Australian Bureau of Statistics merchandise trade data show that in 2010 Japan took 19% of Australia’s goods exports by value, with resources accounting for the lion’s share. The short-term disruption to Japan’s industrial activity is likely to curb demand for Australia’s exports in the short term, however, the recovery effort is likely to be resource intensive, and provide something of a boost to our exports to Japan over time. At this point, we see no reason to change any medium-term view about the likely performance of the Australian economy or financial markets.

At MLC, our portfolios are extremely well-diversified across asset classes, investment managers, countries, industries, and individual securities. In the event of a catastrophe such as this, diversification is perhaps the only protection available to investors, but nevertheless, portfolios have been adversely affected, although some exposures within portfolios will actually have fared quite well.

In global equities, Japan accounted for 8.6% of the MSCI All-Country World Index at the end of February 2011. All except one of MLC’s global managers have Japanese exposure (Sands Capital being the exception). The overall portfolio, however, is underweight in Japan.

Moreover, MLC’s Japanese equity holdings have fared substantially better than the overall Japanese market, reflecting the high quality, and somewhat defensive nature of our holdings. While many of the Japanese companies we invest in will experience disruption to their businesses, it is also important to recognise that many Japanese companies are highly globalised, with production facilities and operations across many countries. The major car companies are an obvious example.

Our global listed real estate portfolios also have Japanese exposure, and some of the Australian REITs we invest in also have assets in Japan. Reports so far suggest that our exposure to the main affected areas is minor.

Australian shares have also fallen in value in recent days, and individual stocks we hold in MLC’s Australian shares strategy will have been affected – both adversely and positively – by the events in Japan. Among the insurance stocks we hold, QBE has already announced its exposure to Japan and its share price has suffered somewhat. However, its exposure is modest when viewed in the context of its overall reserves; the impact on MLC’s portfolio has been minor. On the other hand, other holdings in the portfolio, such as Bluescope steel has seen its share prices fare relatively well in the aftermath of the quake. In addition, MLC’s portfolio is significantly underweight resources stocks that have fallen further than the overall market in recent days, and has little or no exposure to the smaller uranium stocks, where prices have plummeted.

Within MLC’s debt portfolios, our exposure to Japanese debt securities has been minimal, reflecting the very low yields on offer in the Japanese Government Bond (JGB) market. Our exposure to Japanese corporate securities is virtually non-existent as spreads over JGBs have been way too tight to attract the interest of our managers.

Prior to this disaster a number of investment managers – both those we currently engage and those we do not – have expressed a view that Japanese equities were attractively valued, and even some traditionally cautious, value-oriented managers have noted that they were seeing opportunities in the Japanese market for the first time in many years. The market contains many quality companies with truly global franchises that will survive this disaster, and eventually continue to prosper. Moreover, there is a chance that this crisis will bring about the kind of decisive policy action that could help end Japan’s twenty-year long economic malaise. Please forgive the harsh end to this briefing note, but the role of our active managers, is to look through the human tragedy and seek out opportunities that inevitably arise in the wake of disasters, and that is just what they will be doing.

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MLC Wrap leverages the strengths of the Navigator and MasterKey Custom platforms, creating a platform which is rich in functionality and investment options.

MLC Wrap offers a diverse investment menu, with an integrated separately managed account service and a complete solution for self managed super fund (SMSF) investors.

Furthermore, the platform is underpinned by Navigator’s award winning technology, n-link.

Executive General Manager of MLC Investment Platforms, Michael Clancy said, “MLC Wrap is built on award winning platform technology which provides financial advisers with comprehensive reporting capabilities and online straight-through processing.

“It also has an extensive range of Adviser Service fee options, enabling advisers to collect fees for advice in the way that best suits their business model.  Options include charging flat dollar or asset based fees, indexed and tiered fees.

“In a world where advisers are transitioning to fee for service, offering flexibility in the way these fees can be collected is a critical platform capability and MLC Wrap offers the most flexibility in the market.

“With its sophisticated technology and extensive investment menu, MLC Wrap is the most feature packed platform currently available for sophisticated and high net worth investors,” Mr Clancy said.

MLC Wrap’s features include:

• An extensive range of investment options including more than 300 managed funds, ASX listed shares and other listed securities, such as exchange traded funds (ETFs), listed investment companies (LICs), interest bearing securities and instalment warrants.
• A selection of eight direct share portfolios within a separately managed account.
• Access to term deposits and a high interest cash account.
• An SMSF solution for the establishment and ongoing management of a client’s fund, including an extensive compliance and administration service.
• Access to personal insurance and margin lending products with the ability to tax effectively pay insurance premiums from a member’s super or SMSF account.
• A simple, competitive and transparent pricing structure across superannuation, investments and self managed super products.
• A flexible range of adviser service fee options including flat dollar or percentage based fees with multiple variations on how these fees can be applied.
• Award-winning technology that provides advisers with easy-to-use online solutions and real-time information, making it easier for advisers to manage clients’ investments and run their business more efficiently.
• Sophisticated portfolio management and tax optimisation tools, real-time workflow tracking and comprehensive client and business reporting functionality.

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