Business Council of Cooperatives and Mutuals release white paper discussing provision of public services.

Welcoming the launch of the Business Council of Cooperatives and Mutuals’ white paper: Public Service Mutuals: a third way for delivering public services in Australia, Group Executive Kimina Lyall said the inherent characteristics of mutual organisations—focused on returning profits to improve services for members—make them ideally suited to deliver public services.

Mutual companies such as Australian Unity operate on commercial principals without the need to return profits to shareholders. They aim to deliver shared value for members and the community, and are established in response to an identified community need.

The white paper calls on governments, challenged to continue to operate some public services for operational and fiscal constraints, to consider the mutual model as a viable alternative to privatisation. One way this could be achieved is by “spinning out” existing services into mutual organisations, governed for example by employees or customers. Governments could also support existing or new mutuals or cooperatives to broaden their service provision.

As Australian Unity prepares to celebrate its 175th year in 2015, Ms Lyall noted that the white paper talks about the provision of public services by cooperatives or mutuals as the third way.

“In fact, in many instances, it was the first way,” she said. “Long before there was such a thing as governments, people were forming self-governing societies set up to give mutual help.”

“With 13 million Australians currently members of a mutual or a cooperative, this is a sector that remains relevant to the needs of the community. In a time when governments are seeking new ways to deliver public services within budget constraints and rising consumer expectations, there is a clear opportunity for an expanding role for the sector.”

Ms Lyall was part of the task force that prepared the Business Council of Cooperatives and Mutuals’ white paper.

Click here to view the white paper.

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Harish Rao

The most successful organisations have derived value from outsourcing in many ways beyond cost cutting. A recently released white paper postulates that businesses are able to drive growth, manage the challenges of attrition and provide value to their customers through outsourcing.

The paper, titled Beyond Cost Cutting: Driving growth & efficiency in the accounting & financial services industry with BPO, says that: “…BPO in financial and professional services is generally considered a tool for cost savings, a misconception which overlooks the positive role BPO plays in developing growth strategies and freeing up staff for higher value-add activities.”

The paper argues that this has been evident in the outsourcing of self-managed superannuation fund (SMSF) processing by Australian accountants and superannuation administration firms: “This has overwhelmingly been the case for Sundaram Business Services clients in the SMSF area, where more accountants and superannuation administrators are outsourcing processing work in order to concentrate on their core business.”

Harish Rao, Global Head of Business Development at Sundaram Business Services, said BPO in professional services continued to evolve. “More professional services firms see BPO as a multi-dimensional business asset and are using it strategically to help drive growth.

“The idea of BPO as merely a cost-cutting mechanism is fast becoming outdated.”

You can read the whitepaper here.

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Mark Rantall

The Financial Planning Association of Australia (FPA) says a relevant and professional future for financial advice in Australia must uphold and adhere to the fundamental principle of preserving the best interest of Australian consumers.

The FPA yesterday released a comprehensive White Paper outlining its position to achieve a relevant future framework that is both workable and ethical.

1. Raising the minimum criteria so that the term financial planner/adviser is restricted under the Corporations Act and the individual must:

a. Have membership of an ASIC approved professional body; and

b. Hold minimum education standards of a relevant university degree, and three years’ experience over a 5 year period; and

c. Maintain minimum continuing professional development of 90 CPD points over a triennium.

2. Amend the law to develop criteria so that ASIC can approve professional bodies such as those prescribed in the Tax Agent Services Act or the approach proposed by the FSA in the UK.

3. The immediate establishment of a financial planner education working group (FPEWG) to develop a considered, strategic and holistic financial planner education framework. With the aim of lifting minimum education and experience standards to a relevant university degree and three years’ experience over a 5-year period.

4. The term ‘Commission’ to be defined and then banned under the General Advice exemption.

5. General Advice should be re-termed ‘general or product information’ and be limited to the provision of ‘factual information and/or explanations’ relating to financial products.

6. The development and implementation of a co-regulatory design, which recognises and facilitates the role of ‘approved’ professional bodies in assisting ASIC to achieve its consumer protection and confidence mandates.

7. The establishment of a public register which is managed by ASIC, with a requirement for all financial planners/advisers (including employed representatives) who provide personal advice to be individually registered.

9. Once the Federal Budget position has been improved, that the government commence consultation with industry to determine the benefit to have the preparation of an initial financial plan be expressly stated to be tax deductible.

10. A review into lifting the criteria of a sophisticated investor. 

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The use of demographics, the most important driver of our times: Fidelity.

Demographics is the most resilient and significant investment driver of our time, providing investors with greater certainty than many macroeconomic themes and allowing them to identify companies likely to benefit from compounding cash returns over the longer term, Fidelity Worldwide Investment said today.

In a White Paper released titled ‘Investing in Demographics’, Fidelity’s portfolio managers, Hilary Natoff and Nicola Stafford, who are based in London and visiting clients in Australia, discuss in detail the impact of demographics on stock picking and portfolio construction.

“Demographic trends and structural growth themes are happening now and have created clear opportunities for investment strategies for both retail and institutional investors,” said Hilary Natoff, Co-Portfolio Manager of the Global Demographics Fund, Fidelity Worldwide Investment.

“Demographics can be expected to play out with a greater level of certainty than the macroeconomic trends because they don’t just emerge accidentally, they happen systematically. In fact, demography is one of the few social sciences where projections can be made with a relatively high level of certainty,” said Ms Natoff.

“In addition, markets are losing sight of the long-term value of a business with the average stock holding period currently under three months globally. Sell-side analysts focus on near-term earnings forecasts yet earnings – not valuations – drive returns in the long run. A large part of company value is represented by longer term profitability and compounding so those investors able to identify companies exposed to long term structural growth themes such as demographics can sensibly exploit this market inefficiency. “

Ms Natoff said the world is undergoing a dramatic transformation as a result of three demographic megatrends– global population growth, emerging middle class and ageing populations.

“A changing world creates investment opportunities. By 2030, world population is expected to grow from 7 to 8.3 billion, the middle classes will more than double, and the over-60 age group will expand from 0.8 to 1.4 billion. This is having a significant impact on the demand side of the global economy, creating opportunities for companies to expand sales and earnings in growing global marketplaces.”

Ms Natoff said these trends present a number of structural growth opportunities for investors.

“We have more people but a finite world. Rising demand for resources, such as food, water, arable land and energy have a clear multiplier effect on products such grain to feed live stock. With the rapid rise in spending levels across developing markets, we’re seeing opportunity sets emerge in the consumption of staples, global brands, healthcare and education. While with ageing populations, we’re seeing opportunities in areas such as hearing aids and eye care for example.

Click here to read the white paper.

“Time spent identifying companies with a strong competitive advantage and valuable intellectual property in industries benefitting from structural growth is time well spent. Companies such as Essilor, Nigerian Breweries and Novo Nordisk have all significantly outperformed the broader market due to strong structural demographic growth drivers.”

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In this paper, Vanguard Australia discusses portfolio construction theory and explain how including exchange traded funds in a concentrated, equally weighted portfolio of shares can reduce total risk (the overall volatility in portfolio returns) and active risk (the volatility of portfolio returns less benchmark or market returns).

Comprehensive examples of these concepts are provided, using historical returns data to illustrate the diversification and cost reduction benefits of investing in exchange traded funds.

To read the paper, click here.

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Problems threaten from almost every direction: the fiscal cliff looms, the U.S. Presidential Cycle is upon us, Europe’s troubles are clear for all to see, China appears to be slowing…indeed, the possibility of a global recession is non-egligible.

Well-known and respected observers have publicly voiced their concerns. For instance, Howard Marks of Oaktree Capital recently wrote, “The world seems more uncertain today than at any other time in my life.”

John Bogle has said, “The economy has clouds hovering over it…And the financial system has been damaged.”

Economists have come up with measures of uncertainty that combine things like the number of newspaper stories about uncertainty with the spread of economists’ forecasts into a single measure. Exhibit 1 shows an example of this kind of index, and a cursory glance confirms the situation outlined above: the one thing we have been certain of is that uncertainty is high!

To read the white paper, click here.

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Given that market volatility is likely to remain in 2013, amid the US ‘fiscal cliff’ issue and a continued period of austerity and deleveraging within the eurozone, this paper is particularly topical.

Fidelity’s paper finds that sovereign risk has caused a polarisation of the government bond market, creating concentration and liquidity risks among a shrinking set of over-valued safe haven assets. This has led investors to consider broader exposure to high-quality bonds beyond domestic or traditional government issuers.

Sovereigns such as Australia, Canada, and Switzerland, for example, can bring about sensible diversification and introduce currencies that reduce overall portfolio risk. Similarly, with the non-financial corporate sector in good balance sheet health, high quality investment grade corporate bonds, issued by strong multinational companies, are also a good source of safe havens.

Strategic portfolios investing across markets and bond classes can improve diversification and the risk-return profiles of portfolios by freeing up managers from traditional benchmarks. At present, many traditional market-weight bond benchmarks encourage investment in the most heavily indebted areas.

Mark Talbot, Managing Director, Asia Pacific ex-Japan at Fidelity Worldwide Investment said: “Financial markets have become less predictable.  As a result, we have observed investors’ increasing preference for less risky, or rather what are perceived to be less risky, fixed income assets.”

“However, the low or even negative yields for many safe haven bonds could mean low returns or a higher chance of capital loss for investors. As such, holding a diversified portfolio has become even more crucial in the current volatile environment. This paper is a valuable contribution to the current debate of how to improve the risk/return profiles of portfolios in these uncertain times.”

In terms of equities, investing in “quality” or companies with strong balance sheets, solid returns on equity, good free cash flow generation and low levels of leverage can offer a relative safe haven in uncertain times. Such companies can also improve their market share in times of crisis by making acquisitions at attractive prices.

Mr Talbot also observes: “Equities provide dividend income, and over the long run, compounded income is a powerful driver of total returns. Fidelity believes that having the latitude to shift portfolio exposure based on anticipated changes in the economy can allow managers to capture the best opportunities over time, making the most of our research insights.”

In turbulent times alternative investments can be used to generate return profiles that are uncorrelated to those of traditional assets, thereby offering diversification and opportunities for risk control. However, in times of real crisis, correlations can rise as negative sentiment creates general selling pressure that indiscriminately impacts almost every asset class. As such, Fidelity believes that consideration must be given to the nature of the assets held and the investment time horizon.

The paper also takes a look at the reinsurance sector and trend-following strategies as two case studies which provide interesting opportunities for investors looking at alternative return streams. Both offer the potential for attractive risk-adjusted returns but as Fidelity points out, careful manager selection is crucial.

To read the white paper, click here.

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Even fewer remember that heavy rains in Thailand further disrupted the global production chain at the end of 2011. With so much accomplished, why do so few Japanese companies see bright days ahead?

This paper will first look briefly at the resolution of the five potential earthquake- and tsunami-related bottlenecks.

To read on, click here.

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The search for income – already a powerful investment theme – is set to grow in importance over the next decade and beyond. There are a range of near-term and longer-term drivers:

• low interest rates and bond yields are driving a broader search for yield
• slower economic growth in many developed nations burdened with high debt levels is likely to put greater emphasis on income returns versus capital gains
• two large corrections in stock markets in 10 years have deflated sentiment towards equities, forcing investors to reassess their strategies
• the funding challenges facing governments hamstrung with public debts is likely to lead to responsibility for retirement saving increasingly falling on individuals
• aging populations with people living longer will increase retirement saving
• the need to maintain or grow real income levels during retirement to protect the purchasing power of savings from inflation will support investment in real, income-paying assets.

The investing environment of tomorrow is set to be quite different to the one which investors became accustomed to in the last 25 years.

To read the white paper, click here.

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Financial advisers have the determination and ability to adapt and grow despite ongoing industry changes, according to research released yesterday by the Association of Financial Advisers (AFA).

AFA CEO Richard Klipin said that the “Tides of Change” research into adviser attitudes towards the Future of Financial Advice (FOFA) reforms, which was conducted by CoreData/brandmanagement and supported by NAB Financial Planner Banking, demonstrates that advisers have the maturity, flexibility and adaptability to competently and effectively cope with change.

“While advisers are clearly concerned about the proposed reforms, they are also supportive of a number of initiatives and recognise the opportunities that are likely to arise from them,” Mr Klipin said. “For example, while a majority of advisers, that is 57.2%, indicated that they are concerned about the intra-fund advice reform, only 47.1% expect it to have a negative impact on their practice.”

Mr Klipin said the research indicates that these advisers believe intra-fund advice could cater to a segment of the market that does not yet need fully-fledged advice but may need it further down the track and may therefore be more likely to seek professional financial advice.

However, he said the research also shows that advisers harbour very deep concerns about how other FOFA reforms will affect their clients and their businesses.

“Many advisers believe the FOFA reforms may increase paperwork, drive up costs and undermine the long term nature of advice,” he said. “A number of the proposals seem likely to have the unintended side effect of making it more difficult for people to get financial advice.”

CoreData/brandmanagement’s Andrew Inwood said the research shows advisers fear that some of the proposals will put the financial future of their clients at risk, rather than safeguard them.

“Adviser support was strongest for the introduction of a statutory fiduciary duty and weakest for the proposed annual opt-in reform,” Mr Inwood said. “However, despite their concerns, 77.8% of practice principals believe they are likely to grow their business within the next two years, while just 21.1% say they are likely to sell their business and only 17% believe they will leave the industry. This reveals a healthy ‘can-do’ attitude on the part of most practice principals. The entrepreneurial spirit is alive and well in the financial advice industry.”

Shane Kirsch, National Manager, NAB Financial Planner Banking, said that the findings of the “Tides of Change” research provides a better understanding of the current mindset of advisers and their views of the impact of the impending FOFA reforms.

“This information is invaluable in helping us to better understand the likely impacts on adviser businesses and how they can be helped through this transition period,” he said.

The key findings of the research revealed:

• The advice industry is divided over the prospective ban on commissions, with two in five advisers opposing the reform (42.8%) and a further 36.1% strongly supporting it.
• While the majority of respondents (56.9%) anticipate a negative impact on them, one quarter of respondents (25.2%) feel the ban on commissions will have a positive impact on their clients and almost one third (30.5%) say it will have no impact.
• Of all the reforms, respondents are most opposed to the proposed requirement for clients to opt-in annually, with three in five (59.2%) giving a rating of 0-3 out of 10. Practice principals are the most likely to not support the reform (64.5%).
• Contrary to the opt-in reform, there is strong support for the introduction of a statutory fiduciary duty for financial advisers, with three quarters (76.2%) indicating strong support.
• There is considerable opposition to the expansion of low-cost simple advice, with more than half of respondents (57.2%) not supporting the intra-fund advice reform. Practice principals are the most likely to foresee intra-fund advice having a strong negative impact on them (22.3%), while almost half (47.1%) expect a negative impact on their practice.

Click here to read the report.

Click here to read financial adviser’s comments on the report.

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