Switch to safety worked

Good returns … after feeling the sting of the GFC, pension funds are coming good.Spare a thought for investors in pension products. While all super fund members copped a flogging during the global financial crisis, pension fund investors don’t have the luxury of being able to rebuild their retirement savings.
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Quite the reverse, in fact, as they still need to draw down money to live on.

Perhaps that’s why, while accumulation fund members have largely stuck with the more traditional balanced and growth funds in the wake of the GFC, pension fund investors have been more inclined to switch into more defensive investment options.

The the chief executive of SuperRatings, Jeff Bresnahan, says there has been a ”massive swing” by pension fund investors into capital-stable and cash options in recent years.

The GFC, he says, forced them to face the reality that it is up to them – not solely their super fund – to determine the right level of risk for their needs.

That switch certainly paid off in the past financial year with capital-stable funds outperforming balanced options fourfold. The average capital-stable pension fund surveyed by SuperRatings returned 4.8 per cent for the year, compared with a 1.2 per cent return for the balanced funds.

Balanced funds have between 60 per cent and 76 per cent of their investments in growth assets such as shares and property, whereas capital-stable funds hold more defensive investments such as bonds and limit their growth exposure to 20 per cent to 40 per cent. That still provides some upside when sharemarkets are rising, but protects investors from the full impact of a market fall.

Pension funds performed better over the year than accumulation funds, though this difference is largely due to favourable tax treatment. Pension funds pay no tax on their investment earnings.

Accumulation funds are taxed at 15 per cent, or an effective rate of 10 per cent on capital gains where the investment is held for 12 months or more.

SuperRatings says the top-performing capital stable pension funds returned more than 8 per cent last year, largely on the back of an 8.3 per cent return from fixed-interest investments. LGSuper’s defensive allocated pension topped the list with a solid 8.6 per cent return, followed by Commonwealth Bank Group Super with 8.1 per cent.

For those still in balanced options, the best return in the SuperRatings survey was 6.2 per cent with ESSSuper.

But thanks to the strength of bonds over shares, all other balanced pensions returned less than the top 10 capital stable funds.

Russell Investments’ director of client investment strategies, Scott Fletcher, says the GFC has highlighted the huge ”sequencing risk” faced by people nearing retirement.

This is basically the risk that they will need to draw on their money at the worst point in the investment cycle.

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Mind the gap

Steep climb … if you take contributions out of the picture, chances are your super balance hasn’t really budged.Here’s the good news. Your super is clawing its way back after the ravages incurred during the global financial crisis. But don’t hold your breath. If it wasn’t for contributions coming into your fund, chances are your retirement savings have gone absolutely nowhere during the past five years.
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And if your fund has been performing below par, you’re still likely to be sitting on substantial losses.

The 2011-12 financial year was a real roller-coaster for super funds. Up one month, down the next. In early June, there was a real chance that we were looking at another year of losses, but the average fund managed to scrape through with a return of 0.4 per cent.

The chairman of SuperRatings, Jeff Bresnahan, says while that might seem like a poor return, funds actually fared well considering Australian shares were down by 6.4 per cent over the year and international shares fell by 3.3 per cent.

Balanced funds, as measured by SuperRatings, hold between 60 per cent and 76 per cent of their assets in so-called ”growth” investments, such as shares and property, but sharemarket losses were offset by an 8.3 per cent return from fixed-interest investments, such as bonds over the year, and positive returns from property, cash and alternative assets, such as infrastructure and private equity.

Bresnahan says non-profit funds, in particular, have been gradually reducing their reliance on shares for their returns and have benefited from holding unlisted investments.

”There has been a drop of about 4 per cent in their exposure to shares over the past decade and it has gone into unlisted assets,” he says.

”But that raises the issue of whether all balanced funds are comparable and, unfortunately for consumers, they’re not. One balanced fund will behave quite differently to another and that’s unfair on consumers because they get put into these funds but there can be a 10 percentage point difference in performance

”That’s what happened this year and, over the longer term, a performance difference like that is a hell of a lot of money.”

While the top balanced fund, LGsuper, returned 5.1 per cent for the year, SuperRatings says the worst fund in the survey lost 3.5 per cent – a difference of close to 9 percentage points. First State Super’s Health Super Division medium-term growth fund returned 3.3 per cent, but the rest of the top 20 returned between 0.7 per cent and 2.8 per cent (see table on page 6).


The difference between the best and worst was even more spectacular for growth funds (holding between 77 per cent and 90 per cent in growth assets), with the top performer (ESSSuper) returning 4.9 per cent, versus a 5.7 per cent loss for the lowest-ranked fund.

And even in the more conservative capital-stable funds (which are 20 per cent to 40 per cent invested in growth assets), the difference between the best and worst was more than 7 per cent.

The top-ranked Commonwealth Bank Group Super option returned a solid 6.4 per cent, while the worst in the category made just 0.7 per cent.

But it’s the longer-term returns that tell the real story of how the global financial crisis is still affecting retirement savings.

Bresnahan says that while this year’s return isn’t anything to write home about, it has at least consolidated the recovery of the past two years.

”Funds have earned about 20 per cent over the past three years, which is a pretty reasonable result,” he says. Some of the better funds (the balanced options listed for First State Super’s Health Super Division, Recruitment Super, Commonwealth Bank Group Super and LGsuper) have all returned more than 8 per cent annualised during the past three years, which would push their recovery in this period to more than 25 per cent.

However, during the past five years, the picture is much uglier. SuperRatings says the average balanced fund has lost 0.2 per cent a year during this period and only three balanced funds (LGsuper, Commonwealth Bank Group Super and First State Super’s Health Super Division) managed to return more than 2 per cent a year.

Indeed, if it wasn’t for contributions coming into our funds, most fund members would be wondering why they had bothered. ”A lot of people wouldn’t have noticed the [poor] five-year returns because with contributions, they still see their account balance growing each year,” Bresnahan says.

”But you’ve also got to remember that we’ve been through what was arguably the biggest financial and economic crisis of our lifetimes. A year or two back, the three-year returns looked horrible, and the seven-year numbers will eventually look bad, too. It’s a timing issue.”

To put it in perspective, Australian shares have lost 4.2 per cent a year during the past five years. International shares have lost 2.15 per cent when hedged against currency movements or, thanks to the rising Australian dollar, 6.65 per cent a year unhedged.

Diversification has shielded fund members from the full extent of these losses, however, once again, some funds have done much better than others.

While the best balanced fund returned 2.6 per cent a year over the past five years, the worst lost 4.5 per cent a year – outstripping the losses of the local sharemarket.

Over the 20 years since the introduction of compulsory super,

Bresnahan says, the average balanced fund has still managed to beat its targeted return of 3 per cent to 3.5 per cent above the inflation rate.

The average fund has returned a solid 6.6 per cent during this period, while inflation has been about 2.8 per cent.


The problem is that many fund members had become accustomed to the double-digit returns of the boom period. As the graph on the previous page shows, annual returns during the past 20 years have been as high as 18 per cent, and returns in the four years before the GFC were 13 per cent to 15 per cent. Losses were rare and, up to 2008, had been limited to less than 4 per cent.

The director of client investment strategies at Russell Investments, Scott Fletcher, says returns in the mid- to high teens between 2003 and 2007 set unrealistic expectations.

”When you have returns which are completely out of line on the upside, you have to expect a period that will disappoint for a while,” he says. ”The depth and scope of this downturn is what has taken everyone by surprise, but it is a classic deleveraging market.

”Normally you’d expect the peaks and troughs to be over and done with in 12 to 18 months, but deleveraging can be more extended.”

Bresnahan says 6 per cent returns are much closer to what should be expected over the longer term, as balanced funds returns in the high single digits are actually pretty good.

But this doesn’t mean fund members have to accept poor returns.

The range of returns between funds shows that some funds manage market cycles better than others.

While it would be dangerous to ditch your fund after one year of poor returns, Bresnahan says if it has been underperforming similar funds during a five- to seven-year period you need to ask questions.

It may have chosen the wrong investments (funds with high weightings to international shares have been dragged down during this period) and fees can also play a role.

While recent research for the Financial Services Council by Rice Warner Actuaries shows average fund fees fell from 1.27 per cent to 1.2 per cent between 2010 and 2011 (and from 1.37 per cent in 2002), costs can still vary dramatically.

While the average fee for corporate, public sector and large corporate trusts was less than 1 per cent, and the average fee for industry funds was 1.13 per cent, the average for personal super funds was 1.87 per cent and members of small corporate master trusts were paying an average 2.21 per cent.

As with returns, fees also ranged widely within sectors. The cheapest industry funds, for example, charged less than 1 per cent, while the most expensive cost more than 3 per cent.

In the personal super segment, fees ranged from a little more than 1 per cent to about 3.7 per cent.

”A lot of retail funds and some not-for-profit funds need to review their fees and bring them down, especially in some of the cash options,” Bresnahan says. ”They’re returning 2 [per cent] to 2.5 per cent a year, whereas most other cash investments are doing 4 per cent.

”That’s because they’re taking 150 to 200 basis points out of the return in fees before any money goes to the member. Some of the investment platforms charge the same fees whether the money is in a low-cost investment like cash or something like international equities.”


Bresnahan says fund members also need to take ownership of their returns, rather than setting unrealistic expectations for their fund. He says they need to understand where their money is invested and what sorts of returns they can expect in different market conditions.

While most members remain in their fund’s default option, he says there are ”scores” of investment options to choose from if they are not happy with the risk they’re taking or the returns they are getting.

Fletcher says funds have also been working to manage risk more effectively. Before the GFC, he says, most assumed a mix of shares, bonds, cash and property would provide enough diversification to reduce risk.

But there is now a recognition that they need broader diversification to handle GFC-style risks where most of these traditional assets can all be hit at once.

”To maintain the same risk profile for investors, super funds are a bit like ducks swimming on water,” he says.

”Above the water, everything looks the same, but a lot more work is going on under the water to reduce the level of risk.”

Fletcher says funds are realising that it’s not enough to understand the particular risks of each investment class; they also need to understand how different investments interact, how those interactions have changed and how to achieve genuine diversification within each asset class.

”If you mention alternative investments, for example, people often think of airports and tollways,” he says. ”But different infrastructure investments have different levels of liquidity and other features that need to be managed.”

Bresnahan says funds are also reviewing their objectives, which, until the GFC, had not been tested thanks to 15 years of outperformance.

”They’re asking what sort of time period their objectives should be measured against,” he says.

”It obviously needs to be over the longer term. But if you say they should be measured over 20 years, it becomes a marketing ploy. They can underperform for several years and still say they’ve got plenty of time left before they’re held to account.”

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Don’t be caught napping

Deprivation … money under the mattress might be safe, but like fixed interest, the returns are poor. Illustration: Karl HilzingerTrustees of self-managed superannuation funds have a strong preference for investing in shares, cash and fixed interest. According to the Australian Taxation Office, SMSF trustees invest 32 per cent of their money in equities and 28 per cent in cash and term deposits.
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A strong weighting towards cash and fixed interest would have helped produce a good investment return in the year to June. The median return of the capital-stable funds surveyed by SuperRatings was 4.1 per cent for the year to June.

The ATO’s figures are based on a survey of self-managed accounts at the end of the 2009-10 financial year.

More recent research shows not much has changed. According to the SMSF administration company Multiport, as of June 30 this year, self-managed funds had 35 per cent of their money in Australian equities, 27 per cent in cash and term deposits, and 10.5 per cent in fixed-income securities.

SuperRatings says the average asset allocation in a capital-stable super fund is 40.2 per cent fixed interest, 22.6 per cent cash, 12.1 per cent Australian shares, 10.1 per cent international shares, 9 per cent alternatives, and 6.1 per cent property.

Growth portfolios in the SuperRatings survey lost an average of 1 per cent in the year to June, while balanced funds were up an average of 0.5 per cent.

The return for capital-stable super portfolios over the past five years is an average of 3 per cent a year, compared with an average loss of 1.7 per cent a year for growth portfolios, and a loss of 0.2 per cent a year for balanced funds over the same period.

Defensive assets have produced good returns throughout the financial crisis but now investment strategists are warning that cash and fixed interest may not be the best assets to be holding in the period ahead.

The head of investment strategy at AMP Capital, Shane Oliver, says: ”Throughout 2010 and into 2011, there were very attractive rates of interest being offered on bank term deposits.

”The trouble now is that the cash rate is falling as the Reserve Bank has cut rates to deal with softer than expected economic conditions. And just as term-deposit yields have fallen, so too have government bond yields.”

As bond yields fell over the past 18 months, bond prices went up, producing capital gains for fixed-income investors.

Bond yields have fallen to record lows. Anyone getting into bonds now will get a yield of not much more than 3 per cent if they hold the securities to maturity. And if bond yields start to rise again, investors will be exposed to the risk of capital loss.

Oliver says investors who are looking for the defensive qualities of a fixed-income security as well as a higher yield should consider corporate credit. Investment-grade corporate bonds are yielding about 6 per cent.

Investors have had plenty to choose from in the corporate bond market. About $8 billion in subordinated notes and convertible preference shares have been issued over the past 12 months, and all of them have been listed on the ASX. The leading banks have been big issuers and so have companies such as Woolworths, Tabcorp and, most recently, Caltex.

Typical of the returns on offer in this market is an issue of Westpac subordinated notes, launched last month and closing on August 16, paying a floating rate of 2.75 per cent above the 90-day bank bill rate. With the bank bill rate about 3.5 per cent, the notes will pay more than 6 per cent.

Compared with this, the best six-month term-deposit rates on offer at the moment are about 5 per cent. Westpac’s notes have a fixed maturity date of August 2022 but may be redeemed at the bank’s discretion in August 2017.

The executive director of fixed-income strategy at JBWere Wealth Management, Laurie Conheady, agrees investors need to take care with their cash and fixed-income investments.

Conheady says most of the recent fixed-income returns have come from capital gains, as the price of bonds and other fixed-income securities have rallied strongly.

The yield on a 10-year Commonwealth bond has been below 3 per cent this year, reflecting strong demand for the securities. Conheady says these long-term government bond rates are at levels last seen in the 1950s.

”While a repeat of the double-digit returns on government bonds is possible, we believe it is unlikely,” he says. ”Even if capital values remain at current levels, the relatively low running yields associated with current inflated values point to better risk-reward opportunities elsewhere.

”We suggest investors look to floating-rate corporate bonds and better-quality hybrids as a way to improve returns and diversify portfolios.”

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Great bawl of China: hero falls at first hurdle

LIU Xiang hopped the length of the straight, got to the final hurdle paused, bent down and kissed it. He hopped on to the finish line and was gathered up in the arms of a Briton and a Hungarian. They carried him to a wheelchair.
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Liu had been unable to get to the start line in his home Olympics, he was determined to get to the finish line in London but for the second time in consecutive Olympics the former gold medallist has been eliminated without clearing a hurdle.

When he hit the first hurdle Liu tumbled and rolled and sat before the second hurdle looking in pained disbelief at the field of runners sprinting away from him. His games were over, but not his race. Liu, the man who as the first Chinese male to win track gold when he won the 110m hurdles in Athens had gone into Beijing as the face of China’s games, the poster boy of a country and with the burden of a billion people on him.

On the morning of his heats four years ago he had to withdraw with an Achilles injury. At the world championships last year, the man who had carried the world record was buffeted and while he might have won the race but for the illegal attention of Cuban rival Dayron Robles (he as later disqualified), he had to settle for a lesser medal. His last Olympics was to be his moment to redeem his early glory.

So after he had gathered himself up and moved off the track, Liu resolved it was not going to end this way. He turned and hopped on his left leg the length of the straight by-passing every hurdle but the last where he bent to kiss it.

Then he crossed the line and Andy Turner went to him to hold him up and help him from the track. ‘‘I know how painful those Achilles problems are and after what he’s been through, this is absolutely devastating for him. I really feel for Liu Xiang because in my opinion he’s the greatest hurdler ever,’’ Turner said.

As Turner held him Hungary’s Blazs Baji walked over and raised Liu’s hand in the air to declare the true winner of the race. He then wrapped a strong arm across his shoulder and he and Turner helped him to a wheelchair. Each of the rest of the field walked over to shake his hand.

‘‘We are not actually friends, I have seen him competing a lot of times, I saw him when I was a small kid and he is just a great big idol for me so I was racing against him and OK I wanted to beat him but there is not a chance if he runs well,’’ Baji said.

‘‘After all of this he was hopping on one leg all the way through kissing last hurdle, that was just great moment, that was Olympics. I was sorry for him first and he is a great hero for me, after what happened he didn’t just disappeared, he was hopping all the way through and he showed big respect for Olympic games and I wanted to show big respect for him.’’

The scenes were reminiscent of the memorable Olympic moment 20 years ago when Great Britain’s Derek Redmond broke down in the 400m semi-finals, but he was determined to limp to the finish line and was assisted by his father who came on to the track.With Chris Barrett

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Cat-and-mouse game not over on Homeland

Homeland, starring Damian Lewis and Claire Danes, will become ‘more personal’ in its second season.Emmy-nominated psychological thriller Homeland will focus more on personal relationships in its second season, but will play out once more against real-life geo-political tensions between the United States and the Middle East, producers say.
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The drama – one of US President Barack Obama’s television favorites – played out its first award-winning season in a post 9/11 world of suspicion, war-damaged soldiers and extremist tensions.

But when the drama starring Claire Danes and Damian Lewis returns, it will delve deeper into the cat-and-mouse game between their lead characters – a bipolar CIA agent and a returning US prisoner of war whose loyalties have been turned by the Taliban.

“I think this season has moved to really explore the relationship between Carrie (Danes) and Brody (Lewis),” said executive producer Alex Gansa. “It becomes less global and more personal.”

Nevertheless, Homeland will continue its ripped-from-the headlines feel, opening season two against the fictional backdrop of an Israeli bombing on Iranian nuclear facilities while in Washington, Lewis’ character rises through the political ranks.

The first few episodes are set in Beirut but were filmed in Israel.

“We do everything we can to make this thing feel believable. We also try the best we can to ask the questions rather than answer them,” Gansa said. “It does explore whether our fears are justified and warranted.”

Homeland has earned nine Emmy Award nominations, including acting nods for Danes and Lewis. Danes won a Golden Globe in January for her role as a highly strung but brilliant CIA operator in a first season that was packed with plot twists.

Obama in March invited Lewis, a British actor, to a White House dinner and admitted that Homeland was a favourite TV pleasure.

“I asked him about watching TV and President Obama said ‘On Saturday afternoon, Michelle and the two girls go and play tennis and I pretend I am going to work and I switch on Homeland’,” Lewis said.

The second season storyline resumes six months after Danes’ CIA agent seeks electro-shock therapy for her mental disorder after being convinced that her suspicions about the enigmatic POW were ill-founded.

“She has been very humbled and she is struggling with a crisis of confidence. She gets her mojo back but it takes a little time,” Danes said.

As for Lewis, he has been elected to Congress as a war hero and appears on course for a vice-presidential run.

“He will live in a state of paranoia and anxiety,” said Lewis of his character. “Last time he was damaged, and he won some sympathy from the audience. He’s more numbingly juggling balls this season.”

Homeland’s second season begins in the US on September 30. An Australian air date is yet to be announced.


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British sprinting great’s son jailed over drug dealing offences

The son of former British Olympic sprinting champion Linford Christie has been jailed for 15 months for allowing his west London flat to be used for drug dealing.
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Christie, the 100 metres gold medallist at the Barcelona Games in 1992, was not in Isleworth Crown Court as his 26-year-old son, Liam Oliver-Christie, was sentenced on Monday.

London’s Daily Mail reported that police found a package containing five wraps of crack cocaine and 14 wraps of heroin when they raided his west Kensingston apartment last August. He was also caught with £130 ($192), cash police said was paid to him for allowing his premises to be a base for drug dealing by two of his friends.

“You played, in my judgment, a critical role because it was your premises,” Judge Philip Matthews told Oliver-Christie. “Your two pals were dealing from those premises.

All the evidence points to regular drug-related activity at your premises of which you were fully aware.”

Christie’s career on the track, which also included 100m gold medals at the world championships, European championships and the Commonwealth Games, ended in disgrace when he was banned for two years for testing positive to a performance-enhancing drug.

His son’s counsel, Fergus Malone, unsuccessfully argued in his defence that Oliver-Christie had received only marginal support throughout his life from his famous father. The Mail reports that Liam and his twin sister Korel are children from an affair Christie had with their typist mother Yvonne Oliver. Oliver-Christie has a degree in journalism.

“He is somebody who has bettered himself and has somewhat lived in the shadow of a very well celebrated man, his father Linford Christie,” Malone said. “Not necessarily through the fault of his father, in a sense he has suffered throughout his life and perhaps not necessarily got the benefits he might have got through being the son of Linford Christie.”

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Cyclists take their feud into the press conference

It was meant to be the “Jason Kenny Show”, but Great Britain’s sprint gold medallist was only 10 minutes into his winner’s press conference when he was upstaged by the man he conquered.
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Frenchman and reigning world champion Gregory Bauge, who dismissed Australian bronze medallist Shane Perkins in the semi-finals, was clearly bemused by the strength of Kenny and the British team.

Asked what make Great Britain apparently unbeatable on the track, he answered: ”I don’t know … if I knew I would tell. You have to ask him. Being at home with the British public helps.”

Kenny, 24 and second to 27-year-old Bauge in this year’s world titles (he was first last year when the Frenchman did not race), gave his best explanation when he was asked.

”We have always kind of been close at the world championships,” he said. ”Everywhere we go were are always close. When it comes to the Olympics we make sure we get every little detail right. That is what we did at Beijing. We have done the same again here.

“It’s not as if we are winning by miles and miles and miles. But we have got just enough to keep our nose in front. It’s not one little thing, but everything, making sure that every box is ticked in the last six months leading up to this. Team morale goes a long way as well.” And so Kenny went on.

Bauge was not convinced — so he decided to ask Kenny a few questions himself.

Handed the floor, Bauge turned to his left and asked Kenny: ”You were world title silver medallist in 2008, now Olympic champion 2012 — that is four years to today. How did you prepare?”

Looking at Bauge, Kenny said: ”It is not like we do anything different. The Olympics is our main goal. I guess as an athlete we alway try hard. When get to Olympics we are still trying hard and that’s when all the team comes together, for that last little bit. The last two world championships when we have raced we have raced against someone who we feel is unbeatable.”

Bauge, with a wry grin, continued: ”I remember you at Proszkow (for the 2009 world titles) just after the Beijing [Olympics] and we competed in the quarter finals together …”

Kenny, with a grin to match, fired back: ”Yeah … that’s because you went out in the reps and came back and beat me in the quarter final.”

Time out.

The media loved it. So much so, that when Bauge — wanting a more expansive explanation from Kenny for his impressive Olympic form — beckoned for another chance to ask the gold medallist a question, forcing the press conference moderator to ask reporters: ”Are you happy for Gregory to ask another question?”, journalists answered with a chorus of  ”yeahs!”.

So Bauge got at it again to Kenny, asking him: ”If I understand you well, in four years you just relax and when [it] comes Rio you will be on top again?

Kenny was ready, answering his interrogator: ”No, not at all. The Olympics is the main one for us. I think that is the one you get the most support for. I still want to win world championships. The world championships mean a lot for me as a rider. So I am going forward and hopefully will be battling for a top spot [in the Great Britain team] in the Olympics.”

So why was Bauge being so persistent?

“Because he beat me …” he told the reporter who asked. ”I prepare my way for the Olympic Games and I am curious to know how he prepared for this Games, especially as it was not easy. He had to compete with Chris Hoy to get selection [for the sprint]. He had to beat him first, and then concentrate on the sprint and team sprint.”

It wasn’t Bauge’s last word on a night that saw Britain’s gold medal haul in track cycling reach five, while Australia are still without a gold medal heading into Tuesday’s last day of track racing.

Australia still has three chances left for gold medals on the track with Shane Perkins in the men’s keirin event, Anna Meares in the individual sprint and Annette Edmondson in the omnium.

Perkins celebrated his bronze medal. ”To come away with a bronze medal is fantastic,” the world keirin champion said after beating Trinadad and Tobago’s Njisane Nicholas Phillip for it.”

Of his semi-final loss to Bauge, Perkins, who had overcome a virus that struck before the team sprint said: ”Tactically my races were perfect, I just didn’t have that little bit of extra speed.”

First, his mind is today’s keirin, which features some new faces that didn’t enter the sprint. ”We will just go back and look at some of the videos of the past year and see what we are up against,” he said. ”Obviously having the races [on Monday night] and having a few wins under the belt is going to give me the confidence to go out there and do my best.”

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Insight: earnings season

This time last year, when Australia’s big companies opened their books for their annual inspection by shareholders, investors responded in a brutal way.
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The annual ”profit-reporting season” (which began this week) stretched over about four weeks, but by the time it was finished, investors had wiped 6.5 per cent from the value of the sharemarket.

Why? They were clearly unimpressed with all the negative surprises.

In many cases, profits were worse than expected.

Investors had not even responded that badly to the state of corporate Australia’s books during the reporting season that coincided with the depths of the financial crisis in early 2009.

Then, only 4.3 per cent in value had been lost, even though the outlook for Australian companies was arguably more uncertain, given the sharemarket was still plummeting and had yet to bottom out.

So how will investors react this reporting season?

It’s an important question, particularly for super funds, which invest heavily in the sharemarket.

Since the crisis began in late 2007, it has evolved from a banking crisis to a sovereign debt and political crisis in many parts of the world, leading to a sharp slowdown in global growth.

In the past few months, global and Australian economic conditions have worsened, with some leading indicators suggesting profits for Australian companies could deteriorate further in coming months.

Analysts from Credit Suisse have found that, since the half-year reporting season in February and March, the number of local companies telling investors that their profits could be better than expected this year has been ”virtually non-existent”.

But many have been warning that their profits could be lower.

These so-called ”profit downgrades” have been occurring in parts of the economy uniquely linked to the economic cycle: metals and mining, construction and engineering, media, retailing and gambling stocks.

Analysts warn that, if we don’t want to see too much value wiped from shares this reporting season – a situation that would hurt Australia’s super funds – we will need to come to terms with the difficulties that policymakers in the US, Europe and Asia are facing.

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An eye for compliance

Looking out … the ATO is paying close attention to non-arm’s length transactions in pension funds.The strategy: To keep my self-managed super fund out of trouble with in-house assets and related-party transactions.
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Do I need to do that? These things keep cropping up in the Tax Office’s compliance program and this year it will be paying particular attention to non-arm’s length transactions in pension funds. It says pension income (which is tax exempt) does not include non-arm’s length income, so some funds are getting their claims wrong. The head of technical services at SuperIQ, Kate Anderson, says non-arm’s length income is taxed at 45 per cent.

Broadly speaking, Anderson says, income is regarded as non-arm’s length if it comes from a scheme or investment in which the parties weren’t dealing with each other at arm’s length, and if it is more than the fund might have expected to get if those parties had been dealing with each other at arm’s length.

For example, she says income received by a self-managed fund as a beneficiary of a discretionary trust is non-arm’s length income and would be taxed at the higher rate.

The Tax Office says it will contact 3000 pension funds this year to encourage voluntary amendments.

So I’m OK if my fund isn’t a pension fund or isn’t receiving this sort of income? Not at all. As a general rule, all super funds are required to invest on a commercial, non-arm’s length basis. The Tax Office says it will also review 100 self-managed funds this year to ensure they are complying with this requirement. Anderson says there are specific rules in the super laws relating to related-party transactions and in-house assets that all funds must comply with.

What are the rules? Unless an exception applies, the Tax Office says self-managed funds generally can’t lend money or provide financial assistance to related parties or buy assets from them.

A related party is any person, including the member themselves, who is related to you out to second cousins or any entity that is controlled by a related party, such as the fund’s employer sponsor.

Anderson says an exemption to the ban on related-party transactions allows super funds to buy listed securities or widely held trusts at market price or business real property (a technical term meaning the property must be used solely for business) from related parties, so long as the purchase is made on commercial terms.

Business real property can also be leased to a related party at a commercial rent. For assets that don’t fit the exemption there is a provision for a small amount of the fund’s value to be invested in in-house assets.

OK, I’ll bite. What is that? This limits assets bought from related parties, along with investments in or loans to related parties and assets that are leased to related parties, to no more than 5 per cent of the total fund’s assets.

Those exempt assets referred to earlier are also exempt from this rule.

The problem with the in-house assets test, Anderson says, is that it applies on a daily basis. So if your fund also owns shares and those shares fall in value, you could inadvertently breach the 5 per cent limit without changing your investments.

This caused problems for many self-managed funds during the global financial crisis.

She says funds also need to be aware of the sole purpose test – an overarching requirement that all investments made by the fund be made solely for the purpose of providing retirement benefits.

So if you enter into a transaction because you want to help your business or free up funds for personal use, you’ll run foul of the super rules even though you may be under the 5 per cent limit.

Twitter: @sampsonsmh

This story Administrator ready to work first appeared on Nanjing Night Net.

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Xstrata cuts spending as commodity prices slide

Swiss mining giant Xstrata has swung into austerity mode in the face of falling commodity prices, targeting cost savings of $US970 million and deferring $US1 billion worth of spending this year.
Nanjing Night Net

Xstrata reported a sharp 31 per cent drop in interim earnings before interest, tax depreciation and amortisation to $US4 billion, compared with a year earlier.

It blamed the drop on slumping commodity prices in the first half of 2012, citing renewed turmoil in the eurozone and a slowing growth rate in China.

Earnings per share fell 23 per cent to 75 US cents, before exceptional items. The board declared an interim dividend of 14 US cents per share, up 8 per cent on a year ago.

Xstrata is in the throes of a friendly scrip merger with major shareholder Glencore International and today’s weak profit figures may undermine efforts by some investors pushing for a higher effective bid price. Shareholders are scheduled to vote on the merger on 7 September.

Chief executive Mick Davis said Xstrata’s “pro-active response to the cyclical downturn will defend margins and ensure our business emerges in a stronger competitive position to capture the benefits of stronger global economic growth”.

Mr Davis said the $US970 million in savings would more than offset expected cost increases of about $US580 million for the full year, resulting from the inevitable cost pressures of ageing operations reaching the end of their production, including lower grades.

“The resultant expected net real cost saving for the year of around $US390 million is a creditable cost performance against the very complex operating environment in 2012, compounded by the transition phase of our growth strategy and the potential risk of distraction arising from the proposed merger with Glencore,” he said.


After reviewing its development pipeline Xstrata had “resequenced capital spending and deferred $US1 billion of expenditure originally planned for 2012,” the company said. “Our 2013 budgeted spending will increase by $US400 million, with $600 million deferred beyond that, without affecting the commissioning schedule of any of our approved projects.”

“Consequently, we expect capital spending in 2012 to reduce to $US7.2 billion, $US1 billion less than our previous guidance, smoothing the profile of capital spending across the next two years.”

Impairments included: $US514 million against its investment in Lonmin, $US162 million lost in the revaluation of a hydroelectric project in Chile, owned in joint ventrue with Origin Energy; $US111 million from closure of the Brunswick zinc mine, and $US21 million in merger costs.

These were offset by a $US579 million “deferred tax asset” credit tied to July commencement of the Minerals Resource Rent Tax in Australia.

Last week, Xstrata reported commodity price falls across the board in its first-half production report, year on year, including for copper (down 14 per cent to $US8087/tonne), Australian coking coal (down 16.5 per cent to $US217/t), nickel (down 28 per cent to $US18,438/t), zinc (down 15 per cent to $US1978/t) and lead (down 21 per cent to $US2035/t).

Bucking the trend were gold (up 14 per cent to $US1651/oz) and Australian thermal coal (up 4 per cent to $US108/t).

This story Administrator ready to work first appeared on Nanjing Night Net.

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