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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Default options

Juggling act … fund members need to weigh up whether the default is the best choice.Most superannuation savings are held in ”default” funds – the funds selected by employers to receive the superannuation guarantee – and most employees are happy to go along with that decision.
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But is it the best choice when factors other than performance may be given greater consideration?

Fund members need to be aware that other considerations come into play when that selection is made.

For workplaces covered by industrial awards, which cover about 1.5 million workers, the default fund is usually named in the industrial award.

These are mostly not-for-profit industry funds, the boards of which have equal representation by the relevant unions and the larger employers in the industry.

However, if there is no award governing the super guarantee contributions, the employer is free to select any complying fund as the default provider.

Not-for-profit funds are happy to be judged on performance. They have outperformed the retail sector – funds provided by the banks, insurers and master trusts – over the long term. (Although the gap in performance is closing as the retail sector launches lower-fee funds.)

A report recently released by Industry Fund Network, the umbrella group representing industry funds, found during the past 15 years (1996-2011), retail funds underperformed not-for-profit funds by more than 2 percentage points a year.

The report said: ”Over the 15-year period, if retail funds had earned industry fund returns, Australian retirement savings would currently be $75 billion higher.”

In June, the Productivity Commission issued a draft report after the government had asked it to look at whether there should be changes in the way that default funds are selected. The commission said that opening up default funds to competition would benefit members.

The retail sector has long labelled award super as anti-competitive and has been itching to be able to compete with not-for-profit funds to become default providers. Large employers not covered by industrial awards tend to hire asset consultants to select who should be the employers’ default providers. But for other employers, especially smaller ones, the costs of running a tender are too expensive.

Smaller employers are inclined to give the management of their employees’ super to the super arm of the bank with which it does business.

A senior consultant at Rice Warner Actuaries, Bill Buttler, says in most case default funds are ”pretty good” funds. The bottom line is it is not enough for employees to trust that their employer’s default fund is the best for them.

Buttler advises they read the product disclosure statement and check the website.

Reforms will improve offerings

From October next year, the government will require balanced investment options to meet MySuper criteria before they can be selected as an employer’s default fund.

Fund members are always free to choose any complying super fund.

Fund members who do not exercise ”choice” will, from October, have their super guarantee contributions go to their employers’ MySuper-compliant investment option. And, from the middle of 2017, members who do not exercise choice will have their balance shifted to a MySuper investment option.

MySuper investment options will need to have a broadly diversified investment strategy and offer a minimum level of life insurance to all fund members.

MySuper will have lower costs because commissions and ongoing financial advice fees will be banned.

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Ask Noel

We have an investment property with a mortgage of $750,000. We earn $30,000 in rent a year but the outgoings are $55,000. We have the capacity to buy another investment property as our annual combined pre-tax income is $400,000, but we do not want to be financially constrained. Is it sensible to reduce the loan to a more manageable amount of $500,000 before embarking on the purchase of another investment property? We own our home and have no other debts.
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Your current shortfall is only $25,000, tax deductible, so it should not be too much of a financial burden to borrow for another property once the income from the new property and the tax advantages of negative gearing are taken into account. Of course, major factors to consider are the capital-gain potential of any property you buy and the strength and reliability of your present income.

My partner and I are both 52. My income is $86,000 a year and my partner’s is $75,000. At present, our combined super equals $404,000, we own our home and have no dependants. We have two investment properties, which, when sold, will give us at least another $360,000 after the capital gains tax has been paid. We want to retire at 55, or at least scale down to three days a week until we are 56, then down to full retirement if possible. We feel we could salary sacrifice the full $25,000 to both super funds next year and possibly again in our final work year (although that isn’t a certainty). Would retirement at this age be possible?

It’s impossible to give a definitive answer because how much you will need when you retire depends on a multitude of variables, including your spending habits, how long you will live and the rate of inflation. You have done very well to date but your top priority should be to sit down with a financial adviser and decide exactly how much you will need when you retire and what strategies you need to achieve your goals. I would certainly recommend salary sacrificing as much as you can until you retire.

We owe $398,000 on an interest-only loan over an investment property that’s valued at $350,000. Should we look at paying down the principal or just leave it as is and hope that in a few years, capital gains will take over? Is it worth setting up an offset account or is it better to continue maximising tax deductions?

The problem with paying down a tax-deductible loan is that the effective return on the money so invested is probably less than 4 per cent when tax is taken into account. If you don’t have a non-deductible home loan, I would opt for the offset account. Alternatively, make extra contributions to super, which can be withdrawn at some stage to pay off the debt.

I am 30 and earn $104,000 a year. I have $15,000 in savings but no other investments and have recently received a free house as part of my salary package. I have no debts or dependants. However, I need a new car and have the option to salary sacrifice. My goal is to save enough money to put a substantial deposit towards my first home in about four to five years. What would be your advice to help me achieve my goal?

If you don’t have concrete goals, it’s easy to fritter your hard-earned money away. My advice is to decide exactly how much you’ll need in four years for a home deposit and divide that by 48. Make sure that every month, that sum is deposited in a separate bank account. Do not touch this under any circumstances. You should also investigate the first-home saver account because that offers tax benefits for part of the deposit.

We have an investment property with a current market value of $720,000. We bought this property three years ago for $500,000. For the first two years, we lived at the property, which is currently rented out. We are now renting and bought land. We plan to start building soon. If we sell our city property and reuse the profits for our new home or another investment property, do we need to pay any tax on the profit?

Make sure you talk to your accountant before signing any contracts but based on the information you have given, you should be within the six-year capital gains tax exemption period, provided you lived in the house before you rented it out and have not claimed any other property as your principal residence since.

I’ve received a $65,000 inheritance. My husband and I are in our late 50s and have little super. Our mortgage is $180,000. What would you suggest is the best way for us to invest this amount?

At your stage in life, the best strategy is probably to pay it straight off the housing loan, as long as the interest on that loan is not tax deductible. You should then seek advice on the possibility of drastically reducing the amount you repay on your mortgage and substantially increasing the amount you salary sacrifice to super. This should be highly tax effective as salary-sacrificed contributions lose just 15 per cent in contributions tax.

I have two investment properties with a combined value of about $1.5 million and related investment mortgages totalling $950,000. In addition, I have a $130,000 blue-chip share portfolio invested in my unemployed wife’s name. Our family home is valued at about $500,000 and has a mortgage of $130,000. Is there a way of transferring the debt from the family home to either the investment property or against the share portfolio so the interest can be tax deductible?

The only way out is to sell investment assets and use the proceeds to eliminate the housing loan. Then you can borrow back against that house to buy other investment assets. As the purpose of the second loan is for investment, the whole of the interest on that loan would be tax deductible. Before you take any action, check out what transaction costs and capital-gains tax is involved. It is possible that the costs may outweigh the benefits.

Our mother lived in her house until her death 10 months ago. My brother and I are the beneficiaries. The house is worth about $850,000 and I understand that if we sell within two years, we will be excluded from capital gains tax. However, if I pay my brother $425,000 for his half, live in the house for 10 years and then sell, do I pay only half the CGT.

Assuming this house was your mother’s main residence, it was not being used for the purpose of producing an assessable income, and she bought it after September 19, 1985, your brother can sell it to you free of CGT within two years of your mother’s death. If you buy the property and use it only as your residence, you will be free of CGT when you sell it. If your mother bought the house before September 20, 1985, and it becomes your main residence for your entire ownership period, it will also be CGT exempt when you sell it.

I’m 32 and earn $105,000 a year. I have super worth $150,000 with employer contributions of 15.4 per cent and I add an extra 5 per cent. I’m currently renting. I have an investment property worth $270,000 with an interest-only loan. After rent, it costs me $500 a month. The property isn’t appreciating and I’ve been unable to sell it. I’m considering taking it off the market. I have a consolidated line-of-credit owing $38,000 separately to my home loan, with the ability to redraw $12,000. I also have $10,000 in credit-card debts. I have no savings (just $500 in shares) and have spent a lot on luxuries and travel. Would my voluntary super contribution at $200 a fortnight be better used reducing the debt on the cards or line-of-credit?

In view of your young age, I would certainly prefer you reduced your debts than contributed money to super, where it may be inaccessible until you are 60. However, your main priority should be getting your finances in order – if you don’t do this, you’ll spend the rest of your life on the debt treadmill. Remember, it is not how much you make – it is how you spend it.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature. Readers should seek their own professional advice. Email: [email protected]南京夜网.

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Minister rejects uni push to set own fees

Fred Hilmer: Fee deregulation, with fairness, vital for unis
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CLAIMS that universities are poorly funded and could slide into debt are ”alarmist and inaccurate”, Tertiary Education Minister Chris Evans says.

Mr Evans warned that increasing university fees would push higher education beyond the reach of students from poor backgrounds and those in regional Australia.

His comments come after the leader of an elite group of universities urged the government to allow institutes to set their own student fees. Group of Eight chairman Fred Hilmer said some universities could lose up to $100 million unless they received more funding.

But Mr Evans said student debt would balloon if universities set their own fees.

”What we know about deregulation of fees is that we see a vast increased cost to the student and we don’t see any real competition on price,” he said. ”We believe we are now funding universities adequately by increasing their income by 50 per cent since we came to office. That allows them a capacity to properly educate Australian students.”

He said it was crucial to Australia’s economic growth that 40 per cent of young people completed a degree. ”I don’t believe and the Labor Party doesn’t believe that making education prohibitively expensive … is the answer.”

The federal government caps university fees under the current system. But Professor Hilmer said the current model should be scrapped.

The Group of Eight includes Australia’s most prestigious institutes including Monash and Melbourne universities.

Professor Hilmer, who is the University of NSW’s vice-chancellor, has previously said universities should be free to determine fees. He said his university faced a $100 million deficit over the next three years if international student numbers and federal funding remained steady.

”It’s unlikely UNSW is alone in this situation given that all universities are funded broadly in the same way and are facing the same uncertainty around the revenue stream from international students,” he told The Age.

The National Union of Students has rejected his push. Union president Donherra Walmsley said students would pay more for education if universities set fees.

Universities Australia chief executive Belinda Robinson said the funding model needed to be examined after major changes to the sector, including declining revenue from international students. She said Canberra’s decision to remove caps on undergraduate enrolments from this year had also presented challenges.

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Private Media launches career women’s title

AT A time when much of the media is contracting, one outfit, Eric Beecher’s Private Media, is expanding. Its latest title, Women’s Agenda, will be launched today.
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Aimed at career-minded women who want to keep their finger on the workplace pulse, the free online magazine will be the seventh to emerge from the Private Media stable as it eyes audiences and communities that it says have been abandoned or ignored by mainstream media.

With a target of between 100,000 and 200,000 women readers a month, Women’s Agenda will be Private Media’s second-largest title after Crikey and help drive its overall footprint of readers closer to 1 million a month. Crikey, which Mr Beecher bought from Stephen Mayne, was the foundation of his business.

Another title is in the pipeline, Crikey is to be relaunched next month, and the group is exploring ways to charge readers for bolt-on services, said its chief executive, Amanda Gome.

Access to Private Media’s sites – with the exception of Crikey – will remain free, said Ms Gome, who views the erection of paywalls around some media sites with some scepticism.

She says readers are not prepared to pay for news that has been commoditised.

”If you look at the audience of the Herald Sun, the majority of them are not going to pay for news. You have to match the audience with the product,” she said.

She has much the same view of Fairfax Media’s chances when it puts paywalls around parts of its news websites next year.

”I think that the number of people who will be prepared to pay will be small and that is going to affect their overall numbers and their advertising proposition,” she said.

Private Media’s websites are tightly targeted at distinct audiences – the wealthiest 20 per cent of households in the country – and have a distinct role. SmartCompany is aimed at the small business market, Property Observer at the property investor and Women’s Agenda at the nation’s career women.

Its publisher, Marina Go, said there would be significant cross promotion to drive traffic.

She said the internet is going down the same path as magazines, which started with generalist, mass-market titles only to fragment into smaller, special-interest titles.

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Pressure mounts on reluctant Reserve Bank to rein in surging dollar

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PRESSURE is building on the Reserve Bank to follow the lead of the Swiss central bank and move to ease Australia’s soaring currency.

The dollar, which touched a four-month high yesterday, has been blamed for hobbling exports while crimping local producers as they compete in markets flooded with cheaper imports.

Central banks from Russia to Germany have been snapping up the Australian dollar, with the currency emerging as a haven in the face of Europe’s financial woes, particularly as Australia is one of just seven countries with a top AAA-credit rating and stable outlook.

The dollar traded as high as US106.03¢ after the RBA, as widely expected, opted to keep interest rates steady yesterday and said its settings for monetary policy were appropriate for now.

However, in a statement following its monthly monetary policy meeting, the central bank suggested it was taking closer scrutiny of the currency. It noted the dollar had “remained high” despite falling commodity prices and the weaker global outlook.

The Aussie rallied after the release of the RBA statement to its highest since March 20. Last night it was trading at US105.8.¢

The strength of the currency, up more than 70 per cent against the US dollar since the depth of the GFC, has been blamed for recession-like conditions in industries such as manufacturing and some retailers.

“The RBA has powers to intervene in markets if the currency is noticeably out of sync with the fundamentals,” said Australian Industry Group chief executive Innes Willox. ”In the current environment, one would expect that the bank has been considering the level of the currency and its options to influence its levels.”

Most of AIG’s members are manufacturers and engineering companies.

Meanwhile, Cochlear managing director Chris Roberts said yesterday that the rising dollar was partially to blame for the hearing implant maker posting a 68 per cent slump in profit. ”It’s a competitive, tough environment out there,” Dr Roberts said yesterday.

Morgan Stanley strategist Gerard Minack has calculated that Australia’s ”safe” status has added US10¢-15¢ to the dollar.

”Suggestions that the RBA intervene to cap the currency make sense, in our view, but we don’t think Reserve Bank action is imminent,” Mr Minack said.

Currency traders say the Russian Central Bank has been an active buyer of the currency in recent months – a move the cashed-up central bank foreshadowed earlier this year. Others including Germany’s Bundesbank and the Banque de France have also reportedly been adding to their holdings.

HSBC Australia chief economist Paul Bloxham said the RBA was likely to defer to monetary policy rather than dumping its holding of dollars, if it felt the high currency was straining the economy.

”The continued high level of the Australian dollar, despite recent falls in commodity prices, possibly provides further motivation for a further rate cut,” he said.

Still, National Australia Bank chief economist Alan Oster expects the dollar to remain high even if official cash rates are cut.

”You’ve got all these European central banks who might say that they’re going to stay with the euro, but they’re just doing a bit of insurance,” Mr Oster said.

The RBA is notoriously reluctant when it comes to currency intervention. Since a float in 1983, the bank has not targeted a level for the dollar.

Debate about possible intervention emerged in recent weeks after former RBA board member Warwick McKibbin reiterated his call for the central bank to do more to limit damage caused by the strong dollar.

In September last year, Switzerland vowed to peg the soaring Swiss franc against the euro in an attempt to protect its economy from the European debt crisis. The Swiss National Bank, in effect, devalued the franc, pledging to buy ”unlimited quantities” of foreign currencies to force down its value.

The RBA last stepped in to support the dollar when the collapse of Lehman Brothers in 2008 triggered a 40 per cent slide in the currency.

Following yesterday’s monetary policy statement, economists were tipping the RBA to push through a further 25 basis point rate cut by October. The central bank remains wary about Europe’s debt issues, a point repeated yesterday by RBA governor Glenn Stevens.

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Hopes for euro solution lift stocks

THE sharemarket hit a near-three-month high yesterday after Germany’s government said it would support the European Central Bank’s bond-buying program, and as investors hoped Spain would call on the European Union for a full bailout.
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It was enough to see riskier assets become more popular, with resource stocks making the biggest gains.

The dollar surged above US106¢ after the Reserve Bank kept the cash rate steady at 3.5 per cent.

The benchmark S&P/ASX 200 Index closed up 19 points, or 0.4 per cent, at 4291.6.

Economists had expected the RBA to keep the cash rate steady, with most tipping it would cut rates one more time by the end of the year.

But the RBA said economic growth was around trend and core inflation around the bottom of its target range, leading some to conclude that there would be no more cuts this calendar year.

“We’ve got one more rate cut in there, we’ve actually formally got it in September, but I don’t think it’s going in September now,” said NAB chief economist Alan Oster.

“I think it’ll probably be in a couple of months, and it’s not impossible that you won’t even get it. We may be very close to the bottom of the [rate cut] cycle.”

Banks had a good day after rates were kept steady, with Westpac climbing 23¢, or 1 per cent, to $23.68. Commonwealth followed close behind, rising 44¢, or 0.8 per cent, to $56.82.

Some of the first companies to report on last financial year posted results below market expectations.

Leighton Holdings was the first big company to release its full-year profit, disappointing the market, as did hearing device maker Cochlear and toll road operator Transurban.

Leighton shares dropped 25¢, or 1.5 per cent, to $16.48. Cochlear fell $3.40, or 5.1 per cent, to $63 and Transurban lost 9¢, or 1.5 per cent, to $5.94.

Equipment maker Bradken’s 49 per cent rise in net profit sent its shares up 58¢, or 11.2 per cent, to $5.74.

Resources were stronger, with BHP Billiton up 16¢ at $32.16, and Rio Tinto 72¢ higher at $54.85.

BlueScope Steel was the best performer among the market’s top 100 companies, up 1.5¢, or 5.7 per cent, at 28¢.

With Agencies

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Ansell keen to stretch reach with buy

Expanding: Ansell said France’s Comasec was a good fit for the company.CONDOM and glove maker Ansell said it is looking at further acquisitions across the globe after snapping up the French glove giant Comasec for €101.5 million ($119 million) in a deal that highlights Ansell’s optimism on Europe.
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Comasec, owner of the famous European glove brand Marigold, turned over €100 million last year. It has manufacturing operations in Portugal and Malaysia and more than 1200 staff.

Ansell, which will release its full year results next week, said the deal will add to its earnings per share this financial year. It is made more attractive by the fall in the euro against the US dollar, which is Ansell’s currency.

The chief executive of Ansell, Magnus Nicolin, told a teleconference yesterday: ”What we particularly like about the company are its products. They have a number of products that we don’t have, so they complement us in the utility space, in some of the food area.”

Shares in Ansell closed 44¢ higher at $13.54, valuing the company at $1.77 billion.

The Comasec transaction follows three bolt-on acquisitions since April last year worth $US45 million.

Mr Nicolin said Ansell was looking across Europe, North America, Latin America and Asia for opportunities. ”We have, as you know, a strong focus on emerging markets and obviously would welcome opportunities to look at companies in those kind of markets. But the fact is that there are fewer opportunities in the emerging market environment,” he said.

Mr Nicolin said that while no players operating in debt-laden Europe could completely shake off the continent’s economic woes, Comasec had been less affected than other companies in their marketplace.

And despite the well-documented challenges in Europe, it remains the ”biggest single marketplace for industrial hand protection and medical and sexual wellness [condoms.] So it’s a big market.

”So it’s obviously a bit of a mixed bag, and for that reason we feel that this is as good a time as any to make this investment. We also believe, I believe, that Europe will come through these difficulties and will be having a growing economy in all these markets again.”

The Comasec chief executive, Pascal Berend, whose father founded the business in 1948, said the company was pleased to join forces with Ansell. ”This combination will generate many opportunities to accelerate growth and innovation while continuing to provide quality products and services to our customers,” he said.

Ansell recently appointed John Bevan, the chief executive of Alumina, to its board and earlier made Glenn Barnes its deputy chairman. Fund manager Perpetual has increased its stake in the company to 11.2 per cent from 10 per cent.

Citi has tipped Ansell to be net cash positive this financial year in the absence of new share buybacks or acquisitions. An analyst, Alex Smith, said Citi liked Ansell on valuation grounds. The company’s shares are down 6.9 per cent for the year to date.

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Innovate, globalise: how CSL avoids earnings rut

DEPARTING chief executive of CSL Brian McNamee, whose performance in building a global company now capitalised at $20 billion could be argued to have earned him the right to offer advice to Australian companies – the majority of which are stuck in an earnings rut.
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His answer is innovate, globalise and focus on productivity – salient words from a manager with the gravitas and the track record to deliver a broader perspective.

While there are some examples, particularly among our big mining, companies of innovation and globalisation, there are plenty more that have ridden the back of operating in the Australian market as monopolies or oligopolies. There answer to productivity of late has been to cut staff or wages.

The strong Australian dollar, the weaker economic environment and structural changes caused by the digital revolution have exposed a large proportion of Australian companies that had been cushioned into inaction.

Thus it is not surprising that, with the exception of CSL, the 2012 reporting season has gotten off to a pretty poor start.

Even with continuous disclosure there are plenty of companies that have already come in below expectations.

The market has been looking for 2012 earnings to fall by about half a per cent. But this includes dominant resource companies whose profits will fall much more.

Before the reporting season started, the non-resource sector was expected to post earnings growth of about 5 per cent. But there may be equity strategists (the big picture people in investment banks) that will be wondering if even the 2012 forecasts were on the optimistic side.

The bottom line is that it is hard to find the bright spots on the horizon for companies about to deliver earnings over the next couple of weeks.

Manufacturing at large is unlikely to offer any upside surprises. The dollar in particular has decimated the growth for this group and will result in many experiencing falling profits and will push some into losses.

Retail has already heralded its many challenges – the first is consumer confidence and the second is the structural competition from the online area.

Harvey Norman is the first of the big retailers to report and its earnings reflected these factors. Its move out of consumer electronics is clear evidence of the the extent to which the internet has been responsible for price deflation.

The optimists are hoping to get some positive blip from the government’s stimulus package flowing through to retail sales.

But if history is any guide, it won’t be sustainable. Government handouts do end up in the cash registers and in the poker machines, but once used up spending patterns return to normal.

The media is likely to be an equally sad tale – particularly the traditional media – print and TV. They have been squeezed by the pincer of internet induced audience fragmentation and sluggish or falling advertising revenue.

Aviation – a sector dominated by Qantas – will be ugly as domestic competition is putting pressure on yields and Qantas’ international brand continues to bleed. Building materials shouldn’t produce much joy as construction activity, particularly in residential, has been weak.

The financial services sector while sturdy is feeling the headwinds of slow credit growth and a high cost of funding. The only major bank to report in this period is the Commonwealth Bank, but it should set the tone for the remainder, which report in three months.

There are a couple of bright spots. Healthcare is one nominated by several analysts. CSL has already produced a solid result. Cochlear, however, disappointed the market due to costs associated with a recall of a product.

But this company should also be put in the clever, innovative and global group. It now has around 65 per cent of the global market in hearing bionic implants and ploughs plenty back into research and development. Its chief executive, Chris Roberts, was particularly upbeat in his commentary on the expectations for 2013. Nonetheless, the stock was trashed in yesterday’s trading.

The resource sector, while still churning out massive amounts of cash, has already been sold-off by the market this year, with expectations that most of the established players will report profit falls thanks to weaker commodity prices.

However, the mining services sector is predicted to be a brighter spot on the earnings horizon given the already committed expansions and new projects in the mining industry pipeline.

Given that markets always focus on the future, the driver of shares should now be what kind of recovery can be made across Australian listed companies in the current 2013 year.

The investment bank experts are looking for earnings growth of around 10 to 12 per cent in this period. But it’s a fair bet these will be revised down after the current reporting period is over in a month.

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Fording the downturn

So far Toyota’s been the star.GLOBAL downturns are the fault lines around which our automotive industry has always reinvented itself. In theory, managers should restructure their businesses and businesses should change hands whenever it improves productivity.
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Alas human nature intervenes. Corporate dreams are dreamt and restructuring is delayed … until the alternative is collapse. Way back in 1931, as the Great Depression savaged output at a South Australian automotive body manufacturer called Holden, US giant General Motors came to the rescue. The rest, as they say, is history.

VW, Leyland, Chrysler, Nissan and Mitsubishi all withdrew from car making in Australia – VW handing over to Nissan, Chrysler to Mitsubishi – long after they’d ceased to be healthy, all during crises for their parents and/or amid global downturns.

And here we are again.

After a ritual acknowledgment of the conventional wisdom that Australia is no good at making cars, the pundits peel off into ”protectionists” (sometimes dressed up as ”innovation” buffs) – who want to keep the industry alive with additional assistance – and ”free traders” who don’t. Count me among the free traders. But I’ve never bought the line that Australia couldn’t make cars without assistance.

Yes, some low-wage countries are gearing up production and, yes, our domestic market isn’t huge. But while lower-income countries will continue to grow market share in smaller, lower-quality cars, the bulk of production continues to be in high-income countries, particularly for larger, better cars. And though our market is small, so is Sweden’s. But Sweden has provided a volume base on which unique products have been built, which have then acquired export niches.

Toyota and Holden’s Australian operations have tapped into their parents’ global brands and marketing networks permitting rapid export growth. Rather than slaving away for decades building one’s presence in foreign markets, subsidiaries of global giants can win contracts with head office to supply specific market niches.

So far Toyota’s been the star, focusing all Australian production on one car line – the Camry/Aurion – manufacturing up to 150,000 units annually (right now it’s below 100,000) and consistently exporting more than half its production. Yet the Camry car line is produced in Japan and the US and if it comes to be produced in lower-cost locations, they could become preferred suppliers, first to our export markets, and ultimately to Australia.

Holden seems better placed because it manufactures unique vehicles around which more durable export niches might be able to be built. Our high exchange rate and the termination of the Pontiac brand have cruelled Holden’s exports recently, though it retains a monopoly on producing large rear wheel drive cars within GM’s network.

And then there’s Ford. Since the embarrassment of exporting the small, leaky, poorly finished convertible Capri to the US in the early 1990s, Ford US has shown scant interest in its Australian subsidiary’s entreaties to get serious about export from Australia. To utilise its assembly capacity it did some fine re-engineering of its Falcon car line to also produce the Ford Territory. But with flagging domestic Falcon sales and no serious exports, total volume is now around a third of Toyotas and Holdens which is hopelessly unviable. In fact Ford Australia still has great automotive assets, but they are not – and cannot be – strategically important for its current parent. Nevertheless they could be really valuable to up-and-coming Chinese or Indian car makers.

And while new Asian car makers gear up to export millions of small and medium-size cars, they’ll have little interest in making large cars like Falcons and Fairlanes. If they owned Ford’s Australian assets they’d get a foothold in our market and, more importantly, a large, sturdy, luxurious, rear-wheel drive car to badge with their own global marque. Would it be good public policy to subsidise such a transfer? Probably not. But since the current plan is to keep throwing good money after bad, let’s make that assistance conditional on a new owner or at least major equity partner and a global sourcing plan.

This idea was high-risk politics for as long as Ford was muddling through. But now the writing’s pretty much on the wall, the indignity of begging Ford to do us the favour of taking our money to hang around a little longer looks politically riskier still.

Nicholas Gruen is CEO of Lateral Economics and a speaker at the Victoria at the Crossroads? conference on August 23-24. vu.edu.au/events/conference-victoria-at-the-crossroads.

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Down-to-earth look at rural land ownership

Illustration: John Spooner.I HAVE surveyed the foreign investment ”debate” and it’s a curious one. Everybody is making sense. ANZ boss Mike Smith is saying we can’t turn our backs on overseas capital when we have trillions of dollars of growth to fund. He’s right, but we have always been open to foreign investment.
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Opposition Leader Tony Abbott is out there with the Nationals behind him saying we need to more closely monitor agricultural and rural land acquisitions in part by lowering the dollar hurdle for reviews, and he’s right, too.

Agriculture is being swept up in the same boom that has lifted our miners, for the same reason – burgeoning Asian demand. It is a strategic industry on the cusp of a sustained period of high growth, and a point of natural advantage for this economy, like mining.

Australia has enough leverage to argue terms, and enough skin in the global game to want to monitor acquisition trends closely: it’s no accident that Labor is also considering establishing a national register of foreign-owned agricultural land.

Abbott was also right when he said in Beijing last month that it would ”rarely be in Australia’s national interest to allow a foreign government or its agencies to control an Australian business”.

He could have made the point more clearly, but Treasurer Wayne Swan has responded to the same concern by requiring that foreign investment from state-owned enterprises be tested to ensure that it is arm’s length.

The new chairman of the Foreign Investment Review Board, Brian Wilson, said it best this week when he told the Dow Jones news wire that Australian businesses should be run on a commercial basis, ”and not as an extension of the policy, political or economic agenda of a foreign government”.

That’s a fairly simple proposition. No developed country would disagree with it, and it does not mean that state-owned or state-linked Chinese companies cannot invest in this country as part of a broader national plan to secure crucial commodity supplies. A partial template for such investment in fact already exists, in the direct equity stakes that Japanese groups took in Australian resources projects here in the 1970s and ’80s. They shared the development risk, and received their returns not only as investors, but as customers.

Last year’s foreign investment rejection of the partly government-owned Singapore Exchange’s $8 billion attempt to take over the Australian Securities Exchange was only the second time a major acquisition had been sunk by a national interest veto since 2001, when the Howard government blocked Shell’s takeover of Woodside.

There were 42 other deals rejected in 2010-11, all of them in real estate, and FIRB approved more than 10,000 investments worth $176.7 billion, compared with $139.5 billion in 2009-10: not exactly a lockout.


T’S said that in troubled times investors look for companies that are safe as a bank, but in these troubled times banks don’t necessarily fit the bill. But companies that own and operate toll roads that charge on a CPI-plus formula are very close to the defensive sweet-spot, as Transurban demonstrated yesterday.

The group’s official result for the year to June 30 was marred by a $138 million write-down of the Pocahontas Parkway, a US toll road that Transurban acquired in 2006. It leads to empty fields that in 2006 were expected to become suburbs: America’s property crash intervened.

Total toll revenue for the group rose as usual, however, by 5.7 per cent to $765 million. Traffic growth was actually quite subdued, at 1.9 per cent on the CityLink tollway in Melbourne that accounts for 41 per cent of group revenue, for example – but Transurban’s toll pricing formulas allow it to raise prices by at least the rate of inflation.

The group’s lucrative sideline as a tollway constructor delivered another $286 million of revenue, a 30 per cent increase over the year to June 2011, total revenue rose by 11.4 per cent to $1.15 billion, and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were 9.1 per cent higher at $784 million – but there’s some other numbers that reveal what sort of beast Transurban is.

One is the ratio of EBITDA to revenue: at 45 per cent it’s outstanding. Another is the free cash flow the group throws off, and the relationship it has to Transurban’s investor payouts. At least 95 per cent of the uncommitted cash flow is distributed to investors.

Free cash rose by 11 per cent to $433 million – or 29.8¢ a share – in the year, and Transurban lifted its distribution by 9.3 per cent to 29.5¢.

Traffic volumes are still being affected by tollway renovations and subdued economic conditions but Transurban is predicting a distribution of 31¢ in 21012-13, and you can see how it is going to happen.

Former BHP chief financial officer Chris Lynch took over as chief executive of Transurban in April 2008 and by the time he handed the reins to former Lend Lease chief operating officer Scott Charlton last month, he had pulled Transurban’s gearing down to 45 per cent, cut costs and turned on Transurban’s inflation-protected cash flow machine.

Charlton can and is expanding the group’s toll road franchise. His main job is to keep the cash flow machine revving, however, and it’s very doable.

[email protected]南京夜网.au

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