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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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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ANZ could be winner in US fallout

HOT on the heels of HSBC’s admission of money laundering, Asian-focused Standard Chartered has become the latest lender to fall foul of tough US sanctions.
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The string of revelations against the two banks plays into the hands of ANZ, the Australian lender attempting to grow aggressively through Asia.

The New York State Department of Financial Services alleged overnight that for almost a decade London-based Standard Chartered ”schemed” with the government of Iran and hid from regulators about 60,000 transactions involving at least $US250 billion.

The claim argues that Standard Chartered reaped hundreds of millions of dollars in fees from the transactions.

A 27-page filing by the New York regulator is tied to an order for Standard Chartered executives to appear at a US hearing next Wednesday.

”[Standard Chartered’s] actions left the US financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes,” the filing said.

Standard Chartered risks having its New York licence revoked – essentially preventing it doing business in the US. It could also be required to submit to ”independent, on-premises monitoring” of client transactions by an organisation nominated by the New York regulator – and it may incur a big fine, to boot.

Under US law, transactions with Iranian banks are strictly monitored and subject to sanctions because of government concerns about possible financing of Iran’s nuclear programs and allied terrorist organisations.

As an emerging rival in the Asian region, ANZ arguably stands to benefit from any loss to the reputation – and operations – of Standard Chartered.

For its part, Standard Chartered issued a statement that it ”strongly rejects the position or the portrayal of facts as set out” in the Department of Financial Services claim.

”The group does not believe the order issued by the DFS presents a full and accurate picture of the facts,” the statement said.

All this, including the prospect of strict US monitoring, is something that could represent a major turnoff for Standard Chartered’s Asian-based clients.

Bigger rival HSBC is also likely to be distracted for the medium term after its apology last week for ”shameful” systems breakdowns that failed to stop it laundering money for terrorists and drug barons. Most of the affair relates to HSBC’s Mexican operations, and Europe’s biggest bank has set aside $US700 million for potential fines in the US.

HSBC will also spend $US400 million beefing up compliance around the world, something that could again put emerging market customers offside.

While HSBC and Standard Chartered have substantially bigger franchises through Asia, ANZ has been targeting business and trade clients of both banks as part of efforts to expand its balance sheet through emerging markets, particularly in east Asia.

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Cochlear profit hit by recall

Heard the news? Cochlear’s results didn’t thrill the market.THE headline 68 per cent slump in profit was a blaring advertisement of how challenging the year had been for Cochlear.
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Not surprisingly, the $3.59 billion hearing implant maker was keen to focus on the future, rather than the surprise recall of a key implant that resulted in a 5 per cent loss of market share and a $101.3 million write-down.

”I think that where I’m upbeat – and the result is a disappointing result, because you don’t want to do $56 million [profit] – but where the result is a very, very good result is what it says about the future,” chief executive Chris Roberts, who received a pay cut, said yesterday.

”And life’s all about the future. What this result says is that we were able to maintain our strategy, investing in this market, investing in research and development et cetera. We didn’t have to go back and shut down projects and lay people off.

”We don’t want to have problems like this, but I think we’ve dealt with it in a credible way.”

The result did not meet analysts’ expectations, leading to a $3.40 (5.1 per cent) decline in Cochlear’s share price. The shares closed at $63. Revenue for the year to June 30 was down 4 per cent to $779 million and implant unit sales fell 6 per cent on 23,087, although there was a marked improvement in the second half.

Goldman Sachs described the announcement as ”OK overall – noting too exciting”.

After a long dispute with the Australian Manufacturing Workers’ Union, Dr Roberts lashed the Fair Work Act, saying Labor’s industrial relations laws were ”never about” improving productivity. Instead, he said they were a reward for the union movement’s successful campaign against the Howard government’s WorkChoices legislation.

”The problem for me is that … reregulating the labour market was put in the context of collective bargaining driving productivity, and that is intellectually dishonest to suggest that. I think it would have been far more honest to say, look, providing a workplace that’s much more pro-union is about the political arm of the party paying back the industrial arm of the party for getting them elected.”

Fair Work Australia recently found Cochlear had not engaged in a ”course of conduct which offends the good faith bargaining requirements”, but erred in not allowing the union access to the company’s lunchroom. The parties are now in talks.

”The company has fought hard and has taken every procedural point. However, unfortunately, that appears to be a reflection of the adversarial nature of the relationship between the parties,” the industrial umpire said.

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Analysts expect depressed US gas prices to continue

THE bargain-basement US gas prices that forced a $US2.8 billion devaluation of BHP Billiton’s Fayetteville shale assets last week look set to continue for the short-to-medium term, analysts say.
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Wood Mackenzie head of oil and gas Noel Tomnay told BusinessDay last week that the US market was ”disconnected from the rest of the world” with the Henry Hub gas price trading around $US3/mmbtu while European prices were at $US8-9/mmbtu and Asia-Pacific spot prices at $US14/mmbtu.

Mr Tomnay said the Henry Hub price would not reach the $US5/mmbtu range for six to eight years, when new LNG export projects would link the US market to the rest of the world.

”We do see quite a lot of LNG coming out of the US and Canada,” he said, ”perhaps not quite 100 million tonnes per annum [as in Australia] as not all projects proposed will go ahead, and by the time you have shipped from the gulf coast to Japan it ends up costing $US11-12/mmbtu.”

For its part, BHP expects the gap between natural gas prices in the US and elsewhere will narrow in the longer term. The Henry Hub price was $US3.20/mmbtu at the end of July, up 67 per cent from its April 19 low of $US1.91/mmbtu.

Macquarie Bank head of oil and gas Vikas Dwivedi said the gas price may not have bottomed. ”The rally has been delivered by unbelievably hot weather. Then there’s been so much fuel switching, from coal plants turning off and natural gas plants replacing them. But these are both what I call ‘fast friends’. And these fast friends could disappear fairly quickly.

”If you don’t get real structural demand growth, via new homes or factories and industrial facilities that burn gas all the time, you’re not getting real demand growth.”

Mr Dwivedi said the April 19 low, ”may have been the bottom, I’m not calling for a massive meltdown in prices and I don’t think we’re going to go back down to sub-$US2 any time soon, but I’m hard-pressed to see how we continue to rally here, unless the weather helps out”.

”If we take a weather-normal view, the answer is the supply/demand balance is pretty bad. We need supply to really adjust downward,” he said.

Mr Dwivedi said there was factual and anecdotal evidence of new ”sticky” industrial demand for gas, from committed or planned investment in petrochemical plants, primary metals and automobile manufacturers.

”The most recent is methanol, which is an extremely energy-intensive chemical,” he said. ”There are a lot of proposals, a lot of interest. The one thing all these have in common is that they are all long lead-time projects. Nothing is going to show up of any real size in the next few quarters. We’re talking 2016-17, when a lot of new facilities will come on at the same time.”

A faster source of new gas demand was the potential acceleration of coal-fired power generator shutdowns. ”Right now there is roughly 30 gigawatts of coal plants who’ve already given formal notification they’re going to shut down,” Mr Dwivedi said.

He described the shutdowns as semi-permanent. ”The intent is for the shutdown to be permanent, but if they don’t knock the facility down, they can always re-start it – maintain a skeleton staff to just keep the rust off it. But the intent is to shut it down permanently.”

If gas prices rose substantially, he said: ”You could say, of all the coal plants that are shut down, maybe 20 per cent could come back on after a few months to a year – could be un-mothballed – but most of the rest will stay shut.”

That view is not universal. UBS commodities analyst Tom Price said fuel switching from coal to gas started happening when the Henry Hub gas price fell below $US3.50/mmbtu and, once it returned to those levels, ”we should expect a reversal of the trade”.

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Rubbery outlook for Ansell boss

THE Swedish chief executive of Ansell, Magnus Nicolin, seems to think one might have a more lucrative career predicting the direction of the European economy rather than running a latex glove and condom concern.
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At a media conference yesterday regarding Ansell’s €101.5 million ($118 million) acquisition of the French glovemaker Comasec, Nicolin was asked to provide his views on the European economy.

”If I knew exactly where it was heading, I wouldn’t be working here,” he said.

Transurban legacy

THE new chief executive of Transurban Group seems to think it is a tad premature considering what he wants to leave behind when he eventually departs the company.

When asked what kind of legacy he wanted to leave at Transurban, Scott Charlton assured analysts that he would keep a leash on his ego. ”I’m not trying to build an edifice to myself. I am not trying to build a Scott Charlton legacy,” said Charlton, who only started at the company three weeks ago.

The former Leighton and Lend Lease executive, however, did concede he was something of an infrastructure nerd.

”I love the sector, I love the big assets. They are fun to be part of and as an engineer, I love the complexity of the networks and sort of how everything operates together. So the sector interests me and some people might see that as weird,” said the former designer of missile guidance systems.

On the issue of legacies, Transurban also disclosed that its former chief executive Chris Lynch enjoyed a tidy 9 per cent lift in remuneration in his final full-financial year to $7.36 million. In the lead-up to Lynch’s departure, the company stressed he resigned rather than being terminated. This means he will never have the chance to leave a legacy the same size of his predecessor Kim Edwards, who departed the group with a $5 million ”strategic milestone incentive plan bonus”, a $3.2 million ”business generation plan incentive”, a $1 million short-term incentive payment and a $5 million termination payment.

Music to their ears

MELBOURNE composer Noel Fidge has claimed to have ”reinvented” the modern musical by coming up what it is certain to be a new genre: an anti-gambling musical.

A Garden of Money, which will be staged in North Melbourne from August 23 for five days, revolves around a well-off stockbroker and his gambling addict wife.

But the recent track record of finance-related stage entertainment has been rather patchy. In 2010, a British play about the Enron collapse closed after just 15 performances on Broadway.

Labelled a ”flashy but laboured economics lesson” by the New York Times, Enron lost an estimated $4 million in the US.

However, EuroCrash! The Musical continues to power on after opening on the London West End last year. ”It is a parable, and a dreadful warning about what might happen if certain steps … to save the eurozone are not taken,” says the musical’s website.

AMP plummet

AMP chief executive Craig Dunn’s Christmas hamper might be a little lighter this year, thanks to the 40 per cent dip in the company’s share price to $4.05 since late 2009.

The company lodged a change of director’s interest notice disclosing that 777,778 performance rights granted to Dunn in March 2010 had lapsed at the end of July.

CEO bonus cut

ONE wonders whether the heavy engineering concern Bradken’s 49 per cent lift in annual profits will be enough to temper any of the remaining shareholder angst in relation to the remuneration of its senior executives.

Despite posting a better than expected $100 million net profit and 3.8 per cent lift in dividends for the year yesterday, the cash bonus paid to managing director Brian Hodges was cut from the previous year’s controversial $819,000 to $393,000. At last year’s meeting more than 20 per cent of shareholders voted against the remuneration report, where Bradken’s key management personnel were paid the equivalent of 17.5 per cent of Bradken’s operating cash flows. But while Hodges’ bonuses have been trimmed, his fixed pay is still well out of the RBA’s inflation comfort zone. His base pay for the year to June 30 rose a hearty 12 per cent to $1.28 million.

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RBA breaks silence on soaring dollar

The Reserve believes the dollar is soaring because foreign investors have settled on Australia as a safe place to park their money.THE Reserve Bank has turned to ”open mouth” operations in a bid to hold back the rising Aussie dollar.
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The Reserve inserted a sentence of exchange rate commentary into the statement released after yesterday’s board meeting in a conscious attempt to let the market know it thought the dollar was higher than could be justified by the usual metrics. The sentence said the exchange rate had “remained high despite the observed decline in the terms of trade and the weaker global outlook”. The Aussie-US exchange rate has climbed 6 per cent during two months in which base metal prices have fallen 6 per cent.

The Reserve believes the dollar is soaring despite the lower prices because foreign investors have settled on Australia as a safe place

to park their money. A big part of yesterday’s Sydney board meeting was given over to discussing the high dollar and what – if anything – to do about it.

One option – not ruled out – is to intervene in the foreign exchange market by selling dollars and buying foreign currency as the central bank has done on rare occasions in the past.

This option carries a risk of being stuck with foreign assets that would turn out to be bad investments, a criticism that can be levelled at China’s policy of investing abroad in order to hold back its currency.

The Reserve is taking the view for the moment that there is little evidence of broad economic damage flowing from the high dollar, meaning it can wait. Economic growth is strong, employment is climbing and inflation is low.

If needed, the Reserve would restrain the dollar in other ways, by feeding concern about the high dollar into its decisions about whether to cut interest rates; in the same way as it feeds concern about bank funding costs into those decisions.

For the moment it is watching the dollar, letting people know it is watching the dollar, and keeping its options open.

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Leighton insists it sees an upside but reality bites

TAKING a contrary view of the world always gets a headline, and in Leighton Holdings’ case, it released a poor set of interim results but went against the prevailing view that investment activity is declining.
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The positive spin didn’t do a lot for its share price, which fell against a rising market.

In a statement to the ASX, Leighton boss Hamish Tyrwhitt said: ”Contrary to commentary suggesting a decline in investment activity in Australia, the group’s addressable markets have never been stronger.” It backed it up with record work in hand of $47 billion, reaffirmed its full-year profit guidance of $400 million to $450 million and indicated it had a pipeline of $29.9 billion worth of work that it had tendered for as at June 30.

This upbeat outlook came as Australian Industry Group (AIG) released a worse-than-expected construction index for July that showed the industry continues to contract at an accelerating rate.

AIG’s construction index dropped 2.2 points to 32.6 for July. (Anything below 50 means the industry is going backwards.)

It reflects a growing chorus of mining executives who are warning that some big projects will have to be mothballed due to a blowout in labour and equipment costs.

But for Leighton, the more projects it can win the better it is for its bottom line. As soon as a project is started a construction company can start booking a profit on a monthly basis. Some companies wait until a project is about 20 per cent complete before booking a profit, but Leighton decided a few years ago to start booking a profit immediately.

Leighton turned in a net profit of $114 million for the six months, which was within market expectations. One of the issues for investors is its gearing, which at 46 per cent is getting uncomfortably high. Given the company has $840 million of debt due within the next 12 months, it may have been more prudent to reduce its dividend payout.

But then again Leighton has a major shareholder, Hochtief, whose major shareholder, Spain’s ACS, has a mountain of debt and so a dividend payment is welcome.

Leighton has been through a lot in the past 18 months and Tyrwhitt says the company is trying to repair its reputation. It is selling non-core assets, cutting costs and ”resetting the dial on risk” after disastrous write-downs on major projects. It has a long way to go.

Adele Ferguson/Tim Colebatch will be speaking on Victoria at the Crossroads? on August 23-24. For details on the conference, go to vu.edu.au/crossroads

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Bradken posts $100m profit as foundries fire up

BRADKEN Limited, chaired by New South Wales Infrastructure head Nick Greiner, has ridden the resources boom to post a $100 million profit from its cast steel products in the mining, energy and rail freight industries.
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The result exceeded guidance given in April when the company announced an earnings downgrade due to one-off costs. The shares rose 11.2 per cent, closing at $5.74.

The company said its profit after tax was up 15 per cent after minorities, which consisted of write-downs in goodwill of some UK assets. Statutory net profit was up 49 per cent.

Managing director Brian Hodges said Bradken’s order book was at record levels, its foundries ”are pushed to full capacity” and it had added capacity at foundries in Australia, Canada, Malaysia and the US.

”Bradken margins are strong and will remain very defensible,” he said. Accounts showed its overall gross profit margin was 29.8 per cent, with mining consumables, engineered products and industrial posting margins in the low 30s. Rail’s margin was 13.6 per cent.

But the company would minimise its capital expenditure in 2012-13 ”until the outlook becomes clearer”, Mr Hodges said.

Revenue from the mining products division was up 22 per cent at $648 million, boosted by acquisitions. Rail freight sales were up 56 per cent to $330.2 million. The US-based engineered products division was up 20 per cent, to $347 million. Earnings before interest, tax, depreciation and amortisation were $220.4 million.

Mr Hodges said he expected the past year’s softness in the energy sector to ease in the fourth quarter.

”There is quite a lot of expansion in land-based oil, and expansion in gas fracking and low-cost energy, which seems to be having such a positive impact on the US economy,” he said, and Bradken would get a spinoff.

Moelis Research noted the global uncertainty with coal, which represents 9 per cent of Bradken’s sales, but thought a GFC-type slowdown was unlikely. Bradken will pay its fully franked final dividend of 21.5¢ on September 4.

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