FoFA's twists and turns continue: ASIC's focus on fee disclosure.

Last week's Hedge Clippings jumped the gun by claiming that the much discussed changes to FoFA had become a reality. The real lesson in reality is that at the current time nothing coming out of Canberra can be guaranteed, except perhaps more of the same. As a result the reality is uncertainty, and this uncertainty is only a benefit to the opposition, and the collection of senators in the new Parliament who will control the country's (and the government's) destiny until the next election.

That may come sooner than later.

As we said last week there has been plenty of rhetoric regarding FoFA, and from our reading of the legislation (for the technically minded the Select Legislative Instrument No. 102, 2014) a fair deal of scaremongering along with it. The Explanatory Statement issued by the authority of the Treasurer which accompanied SLI No 102, 2014 ran to nearly 60 pages, or approximately 3 times the length of the actual Select Legislative Instrument, which probably says something in itself.

If the Explanatory Statement from the Treasurer is taken at face value it would appear that, as far as the issue of conflicted remuneration for General Advice is concerned, the proposed situation is pretty clear: In order for benefits to be paid to an individual in relation to General Advice to NOT be considered as conflicted remuneration, a suite of five conditions all need to be met, one of which is that payments commonly known as commissions cannot be paid on products sold as a result of General Advice (see pages 6-8 of the statement).

Not being a lawyer may well mean that I have got the wrong end of the stick on this issue, and FoFA deals with a range of other issues in addition to conflicted remuneration, including definitions between wholesale and retail clients, the need for clients to renew their ongoing fee arrangements (opt in), best interest duties and a range of other issues. As previously stated it sounds as if there are some large and competing interests at play here between the large product issuers and distributors, and the non-for-profit superannuation industry.

Added to which are of course the competing interests of a government that is struggling to win many friends, or take many tricks, either inside or outside of Parliament.

It doesn't help of course that the Commonwealth Bank's compliance woes and failures are also currently front and centre in the media. There were certainly deficiencies in the law when some CBA financial advisers ran riot, but the main issues would seem to have been effective compliance controls at nearly all levels of management.

Changing tack only slightly, this week ASIC also released Report 398 covering Fee and cost disclosure in the superannuation and managed investment product sector. This has only just hit Hedge Clippings' desk so maybe we will park a detailed analysis to another time. Suffice to say that fees and their disclosure will always remain a contentious issue, especially in an industry where asset values are guaranteed to increase dramatically over the next two decades without any corresponding reduction in fees in sight.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Morphic Global Opportunities Fund returned 1.07% during June, ahead of the global equity index at 0.46%, and financial year performance of 20.81%.

Performance for the Monash Absolute Investment Fund 2014 financial year was 23%.

Optimal Australia Absolute Trust returned +0.63% in June against the ASX200 which fell -1.5% with the fund's low concentration and risk controls mitigating losses on long positions, while shorts significantly outperformed.

Slightly ahead of the index at -1.5%, Bennelong Kardinia Absolute Return Fund returned -0.66% for June.

Bennelong Alpha 200 Fund returned 0.32% in a weak market (ASX 200 Accum - 1.5%).

In a difficult month for the ASX The Paragon Fund returned 4.9% bringing 12 month performance to 30.0%.

FUTURE EVENTS:

14-15 August in Sydney: Alternative Investments Conference - Investigating the rise and rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different, Ray Jessel, an 84 year old contestant on America's Got Talent may lament his lack of size in certain areas, but makes up for it ... elsewhere.

On that note, I hope you have a safe and happy weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

THE RETURN OF THE BOILING FROG

This week saw the much discussed changes to FoFA become reality, at the same time as the Senate released its report on poor management controls in the financial planning arm of the Commonwealth Bank. There's been plenty of rhetoric, along no doubt with some behind-the-scenes lobbying, regarding the changes to FoFA, and it is fair to suggest that much of the scaremongering has been just that.

From what we've seen of the new legislation (which is a fair amount having trawled through it along with the relevant sections of the Corporations Act) there would appear to be appropriate safeguards and controls in place to protect retail investors from inappropriate actions by financial advisers. Time will tell of course, but the reality is that no legislation will deter those intent on breaking the law, and as has been seen with the Commonwealth Bank, the risks are not so much with the law, but a lack of effective compliance controls at management level.

So back to markets and risk. This week we read an excellent piece of research by Simon Doyle, Head of Fixed Income and Multi Asset at Schroder Investment Management, entitled 2014: The year of the "Boiling Frog" in which he continued with the theme of heightened risk at the same time as excessive complacency that we highlighted a few weeks ago in George Colman's Optimal Australia performance report.

It is difficult to boil down (excuse the boiling pun) the contents of Schroder's five-page article to a couple of paragraphs, but the essence would seem to be that as valuations rise, so the risk of loss increases, while at the same time volatility, (which implies relaxed and comfortable investors) as measured by the VIX is trading at historic lows.

Doyle's alternative interpretation is that "extra easy monetary policy and reassuring words from central bankers is lulling investors into a false sense of security" and that parallels with the proverbial boiling frog come to mind. As such the temperature may be rising, and the risk to investors more significant than they currently perceive. According to his research and return forecasting framework, Doyle concludes that "valuations in key markets are stretched, future returns are diminishing and the risk of loss is high (and uncomfortably so)".

A link to the full article is included here. Doyle puts the responsibility of the current situation firmly at the feet of central banks and exceptionally easy monetary policy, but at the end of the day it is likely to be investors who are hurt.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

In the first negative month of the ASX since January the Microequities Deep Value Microcap Fund returned 1.39% and 31.53% for the year.

Fund Reviews released this week included:

Optimal Australia Absolute Trust; Insync Global Titans Fund; Supervised High Yield Fund.

FUTURE EVENTS:

14-15 August in Sydney: Alternative Investments Conference - Investigating the rise and rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different, more details on the boiling frog analagy can be found here.  Please note, no frogs were harmed in the filming of this clip.  Unlike this second clip, but at least they were dead first.

On that note, I hope you have a safe and happy weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.