This week's release of the interim report of David Murray's Financial System Inquiry (FSI) was a mixture - part interim report, and part seeking further feedback and comment from interested parties. At 460 pages it has, or will, take some time to go through the complete document, but our initial impression is that the final report will be a major influence on the direction of the financial system, including superannuation for some time to come.

Courtesy of modern technology and the Internet (which the report itself focused on) the presentation and ease of understanding the report was a breath of fresh air. While not everyone might agree with all the directions it is going in, one has to be impressed by the quality of its scope, coverage, and production.

Distilling all 460 pages (even if I had read them all) is not the purpose of Hedge Clippings, so we will just focus on some specific areas of interest. The main one to us is Australia's superannuation system, currently around $1.8 trillion and forecast to grow to 7 or $8 trillion by 2030 according to a recent report from Deloitte. The FSI interim report inevitably spent some considerable effort on superannuation, partly in the area of fees, and also flagging that the final report will have a fair amount to say about superannuation's retirement phase, as opposed to the accumulation phase which seems to be the focus of so much attention.

Firstly the fees. The FSI points out that while the total superannuation pool has grown dramatically over the past 20 years, partly as a result of time, and partly as a result of the SGL levy rising from 3% to 9%, fees as a percentage of total funds has hardly budged. The interim report estimates that whilst one of the largest superannuation systems in the world, it is also one of the most expensive by a factor of two or three times, and that a reduction of around 0.4% in fees would save superannuation members a total of $7 billion a year at current levels.

Given Deloitte's forecast, a simple calculation suggests that figure will be closer to $30 billion a year by 2030 unless competitive pressures (or legislation?) come to bear.

As we are normally at pains to point out, fees are one thing, but net performance drives the bottom line return. Whether net performance, or choice and a preference for being in control of one's own retirement destiny is the cause for SMSF's to be 35% of the total superannuation pool is debatable, but self-managed super funds, while not impervious to fees, would from our experience seem to be far less fee focused than their institutional counterparts.

The FSI also put considerable focus on potential changes or implications to the retirement phase of superannuation. At the current time, and in fact since inception, the pointy end of superannuation has been contributions, returns, and fees in the accumulation phase covering the time up until retirement. David Murray's interim report suggests, correctly in our view, that as the objective of superannuation is to provide for the retirement phase, there should be a greater focus on how the retiree's final superannuation balance is handled.

Given increasing longevity and an ageing population it would seem illogical to force people to save for 40 or 45 years of their working lives, only to allow them to take a lump sum in the hope of carrying them through the next 20 or so years of retirement. We are obviously not aware of how the final report will come down on this, but it would seem that the recommendation might fall somewhere between incentive (the carrot) and legislation (the stick) to increase the focus on annuity style incomes over the longer term.

While they're at it they may want to consider either a carrot or stick approach to encouraging an increased allocation of the superannuation pool to infrastructure assets. Both have a long term timespan of 30 to 40 years, and infrastructure should be able to provide the necessary steady returns without the volatility of equities and other financial markets.

Our focus on the superannuation aspects of the FSI are not meant to diminish the importance of other areas the report, including the quality of financial advice, and Australia's dependence on overseas capital. We'll leave that to others, or another day.

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

The Nanuk Global Alpha Fund returned 1.16% during June, with 12 month performance coming in at 14.83%.

Pengana Australian Equities Market Neutral Fund returned 1.8% during June.

Performance for the Aurora Fortitude Absolute Return Fund was -0.31% during June, its first negative month since January 2013.

Avenir Value Fund returned 0.22% during June, a month in which the Global Equity Index fell -0.76%. The Fund's financial year performance was 30.04% (Index 17.87%)..

Performance for the Insync Global Titans Fund over the 2014 financial year closed at 10.70%.

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 so to something completely different: on what would have been his birthday today here are 7 things we can learn from Nelson Mandela's life. Seven pretty important principles but in my world there's one that rises above them all: Happy Wife, Happy Life!

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.

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.