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Thursday, 14 March 2013 03:26

Assessing a Property Investment

 

I recently had a client ask me to assess the merits of an unlisted property trust offer that he had received - the name of the offer shall remain nameless, but I thought it would be interesting to walk you through the key reasons I advised to disregard the offer.

I must highlight that on the surface of it, the offer looked very attractive with a juicy rate of income of 9% pa and some lovely photos of the building with a well known listed company as the major tenant.

Firstly, the trust consisted of only one office building, so there was no geographic diversity. Add to this that 80% of the building was leased to one company and this means that investors are not only putting their eggs into one basket (one property), but almost totally relying on one tenant.

The tenant was a successful listed company, so we are not arguing that the company would go broke, but highlighted what would happen if that company wished to relocate into larger or smaller premises.  If this happened then virtually all of the income is vulnerable.

There were two other aspects that concerned us.  One was the average lease expiry which was only until 2016 - which means that the income from the property was only really secure until 2016.

Finally this property trust was an unlisted property trust which meant that in the event of an investor wanting to get their money back, for any reason, there is no mechanism to do this.

I thought this was an interesting exercise in the aspects we consider when deciding to proceed or "bin" an investment idea.

Mark Draper

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

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As expected Reserve Bank Board holds rates steady at March meeting

As we expected the Board of the Reserve Bank decided to hold the cash rate
steady at 3% following today's Board meeting.

There were minimal changes in the wording of the Governor's statement from
the statement issued on February 5 following that "no change" decision.

Of most importance was retaining the term "the inflation outlook, as
assessed at present, would afford scope to ease policy further should that
be necessary to support demand". Maintaining that statement indicates that
the Board retains an easing bias and future decisions will be impacted by
the growth profile.

By far the most important data release since the last meeting was the
Capital Expenditure survey for the December quarter. This survey provided
the first estimate of investment plans for the 2013-14 fiscal year. It also
provided the fifth updated estimate for investment in 2012-13. The news on
2012-13 was quite poor with substantial downward revisions to investment
plans. However, partly because the 2012-13 number was so low it was not too
big a stretch for the 2013-14 investment plans to show a solid increase.
Indeed by our calculations those plans indicated an 11% boost in investment
in 2013-14. That evidence is likely to have been a key factor in the Bank's
decision to hold rates steady. Indeed, while investment outside mining
continued to be assessed as "relatively subdued" the Governor did qualify
that with "recent data suggest some prospect of a modest increase during
the next financial year". Hence from the Bank's perspective progress in
rebalancing growth towards the non-mining sectors appeared to be underway.

Another aspect of the Capex survey indicated that the peak in resource
investment might be further out than previously assessed. However, there is
considerable uncertainty around those estimates and the Bank, prudently,
retained its general assessment that "the peak in resource investment is
approaching".

The themes that have figured consistently in previous statements were
repeated today – moderate growth in private consumption; near term outlook
for non residential building subdued; exports strengthening; public
spending constrained; inflation consistent with the medium term target; and
low demand for credit.

The wording on the housing market changed. Whereas in February it was
described as: "prospective improvement in dwelling investment", it is now
described as: "appears to be slowly increasing". This somewhat more
positive assessment is the direct result of a modest 2.1% reported increase
in housing construction for the December quarter. Higher dwelling prices
and rental yields are also noted.

The conviction that inflation will remain consistent with the medium term
target is given more support in this statement. Whereas the February
statement predicted that a soft labour market would be working to contain
pressures on labour costs this statement notes that this result has indeed
been "confirmed in the most recent data". In the February statement the
Bank raised the prospect of businesses focussing on lifting efficiency to
contain wage pressures and this sentiment is retained.

The description of the international situation is largely unchanged
although the Governor appears to be a little more confidence around
downside risks. Compare "downside risks appear to have abated, for the
moment at least" (February) with "downside risks appear to have lessened in
recent months".

The description of financial markets includes a more upbeat assessment of
the sharemarket, "share prices have risen substantially from their low
points". However, the Bank continues to point out that financial markets
remain vulnerable, adding "as seen most recently in Europe".

The key theme is repeated in this statement, "the full impact of this
[easing in monetary policy] will still take more time to become apparent,
there are signs that the easier conditions are having some of the expected
effects".

Despite the recent fall in the AUD (substantially more in USD terms than in
TWI terms) the Bank continues to point out that the exchange rate remains
higher than might have been expected.

Conclusion – expect the next rate cut by June.
This statement is clearly structured to signal that the Bank retains its
easing bias but will be patient before cutting rates further.

We believe that there will be another cut in this cycle but not until
around June. Forces that are most likely to highlight the need for lower
rates will be around: an ongoing softening in the labour market; contained
price and wage pressures; a disappointing response from business in terms
of investment; and a housing recovery that, while quite vibrant in Sydney,
will not be replicated around the country. We also expect that the
Australian dollar will be drifting higher through to mid year particularly
as foreign investors rebalance their appetite back towards high yielding
Australian assets.

Bill Evans
Chief Economist
Westpac Institutional Bank

 

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

 

 

Interest Rate ImageAs expected the Board of the Reserve Bank decided to leave the cash rate unchanged at 3.0%.

However there was considerable encouragement in the statement for our near
term view that they will decide to cut rates by 0.25% at the next meeting
on March 5.

The most important justification for that expectation is around the
sentence in the final paragraph: "The inflation outlook as assessed at
present would afford scope to ease policy further should that be necessary
to support demand." Our experience is that use of that word "scope" in a
forward sense indicates a decent chance that the Bank will move at the next
meeting.

The discussion around the domestic economy was largely similar to the
discussion following the December Board meeting. That is, two extra months
of low rates have not provided the Board with much encouragement that
things are turning. For example, investment outside mining is still
described as "remains relatively subdued". The labour market is still
described as "softening somewhat and unemployment edging higher". And
consumer spending is described as "moderate growth".

On the other hand there is a modest uplift in the assessment of the housing
sector with house prices being described as "moved higher" compared to the
December assessment of "moving a little higher". The strength of car sales
is recognised for the first time: "the demand for some categories of
consumer durables has picked up". And the mild reduction in risk aversion
by savers is noted: "savers are starting to shift portfolios towards assets
offering higher expected returns".

Some new concerns emerge in the statement. Firstly, a sign that the Board
is concerned about the outlook for employment growth: "businesses are
likely to be focussing on lifting efficiency". And recognition of the weak
credit growth in both households and firms: "some households and firms
continue to seek lower debt levels". Despite a modest fall in the AUD and a
30% jump in the iron ore price since the last Board meeting, the Board
continues to note the high exchange rate in a context of the observed
decline in export prices.

The main motivation for markets beginning to price out further rate cuts is
around developments in the world economy. In previous statements, the
Governor had consistently described risks to the global economy as to the
down side because of Europe. He now qualifies that by talking about these
risks having "abated, for the moment at least". However, he notes that the
build-up in public and private debt still affords vulnerability to
financial markets.

The wording around China is a little more upbeat with growth being
described as "fairly robust pace", while he is more constructive around
prospects for the rest of Asia due to the improved overall global
environment. Surprisingly no attention is given to the recent upswing in
iron ore prices with export prices still being described as having
declined.

Conclusion
We expected that recent optimism around the world economy would not be
sufficient to change the Bank's clear bias to further cut rates. This
expectation has been confirmed more strongly in this statement than we had
expected. In qualifying the recent improvement in financial conditions it
is clear that the Board does not believe that the global economy is on a
sustained upswing.

Commentary around the domestic economy highlights new concerns around the
outlook for employment growth and credit while the description of the
housing market is hardly exuberant. From our reckoning we are also seeing
for the first time guidance that the Bank expects growth to be "a little
below trend over the coming year" – that is consistent with the current
forecast of 2.25 to 3.25% in the November Statement on Monetary Policy.
However it is interesting that this "below trend" concept is raised in this
particular statement given that has not been the practise in the past.

In May last year we forecast that the cash rate which at the time was 3.75%
would bottom out at 2.75% some time near the end of 2012 or the beginning
of 2013. Today's statement has given us considerable encouragement that
this last leg in the cycle is likely in the near term and we maintain our
call that another cut can be expected in March.

Bill Evans
Chief Economist
Westpac Institutional Bank

 

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Tuesday, 29 January 2013 01:45

Reflating the Japanese Economy

Key points:

  • While it is likely still has more to do,the Bank of Japan is on a path towards major policy reflation for the Japanese economy.
  • This is likely to see further downwards pressure on the yen and strong gains in Japanese shares.
  • It is also positive for the global economy as Japan will likely no longer be a drag on global growth going forward.
  • While Japanese monetary reflation adds to upwards pressure on the Australian dollar, a stronger Japan will be positive for Australia overall as it remains our second biggest export market.
  • Platinum International Fund has significant exposure to the Japanese share market.

Introduction

The announcement that the Bank of Japan (BoJ) is raising its inflation target to 2% and adopting open-ended quantitative easing is very positive.

Options for further fiscal stimulus in Japan are severely limited
by an already world beating budget deficit and public debt levels. Currently, the budget deficit is running around 10% of gross domestic product (GDP) and net public debt is around 135% of GDP compared to 73% in Europe and 84% in the US. Half-hearted monetary stimulus from the BoJ has played a major role in driving the deflationary malaise the Japanese economy has been in for the past two decades. So, apart from structural reform, it is really all up to monetary policy in Japan to pull the economy out of its long-term malaise.

The BoJ’s move reflects ongoing pressure from the new Japanese Government under Prime Minister (PM) Abe, which received a resounding mandate to reflate the economy at last December’s election. This is now resulting in aggressive action from the BoJ and highlights that Japanese economic policy is undergoing a dramatic turn for the better. Key to this change is PM Abe’s comment that the Japanese economy is not going to change “unless we display a firm commitment to escape deflation.”

While some quibble that the pressure from the new government has violated the BoJ’s independence I view this as entirely appropriate. Central bank independence should be conditional on the central bank achieving stable prices and thereby contributing to economic growth and full employment. However, the BoJ has failed in this regard overseeing years of chronic price deflation. As such, it is entirely appropriate that the Japanese Government intervene to refocus the BoJ on achieving an inflation objective.

More to do

The big news from the BoJ was its adoption of an official ‘target’ of 2% inflation agreed with the government. This is a far more substantive commitment than its previous ‘goal’ of 1% inflation.

Having boosted its monthly asset purchase program (basically buying government bonds and other assets using printed money) for 2013 to levels that matched the US Federal Reserve at its December meeting, it also announced the program would become open ended starting in 2014 with ¥13 trillion in asset purchases a month.

On the downside though, with no increase in the size of its 2013 program and the 2014 program focused on short-term bills and likely to be diluted by redemptions, the BoJ will probably still need to do more if it is to achieve its 2% inflation target.

However, the move by the BoJ should be seen as another step along the way to much more aggressive policy reflation. The first step was the big expansion of its quantitative easing program at its December meeting. This has now been followed by the adoption of a firm 2% inflation target. Further easing is likely once a new more dovish BoJ governor takes over in April and finds that he has little choice but to further ramp up quantitative easing if the agreed inflation target is to be met.

Global implications

The adoption of aggressive monetary reflation in Japan aimed at exiting deflation has a number of mostly positive implications globally:

  • TheJapanese yen is likely to fall another 10-20%,after the current short-term correction runs its course. This would take it to around ¥105 against the US dollar and to around ¥110 against the Australin dollar ( just surpassing its 2007 high of ¥107.8). Such a fall in the yen will be necessary if Japan is to achieve its 2% inflation target in the next few years and this in turn means that Japan will need to continue its open-ended quantitative easing for quite some time.
  •  Japanese shares are likely to perform well. A 30% or so gain is feasible this year. As can be seen in the next chart the relationship between value of the yen and the Japanese share market has been inverse over the last ten years, so a weaker yen will provide a big boost to Japanese shares. This largely occurs because a weaker yen provides a huge boost to Japanese exporters.

Japan Yen and sharemarket

  • A strongerJapanese economy helped by a weaker yen and an end to deflationary expectations.
  • Japan will no longer be a drag on global economic growth.
  • Easier monetary policies in Japan will add to ultra easy global monetary conditions.
  • Yen weakness will put more pressure on competitor countries, notably Korea and Taiwan, which may in turn put more pressure on their central banks to further ease policy too.
  • Aggressive easing from the BoJ adds further fuel to the global carry trade of borrowing cheap in Japan and investing in higher yielding currencies like the Australian dollar.While the immediate reaction to the BoJ’s announcement has been for Japanese shares to fall a bit and the yen to rise this looks like a classic example of short-term profit taking after the strong moves in both markets over the past few months. As the pace of BoJ easing continues and probably steps up the rising trend in Japanese shares and falling trend in the yen will likely resume.

Concluding comments

Japan takes 19% of Australia’s exports and is our second largest trading partner, so notwithstanding the risk of more upwards pressure on the Australian dollar, an exit from deflation and stronger growth in Japan will be positive news for Australia.

This year has already seen a number of positive developments for the global economy, including: the avoidance of the fiscal cliff in the US; indications that the US debt ceiling will be extended; the relaxation of the Basel bank liquidity requirements; and solid data releases from the US and China. Aggressive Japanese policy reflation just adds to this list. As such it’s little wonder that share markets have started the year on a strong note.

Investors in Platinum International Fund have significant exposure to the Japanese share market and are therefore potential beneficiaries of this course of action from the Bank of Japan.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Consumers can expect double digit percentage increases in their Life Insurance and Income Protection premiums over the next few years.

Insurance company TAL recently said in a statement to the media that the last few years has seen a much higher incidence of claims which has put severe pressure on insurance company profitability.  This can be seen in the charts below which were sourced from actuaries Rice Warner.

Insurance Premiums likely to rise

It was also revealed recently that the Media Super fund had increased insurance premiums by 45%.

Life Insurance and Income Protection is a highly competitive industry and we recommend that given the likelihood of premium increases, consumers would be well advised to seek help from an insurance specialist (offered by GEM Capital).  An insurance specialist can access insurance policies from many different insurance companies to obtain the best possible outcome for each individual.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

 

Monday, 11 February 2013 04:08

Investing in Bonds - the Safety Trap

Following the Global Financial Crisis many investors have fled share markets for the safety of Government Bonds and now safety has never been more expensive, or dangerous.

This can be seen in fund flow figures that show (blue bars) that investors have withdrawn money from share markets since 2008 and heavily invested into bond funds since that time.

Bond Fund Flows

In Australia the 10 Year Government Bond yields are around half of what they were before the GFC, as is the case in the US.  The chart below shows the income yield for 10 year Australian Government Bonds.  The key point here is that there is an inverse relationship between bond yields and bond prices, in that as yields fall, bond prices rise.  Conversely as bond yields rise, bond prices fall.

10 Year Govt Bond rate

In other words, as interest rates on Government Bonds rise, investors in those bonds stand to lose capital.

How much do interest rates have to rise before investors start losing money?  The table below is sourced from the Wall Street Journal and shows that investors in US 10 year Government Bonds (yield at the end of 2012 was 1.84%) would receive a negative return this year if the yield rose to 2.23%.

BF-AE255_BONDFU_G_20130125155710

And just how much could investors lose long term interest rates rise on Government Bonds?  The chart below calculates the impact on bond prices of rising rates in various scenarios.  The dark blue bar shows the value of a bond at current interest rates.  The mid blue shows the value of the bond should rates rise by 2% and the lightest blue shows the value of the bond should rates rise by 4%.

Bond Loss

The message is clear - investing in bonds right now has never been more dangerous and now is the time for investors to review these investments.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

 

There are many ways of measuring value in the share market, but today we will concentrate on two.

1. Price Earnings Ratio

The Price Earnings ratio (PE) measures the share price divided by the earnings of a company.  If Company A had a share price of $1-00 and had earnings per share of $0-10, then the PE multiple would be 10.  If the share price however doubled to $2-00 while the earnings remained the same, then the PE multiple would be 20.

There is no hard and fast rule about PE ratios, but clearly the higher the PE ratio, the more expensive the company.  Of course a company that is growing its earnings quickly may look expensive today but as earnings grow the PE multiple reduces assuming the share price remains unchanged.  For example Company A with a share price of $1-00 and earnings of $0-10 per share, doubles its earnings to $0-20 per share now has a PE multiple of 5.

Below is  a chart showing the forecast PE multiples for the Australian share market as at today and compares the ratio historically.

Forward PE ratios

You can see that the forecast PE ratios are at the low end of where they have been since the 1980's, which implies that based on this measure, the Australian share market is not expensive.

2. Dividend Yield

The dividend yield is simply a percentage of income that is paid to investors from a share in a company.  It is calculated by dividing the dividend paid by the share price x 100.  For example Telstra pays a 28 cent dividend and assuming a share price of $4.50 represents a dividend yield of 6.22% (0.28/4.50 X 100).  When the Telstra share price was around $3 it was still paying a dividend of 28 cents per share, which equated to a dividend yield of 9.33%.  This does not include the benefit of imputation which is discussed elsewhere.  A simple way of looking initially at dividend yield is that the higher the yield the better the value.

Investors need to determine whether a dividend is sustainable by looking at what percentage of company profits is paid out as a dividend as well as the sustainability of profit levels.  For example a company that pays out 90% of its profits as a dividend may not be able to sustain its dividend, particularly if profit falls, versus a company paying out 70% of its profits as a dividend.

Dividend alone is not a determinant of value as many companies reinvest heavily back into their business rather than pay higher dividends to investors.  That said when considered across an entire market, dividend yield provides some clue as to whether a market is cheap or expensive (ie a higher dividend yield implies the share price is cheaper, while a lower dividend yield across a market implies share prices are more expensive)

Here is a chart showing the dividend yield of the Australian share market as well as its history.

Dividend Yields

Australian dividend yields are materially higher than their global counterparts (measured as MSCI World in red).  You would also notice that Australian dividend yields are relatively high compared to where they have been over the past 25 years, which implies that the Australian share market is relatively inexpensive.

We caution investors in attempting to value shares using only one method as there are many other aspects that should be considered.  However on two of the more commonly used valuation methods, the Australian share market appears attractively priced for investors.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

It is almost universally accepted that in the Western world we are likely to see a future that features lower economic growth than in previous decades.

Most people automatically draw the conclusion that low GDP growth equals low share market returns.  This article will show you that there is virtually no relationship between GDP growth and share market returns.

The first chart shows the share market returns of developed countries on the vertical axis and at the same time shows GDP growth on the horizontal axis.  You can see that the country with the highest GDP growth is Japan and yet that country had one of the lower share market returns over the period (of 100 years).

Conversely Australia had one of the strong returns from the share market, but was among the lowest GDP growth countries.

We now take a look at developing countries to see if the same holds true for them.

Again we see that the country with the highest share market returns had one of the lowest GDP growth rates.

Ah I hear you say, but none of these charts consider China, which most would highlight as the beacon of economic growth.

The following chart shows Chinese GDP from 2000 to 2012 (measured in $US).  It shows an economy that has grown four fold over that time.

Now lets take a look at the Chinese share market over the same period.

This chart shows that the Chinese share market has barely grown since 2000, and yet the economy (GDP) has grown four fold.

To finish on China we now compare how investors fared in 2012 by investing in Greek shares versus Chinese shares.   The Greek economy is in the middle of a depression while the Chinese economy grew around 7%.  We rest our case.

 

Bottom line - GDP has virtually no relationship to share market returns.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

 

 

 

 

We recently celebrated the 5th anniversary of the high point for the Australian share market that occurred in November 2007.  The value of the market remains 30-40% below this peak.

History tends to repeat itself so lets compare the last 5 years to other large market downturns in history.

The chart below shows the value of the Australian share market many years after a large drop such as the 2008 drop.  The blue line is the journey investors have witnessed over the last 5 years and plots that journey against other times in history when the market fell heavily.

The question on most investors lips is when will the market recover to new highs?

The chart above shows that it took around 4 years for the market to reach new highs after the 1980 downturn (purple line) and around 5 years after the great 1929 crash (green line). This makes the current downturn one of the most severe in history.

The 1973 and 1987 downturns took 6 - 7 years to recover the previous high.  From the current level the Australian share market would need to rise by around 50% to move back to the previous high.

Bear markets do end and can move quickly when they do.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.


Thursday, 29 November 2012 01:33

The Conflict of Industry Super Funds

Illustration: Rocco Fazzari.

We are concerned about the conflict of interest within the Industry Superannuation Fund movement which has close ties to the union movement.

Below is an article we have been authorised to reproduce from the Intelligent Investor.

"As many of you will be aware we are currently doing the Intelligent Investor national tour. Returning from Brisbane on the plane yesterday, I grabbed the Australian Financial Review and came across the page two article 'Union super leaders see assets sale conflict ‘.

Now I have to admit to having a bit of a gripe when it comes to industry super funds – the marketing of their outperformance over retail super funds. Not that I am wanting to defend the poor performance of many retail funds but:

1. I don’t think it is an apples and apples comparison and, in any event, the timeframes covered are generally too short to be reliable. Industry funds make a big deal of the fact the asset allocations (between industry and retail) are different. This is the very reason why the comparison is inappropriate. Industry funds may well outperform their retail equivalents but the data that proves it has not been put in front of us yet.

2. More specifically, the performance of industry super funds in the post GFC period benefited from what investment bankers like to refer to as ‘mark to guess’ valuations.

What do I mean by ‘mark to guess’?

Accountants use two broad means of reporting assets on a balance sheet – historical cost (the original price paid for an asset) and mark to market (the current market value). Funds will generally use mark to market to calculate both their assets and their performance for a year.

What is often forgotten is that ‘Mark to Market (or MTM)’ itself consists of two broad subcategories:

1. Actual mark to market – where you look at the price of a security on a public market (for instance the ASX) and use that price. So if I was marking BHP shares to market today I would use $34.

2. Mark to guess – where someone sits at their desk and comes up with a number. Now some ‘mark to guess’ valuations are very accurate (typically where the asset has a strong relationship to a listed security) but others are less so. For instance, if you’ve had a property valuation done, one of the first things they ask is whether it is a ‘stamp duty valuation’ (ie low) or ‘sale/bank valuation’ (ie high). Enron’s energy traders were able to make massive profits (and bonuses) by doing their own mark to guess valuations of the positions they had on their books (nice work if you can get it). So, if BHP were to be de-listed, a mark to guess valuation might put it’s price anywhere between $30 and $40, depending on what the purpose of the valuation was.

Now, in the period post GFC, many assets benefited from the use of ‘mark to guess’. The ‘stock or bond market is not functioning properly’ was a popular excuse for why the market price of an asset wasn’t an appropriate value. Unlisted assets (esp property and infrastructure) were beneficiaries of this phenomena. They were valued more highly than listed assets (similar property and infrastructure) simply because the unlisted asset owners hadn’t been silly enough to have their shares quoted on a stock exchange.

What do industry super funds tend to hold more of than retail funds? Unlisted assets. So their performance benefited from the ‘mark to guess’ phenomena (and it has been a drag in the years since, as the gap between listed and unlisted has closed back up).

The ads were flying thick and fast, trumpeting their GFC performance, but the real message should have been ‘how lucky was that?’ Industry funds may well be better performers than retail funds but being able to use ‘mark to guess’ is not the factor that proves it.

So that’s my gripe explained. Back to the AFR article. In this case some of those with dual hats (union official/industry super board member) have come out and criticized proposals to sell various logistics, energy and water assets.

Whether this is a good idea or not is not the point. What this case highlights is the huge conflict of interest involved in having union officials also sitting on industry super fund boards.  A super fund’s focus should be (and is required to be) the retirement savings of fund members – those working, those approaching retirement and those who have retired. The financial interests of industry super fund members may well be served by having the Government doing a poor job of privatizing these assets. Every dollar the Government misses out on is a dollar that can be made by the buyers of the assets (which could include industry super funds).

Clearly, employees of these businesses (and their union representatives) have a completely different perspective. Again, their interests may clash directly with the financial interests of potential buyers. A cheap (or botched) sale by the Government may be great for the buyer, but not so good for the employees (it may also not be in the national interest – but that’s another point again).

Like a lawyer trying to act as both prosecution and defence, it’s a bridge too far. Sitting on the board of an industry fund, or acting as a union official, are both reasonably lucrative gigs. No-one’s going to starve choosing one or the other.

Of course, there may also be retail fund board members with similar conflicts. In either case I would say, in the interests of members, it’s time to pick a side.

Source:  Intelligent Investor Blog Site (http://blog.walnutreport.com.au/)