EU paints bleak picture for PIGs

May 14, 2011

The European Union has warned the debt loads of Greece, Ireland and Portugal will be much bigger than previously forecast, adding to fears that international bailouts are failing to solve the region’s crisis.

However, the bloc’s biannual economic forecasts paints a more optimistic picture of the economy of Spain - commonly seen as the next-weakest state in the euro zone - which supports the currency union’s hope that the debt crisis won’t draw in any other countries.

For the three countries that have already received or are about to get international help, debt is expected to remain a problem for some time.

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The higher debt forecasts, combined with larger budget deficits and weak growth, boost the complaints of many economist that the bailouts are taking too hard a toll on economic activity and are not solving the debt problem.

Although Greece on Friday reported economic growth in the first quarter, its longer-term prospects remain grim, experts say.

Greece’s debt will reach 157.7 per cent of economic output this year and jump to 166.1 per cent in 2012, the European Commission, the EU’s executive, said in its forecast. That’s up from 150.2 per cent and 156 per cent respectively it predicted last autumn.

While expected, the significantly worse forecasts will likely spice up discussions among euro-zone governments on whether Greece will need a second bailout, after it was already granted  110 billion euros in rescue loans a year ago.

It will also add to calls from many economists that the country needs to restructure its debts - forcing private creditors like banks and investment funds to accept lower or lower repayments on the bonds they hold.

The situation does not look much better in Ireland, the second country to get bailed out last year. Ireland’s debt is expected to hit 112 per cent of gross domestic product this year before rising to 117.9 per cent in 2012.

That’s up from earlier forecasts of 107 per cent and 114.3 per cent. Its economy is predicted to grow a meagerly 0.6 per cent this year, while it will likely run a deficit of 10.5 per cent, up from 10.3 per cent forecast in the autumn.

The most severe revisions were made for Portugal, which at the time of the last forecast was still hoping to avoid a bailout.

However, after last year’s deficit turned out much bigger than expected and the government was defeated over austerity measures, Lisbon asked for help last month and finance ministers are expected to sign off on a  78 billion euro rescue package for the country on Monday.

Portugal’s debt will likely stand at 101.7 per cent of GDP in 2011 and increase to 107.4 per cent next year, the Commission said. That’s up from 88.8 per cent and 92.4 per cent previously.

The Portuguese economy will likely contract 4 per cent over the next two year, in line with what international exports examining the country’s books to prepare the bailout predicted last week. The deficits projections are also based on the targets set out in Portugal’s bailout program, 5.9 per cent this year and 4.5 per cent in 2012.

The bleak forecasts for the euro zone’s three weakest countries contrast with strong economic growth in the currency union’s large countries such as Germany and France, where GDP growth was revised up.

Even for Spain, the country that most economists say would seriously test the eurozone’s capacity to help its struggling members, there was some good news in Friday’s forecasts. Its debt load will reach 68.1 per cent this year and grow to 71 per  cent in 2012. That’s better than the 69.7 per cents and 73 per cent predicted last autumn.

AP

Read more: http://www.smh.com.au/business/world-business/eu-paints-bleak-picture-for-pigs-20110514-1emz8.html#ixzz1MTERkRVB

Performance fees catch investors

John Collett

May 7, 2011

Making sense of fee structures can be like jumping through hoops.

Deciphering complex fee structures can be like jumping through hoops, writes John Collett.

A report by investment researcher Morningstar shows some fund managers have performance-fee structures so complex, they are likely to bamboozle investors, leaving them unable to compare fees and, worse, paying more than if they had flat percentage fees instead.

''There is no standard way to present the fees and it makes it difficult to make like-for-like comparisons,'' says Tom Whitelaw, a senior research analyst at Morningstar and lead author of the report.

But fund managers argue that performance fees better align the interests of fund managers and investors.

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The Morningstar report's ''Best practices in managed fund performance fees'' shows funds with performance fees also charge a flat percentage ''base'' fee that is usually no lower than the flat fees commonly charged by other managers. In other words, some funds could be said to be double-dipping on their fee take.

The typical performance fee for an Australian shares fund is between 15 per cent and 30 per cent of the fund's returns in excess of a benchmark.

Funds investing in Australian shares will typically have the sharemarket return - measured against the performance of the biggest 200 or 300 companies - as their benchmark.

Importantly, they will also have a base fee - usually just under 1 per cent, though some are much lower.

Morningstar modelled returns over the past 10 years. It used the actual performance of Australian shares during that period and the average return of the three best-performing Australian funds. The modelling assumed a performance fee of 20 per cent on returns above the fund manager's benchmark on an initial investment of $100,000.

The modelling found that over the decade, investors would pay total fees of 3.82 per cent on the most expensive fee structure and 0.97 per cent on the cheapest - a difference of $65,763 between the two funds.

Bar too low

The Morningstar report on 18 Australian share funds with performance fees found several instances where the way the fees were structured could work to the disadvantage of investors.

The single biggest problem identified in the report was a low benchmark against which the performance was measured and the performance fee paid.

One of the share funds with performance fees covered in the report had a benchmark of zero.

In other words, the manager took 20 per cent of returns above zero. The fund also had the highest base fee - 1.09 per cent - of the 18 funds.

''We do not consider the absolute benchmark approach to be best practice,'' Morningstar says. ''It is not [in] investors' best interests to reward a fund manager that can take advantage of a rising market and charge performance fees irrespective of whether or not the fund manager outperforms an appropriate market index.''

The report did not identify the fund but Weekend Money has ascertained that the fund manager referred to is the Sydney boutique fund manager PM Capital, which was funded by Paul Moore in 1998.

Its Australian Opportunities Fund has a benchmark of zero and a base fee of 1.09 per cent.

Moore says the fee structure is different to other funds because it manages money differently. Most managers have portfolios that do not differ much from the composition of the sharemarket, ensuring that their returns are similar to the market.

''We are investors, not index managers,'' Moore says.

The good performance of his fund justifies the fees, he says. Since its inception in 2000, it has returned 230 per cent, after fees, compared with the return on Australian shares of 145 per cent during the same period. ''Investors will make up their own minds whether the fee structure is fair and reasonable and, if they think it is not, they will take their money away,'' he says.

The PM Capital Australian Opportunities Fund has a ''high-water mark'', which means any earlier losses have to be recovered before the performance fee can be charged, whereas two of the 18 funds do not have high-water marks; meaning they do not have to first recover money lost before they can charge a performance fee.

If the performance is measured every 12 months, for example, managers without a high-water mark could underperform the benchmark in one year - making big losses for investors - while taking performance fees the next year.

''A high-water mark is necessary in any performance-fee structure,'' Morningstar says. ''We believe that performance-fee structures that operate without a high-water mark act against the best interests of investors,'' the researcher says.

Regulator

Morningstar says the lack of consistency in performance-fee structures stems from the lack of any clear regulatory guidelines on how the complex components should be displayed.

This makes it much more difficult for investors to compare funds.

The fee structures are so complex, Morningstar found, that even a ''number of fund managers also appear not to fully understand all the implications of their performance-fee structures''.

To protect themselves against being charged too much, investors need to make sure that any performance fee is benchmarked to an appropriate index, Morningstar says. They need to look for a low base fee because it is a constant cost, regardless of performance.

Well-structured performance fees should include a ''hurdle'' that the fund has to outperform in addition to returns of the Australian sharemarket before a performance fee is paid. ''Ensure that the fund manager has to beat a reasonable hurdle before starting to accumulate performance fees,'' Morningstar says.

Tough line balances the ledger

Regulators in the US have taken a tough line on performance fees.

If a fund manager in the US wants to charge a performance fee, it must be a "fulcrum" fee.

If the fund outperforms its benchmark, the investor pays the fund manager the agreed performance fee.

But if the fund underperforms the benchmark, the same calculation occurs in reverse and the management fee is then reduced to account for the underperformance.

An analyst at Morningstar, Tom Whitelaw, says this is the fairest type of performance fee.

Another advantage of a fulcrum fee for investors is that it is simple to understand and makes redundant the "high-water marks", "hurdles" and "resets" of performance-fee structures of Australian funds.

Morningstar says it appears US fund managers do not have much confidence in being able to consistently outperform investment markets because, after the introduction of the regulations in the US that make it mandatory to use fulcrum fees, the number of funds charging performance fees dropped dramatically.

Whitelaw says there needs to be a standard way performance fees are disclosed in Australia so investors can easily compare the different fee structures.

 http://www.smh.com.au/money/investing/performance-fees-catch-investors-20110506-1ecgf.html#ixzz1MTDQN8u6

Make the most of good fortune

Lissa Christopher

May 4, 2011

If your numbers come up - fingers crossed - the first thing you should do is...nothing.

An unexpected windfall can transform your life providing you invest the money well. Lissa Christopher gets expert advice on what you should do with it.

If a significant financial windfall ever comes your way - perhaps through an inheritance, a work-related bonus or even a lottery win - the first thing a good adviser should tell you is to do nothing.

Put the money in a high-interest savings account, a term deposit or your mortgage off-set account for a month and just think, says a co-director of WLM Financial Services, Laura Menschik.

''Sit on it, dream about it and focus on what you can do, what you should do and what you want to do,'' she says. ''And possibly seek advice, especially if it's a substantial amount of money.''

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A chartered accountant and financial planner with Quantum Financial Services, Tim Mackay, agrees it's important to cool off and manage your emotions in the face of a windfall.

Research has shown, he says, that a change in wealth is stressful and while people tend to protect money they've earned, they can be spendthrift with money for nothing - particularly with an inheritance.

''Don't let anyone rush you into making decisions,'' he says. ''Take your time and allow any urges to splurge on a bigger car or house to pass.''

Money has approached four financial advisers, including Menschik and Mackay, to ask what they'd suggest for people in the 25-to-45 age bracket, the 45-to-65 bracket and those older than 65 in the event of a windfall of between $50,000 and $100,000.

While most have provided advice specific to people's life stages, the director of Brocktons Independent Advisory, Daniel Brammall, stresses there is no one right way for any demographic. ''There's only a right or wrong way for you,'' he says.

''Making smart decisions with your money is done by thinking about your life situation and what you want to achieve in the future. Having a financial road map like this provides a framework to guide your money decisions, lifting you above the noise of the markets and the media.''

Mackay, too, says, ''There is no one-size-fits-all advice [but] your key goal should be to use the money to build yourself a more secure financial future, not to change your material surroundings as quickly as you can.'' While Money expected the advisers to launch quickly into talk about debt-reduction and investment portfolios, one of the first things most mentioned, targeted to all age groups, was the importance of spending the money - just not all of it.

''Take less than 5 per cent and treat yourself and your family,'' Mackay says.

''Reward yourself but be sensible with it because [money like that] may never come again,'' Menschik says. She suggests being as frugal as going out for a splash-up dinner with the interest you earn on the principal during your month of cogitation.

The manager of advice development at ipac, John Dani, says it's all about balancing buying items, buying experiences and putting the money towards improving your future.

''Buying experiences is probably better than buying things,'' he says. ''You can create enduring memories and bring families closer together. It doesn't have to be extravagant.

''There's nothing wrong with improving your lifestyle now by buying things or experiences but people fall short with also applying a windfall towards their future.''

Keeping in mind that what you should do largely depends on your personal circumstances, here are some guidelines and ideas for each age group.

AGE 25 TO 45

Most people in this age bracket are likely to have some level of non-deductible debt, Menschik says, and paying it down with a financial windfall, starting with the one attracting the highest interest rate - probably the credit card - should be considered first.

Next, the mortgage. ''Paying down the mortgage generally makes more sense than investing,'' Mackay says. ''If you have a 7.8 per cent mortgage rate and earn $40,000 to $80,000 in income, then you would need to earn more than 11.4 per cent on investments, before tax, for investing to make more sense than mortgage reduction,'' he says.

''And you would need to earn 12.7 per cent if you earn $80,000 to $180,000. One of the best moves you can make is to own your home outright as soon as possible.''

If you are in good financial shape, you could also consider starting an investment portfolio (be sure to invest in the name of the spouse who pays the least tax). You could also undertake further education, put the money aside for your children's education or donate to a charity.

But don't stop reading yet - some of the advice for the older folk may also apply to you.

AGE 45 TO 65

Superannuation may be the best place for a windfall in this bracket.

''If you're approaching retirement, you might want to look at topping up your super by making a non-concessional contribution [which means] you don't get a tax deduction but it's not taxed when it goes into the fund,'' Menschik says.

''If you're self-employed, you could use it towards your concessional super contributions.'' A ''dent in the mortgage'' is still a good idea at this time and so is starting up a wealth-accumulation portfolio, she says.

Dani says those at the younger end of the spectrum face what's called greater ''legislative risk'' with super.

Money in super is, essentially, inaccessible until you reach preservation age and changes to super legislation may occur in the years to come, including the preservation age being raised.

While you should not ignore super - Dani says ''it remains the most tax-effective form of retirement savings'' - if you're in your early to mid 40s, ''you may want to invest some of the windfall for the longer term in a non-super environment … for the peace of mind and accessibility.''

AGE 65+

People in this age group are often looking for ways to generate sufficient income to maintain their lifestyle, Dani says. They also need to know how any increase in income would affect any Centrelink benefits they're receiving.

''They may wish to consider adding money to super to create an allocated pension, term deposits or the use of specific investment products designed to generate reliable income,'' Dani says.

In this age bracket, it may pay to be conservative with your choices.

If you seek advice on investment options and products, Brammall recommends finding an independent, flat-fee-for-service financial adviser.

''If you see a non-independent adviser, what you're really getting is a sales pitch masquerading as advice,'' he says. He also recommends being wary of complexity and being beholden to an adviser. ''Don't become a slave to your finances,'' he says. This applies to all age groups.

Menschik says she has seen people in this group, mostly women, who receive a lump sum when their spouse dies and hand it out to their adult children. ''Don't give it away because you are going to need it later on,'' she warns.

Inheritance makes the impossible possible

Six years ago, when Anna Beardmore's much-loved grandfather died, he left her $65,000. She was driving a small, old car at the time and decided to buy a new, bigger one with some of the money.

''I'd always wanted one of these [Subaru] Foresters,'' says the 44-year-old mother of two. ''I used to go away a lot, camping and things like that, and it was just a lot more practical. I knew I'd use it a lot.''

Beardmore (pictured) paid $20,000 towards the car, put the rest in a high-interest savings account and took out a personal loan to pay off the remainder owing on the car.

''I just couldn't bear spending it all at once on the car,'' she says.

Beardmore has since used bits of the remaining principal to pay for ''many things'', including two periods of unpaid maternity leave, some of the peripheral costs of setting up a mortgage and buying a house and a trip overseas.

She still drives her ''sensible, practical'' Subaru but now it's more of a family wagon than a camping vehicle.

And she still has some of her inheritance left. Two-thirds sits against the redraw facility on her mortgage and the rest remains in that high-interest savings account.

''Every time I need to use [the money], I thank my grandfather, wherever he is, because there is so much I've been able to do that I couldn't have done without it,'' Beardmore says.

10 golden rules for prosperity

• Do nothing. Park your money, calm down, think

• Remember, there's not one right thing to do. It's about your circumstances and values.

• Reward yourself with a sensible portion of the money. Anything from a splash-out dinner to an overseas trip.

• Pay off debts. Reduce non-deductible borrowings, such as credit cards, personal loans and home loans.

• Consider superannuation. Would you benefit from topping up your retirement nest egg?

• Consider an investment portfolio. However, seek out sound, impartial advice if you decide to take this path.

• Mind the consequences. Remember, a windfall may affect Centrelink benefits.

• Consider charity. It's good to give back and it feels good.

• Think about education. Further education could provide worthwhile emotional and financial returns. Or put the money away for your children's education.

• Seek advice. Sound, independent financial advice is what you want. Don't be seduced by complicated or trendy products. Establish a financial map that's right for you and your goals.

 http://www.smh.com.au/money/investing/make-the-most-of-good-fortune-20110503-1e5gs.html#ixzz1MT8uQKEH