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Organised criminals

Organised criminals eye super

The Australian Crime Commission believes Stronger Super reforms implemented from 2013 have reduced illegal early release schemes run through self-managed super funds (SMSFs).

In the latest report, Organised Crime in Australia 2015, the commission explains SMSFs have traditionally been more attractive to exploitation than prudentially regulated funds. The report said because SMSFs generally hold the largest balance of superannuation assets it provides an opportunity for low-volume, high-impact fraud on individuals’ funds “that may be managed by financially inexperienced individuals.”

The commission said allowing the Australian Tax Office (ATO) to address wrongdoing and non-compliance by SMSF trustees; capturing rollovers to SMSFs as a designated service under the Anti-Money Laundering and Counter Terrorism Financing Act 2006; and established a register of SMSF auditors have all helped to reduce organised crime in the space.

Australian Crime Commission chief executive, Chris Dawson, said organised crime affects everyone.

“Whether it’s the ripple effect of illicit drug use on families and the community, the significant financial loss from investment scams or having your identity stolen by cyber-criminals — everyone is at risk,” Dawson said.

“But the fight against organised crime, we must recognise and build on the critical role the private sector, industry and the public play in this matter.”

As Australia’s superannuation pool is in excess of $2 trillion and expanding exponentially, the commission said infiltration of the system by organised crime — and associated losses through fraud — would result in more people relying on the social security system in their retirement.

[via Financial Standard]

Bond investors

Bond investors warned not to overlook

While most fixed income investors recognise the need to take a more flexible approach to finding return in a threatening interest rate environment, T. Rowe Price head of international fixed income Arif Husain believes that most investors are overlooking fixed income’s role in protecting portfolios from equity market shocks.

With record low interest rates and the 30-year bond market bull rally coming to a close, returns in fixed income markets are becoming increasingly hard to find. That is why many fund managers have successfully marketed so-called unconstrained bond funds which do away with traditional benchmarks and are instead free to use any market, any security, and any means to find value.

But while using currency markets, negative duration, derivatives and so forth to achieve higher returns is all very well, it only deals with one part of the fixed income story.

Speaking to Financial Standard, Husain said: “The unconstrained world is a garden of both good and evil. The majority of folk out there have taken that broader flexibility and used it to try and find return. To borrow an American expression, they go on offense.”

“We’re using all that extra flexibility to try and find new ways to go on defence.”

Husain wants his bond fund, the T. Rowe Price Dynamic Global Bond Fund, to behave like bond funds used to behave – to be a store of value, or even post positive returns when equity markets fall.

“We want to provide a bit more liquidity, a bit more simplicity and a bit more transparency. We don’t want to use all the funky derivative structures that are out there,” Husain added.

“I used to be a derivatives trader so I know there’s nothing wrong with them, but I don’t think every client wants them in their portfolio.”

What Husain and his team look for when buying bond markets is three characteristics: low volatility; little probability of what the bond expert calls ‘jump risk’, or a regime change in volatility; and a relatively steep yield curve.

Regionally that approach has seen the fund take a relatively negative view on the US, where Husain believes a rate hike will come sooner than most investors expect; a very positive view in Asia, especially in lower volatility countries like South Korea; and a negative view on Europe, where the outcome from Greece’s debt crisis remains uncertain.

The strategy is unique in that it was built for the Australian market. Unusually, it launched here first (in February 2014) and was then released to the US market later. It is only just being made available to European investors now.

The fund has not had its defensive characteristics fully tested yet as the equity market has performed well in the 18 months it has been running but Husain did note its rolling correlation with equities over that period has been close to zero, if not a little bit negative.

Further, in short, sharp periods where the equity market has faced drawdowns, the fund has done exactly what it’s aimed to do – either staying stable or posting positive returns.

“The coming months up until and a little bit after the Fed rate hike are going to be a real testing ground for these types of strategies. When we see negative returns across traditional bond funds, you’ll want to see these strategies at least at zero and hopefully positive,” Husain concluded.

[via Financial Standard]

Property bubble debate

Property bubble debate heats up

Public officials’ concerns of a property bubble in Sydney and Melbourne are spreading uncertainty amongst those thinking about increasing their exposure, but are not dissuading Chinese investors.

Treasury secretary John Fraser was the last public official to warn about fast rising house prices: “When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney,” he told a Senate committee, and added that this was “certainly the case in higher priced areas in Melbourne.”

Fraser joined the Australian Prudential Regulation Authority (APRA), which recently reviewed bank lending standards for property investors and last December warned lenders not to increase investor loans by more than 10% a year.

But the precautions are still a long way from the measures taken by the New Zealand government, which has put in place severe measures to cool house prices in Auckland, including a 33% tax on properties bought or sold in the city within two years.

Speaking about APRA’s measures to tighten lending, Property Investment Professionals of Australia (PIPA) chief executive Ben Kingsley said: “We recognise that marketplaces like Sydney and Melbourne are posing concerns, as new and existing investors are potentially speculating in trying to capitalise on boom conditions.

“However, there are plenty of other property markets in Australia and these measures are an unfair imposition on investors who want to invest in other parts of our country.”

At the same time, a Credit Suisse report highlighted the difficulties of cooling down the Australian property market, as Chinese buyers are expected to invest as much as $60 billion into the sector until 2020.

Only during the last financial year, Chinese citizens bought close to $9 billion worth of Australian property, 60% more than the previous year.

They were buying mostly in Sydney and Melbourne, where Chinese demand accounted for 23% and 20% of the new supply, the report said.

Lombard Street Research attributed Chinese interest in the Australian market to the falling Australian dollar: “The currency angle is often underestimated.”

The local currency has depreciated 20% relative to the Renminbi over the last year and almost 50% since the resources cycle peaked in 2011.

This “has rendered Australian real assets increasingly attractive to Chinese yield.”

[via Financial Standard]