“Dear Investor, Please Shut Up”

–Australian investors can’t be trusted to know what’s in their retirement funds. That seems to be the conclusion of the funds industry. It’s reacting to pressure from ASIC for super funds to disclose what assets they invest in. The mere suggestion for more transparency is really about accountability. And that must scare the dickens out of some people.

–First, let’s not underestimate what’s going on in Europe. It’s like a financial super volcano that’s been spouting off steam for the last 18 months. Fiscal deficits at the periphery of the European Union were the problem last year. Now the problem is whether the whole European project can even survive.

–Yes, yes. That probably sounds a bit melodramatic. But super volcanos are serious issues. And more seriously, this is where we’re at in the evolution of the GFC. The solvency of the European project is in doubt. Whatever happens in Europe in the next few months will have tectonic implications here in Australia.

–The chance of an immediate eruption seems to have diminished. The European Central Bank (ECB) re-activated its Securities Market Programme (SMP) last week. The SMP bought nearly $31 billion in 10-year Spanish and Italian government bonds. That brought interest rates down from nearly 6% to around 5% for 10-year Spanish debt.

–But all you have to do is look at the numbers and you’ll see that something in Europe is going to blow. Europe’s currency union could blow. National fiscal policy could blow, if the Eurobond comes into play. And the tempers of millions of Germans and French could blow if Europe collectivises its liabilities.

–The trouble isn’t Greece anymore. Its second bailout of €109 billion was more than covered by the original European Financial Stability Fund (EFSF). That fund was funded up to €750 billion. About €420 billion of that is already committed to Portugal, Ireland, and Greece. That leaves €300 billion. And that used to be a lot of money.

–But it’s not nearly enough to cover the refinancing needs of Italy and Spain. Those two counties require nearly €750 billion in refinancing and new deficit spending in the next two years. And let’s not forget that European banks—stuffed with government bonds—could require as much as €250 billion in order to be adequately capitalised, according to Britain’s Telegraph.

–The EFSF is not equipped to bail out Spain, Italy, and all of Europe’s troubled banks. These deficits are beyond the ability of Europe’s nations to fund by themselves. They must become one borrower, in financial terms, anyway, to lower the cost of borrowing and hit the target.

–Europe has a $13 trillion economy. If you collectivise the debts of the various national governments, they amount to about 87% of GDP. That’s a big number. But it’s not the 90% Rogoff and Reinhart have flagged as the point where debt drags on the economy. And the cumulative fiscal deficits are just 4.4% of GDP, thanks to sounder fiscal policies in Germany.

–Of course that’s all just hocus pocus. The only way to make Italy and Spain’s problems smaller is to express them as a percentage of Europe’s economy. It’s a parlour trick. It’s also the final, logical extension of the idea of a collective Europe.

–We’re not banging on about it because we’re for unemployment, hunger and poverty. We’re banging on about it because the very idea at the heart of socialist democracies—that everyone can live at everyone else’s expense—is literally bankrupt. In Europe, equality now means everyone will get poorer together. Shared sacrifice means private wealth will be confiscated by the State and rationed out until there is nothing left.

–You’d expect that before we get to that point, at least one country is going to pull the pin on the whole project. It’s either that, or drink the Kool-Aid and join in the mass economic suicide. Hmm.

–By the way, all this talk about austerity is garbage. In most cases, politicians are talking about lower rates of growth in debt, not an absolute reduction. They are unserious and unfunny clowns. Most of them are probably regretting they ever ran for office and hoping they have siphoned enough money into their Swiss bank accounts to get away before it all goes cactus.

— In the meantime, wouldn’t you like to know how much exposure Australian banks and investment funds have to European government debt? We’re assured that it’s “not very much”. But the harder you look, the less you actually know!

–This seems to be ASIC’s conclusion, too. “The corporate regulator is pushing superannuation funds and managed investment schemes to publish the securities and debt instruments they invest in, as part of a campaign to improve transparency in the $1.8 trillion funds management industry,” reports Bianca Hartge-Hazelman in Monday’s Australian Financial Review.

–As the law stands now, Aussie funds don’t have to show you, the general public, what they’re investing in at any given moment. Information on specific fund allocations and assets is sometimes available to fund members once a year, in the annual report. And as we’ve discovered, the funds often outsource the active management of your money to asset managers. Those managers don’t give a lot of information about what they’re doing with your money either.

–The reaction of the funds industry to ASIC’s suggestion has been almost comical. “Investment managers warn the task of providing information on underlying holdings of securities would be an administrative nightmare, leading to higher fees for investors, and it could have also have a negative effect on sharemarkets.”

–Translation: “Dear Investor, yes, we can do it. But it’s going to cost you. And it will probably be bad. Go away. Also, please shut up.”

–“We do not see any evidence of investors clamouring for investment holding disclosure,” says Joe Brennan, the chief investment officer of Vanguard Asia Pacific.  He’s probably right. People won’t start asking to know what’s in their funds until their funds report losing money on investments no-one knew they had, like European and American government bonds. By then it will be too late to do anything about it, of course.

–Brennan worries that funds might lose their competitive advantage if forced to tell the public what they’re actually buying with your money. Maybe. But maybe the public would find out that the funds are all thinking and doing pretty much the same thing: buying the same 10 large Aussie blue-chip stocks, government bonds, and anything correlated to China and commodities.

–We’re just speculating here. But if Aussie funds were forced to disclose how they’re investing your money you’d probably find out a simple answer: as lazily and unimaginatively as possible. That’s what they probably don’t want you to find out.

–Disclosure of fund holdings would make fund managers accountable to Australian investors. And that would be the end of a great racket where fund managers don’t have to work to get your money (it’s compulsory) and they don’t have to tell you what they’re doing with it. Not a bad gig, eh? No wonder they’re resisting it.

–Tomorrow, we’ll try and find out if Australian funds are prepared for an era of lower Chinese growth. There’s big trouble brewing in the Chinese market. And if you thought Europe posed a risk to your wealth—it does—wait till you get a load of what could happen in China.


Dan Denning
Markets and Money Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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5 Comments on "“Dear Investor, Please Shut Up”"

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With the union controlled industry funds the givaway on equities is provided in the range of personally electable stocks. Recently on a day when the AUD was going the other way (which might have indicated reverse carry), and markets were stressed, this demarkation line separated those stocks pulled up on the given day that Australia thought it would lead the world markets up even as Asian markets remained stalled. The other factor is the weight of funds in the XXJ (financial services sector) which is particularly peculiar on the world stage but which might not be held as peculiar if… Read more »

Another peculiar product now being offered by super managers is the guaranteed return product. Ah yes, annuities. Ah yes Challenger (CGF) was too hot for James Packer to hold onto but seems just right to the folk at APRA.

Andrew Noble

Long term returns delivered by every major super fund are dismal. Simply focusing on the cost side of managing your superannuation is a better strategy than looking for a ‘performer’. The fund managers have got fat and lazy off the back of the Australian investor. There is new technology emerging in the SMSF space that will make $399/annum SMSF’s a reality within 6 months. If the Euro volcano blows though, it might not matter.


If it is the case that Aussie funds are “investing your money . . as lazily and unimaginatively as possible” then Mainstream Super Fund Managers are basically sleepwalkers.

But what if Fund Managers are being advised by ‘experts’ to buy at interim market tops and sell at the bottom of rallies? With the constant inflow of superannuation contributions from employers, the Funds could appear to grow despite making constant losses.
For this reason, I think it would be good to see when and what is being bought and sold by Mainstream Super Funds (or any Fund for that matter).

“Now the problem is whether the whole European project can even survive” Uh-huh… the fact is that the EU is teetering on the brink of collapse right now. The Euro IS going to fail, the EU IS going down. The EU is a basketcase living on borrowed time with toxic debts and liabilities (around $11T) none of the EU members can afford or repay, full stop ! The London riots are just a symptom of how the economic greed at the top of the pyramid is screwing those at the bottom. The cause isn’t “mysterious” as my local Tassie rag… Read more »
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