Three months into the top job at the corporate watchdog, Greg Medcraft is making some big inroads into cleaning up the opaque world of contracts for difference, exposing the risks associated with exchange traded funds and improving disclosure in the superannuation and managed investments scheme industry.
THREE months into the top job at the corporate watchdog, Greg Medcraft is making some big inroads into cleaning up the opaque world of contracts for difference (CFDs), exposing the risks associated with exchange traded funds (ETFs), and improving disclosure in the superannuation and managed investments scheme industry.
ASIC's announcements over the past few days are part of a move to increase disclosure and transparency in the market..
In the case of CFDs, it released seven benchmarks to improve disclosure and better protect investors from the high-risk nature and complexity of these products, particularly unsophisticated investors.
In recognition of the popularity of ETFs, ASIC has put out a paper outlining the different types of ETFs and risks associated with vanilla ETFs and synthetic ETFs.
And when it comes to super funds, ASIC will ask industry participants to develop best-practice standards that would allow individual investors to see what investments their fund is buying and selling.
It is about time. While ASIC isn't the regulator of super funds, it is responsible for the disclosure aspects of the funds management industry, and that is what it will concentrate on. In the case of superannuation funds there is all too little transparency in what assets the funds invest in, or how risky some of them might be.
For instance, when it comes to cash, some funds that invest in cash-plus and cash- enhanced funds, are investing in things other than cash. Such funds offer better returns than straight cash by investing in shares and property as well as bank bills and fixed-interest securities, but they are much higher risk and some investors don't realise this.
Other funds that offer balanced funds are not always balanced. For instance, MTAA Super was offering a balanced fund that during the GFC had more than 70 per cent of its funds under management investing in illiquid assets. This fund went from the best performer to one of the worst over one, three, five and seven years in the latest Chant West survey.
While some investment managers have whinged that providing more information on what they are investing in will result in more red tape and give away their intellectual property to competitors, the reality is somewhat different. In this fast-paced market, where shares are bought and sold in less than a second, by the time investors get such information it will not impact on their strategies.
Indeed, the Australian Prudential Regulation Authority and the Gillard government should take a leaf out of Medcraft's book and push for more transparency in other areas of superannuation, such as disclosure of remuneration. Right now, super funds do not have to disclose how much directors or senior executives are paid, which is outrageous. Indeed, some funds don't even put out their annual accounts.
SHARES in Leighton Holdings rocketed as much as 8.3 per higher yesterday as investors took its boss, David Stewart, at his word that the worst is over for the company.
Instead of focusing on the $405 million loss, the absence of a final dividend, or the massive losses in most divisions, investors looked at the construction giant's $46 billion work-in-hand and its 2011-12 profit guidance of $600 million to $650 million.
''We are hugely confident we can make 2011-12 guidance,'' Stewart said. ''Look at our work-in-hand at $46 billion and an enormous stream of highly likely and preferred project bids of between $15 billion and $20 billion,'' he said.
Stewart will want to be right, as one more hiccup or stumble at Leighton and his job - and the jobs of some of the directors on the board - will be on the line.
Since Stewart took the top job earlier this year, Leighton has been a tale of woe for shareholders, resulting in a number of profit downgrades, project blowouts, a big equity issue and the departure of a string of experienced senior managers.
Stewart also has to manage relations with a new major shareholder, Spain's Grupo ACS, which recently emerged as the controlling shareholder in Hochtief, which in turn controls Leighton.
ACS will be watching the performance of Leighton and its management team closely to ensure that the two troublesome projects - the Victorian desalination plant and Brisbane Airport Link - are being managed effectively and that a quick return to profitability is guaranteed.
Under the previous regime at Leighton, managers were dispensed with when they didn't deliver. With ACS, it will be the same again.
To put it into perspective, before ACS made a move on Hochtief, Leighton's share price was trading at $38 a share. After some shock write-downs in April, a full-year loss and a hefty capital-raising, Leighton's shares are now trading at $21.49.
Behind Stewart's upbeat facade, he knows the company has a long way to go to get back on track. He also knows he is on borrowed time, as is the chairman, David Mortimer.
Properly managing risk in a construction company cannot be underestimated. Leighton's major write-downs on Brisbane's Airport Link project and Victoria's desalination plant were the result of poor risk management.
If things don't improve, the annual meeting will see a few director spills or polite decisions by some directors not to stand for re-election.
Frequently Asked Questions about this Article…
What steps is ASIC taking to improve market transparency and disclosure?
ASIC’s new boss, Greg Medcraft, has launched a push to increase market transparency by issuing guidance and benchmarks. That includes seven disclosure benchmarks for contracts for difference (CFDs), a paper outlining types and risks of exchange traded funds (ETFs), and asking industry participants to develop best-practice disclosure standards for superannuation and managed investment schemes so investors can see what funds are buying and selling.
What do ASIC’s new CFD disclosure benchmarks mean for everyday investors?
The seven benchmarks aim to make CFDs less opaque by improving disclosure of their high-risk features and complexity. For everyday investors this means brokers and product providers should give clearer information so unsophisticated investors better understand the risks before trading CFDs.
How do vanilla ETFs and synthetic ETFs differ and what ETF risks should investors know?
ASIC’s paper explains different ETF structures. Vanilla (physical) ETFs typically hold the underlying assets, while synthetic ETFs use derivatives to replicate performance. Investors should be aware that synthetic ETFs carry counterparty and derivative-related risks, whereas vanilla ETFs have the usual market and liquidity risks associated with holding the underlying assets.
What transparency changes is ASIC seeking for superannuation funds and why does it matter?
ASIC wants industry participants to develop best-practice standards so members can see what assets their super funds are buying and selling. Greater disclosure matters because some super products labelled as ‘cash’ or ‘balanced’ may actually hold riskier or illiquid assets, and members often don’t realise the level of risk in their portfolios.
Are ‘cash-plus’ or ‘cash-enhanced’ super funds really just cash?
No. The article notes some cash-plus or cash-enhanced funds invest in shares, property and fixed-interest securities in addition to bank bills. While that can deliver better returns than straight cash, it also introduces higher risk — something some investors may not realise without clearer disclosure.
Why should investors be cautious about ‘balanced’ funds – haven’t they always been diversified?
‘Balanced’ funds aren’t always truly balanced. The article cites MTAA Super, whose balanced option held more than 70% in illiquid assets during the GFC, which led to a dramatic fall in performance. Investors should check what assets and liquidity a balanced fund actually holds, not just the label.
What recent issues have affected Leighton Holdings and what should shareholders watch?
Leighton reported a A$405 million loss, absence of a final dividend and major division losses, though management highlighted A$46 billion of work-in-hand and guidance of A$600–650 million profit for 2011–12. The company has had project write-downs (notably the Victorian desalination plant and Brisbane Airport Link), senior departures, and a large capital raising that pushed its share price down from about A$38 to A$21.49. Shareholders should watch project risk management, execution on guidance and relations with new major shareholder Grupo ACS.
How does poor risk management in construction companies affect investors?
Poor risk management can lead to large project write-downs and big swings in profitability, as seen with Leighton’s costly projects. That can erode shareholder value, force capital raisings, and put directors and senior managers under pressure. Investors should monitor a construction company’s project controls, contract risk exposure and transparency about problem projects.
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