Friday, November 18, 2005

Who's buttering your "bread"?

"Baby boomers aged 55 years and over will be able to sacrifice 100 per cent of their salary into their superannuation fund and gain windfall tax benefits under a tax minimisation scheme allowed by the departing tax commissioner, Michael Carmody.

The financial planning industry has been lobbying the tax office for months to have the scheme allowed."

Looks like those greedy me generation boomers are getting another big free kick-along from society, right? After all, here's the government giving away tax avoiding breaks to them and all they have to do is "wash" (not launder) their money through their retirement account/superannuation funds.

Looks are deceiving. What is really happening is that they are being led to the milking shed, where the funds managers will churn that milk into their own butter, creaming off the largest part of the benefits. It's a device meant to assure that the boomers do not use their funds for personal or family pleasure, and particularly to make sure the funds do not get "frittered away" in other asset classes or pursuits, like education, health, art, travel, charity, etc. It's a big sump to collect all that money and turn it over to the stock and money management industry. Its a carefully designed plot to part you from your money; to place it in the hands of "managers" who are more interested in managing their own affairs than yours. It is, after all, big business.

The guy who really put the whole consumer/retail funds management notion on the financial landscape, Jack Bogle, has been on a one-man campaign to education investors about this rip-off by the "management class" of modern large corporations and the funds management industry.

"Mr Bogle was addressing the Association of Superannuation Funds of Australia's annual conference via satellite link on Friday. During the address he launched a stinging attack on the "agents of ownership" - corporate and investment fund managers.

Bogle's latest book, The Battle for the Soul of Capitalism, identifies three trends changing the nature of capitalism, which he expounded on at the conference.

He said there has been a "pathological mutation of capitalism". The old style of "owners' capitalism - maximising returns for owners" - had been superseded by managers manipulating financial results to boost their own wealth. He said the excessive manipulations behind many of the recent corporate collapses were driven by a hunger or greed for executive remuneration based on overstated earnings.

He said chief executive remuneration in the US had grown from 42 times the salary of the average worker in 1980 to 386 times in 2004, on the rationale that chief executives had succeeded in building wealth. [See]

While earnings were forecast to grow annually by an average 11.4 per cent between 1980 and 2005, these managers delivered annual growth of only 6 per cent. "If they failed to create value there must be another reason for their outlandish remuneration," he said. "One good reason was that the owners didn't seem to care."

Mr Bogle said greedy managers were helped by the replacement of individual share owners with institutional investors. "These institutions are failing to honour the responsibilities of ownership," he said. With a few exceptions, institutions had failed to take an active interest in corporate affairs and were often guilty of putting their own interests before those of investors.

He said the third trend, the increasing focus on short-term gains, had shifted the focus from the intrinsic value of companies and allowed manipulations to go unchecked. "During recent years investors have paid a high price for the shift to speculation," he said."

As evidence that the funds managers will churn your savings from milk into butter, Al Gore (yes, that Al Gore), who was also a speaker at the same conference as Bogle, said,"Seven years ago... the average holding period for US stocks was seven years. Today the average mutual fund turns over its entire portfolio every 11 months."
The thing to note is that there are heaps of ways for funds managers to make money off that churn, almost all of it legal (e.g., and
""If you're getting in and out of a stock every few months, you're not investing, you're speculating," he says. Gore says this has created a marketplace where corporate managers are afraid to make decisions for the long-term future of their companies.

He cited a US study where chief executives were asked if they would make an investment that provided long-term returns but risked them not meeting their short-term profit targets. Four out of five executives said they would not make the investment.

"This emphasis on the extreme short-term horizon works against the best interests of shareholders, the sustainability of the profits of the company, the environment in which it operates, and the values that it should be following," Gore says. He says remuneration systems built around short-term results (both for fund managers and corporate executives) exacerbate the problem.

"[Even if] the investment community is enthralled by churning, that doesn't mean it's right," Gore told ASFA. "And it's especially wrong if it's done by bodies that have a fiduciary duty to manage assets according to the long-term needs of their investors.""


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