Generous Servings How business can thrive when profits are taken out of the equation.
Issue no. 9, August 2012
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Message from Angela
Welcome to the ninth edition of Private Word. I recently returned from two overseas programs that offered valuable insight into ‘best practice’ companies and the future of private banking. The first was a Study Tour to the USA. It was a fascinating trip, visiting more than a dozen globally recognised best practice organisations including Intel, Vanguard, Google and Boeing. I was particularly impressed by the powerful vision and purpose each of these companies live by. They were all centred around placing clients and employees at the heart of everything they did, something that’s a personal passion of mine. I truly believe private banking is defined by exceptional service, expertise and capability. Above all else, our relationships with our clients must provide expert advice delivered with a highly personalised, competent and trusted service. I also spent some time in our Hong Kong and Shanghai offices in June.
I personally believe private banking is defined by service, expertise and capability. Above all else, our relationships with our clients must provide expert advice delivered with a highly personalised, competent and trusted service. winning Outstanding Institution: Philanthropic Services and Outstanding Wealth/Investment Adviser: Catherine Wong Doo. I was particularly pleased for Catherine, whose passion for private banking and dedication to her clients is an inspiration.
With strong growth in the region, the importance of connecting and partnering with our clients when they do business across Asia is vital.
As we move through the latter half of 2012 and beyond, our focus will be to build on this passion and dedication to our clients, backed up by continuous advancements in our capabilities.
NAB has enjoyed representation in Asia for over 30 years and we’re always seeking opportunities to better support our clients who live or do business in the region. We have established capabilities in Asia and are continuously developing them in line with our clients’ expectations.
If you have any suggestions on how we can better support you, or on this edition of Private Word, please share your thoughts at firstname.lastname@example.org
Angela Mentis Executive General Manager NAB Private Wealth
Finally, I was delighted NAB Private Wealth was recognised as a leader in private banking at the recent Australian Private Banking Awards,
Important information: The information in Private Word is general and tailored for Australian residents. NAB, its related corporations, and their officers, employees and agents, make no warranty or representation about the accuracy or reliability of the information. The information does not take account of your objectives, financial situation or needs. You should consider whether it is appropriate for you before acting on the information. If any NAB financial products are referred to in the information, you should consider the Product Disclosure Statement or other disclosure material for such NAB financial products available at NAB branches, on nab.com.au or by calling 13 10 12 before deciding on any NAB financial product. Views expressed and products endorsed by external contributors cannot be taken to be endorsed by or to represent the views or opinions of NAB. The views and opinions of external contributors are provided in their personal capacity and are their sole responsibility. NAB is not liable for direct, indirect consequential or economic loss, loss of profits or damage however caused, whether by negligence or otherwise, suffered by anyone relying on the information. Publication of non-NAB related advertisements does not imply NAB endorsement of the advertised products or services. The information is subject to copyright. Information in the magazine is accurate at time of publication.
NAB Private Wealth is part of the National Australia Group, which includes National Australia Bank Limited ABN 12 004 044 937 and MLC Limited ABN 90 000 000 402 and their related companies.
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Contents The cover Contributors Giselle Roux heads the Investment Strategy Group at JBWere and has worked in financial markets for more than 20 years. She has been a rated institutional equity analyst covering a range of industrial sectors for major investment banks. Giselle’s expertise lies in Australian equities, asset allocation and the economic dynamics driving investment markets. Lisa Dunne is the editor of Private Word as well as a range of other NAB Wealth magazines and newsletters. She has over eight years’ experience in communications and specialises in writing for financial services.
Success and leadership
Generous servings The conscious capitalism movement, which takes profits out of the equation, is driving commercial success among Australian businesses. Two advocates tell their story.
The features 18 Value of advice
Editor: Lisa Dunne Art Director: Jessica Kerr Front cover photograph: Jeremy Park
Going the distance How 17 year old Emilie Miller’s determination and family support helped her overcome paralysis to become be one of Australia’s most promising disabled athletes.
16 Wealth protection
Top 5 tips…estate planning Troy Palmer, National Manager of Estate Planning at National Australia Trustees, shares his tips for smart estate planning.
The tail of the tiger Thailand and Vietnam are two economies ripe with opportunity but fraught with challenges. NAB Economist James Glenn discusses how these emerging markets look set for the future.
13 Making an impact
A welcome harvest Why Philip Myer decided to donate the 167 acre working farm, restaurant and olive oil brand he spent 16 years developing, to an agricultural college.
Is the Australian dollar overvalued? Three industry experts give their view.
The regulars 3
Message from Angela
24 Market update 26 The last word
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Success and leadership
Generous servings How business can thrive when profits are taken out of the equation.
A new style of business is emerging in Australia called conscious capitalism. Already a success in a number of high profile companies in the US, such as Zappos, Southwest Airlines, Wholefoods and Google, this form of capitalism serves a higher purpose beyond making money. Ironically, studies show many of these companies who treat profits as a by- product of their endeavour, tend to make more money than their peers. Research in the US over the past 15 years reveals companies that operate this way are outperforming others by a factor of 10.5 to one in terms of cumulative shareholder value, when compared against benchmark indices. 6 Private Word
In Australia, Zambrero Fresh Mex Grill restaurants is just one of a handful of companies driving the conscious capitalism agenda. Zambrero made it onto BRW’s Top 5 Fast Franchise list for the second year running, despite donating a plate of food to those in need for every meal sold in the restaurant. Private Word ’s Lisa Dunne met with the founder of Zambrero, Dr Sam Prince, to find out why he took this approach with his restaurant chain and how business can thrive when profits are taken out of the equation.
Business first A practising medical doctor and restaurant entrepreneur, the 28 year old Dr Sam Prince juggles his remaining time as an aid worker with his foundations Emagine and One Disease at a Time. However, despite his natural inclination towards humanitarian work, Sam says his Zambrero restaurant chain didn’t actually start out with any philanthropic view or higher purpose. “I started Zambrero in 2005, between the end of one year of medical school and the beginning of the next,” he recalls. “To pay my way through uni, I worked in restaurants as a kitchen hand and then became a chef.
The greatest good you can do for another
is not just to share your riches but to reveal to him
his own. ~Benjamin Disraeli
is giving more than you can, and
The purpose of life, after all, is to live it,
is taking less than you need. to taste experience to the utmost,
~Kahlil Gibran to reach out eagerly and Act as if what you do makes a difference. for newer and richer experiences.
it does. ~William James Bethechangeyou ~Eleanor Roosevelt
want to see in the world
~Mahatma Gandhi 1 Zambrero’s Townsville store 2 Sam promotes his plate4plate initiative 3 Promotional material for plate4plate initiative
“At the time, I noticed the fresh gourmet Mexican food movement was growing at an alarming rate in America. My gut feeling was something like that had to happen here in Australia, and I was happy to back myself and have a go at starting it up.”
With the first restaurant up and running and a manager in place before Sam went back to medical school again, the business took off. But it was only when the restaurant was on a stable footing that the higher purpose of redirecting profits to those in need came about.
Initially, a percentage of profits were used as a source of funding for Sam’s Emagine Foundation, which builds and equips IT centres in underdeveloped regions. But now the main focus for the restaurant is plate 4 plate (P4P), an initiative Sam started as a way to directly donate food rations to the developing world.
“When it started, Zambrero was a private business that plugged a hole in a gap I saw in an emerging market. For that reason, it stood alone and could compete in a free market. It was a business that had a very clear reason to be there: as a way of making money,” he says.
“But once it became strong enough to divert some of this money towards other causes, Zambrero started to evolve into what it is today. That’s when things really took off.”
Each quarter, Zambrero adds up all the meals sold and donates resources to provide the equivalent number of meals to its distribution partner, Action Against Hunger, which distributes nutritious food to areas that need it.
What is conscious capitalism? The conscious capitalism movement challenges business leaders to re-think why their organisations exist and to re-imagine how business gets done. Conscious businesses demonstrate four key characteristics: Purpose – the business exists to serve a higher purpose beyond making money. Stakeholder relationship model – the business operates in order to optimise value for all stakeholders, not just shareholders. Conscious leadership – the leaders of the business are driven to serve the purpose of the business as well as delivering value to all stakeholders. Conscious culture – the business fosters a conscious culture. To find out more about conscious capitalism in Australia, visit consciouscapitalism.org.au
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There’s been a certain ‘x factor’ that’s been pushing us forward. Maybe it’s the youth factor, but maybe it’s because we’re doing it for a really positive reason. Either way, Zambrero has been growing exponentially.
Implementing a business model where profits are diverted to other causes could have been seen as a leap of faith and a risk to a successful business. But to Sam it seemed like the obvious step. “For me, Stuart Cook our CEO, and our group of executives, philanthropy and humanitarianism are deeply engrained within us, so it was about being true to ourselves. We realised these are things we do anyway, so why not make it part of our day to day business?”
Raison d’être It’s a leap that’s paid off. At time of print, Zambrero has 25 restaurants across Australia with a combined revenue growth of 133% and plans to expand internationally this year, which will make it a global brand within its first six years of operating. Sam believes this higher purpose that’s evolved within Zambrero has given staff, franchise partners and customers something positive to align with, particularly as they’ve made P4P an increasingly vocal part of the group. “It’s one of those things we feel shouldn’t drive customers to the restaurant. However, we’ve been hearing from customers that they like that our restaurant is a global citizen and humanitarian pursuits are part of its DNA. It gives customers reasons to come back. “From an internal perspective, we hire likeminded staff and franchise partners – people who think past burritos! So the business is now full of people who embody what we
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believe in and who are passionate about what we do. This has created a youthful ‘who’s gonna stop us?’ kind of attitude within the group,” says Sam. It’s this attitude, energy and commitment to the P4P initiative that Sam credits for helping Zambrero become the fastest growing restaurant chain in Australia. “There’s been a certain ‘x factor’ that’s been pushing us forward. Maybe it’s the youth factor, but maybe it’s because we’re doing it for a really positive reason. Either way, Zambrero has become a solid business that’s been growing not only predictably, but also exponentially. And the more it grows, the more it can give back.”
Entrepreneurial crossover Sam is optimistic that giving back and conscious capitalism will become the driving force of more Australian businesses in the future. “I’ve always found Australia is a really philanthropic, giving and conscious place,” he says. “But realistically, entrepreneurs have a really valuable skill set they can give: being able to see a gap, having the vision to fix it and the tenacity to see it through. “Those skill sets could be used to not only make money in a business, but they can also be used directly towards fixing some of the problems we face worldwide and here in Australia.”
Success and leadership
Pursuit of happiness While humanitarian pursuits drive a degree of Zambrero’s growth, other Australian businesses are also finding that focusing on a higher purpose instead of the bottom line is leading to business success. In August 2008, lawyer Michael Bradley and three of his colleagues decided to leave the traditional law firm they were employed by and start a private practice with a difference. That difference was putting ‘personal happiness’ of clients and staff as their motivating goal. “We wanted to practise law and be happy,” explains Michael. “So we decided to treat profits as a consequence rather than a driving force. That decision ended up having a lot of knock-on effects on how we now run the business.” “Firstly there’s the absence of timesheets,” he says. “We don’t charge by time and we don’t have chargeable hours. Because of this, we don’t manage performance by any kind of financial measure. So that created a completely different culture from the start. “We also wanted to strip out all the faux seriousness that tends to go with law,” he adds. “We wanted to represent ourselves as normal people with a sense of humour and not hide behind any of the barriers lawyers sometimes put between themselves and clients. We’ve found this allows for much deeper relationship with clients.” Michael says this focus on relationships and happiness ahead of profits creates a different dynamic among staff members that has benefited the business.
as something to get reward out of, not just financial reward but genuine reward and enrichment, they enjoy it more and everyone works together towards a collective goal. That’s a very empowering thing; it’s more akin to a sporting team than to a conventional notion of what a business is.” Like Zambrero, with everyone working together towards a higher purpose that doesn’t revolve around profits, Marque’s bottom line continues to grow. “Our business has been profitable since day one and continues to become more so,” says Michael. “The initial reaction from clients when we opened the practice was really positive and supportive and actually took us by surprise. Since then, finding new clients has not been hard.” He adds that treating profits as purely a consequence of getting everything else right takes some pressure off and enables them to focus on what really matters to them. “If you’re purely driven by the bottom line, then that leads to certain choices and drives a very short-term perspective. “If you put that to one side and say, ‘if we do everything else right we’ll be fine, we’ll make money anyway’, then it brings back the focus to the things you should be working on as an organisation. “Part of that involves giving up comparing your business to other businesses and seeing it as an arms race, that the measure of success isn’t how well you do but how much better you do than someone else. To me, that is a zero sum game and doesn’t create happiness.”
“We’ve found that when the team are focused on experiencing work
1 Michael Bradley 2 Marque Lawyers’ Offices, Sydney 3 One of Marque Lawyers’ mantras
If you’re purely driven by the bottom line, then that leads to certain choices and drives a very short-term perspective. Private Word 9
Thailand and Vietnam, two of the Southeast Asian ‘tigers’, have seen their fair share of economic and political ups and downs over the past couple of years. These emerging markets are both ripe with opportunity but fraught with challenges. James Glenn, NAB International Economist, gives his view on where these two economies are placed and how they look set for the future.
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Thailand Has the Thai economy bounced back from the issues it’s faced over the past couple of years? The floods Thailand experienced last year, and, to a lesser extent, the political uncertainty saw the economy grind to a halt in 2011. The agricultural, construction, transport and retailing sectors were all badly affected by the floods across central and northern Thailand. Meanwhile, the national election and change in government meant construction was impacted by delays to public projects.
been a number of flood relief measures and significant spending on reconstruction, as well as ambitious infrastructure investment plans for the next 5 to 10 years.
Firstly, manufacturers will seek cheaper labour as wages grow in China (according to the IMF, China’s GDP per capita in USD terms overtook Thailand in 2011).
How’s the political situation now?
Secondly, Chinese consumers will start to demand a greater variety of goods, which could boost China’s imports from Thailand.
Unfortunately, political instability remains a concern. This could impact the effectiveness of these new fiscal initiatives. In the past, delays in planned infrastructure spending have been common, so it remains to be seen whether there’ll be any improvement on this front. There’s also a significant degree of unrest between the political parties, military leaders and religious groups that needs to be closely watched.
However, reconstruction of flood affected areas, and more stimulatory policy implementations undertaken by the new leadership, should help bolster Thailand’s economic growth, at least in the near term.
Thailand has a similar net export profile to China. Can Thailand ride on China’s coat tails and benefit from China’s boom?
Is the new government taking action to breathe life back into the economy?
This will be another challenge for Thailand – how it plans to respond to China’s seemingly relentless rise to economic dominance in the region.
Yes. The new government has introduced a slew of new stimulus measures to boost the economy. They’ve increased public sector salaries, raised the minimum wage, and provided tax breaks. There have also
Thailand’s export profile should position the economy well to benefit from China’s good fortune. Over the longer term, countries like Thailand may benefit from the rising middle class in China for two reasons.
Is there anything standing in Thailand’s way of achieving this? The rise of regional integration of production chains following the Asian Financial Crisis has allowed some Southeast Asian countries to profit from China’s success. However, the downside to this development has been the incentive for countries like Thailand to specialise in low- end labour- intensive manufactures, which can create a ‘middle-income’ trap that’s difficult to break out of. The key to breaking-out will be greater investment, particularly in human capital. This will allow for improved competitiveness in higher yielding high-end manufactures and services. Unfortunately, the new government’s spending initiatives seem to be rather lacking in this area to date.
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Vietnam How has the Vietnamese economy been performing since the GFC? The Vietnamese economy is one that can be very difficult to read at the best of times. While the economy continued to grow at a brisk pace during the worst of the Global Financial Crisis, growth dipped to 5.3% in 2009 from almost 8.5% in 2007. The stimulus measures put in place in reaction to this led to a massive spike in inflation last year – CPI inflation hit a high of 23% year on year in August 2011, with rising food prices, currency devaluation and administrative increases to electricity and fuel prices all contributing. In response, the central bank raised the prime lending rate to 9%, from a low of 7% for much of 2009. Although with such high inflation, real interest rates remained negative from early 2010 all the way until April of this year. Nevertheless, inflation has started trending lower on the back of softer food price inflation and slowing economic growth and is anticipated to fall further, which could provide authorities with more scope to cut rates. The refinancing and discount rates have both been cut by 2% since the start of the year, but remain at relatively elevated levels. The government set an inflation rate target of 9-11% for 2012; inflation came in at 8.3% in May. However, authorities are likely to be cautious in their approach to monetary policy easing for fear of bringing renewed pressure on the currency. The Dong depreciated almost 10% early last year, and has fallen in value considerably over the last five years.
What effect has this been having on foreign investment? Renewed pressure on the currency could take a toll on investor and consumer confidence and provide headwinds to foreign investment. Vietnam was relatively successful in attracting foreign investors in the lead up to the GFC, making a significant contribution to the economic development of Vietnam.
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The Hanoi-based Foreign Investment Agency estimated that foreign investment created more than 200,000 jobs in 2008 and employed 1.4 million people. Much of the run-up in foreign investment over that period was driven by heavy industry and petroleum. However, following the GFC, Vietnam’s export outlook deteriorated significantly and investor confidence in the economy plunged. Foreign direct investment declined sharply in 2009 and resumed falling in 2011, along with the currency and holdings of foreign reserves. This served to heighten Vietnam’s debt servicing risk.
What about the future for Vietnam? There are a number of fundamentals working in favour of the Vietnamese economy that should help attract foreign investment over coming years once steps are taken to underpin macroeconomic stability. Recent reform initiatives have been a positive step in this regard. That said, investors remain cautious due to the uncertainty in the regulatory environment and fiscal regime. Over the longer term, Vietnam has the potential to follow a similar growth path to China, albeit on a smaller scale, thanks to an emerging middle class and low urbanisation rates. However, necessary reforms to state owned enterprises and the financial sector need to be made to help underpin Vietnam’s long-term economic development. Vietnam has large deposits of oil and gas, which could provide an investment opportunity for foreign firms. It has one of the largest oil deposits in Southeast Asia, enough to last more than 30 years at current rates of production, though still quite small relative to major oil producers. Production looked to have peaked in 2004 and crude oil’s share of Vietnam’s total export values has more than halved over the past decade (now accounting for less than 10% last year). Nevertheless, high oil prices have helped bolster incomes and government revenues over the past year or so, narrowing the government’s budget deficit.
Making an impact
A welcome harvest The decline in numbers of students enrolling in agriculture colleges is now a long-term national trend, posing a risk to Australia’s food producing future. In the 1980s, Australia had 23 campuses that offered agriculture and agricultural science degrees. Now, there are just nine. With less young people involved in agriculture, ownership of Australian farms by Australian farming families is diminishing. With the scale of this problem, the idea that one person could make a difference seems unlikely. Tackling this problem head on, Philip Myer made the bold move to donate his entire 167 acre working farm, including machinery, stock, an olive farm and restaurant, to Marcus Oldham Agricultural College, with the aim of attracting more students to the college. Private Word met with Mr Myer to find out what drove him to donate his property and what he hopes this will achieve for agriculture. Private Word 13
Growing the farm 1 Unveiling of the Prudence Myer Campus at Marcus Oldham College 2 Lighthouse olive oil brand, donated to the college by Mr Myer 3 Arial view of Murradoc farm
Agriculture is something of a passion for Philip Myer, who spent 16 years of his life developing and working on his farm Murradoc, located in the Bellarine Peninsula in Victoria. During that time he redesigned and transformed the property, planting an olive grove and establishing a restaurant and shop, together with a new olive oil brand. Philip is a third generation Myer, but followed a slightly different career path to his siblings. “I’m a practical person rather than a corporate person. I went to Scotch College like my brothers, but left at the end of year 11 and did a drafting apprenticeship. I was a registered builder and worked in the building industry for 20 years.”
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Later, Mr Myer developed an interest in olive growing and olive oil, which led him to establish Boundary Bend with Paul Riordan and Robin McGavin. Today, Boundary Bend is Australia’s largest olive farmer and extra virgin olive oil producer. Mr Myer is still a large shareholder in the company. After moving to Southern Tasmania with his wife about 10 years ago, Mr Myer was still visiting Murradoc regularly. “I used to fly up in my twin every two weeks or so. I did over 300 crossings of Bass Strait. But then I thought, it’s time to slow down.” Initially, Mr Myer put Murradoc on the market, but then he had another idea. “I thought why not give it away? Because I’m lucky enough to be in a position to do so.”
Making an impact
Philanthropic roots As a member the Myer family, Philip Myer is no stranger to philanthropy. His grandfather, Sidney Myer, left one tenth of his estate to give back to the community that helped make his fortune. The Myer Foundation, established in 1959 by his sons Baillieu and the late Kenneth Myer, has carried on Sidney Myer’s vision of philanthropy, giving away millions of dollars each year to benefit a wide cross-section of Australians. A previous board member of the Myer Foundation, Mr Myer says his family history played a part in his decision to give Murradoc away. “There is a strong philanthropic gene in my family from Sidney Myer, and a culture of noblesse oblige — my father’s favourite expression,” said Mr Myer. However, being independent from Myer Foundation allowed him to take a more spontaneous approach. In particular, he was able to seek out a suitable recipient, rather than waiting for one to come to him. “I’m less of a corporate and more of a designer and creator. The Myer Foundation get applications all the time, whereas I did it the other way around,” Mr Myer explained. Mr Myer enlisted the help of Helen Morris, a philanthropic consultant who had worked previously with the Myer Foundation. Together they short-listed three organisations and asked them to submit expressions of interest. Even though Mr Myer was able to choose the recipient, once he gave the land away he would have no say on how they chose to use the land. “Under the Tax Act, the gift must be unconditional. I can’t tell them what to do, and I can’t direct the gift,” Mr Myer explained. “If they decide that it’s in their best interest to sell the land, they can.”
Finding a recipient Mr Myer was impressed by the enthusiasm that Marcus Oldham College showed in the expression of interest process. A private educational institution that trains graduates in farm business management and agribusiness, Marcus Oldham College receives no government funding.
“Marcus Oldham ticked all the boxes,” explained Mr Myer. “It’s local, it trains highly sought after graduates and doesn’t get any funding. And a working farm has to go to a person or organisation that can manage it”, he said. “One of the questions in the expression of interest was: ‘How would you share the benefit of this around a bit?’ The farm not only benefits Marcus Oldham, but they’ll also do a joint venture with local high schools, as well as teaching riding for the disabled.” The gift also required the federal Minister of Education’s approval. “You can donate cash but to gift land over a certain value you need the Minister’s approval for it to be tax- deductible,” said Mr Myer. Overall, the process took nine months, with Mr Myer handing over the property to Marcus Oldham College in March 2012.
The big picture Mr Myer sees agricultural training as paramount for the future of rural and regional Australia. “Agriculture is becoming very organised and business-like, and farming is becoming more corporate. For it to remain competitive, we need to train more graduates,” he said. Having an extra property gives Marcus Oldham College more space than their existing live-in campus near Geelong, and extends the type of training they can offer students. “Murradoc is a multi-faceted property, and includes elements of tourism and farming, allowing students to focus on other aspects of modern farming and horticulture,” Mr Myer said. “The property has farming, forestry, olive groves and a full olive press. All waste is processed and recycled into compost, and all water is treated onsite. Students are involved in the whole process of food production — from paddock to plate.” The college received everything: machinery, a shop with stock, an olive farm and brand, and a privately leased 100-seat restaurant, Loam, which brings in a secure income to the college.
Mr Myer does not see his gift of Murradoc as charity, but rather a way to empower the college in its ongoing mission. While he acknowledges that gifting land is probably more difficult than giving away cash, he found the process immensely rewarding. “Money and wealth is a personal thing, so it’s not for me to say what people should do with it. However, I found it an immensely rewarding experience, and one that was empowering for both parties.”
Gifting land: five issues to consider Helen Morris was Program Director of the Myer Foundation for 10 years and assisted Philip Myer when he gifted Murradoc to Marcus Oldham College. Here are her tips for anyone planning to make a gift of land. 1. Treat it like a business: “Do your market research,” says Ms Morris. “Find an issue that you can have an impact on and look at it in the short, medium and long term.” 2. Make a covenant. If you decide to give away land for conservation purposes, put a covenant on the land stating that it must remain a nature reserve. Whoever buys the land must comply with that covenant. 3. Red tape. Understand that if you gift property for educational purposes, the federal Minister for Education must give their approval first before you can claim it as a tax deduction. 4. No strings attached. According to tax law, a donor cannot stipulate how a tax-deductible gift of land is used. While, like Philip Myer, a donor may ask for expressions of interest to choose a recipient likely to benefit from the gift, once the land is given away, the owner is free to do as they wish with it — including sell it. 5. Valuation. Understand that if there is a discrepancy between the market valuation of the land and the Tax Office’s valuation, you may end up receiving a lower tax deduction than you expected.
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Troy Palmer, National Manager of Estate Planning at National Australia Trustees, shares his tips for smart estate planning.
More than a Will Estate planning involves more than implementing a standard Will. Ideally, a solid estate plan should take into account superannuation, trusts, jointly-held assets, companies, and other circumstances. A Will alone most likely won’t be able to deal with these situations. And, if your estate is likely to be challenged, additional planning is generally needed.
Don’t overlook asset protection and taxation Australia is about to experience its biggest ever intergenerational transfer of wealth: an estimated $600 billion in assets will be inherited over the next 10 to 15 years. Building up assets during one’s lifetime is only part of the equation. Protecting the assets in the hands of beneficiaries is another.
Estate planning should also encompass guardianship of infant children and wishes in relation to them.
Current data shows almost one third of marriages end in divorce and there are more than 20,000 personal bankruptcies each year. Our society is also becoming more litigious.
And, it’s always worth having a plan that sets out who’ll make decisions if you’re incapacitated.
Testamentary trusts established within a Will can provide significant asset protection and tax effectiveness for your beneficiaries.
Having professional advice can be invaluable for making sure you cover all grounds and your estate is adequately protected.
Proper estate planning can help prevent the assets you work so hard to build up falling into the wrong hands after you die.
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Outdated estate planning can be a disaster A common trap I see people fall into is not updating their estate plan over the years. Outdated estate planning can sometimes be worse than no estate planning at all. Estate planning should be reviewed at least every three years or if your circumstances change, for example if you: • get married, divorced or separated • have children • have a potential beneficiary with special needs (if they’re disabled, or have addiction problems etc) • establish a self managed super fund or family trust • attain an interest in a private company • sell or acquire a major asset. Also, if planned succession of family trusts and superannuation is no longer relevant it can have drastic unintended consequences.
Take time to appoint an executor or trustee Appointing an executor and trustee is one of the most important decisions you’ll make in relation to your Will and careful consideration is required. It’s an appointment that should not be taken lightly. However, quite often, not enough thought is put into who’ll take that role. Being an executor or trustee of an estate can be time consuming and complex and the roles have a number of duties, responsibilities and obligations. If an individual is appointed, do they have the time, expertise and willingness to assume the role? The role becomes even more important if there are ongoing trusts, for example in situations where there are young children, or if there are challenges to one’s estate. A professional executor and trustee can bring expertise, independence and longevity into the position. However, it’s important fees are also considered when a professional is appointed.
Don’t put it off Anyone who owns or controls assets should address their estate planning. There have been some cases over the past few years where high profile individuals have had their incomplete estate planning put into the spotlight. Motor racing champion Peter Brock’s death in September 2006 famously sparked a lengthy legal battle between his girlfriend and his former long-time partner and children. Causing the battle was the fact that Peter Brock left three unclear Wills: one unsigned and half-finished, another DIY Will that left spaces for his wife to fill in after his death, and a 1984 Will that included his parents as beneficiaries. This was further complicated by changes in his personal life shortly before he died, leaving his estate wide open to challenges.
Appropriate estate planning can help ensure your estate is administered and managed in a tax effective manner. Your NAB Private Manager or Wealth Advisor can put you in touch with National Australia Trustees who can provide estate planning advice on Wills, powers of attorney, succession plans, family trusts, corporate structures, superannuation and more.
Examples like Peter Brock’s case are a reminder of the importance of having thorough and complete estate plans and updating them on a regular basis. Private Word 17
Value of advice
18 Private Word
1 Emelie doing hand cycling training
“Emilie was just starting in year eight when she had the accident. She was doing some swim training one morning, when she did a dive, hit the water at an awkward angle and broke her neck. She was rushed by helicopter to The Children’s Hospital at Westmead, where she stayed for four months and 29 days. It was our worst nightmare come true. With Emilie paralysed from the waist down, we had to make massive changes to our house to make it suitable for her homecoming. We quickly got the builders in to widen all the doorways and re-do the bathroom, and we bought a wheelchair accessible car. All in all it cost $190,000 just to make the preparations for getting her home! I was also pregnant at the time of the accident, so soon after Emilie was out of hospital, we had our third child, Mia. As you can imagine, it was a pretty crazy time in our house! We weren’t seeing our NAB Private Wealth Advisor Daniel at the time of the accident, but I’d known him for some years before then. When Daniel found out about what happened to Emilie, he got in touch to offer a helping hand.
When Australia’s largest ever team of 304 athletes take part in the London Paralympics later this year, Bathurst’s Emilie Miller will be watching keenly and taking notes to perhaps one day compete herself. A talented swimmer from an early age, 17 year old Emilie has been wheelchair bound since she broke her neck in a tragic diving accident in January 2008. But Emilie’s determination and commitment to swimming, and now hand cycling, has seen her become one of Australia’s most promising young disabled athletes. Her mother, Donna Miller, tells the story of how her family made it through the difficult time after the accident and how Emilie fought her way back from injury to pursue her love of sport.
We got talking and he mentioned what he does and how he’d be able to help us manage the costs of Emilie’s ongoing care and her compensation. Because we were so busy, financial management was down the bottom of the priority list; we were thinking we’d get to it at some stage. But looking back, we were really lucky to have Daniel gently reminding us we needed to address these issues. Once we did, he was able to take over and put some structures in place around long-term management of the financial cost. This was a weight off our minds and really helped us support Emilie over the following years. Once Emilie was home, she returned to school immediately and was back in the pool by November that year. The swimming started as part of her rehab but by January the following year she started racing again. It was tough for her initially, because she went from being the fastest in the pool to the slowest, but she worked her way up and eventually represented her school. She’s now captain of swimming for Kinross Wolaroi, has Australian titles and is ranked in the top 10 in the world for her age in the S2 category in 50m backstroke and 50m freestyle. Private Word 19
It gets pretty cold here in the wintertime, but her motivation for sport is so strong, she doesn’t care how cold or rainy it is... once she’s down at the track, she’s happy!
While she’s still swimming competitively, Emilie’s also taken up a second sport of hand cycling. It started out as something she’d do for extra exercise and something she could do with her sister. But in typical Emilie fashion, she’s taken it to the next level and is now competing. She’s got to know the wheelchair racer Kurt Fearnley, who’s local to the area, and she’s been working with hand cyclist John Maclean and the John Maclean Foundation. She’s also become friends with Paralympic cycling coach Toireasa Gallagher, a Bathurst local who went to the last Paralympic Games. This is fantastic for Emilie because Toireasa’s agreed to coach Emilie in hand cycling. Having the help of qualified coaches makes all the difference in the world.
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All the training keeps Emilie really busy. She does about three bike rides a week with Toireasa and they’re now increasing their distances and riding further. She’s training for some races and events later in the year, which she loves. Emilie’s also been working with a few NSW cycling coaches in Sydney where they take her to Parramatta Park and she does a couple of sessions there with some of the Paralympic athletes. She really thrives on the interaction with them and it’s so motivating for her. Living in Bathurst, it gets pretty cold here in the wintertime, but her motivation for sport is so strong, she doesn’t care how cold or rainy it is. That kind of stuff doesn’t matter to her, once she’s down at the track, she’s happy!
Value of advice
2 Emilie with Libby Tricket 3 Emilie wins at hand cycling race 4,5 & 6 Emilie at swimming trials prior to the accident
Daniel Traylen, Senior Wealth Advisor, NAB Private Wealth Services, has been advising the Millers since shortly after Emilie’s accident.
She still trains regularly for swimming, and goes to the gym twice a week with her exercise physiologist where she does strength training and a small amount of rehab. It all works together: if she’s strong, she can do a lot more for herself. Plus, it keeps her well and out of hospital. It’ll take time to see whether she makes it professionally, but at the moment, she’s just so passionate about it and loves to do anything to do with it! Four years after the accident things are looking bright for Emilie. She starts university next year, so she’s really looking forward to that. We’re in the process of getting a car modified for her so she can have more independence. And of course driving yourself to uni is far cooler than having mum drop you off!
He says they’re acutely aware of how much capital Emilie will need over her lifetime. The car is tailored to fit her so she can drive independently, but because of this it costs about $250,000! But Daniel’s been very helpful at organising the breakdown of payments for this, and he’s always keeping an eye on where we’re up to and what we need for the future. I’d like to think over the next few years this relationship we’ve built up with Daniel will pass to Emilie, and she’ll deal directly with him for managing her money. She knows him well now, but isn’t really across everything that he does for her. However, I think it’s important she becomes quite proactive and aware of what’s going on with her finances and I’m very happy he’s started to foster this relationship early.”
“For example, as well as the costs incurred in making their house and car wheelchair friendly, they also had to employ a homecare nurse who comes twice a day and get a $12,000 wheelchair,” Daniel says. “And since Emilie has limited hand movement and no finger movement, they’ve had to get a specially modified computer and will require other bespoke equipment over the years. “However, we’ve invested their capital so it can be stretched a long way, over an entire lifetime, so this will certainly help meet these costs, and in turn help Emilie pursue her goals. “The Millers fully understand the need for longevity of capital, the tax benefits available through special trusts and the need for a conservative and yet diversified portfolio.”
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Is the Australian dollar overvalued? In the current circumstances, many other influences have partly overwhelmed an assessment of fair value.
Currency as a medium of exchange has no absolute value but is measured relative to others. Even on observation alone, most Australians would suggest the AUD is relatively overvalued. Overseas travel feels cheap and purchases of goods internationally, even allowing for other influences, are at notably lower prices than locally. The fundamental determinants of currency values are: a country’s current account balance (or terms of trade), interest rate differential (and its alter ego, inflation) and economic growth (productivity).
Giselle Roux Chief Investment Strategist JBWere
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However, in the current circumstances, many other influences have partly overwhelmed an assessment of fair value. Capital flows and diversification, currency pegs and managed floats, and most of all, sentiment towards the pressures in Europe and China have arguably become predominant in the short term.
The AUD sits awkwardly between relative fundamentals and currency diversification, versus concerns on the direction of commodity prices and potential deterioration in the current account. Layer sentiment swings on top of this and a cocktail of complexity comes into play. As long as the Euro issues trouble markets, the USD is likely to remain relatively strong and the AUD sticky. Any amelioration of concerns for Europe may swing attention back to the fiscal problem in the US and then turn that relative trade on its head. For the AUD we expect a slow fall in the value of its effective exchange rate, but the ride may be bumpy with plenty of potential to lurch unexpectedly in either direction. For investors, we recommend a bias to unhedged exposure, specifically taking no hedging against Asian currencies but retaining a buffer with respect to the USD/ Euro and Yen.
It’s not so much our currency going up, but everything else is falling around it.
Yes, we think the AUD is overvalued at the moment. We know it’s overvalued because every time we step out of Australia, whether online or physically, we can buy things much cheaper. Our purchasing parity is out of whack. There are a number of reasons for this. Firstly, interest rates in Australia are a lot higher than everywhere else. Investors seeking yield are borrowing USD, Yen or Euros, buying AUD and leaving the money deposited in AUD. There’s trillions of dollars going into the AUD right now and that’s strongly influencing the currency. Secondly, there’s a currency war going on between the Eurozone, the USD zone and the Yen. They’re all trying to get their currency lower in order to de-monetise their debt, stimulate exports and in turn, their economies. It’s a political issue.
Rhett Kessler Fund Manager Pengana Australian Equities Fund
The AUD has not matched the drop in commodity prices, suggesting there’ll be pressure on the AUD to catch up to these prices.
Those currencies are being structurally diluted which means it’s not so much our currency going up, but everything else is falling around it.
We think the AUD is relatively expensive to what it should be on a longer term basis, and expect by the end of the year it’ll be 97 cents against the US dollar. There’s certainly a premium in the currency at the moment and the reasons for this are two-fold. One, Australia stands out in international markets as being very solid. We still have AAA rating, we’ve a government committed to achieving a surplus and yields on our bonds are relatively high. That’s a rare thing in this day and age when there are sovereign downgrades all over the world. Two, the interest rates cuts we’ve seen this year haven’t been fully priced into the currency. The rest of the developed
We think this presents a once in a generation opportunity to create global purchasing power by using a supercharged AUD to buy non-tradeable assets that haven’t adjusted for currency yet. Mermaid Marine is one example. They’re buying ships in USD very cheaply with a strong AUD. The price of ships hasn’t adjusted globally yet, so we’re essentially buying the company at a discount. We’ve also got a big position in the Caterpillar franchise. Caterpillar hasn’t adjusted for currency, so the underlying asset price hasn’t changed. But because we’re in Australia, we can buy Caterpillar shares much cheaper. Then there are companies like ResMed, NewsCorp and Computershare that have non-AUD earning streams. The strong AUD is making them cheap to buy right now. If our currency falls, we’ll have bought non- AUD earning streams at a discount.
world is very weak so even lower returns in Australia are quite attractive at the moment. Commodity prices have also driven the AUD to record highs over the past couple of years. With Chinese growth slowing slightly, we’ve seen commodity prices come off their highs. However, the AUD has not matched the drop in commodity prices, suggesting there’ll be pressure on the AUD to catch up to these prices. Even though we expect 97 cents by the end of the year, that’s still very high compared to the average valuation of the AUD over the last couple of decades. This is due to the high terms of trade for Australia. So while we don’t expect the AUD to collapse, we do expect it to moderate over time.
Emma Lawson Currency Strategist NAB
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Market update & insight Giselle Roux Chief Investment Strategist, JBWere
Optimism early this year has been grounded by the reality of the issues in Europe. The complex problems of sovereign debt, unreconstructed bad debts and unaffordable entitlements are likely to be with us for many years. For Australian-based investors there are two major consequences relevant to the problems in Europe. The first is that Europe is a large externally facing economic power, so its impact on global trade is substantial, particularly as Australia is very much an outward economy. Secondly, the impact on financial markets in terms of credit and wholesale bank funding hits hard at our own domestic financial conditions. With our banking system still dependent on access to these markets, we should expect constrained credit growth domestically and inevitably more difficult economic conditions.
While the focus has been on the rather colourful news out of Europe, the reality is that softening growth in the US has also been a major factor in weak investment markets. Data out of the US is pointing to suboptimal trends, unlikely to create a respectable trend in employment and investment spending.
Ultimately, China determines more of our economic destiny than Europe or the US. Late last year China stepped on what is considered excess investment into property and the risks in bad lending practices to business.
One should not ignore the more positive pockets – an energy investment boom, competitive manufacturing sector, multi- family home and refurbishment activity – but these are not enough to push GDP growth over 2% and create sufficient jobs. Attention is now on the so-called fiscal cliff, the cumulative impact of expired tax benefits that come to pass on 1 January 2013, only weeks after a divisive election. This uncertainty holds back all in the private sector. The markets will therefore watch the upcoming US quarterly profits for any signs of weakness. To date, companies with FX translation out of Europe or operational weight towards Europe have noted slower than expected earnings, but elsewhere there has been little to suggest earnings are on the downward slope. With global equity correlations high, the US market will continue to set the tone.
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For those cynical on the data out of China, the level of concern from authorities suggests an increasing recognition that problems are better dealt within open forums, itself a welcome development. Tight financial conditions have seen the Chinese economy pull back and may even overshoot on the downside. In recent weeks, the authorities have been easing back, allowing more credit and supporting specific industries. As we move towards the change in regime later this year, we expect further proactive programs. The longer term shift from investment spending to consumption spending may well take a back seat until the government feels comfortable it can manage this transition. We expect China will be helpful to growth and therefore to markets. The tougher call is to assess how these three major trends balance each other out.
As custodians of investors’ financial wellbeing, we’re acutely aware our advice may have a significant impact.
Impact on portfolios The impact on investment portfolios can be summarised as follows: • Markets, as indexes of assets, are likely to be unhelpful in investment returns. Non-benchmark strategies and security selection are therefore important. However, this will result in performance that may deviate substantially from the benchmarks for some time. • Investors are encouraged to think broadly on how to gain access to a theme. For example, accessing emerging market growth through commodity stock, emerging market stocks or developed market stocks with substantial growth in those regions. Similarly, portfolio income can come from a combination of fixed interest and equities. The balance and construction between these two, however, should be carefully considered.
• A modest position can be reserved for out of favour assets with high potential upside. In these we include European stocks, where many have been sold indiscriminately, disregarding their stronger fundamentals. Others are local resource stocks, with most falling well below their assessed net present value. As custodians of investors’ financial wellbeing, we’re acutely aware our advice may have a significant impact. The easy answer would be to take all downside risk off the table and sit out in low return cash. This ignores the other risk, that the real value of assets diminishes over time and that capital returns are forgone.
NAB Private Wealth can help you manage your investment portfolio. We can also give you access to JBWere, one of Australia’s leading providers of wealth management, as well as a range of other expert investment services. Speak to your NAB Private Wealth Advisor to find out more.
It may appear as indecisive advice to some, but having a range of assets in a portfolio in the current climate is, in our view, an appropriate balance between security and long run higher returns.
• Corporate credit is considered by many to be a sweet spot, with adequate returns and relatively low volatility. With any future interest rate moves pushed out, the return profile of corporate credit suits today.
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The last word.
Keeping you informed of Private Wealth views, insights and activities.
Philanthropic focus a winner NAB Private Wealth was recognised for its philanthropic services at the fourth annual Australian Private Banking Awards. Receiving the award for Outstanding Institution: Philanthropic Services, David Knowles, JBWere Executive Director of Philanthropic Services, said it was an honour for NAB Private Wealth to be recognised for its work in this space. “Philanthropic services are an essential part of any private bank’s offering. To be able to facilitate a client’s philanthropic wishes is a privilege and it’s great to see more clients taking a philanthropic view,” he said.
The fourth annual Australian Private Banking Awards Ceremony held on 14 June 2012.
Philanthropy wasn’t the only winner of the night. NAB Private Wealth Advisor Catherine Wong Doo was also honoured in the Outstanding Wealth/Investment Adviser category.
A deer market is characterised by low activity, with investors unable or unwilling to move due to uncertainty, like deer who freeze when ‘caught in the headlights’.
Large institutions that have the funds to make high volume trades. Due to the large volumes of stock that ‘elephants’ deal in, any investment decisions they make will have a large influence on the price of the underlying financial asset.
An event or occurrence that deviates beyond what’s normally expected of a situation and that would be extremely difficult to predict.
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The last word
rd – where Australia ranks in the World Giving Index, after slipping from the top spot held in 2010.
Volunteering time proved the least popular of the three giving behaviours in Australia (36%).
Australians are most likely to be charitable by giving money, the index found, with 71% helping that way, while helping a stranger recorded a 68% rate. Source: Charities Aid Foundation World Giving Index 2011
What’s new? Gear into the sharemarket through your SMSF NAB Super Lever is a limited recourse borrowing arrangement specifically designed for self managed super funds (SMSFs). If you’re a SMSF trustee, Super Lever allows you to borrow for investments in an approved list of shares, managed funds and exchange traded funds (ETFs). There’s also flexibility to select your preferred gearing level, capitalise loan interest, and repay the loan whenever you like. A security trust structure is provided within the product, and there’s no need for personal guarantees from fund members. To find out more, speak with your NAB Private Wealth Manager or Advisor today. We recommend you seek professional tax advice and read the Product Disclosure Statement before applying for a NAB Super Lever facility.
TEDx Sydney 2012 NAB Private Wealth was proud to support the recent TEDxSydney, an event that challenged and inspired those who attended. TED, which stands for Technology, Entertainment and Design, began in Silicon Valley in 1984 as a one-off for technology business leaders to exchange ideas. It’s since developed into a global think tank, with the theme of ‘ideas worth spreading’. The day provided guests with a chance to hear from a diverse range of speakers, from an architect to an astrophysicist, from an installation artist to an ecologist. Thanks to all who attended and supported this innovative event.
minutes with an advisor… Catherine Wong Doo Senior Wealth Advisor NAB Private Wealth I’m seeing a large focus from clients at the moment in reviewing their asset protection strategies and estate planning. Because of this, we‘re having more conversations about the use of discretionary trust structures and self managed super funds (SMSFs), which can be effective vehicles for accumulating a significant amount of wealth. From an estate planning perspective, clients need to consider the transfer of control of these entities to ensure they’re passed to the appropriate people. Here are some things to keep in mind: • understand your role and responsibilities as trustee of your discretionary trust and SMSF • remember that trustees of discretionary trusts need to have minuted the distribution of income to beneficiaries prior to 30 June • ensure your SMSF trust deed is current and includes the changes in super legislation; for example, allowing for strategies such as contribution splitting, reserve accounts, paying transition to retirement pensions etc • consider the pros and cons of individual vs corporate trustees of your SMSF. Many of the reviews I undertake with clients are to ensure the strategies recommended are current and the above issues are managed and under control. I encourage all clients to review their personal and financial objectives for the next 12 months; know your current positions and know your top three financial strategies to move you forward.
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