SPECIAL INVESTMENT ALERT FROM PIR

MEDIA RELEASE:

26th May 2008

Government to review ratings 

and research agencies

The important role of research - is it being misunderstood?

Investment industry participants would have noted an announcement on Thursday 22nd May that the Australian Securities and Investments Commission (ASIC) has concluded its investigation into research reports issued by PIR and have closed their files with no action.

Following the ASIC/PIR announcement the Government announced that they had ordered a review of ratings agencies and research houses. PIR welcomes such an enquiry and offers its full cooperation and stakeholder input to this review. At the same time, PIR points out that credit rating agencies and financial product research houses have different functions and perform different roles.

PIR's view is that consumers need more protection from substandard investment product and inappropriate advice and that legislating the requirement for independent research to support product advice is essential.

Property represents half the world's wealth and there is general consensus that the average adviser is not properly equipped to fully appreciate and subsequently convey value-add advice on securitized property funds to their clients. Having identified this as an issue in 2005, PIR established a training course for advisers with CPD recognition from the FPA to assist advisers in understanding the sector.

Independent research reports are designed to assist advisers to meet their compliance requirements under s945A(1)(b) of the Corporations Act 2001 by providing reliable and impartial assessments of investment products, promoters, their track record, the investment market and the risks involved. As part of this, advisers are obliged to be aware of the wider investment market and products available by way of comparison.

Most funds research is designed for general product advice, not as a blanket endorsement of managers and their activities, and is a point-in-time evaluation. Unlike listed entities, researchers cannot monitor daily activities of the wide variety of unlisted funds or be held responsible for changing circumstances beyond the date of the evaluation and thus their control. For this reason unlisted reports require regular updates. All the key facts, including key considerations relating to risk/return, should be clearly set out in all research reports.

However, research is only one part of the investment process. Investors should seek professional advice (including detailed product explanation) suitable to their own circumstances, return expectations and risk tolerance. All investments have various degrees of inherent risk and not all products suit all people, no matter how highly they may be rated. This should be assessed against the investor's appetite for such risks.

Advisers also need to ensure that researchers have appropriate qualifications and experience in the asset class they are assessing and, if claiming "independence", that they satisfy section 923A of the Corporations Act 2001.

In the case of Property, it is a specialist asset class and requires specialist skills. PIR and its associates have in excess of 500 years of experience (having compiled over 1,500 reports over 18 years) in the areas of property, investment and finance, generating a substantial database of information to support product evaluation.

Compliance and best practice dictates that all investments require at least annual independent reviews, particularly property and mortgage funds, whether they be open or closed funds or rollover proposals (which constitute a new investment). With all due respect to product issuers, the logic of conflict dictates that advisers should not place total reliance on the product issuer's reports, statements and/or newsletters.

PIR believes that there is currently sufficient uncertainty in the property markets that oblige financial advisers to insist on obtaining "current" independent specialist reports on all unlisted property (see footnote) and mortgage funds held in their client's portfolios.

For further information, please call:
Richard Cruickshank
Managing Director
Property Investment Research
Direct line (03) 8622 3311

Critical questions that advisers need answers to in 2008

• ASSETS: What is the quality and the current status of the individual fund assets?
• MARKETS: What is the state and likely direction of the relevant property market for each property?
• RETURNS: Has the fund's income and lease profile been reassessed, is there potential for capital growth or loss?
• CAPITAL MANAGEMENT: Is the debt position appropriate and hedged, what has been the effects of any return of capital?
• MANAGEMENT: Does the manager have appropriate skills and strategies to navigate a challenging market environment?
• PERFORMANCE: is the manager's performance consistent with fees, are there capacity constraints and/or conflicts of interest?