ASIC deputy chairman, Jeremy Cooper, outlined a somewhat unusual proposal last month intended to simplify otherwise complex investment jargon for retail investors. In an article appearing in Company Directors magazine, Cooper suggesting that dividing investments into two categories — the first category, which would include bank deposits, your super, blue-chip shares, vanilla managed funds would be deemed the financial equivalent of “swimming between the flags”. The second category, akin to swimming “outside the flags”, would involve allegedly ‘riskier’ assets, such as complex, illiquid, undiversified investments or leveraged products, all the way to outright scams.
While ASIC is to be commended for attempting to simplify the otherwise highly complex notion of investment for “mums and dads”’, the idea of splitting investments into two highly generic categories is itself fraught with danger.
Despite noting that “all investing involves some risk, so investing between the flags, just like at the beach, is never risk-free”, by promoting the image of certain investments being akin to ‘swimming between the flags’ and inherently safe, ASIC runs the risk of impliedly recommending poor investments.
There are many examples of supposedly “blue chip” companies which have collapsed suddenly into insolvency. Centro was a $8 billion company until it embarked on a debt-funded extravagance in the United States. Later, its share price collapsed by 99 percent. ABC Learning Centres was once the largest child-care company in the world before it slid into insolvency, with ASIC investigating the company for alleged misleading and deceptive conduct.
Even the great Rio Tinto, one of the bluest-chip companies on the ASX saw its share price slip by more than 70 percent as its management undertook a US$38 billion highly-leveraged takeover defense by acquiring Alcan. Globally, for more than half a century, General Motors was one of the largest companies in the world — earlier this month, the company declared chapter 11. Citigroup, once the largest bank in the world by assets survived last year courtesy of a taxpayer guarantees and multi-billion dollar cash bail-outs.
Even investing in the share market index is certainly not a ‘risk free’ investment — the All Ordinaries dropped by more than 55 percent after reaching its peak in October 2007.
Other “between the flag” investments may also not provide the level of safety that risk-averse investors are seeking. Investors in Pyramid, a building society, were faced with the near complete loss of deposits in the early 1990s prior to Government bail-out. Even government bonds, ostensibly the safest of investments can provide poor real returns in times of high inflation.
As a regulator, ASIC does not have the means or the ability to determine the risk-level associated with individual investments. Asset-classes or specific securities which may have been long considered safe, may actually be inherently risky. Bernie Madoff’s fund was long-sought after by wealthy US investors for its continued stable returns turned out to be the world’s largest Ponzi scheme.
While ASIC may be correct in deeming certain complex, illiquid or leveraged products unsuitable investments for many retail investors (especially without extensive independent financial advice), by implication, the regulator may be accidentally providing a ‘stamp of approval’ for other, less obviously risky investments.
How about this idea for something similar: you could go to a bunch of experts such as S&P and others, they would call themselves a “ratings agency”, and you could pay them to rate your investment product. This would produce a scale of financial dependability which mums and dads and municipal funds could read and judge for themselves whether they can trust you.