AMID a gloomy sharemarket outlook, Contango Asset Management is seeking to launch another listed investment company, hoping to raise as much as $200 million to invest in mid-cap stocks.
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Tapping into investor demand for dividends, the Contango MidCap Income fund is boasting a 7.2 per cent annual yield, payable via a 1.8 per cent quarterly dividend, which will be generated from investment performance or from capital.

The launch comes at a difficult time for financial markets, with the resources sector off the boil and most domestic cyclical stocks forecasting tough trading conditions well into 2013, leaving only defensive sectors such as healthcare, facing firmer earnings prospects.

The proposed float comes six months after it delisted trading in Contango Capital Partners after seeking to merge it with another of its listed funds, Contango Microcap, following a poor investment performance and being wrong-footed by sharemarket gyrations in the wake of the global financial crisis.

Along with some unlisted funds, this has left Contango Asset Management with the sharemarket-listed Contango Microcap, a $150 million fund that has struggled on a five-year view, although it has performed well since its inception in 2004.

The proposed mid-cap fund is to invest in ASX 300 stocks, excluding the top 30 companies. Investors are being offered a free bonus option for each share subscribed for, with the minimum size of the offer pegged at $30 million.

If the float succeeds in raising the $200 million it is targeting, this will rank it as one of the biggest floats of 2012. Difficult market conditions are keeping new issues to a minimum, while companies raising fresh equity have typically been forced to offer sizeable discounts.

Listed investment funds associated with former stockbroker Geoff Wilson have blocked the move to merge Contango Capital Partners, arguing that the offer price of 90¢ a share was too cheap. It is believed there have been sporadic negotiations between the two parties, although Mr Wilson would not comment on the status this week.

Contango MidCap plans to have an ongoing buy-back program if the shares fall below 90 per cent of the net asset value and hasn’t ruled out further issues of shares after the first two years of trading.

Management fees will average 1 per cent of the gross portfolio annually, with no fees for the first two years, but 1.66 per cent annually for subsequent years.

A 20 per cent performance fee is also payable if the fund has paid a minimum 1.8 per cent quarterly return, exceeded a performance benchmark of the Reserve Bank’s cash rate plus 4 per cent and for the portfolio value to exceed a ”high water mark” valuation.

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AUSTRALIAN shares followed a global sell-off on Thursday, reflecting the uncertainty coursing through world markets as China kicked off a once-in-a-decade leadership transition and Barack Obama’s post-election victory high rapidly gave way to concerns that a ”fiscal cliff” of looming tax hikes and spending cuts could cripple the US economic recovery.
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Despite Greece’s fractured parliament passing austerity measures on Thursday that will gain it access to bailout funds and stave off a default, and latest unemployment figures showing the Australian economy added more than 10,000 new jobs last month, the benchmark All Ordinaries index closed 32.6 points, or 0.7 per cent, lower at 4483.8.

Voters returned Mr Obama to office despite a stuttering economy and a stubbornly high unemployment rate, but the defeated Mitt Romney’s Republican Party retained its majority in the lower house, and the prospect of the President and Congress struggling to agree on a resolution – needed by year’s end – sent Wall Street stocks down 2.4 per cent on Wednesday.

The Congressional Budget Office in the US has estimated that the fiscal cliff could result in a drag of up to $US600 billion next year, or 4 per cent of gross domestic product.

In Beijing, China’s outgoing President Hu Jintao – who is expected to be succeeded by vice-president Xi Jinping – warned corruption remained the biggest threat to the legitimacy of the ruling Communist Party, as he formally opened the party’s national congress.

The week-long congress will usher in a new set of leaders, who will likely oversee China overtaking the US as the world’s largest economy.

But the transition is being held in a backdrop of mounting social issues, including a growing wealth gap, rising costs of living and perceptions of rampant corruption.

China also faces an urgent need to reform an economy that heavily favours its state-owned enterprises and to shift the economy’s reliance on investment-led growth more to domestic consumption.

”Reform of the political structure is an important part of China’s overall reform,” Mr Hu said. ”We must continue to make both active and prudent efforts to carry out the reform of the political structure and make people’s democracy more extensive, fuller in scope and sounder in practice.”

Qu Hongbin, HSBC’s chief economist for China, said the new leadership could liberalise interest rates, and push to make the yuan freely convertible within five years. “There are clear signs that China’s new leaders … will make speeding up reform top of their policy agenda in the coming years,” he said in a report.

But others point out that internal factional struggles – laid bare by the sensational Bo Xilai scandal – would mean the new leadership under Mr Xi would take time to consolidate its power before being able to make meaningful policy decisions.

“If the markets hope that structural changes could take place soon after March next year, when the new administration comes in, my advice is ‘don’t hold your breath’,” Credit Suisse economist Tao Dong said.

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WORLD peace is something everyone aspires to and yet the world abounds with conflict. The same can be said about electricity prices, yet there has been a noticeable absence of reform.
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Over the past decade, endless reports and investigations into the electricity sector have all concluded that the only way to reduce prices is dramatic change. However, without the political will of the states, nothing can change.

And so it was with the federal government’s 2012 energy white paper, which was released on Thursday with great fanfare.

It called for price deregulation, price signalling, the introduction of smart meters and called on the states to ”take on hard reforms”. It stopped short of recommending privatisation, something which it explicitly mentioned in its draft report.

The final report says: ”Government ownership of energy assets

may create the potential for conflict in both policy and operational decisions. However, government ownership of energy businesses is a decision for the respective governments.”

This makes it another so-what report. There is nothing revolutionary in it and it doesn’t change the fact that reform was required three months ago, last year, a decade ago – but nothing has happened and nothing can happen unless Queensland, New South Wales and Tasmania come on board.

Indeed, the white paper is similar to a plethora of other reports that have called for radical reform. Back in 1991, the Industry Commission (now the Productivity Commission) released a report recommending privatisation to lower prices. The proposal was then backed by the Hilmer review and became a central plank of the national competition policy.

This was echoed in subsequent reports by groups including the OECD, COAG, the Owen report in NSW, and more lately the Productivity Commission, which released its draft report into electricity regulation last month, with a deadline of November 23 for submissions.

It is now in the federal government’s interests to push hard for reform ahead of an election next year, when it will need to counter perceptions that the introduction of the carbon tax is the prime cause of rising electricity prices.

As Energy Minister Martin Ferguson pointed out on Thursday, average retail electricity prices have risen about 40 per cent nationally over the past four years and well above 50 per cent in some states.

These are alarming increases. But unless NSW, Tasmania and Queensland jump on board, prices will continue to rise and hopes of reform will remain a pipe dream.

In NSW and Queensland, both governments came to office promising no asset sales. Barry O’Farrell has put the wheels in motion to get a sale ready to go, Queensland’s Campbell Newman is immovable.

The reality is electricity reform is a hot political potato and it shouldn’t be. It gets the unions offside and that explains why the federal government has backed away from explicitly recommending privatisation.

Sadly, reform should be bipartisan as it is in the country’s national interest to improve productivity and make infrastructure assets more efficient.

Despite this, we get the Greens in NSW trying to score points by issuing a news release warning against deregulation on the basis that now was not the time for ”blind faith” in markets and competition.

We don’t need blind faith in markets and competition, we need to look at the facts. In Victoria, which became a wholly private electricity market in the 1990s, price rises have been consistently lower than in all other states.

Reform kicked off in 1995 with the establishment of a contestable National Electricity Market. But it has halted in the past few years. The NEM facilitates about $10 billion of electricity trade each year, adding about $1.5 billion to gross domestic product a year, according to the Australian Bureau of Agricultural and Resource Economics.

A report released by Ernst & Young in 2011 found that the price paid per megawatt-hour in Victoria increased by just 7 per cent in real terms from 1996 to 2010, compared with real increases of 45 per cent and 46 per cent respectively in NSW and Queensland.

The other fact is Victorian consumers can churn their way to cheapness due to the number of retail outfits vying for business.

It seems the big price rises in the unreformed states can mainly be attributed to network costs. Ernst & Young found that network costs in Victoria decreased by 9 per cent in real terms on a per customer basis between 1996 and 2010. Over the same period, per customer network costs in NSW increased by 65 per cent and in Queensland they increased by a whopping 105 per cent.

Infrastructure Partnerships Australia argues in a paper that market reform, including the privatisation of network businesses, provides a great opportunity to break the back of Australia’s broader infrastructure shortfalls. ”In states where networks remain publicly-owned, electricity investment consumes up to a quarter of total public infrastructure investment – money that would be much better spent on ailing transport, hospitals and other social infrastructure,” IPA says.

In NSW, the sale of network assets would raise up to $50 billion. This would give it oodles of money to fund the North-West Rail Link, the M5 and M4 motorway completions, and the Pacific Highway duplication. In Queensland, the sale of electricity network businesses would raise something similar.

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THOUSANDS of Chinese Communist Party delegates, including billionaire industrialists and a teenage Olympic gold medallist, assembled in Beijing on Thursday to witness the coronation of a new generation of red emperors.
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For better or worse, they will govern the world’s second-largest economy and the most populous nation for the next decade. It is probable that China will surpass the United States as the largest economy during their reign.

The 18th Party Congress will be convened without the theatrical fanfare of the US presidential election. But its impact will be arguably even greater for Australia and the region.

It is commonly acknowledged that China has once again reached another inflection point in its long march to be a modern and prosperous nation. The unwritten social contract between the ruling party and the 1.3 billion ruled needs to be redrawn.

For the past three decades, the party has provided uninterrupted economic growth for a once poverty-stricken country and much-needed social and political stability after years of Maoist political extremism.

However, the Chinese model of heavy infrastructure investment and export-led growth is showing signs of fatigue. The doyen of Chinese economists, Wu Jianliang, has repeatedly said the country has reached a threshold of economic and social tensions.

Leading reformist newspapers have urged Beijing to implement a comprehensive economic and social reform agenda to steer China away from the so-called middle income trap, when developing countries fall short of their full growth potential.

The outgoing party chief, Hu Jintao, said the key to resolving all of China’s mounting problems was sustained economic growth, and central to that was tackling the vexed issue of the relationship between the government and market.

Though China has long ditched a Maoist command economy, it is only halfway to a fully mature market economy. The ”visible hands” of the government are still disproportionately influential in the running of the economy.

State-owned enterprises, which are affectionately known to the Chinese party leaders as the ”elder sons of the republic”, are dominating key sectors of the economy and sucking oxygen out of the dynamic private sector.

The big four state-owned banks have managed to squeeze large monopoly rents out of the long-suffering Chinese depositors, which easily dwarf the combined profits of some of the best private companies in China.

Chinese banks have long favoured their state-owned counterparts in the credit market. Cash-strapped private companies have been forced to borrow at usurious rates from loan sharks to sustain their operations.

The real litmus test for Beijing’s avowed goal to deepen economic reform is its willingness to take on the powerful vested interests of its red capitalists.

It is no easy challenge. Some of the biggest and most powerful Chinese state-owned enterprises were former government ministries. Their chief executives still enjoy status as cabinet ministers and have strong influence over government policies.

Some commentators argue that China’s state-owned oil companies are outmanoeuvring the foreign ministry in some parts of the world. Indeed, the ministry building in Beijing is literally being overshadowed by the imposing headquarters of these oil giants.

Early this year, a joint World Bank and Chinese government report argued that the long-term prosperity of the Chinese economy depends on Beijing reforming the state-owned sector. China’s red capitalists have ferociously resisted the change so far.

Hu’s opening speech at the 18th Party Congress has sent out mixed messages about the future policy direction in this vital area.

He said market-based rules must be respected and the government would unreservedly support the expansion of the private sector, ensuring a level playing field for state and private sector players.

Despite the lofty rhetoric of encouraging the private sector, the retiring party chief said the government would also support the continuation of the state-owned enterprises. It is unclear how his successors will walk this tightrope.

Reform of the state-owned enterprises has added significance for another announced goal of the Chinese government, namely the further integration of the Chinese economy with the world. Hu said the country needed to accelerate the pace of its ” going out” strategy.

Chinese overseas investment led by state-owned enterprises has fast become one of the most sensitive issues between China and many of its trading partners, including Australia and the US.

In fact, it is one of the key issues holding back the tortured negotiations between Canberra and Beijing over a free trade agreement.

Chinese leaders have a strong record of implementing a difficult and challenging economic reform agenda since the late 1970s, though there were signs of reform fatigue in the twilight years of the Hu-Wen administration.

We can be cautiously optimistic that new leaders can pull this one off again. But China’s red capitalists will not make their job easy.

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THE Labor Party often points to the super guarantee system to establish its credentials when it comes to maximising Australians’ retirement benefits. In fact, the lack of action by all Labor governments since the introduction of the system to fix a big problem with its design proves the opposite.
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The superannuation guarantee has its origins in a deal done by the ACTU with the Hawke government to forgo a 3 per cent wage increase for a 3 per cent compulsory employer superannuation contribution.

In 1992, after a Senate select committee inquiry into superannuation, the guarantee system was introduced by the Keating government. There have been minor changes over the years.

Due to a lack of clarity in the definition of salary used by the system, less than scrupulous employers are able to reduce their required contribution. This occurs when employees try to improve their retirement investments by making voluntary salary-sacrifice super contributions.

The Tax Office, in information provided to employers to help them meet their super guarantee commitments, states that the salary to use for an employee is evidenced by:

■ Ordinary weekly earnings; or

■ The salary specified in an industrial agreement or employment contract; or

■ The amount calculated by the payroll system.

It is this multiple choice of the salary figure to be used by employers that creates problems for employees wanting to sacrifice salary into extra superannuation contributions. This is because some employers follow the letter of the law and base their super guarantee contribution on ordinary weekly earnings after the employee sacrifices some of their wage or salary.

Take for example an employee on a salary of $50,000 a year. If they did nothing, the employer super guarantee contribution should be $4500. But if the employee chooses to salary sacrifice $5000, they are now being paid a weekly salary based on $45,000.

This means their employer is able to base that 9 per cent contribution rate on the lesser salary and only contribute $4050.

In some cases less scrupulous employers are able to avoid making any contribution at all. This is because, some legal experts believe, there is the possibility for an employer to count the $5000 salary sacrificed as meeting their requirement to make the $4050 contribution, and therefore not make any contribution.

Both main political parties are aware of this flaw in the design of the system. The best response that the Gillard government has provided is: “We are considering the issues raised in relation to salary sacrifice.” Given that this problem has existed since the system was introduced, offering to consider the issues raised is far from comforting.

If employees were hoping for a more concerned attitude from the opposition, they will be sorely disappointed. Mathias Cormann, shadow minister for financial services and superannuation, said: “We have no current plans to revisit the way compulsory super and salary sacrificing interact. Obviously employees choosing to salary sacrifice will make judgments on whether or not salary sacrificing makes sense for them given their individual circumstances.”

The problem can be solved by tightening the definition of salary for SG purposes to that of salary plus amounts sacrificed as superannuation contributions.

Hoping that politicians will do the right thing has not worked for more than 20 years. Perhaps the only way to achieve fairness is for employees to write to their federal member.

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