Ian World Australian Financial Services Ltd

For a number of reasons, 2007 may be the best year ever to consider diversifying your investments. In our role as financial planners and offering investment advice to many resident managers, we are very aware that the returns from management rights businesses have been good for many years, and have generally exceeded returns available from most other areas. Let’s face it there are some great financial success stories in management rights and there’s no reason to think that that will change.

A good management rights investment provides a regulated industry; recognised sale multiples; willing financiers; guaranteed income that the manager has some control over; and a place to live with a great lifestyle (so I’m told).

So we can understand that in the past many people involved in the industry have had “blinkers on” when it came to investment options. However, when considering an overall investment portfolio, resident managers should not ignore one of the basic investment principles - that of diversification and should also be aware of recent superannuation changes and the latest returns available from other investment sectors.

Diversification - In simple terms, diversification reduces risk. Most resident managers understand this theory and look to actively build investments outside their business. Others interpret diversification as “investing in different management rights complexes”, or “buying a unit in the complex” and there may be nothing wrong with that either, provided the risks are understood and alternatives considered.

The bottom line is - if you can’t sleep at night because you are worried about your investment, then perhaps you need to diversify.

What else is available? – As economic cycles change and consumer demand alters, fund managers and investment companies continue to introduce new investment opportunities.

There is now a huge range of products to suit most investors, no matter what your “risk profile”, ranging from the most conservative to the very aggressive. Here are some examples:

Share fund investments

While there have been good results from these sectors recently, we notice that many people missed the boat because of bad experience in the first part of this century. Investments in many Australian shares and selected managed funds have increased by around 15-20% pa over the last three years, which is a similar return to figures often quoted for management rights.

While we know these share market returns won’t continue forever, some exposure to Australian and/or International shares may help investors achieve their goals of either capital growth or income.

Capital guaranteed share investments

To help those investors who are more “risk averse” there are now some share funds with a built in guarantee of initial capital at maturity, but still giving the investor all the “upside” of any growth in future years. These are particularly suited to investors who may be retiring in the next seven years, but don’t want to tie their money to superannuation.

Emerging markets and sectors

Other recent developments allow investments in Australian or international property funds, Emerging markets (China, India, Brazil Russia etc) or infrastructure or resource funds. In most cases these funds can be accessed with borrowed money (just like management rights), meaning that cash flow is not too greatly affected and interest costs may be tax deductible.

By using the investment itself as security, your own business and property remains unencumbered. Some of these funds may also be supported by a capital guarantee to further reduce downside risk.

Superannuation

Superannuation is not an investment in itself, but is really just an environment in which investments are treated differently. These differences might be beneficial when taxation is considered, but can also be restrictive when access to funds is needed.

Superannuation investments range from cash in the bank, to shares, property, and almost any type of managed fund investment, as listed above - it might even include management rights (maybe not your own!). Many people involved in management rights have established their own “self managed” super fund and as trustee make their own investment decisions (within certain guidelines).

The proposed superannuation changes (still not law at the time of writing) are so important that every Resident Man-ager should take some time before June 2007 to find out how they might benefit from these changes.

By all means work hard in your business with passion and enthusiasm, because that will probably be your major investment, but don’t carry all your eggs in one basket – unless you have a good omelette recipe!