SUPER A NNUATION P OLICY IN V E S TMENT S INSUR A NCE A DMINIS TR ATION
AUSTR ALIA’S LE ADING SUPER ANNUATION M AGA ZINE
APRA acknowledges early release departure from usual fraud controls APRA will require funds to act on any red flags detected, but it is unlikely the regulator will take action where fraud occurs
DRPs needed for retirees reliant on dividend income The big four banks have been urged to utilise dividend re-investment plans as many Australians rely on dividends for income
Custody What is the future of the biggest outsourced task in the Australian superannuation industry?
Income Can focusing on income lead to improved outcomes for retirees?
VOLUME 34 - ISSUE 2, APRIL 2020
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CONTENTS
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APRIL 2020 WWW.SUPERREVIEW.COM.AU F IN D U S O N TWITTER @SUPERREVIEW LINKEDIN SUPER-REVIEW FACEBOOK SUPERREVIEW
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TOP STORIES & FEATURES
4
Which balanced funds lost the least?
The average sector loss was 8.46% and none made a return due to COVID-19 in Q1
7 | AustralianSuper defends value of unlisted exposures Although it has written down the value of unlisted assets, it is telling members those assets are handling current volatility better than shares
5 | LGIAsuper leadership team to take 10% pay cut Its directors and executives have agreed to the pay cut at least until 30 June
10 | RBC’s exit causes ongoing ripples in the Australian custody market How many of the remaining banks can handle mandates from superannuation funds?
6 | Superannuation funds want consistency on advice fee consents ASFA says super fund members should only need one document for advice costs provided by the fund
13 | Why you might care for income Many advisers ignore income, but there is merit to its importance for clients
2 | Super Review
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EDITORIAL
Time for super industry to circle its wagons There are those who are attacking the superannuation industry under the cover of COVID-19 and the sector needs to circle its wagons or brace for an unpalatable future.
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If the superannuation industry has not already circled the wagons, then that funds covering such industries are guilty of not having ensured it most assuredly should. greater membership diversity is gratuitous in circumstances where Make no mistake, the Australian superannuation industry is not one single financial services regulator has ever demurred under attack and when the current emergency situation generabout the merger of superannuation funds covering similar indusated by the COVID-19 pandemic is at an end, then superantries. Most often such mergers have been encouraged. nuation funds may find the environment in which they operate Given the political sensitivity of dealing with the COVID-19 pandemic changed for all time and not in ways they will find to their liking. it is probably little wonder that few, if any, Federal Labor politicians In any other circumstances than a pandemic-induced national have seen fit to criticise the Government’s approach and comments emergency in which entire industries have been on superannuation which probably makes it just as well that one of the virtually closed down and superannuation fund members thrown fathers of the superannuation guarantee (SG), former Prime Minister on the dole queue the industry would be vocally up in arms and Treasurer, Paul Keating, earlier this month saw fit to speak up. against any Government which acted to pull down the barriers Keating was provoked by suggestions by former Abbott to early access to superannuation. Government National Audit Commission But, of course, hundreds of thousands of chairman, Tony Shepherd, that the 9.5% SG be “Who amongst workers have been peremptorily thrown out suspended over the period of the pandemic. Australia’s most senior of work and many of them are facing finanThe former Prime Minister interpreted superannuation executives cial and family collapse which may or may Shepherd’s proposals as an attempt to permanently is going to wear the public not be made avoidable by the Government’s eliminate the SG and with it “destroying in Australia opprobrium and negative $130 billion measures such as the JobKeeper the best retirement savings system in the world”. publicity by suggesting the program and the boost to JobSeeker. “In Shepherd’s terms, ruthlessly exploiting Government is wrong?” Thus, who amongst Australia’s most a national crisis to secure his own misersenior superannuation executives is able objectives,” Keating wrote. going to wear the public opprobrium and negative publicity by Nobody ever accused Keating of not having astute and finelysuggesting the Government is wrong? This is notwithstanding tuned political antennae and it is clear that he recognises that while the fact that virtually everyone from fund executives to finanthe Government’s hardship early release of superannuation policy cial planning organisations all recognise that early release may be a necessary expedient in the face of the COVID-19 pandemic, carries with it more long-term negatives than positives. it should not be allowed to be used as a political Trojan Horse. And yes, just as suggested by political agent provocateurs such The COVID-19 pandemic and the Government’s responses former Financial Services Council (FSC) policy director and now have laid bare many of the failings of the Australian superNSW Liberal Senator, Andrew Bragg, the money in members’ annuation industry, not the least of which being asset allocaaccounts does belong to those members and some superantion weaknesses and a lack of adequate focus on liquidity. The nuation funds, particularly those covering the travel and hospiwarnings signs were there during the global financial crisis tality industries, are going to face serious liquidity issues. (GFC) the brutality of the coronavirus has made them real. However, for the Assistant Minister for Superannuation, Financial It is at such moments that enemies attack and that is why the superServices and Financial Technology, Senator Jane Hume, to suggest annuation industry needs to circle its wagons and mount its defences.
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3 | Super Review
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NEWS
APRA acknowledges early release departure from usual fraud controls BY MIKE TAYLOR
“It will be reasonable for RSE [superannuation fund] licensees to depart from their usual fraud control measures in order to ensure payments are made to members as soon as practicable” under the Government’s new hardship early access to superannuation regime, according to the Australian Prudential Regulation Authority (APRA). While superannuation funds will still have to play a role in verifying the legitimacy of early release superannuation under the Government’s COVID-19 arrangements, APRA has conceded that the fact most of the work will be done by the Australian Taxation Office (ATO) means they will have less visibility over what is happening. APRA has confirmed that funds will still need to act on any red flags they detect but has added that, provided the funds can prove they have followed all the relevant procedures, it is “unlikely” the regulator would take any action against where fraud occurs. In an updated question and answer exercise around the changed arrangements, APRA said that it acknowledged that the process for determining and paying amounts under the COVID-19 early release of super measures was different to the usual process for making payments under existing early release grounds. “The AML/CTF Rule exempting RSE licensees from undertaking up-front customer verification means that RSE licensees will, in most cases, have less RSE licensee-verified information upon which to form a view about a payment,” it said. “However, the security controls around the application process and the RSE [superannuation fund] licensee appropriately acting on red flags identified by their automated checking process will mean that for the majority of applications it will be reasonable for RSE licensees to depart from their usual fraud control measures in order to ensure payments are made to members as soon as practicable. “In circumstances where an RSE licensee is able to satisfactorily demonstrate to APRA that it has followed the approach set out in these FAQs, APRA would be unlikely to take action against an RSE licensee should a fraudulent payment/s occur.”
Which balanced funds lost the least? BY JASSMYN GOH
All balanced superannuation funds experienced a loss during the first quarter of the year, illustrating the volatility cause by the COVID-19 pandemic. According to FE Analytics data, all 180 balanced funds recorded a loss and the best performing fund was Perpetual WealthFocus Super Diversified Real Return at a loss of 2.43%, over the three months to 31 March, 2020. This was followed by Suncorp Brighter Super Personal Suncorp Multi-Manager Balanced and Suncorp Bright Super Business Suncorp Multi-Manager Balanced both at a loss of 3.65%, AMP Signature MySuper Macquarie Balanced Growth at a loss of 3.77%, and AMP SignatureSuper Macquarie Balanced Growth at a loss of 3.87%. According to the Perpetual fund’s latest factsheet, the fund’s key drivers of returns in February were the negative contribution of global and domestic equity markets. “While global equity stock selection contributed to performance, Australian equity stock selection detracted as undervalued sectors such as materials, energy and consumer cyclicals underperformed,” it said. It noted that the performance of the fund’s positions in global equity options offset a significant portion of the negative equity returns. “Defensive assets performed well generally, with Australian duration and US dollar exposures contributing,” Perpetual said. “The fund’s other foreign exchange positions also performed well as the Australian dollar continued its decline.” It said the fund was positioned to maintain participation in any rally in equities and credit markets but the portfolio retained strong defensive qualities to mitigate against various risks. These risks included value and quality bias in equity allocations, optionality in Australian and US equities that would lower the weight of equities in the event of a sell-off, and its significant cash position and substantial foreign exchange exposure. It noted improving liquidity and weak economic growth suggested a delicate balance between a softlanding outcome which would be supportive for equities, credit and other risk assets and a recession which would inevitably cause a nasty bear market. The continuation or resolution of the COVID-19 epidemic will likely be a decisive factor. The fund’s largest sector weighting was to cash and enhanced cash at 36.5%, followed by global equities (developed markets) at 12.3%, and Australian bonds at 7.8%. Chart 1: Best performing balanced super funds v sector during Q1 2020
SOURCE: FE ANALYTICS
4 | Super Review
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NEWS
Dividend reinvestment plans needed for retirees reliant on dividend income
LGIAsuper leadership team to take 10% pay cut BY JASSMYN GOH
LGIAsuper’s directors and executives have committed to a 10% pay cut until at least 30 June, 2020, as a response to the COVID-19 pandemic. The Queensland superannuation fund’s chair, John Smith, said the remuneration cut decision was because its core membership came from the local government sector and they would be hard hit by the virus as ratepayers experienced financial hardship. The fund’s chief executive, Kate Farrar, said the pay cut would be through sacrificing annual leave entitlements. “Many of our members are directly impacted by COVID-19, and it is important they know we are standing with them, while working tirelessly to protect them and their savings,” Farrar said. “We know our fund will be impacted by COVID-19, but our members can rest assured that we are determined to keep investing in services for members even through the fallout from this pandemic.” Farrar noted that the board and leadership team would not ask employees to make the same sacrifices.
Plato Investment Management has urged the big four banks to utilise underwritten dividend re-investment plans (DRPs) to keep paying dividends as they are a major income stream for Australians. Plato’s managing director, Dom Hamson, encouraged the banks to take on the suggestion from the Australian Prudential and Regulation Authority (APRA) as it was a solution that could help address concerns about the ability of lenders to maintain capacity while paying dividends. “We know many of Australia’s traditional income stocks have DRPs. These companies can choose to underwrite those plans, which effectively means that new shares will be issued matching the dollar value of all the dividends that they pay,” Hamson said. “For all those investors electing cash rather than the DRP, the company will still issue new shares which a broker will sell on market during the DRP pricing
period. This allows the company to completely preserve its capital as well as paying dividends to those who rely on the income to make ends meet.” Banks have already been named as a sector where dividends were at risk, particularly the smaller players. This would be caused by the knock-on effect of the rent and mortgage deferments which would mean less cash and the need for banks to keep capital to service their own debt loads. He said he expected Australia would fall into a ‘deep recession’ in the June quarter of 2020. Hamson noted that the DRP would ensure Australian retirees and other investors who relied on dividend income from the big four banks were not “hung out to dry”. Plato estimated that the big four banks paid 30% of gross dividends (cash dividends plus franking) of the entire S&P ASX 200 index in 2019.
Super members need long-term view BY CHRIS DASTOOR
Superannuation fund members need to stop worrying over their current account balances and maintain a bigger picture view as the investment is designed as a long-term solution, according to research house SuperRatings. The advice from SuperRatings comes as members check their account balances to see the effect the sell-off had on their retirement savings and it warned against making decisions based on an emotional reaction to the current environment. Kirby Rappell, SuperRatings executive director, said super members far away from retirement need to stay invested. “Knee-jerk changes to your portfolio could have a negative effect on your retirement,” Rappell said. “Switching to cash will lock in losses and mean you miss out on the upside when the market eventually recovers. “We suggest members talk to their fund or financial adviser to help ensure any decision is aligned with a long-term strategy.” The firm reminded investors that for those in the 20 to 40 age bracket, you still had another 30 to 50 years before retirement, and older investors closer to retirement should be in conservative options to mitigate losses in market downturns. According to estimates from SuperRatings, the median balanced option fell 8.9% in March and was down 10% for the quarter. The median growth option, which was generally more exposed to shares, fell 12.5% in March and 14.1% over the quarter; the median capital stable option fell only 4.1% in March and 3.8% for the quarter. For pension returns, the median balanced option fell 10.2% over the quarter, while the median growth option fell 14.4% and the median capital stable option fell 3.8%. 5 | Super Review
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NEWS
Superannuation funds want consistency on advice fee consents BY MIKE TAYLOR
Superannuation fund members should only have to deal with one document when dealing with the costs of financial advice provided via their fund, according to the Association of Superannuation Funds of Australia (ASFA). In a submission responding to the Australian Securities and Investment Commission (ASIC) on advice fee consents, ASFA said it considered that the fee disclosure statement (FDS) and consent should be together when considered by the account holder. “This will ensure that the account holder has the required information about the services they are entitled to receive under the arrangement,” it said. “Some additional information that could also be included is if services had been provided by the fee recipient previously, the consent form should provide confirmation that services had been provided to the account holder for that period.” The submission also backed a prescriptive approach for financial advisers receiving a fee via superannuation funds. “ASFA notes that ASIC is striving for a balance between prescriptive standards and providing flexibility for fee recipients. Superannuation funds, as account providers, need to build systems and processes to ensure that the consent received from the fee recipient meets all the requirements,” it said. “If the form of these consents differs between each fee recipient, this could create significant compliance and administrative costs for superannuation funds. ASFA recommends a more prescriptive approach be used to determine exactly what must be included in a consent to ensure it is as consistent as possible between fee recipients, creating administrative and compliance efficiencies for account providers when processing these forms.” “Consistency between consent forms is likely to decrease the need for manual interventions and contact with the fee recipient, increasing administrative efficiency for the fee recipient as well. Part of the prescriptive approach could include, for example, a prescribed list of services that will be provided by the fee recipient.”
COVID-19 could be nail in income protection insurance coffin BY JASSMYN GOH
The COVID-19 pandemic could be the final catalyst to cease long-term income protection in its current form, both in retail and group markets, according to Rice Warner. The research house’s latest analysis pointed to Australian Prudential and Regulation Authority (APRA) data on profit margins pre-pandemic that showed insurers, and reinsurers, were experiencing greater losses than ever. In December, 2019, individual disability income insurance sum posted a net loss after tax of $1.5 billion – the largest loss compared to individual lump sum, group lump sum, and group disability income insurance. “For the 12 months to December 2019, risk products reported a combined after-tax loss of $1.3 billion. All risk products deteriorated with the only exception being the individual lump sum product,” Rice Warner said. “In particular, individual disability income insurance (also known as income protection insurance) reported a substantial loss, primarily driven by the persistence of adverse claims experience. “COVID-19 will deliver a further hard blow.” It said there would be death disability claims directly from the virus, but the impact of a sudden spike in unemployment and a general economic downturn would swamp that impact. It noted that disability claim rates were directly correlated to unemployment. “In addition, workers compensation claims in Australia are also closely correlated to unemployment. This arises from elevated stress around work performance and business continuity, existing conditions that were previously manageable becoming unmanageable, and a rise in mental health claims,” the analysis said. “Insurers are also in a position where, due to COVID-19 and physical distancing requirements, they will have less ability to manage existing claims as they will need to relax requirements for existing claimants to prove their on-going incapacity to work. “…There are of course fewer jobs for claimants to return to, which inevitably impacts the duration of claims and worsens experience.” Rice Warner noted that when investments markets drop, advisers often turned their client conversations to insurance cover and while this was a positive in addressing underinsurance levels, customers would have questions around whether they will be covered specifically for pandemics. “So far, insurers have strong messaging reassuring the community that any existing cover that has pandemic exclusions will not have them applied. It may be more difficult to promise no pandemic exclusions on new cover given the potential for anti-selection,” it said. “There would be also seem to be inevitable premium increases required across both retail and group markets, prompting the need to accelerate and perhaps scale up further product design changes.” 6 | Super Review
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NEWS
AustralianSuper defends value of unlisted exposures BY MIKE TAYLOR
AustralianSuper may have written down the value of some of its unlisted assets, but it is still telling members that unlisted assets are weathering the current volatility better than listed share markets. In information directed to members, AustralianSuper has pointed out how well its balanced option has performed when compared to the broader market, due to its diversification. “AustralianSuper’s balanced option (where most members are invested) includes exposure to growth assets like listed shares, and defensive assets like fixed income, foreign currency and cash as well as unlisted assets such as infrastructure, property and credit, which provide both growth and income. It currently has just over half its portfolio invested in listed shares. “This structure helps to reduce the impact of negative market movements on your returns, while providing long-term growth, just like the significant growth members have enjoyed over the last 10 years,” the fund’s communication to members said. “As you can see in the chart below, while Australian and global markets have fallen 20.9% and 12.7% respectively since the start of this financial year to the end of the March quarter, the balanced investment option has only fallen by 6.45% in comparison. “The current fall in listed shares is being moderated by the allocations to fixed income, cash and foreign currency, as well as the exposure to unlisted assets such as infrastructure, property and credit – which typically exhibit lower levels of volatility than listed shares across economic cycles,” it said. “While COVID-19 is having an impact on the values of these unlisted assets, the falls are relatively lower compared to what we’ve seen in listed share markets.”
Raiz Invest loses 20.1% in FUM in March BY JASSMYN GOH
Since the COVID-19 pandemic ramped up over the last month, Raiz Invest has experienced a 22.5% loss in retail funds under management, a 6.5% loss in superannuation FUM and is reviewing its staffing levels. In an announcement to the Australian Securities Exchange (ASX), Raiz said its retail FUM stood at $305.3 million at 31 March, 2020, and $66.3 million for its super fund FUM. This was a total FUM of $371.5 million, after a 20.1% loss over the last month. Raiz Invest chief executive, George Lucas, said: “Despite the difficult times for the many young people losing their jobs as a direct
consequence of the economic fallout from the COVID-19 pandemic, the vast majority are remaining loyal to Raiz with March active customers only falling 2.4%. “We are well placed to emerge from both the public health and economic crises in a solid financial position, in large part due to this customer loyalty but also because of the $7.5 million capital raise late last year and strong in cash and cash equivalent position. “However, these are uncertain times and we are reviewing staffing levels, senior management salaries, directors’ fees, and other fixed costs to ensure the company continues to provide the best services to our customers throughout this difficult period.”
Revalue unlisted assets more frequently – superannuation funds told Because unlisted assets held by superannuation funds are not subject to daily pricing, trustees are currently walking a fine line in determining what is equitable, transparent and defensible in terms of both their members and the regulators, according to major consultancy, Willis Towers Watson (WTW). The WTW analysis argued that, in circumstances as volatile as is currently the case, superannuation funds should be revaluing their unlisted assets more frequently “as significant value swings are likely to occur while there are large numbers of transactions across their membership accounts”. “In periods of significant market volatility, unlisted asset valuations are problematic. We saw asset owners dealing with this quandary during the Global Financial Crisis (GFC), so it’s not a new complication,” WTW senior investment consultant, Nick Kelly said. “But what may surprise, is that there’s very little consistency in the way super funds and other unlisted asset owners manage the valuation process. “What do trustees and executives need to consider? It’s a particularly important question, given that regulators will undoubtedly ask about what process they’ve adopted,” he said in an analysis. “The intractable conundrum of the super fund fiduciary is maintaining a medium-to-longterm time horizon of the entire investment portfolio, while members have the ability to ‘switch’ on a short-term basis. Within that Gordian knot, unlisted assets play many valuable roles; however, because they remain without a daily assessment of their value, trustees are walking a fine line in determining what’s equitable, transparent and defensible.” He notes that trustees and executives remain responsible for the unit prices struck. “Member switches or redemptions have already begun and are taking place more frequently, but for the most part, valuation changes are yet to flow through to unit prices. Regardless of what valuation a fund or institutional investor gets from its investment manager, trustees and executives remain ultimately responsible for the unit price they strike for members and beneficiaries.” 7 | Super Review
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CUSTODY
RBC’s exit causes ongoing ripples in the Australian custody market BY MIKE TAYLOR
The Australian custody market continues to be as competitive and dynamic as ever, with the announced exit of RBC having created a series of ongoing ripples.
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It is a measure of the impact of the COVID-19 pandemic that at least four superannuation fund custody mandates which were on foot in February are now, largely in abeyance as the industry seeks to deal with more pressing issues, not least the Government measure allowing hardship early access to superannuation. Custody, more so than even administration and asset allocation, continues to be the big task outsourced by superannuation funds simply because it represents such a complex area which necessarily needs the underpinning of the sort of highly specialist technology which can only be delivered by the major banks. Little wonder, then, that when a number of superannuation funds late last year decided to review their custody needs and to test the market, they would have been aware that one way or another they would end up with a choice of around five global institutions, and one locally domiciled major player. In Australia, the top 10 players are: • • • • • • • •
JP Morgan; NAB Asset Servicing; Northern Trust; Citigroup; State Street; BNP Paribas; HSBC Bank; RBC Investor and Treasury Services;
• Ausmaq; and • Netwealth.
However, of these players, only the top seven are usually regarded as being in contention for superannuation fund mandates, and it is worth mentioning that one of those major players – RBC Investor and Treasury Services – decided last December to exit the Australian market. What is more, as part of that exit, RBC gave its imprimatur to Citigroup to pursue onboarding RBC’s major Australian clients – something which is regarded as being at least in part responsible for some of the custody mandates currently on foot in the market. Australian staff of RBC were told that the company had decided to close is Australian custody business and the messaging around the move was that “the complex and dynamic nature of the market in Australia meant it was difficult for us to grow the business to the size and scale required to deliver meaningful value for our shareholders and clients”. “We consider that it is in the long-term interest of our clients and employees to seek a transfer of our business to an organisation with a client focus and strong offering in the market. We thank our colleagues and clients for their partnership and remain committed to supporting each of them during this period of transition,” it said. RBC is not the first nor is it likely to be the last global custody
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CUSTODY
“It’s a complex market and the clients and buyers the superannuation funds, asset managers, and broker/dealers and the like - are very sophisticated organisations, they understand what they want extremely well.”
business to decide to exit Australian custody notwithstanding the scale of Australia’s $3 trillion superannuation industry and its still-growing funds management industry. Over the past 20 years, BNY Mellon has ventured into and then largely departed the domestic custody market and it was not that long ago that NAB Asset Servicing was actively canvassing exiting the market with the decision to remain understood to have been largely influenced by the dearth of companies willing to buy the business for the price hoped for by NAB. Indeed, after deciding to remain in the custody market in 2015, NAB Asset Servicing also chose to end its long-standing global custodian partnership with BNY Mellon and switch to Citibank. At the time, NAB was citing the benefits of Citi’s extensive global network and technology. And the ability to leverage global technology remains a key selling point as custodians seek to compete for Australian superannuation mandates. Looking at the changes which were occurring to the Australian custody market, BNP Paribas Securities Services Australia chief executive, David Braga, said that he had done some analysis and it was interesting to see how, over the past 25 years, players and
entered and left the Australian market. “Its been pretty stable for a while now but we need to remember that it’s a very competitive market, it’s a complex market and the clients and buyers – the superannuation funds, asset managers, and broker/dealers and the like – are very – David Braga sophisticated organisations, they understand what they want extremely well so it makes it a very competitive environment,” he said. “That strong competition is a good thing because we all want to keep our clients and look after them properly, so for an organisation like RBC to decide they’re going to change their posture in Australia – that sort of thing is going to happen from time to time with the underlying dynamic being that we’re operating in a very strong market, a very large market and a very competitive market,” Braga said. He said that from BNP Paribas’ point of view, the company remained very committed to the Australian market. “We like being here [Australia] we think it is a very positive place for us both on a local basis and on a global basis in terms of the types of services and the questions we get asked of us here,” Braga said. Continued on page 10
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CUSTODY
Continued from page 9
“You would have seen the first step of that with superannuation clients insourcing investment and leveraging their service partners to be able to provide not just the traditional custody and fund services but the middle office service to the superannuation fund,”
“We can often find ourselves solving problems for clients in Australia and then developing new global capabilities and we’ve got a few examples of that around some reporting for one of our superannuation fund clients which is now being used as a prototype for our global capabilities,” he said. “There’s also another project we’re working on around the provision of data for a major complex asset owner and, again, that is something that we’ve done in Australia first leading to it becoming a new global capability,” Braga said. JP Morgan’s head of platform sales, Nick Paparo, echoed many of Braga’s sentiments including the need for custodians to, as far as possible, maintain a business as usual (BAU) approach in the current circumstances of the COVID-19 pandemic. “Fundamentally maintaining the BAU service – that has been the priority and at the forefront of our minds and we’ve been able to maintain that level of service which is extremely important. And, like BNP’s Braga, Paparo and JP Morgan have been conscious on the events which have impacted the custody market over the past 18 months. “It has definitely evolved over the last 18 months,” he said. “Obviously we’re extremely proud of our leading position in the
Australian market and as a global custodian we just recently hit number two as well, but ultimately what we’re seeing from our clients is how can JP Morgan leverage its scale but also its investment in technology not just on a business as usual basis but as clients change direction.” “You would have seen the first step of that with superannuation clients insourcing investment and leveraging their service partners to be – Nick Paparo able to provide not just the traditional custody and fund services but the middle office service to the superannuation fund,” Paparo said “And that’s actually accelerated and expanded quite quickly to the point where it’s not just how we support them in the local market but as they expand into different jurisdictions – its how JP Morgan supports them as they move into different markets.” Paparo said the other major factor was the provision of data. “The data back-bone that we’ve created is integral to delivering the services and data to our clients to perform the roles they need to not just as traditional asset owners and managers,” he said. That’s been extremely important and that’s the direction the market has taken in the last 18 months. A recent white paper produced by the Australian Custodial Services Association (ACSA) has painted a highly accurate picture of the current state of the custody market. The white paper said the clients of ACSA
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CUSTODY
Chart 1: Funds industry, December 2018, $B
$375 - 11%
$56 - 2% $228 - 7%
$2,671 - 80%
Life insurance corporations
Superannuation (pension) funds
Public offer (retail) unit trusts
All other managed funds institutions
SOURCE: ABS 5655.0 - MANAGED FUNDS, AUSTRALIA, DEC 2018 - UNCONSOLIDATED ASSETS TOTAL MANAGED FUNDS INSTITUTIONS.
members generally comprised: • The trustee (RSE) of large superannuation funds; • The trustees or responsible entities of managed investment schemes;
• Operators of investor directed portfolio services (IDPS) or managed accounts (SMA, MDA); • Life and general insurance companies; • The trustees of endowments and charitable funds; • Australian governments (Commonwealth and State) and agencies; • Overseas governments and sovereign funds; • Global custodians, banks and brokers with a need for sub-custody arrangements in Australia (supporting in-bound institutional investment); • Listed trusts and other closed ended investments; • Some of the larger Australian charitable foundations; • Overseas pension funds; and • Other overseas institutions (investment banks, broker/dealers, endowment funds, charitable foundations). “Technically (and contractually), the “client” is the company that acts as the fiduciary of the fund (for example, trustee of a regulated superannuation fund, or the responsible entity of the regulated managed fund),” the paper said. “The following table provides a view of the Australian market from the Australian Bureau of Statistics (ABS). Note that the ABS also measures retail unit trusts on a consolidated basis which shows a total of approximately $957 billion in this sector, the difference largely due to unlisted trusts accessed directly, not via superannuation funds.”
Who is top dog in the custody space
So who is leading the league table among Australia’s custodians? As has been the case for most of the past five years, JP Morgan continues to be the dominant player in the custody space. Table 1: Total Assets Under Custody for Australian Investors
Rank Provider
30-Jun-19
31-Dec-19
% change
1
J.P. Morgan
809.4
866.7
7.1%
2
NAB Asset Servicing
564.0
578.0
2.5%
3
Northern Trust
448.6
576.0
28.4%
4
Citigroup
506.7
575.4
13.6%
5
State Street
489.5
511.4
4.5%
6
BNP Paribas
501.0
511.0
2.0%
7
HSBC Bank
193.0
200.3
3.8%
8
RBC Investor & Treasury Services
122.5
129.3
5.6%
9
Ausmaq
58.8
64.5
9.8%
10
Netwealth
23.3
28.5
22.3%
11
BNY Mellon
28.0
24.6
-12.3%
Total
3,744.8
4,065.7
8.6%
SOURCE: AUSTRALIAN CUSTODIAL SERVICES ASSOCIATION
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Why you might care for income BY JONATHAN SHEAD
A look at why a focus on income will make it easier for retirees and their advisers to buy and hold growth, assets and how mentally quarantining price volatility plays a part.
M
Many retirees and their advisers place emphasis on income from their investments. Others ignore income completely. Is there a right or wrong answer to the importance of income in retirement?
Defining income
Let’s start with clarifying what “income” means. Retirees typically use “income” to mean one of two things: (i) Accounting income from their investment portfolio. This includes dividends from equities, coupon payments from fixed income investments, rental income and interest. It does not include capital gains, whether realised or unrealised. (ii) Regular payments from their superannuation once they have retired. The source of these payments is not important. “Behind the scenes” you may argue these payments are sourced from accounting income, capital gains or a return of capital. For the remainder of this article, we will
use the first definition, where “income” means income as opposed to capital gains. We will refer to the second definition as “pension payments” to avoid confusion. Having defined “income” we can rephrase the original question slightly. Should retirees care whether their investment returns are coming from capital gains or from income?
The argument against caring about income The argument against caring is straight forward. It is total returns that matter for retirees, so why should they care whether those returns are generated by capital gains or by income? Surely a total return of 8% made up of 2% income and 6% capital gains is better than 4% income and 2% capital gains? This is a powerful argument and large parts of the industry rely on it. In fact, almost all large superannuation funds don’t even distinguish between income and capital gains
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Chart 1: Australian and Global Equities Portfolio – Historical Income
Chart 2: Australian and Global Equities Portfolio – Historical Price Only Return
PORTFOLIO ALLOCATION AT BEGINNING OF PERIOD: 50% AUSTRALIAN EQUITIES; 50% GLOBAL EQUITIES. SOURCE: STATE STREET GLOBAL ADVISORS, S&P, MSCI
when they report their returns. For retirees and their advisers who are comfortable with this way of thinking, we would be reluctant to force change. This is especially true for retirees with most of their superannuation in a large superannuation fund. Trying to distinguish between income and capital gains for these investors will only cause confusion.
SMSFs and assets outside superannuation So, if thinking about income may not be helpful for retirees in large superannuation funds, who might find it helpful? We think there are two groups where a focus on income may provide benefits. The first is self-managed super funds (SMSFs) in pension mode. Retirees using SMSFs have more control over their investments and can easily see whether their investment returns are being driven by capital gains or by income.
PORTFOLIO ALLOCATION AT BEGINNING OF PERIOD: 50% AUSTRALIAN EQUITIES; 50% GLOBAL EQUITIES. SOURCE: STATE STREET GLOBAL ADVISORS, S&P, MSCI
The second is retirees with significant assets outside superannuation. This may be anything from investment property, to listed shares to exchange traded funds (ETFs) to managed funds.
Mental accounting and market volatility We, along with many others in the industry, believe that most new retirees need to keep a healthy exposure to growth assets because most new retirees still have 20 to 30 years of investing ahead. Unfortunately, growth assets are usually more volatile, and that leaves retirees exposed to sudden market falls. Sudden market falls can lead to panicked investors, just itching to sell their investments. Or they can cause investors to worry that their superannuation will run out much sooner than expected. This is where the idea of “income” can be powerful, particularly for growth assets.
Provided an equity or growth portfolio is well diversified, its income is likely to be surprisingly stable. To demonstrate this, take a simple portfolio split equally between Australian equities and global equities, with no rebalancing – just “buy-and-hold”. The chart below shows the historic income from dividends that this portfolio would have generated. All numbers have been adjusted for inflation, so they represent “real income”. The opening balance is $1 million in today’s terms (equivalent to just over $300,000 in 1983). Over this 35-year period, this simple equity portfolio shows steadily rising dividend income. Certainly there are periods where dividends contract. Most notable was the global financial crisis (GFC) where dividends of close to $120,000 on this portfolio fell to just over $80,000. However, compare this variability in income with variability in price. The second chart shows one-year price returns Continued on page 14
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Continued from page 13
for the Australian and Global components of the portfolio. This is the kind of intimidating volatility investors associate with equity or growth investing. Encouraging retirees to focus on income, especially dividend income, allows them to mentally quarantine their pension needs from shorter term price volatility. We believe it helps investors hold steady during market sell-offs.
Investment benefits of income But there is a second reason for focusing on investment income, and particularly dividend income from equities. A number of research datasets suggest that companies with higher dividend yields tend to outperform over the very long term. High dividend yield investing is not for everyone; it involves accepting significant style biases in a portfolio. Investing for dividend yield may have a good very long-term track record, but shorter performance has been much more mixed, with extended periods of both market outperformance and underperformance.
Table 1: High Equity Yield Performance Data Set
Market
Excess Period (% p.a.)
Time Notes (yrs)
Kenneth R. French3
US
1.4
6/1927 – 12/2018
91.5
Highest 30% vs. market return
Kenneth R. French3
US
1.4
12/1974 – 12/2018 44.0
Highest 30% vs. market return
Kenneth R. French3
Dev. ex-US 3.3
12/1974 – 12/2018
44.0
Highest 30% vs. market return
S&P Global Aristocrats
All World
1.3
12/2001 – 1/2019
17.1
Excess return vs. MSCI ACWI
S&P High Dividend Yield
US
4.4
12/1999 – 1/2019
19.1
Excess return vs. S&P500
MSCI World Dividend Tilt
Developed 1.0
11/1998 – 1/2019
20.2
Excess return vs. MSCI World
2.8
11/2002 – 1/2019
16.2
Excess return vs. MSCI ACWI
MSCI ACWI Dividend Masters All World
SOURCE: STATE STREET GLOBAL ADVISORS, KENNETH R. FRENCH, S&P, MSCI
The table above summarises findings from three datasets covering high equity yield strategies for US and global equities. While it may be true that total return should count more than income, it is not true that focusing on income automatically comes at the expense of total return. In fact, the very long-term historic data suggests the opposite.
Conclusion
We believe SMSF investors who focus on income are better able to mentally quarantine price volatility in their growth
assets from their regular pension requirements. That makes it easier for a retiree and their adviser to buy and then hold onto growth assets in their portfolio. This mental quarantine is helpful regardless of style biases within the portfolio. However, for investors willing to take a very long-term view, there is evidence to suggest higher dividend yield companies tend to outperformance over the very long term. Jonathan Shead is head of investments at State Street Global Advisors.
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ROLLOVER THE OTHER SIDE OF SUPERANNUATION
Are APRA’s heatmaps in social isolation? Rollover offers a big shout out to the girls and boys at the Australian Prudential Regulation Authority (APRA), particularly those involved in the superannuation funds heatmaps exercise. Given the investment fall-out from the COVID-19 pandemic, Rollover is wondering what sort of colours are showing up the heatmaps of all those funds who were focussing on growth rather than capital preservation. Rollover knows that APRA has been communicating with a number of superannuation funds seeking regular updates regarding their liquidity in the face of high levels of switching and, of course, the hundreds of thousands of members who have contacted the Australian Taxation Office (ATO) about drawing down $10,000 in hardship early access to their accounts. Given all of the above, the question is whether APRA has time to work on its heatmaps and, if it does, what will they look like given what represents rapidly-changing circumstances and the need to factor in membership demographics. Rollover hears tell it could be the back end of 2021 before the APRA team feel brave enough to undertake another heatmap exercise.
HOW THE WHEEL TURNS It seems only a few short years ago that superannuation policy guru and sometime Super Review columnist, Blake Briggs, packed his swag and left the Financial Services Council for what looked like a pretty cushy job over at Westpac as head of government affairs for wealth. But how things change in two years. Westpac has largely exited wealth leading Rollover to conclude that Briggs’ move was not so much a case of returning to the mother ship, but actually finding
a convenient career life raft. Not that Briggs is actually discernibly taking a backward step. Oh no. He left the FSC as senior policy manager, superannuation, and returns as deputy chief executive, under Sally Loane. Rollover can’t remember the last time the FSC had an official deputy chief executive but he does remember that when Richard Gilbert was chief executive of its forerunner, the Investment and Financial Services Association, he had a deputy, John O’Shaughnessy.
Hello, hello is anyone there? Rollover doffs his cap to all those superannuation industry operatives who have begun working from home, but after three weeks on the home front he is beginning to wonder whether some people are as focussed as others. Of course, there are those who, when Rollover dials their number, they pick up as promptly as ever but then there are others who, well, the phone just rings and rings. Now, your correspondent entirely gets that working from home is not easy when parents have to balance their work with managing young children, but he is wondering whether some of his contacts might be catching up on Netflix or having a snooze in the big, red chair. No names, no pack drill at this stage, but Rollover is keeping a list.
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