MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY
www.moneymanagement.com.au
Vol. 36 No 3 | March 10, 2022
18
INFLATION
Positioning portfolios
ESG
22
The carbon transition
Explaining the Metaverse
Hume eyes principlebased advice
ESG
BY LIAM CORMICAN
PRINT POST APPROVED PP100008686
Taking an equal approach to ESG ADVISERS who fail to adequately demonstrate environmental, social, governance (ESG) commitments, with an equal focus on each of the three components, may risk losing clients. Recent studies have shown investors are more willing to move their money into investments that are less detrimental to the environment and the ESG factors are becoming even more important for those clients who are considering deploying cash into new investments. Although out of the three factors, the environmental one still receives the most attention, fund managers have noted the benefits are also coming from the social and governance components. They should equally consider each and it was almost impossible to realize one of the goals without taking into consideration the other two elements. The Perennial Better Future Survey Report also found that 2020 and 2021 were watershed years for sustainable investments, with significant inflows into products as well as an intensified focus on climate change and net zero emissions. At the same time, increased ESG engagement by investors with listed entities led to improved disclosure. The top ESG areas with the most material impact to the businesses were GHG emissions, diversity, modern slavery and cyber security, among others.
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26
TECHNOLOGY
Full feature on page 14
THE GOVERNMENT will target a principle-based regulation framework and remove prescriptive checklists like the safe harbour provision for the best interest duty if it is re-elected, says Senator Jane Hume. Speaking at the AIA Adviser Summit 2022, Hume, minister for superannuation, financial services and the digital economy, said the Quality of Advice Bill would go back to basics by identifying opportunities to simplify regulatory compliance, reduce costs and remove duplication. “The regulatory environment has truly become a Gordian knot so now we’re stepping back and untangling that knot,” said Hume. “We want to make sure that
the regulatory framework could better enable the provision of high quality accessible and affordable financial advice for retail investors.” Other than replacing the prescriptive rules based framework with a simplified principle-based framework, as had been suggested by commentators, Hume said the Government would look at simplifying education standards and disclosure as well as documentation requirements. “Statements of Advice should be more helpful for consumers and less expensive for advisers to prepare,” said Hume. “The Government intends to rebalance the regulation industry and ensure that standards are practical as well as professional. Continued on page 3
FPA proposes changes to financial advice law BY LAURA DEW
THE Financial Planning Association of Australia (FPA) is proposing changes to make financial advice law simpler and less burdensome for advisers. These were part of a review by the Australian Law Reform Commission (ALRC) of the Legislative Framework for Corporation and Financial Services Regulation- Interim Report A. This was working to simplify and support the professional services provided by financial planners through improving the operation and structure of the Corporations Act 2001. In its submission, the organisation said it broadly agreed with the structural amendments proposed by the ALRC and suggested the Continued on page 3
3/03/2022 11:58:55 AM
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3/03/2022 12:40:17 PM
March 10, 2022 Money Management | 3
News
Vertically-integrated advice not a panacea to industry problems: Jones BY LAURA DEW
A “hard-headed discussion” is needed about the possibilities of vertically-integrated advice, according to shadow minister for financial services, Stephen Jones. Speaking at the AIA Adviser Summit, Jones was asked by the moderator what a Labor government would focus on its first 100 days if it was elected in May. “We need to have a hard-headed discussion about the benefits and limitations of verticallyintegrated advice because a lot of funds have been saying the answer lies with them and that [the government] should just open up the rules around intra-fund advice and fill the gaps. “I’ve got a high level of discomfort around that, given everything we have seen with some of the conflicts that exist in that area in the past.” A second priority, he said, would be to rectify problems caused by the education requirements under the Financial Adviser Standards and Ethics Authority (FASEA) and to formalise the experience pathway which was proposed at the end of 2021. “I think the problem we had with FASEA model is trying to squeeze everyone through the same funnel and testing and educating people on things that are not relevant to the job they have
been doing for the past 10 or 20 years, that seems to be an enormous waste of public resources. “We need to have a conversation and actually see it as a high priority, something we should be able to start actioning immediately after the next election if we are successful.” Concluding, Jones said Labor would try to avoid making radical changes and focus on fixing previous issues which would allow advisers to better do their job.
Hume eyes principlebased advice Continued from page 1 “This includes simplifying minimum education requirements to ensure high quality financial advice is available to consumers, and this will achieve the intention of the FASEA reform but without micro-managing advisers, or universities or students and businesses.” She said it was no secret that the pipeline for new advisers was thin with only a few hundred entrants completing their Professional Year in 2021. “The sunk cost, the investment in time and in money and the pressure that we’re putting on young people straight out of school is simply too much. “So we want to consider taking a more simplified and sensible approach. The government is ensuring that consumers can expect a high quality of professional advisers certainly, and all new entrants must have a relevant degree. “But we want to increase the size of the pool that businesses can select new advisers from, and for experienced advisers, we want to recognise the value of that experience.”
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“There’s a fair bit of background anxiety in the community around all these things that are going on. We want to ensure advisers can spend their time on the things they are best at and that is providing advice to customers. “We are not going to chuck everything in the air and change everything, we want to work in a deliberate way with the profession and fix those things that advisers have been complaining about for some time. We’re up to the job.”
FPA proposes changes to financial advice law Continued from page 1 language and structure of the Act should also be amended to allow for better engagement with the financial services sector. Proposals by the FPA included renaming the term ‘general advice’, reviewing terms such as ‘financial planner’ and ‘financial coach’, revising the test for ‘sophisticated investor’ and separating the regulation of financial products from regulation of advice. It also proposed removing the requirement for an AFSL to cover the provision of financial advice. Sarah Abood, chief executive of the FPA, said: “The FPA supports the ALRC proposals to make financial advice law and regulation simpler through a consolidated ‘rules book’ for financial advice. This approach would help improve the affordability and accessibility of financial advice for more Australians. “The financial planning profession doesn’t need more regulation; it needs
better regulation. Financial planners are required to interpret a never-ending list of contradictory requirements placed on them. To ensure compliance, planners are required to comply with four laws regulated by eight regulators with additional oversight from Australian Financial Services Licensees and professional associations and additional consumer complaint mechanisms through two ombudsman services and the courts. “We believe this creates a significant risk. Financial planners are not lawyers, but it may be that the regulatory and compliance requirements under one Act and Regulator differ from those of others, leaving financial planners at risk of breaching one requirement in order to meet the conditions of another. “As well as the compliance risk, this has a significant impact on costs and efficiencies, particularly on small licensees who have less support and will find it find it harder to meet the increasing regulatory demands.”
3/03/2022 11:59:01 AM
4 | Money Management March 10, 2022
Editorial
laura.dew@moneymanagement.com.au
IMPROVING WOMEN’S SUPER
FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000
There have been improvements to closing the gender gap in superannuation but women are still finding themselves penalised when it comes to their finances and their super.
Editor: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814
The passing of Helen Hewett AM, founding member of Women in Super and former chief executive of superannuation fund Cbus from 1997-2004, has highlighted how much has changed over the years regarding the gender gap in superannuation. Hewett founded Women in Super with three others in 1993 with the aim of advocating for reform to improve women’s economic security. In the last 10 years, the gender super gap has narrowed from 46% in 2011 to 28% in 2021 while the amount that women hold in super has also increased. In 2011, the average female superannuation balance for women aged 60-64 was $104,734 and had increased to $146,900 in 2021. Progress is also being made as changes were passed which would see those earning less than $450 per month receiving super for the first time. This is positive progress for women and a sign that women’s presence in the workplace is finally being reflected in their super payments. However, it is not all good
oksana.patron@moneymanagement.com.au Journalist: Liam Cormican Tel: 0438 789 214 liam.cormican@moneymanagement.com.au ADVERTISING Account Director: Damien Quinn Tel: 0416 428 190 damien.quinn@moneymanagement.com.au Account Director: Amy Barnett Tel: 0438 879 685 amy.barnett@moneymanagement.com.au Junior Account Manager: Karan Bagai Tel: 0438 905 121 karan.bagai@moneymanagement.com.au
news as women over-55 are the fastest-growing category of homeless people and 34% of single Australian women over60 live in income poverty. There are also concerns about how women who have taken parental leave are excluded from receiving super. To make matters worse, far more women than men accessed their super early during the pandemic. As many as 70,000 of these women are also believed to have been coerced by a partner, according to the Australian Institute of Superannuation Trustees, proving abuse is not limited to physical violence and can leave women in a precarious
financial situation or dependent on men for their money. In a statement, Women in Super said: “[Hewett’s] passion for improving people’s lives, from mental health in the workplace to women’s financial security and representation in the industry, drives us as we continue to work for better outcomes for women”. Hopefully, in the next 30 years, the superannuation industry will be able to carry on Hewett’s legacy and continue to push hard for measures to close the gender gap further still.
Laura Dew Editor
WHAT’S ON AFA Queensland international women’s day walk 2022
Portfolio management conference 2022
The A-Z of pro bono advice
FPA WA chapter golf day
Brisbane 11 March afa.asn.au
Sydney 15 March imap.asn.au
Online 15 March afa.asn.au
Perth 22 March fpa.com.au
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2/03/2022 5:43:11 PM
March 10, 2022 Money Management | 5
News
Where next for troubled Dixon Advisory? BY LAURA DEW
EVANS & Partners (E&P) has set aside $8.2 million for penalties related to Dixon Advisory & Superannuation Services (DASS) as 70% of DASS clients transfer to the firm. DASS, a subsidiary of E&P, entered into voluntary administration in January as it was feared the firm would become insolvent. Announcing its results, E&P said 70% of DASS clients had asked to transfer to E&P and 16% had chosen to transfer to an external service provider. This left 14% of DASS clients who were still yet to advise the firm of their preference.
The firm said it made commitments during the transition period including continuing operations and making technology and systems available to facilitate DASS’ ongoing operations. These would be in place until 30 June, 2022. Going forward, the firm said it had set aside $8.2 million in penalties and costs. “The group intends to propose a deed of company arrangement to the voluntary administrators as part of a wider arrangement that will include, among other matters, a comprehensive settlement of the Piper Alderman and Shine Lawyers representative proceedings and all other claims.
“The group intends to contribute a sum equivalent to $8.2 million in penalties and costs agreed in the ASIC proceeding for the benefit of creditors as part of a comprehensive settlement of all DASS and related claims.” DASS was also the subject of open cases with the Australian Financial Complaints Authority (AFCA) regarding alleged breaches by DASS in connection with personal advice provided by DASS representatives in respect to the US Masters Residential Property fund. Following the appointment of voluntary administrators, AFCA said the handling of these cases was currently on pause.
How are fund managers reacting to the Russia/Ukraine war? BY LIAM CORMICAN
UNCERTAINTY reigns in markets following the initial developments of the Ukrainian invasion by Russia but some fund managers believe the bulk of selling pressure is over. The S&P/ASX 200 was recovering from its worst day since September 2020, tumbling 2.99% to 6990.6 points following initial explosions being heard in Kyiv. Fast forward to March and the world was seeing the thirdpossible outcome suggested by AMP chief economist, Shane Oliver; a full-scale invasion of Ukraine without direct NATO troop involvement. Oliver cautioned that this outcome would cause a ‘stagflationary’ shock to Europe and to a lesser degree globally as oil prices would rise, with markets falling as much as 10% but recovering over six months. Natixis Investment Managers Solutions portfolio strategist, Garrett Melson, said the worst had played out in markets. “Historically incursions and military escalations have proven to be a case of sell the build-up, buy the invasion. “In other words, your classic sell the rumour and buy the news playbook where investors take risk down as the rumours abound only to buy shortly before or after the actual escalation,” Melson said.
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“These events generally have very little fundamental impact on broader economies, unless they are at a much larger global scale. As such, beyond the knee-jerk selloff markets tend to refocus on the economic backdrop, which currently remains very constructive.” Melson said the crisis posed the greatest threat to European energy importers with the potential to weigh heavily on European demand, but that the US was in better stead. “The US, however, remains a net exporter of crude and is relatively insulated from the global economy from a broader export perspective. As such, the conflict will likely have little impact to the US economy as well as US multinationals.” Franklin Templeton’s emerging markets equities team said while
the invasion of Ukraine was testing its conviction, it was still committed to its ‘constructive’ view of Russian equities, with diversified exposure to the market, including in the energy and financial sector. “Individual company sanctions by the US and European Union represent a risk we see. These could limit liquidity and impact companies’ ability to pay dividends—and limit foreign investment,” they said. “Lessons from prior Russian military action may offer some comfort for investors who share our view. Following the Russian invasion of Crimea in 2014, the MOEX Russia Index fell almost 20%. “Within nine months, the index reached a new high, up 30% from the March lows. Short-term investors who reduced their
Russian weighting subsequently missed out on a significant rally” Clearbridge investments chief executive, Scott Glasser, and investment specialist, Jeff Schulze, said the war would exacerbate global inflation and supply chain issues. “Goods and materials that flow out of Ukraine and Russia will be halted and could exasperate supply chains issues many companies are facing for raw materials like steel for autos,” they said. “Natural gas and oil price spikes will have a material effect on US headline inflation and a minor impact on core inflation.” The pair said most energy price spikes were occurring in the front end of the futures curve and represented a geopolitical premium because flows had not been affected. However, “the back end of the curve is pricing a much more benign environment and potentially lower economic activity, which could lead to lower energy prices”. Glasser and Schulze said the Federal Reserve was unlikely to deviate materially from the market’s pricing of rate hikes as it would not be swayed by higher commodity costs. “At present, the market is pricing in 5.9 hikes for 2022. We have been more dovish than consensus and continue to believe the Fed will slightly undershoot expectations,” they said.
3/03/2022 11:15:27 AM
6 | Money Management March 10, 2022
News
Support needed to encourage advice firms to hire BY LIAM CORMICAN
SUPPORT is needed for advice firms to encourage them to hire Professional Year advisers as those that are entering the industry are not offsetting those that are leaving, according to Wealth Data. While Wealth Data showed a recent surge in new and professional year advisers, as evidenced by running totals in the chart below, numbers were well short of where they needed to be. Back in 2018 when the rules for hiring new advisers were announced, there was a clear advantage for any person wishing to be an adviser to get onto the Financial Advisers Register before the end of the year, Wealth Data’s Colin Williams said. But the chart below, which highlighted the year-on-year change in adviser numbers, showed that 2019 was when things took a turn for the worst, recording a net change of -4,436 advisers.
Williams said a few hundred new entrants each year was great, but it was not offsetting the amount of people leaving the industry. He said if the assumption was made that 5% of advisers would drop out each year for any reason, be it retirement or sickness for example, then that would mean the industry would see 850 advisers leave based on the current figure of 17,000 advisers in the industry. “To rectify this issue, support will be needed to encourage firms to hire provisional advisers,” said Williams. “In the past, the banks were
very much the nurseries for new advisers and to date, no major business or group has tried to fill the vacuum left after the withdrawal of the banks. Firms should also look at advisers who exited recently who could well come back in.” While it was positive to see a good number of ex-Commonwealth Bank of Australia (CBA) advisers being hired in recent weeks, Williams said, the other issue was getting young people excited about becoming an adviser. “All the bad media around financial advice has obviously not been helpful.”
Diverger adviser numbers down 18% DIVERGER Limited adviser numbers are down 18% from Financial Adviser Standards and Ethics Authority (FASEA) driven departures of limited authorised representatives while average licensee net revenue per adviser is up 64%. Announcing its half-year results to the Australian Securities Exchange (ASX), Diverger posted statutory earnings before interests, taxes and amortisation (EBITA) of $3.21 million in the half year ended 31 December 2021, up 5%. Looking forward, it said the board and management’s view was that the financial advice and accounting industries represented an attractive investment opportunity in the next five years. By 2025, it wanted to triple net revenue, grow its client base in its high margin accounting solutions business by 40% and grow its EBITA margin in wealth solutions to 40%. “Achieving the 2025 goal depends on both increased organic and inorganic results. The company continues to explore M&A options to accelerate growth, however none have met board criteria for investment to date,” Diverger said.
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The firm said organic momentum was continuing to build with revenue from continuing operations jumping 54% to $59.97 million from $38.96 million in 1H21 and net revenue sliding up 11% to $14.78 million. Looking at the wealth segment of the business, net revenue increased 30% to $7.52 million from $5.80 million in 1H21. There was also a 37% growth in the funds under management for its managed portfolio services CARE, which the firm said was in line with a multi-year trend of high growth. The advice and accounting services firm said it was improving business margins and sustained growth through its EBITA result, representing a three-year compound annual growth rate of 21%. The margins of its wealth arm had grown 25% which Diverger was forecasting to continue to grow. It said its accounting solutions were sustaining pleasing margins of around 39% despite net revenue down 3% to $7.26 million. Diverger set an interim dividend of 1.5 cents per share, fully franked, with record date 19 April, 2022 and payable 26 April, 2022.
Fantastic time to consider a career in advice: Insignia CEO IT is a fantastic time to consider a career in financial advice, according to Insignia Financial, because demand is currently outstripping supply and it will always be valued by consumers. Speaking with Money Management, chief executive Renato Mota said Insignia Financial, formerly known as IOOF, was committed to investing in advice and that the future of financial advice had never been brighter. However, Wealth Data statistics told a different story, showing that while there had been a recent surge in new and Professional Year advisers, numbers were not offsetting those leaving the industry, with 2021 seeing a net change of -3,284 advisers. With new entrants a key part of creating a healthy industry, Mota was asked whether he would support a Government-funded apprenticeship model, such as was raised by the Association of Financial Advisers (AFA) chief executive, Phil Anderson. Mota said Insignia would be supportive of anything that allowed and created some natural avenues to grow the adviser pool. “We think it’s a noble profession and is one that is growing,” he said. In terms of what avenues could be explored, Mota said it was one of the things the firm was looking forward to participating in when the advice review kicked off later this year. “As one of the largest advice businesses in the country, we’re committed to supporting the advice industry and it will be really interesting to, as an industry, see what kind of ways we can come up with,” Rota said. Insignia Financial delivered a strong half-year profit with underlying net profit after tax jumping to $117.9 million, up 79% on the previous corresponding period, following the acquisition of MLC Wealth in May last year.
2/03/2022 5:49:59 PM
March 10, 2022 Money Management | 7
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How are Aussie stocks holding up in 2022? BY GARY JACKSON
STOCK markets around the globe have gone through a roller coaster ride in the opening weeks of 2022 but Australian equities appear to be holding up. This year had already seen markets hit with some heavy falls as investors prepared for more interest rate hikes from central banks attempting to hold back inflation, while the tense situation in Ukraine also acted as a dampener for investor sentiment. Money Management examined at how the Australian market compared with others around the world over 2022 so far, as well as which parts of the stock market yielded the best returns – and posted the worst losses. Australian stocks fell across the opening weeks of 2022 but held up
relatively well when compared with the rest of the world – the MSCI Australia index is down a little under 2% while the MSCI AC World ex Australia index (so the global stockmarket aside from domestic stocks) has dropped 6.40%. Part of this is down to the make-up of the Australian market, where more than half of the index are from cyclical business in the financials and materials sectors – which are beneficiaries of the higher inflation and rising interest rate backdrop to the global economy. The global market, on the other hand, has large weightings to growth stocks like tech, which would suffer from higher rates. Taking a more granular look at the global stock market and its major players, the ASX 300 outperformed the US’ S&P 500 and Europe’s EuroSTOXX by a
Adviser numbers fall back again BY OKSANA PATRON
decent margin, thanks to the relative strength of cyclical stocks. However, the best performer was the UK’s FTSE 100. Although this market had been a laggard for some time, mainly down to the uncertainty caused by Brexit, its heavy weighting to areas such as banks, miners and oil stocks, as well as its cheapness compared with other markets, attracted investors in early 2022.
Vale Helen Hewett AM BY LIAM CORMICAN
HELEN Hewett, former chief executive of Cbus Super from 1997-2004 and founding member of Women in Super, has died. In a statement, Cbus Super said it was “deeply saddened” by the news and honoured Hewett for her contribution to advocacy in the workplace and women in super. Hewett had served as Cbus Super deputy secretary from 1995 to 1997 and as its chief executive from 1997 to 2004. She was also one of the four founding members of Women in Super, an organisation that supported the interests of women in the superannuation industry and played a lead role in achieving meaningful policy change for women’s retirement security. Women in Super paid tribute to the life and work of Hewett saying her passion for improving people’s lives, from mental health in the workplace to women’s financial security and representation in the industry, had driven the organisation to achieve better outcomes for women. Some of her most significant changes were negotiating increases in death and total and permanent disability (TPD) cover and founding Superfriend through partnerships with the group insurance sector after seeing the need for greater support for mental health and wellbeing in the workplace, for which she
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was awarded an Order of Australia medal. Extending its sympathy to Hewett’s family, Cbus highlighted her vision and astute leadership of the superannuation industry. “As CEO of Cbus Super, Helen’s determination to see members retire in comfort and dignity inspired all of those around her,” Cbus said in a statement. “Under Helen’s tenure the funds under management grew fourfold, she expanded member access to personal risk insurance, through investment in building and construction created jobs for members and took a leadership role on issues of responsible investment. “Helen was CEO during a period that was instrumental in establishing Cbus’ strong memberfocused culture and the distinguishing business model of profit for member funds. “Helen was a passionate advocate for an industry response to suicide prevention and the impacts of mental illness on members. As a result of Helen’s vision, evidence-based mental health tools are now available to over half of Australia’s workplaces, significantly changing the workplace landscape in Australia. “Helen’s legacy can be seen in skylines of our major cities, the increased retirement savings of Australian women and in the support given to workers when they are most in need.”
AFTER two more optimistic weeks, the total number of advisers fell again in the week to 25 February to 17,282, according to Wealth Data, with 31 licensee owners having posted net losses of 51 advisers while 30 firms reported net gains for 43 advisers. Additionally, only two new licensees commenced while five were closed down. Looking at the year-to-date numbers, Insignia, which reported a 79% growth in underlying profit, continued to lead the losses with a departure of more than 40 advisers which represented more than half of the total net losses for the entire market (which lost 72 advisers to date). It was followed by AIA Group which was down by (-9) advisers, with many leaving to join Count. At the same time, four groups were down (-8) each including Craigs and Findex. Altogether 39 licensee owners were showing net losses year to date, with total losses of advisers standing at -163 between them. As far as losses this week were concerned, Craigs Investment Partners, which was based in New Zealand and the advisers had limited authorisations for securities advice here in Australia, reported a loss of eight advisers. It was followed by Insignia down by six advisers in the week, losing seven and gaining one. Of these seven advisers who departed this week Insignia, four were reappointed elsewhere. Industry Super Holdings, better known as IFS, was down four after recent gains. Another industry fundbased advice business, FSSSP, better known as Aware Super was down (-3) and AMP Group was down (-2) as were Synchron. The data also found that the largest peer group – financial planning (offering holistic advice), was actually showing a net gain of nine advisers which was good to see. Further to that, 22 new licensees have been established year-to-date for this segment and seven closed.
3/03/2022 10:08:50 AM
8 | Money Management March 10, 2022
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Opportunities abound for advisers in next wave of retirees BY LAURA DEW
A “wave of grey” is creating opportunities for financial advisers as the number of Australians expected to retire in the next five years increases to 500,000, according to Challenger. Retirement was being discussed by all parts of the industry more than ever before, the firm said, as there was a growing awareness of how the needs of retirees differed from those in the accumulation stage. According to the Australian Bureau of Statistics (ABS), some 50,000 people were expected to retire in the next five years and 3.9 million people were already retired. Luke Cheetham, general manager for retail distribution at Challenger, said: “There is wave of grey coming over the mountain and there is an opportunity for advisers to support those entering retirement, it is enormous. All the research shows that those people who have an adviser feel more prepared and confident about their retirement plan”.
Referencing the Retirement Income Covenant (RIC), which would come into force on 1 July, 2022, he said it was unlikely the industry would see an immediate change and it would be more of a gradual transition. “We see the RIC as a really important measure to raise awareness of the importance of retirement and we don’t necessarily see it as a Big Bang. You won’t go to bed on 30 June and wake up on 1 July operating very differently. “We expect as the system matures, we’ll
ClearView earnings up 14% following separation of financial advice arm BY LIAM CORMICAN
CLEARVIEW Wealth Limited has reported operating earnings after tax of $13.9 million, up 14% on the previous corresponding period, following the sale of its financial advice arm to Centrepoint Alliance. Reporting its half-year results to 31 December 2021, ClearView said its underlying net profit after tax (NPAT) moved up 5% to $12.7 million, following the sale of its financial advice business to Centrepoint Alliance on 1 November, 2021. The firm highlighted improving industry performance, steady improvements in life insurance claims, lapse experience and resilience to COVID-19 as key reasons for their positive results. ClearView managing director, Simon Swanson, said: “ClearView continues to drive transformational change through the delivery of key projects and out significant investment in technology, processes and people will underpin our medium to long term growth.” Total funds under management increased by 19% to $3.6 billion as the firm highlighted a more targeted focus on life insurance and wealth management following the sale of its financial advice businesses. Wealth management operating earnings after tax jumped by 95% to $1.1 million.
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begin to see best practice emerge across certain member cohorts and certain member demographics which will drive innovation. It’ll shape product design, modelling, the development of tools and calculators that will ultimately influence the advice experience.” He said the RIC would also help people to understand the risks they faced in retirement and ensure they capitalised on opportunities available to them. Challenger had launched a range of market-linked lifetime annuities which Cheetham said had been popular with advisers as they offered clients flexibility to adapt to their changing circumstances. “Australians are living longer than ever so the ability to adjust the risk profile as they age is a real innovation. “We will continue to innovate over the coming years and we want to do that in conjunction with advisers because they are at the coalface and they can tell us where the opportunities and the gaps are so we can provide with the solutions they need.”
Insignia underlying profit soars 79% INSIGNIA Financial has delivered a strong half-year profit with underlying net profit after tax jumping to $117.9 million, up 79% on the previous corresponding period, following the acquisition of MLC Wealth. Reporting its half year results to 31 December, 2021, Insignia said its funds under management, advice and administration (FUMA) had increased by $7.1 billion to $325.8 billion while its gross margin of $778.4 million was up by 122% including a six-month contribution from MLC. Net profit after tax (NPAT) was $36.2 million, down from $53.8 million a year ago, which reflected an increase in integration and funding costs. Insignia chief executive, Renato Mota, said: “Our first results as Insignia Financial delivered a strong uplift in financial performance, with significant growth in underlying profit, FUMA and gross margin. “Our strategy for growth centres on scale, economic diversity, and a sustainable business model that delivers accessible and affordable products and services relevant to all client life-stages. While our name has
changed, our ambition remains to improve the financial wellbeing of all Australians.” Insignia highlighted the MLC acquisition, strong market performance, and the realisation of synergies and benefits from strategic initiatives as key reasons for growth. It said acquisition synergies were 18 months ahead of schedule with cumulative annualised savings of $122 million, $66 million of which was achieved in 1H22 and expected to be realised by the end of calendar year 2022. It said it was on-track to achieve break-even of ex ANZ Aligned Licensees (Als) advice business on an annualised basis by end of FY22. Mota said: “Our integration initiatives and early simplification efforts have proven successful to date. Our business is acutely focused on operational simplification, enhancing products and services, and delivering long term value to clients, members and shareholders.” The firm posted an interim dividend of 11.8 cents per share fully franked, payable 1 April and introduced a dividend reinvestment plan with a 1.5% discount.
3/03/2022 10:09:13 AM
March 10, 2022 Money Management | 9
News
Financial firms making progress on gender pay gap BY LAURA DEW
FINANCIAL and insurance services is “making strong progress” in reducing its pay gap, with the gap falling to 29.5%. According to the latest figures from the Workplace Gender Equality Agency (WGEA) scorecard, the gender pay gap was highest in the construction sector at 30.6% while financial and insurance services was second at 29.5%. However, the report noted financial services had made strong progress since 2013, reducing its gap by more than one percentage point each year. This was the second-largest reduction out of the 19 industries surveyed. Some 76% of companies in the industry said they had investigated their gender pay gap and 66% had taken action since then, the highest of all industries. The most-common actions taken after an
audit were identifying causes of the gaps, correcting instances of unequal pay and reporting pay equity metrics to the board. Overall, women made up 50% of the workforce but less than 20% of chief executive
roles and the average gender gap was 22.8%. Men were twice as likely to be earning more than $120,000 while women were 50% more likely than men to be in the bottom quartile, those earning $60,000 or less.
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This information was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian Credit Licence 233714. This information provided is factual only and does not constitute financial product advice. Before acting on it you should seek independent advice about its appropriateness to your and your clients’ objectives, financial situation and needs.
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News
‘Stickiness’ rife as 1.3m remain in underperforming super funds BY LAURA DEW
THERE has been surprise at the level of ‘stickiness’ demonstrated by superannuation fund members, as 1.3 million have opted to remain in an underperforming fund. While 89,000 members had exited an underperforming superannuation fund, this represented just 6% of the total members affected, according to the Australian Prudential Regulation Authority (APRA). Responding to a question on notice during Senate estimates, the organisation said: “Data received to 2 February, 2022 indicates that just over 89,000 members have exited their underperforming MySuper products since 30 August, 2021, representing a 6.4% net decrease in total membership numbers. These exited member accounts held a value of $3.48 billion, 6.2% of the amount held
in the underperforming products at 30 June, 2021”. However, APRA highlighted that seven of the 13 underperforming funds were in the process of merging with another fund which would reduce the likelihood for underperformance in the future. During the estimates, Senator Jane Hume, minster for financial services, superannuation and the digital economy, said the figure was encouraging that people were taking proactive action and that she had been surprised by the level of ‘stickiness’. “I think it’s encouraging that 89,291 people have taken action of their own accord to move funds, and that’s largely because they received something in registered mail to say: ‘Your superannuation fund is underperforming and you probably don’t realise it,’ and that’s the first time that has
ever occurred. So I think that’s an encouraging sign. “We knew that, after the letters were received, there was still considerable stickiness. Did that take us by surprise? Probably, except for the fact that disengagement, as you know, has plagued the superannuation system since day one.”
Ex-bankers choose boutique licensees BY OKSANA PATRON
FORMER bank-licensed advisers have moved to privately-owned licensees, with a preference for boutiques, according to Adviser Ratings’ ‘Adviser Musical Chairs Report’ for Q4 2021. The study, which looked at adviser movements, found that the quarterly drop in the financial adviser workforce stood at -8.2% while the proportion of banklicensed advisers who departed over the quarter was down at -38%. At the same time, the boutiques in the privatelylicensed space posted a 4% growth and the share of the market privately-licensed as of Q4 2021 was 61%. The study confirmed that the biggest losses were recorded in the bank and limited licensee sector, with more than 200 bank-licensed advisers departing the industry or switching licensees, the segment now had only a few hundred advisers on the books. Following this, limited licensees faced a similar scenario, as accountants continued to lose interest in advice, with limited licensees accounting for less than 3% of the market. “In the past year, we’ve seen many of the heavyweights enter takeover arrangements or exit the market completely, which has shifted advisers to a
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spectrum of new licensees. For example, the IOOF acquisition of NAB/MLC dislodged 411 advisers from MLC-aligned GWM Financial Services in 2021. Last year, we also saw the closure of Financial Services Partners, which displaced 125 advisers, and Godfrey Pembroke, which left 77 needing new licensees,” the report said. At the same time, there were a few mid-sized to large outliers that kept strong headcounts amid the general industry decline, such as Morgans Financial, Capstone or Fortnum Private Wealth. The report also confirmed that among advisers who chose to stay, formerly bank-licensed advisers moved mostly to privately-owned licensees, with a particular preference for boutiques. According to the study, since 2017, the small, private licensee, with one to 10 advisers, was the only segment to have grown amid the mass exodus. “There are now more than 700 more advisers licensed in this space than there were five years ago. Advisers tell us they don’t miss being tied to limited product lists; the main teething problems listed have been around access to some of the traditional technology and support services that big licensees could provide at low cost,” the report read.
HUB24 posts 103% growth in NPAT in 1H22 FINANCIAL platform provider HUB24, which completed an acquisition of Class Limited in February, has posted a 103% yearon-year growth to $14.2 million in its underlying net profit after tax (NPAT). The firm also updated the target platform funds under administration (FUA) range to $83 -$92 billion for FY24, an increase from $63 - $70 billion for FY23. At the same time, total funds under administration grew to $68.3 billion, with platform funds under administration (FUA) increasing by 128% to $50 billion from 1HFY21 and the group set a half year record for platform net inflows of $6.7 billion. Also, the group reported statutory NPAT of $8.4 million in 1H22 included $5.8 million (after tax) of implementation costs and acquisition amortisation related to the Xplore Limited and Ord Minnett PARS acquisitions. HUB24 said it expected the proposed acquisition of Class Limited would accelerate its platform of the future strategy, “consolidating the group’s position as a leading provider of integrated platforms, technology and data solutions for financial professionals” and would help empower better financial futures together. HUB24 also announced further investments in its executive team, with Deborah Latimer joining in March 2022 as chief risk officer and a planned appointment of a chief growth officer. “We’ve delivered record net inflows and strong financial results including an increase of 80% in group underlying EBITDA, whilst continuing to deliver on our strategic objectives and ensuring we are well-positioned to capitalise on emerging opportunities. “We are very excited about the recent acquisition of Class and how together we can lead change in the wealth industry and enhance value for our customers and shareholders,” HUB24’s chief executive and managing director, Andrew Alcock, said.
3/03/2022 2:00:59 PM
March 10, 2022 Money Management | 11
News
Magellan doubles down to prevent outflows following Douglass exit BY LAURA DEW
“SHEEP-LIKE behaviour” by consultants led to the outflows following the exit of Hamish Douglass, according to Magellan, as his return date remains unconfirmed. In an shareholder update following its halfyearly results to 31 December, 2021, the firm said average funds under management were $112 billion, up 12% from $100.9 billion a year ago. However, the exit of chairman and chief investment officer Douglass to take a ‘leave of absence’ at the start of February meant they had since fallen to $87 billion, with more than $6 billion lost in less than two weeks. Chris Mackey, who had temporarily taken over Douglass’ portfolio management duties, told listeners this could be attributed to “sheeplike behaviour” by consultants. He also stated the firm was in detailed conversations with research agencies about Douglass’ funds; Zenith and Lonsec had already downgraded the funds. “Sometimes clients have clear terms in their mandates which require redemption. When the lead portfolio manager steps away, even if it’s only temporary, that’s triggered some sheeplike behaviour particularly from consultants. “At this stage, we are ahead of the curve with increased liquidity, we’re in massively liquid companies all around the world and we have taken some early action at the bottom of the portfolio to assist with additional liquidity. “The engagement [with research agencies] is high but we will leave them to speak for themselves, there have been very detailed conversations.” However, the firm stopped short of announcing an expected return date for Douglass. Hamish McLennan, chairman at Magellan, said: “It’s premature to say when he’ll be back, we fully expect that to happen and we want a speedy recovery for him. So when we’re in a position to talk about that with more information, we’ll do that, while accepting it’s a private matter.
“But I want to reiterate Magellan has always had a very big pitch, a lot of our clients may not have seen that because Hamish was such a highprofile front person but we’ve got Nikki [Thomas], Dom Guiliano the guys in the infrastructure team and we have fantastic people here. All the bases are covered from our side.” The firm was also asked if there were any plans to simplify the flagship Magellan Global fund range which moved to offer an open and closed class in 2020. Three global equity funds were merged into one single trust, the Magellan Global fund, which was over $16 billion between the two classes. Mackey said: “We prefer simple, we dislike complexity and maybe down the track that’s something to look at but it’s not a priority. If we do any action like that it will be because it’s in the best interest of unitholders in the respective funds”.
ATO questioned over lack of superannuation stapling advertising THE Australian Taxation Office (ATO) did not undertake any mass market advertising for the Your Future, Your Super (YFYS) reform including superannuation stapling changes. Appearing at Senate Estimates, Labor Senator Jess Walsh, said the Senate had spoken to Treasury who referred them to the ATO on questions concerning advertising and outreach regarding YFYS. Responding to Walsh, ATO deputy commissioner, superannuation and employer obligations, Emma Rosenzweig, said the ATO did not undertake any paid ‘above-the-line’ (ATL) advertising campaigns for YFYS. ATL was focused on mass media promotion to reach large audiences and includes media such as radio, TV and print whereas below the line advertising refers to targeted marketing such as email campaigns. Rosenzweig said the ATO did employ its existing methods of communication, including direct messages to all 800,000 employers, educating them on new stapling obligations. “We also worked through our usual stakeholder groups; we had social media posts; we had fairly comprehensive material about these obligations,” she said. To clarify, Senator Walsh asked whether the only way for employees to access information that stapling was going to occur was through the ATO’s website or through Facebook. In reply, Rosenzweig said stapling only applied to new employees and an employer did not need to go back and request stapling for existing employees and that new employees were given a superannuation choice form by their employer. “The most targeted way that we had to make sure that employees understood the impacts of stapling was to make it very prominent in that choice process that if they did not select a fund their employer would use the stapling service and receive a stapled fund for them,” Rosenzweig said.
CHOICE AND SUSTAINABILITY BY DESIGN Including NEW flat 70% income replacement ratio
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News
Four trends from reporting season BY LAURA DEW
THERE have been four key observations from the latest reporting season, according to Swell Asset Management. Firms on the Australian Securities Exchange (ASX) had been reporting their half-year results for the first half of 2022 in February while US firms had reported Q4 results. Swell found the four key themes were: • The extremely limited ability of governments, businesses and consumers to tolerate higher interest rates, due to ballooning debt; • The increasingly important role of technology to drive productivity, particularly among older workers; • The bifurcation of good tech and bad tech; and • The predictable nature of quality companies. While interest rates and inflation were top of the agenda, Swell Asset Management chief investment officer, Lachlan Hughes, said they should not be the primary factor for investors.
Instead, it was more important to focus on fundamental value. “Amidst the volatility and noise, fundamental value is crucial because companies that provide high quality sought-after goods and services will perform strongly in the long term regardless of whether inflation is 2% or 8%. “Some things in life can be objectively predicted with reasonable certainty, such as which companies will lead in search or dominate cloud. Other things, like the direction of interest rates, are subjective and rely on factors that can’t
APRA pushes for superannuation data transparency BY LIAM CORMICAN
THE Australian Prudential Regulation Authority (APRA) is consulting with industry on plans to expand the breadth and granularity of the superannuation data it publishes. The consultation followed the completion of its first phase (Phase 1) of the APRA Superannuation Data Transformation in September, which determined 10 new reporting standards for what would and would not be treated as confidential. Starting in June this year, APRA proposed publishing new aggregate industry, fund-level and product-level statistics containing key metrics, including improved data on insurance arrangements, expenses, member demographics and asset allocation classifications. Where relevant, new approaches would be used to better enable comparisons across complex fee and cost structures or insurance design. APRA’s consultation proposed most of the data collected under Phase 1 as “non-confidential”, and therefore able to be published. It would be the first time APRA has published data on all products and investment options; until now, APRA has only published product-level data for MySuper products. Executive board member, Margaret Cole, said APRA was determined to publish as much
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the new data as possible. “The Superannuation Data Transformation sits at the heart of APRA’s agenda to use heightened transparency to lift industry performance and improve member outcomes,” Cole said. “While collecting better quality data across all products and investment options is essential for APRA’s ability to scrutinise the outcomes trustees are delivering for members, it’s only half the puzzle. She said increasing the breadth, depth and consistency of the data the regulator published would help all stakeholders make better informed decisions. “As with the MySuper and Choice heatmaps and Your Future, Your Super performance test, we also expect the increased transparency to benefit members by making it even clearer who isn’t performing and urgently needs to improve or get out.” In addition to expanding its existing superannuation publications, APRA flagged plans to introduce two types of datasets for users to access published statistics in a format that was easily consumed by their own reporting tools: Key metrics datasets which primarily mirror the statistics in the publications without formatting; and Granular datasets for sophisticated users to access more detailed data in a format that closely resembles the data as reported.
be known in advance. “Investors should look for attractive companies that they want to own for the longterm and aim to buy them at a discount to their intrinsic value.” The comments regarding technology also created opportunities for technology companies to support businesses to improve productivity. Hughes said: “Technology companies have benefited from greater institutional and retail attention, reflecting the significant growth of technology spend as a percentage of GDP, however, as inflation rises and fears about valuations climb, investors have responded by savaging technology companies. “Unfortunately, good tech companies characterised by strong earnings and attractive multiples - have been treated much the same as bad tech companies which have had their share price bid up to historic highs, off the back of overly-optimistic expectations of a potentially rosy future.”
Still place for bonds in portfolios WHILE returns for bonds are still low, current rates are the best they have been for two years, according to Zenith. In a webinar, head of asset allocation, Damien Hennesey, was asked about the role that bonds had to play in portfolios when inflation was rising. “The first thing I’d say about bonds is a positive thing because their return expectations are better than they were for the last two years. So that’s saying something,” said Hennesey. “It’s not as if they are great [returns] but our return expectations have bonds up around 2%, so it’s hardly world-beating but they do have a role in portfolios.” According to FE Analytics, the Australian bond sector had lost 1.1% over the last three months to 03 March and declined by 2.7% over 2021. Hennesey said Zenith had noticed weightings to fixed income were declining more recently in portfolios. “What we have found in the portfolios we are putting forward this year is the weighting to fixed interest has generally been reduced at the lower risk profiles. “It tends to benefit cash and, to some extent, defensive alternative strategies. So bonds still have a place but less of a place than they have done in a more bond-friendly environment.”
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March 10, 2022 Money Management | 13
InFocus
MOVING TO PRINCIPLE-BASED LEGISLATION The latest proposal suggested by the financial advice industry is to move to one focused on principlebased legislation and for changes to the Corporations Act, writes Laura Dew. IN A WORLD of ever-changing regulation, thanks to the Royal Commission and the educational requirements, one would think the financial advice industry had seen enough change to regulation. However, there are now calls for changes to the Corporations Act 2001 to make it simpler and less burdensome for advisers. First, Nathan Jacobsen, managing director of Diverger Limited, said the Act had become very operational and specific in how outcomes should be delivered to clients, rather than principles based. A principle-based system would be less prescriptive and allow for more flexibility by advisers. This prescriptive approach particularly applied to fee disclosures and opt-in obligations. “A reversion to a less prescriptive, less black and white and more principle-based legislation will actually provide, what is now a very professional adviser population, with the flexibility to execute advice more efficiently,” said Jacobsen. Several days later, appearing at the AIA Adviser Summit, Senator Jane Hume, minister for superannuation, financial services and the digital economy, appeared to echo Jacobsen’s sentiment. If the Government was re-elected, she said, moving to principle-based regulation would be a key priority for its first 100 days. It would use the Quality of
2022 ADVICE PRACTICE DIMENSIONS
Advice Bill to identify opportunities to simplify regulatory compliance, reduce costs and remove duplication. “The regulatory environment has truly become a Gordian knot so now we’re stepping back and untangling that knot,” Hume said. “We want to make sure that the regulatory framework could better enable the provision of high quality accessible and affordable financial advice for retail investors.” Finally, the Financial Planning Association of Australia issued its own recommendations to a review by the Australian Law Reform Commission (ALRC) into the Corporations Act. The ALRC’s review was intended to simplify
and support the professional services provided by financial planners through improving the operation and structure of the Corporations Act. Proposals for this included: • General advice - The law should be changed to rename the term ‘general advice’ to ‘product information’ and ‘strategy information’, which better reflects the definition and is less misleading to consumers. • Restricted and like terms - the use of the terms ‘financial planner’, ‘financial adviser’ and like terms (including ‘financial coach’, ‘financial mentor’ and ‘financial guru’) should be reviewed to determine if
restrictions on the use of these terms are effectively protecting consumers from unqualified financial advice. • Sophisticated investor - The law should be changed to revise the test for a ‘sophisticated investor’ by increasing the dollar- value threshold to an appropriate and contemporary level, providing a method for indexation and introducing a financial capability measure. • Separation of product and advice - The law should be changed to separate the regulation of financial products from the regulation of financial advice. • The future of licensees - The law should be changed to focus the AFSL system on the regulation of financial products and remove the requirement for an AFSL to cover the provision of financial advice. Sarah Abood, chief executive of the FPA, said: “Financial planners are not lawyers, but it may be that the regulatory and compliance requirements under one Act and regulator differ from those of others, leaving financial planners at risk of breaching one requirement in order to meet the conditions of another. “As well as the compliance risk, this has a significant impact on costs and efficiencies, particularly on small licensees who have less support and will find it find it harder to meet the increasing regulatory demands.”
$1,197,902
24%
228
Gross business revenue
Notional business profitability
Clients per adviser
Source: Midwinter/ Business Health Future Ready IX report
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ESG
TAKING AN EQUAL APPROACH TO ESG Advisers need to take the ESG considerations for the investments seriously and give more equal focus to each of the three components, Oksana Patron writes. THE TIMES WHEN advisers had an option to take into account the environmental, social, governance (ESG) considerations are over and those who are lacking in this department may actually be risking losing clients. Research from behavioural finance experts Oxford Risk found that more than 60% of retail investors were ready to move their investments to new advisers if they were unhappy about the ESG focus
from their current wealth manager. What is more, the focus on the ESG factors has become even more important for those clients who are now considering deploying cash into new investments. The same study found that only around 30% of current clients rated their adviser commitment to ESG highly or very highly, while 7% were of opinion that their adviser’s ESG focus was poor or very poor.
On the other hand, the Perennial Better Future Survey Report, which surveyed the Australian Securities Exchange (ASX) listed companies on how they are moving with all things ESG, found that 2020 and 2021 became watershed years for sustainable investment, with significant inflows into sustainable investment products, intensified focus on climate change and net zero emissions
and governments paying more attention to ESG and introducing legislation offshore. Also, it meant that the increasing ESG engagement by investors with listed entities had led to improved disclosure and increased company willingness to engage on ESG topics. The study also identified the three top areas of ESG which had the most material impact to the businesses and would be of focus
Investments that create a Better Future perennial.net.au/better-future
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March 10, 2022 Money Management | 15
ESG for their managements in the next 12 to 18 months, with GHG emissions, including alignment with the Paris Agreement, coming in as the number one priority for companies for the second year in a row. This was followed by diversity, which moved up as a priority, while Modern Slavery and cyber security issues came in equal third. Perennial’s head of institutional and retail, George Whiting, said that ESG considerations were definitely a growing trend among the advisers, although there was still room for growth. “Asset owners were certainly the first to move on ESG as it becomes a criteria in almost every mandate but if you look at the wholesale small institutional market, particularly charities, ESG considerations have been embedded in their mandates for years and years,” he said. “But as far as the adviser market goes, we are seeing it has become increasingly more important for ESG to be considered on the fund level, although there is still a lot of room to go there before it is properly engrained in the thinking of every adviser.” When asked which component resonated the most with advisers and investors, Emilie O’Neill, co-head of ESG and equities analyst at Perennial, said that the environment part was “overwhelmingly most important criteria”. “We definitely see the environment tops minds for clients, with more countries signing the Paris Agreement. “For investors it’s about moving capital to help and support environmental outcomes.
Chart 1: Areas of ESG importance
Source: Perennial
“Investors no longer want their money in things that are detrimental to the environment like fossil fuels, and they are willing to move their money in order to do so. So that’s been a really interesting shift.” O’Neill further stressed that as far as other components were concerned, the small-cap companies were often involved in positive things from the environmental or social perspective but were slightly lagging behind in the governance space. “Because they are small or they are newly listed on the ASX they don’t tend to have all the governance that we would expect normally in the large cap space. Governance is one bit that is lagging in small caps, but luckily this is one thing that we can work with companies to improve.” According to her, the governance issues in the smallcap space often included gender diversity and board composition due to their size and the fact that those firms were also run, in some cases, by families. “So, I guess a board composition is something that they typically perform on less strongly than large cap.” Whiting also stressed that
environmental factors in Australia were also one of the most tangible for everyone. “That [environmental factor] is also the most obvious one where investors can see whether it is the cost reduction or future costs so that’s the one that is the ‘S’ and the ‘G’ for investors investing in a fund is not in plain sight for them so they could see that there are benefits. We understand that there are benefits in the ‘G’ and the ‘S’ but investors are probably more focused on the ‘E’.”
ESG IN INFRASTRUCTURE However, for Sarah Shaw, global portfolio manager, chief executive and chief investment officer at 4D Infrastructure, when it comes to the investment process it is all about sustainability and the responsible investments rather than general ideas. “We see the ‘E’, ‘S’ and ‘G’ as equally important as so we don’t just focus on one but we see them as quite integrated and we believe that you cannot have one without consideration of the other three elements of this acronym. “We really ultimately looking to do due diligence around of all aspects of that in order to make sure that the investment
proposition that we look at is sustainable and has that responsible investment strategy. Following this, Shaw said that during the investment process there would be certain stocks completely screened out from the infrastructure opportunity set based on the ESG elements. “This [screening out] process could be too much fossil fuel exposure, or this could be sanctions against social misconduct or it could be the case that companies do not report enough in English sources for us to be comfortable that we are getting the same information as domestic sources,” she added. According to Shaw, one other important criteria when it came to infrastructure investments would be a country review. “By that I mean we need to be comfortable with that country that this company is operating in before we even look at the company itself. If we do not believe that a country is an acceptable investment destination then we will not even bother looking at the stocks or those assets within that company,” Shaw said. Continued on page 16
Better Future sustainably and financially perennial.net.au/better-future
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ESG
Continued from page 15 “We do invest in emerging markets as well and that assessment is done exactly the same way as every country that we look at. “The way we do that is we look at four elements at the country level: one is financial risk, one is economic risk, one is political risk and the other one is ESG. Now, those four factors together dictate whether we believe that a country is an acceptable investment destination or whether it is completely unacceptable or whether it is sort of transitioning. And every country is looked at on the individual basis. “Once we look at the company level, we construct a portfolio based on those country reviews, based on company assessments, and we are looking at the combination of the quality and value and then we measure our portfolio on key and ESG metrics such as carbon emissions, board independence, shareholder alignments, social goals. And we make sure that what we are presenting to clients is offering a better track record on those metrics, than what we could get from the broad universe as a whole.” Shaw also stressed that although the ESG considerations are integrated in the process through the outset, the infrastructure sector had earned a bad reputation from the environmental standpoint which was, according to Shaw, quite unjustified. “We need huge investments in infrastructure and technology. Infrastructure as we know it, technology to improve that infrastructure, and infrastructure to improve the congestion. All of those things need to happen if the
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world is planning to meet our carbon goals by 2050 or whenever it may be,” she said. “The reality is that infrastructure is probably part of the problem we are now facing in terms of decarbonisation needs. “We’ve had globalisation, industrialisation, population growth, emergence of the middle class and a shift in demographic trends around the world, and that has created the emissions and environmental situation that needs rectification. “But if you take it from where carbon emission or environmental issues are stemming from then the biggest part is the energy sector, with over 25% of carbon emissions, and the second biggest sector is transport that is over 15% of carbon emissions. “So unless we can build the infrastructure that can address those emissions, there is no chance of the world decarbonising or getting to net zero or however you are going to measure the goal.”
SCORING ESG For Jack Nelson, portfolio manager at Stewart Investors, there are two reasons why sustainability and ESG considerations matter so much
and both of them relate to longterm returns. These two reasons are the fact the world will not continue on the same developmental path while the second thing to consider is the quality of investors. “The reality is that the whole world cannot follow the same developmental path which is carbon and resources-intensive particularly in the emerging markets which is where we are focused. “In those countries, we see great opportunities to take a different developmental path and great risk if they do not. “So when we are looking at the companies in that context we care about sustainability simply because we are a long-term investor and we’ve held many companies for 25 years in our funds. You certainly need to think what is the development path that a society we are investing in is taking?” The quality of investors criteria pertained to the “people behind the business”, their reputations and how they behaved in the past, he said. According to Nelson, there were a number of companies which offered data-based approaches solutions which
attempted to score and rank companies on these sustainability criteria and their performance. “What we find sometimes is there is a lot of inconsistency between those quantitative approaches so you can find the same company having scored very well on one data provider on the sustainability efforts and scoring very poorly on different providers’ metrics,” he said. “But we don’t really use those quantitative approaches and we don’t assign scores on sustainability and try to quantify something that is unquantifiable. “You cannot put the number on the integrity of a manager but also you have to build it subjectively using face-to-face conversations rather than using a spreadsheet and you can’t take a shortcut of using a provider. You have to go out and do that active management and spend years getting to know companies. “For us it’s much more fundamental, it’s not about ESG and scoring, it’s simply about saying how well is that company positioned to the future as there are many businesses out there which score incredibly well on ESG metrics but, to us, they fall out on the sustainability.”
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Empower those who create a Better Future Perennial Better Future is the next generation of authentic ESG investing. We invest in companies making a positive contribution to society and the environment, while pursuing strong, consistent returns for investors. Empower your clients to make investments that create a Better Future – sustainably and financially. Why Perennial Better Future? – Authentic ESG-first approach integrated across the entire process – Consistently strong returns, having outperformed the benchmark – Highly experienced and large team dedicated to finding investment solutions across small- and mid-cap markets – Active engagement with companies to improve outcomes & manage downside risks Start creating a Better Future today Call us on: +61 2 8274 2740 or visit www.perennial.net.au/better-future
Disclaimer: This information has been prepared and issued by Perennial Investment Management Limited (ABN 13 108 747 637, AFSL No. 275101) as Responsible Entity and is for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs and you should not construe the contents of this material as legal, tax, investment or other advice. Past performance is not a reliable indicator of future performance. A copy of the PDS, Additional Information Booklet and the TMD is available at www.perennial.net.au. No distribution of this material will be made in any jurisdiction where such distribution is not authorised or is unlawful.
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Inflation
WALKING THE TIGHT ROPE OF INFLATION
Like death and taxes, market volatility is an inevitability, Liam Cormican writes, so how are fund managers walking the tight rope of inflation with their investments? VOLATILITY IS LIKELY to be the dominant feature of 2022 as central banks raise rates to curb inflation. And as we exit earnings season, with many economies facing inflationary pressures, investors are seeking opportunities to invest in companies with an ability to protect their margins and earnings. With headline inflation
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jumping to 3.5% and underlying inflation to 2.6% in the year to December 31, all eyes are on Reserve Bank of Australia (RBA) governor Phillip Lowe lifting interest rates by the end of the year. While over in Europe, UK inflation has hit a 30-year high of 5.5% with economists expecting consumer price index (CPI) to hit almost 8% in April.
So how are fund managers employing their investment processes to navigate this difficult time?
THE INFLATION TRAPPINGS Schroders portfolio manager, Ray David, said inflation is the enemy of profit margins and bond yields which play a critical role in
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Inflation
valuing a company. “Persistent inflation will cause a recalibration of bond yields (long-term interest rates), which are used to value the cash flows of companies,” David said. “Therefore, if discount rates increase further than investors’ expectations, the companies that are valued on low discount rates (or trade on high price to earnings ratios), are susceptible to significant falls in valuation.” David said it was common these days for high-growth companies to trade on 45 times or 55 times price to earnings. “These stocks will be susceptible to significant falls in market valuations if interest rates rise faster than expectations, a film that played out in the 1980s with the collapse of the Nifty 50,” he said. Gaston Amoros and Alex Shevelev, senior analysts for Forager Funds Management’s Australian Shares fund, said investors may fall victim of buying stocks just because they look cheap. An optically low price/earnings ratio can lure investors into a false sense of safety, according to Amoros and Shevelev, only for it to unravel when revenues become softer than expected and costs become higher. “In a large and diversified business with high margins, inflation may cause a minor hiccup. In a lower quality, lower margin business this can lead to a catastrophic “crunching” of margins and ensuing reduction in earnings,” Shevelev said.“Cheap can turn expensive very quickly.”
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Antares head of fundamentals, John Guadagnuolo, said a lack of due diligence on the operational side of a business could lead to the investor underestimating the impact of rising costs on margins. “Further, unless a revenue model is properly understood, the assumption often made about passing such costs on can be greatly overestimated.”
CHANNEL CHECKS Michelle Lopez, head of Australian equities at abrdn, says it is important that investors undertake checks of suppliers and industry associated with the stocks they invest in. “We frequently undertake channel checks with various players within a company’s value chain from suppliers through to customers,” said Lopez. “We do this internally, leveraging our global network of over 120 equity analysts located on the ground across most continents, as well as externally, through third party expert networks.” Amoros and Shevelev from Forager said they often had conversations with industry consultants, competitors, suppliers, and customers of the businesses they invested in or the ones they were contemplating investing in. “From these we try to fine tune our views of both near-term effects from higher costs as well as the ability of the businesses to pass those costs along to customers in the medium term,” said Amoros.
Guadagnuolo said he speaks to numerous participants, especially in the transportation and logistics spaces around pressures from fuel, absenteeism related to COVID isolation rules, as well as freight rates. “In retail, we speak to numerous suppliers to gauge the level of price inflation coming through the supply chains and to put our transport research into perspective. Another growing area of concern has been around cost inflation in mining as border closures and COVID protocols continue to hinder productivity.”
MANAGING INFLATION RISK David says his Schroders Australian Equity team regularly discuss company valuations, industry trends, and the longterm picture of profit and returns for each company. “Part of this process involves understanding industry structure, the drivers of historical financial performance, and what are the critical issues that will shape our long-term financial forecasts and valuation going forward,” David said. “This research process forms the basis of our knowledge of company unit economics, enabling us to determine how a company can manage in a set of industry conditions. “With inflation now at a 20-year high, this process helps us assess which parts of the market are beneficiaries, and which are likely to be impacted.”
Continued on page 20
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Inflation
Continued from page 19
David says his team has been well positioned for this scenario for some time, as valuations for inflation beneficiary sectors such as materials, cyclicals, and communications have been attractive in 2021. SG Hiscock & Co portfolio manager, Hamish Tadgell, said his fund mitigates inflation risk by looking for companies with a strong competitive advantage and pricing power. “This is particularly important in a rising cost environment, where the ability to pass on cost becomes critical to managing margins and profitability,” Tadgell said. “At a portfolio construction perspective, it is also important to manage duration risk and exposure to sectors more linked to underlying economic conditions. Commodities and more cyclical stocks tend to benefit from rising prices and be less susceptible to the risk of rising rates and impact on valuations.” Tadgell said bargaining power with suppliers, the degree of supply chain integration and the ability to manage labour costs tended to have a significant bearing on a companies’ ability to deal with costs. “How they deal with them generally comes down to pricing power and the competitiveness of the market in which they operate,” he said. “It goes without saying, the ability of companies to pass on costs and how this effects demand for their offering and ultimately sales and margins will be a focus. “It always is, but the attention
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will be even more acute given the inflationary pressures that currently exist.” Tribeca Investment Partners’ portfolio manager, Simon Brown, said his firm relied on an overarching risk management framework that identified inflation-associated risks. “A rigorous focus on valuations and an internal peer review process on how our team derives value is an initial checkpoint. “Our Portfolio Construction Tool (PCT) is our main risk overlay on the portfolio, identifying the risks the portfolio is throwing up as a whole. From this point, we can mitigate or accentuate risks as we deem appropriate, including those associated with inflation.” Brown said he looked for
businesses that could increase prices easily, even if demand was flat or if there was excess capacity, without losing significant amounts of market share or volume and attractive attributes. “These may be producers of popular or essential products, or in mono/oligopolistic industries. Also, stocks that have fixed assets with low levels of capital expenditure such as real estate should weather higher costs relatively well,” Brown said. “Elevated inflation can act as a tax on capital and lower returns on any capital investment, so stocks with major capital investment programs will need to be scrutinised closely. High levels of variable cost, particularly labour, may also present a
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challenge especially given current levels of unemployment.” Lazard Asset Management Australian equity portfolio manager, Aaron Binsted, said he was positioning his portfolio in names that were delivering strong earnings today that were attractively priced. “We also see a great valuation opportunity in areas of the market that benefit from inflation, specifically energy, materials and some non-bank financials,” Binsted said. “One of the key drivers of inflation globally has been higher energy prices. Energy stocks are beneficiaries of higher inflation and have historically been the strongest-performing sector during inflationary periods. “Yet, Australian energy stocks have not kept pace with rising commodity prices or their international peers. “We believe that Australian energy stocks are very attractively priced even on very pessimistic assumptions and there will be a catchup in Australian energy stocks. “There remains great demand for gas (particularly from Asia) and we believe they are a net beneficiary during the energy transition.”
BUYS AND SELLS Guadagnuolo said it was too early to tell which companies were navigating the inflationary environment best, but channel checks by the firm had suggested distribution company Metcash was dealing with supply chain
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issues better than the major supermarkets and winning some market share. “Further, as a wholesaler with a strong market position compared to its customers, Metcash has historically benefitted from rising input costs as its takes stock profits,” he said. He said the Antares Ex-20 strategy had sold out of two companies based on inflation risk. “The first of these was Downer which, as a services business, is highly exposed to the lack of labour supply and COVID enforced absenteeism. More recently we have exited our position in Qube Logistics, for similar reasons. We have also sold our position in Wisetech Global,” said Guadagnuolo. “While Wisetech Global has a very strong industry position and actually benefits from supply chain congestion, we believed its valuation was extremely challenging, even before rates started to move higher in response to growing inflationary pressures.” Lazard’s Binsted said his fund was selectively exposed to real estate investment trusts (REITs). “Looking forward, the prospect of higher inflation and interest rates resulting in rising cap rates has increased the downside risk to property valuations, and hence the exposure to the REIT sector was reduced,” said Binsted. Brown said advanced cooling manufacturer PWR Holdings was navigating inflation well. “PWR Holdings previously had the majority of their cost base in AUD, and as an exporter, the
majority of revenue denominated in foreign currency. It has successfully navigated periods of higher costs, during periods of appreciating AUD, well in the past,” said Brown. Over at Schroders, David said global packaging company Amcor stood to weather a higher cost environment. “While packaging is generally a commoditised industry, Amcor’s global scale and cost leadership has culminated in the company having leading market shares across its substrates and geographies,” said David. “Prior to reporting season, our industry channel checks indicated significant price rises of 10%-15% were being implemented, compared to a long-run history of consumer price index (CPI) level increases. “Lo and behold, the first-half profit result showed a 10% revenue increase, which was all price just to offset cost pressure. Without these price rises, profits and shareholder value would have been decimated.” He said his fund had reduced exposure to the Australian supermarket sector in the last 12 months. “Part of the decision was also related to these companies trading on expensive valuations having been winners from the lockdowns, as well as the likelihood of declining returns from their investment in infrastructure to facilitate online services. “The margin on online delivery is lower due to the labour cost of picking and packing individual orders.”
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ESG
THE INFLATIONARY IMPACT OF THE CARBON TRANSITION The impact of inflation on energy prices will be determined by a government’s ability and commitment to utilising renewable energy, writes Scott Ruesterholz. THE SHIFT TO net-zero carbon emissions is a global phenomenon, with pledges and commitments now covering 90% of GDP and 85% of the world’s population. These range from firm commitments written into national law through to proposals and pledges, but the trajectory is clear. Globally, greenhouse gas emissions are driven by the energy sector. Much of this is driven by electricity and heat generation, followed by transportation, manufacturing and construction. Achieving net-zero emissions by 2050 will therefore require a sharp focus on reducing emissions in these areas. Under currently-enacted policies, global emissions would plateau in the 2030s and be slightly below current levels in 2050, according to analysis by the International Energy Agency (IEA) – but the global average temperature rise in this scenario passes the 1.5° Celsius mark around 2030 and reaches 2.6 °C in 2100. Compared with this status quo scenario, IEA projections show the required reduction in emissions to achieve net zero is substantial, even if announced net-zero pledges were fully implemented.
INFLATION IMPLICATIONS The extent of net-zero commitments and their ramifications for globally significant industries mean there could be significant implications for global inflation. This is particularly clear in the
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case of energy. Stable energy prices were a critical driver of the muted inflationary dynamic of the past decade. According to the US Bureau of Labor Statistics, in the 2000s, energy inflation rose faster than overall inflation, and headline US CPI averaged 2.6%. In the 2010s, as energy prices stayed largely flat, headline CPI rose 1.8% on average. The global inflationary impact of moving towards net-zero emissions is likely to be modestly to moderately positive during the transition period, and once the transition is complete, the longterm impact is likely to be deflationary.
ENERGY PRICE EFFECT For the energy sector, the upfront costs associated with the transition to net zero, and need for investment today to lower future emissions, means the associated price levels would likely rise by at least 15 basis points to 25bps per annum during the transition over the next several years, before falling by 25bps to 35bps per annum after the transition, as renewable energy sources scale up and drive down energy prices. These estimates reflect our expectation that governments will shoulder a significant portion of the costs of the transition. This would likely reduce the impact on inflation, at least in the short run, but it may instead lead to other costs, such as higher taxes or greater incentives to engage in financial repression to manage large debt loads.
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Strap ESG
The need for incremental investment and the possibility of higher fossil fuel prices through the transition could both put upward pressure on prices. In combination, these have potential for 40bps to 50bps of annual positive inflationary forces through 2030 associated with the carbon transition. The countries most sensitive to energy price inflation are Spain, Thailand, Japan, and India, given their reliance on energy imports and relatively low usage of renewable energy sources. Canada and Brazil have the least relative inflation risk from the carbon transition and the EU, and the US are in the middle of the pack. China is harder to know given a lack of transparency around the composition of its CPI basket.
NATIONAL IMPACT OF THE CARBON TRANSITION While we expect overall energy price levels globally are likely to rise during the transition, and then fall afterwards, the impact on inflation within specific countries will differ. The sensitivity of a country to inflation risk driven by the carbon transition will depend on several factors, including the weight of energy within a country’s overall inflation basket, the extent to which a country already generates clean energy, which will reflect how much it may need to invest in clean energy, and how much energy a country imports. How countries weight energy within their inflation baskets Unlike food, energy as a share of the CPI basket does not exhibit much of a correlation to economic development. This would suggest that the developed world’s inflation is no better or worse positioned than emerging markets during an energy shock. When we look at the CPI weights of key countries, South Africa, the UK, and Canada appear to be least vulnerable to energy shocks whereas Mexico and Spain, would exhibit greater vulnerability.
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How countries generate their energy Countries that produce more of their electricity from renewable sources are generally likely to have less future investment requirements and vice versa. Brazil and Canada stand out as best positioned with Germany, Italy, and Turkey also relatively well positioned. Conversely, South Africa, South Korea, India, and the US are relatively low. One point of uncertainty is where nuclear fits into the future as it is not renewable but is also non-carbon emitting. Whether nuclear remains acceptable after the transition has significant implications for the amount of investment needed in some countries, especially France – where we assume nuclear will be a long-term part of their electricity portfolio. How much energy countries import or export As we have seen in recent months, having to import energy can lead to more pronounced price movements relative to countries with excess energy: for example, natural gas prices have risen much more in Europe than the US in late 2021. Countries that are net importers may face more price volatility during the transition than those that are net exporters. On this factor, Europe, China, India, and Japan are vulnerable, while Canada, the US, Australia, and Brazil are better positioned.
HOW GOVERNMENTS COULD MITIGATE INFLATION IMPACT Government policies remain a major uncertainty. ‘Green protectionism’ could raise prices, while subsidies could reduce the inflationary impact of the transition. Two approaches that could affect global inflation are carbon taxes and subsidies and incentives focused on the transition. Notably, at the 2021 COP26
Rather than seeking to raise the costs of ‘dirty’ energy and products, governments may choose to reduce the cost of clean energy and products. summit, nations made a variety of pledges to reduce their carbon footprint ranging from reducing methane to halting deforestation. Achieving these pledges will require public and private sector action, and governments will likely have to use regulatory powers, subsidies, direct investment, penalties, and potentially even tariffs to reach these goals. There was a greater consensus on ending deforestation and expanding renewable and affordable hydrogen, while ending overseas fossil-fuel financing and raising maritime shipping standards were the most controversial subjects. It is worth noting that different inflation methodologies could lead to different outcomes from the same government policies. For instance, in the US, CPI only accounts for the price consumers pay whereas PCE considers the entire cost of a good. So, to the extent subsidies reduce the consumer’s purchase price of an electric car, the impact of the transition on CPI would be less than PCE. All else equal, the energy transition could narrow the historic PCE-CPI inflation gap. Carbon taxes The EU has proposed the Carbon Border Adjustment Mechanism (CBAM) targeting aluminium, steel, fertilisers, electricity, and cement. From now through 2025, producers would be given free carbon credits based on the carbon intensity of the top decile of producers in their sector. As such, inefficient producers would face increased costs immediately. After 2025, the credit grants would decline 10% per annum to incentivise all producers to improve operations. The EU wants to avoid ‘carbon leakage’, whereby imports of ‘dirty’ products increase at the expense of domestic production, thereby mitigating the carbon reductions.
The EU effectively aims to set up a carbon border tax to equalise the playing field, crediting any importers for carbon taxes they have already paid. It is unclear whether this would influence emissions policies in other countries, or simply result in higher priced imports. Such policies may deepen the industrial base in the developed world but could lead to higher consumer prices. A European Central Bank working paper deemed the inflationary impact of carbon taxes to be low, though we believe it poses an upside risk to medium-term inflation forecasts. Governments could also use tariff revenue to increase subsidies in green project, thereby reducing prices elsewhere. Subsidies and incentives Rather than seeking to raise the costs of ‘dirty’ energy and products, governments may choose to reduce the cost of clean energy and products. For example, the Biden administration has proposed over $300bn in subsidies for the carbon transition and electric vehicles, as well as direct payments to utilities to fund green projects, though the prospects of this plan becoming law are very unclear. The required spending to achieve net-zero emissions and the reduction in fossil-fuel power generation are likely to be inflationary, before the various ramifications – including the shift to renewable energy – are disinflationary over the long term. But how fast the transition occurs, alongside the unknowns of future government policy and even geopolitical dynamics, mean significant uncertainty remains. Scott Ruesterholz is portfolio manager for fixed Income at Insight Investment.
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Retirement income
INFLATION RISK IN RETIREMENT INCOME
With inflation on the rise, Aaron Minney explores how this will impact the long-term futures of retirees and how they can mitigate against it in their portfolios. FROM JULY 2022, superannuation funds will be required to have a retirement income strategy that, among other things, manages inflation risk for retired members. There are two aspects to this. One involves a strategy to manage expected inflation and the other is to manage the adverse impacts of an unexpected increase in inflation.
impact of future inflation is unknown. Inflation expectations can be factored into a retirement income strategy, but there needs to be a plan for what happens if inflation does not match the built-in expectations.
THE IMPACT ON A RETIREE’S LIFESTYLE The impact of inflation over a retiree’s lifestyle can be dramatic, even with modest inflation. Chart 1 below highlights how inflation erodes the real value of income
for a retiree. There isn’t much difference in the early years, but the impact compounds over time. Even modest rates of inflation will hamper a retiree’s lifestyle. With inflation of only 2% a year, one-quarter of the value of the
Chart 1: The impact of different inflation rates on $40,000 of retirement income per year
WHAT IS INFLATION? Inflation generally refers to the rising costs of goods and services over time. It reduces the purchasing power of a retiree’s income if not managed. Retirees need a source of income that adjusts to inflation in order to sustain a stable lifestyle throughout retirement. Inflation risk arises because the level and
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Source: Challenger
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What retirees need is an investment that benefits from higher inflation, or even better, automatically adjusts through a linkage to the CPI. nominal income is lost after only 14 years. The risk of higher inflation is stark - 5% a year would halve the value of payments over the same period. The erosion of value can have a severe impact on a retiree’s lifestyle. Some reduction in lifestyle might be okay. Research by David Blanchett in the US and the Grattan Institute in Australia have shown that retirees tend to spend less (in real terms) over time. However, the fall in spending is typically less than inflation, which means that nominal spending increases. Even if a decline in living standards is intentional (ie less spending on discretionary items), retirees still need to manage inflation to afford the lifestyle they desire.
MANAGING EXPECTED INFLATION AND RISKS Protecting against inflation in accumulating savings requires a high enough return to offset the inflation. Some investments, like equities, provide high returns that have compensated for rising
prices over time. Others, such as unlisted property get a benefit as property prices often increase in inflationary periods, therefore increasing total returns. Bond investments are more exposed to inflation because the yield to maturity doesn’t change after purchase unless they are specific CPI-linked bonds. This does not mean that bonds cannot help with managing inflation. Buyers of bonds know about the potential impact of inflation. So, the price they pay, and the yield they demand, will depend on the inflation rate that they expect in the future. This is central to bond markets and is monitored by the Reserve Bank of Australia (RBA) in monitoring inflation expectations. Chart 2 shows the bond market’s inflation expectations from the RBA back to 1985. Breakeven inflation, as it is known, is simply the yield on a normal bond, less the associated yield on a matching CPI-linked bond. If inflation were to match breakeven inflation until the maturity of both bonds, then the
Chart 2: RBA measure of inflation expectations from the bond market
Source: RBA
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return on each bond would be the same. Investors lock the breakeven inflation rate into expected returns. If the market expects that inflation will be higher, there will be more demand for CPI-linked bonds as they would provide higher returns. The market clears by increasing the spread between the bonds and breakeven inflation rises. Similarly, if expected inflation is lower, the market will adjust to reduce the breakeven inflation rate. As Chart 2 shows, expected inflation has generally been in the 2%-3% target band of the RBA since the mid 1990s, reflecting the policy target that was confirmed at that time. It has fallen below that band in recent years as inflation has surprised on the downside. This manages inflation, but there is an additional challenge to manage inflation risk. What if the inflation rate is not what was expected? Lower than expected inflation will mean a higher living standard so that isn’t much of a problem, as opposed to the reverse situation. This risk is one of the ‘known unknowns’ - in the language of former US defence secretary Donald Rumsfeld. Everyone knows that there will be inflation, and while we might have an expectation of what it will be, no-one actually knows how it will play out until after the fact. Managing this takes more than just high returns. After all, they might not be high enough. What retirees need is an investment that benefits from higher inflation, or even better, automatically adjusts through a linkage to the CPI.
AARON MINNEY
MANAGING INFLATION RISKS FOR RETIREES
considers and manages inflation risks. The first part of this strategy is likely to involve the Age Pension. Many retired fund members will receive at least a partial age pension in retirement. This helps manage inflation risk because it is automatically adjusted for inflation. The full Age Pension actually tracks average wages over time, which typically grow more than inflation (with the exception of recent years). It is also worth a fund considering what type of spending their members need to protect against inflation. As noted, some discretionary spending drops off at older ages, so inflation on this consumption might be okay with less protection. However, it is important to have some inflation cover for the essential components of a retired member’s lifestyle. Members with only a part Age Pension, or those who receive no Age Pension, could benefit from an investment that explicitly manages this risk, by protecting against higher than expected inflation. Super funds have been protecting members from inflation by growing their accumulation assets faster than inflation. There will be an additional requirement on super funds to consider inflation risk for their retired members. Like many aspects of retirement, inflation risk is slightly different when generating retirement income, but funds can deliver better (inflation-adjusted) outcomes for their members by using some inflation-linked assets in addition to investments with high expected returns.
The Retirement Income Covenant will require super funds to have a retirement income strategy that
Aaron Minney is head of retirement research at Challenger Life.
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Technology
WEB 3.0 – ARE YOU READY PLAYER ONE? Theo Maas explores the latest technology trend and how investors can get involved in the newest Metaverse universe. WANDERING AROUND NIKELAND on my newlyacquired Roblox account, looking for some virtual sneakers… all in the name of deep-dive research! If you have no idea what that first sentence means, you are not alone. Roblox is a trailblazer for the ‘newly’ coined Metaverse, which is the main example of where ‘Web 3.0’ will take us. The terms ‘Metaverse’ and ‘Web 3.0’ have become popular buzzwords but are poorly defined and are widely misused in the popular press. The term ‘Metaverse’ was first used in Neal Stephenson’s science fiction novel ‘Snow Crash’ in 1992, where it was described as a virtual reality-based next generation Internet. It resembled a massive multiplayer online game populated with user-controlled avatars. The common elements of the original novel still play an important role however: a logical successor to the current Internet, a virtual 3D world on top of or extending the physical world that may be accessed by using augmented or virtual reality headsets. This of course leaves plenty of room for interpretation and strongly reminds us of the early days of the World Wide Web.
LAYERS OF THE METAVERSE We have identified five ‘layers’ of the Metaverse and give examples of potential stocks that might benefit. 1) Networks and data centres By definition, the Internet needs a well-functioning network, but we have seen the demands for a) bandwidth/speed, b) low latency
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and c) reliability, increase significantly and the wish list for the Metaverse will see these demands grow exponentially. Moving to a virtual reality world, i.e., creating 3D images in realtime, is a whole new level of demand for bandwidth and low latency. Whilst it doesn’t matter if an email arrives 50 milliseconds later, the demands of realistic 3D virtual worlds are multiples higher. Meanwhile, data centres are essential in that they connect, store and compute data that travels over networks. The demand for high-end computing in virtual worlds will simply mean more ‘local’ computer facilities to support and relieve the computational efforts that will be necessary on a device (e.g., Oculus headset) level. An Edge data centre will be nothing like a traditional large-scale data centre and can be anything from a small facility at a mobile tower or indeed an autonomous car. It is unlikely in our view that the traditional telcos will benefit from these tailwinds, given their horrendous track record over the last three decades to do exactly that with the developments in Web 1.0 and 2.0, itself a function of a competitive industry and need to regularly bid for spectrum in this environment. More likely, the true beneficiaries are the tower and data centre companies and potentially some of the network equipment companies. One of the best examples is American Tower, the world’s largest owner/operator of wireless communication infrastructure. With its global presence it is uniquely positioned
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to benefit from the demand of increased network traffic driven by the Metaverse. 2) Semiconductors Semiconductors are the new oil, critical in nearly every technological development that we have seen in the last 50 years or so. Semiconductors play an important role in every step of the way, from the GPUs (graphics processing unit) accelerators in datacenters, CPUs (central processing unit) in notebooks and PCs to the specialised Qualcomm processor in your Oculus headset. Given the immense compute complexity in 3D virtual reality, the developments in the Metaverse are closely linked to the cutting edge of semiconductor development. Nvidia is the market leader in GPUs (graphical processor units). Where GPUs were once limited to the gaming market and Nvidia and AMD were the dominant duopoly, the use case for GPUs has widened to data centres, autonomous cars, and other processing intensive tasks. The Metaverse is the ultimate end market for Nvidia, as it is both a very large total addressable market in addition to being a use case where GPUs will likely dominate in both data centres as well as in hardware. 3) Hardware While the form factors that end users will need to participate in the Metaverse are still unknown, it is clear that there will be demand for user friendliness and significant local processing power. One of the debates is whether augmented reality (AR), virtual reality (VR) or a combination of both will dominate. While AR is relatively ‘processing power light’, so it can be implemented in a smartphone form, it is hardly the Metaverse
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experience that most people would envision so it is therefore very likely that VR will play a dominant role but the current VR form is a clunky headset. Early leaders in this field are: Meta (Facebook) that bought Oculus in 2014, Alphabet that launched Google Glass in 2014 and Microsoft. We believe that the current situation is comparable to the early days of the ‘smartphone’ where Nokia, Ericsson and Blackberry dominated until the Apple iPhone was launched in 2007. It is therefore much harder to find early beneficiaries in the hardware space in our view, especially given the fact that the current market (which will include Apple shortly as they enter the AR/VR market) is dominated by the tech giants whose stocks are driven by other more material factors than the small dent that these devices are currently making. 4) Software The developments in software are at a similar preliminary stage making it relatively hard to find early winners. Looking at the software drivers of Web 1.0 and Web 2.0, it also took years to come to common standards. In Web 1.0 the tools to access (PCs and notebooks) had decades in the making and when webpages and the browser started to go mainstream in the 1990’s, the market had mostly settled on WinTel (the combination of Microsoft Windows and Intel processors). The developments of Web 2.0 were a bit more complicated as the main access point, the smartphone, had a bit of a false start. The early ‘smartphones’ pre-2007 used either BlackBerry OS (mainly limited to enterprise usage) or WAP (wireless application protocol) used by then market leaders Nokia and
Ericsson. Everything changed with the launch of the Apple iPhone in 2007 (or really the second-generation iPhone 3G in 2008) that deeply integrated an operating system (IOS) with great hardware. The rest of the market then rallied around Android, developed by Google as an alternative operating system, and the global smartphone market since then has been split between just these two platforms. The Metaverse, as the main early manifestation of Web 3.0, has not seen any convergence on platform level yet as most of the early examples are company specific and not widely used. Roblox is an online game platform and allows users to develop their own games using the Lua programming language. It is very popular with young children, and it is estimated that more than half of all children under 16 in the US are active players on the platform. Roblox had its IPO in March 2021, is expected to generate about US$3bn of revenues this year and has a market cap of US$60bn.
Mastercard, remain highly relevant in the online world. While this current infrastructure is efficient and safe, it is also expensive (typically between 2%-3% of the transaction value), which makes it less than ideal for the Metaverse. One of the most fundamental technologies that will likely play a role is Blockchain and while cryptocurrencies have been heralded as the solution, its limited acceptance and especially the volatility of the price of the currency itself make it far from ideal. In our view it is very unlikely that the existing players will be replaced, and they are more likely to become part of the solution instead of the problem. One of the companies well positioned to benefit is PayPal which has been a pioneer in online transactions. Not only did they make online transactions safe and convenient, but also developed new concepts like peer-to-peer payments through Venmo. Its tight partnership with Visa shows that they have a foot in both camps and are ready for any direction that Web 3.0 will go into.
5) Payments and Databases The rise of e-commerce has not been met with more efficient payment ‘rails’, as most of the offline structures have simply been copied online. Moving into a Web 3.0 world where unlimited micropayments play an important role, there has been a big debate about better payment infrastructure. The ideas behind the Metaverse are usually based on forms of virtual payments, which can remain virtual or be transacted into ‘real’ currency and often are in the form of micro-payments. The move to ecommerce in Web 1.0 has seen many of the existing ‘rails’, i.e., banking networks or Visa/
CONCLUSION The move to Web 3.0 and the development of the Metaverse will take many years to complete and will be an evolution not a revolution. For us, it is however clear that this Web 3.0 direction is inevitable and will have a profound impact on many industries, companies, and us as potential users. The challenge for us as investors is to separate hype from reality and not fall into the same trap of 20 years ago during the dotcom bubble. Theo Maas is global equities portfolio manager at Northcape Capital and for the Warakirri Ethical Global Equities fund.
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Toolbox
ESG CREDENTIALS AND STRONG RETURNS
Investing with an ESG focus in mind, writes David Smith, is no longer a ‘nice to have’ for investors and can lead to better performance over the long-term. FOR SOME TIME now, strong credentials in environmental, social and governance – ‘ESG’ to use the shorthand – have been the buzzwords on every investor’s lips. It would seem that everyone now wants to make investments in companies with strong ESG scores, with asset managers wanting to offer investments that stand up to ESG scrutiny. But there can be no denying the suspicion that ESG investments may not be able to keep pace with ‘traditional’ investments. Many investors still believe that adhering to strong ESG principles inevitably means sacrificing returns. We disagree, and so to challenge this belief
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we’ve taken a detailed and objective look at the research evidence to see how, especially over the longer term, ESG factors truly affect the performance of both companies and portfolios. The very good news is, taking ESG seriously is even better for companies, employees, consumers, the environment, the future and investors’ returns than current opinion may suggest.
RESEARCHING THE RESEARCH Our aim with the research was to give investors solid evidence of how ESG considerations could affect their investments. We’ve focused on rigorous, peer-reviewed academic research – we’ve carried
out research into the research, you could say. We hope that our findings will go some way to convincing investors and asset managers who are still sceptical. One substantial piece of research we looked at was analysis by MSCI of over 1,600 companies from the MSCI World Index universe, between January 2007 and May 2017. This analysis divided companies into five ESG score quintiles, with Q1 indicating the lowest ESG rating and Q5 the highest. Highly-rated (Q5) firms were more profitable and paid higher dividends than lowly-rated firms (those in Q1). Highly-rated firms also demonstrated lower earnings volatility and lower systematic volatility.
STRONG ESG AND LOWER RISK We also found that there is correlation between a strong ESG score and the following attributes: profitability, share price growth, and a lowering of risk, at both the portfolio and the stock level. Another benefit for higher-scoring companies is that the cost of obtaining both debt and equity capital (known as the cost of capital) becomes lower. Further proof of the benefits of a strong ESG scorecard comes from research which demonstrates that highly rated ESG companies perform better in times of volatility. This is borne out not just in the data from the COVID-19 crisis of 2020, when
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Toolbox
Chart 1: Relationship between ESG and corporate financial performance
companies with higher ESG scores were more resilient during the volatility, but across 2004 to 2018. In short, research suggested that strong ESG credentials significantly improve a company and a portfolio’s riskadjusted return. We also looked at research which concluded that lower ESG-scoring stocks tended to have 10% to 15% higher total volatility and stock-specific volatility than higher ESG-scoring stocks. This means that assessing a company’s ESG ratings and exposures may inform investors about the riskiness of securities in a way that is complementary to traditional statistical risk models. Other research found that ESG integration reduces portfolio risk across the full spectrum of markets and investment styles. We also noted findings elsewhere which suggested that, although the performance of ESG-focused mutual funds and ETFs was similar to non-ESG focused funds, there was 20% less downside deviation, making the funds ‘less risky’ overall. So, a firm’s environmental performance is inversely related to its systematic financial risk. In addition, this positive ESG effect increases over longer time horizons. The evidence suggests that higher-quality companies, ones concerned about their environmental impact, their ‘footprint’, their workforce, the sustainability of their products and their impact on the planet, tend to make better profits, and see share price performance that is better than those of their less ESG-oriented peers.
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Source: Journal of Sustainable Finance & Investment, 2015
EMERGING MARKETS Positive ESG has a particularly significant beneficial effect when it comes to emerging market investments; here, the relationship between strong ESG credentials and better corporate performance is very high. A recent and comprehensive metaanalysis of over 2,200 unique research papers on ESG integration found that a large majority revealed a positive relationship between ESG and corporate financial performance. The sample from emerging markets was particularly interesting, revealing a 65% to 71% higher share of positive outcomes over developed markets. Investing in emerging markets is inherently more difficult; there is far less available information around the companies, and often less sophisticated regulation. So for emerging market investors, the importance of strong ESG being displayed by a potential investment becomes quite material. ESG principles give us a framework to investigate an emerging market company. If a company is well run – it is not treating its employees badly, not polluting the area with chemicals, and it is managing its energy use and waste creation well, it will tend to have better results, both
in the long and short-term. The evidence we have gathered allows us to conclude that strong ESG performance can lead to strong returns. To cite two leading examples: for many years now, we’ve invested in Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan and Housing Development Finance Corporation (HDFC) in India. Both have strong ESG credentials, both in terms of their business and strategy, and the way they operate. TSMC is focused on improving the energy efficiency of its chips, with the company’s innovations helping make end products more energy efficient, driving the development and expansion of industries like renewable technology and green transport. The company’s commitment to ESG is strong; green energy is used wherever possible at all of the company’s factories and offices, and TSMC is the first semiconductor manufacturer globally to join RE100, a global initiative bringing together the world’s most influential businesses committed to 100% renewable power. There is currently a 95% waste recycling rate at the company’s operations, and air pollution has been reduced by 46% since 2015. The company is building the
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Toolbox
CPD QUIZ This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development.
Continued from page 29 world’s first advanced water reclamation plant for industrial wastewater from chip manufacturing, a critical capability given Taiwan is a water-stressed country. In the case of any water shortage, the company is obliged to ferry in water at extra cost, and so lowering water usage whilst driving water re-use every year is an important aim for the firm, with both environmental and business benefits. Housing Development Finance Corporation (HDFC) in India is focused on improving access to housing finance, with a particular focus on improving access in the Economically Weaker Section and Low Income Group segments of the country, and has financed 8.4 million homes since the company was founded in 1977. The company is equally focused on ESG in its operations. It sets strong annual targets for emissions reduction, energy usage, water consumption and waste recycling and disposal. Solar energy is used in the company offices and buildings. Small changes, such as phasing out single-use water bottles, have been adopted. Corporate governance is strong and social welfare aims are high. Both TSMC and HDFC have been major success stories and are perfect examples of the findings of our extensive research – that standout performance can be generated not just by doing good business, but by also placing a strong emphasis on doing business for the good of the people who work at a company, for the good of the company’s customers and to improve every aspect of the environment that is affected by the company.
ACTIVE MANAGERS AND ESG RESEARCH Our findings have reinforced our belief that taking an active approach to equity investing can make a critical difference. Investors need to conduct their own thorough research into a company’s ESG qualities and not just rely on data from third parties. We try to use our local presence around the world to find companies with high ESG credentials that are not yet fully appreciated by the market. In addition, we believe asset managers have a responsibility to help companies improve their ESG standards by actively engaging with them. We are not ‘activist’ investors, but we do aim to draw on our experiences across industries and regions to constructively challenge managements to do better. It is now an outdated and incorrect view that ESG is ‘nice to have’, ‘an added extra’, or an ‘additional expense’ that brings nothing in return. In fact, one could argue that the very opposite is true: companies that don’t care about their people, their customers, or the effect their business is having on the air, climate, water and natural habitat, are unsustainable business models, and are businesses that increasingly investors don’t want to risk investing in. David Smith is senior investment director – Asian equities at abrdn
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1. One substantial piece of research Aberdeen Standard Investments looked at was MSCI analysis of over 1,600 companies from the MSCI World Index universe, between January 2007 to May 2017. This analysis divided companies into five ESG score quintiles, with Q1 indicating the lowest ESG rating and Q5 the highest. It found that highly rated (Q5) firms were: a) More profitable than lowly-rated firms (those in Q1) b) Paid higher dividends than lowly-rated firms (those in Q1) c) Demonstrated lower earnings volatility and lower systematic volatility than lowly-rated firms (those in Q1) d) More profitable, paid higher dividends and demonstrated lower earnings volatility and lower systematic volatility than lowly-rated firms (those in Q1) 2. Research concluded that lower ESG-scoring stocks tended to have higher total volatility and stock-specific volatility than higher ESG-scoring stocks. How much higher was this volatility? a) 5% to 10% b) 10% to 15% c) 15% to 20% d) 20% to 25% 3. There is a correlation between a strong ESG score and which of the following attributes? a) Profitability b) Share price growth c) Profitability, share price growth, and a lowering of risk, at the portfolio level d) Profitability, share price growth, and a lowering of risk, at both the portfolio and the stock level 4. A firm’s environmental performance is related to its systematic financial risk. What word best describes this relationship? a) Directly (related) b) Inversely (related) c) Mathematically (related) d) Linear (relationship) 5. Positive ESG has a particularly significant beneficial effect when it comes to which of these market investments? a) Asian market investments b) Developed market investments c) Emerging markets investments d) All market investments
TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ esg-credentials-and-strong-returns For more information about the CPD Quiz, please email education@moneymanagement.com.au
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Send your appointments to liam.cormican@moneymanagement.com.au
Appointments
Move of the WEEK Matthew Rowe Chief executive CountPlus
CountPlus announced that it would not enter into a new employment agreement with its chief executive and managing director, Matthew Rowe, who was contracted until 24 February. The company said in its
The Financial Services Council (FSC) appointed Nick Hamilton, managing director and chief executive of Challenger Limited as a director to its board. Hamilton’s appointment followed deputy chief executive, Blake Briggs, stepping in as acting CEO in December, in response to Sally Loane leaving after seven years at the helm. Hamilton would join with more than 20 years’ industry experience gained across Australian and international markets and had successfully led top-tier global equity and multi-asset businesses both in Australia and the UK. Prior to being appointed managing director and CEO of Challenger Limited in January this year, Hamilton had held a number of executive roles at Challenger since joining in 2015 and had previously worked at Invesco Perpetual (UK) and Colonial First State. The Advisers Association (TAA), whose board was comprised of representatives from its member base: authorised representatives of AMP Financial Planning (AMPFP) and Hillross Financial Services announced the appointment of Bill Beimers as its new chair. Beimers, a practicing financial adviser and managing director of Queensland-based financial service practice SEQ Advice,
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announcement to the Australian Securities Exchange (ASX), that current chief financial officer, Laurent Toussaint, had agreed to assume the role of interim CEO. At the same time, the firm said
had served on the TAA board as vice chair since 2020 and was also a board member of TAA’s forerunner, AMPFPA, from 2019. He had over 23 years’ experience in financial services and expert knowledge of the industry, having worked from the ground up with financial institutions in the retail banking, insurance and advice sectors. Schroders appointed Simon Doyle as the newly-created role of chief investment officer for Australia. He would report to Australian chief executive, Sam Hallinan, and UK-based group chief investment officer and co-head of investments, Johanna Kyrklund. In the role, Doyle would be responsible for creating and delivering investment solutions for existing and prospective clients in the Australian market. He would work closely with Natalie Morcos who was promoted to head of product and solutions, Australia. Hallinan said: “In the new structure, I will work closely with Simon and Natalie to identify solutions that meet clients’ evolving needs over the coming years. This will also include leveraging Simon’s extensive multi-asset and solution-oriented experience to drive our response to the changing regulatory and market landscape”.
there would be no other changes to its board, with Ray Kellerman remaining an independent non-executive chair and the company would shortly commence a search process to appoint a permanent CEO.
Iress announced changes to its client-facing commercial team with Tizzy Vigilante and Kirsty Gross stepping away from the business. Under the change, teams would align with client or industry segments which reflected “the convergence of financial services offerings in the market and to better support the delivery of strategic priorities”. It would mean Vigilante, managing director for financial advice, and Gross, managing director for investment management, would depart. Vigilante had worked at Iress since 2007, including eight years in her current role, while Gross had been at the firm for 25 years. Instead, Nicole Mahan would join in April as commercial director for Australia and New Zealand, Geoff Rogers as commercial director for investment infrastructure and Warwick Angus would be an internal promotion to commercial director-strategic markets. Bravura Solutions appointed Paul Dunn as Asia Pacific (APAC) managing director to scale the firm’s business in the region. Dunn was previously client relations and sales director for APAC at the firm where he had worked for three years. Prior to that, he was national manager for
institutional relationships at ANZ Wealth. His role would focus on scaling the APAC business across Bravura’s full range of products and services and accelerating existing and new opportunities in the market. He would also be part of the firm’s leadership team, reporting to chief executive, Nick Parsons. Parsons said: “This regional appointment will strengthen our ability to meet the increasing demand for Bravura’s ecosystem of products within APAC. Paul’s role will help to ensure the successful delivery of our solutions at a localised level, providing regional autonomy and control to ensure local market alignment. The Australian Investment Council appointed four new directors to its board to oversee the organisation’s strategic direction and governance. The four directors were Anna Ellis from ROC Partners, Louise Haslehurst from Quadrant Private Equity, Matthew Robinson from Pacific Equity Partners and Michelle Segaert from EY. Ellis and Haslehurst were both investment directors, Robinson was a managing director and Segaert was a partner in financial services law. They would join 13 existing directors on the board.
3/03/2022 10:11:51 AM
OUTSIDER OUT
ManagementMarch April 2,10, 2015 32 | Money Management 2022
A light-hearted look at the other side of making money
Dirty money
Suits you, sir
OUTSIDER, like the rest of the world, has been paying close attention to the abhorrent actions undertaken by Russian President Vladimir Putin, enough to heed the advice of the Australian Federation of Ukrainian Organisations and boycott Russia. Doing what little he could, Outsider decided to divest from Russian companies and firms associated with Putin’s regime and throw out his Russian vodka, encouraging his friends to do the same. This is why Outsider was particularly hurt to see wholesale advisers, Koda Capital, recommending to clients via email that they increase their investment in Russian companies as Russian stocks were “very cheap”.
IN the last few weeks, there has been a general shift towards staff returning back to the office and appearing at face-to-face events again as Omicron cases die down. For some staff, however, it is a bit of a mindset shift to adjust to working in a public space again and finding the appropriate attire to wear. Even Outsider had to dig his suit from the back of the wardrobe and shake the mothballs off before his first return to the office. He seems to have found a kindred spirit in Association of Financial Advisers (AFA) chief executive, Phil Anderson, who also rejected suits during lockdown. Presenting at the AIA Adviser conference in March, Anderson was introduced as someone who had enjoyed adopting a casual summer attire of shorts and T-shirt during his period of working from home, as well as growing a lockdown beard. “Fear not, I can confirm I am wearing pants today”, he told the audience. Watching the conference, Outsider is very relieved to be able to confirm that Anderson was indeed wearing a natty suit for his appearance.
While the firm issued an apology, saying the email had been sent in error as an ‘ethical overlay’ had not been applied, Outsider would like
to know what an ethical overlay really meant. Outsider and Money Management #standwithukraine.
Rain, rain, go away WITH so much rain falling over the country, to devastating effect in many places unfortunately, the promotional umbrellas that Outsider receives from asset management firms are finally being put to good use. While he won’t name and shame the particular companies, he has accumulated quite a supply over his time and there are some that are better than others. Maybe some would even class as vintage given the frequency that companies change their names and branding.
OUT OF CONTEXT www.moneymanagement.com.au
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Good thing too, as if one blows inside out the minute he steps out the door, then he has plenty more to choose from. For Outsider, he is partial to a decent neutral-coloured golf umbrella to accompany him on the golf course and to keep away from pedestrians in the street, thereby having the dual benefit of also being COVID-safe. With winter on the horizon in a few months, Outsider wonders if the next promotional activity will be branded scarfs or blankets.
"That it's going to be a ripper"
"Because it was crap."
- Senator Jane Hume is asked what she can say about a superannuation advert
- Magellan's Chris Mackey on why the firm scrapped its dividend repayment plan
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2/03/2022 5:45:23 PM