Money Management | Vol. 35 No 3 | March 11, 2021 by FE Money Management

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Vol. 35 No 3 | March 11, 2021

ESG

Exposure to miners

ASIA

Five areas for growth

Factor investing

Advisers told to charge what their advice is really worth

EDUCATION

BY MIKE TAYLOR

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FA-SEE-YA “DISAPPOINTMENT. The one word I’d use to explain the FASEA story,” said Dante De Gori, FPA chief executive. The Financial Adviser Standards and Ethics Authority (FASEA) may be gone but its legacy will last for a long time yet. The removal of FASEA has done nothing to change education requirements, however the industry associations and licensee groups are still working behind the scenes on the code of ethics, continuing professional development requirements and recognition of previous experience. Just over half (52%) of advisers have passed the FASEA exam in nine sittings. The 10th sitting was completed in January, leaving only five more available this year for advisers to complete before the 31 December, 2021, deadline. As more advisers pass, frustration towards the exam has reduced, although many advisers have repeatedly failed and are anxious to meet the deadline. Older advisers with decades of experience are still frustrated by the degree requirement: education is time consuming and expensive, even with Government financial support. If this issue isn’t addressed, there will be an exodus of talented and experienced advisers who maintained a clean record throughout their careers but are left to become unnecessary collateral damage. “If we want to create a profession that only the very wealthy can access then what we’re doing is great,” Eugene Ardino, Lifespan chief executive, said.

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TOOLBOX

Full feature on page 16

FINANCIAL advisers should not be unilaterally cutting fees in a race to the bottom. They should instead be charging fees which accurately and profitably reflect the value and complexity of the advice they are providing. At the same time as the Australian Securities and Investments Commission (ASIC) is conducting its affordable advice review and as Government ministers have canvassed broader use of general and intra-fund advice, advisers have been told that too many of them are simply not charging enough to ensure they are sufficiently remunerated and profitable. What is more, the advisers have been told that they should be regularly reviewing the adequacy of their fees in circumstances where

some are doing so as infrequently as every five years. Speaking during an AIA Australia adviser forum, Peloton Partners chief executive, Rob Jones, said that there was a tendency by advisers to want to push costs down when dealing with hard-pressed clients, but that they needed to understand and explain the cost of the advice they were providing. He said there was a need to properly cost the service, value and complexity of the advice that was being delivered. Jones said that advisers needed to understand that clients were not being forced to obtain financial advice and were doing so on the basis of a “self-selection process triggered by specific events or needs including a lack of understanding of financial-related matters”. Continued on page 3

ASIC urged to use ATO and super to reunite unclaimed remediation monies THE Australian Securities and Investments Commission (ASIC) may think that unclaimed client remediation money should go to charities or not for profit consumer groups, but superannuation funds have other ideas – they want it directed, via the Australian Taxation Office (ATO), to superannuation. In fact, the superannuation funds want unclaimed remediation monies to be directed to the specifically identified clients via the ATO superannuation register and then into their active superannuation accounts. In a submission to ASIC’s current consultation on Consumer Remediation, the Association for Superannuation Funds of Australia has made clear it does not see ASIC’s proposal for licensees to lodge unclaimed monies with a “charity or no-for-profit registered with the Australian Charities and Not for Profits Commission. Continued on page 3

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News

YFYS does not address retail super funds’ underperformance BY JASSMYN GOH

THE Government’s proposed Your Future Your Super (YFYS) legislation stops short of addressing the underperformance across the superannuation sector, the Australian Institute of Superannuation Trustees (AIST) believes. AIST pointed to data from the Australian Prudential Regulation Authority (APRA) that found over the five years to December 2020, profit-to-member super funds, on average, outperformed retail funds by 23%. AIST chief executive, Eva Scheerlinck, said this concentrated retail fund underperformance needed to be

urgently addressed by the government and regulator. She said the YFYS legislation stopped short of this as it only prescribed the annual performance test to default MySuper products, which on average tended to perform better. “A one or two percentage differential in annual investment returns has a huge impact on the financial outcome for members in retirement,” Scheerlinck said. “It should be legislated that every super product is subject to annual performance testing. Any exclusion simply lets underperforming funds escape scrutiny and eats away at member returns.”

Yarra to become one of the largest Aussie fund managers BY LAURA DEW

YARRA Capital Management has entered into agreement to acquire the Australian business of Nikko Asset Management to create one of Australia’s largest independent fund managers. Yarra would assume control of Nikko AM’s Australian subsidiary and its associated entities and the Australian equities business would be rebranded as Tyndall. Expected to complete in April 2021, subject to regulatory approval, the Tyndall brand would be managed by Brad Potter, Nikko AM’s head of Australian equities. The fixed income business would be jointly led by Roy Keenan and Darren Langer as co-heads of Australian

fixed income. The two fixed income businesses would be combined but the equity division would remain separate from Yarra’s existing equity division. Dion Hershan, managing director of Yarra and head of Australian equities, would become executive chair and head of equities and the search for a new managing director had commenced. Until then, Garvin Louie would take the role on an interim basis. Nikko AM would become a 20% shareholder in the combined group as a strategic investor, alongside private equity firm TA Associates, and appoint a director to its board while Michael Gordon, non-executive director at Yarra, would join the Tyndall board as chair.

Advisers told to charge what their advice is really worth Continued from page 1 “Therefore, they are electing to invest in their financial wellbeing, financial security and financial improvement,” he said. Jones said there was both a cost and an investment inherent in the adviser/client relationship. “We must understand the cost of delivering advice so we can attach a reasonable profit and for too long we have neglected profit,” he said. “Clients can always find an adviser who will undercut another adviser – so focussing on cost only or trying to cut fees to make it work for a client is a ‘flight to the bottom’ and only the client will benefit,” Jones said.

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Hershan said: “The transaction will enable us to continue strengthening our partnerships with clients and will provide the additional scale to support greater investment in talent, technology and operational excellence. “Yarra was attracted to the quality of the people within Nikko AM’s Australian business and we are delighted to welcome them into the Yarra team.” Brad Potter, head of Australian equities at Tyndall, said: “This is a great outcome for our clients and the team. We share the same values and strong alignment with Yarra. We believe Yarra will be an excellent partner and that together we will maintain high quality support functions and a singular focus on

delivering investment returns for our clients. “We’re also very excited to return the Tyndall name to the Australian market, a brand with a strong heritage and excellent reputation of delivering strong outcomes for clients.” Nikko AM co-chief executive, Hideo Abe, commented: “We are confident that our investment in Yarra will be the catalyst to enhance the capabilities that Australian investors are looking for, while sales, distribution and back and middle office functions will complement each other and thus continue to provide quality service to our clients. We are also excited to be able to expand our Australian and fixed income offering to Japanese and global investors in this new capacity”.

ASIC urged to use ATO and super to reunite unclaimed remediation monies Continued from page 1 “For superannuation funds, an alternative option is for any unpaid money to be instead paid to the ATO so that it can be reunited with the consumer’s active superannuation fund account,” the ASFA has told ASIC. The superannuation funds also signalled their resistance to fund trustees to be distracted and have costs imposed to compensate clients for small amounts, and therefore signalled its opposition to any removal of the broad low-value compensation threshold of $20. “ASFA does not support the removal of the broad low-value compensation threshold of

$20. As the current RG 256 notes, paying compensation to clients can require significant effort on the part of the licensee,” it said. “Requiring licensees to incur significant compliance and administrative costs in an effort to pay consumers compensation amounts as low as $1 would not be, in ASFA’s view, the best use of resources.” “ASFA encourages ASIC to reconsider the removal of a broad low-value compensation threshold or, alternatively, allow superannuation funds to pay low-value remediation amounts to the ATO so that the ATO could reunite these amounts with the consumer’s active superannuation account.”

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4 | Money Management March 11, 2021

Editorial

mike.taylor@moneymanagement.com.au

SUCCESSIVE GOVTS HAVE FAILED ON FINANCIAL PLANNING REGULATION

FE Money Management Pty Ltd Level 10

If financial advice is to be made more affordable, the layer upon layer of financial planning regulation needs to be stripped back and the Australian Securities and Investments Commission is not the vehicle to achieve that. TWO POLITICIANS from either side of the political aisle got it right this month when they identified the degree to which the financial planning industry has become over-regulated. On the left hand side of the aisle was Labor’s Shadow Minister for Financial Services, Stephen Jones, who reflected upon the manner in which a succession of well-meaning Governments had introduced legislation around financial planning only to see that legislation translated into deeply-layered regulation. On the right hand side of the aisle was the former chief of staff to former Minister for Finance, Mathias Cormann, West Australian Senator, Slade Brockman, who used a speech to the Parliament around yet another piece of well-meaning legislation to point to the increasing burden being placed on an industry which is already over-burdened. The legislation to which Senator Brockman referred was that imposing annual client opt-ins on financial advisers all because it had been one of the recommendations resulting from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. It is worth noting that Brockman, who is no political neophyte, reflected that it was most unusual for a Government to commit to implementing all of the recommendations of any Royal Commission. Brockman said he feared that the suite of changes made to financial planning over the past decade “has created an environment where the cost of advice will increase and some Australians will not be able to afford high-quality financial

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4 Martin Place, Sydney, 2000 Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au News Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561

advice and so will be forced into more set-and-forget products, like superannuation”. His fears are legitimate and need to be properly understood by his colleagues in the Parliament. Both sides of politics have been guilty of adopting a band-aid approach to the perceived ills of the financial planning industry – legislating over and over, regulating over and over – without ever once conducting an analysis of what sat at the root cause of the problems. Financial planners themselves have always known the root cause – the use of financial advisers as product distributors and a Corporations Act which, to this day, continues to define ‘advice’ as relating to the provision of a product. SECTION 766B MEANING OF FINANCIAL PRODUCT ADVICE (a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or. (b) could reasonably be regarded as being intended to have such an influence. Unless and until this Government or its successor addresses this fundamental problem – which was somehow

overlooked or ignored by the Royal Commission – then little real progress will be made. And, in addressing the problem of Section 766B, the Government should fully audit the layers of regulation generated by “well-intentioned” but often-times politically expedient regulation and wind them back to something which relevant, manageable and affordable. For most financial planners with solid ongoing relationships with their clients the annual renewal arrangements should not be overly burdensome, but Senator Brockman and scores of financial advisers are right in suggesting that Hayne was not 100% right and the legislative change was not warranted. Once again, wellmeaning politicians have added another regulatory layer. Right now, ASIC is conducting its affordable advice review. Given that ASIC should properly be regarded as a corporate cop rather than a policymaker, any Government wanting financial advice to be more easily obtained and affordable should initiate an independent review with the Productivity Commission being a much more appropriate vehicle than the regulator.

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News

Platforms contacting advice clients without adviser knowledge BY JASSMYN GOH

A number of financial advisers are reconsidering their platform relationships after some platforms directly contacted clients, without the advisers’ knowledge, regarding the legislative changes around the annual adviser fee, according to WealthO2. The legislation, the Financial Sector Reform (Hayne Royal 4 Commission Response) Bill was passed last week which would require superannuation fund members to consent annually to trustees to deduct ongoing adviser fees from 1 July, 2021. The firm’s managing director, Shannon Bernasconi, said advisers were unhappy to discover their platform provider had been contacting their clients about potential changes to their fees without notifying them.

“This isn’t the first time that some platforms have contacted clients of advisers – we saw similar instances when fees and commissions were turned off by some platforms well in advance of legislation,” she said. “No doubt the platforms believe they have good reasons for taking this step, and circumventing the adviser’s relationship with their clients. They may claim that it is a regulatory requirement, or perhaps an action to reduce liability. Another reason may be that they lack the technological ability to obtain consent in a more adviser led or digital way.” Bernasconi noted the banks’ exit from wealth management and advisers moving away from aligned distribution had changed the way adviser groups selected and used

platform providers. “We find it surprising that some platforms have taken a very blinkered approach with advisers, which doesn’t take into account the annual review process where the client is consenting to fees already,” she said. “Many platforms also don’t have the ability to generate a digital consent-based workflow and revert to a paper trail, adding more administration to the adviser process. “Another consideration for advisers are the providers who have integrated digital signatures and alignment of adviser opt in and annual fee arrangements with the reform requirements. “Such offerings provide advisers with control of the narrative and branding of communications with their clients, which can give both sides greater peace of mind.”

Who’s focusing on long term opportunities?

Aussie financial advice landscape to change at faster pace than UK BY LAURA DEW

AUSTRALIA could change its financial advice landscape at a faster pace than the UK, which took around three years, leading to a more efficient and professional industry. According to Intelliflo, which recently partnered with Centrepoint Alliance, the UK financial advice landscape had been “transformed” by UK regulation called the Retail Distribution Review which came in at the end of 2012. This brought in

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changes such as the end of commission and necessary educational qualifications. It was then followed by EU regulation on data protections which increased the need for data accuracy and fee transparency. A similar story could play out in Australia, the firm said, thanks to changes such as the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and qualifications from the Financial

Adviser Standards and Ethics Authority (FASEA). Nick Eatock, chief executive and chair of Intelliflo, said: “Following a period of significant upheaval, which saw adviser numbers fall and larger players exiting advice, the UK advice industry took two to three years to turn around. What has emerged is an industry that is both more efficient and more professional, with an increasing number of Britons seeking advice”. The firm added the COVID-19

pandemic had accelerated technological change. “We expect Australia to follow a similar trajectory but perhaps at a faster pace, given the level of technology adoption we have seen across the industry during COVID19. There are great synergies between the UK and Australian financial advice markets in terms of adviser needs, regulatory reforms and market dynamics,” added Johann Koch, international business development director.

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News

No one yet prosecuted for calling themselves ‘financial adviser’ BY MIKE TAYLOR

THE legislation protecting the use of the titles “financial adviser” or “financial planner” has been in place for over 12 months but appears to have never resulted in a prosecution mounted by the Australian Securities and Investments Commission (ASIC). While the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) campaigned hard for legislation limiting the legal use of the titles “financial adviser” or “financial planner” the reality is that in the four years since the Corporations Amendment

(Professional Standards of Financial Advisers) Bill 2016 passed both the House of Representatives and Senate its provisions have not been specifically used. Instead, ASIC has preferred to use the less specific breach of operating “without a licence”. The FPA in 2017 celebrated the passage of the legislation noting it as “a major leap forward for consumer protection and the future of the financial planning profession”. However, when contacted by Money Management, ASIC confirmed it most regularly pursued people on the basis of

them either not holding an Australian Financial Services License (AFSL) or being authorised to operate under such a license. The question of the restricted use of the term “financial adviser/planner” has come to the fore because of the controversy surrounding alleged fraudster, Melissa Caddick, who was passing herself off as a financial adviser without holding an AFSL or an authority. It also came as veteran Sydney-based financial adviser, Ian MacRitchie, noted that he had been concerned by what he regarded as ASIC’s apparent

inaction when sought to help a family friend who had been burned by an unlicensed financial adviser. MacRitchie said that ASIC had at first advised him that it would not be pursuing the issue and appeared only to change its mind after intervention by the Federal Opposition front-bencher, Andrew Leigh. He said the Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume, had responded by writing back to him and informing him that such matters were the responsibility of ASIC.

Who else, but Elston.

Life advisers must prove need for commissions LIFE/RISK advisers are going to have to make their case for the retention of commission-based remuneration in the same way that mortgage brokers did, according to the Federal Opposition. The Shadow Minister for Financial Services, Stephen Jones, made clear that he remains to be convinced about commissions-based remuneration in the life insurance industry but acknowledged the case that had been made by mortgage brokers on the issue. “Conflicted remuneration is a problem but mortgage brokers have been able to make a case for commissions,” he told an AIA Australia

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adviser summit. Jones said that it would be up to life/risk advisers to make a similar case, but that before adopting a firm position he would be awaiting the outcome of the Australian Securities and Investments Commission (ASIC) review into the Life Insurance Framework (LIF). Asked to define what he regarded as “conflicted remuneration” to be when a product manufacturer paid a fee to the adviser related to the sale of their product – something which had been similarly viewed by the Royal Commissioner, Kenneth Hayne.

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News

Big banks now also-rans in platform space BY MIKE TAYLOR

IN what represents almost a reversal in the platform dominance stakes, the banks have been trumped by the minnows. The latest data from Investment Trends reveals HUB24, Netwealth and Praemium sitting atop the list of platforms preferred for their features when, less than a decade ago, the top three positions were dominated by bank platforms such as the CFS, Macquarie Wrap and Asgard. These days the big bank wraps are still mostly in play, but they have been supplanted by the technological agility of the newcomers. The ‘Investment Trends 2020 Platform Benchmarking and Competitive Analysis‘ report confirmed the degree to which fortunes have been reversed. It said that for overall platform functionality ranking, HUB24 had marginally overtaken Netwealth for top spot, with consistently strong results across all six assessed categories. In a close second

position, Netwealth continued to perform strongly in four out of six categories. Industry wide, the five top-ranking full-function platforms are: 1) HUB24 (overall score of 89.0%); 2) Netwealth (88.9%);

Link aims to ﬂoat off PEXA BIG superannuation administrator, Link has moved further down the road of floating off its property settlement business, PEXA, after posting a decline in net profit after tax of $65 million. Link, which is the major shareholder in PEXA, said the other shareholders – the Commonwealth Bank and Morgan Stanley – had agreed to explore the possibility of an initial public offering (IPO) for the business. It represents a significant move by Link and the other shareholders in circumstances where PEXA recorded a strong half with a 27% increase in revenue to $99.2 million and a 90% lift in EBITDA to $51.5 million. Commenting on the broader Link half-year result, the company’s chief executive, Vivek Bhatia said it had successfully navigated some challenging external conditions, demonstrating financial resilience. He said the group reported EBITDA of $137 million and net operating cashflow of $192 million, having navigated the impacts of Brexit, COVID-19 and superannuation regulatory reforms including Protecting Your Super (PYS), Putting Members Interests First (PMIF) and the early release scheme. The company said it had handled 2.4 million early release superannuation payments valued at around $18 billion, and had managed contract renewals with Cbus and HESTA. The Link board declared an interim dividend of 4.5 cents per share 60% franked.

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3) Praemium (84.8%); 4) BT Panorama (82.4%); and 5) Macquarie Wrap (76.5%). The Investment Trends report found that platforms were responding to calls from financial advisers to better support their socially distanced advice processes, with notable functionality improvements around electronic signatures and digital acceptance tools. Commenting on the report findings, Investment Trends associate research director, King Loong Choi, said the platform industry was continuing to drive innovation and functionality improvements from the back-end to front-end, which was especially vital as financial advisers and their clients adjusted to a social distanced way of living. Referring to the platform functionality scores, Choi said the narrow difference highlighted the intense competition between the leading platforms, many of which had made meaningful refinements to their product offering, reporting, decision support tools and integration in the last 12 months.

ClearView commits to ﬁnancial advice on back of earnings growth BY OKSANA PATRON

CLEARVIEW has reported a 39% increase in operating earnings after tax to $13.1 million for the first half of 2021, underpinned by strong claims performance, while its underlying net profit after tax (NPAT) saw a 27% growth to $13 million. At the same time, the firm’s board announced plans to reinstate its FY21 dividend, in line with its dividend policy, and subject to its capital position and 2H21 performance. The group also updated its underlying NPAT guidance of $21 million to $25 million for FY21, given that its business was “on track to meet its medium and long-term performance improvement objectives”. ClearView continued to enact transformational change through the delivery of key milestones including a new life insurance policy administration system and life insurance product series as well as enhanced superannuation and investment offerings to accelerate the growth of the group’s wealth management business. Its life insurance operating earnings after

tax was up 55% during the first six months and amounted to $12.4 million. During the same period, funds under management (FUM) passed $3 billion. At the same time, the group reiterated its commitment to personal financial advice, given its strategic investment in compliance and technology to help drive efficiencies in financial advice which resulted in 28 practices joining LaVista Licensee Solutions since its launch (91 financial advisers), it said. “While challenging market conditions persist, this result reflects the impact of initiatives to improve claims management outcomes, boost customer loyalty and strengthen our relationships with professional financial advisers,” ClearView managing director, Simon Swanson, said. According to Swanson, the complex tax and regulatory environment combined with ageing population and rising debt levels underpinned the need for strategic advice and fit-for-purpose products. “COVID-19 has only heightened awareness of the need for sound financial advice and relevant products like life insurance,” he said.

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News

ASIC ‘very supportive’ of quality limited advice BY MIKE TAYLOR

THE Australian Securities and Investments Commission (ASIC) has defended its handling of intrafund and limited advice delivered by superannuation funds in the face of questioning within a key Parliamentary Committee. Asked to explain why ASIC had not taken action against superannuation fund limited personal advice given the compliance rates outlined in the regulator’s Report 639, ASIC declared “We do not consider limited advice to be a dangerous form of advice”. NSW Liberal backbencher, Jason Falinski had filed questions on notice to ASIC within the Parliamentary Joint Committee on Corporations and Financial

Services in which he compared the level of action initiated by ASIC around advice inside superannuation when compared to the action it took around its Report 413 involving life insurance advice. Falinski referred to limited personal advice as being a “very dangerous form of advice” and suggested it was doing consumer harm and asked what action ASIC

MEETS

was taking to shut it down. He also suggested that because ASIC had taken pre-emptive action against real estate agents and questioned why ASIC had not taken similar action with respect to limited personal advice provided by superannuation funds. Answering the questions, ASIC said it was “very supportive of the

provision of good quality limited advice”. “We do not consider limited advice to be a dangerous form of advice,” the regulator said. ASIC said that it also did not believe that the delivery of limited personal advice by superannuation funds was “analogous to the possible inadvertent provision of unlicensed financial advice by some real estate agents”. The ASIC answer also dismissed an admonition in Falinski’s questioning that it give a commitment to exercising its regulatory duties “without favour and in an impartial way”. “ASIC always undertakes its regulatory duties in a diligent and appropriate matter,” the regulator’s answer said.

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10 | Money Management March 11, 2021

News

Advisers not utilising mental health services enough BY CHRIS DASTOOR

ONLY 27 people have utilised the Financial Planning Association’s (FPA’s) Wellbeing service in 2020, while the Association of Financial Advisers (AFA) has similarly reported low usage of their AFA Care service. The FPA released statistics on usage of its service which was available to members and FPA staff to Money Management, but the details within the individual sessions were private and anonymous. During January, another three cases had been taken and Dante De Gori, FPA chief executive, said the service had not been utilised anywhere near to the extent that he thought it would. “That’s not to say that advisers aren’t turning to other programs, hopefully they are, my concern is that advisers aren’t utilising not only our program but aren’t utilising programs like that at all,” De Gori said. Uptake was already low during 2019 and the effects of the COVID-19 pandemic had done little to improve usage.

“We are completely aware of financial advisers being anxious and concerned about what’s happening – about how they’re going to transition their business, doing the exam, legislative changes,” De Gori said. “The other area of anxiety is coming from the major licensees getting out of the game or forcing advisers out of their licence. “That is an area I’m probably more concerned about because being forced out of your

employment is not a good thing, but some people are struggling there.” De Gori said compared to the FPA membership numbers, the number of people that had used the service was much lower than what they had originally expected. “Predominately our membership base is male, so as a result of that men are less likely to utilise the service,” De Gori said. “It’s a combination of things, male, the age group as well

– older males are less likely to call up – and it’s relatively new.” The AFA offered members access to AFA Care via a partnership with employee assistance program provider Benestar. Phil Anderson, AFA general manager, policy and professionalism, said AFA Care offered free, 24/7 access to confidential support and coaching for members, their families and their employees. “Whilst we have not seen a big uptake of the service, we believe it is essential for us to continue to provide it, particularly considering the very challenging circumstances facing the financial advice profession at this time,” Anderson said. “We recognise that there is a level of reluctance to seek help, even when people are struggling, and this is why we continue to emphasise the important point that financial advisers need to keep an eye out for their friends and colleagues and to regularly check in and to offer support if there is any sign that it is needed.”

Public sector superannuation fund members most satisfied BY JASSMYN GOH

PUBLIC sector superannuation members are the most satisfied partly due to defined benefit funds, according to Roy Morgan research. The 67.6% satisfaction rate was a record high, and self-managed superannuation fund (SMSF) members were the second most satisfied, followed by industry funds, and retail funds. The research house found public sector fund members’ average satisfaction rating for the financial performance of their fund over the six months to 31 January, 2021, was at 75.7%, followed by SMSFs (75.6%), industry fund members (67.5%), and retail funds (63.1%). However, members of retail funds run by the big four banks had a satisfaction rating of 61.4%. The top retail performer was

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Macquarie at 72.9%, followed by OnePath (69.8%), Mercer (66.9%), and Colonial First State (63.9%). Catholic Super had the highest satisfaction rating among the industry funds at 78.5%, followed by Cbus (78.2%), followed by Tasplan (76.5%), UniSuper (76.4%), and CARE Super (72.5%). AustralianSuper, the nation’s largest fund by number of accounts, came in sixth at 69.5%. Roy Morgan chief executive, Michele Levine, said the COVID-19 pandemic’s impact on financial markets had a clear and immediate impact on satisfaction with super funds as a lot of individual super fund balances dropped during the market sell off. “Then, in response to the overall economic impact of the pandemic, the Federal Government allowed Australians who were experiencing financial hardship (in

specified ways) to withdraw up to $20,000 of their superannuation in total, in two tranches, before and after July 2020,” she said. “Together these factors focused people’s attention on their superannuation, and their funds’ performance, to a degree that’s unusual, especially for those who are nowhere near retirement. And Australians have never been more satisfied. “It’s not surprising to see public sector fund members the most satisfied — some members have the security of now phasedout defined benefit funds, while others receive more than the legally required minimum 9.5% employer contribution. As for self-managed super funds, well you’d hope their members were satisfied with performance since they are the ones making the investment decisions.”

3/03/2021 3:48:56 PM

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26/02/2021 10:12:23 AM

12 | Money Management March 11, 2021

News

ASIC urged to make affordable advice submissions public BY MIKE TAYLOR

THE Financial Adviser Standards and Ethics Authority (FASEA) came under intense pressure to make public the industry submissions around its code of conduct and now the Australian Securities and Investments Commission (ASIC) is being urged to make public the many submissions filed as part of its affordable advice review. With Australian Securities and Investments Commission (ASIC) commissioner, Danielle Press, having revealed that the regulator has received over 480 submissions as part of its review process, advisers have told Money Management that they believe those submissions should be made public before the regulator moves to produce its final report. While ASIC has a strong track-record of making submissions to its inquiries public, it usually does so only after it has conducted its consultation processes and published the resultant report.

How much use is an AFCA review without discussion of broader costs? THE Federal Government has not provided explicit scope to consider the cost of the Australian Financial Complaints Authority (AFCA) alongside the cost of the proposed new compensation scheme of last resort in the terms of reference provided for a review of the cost and effectiveness of AFCA. While the Government has a compensation scheme of last resort on the legislative drawing board, it did not open the issue for discussion in its scheduled review of AFCA. However, the terms of reference for the AFCA review do give stakeholders, including financial advisers, the opportunity to point to broader funding and cost issues, including whether the cost of the AFCA is impacting competition in the industry. The legislation underpinning the creation of AFCA required a review be conducted two years’ after its formation and the process is occurring at a time when there is also debate over the effectiveness and affordability of the professional indemnity (PI) insurance regime statutorily imposed on financial planning firms.

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The terms of reference specifically ask: “Do AFCA’s funding and fee structures impact competition? Are there enhancements to the funding model that should be considered by AFCA to alleviate any impacts on competition while balancing the need for a sustainable fee-for-service model?” But in asking the question, the Government then demands stakeholders provide specific examples and case studies. Announcing the AFCA review, the Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume, said the Government was determined to ensure AFCA was working effectively and meeting its objectives. For its part, AFCA has welcomed the review with the chief ombudsman, David Locke, saying the authority was proud of what it had achieved in the space of two years. “AFCA welcomes the opportunity to make a submission and put forward our views of how external dispute resolution for the financial services industry can be further improved,” he said.

Calls for the earlier release of submissions have come amid financial adviser concern that ASIC is focussed on achieving the objective of more affordable advice via the use of limited advice and an extension of intra-fund advice. Association of Financial Advisers (AFA) general manager, policy and professionalism, Phil Anderson, said that his organisation had filed its submission with ASIC and had read a number of other submissions and was looking forward to participating in the resultant consultative processes. While calling for submissions late last year ASIC made clear that they represented only the first stage in process. The regulator said it would be holding industry roundtables in the first quarter of this year to discuss the issues raised in the submissions. However, advisers said that the roundtables were not always easily accessible and that making submissions would be useful in encouraging discussion amongst a wider range of participants.

More than just super should be portable between jobs MORE than just superannuation should be portable between jobs, according to a new report issued by the McKell Institute. The report, ‘Insecure Work and Portable Entitlements: a solution for Australia’, is arguing that alongside superannuation other entitlements such as long service leave and sick leave should follow workers from job to job. Such a scheme has been canvassed by Federal Opposition leader, Anthony Albanese, and the McKell Institute report argues that there would actually be significant benefits for the Government from the introduction of such a regime. The report author, Ryan Batchelor, said the case for a more universal portable entitlement scheme was now impossible to responsibly ignore. “When one-in-five workers changed jobs in the past year and 3.7 million have no access to paid leave that should tell us we need a portable entitlement scheme urgently,” he said. “COVID-19 has shown how vulnerable we all are when people without enough sick leave show up to work sick. “Fortunately, there are now a range of practical models for implementation, several of which with proven real world track records,” Batchelor said. “The Commonwealth should get on board instead of trashing a good policy idea before they’ve even had a chance to properly consider it. “Our report shows there are actually significant benefits for the government, which currently picks up the tab when companies go bankrupt and workers lose their employees through the Fair Entitlements Guarantee. Claims that the sky will fall in are simply not borne out by the facts.”

3/03/2021 11:36:26 AM

March 11, 2021 Money Management | 13

News

Removal of grandfathering and rebates was ‘overdue’ BY MIKE TAYLOR

THE changing of the guard from grandfathered revenue, product commission structures and portfolio administration margins had been overdue and had favoured the economics of conflicted product distribution models, according to CountPlus chief executive, Matthew Rowe. Flagging the likelihood of the switch from grandfathering and other arrangements showing up adversely on its company’s next results announcement to the Australian Securities Exchange (ASX), Rowe used a communication to Count Financial advisers to point to the end-run benefits of making the switch. And, in a message to shareholders, Rowe pointed to the company having deliberately reduced adviser numbers. He said that adviser numbers within Count had declined from 284 at 31 December, 2019, to 231 a year later but noted that the planning group expected a further 40 or more advisers to join the “revamped group” in the second half of this year. “In terms of known roadblocks, Count Financial has entered a period of cessation of grandfathered commissions and product rebates, and the start of a wholly user-pays model,” Rowe said. “Historically, these grandfathered commissions and product rebates have represented 47% of Count Financial revenue.” However, he said that the move represented a necessary and purposeful shift, noting that the move was likely to have “a negative financial impact in the second half”.

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3/03/2021 11:36:24 AM

14 | Money Management March 11, 2021

InFocus

AMP TOPPING UP ITS WAR CHEST BUT WHAT ABOUT ADVICE? Mike Taylor writes that if AMP’s joint venture with Ares around its private markets business comes to fruition it will have topped up the company’s commercial war chest but reshaping the advice business remains a significant work in progress. WHILE MOST ATTENTION last month focused on AMP Limited’s deal with Ares Management Corporation around a joint venture based on its private markets business, a key message from AMP is that the transaction, if it comes off, represents the conclusion of AMP’s ‘portfolio review’. That means that there will be renewed focus on how it can complete its advice ‘reinvention’ strategy. AMP began its portfolio review process in September last year noting that it “periodically receives unsolicited interest in its assets and businesses, and recently has experienced an increase in interest and enquiries”. “The board has therefore decided to undertake a portfolio review to assess all opportunities in a considered and holistic manner, evaluating the relative merits as well as potential separation costs and dis-synergies, with a focus on maximising shareholder value,” it said. It was not long after that announcement that AMP received an expression of interest from Ares which initially looked attracted to the totality of AMP Limited but which ultimately

FASEA EXAM NUMBERS

decided it’s real focus was on AMP Capital – something which evolved into last week’s joint venture announcement. The bottom line for AMP shareholders is that if the joint venture arrangement comes to fruition then, taken together with the sale of the AMP Life, it will serve to have provided AMP with a substantial war chest with which to continue reshaping the business, including its reinvention

of wealth management in Australia and defending or settling litigation. And wealth does represent a continuing sore point for AMP with net profit after tax (NPAT) down $80 million to $110 million, according to the company’s fullyear investor presentation and with the company still struggling to reshape its advice business at the same time as dealing with issues such as buyer of last resort

(BOLR) disputation and associated adviser-initiated class actions. According to the investor update, 2021 is supposed to be the year in which it completes the reshaping of the advice business while 2022 is when it “scales Australian wealth management through competitive, differentiated product offerings”. According to AMP, reshaping the wealth business is about 75% delivered and “practice exits are being delivered to plan” but the bottom line is that those words have translated into the 942 advice businesses which sat under the AMP umbrella in 2019 now being reduced to 595. But at the core of the AMP strategy is the same objective as that which has been expressed by both CountPlus and other major licensees – “standalone profitability”, which translates to the removal of product and other subsidies. What AMP signalled it was looking for was assets under management (AUM) per practice of $148 million – a benchmark that was always going to test some of small-scale advisers. AMP advisers and plenty of growth-hungry financial planning licensees will be paying close attention to how the AMP strategy ultimately plays out.

11,241

52%

sittings remaining until the 31 December 2021 deadline

advisers have passed the exam

of advisers on ASIC’s Financial Adviser Register have passed

Source: The Financial Adviser Standards and Ethics Authority

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2/03/2021 10:12:03 AM

16 | Money Management March 11, 2021

Education

WHERE DO WE GO FROM HERE?

There was support for increased standards in the financial advice industry, Chris Dastoor writes, but any goodwill was destroyed by FASEA in just a few years. Where did it all go wrong? THE SCRAPPING OF the Financial Adviser Standards and Ethics Authority (FASEA) made shockwaves in the industry late last year and although it was a welcomed change, there were still several issues waiting to be addressed when it came to education requirements. A lot happened in 2020: in June, the deadline was extended so that advisers had until 1 January, 2022, to complete the exam; advisers also had until 1 January, 2026, to complete the education standard. In July, FASEA formalised the

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legislative instrument that provided three-month continuing professional development (CPD) relief for advisers, as advisers had been granted an additional three months to meet the 40-hour CPD requirement. As with everything else, the exam was affected by the COVID19 pandemic which meant the introduction of remote proctoring. And finally, Santa Claus arrived early for many advisers as the Government announced FASEA would be rolled into Treasury and the Australian Securities and Investments Commission (ASIC).

The ending of FASEA did little to change education requirements, but given how difficult FASEA had been to work with and the anxiety in the industry, there was optimism it might help usher in other changes to make the education requirements more workable to retain more advisers. By its end, FASEA was virtually universally despised, but although there was support for increased standards in the industry, which included support for an education standard, how did it go so wrong? Phil Anderson, Association of

Financial Advisers (AFA) general manager, policy and professionalism, said it was unfortunate that there were too many objections and obstacles with FASEA. “They were trying to push the standards that did not adequately reflect the expectations of the advice profession, the FASEA code of ethics has unfortunately been mired in controversy,” Anderson said. “They pushed too hard for standards and outcomes that have caused concern and pushback, and it could have been different if there had been better

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March 11, 2021 Money Management | 17

Education

consultation and better agreement as to what we were trying to achieve.” Anderson said that didn’t mean significantly lower standards, but instead having a better industry consensus. “In some ways it’s an unfortunate wasted opportunity, and as we can see with the code of ethics, if we had something that the industry had agreed to back in February 2019 when it was released, I think we’d be in a very different situation now,” Anderson said. Dante De Gori, Financial Planning Association (FPA) chief executive, said the FPA and financial planners were supportive of FASEA, conceptually and principally, in terms of the intent. “Once FASEA was created, the structure of the board of FASEA was legislated, i.e. it had to be an independent chair – fair enough,” De Gori said. “But there had to be three representatives of industry – whatever that means, three representatives for consumers – whatever that means, an ethicist – whatever that means, and then an education expert. “It was defined in terms of roles, so when people complained about why is so and so on there, it was because the type of person was a legislative requirement. “Some people asked why is there a university academic on the board? It’s because the law required an education expert was on there.” De Gori said what followed set the trend for the next couple of years, where some ‘red flags’ started being spotted. “The FPA is on public record for a long time for being disappointed in terms of the role the board decided to play, and the complete lack of consultation and

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engagement with the profession to try and work together in creating the standards,” De Gori said. “The way they interpreted the standards – and the process they went about to create those standards and implement them – was fundamentally the core failure of FASEA which led to where we are today. “The announcement by the Government last year didn’t come out of the blue, it was a result of a number of years of constant failure of the role in creating and consulting on those standards.” De Gori said the FPA had tried to work with FASEA on each standard and there was a time where FASEA did not plan to recognise any existing qualifications. “This all started under [former Minister for Revenue and Financial Services] Kelly O’Dwyer – there’s a lot of question marks about her role here,” De Gori said. “I’m not going to put words in the mouth of the Government today, but I think the Government will be hard not to admit there were failings from that starting point. “We’ve had a number of ministers, and to be fair, when Senators Stuart Robert and Jane Hume came in they have been nothing but genuine in wanting to understand and balance what the role of FASEA should be.” De Gori said much of the issue was with chair, Catherine Walter, who, according to De Gori, failed to engage with the industry about FASEA. “[FASEA chief executive] Stephen [Glenfield] has been great and very engaging, but it just shows the operation model of FASEA that the board of directors have not once engaged with anyone in the industry and that

“FASEA started off with the right intentions, high expectations and a welcoming embrace by the profession, but disappointingly let itself down.” – Dante De Gori, FPA has been its downfall,” he said. “I’m afraid I might come across too harsh – FASEA started off with the right intentions, high expectations and a welcoming embrace by the profession, but disappointingly let itself down. “Disappointment. The one word I’d use to explain the FASEA story.” Glenfield defended the legacy of the authority and said in the short period that it had been in operation, it had developed and implemented a balanced workable framework through the implementation of the seven statutory standards required under the Corporations Act. “In February 2017, Parliament passed the Corporations Amendment (Professional Standards of Financial Advisers) Act to amend the Corporations Act to raise the education, training and ethical standards of licensed financial advisers in Australia,” Glenfield said. “These amendments reflected key findings of the Financial System and PJC [Parliamentary Joint Committee] Inquiries which highlighted that low minimum competency standards and cases of inappropriate advice had a negative impact on consumers’ confidence and acted as a barrier to consumers’ seeking financial advice.” Glenfield said FASEA was formed to set seven standards that addressed issues identified

by Parliament and which would, over time, professionalise the industry of financial advice and restore consumer confidence. “The adoption of these standards by industry has set a foundation from which a profession may grow over the years ahead,” Glenfield said. “The lift in professionalism across financial advice is seen in the commitment to raising standards of existing and potential advisers in the two-year period the standards have been in place.” Glenfield pointed to the 11,000 advisers that had passed the exam, 300 new advisers commencing their professional year, close to 1,200 new advisers enrolled in degrees, and all advisers completing 40 hours of CPD each year as proof of the success FASEA had brought to the industry. “FASEA’s legacy is two-fold; both the setting of a framework to help raise the education, training and ethical standards of financial advisers and helping to lay the foundations for enhanced professionalism of financial advisers and the restoration of trust in the sector, as consumers will take comfort that when they seek financial advice it will be from an adviser they can trust who is ethical, qualified and appropriately skilled,” Glenfield said. Continued on page 18

3/03/2021 11:57:10 AM

18 | Money Management March 11, 2021

Education

Continued from page 17 The Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume, said it was “important to understand” that FASEA was technically not being scrapped. “The valuable work it has done will continue, but will be incorporated into the single disciplinary body, as recommended by the Hayne Royal Commission,” Hume said. “This is to avoid unnecessary and costly duplication, streamlining regulation and avoiding red tape.” However, Hume said any impact on cost recovery – which was how FASEA was funded – was yet to be determined by ASIC. Hume said FASEA provided the foundation for a consistent educational standard for financial advisers and had been a key part of ongoing efforts to professionalise Australia’s financial advice industry. “The development of standards by FASEA has been an important step in restoring trust in the sector and ensuring that Australian consumers always receive world-class advice on their finances,” Hume said. “FASEA has undertaken significant work over the last three years in establishing a code of ethics, approving qualifications for both new and existing advisers, and orchestrating the exam. “So far we’ve seen nearly 12,000 financial planners, stockbrokers, and insurance advisers sit and pass the exam.”

EXAM PRESSURE The deadline to complete the exam was now 1 January, 2022, and since the end of 2020, 11,241

03MM110321_16-29.indd 18

advisers had passed the exam. Joel Ronchi, myIntegrity in Practice principal consultant, said although there had been earlier resistance to the education requirements, advisers had started to accept it. “There’s been a greater acceptance that the FASEA standards are here to stay and the exam needs to be passed,” Ronchi said. “In terms of the exam itself and the programs I’ve been running, the feedback has been consistent: ambiguity of questions, the lack of feedback and issues with remote proctoring. “I know there’s a group of advisers that have postponed doing the exam because of remote proctoring and are waiting to go back into the exam centres.” His firm runs a FASEA exam masterclass and he said advisers would often contact them after they had attempted the exam themselves. “I’m hearing from people who have failed it two or three times and they’re very frustrated and worried because their careers are on the line,” Ronchi said. “There’s a sense of worry,

having said that, there’s the realisation that they’ve got three cracks this year. “People are focused on the fact that there isn’t going to be another extension and that this is it.” The AFA and FPA had lobbied for the extension of the deadlines and De Gori said it took over a year to complete. Anderson said as well as advocating for the extension of the education deadlines, the AFA had also advocated for better feedback for advisers who failed the exam. “We are very concerned about the pass rate for people who sit the exam after first failing and we’ve been talking to FASEA about that,” Anderson said. “We’ve also been talking to FASEA about what we perceived was a problem with the timeframe between being allowed to sit exams, because of the rule that you can’t register until three months after the last exam sitting.” Anderson conceded, however, that because of the timeframe when results were received – which was generally six to eight weeks after sitting – registering for every exam was unnecessary.

“If you don’t find out until six weeks after you sat, then you only have two weeks to prepare, so the ability to do it every second round is probably the right outcome,” Anderson said.

CHANGES STILL TO BE PUSHED Eugene Ardino, Lifespan chief executive, said the study requirements were still excessive for experienced advisers and their industry experience needed to be better recognised. “I don’t see the value, particularly in an environment where costs are going up across the board, I’m hoping that is reviewed,” Ardino said. “If you look at the number of new entrants coming into the industry… we don’t have a flood of people coming in. “The entry education requirements were too low, and I think most people would agree with that, but perhaps where we’ve moved is too high. “If we want to create a profession that only the very wealthy can access then what we’re doing is great.” Anderson agreed about credit

3/03/2021 11:56:43 AM

March 11, 2021 Money Management | 19

Education

Table 1: FASEA exam dates

for older advisers and said the association had considered it a priority. “We’ve suggested three subjects credit for anyone with more than 15 years’ experience, two subjects credit for someone with between 10 to 15 years’ experience and one subject for someone with more than five years’ experience,” Anderson said. “For someone who is older, faced with the need to do a full eight-subject graduate diploma, it’s a very easy decision to say ‘that’s just not practical for me and there’s no business case in it for me’. “If we at least reduce it so the education requirements are more manageable then we stand a much greater chance these experienced advisers will say ‘I will have a go at the education, I will stay a professional, I will continue to be there to my support my clients’.” De Gori said from a long-term perspective Standard 3 of the code of ethics, which dealt with conflicts of interest or duty, still created anxiety and confusion for advisers. “The exam will be a non-issue at the end of the year, but the code is here forever, with or without FASEA,” De Gori said. “It’s important that everyone feels comfortable that they actually understand the code and that’s an area that we will be focusing on primarily so that our members are comfortable with the code of ethics.

SPECIALISATIONS Don Trapnell, Synchron director, said the education requirements were still insufficient for the needs of specialised adviser roles. “I’m seeing more and more

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Registration Dates

Sitting Dates

Sitting 11

7 December 2020 to 5 March 2021

25 March to 30 March 2021

Sitting 12

8 February 2021 to 30 April 2021

20 May to 25 May 2021

Sitting 13

5 April 2021 to 25 June 2021

15 July to 20 July 2021

Sitting 14

31 May 2021 to 20 August 2021

9 September to 14 September 2021

Sitting 15

26 July 2021 to 15 October 2021

4 November to 9 November 2021

Source: FASEA, Feb 2021 *Remote proctoring available for all sittings

[life/risk] advisers forecast to us, with the concentration of the education being on holistic advice, they’re seeing very little point in pursuing the education tranche and they’re looking at moving out of the industry,” Trapnell said. “It’s absolutely terrible, it’s not good for our industry, it’s not good for the consumer either. “I do understand that one university is considering putting together a relevant degree which concentrates on life insurance and superannuation… but that is yet to be put together. “If it does happen and it gets FASEA/Government approval that would be a huge step forward, but at this stage there is no separation in education requirements in relation to financial planners and risk advisers, and they are two very different sets of skills.” Trapnell said the feedback he received was more that life/risk advisers had issues with the education standards as opposed to the exams. “The exam is centred around ethics and procedures, as opposed to specific disciplines, so I had no issue with the style of the FASEA exams,” Trapnell said. “But you lump that on top of doing a relevant degree that is not specifically in the discipline in which

you choose to make your living. “If a university came up with a relevant degree that concentrated on risk insurance and how it relates to superannuation, risk advisers would go for it in droves. “That would be a strong way of stemming the bleeding we have from our industry right now.” When asked whether specialisations would be better differentiated, Hume said FASEA had accredited a “wide range” of degrees and courses. “The majority of existing advisers will only need to complete four units of study by the end of 2025 – less than one unit per year,” Hume said. “There are no changes to exams, with five exams still to take place between now and the end of the year. “The pass rate has been very high pass rate at approximately 90%. We encourage anyone who has not yet sat the exam to do so as soon as possible, as time is running out.” No one is certain if FASEA being rolled into Treasury and ASIC will be an appropriate longterm solution, but whoever governs over education standards in the future will have to address these challenges or the financial advice landscape in Australia will become completely insufficient.

3/03/2021 11:59:35 AM

20 | Money Management March 11, 2021

ESG

BALANCING RETURNS WHILE EXCLUDING MINING Australian investors need to consider whether they are willing to sacrifice returns for their ethical values as the exclusion of miners could cause a significant skew to portfolios, Laura Dew writes. DOMESTIC INVESTORS NEED to balance their desire for the yield provided by mining companies with their ethical values as the sector’s large stockmarket weighting in Australia makes this a harder decision than in global portfolios. As issues such as Juukan Gorge, where Rio Tinto was accused of ‘cultural vandalism’ for destroying two 46,000-year-old caves, flare up in the news, more investors are asking their advisers about the possible consequences of excluding mining companies. However, the 18% weighting in the Australian Securities Exchange (ASX) is far larger than the weighting in other countries. Australia is the world’s largest exporter of iron ore and coal, particularly to China which depends on the country to support its resource demands for its infrastructure plans. During 2019 to 2020, exports of iron ore accounted for 56% of all Australian goods exported to China. According to the Australian Bureau of Statistics, mining recorded a growth of 4.9% during 2019 to 2020 which was driven by increased capacity at oil and gas extraction facilities. Metal ore mining also recorded a strong year driven by iron ore due to international supply disruptions and increased demand from China. But research by the Responsible Investment Association of Australasia (RIAA) found two-thirds of investors consider environmental

03MM110321_16-29.indd 20

issues as the most important theme they would want to avoid in their investments. This was in response to the growing threat of climate change, evidenced in Australia’s bushfires, floods, and droughts. This was subsequently being reflected in the activities of firms with the most common negative screening being for fossil fuel exploration, mining and production companies followed by companies which generate power using fossil fuels. But some commentators are worried that excluding such a large sector would contribute to lower diversification and higher active risk within a portfolio. Stephane Andre, principal at Alphinity Investment Management, said: “If you excluded energy and mining then you would be withdrawing close to quarter of the index. You could still outperform if the market was under pressure but when they are going through a cyclical recovery like we are now then you would struggle if you were out of them. “You would have to be concentrated in other sectors such as consumer discretionary, IT, and healthcare but they have their own ESG challenges. It is not impossible but it would be challenging, excluding miners would be a serious constraint.” The largest mining companies were BHP, Newcrest Mining, and Rio Tinto while others included Fortescue Metals, Whitehaven Coal, and Pilbara Minerals.

3/03/2021 12:00:16 PM

March 11, 2021 Money Management | 21

Strap ESG

Over the past 12 months to 25 February, 2021, Pilbara Minerals returned 310%, Fortescue Metals returned 164% while Rio Tinto and BHP both returned 46% compared to returns by the ASX 200 of 2.3%. The performance of the first two firms was on par with some of the best-performing stocks such as Afterpay (262%) and Temple and Webster (179%). “If you exclude Fortescue Metals then you would need to hold a lot of Afterpay,” Andre added. Rachel Farrell, chief executive of J.P. Morgan Australia, said: “With regards to it being a high-yielding sector of the index, there are other ways to generate yield such as unconstrained fixed income or credit, you would need to generate 3% to 4% to make up for what you would be giving up. But you would need to rebalance and perhaps have more in financials instead. “If a client was set on exclusion, we might direct them to a fund with an ESG [environmental, social and governance] tilt but there is still a lot to be defined there and parameters set so we are all speaking the same language. Europe is already there and Australia is right behind,” said Farrell. However, commentators pointed out that mining companies were not necessarily the ‘villain’ of the stockmarket despite their poor ESG reputation. As well as improving their ESG profiles, many companies were pivoting their business models towards minerals needed for renewable energy such as lithium and copper. They also suggested advisers encourage their clients to focus on the individual companies, rather than taking a broad-brush approach and excluding miners completely. Daintree Capital senior credit analyst, Brad Dunn, said: “Investors need to be very clear on their philosophy, if they are against it for environmental reasons then yes, mining has a severe impact. But we think there is lot of mining that is OK because we want to see more renewable energy and that needs a lots of resources such as lithium for

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batteries and copper for it to move onto the next stage”. “Most companies have taken positive steps and some are no longer even active in those areas, there are some companies which are better than others, some which people think are villains are not. The change has been huge, meeting the goals of the Paris Agreement is not easy but there is commitment to the goal which is positive and willingness to address these issues,” Farrell said.

ENGAGEMENT v EXCLUSION An alternative to exclusion would be holding onto the companies and trying to positively engage with them on topical issues. It was important to question firms on how they were enacting ESG principles and demand evidence on whether the process was working. Relating back to the Juukan Gorge issue at Rio Tinto, Aberdeen Standard Investments, which was one of the firm’s largest shareholders, said it had been ‘saddened and deeply concerned’ by the action. It said it expected companies to comply with local laws and regulation, incorporate additional standards into their operating systems and be fully transparent about their approach and their progress. In response, Rio Tinto said: “It is our collective responsibility to ensure that the destruction of a site of such exceptional cultural significance never happens again, to earn back the trust that has been lost and to re-establish our leadership in communities and social performance”. A change in recent years, Aberdeen Standard ESG investment director Danielle Welsh-Rose said, was the focus on outcomes rather than purely process. “We have access to Rio Tinto if we need to talk to them and we have already engaged reactively in the past. Engagement is part of the investment process to understand the culture of the company, we do it pretty regularly and disinvestment would be the last step, only if they

were not handling risks appropriately,” she said. “Investors are asking for evidence of what firms are doing to support things like the Paris Agreement and wanting them to demonstrate they have a plan or are successfully shifting their business models.” This was echoed by Andre who said, even if a firm had good ESG ideals, it was important to test those out, to ask for transparent data and conduct independent surveys. Emma Pringle, head of ESG at Maple-Brown Abbott, said: “Engagement is essential, it can protect invested capital and help make better informed decisions. For fund managers to understand a company’s exposure to climate risk we need to understand how the company is assessing and dealing with those risks. “The feedback loop is clear, there is no doubt companies understand how investors view climate risk and we have seen examples of companies such as BHP benefit from being proactive in their engagement.” Dunn said: “We have excluded fossil fuels and energy but kept materials, we will hold them and engage when appropriate. We hold Fortescue and they are very clear about what they do and why they do it, projects need to be done in the right way and if they make decisions which don’t gel with that then we will go down the engagement route”. As a fixed income manager, rather than equity, Dunn said ESG engagement tended to come up when a firm was issuing a new bond. Commentators also focused on the ‘social licence to operate’ of mining companies, which was defined as the perceptions of local stakeholders that a project or industry that operated in a given area was socially acceptable or legitimate. Federated Hermes engagement lead for industrials and capital goods, Jaime Gornsztejn, said: “Investors and clients of mining companies expect them to secure their social licence to operate by

“It is about treating the community and the environment well, miners have a huge focus on this because any mistake will create huge reputational damage.” – Stephane Andre developing a mutually constructive relationship with the communities where they operate, including a sustainable legacy that endures beyond the life of a mine. “The safety of employees, contractors and communities must be a top priority for mining companies with a strong ‘tone from the top’ by senior management and the board of directors. We see the safety performance also as an indicator of the quality of management.” Andre added there had been a transition away from a focus purely for health and safety to one focused more on climate and wider issues. “It is about treating the community and the environment well, miners have a huge focus on this because any mistake will create huge reputational damage. They used to focus on health and safety and local employment but this focus has shifted to heritage, decarbonisation, climate change and modern slavery. The ones doing this better are the ones who have a good culture and systems in place,” he said. Ultimately, commentators said the transition was underway but mining would remain a large part of Australia’s economy for years to come. If investors were considering exclusion, it was up to the adviser to understand their clients’ individual philosophies, their ESG preferences and how much they would be willing to sacrifice for returns. “The volume of resources in Australia is both a blessing and a curse,” Farrell said.

3/03/2021 12:00:26 PM

22 | Money Management March 11, 2021

Asia

FIVE THEMES FOR EXPOSURE TO THE ASIAN CENTURY Asia is on the cusp of global leadership, writes Sunny Bangia, with five areas of the economy in particular set to help with future growth. THE RISE OF Asia over the past four decades has been a story of stunning economic growth. It’s a rise that many predicted would progress to global leadership in the 21st century. After getting through numerous stress-tests – the latest COVID-19 – the region is on the cusp of the long-anticipated century of economic leadership. China was initially the epicentre of the COVID-19 crisis. The virus devastating to the whole Asia region. Much like stockmarkets around the world, Asian markets have experienced a rapid recovery following the initial shock. But

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what’s most impressive is the broader economic health of the region. Unlike the aftermath of the Global Financial Crisis (GFC), when government debt in the region exploded, policymakers have approached the COVID-19 recovery phase with far less aggressive fiscal and monetary stimulus. In 2020, money supply (this is money printed) increased by almost 80% in the US. But amongst the major Asian economies, the contrast is stark. In China the increase was only around 10%, India 20% and South Korea around 30%. This is illustrated in Chart 1.

Despite fiscal and monetary stimulus being reined in, recent economic data out of Asia is strong. Without the excessive monetary support seen in other parts of the world the private sector is prospering in the wake of the virus. In China, gross domestic product (GDP) grew by 6.5% in Q4 2020. For the 2020 calendar year, China actually registered positive GDP growth. One of the few economies in the world to do so. This would suggest the Asian Development Bank’s forecast that Asia’s share of global GDP will surpass 50% by 2050, remains unencumbered. To gain exposure to Asia’s

continued growth we see opportunities within five key structural themes:

SOCIAL COMMERCE COVID-19 has provided a boost to many digital businesses, but we think there remains a long runway for growth in Asia. When you look at the penetration of advertising spend as a percentage of GDP in China, it’s still a long way behind Western markets. As brands continue to opt for the digital advertising format, we think the market will grow at over 20% per annum over the next five-to-six-year period,

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Asia

“When you look at the penetration of advertising spend as a percentage of GDP in China, it’s still a long way behind Western markets.” – Sunny Bangia catching up to the US by the end half of the decade. There’s a major opportunity for investors in companies exposed to this across the Asia region. Our portfolio holdings include Meituan Dianping, Tencent and JD.com.

CONSUMER CYCLICALS Much positivity on the outlook for Asia surrounds the ballooning middle-class population as people move from poorer rural areas to become city dwellers. Nowhere is this more evident than in China, where domestic consumption has emerged as the engine of economic growth, becoming a larger part of overall GDP year-on-year since 2015. Major structural reform in India is also expected to significantly boost productivity in a nation where household debt to GDP levels are amongst the lowest in the world. By 2030, China, India and Indonesia are expected to dominate global consumer spending. Cyclical businesses such as those within the financials sector, can provide investors strong exposure. Examples of opportunities include HDFC Bank in India (one in every three credit cards that an Indian has is with HDFC) and China Merchants Bank which offers a range of financial services throughout China.

has a population pool of around 340 million – the same size as the US. With income per capita of around US$16,000 ($20,630) per annum, this Chinese consumer class is growing at a compound annual growth rate of 15%. We find defensive investment opportunities in businesses aligned to both the premium class and middle class. At one end, premium alcohol producer Wuliangye provides defensive exposure to premium consumption, while Yum China which owns leading Chinese quick service brands such as Pizza Hut and KFC, provides broader defensive consumption exposure.

CONNECTIVITY AND COMPUTE While Asia was traditionally associated with low-tech manufacturing, this has transformed in many parts to leadership in hightech manufacturing – supporting not

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DECARBONISATION From an Asian investing point of view, decarbonisation means two things: greening of the electricity grid and the electrification of vehicles. China’s immediate focus is on reducing city-based pollution which means increasing usage of electric vehicles. In November 2020, China announced New Energy Vehicles should account for 20% of vehicle sales by 2025. Whilst this target was reduced from an original 25% it is still significant. China is the largest auto market globally, with more

Chart 1: Year-on-year money supply

SUNNY BANGIA

than 21 million new car sales p.a. With its target of 20%, China is looking to become the global leader in electric vehicles (EVs) and could account for as much as 40% of total global EV sales in 2025. Additionally, solar has become increasingly competitive across Asia as the all-in cost of solar greenfield capacity has approached that of coal without any subsidies. One of our holdings, South Korean-based LG Chem is the largest manufacturer of EV grade batteries in the world. We think investors can also get exposure to this key theme by looking closer to home. Copper producers such as Oz Minerals are likely to benefit from ongoing requirements for copper for both the greening of the grid and vehicle electrification.

DIVERSITY IS KEY Those wanting exposure to the Asian Century should ensure they do so through a diverse portfolio of Asian equities. By investing across these five key themes, we believe investors achieve not only strong diversity but exposure to uncorrelated growth areas. The Asian Century is no longer imagined, it’s here today and investors should ensure they’re part of the action.

CONSUMER DEFENSIVES With so much focus on Asian middle-class consumption, many investors often ignore the premium consumer. China‘s ‘premium class’

just the major Asian economies but promoting regional interdependence too. The global market for leadingedge semiconductor manufacturing is dominated by Taiwan Semiconductor Manufacturing Company (TSMC) (Taiwan) and SK Hynix (South Korea). As technology and data consumption continues to advance, we think manufacturing sales of semiconductors can rise from US$40 billion today to above US$120 billion in 2030 – a tripling of the market size. Given the extraordinary barriers to entry in leading-edge semiconductor manufacturing, TSMC will continue to dominate.

Source: AASE

Sunny Bangia is portfolio manager of the Antipodes Asia fund.

3/03/2021 9:51:34 AM

24 | Money Management March 11, 2021

Equities

PUTTING E BACK IN PE Markets can be split into four distinct phases, writes Elfreda Jonker, and understanding how each one performs can be key to picking the right equities. GLOBAL EQUITY MARKETS entered 2021 with lofty valuations, following big multiple expansions since the COVID-induced market lows of March 2020. As the new year gains momentum, it is comforting to see continued positive earnings revision momentum broadening across regions and sectors, as would be expected in a postrecession global economy. Below we compare the current market return drivers to historic equity market cycles, explore earnings trends seen in the recent reporting season and flag the risks ahead for equity investors as bond yields start to price in higher economic growth and potential inflation. Investors need to understand the risks they are exposed to by investing in highly-valued companies, unsupported by a strong earnings outlook. It is during these periods of increased market volatility and significant style switches or regime changes, like the present, that a rigorous and tested investment process becomes even more important. Alphinity’s style agnostic process, premised on earnings leadership, has allowed us to opportunistically tilt our Australian and global portfolios to the more cyclical part of the market by following the earnings leadership change over the last six months and continuously adjust our exposure to benefit from changing market and macro trends.

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Drivers of equity market returns changes during market cycles Equity market returns are normally driven by a combination of earnings growth, rating changes (multiples moving up/down), dividend growth and FX adjustments. The contribution of each varies, depending on the economic and market cycles we are in. Research by Goldman Sachs on historic equity cycles, suggests that nearly every equity market cycle can be split into four distinct phases: hope, growth, optimism, and despair. The extraordinary returns of 2019 were consistent with the classic ‘optimism’ phase that tend to play at the end of a prolonged bull market, with most of the gains coming from rising valuations. The ‘hope’ phase, which is the first part of a new cycle and usually begins in a recession as investors start to anticipate a recovery, is predominantly driven by multiple expansion, and can often be the strongest part of the cycle. The dramatic re-rating across global equity indices (20 to 90%) witnessed since the March 2020 lows to the end of last year were in line with the ‘hope’ phase of an equity market cycle, as markets are forward looking and already pricing in high expectations of an earnings recovery, even as earnings are still being adjusted downwards for current periods in many cases. The scale and speed of the recovery this time was however unprecedented. Then again, nothing about 2020 was normal! Since the start of the new year,

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we have already witnessed a derating (5% to 30%) across global equity indices where earnings become the predominant driver, which is typical of the ‘growth’ phase. While each cycle is unique this phase often produces lower returns relative to other cycles (and higher bond yields can start to impact valuations). As Chart 1 reflects, the current move from the ‘hope’ to the ‘growth’ phase reflects historic patterns last seen after the Global Financial Crisis (GFC) during 2009/2010 and the 1999 Tech Bubble. Earnings recovery broadening out With end 2020 result releases now behind us, we can reflect on one of the best reporting seasons over the last decade. Not just abroad, but also here in Australia. Corporate earnings have generally beaten expectations by a bigger margin relative to historic outcomes and have led to persistent positive earnings revisions across all the major regions. Cyclical sectors, such as financials, metals and mining and consumer discretionary have seen broad-based beats and are leading earnings revisions. Banks have been a standout sector globally, with more than 80% of banks reporting in the US, Europe and Australia beating earnings and dividend expectations. Resources companies have been benefiting from a perfect storm of higher commodity prices (positive demand/ supply dynamics) and a weaker US dollar, but their strong capital discipline shown during 2020 is commendable. ‘COVID beneficiaries’, such as consumer staples and home builders, have generally been reporting even stronger than expected, whilst ‘COVID recovery’ sectors had to rely on cost cuts and government support to survive, although in economies like Australia some are already reporting improved conditions or outlook. The pace of revisions is however peaking across most markets, except for Japan, global emerging

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markets, and Asia Pacific. The market reaction to positive surprises has also been a bit more muted than we’ve seen historically, implying that much of the good news to date has already been priced in by global equity markets through the ‘hope’ phase. The focus from here should remain on earnings growth guidance to 2021 and beyond, which has largely come through either in line or ahead of expectations. The breadth of earnings downgrades during 2020, were in line with that seen during the GFC (2009). On the positive side, earnings revisions have again turned positive and broadened, not just for the next financial year (FY1), but also for the year thereafter (FY2). Higher bond yields are flagging the risk of unprofitable highly valued equities Equity valuations (PEs) are also influenced by other macro drivers, such as the change in bond yields. Bond yields influence the discount rate used in valuation models to determine the present value of a company’s future cashflows. Thus, the higher the discount rate, the lower the current value of future cash earnings (all else being equal) and therefor the current share price. The higher the valuation of a company, the longer the duration risk, as a bigger part of the company earnings are expected to come through over a longer period. So highly-rated companies (or long duration assets) have a higher risk

of contraction when yields rise. In addition, certain sectors are more sensitive to a rise in bond yields than others. For example, global financials should benefit from a rise in bond yields (or interest rates) as they can charge more to lend out. More economicallysensitive sectors, such as small businesses and typical value companies will also benefit as higher bond yields normally imply that economic growth is starting to come through. On the other hand, defensive sectors such as telecoms, utilities and real estate investment trusts (REITs) normally suffer in a higher yield environment, as more cyclical companies become attractive (more growth opportunities), and the yield of income-producing companies becomes relatively less attractive vs investing in bonds. Since the GFC, bond yields have been persistently trending lower (really since the 90s), underpinning equity valuations. This was particularly prevalent during 2020 when US rates fell below 1% and even before that with many other developed market yields falling into negative territory. Add massive levels of government stimulus and retail speculation to that cocktail and you see an explosion of valuations across certain sectors, such as technology, as we did last year. A major driver of returns since the COVID lows of February 2020, has been a small cohort of

Chart 1: S&P 500 options put/call ratio

Source: BoFA, MSCI, IBES

“The focus from here should remain on earnings growth guidance to 2021 and beyond, which has largely come through either in line or ahead of expectations.” – Elfreda Jonker technology/communications companies. ‘Mega technology’ companies like, Amazon, Microsoft, Facebook, and Alphabet (or Google) have outperformed the larger Nasdaq index. These are all largecap companies with solid earnings streams and structural growth stories. Interestingly however, we have also seen ‘unprofitable technology’ companies (as measured by Goldman Sachs in a basket of 51 stocks) growing even faster and have surpassed mega tech over the last few months. Driven by low interest rates and a search for growth (and a healthy dose of ‘Reddit’-style induced retail speculation no doubt). Through to the end of February, the Nasdaq index has declined by 7% since the highs reached earlier in the month, with the broader S&P 500 index hardly changed. This compares to the 16% selldown seen across the unprofitable tech index, which has less valuation protection when inputs like higher discount rates occur. The recent market moves are again a good reminder of the risks associated with investing in ‘expensive’ growth stocks, where the lofty valuations are not wholly supported by their realistic earnings growth outlook, even if they are solid companies. Valuations always matter eventually (as well as earnings). Picking the timing is difficult. Elfreda Jonker is client portfolio manager at Alphinity Investment Management.

3/03/2021 9:52:08 AM

26 | Money Management March 11, 2021

ESG

BIDEN’S WAR ON CLIMATE CHANGE The Biden administration has stated its dedication to climate change, writes Joshua Kendall, so how could this affect broader worldwide ESG policies? THE FIVE POLICY commitments from the Biden administration that we believe are of relevance to investors focused on environmental, social, and governance (ESG) issues are, in short: to recommit the US to a more proactive stance on tackling climate change, to adjust the rules on sustainable investing, to accelerate a range of energy transition rules, to strengthen sustainability-related priorities for corporate America and to set significant long-term and aspirational environment goals. We expect these to broadly affect corporate issuers of bond and equity securities, governments and potentially even asset-backed securities. Climate leadership is a genuine possibility under the new administration. In 2017, President

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Trump withdrew from the 2015 Paris Agreement, driven by concerns that the Paris Accord would undermine the US economy. President Biden orchestrated the original involvement of the US, and so it is hardly surprising that we have seen an early recommitment by the US government to the Paris Agreement. Because this agreement is not legally a treaty, no Congressional approval is needed. As a result, this year’s United Nations Climate Change Conference taking place in the UK in November is likely to take on new importance. The conference could be an opportunity for the US to again take the lead on climate change, a role which over the last four years has been assumed by the European Union (EU). One area likely to gain increasing attention is a carbon border

adjustment mechanism, colloquially seen as a carbon tax. Exporting nations with high carbon (led by China) will be most negatively impacted. More than 3,000 US economists and all living former chairs of the Federal Reserve have endorsed a carbon tax, making it possible a Biden administration will seek to advance this policy to align with an expected EU carbon border tax. Company carbon-intensity metrics will become more important for investors, and sectors with higher intensity metrics, such as utilities and materials, are most likely to be impacted. We also expect climate change to form a key part of foreign policy, including trade. Many development banks are strongly focused on environment and social impacts and President Biden has committed to

ensuring the new US International Development Finance Corporation significantly reduces the carbon footprint of the investment portfolio. Most tellingly, the US will look to introduce ‘green debt relief’ for developing countries that make climate commitments, a timely initiative with growing COVID-19 related debt issuance and need for poorer countries to undertake climate mitigating action. While details are lacking, this will require close monitoring by emerging market debt investors.

ADJUSTING RULES ON SUSTAINABLE INVESTING Five days before the US election, in one of its last policy initiatives, the Department of Labor (DOL) approved new rules for fiduciaries of Employment Retirement

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ESG Income Security Act (ERISA) plans. When originally proposed, these rules were interpreted as limiting ESG investment strategies for US ERISA investors. However, this may not necessarily be a complete obstacle to ERISA investors effectively integrating these factors to a degree within portfolio design and investment analysis. We welcome the fact that the DOL did not recommend banning the inclusion of ESG factors as relevant factors within investment decisions. Rather, the policy focus is on explicit and implicit pecuniary objectives within pension-scheme allocations. We anticipate that President Biden’s administration will encourage sustainable investment to support his climate-change investment plan. We believe that, while it is possible that newly appointed officials at the DOL could seek to propose or alter rules to facilitate such investments, at this time it is difficult to predict whether any such changes are within the intermediate or even long-term priorities of the new administration. Separately, we note that momentum appears to be building for the US Securities and Exchange Commission (SEC) to require ESG disclosures to be standardised. In May 2020, the SEC Investor Advisory Committee called for the SEC to “begin in earnest an effort to update the reporting requirements of Issuers to include material, decisionuseful, ESG factors.”

ACCELERATING ENERGY TRANSITION POLICIES President Biden argued in the final presidential debate that he expects the US to “transition” away from fossil fuels. While we expect economic factors will determine the speed and trajectory of that transition, we anticipate President Biden to focus policy initiatives on stricter emissions rules. These rules come at a time of record-low energy prices and profitability, and so the cost to

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industry could be material. The low-hanging fruit will involve setting pollution limits, especially around methane pollution on existing oil and gas operations. This would be a reversal from the previous administration, which loosened energy rules. The president has also promised to strengthen the Clean Air Act to accelerate emissions reductions across industries. Transportation is a primary target. Weaker rules under the previous administration, have contributed to lower electric vehicle (EV) sales compared to other nations. Under a new administration EVs could grow to 25% of total sales by 2026, compared to just 5% under President Trump, according to BloombergNEF. Ultimately, the Biden climate plan commits to “developing rigorous new fuel economy standards aimed at ensuring 100% of new sales for light- and medium-duty vehicles will be electrified”. Together with California’s declared 2035 deadline for fossil fuel-free vehicles, this would significantly alter the trajectory of US EV demand, and likely raise the US share of global demand for electric vehicles.

STRENGTHENING SUSTAINABILITY CRITERIA We believe a new era of transparency on sustainability issues is likely. First, President Biden hopes to pass tax reform. This includes a 15% percent alternative minimum tax on book income for US companies. Further, all income earned overseas would be taxed at 21%, twice the current rate, with the previous administration’s corporate tax cut set for reversal. The caveat is the familiar challenging political climate: many attempts at tax reform often fail. Putting workers first is an oft-used mantra in US elections, and the recent election was no exception. President Biden stated he would seek to strengthen the ability of employees to challenge discriminatory pay practices and

hold employers accountable. Vice President Harris will likely focus on the role of corporate America in advancing gender equality. In May 2019, she proposed a new law compelling companies of 100 employees or more to prove they pay men and women equally or face fines equal to 1% of profit for every 1% of pay gap, though such a measure has very little chance of becoming law. This focus comes as many large companies are promoting their diversity and inclusion policies, announcing targets and making investments in diversity hiring and training. We therefore expect social development, particularly labour management, to become a greater priority for US issuers.

SETTING LONG TERM GOALS Taking Europe’s lead, the new administration hopes to set a 0% CO2 target for the US power sector. President Biden aims for the US achieving net-zero emissions by 2050 through clean energy policy incentives, energy-efficiency projects and public works programmes. The plan does not address the role of natural gas, which generated approximately 40% of US power in 2019 and promotes nuclear power, which has proven technologically and politically difficult in other markets. We anticipate large utilities will face significant pressure to reorient their power generation away from fossil fuels, creating potential credit risks.

CORPORATE ISSUERS HAVE A ROLE TO PLAY To conclude, while the Biden administration is widely expected to introduce more ESG-related regulation impacting corporate America, we do not expect rules as ambitious as in other jurisdictions. The EU, for example, has prioritised sustainable finance and corporate action focused principally on climate change. Japan has advanced corporate governance initiatives. The Biden administration may aspire to replicate these, but a divided legislature will constrain efforts

JOSHUA KENDALL

to introduce aspirational sustainable finance and corporate accountability goals. Nevertheless, we expect corporate issuers to find a receptive investor base looking to support such goals. More attention on green and social issues is an opportunity to issue green bonds, and the US market has seen a significant growth in corporate issuance of such debt. With more investors looking to create resilient and sustainabilityfocused portfolios, we believe companies may seek to make greater commitments towards sustainability themes, irrespective of any regulatory requirements. To manage the potential risks and opportunities highlighted in this article, we believe investors’ research should take a close look at issuers with high carbon emissions, utilities with material exposure to coal and gas generation, issuers with weak disclosure and transparency, issuers prioritising renewable energy and clean technology and issuers with weak environmental and social commitments. Credit research that integrates ESG factors can help identify potential leaders and laggards, and so Insight’s analysts aim to process material ESG signals to support risk management. Issuers exposed to such risks may require closer monitoring and engagement to learn how disruptive sustainability factors can be to their finances, including profitability and cashflow. Joshua Kendall is head of responsible investment research and stewardship at Insight Investment.

3/03/2021 9:52:45 AM

28 | Money Management March 11, 2021

Funds

CODING DATA UNDERSCORES HEALTH OF FINANCIAL SECTOR The resolution of several regulatory issues regarding Legal Entity Identifiers, writes Chris Donohoe, demonstrates the financial system is set for further growth. APIR-ISSUED CODES TAKE in APIRs as well as Superannuation Product Identifier Number (SPINs) and legal entity identifier (LEIs). They are used by end users, such as platforms, financial planners, managed funds, separately managed accounts (SMAs) and superannuation funds as well as regulatory bodies such as the ATO, to identify assets and enable execution and portfolio valuations. They were introduced in Australia in the mid-1990s and have been issued by APIR since that time. In its 27 years of operation, APIR has issued identifiers for over 30,000 individual financial products; 15,000 of which are still actively trading in today’s market. Increasingly, the data recorded by these codes has played an important part in identifying trends and developments within the industry, and in measuring and monitoring activity across all product segments. Over the years, the number of financial products registered in the market tends to be consistently strong, irrespective of the market cycle. In fact, for many fund managers, major market upheaval can be an opportunity to launch investments in new financial instruments or to access new investment opportunities. Larger asset managers and superannuation funds in particular, that experience significant declines in funds under management, may find that the operating environment results in the reengineering of products on offer. It could also lead to the development of different

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investment products that better reflect the economic conditions and market trends.

MARKET VOLATILITY AND FUND REGISTRATIONS The Global Financial Crisis (GFC) is a prime example of fund registration levels not being adversely impacted by a major market disruption. Product numbers for unlisted financial products were static throughout 2008/09, with no significant declines recorded. While funds under management certainly reduced in some cases, it wasn’t to the extent that large numbers of products were archived or closed. There were of course investment products in the market which were effectively quarantined. Equally, however, the GFC provided the opportunity to launch new products into the market, and there were some organisations who did just that during this period. The types of product that are launched is dependent on the nature of the market at any one time. In fact, corporate activity, such as mergers and acquisitions, has more of an impact on fund registrations (and closures) than broader economic factors. Industry regulation can also have an impact on product registration numbers.

COVID-19 IMPACT COVID-19 has not slowed the growth of funds in Australian and the number of products registered over the past 12-18 months has been significantly higher than the 10-year annual average.

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2020 was also the second consecutive year of 10% year-onyear participant or product issuer growth. Interestingly, much of the growth in product registrations during this time was from fairly vanilla offerings such as traditional equity funds and property trusts. But the growth of active funds in the market over the past six years has been strong, with more than 600 funds registered to 30 June, 2020; strong registrations have also continued into 2021 despite the impacts of COVID-19. While some uncertainty remains for financial markets, particularly with the imminent cessation of the Federal Government’s JobKeeper program, the outlook for new products being issued for the remainder of this year is favourable. This not only highlights the strength of the Australian financial services market, but also shows that market volatility is not necessarily the best barometer of whether products enter the marketplace.

CHANGES ABOUND Despite the strong performance of the Australian financial market and the role that APIR codes play in tracking market trends, there continues to be debate on how the use and accessibility of financial data should be regulated globally. Maintaining investor protection in light of changing global regulations, along with the move to cross border investing, has increased the pressure on financial regulators to implement common standards internationally. While this global harmonisation of financial services regulations – whether intended or otherwise - is seen by many in the industry as an increased compliance burden, it has also facilitated cross border

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investment, while helping ensure that the regulatory framework is robust. There has also been an evolution in the way product and entity identifying systems are used in the financial services industry. Once seen simply as a useful way to categorise and monitor financial products, they are now an integral part of the compliance and risk management framework. The LEI is a good example. An LEI is a 20-character alpha numeric code that uniquely identifies legally distinct entities that engage in financial transactions. The LEI code is associated with certain reference data for each entity, and these codes have been issued to over 1 million entities in more than 200 countries and territories since its formal introduction in 2018. The LEI requirement originally agreed by the G20 in response to the GFC and later formed part of the European Markets in Financial Instruments Directive (MiFID II) reporting regime. It has the aim of providing greater transparency for regulators and policy makers in transaction identification across jurisdictions and, therefore, strengthening investor protection for those undertaking a range of transactions. Initially thought to only impact those based in Europe, it soon became apparent that there were a range of Australian financial services entities including funds, brokers and traders, as well as trustees of self-managed superannuation funds – that were unable to transact certain OTC derivative investments without an LEI. While regarded as the globally preferred identifier, until recently, the renewing of LEIs in Australia

failed to attract stringent oversight as there was no regulatory requirement to do so. That could be about to change. The Australian Securities and Investments Commission (ASIC) has released a consultation paper, CP 334: Proposed changes to simplify the ASIC Derivative Transaction Rules (Reporting): First consultation, proposing an update on rules to require that a current, renewed LEI is the only allowable entity identifier in OTC derivative transaction reporting. There is a large depository of data which means when those with an LEI transact, authorities can see where transactions are taking place around the globe. A current LEI is a way for authorities to cross reference transaction activity, so it’s critical that the information is current and accurate. According to the consultation paper, ASICs proposal will “require in most circumstances that the registration status of the reported LEI is duly issued and maintained, not lapsed… LEIs are considered a crucial data element for the standardisation of identifying information for the relevant entities in derivative transactions. “Further, they are part of a global effort to achieve consistency to allow for global data aggregation. Our proposal aligns with requirements in other major jurisdictions.” The LEI is APIR’s fastestgrowing identifier, issuing over 3,600 LEI since September 2015.

PRODUCT DESIGN AND DIRECTOR OBLIGATIONS – WHAT’S NEXT? Target Market Determinations (TMDs) are another requirement for every financial product under the Design and Distribution

“The number of products registered over the past 12-18 months has been significantly higher than the 10-year annual average.” – Chris Donohoe Obligations (DDO) overseen by ASIC. The objective of the regulations is to place the onus of responsibility on product issuers and platform providers to ensure products are suitable for the market being distributed to, namely retail investors. TMD distribution and the obligatory communication between financial services participants under the DDO regime have presented Australia’s financial services industry with significant challenges. The industry is diligently working to create an efficient communication ecosystem, with APIR proposing to extend its utility function to provide the industry with a central repository for TMDs. This will provide relevant stakeholders with a simple one-stop location to distribute and access TMDs; it’s one step towards an efficient industry ecosystem and a healthy product development market. ASIC has deferred the commencement date for the DDO until 5 October, 2021, and APIR will continue to work with industry stakeholders to deliver a TMD repository that meets the needs of all participants. Chris Donohoe is chief executive of APIR Systems.

3/03/2021 9:53:13 AM

30 | Money Management March 11, 2021

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ECONOMIC RECOVERY AND FACTOR PERFORMANCE

The shock to markets in 2020 has left the investment landscape in an unusual position, writes Mike Akers, with five factors impacting a portfolio’s performance. AS INVESTORS, WE are rarely given the twin tailwinds of cheap valuations and a supportive economic environment. The current rotation out of growth into value securities is a sign of the recovering global economy, and one that every government and central bank would like to see continue for some time yet. Based on our Asset Allocation Interactive, we would expect an Australian value portfolio to earn

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8% per annum over the next five years. Over the same period, we would expect an investor in a broad US equity portfolio to tread water, if they are lucky, but a value-based portfolio should gain 5% p.a. Even better opportunities exist in the downtrodden UK market (10%) and the riskier emerging markets (11%). We are definitely living in interesting times. Last year, 2020, was a shock. An

unexpected health and economic crisis on a global scale was thrust upon us. As we globally vaccinate, our focus moves to the future, and in all areas of our lives we look to recover. Whilst 2020 may have been unprecedented, if we can separate the economy and the equity market, investors may find themselves on very familiar turf. We had a significant global recession in 2020, and we are well into a worldwide economic

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March 11, 2021 Money Management | 31

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recovery. Likewise, broad economic markets plunged, and after broadly troughing in early 2020, markets have surged, in some places to record high levels. This is the story of many a recession throughout the modern financial era. But, when we look deeper, we see some eddies that add significant context to our understanding of the current investment landscape. When we delve deep below the surface of the broad global equity market and draw historical parallels, we likely know more about the future than we credit ourselves. To tease out the patterns of these eddies, we need to take a quick sojourn into the relationship between factor investing and the economic cycle.

THE ECONOMIC STORY BEHIND FACTORS The economy has very real implications in our daily lives. Our jobs, spending, and personal well-being are all tied to its ups and downs. When economic times are good, we feel good. When economic times are bad, it gets us down. The same is true of the capital markets. When economic times are good, it feels like the market has no bound on the upside. During tough economic times and during recessions, it seems everything piles up against the market, and returns suffer. Simply, the state of the economy matters. It has consequences not only in our everyday decisions, but also in how the capital markets behave.

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When equity investors consider the prospects of an individual company, a set of securities in an industry, or just the entire equity market of a country, the future economic environment is paramount in their thoughts. Therefore, would it not also matter for a factor portfolio, a set of securities that share a common characteristic? What is surprising is the widely-held belief that factor timing, or varying your portfolio’s factor exposure over time, is a fool’s errand! Factor investing has become a valid choice for investors seeking to implement the shares slice of their portfolio. As investors implement factor strategies more often, it becomes more important for them to understand a factor’s cyclical tendencies. Briefly, we can summarise the characteristics of a broad set of factor-based portfolios: namely, momentum, value, size, low volatility, and quality. The momentum factor represents a group of securities that performed best over the last year. The value factor represents the lowest priced securities relative to the respective company’s economic size. The size factor represents a group of the smallest companies. The quality factor represents companies with a strong and stable financial scorecard. Finally, the low volatility factor represents the securities that do not rise or fall on a par with the market. A portfolio of securities based on each of these characteristics

has proven to perform better than the market over the modern financial era.

DIFFERING ENVIRONMENTS VARY THE STORY Just like the broad equity market or the securities in a common industry, different factor portfolios perform differently in different economic environments. Let us simply define the economic cycle as three basic stages: a recession, the following recovery, and a period of growth, which is better characterised as the economic calm that persists until the next recession. Across the three economic stages, two major themes are at play. First, the higher economic exposure of a value and size factor portfolio separates them from the less economically leveraged factors of low volatility and quality. The pro-leveraged factor portfolios of value and size perform poorly during the negative growth of a recession and perform better during the faster growth of an economic recovery. The opposite applies for the antileveraged factor portfolios of low volatility and quality. The second theme is momentum, which performs better during the longer-lasting growth periods. In the shorter and more economically significant, but less sustained, recession and recovery stages, momentum produces poor performance outcomes. Equity securities are discounting mechanisms.

Continued on page 32

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32 | Money Management March 11, 2021

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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. 1. What are the financial characteristics of companies that are part of a quality factor portfolio? a) A strong and stable financial scorecard Continued from page 31 Security prices are forecasting the future, rather than what is current or has been. Likewise, the performance of equity securities, and their composite factor portfolios, consider the economic environment three or six months into the future. But, economic data lags reality. We do not get gross domestic product (GDP) growth numbers until well after each quarter’s end. We could forecast the economy. This undertaking keeps a plethora of highly qualified and compensated economists busy. We could also argue that large advances in computing power and the ability to process big datasets herald the dawn of a new era in prediction, but regardless of this foresight, the further we look into the future, the murkier our view gets. If only we could synthesize the collective knowledge of all the efforts of these economists. Luckily, we need to look no further than the relative state of factor portfolios to forecasting or now-casting the economic environment. We find two measures matter: a factor’s discount and a factor’s momentum. Therefore, if we are keeping track of the economy, we need to look to a broad range of factor investment strategies to inform our opinions. We know that during a recession, the value and size factor portfolios perform poorly. At the end of September, 2020, value portfolios around the world were priced at 50% discounts to average, and they had fallen about 30% in the preceding 12 months. Conversely, we see positive factor momentum of quality strategies, averaging 16% as of September 2020, and priced at a 25% premium to average. A recession would do that! We do not choose randomly the end of September, 2020. In the five months since that date, we have seen the trend reverse. The performance of value securities has surged, and quality companies have languished. In the US, within the last few weeks, a value portfolio has surpassed the performance of the overall stockmarket, a result that gives it positive momentum. Alternatively, quality is moving sideways. We see similar results in other parts of the developed world.

THE FACTOR STORY NOW What can we intuit from the differential performance of factor portfolios since the third quarter of 2020? Investors believe the global economy is recovering. Investors came to this conclusion during September 2020, about five months ago, and have been cautiously reflecting a recovery in security prices. That said, the markets have a long way to go. Globally, value securities are still priced 30% below average, whereas some quality factors are priced at a 40% premium to their average valuations. Cheap valuations and the global economic recovery are building. We rarely get opportunities to invest in portfolios with such strong tailwinds. Michael Aked is director of research for Australia at Research Affiliates.

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b) Are small and nimble c) Produce goods that are well made d) Have the strongest one-year price performance 2. When does the momentum factor portfolio typically performs better? a) During a recession b) During an economic recovery c) During the longer-lasting growth period of an economy d) Equally during all economic stages 3. What does the global outperformance of a value factor portfolio over the last six months indicate? a) A recession b) An economic recovery c) The longer-lasting growth period of an economy d) A mixture of economic cycles 4. Why is the current global economic recovery likely to persist? a) Governments around the world would like this to occur b) Central banks will adjust monetary policy to allow it to persist c) The performance of factor portfolios expects it to continue d) All of the above 5. Over what time period do equity securities discount the economic environment? a) 12 months into the future b) Three to six months into the future c) That we are currently experiencing d) That was last reported by the OECD

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ economic-recovery-and-factor-performance For more information about the CPD Quiz, please email education@moneymanagement.com.au

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26/02/2021 10:18:18 AM

34 | Money Management March 11, 2021

Send your appointments to chris.dastoor@moneymanagement.com.au

Appointments

Move of the WEEK Jacquie Arnott Relationship manager T. Rowe Price

Global asset management firm T. Rowe Price has appointed Jacquie Arnott to lead its wholesale and family office distribution for Australia and New Zealand. Arnott would be responsible for leading the firm’s continued growth in the wholesale and family office distribution

Fixed income investment manager PIMCO has appointed Kimberly Stafford as global head of PIMCO’s product strategy group, as well as making several other changes in key leadership roles. Stafford was currently head of Asia Pacific and would return to the firm’s Newport Beach office in the middle of the year to oversee traditional strategies and alternatives, which included private strategies and hedge funds. Stafford had led PIMCO’s Asia Pacific region since 2017 and during her 21 years at PIMCO, she held various positions including head of the consultant relations group, oversight of US institutional sales and alternatives marketing teams, head of human resources and talent management, head of global sustainability initiatives, and account manager in the consultant relations group. Alec Kersman, currently head of strategic accounts in US global wealth management (US GWM), would replace Stafford as the new head of Asia Pacific. David Fisher, currently managing director and currently head of traditional product strategies, would become co-head of US GWM strategic accounts, alongside Eric Sutherland, managing director and president of PIMCO Investments.

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channels, which included the private banks. She had over 12 years’ experience at global financial institutions in various relationship management roles looking after ultra and high net worth, research and intermediary clients. Prior to joining T. Rowe Price in

Global asset manager Aviva Investors has appointed Daniel McHugh as chief investment officer of its real assets business, following the appointment of Mark Versey as chief executive who previously held the position. McHugh would report to Versey and would responsible for the strategy and growth of Aviva Investors’ integrated real assets business, which included real estate, infrastructure and private debt. He would oversee around 300 professionals working across fund management, asset management, development, transactions, origination, underwriting, research, and business management. McHugh joined Aviva Investors in April 2018 as managing director, real estate, and in that role he was responsible for business strategy, product initiatives, and external engagement across real estate, as well as leading the firm’s direct investment activity across the asset management, development and transaction teams. Before joining Aviva, he was head of continental European real estate investment at Standard Life Investments, which he joined in 2000. A successor to his former position was expected to be announced soon.

February 2015, she worked for Julius Baer Private Bank and Merrill Lynch Wealth Management in London and Los Angeles. She would continue to report to Jonathon Ross, head of intermediary Australia and New Zealand, and remain based in Sydney.

US investment firm GQG Partners has appointed Ashneel Naidu to the newly-created role of director of business development, based in Sydney. Naidu joined from Vanguard Investments where he was responsible for retail distribution to financial advisers in NSW and ACT, which included institutionally-aligned dealer groups, independent financial advisers and boutique planning groups. Before Vanguard, he worked in business development roles for Westpac Private Bank and Macquarie Bank. He would report to Daniel Bullock, director of wholesale markets, who said the strong growth of the Australian business had created the need for additional senior personnel. Financial services software provider, Iress has announced the impending appointment of a new chair, driven by the retirement of its current chair, Tony D’Aloisio. The company announced that former ABN AMRO Asia Pacific Securities chief executive, Roger Sharp would be stepping into the role when D’Aloisio stands aside at the company’s annual general meeting in May. Sharp would join the Iress

board as a non-executive director and chair-elect. He was currently chair of Webjet and deputy chair of Tourism New Zealand. D’Aloisio, a former chair of the Australian Securities and Investments Commission, had been chair of Iress since 2014, having joined the board in 2012. Australian Ethical has made several new appointments to strengthen its adviser sales, distribution and investment teams. Keenan Bunning (formerly of Perpetual) and Jeannie Bredberg (formerly of Blackrock) were appointed as senior managers – adviser relationships, and Sara Wakefield (formerly of the Association of Superannuation Funds of Australia) was appointed as a B2B marketing manager. Mike Murray had been promoted to head of domestic equities and would be responsible for overseeing the active equities team. The appointments come as the firm said it had experienced “booming demand” in those channels as it eclipsed $5 billion in funds under management (FUM). John McMurdo, Australian Ethical chief executive, said he attributed this demand to an increased number of Australians who had embraced ethical investing.

3/03/2021 11:58:53 AM

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26/02/2021 10:55:29 AM

OUTSIDER OUT

36 | Money Management Management October April 2, 2015 22, 2020

A light-hearted look at the other side of making money

Which Wu is who in the funds management zoo? WILL the real Simon Wu please stand up? There is only one Outsider but apparently there are two Simon Wus operating in the Australian funds management industry. Now Outsider has been around long enough to know that finding two people

named Mike Taylor plying their trade as journalists is not unusual, it is unusual for the aforementioned two Mike Taylors to be both writing about financial services which, thankfully, they are not. Similarly, while there are undoubtedly hundreds of thousands of Wus in China, Outsider finds it unusual that two of them would be operating in the Australian funds management industry and both of them operating in the Asian funds space. But there you have it. Simon Wu of Premium China Funds has been around for quite a while and now it turns out that Aberdeen Standard has its own Simon Wu, who just happens to be director of wholesale sales. Now Outsider has known Premium China’s Simon Wu for many years and so he knows which Wu is who in the funds management zoo, do you?

Back to the future with Tyndall OUTSIDER has been around long enough to know that if you wait long enough some of the fashions you were wearing 20 years ago come back into fashion. Well, almost. And so he was pleased to see that a couple of old golf polo shirts that had been sitting in the bottom of his drawer for around a decade might warrant another outing. Why, not because of fashion, but because the Tyndall brand is returning to Australian funds management thanks to Yarra Capital Management entering into an agreement to acquire the Australian business of Nikko Asset Management. Thus, in what represents a back to the future moment, Nikko will once again become Tyndall which in many respects represents the closing of a circle which started in September 2014, when Nikko decided to shelve the Tyndall brand. So, Outsider will dust off the Tyndall shirts for his next golf outing, and closely monitor how the new/old brand performs. Nothing quite like rebranding without having to commission expensive collaterals.

No paparazzi – Outsider ain’t feeling pretty OUTSIDER has sought to stay away from the Melissa Caddick financial planning fraud scandal because, frankly, he thinks coverage has reflected badly in general terms on financial advisers and the financial sector more broadly. But having said all of that, he is reminded about why, many years ago, the senior editorial executives of Money Management (Outsider and his offsider) decided not to publish personality photographs on the front cover of the magazine. Why? Because, as recently proved, those personality photographs can pop up years later to justly, or unjustly, diminish your publication’s credibility. Outsider is reminded that the Institute of Managed Account Professionals (IMAP) ran into just such a problem when it used its magazine to publish a photograph of former notable financial planner, Sam Henderson, just before he was named in the Royal Commission and he notes that one of Money Management’s competitor

OUT OF CONTEXT www.moneymanagement.com.au

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publications has been found to have published a cover photograph of Caddick many years ago. For the record, and in defence of Money Management’s competitor, the photograph of Caddick was nigh on 20 years’ old when she was in fact invested in an advice firm and carried an authorisation and unlike some of Outsider’s young colleagues, the editor of that magazine at the time did not have a crystal ball. But one should always assume that today’s rooster may be tomorrow’s feather duster or just plucked chook, so no personality pics for Money Management’s front cover and not just because Outsider is not looking his best today.

"We've gathered the A-team or the Avengers of the SMSF world."

"This is the year of living dangerously."

– SMSF Association National Conference MC, Andrew Klein

– Hamish Douglass, Magellan chair

Find us here:

4/03/2021 1:02:09 PM