Money Management | Vol. 34 No 6 | April 23, 2020

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Vol. 34 No 6 | April 23, 2020

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MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

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Vol. 34 No 6 | April 23, 2020

22

TAX

Year-end tax strategies

ETFS

28

Taking advantage of buying opportunities

Trading ETFs in a crisis

MULTI-ASSET

Asset-based fees apt for COVID-19 volatility says AFA

BY MIKE TAYLOR

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Taking a flexible approach to turbulent markets IT has been a turbulent few weeks for equity funds thanks to the volatility caused by the COVID-19 pandemic.

Unsurprisingly, this has left investors unsure and confused about where they can place their assets to get a positive return, especially as interest rates are at record low rates.

One area that is navigating the market successfully is in the multi-asset space, specifically those funds which have an objective-based mandate, as managers have hurried to implement defensive positions and protection.

The benefit of these type of funds is they have a broad, diverse remit which allows them to ‘go anywhere’ to achieve its target return and they are not forced to stick within rigid remits.

According to Bruce Murphy, director at Insight Investment, allocations in multi-asset were about the three D’s; diversification, dynamic asset allocation, and downside risk management.

This means as well as bonds and equities, the managers can also put in strategies such as gold, hedged positions and put options to reduce the market effect on the portfolio.

However, managers cautioned, while the funds were beating equity funds at the moment, investors should not expect them to outperform when equity markets were rallying.

Kej Somaia, co-head of multi-asset at First Sentier, said: “If you are after capital preservation then this type of fund can do that in volatile times. But the caveat is that if you are looking for equitylike returns then you won’t get that from multi-asset when the market is rallying hard”.

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Full feature on page 19

30

EQUITIES

AS the first impacts of the COVID19 market meltdown began to be felt, the Association of Financial Advisers (AFA) wrote to the Accounting Professional and Ethical Standards Board (APESB) mounting a strong defence of asset-based fees noting that they ensured advisers had “skin in the game” alongside their clients.

The AFA used a submission to the APESB’s review of APES 230 to mount its defence arguing that it believed asset-based fees should be retained alongside

fee-for-service and life insurance commission in any refresh of APES 230. “…We do not see any need for the removal of either asset-based fees or life insurance commissions,” the submission said.

“In Regulatory Guide 175, ASIC [the Australian Securities and Investments Commission] have stated a very clear view that the receipt of asset-based fees does not prevent an adviser from describing themselves as independent. It is also a fact that some clients prefer Continued on page 3

Latest exam result shows need for more entrants

BY CHRIS DASTOOR

WITH the latest Financial Adviser Standards and Ethics Authority (FASEA) exam results showing another drop in the pass rate, and the reality that not enough new advisers are coming through to replace them, there is a growing concern there won’t be enough advisers in the industry to give affordable advice.

The most recent FASEA exam showed a pass rate of 82%, the lowest of the four exams, as each result had continued to drop.

Phil Anderson, Association of Financial Advisers (AFA) general manager policy and professionalism, said it was a concern that Australians may not be able to get affordable financial advice.

“The more people who leave, the worse the situation gets, we need to hold onto as many existing advisers as we can and we need to ensure that we have a flow of new advisers into the market,” Anderson said.

He said there were obstacles making it difficult for new advisers to join the industry and not enough students studying financial advice.

Continued on page 3

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April 23, 2020 Money Management | 3

News

Average cost of super fund comprehensive advice – $2,000 - $2,500

BY MIKE TAYLOR

SUPERANNUATION funds can deliver comprehensive advice for an average of around $2,500 a member and intra-fund advice can be delivered for as little as three cents per member per year.

The financial adviser community has been granted a rare glimpse of what financial planning actually costs within superannuation fund structures, thanks of questions pursued via the House of Representatives Standing Committee on Economics Review of the Banks, Insurers and Superannuation funds.

An examination of answers provided to the committee by First State Super, HESTA and Equip Super has revealed that, in the case of First State Super, which no longer employs advisers directly under its license, it spent $1.9 million on the provision of intra-fund advice

which equated to an average cost to members of three cents.

This compares to Equip Super which estimated that the average cost of advice apportioned to individual fund members was $8.07 and HESTA which estimated the cost at being 1.19 cents per member.

HESTA revealed that the average per fund member cost of comprehensive advice in 2018/19 was $2,043 up from $1,919 five years’ earlier.

HESTA said the cost of general advice in 2018-19 had been just over $4.3 million, equating to $5.17 per member.

First State Super made the point that it was no longer directly employing advisers but, in answer to question about the aggregate value of bonuses provided for intra-fund advice, and the average per adviser it provided the following table.

Asset-based fees apt for COVID-19 volatility says AFA Continued from page 1 to have their adviser paid on the basis of an asset-based fee arrangement. They like to see that their adviser has some ‘skin in the game’,” the AFA submission said.

“And this is exactly the case at present, as we observe the material declines in the value of the Australian and international share markets as a result of the coronavirus. As the client’s assets go down, so does the income of the adviser,” it said.

“We also struggle with the assumption that hourly fee arrangements or fixed fees are completely free of conflict, yet there is something inherently wrong with asset-based fees. There are risks with each of the models.

“In terms of an hour fee arrangement, this provides an incentive to take longer to complete the work, or to provide services that are not important to the client.

Ultimately, we believe that clients should have the ability to choose how they pay for their financial advice, and asset-based fee arrangements are an option that many may choose,” the AFA said.

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Latest exam result shows need for more entrants Continued from page 1 “It’s been hammered as a result of things like the Royal Commission, [given] our coverage over recent years it’s not surprising that people are not saying they want to become a financial adviser, but over time that will dissipate,” Anderson said.

“It’s going to be important that we do get out to future advisers to encourage them to take the profession up.

“But there’s other obstacles that are preventing people coming into business at the moment, like the professional year which is a challenging requirement.”

Because it was a big commitment from businesses to bring in new people when they’re not going to generate much revenue, it made it

hard to develop new talent, if that talent was coming into the industry.

“Some of the big starting grounds for new advisers in the past, such as the bank-owned channels, have very much reduced their businesses,” Anderson said.

“If we’re going to need to get new advisers to come into this industry via the self-employed side of the market, then things are going to need to be done to make it more economically viable for that to happen.

“We’ve got to look very closely at how we can do more to enable more advisers to come in through that channel because that’s going to be increasing important with the big banks stepping away from advice.”

16/04/2020 2:11:56 PM

4 | Money Management April 23, 2020

Editorial

mike.taylor@moneymanagement.com.au

ASIC’S ‘RELIEF MEASURES’ SHOULD BE MOST DEFINITELY TEMPORARY

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000 Managing Director: Mika-John Southworth Tel: 0455 553 775 mika-john.southworth@moneymanagement.com.au

The Government and ASIC were right to act on making the provision of advice to confused and worried superannuation fund members and advice clients easier, but some important lines have been crossed in terms of licensing which will need to be put right when the crisis has passed.

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

GIVEN THE PLETHORA of policy measures the Federal Government had put in place to deal with the fall-out from the COVID-19 pandemic it was both sensible and appropriate that the Australian Securities and Investments Commission (ASIC) announced “relief measures” with respect to the provision of financial advice.

What surprised many, however, was the degree to which the regulator went beyond normal bounds in allowing the provision of advice by unlicensed people and entities – accountants, tax agents and superannuation fund trustees.

The ASIC announcement, released straight after the Easter break last week stated: “To assist the provision of affordable advice on early access to super, ASIC has: • Allowed advice providers not to give a statement of advice (SOA) to clients when providing advice about early access to superannuation; • Permitted registered tax agents to give advice to existing clients about early access to superannuation without needing to hold an Australian financial services (AFS) licence; and • Issued a temporary no-action position for superannuation trustees to expand the scope of personal advice that may be provided by, or on behalf of, the superannuation trustee as ‘intra-fund advice’. (Intra-fund advice is provided free of charge to the recipient of the advice.)”

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The ASIC announcement then went on to say that the relief and no-action position were temporary and subject to the important conditions, including: • Clients must be provided with a record of advice (ROA), which meets certain content requirements. An ROA is a shorter, simpler document that sets out the advice that is being provided; • The advice fee, if any, is capped at $300; • The advice provider must establish that the client is entitled to the early release of their superannuation; and • The client must have approached the advice provider for the advice.

What is important to recognise about the ASIC announcement was that it apparently followed consultations with some of the key financial planning and accounting organisations who lost no time in not only welcoming the regulator’s move but promising to work together to achieve an appropriate outcome.

Those bodies included the three major accounting bodies, the Financial Planning Association (FPA) and the SMSF Association.

Little wonder, then, that a number of financial advisers expressed concern that, on the face of it, unlicensed tax agents and accountants would be able to provide advice.

Equally unsurprisingly, those advisers were concerned at the suggestion contained in the ASIC announcement that the provision

of intra-fund advice came without cost to superannuation fund members when answers provided by some superannuation funds to the House of Representatives Standing Committee on Economics made clear that intrafund advice did come at a cost carried by all members of a fund.

Notwithstanding the reservations of financial advisers about the implications of ASIC’s “relief package” it is hard to argue with the objective of ensuring that people who seek hardship early access to superannuation do so with their eyes open and that, so far as possible, advice clients and members of superannuation funds are assisted in avoiding the crystallisation of their investment losses.

The Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume has stressed the relief measures will be temporary. That will need to be reinforced when the crisis has passed.

It does not require a very long memory to recall that some elements of the superannuation industry have been arguing for an expansion of intra-fund advice, while some elements of the accounting profession have been arguing for a return to the days of so-called ‘accountants’ exemption’.

Measures can be temporary or they can be the thin end of a wedge.

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 candace.qi@fefundinfo.com ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@moneymanagement.com.au Account Manager: Amelia King Tel: 0407 702 765 amelia.king@moneymanagement.com.au PRODUCTION Graphic Design: Henry Blazhevskyi

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Mike Taylor Managing Editor

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6 | Money Management April 23, 2020

News

70 complaints against real estate agents on early release super: ASIC

Westpac’s major provisioning increase

BY MIKE TAYLOR

WESTPAC has announced new and increased provisioning and asset write-downs totalling around $1,430 million after tax – something the big banking group says will reduce its first half cash earnings and statutory net profit after tax.

In an announcement released to the Australian Securities Exchange (ASX), the company said it was also undertaking detailed analysis to finalise its impairment provisions for the first half and that the impairment charge was expected to include a “significant collective provision increase that will lift the Group’s total provision balance in anticipation of credit losses anticipated from the COVID-19 outbreak”.

Westpac chief executive, Peter King, said that having spent much of the last decade strengthening its capital, Westpac was wellplaced to respond to the unfolding environment.

He said the items along with their cash earnings impact included: • Provisions and costs associated with the AUSTRAC proceedings and response plan of $1,030 million after tax; • An increase in provisions for customer refunds, repayments and litigation of around $260 million after tax; • A reduction in the value of several assets cost around $70 million after tax; and • Costs and changes in the provision of group life insurance of around $70 million after tax.

THE Australian Securities and Investments Commission (ASIC) has revealed it received around 70 reports from the public expressing concern about real estate agents referencing the ability of tenants and others to obtain early access to their superannuation.

The regulator has revealed that, in the first instance, it became aware of the real estate agents’ activity via a staff member who received a letter from an agent and via social media.

Answering a question on notice from the Joint Parliamentary Committee on Corporations and Financial Services, ASIC said that “between 3 April, 2020, and 7 April, 2020, ASIC received approximately 70 reports of misconduct from members of the public”.

However, the regulator said that it had not yet decided to take action with respect to those reports.

Explaining how it had come to

write a letter warning real estate agents about giving advice around early release super, ASIC said that before its letter dated 3 April, 2020, “an ASIC member of staff initially flagged a letter they had received from their real estate agent about applying for the early release of superannuation funds to meet rental payments, if they were experiencing financial difficulty”.

“ASIC also received one report of misconduct from a member of public raising similar concerns,” it said. “ASIC’s review of Twitter had indicated early concerns being identified by tenants of messaging from agents on behalf of landlords.”

“ASIC is unable to provide copies of the correspondence received by the ASIC staff member or the report of misconduct received from the member of the public as this material was received in confidence,” ASIC said.

“Further, on 1 April, 2020, ASIC received a letter from Stephen Jones MP expressing concern about unqualified financial advice being given by real estate agents that may not be in the best interests of individuals.”

Jones is the shadow Assistant Treasurer and his letter urged ASIC to issue a warning to real estate agents.

Corporate watchdog reminds responsible entities of liquidity obligations IN what represents an echo of events during the global financial crisis (GFC), the Australian Securities and Investments Commission (ASIC) has reminded the responsible entities (REs) of listed investment schemes of the need to closely monitor redemptions and suspend those redemptions if necessary.

In a letter focussed on liquidity and written in similar terms to that directed to superannuation fund trustees, ASIC has reminded responsible entities of their obligations including their ability to apply to the regulator for hardship-related relief.

The contents of the ASIC letter carries a reminder of the number of mortgage-backed schemes which suspended redemptions and sought hardship-related relief during the GFC some of which did not clear their backlogs for up to two years after the event.

The underlying message contained in the ASIC letter is REs need to be closely monitoring redemptions and the valuation of scheme property and how

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that flows through to unit-pricing and then appropriately communicating the facts to members in a timely manner.

“Should a RE find itself in the position of declaring a Scheme non-liquid for an extended period of time, the RE may wish to consider applying to ASIC for hardship relief via the usual process,” it said.

“Taking into account individual circumstances and on a case-by-case basis, ASIC is able to modify the law to facilitate partial investor access to funds in cases of hardship. Should the need arise, ASIC may also provide rolling withdrawal relief to REs to simplify the procedure for periodic withdrawal offers (out of available cash) in appropriate cases.

“REs are able to apply for one or both types of relief. ASIC Regulatory Guide 136 Funds Management: Discretionary Powers refers to ASIC’s powers to grant hardship relief and rolling withdrawal relief and outlines the factors we may consider when determining whether to grant relief,” the ASIC letter said.

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8 | Money Management April 23, 2020

News

ISA launches campaign to encourage nest egg protection

BY JASSMYN GOH

INDUSTRY Super Australia (ISA) has launched a campaign to reassure members that superannuation funds will bounce back from the downturn caused by COVID-19, given that a sizeable minority of members make rash decisions with their super after a downturn.

The campaign’s main message will be broadcast in a 30-second TV advertisement along with a series of online videos from industry experts.

ISA chief executive, Bernie Dean, said: “This is a timely reminder for members that their industry super fund is looking after them now and over the long-term by protecting their nest egg and making sure it can grow again out the other side of this crisis.

“It’s important for members to know that they’ll also be helping the economy bounce back, just like they did with the global financial crisis [GFC], by investing in infrastructure and other things that create jobs and keep business strong.

“Saving for your future is just like

protecting our health now – it’s best done when we all come together.”

The video series would provide information on how to avoid crystallising losses at a downturn; the pros and cons of accessing super early in times of financial hardship; how super funds protect members’ savings during market volatility and how, through investments in Australian business and local infrastructure, Industry Super Funds would help power the recovery.

ISA noted online searches about super had increased by 74% since the Government announced its early access to super scheme for those facing financial hardship due to the COVID-19 pandemic.

It also pointed to research by UMR that found that 58% of Australians were confident their super would recover over time, and 58% of Australians agreed making changes to super after a downturn is risky.

“But there is still a sizeable minority that make rash decisions with super after a downturn – like switching to cash or other defensive assets – locking in their losses,” ISA said.

Play market gradually: Amundi

Managed funds caught up in foreign investment changes

BY CHRIS DASTOOR

BY LAURA DEW

TRYING to time to bottom of the market is unrealistic and investors should gradually consider opportunities to rebalance their long-term strategic allocation, according to Amundi Investment Management.

COVID-19 had led to a massive sell-off and investors could take advantage of the potential sequence of market opportunities that would emerge from the crisis.

“We know that the financial cycle leads the real cycle.

Markets will bottom before the real cycle has completed its downward trajectory, and, based on history, their recovery will be ahead of and will drive the recovery in the real sphere by three to six months,” the firm said.

The firm said the sell-off had eliminated deviations in equity returns and in credit spreads, but not at the same pace everywhere, and the sell-off had not priced a permanent loss of potential growth.

“From an investment perspective, to detect the tipping point of the crisis, investors will need to look at the corporate-bond asset class where there is a race against time between liquidity and solvency,” the firm said.

“The de-freezing of the credit curve – crucial at the short end – will be necessary for validation of a full recovery in markets.

“Bounces in equity performance have masked this, but this is the indicator to watch.”

CHANGES to the foreign investment review framework as a result of COVID-19 could have ‘unintended consequences’ for fund managers.

Since 29 March, 2020, all proposed foreign investments subject to Foreign Acquisitions and Takeovers Act 1975 require approval, regardless of value or the nature of the foreign investor.

According to investment advisory group Atlas Advisors, the changes had unknowingly captured some managed funds which could reduce Australia’s appeal as an investment destination.

This came at a time when Australia was in ‘desperate need of capital’ and equity and debt funding was already in short supply.

Executive chair, Guy Hedley, said: “The reforms importantly aim to safeguard the national interest against opportunism amid the COVID19 crisis. However, it also creates

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needless complications for managed funds that invest broadly across different industries and sectors on behalf of investors in areas that require capital support.

“In today’s fast-moving business environment, where innovation is key to survival, enterprise cannot wait unreasonably long periods of time for the delivery of outcomes.”

He warned various types of businesses, from startups to private companies, could be at risk of collapse if they were unable to access the necessary funds.

“These measures will leave thousands of Australian startups, emerging, listed and private companies stranded without critical funds needed to drive business continuity and change,” he said.

“Many of these companies will inevitably collapse, forgoing billions of dollars’ worth of tax and employment generating business.” opportunities.”

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10 | Money Management April 23, 2020

News

Chant West’s legal action against Zenith owners

BY MIKE TAYLOR

PUBLICLY-LISTED superannuation and financial services researcher, Chant West has launched legal action against the owners of research and ratings house, Zenith, over its decision to withdraw from a sales transaction.

Chant West informed the Australian Securities Exchange (ASX) that it had filed proceedings against CW Bidco in the NSW

Supreme Court seeking to compel it to complete the sale of the Chant West business on the terms agreed in February.

The ASX announcement said it continued to reject allegations that a material adverse change in the business had occurred stating that Chant West had delivered a positive earnings before interest, taxes, and amortisation (EBITDA) for the first half of FY 2020 and the board remained confident that it would continue this trend in the second half.

ASIC commences proceedings against Mayfair for sponsored ads

BY CHRIS DASTOOR

ATO and TPB on alert for COVID-19 rorters THE Australian Taxation Office (ATO) and the Tax Practitioners Board (TPB) have issued a joint warning to tax agents and advisers not to seek to manipulate the system as a result of COVID-19 and the Government’s various policy announcements.

The two bodies have quite specifically asked “that tax agents and businesses be mindful that it is not acceptable to backdate or artificially change a business structure or employment arrangements, including changing the characterisation of payments, in order to obtain a benefit or payment that would not otherwise have been paid”.

“The ATO and TPB will take firm and swift action should this be the case,” they said.

“We understand these situations can be difficult to navigate and we encourage anyone who needs advice to seek assistance from us,” the joint communication said. “If you become aware of someone doing the wrong thing, report them.

“As trusted guardians of the tax and super systems, we all have an important role to play in helping Australia overcome these challenges.

The best way forward is for all of us to work together to ensure the Government measures are applied in accordance with their intent.”

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THE Australian Securities and Investments Commission (ASIC) has commenced proceedings in the Federal Court of Australia against Mayfair 101 and Mayfair Platinum for misleading or deceptive advertising.

It had promoted two debenture products to wholesale investors: M Plus Fixed Income Notes, which were unsecured promissory notes issued by M101 Holdings; and M Core Fixed Income Notes, which were secured promissory notes.

Mayfair used sponsored link internet advertising through Google AdWords and Bing Ads, so the websites appeared as sponsored links when consumers searched for ‘bank term deposit’ or ‘term deposit’.

Other promotional material also used key words and phrases such as term deposit alternative, term investment, fixed term, certainty, confidence, and capital growth.

ASIC alleged Mayfair made statements that were false, misleading or deceptive by representing that: • Mayfair debenture products are comparable to bank term deposits and have a similar risk profile when they are much riskier; • The principal investment would be repaid in full on maturity, when investors may not receive capital repayments on maturity or at all because Mayfair could elect to extend the time for repayment for an indefinite period; • The products were specifically designed for people seeking safe investments, when these carried significant risk; and • The products provided capital growth opportunities when they do not.

ASIC sought injunctions to restrain the publication of statements like this and pecuniary penalties in relation to the alleged false or misleading representations.

On 11 March, 2020, Mayfair Platinum suspended payment of capital redemptions to investors in the Mayfair debenture products due to liquidity issues.

ASIC also sought an interim injunction to stop the defendants from promoting and issuing the Mayfair debenture products while redemptions to existing investors remain suspended.

The injunction would be heard by the Federal Court on 14 April 2020 at 9.30am.

15/04/2020 2:44:34 PM

April 23, 2020 Money Management | 11

News

Who earned the stamping fee exemption millions?

ASIC permanently bans jailed Adelaide adviser

BY MIKE TAYLOR

BY CHRIS DASTOOR

STOCKBROKERS and advisers have received over $186 million in ‘stamping fees’ over the past five years, according to the Australian Securities and Investments Commission (ASIC).

The figure has been revealed in an answer to a question on notice from the Parliamentary Joint Committee on Corporations and Financial Services, albeit that ASIC said it was not possible to quantify the total amount of remuneration paid in reliance on the stamping fee exemption.

“We estimate that over the five years to end 2019, stockbrokers and other financial advisers have earned over $186 million in ‘stamping fees’, or what public offer documents refer to as broker or adviser fees, from more than $14 billion of initial capital that has been raised by [listed investment companies] LICs and [listed investment trusts] LITs,” ASIC said.

“This amount does not include secondary capital raised

in the form of secondary equity offers, entitlement rights and attached company options.

Further, significant joint lead manager (JLM) or arranging ‘success’ fees are often paid if the IPO is successful,” it said.

“A portion of these payments are made in reliance on the stamping fee exemption and

could run into the millions of dollars for a single stockbroking or financial advice firm.

“We estimate that over the five years to end 2019, the combination of stamping fees and JLM and arranger fees, firms involved in the raisings could have earned well in excess of $330 million.”

Asset devaluations – first the industry superannuation funds, now property funds

FORMER financial adviser James Gibbs has been permanently banned by the Australian Investments and Securities Commission (ASIC), the first banning imposed by ASIC utilising its recent banning power extensions.

ASIC banned the Adelaide adviser from having any involvement in financial services and credit activities.

The extension of ASIC’s banning powers came into effect on 18 February, 2020, as a result of the Stronger Regulators Act that allowed ASIC to ban people from having any involvement in financial services or a credit business.

Previously the ban only extended to providing financial services or engaging in credit activities.

In July, 2019, Gibbs was sentenced to 10 years imprisonment for fraud offences with a non-parole period of seven years.

Following the conviction, ASIC pursued the banning orders to permanently remove Gibbs from the financial advice and credit industries.

INDUSTRY superannuation funds are not the only entities devaluing assets, with property funds having started the same process.

One of Australia’s largest real estate investment groups, GPT, has announced downward revaluations affecting both its office fund and its Wholesale Shopping Centre fund.

In an announcement released on the Australian Securities Exchange (ASX), GPT said the GPT Wholesale Office Fund had been subject to a negative revaluation of approximately $183 million, representing a decline in book value of 2%.

It said that the Wholesale Shopping Centre Fund had been subject to a negative revaluation of $511 million representing a decline in book value of 11%.

Commenting on the negative revaluations, GPT chief executive, Bob Johnston, said they reflected the independent valuers’ assessment of the effects of COVID-19 and the measures being implemented by the Federal and State Governments were having on economic activity.

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14/04/2020 2:58:06 PM

12 | Money Management April 23, 2020

News

OneVue flags possible legal action against Sargon directors

BY MIKE TAYLOR

ONEVUE has foreshadowed legal action against the directors of Sargon as it seeks to assert its rights following the collapse of the company.

In an announcement released to the Australian Securities Exchange (ASX), OneVue confirmed the likelihood that the sale of the Madison Financial Group will be completed by the end of the month, that it has an unpaid vendors lien over the shares in both Diversa and CCSL Trustees, which it sold to Sargon, and that it will consider pursuing legal action against Sargon’s current and former directors.

OneVue also referenced a Voluntary Administrators report which stated that if Sargon Capital was wound up, the liquidators would have the potential to pursue insolvent trading claims against Sargon’s directors and officers, and potential voidable transaction and unfair preference claims.

“Those claims may result in returns to unsecured creditors, however, OneVue’s primary course of action has been to recover the amounts owed to it at the subsidiaries’ level, first with the sale of its secured assets,

and secondly with the enforcement of the lien over the previously owned Trustee Services Business businesses,” it said.

“OneVue advises that if the recoveries at the subsidiaries’ level are insufficient it will also consider pursuing its own claims against Sargon’s current and former directors and officers arising from the sale of the Trustee Business businesses.”

ASIC creates adviser lee-way on grandfathering THE Australian Securities and Investments Commission (ASIC) has applied the brakes to work it is doing on life insurance advice and grandfathered conflicted remuneration to help financial advisers navigate the extraordinary times being generated by the COVID-19 pandemic.

In a question and answer document issued to advisers and licensees, the regulator said that to reduce the regulatory burden on financial advisers, it was: • Delaying work on life insurance advice.

We will not ask you for client information or for your client files at this time; and • Delaying work on grandfathered conflicted remuneration, which we commenced on direction from the Treasurer. We will not ask product issuers for data at this time.

ASIC said it would be recommencing this work at a future date but that, “in the meantime, we expect product issuers to turn-off their arrangements as soon as possible and

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by no later than 1 January, 2021”.

“All rebates and/or reductions in fees should be passed on to consumers as quickly as possible. We have communicated separately with product issuers about this.”

In a further measure, the regulator said it would be allowing additional time for industry to respond to ASIC notices.

The ASIC document also makes clear to advisers and licensees an element of flexibility around the delivery of advice provided satisfactory records are kept and noted that the Corporations Act allowed for delayed financial services guides (FSG) and statements of advice (SOAs).

On the question of life insurance, the document stated: “ASIC is currently monitoring developments in the life insurance industry, including the possible introduction of exclusions for pandemic cover for new policies.

“The situation is moving rapidly, so you should be cautious about recommending replacement cover to your clients during this time.”

Insurers give COVID-19 undertaking via FSC AUSTRALIA’S major life insurers have moved to head off further uncertainty and criticism by delivering an undertaking on the cover of healthcare workers who are exposed to COVID-19.

Working under the auspices of the Financial Services Council (FSC) and in line with the Federal Government, the life insurers issued the following announcement: “Today the FSC announced a commitment on behalf of participating life insurance FSC member companies to ensure that frontline healthcare workers are not prevented from obtaining life insurance cover purely because of their exposure, or potential exposure, to COVID-19.

“Frontline healthcare workers are a group who could be exposed to contracting COVID-19 and to this end, participating life insurers are making a commitment that their exposure, or potential exposure, will not of itself be used to: 1) Decline an application for cover; 2) Charge a higher premium; or 3) Apply a COVID-19 pandemic risk exclusion to any of the benefits offered, subject to the relevant conditions and financial limits.”

Commenting on the move, the Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume, said frontline workers were doing an amazing job in the crisis, and was “vital that we’re ensuring their work won’t adversely affect their life insurance cover”.

“I thank the FSC and insurers for their responsiveness on this issue,” she said.

FSC chief executive, Sally Loane, said in developing the commitment, the FSC had ensured a broad definition of a relevant frontline healthcare worker.

“This means not only doctors, nurses and hospital staff but also those who may potentially be exposed to COVID-19 such as police, pharmacists, paramedics and age care workers. While not everyone will be able to get new cover for other unrelated reasons, this commitment means potential exposure to COVID-19 alone won’t affect the cover these workers can get with participating life insurers,” she said.

“We hope this measure will help reduce any anxiety that our healthcare workforce may feel when working on the frontline. This is part of helping these Australians to have peace of mind for themselves and their families while continuing their vital service to our community.”

The announcement said that “for people who had life cover in place before 11 March, 2020, when the World Health Organisation declared the coronavirus to be a pandemic, our members have confirmed that there are no exclusions that would prevent the policy paying out for a death claim related to coronavirus, if you follow Government travel advice”.

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14/04/2020 5:10:37 PM

14 | Money Management April 23, 2020

News

CCUBE in voluntary administration

BY JASSMYN GOH

FINANCIAL planning software provider, CCUBE Integrated Wealth has appointed DVT Group as its voluntary administrators as a result of COVID-19 and lack of revenue to make up the start up’s expenses.

Speaking to Money Management, DVT Group’s administrator and senior adviser, Mark Robinson said the group was appointed by the

directors of CCUBE on 1 April.

He said clients were experiencing tough times due to the COVID-19 pandemic and the slow growth pattern of acquiring more financial planners to provide services to that growth had levelled off.

The second reason, he said of the appointment, was that it was a start-up organisation and its expenses were significantly greater than revenue and there were no longer any shareholders

or providers who were willing or able to provide any further funding to make up the revenue over expense going forward.

Robinson noted that the sale of the business was advertised in the Australian Financial Review and DVT were looking for expressions of interest by 9 April.

“We’ve received over 10 calls this morning, as a consequence of our ad, and some other enquiries that we received privately prior to the ad going in the paper from people close to the business,” he said.

Robinson said he was looking for a party that provided the best price, capabilities of facilities, and how quickly they could move.

“It’s not just price but also certainty of being able to come up with funds quickly and timing. It’s a combination of certainly, timing, and amount in respect to offers made for the business,” he said.

DVT would hold a meeting on 15 April with creditors by way of conference call to give an update on how the administration and sale was going and what the situation might look like going forward.

Charterhill’s Nowak sentenced to 10 years imprisonment CHARTERHILL director George Nowak has been sentenced to 10 years of imprisonment for misappropriating $1.2 million in self-managed superannuation fund (SMSF) monies to fund a lavish lifestyle.

The District Court of South Australia’s sentence included a non-parole period of six years and three months. Nowak was also automatically disqualified from managing a corporation for five years.

The sentence followed Nowak pleading guilty to 17 counts of aggravated deception and one count of dishonest dealings with documents in February.

The SMSFs were undertaking property purchases offered by companies Nowak was a director of, including EJ Property Developments.

Judge Sophie David noted in her sentencing that the “fraud had a significant impact on the victims’ lives and was perpetuated in order to fund a lavish lifestyle”.

The Australian Securities and Investments

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Commission (ASIC) commissioner Danielle Press said: “Mr Nowak deliberately misled his clients and used their funds for his own benefit.

“Mr Nowak dishonestly and deliberately breached his clients’ trust. The court’s sentence reflects the seriousness of this conduct and the impact it had on Mr Nowak’s clients.”

Multiple accounts no impediment to early access says ATO

BY MIKE TAYLOR

PEOPLE with multiple superannuation accounts will be able to choose how much they take from each account up to the maximum $10,000 a year under arrangements confirmed by the Australian Taxation Office (ATO).

The ATO has outlined to superannuation funds the new arrangements and how they will work, including the arrangement under which they will be able to take amounts from multiple accounts to reach their $10,000 limit.

“An individual can make one application in the 2019–20 financial year and one application in the 2020–21 year prior to 24 September 2020, when the measure ends,” the ATO explanation said.

“The application is accessed in one of two ways: • The member authenticates themselves through myGov and is able to complete the application form in ATO Online.

• For those who are unable to access online services, the individual will be able to call the ATO, confirm their identity and complete the application over the phone.

The application requires the person to certify that they are eligible and includes information about the consequences of making false applications. The individual then proceeds to: • Review a list of open accounts they have and the last account balance reported for that account (in most cases that is 30 June, 2019); • Input the amount they would like to release from each account (there are no limitations on what the individual can input only that in total the amount can’t exceed $10,000); • Input the bank account details (account name, BSB and number) they would like the money paid into; and • Authorise the ATO to provide it to the super fund and that the super fund release the money into that account.

“It will take approximately one to two business days for the fund to receive notifications about their members.

Funds can expect to start receiving notifications from Tuesday 21 April 2020,” the ATO explanation said.

15/04/2020 2:43:46 PM

April 23, 2020 Money Management | 15

Insurance

COVID-19: INSURANCE FAQ The major insurers have been faced with some key challenges as a result of COVID-19.

Col Fullagar looks at the issues and the implications resulting from the pandemic.

INSURERS OF ALL kinds have recently been distributing flyers purporting to respond to frequently asked questions (FAQs) explaining how their risk insurance products will respond to COVID-19.

If the assumed intent of these documents is to provide advisers and/or their clients with factual information enabling an informed assessment of the current position or an informed decision of a future action to be made, one would be forgiven for hoping that information provided would at least come close to satisfying these intents.

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Sadly, in some instances, the documented responses are about as useful as the proverbial.

– "There are no specific exclusions for COVID-19 in any of our policies" – To the extent that the virus appeared without warning fewer than three months ago, this is not surprising.

– "We'll continue to assess claims according to the terms of the relevant policy" – Crikey, good to have that clarified.

– "We encourage all our customers to check the Australian Government travel sites and recommendations regarding overseas travel" – That's

incredibly sweet of you but how is this relevant to the FAQ? – "All existing customers are fully covered for COVID-19" – a bollocking brave call at the best of times.

Not only are the documents arguably anorexic on detail but they assume the only relevant questions are those that are “frequently asked” which may be shown to be an erroneous assumption.

1. Range of in-force insurances As a starting point, it is crucial to remember that there is a vast array of in-force risk insurance policies and thus, information

provided needs to consider not only the five risk insurance types: term, trauma, total permanent disability (TPD), income protection and business expenses, but it should at least acknowledge that in-force policies may have been written many years ago, some even at a time when drafting was only in the male gender.

To add to the complexity, there are not only products being made available via the advice process but also non-advice products emanating from employersponsored group, public offer Continued on page 16

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Insurance

Continued from page 15 superannuation and direct insurers with the icing being traditional general insurers with their own range of life risk insurance products.

Clearly, not all scenarios can be covered in a detailed and specific way, and to attempt to do so might well be both misleading and counter-productive.

With the above in mind, this article will not attempt to provide all the answers but rather alert to generic issues such that advisers, or the insured in the absence of an adviser, might recognise a relevant issue exists or could arise, and seek by way of insurer questioning, greater detail for their own unique circumstance.

2. COVID-19 related claims There will no doubt be claims directly related to the presence of the COVID-19 virus with these claims potentially being covered under any of the policies mentioned in (1) above.

In the absence of any of the issues mentioned below, it would be expected that these claims would be ‘fully covered’ and paid expeditiously, professionally and respectfully.

These claims may well represent the majority but they will certainly not represent the entirety of claims made or situations that can arise.

3. Policy exclusions As above, it is correct that until recently no specific exclusion existed for COVID-19 but it is relevant to note policies contain other exclusions which may need to be carefully considered.

Falling into this category

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would be the presence of a ‘pandemic exclusion’. These are unlikely to be found in retail risk insurance, but do exist in some policies issued by general insurers. Relevance for a financial adviser arises when the matter of a client’s existing insurance portfolio is being assessed.

Also, within all risk insurance policies there is commonly an exclusion for ‘self-inflicted acts’ with some child trauma policies including a clause to the effect that a claim will be void if the claim event arises out of a deliberate and malicious action of the policy owner.

Underpinning the above is the insurance principle of mitigation of risk i.e. the requirement for the insured to take reasonable and necessary steps to reduce the risk of loss.

Bearing the above in mind, how would a policy respond if the insured: • Knowingly and/or recklessly socialised with a person known to be infected with the COVID-19; • Acted as a carer for an infected friend, relative or partner; or • Travelled overseas to a country that the Department of Foreign

Affairs and Trade (DFAT) rated as a no-go zone... which, when you think about it, may be the relevance of the reference in (i) above.

Another common exclusion is that covering ‘criminal acts’ and ‘insured events arising during incarceration’ both of which can now come out of conduct breaches associated with COVID-19.

It may not be possible, or even prudent, for an insurer to give a definitive answer to the above but, as previously inferred, their presence and potential relevance should at least be made known.

4. COVID-19 exclusion for new insurances If an insurer is looking to impose a COVID-19 exclusion on new insurances and an application in suspense completes after the non-exclusion cutoff date; there may be merit in an adviser checking the new business chronology to see if unnecessary delays occurred leading to the client’s position being prejudiced.

5. Following medical advice The aforementioned flyers oft include the question “Can I make

a claim for IP relating to COVID-19 for having to be away from work because of self-isolation, even though I haven’t been diagnosed with this illness?”

The thrust of the answer is generally “The policy is designed to cover loss arising out of the presence of an illness or injury, so don’t even think about claiming”.

This response may, however, be an over-simplification.

It is widely known that, after the aged, those most at risk from COVID-19 are people suffering from an underlying medical condition that of itself or by way of treatment, renders them immuno-deficient.

People in this medical category may be otherwise fully occupationally capable i.e. working full-time and without restriction or partially occupationally impaired i.e. working part-time and/or with restriction.

Those in the latter group that hold income protection insurance may even be on a partial disability claim.

Irrespective of the claim status of an insured person, the question that might be asked is “How would the policy respond if the treating

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April 23, 2020 Money Management | 17

Insurance

“ How would a policy respond if the insured knowingly and/or recklessly socialised with a person known to be infected with the COVID-19?”

- Col Fullagar

COL FULLAGAR

medical practitioner advised the insured to cease attending the workplace for a period of time and, for those not on claim, such period of time was longer than the policy waiting period?”

The above circumstance appears to be similar to that of the surgeon who is physically capable of working but is prevented from doing so by virtue of the presence of a contagious blood-borne disease.

Thus the reason why an unequivocal ‘no’ to the question may be an over-simplification.

6. Partial v total disability claims A further consideration coming out of (4) above is whether an insured in receipt of a partial disability benefit might become eligible for a total disability benefit in so far that the insured is ‘not working’ and the relevant income protection insurance policy does not include a so-called capability clause.

7. Unemployment Another FAQ is “can I make a claim for having to be away from work because of self-isolation?”

The response tends to be “no, income protection insurance provides cover arising out of an inability to work as distinct from the unavailability of work”.

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Whilst technically correct, there will be genuine cases of stress, anxiety and depression related to a business failure or the financial stress following same. The assessment difficulties associated with claims of this nature are acknowledged but these difficulties do not negate the right of the insured to lodge a claim and expect it will be assessed on its merits.

Similarly, albeit more severely, claims may arise under trauma, TPD and tragically, even term insurance contracts.

Additionally, many income protection insurance policies include an ancillary benefit providing for a limited premium waiver in the event of involuntary unemployment; this may well apply.

cover being automatically suspended during a period of leave without pay.

The first may be a facility the insured can utilise in order to retain the policy for future re-activation with the latter being a relevant consideration coming out of a need to possibly retain employment for future re-activation.

13. Other issues Whilst the intent of this article was in part to raise and consider risk insurance issues potentially relevant to COVID-19, there may well be matters that have not been discussed. If the reader has questions or suggestions that fall into this category, there is an invitation to contact the writer.

10. Policy lapses and reinstatements Some insurers have indicated that new policies will contain a specific COVID-19 exclusion. If this is the case, care would need to be taken to ensure existing insurances remain fully paid to date as the reinstatement of a lapsed policy could see the inclusion of any new standard exclusions.

8. Rights to terminate policy An income protection insurance policy may include a clause to the effect that cover will terminate if the insured ceases work for reasons other than total or partial disability.

The clause may or may not include a timeframe safety net e.g. cessation of work must be for longer than three months.

Either way, prudence dictates that the client be made aware if for no other reason than the insurer might be approached for individual consideration and dispensation.

11. Indexation and underwritten policy increases Whilst all bets may be off in regard to a COVID-19 exclusion on new policies, there remains the question of how will increases to existing policies be treated?

Underwritten increases would likely see the inclusion of any new standard exclusion but the same may not be the case for automatic indexation increases?

Adviser value It’s at time like this and in regard to topics such as this, that the adviser value-add might be detailed, in this case by invoking, plagiarising and appropriately amending the conclusion of a Money Management article (“When crime doesn’t pay” 13 January 2006): "Bearing the above in mind, the best an adviser may be able to do is: - Make known and document the existence of issues relevant to the client; - Within the advice document, inform the client of the practical difficulties surrounding the application of these issue at the time of a claim; but - Reassure the client that, at the time of a claim, yet another value-add of the adviser will be to scrutinise the conduct of the insurer and ensure it is not only in line with the policy terms and conditions but is also in line with the insurers duty to act in good faith.

Perhaps in this way the promised peace of mind will in fact be delivered."

Please stay safe out there!

9. Suspension of cover Again, in regard to income protection insurance, the policy may include a provision to the effect that premiums can be temporarily suspended with cover similarly being suspended and/or

12. Policy replacement An adviser considering whether to replace or retain existing insurances may, in some situations, have a new matter to consider, i.e. what value rating should be applied to an existing policy that does not contain a COVID-19 exclusion (vs) a new policy that may include an exclusion for same.

Col Fullagar is principal of Integrity Resolutions.

15/04/2020 10:33:14 AM

18 | Money Management April 23, 2020

InFocus

THIS TIME IT’S DIFFERENT Significant market corrections are, thankfully, rare but Ausbil Investment Management executive chair, chief investment officer and head of equities, Paul Xiradis, says this correction is distinctly different.

SIGNIFICANT MARKET CORRECTIONS are typically brought on by fundamental factors such as a slowing economic cycle or interest rates rising to a point where they start to choke off corporate earnings. Sometimes there are systemic issues which create hidden risks and, once the risks become more apparent, valuations suffer. We saw this with the Long Term Capital Management Hedge Fund crisis in 1998, and again with the global financial crisis (GFC) in 2008.

This event is different, in that it wasn’t instigated by fundamentals.

The resultant shutdown has upset consumer behaviour and spending patterns. It has also disrupted the working environment and work practices. We haven’t seen this before at this universal scale.

Equity market valuations have adjusted rapidly to the new environment and they’re down around 30%.

The risk now is the extent to which this feeds through into the broader economy, and into future company earnings.

Lockdowns have been implemented across a whole range of jurisdictions and industrial production has moved

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back to levels not seen since the GFC in 2008 and 2009.

The virus originated in China and they will experience a poor first quarter. More recently, they have had some success in controlling the spread of the disease, with reports that major industrial enterprises have resumed work.

The G20 will experience a very weak second quarter. Certain service sectors such as travel, hospitality and retail have either ground to a halt or have been severely disrupted, so this must have a cost. Many workers have already been laid off or stood down.

For example, here in Australia, Qantas stood down 20,000 staff. It’s important to note that the majority of people who have been laid off are expected to return to the workforce, at this stage, when the virus has been suppressed.

Will the globe experience a technical recession? The answer may vary across jurisdictions depending on the level of stimulus.

Countries like the USA and Australia have so far responded with policy measures that amount to some 22% and 17% of GDP, respectively. These levels are unprecedented. But activity will gap down sharply during the next months, unemployment will rise and growth rates will stall. It

will feel like a recession.

Some $320 billion in monetary and fiscal measures has been announced, designed to support individuals, households and businesses, and ensure the flow of credit. This is huge and without recent precedent.

On the monetary side, the Reserve Bank of Australia is deploying ‘yield curve control’, and we’d expect the official interest rate to remain at 0.25%, or less, for the next three years. So, interest rates and inflationary expectations will remain low. This should support activity and extend the equity cycle as it recovers.

It’s also worth noting that China’s stimulus will boost their infrastructure and construction activity. Steel inventories have been depleted and demand for bulk commodities has been resilient. You can see this in bulk prices with iron ore at around $82 per tonne and metallurgical coal at around $145 per tonne. This is a supportive for our terms of trade and national income. The AUD/USD is set to benefit from both this effect and the global stimulus.

Overall, we expect a very, very tough period during the next few months. Our base case is that we expect recovery later in 2020 and into 2021.

While earnings are always important, immediate balance sheet strength has become a priority across the market, so we have been doing a lot of stress testing.

Any signs of balance sheet weakness, or an industry structure that is challenged, may provide a reason to decrease exposure or sell. We have seen this in parts of the building and mining services sectors.

We have a quality bias including a solid position in biotechnology and healthcare. At the same time, we are ensuring some defensive

PAUL XIRADIS

characteristics via supermarkets, telecommunications and selected real estate investment trusts.

We are a little overweight the banks because they went into this crisis with real financial strength and they are working with the government to support business and consumer activity. Unlike in 2008, they are part of the solution, not part of the problem.

We own bulk commodities too, given that there is improvement in China and more stimulus on its way.

Contrary to the negative sentiment in the market, some companies offer both resilience and clear growth prospects in and beyond this crisis. We are seeing such opportunities in the online and technology space, and we are exploring these in depth.

So, as you’d expect, it’s a balanced, diversified approach that acknowledges the challenges ahead of us over the coming months, but also maintains exposure to the best companies so that we can participate in the full recovery cycle when it starts.

We think it’s important not to become too defensive right now.

Australian governments and the health authorities are, on balance, managing the crisis effectively and there is some slowing in the rate of the spread of the disease.

There is potential for the shutdown to ease more quickly here than in other parts of the world.

15/04/2020 3:40:07 PM

April 23, 2020 Money Management | 19

Multi-asset

TAKING A FLEXIBLE APPROACH TO TURBULENT MARKETS With equities falling and rates at record lows, Laura Dew speaks to multi-asset managers on how they are utilising their flexible mandates to withstand volatile markets.

SINCE THE ANNOUNCEMENT of the COVID-19 pandemic, stockmarkets have been at their most volatile since the global financial crisis (GFC) and interest rates at record lows, making it difficult for investors to know where to allocate their assets.

As at 9 April, the ASX 200 had fallen 18.3% as global markets plummeted as a result of COVID19 while the Reserve Bank of Australia (RBA) had cut interest rates at 0.25%, a record low for Australia. The move was replicated in other countries with the Federal Reserve in the US moving to a target range of 0% to

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0.25% and the Bank of England cutting rates to 0.1%.

Speaking after the cut, RBA governor Philip Lowe said the country could expect this rate to be in place for around three years. In order for rates to be raised, Lowe said, he would want to see the virus contained, the market to be in a recovery phase and progress being made towards full unemployment and the inflation target.

The struggle faced by investors is the same for fund managers – equity managers are struggling with falling stockmarkets while bond managers are on the hunt

for yield in a low-rate world.

However, in the multi-asset space, managers have the benefit of a flexible mandate and the ability to go ‘anywhere’ in the hunt for returns.

MULTI-ASSET FUNDS There are two main types of multi-asset funds; a balanced fund across various levels of the risk spectrum such as conservative or growth and an objective-based fund which will have more flexibility in assets in order to achieve a specific return.

Balanced funds usually hold a specific percentage of assets

depending on their mandate which cannot be altered past a certain range such as 40% to 70% in equities and 20% to 40% in fixed income depending on their risk profile.

On the other hand, an objectivebased one will have a much wider remit in terms of assets it holds and percentage of assets and can use alternative assets such as hedges, gold and property in order to achieve its target return.

According to FE Analytics, within the Australian Core Strategies universe, there are over nearly 600 funds in the six Continued on page 20

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20 | Money Management April 23, 2020

Multi-asset

Continued from page 19 different mixed asset sectors with the most popular sectors being 118 growth funds and 107 balanced funds.

Over three years to 31 March, 2020, the average mixed asset fund had returned 1.9% with the best performance coming from the mixed asset – moderate sector where funds had seen average annualised returns of 2.2%.

Across the six different sectors, the best funds of each were Australian Unity Wingate Spectrum with annualised threeyear returns to 31 March, 2020, of 7.2%, Zurich Money Maker Series Managed at 6.2%, Macquarie Multi-Asset Opportunities and IOOF MultiMix Growth at 5.9%, Macquarie Life Capital Stable at 5.5% and Perpetual Growth Opportunities at 3.9%.

Simon Doyle, head of multiasset at Schroders, said there had been an increase in objectivebased funds in the last 10 years.

“The GFC re-focused people’s minds on liquidity as they realised equities could go down as well as up. It became about delivering

against objectives, not just the peer group,” Doyle said.

“There can be a lot of wealth destruction done during this volatile period and having an objective-based portfolio reduces that variable.”

State Street’s senior investment strategist Raf Choudhury said: “While investors have experienced strong market returns since the GFC, they learnt hard lessons. Arguably the most important lesson was that correlations are not stable.

“This is significant because investors often rely on the diversification between asset classes to manage risk but

Chart 1: Performance of six mixed asset sectors over three years to 31 March 2020

diversification only works when correlations are consistently low or negative.

“This leads us to the asset class loosely described as ‘alternatives’. We don’t believe traditional assets alone will deliver the return or risk management characteristics that investors need so investors globally are searching for new assets.”

Al Clark, head of investment at MLC, said: “We run diversified accumulation funds which are growth/defensive split. Then we have objective-based funds and they are run in a distinctly different way.

When we think about accumulation, they are more return-focused

whereas the objective-based ones tend to be more risk-focused and minimise risk”.

Over at Insight Investment, Bruce Murphy, director for Australia and New Zealand, described the firm’s multi-asset approach as the ‘three Ds’.

“For us, it’s about the three D’s of diversification, dynamic asset allocation and downside risk management,” he said.

HOW THEY HAVE POSITIONED FOR COVID-19?

The first move when COVID-19 looked like it could become widespread, most managers said, was to reduce equity exposure, in

Chart 2: Performance of best-performing multi-asset funds v ASX 200 over three years to 31 March 2020

Source: FE Analytics

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April 23, 2020 Money Management | 21

Multi-asset

some cases to as low as 5%.

Kej Somaia, co-head of multiasset solutions, at First Sentier Investors, said he had been making incremental changes to the asset allocation of his First Sentier Real Return fund since January.

“We reduced our equity exposure to 47% in January because we were concerned about the spread of COVID-19 with people travelling around Asia around Lunar New Year. Then the situation changed dramatically and we brought it down further to 30%,” Somaia said.

Murphy said the Insight Diversified Inflation Plus fund had gone into the crisis with almost half of the portfolio invested in equities but had cut that dramatically. The fund had lost 12% since the start of 2020 to 8 April.

“We went into the period with reasonably high equity levels and by the end of February, we had cut that to 11%. Now we are at 5% which is the lowest we have been in a long time,” he said.

Next up was the allocation to fixed income and adjusting the duration, which the managers said was a key differentiator as these type of funds were usually not aligned to a particular index.

“The remainder is in fixed income such as government bonds but it is about the duration rather than the allocation weight; we were at 4.5 years and now we are at 3.6 year as yields have come down. This duration exposure is the key differentiator for us because it doesn’t have to be in line with the index,” Somaia said.

Doyle said: “We went into the crisis defensively positioned and are taking advantage of the re-pricing by buying Tier 1 credit”.

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There were five varieties of the Schroder Real Return funds with different targets, the bestperforming since the start of 2020 was the Real Return Single fund which had lost just 1.6%.

The final step was to strategically allocate to defensive positions, cash or protection.

Murphy said: “We have been dialling down our equity exposure and upping fixed income instead.

We have also increased cash to take advantage of opportunities when we think the time is right.

“We have 30% cash, 40% in fixed income (mostly government bonds) then 7% to 8% in real assets. We haven’t put any large protection positions in place as most of our protection came from ratcheting down the equity exposure.”

Clark said the firm’s objectivebased Inflation Plus range was utilising strategies such as foreign currency and tail risk hedges.

“In the Inflation Plus range, we went into the crisis defensively positioned, we were underweight risk assets, had lots of cash and had defensive strategies in place such as foreign currency (USD, yen, euro and Swiss franc), had tail risk strategies and a gold position and these have done all well,” he said.

He said these moves, in particular, highlighted the benefits of an objective-based fund over a traditional balanced multi-asset fund.

“Our Inflation Plus funds are more aggressive, we were holding 10% to 20% cash which we couldn’t do in the accumulation funds, we wouldn’t be able to have the same level of foreign currency either,” Clark said.

There were three Inflation Plus funds, targeting inflation plus 3.5%, 4% and 5%, the best-performing

“When your house is on fire, it is too late to buy insurance.”

– Kej Somaia, First Sentier Investors was the Inflation Plus Conservative fund which had lost 2.5%.

However, due to the speed of the market moves and the volatility, managers still felt they would have done more if the circumstances had been different.

Somaia said the changes First Sentier had made were a “reasonably material move” in difficult circumstances but that the fund could have perhaps held more protection. By the time the difficulty of the situation became clear in late March though, he said, the implied volatility of put options was very high.

“The price of insurance is dynamic so when your house is on fire, it’s too late to buy insurance,” Somaia said.

“We didn’t hold much fixed income,” said Clark. “If we had held more duration then we would have been happier but it was too expensive so we went for the currency, tail risk hedge and gold positions which have provided the cushion we needed.

“We have already crystallised gains from the tail risk hedge and taken profit on our gold positions and put a call option in instead.

We are now looking for other defensive plays we can use. I don’t believe it is the time to be aggressive, there is too broad of a range of outcomes to be clear.”

ARE MULTI-ASSETS FUNDS A VIABLE OPTION? Somaia said multi-asset funds could be an option for investors who wanted an alternative place to park

their cash but highlighted investors should not expect it to achieve the same returns as equities.

“If you are after capital preservation then this type of fund can do that in volatile times. But the caveat is that if you are looking for equity-like returns then you won’t get that from multi-asset when the market is rallying hard,” Somaia said.

Doyle said: “Previously we have had very strong economies and supportive central banks and now you’ve had a shock and people are seeing how intertwined they were.

They can’t sell illiquid assets which puts even more pressure on so multi-asset can help in this case as we are actively adjusting portfolios as opportunities come up and are operating with liquid assets to retain liquidity”.

Clark said the usefulness of these type of strategies as part of a retirement solution was underappreciated by investors.

“If you are return-focused with time on your side then accumulation makes more sense but if you are risk-focused, either because you have a meaningful pool of money or less time and are worried about loss then it’s better to be in an objective-based one,” Clark said.

“As part of a retirement solution multi-asset plays an important role, you have to align it with your time horizon. For people who are conscious about drawdown and minimising losses, there is a real opportunity for this type of risk-conscious fund to play a role that is not appreciated.”

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22 | Money Management April 23, 2020

Year end tax strategies

TAX TIME IN A PANDEMIC

With many people focused on how far their investments have plummeted, it is an opportunity for advisers to contact with their clients on tax to make sure they are making sensible decisions and not overreacting, Jassmyn Goh writes.

WHILE THERE IS a lack of new financial related legislation this year, the COVID-19 pandemic means financial advisers will need to take a different approach with their clients’ regular tax strategies.

With two months away from the new financial year, advisers and clients need to make sure they are giving themselves enough time to take appropriate action.

BT head of financial literacy and advocacy, Bryan Ashenden, said

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this year people were more focused on what had happened to their investments, what their income looked like, and whether they had a job or not, as market volatility had caused investments to plummet.

However, Ashenden said while tax had disappeared for a lot of people and was back of mind, people could not forget everything they normally looked at just because the environment was different. Advisers, he said, had the opportunity to make contact

with clients and make sure they are doing everything sensible and not overreacting.

The virus has turned the world on its head and working from home has become the new norm for many industries. This is the only change since last financial year and advisers will need to include running costs deductions when speaking to clients who are now working from home.

While the Australian Taxation Office (ATO) simplified the

deduction methodology for running costs for those working from home due to the pandemic, Ashenden warned that it was easy to make mistakes.

WORKING FROM HOME EXPENSES Ashenden warned that running costs could be simply be calculated by the fact that people worked 40 hours, for example, over 10 weeks and that equalled 400 hours. However, this did not

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April 23, 2020 Money Management | 23

Year end tax strategies

include leave or long weekends.

Authorised representative of the Doctors Financial Services, Julie Berry, told Money Management that employees needed to keep a log for workrelated expenses to make sure claims would be valid.

“Perhaps there are some workrelated expenses that can be claimed, particularly at this time when people are working from home. This creates some opportunity for claiming home office expenses for example, but these need to be valid claims and be able to be substantiated,” Berry said.

“Make sure your clients keep records where possible so they can demonstrate that these claims are factual.

“There are of course the usual work-related expense claims and again it is important to be able to substantiate these. Where possible, keeping records such as receipts and logbooks is the best way to record these expenses during the year.”

She noted there might be deductions that clients could claim for financial advice and these too would require evidence.

SUPERANNUATION The other deductions, Berry said, needed be examined were additional concessional superannuation contributions.

“These contributions are tax deductible, but can only be made up to a maximum of $25,000 in each financial year and this includes any employer contributions they receive.

Unused concessional caps from previous years can increase this limit, where the total superannuation balance is less

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than $500,000 on 30 June, 2019,” she said.

“You can also consider a spouse contribution which would entitle your client to an 18% tax offset on superannuation contributions up to $3,000 made on behalf of a non-working or low income earning partner. Your partner must earn less than $40,000 per annum to be eligible.”

Berry noted there was also an opportunity to make after-tax contributions (non-concessional) to super as well to give clients access to the co-contribution of up to $500.

“You can maximise these non-concessional contributions using the bring forward rules where available. This enables clients to contribute more to superannuation where their funds can work towards their retirement in a tax effective environment,” she said.

HLB Mann Judd partner, tax consulting, Peter Bembrick said despite current volatility, super was a long-term investment and was still an important tax-effective investment vehicle.

This was especially important if clients had the means to build their super in the current environment.

“People should be trying to maximise their super depending on their age and their financial situation such as what investments they have and if they are paying off mortgages,” he said.

“If those in their late 40s into 50s have their mortgage under control, getting their super built up is important thing to do. The current situation doesn’t really change that.

“The $25,000 concessional contribution cap isn’t very high so if

people have reasonable income they should try to get the full deductible contribution of $25,000.”

Ashenden said advisers needed to be particularly focused on clients about to turn 65 or had turned 65, given the work test proposals were set to take effect on 1 July. However, with Parliament not sitting until August due to the COVID-19 pandemic, it was unlikely the proposals would be passed through by then.

Last year, the Government announced that: • People aged 65 and 66 will be able to make voluntary contributions without meeting the work test; • People aged 65 and 66 will be able to make up to three years of non-concessional contributions under the bringforward rule; and • People aged below 75 will be able to receive contributions from their spouses.

“For advisers that had their clients to wait and see what happens with the legislation would now have to assume the legislation won’t occur and therefore find out what can they do instead to maximise the opportunities,” he said.

However, for those that were making over contributions in anticipation of the proposals the ATO would issue a contribution notice and the contribution would need to be taken out.

“If there are potential penalties enclosed on this – normally on a tax on deemed earnings within the fund – clients might be able to approach ATO to get those penalties reduced to the extent of waiving it because of the

Continued on page 24

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24 | Money Management April 23, 2020

Year end tax strategies

Continued from page 23 environment,” he said.

“They thought the change was going to happen and were preparing for the change. Senator Jane Hume even mentioned at the SMSF conference that they were keen to put through the legislation and it looked absolutely like it was going to happen and everything else had changed due to COVID-19 but, of course, they would be relying on ATO discretion.”

On clients looking to access their super early due to financial hardship stemming from the pandemic, Ashenden said people would need to apply to the ATO this financial year and would not be able to apply in July for the previous financial year.

“If they need it for next financial year it needs to be done first three months of next financial year – July, August or September.

But it is important to educate clients and ask ‘do we need to access that $10,000?’ because it is taking money out of the super tax environment,” he said.

RETIREMENT For those in retirement, Berry said advisers could look at the timing of selling assets.

“Have there been asset sales that have caused a capital gain?

What, if any, tax might be payable on this? Should you look at capitalising a loss to help offset this gain,” she said.

“You may have seen clients sell out of assets at a loss as they switched to cash as the

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sharemarket fell, can these losses be used to reduce their taxable income? Again, specialist tax advice from a registered tax agent can help your clients minimise their liability.”

“It is also important to make sure they don’t pay too much on gains and while obvious, advisers need to be conscious of discounts on capital gains and timing with clients are looking to sell assets.”

CAPITAL GAINS

PREPAYING INTEREST

On tax advice, Bembrick noted advisers needed to be aware of capital gains or losses, depending on how long clients had been sitting on investments for and to help give them a picture of their overall financial position.

“Advisers might not have all that information depending on how long they’ve been dealing with the client and this links back to tax advisers knowing the situation,” Bembrick said.

“If they have carry forward capital losses then that information is in the individual’s tax return. If the financial adviser doesn’t have that then they need to talk to their client to find out if there are any capital gains they can move around the portfolio, or capital losses.

Both Bembrick and Ashenden said advisers also needed to look at prepaying interest on investment loans if clients could afford to.

“Financial institutions and lenders are giving people that ‘repayment holiday’ where you don’t need to pay anything for a particular amount of time. Some say prepay interest is going against what a lot of things have been talked about but obviously interest rates now are the lowest we’ve seen or will ever see them so prepaying might be worth it,” Ashenden said.

“But you need to find the right balance and if could be that tax-wise prepaying interest makes sense but cashflow-wise it doesn’t. Advisers will need to work out the right balance between the two.”

16/04/2020 10:59:40 AM

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14/04/2020 12:09:48 PM

26 | Money Management April 23, 2020

Equities

INVESTING IN AUSTRALIAN EQUITIES THROUGH THE COVID-19 STOCKMARKET CORRECTION These are challenging times for equity investors as the spread of COVID-19 and its impact on the global economy drives uncertainty, writes Anton Tagliaferro.

ALL AROUND THE world, as the uncertainty about the global economy weighs on investors’ minds, we’ve seen major stockmarket downturns as investors try to factor the length and depth of the downturn into profit forecasts for every sector on the stockmarket.

Most companies around the world are being affected, directly or indirectly, and it is the uncertainty over the outlook that is driving the daily stockmarket gyrations we are experiencing.

Virtually every company in the world has been impacted by COVID-19 as Governments have taken drastic actions to fight the spread of the virus including: • Travel bans which have directly hit sectors such as airlines, hotels, airports, toll roads and travel agencies. The shutdown of these sectors has contributed to the current slump in the price of oil, affecting all energy producers and service providers; • Global lockdowns, including Australia, are impacting many businesses in the retail and hospitality sectors; and • Widespread factory closures have caused supply disruptions for many companies, particularly those dependent on imported goods.

While all these measures taken will ultimately bring the spread of the virus under control, they are also having a hugely negative impact on every economy around the world.

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The crisis has created uncertainty in three major areas: 1) Health – COVID-19 is first and foremost a major global health issue being addressed in a country by country manner. We are hopeful that within six months, given the extreme measures in place, the virus will be under control and the worst of the infection will be behind us.

2) Financial – The second issue is the chaos in financial markets around the world. Stockmarkets are down sharply and parts of the corporate bond markets are in turmoil. Thanks to intervention by central banks, the inter-bank market is still functioning well.

3) Economic – The third impact, and the most difficult to assess, is the long-term economic impact of the measures put in place to control the virus. While clearly this will have a severe short-term impact on gross domestic product (GDP) growth, unemployment and corporate profits, we are yet to fully appreciate the effect these measures will have on the longterm economic outlook.

The longer-term implications will depend on how long the current restrictions stay in place and whether Government stimulus can help soften the downturn and help engineer an upturn.

The economic standstill, at a time when debt and leverage were at a record level across many households and corporates, is putting substantial strain on

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April 23, 2020 Money Management | 27

Equities Strap

these sectors. Many companies will have to drastically restructure their financial positions which will result in many recapitalisations through the raising of new equity and many dividend cuts. A decade of reliance on record-low funding rates fuelled by most central banks’ near zero interest rate policies will take time to unwind.

Some of the more optimistic commentators believe that we will see a V-shaped rebound in economic activity, while many others believe it will be more of a U-shaped type economic outlook where it will take a sustained period of time before activity levels can return to anywhere near where they were before the outbreak of the pandemic.

What we’ve always tried to do at IML is buy companies that have a strong competitive advantage, with recurring, predictable earnings (although we never predicted the current circumstances where many sectors are shut) and which we believe are run by capable management teams.

We had been predicting some sort of correction for some time as we thought markets needed a reality check and, although this has now happened, it has come from an event that not many investors could have forecast.

OUR CURRENT FOCUS: Look beyond the daily headlines The news regarding the spread of the virus in places like the US is likely to get worse before it gets better. While the spread of the virus appears to be slowing in Australia, it is unclear when the current restrictions will be eased.

The discovery of a vaccine would provide greater certainty on a

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timeline for these restrictions to be lifted, although, the availability of one in the short term seems unlikely.

Company by company review We are examining how every company in our portfolios, and those on our target lists, will be affected under different scenarios. Most share prices have already corrected significantly.

What we are trying to assess is if the current share prices have factored in a worst-case scenario.

By doing this we are looking to decide which companies we want to keep in our portfolios, which positions we exit, and which ones we can look to buy as the opportunities arise.

What are we looking for?

We’re looking for wellestablished, proven businesses.

In particular, companies that own long-duration assets and companies that have a strong balance sheet to endure the coming economic downturn.

Look beyond FY 2020 Full-year results for the majority of companies are going to be severely impacted by the current turmoil. We are assessing how each company will fare in FY 2021 (and beyond) in what is likely to be a very tough economy. We are focused on the long-term value of each business and how this compares to the current share price, many of which have fallen by large percentages in the last month.

Our approach as always, is to remain disciplined and true to our quality and value investment philosophy – investing in wellestablished companies and staying away from speculative ones. Our portfolios are underpinned by solid companies

which are obviously all being tested at the moment by these unprecedented events, but we believe the vast majority of the companies we hold will come through this period in one piece.

We have made some necessary adjustments by selling out of some of the more highlygeared companies such as Transurban and Sydney Airport that we believe are not very wellpositioned for a longer than expected downturn.

Whilst the current volatility and uncertainty make it a very challenging environment, we are positioning all of our portfolios for what we see as a more normalised – although probably more subdued – environment beyond FY 2020.

We are being extremely selective in terms of investing any of the cash held in the portfolios but continue to look for opportunities to deploy when these opportunities become available – such as corporate recapitalisations whose longterm future we believe is sound.

ARE SHARES STILL A GOOD INVESTMENT? At this stage of the correction, there is a fair temptation for many investors to sell out, and forget about the stockmarket forever.

However, the world will keep turning and things will normalise at some stage. Quality companies will live to fight another day and strong companies may emerge even stronger – and this is what shareholders will benefit from in the long-term.

For those invested in the stockmarket, there are some guidelines to consider when investing during periods such as these.

“Markets needed a reality check and, although this has now happened, it has come from an event that not many investors could have forecast.”

– Anton Tagliaferro Understand the companies you own in your portfolio Why do you own them? Do you understand the long-term direction the company is heading in? Are you still happy to own them for the next three to five years?

Try to stay calm This is very difficult when markets are uncertain and volatile and emotions are running high, especially for investors who are experiencing a significant correction for the first time.

Look for opportunities to invest in good quality companies We believe the market volatility will remain for a while given the many uncertainties, but when the world starts to normalise, well-established companies with solid business models and reliable earnings generally recover better than the overall market.

Anton Tagliaferro is investment director at Investors Mutual Limited.

14/04/2020 2:40:18 PM

28 | Money Management April 23, 2020

ETFs

ETFs PASS THE COVID-19 TEST The last few weeks have highlighted the importance of liquidity to markets, writes Arian Neiron, so how have ETFs fared and how can they be traded in volatile times like this?

JONI MITCHELL SANG, “you don’t know what you’ve got ‘til it’s gone”. You could sing the same line about liquidity. It is something investors do not appreciate it until it is gone. Over the past few weeks, in a few small pockets, liquidity has been under pressure and this has highlighted the importance of good exchange traded fund (ETF) trading practices.

But overall, ETFs have worked well and as intended, as investment products offering investors the ability to quickly and effectively adjust and build their portfolios.

Indeed, ETFs “have passed their

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COVID-19 stress test,” according to The Wall Street Journal.

Liquidity is very important, and it impacts investments in two ways: 1) How quickly you can access your money; and 2) The value of your investment.

A very liquid investment can be readily converted to cash and can also be bought/sold at a fair value without a significant premium/ discount to its fair value.

But what happens in a period, like now, when the market is falling?

Investors who need to convert their investment to cash quickly, to meet short-term obligations, incur what is

called a ‘liquidity premium’. The premium is the cost you pay to redeem in a falling market.

In periods of market volatility, trade execution through a limit order can provide you with a way to limit your ‘liquidity premium’.

TRADING ETFS Remember, there are two ways to input your buy or sell ETF order: Limit Order – this allows you to set your ‘bid’ or ‘ask’ price. This means you will not pay (or receive) any more or less than your limit price. This type of order protects your price but does not

guarantee your trade.

Market Order – this means you will buy or sell at potentially any available market price. This type of order guarantees your trade, but leaves you exposed on price.

Understanding how to trade is important now, more than ever, because markets are moving so quickly. One of the many features of ETFs is their liquidity. Two of the ways ETFs provide investors liquidity are: • via trading on the Australian Securities Exchange (ASX); and • via screening of the underlying holdings.

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ETFs

THE SECONDARY MARKET: THE ASX The ASX provides a secondary market that facilitates share trading. For large-cap shares which trade all the time, such as CBA and BHP, liquidity is high.

There are always so many buyers in the market that such shares can be sold at a fair price quickly without impacting the value.

Some smaller listed companies are less liquid. There are relatively few buyers so market forces allow them to extract an ‘illiquidity discount’ from anyone who needs to sell. Illiquidity pushes the price down.

Just like shares in companies, units in ETFs are listed and traded on an exchange. In Australia, ETFs operate under a set of rules prescribed by the ASX known as ‘the AQUA rules’. A key feature of the AQUA rules is the requirement to have a market maker to facilitate maintaining liquidity on the ASX throughout the trading day.

Market makers do exactly as their name suggests. They make markets by matching buy and sell orders for investors that want to trade ETFs. This means, as an investor, you do not depend on there being other investors wanting to sell when you want to buy or other investors wanting to buy when you want to sell. The market maker will do it. Market makers stand in the market during ASX trading hours offering to buy or sell at prices either side of what they consider to be the current value of the ETF shares.

The market maker holds an inventory of ETF units so that they can always match the demand from buyers and they sit ready to acquire more units from sellers.

Market makers charge a ‘spread’, also called the ‘buy/sell spread’ to reward them for the service they are providing and to reflect the costs and risks associated

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with buying and selling the underlying assets.

In the current market environment, investors should pay particular attention to the ‘buy/ sell spread’ on any investment, because these have been changing throughout the trading day due to changes in the liquidity of the underlying holdings.

THE LIQUIDITY OF THE UNDERLYING HOLDINGS Another key feature of the AQUA rules is the requirement for issuers to satisfy to the ASX the underlying holdings in an ETF have robust pricing mechanisms which enable prices to be immediately ascertained. This is intended to ensure that market makers are able to keep the ETF market liquid as long as the underlying securities held by the ETF are themselves liquid.

This is a feature of the index design used by ETFs. For example, equity ETFs should track indices that filter out illiquid micro-caps.

In typical market conditions market makers are able to price the underlying securities easily so they only charge a small spread representing their estimated cost of selling the underlying holdings. In times of market turmoil, it can be hard for market makers to constantly price the underlying securities therefore they widen their spreads. This has been prevalent in fixed income and credit ETFs.

LIQUIDITY DIFFERENCES BETWEEN EQUITIES AND FIXED INCOME SECURITIES Equities Liquidity for equities has been largely unaffected during the recent market turmoil. For largecap shares which trade all the time, liquidity is high. There are always so many buyers in the

market that such shares can be bought and sold quickly.

There have however been isolated incidents in international equities over the past few weeks in which the market maker has not been able to accurately assess the value of the ETF’s underlying holdings. For example, in the US, the S&P 500 stock-index futures’ circuit breaker was triggered when it dropped by more than 5%.

For a short time, the market maker may have widened the spread on ETFs with US equity exposure because they couldn’t properly price the underlying holdings of the ETF. This highlights the importance of limit orders over market orders. Those placing market orders may have accidently incurred the higher spread. By using limit orders, you can limit the chance of incurring a higher spread, as these pauses in equity trading are generally short lived, as too are the wide spreads.

Fixed income and credit Fixed income and credit investments are not traded on an exchange, rather, they are traded over-the-counter (OTC) between buyers and sellers. Banks and brokers, who facilitate bond trading between institutions, generally carry a book of bonds on their balance sheet to assist with trading and making a liquid market. This works well in normal market conditions.

There is however a limit to how much they can hold on their balance sheets. In the current market environment where there are more sellers than buyers, selling bonds at fair prices become difficult. This causes a ‘liquidity crunch’. It is not uncommon for ETFs with these types of exposures to experience wider spreads. As liquidity in the underlying bond market dries up,

ARIAN NEIRON

market makers will widen spreads to reflect the prices they believe they can trade the bonds for. This is then reflected as a discount to net asset value (NAV).

Again, trade execution through a limit order provides you with a way to avoid higher spreads if they widen beyond your price.

Remember too, these are extreme times, and, all things being equal, we expect spreads to normalise over time.

Having said that, overall, bond ETF prices during the COVID-19 crisis have effectively become benchmark prices of the underlying market, says the WSJ, quoting research from Société Générale. Even as spreads widened on bond ETFs as a reaction to market sell-offs, they have “essentially been able to rely on their own liquidity, rather than that of the underlying bonds,” the WSJ says. Indeed, “some ETF prices may now be more ‘real’ than the markets they track.” That should be a huge reassurance for bond ETF investors.

Practically speaking, the market has been volatile. So, it’s important to remember, while a limit order limits the price, it does not guarantee the trade.

Conversely, while a market order ensures the trade, it does not limit the price.

Arian Neiron is managing director and head of Asia Pacific at VanEck.

14/04/2020 2:55:16 PM

30 | Money Management April 23, 2020

Equities

GROWING AGAINST THE GRAIN IN COVID-19 Investors have been considering their equity allocations on the basis of ‘growth at any price’, writes Mahesh Fonseka, but COVID-19 might see the end of this strategy.

TO SAY THAT 2020 has been like nothing we’ve ever seen before, is an understatement.

Back in February, our chief investment officer (CIO), Ned Bell, wrote the developing COVID-19 pandemic in China was becoming more than a cause for concern, and that the ramifications of this virus would likely be giving investors the requirement to reconsider certain asset allocation within their portfolios.

Fast forward to April, and we’ve seen markets fall globally under the weight of COVID-19.

The nature of this current crisis as a health crisis first and foremost makes it different to previous financial crises such as the global financial crisis (GFC) and the dot-com bubble, as it is affecting more and more industries – the sectors hardest hit include energy, financials and industrials.

Over the March quarter, the MSCI World index has fallen dramatically by 9.33%.

In respect of the drawdown in global equities that started on 19 February, 2020, we would make a couple of observations: 1) This has been a ‘value’ led drawdown – the crisis has exposed the financial vulnerabilities of companies that exhibit varying combinations of cyclical earnings, poor pricing power, capital intensity and balance sheet weakness; 2) At a sector level, energy,

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financials and industrials led markets lower as earnings expectations collapsed. The more defensive sectors such as consumer staples and healthcare held up much better; 3) Perhaps contrary to many investors’ earlier thinking, large-cap growth stocks actually held up quite well in the drawdown as many of the already crowded recent winners were seen as safe havens; and 4) Unsurprisingly, global small & mid-cap (SMID) stocks bore the brunt of the sell down and are underperforming the broad market in the drawdown.

From an economic perspective, the global economy is clearly taking a hit in the short to medium term. What’s less clear is how long the dip will go on and to what extent will the global economy rebound? Governments and central banks are clearly concerned and acting accordingly which is somewhat encouraging.

When we look to the remainder of 2020 above and beyond COVID-19 we believe we’ll see the following: • Global earnings in 2020 will fall materially vs 2019 – anticipate 30% to 50% year-on-year, and current sell side earnings estimates have a long way to come down; • Balance sheet strength has become a key focus for investors and many companies have been ‘found out’ as a result of COVID-19. There has been a mad scramble by

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companies to shore up their balance sheets by drawing down existing lines of credit and capital raisings; • There will be a number of companies and sectors that simply won’t fully recover in the foreseeable future. The tourism and energy industries have clearly borne the brunt of COVID19 and will likely see a number of bankruptcies, bailouts and restructurings that will have ramifications for years to come; • The US earnings season in April will provide investors with a reality check as to the magnitude of the earnings hits that companies will take; • The earnings recovery in 2021 and beyond – at this point – should be quite sharp as Governments around the world have been very proactive in pumping stimulus into their respective economies.

Companies will also pull as many ‘cost levers’ as they can – thereby setting up for strong earnings recoveries once sales growth re-emerges; and • Given that consumer spending accounts for approximately 70% of gross domestic product (GDP) in the US and consumers are in varying degrees of lockdown – the economic impact of COVID-19 is material.

One of the biggest unknowns is still the length of the lockdown in different parts of the world. While some countries have demonstrated they can successfully curtail the spread of the virus, what is less clear is how quickly the virus could resurface once life returns to normal?

We believe the biggest risk yet to be priced into markets is arguably a scenario whereby the US pre-maturely ‘opens for business’ after a short lockdown period. As economically painful as a short lockdown period will be, a

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“As economically painful as a short lockdown period will be, a secondary resurgence would prolong the economic stagnation well into 2021.”

– Mahesh Fonseka secondary resurgence would prolong the economic stagnation well into 2021.

INVESTING IN QUALITY AT A REASONABLE PRICE As mentioned, the tumble in markets has been largely valueled. During these negative markets, ‘quality’ has outperformed while ‘value’ has underperformed. As much as we cannot understate the human cost associated with COVID-19, from a pure investment perspective the numerous disconnects between quality and value we are seeing are throwing up some excellent opportunities.

Quality at a Reasonable Price (QARP) describes our overarching investment philosophy and style.

Essentially what it means is that we look to address the two most important risks in equity investing – fundamental risk and valuation risk.

In a practical sense this means we build portfolios that simultaneously have much higher average profitability levels and considerably lower leverage, while having comparable valuations to the broader index.

Once a company has been identified as ‘quality’, the valuation piece of the process is the trigger that determines our decisions. We would argue we are very disciplined about selling names (for valuation reasons) and very patient getting in – i.e. waiting for oversold opportunities like we

have seen in March – to initiate positions in names that we have long admired but always considered too expensive. Our recent portfolio activity has been predominantly driven by valuation triggers (the ‘RP’ part of QARP).

SO WHERE TO NEXT FOR INVESTORS IN THIS TURBULENT TIME? COVID-19 is posing real challenges for global corporates and 2020 will be a year where poor quality companies will be found out and most likely go through material financial distress.

We think we are still staring down a pretty material earnings cliff in 2020 and the drawdown and recovery curves will be very different by sector and company quality. We are staying well away from companies with weak balance sheets and those that have been seemingly mortally wounded by the COVID-19 crisis – cruise lines, energy.

From a valuation perspective, we would argue global SMID equities are the cheapest they have been in a long time. Since the market started tipping over, we have been presented with some fantastic opportunities to start positions in names that we think will do well over three to five years and beyond.

We believe our material exposure to some of the highestquality SMID companies in the world, sets up our portfolios

extremely well for what we expect will eventually be a sharp rebound. SMID stocks lagged their large-cap counterparts in the latter part of the bull market and have borne the brunt of the recent sell down – the net result being that global SMID equities are now trading at their cheapest relative valuations in 10 years.

More specifically we have opportunistically introduced two very high-quality franchise businesses – Idexx Labs and Straumann – after they both had decent drawdowns. Both companies have quite unique health care franchises that generate very strong returns on capital and have much less earnings sensitivity to the current economic weakness.

We consider these stocks to be high-quality names and were well off their highs at the time we started buying.

In the broader global SMID universe there is a massive divergence of quality – we only focus on the highest quality businesses. We expect there will be plenty of smaller companies that won’t survive the COVID-19 crisis and others that ‘stay on the mat’ for the foreseeable future.

We have zero interest in these names and would much rather focus on the global SMID powerhouses that will come out the other side even stronger.

On the other side of the COVID-19 drawdown, this exposure provides investors with a very unique form of upside leverage that large-cap strategies simply don’t have.

We believe investors who adhere to the valuation and fundamental disciplines will be rewarded more so in 2020 than was the case in 2019, when ‘growth at any price’ was the winning strategy.

Mahesh Fonseka is senior investment specialist at Bell Asset Management.

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CREATING A SUCCESSFUL DIGITAL ADVICE MODEL The COVID-19 pandemic has emerged as the greatest disruption to economic growth in generations but presents an opportunity to highlight the benefits of technology, writes Emily Chen.

FOR FINANCIAL ADVISERS, the ongoing coronavirus pandemic presents a dual challenge – with advice firms needing to quickly adapt to remote working while simultaneously supporting their clients to manage the financial impact of the pandemic.

Technology plays a key role in supporting this transition. There are a range of tools available to support remote and digital ways of working,

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but some advisers may be unaware of the many options available to them, as well as the long-term benefits of taking a digital and datadriven approach to practice management and client experience.

Let’s break down the key tools at an adviser’s disposal to manage their client, team and business operations, as well as exploring the key considerations in setting up a successful digital operating model.

1. THE IMPORTANCE OF STRONG DATA PRACTICES Successful digital transformations don’t start with technology. They start with data. Trouble is, all too often, there’s a real absence of it.

It might seem an unusual problem to have when we live in a world where an unimaginable amount of data is being generated.

According to the International Data Corporation (IDC), it’s estimated that

by 2024, over 110 zettabytes of cloud storage will be required simply to deal with the amount of data generated by AI-enabled automation and smart devices.

To put that into perspective, a zettabyte is one billion terabytes.

Or one trillion gigabytes. Given many of us will recall early personal computers had a memory capacity of about 250 megabytes, it is almost impossible to fathom the

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April 23, 2020 Money Management | 33

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amount of data being generated and captured everyday.

So now that we have all this data, what do we do with it? And as advisers, why is it so important?

Data holds the key to important insights into your business and your clients. It needs to be put at the heart of any transformation — to know where you are now, where you want to be, and where to focus.

The challenge is, many advice firms are still in a phase of data transition. From paper to digital and from unstructured to structured.

Increasing regulation and reputation risks have understandably kept many firms focussed on data protection and compliance (the things that must be done), leaving little opportunity to consider data for business efficiency and competitive advantage (the data advantage).

When it comes to data, the key things to consider are: • Where do you store your client and business data?

• Is it easy to access your data?

• Do you have a single source of truth?

• Are files digitised and stored in a secure cloud-based solution?

While there’s been a lot of discussion about artificial intelligence (AI) and machine learning in recent years, it’s important to remember these concepts are quite a way off for most financial services firms.

What’s more realistic, and useful, is understanding the data you have in your business and ensuring you have a system to capture it, store it and handle it in accordance with privacy laws and other legislative requirements.

Good data management is also the bedrock of embracing a digital advice model.

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2. AUTOMATION – POWERING WORKFLOW Once a sound data management system has been put in place, the next area to look at in the digital operating model is the automation of business processes.

Thinking about systems and processes is unlikely to get many of us excited. But it’s critical to the success of any business, and never more in an environment where people are working in a dispersed, remote way.

Before technology can be applied to manage and automate workflow, advice firms need to first have a clear understanding of what the optimum experience for clients and employees looks like.

Once processes and responsibilities have been clearly defined, advice software such as Xplan can be applied to automate tasks, manage the flow of work throughout the business and track activities to completion.

Alerts can be set up to identify processes that aren’t being followed properly. Powerful data analytics software can also be plugged in to proactively scan for risks and issues before they become a problem – including red flags such as identical strategies applied to all clients, spikes in revenue, elderly clients over – invested in growth assets and evidence of fee-for-no-service.

3. DIGITAL CLIENT ENGAGEMENT – OPTIONS AND OPPORTUNITIES The traditional financial advice model is predicated on the need to build strong client relationships. Traditionally this has been done face-to-face however in the current climate this is largely no longer an option.

The good news is, there are a range of digital tools available now, to support advisers in continuing to service their existing clients, as well as reach out to new clients in need of advice.

VIDEO CONFERENCING The COVID-19 pandemic has seen video conferencing tools and apps come to the forefront. In fact, video conferencing apps saw a record 62 million downloads in one week in March, 2020 alone due to the pandemic.

While we may be familiar with FaceTiming family members and hosting virtual gatherings with friends, how comfortable are advisers with using video conferencing for clients?

Video conferencing presents a powerful opportunity for financial advisers to talk ‘face to face’ with clients, without needing to be in the same room or hopping into their car to drive to see them. Clients can join using their device of choice (e.g. laptop, tablet or mobile), and multiple users can also join simultaneously.

Screens can be easily shared to talk through objective and goals review and tracking as well as any documents that need to be authorised by the client.

Perhaps most useful for financial advisers is the ability to record the video and discussion, and append it as a file note in their financial advice software – providing an record of advice to meet compliance and regulatory obligations, as well as the ability to share it back to clients who may want to revisit key concepts or recommendations.

CLIENT PORTALS Client portals enable advisers to meet the increased need for client communication in an online, secure,

efficient, cost-effective way.

Advisers can stay in touch through direct instant messaging, as well as broadcasting news and updates to their entire client base.

This could be handy as the COVID19 situation develops, by guiding clients through important updates relating to Government announcements or keeping them informed and on-track throughout market volatility.

Advisers can use a client portal to ensure they maintain regulatory obligations in a simple and efficient manner. For example, if advisers have recently completed Financial Adviser Standards and Ethics Authority (FASEA) requirements and need to update their financial services guide (FSG), they can simply add the new document to the client portal and click a button to send a communication to all clients.

Additionally, with many people now staying home as much as possible, getting to a Post Office to send signed documents may be difficult.

By encouraging clients to upload documents into the secure storage feature within a client portal, advisers can alleviate a common pain point, as well as provide comfort to clients that their personal information is secure and protected.

DIGITAL SIGNATURES When it’s not appropriate for people to be in a room together to sign a document, digital and e-signatures are an excellent alternative. These allow your clients to safely and securely sign documents using any device.

Whether it’s gaining authority to proceed with or manage insurance Continued on page 34

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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. How much data is expected to be stored in the cloud by 2025? a) 50 zettabytes b) 80 zettabytes c) 110 zettabytes 2. A key considerations in reviewing a digital data strategy should include: Continued from page 33 claim applications – digital signatures make it easy to execute on behalf of clients, without the need for face-to-face meetings or lengthy delays, caused by sending hard copy documents back and forth.

FUTURE-PROOFING While nobody can predict how the current crisis will play out, it’s clear that some businesses, including financial advice firms, have fared better than others in continuing to operate with minimal disruption. While some advice firms have been working towards digital and data-driven ways of working long before it became a necessity, others may only have begun their journey. The good news is that it’s not too late for any advice practice to get up to speed by reviewing their technology strategy.

There are significant long-term advantages of transitioning to a digital advice operating model. These include: • Efficiency: Digital tools enable advisers to provide advice to clients faster, while at the same time increasing their ability to communicate and engage with clients quickly and easily; • Cost reduction: Investing in the right technology tools and systems can result in significant savings in the long run – either reducing the need for adding employees or enabling them to service more clients in a more cost-effective manner; • Simplifying compliance practices: Using digital tools and having a single source of truth for data makes it much simpler for advisers to meet compliance and regulatory obligations. For example, conducting a client meeting via video conferencing and saving the file directly into financial advice software like Xplan is a stronger piece of evidence than a handwritten note in a paper file somewhere; and • Scale: When done in the right way, adopting a digital operating model will enable advisers to reach and secure new and broader client demographics – for example, time-poor or young clients, people living in different geographical locations.

In summary, the current climate represents both a challenge and an opportunity for advisers to review their current operating model and identify opportunities to automate, improve and digitise ways of working.

Not only will this support the ability to continue to service clients throughout the current pandemic it provides significant long-term benefits when it comes to efficiency, reputation management and scalability.

Emily Chen is product lead for wealth management at Iress.

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a) Whether files are digitised and stored in an unsecure cloud-based solution b) Whether files are digitised and stored in a secure cloudbased solution c) Whether files are printed out and locked in a secure filing cabinet 3. What is an advantage of using video conferencing in client conversations? a) The ability to append a recording of the video conference call to files notes in their advice software b) The ability to send text messages to clients c) The ability to watch videos on your phone 4. What can advisers use to obtain authorisation from clients when they’re unable to physically sign documents? a) Emojis b) Digital signatures c) Digital fingerprints 5. Which of the following is not an advantage of adopting digital ways of working for advisers? a) Enhanced client experience b) Simplifying compliance procedures c) Reducing the amount of clients they can service

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ creating-successful-digital-advice-model For more information about the CPD Quiz, please email education@moneymanagement.com.au

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April 23, 2020 Money Management | 35

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

Appointments

Move of the WEEK Peter King Chief executive officer Westpac

Westpac has named its new chief executive officer – elevating acting chief executive, Peter King.

Announcing the move, Westpac chairman, John McFarlane said it was a case of wanting a chief ex-

Count Financial has appointed Phil Creswell as its head of professional standards, who previously worked with Count’s chief executive Matthew Rowe in writing the Financial Planning Association of Australia’s (FPA’s) first code of ethics and professional standards.

That code and professional standards framework had been exported globally through the Global Financial Planning Standards Board.

Creswell had sat on the Financial Planning Association of Australia professional conduct committee, been a member of the Financial Planning Advisory Committee, the Financial Planning Advisory Committee to the board of the Financial Ombudsman Service, Governor and Secretary of the Institute of Internal Auditors.

In his most recent position, Creswell led a national team of 17 compliance professionals with responsibility for 700 financial advisers at IOOF.

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ecutive in place now, and not later.

He said King’s appointment was for a period of two years.

King has been a long-term executive of Westpac having spent 25 years with the banking group.

He also previously worked for KPMG in London and Pricewaterhouse Coopers.

Elston Private Wealth has appointed Eric Armbrust to the role of partnership executive, working closely with the adviser team to strengthen existing partnerships and establish new ones.

Formerly with Perpetual, he had also worked for National Australia Bank and Lloyds Banking Group.

Damon Bensein, Elston chief executive, said when a firm got the relationship right, a trusted partnership could be a powerful catalyst for mutual growth.

“We’ve seen that happen again and again, and we have so many great long-term success stories to share; Eric is coming on board to help us continue that success,” Bensein said.

“And he’s arrived at the right time, just as we’re building a stronger presence in Sydney and

looking to future expansion in Melbourne.”

Westpac head of government affairs for wealth, Blake Briggs, is making a return to the Financial Services Council (FSC) – this time as deputy chief executive under Sally Loane.

Briggs, who had been a senior policy manager, superannuation, at the FSC, joined Westpac two years’ ago.

Confirming Briggs’ appointment, FSC chair, Geoff Lloyd said he was joining at a challenging time for the financial services sector, which is at the forefront of delivering much needed services to Australians as we all work together to help mitigate the economic consequences of the COVID-19 crisis.

Loane said she was delighted to welcome Briggs back to the FSC in the senior role.

“His depth of experience in financial services policy and government relations will strengthen the FSC’s excellent policy team

both now during the current period and into the future,” she said.

Briggs will start with the FSC in May. HESTA has appointed Luke Galloway as its general manager – strategic tilting to help build out its internal investment capability and deepen relationships with key partners.

Galloway joined the industry superannuation fund in November last year as its investment adviser.

HESTA chief investment officer, Sonya Sawtell-Rickson, said since joining the fund, Galloway had demonstrated skills and experience in derivative trading, and dynamic asset allocation decision though a period of significant market volatility.

Galloway would be responsible for managing dynamic asset allocation, rebalancing and overlay process, and would report to the head of portfolio design which was yet to be filled.

15/04/2020 3:37:50 PM

OUTSIDER OUT

ManagementApril April23, 2, 2015 36 | Money Management 2020

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

Grumpy Outsider prefers a chook raffle to a tombola ANYONE who knows Outsider knows that, not unlike the great Groucho Marx, Outsider would not want to join any club which would have him as a member.

And that is why Outsider is currently somewhat more irascible than is normally the case. You see some person who Outsider has never met and probably would never want to meet has sought to deal with the social isolation of COVID-19 by trying to impose a thing called ‘Team Tombola’.

Now, without wanting to be too prejudicial, the mere mention of the word ‘tombola’ should tell readers that the author of this exercise is sitting somewhere in the ‘Old Dart’ because any good Aussie would have organised a chook raffle, meat tray or lucky dip but in the United Kingdom the tombola is a staple at parish fairs.

So, Outsider is being asked to electronically reach out to some poor soul working for Money Management's international parent company somewhere in the world and doubtless doing a job which Outsider neither recognises nor understands. What is

more he feels sure that his ‘Tombola Match’ probably feels much the same way about him, who wouldn’t?

Now Outsider acknowledges this is possibly a generational thing, because some of his Gen Y and millennial colleagues, those of the Tinder generations, have never understood the importance of pub pick-up lines and have become quite excited about the prospect of making new online friends.

As Outsider said from the outset, he is not in the business of joining clubs that want him for a member. Anyone for a meat tray or chook raffle?

The next flight to nowhere WHILE airlines are feeling the hit of lockdown on their share prices, to the point where they may need Government bailouts, Outsider spares a thought for those who have invested in airports.

Notwithstanding the rivers of gold generated for the owners of Sydney and Canberra airports (ever paid for parking?) times have changed and the rivers of gold are now looking more like the Murray-Darling in the middle of the drought.

In happier times, these infrastructure picks have been touted as delivering stable revenues, essential to the community and resilient to changes in economic conditions. Passenger numbers are increasing and everyone still has to fly right? That is until a global pandemic sees borders closed and flights grounded…

Super funds have been investing heavily in airports, among other unlisted assets, as a way to diversify their risk and reduce volatility but the crisis is showing nothing is a ‘sure thing ‘anymore.

UniSuper, Sunsuper and AustralianSuper are all invested in Brisbane Airport, UniSuper is invested in Adelaide Airport and Macquarie is invested in Sydney Airport but now they are being forced to slash the value of these assets to the detriment of members and investors. Meanwhile, listed infrastructure funds have already stated their airport exposure has been a dent in returns.

For Outsider, he looks forward to his next trip to Queensland when the state borders re-open, but as he wheels his suitcase to the gate, he will be looking at the airport in a whole new light.

Maybe he should buy a few extra packs of peanuts to boost their fortunes, after all, every little helps right?

Is Outsider ‘elderly’ or only as old as he feels?

OUTSIDER has discovered something disturbing. According to the medicos and the Government he is elderly.

Now Outsider is not going to reveal his age but suffice to say that amid all the brouhaha around COVID-19, he learned he fell into a cohort of people deemed more than a little bit susceptible to the virus.

What is more, and to Outsider’s great distress, there is no clear evidence that a daily dose of single malt will help see off the infernal infection, though he keeps on trying.

But what Outsider has found particularly disturbing are suggestions by some economic

OUT OF CONTEXT www.moneymanagement.com.au

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writers that he and his ‘elderly’ peers should be prepared to sacrifice themselves and their health on the altar of the interests of the younger generations; to enable the economy to open up and restore the millennials and the Gen Y’s to their jobs.

Outsider is not opposed to getting the economy back in action and younger workers back on the job, it’s just that as a student of history he is reminded of the Nazi’s “Lebensunwertes Leben” policy – the life not worthy of living.

Outsider is prepared to take his chances, but so long as there are golf courses, bottles of single malt and the grandkids, life is certainly worth living for this old codger.

"Unlike the Titanic, the Australian sharemarket will rise again to meet another day."

– Rod North, sharemarket strategist and market analyst.

"There are diseases like cancer... that you don't catch from other people. But like a cold, you can catch it from someone else, but a cold won't lead to you passing away."

– ScoMo explaining COVID-19 (to kids, on ABC's Behind the News).

Find us here:

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