Money Management | Vol. 34 No 9 | June 4, 2020 by FE Money Management

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

www.moneymanagement.com.au

Vol. 34 No 9 | June 4, 2020

CHINA

Emerging from lockdown

FIXED INCOME

QE The impact of QE

EMERGING MARKETS

INSURANCE

The changing face of the sector

Merger conjecture back on around FPA and AFA BY MIKE TAYLOR

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Who wins from the lower oil price? WHEN investing, it can help to take a broad approach to the world beyond domestic Australian equities. However, there are headwinds to this overseas approach, particularly when investing in emerging markets, and it is important to remember emerging markets are not necessarily in the same shape as their developed market counterparts. Factors to consider with emerging markets which are less of a consideration for developed markets include the political stability of the country, the stability of the currency, their fiscal deficit and economic outlook. These differences have been illustrated recently by the impact of the lower oil price which turned negative for the first time in history, significantly affecting emerging markets who rely on oil price strength in US dollar terms such as Brazil, Russia and Saudi Arabia. These markets have all been hit at a time when they are already under pressure from the COVID-19 pandemic and Brazil, in particular, is going through a rocky time politically with the departure of several ministers. However, it was not all bad news for the sector, as countries such as China and India were beneficiaries by virtue of being some of the world’s largest oil importers. With oil production cut by 10% and oil tankers sitting idle with millions of barrels aboard, the question now is what will happen once lockdown has ceased?

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For full feature see page 14

THE announcement of a significant restructure within the Financial Planning Association (FPA) and consequent job losses has reawakened calls for a merger between the FPA and the Association of Financial Advisers (AFA). In the wake of the calling of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, both the AFA and the FPA have been working more closely together on generating a single voice policy approach but, as yet, there has been no move towards formal merger talks. However, this has not stopped discussion of the issue, with former FPA chair and chief executive of financial planning group, CountPlus, Matthew Rowe suggesting that a merger might be in the ultimate best interests of

the industry. “It is great to see the FPA and AFA beginning to work closely together on some key issues. I think the forecast drop in financial adviser numbers to circa 15,000 will mean it is only a matter of time before we have a single Association representing our professional community,” he said. AFA chief executive, Phil Kewin, acknowledged the degree to which both the FPA and the AFA had been working more closely together and their shared challenges in terms of decreasing adviser numbers which would inevitably impact on membership of the two organisations. However, he made clear that there had been no formal discussion around mergers – something which would need to happen at board level. Continued on page 3

FPA announces its new shape – fewer jobs, more advocacy FINANCIAL Planning Association (FPA) chief executive, Dante De Gori has confirmed job losses resulting from the organisation’s pursuit of a new structure. As revealed by Money Management, weeks after the departure of the FPA’s chief operating officer Pene Lovett in February, eight people in late May were told they were to be made redundant with De Gori a day later issuing a formal statement confirming the job losses and unveiling a “2025 Strategic Roadmap”. He said the five-year strategic roadmap would start from 1 July and would focus on three core pillars – members, advocacy and consumers • Members: To lead the profession on the financial planning model of the future • Advocacy: To be the voice of the profession with a policy vision that ensures a growing and sustainable future for financial planning Continued on page 3

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Stop making excuses not to merge says APRA BY MIKE TAYLOR

SUPERANNUATION fund trustees have been warned they need to stop making excuses to ward off mergers. The Australian Prudential Regulation Authority (APRA) has used its quarterly Insight publication to chasten the fund trustees for throwing up unnecessary hurdles to mergers. “Mergers are often stalled or abandoned by trustees that appear to take an overly narrow or restrictive interpretation of the legislation governing mergers,” the regulator said. “APRA expects trustees to take a pragmatic approach to this assessment – a holistic and ‘on balance’ assessment of equivalency, rather than a line-by-line ‘same rights’ approach.” Further, the regulator said that where equivalence remained an issue, the trustees involved should actively consider negotiating trust deed amendments in relation to member rights, rather than abandoning the possibility of a merger. APRA said that resistance to consolidation was not isolated to the crimson sections of its MySuper heatmaps. “…even stronger performing funds can be quick to present arguments why a potentially advantageous acquisition gets consigned to the ‘too hard basket’,” it said. “These trustees, that are otherwise open to acquiring funds, express legitimate concerns

Merger conjecture back on around FPA and AFA Continued from page 1

about the due diligence costs and effort involved. They worry about what liabilities they are taking on: unit pricing errors, insurance disputes, inadequate reserves that would otherwise provide some recourse to being indemnified for these unknowns,” APRA said. It said these issues then impacted on their appetite for taking on a merger given they needed to assess whether it is in the best interests of their existing membership. “To overcome this, trustees that may be seeking a merger should take steps to address these issues to improve their prospects of finding a suitable partner. For example, ensuring

reserves are sufficient to cover expected liabilities is something that funds should be acting on now,” the APRA article said. “When developing a business case for a merger, trustees undoubtedly need to consider the costs associated with the merger and the impact those costs will have on their members. However, these costs need to be considered over the medium to long-term, and need to be balanced against the benefits to be gained from the merger over the same period. This recognises the relatively long horizon over which a trustee manages members’ retirement savings.”

FPA announces its new shape – fewer jobs, more advocacy Continued from page 1

Recent data published by Money Management has confirmed the high level of adviser exits from the industry in the face of the Financial Adviser Standards and Ethics Authority (FASEA) regime and other factors, with some calculations suggesting it might take the industry up to a decade to grow adviser numbers back to pre-2018 levels. Importantly, the FPA’s announcement around a significant restructure coincides with the organisation’s member renewal cycle, albeit that it is understood that planning around the changes began late last year. There have been a number of informal discussions around the possibility of a merger between the FPA and the AFA over the past two decades, but little has developed with some suggesting this reflected the different nature of the membership of both organisations with the AFA being more representative of life/risk advisers.

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• Consumer: To showcase the value of financial advice among all Australians, increasing awareness and use of financial planners. “There are significant opportunities for the FPA to lead on initiatives under each of these three strategic priority areas. Supporting members to grow and thrive, increasing the number of Australians accessing financial advice, and having a leading voice in public policy will be key priorities with significant initiatives to be rolled out over coming weeks and months to support each of these areas,” he said. Acknowledging that the changes had been driven by the changing face of the industry over recent years and extensive

adviser exits, De Gori said the organisation’s members were facing more regulation, higher education standards and increased costs. “At the same time, there has never been a greater need for Australians to seek financial advice,” he said. Acknowledging the job losses, De Gori said that it as the five-year strategic plan was finalised it was natural to look at the team structure. “I am personally grateful for everyone’s contribution to the FPA over the past five years but as our strategy evolves and the environment changes we need to transform to ensure we remain relevant and effective,” he said.

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4 | Money Management June 4, 2020

Editorial

mike.taylor@moneymanagement.com.au

APPLYING THE BRAKES TO THE AMBULANCE CHASERS

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000 Managing Director: Mika-John Southworth

Australia’s litigation funders have, by and large, done a good job but few in the financial services industry will argue against making them rise to the requirements of holding an Australian Financial Services License.

Tel: 0455 553 775 mika-john.southworth@moneymanagement.com.au Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814

ONE thing was as certain as night follows day from the Royal Commission into Misconduct in the Banking, Financial Services and Superannuation industries – that the courts of Australia would be busy long after the Commissioner, Kenneth Hayne, published his final report and recommendations. And so it proved to be, particularly when the legal environment was further stirred by the Australian Prudential Regulation Authority’s (APRA’s) decision to pursue legal action against IOOF and some of its officers on the basis of issues raised during the Royal Commission. It is history that APRA’s action against IOOF and its officers failed and the regulator opted not to pursue the matter further and, late last month, a further manifestation of Royal Commission-related legal action came to an end when IOOF settled a class action mounted in the NSW Supreme related to the APRA action without paying anything to the plaintiff and without paying costs. What needs to be understood about that class action is that it was entirely typical of its type – fuelled by the publicity/opportunity afforded by the Royal Commission, somewhat speculative in nature and underwritten by a litigation funder. It seems entirely probable that the outcome of the settlement with IOOF will show up in red ink on the litigation funder’s balance sheet and some might be tempted to suggest that the whole episode is reflective of

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the speculative nature of litigation funding – the weighing of odds; the placing of a bet. And that is why the Federal Government is quite right to be moving to ensure that litigation funders are subject to greater regulatory oversight via a requirement to hold an Australian Financial Services License (AFSL) and to comply with the managed investment scheme (MIS) regime. Litigation funders have flourished in Australia over the past decade in part because those running them are very good at running the ruler over a legal issue and determining its chances of success and failure and, in part, because they have acted in a largely unregulated environment. As the Federal Treasurer, Josh Frydenberg, put it in his announcement: “Litigation funders are currently exempt from holding an AFSL and being categorised as a managed investment scheme. As a result, litigation funders do not face the same regulatory scrutiny and accountability as other financial services and products under the Corporations Act.” Because litigation funders will, in future, be required to hold an AFSL and to operate within the MIS regime, they will need to be far more transparent in their operations and, to some degree, the rationale which would prompt them to underwrite a class action off the back of a Royal Commission. Money Management is not suggesting that litigation funders should be unduly constrained or

that many of them hitherto had questionable intentions. There are plenty of examples of funders having underwritten worthy actions on behalf of plaintiffs who would otherwise have been disadvantaged by the cost and complexity of the Australian legal system. But financial advisers, amongst others, will see no problem in lawyers and their litigation funders being asked to act under an AFSL regime which requires them to: • Act honestly, efficiently and fairly; • Maintain an appropriate level of competence to provide financial services; and • Have adequate organisational resources to provide the financial services covered by the licence. Indeed, it will be interesting to see whether the imposition of an AFSL and the consequent requirements it imposes on the funders has any significant effect on the number of cases which are pursued in Australia. What is interesting about Frydenberg’s announcement on the AFSL requirement for litigation funders is that it is being imposed well ahead of an inquiry being undertaken by the Parliamentary Joint Committee on Corporations and Financial Services which is not due to report until 7 December, this year. Irrespective of what that committee finds, an MIS regime for litigation funders will become a fait accompli from about September.

oksana.patron@moneymanagement.com.au News Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 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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Money Management is printed by Bluestar Print, Silverwater NSW. Published fortnightly. Subscription rates: 1 year A$244 plus GST. Overseas prices apply. All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the editor. © 2020. Supplied images © 2020 iStock by Getty Images. Opinions expressed in Money Management are not necessarily those of Money Management or FE Money Management Pty Ltd.

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Mike Taylor Managing Editor

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26/05/2020 9:16:17 AM

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News

Intrafund advice within Mercer costing $1.27 million a year BY MIKE TAYLOR

THE cost of delivering intrafund advice ran to over $1.27 million for one of Australia’s largest corporate superannuation outsourcing

providers, Mercer, last year. Mercer has provided evidence to the House of Representatives Standing Committee on Economics that the cost of intra-fund advice as

$1,271,000 for the year ending 30 June, 2019, and that this averaged out to approximately $6 per member. Mercer noted that the cost of the intrafund advice was included in the administration fees charged to members and was not a specific fee to members. Like a number of industry funds, Mercer made clear to the parliamentary committee that it was running an outsourced model and that it had an arrangement with a service provider for intra-fund advice to be provided to members. “Advice fees can be paid from member accounts at the request of that member, with the proviso that the advice relates to superannuation. MSAL does not charge any other fees for advice/financial planning,” the company said.

Superannuation assets in decline even before Govt’s early access regime EVEN before the Government introduced its hardship early superannuation release regime, superannuation assets were in decline in Australia, according to the latest data released by the Australian Prudential Regulation Authority (APRA). The regulator’s March quarter data revealed that superannuation assets totalled $2.7 trillion at the end of the March and that over the 12 months from March 2019 there was a 0.3% reduction in total superannuation assets. “Total assets in MySuper products were $710 billion at the end of the March 2020 quarter. Over the 12 months from March 2019 there was a decrease of 0.4% in total assets in MySuper

products,” it said. “The reduction in the value of superannuation assets during the March 2020 quarter was due to a significant downturn in global financial markets as a result of COVID-19.” “The annual industry-wide rate of return (ROR) for entities with more than four members for the March 2020 quarter was -10.3% and for the year was -3.3%,” it said. “The March 2020 quarter was the lowest quarterly ROR recorded by APRA since data collection began 15 years ago. The five year average annualised ROR to March 2020 was 3.7%.”

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RC-based class action against IOOF settles quietly IOOF has seen off one of the class actions which dogged it before and after the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and action initiated by the Australian Prudential Regulation Authority (APRA). The company announced to the Australian Securities Exchange (ASX) that it had reached agreement to settle the class action which had been commenced against it in April, last year, in the NSW Supreme Court. Importantly, IOOF said that the class action had been “discontinued with no order as to costs”. The class action had been brought by law firm Quinn Emanuel Urquhart and Sullivan on behalf of shareholders who had acquired an interest in IOOF’s shares between 27 May, 2015, and 9 August, 2018, with the company saying at the time the action appeared to be based on evidence given to the Royal Commission and that APRA had commenced legal proceedings against certain officers of IOOF. The APRA action which appeared to underpin the class action failed in court last year. IOOF noted that it was making no payment to the plaintiff, its lawyers or the litigation funder and was very happy with the outcome.

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Important information: The information on MLC Wrap Super Series 2 and MLC Navigator Retirement Plan Series 2 is provided by NULIS Nominees (Australia) Limited ABN 80 008 515 633, AFSL 236465 (NULIS), part of the MLC Superannuation Fund ABN 40 022 701 955. The information on MLC Wrap Investments Series 2 and MLC Navigator Investment Plan Series 2 is provided by Navigator Australia Limited ABN 45 006 302 987, AFSL 236466 (NAL). The information on the MLC Horizon, MLC Inflation Plus, and MLC Index Plus Portfolios is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705). The information is a summary only and should not be relied on for decision making and is provided solely for the use of authorised financial advisers and is not intended for distribution to investors and potential clients. To find out more, please refer to the relevant Product Disclosure Statements and the Financial Services Guide at mlc.com.au. The information is correct as at 9 March 2020, but may change in the future. A155980-0520

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News

FASEA extension delay displays politicians’ inability to put wellbeing of others over political gamesmanship BY JASSMYN GOH

BY stalling the Financial Adviser Standards and Ethics Authority (FASEA) exam extension, politicians are displaying their inability to put consumers and the wellbeing of the financial advisory sector ahead of political gamesmanship, according to United Financial Advisers Association (UFAA). The UFAA’s chair, Alex Vagliveiello, said the failure to pass the extension reaffirmed the gulf that existed between politicians, their consultants, and advisers and the benefit they provided to consumers “many of whom are on struggle street” as a result of the COVID-19 pandemic. “At a time when Australia needs bold and decisive action and a vision charting a return to

economic wellbeing for the good of the people, federal parliamentarians are once again found wanting. They simply don’t care,” he said. He noted the pandemic had caused one of the greatest economic challenges and advice was now crucially needed by consumers, business owners, and individuals that had lost jobs. “Politicians continue to ignore the fact that financial advisers are small to medium enterprises and are leaving the industry in unprecedent numbers. This latest fiasco will not only accelerate the exodus, but in doing so, condemn their administrative staff and paraplanners to be added to the ranks of unemployed,” Vagliveiello said. “It simply defies comprehension.”

Why aren’t superannuation funds moving to fill the advice gap? BY MIKE TAYLOR

Equities still risky despite optimistic signs BY CHRIS DASTOOR

“SUPERANNUATION funds have an immediate opportunity to meet the growing unmet advice needs of Australians, but must first ensure they have a strategy and operating model which enables them to deliver services their members need efficiently, at scale, and in the best interests of members.” That is the bottom line assessment of the latest KPMG Super Insights report The report also comes just weeks after research undertaken by HFS Consulting principal, Colin Williams, confirmed that while the major banks had largely exited the financial planning arena the superannuation funds, particularly industry superannuation funds, had not moved to fill the gap. Williams’ research noted that while the super fund sector had held up well in terms of adviser numbers, it had not actually grown “which many may see as surprising given the losses elsewhere and a greater take up of industry funds by the public post the Royal Commission”. Superannuation adviser growth had not shown any significant growth since 2018. The KPMG analysis said that with demand for advice services likely to increase, funds needed to think about how they provided accessible, low cost advice solutions to meet the needs of members, “without creating a negative financial impact for members that don’t utilise these services”. “Ensuring process efficiency in the advice creation and delivery value chain, and closely managing the economics of cost‑to‑serve and cost‑recovery are critical to creating a sustainable advice offering,” the analysis said. “…any advice offering – be it intra‑fund only, a comprehensive in‑house advice model, a third party partnership arrangement, or any other model – must be built on a foundation of unrelenting focus on quality advice, through ensuring advisers are highly trained, well supervised and disciplined in their approach,” it said. “Ongoing changes in regulation and consumer expectations are transforming the financial advice profession, increasing the costs of providing advice, and driving many participants to leave the industry,” it said. “Super funds have an immediate opportunity to meet the growing unmet advice needs of Australians, but must first ensure they have a strategy and operating model which enables them to deliver services their members need efficiently, at scale, and in the best interests of members.”

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DOWNWARD earnings revisions and bearish signals have led to concern the recent rally in riskier assets ignores potential headwinds in the US economy due to lower consumption, according to Janus Henderson. Ashwin Alankar, Janus Henderson’s head of global asset allocation, said short-lived bounces in stock prices while markets established new lows were not unheard of. “In late 2008, equities rallied in response to the Federal Reserve’s first round of quantitative easing and other programs aimed at supporting the economy,” Alankar said. “While investors welcomed these moves, it can be argued that some took their eye off the ball and didn’t fully grasp the harm being wrought on the real economy.” However, other parts of the market had been reliable forward indicators, which included corporate earnings revisions and options prices. Like in 2008, Alankar said earnings revisions and options markets were now indicating caution. “Since the beginning of the year, full-year 2020 earnings have been revised downward at a pace faster than during the depths of 2008 as analysts take into account the near shuttering of the global economy,” Alankar said. “It can be argued that the [COVID-19] pandemic is a one-off crisis – implying it’s isolated to this year – but following year earnings revisions for major indices have been just as torrid as what was registered in 2008.” Higher unemployment, increased savings, lower consumption and altered consumer behaviour could also weigh on corporate prospects in the near-tomedium term.

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News

Industry superannuation fund reveals paying up to $500,000 a year fee to outsource financial advice BY MIKE TAYLOR

YET another major industry superannuation fund has revealed that the per member cost of providing financial advice is around $2 to $2.50 per member. The latest fund to disclose this cost is MTAA Super which acknowledged that it did not directly employ financial advisers. Answering questions on notice from the House of Representatives Standing Committee on Economics,

the big fund said that it did not employ financial planners. “Financial planning is outsourced. The cost of providing this service to members is approximately $400,000 to $500,000 per annum which is approximately $2-$2.50 per member per annum,” it said. “MTAA Super outsources comprehensive advice activity to Industry Fund Services (IFS), with members able to access advice from qualified planners who are

dedicated to MTAA Super members. “Members pay IFS directly for advice received, with those payments offset against the outsourced service fee,” it said. “To have this service available to members, MTAA Super pays between $400,000 and $500,000 each year.” The MTAA Super answer said that members were not charged specifically for intrafund/scaled advice and that these costs formed part of the fund’s operating

expenses which were funded from the administration fee to members. It said that general advice formed a part of a broad administration activity, including call centre and field staff. “In addition, publications (product disclosure statements, factsheets), online calculators and workshops/seminars form a part of the general advice offer. As such we are unable to identify the specific costs overall or per member for this activity,” it said.

The slowest funds to pay early access BY JASSMYN GOH

TWO BT Funds Management superannuation funds have been placed at the top of the charts when it comes to slow early access to superannuation scheme payments, according to Australian Prudential Regulation Authority (APRA) data. Until 10 May, 2020, for 98% of BT’s Advance Retirement Suite’s applications, it took the fund between six to nine business days to pay eligible members. This was followed by Mercer Superannuation’s Mercer Portfolio Service Superannuation Plan at 80%, Intrust Super Fund at 55.5%, BT’s Asgard Independence Plan Division Two at 53.4%, and Retirement Benefits Fund at 50.5%. When it came to applications paid in 10 or more business days, it was SAS Trustee Corporation Pooled Fund at 60%, Australian Catholic Superannuation and Retirement Fund at 52.3%, Retirement Benefits Fund at 35.2%, LifeFocus Superannuation at 30.8%, and Ultimate Superannuation Fund at 16.7%. BT’s Asgard Independence Plan Division Two again made the top 10 slowest in this category in eighth place at 8.6%. Commenting, a BT spokesperson said that Advance and Asgard funds made up less than 10% of early access to super requests. APRA data showed there were 93 Advance applications and 5,805 Asgard applications. “For certain types of products, when a member seeks to withdraw their funds from their super account we are required to sell down the investments from the account in line with the investments held which can take some time if it isn’t held in cash, this is particularly true for our platform customers such as Asgard and Advance,” the spokesperson said.

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“We also need to go through the relevant security procedure to verify the payment and the request to protect our members’ super.” They noted that approximately 85% of requests BT received to date were from members in its MySuper products – BT Super and BT Super for Life “which we are able to process very quickly”. “For Choice or platform members, who have opted to invest in specific funds or asset classes, this can take longer due to redemption requirements,” they said. “Our total processing time across all our funds has accelerated since then as the process is refined. Across all our products we are processing close to 90% of requests within the five days.” In a statement to Money Management on its payment process, State Super (SAS) said: “As a defined benefit fund, State Super was not required to participate in the COVID-19 early release payments. Nevertheless, State Super voluntarily decided to support their members, even though this required finding solutions to constraints in the State Super Scheme legislation. One of these requirements is that members need to provide a written consent to allow for an early release payment and as result this has the unavoidable effect of adding time to the process”.

REJECTED APPLICATIONS The data also found that superannuation funds with the largest amount of early access to super scheme applications have rejected between 0.9% to 2.1% of applications. Until 10 May, 2020, the data found that AustralianSuper, Hostplus, Sunsuper, and REST were still the funds with the highest amount of applications for the scheme, along with CBUS. The data showed that ‘closed’ applications accounted for 1.6% of AustralianSuper

applications, 1% for Hostplus, 2.1% for Sunsuper, 1.9% for REST, and 0.9% for CBUS. Overall, 1.3% of all early access to super scheme applications had been ‘closed’. Applications were classified as ‘closed’ if it was unable to be processed by the registrable superannuation entity (RSE) either due to fraud flags, insufficient details in the file provided by the Australian Tax Office, or other issues that identified the source or destination of the payment. Since the previous data was released all these funds, except Sunsuper, had more applications that took over five days to process. The APRA data for the overall time it took for payments to be received overall also went up to 3.3 days, from the prior reading of 3.1 days. Over 88% of applications had been paid, 10.3% were ‘in process’, and 1.3% were ‘closed’. On the other end of the scale, 100% of 26 Northern Territory Supplementary Super Scheme applications had been ‘closed’. This was followed by 27.3% of 11 CSS Fund applications, 14.3% of 14 Incitec Pivot Employees Superannuation Fund applications, 12% of 25 Lifefocus Superannuation fund applications, and 10.9% of 377 Westpac Mastertrust – Superannuation Division applications. The early access to super scheme was for members who were suffering financial hardship due to the COVID-19 pandemic.

26/05/2020 3:50:26 PM

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12 | Money Management June 4, 2020

News

Industry superannuation funds hit back, committing to investing in growth and recovery BY MIKE TAYLOR

AMID ongoing criticisms from Federal Government back-benchers, industry superannuation funds are reinforcing the degree to which they are moving to help Australia move out of the recession generated by the COVID19 pandemic via key investments. On the same day that key executives were

made to appear before the House of Representatives Standing Committee on Economics, Industry Super Australia (ISA) chairman and former Federal Labor frontbencher, Greg Combet declared that industry superannuation funds would be investing “tens of billions in Australia’s economic recovery with the aim to create or support many thousands of jobs in the years ahead”. “Not only has the superannuation sector paid out about $10 billion to members who need to access their super now, they plan to invest tens of billions more in Australian business, equities, property and infrastructure, investments that support the economy and drive growth and job creation,” Combet’s statement said. “Collectively Industry Super Funds own $80 billion in Australian infrastructure, property, and other assets. One year’s capital expenditure on infrastructure created or supported 46,000 jobs.”

How well have dealer groups handled COVID-19? BY JASSMYN GOH

MOST financial advisers under dealer groups are satisfied with the support and guidelines they have brought during the COVID-19 pandemic. Speaking to Money Management, Verve Group director and senior wealth adviser, Matthew Carberry, said overall he was happy with his dealer group as it brought peace of mind with what was going on in the market. On COVID-19 business continuity plans (BCP), Carberry said his dealer group were useful in the sense that it had given comments, guidelines, and feedback when it came to regulatory changes, and advice provisions and how it “looks like in this new world”. “Their guidelines have been quite good and there are no questions on our end on how we need to roll things out,” he said. A Money Management survey found that 40% of advisers found their dealer group had dealt with their COVID-19 BCP plans either ‘very well’ or ‘good’. Another 50% said it was ‘average’. The survey’s respondents said the types of support they were looking for from their dealer group in terms of uncertainty were efficiency tools, articles to send to clients, guidance on how to streamline business processes, and more input from their practice manager. One respondent said they wanted their dealer group to “back off on some of the strict

09MM040620_01-13.indd 12

requirements in place with deadline while we work through this [COVID-19] and support our clients. Now is when clients really need us to concentrate on their needs not that of the Australian financial services licence (AFSL) and the Australian Securities and Investments Commission (ASIC) requirements”. Another said: “My expectations of support from my dealer evaporated many years ago over many issues. You must remember, most dealer groups have different goals to that of a privatelyowned financial planning practice”. Pride Advice’s chief executive, Brett Schatto, said he was happy under a dealer group as it covered 20% of process in the business and this allowed more time to look after clients. He also said his dealer group was good in interpreting the stimulus packages announced by the Government as a response to COVID-19. He said the dealer group also created factsheets that were useful when answering client’s queries. “It’s great because we don’t have to reinvent that, and some of the content clients have been reading and watching from the Government can be confusing,” he said. “So, then they call us, and this also helps to deepen the relationship.” The survey also found that while 50% of respondents said they were happy with their dealer group but 20% were ‘looking to change’.

It said that since the COVID-19 downturn Industry Super Funds had “poured hundreds of millions into the balance sheets of good Australian business” helping them build and expand operations with beneficiaries being the capital raisings of NAB, Reece Plumbing and Ramsay Healthare. “And there could be billions more to come, at the end of the Global Financial Crisis the superannuation funds provided a significant portion of the $120 billion in capital raised by local businesses,” the statement said. “Industry Super Funds remain committed to supporting technology start-ups, SME businesses, social housing and aged care, as well as providing finance to the major banks. “Industry Super Funds hold a major stake in Australia’s economic life through investments in Australian listed companies – collective owning 10% of the ASX – debt markets, infrastructure, property and the wider financial system.”

CGT relief for super mergers in members’ best interest THE Association of Superannuation Funds of Australia (ASFA) has welcomed the now permanent capital gains tax (CGT) relief for super fund mergers. ASFA chief executive, Dr Martin Fahy, said when the relief was only a temporary measure the trustees did not always have certainty about whether tax relief would be available, when considering whether a potential merging would be in members’ best interests, as typically mergers took time to complete. “ASFA has, over a long period, highlighted the absence of ongoing tax relief for mergers as a barrier to fund consolidation, and welcomed the Government’s 2019 Budget announcement that it would make the tax relief permanent,” Fahy said. The association said the passage of the Treasury Laws Amendment (2020 Measures No.1) Bill 2020 would provide vital certainty to the industry and ensure that tax implications do not impede mergers that would otherwise be in the best interests of superannuation fund members.

26/05/2020 4:55:33 PM

June 4, 2020 Money Management | 13

InFocus

CONDUCTING CLIENT REVIEWS IN DIFFICULT TIMES In the first of a two-part series, Hans Egger explains what clients are wanting from their reviews in these difficult times. COVID-19 IS OBVIOUSLY causing financial advice clients a great deal of concern. Not only are they worried about what the resultant stockmarket volatility is doing to their investment portfolios, they are also concerned about their life insurance and possibly even their estate planning. Clients want to know if they are still on track to achieve their goals, and if not, how you can help them get back on track. This is where client reviews really come into their own. Client reviews provide the best, and perhaps only, opportunity to demonstrate that the value of your advice far outweighs the cost. New opt-in rules may soon also require you to obtain the client’s agreement to ongoing service every 12 months or lose fees, so client reviews become even more significant. How do you ensure that in the space of 60-90 minutes you communicate the right messages to your client and give them the confidence to opt-in for another year? Value and efficiency The additional compliance requirements resulting from the Future of Financial Advice (FOFA) and Banking Royal Commission measures, mean (unfortunately for many Australians) advisers will only be able to service a limited number of engaged, opt-in clients. But the new requirements mean that to service even a reduced number of clients, advice practices will need to make their processes far more efficient. This is likely to mean using specialised software, for example, in-built compliance and client engagement technology, in addition to customer relationship management (CRM) tools. Once practices have become more efficient, practice owners will be able to calculate how many

09MM040620_01-13.indd 13

clients per adviser they can realistically service each year. They can then calculate the total operating cost for the practice, add in the required profit margin and create fee packages for each client segment.

‘state-of-position’ where each aspect of the client’s circumstances can be revisited and a new foundation set for the ongoing advice. Obviously, this also needs to be done as efficiently as possible.

What ASIC tells us The Ongoing Service Agreements (OSAs) that advisers now have to provide to their clients must articulate a very clear service offering and what it will cost. If you can’t provide evidence that each element of the offering has been delivered, you face having to reimburse the fees. ASIC has taken the view that the main element is the client review, however they provide surprisingly little guidance regarding the conduct of a review. What is clear is that whenever advisers provide personal advice to clients, they must carry out the safe harbour steps to comply with the best interests duty (RG 175.261). In this respect, ASIC sees the client review as a repeat of the initial client meeting, both in terms of depth and breadth.

Purpose of the review Every adviser should have a clear understanding of the purpose of the client review for both themselves and their clients. This may include: • Re-connecting with your client and deepening your relationship with them; • Confirming or discussing changes to the client’s goals and objectives; • Determining the impact since your last meeting of any changes in: - Legislation - Market conditions - The client’s circumstances; • Determining if the client’s financial plan needs to be modified; • Understanding the evolving circumstances of your client’s lifecycles as they grow older; • Reporting on any progress towards achieving existing goals; • Discussing strategies to continue achieving goals and any new goals; • Looking for opportunities to expand the relationship by including additional services; • Confirming that the client’s expectations have been met (or exceeded) and that they will opt-in and remain a client; and • Explaining your referral process to help grow your business.

Time for a client re-set While you may think it too timeconsuming and unprofitable to go through this process for every review meeting, for a number of reasons, we think ASIC’s view is correct. The initial discovery process includes not just the client fact find information but also their goals and objectives. The review can identify any changes in these over time and should include a discussion about all aspects of the client’s circumstances. For those clients who have drifted into a review process that is narrow in scope, using outdated information and vague goals, the next review meeting is an opportunity to provide a real

Before the review A review meeting should be a structured, formal process and as such requires advance preparation, including: • An agenda; • An update on the client fact find

information, goals and objectives (preferably updated before the meeting); • Any issues that the client has asked to be addressed; • An investment markets update; • Investment portfolio performance for all investments; • A list of legislative changes (tax, super, pension, Centrelink) that may affect the client; • A list of financial market changes (interest rates, currencies, market valuations) that may affect the client; • A list of insurance products, mortgages, etc. that the client has with you; and • Any other relevant information. Being prepared is important to ensure the meeting runs smoothly and within your timeframe and also sends a message to your client that you consider them to be important and are not just running an ad-hoc meeting for the sake of it. For the majority of your clients, the next 60 to 90 minutes represent the most important aspect of the perceived value they are receiving for their annual fees. How you conduct that meeting will be a critical factor in helping them decide whether to continue being your client or not. This is especially in times as difficult as these. Hans Egger is managing director of astutewheel.com.au.

26/05/2020 3:10:10 PM

14 | Money Management June 4, 2020

Emerging markets

WHO BENEFITS FROM LOW OIL PRICES? The record low oil price would ordinarily be a benefit for oil importers, writes Laura Dew, but the COVID-19 pandemic means these are anything but ordinary times. THE COVID-19 PANDEMIC has led to many historic moments for the world; the huge death toll, the Government-imposed lockdowns and the move to remote working. One of the largest changes has been the dramatic decline in travel with flights grounded indefinitely and fewer cars and public transport on the road as everyone stays at home. This has led to one of the most unusual consequences of the pandemic with the price of oil turning negative for the first time in history. After an earlier failed meeting, the Organisation of Petroleum

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Exporting Countries (OPEC) finally agreed on 10 April to a production cut to 10 million barrels per day from 1 May, a 10% production cut, in hope of boosting prices. The price of WTI crude oil fell to US-$37 (-$56) in mid-April, its lowest price on record, as the combination of limited demand and rapidly-shrinking capacity led to oil producers paying people to take it off their hands. As of 20 May, the price had risen back up and was US$33 per barrel, although this remains far below the US$63 at the start of the year. While the prospect of low fuel prices at the pump would normally

be celebrated, like most things in the world at the moment, COVID19 has meant this is not the case. Those countries which are net exporters are having their economies hit by the low oil price at the worst possible time while those which are importers are unable to take advantage of it due to the travel restrictions, no matter how cheap it gets. Around the world, oil tankers are sitting idle as producers struggle to contain supply. Legg Mason emerging markets portfolio manager, Alistair Reynolds, said: â&#x20AC;&#x153;If something goes on sale, you buy it at a bargain but

26/05/2020 3:11:25 PM

June 4, 2020 Money Management | 15

Emerging markets

Chart 1: WTI oil price since start of 2020 (US$)

Chart 1: The world’s biggest oil producers

USA

16.2%

Saudi Arabia

13.0%

Russia

12.1%

Canada

you’ll only buy however you have much room for, you don’t want to be re-organising the house. It’s the same for oil, it may be cheap but if there is nowhere to store it then the price won’t matter”.

IMPACT ON EMERGING MARKETS There are two segments of emerging markets most affected by the change; those which are oil producers such as Saudi Arabia, Brazil and Russia and those such as China and India which are oil importers. Oil exporters While the US is the largest oil producer overall at more than 16.2% thanks to its shale production, emerging markets producers include Saudi Arabia (13%), Russia (12.1%) and Brazil (2.8%). For Russia and Saudi Arabia, managers said the countries would largely be able to withstand the fallout. Saudi Arabia requires oil to be priced at US$88 per barrel to achieve breakeven while Russia, where oil makes up just half of exports compared to 80% of Saudi Arabia’s exports, only needs a price of US$42 per barrel. “For Saudi Arabia and Russia,

09MM040620_14-35.indd 15

Iran

5.0%

Iraq

4.9%

UAE

4.2%

China

4.0%

Kuwait

Source: Bloomberg

these countries and their oil-producing companies can cope with the pressure. Oil makes up 80% of Saudi Arabia’s exports and they would need oil to be at US$88 per barrel to balance what they are spending on population. We are nowhere close to that so they will have a fiscal deficit but it won’t be the end of the world for them, they are exposed but are in a better position,” Reynolds said. “In Russia, they are more diversified and less reliant on oil than Saudi Arabia and have a low level of debt so they are in a good position to survive.” Alastair Way, emerging markets portfolio manager at Aviva Investors, said his fund had exposure to Russian oil company Lukoil and he felt more comfortable having exposure to the energy sector now than he did six months ago. “We have exposure to Lukoil as this looks resilient and the cost of production is low. There are political risks we worry about in Russia but it has a resilient economy and one which is geared to the oil price.” However, for Brazil, it already had significant economic problems and a large fiscal deficit so the price crash would exacerbate these existing

5.5%

Brazil

3.2% 2.8%

Source: BP

problems at the worst possible time. As well as oil, the price of other commodities such as iron ore – which is Brazil’s largest export – copper and ethanol had also fallen. Rohit Chopra, portfolio manager and analyst in Lazard’s emerging markets equity team, said: “For energy exporters, the collapse in oil prices may compound the fiscal costs and emergency measures enacted in response to the pandemic. “[For Brazil] the low oil price could result in lower 2020 gross domestic product (GDP) growth estimates, lower oil prices and a series of emergency spending measures are likely to result in a revenue shortfall and a higher fiscal deficit.” Reynolds, whose Legg Mason emerging markets fund had 3.9% invested in Brazil, said: “The last thing Brazil needs is an economic slowdown combined with weakness in oil markets. Brazil already has a fiscal deficit even when oil was at US$60 per barrel. It is reliant on oil for taxation so I expect the fiscal deficit will balloon to 10% of GDP.

Continued on page 16

26/05/2020 3:49:08 PM

16 | Money Management June 4, 2020

Emerging markets

Continued from page 15 “Petrobras also hold a lot of debt unlike the Saudi or Russian companies so they could do without this. Petrobras has been the emerging market company to avoid in funds lately.” Nick Price, manager of the Fidelity Emerging Markets fund which holds 4.5% in Brazil, said: “The Brazilian market sold off sharply on the back of the twin shock of the pandemic and lower pricing environment for commodities. “No exposure to Petrobras boosted returns, as oil prices slumped on the back of the OPEC+ breakdown and lower demand.” It was not just the oil price either that was troubling the country, Brazil has been dealing with its own domestic problems under President Jair Bolsonaro who is trying to implement reforms. These include reforming the pension system, privatising state-controlled companies, reducing bureaucracy, simplifying the tax system and restructuring public sector wages. It is also one of the worstfaring nations in terms of COVID19 cases with more than 363,000 cases and 22,000 deaths, the third-highest in the world and two health ministers quit within a month after clashing with the president. This highlighted the challenges of investing in emerging markets as the countries can often be more politically turbulent than developed markets, have volatile currencies and less equipped to cope in a crisis such as COVID-19. There is also less transparency meaning it can be hard to get a hold on accurate figures regarding their finances.

09MM040620_14-35.indd 16

Chopra said: “Brazil’s main challenges centre around the federal Government’s response to the pandemic as well as renewed political uncertainty following the resignation of Sergio Moro, the former justice minister and speculation that the current economy minister Paulo Guedes may do the same. “Though 2019’s approval of pension reform was encouraging for the potential savings, debt-toGDP trajectory and economic growth prospects for the country, the immediate priorities are emergency spending measures and unconventional monetary policies to support the Brazilian economy during the pandemic.” The Ironbark Copper Rock Emerging Market Opportunities fund, which has 11.7% allocated to Latin and South America, said six of its worst 10 detractors from performance during March were Brazilian companies. “Brazil had been performing strongly on the back of the Government pushing forward much-needed reforms. However,

“Normally there would be a long list of countries who would be cheering lower prices but the low price has fallen on deaf ears this year.” – Alastair Reynolds, Legg Mason recent actions by Congress unwound some of that progress. Those steps backward, combined with the risks related to COVID-19, have significantly impacted the currency and equity markets,” it said in its most recent factsheet. Way said: “The departure of the health minister has shaken investor confidence in Brazil, they need politicians to be doing a good job right now. Brazil was slow to go into lockdown and has handled it worse than other emerging markets so is one of the least attractive emerging market countries at the moment. “We have some exposure to Brazil but are defensively positioned and have limited exposure to those companies

Continued on page 18

26/05/2020 3:11:29 PM

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26/05/2020 9:19:41 AM

18 | Money Management June 4, 2020

Emerging markets

Continued from page 16 which are exposed to the domestic economy.” However, there was a silver lining as PGIM Latin American economist Francisco CamposOrtiz, thought the dual shocks might prompt Brazil to address its economic problems. “The outlook for Brazil looks challenging on both the political and economic side, they will have a deep recession. “The debt to GDP ratio is 90% which is high for an emerging market and that has consequences for its monetary policy so we expect to see rate cuts to their lower bound. “The relationship between the legislative and the judicial branch has been deteriorating and this situation has worsened it. But we can’t rule out that the situation reverses and cooler heads will prevail. A political or economic crisis is not in anyone’s interest and maybe a silver lining will be that there may be an increased sense of urgency to address the country’s economic vulnerabilities, fiscal position and structural growth problems.” Oil importers For those countries who are net importers of oil, at first glance the lower price looks to be a benefit for them. The largest emerging market net importers of oil are China (12.5% of overall oil imports), India (9.7%) and South Korea (6.6%). Conrad Saldanha, portfolio manager at Neuberger Berman, said: “The governments that import oil such as China, Korea, India and Indonesia will benefit from the oil decline through low inflation, better current accounts and better fiscal deficit so that’s a silver lining”. But the restrictions on travel

09MM040620_14-35.indd 18

plus the lack of manufacturing in factories mean there is minimal need for oil right now. This means what would ordinarily be a boost to these countries’ economies, is instead having little impact. The only countries currently able to benefit from the low price were China and South Korea as these countries had slowly begun opening up again. “The low price has fallen on deaf ears this year,” said Reynolds. “China and South Korea are the only two countries which are up and running again and they are net importers of oil so they can take advantage. “But in China, as prices tumbled, they have not fed that price decline through to consumers as the Government is keeping the benefit in a reserve fund to fund other projects like emission reductions and alternative fuels rather than passing it onto consumers.” Asked what would happen when other countries began to re-open up, he said the production cuts which came into force in May would mean the price

would likely have recovered by the time most countries were consuming at full capacity. “Oil demand will spike up in the second half of the year but oil will cope very easily as there is so much supply of it and we are running out of places to put it. “But now every country has agreed to cuts, it will take some time for that storage to be drawn down and it could be another 12 months before oil production returns to normal levels. As demand recovers, the 10% production cut will be enough to balance the market.” Way said: “The extent to which life goes back to normal will be a key issue. With the shift to working from home, will people still go back to an office everyday? Will they still use public transport or start to drive more instead? That’s an upside for the oil price although it will be worse for the environment. “As the first one out of lockdown, China is a role model for other countries and the recovery there has been sharper than was first expected so could that happen in other parts of the world?”

26/05/2020 3:11:42 PM

investmentcentre.moneymanagement.com.au

a part of

FACT CHECK:

HYPERION GLOBAL GROWTH COMPANIES FUND

VERDICT: PASS

a part of

Laura Dew writes the Hyperion Global Growth Companies fund is a global equities fund weathering the pandemic storm better than its counterparts. FOR HYPERION, THIS pandemic has given the firm a chance to demonstrate their bottom-up stock selection capabilities and the benefits of active management. Both the flagship Australian Growth Companies and its smaller Global Growth Companies fund have outperformed their respective equity indices since the start of the year, proving equity funds are indeed able to weather turbulent markets with the right stock selection. The Global Growth Companies fund was launched in June 2014, 20 years after its original Australian equity fund was launched in 1994. At the time, Hyperion said the decision to launch a global equivalent would allow it to “take advantage of a wider universe of high-quality businesses with larger addressable markets”. Managed by Mark Arnold, the firm’s chief investment officer, Jason Orthman and William Hartnell, the trio had managed the $293 million fund since its inception. It aims to achieve medium to long-term capital growth and income by investing in high-quality global companies. Taking a bottom-up growth approach, it seeks companies

with a sustainable and transparent competitive advantage that can grow sales and earnings at a higher rate than the general economy. In order to sit in the portfolio, a company must have a high-quality business franchise, above average long-term growth potential, low levels of gearing and a predictable long-term earnings stream. In a quarterly update, the managers said: “Over long periods of time, a portfolio of quality companies can produce considerable outperformance against a benchmark of generally average businesses. A portfolio that can produce higher and more persistent earnings growth than its benchmark will outperform long term. “In good market conditions, earnings of structural growth companies should be higher than average while in periods of economic crisis, their earnings should be more resilient.” Hyperion was known for its high conviction approach to fund management and this fund was no different with only 15 to 30 holdings at any one time, although no one stock could make up more than 15% of the portfolio. Cash was currently

Chart 1: Performance of Hyperion Global Growth Companies fund versus MSCI World index over one year to 30 April 2020

8% but had ranged as high as 20% in the past. In line with its stockpicking approach, the allocations on the fund significantly differed to its MSCI World benchmark with large weightings to consumer discretionary stocks and information technology, and underweights to consumer staples, financials and healthcare. For example, the fund had 29% allocated to consumer discretionary equities compared to a 10.8% weighting in the benchmark and just 1.8% to financials versus 13% in the index. This was a boost for the fund in recent months as information technology and consumer discretionary stocks were among the best-performing sectors for the fund in April while consumer staples and financials were worst. From a geographic perspective, the fund had 63% allocated to the Americas, 23% to Asia Pacific, 14% to Europe and 0.2% to countries in the rest of the world. With a 38% weighting to information technology, all five of the fund’s top holdings were technology companies. These were Amazon, Microsoft, Alphabet, Visa and PayPal. Microsoft, Alphabet and Amazon were all among top contributors to returns during April, contributing 3.5%, 3.3% and 1.4% during the month.

PERFORMANCE

Source: FE Analytics

09MM040620_14-35.indd 19

Since inception, the fund had been a strong performer and consistently outperformed its MSCI World benchmark and the wider global equities sector. Since it was launched in June 2014 to 30 April, the fund had returned 213% versus average returns by the global equities

LAURA DEW

sector of 69% and of 95% by the MSCI World index. According to FE Analytics data, within the Australian Core Strategies universe, there were over 300 global equities funds and the Hyperion sat in the top 10 in terms of one-year performance. Over one year to 30 April, 2020, the fund returned 16.6% versus returns by its benchmark of 4.2% and by the global equity sector of 1%. Referring specifically to the period including the COVID-19 pandemic, it had returned 10.1% from the start of the year to 30 April, 2020, compared to losses of 5.7% by the index and 7.1% by the sector. In its quarterly update for the first quarter of 2020, the firm said the low growth and slowing economic environment suited the fund. “This low growth and slowing economic environment best suits Hyperion’s investment style. Hyperion has a portfolio of modern businesses that are typically better positioned to operate digitally and remotely,” it said. “Through short-term market volatility and fundamental market corrections our disciplined portfolio construction process allows Hyperion to ‘top and tail’ the positions within our strategies in order to maximise the long-term returns that can be achieved.” It particularly said recent performance had been helped by positioning moves including increasing cash weightings to double digits, a low active weight to financials, removing cyclical positions and increasing weighting to companies with robust business models.

26/05/2020 4:55:33 PM

a part of

ACS CASH - AUSTRALIAN DOLLAR

ACS EQUITY - AUSTRALIA EQUITY INCOME

Fund name

Macquarie Australian Diversified Income ATR in AU

0.55

1.92

2.55

Macquarie Diversified Treasury AA ATR in AU

0.54

1.89

Mutual Cash Term Deposits and Bank Bills B ATR in AU

0.08

Mutual Cash Term Deposits and Bank Bills A ATR in AU

Crown Rating

Risk Score

Fund name

Lincoln Australian Income Wholesale ATR in AU

7.37

-10.59

2.46

2.53

Lincoln Australian Income Retail ATR in AU

7.28

-11.3

1.73

1.53

2.01

Armytage Australian Equity Income ATR in AU

8.66

-13.53

0.17

104

0.08

1.53

1.98

Lazard Defensive Australian Equity ATR in AU

6.81

-9.51

Pendal Stable Cash Plus ATR in AU

0.09

1.55

1.96

Plato Australian Shares Income A ATR in AU

6.51

-11.31

-0.35

Macquarie Treasury ATR in AU

0.05

1.6

1.84

CFS Acadian Australian Equity High Yield-Class A ATR in AU

-14.91

-1.6

100

Australian Ethical Income Wholesale ATR in AU

0.19

1.24

1.83

Legg Mason Martin Currie Equity Income X ATR in AU

7.72

-12.75

-2.03

Mercer Cash Term Deposit Units ATR in AU

0.08

1.43

1.82

Merlon Australian Share Income ATR in AU

8.5

-14.19

-2.46

IOOF Cash Management Trust ATR in AU

0.04

1.27

1.76

Legg Mason Martin Currie Equity Income M ATR in AU

7.66

-13.28

-2.6

Mutual Cash Term Deposits and Bank Bills C ATR in AU

0.06

1.26

1.72

Legg Mason Martin Currie Equity Income A ATR in AU

7.66

-13.43

-2.76

Crown Rating

Risk Score

OC Micro-Cap ATR in AU

22.16

6.96

14.43

132

Ophir Opportunities Ordinary ATR in AU

13.68

-4.96

14.3

116

Macquarie Small Companies ATR in AU

15.99

-5.26

12.43

114

10.65

Macquarie Australian Small Companies ATR in AU

15.96

-5.59

11.82

114

7.19

10.42

Fidelity Future Leaders ATR in AU

10.95

-3.39

11.7

104

Hyperion Small Growth Companies (apps closed) ATR in AU

14.03

3.91

9.75

107

Australian Ethical Emerging Companies Wholesale ATR in AU

13.96

3.27

9.69

104

Fairview Equity Partners Emerging Companies ATR in AU

15.02

-6.03

9.57

117

Ausbil MicroCap ATR in AU

18.42

-10.95

9.49

137

Australian Ethical Emerging Companies ATR in AU

13.89

2.69

8.92

104

Lakehouse Small Companies ATR in AU

25.77

3.52

23.11

174

Mirae Asset Asia Great Consumer Equity A ATR in AU

3.94

18.27

18.22

Fidelity Asia ATR in AU

2.98

4.06

13.43

CI Cooper Investors Asian Equities ATR in AU

-5.06

1.34

Nikko AM TAAM New Asia ATR in AU

2.88

8.61

9.81

Platinum Asia C ATR in AU

3.22

7.39

9.72

Schroder Asia Pacific Wholesale ATR in AU

1.85

-2.83

9.59

Premium Asia ATR in AU

1.91

-2.17

8.05

CFS Asian Growth A ATR in AU

2.8

-3.04

6.96

ACS EQUITY - AUSTRALIA 1m

Crown Rating

Fund name

T. Rowe Price Asia Ex Japan ATR in AU

Risk Score

ACS EQUITY - AUSTRALIA SMALL/MID CAP

ACS EQUITY - ASIA PACIFIC EX JAPAN Fund name

Crown Rating

Risk Score

ACS EQUITY - EMERGING MARKETS Fund name

Fidelity Global Emerging Markets ATR in AU

2.15

1.58

10.31

12.67

113

Northcape Capital Global Emerging Markets ATR in AU

3.87

1.17

9.45

-5.13

12.63

1.3

-0.18

8.76

8.66

1.43

10.12

105

Legg Mason Martin Currie Emerging Markets ATR in AU

DDH Selector High Conviction Equity A ATR in AU

1.85

-3.13

5.98

12.1

-6.22

9.96

115

Schroder Global Emerging Markets Wholesale ATR in AU

2.26

-2.49

5.88

Hyperion Australian Growth Companies ATR in AU

CFS FirstChoice Wholesale Emerging Markets ATR in AU

7.34

9.28

9.13

-0.46

-4.79

5.54

Bennelong Australian Equities ATR in AU

CFS Wholesale Global Emerging Markets Sustainability ATR in AU

12.3

-0.21

8.27

118

2.04

-5.15

5.19

Bennelong Concentrated Australian Equities ATR in AU

Macquarie True Index Emerging Markets ATR in AU

12.04

2.44

7.33

121

Macquarie Walter Scott Emerging Markets ATR in AU

3.66

-0.23

4.61

APSEC Atlantic Pacific Australian Equity ATR in AU

5.46

18.01

6.95

1.49

-8.28

4.6

BlackRock Concentrated Total Return Share E1 ATR in AU

OnePath Wholesale Global Emerging Markets Share ATR in AU

12.9

Pendal Global Emerging Markets Opportunities-WS ATR in AU

4.32

-5.93

4.49

Lincoln Australian Growth Wholesale ATR in AU

11.77

-4.78

13.31

DDH Selector Australian Equities ATR in AU

11.85

-4.71

Lincoln Australian Growth Retail ATR in AU

11.69

Platypus Australian Equities Trust Wholesale ATR in AU

09MM040620_14-35.indd 20

-7.1

6.79

101

Crown Rating

Risk Score

27/05/2020 3:07:19 PM

a part of

ACS EQUITY - GLOBAL Fund name

ACS EQUITY - SPECIALIST Fund name

BT Technology Retail ATR in AU

7.57

18.32

23.45

22.37

CFS Wholesale Global Technology & Communications ATR in AU

7.81

15.5

19.11

Fiducian Technology ATR in AU

18.66

18.15

20.22

6.95

16.9

7.34

24.42

15.25

7.1

10.49

19.95

Platinum International Health Care C ATR in AU

CC Marsico Global Institutional ATR in AU

5.28

21.44

13.48

4.92

13.69

19.79

CFS Wholesale Global Health & Biotechnology ATR in AU

Zurich Investments Concentrated Global Growth ATR in AU

10.99

19.38

Platinum International Technology C ATR in AU

11.44

15.39

5.66

6.31

CC Marsico Global B ATR in AU

4.82

12.98

19.07

Platinum International Brands C ATR in AU

8.95

-10.45

5.12

Findex Advice Services Pty Ltd Custom Portfolio Solutions Global Growth ATR in AU

8.08

13.82

17.93

CFS Colonial First State Australian Share Growth ATR in AU

8.57

-6.13

3.34

Insync Global Capital Aware ATR in AU

6.16

18.36

16.38

Barwon Global Listed Private Equity ATR in AU

10.33

-9.66

1.02

159

AtlasTrend Big Data Big ATR in AU

4.95

10.04

16.23

BlackRock Concentrated Industrial Share D ATR in AU

11.3

-13.54

0.49

111

11.21

15.72

22.72

CFS FC Baillie Gifford W LT Global Growth ATR in AU

8.2

36.05

Loftus Peak Global Disruption ATR in AU

Hyperion Global Growth Companies A in AU

Hyperion Global Growth Companies B ATR in AU

Crown Rating

Risk Score

Crown Rating

Risk Score

ACS EQUITY - GLOBAL SMALL/MID CAP Fund name

Crown Rating

Risk Score

Bell Global Emerging Companies ATR in AU

2.85

3.64

10.58

Ellerston Global Mid Small Unhedged ATR in AU

5.41

7.83

9.43

Prime Value Emerging Opportunities ATR in AU

12.71

2.71

8.38

102

Mercer Global Small Companies Shares ATR in AU

8.32

-8.5

4.04

110

OnePath Optimix Wholesale Global Smaller Companies Share Trust B ATR in AU

9.43

-5.74

3.76

109

OnePath Optimix Wholesale Global Smaller Companies Share Trust A ATR in AU

9.41

-5.86

3.59

109

Lazard Global Small Caps I ATR in AU

6.63

-6.52

2.94

109

Yarra Global Small Companies ATR in AU

6.81

-10.93

2.57

114

Dimensional Global Small Company Trust ATR in AU

5.89

-10.48

1.99

Pengana Global Small Companies ATR in AU

6.31

-8.63

1.93

ACS FIXED INT - AUSTRALIA / GLOBAL Fund name

Crown Rating

Risk Score

CFS Colonial First State Wholesale Diversified Fixed Interest ATR in AU

-0.01

4.93

4.45

UBS Diversified Fixed Income Fund ATR in AU

0.89

4.79

4.37

Macquarie Dynamic Bond ATR in AU

1.84

4.59

4.33

BT Wholesale Multi-manager Fixed Interest ATR in AU

0.43

4.97

4.24

CFS FirstChoice Wholesale Fixed Interest ATR in AU

0.96

3.73

4.08

PIMCO Diversified Fixed Interest ATR in AU

1.05

4.08

4.05

PIMCO Diversified Fixed Interest Wholesale ATR in AU

1.05

4.07

4.01

104

Bendigo Diversified Fixed Interest ATR in AU

1.04

4.55

3.96

Onepath Wholesale Diversified Fixed Interest Trust ATR in AU

1.07

3.87

3.81

IOOF MultiMix Diversified Fixed Interest ATR in AU

1.17

3.77

3.76

ACS EQUITY - INFRASTRUCTURE 1m

BlackRock Global Listed Infrastructure ATR in AU

1.87

5.19

11.21

Fund name

AMP Capital Global Infrastructure Securities Unhedged Wholesale ATR in AU

3.49

3.45

7.99

Mercer Australian Sovereign Bond ATR in AU

-0.39

7.8

6.02

Magellan Infrastructure Unhedged ATR in AU

-0.22

7.25

5.97

-0.54

-0.37

7.82

Macquarie True Index Sovereign Bond ATR in AU

AMP Capital Global Infrastructure Securities Unhedged A ATR in AU

-0.27

7.73

5.95

3.45

3.2

7.73

Jamieson Coote Bonds Active B ATR in AU

AMP Capital Global Infrastructure Securities Unhedged R ATR in AU

-0.28

7.62

5.83

3.44

Jamieson CC JCB Active Bond ATR in AU

Macquarie True Index Global Infrastructure Securities ATR in AU

Pendal Government Bond ATR in AU

-0.22

7.44

5.79

1.43

-0.57

7.69

Jamieson Coote Bonds Active C ATR in AU

-0.3

7.49

5.72

4D Global Infrastructure A ATR in AU

2.22

-3.25

7.52

Jamieson Coote Bonds Active A ATR in AU

-0.3

7.48

5.71

AMP Capital Global Infrastructure Securities Unhedged H ATR in AU

3.42

2.88

7.4

Legg Mason Western Asset Australian Bond X ATR in AU

0.09

6.1

5.67

ClearView CFML Colonial Infrastructure ATR in AU

2.3

0.1

7.15

QIC Australian Fixed Interest ATR in AU

-0.24

6.71

5.65

Mercer Global Unlisted Infrastructure ATR in AU

2.04

-0.73

6.36

Macquarie Enhanced Australian Fixed Interest ATR in AU

0.32

6.55

5.57

09MM040620_14-35.indd 21

3.09

7.69

Crown Rating

Risk Score

ACS FIXED INT - AUSTRALIAN BOND

Fund name

Crown Rating

Risk Score

27/05/2020 3:13:43 PM

a part of

ACS FIXED INT - INFLATION LINKED BOND

ACS FIXED INT - DIVERSIFIED CREDIT Fund name

Crown Rating

Risk Score

DirectMoney Personal Loan ATR in AU

0.55

7.51

7.73

Manning Private Debt ATR in AU

0.46

5.65

6.5

Principal Global Credit Opportunities ATR in AU

4.97

11.86

6.08

MACQUARIE CORE PLUS AUSTRALIAN FIXED INTEREST ATR IN AU

1.45

4.87

5.42

CFS Wholesale Global Corporate Bond ATR in AU

4.35

8.67

4.98

UBS Global Credit Fund ATR in AU

5.11

5.71

4.4

Premium Asia Income ATR in AU

1.76

0.08

4.37

Pendal Enhanced Credit ATR in AU

0.35

3.84

4.29

Firstmac High Livez Wholesale ATR in AU

0.35

2.73

4.02

Firstmac High Livez Retail ATR in AU

0.33

2.5

3.77

Fund name

Crown Rating

Risk Score

Ardea Real Outcome ATR in AU

0.52

6.5

5.27

Mercer Australian Inflation Plus ATR in AU

1.46

4.6

3.5

Ardea Australian Inflation Linked Bond ATR in AU

0.09

1.02

3.23

Macquarie Inflation Linked Bond ATR in AU

0.38

0.28

3.07

Morningstar Global Inflation Linked Securities Hedged Z ATR in AU

1.42

2.51

2.88

Ardea Australian Inflation Linked Bond I ATR in AU

0.12

-1.5

2.53

Aberdeen Standard Inflation Linked Bond ATR in AU

0.74

0.81

2.23

ACS PROPERTY - AUSTRALIA LISTED ACS FIXED INT - GLOBAL BOND Fund name

GCI DIVERSIFIED INCOME WHOLESALE UNHEDGED USD ATR IN AU

23.04

12.01

Crown Rating

Risk Score 45

Fund name

Crown Rating

Risk Score

CF Property Capital Pty Ltd Chiodo Diversified Property Development Strategy Class in AU

-2.03

9.46

18.89

Crescent Wealth Property Wholesale ATR in AU

4.19

-0.93

7.57

Crescent Wealth Property Retail ATR in AU

4.08

-2.53

6.4

Freehold Australian Property ATR in AU

3.64

-1.6

4.52

AU Property Securities Income Units ATR in AU

4.02

-4.88

4.18

301

AMP Capital Listed Property Trusts ATR in AU

10.03

-14.66

1.87

145

-15.07

1.65

147

Challenger Guaranteed Income 400 cents pa 30/09/22 ATR in AU

0.61

Mercer Global Sovereign Bond ATR in AU

0.92

7.13

5.32

Colchester Global Government Bond N ATR in AU

-2.2

6.96

5.23

Russell Global Bond AUD ATR in AU

-0.38

5.65

5.01

Russell Global Bond NZD ATR in AU

-0.37

5.65

4.92

AMP Capital Property Securities ATR in AU

IPAC SIS International Fixed Interest Strategy No 2 ATR in AU

0.15

5.47

4.91

AMP Capital Listed Property Trusts A ATR in AU

9.99

-15.1

1.35

145

Pendal Global Fixed Interest ATR in AU

0.47

10.02

4.61

Resolution Capital Core Plus Property Securities A PF ATR in AU

11.73

-13.28

1.18

138

Pendal Sustainable International Fixed Interest ATR in AU

0.75

10.36

4.57

Pendal Property Investment ATR in AU

10.4

-15.34

0.98

143

Schroder Global Corporate Bond Inst ATR in AU

6.25

4.83

4.38

Fund name

APN Asian REIT ATR in AU

-2.01

-5.42

8.31

121

Resolution Capital Global Property Securities Unhedged II ATR in AU

-0.21

-0.43

7.54

107

Premium Asia Property ATR in AU

-1.22

-9.26

7.27

Quay Global Real Estate A ATR in AU

-1.24

-6.58

6.73

102

6.04

6.06

ACS FIXED INT - GLOBAL STRATEGIC BOND

Risk Score

Dimensional Global Bond Trust NZD ATR in AU

-0.05

Dimensional Global Bond Trust AUD ATR in AU

2.65

6.04

4.46

IOOF Strategic Fixed Interest ATR in AU

0.42

1.03

1.88

Quay Global Real Estate C ATR in AU

-1.24

-6.54

6.63

102

T. Rowe Price Dynamic Global Bond ATR in AU

1.26

4.39

1.75

Reitway Global Property Portfolio ATR in AU

-3.02

9.84

6.57

Pimco Dynamic Bond C ATR in AU

2.33

-1.64

1.47

BetaShares AMP Capital Global Property Securities Unhedged ATR in AU

-1.52

-5.15

5.65

114

JPMorgan Global Strategic Bond ATR in AU

1.65

-0.19

1.45

IOOF Specialist Property ATR in AU

1.6

-7.7

4.71

124

Pimco Dynamic Bond Wholesale ATR in AU

2.32

-1.73

1.37

Dimensional Global Real Estate Trust Inc AUD ATR in AU

1.84

-7.22

4.28

134

MacKay Shields Unconstrained Bond ATR in AU

3.47

-1.22

1.33

Perpetual Private Real Estate Implemented Portfolio ATR in AU

5.58

-9.96

2.63

117

5.99

5.67

Risk Score

Crown Rating

Fund name

Crown Rating

ACS PROPERTY - GLOBAL

The tables and data contained in the Investment Centre are intended for use by professional investors and advisers only and are not to be relied upon by any other persons.

09MM040620_14-35.indd 22

27/05/2020 3:09:30 PM

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26/05/2020 9:22:48 AM

24 | Money Management June 4, 2020

China

DESPITE COVID-19 CHINA IS STILL YUAN-STOPPABLE China has been under intense political scrutiny as a result of the COVID-19 pandemic, but Chris Dastoor writes, its investment markets have proven resilient. CHINA HAS BEEN under the spotlight as the world copes with the COVID-19 pandemic, but its swift economic rebound may give hope for the rest of the world, while allowing investors to maintain confidence in China. China was the first country to face the COVID-19 pandemic and the first one out of lockdown but there have since been questions over their early stage handling of the crisis by a coalition of 62 countries, including Australia. There was also the possibility that these 62 countries may have to lower economic dependency on China in the future. Do these situations affect investors’ confidence of China and is it a reliable market to invest in? Wenchang Ma, portfolio manager of Ninety One’s All China Equity fund, said when the

09MM040620_14-35.indd 24

performance of global equity markets was compared year to date, China was one of the best performers. “The mainland markets are on aggregate down 5%; originally the market reacted negatively in January upon the outbreak, but that recovered very quickly,” Ma said. “In March, when the situation spread globally, the market tanked but again started to recover towards the second half of the month.” Jing Ning, Fidelity China portfolio manager, said Chinese equities declined over the first quarter as COVID-19 spread worldwide which prompted a massive wave of risk aversion in financial markets. “Chinese policy makers implemented proactive prevention and control measures, including

extending the Chinese New Year public holidays, imposing large scale quarantines and travel restrictions, and declaring a nationwide lockdown to curtail the contagion,” Ning said. “China’s official manufacturing purchasing managers’ index (PMI) declined steeply in February to 35.7 points, the lowest on record as the COVID-19 outbreak stalled several factories in the region.” China’s central bank, the People’s Bank of China (PBOC), announced policy measures which included the reduction of the sevenday reverse repo rate – the rate at which the PBOC borrows money from banks – from 2.4% to 2.2%. In February, it had cut the one-year loan prime rate from 4.15% to 4.05% and the five-year rate from 4.8% to 4.75%, and

injected 1.72 trillion Chinese yuan ($371 billion) worth of liquidity through reverse repo operations. “As a result of the intense containment measures, China recorded a steep decline in new infections, which prompted a narrative of China first in/first out from the crisis and helped Chinese stocks outperform global markets over Q1 2020,” Ning said. Russel Chesler, head of investments and capital markets at VanEck, said gross domestic product (GDP) in China had already drastically improved. “In Q1, GDP contracted by about 6.8% due to COVID-19, but in April the economy has bounced back quite quickly,” Chesler said. “There was a projection of a double-digit decline and it’s increased 3.5% over April.

26/05/2020 3:12:13 PM

June 4, 2020 Money Management | 25

China “In the Chinese market, equities are up 2.9% to the end of April, whereas all the other markets were in negatives.” According to FE Analytics, within the Australian Core Strategies universe, the Asia Pacific single country sector had five funds specifically focused on investing in China. The sector had an average loss of 2.51% over the year to 30 April, 2020, which included funds focused on India, Japan and South Korea. The VanEck Vectors China New Economy ETF returned 18.9%, the most in the sector overall. Vasco ChinaAMC China Opportunities and Premium China returned 4.55% and 1.21%, respectively; while VanEck Vectors ChinaAMC CSI 300 and Fidelity China lost 2.1% and 3.56%. The VanEck Vectors ChinaAMC CSI 300 had recently been renamed the VanEck Vectors FTSE China A50 ETF and now tracked the FTSE China A50 Index – the 50 largest stocks in China by market cap – rather than the CSI 300.

REGAINING CONFIDENCE Jonathan Wu, Premium China Funds Management executive director and chief investment specialist, said he never thought the confidence in China existed in the first place. “I mean that as a broad statement, generally speaking, people have always been very cautious investing in China,” Wu said. “People should have confidence to invest in China going forward because China has weathered through the crisis very well. “When China decided to lockdown, if you look at infection rates within Wuhan and the [Hubei] province versus China outside of the province, the amount of infections was not high.” Wu said Asia had a playbook for pandemic situations, as opposed to Western countries – including Australia – that were less experienced in dealing with this type of crisis. This had helped the country’s recovery, as well as why many Asian countries had been able to get back to business quicker than

09MM040620_14-35.indd 25

their Western counterparts. “If you think about it culturally, we don’t wear masks, we don’t have a great culture of physical hygiene and I mean that in a very respectful way,” Wu said. “The reason why I say we don’t – and I was born and raised in Sydney – is because we have such strong social infrastructure in terms of healthcare, as well as public toilets and sewage systems that’s not as prevalent in Asia, especially emerging Asia. “People’s personal hygiene becomes more of a direct personal issue which they don’t take for granted. “Therefore, when you have SARS, they have a stronger culture to understand it’s bad, we need to clamp down on it and it’s everyone’s responsibility.” Ning said long-term investors in China would find opportunities not only in the structural shifts but also among beneficiaries of reforms. “There is rising awareness among corporates towards improving shareholder returns and enhancing dividend pay-out, and a growing acknowledgement of good governance as well as the societal and environmental impact of businesses,” Ning said. “Chinese income growth opportunity is also seldom discussed and is an area of potential future returns. “Against this backdrop, Chinese equities provide attractive opportunities for bottom-up stock picking as valuation premiums have retreated from peak levels seen at the end of 2019.” Ma said China was first in – and hopefully first out – of COVID19, and so far the situation remained in control. “The Chinese government acted very decisively and have the experience from the SARS outbreak from 2003 and that was an important lesson learned, and they implemented lockdown measures very swiftly,” Ma said. When it came to long-term positioning, Ma said the potential upside in China was compelling and there was currently a strong entry point for investors who wanted to start investing in China or increase

“It’s no longer an economy that is largely reliant on manufacturing and export, and it has moved towards consumption and services.” – Wenchang Ma, Ninety One All China Equity fund manager their exposure. “When you think about China’s economy, it’s very dynamic and it’s the second-largest equity market in the world,” Ma said. “It offers a variety of investment opportunities and the economy itself has been going through transformation. “It’s no longer an economy that is largely reliant on manufacturing and exports, and it has moved towards consumption and services.”

BEING MISUNDERSTOOD Even before the COVID-19 pandemic, there was still much misunderstood about China and how investing in the country worked. China had the world’s secondlargest economy, was the largest exporter and the second-largest importer. Although known for manufacturing – for which it is the largest producer globally – it had a sophisticated and diverse economy which included the world’s secondlargest retail market with the biggest middle class demographic in the world. Wu said people misinterpreted authoritarian governments as a government system that doesn’t allow you to make money. “The way we like to describe the Chinese economy and the governing style of the Central Government is that they are utilitarian in nature,” Wu said. “They’re trying to derive the greatest good for the greatest number of people, which is very different from a democracy where you’re trying to give everyone a single vote.” Chesler said people often had the perception China was a less

sophisticated market than the rest of the world and there were governance and regulatory issues. “That might have been the case in the past, but that’s changed significantly over time and China has opened up a lot,” Chesler said. Ma said China was an ideal market for active stockpickers and there were better returns available for those that focused on fundamentals and choosing quality companies at attractive valuations. “China is a very inefficient market with a lot of behavioural biases, it’s dominated by retail investors so there’s market inefficiencies driven by irrational investor behaviours,” Ma said. She said many investors choose to make a passive allocation to the country rather than active but this could mean they miss out on “the exciting, long-term opportunities” available. “This is the type of market where active investors can add value and the performance can be quite different for active [managers] versus the market in general.” Ning said investors mistake China for being an ideal place for growth, when in reality China was a very unique and policydriven economy. “The extent of policy and government regulation make it a complex market to navigate, and the regulatory framework evolves at a fast pace,” Ning said. “China is also a competitive market with an abundance of capital and talent, and therefore, any successful business model or approach is quickly replicated. “Time and again, we have seen investors in China overpay for growth levels that are not sustainable over an economic cycle.”

26/05/2020 3:12:24 PM

26 | Money Management June 4, 2020

Sustainability

ESG FUNDS – THE REAL DEAL OR PRETENDERS? Mike Taylor writes that research and ratings house Lonsec has developed and launched a new approach to ESG ratings which it hopes will help advisers separate the real ESG funds from the pretenders hiding behind loose labelling. THERE ARE PLENTY of fund managers who claim environmental, social and governance (ESG) credentials, but how many of them are actually the real deal? When clients approach advisers looking to specifically invest in ESG, the problem has been distilling the true-to-label ESG players from those which only tick some of the boxes and, as Lonsec’s head of sustainable investment research, Tony Adams, points out the objectives of investors are not necessarily identical to those of the fund managers. Adams acknowledges that there have always been “pretenders” in the mix when it comes to ESG managers, but a part of the issue is that mum and dad investors view ESG very differently to professional fund managers. “Well I guess that I can’t disagree that there are pretenders and there are a number of them but importantly there are different approaches to ESG and this is where the gap comes up because there are a lot of institutional fund managers who when they put in ESG are

09MM040620_14-35.indd 26

talking about a different thing to what mum and dad investors are talking about,” he said. “When they [the institutional investors] are talking about ESG they are thinking about looking at it through an investment prism – i.e. what will the ESG risk do to the value of this company?” “However when the mum and dads are looking at this they are looking at it through the prism of what are the ESG risks as they pertain to me and what does this mean for my community, my planet and my grandchildren,” Adams said. “The bottom line is that the perspective the institutional fund managers and the mum and dad investors are coming from is different,” he said. Research house Lonsec has spent most of the past 12 months developing what represents a new approach to rating ESG funds and is unashamedly marketing it to financial advisers as something which differentiates Lonsec from its competitors. Under the new regime, funds covered by Lonsec are issued with a sustainability score, which

27/05/2020 9:16:26 AM

June 4, 2020 Money Management | 27

Sustainability Strap

reflects the underlying investments of individual products and their compatibility with the United Nation’s 17 Sustainable Development Goals (SDGs). Lonsec said the research was being provided in partnership with Sustainable Platform, a leading provider of sustainability data for investment managers and institutions. In a further announcement of the new approach issued late last month, Lonsec Research executive director, Lorraine Robinson, said that while the concept of ESG was part of the investment selection process and had been around for a long time, there had been a distinct lack of clarity around what it really meant for the end investor. “Lonsec wants to bridge this understanding gap by offering research that looks past the process and directly analyses the assets and industries that investors are exposed to when they invest in a managed fund product. This is what investors ultimately care about,” she said. Robinson said Lonsec believed the new research would enable financial advisers to better meet their clients’ investment needs and expectations, as well as helping

info@lonsec.com.au 1300 826 395

09MM040620_14-35.indd 27

fulfil their best interest obligations. “There is growing awareness among investors of the importance of considering sustainability issues when constructing a portfolio,” she said. “Advisers are now typically confronted with the question: ‘What am I really invested in?’ We want to help advisers not only answer this question, but to create a portfolio that is truly aligned to their client’s preferences.” Robinson said that under Lonsec’s new approach, a Sustainability Report was issued for each fund that underwent assessment - a two-page document detailing the relative success of the fund in supporting the SDGs, together with any exposure to the 10 controversial industries. “The Lonsec Sustainability Score reflects the net impact of these measures, which is peer ranked and results in a score of between one and five bees,” she said. Lonsec rolled the new approach out in May with the company’s executive director of sales and marketing, Robert Hardy saying it had been well received by advisers. “We’ve had extremely positive feedback and the objective is to

“There are certainly some funds that are mislabelled and, of course, there is no formal deﬁnition of what ‘sustainable’ means but they are using those sorts of labels with some poetic license.” – Tony Adams educate and inform because there is significant misunderstanding about what ESG means – the biggest piece that’s missing is what is ‘good stuff’ when the ESG process doesn’t guarantee people are not investing in bad stuff,” he said. Adams said that from an adviser’s point of view, the bottom line was accepting that very often the perspective of the institutional fund managers and the mum and dad investors were coming from were very different. “There are certainly a lot of traditional fund managers who have very good ESG processes in that institutional process and yes they do look at the environmental, social and governmental elements and they do understand the risks and, if they’re being paid enough to take that risk, they’ll take it,” he said. “Because they’re thinking about it in terms of the future value of a firm but they’re not necessarily thinking about the

Continued on page 28

Discover the new Lonsec Sustainability Report and Score

27/05/2020 9:16:34 AM

28 | Money Management June 4, 2020

Sustainability

Continued from page 27 risk to the future of the planet. “So there are certainly companies and funds and fund managers who will come up on our ESG analysis as very strong ESG managers because they do the work, they understand the risks and they engage with the companies but that does not mean that their portfolios will align with what investors are looking for,” Adams said. “So that is what we’ve tried to do – we’ve tried to separate the two – the way it happens in the ESG and how fund managers think about it in terms of the investing process and then we look at it from the perspective of the investing clients and what they care about. “And what the investing clients are about is whether a portfolio is full of coal mining companies or what sort of other allocations are in the portfolio,” Adams said. “They’re not really that concerned about the gender gap in the senior executive of the company. “So this is about looking beyond the marketing stories the managers are trying to tell, their merchandising and their process. Instead, we’re looking at their portfolio and we’re rating their portfolio based not only on what a particular company is, but what it makes (products and services) and how are they used. “By mapping them, on the good side to sustainable development goals and on the bad side against controversies and by providing a single score. It’s a case of looking through the fund manager story to what they

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actually own.” Asked whether he was surprised by the number of ESG funds which had not lived up to their promise in terms of the new Lonsec approach, Adams said he was not surprised. “I was not surprised, I’ve been in the game for a long time and I know there’s been a lot of marketing stuff that goes on,” he said. “There’s certainly some misbranding of funds that goes on out there. “There are certainly some funds that are mislabelled and, of course, there is no formal definition of what ‘sustainable’ means but they are using those sorts of labels with some poetic license. “When we rank our scores, our sustainability score is one through five where one is the best and five is the worst and we utilise a bell curve where if you’ve got a one you’re pretty damned good and when we put our responsible investment sector funds through it almost all of them are fours and fives and one of them was a three. “And that didn’t surprise me,” he said. “There are certainly funds that are labelled ‘ESG’ as opposed to being labelled ‘sustainable’ or ‘ethical’ that are not necessarily delivering what an end investor might think about them because the lens they are looking at it through is different,” Adams said. He said that he believed that by producing a score and condensing the analysis down to two pages, he hoped Lonsec would create some good conversations between investors

and financial planners. “We want it to create the opportunity for advisers to help their clients look at a fund and decide what it is doing and why it is good,” Adams said. “I hope we’re providing the information in a useful way which allows the planner to engage with their client and then planners can go back to particular fund managers and ask why they’ve got uranium in their portfolio when its supposed to be a sustainable fund,” he said. “It’s about enabling that discussion between clients and financial planners.”

27/05/2020 9:16:49 AM

Helping you and your clients understand the real â&#x20AC;&#x153;goodnessâ&#x20AC;? in a portfolio Lonsec is pleased to announce the launch of its new Sustainability Score The score aims to assist advisers and their clients in the selection of products that genuinely align with their values. The score (and associated report) is not designed to look at the simple application of ESG process in an investment decision, but rather drills down to the underlying investments to see how they contribute to sustainability across a range of criteria and whether the mandate permits the investment in controversial industries.

info@lonsec.com.au | 1300 826 395

_FP ad Test.indd 29

26/05/2020 9:18:55 AM

30 | Money Management June 4, 2020

Fixed income

QE FINDING INCOME IN A QE WORLD With unprecedented quantitative easing policies being implemented by central banks across the world, Justin Tyler looks at the implications this will have for bond investors. OVER THE PAST 40 years, lower interest rates have become the norm across the globe, culminating in the ultra-low, and in some cases negative, interest rates we are seeing in some parts of the world today. Savers in some countries now commit to receiving zero interest. For bond investors this means no income from their investment, ultimately forfeiting part of the purchase price of a bond if they hold it to maturity. Government bonds have morphed from their historical role in portfolios as a source of risk-free return to now being a source of

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return-free risk. Investors should not be fooled by the high historical returns of some government bond funds over the last year or two. Investors allocating capital are concerned with the yield to maturity, which is a forwardlooking measure that reliably predicts future returns for longterm holders of bonds. For government bonds, this yield is invariably now very low. We will avoid the question of why investors continue to invest in products with such low (or even negative) yields. There are several potential explanations, which have little to do with the need retail

investors have for a secure, longterm income stream and a need for defensiveness in a multi-asset portfolio. Thankfully, there are ways for these investors to navigate this challenging environment.

A QE WORLD In March 2020, some investors discovered, to their detriment, that equity dividends are highly conditional on broader economic conditions, even in the case of so-called â&#x20AC;&#x2DC;blue-chipâ&#x20AC;&#x2122; stocks. The abrupt reduction in dividend payouts, by what were previously considered reliable companies, will likely drive interest in fixed income

from retirees. In contrast to equity dividends, the interest payments received from bonds are contractual obligations and therefore more reliable and predictable. One misconception, which some investors have about bonds, is that fixed income equates to a capital price that is essentially fixed. That is, investors do not expect significant day-to-day volatility. This is incorrect: bond investments can be volatile. Bond investors are exposed to two main risks: credit risk and interest rate risk. As with other asset classes, appropriate portfolio construction in credit is

26/05/2020 3:13:06 PM

June 4, 2020 Money Management | 31

Fixed income

about assessing risk tolerance. A starting point is to ask, “How much of each of these risks can an individual investor afford to take?” Followed by, “Does the extra yield compensation being earned in higher risk bonds justify the increased risk being taken?”. In March 2020, it turned out that some investors were being undercompensated for the risks they were exposed to in their credit portfolios. While bonds with interest rate risk did well, as mentioned previously, the interest rate risk of government bonds is now very poorly compensated. This leaves corporate bonds as the primary means of gaining exposure to secure income streams, while increasing the defensiveness of multi-asset portfolios. So, assessing the appropriate credit risk budget is key.

DIVERSIFICATION REMAINS CRITICAL The bond investors who tend to be most undercompensated for credit risk are often those who build their own portfolios of individual securities. Credit is not an appropriate asset class to attempt to ‘pick winners’. Bonds with lower credit ratings pay higher yields because they are compensating investors for a higher risk of default, and detailed credit work is required to assess this risk. In March, investors with holdings of individual bonds were once again harmed, with Virgin Australia becoming the latest local default story. Investors in a recent AUD Virgin bond issue did not even receive their first interest payment before the bond defaulted, destroying most (if not all) of the capital committed. For bond investors it is possible to lose capital but in normal circumstances upside is constrained. This is because outside of a default situation, bond returns in the long-term are almost entirely explained by coupon income rather than capital price fluctuations. For this reason, it makes sense to invest across a large number of different bonds.

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A well-diversified bond portfolio should include exposure to a number of sectors and regions to mitigate the downside if something goes wrong. A positive is that this sort of diversification doesn’t have the potential to reduce upside, because that upside is constrained in the first place. So, there is little downside to diversification in credit – it is just good risk management. Investors who do diversify can earn their target yield without risking the loss of a large portion of their capital. As most individual investors do not have sufficient wealth to do this effectively, a number of actively-managed funds exist to provide opportunities for income to be earned in the most optimal, risk-aware way.

MANAGING DOWNSIDE RISKS Yields in excess of government bonds and term deposits are available even from funds with quite conservative credit profiles, and so these are an ideal base from which to build a defensive, incomeproducing portfolio. By contrast, funds investing in higher-yielding bonds have reduced defensive characteristics. Focusing on the US market where data availability is more plentiful, US investors have earned a 0.76% annual premium since 2010 for investing in investment-grade corporate bonds rather than equivalent government bonds.

“Government bonds now represent a ‘return-free risk’, rather than a risk-free return.” For investors with a higher risk tolerance, it has been possible to earn a substantially higher 3.14% annual premium by investing in high yield bonds rather than government bonds. In addition, Australian investors in US bonds will typically have earned even higher yields by hedging their currency risk (because Australian interest rates have mostly been higher than US interest rates). What sorts of risks are investors taking to earn these higher returns? Chart 1 below shows the volatility inherent in the returns earned in credit relative to government bonds. Investors should determine whether they can ride out periods of weaker returns without compromising their overarching investment strategy. This question should, however, also be asked in the context of an entire portfolio. In periods of market weakness, poor equity returns will dominate the returns of all but the most high-risk fixed income portfolios. A sensible approach would therefore be to blend growth and defensive allocations appropriately to target an average expected return, in the context of a maximum tolerance for negative returns over a given horizon. Other issues, such as liquidity needs and other individual circumstances, can then be overlaid.

Chart 1: Annual excess return from investing in corporate bonds instead of government bonds

Source: Bloomberg. Data shown is the excess return over US Treasuries in US dollars of the Bloomberg Barclays US Aggregate Index; and the excess return over US Treasuries in US dollars of the Bloomberg Barclays US Corporate High Yield Index. Annual data is compounded from monthly observations, Jan 2010 to Apr 2020.

Investments in defensive funds like credit funds should then be undertaken on the proviso that the expected investment time horizon closely matches the recommended holding period for the fund. In other words, as an investor increases the risk they are taking, there should also be an upwards adjustment to the expected investment holding period.

THE FUTURE OF FIXED INCOME What will investment portfolios look like in the future? Greater volatility is a sensible expectation across a range of markets, as allocations that have behaved defensively in the past may not be as useful going forward. Government bonds have lost their defensive efficacy – they now represent a ‘return-free risk’, rather than a risk-free return. Other potential defensive allocations will also become more expensive, in part because of generally higher market volatility and in part because of low interest rates. Given the current environment, now is the time to consider an actively managed, high-quality credit fund as the most appropriate defensive building block for a multi-sector portfolio. Credit provides a historically attractive yield pickup over both cash and government bonds. It serves to remove reliance on insecure sources of income, like equity dividends, while increasing the defensive characteristics of the overall portfolio. In some cases, credit allocations may also increase the portfolio’s income yield. In a QE world, it is easy to earn income by taking disproportionate risks but earning income in a sensible, risk-aware way is more challenging. The good news is the recent sell-off has provided an excellent buying opportunity for investors looking for a defensive way to earn income. Justin Tyler is director at Daintree Capital.

26/05/2020 3:13:17 PM

32 | Money Management June 4, 2020

Insurance

DIGITISE TO SURVIVE No-one foresaw the extent the pandemic would disrupt life, writes Andy Todd, but has it brought the future of work forward and how will companies adapt as we enter the recovery phase? EVEN WITH THE technology in place to work from home indefinitely, most people don’t want to self-isolate forever. Working with a team in an office is about much more than easy access to the tools needed to do your job. Having said that, COVID19 has highlighted the need to be able to move seamlessly from an office-based environment to a work-from-anywhere model. I believe this is going to be a fundamental part of more businesses’ operational strategies going forward. If service, delivery and the ability to interact with your clients is central to your business, then the tools your staff need to do that must be accessible from any location. And, in the case of a business like financial services, from a secure online location. Flexible work arrangements and the back-end technology which support remote working are one thing, but in the case of an online insurer, if service and delivery is to remain unchanged regardless of the location of our staff, our adviser and customer portal must be available, and easy to use, on any device – from a desktop computer to a tablet as well as a mobile phone. For many companies, remote working has presented unprecedented challenges. For larger institutions, it is often limited to a few employees, and used mainly for sending emails

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and working on other non-operational systems. Take the education sector for example: a large handful of universities advertise distance learning as a competitive advantage – yet primary and secondary schools are still largely reliant on staff and students being on-site to learn. Virtual conferencing facilities for teachers and network access for administrators are rare. No doubt that is now changing swiftly. This is where tech-based disrupters such as Integrity Life have an advantage. Having been built with flexible and secure, cloud-based technologies at the centre of our business model, transitioning from our HQ to multiple home locations securely, can be easily achieved within a matter of hours.

LEGACY SYSTEMS COVID-19 isn’t the only catalyst for change, although it is certainly shining a spotlight on the need to move faster. In his final report to the Royal Commission into Banking and Financial Services, Commissioner Hayne called for the financial services industry to make rapid in-roads into cultural and technological transformation to better put the customer first and simplify products. The unprecedented events of the past few months have only served to reinforce these words and accelerate change.

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June 4, 2020 Money Management | 33

Insurance Strap

Unfortunately, the need to use technology to restructure the way we think, and the way we do business is particularly true in life insurance, where legacy systems continue to impact the way advisers work. The major problem is these systems were originally designed by insurers to suit their business models and to make their lives easier, forcing customers to conform to the way insurers wanted to assess, underwrite and charge, rather than considering the needs of advisers and customers. Taking personal data from clients is a particularly painful case in point. For many advisers and clients, tele-underwriting has been a clunky and intrusive process, where an agent of the insurer calls the client up at (probably) an inconvenient time to ask a series of personal questions no one would be particularly happy about answering out loud, and certainly not to someone they have never met. Then after the financial adviser gets the information from the client, they have to key it in multiple times to multiple systems. It’s time consuming and increases the odds of error, both of which raise the cost-per-client for advisers, which has become an increasing burden of late. Newer insurers ensure this part of the process is actually completed by the client, on their mobile phone or tablet, via a web-based form that they can complete when they want, where they want. Integrity have found when emailing an application to clients, just over 50% of forms are completed within 24 hours, the rest within a few days, no doubt because the client can spend as little as a few minutes or as long

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as half an hour on the form. Meanwhile, advisers have saved a tremendous amount of time by not having to drive out to the client and walk them through a paper application that often begs as many questions as it answers. Such digitisation also means there’s no slow and error-prone, repetitive data entry for the adviser. There’s similar time and cost benefits for advisers with risk assessment. A product comparison for a client has typically required advisers to extract information from multiple platforms including IRESS and IOOF. Digitisation means Integrity can take that information and pull it into our quote system, so advisers don’t have to re-key everything again.

HUMAN INTERACTION Virtual interaction is making business and lives easier, but nothing can take the place of an actual person-to-person connection. Evidence suggests that our brains function better when we’re interacting with others and experiencing togetherness. This is better in person, but not necessarily crucial. The use of video technology to interact can help keep teams connected. Like many start-ups, we’ve already fully embraced tools such as Microsoft Teams and Zoom, which means there’s no interruption to our usual meetings and regular events. We have also launched a virtual lunchroom, where every day from 12-1pm you can log on and enjoy a break with colleagues and feel, hopefully, less isolated. We’ve also encouraged staff to share pictures of their work from home set up – including kids and pets in the background – so we can

connect and see clearly that everyone’s in the same boat. These are all practices we’re encouraging our adviser partners to adopt, but they’re all much simpler when you have a robust cloud-based technology platform in place and are supporting your people through both training and education.

ADVISERS FACING THE FUTURE We’re heartened to see that advisers are also transforming including the likes of The Advice Movement, a group of young advisers determined to make financial advice more widely accessible, with an alliance that produces webinars, online courses, podcasts and (postCOVID-19 restrictions) live events. The future of advisers also includes being able to get the most out of technology to deliver their customers personalised, bespoke service that is just as effective as the traditional, hightouch, face to face model. Advisers also have for some time needed to build their reputation and profile online. This need has been sped up by the COVID-19 pandemic. Some of the ways that advisers can build their online profile include improving their search engine optimisation – in other words, how well they show up when a potential client Googles either their firm or areas they work in, so they are less reliant on wordof-mouth alone to raise their profile, and can serve people from a wider geographic region. Advisers also need to check their social media and general web presence. While many of their referrals may come through word of mouth, that certainly won’t stop a client from visiting their Facebook page, where they may

“Technology should be a tool which helps us to do our work better, to interact more efficiently and more closely with our team members.” be more publicly exposed than they think. Similarly, many will visit an adviser’s LinkedIn profile and if they’ve neglected it to the point that there’s either a poor quality or generic profile photo and scant details about their professional history, clients may be unimpressed. Whether it’s using digitisation to lift their profile or reduce their per-customer costs, advisers must make technology part of their future, long after COVID-19 has receded as a historic disruptive threat. Insurance companies in particular must also digitise to better serve advisers and their clients, and thus ensure their own future. In the end, technology should be a tool which helps us to do our work better, to interact more efficiently and more closely with our team members, ultimately serving our clients better. But as we wait for life to return to normal, it’s comforting to be able to rely on technology, particularly if we are in isolation, to continue to work, live and interact with others in as normal a way as possible at such an unprecedented time. Andy Todd is general manager, IT at Integrity Life.

26/05/2020 3:14:40 PM

34 | Money Management June 4, 2020

Asset allocation

POSITIONING FOR A RECOVERY What lessons can we learn from past financial crises as investors and financial advisers try to construct portfolios for an economic recovery, asks Anthony Doyle. GLOBAL INVESTMENT MARKETS are currently grappling with the far-reaching ramifications of COVID-19. Unsurprisingly, capital markets have been volatile, reflecting the uncertainty that surrounds the outlook for households and businesses. Governments have been quick to stimulate their economies, while central banks have taken unprecedented actions to prevent the current recession from turning into a depression. Volatility, uncertainty, and unprecedented are the words that will define 2020 in investorsâ&#x20AC;&#x2122; minds. Given the nature of the current

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crisis, it is useful to remind ourselves of some of the lessons from the past. This is important when constructing and positioning a diversified portfolio of assets, a challenge that most financial advisers face daily Reminding themselves of the fundamentals of portfolio construction can help investors position portfolios appropriately in times of crisis and volatility.

EXPLOIT A LONG-RUN TIME HORIZON Investors with a long-term time horizon do not need short-term liquidity, giving them an edge

during market sell-offs. As markets fall, long-run investors have often generated excellent returns by buying quality distressed assets across major asset classes. Additionally, if the market rewards illiquid assets with a higher risk premium, it makes sense that investors overallocate to such assets, as it is unlikely that they will need to sell during bouts of market volatility. Pockets of traditional asset classes like corporate bonds, small-cap equity, and emerging market equities offer the opportunity for long-run

investors to generate superior returns over time. Whilst many would like to describe themselves as longterm investors, this time horizon can shorten very quickly. During financial and economic turmoil, both institutional and individual investment horizons tend to shorten due to immediate cashflow needs or because of psychological factors. The last thing that any investor wants to do is sell an asset into a volatile and illiquid market, where bid-offer spreads can widen materially, and asset prices can fall well below fair value.

26/05/2020 3:16:22 PM

June 4, 2020 Money Management | 35

Asset allocation

THE FREE LUNCH Diversification is the rare free lunch available for all investors: it can reduce portfolio volatility without reducing its return. A key challenge to achieving diversification is reducing the dominance of equity risk in a balanced portfolio. Even if diversification tends to fail in crises as correlations spike across asset classes, it can still be useful in the long-run. This matters more for long-run investors who face less liquidation pressure during market drawdowns. Most portfolios have positive exposures to the equity market and to economic growth. This directional risk is difficult to diversify away, making those assets with a negative correlation to equities a valuable addition. Despite yields being at all-time lows, cash and high quality government bonds and gold can play an important role to play in most portfolios. Diversification of course has limitations, one of which is the tendency for correlations to approach one during crises. Many good fund managers distinguish themselves by managing downside risk instead of just relying on diversification. A strong risk management framework and avoidance of large drawdowns is key to generating good long-run compounded returns.

longer generate a positive inflation-adjusted yield and are return-free. Long-run investors can position for the ‘portfolio rebalancing effect’ that is likely to dominate investment flows in the next decade. Expected portfolio returns can be improved by increasing the weight of the most volatile asset class. The classic approach is to raise the weight of ‘high-risk, high-return’ equities and reduce the weight of ‘low-risk, low-return’ assets such as cash and government bonds. Taking more risk in this way, and getting rewarded for it, is an easy way to boost long-run returns for investors.

MINIMISING COSTS CAN COME AT A COST Passive investing minimises trading costs. However, some costs are worth paying. For example, buying an equity index fund costs more than investing in a bank deposit, but the equity risk premium should make the cost worthwhile in the long-run. In general, investors should allocate more to active products the less they believe in market efficiency. Minimising costs is not always smart; being costeffective and avoiding wasteful expense is.

“Even if diversification tends to fail in crises as correlations spike across asset classes, it can still be useful in the long run.” THE IMPORTANCE OF BEING SELECTIVE Market outperformance – through the compounding of returns – can help investors increase their ability to achieve their financial goals. Excess returns can be an important driver of wealth creation, and actively-managed funds offer the opportunity to outperform the market. Even seemingly small amounts of excess return can lead to significantly better outcomes. Over the intermediate term, asset performance is often driven largely by cyclical factors tied to the state of the economy, such as corporate earnings, interest rates, and inflation. The business cycle, which encompasses the cyclical fluctuations in an economy over many months or a few years, can therefore be a critical determinant of market returns. In the current environment, investors are placing a premium on less economically sensitive sectors like consumer staples, healthcare and utilities. Many discretionary sectors

Chart 1: Sample of asset yields and Australia consumer price index

RISK-FREE IS RETURN-FREE Developed market central banks have taken the actions that they have with a defined monetary policy transmission mechanism in mind. One of the channels of monetary policy is the asset prices and wealth channel, with lower interest rates and quantitative easing expected to spur demand for higher risk assets. Risk-free assets like cash and government bonds no

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Source: Fidelity International, Bloomberg, April 2020

such as hotels, airlines and restaurants have shut down almost completely. Many of these companies have a big fixed cost base and are priced as at risk of default. However, not all are the same and some will have enough liquidity, no imminent debt calls and experienced management. These are the ones which will be able to survive and possibly thrive after this crisis, which will see at least part of the competition eliminated. Once the dust settles, companies that can survive the current crisis and are oversold will recover sharply. The road ahead is unlikely to be smooth, but long-term investors can embrace the volatility and look for new opportunities that arise from it, while continuing to ask themselves whether the companies they invest in have the right characteristics to endure this difficult period. Active investing, combined with rigorous bottom-up research, can help to identify those companies that will be winners in the long-run. As volatility looks set to continue in the coming weeks and months, protection in the form of safe haven assets and portfolio diversification will be increasingly important. Due to central bank action, riskier asset classes like equities appear likely to attract increasing inflows over the coming decade. The traditional methods of portfolio construction – a long-run horizon, diversification, cost-control, and active investing – remain the best approach to generating sustainable long-run returns. Anthony Doyle is cross-asset specialist at Fidelity International.

26/05/2020 3:16:25 PM

36 | Money Management June 4, 2020

Toolbox

THE CINDERELLA OF REAL ESTATE INVESTMENTS As the average life expectancy rises to 83 years, this puts pressure on society to care for an aged population and opportunities in the healthcare property sector, writes Andrew Hemming. ALMOST 50 YEARS ago the investment sector witnessed the floating of Australia’s first real estate investment trust (REIT), shining a spotlight on commercial property’s ability to generate returns for individuals as well as institutions. While office and industrial assets continue to hold the limelight, emerging from the shadows is the overlooked, soon-to-be belle of the ball – healthcare property. Healthcare property encompasses hospitals, outpatient day hospitals, laboratories, medical offices, GP clinics, medical centres, holistic health centres and aged-care properties. Healthcare is a staple sector in our society that has an increasing

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demand and continuous growth forecast which has a knock-on effect for healthcare real estate assets.

DEMAND CHARACTERISTICS Ageing population and rise of chronic diseases Throughout every life stage, an individual requires healthcare and even more so later in life. Those aged 75 years or older incur health costs approximately five times higher than those aged 25-34 years. With an ageing population, this demand won’t abate. In the 1960s, the average life expectancy was approximately 71 years. Today, it’s risen to 83 years. However, by 2060 it’s anticipated

that those living in OECD nations are expected to live to 90.5 years for women and 87.8 years for men, increasing demand on healthcare services. Equally, the rise of chronic diseases adds to demand – in particular, diabetes. Poor sugar control leads to a 16%-33% increase in heart attacks, a 24% increase in microvascular complications (kidney, eye) and a 27%-36% increase in death after 10 years. The annual cost of managing diabetes is $3,500 without complications but increases to $9,600 with complications. Diabetes with complications increases emergency presentations and hospital admissions by 48% and increases

27/05/2020 12:09:24 PM

June 4, 2020 Money Management | 37

Toolbox Table 1: Forecast Federal Government Health Expenditure ($ million)

mortality by 13%-30%. What this means is significantly increased expenditure on healthcare to support the Australian population and its medical needs. The 2019/20 total Federal health expenditure is estimated to be $81.8 billion, representing 16.3% of total expenditure. In the coming years it is estimated this expenditure will steadily increase, as per the Table 1. More specifically is the significant planned expenditure on healthcare facilities and precincts from the State Governments. Below is a summary of 2019/20 State Budget allocation on healthcare property alone (Table 2). Outpatient trends Outpatient facilities can help alleviate demand on public and private hospitals. In 2017, Private Health Insurers (PHI) in Australia paid inpatient hospitals 32% more than they paid outpatient day hospitals for the top nine most common same-day procedures. According to the leading industry body, Private Healthcare Australia (PHA), substituting inpatient care with outpatient care could potentially save $315 million per annum. There have been 105 new outpatient centres opened in the past 10 years across Australia. PHA also recommends reducing preventable hospitalisation for those with chronic/complex diseases with holistic care. This indicates a continuous demand for facilities such as day hospitals and respite care. More outpatient facilities can also potentially assist with

2018-19 (estimated)

2019-20 (estimated)

2020-21 (estimated)

2021-22 (projected)

2022-23 (projected)

80,569

81,777

82,530

85,552

89,544

Source: Parliament of Australia

reducing hospital waiting periods for elective surgery. Currently, public hospital waiting periods for elective surgery average is 89 days compared to private hospitals’ 25 days. Arguably, more facilities can cope with the significant demand for elective procedures. Complementary healthcare Both hospitals and outpatient facilities also create a tertiary, complementary requirement to support their services. These are specialists that are integral to treatments including pathology providers, radiology centres, physiotherapists, pharmacies and the like. Decades ago, these specialists would be geographically dispersed but now there is a benefit to be positioned in one premise, like a one-stopshop for healthcare needs – medical centres. In the past 10 years, it is estimated 3,274 medical centres have been built based on the 7,985 centres listed in the National Health Services Directory with a revenue growth of 41% throughout this period. Demand for these types of properties is likely to continue. Aged stock Medical advances, new technologies and scientific developments mean facilities that were built 30-40 years ago are no longer fit-for-purpose. Unlike industrial, office and other

commercial real estate assets, healthcare property needs to be purpose-built so aged buildings need to be replaced or superceded.

GROWTH What has helped healthcare property move into its own lane is its attractive yields, especially when compared to other property classes. According to MSCI’s research for the December 2019 year end, hospital market yields were 6.11% and medical centres were 5.97%. A further factor is the longer leases as healthcare assets can attract 10-25-year lease lengths whereas offices leases are generally between three and 10 years (depending on the lettable space) and industrial leases average between five and seven years. Longer lease terms provide investors with more security, knowing an asset will generate rental revenue for a long term and, therefore, more likely to deliver continues returns. For example, a $44.6 million healthcare asset located at Riverview Place in Murarrie (Brisbane), was purpose-built in 2005 for single tenant, QML Pathology. The 10,005sqm property has been let to the same tenant since its completion and has a current weighted average lease expiry (WALE) of 16.5 years (as at June 2019).

Continued on page 38

Table 2: 2019/20 State Budget allocation on healthcare property

NSW

VIC

QLD

Amount

$10.1 billion

$1.6 billion

$777.7 million

$619.1 million

$165 million

Specifics

Healthcare infrastructure allocation throughout four years (includes continuing current works, upgrades and building a further 29 hospitals and health facility projects, as well as ensuring compliance with new leasing standards)

Building new hospitals and health infrastructure

Capital expenditure in health portfolio

$550 million to commence construction of new Women’s and Children’s hospital. $69.1 million will be spent over four years to reactivate the Repatriation General Hospital site

$161 million to redevelop Joondalup Health Campus and $5 million towards an aged care facility in Carnarvon

Source: State Governments

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27/05/2020 12:09:28 PM

38 | Money Management June 4, 2020

Toolbox

CPD QUIZ This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development.

1. What are the two health implications driving demand for healthcare property? a) Heart disease Continued from page 37 Despite COVID-19’s impact on businesses operations, the healthcare and medical sector has remained relatively resilient. Though elective procedures were temporarily postponed, it is estimated 400,000 elective surgeries were cancelled in Australia, according to a British Journal of Surgery published paper. Reports suggest it will take 18 months to process the backlog. This gives confidence to investors as medical and healthcare tenants can continue to meet their leasing obligations.

WAYS TO INVEST As healthcare property has come into its own, there has been an emergence of specialist fund providers. Currently, there are two different ways to invest in healthcare assets in Australia, both of which are unlisted on the stockmarket or securities exchange. 1) Unlisted, closed funds The fund might manage one or several specific assets. An investor can secure units in the fund during its prospectus offer period. The fund operates for a defined period of time or until it completes its objective. Investors cannot withdraw their investment from the fund. Typically, monthly distributions payments are paid to unitholders during the defined period. At the end of the period, the fund manager disposes the asset and capital returns are made to the unit holders. 2) Unlisted, open-ended funds The fund usually invests in a number of assets. An investor can secure units in the fund at any time. There is no set period for this fund’s operation, but a continuation. Assets can be acquired and disposed within the fund. Investors can buy new units and withdraw their investment at any time, subject to the terms and the liquidity of each fund. Interest in healthcare property is increasing, particularly among institutional investors, which is a testimony to the robust nature of the asset class and confidence in its performance. Some of Australia’s largest institutional backers in this sector include: • GIC, which formed a $2 billion joint venture with Northwest Healthcare Properties; • AXA Investment Manager and Grosvenor Group’s joint $500 million fund mandated to Centuria Heathley; • HESTA Healthcare Property Trust, a $200 million equity commitment by HESTA to ISPT. In summary, because healthcare is a staple sector in our society it will benefit from continual demand and growth, which means demand for healthcare assets will continue to grow. Healthcare real estate is an asset class expected to grow in sophistication and dominance in the investment markets. Andrew Hemming is managing director at Centuria Heathley.

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b) Ageing population c) Chronic disease d) Chronic disease and ageing population 2. There is increasing demand for outpatient centres, which is why more than 100 new centres were built in the past 10 years. True or False 3. Why has there been an increasing demand for healthcare centres? a) Because the Federal Government has commissioned a fund for healthcare centres b) Because complementary, tertiary healthcare providers such as pathologists and pharmacies see a benefit in being located together c) Because healthcare centres are usually owned by hospitals d) All of the above 4. According to MSCI research, what is the average market yield for a medical centre? a) 7.93% b) 4.52% c) 5.97% d) 6.91% 5. Healthcare property has remained resilient throughout the COVID-19 pandemic despite elective surgeries being temporarily suspended. True or False

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ cinderella-real-estate-investments For more information about the CPD Quiz, please email education@moneymanagement.com.au

27/05/2020 12:09:43 PM

June 4, 2020 Money Management | 39

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

Appointments

Move of the WEEK Chris Burton Practice development manager Count Financial

Count Financial has appointed Chris Burton as practice development manager. Burton, who had previously worked at Affinia, the Commonwealth Bank and AMP, joined on 18 May, and was responsible for growing the Count network by bringing in new firms and helping existing firms to revisit their revenue channel and business strategy. Count chief advice officer, Andrew

Metrics Credit Partners has appointed Lance McKegg and Michael Goldman as investment directors, while Jennifer Lyon and Chloe Tilley have been added to its newly-created external relations and investor analytics team. McKegg joined the Sydney team from UBS Investment Bank where he spent 13 years, most recently as managing director with a focus on leveraged finance, corporate banking, structured lending, US bond market and term loan origination. He had also held roles at NAB in leveraged finance and corporate banking with 30 years’ experience in the Australian, New Zealand and UK financial markets. Goldman joined from commercial real estate funds management group CVS Lane Capital Partners, where he was director of origination. Lyon was appointed as

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Kennedy, said the appointment was a reflection of Count’s commitment to growing its network even in uncertain times. “For some time now, we have been talking about our commitment to growth at a time when other players have been leaving the industry. There are quality advisers out there who are looking for a licensee that has a long-term vision, and the systems in place to achieve it.

Chris’s appointment will help us deliver on this strategy,” he said. “His experience speaks for itself. He has a strong track record in practice development and growth roles over the past two decades and has an intimate knowledge of the industry.” The appointment followed the firm’s hiring of Phil Creswell from IOOF as head of professional standards.

director external relations and had previously spent nine years as head of hedge fund investor relations for Asia, Australia and Middle East at Macquarie Asset Management. Tilley was appointed as external relations associate and previously held product management and distribution roles at Pinnacle Investment Management and Macquarie.

held business development and national account positions with Schroder Investments Australia and Credit Suisse Asset Management. Hall would be responsible for the institutional and financial intermediary business in Australia and New Zealand, reporting to Nick Trueman, head of distribution for Asia Pacific, based in Singapore.

T. Rowe Price has appointed Darren Hall as its new head of distribution for Australia and New Zealand, effective from 28 August, 2020. He was currently head of intermediary for Australia and would succeed Murray Brewer who would retire at the end of the year after 14 years with the firm. Based in Sydney, Hall had over 20 years’ investment experience which included 13 with T. Rowe Price. Before joining in 2007, he

First State Super has appointed John Dixon and Philip Moffitt as board directors following the retirement, by rotation, of Bob Lipscombe and Ralph Kelly after nine years. For the past six years, Dixon had been general secretary of the NSW Teachers Federation and had a passion for new communication technologies for members and the community. Moffitt is the founding director of the Nexus Initiative and

worked at Goldman Sachs Asset Management for 20 years in roles including partner, managing director and co-head of the global fixed interest and currency group. Bennelong Funds Management has appointed Eric Finnell as institutional distribution executive as the company grows its domestic and offshore institutional capability. He would be based in Sydney, reporting to Jonas Daly, head of distribution. Finnell previously worked at Fisher Investments as cohead of institutional business development and client services for Australia, New Zealand and Southeast Asia, and had also been a financial adviser with Ameriprise Financial. Craig Bingham, Bennelong chief executive, said Finnell’s appointment represented a commitment to increasing its institutional business.

27/05/2020 2:30:11 PM

OUTSIDER OUT

ManagementJune April4,2,2020 2015 40 | Money Management

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

Early release or a kick-start?

One way ticket for Poms

SO, what does the cost of a motorcycle trail bike have in common with the average drawdown of superannuation early release? Well, according to a number of motorcycle aficionados of Outsider’s acquaintance a new trail bike costs a bit over $8,000 and, guess what, that equates almost precisely to the average early release superannuation drawdown. Now, far be it from Outsider to suggest that early release superannuation was not, in the main, used to address genuine COVID-19-induced hardship, but his motorcycling friends have noted that trail bikes in that $8,000 price range have become hard to source in recent months. And anyway, as NSW Liberal Senator and former Financial Services Council policy exec, Andrew Bragg, told his constituents “superannuation is for a rainy day and today is a rainy day” which begs the question of whether anyone is riding the ‘Braggster 250’ which is guaranteed to maintain political traction in almost any conditions. For his part, Outsider believes this talk of trail bikes and drawdowns is all just coincidence particularly because he knows that bicycles have also become big sellers since social distancing started as people contemplate girding their loins with lycra to cycle into the city, thereby avoiding the perils of public transport. Outsider intends returning to Money Management Central as soon as is safely possible utilising a combination of public transport and Shanks’ pony after receiving a number of diplomatic messages from Mrs O which would have made a Chinese diplomat blush.

OUTSIDER was relieved but not particularly surprised to read that over half of British expats would not move back to their UK motherland – and not just because one of his best and most modest journalists is a Pom. Even though it’s winter in Australia, Outsider can see what the appeal is for this English rose choosing to stay here rather than return to a UK which appears to have gone from Brexit to being totally ‘Borised’. With a special adviser breaking lockdown laws by visiting a castle to “test his eyes” and a scruffy-haired Prime Minister who is clearly struggling to run the country during a pandemic as COVID-19 deaths mount into the scores of thousands, Australia’s Scotty from Marketing isn’t looking so bad through English eyes. Then again, Outsider’s English expat colleague tells him that the reason expats may not be leaving anytime soon is because there are no international flights which, he agrees, does present a slight problem. Why,

even the First Fleeters could eventually hope to ship home. Never mind, she is far from alone on our shores as the Australian Bureau of Statistics reports there are nearly a million Brits seeking a better life and why you can possibly still hear some whining even though there are fewer planes arriving at our international airports. Outsider just hopes they know which team to support during the Ashes.

Who wants membership of a licensee club?

OUT OF CONTEXT www.moneymanagement.com.au

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OUTSIDER knows that the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) seek to represent financial planners and he knows that the Financial Services Council (FSC) seeks to represent insurers and other product providers so who is representing the licensees? Outsider was prompted to think about this as he noted the number of licensee get-togethers which have occurred over recent weeks with gatherings of small licensees, gatherings of medium-sized licensees and gatherings of large licensees and some gatherings encompassing all three. Now, in each and every case, it seems to Outsider that these gatherings were organised by one licensee or another which was seeking to

achieve a common objective and very often that was a regulatory objective. So the question in Outsider’s mind, given the pivotal role played by licensees in the regulatory system, is whether they should formalise the arrangements and form their own representative body? Afterall, licensees do not have the pulling power they once had within the FPA and they would certainly not want to be mixing it with the insurers and other product providers who make up the various elements of the FSC. The only question for a licensee body is where, given the constraints on soft dollar, they can expect to source the wine and beverages to fuel their meetings.

"Active managers are an endangered species."

"I tested positively toward negative."

– Tim Carver, GQG partner and chief executive

– President Trump on his COVID-19 test results

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27/05/2020 4:58:22 PM