Money Management | Vol. 35 No 13 | July 29, 2021

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

www.moneymanagement.com.au

Vol. 35 No 13 | July 29, 2021

18

EOFY

Positioning for next year

ADVICE

ALTERNATIVES

Lessons from the UK

Long/short strategies

FIXED INCOME

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Superannuation fund offers made to employers as default fund allowed

BY JASSMYN GOH

THE hawking of superannuation products does not count if a super fund is offered to an employer to discuss the employer’s choice of default fund for employees who do not nominate a fund to receive payments.

The Australian Securities and Investments Commission’s (ASIC’s) regulatory guide on the hawking prohibition regime, which is to commence on 5 October, said the prohibition applied only to offers that were made to a retail client.

“Although employers are generally considered to be retail

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Funding a sustainable world EQUITIES have long been the focus of responsible investing, but despite funding large-scale sustainable projects, fixed income often gets left out of the discussion.

Bonds are an important part of a balanced portfolio, so a portfolio that focuses on environmental, social and governance (ESG) investment requires an allocation that holds up to those values in the same way equities are expected to.

“While ESG integration has often been associated with equity investing, integration of these facets should be a central tenet for bond investors too,” Brishni Mukhopadhyay, Western Asset ESG product specialist, said.

But fixed income offered something both ESG and impactorientated investors would find attractive – the ability to finance large-scale green projects.

“Fixed income is the home of the labelled sustainable bond market, with total issuance now well over $1.5 trillion and growing, which gives a high degree of transparency on issuers’ sustainability objectives,” Navindu Katugampola, Morgan Stanley Investment Management global head of sustainability, said.

However, the sector was not without its own risks and advisers needed to consider the labelling of the product as well as the potential for greenwashing.

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Full feature on page 14

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clients within the meaning of the Corporations Act, employers do not typically acquire an interest in the fund,” the guide said.

“An employer selecting a superannuation fund as a default fund does not constitute the issue or sale of a financial product to that employer.”

The prohibition also did not apply to offers made in the course of giving personal financial advice made in the client’s best interest.

However, consent was required when a consumer was offered, invited, or requested to apply for a different class of Continued on page 3

Pahari accuser let down by female colleagues

BY CHRIS DASTOOR

THE FORMER AMP employee who accused Boe Pahari of sexual harassment says she was let down by female employers at the firm who expected her to return to working under the man she accused.

In an address to the Australian Council of Superannuation Investors (ACSI), Julia Szlakowski, former AMP private equity specialist, said: “The same individuals who shamelessly touted AMP’s culture and encouraged me to join are also the ones who demanded I return to work for my harasser, even after my credible complaint against him was investigated and verified – what may come as a surprise is that these individuals were all female”.

Szlakowski said when she interviewed with AMP, she asked about their corporate culture and was assured on their policies regarding AMP’s diversity inclusion policy, female staff retention, quality in compensation and how they accommodated working mothers.

“I did my due diligence and thought I had found a firm I could grow with, a place where I could be safe… everyone now knows how deeply mistaken I was,” Szlakowski said.

Continued on page 3

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July 29, 2021 Money Management | 3

News

‘Reasonable expectations’ for super returns needed

BY CHRIS DASTOOR

SUPERANNUATION members are being encouraged to have “reasonable expectations” for growth, after super funds saw strong performance in the last financial year.

Data from Chant West showed the median growth super fund returned 18% – the best in the last 24 years – while SuperRatings data showed the top 20 balanced super funds also returned above 18%.

Speaking at the Australian Council of Superannuation Investors (ACSI) conference, Damien Graham, Aware Super chief investment officer (CIO), said they always wanted members to retain a long-term view.

“From my perspective, we’re always trying to ensure members have reasonable expectations and a long-term view of what they need from their super or their retirement savings,” Graham said.

“Twelve months ago, we were having a very different conversation with very weak returns, so we’ve seen a very strong rebound and a

Super fund offers made to employers as default fund allowed Continued from page 1 superannuation fund to which they already held.

“We will consider the contact to have been unsolicited unless consent was given in relation to the offer or invitation for that new beneficial interest,” ASIC said.

“If a consumer has consented to be contacted about the issue or sale of superannuation generally, a superannuation trustee can discuss both MySuper and choice products. However, if the consumer’s consent only reasonably applies to one class of beneficial interest, the trustee cannot make an offer, request, or invitation to apply in relation to a different class.

“Although consumers are unlikely to ask about MySuper products by name, they may ask about products with characteristics that MySuper products exhibit such as a ‘low cost’ product or the ‘default’ product.”

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strong return for members in the last financial year.

“But that long-term view and making sure people are attached to what they need on a long-term basis will try to ensure they don’t have too high an expectation after a strong

year – or too negative of an expectation after a weaker year – because both can be quite damaging.”

When it came to how the COVID-19 pandemic had changed the investment landscape, Graham said the biggest observation was how some sectors had pulled growth forward.

“If you look at the sectors that have done really well, there’s been some structural changes,” Graham said.

“Online retailing is an example, where there’s been a very strong pull forward of what was a long-term trend.

“Some people have suggested five years of changes happened in a quarter last year, with regards to online retailing and logistics.

“But we’re in a period of longer-term where rates are likely to stay low and that means there will be a different way of creating economic growth.

“That’s a medium-term issue, rather than just the short-term cyclical issues we’re seeing, as well as the structural issues.”

Pahari accuser let down by female colleagues Continued from page 1 “I never imagined that as an experienced and qualified professional in a company that holds the public’s trust, I would be treated no better than I was as a waitress in a restaurant.”

Pahari was appointed as AMP Capital chief executive last year, which AMP initially defended after the sexual harassment complaint became public, only for Pahari to step down as chief executive less than a week later.

Szlakowski said the aftermath of her going public with the incident was a lesson on corporate governance and how lack of proper corporate culture can destroy a company.

“When I was hired in 2016, AMP was one of the biggest financial institutions in the world, one of the top 20 companies listed on the Australian Securities Exchange (ASX), and one-in-four customers were an AMP customer,” Szlakowski said.

“Since 1 July, 2020, when news of my 2017 sexual harassment complaint broke, AMP shares fell approximately 40% or $2.8 billion in market capitalisation.

“Between July 2020 and March 2021, investors withdrew $9 billion in assets under management from AMP Capital.

“A number of pension funds withdrew hundreds of millions from AMP ethical investment options and a $5 billion property fund recently changed ownership, and there’s speculation two more funds will change hands.”

Szlakowski said the 172-yearold company was no longer in the ASX 50 and its market capitalisation continued to shrink.

“Over the past year dozens upon dozens of talented senior and junior staff have left, not to mention almost every single executive,” Szlakowski said.

“My harasser, however, is set to finally depart next month with a reported $50 million golden parachute.

“It should be painfully clear how a company’s toxic culture where sexual harassment is not treated with the dignity and urgency it requires can not only degrade – not only the survivors who report it – but an entire company’s global workforce and its underlying market value.”

Kate Jenkins, Australian Human Rights Commission sex discrimination commissioner, said employers needed to focus more on response rather than prevention when with sexual harassment.

“What we found is the key driver of sexual harassment is power disparity,” Jenkins said.

“The current system relies on victims complaining and whether they meant it or know it, that’s how employers are working – if they don’t get a complaint, they think they don’t have any sexual harassment.

“Where there were more women on boards, there was likely to be more discussion on the topic.”

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4 | Money Management July 29, 2021

Editorial

jassmyn.goh@moneymanagement.com.au

WHAT WAS ASIC’S FOCUS ON FEE-FOR-NO-SERVICE ALL FOR?

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000

Editor: Jassmyn Goh

The corporate watchdog has dropped the pursuit of criminal charges relating to AMP Financial Planning’s alleged fee-for-no-service, raising questions on why it was made such a focal point of the Royal Commission.

Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814

THE NEWS that no criminal charges would be brought against AMP Financial Planning over alleged fee-for-no-service raises questions about the level of focus directed on the entire fee-for-no-service by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

This is an important question because, during the Royal Commission, the Australian Securities and Investments Commission (ASIC) provided most of the detail on AMP’s alleged fee-for-no-service conduct to the counsels assisting the Royal Commissioner, Kenneth Hayne.

But seems those allegations will never be tested in a Court of Law. The Commonwealth Director of Public Prosecutions (CDPP) quite simply found there was not enough evidence there to proceed.

The question this raises is whether there was any point to the degree of concentration on fee-forno-service during the Royal Commission if lawyers later believed there was insufficient evidence to take the matter to court.

It was ASIC’s decision, in consultation with the CDPP, that

oksana.patron@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 ADVERTISING Account Manager: Damien Quinn Tel: 0416 428 190 damien.quinn@moneymanagement.com.au Account Manager: Amelia King Tel: 0407 702 765 amelia.king@moneymanagement.com.au PRODUCTION

decided to close the investigation as the CDPP determined that given the available evidence along with weighing relevant public interest factors, that no criminal charges should be brought of that conduct.

Following the Royal Commission financial advisers have been pointed to as a ‘troublesome’ industry, have been piled on with an onerous amount of compliance including disclosing the same fees eight times over to clients, leading to many small practices and advisers being knocked out of the industry.

All of this has reduced and will continue to reduce the industry to a handful of advisers unable to

service the unmet advice gap all while the one of the companies most focused upon at the Royal Commission over fee-for-noservice, AMP, has walked away scot-free except for a large measure of damage to its reputation.

But the issue is not over yet for AMP. All eyes will be on the regulator and AMP as ASIC said it still had civil proceedings on foot in the Federal Court on allegations of fee-for-no-service including the fees charged to deceased customers.

Jassmyn Goh Editor

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22/07/2021 3:02:47 PM

July 29, 2021 Money Management | 5

News

FASEA standards don’t adequately recognise previous study

BY OKSANA PATRON

THE current educational standards for financial planners, which have been defined by the Financial Adviser Standards and Ethics Authority (FASEA), need to better recognise previous experience and studies, according to the Association of Financial Advisers (AFA).

In answering questions during a Parliamentary hearing from South Australian Senator, Rex Patrick, the AFA’s acting chief officer, Phil Anderson, said that the explanatory memorandum specifically referred to the ability to recognise experience through continuing professional development (CPD) and other studies that advisers have taken in the past.

“What we’ve identified though is that the current standard has been defined by FASEA does not adequately recognise experience for previous study and in particular CPD that has been done by financial advisers,” he said.

“There is a lot of longer-term financial advisers who are not getting any credit for what

they’ve done in the past and are required to do eight graduate diploma subjects,” he said.

Anderson said that over the years the subject had been raised with the minister, who has currently delegated its powers in that matter to the FASEA, as well as with the FASEA itself through a number of submissions and interactions.

Speaking on the education standards, chief executive officer of the Stockbrokers and Financial Advisers Association (SAFAA), Judith Fox, said that according to the legislation the members of her organisations were required to hold a degree equivalent, however FASEA determined that the only degree that would be approved would be that of financial planning.

“That’s not what legislation requires, the legislation requires a degree equivalent,” she said.

“So, our concern is that we have highly qualified, highly educated people who come with degrees that are absolutely suitable for our industry, but they are not being approved under

FASEA. Our view is that given the legislation requires a degree equivalent we are hoping that the treasury will actually understand that those degrees are the right degrees.”

Fox said that she agreed that everyone would still have to do ‘an additional unit in ethics’ but if they already started economics, finance, commerce and business, then those degrees from the top universities, which have been approved by the national education regulator, should also be approved.

“It should not be appropriate for the retail investor that the only degree that is approved is a financial planning one,” Fox stressed.

Also, she said that given that FASEA would be wound up and the standard setting would go to Treasury under ministerial authority, it would be for the minister to be able to determine the degrees that were suitable for the industry and could be approved.

“It does not need to go back before Parliament because the legislation says a degree equivalent,” she reiterated.

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We are proud to offer your clients the opportunity to invest in the Baillie Gifford Long Term Global Growth Fund and the Baillie Gifford Global Stewardship Fund.

For more information, visit cfs.com.au/adviserbailliegifford

ADVISER USE ONLY. Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (CFSIL) is the issuer of Baillie Gifford Long Term Global Growth Fund and the Baillie Gifford Global Stewardship Fund (‘the Funds’). CFSIL have appointed Baillie Gifford as the investment manager for the Funds. The Funds are offered by CFSIL through an alliance partnership with Baillie Gifford. CFSIL is a wholly owned subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 (CBA). CBA and its subsidiaries do not guarantee the performance of CFSIL products or the repayment of capital from any investments. Past performance is no indication of future performance.

While all care has been taken in the preparation of this information (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including CFSIL or any member of the Commonwealth Bank Group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. This information is for the adviser only and should not be handed on to any investor. It does not take into account any person’s individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) before making any recommendations to a client. Clients should read the PDS and FSG before making an investment decision and consider talking to a financial adviser. The PDS and FSG can be obtained from cfs.com.au or by calling 13 18 36.

Fund Manager of the Year award does not constitute investment advice offered by FE Money Management and should not be used as the sole basis for making any investment decision.

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6 | Money Management July 29, 2021

News

Magellan opts out of targeting net zero goal

BY LAURA DEW

MAGELLAN chair Hamish Douglass has hit out at “arrogant” asset managers who are seeking to control net zero emissions in their portfolios.

Earlier this month, several asset managers including Franklin Templeton and Ninety One announced they had signed up to the Net Zero Asset Managers Initiative which aimed to support the goal of net zero greenhouse gas emissions by 2050.

However, Douglass said, while the direction of the Magellan portfolios was towards net zero, he would not actively be controlling it with a target in mind.

“There are some asset managers who are hooking up to these net zero agreements and forcing investors into that, we are not as arrogant as that,” Douglass said.

“It is not our money, we don’t

dictate where our clients’ climate goals should be.”

Rather than exiting all exposure, Douglass said he preferred to use capital to invest in companies which were trying to decarbonise and that companies that chose to divest were “passing the buck” to someone else.

He said the only carbon risk in the funds came from three US utilities but that Magellan

had been approached by some investors to create a bespoke portfolio which removed the utilities and reduced the carbon risk.

With this in mind, Douglass said, it was not “inconceivable” for the firm to offer a separate portfolio which had a lower carbon risk in the future.

Meanwhile, he said he was still confident about the positioning of the Magellan

Global fund and its defensiveness. The fund had underperformed due to his large weighting to defensive companies rather than cyclical ones and had a 5% weighting to cash, which was lower than usual, but the manager believed it would be costly to hold more than this given inflation was only expected to be transitory.

“We are fully invested, the most in some time, and should be OK. Over the next three to five years, the portfolio is invested in some outstanding businesses which have attractive growth,” Douglass said.

“The hardest part is inflation rearing its head but I think the portfolio will do just fine relative to the market.”

The Magellan Global fund had returned 10.3% over one year to 30 June, 2021, according to FE Analytics, versus returns of 28.3% by the global equity sector within the Australian Core Strategies universe.

Financial advisers shouldn’t be responsible for product failure

BY CHRIS DASTOOR

ADVISERS should not be held accountable for product failure, and product and advice should remain separate, according to the Association of Independently Owned Financial Professionals (AIOFP).

Speaking to a Senate Committee on submissions to the Better Advice Bill, the AIOFP argued it was important to have this distinction legislated so it would be considered by the Financial Services and Credit Panel (FSCP).

Phil Osborne, AIOFP compliance expert, said just because a product had failed does not mean the adviser did not uphold their responsibilities.

“An adviser puts in the research, they will go through a due diligence process and that’s why we have approved product lists, and there is a certain amount of research that goes into that,” Osborne said.

“If the product provider has been shielding things from the research process… unfortunately what has happened in the past is that the adviser has been held accountable.”

Osborne said advisers had been held

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responsible for lack of disclosures by product makers, which the Australian Securities and Investments Commission (ASIC) failed to pick up on.

“It’s something that needs to be taken into account, simply because a product actually failed it does not mean the adviser has failed in their attempts to work in a client’s best interest and perform their due diligence,” Osborne said.

“Our concern is this has happened quite a bit and we’d like to see that aspect covered by the FSCP.” Peter Johnston, AIOFP executive director, said one of the problems with product failure was that consumers mistakenly believed a product was safe just because it was on the market.

“Consumers think because a product is released on the market, ASIC has actually looked at the business model and the directors, etc. and they don’t,” Johnston said.

“This product which hits the market has been tested if it complies with four or five legal requirements, but ‘mum and dad’ think it’s been looked at and it hasn’t.

“This product hits the market and then you have conflicts out there in the research

industry and they can go buy a favourable rating.

“Then they go onto the internet and advertise, and ‘mum and dad’ buy it, thinking it’s got a five-star rating and has been approved

by ASIC but it hasn’t.

“What has happened in the past is we have $40 billion worth of funds failed since 1980 and what has happened is ASIC has run for cover, the product managers have run for cover, so the advisers get the blame.

“Advisers are just consumers like every other consumer. We’re relying on other parties to do the right thing and manage the product properly and unfortunately what happens is we get blamed while the others run away and avoid accountability.”

Johnston said the association believed product and advice should be totally separate, like it was pre-1990.

“During the ‘90s is when the banks got involved with the industry and set up vertically integrated models, which is internal advisers selling their own products; this is where the industry went backwards which was a huge conflict for consumers,” Johnston said.

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8 | Money Management July 29, 2021

News

Wealth coaches and ‘finfluencers’ next bubble to burst

BY JASSMYN GOH

WEALTH coaches and ‘finfluencers’ will be the next bubble to burst and financial planners will bear the brunt of any wrongdoing, the Financial Planning Association of Australia (FPA) believes.

FPA chief executive, Dante De Gori, said the latest danger and risk to come out of the increasing cost of advice was the emergence of wealth coachers/finfluencers and advisers getting into the wholesale game to avoid obligations and regulatory red tape.

“One main reason of this emergence is that it’s too costly and complicated to deliver those services in the current regime. Planners should be able to service consumers at any price point they wish as it is their business models and again we don’t have to force advisers to service low income earners but there should be business models that cater for that,” De Gori said.

“If there’s a wrongdoing by a wealth coach or finfluencer or in the wholesale space, it’s going to come back to the planning space and financial planners will bear the brunt and that’s irrespective of who is involved and we shouldn’t kid ourselves thinking that won’t happen.”

De Gori said those operating outside the

regime had no statutory obligation to act in their clients’ best interests and that they were not watched by the corporate regulatory, so consumers had no protection or compensation.

De Gori said there was a role for wealth coaches in terms of educating consumers who wanted to do things themselves, to help verify things, or to have someone coach them along without necessarily giving them advice.

He noted that there were always going to be Australians priced out of private financial advice but that in industries like medicine there was the Medicare system and in law there was Legal Aid.

Worn and Satchell launch wealth tech advisory arm

BY OKSANA PATRON

FOLLOWING the departure from Enzumo, Peter Worn and Aron Satchell have announced an expansion of Finura Group’s reach into technology consulting, and launched an independent wealth technology advisory arm.

They said the goal was to bring wealth management technology firms closer to customers as with more international players entering the Australian market, there was an abundance of technology choice; however the real challenge remained in the execution.

This was particularly visible in financial advice, a sector which was underinvested in technology.

“Whilst we knew there was strong demand for our digital content services, our backgrounds in wealth management technology consulting made it a natural next step for us,” Satchell said.

“We are already working with several leading wealth management organisations and are excited to play our part in the digital transformation of client experience and advice delivery. We are well underway in expanding our team and look forward to announcing more details on this and our partnerships.”

Finura worked with enterprise software, fintech companies, product manufacturers and advice firms engaged in digital transformations.

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“We think it should be a human right for Australians should get advice on finances and get financial control of their situation and to have access to a qualified financial planner,” he said.

“At the bottom end where people are in financial and debt crisis there are financial counsellors. Then there’s the point where financial counsellors won’t intervene.

“That gap is a group of Australians who depending on what decisions they make they could be the next group that get into financial distress but if they make the right decisions they could be on their way to getting control over their finances. But they’re not in a position where they can afford a financial planners.”

De Gori said this space could be filled with not-for-profit advice and be funded through a combination of government and industry that would fund a pool of advisers to give pro bono or to work in this space full time to give advice to Australians who could not afford to get advice.

“There’s precedent here – in the UK they’ve done this model specifically to assist with pensions advice,” he said.

“Something similar could be started here in terms of retirement, what to do between accumulation and starting your pension.”

AIOFP attacks Govt with video on advisers THE Association of Independently Owned Financial Professionals (AIOFP) has attacked the Liberal Government by launching a video telling its members’ clients that the Government had been treating financial advisers badly and should not be voted for in the upcoming election.

The two-minute video said the Liberal Government had favoured big banks and that the banks were replacing advisers with telemarketers, robo-advice, and computers which would lead to conflicted advice on products.

“There has been more than $40 billion in failed investment products since 1980 and financial advisers have taken all the blame and the Liberal Government have been treating financial advisers badly over the last seven years and left people paying more for financial advice,” it said.

“The Liberal Government are forcing advisers out of the industry with unfair measures.

“It’s the politicians, regulators, and banks for product failure. They have avoided accountability by

blaming advisers. Financial advisers only give advice on the product that have been released by the regulator and managed by banks. For investors the system has failed them repeatedly, not advisers.”

The video noted the federal election was approaching and said its clients should voice their concerns to the Government and that if things did not change for advisers they would reconsider their vote.

“If you want to save $7,500 in lower advice costs over the next three years, don’t want to deal with bank tele-marketers or computers to get advice, and instead want your personal financial adviser to survive and look after you. We all need to send a message to coalition politicians.

“Stop supporting banks or you will lose your seat. We will put you last on the ballot sheet.

“It’s time for coalition politicians and banks to start acting in the best interest of consumers, not themselves your advice will be in contact with further information shortly.”

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10 | Money Management July 29, 2021

News

No charges for AMP FP alleged fee-for-no-service conduct

BY JASSMYN GOH

NO charges will be brought to AMP Financial Planning arising from the corporate regulator’s investigation into its alleged feesfor-no-service conduct arising from its buyer of last resort (BOLR) policy.

The Australian Securities and Investments Commission (ASIC) announced that the investigation, which was the subject of inquiry and evidence during the Financial Services Royal Commission, had been finalised.

It said the decision to finalise the investigation followed consultation with the Commonwealth Director of Public Prosecutions (CDPP).

ASIC said it had been conducting investigations into fees-for-no service conduct by entities within the AMP Limited group, including the BOLR policy conduct which resulted in two briefs of evidence being referred to the CDPP in mid-2020.

ASIC’s investigations into other allegations of fees-for-no-service conduct within the AMP Limited group are continuing.

“The CDPP has now determined, on the basis of the available evidence and weighing the relevant public interest factors, that no charges should be brought for that conduct,” ASIC said.

“ASIC has conducted a number of investigations into alleged civil

contraventions by entities within the AMP Limited group.

“Civil penalty proceedings were commenced in the Federal Court in May 2021 against five companies that are, or were, part of the AMP Limited group for allegedly charging fees to deceased customers.

“ASIC does not intend to make any further comment.”

Responding to the decision, AMP said it welcomed the confirmation that ASIC would not take action in relation to either the processes or reporting of the historic feesfor-no-services conduct.

AMP group general counsel, David

Cullen, said: “AMP acknowledges the deficiencies in its historic systems and processes within the Advice business to monitor ongoing service fees in relation to BOLR. “In 2018, the business completed the implementation of enhanced systems and controls to improve monitoring and reporting and to protect against recurrence. We have apologised to all affected clients and confirm that remediation was also completed in full in 2018.

“With today’s confirmation that no action will be taken, we are pleased to have closure on this matter.”

8 issuers had grandfathered commissions at start of 2021 EIGHT product issuers have grandfathered conflicted remuneration (GCR) arrangements in place since the start of 2021 for 46 products amounting to $24.4 million, according to the corporate regulator’s review on GCRs. The Australian Securities and Investments Commission’s (ASIC’s) review said the issuers planned to rebate product holders and they had to provide the rebates no later than one year after the date by which they were legally obliged to give the conflicted remuneration to another period.

ASIC said it found most of these arrangements were only

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terminated towards the end of its review period.

The report found around $760.5 million in grandfathered conflicted remuneration (GCR) was paid by 89 product issuers relation to 1,273 products during its review period of 1 July, 2019, to 31 December, 2020.

Though, during ASIC’s review period, product issuers terminated 96% (1,227) of GCR arrangements, but 46 remained.

“Product issuers estimated that $266.7 million was rebated to product holders over the review period, mostly through fee reductions. During the review period, there was no mandatory requirement to rebate to product

holders,” ASIC said.

“Financial advisers changed the way they charged clients over the review period. Where appropriate, they moved clients to other fee arrangements – for example, charging an ongoing fee, an hourly rate, a fixed price or an asset-based fee.

“Overall, the findings of our investigation were very pleasing.

Nearly all product issuers ended GCR arrangements before 1 January, 2021.”

Prior to the review period, ASIC also found that 93 product issuers paid at least $816.1 million in GCR to Australian financial services licensees or their representatives in the

2018/19 financial year.

The review also found the top 10 product issuers that paid the largest amount of GCR between 1 July, 2018, to 31 December, 2020, paid a total of $1.196 billion.

AMP’s N.M Superannuation Proprietary Limited paid the most at $266.6 million, followed

by Ipac Asset Management ($245.5 million), and Colonial First State Investments ($221.2 million).

N.M Superannuation’s AMP Flexible Lifetime Super prodcut accounted for 10% of the total GCR paid during 1 July, 2018, to 31 December, 2020, amounting to $155.1 million.

21/07/2021 11:34:44 AM

July 29, 2021 Money Management | 11

News

Govt announces CSLR legislation draft exposure

BY CHRIS DASTOOR

THE Federal Government has released exposure draft legislation to implement the Royal Commission recommendations of the compensation scheme of last resort (CSLR) and the financial accountability regime.

The CSLR was meant to be implemented at the end of the financial year, but was delayed for budgetary reasons, but the regulation was expected to be passed and enacted between Q421 and Q122.

The Minister for superannuation, financial services and the digital economy, Senator Jane Hume, said: “The establishment of the

Compensation Scheme of Last Resort will support ongoing confidence in the financial system’s dispute resolution framework by facilitating the payment of compensation to eligible consumers who have received a determination for compensation from the Australian Financial Complaints Authority (AFCA) which remains unpaid”.

The financial accountability regime would extend the banking executive accountability regime to all Australian Prudential Regulation Authority (APRA) regulated entities and would be jointly administered by APRA and the Australian Securities and Investments Commission (ASIC).

“The financial accountability regime imposes a strengthened responsibility and accountability framework within financial institutions, recognising that decisions taken by directors and the most senior executives of financial institutions are significant for millions of Australians and the Australian economy,” Hume said.

The Government also released the ASIC report into industry’s transition away from grandfathered conflicted remuneration.

The Government introduced legislation to remove grandfathering arrangements for conflicted remuneration from 1 January, 2021, and to

require product issuers to rebate these amounts to consumers.

Following a direction from the Government, ASIC’s investigations found that financial product issuers had fully terminated 96% of grandfathered conflicted remuneration arrangements by 31 December, 2020, and approximately $266.7 million had already been rebated to consumers over the period 1 July, 2019, to 31 December, 2020.

A further $24.4 million was estimated to be rebated to consumers during 2021.

Submissions on the legislation would be open until 13 August.

BioNTech vaccine boosts Platinum European fund

BY LAURA DEW

THE COVID-19 vaccine roll-out may be slow in Australia but exposure to one of its creators has boosted the Platinum European fund.

The fund held exposure to German healthcare firm BioNTech which created a vaccine in conjunction with US pharma giant Pfizer. This had since been identified as the leading vaccine after cases of blood clots were found to occur after the rival AstraZeneca vaccine.

Shares in BioNTech had risen 171% over

the past year to 14 July, 2021, and managers Nik Dvornak and Adrian Cotiga said it had been the fund’s best-performing stock in the last quarter.

“Demand is extremely strong for the BioNTech/Pfizer COVID-19 vaccine, which remains effective against all currently known variants of the virus and has a relatively benign side-effect profile.

“The same cannot be said for many competing vaccines, making it increasingly likely that BioNTech and US-based Moderna will dominate this market for another year

Chart 1: Performance of Platinum European versus sector over one year to 30 June 2021

or two at least. Investors are also reappraising the possibility that the success of mRNA-based vaccines against COVID-19 can be replicated with various other infectious diseases.”

However, the team had since reduced their weighting as the company’s value had doubled in the last three months to US$55 billion ($74 billion) and they were cautious of rivals appearing on the scene.

“We are mindful, however, that there are still many competing products under development and with such a large prize at stake, these aspirants will be well-funded and highly-motivated,” they said.

“The challenge for BioNTech is to successfully turn the prodigious cashflow that they are now receiving into new vaccines, both in the field of infectious diseases as well as oncology, their traditional area of focus.

“We have tremendous respect for the leadership team, who lack neither ambition nor vision. However, as investors we are somewhat circumspect about the risk/ reward trade off at current valuations.”

The Platinum European fund had returned 25.3% over one year to 30 June, 2021, according to FE Analytics, versus returns of 24.3% by the European equity sector in the Australian Core Strategies universe.

Source: FE Analytics

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21/07/2021 11:35:07 AM

12 | Money Management July 29, 2021

InFocus

ATTRACTING TALENT TO ADVICE IS NOT ALL ABOUT THE MONEY Advice practices need to put more work into their culture, career structures and salaries if they want to attract and retain what little supply there is of current and future advisers, Jassmyn Goh writes.

IT IS NO secret that the industry is worried about how many financial advisers will be left by the end of the year and after the education requirement deadline in 2026.

The industry has already seen a huge impact to its numbers with current figures standing at just over 19,000 and it is wondering how and where to attract talent from a shrinking pool.

During the recent Australian Institute of Superannuation Trustees (AIST) symposium, Deakin Business School program director for financial planning, Marc Olynyk, said there would not be enough students to replace the adviser exodus and that significant shortages were coming through.

He said employers and institutions would have to pay more for existing advisers and would have to engage with education providers to get future planners into the industry.

While at a surface level, the numbers Olynyk pulled on financial planning students looked promising this was not being transferred into people wanting to become financial advisers.

He said most students undertaking a financial planning degree were often undertaking a second major and that only 40% of students who had a major in financial planning looked to move into the profession.

FY20/21 AVERAGE SECTOR PERFORMANCE

Financial Planning Association of Australia (FPA) student engagement manager, Jemimah McMurray, said that practices looking for new entrants needed to offer flexible study allowances, have a clear graduate career pathway, and that their job ads needed to use terminology job seekers were looking for.

She said for example, practices advertising for junior paraplanners could include that the job had a pathway into the professional year (PY) and that practices needed to be “loud and proud about their

options available to attract the brightest minds”.

However, it seems one of the biggest areas practices need to work on is culture to draw in candidates.

LBW Business and Wealth Advisors adviser Mitchell Harrison, who had almost completed his PY, said outside of monetary benefits, the most important aspects of a workplace were culture and flexibility.

“I wouldn’t want to work for a company and earn a significant amount of money if the culture

was awful and I felt like I did not want to show up to work every day,” he said.

“Especially with millennials and younger people moving into the industry, the focus is more on flexibility around workplace arrangements with school and study. If you have the right culture and flexibility you’ll do a great job of attracting people in the industry. People will then want to stick around.”

There is one thing going for the financial planning industry to attract candidates and that is having available jobs.

FPA chief executive, Dante De Gori, told Money Management that while the monetary rewards in professions such as law could be good, there was an over supply of candidates and there were many who would not be able to make it as lawyers.

“We need to optimise that advantage that there are jobs today and tomorrow because demand for financial planners outstrips supply, and supply is decreasing,” he said.

“Every financial planning business will take on an adviser if there was one to take on. That is what we have in our favour that the law profession does not – jobs.

“We can’t compete with massive salaries but we also know that if you are successful in financial planning and run your own practice the sky is the limit.”

28.3%

29.2%

28.9%

Global equities

Australian equities

Emerging market equities

Source: FE Analytics, one year to 30 June 2021

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22/07/2021 11:46:42 AM

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21/07/2021 9:35:56 AM

14 | Money Management July 29, 2021

Fixed income

FUNDING A SUSTAINABLE WORLD

Solving today’s sustainability challenges will be funded by debt, writes Chris Dastoor, meaning it is worth investors considering ESG in their fixed income allocations.

WITH THE GROWING importance of environmental, social and governance (ESG), many investors will be aware of the need to consider those factors when making their equity allocations.

However, they may have less knowledge of how their bonds can contribute as many large-scale sustainable projects will be funded

13MM290721_14-27.indd 14

through debt issued by bond issuers.

The easiest way for investors to access this in their portfolios is via holding sustainable or green bonds which aim to have positive environmental benefits and have grown to be a trillion-dollar market.

According to HSBC’s global research report ‘Green Bond Insights’ the overall green bond

market exceeded US$1 trillion ($1.35 trillion).

Green bond supply (year to date) was US$196.8 billion – just over double the US$93.7 billion for the same period last year.

That is a lot of money at stake – and it’s crucial for building the framework for a green future.

Navindu Katugampola, Morgan Stanley Investment Management

21/07/2021 9:42:55 AM

July 29, 2021 Money Management | 15

Fixed income

global head of sustainability, said fixed income was the natural home for sustainable investing.

“Asset managers are mainly transacting in the primary market rather than secondary, which gives us regular, direct interface with issuers seeking capital, versus equity investors, and the opportunity to engage with issuers to encourage meaningful positive sustainability outcomes,” Katugampola said.

“Many of the sustainability challenges, environmental and social, will require capex [capital expenditure] to drive change, and that capex will primarily be debt funded.

“Fixed income is the home of the labelled sustainable bond market, with total issuance now well over $1.5 trillion and growing, which gives a high degree of transparency on issuers’ sustainability objectives.”

Brishni Mukhopadhyay, Western Asset ESG product specialist, said fixed income investors played a key role as creditors in assessing material ESG risks and opportunities that may impede creditworthiness of issuers.

“While ESG integration has often been associated with equity investing, integration of these facets should be a central tenet for bond investors too,” Mukhopadhyay said.

“Material issues such as climate risk and environmental management, diversity and development of talent, human rights and supply chain management, product safety and security, transparency in reporting and the quality of corporate management, to name a few, are key issues that should form part of a fixed income investor’s assessment across all sectors.”

Calvert Research

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Management’s Brian Ellis, fixed income portfolio manager, and Andrew Goodale, institutional portfolio manager, said fixed income offered a unique benefit that both ESG and impactoriented investors would find attractive. “[That is] the ability to invest in specific direct impact opportunities that finance specific projects,” they said.

“This has been a driving force behind the recent rapid growth of the green, social, and sustainable bond markets.

“All of these benefits help to complete an investor’s portfolio without solely relying on the equity portion.”

GREENWASHING RISKS Like with equities, fixed income still faced the risk of possible greenwashing, where ESG products failed to deliver promises made by its marketing.

Mukhopadhyay said academic research and practitioner experience indicated issuers with superior ESG practices had a lower cost of debt, favourable future bond spreads and tend to experience lower drawdowns during periods of market stress.

This meant there was a financial cost to not using a fixed income provider that was serious about underlying ESG credentials of its holdings.

“Conversely, issuers that are deemed to be lower in ESG quality tend to have higher risk affecting their future ability to meet debt obligations and must compensate investors with a higher premium,” Mukhopadhyay said.

“Poor quality ESG issuers are also more likely to be adversely affected by developments such as legal sanctions, the introduction of new regulations or shifts in consumer sentiment.

“You don’t just buy a bond because it has a green or sustainable label.”

– Stuart Dear, Schroders “It is therefore imperative that asset managers understand, measure and allocate strategically to mitigate these risks while seeking to benefit from opportunities arising from ESG integration.”

Although the Australian Securities and Investments Commission (ASIC) had started a review into greenwashing to review the labelling of super and managed funds, it was still important for advisers to do their own due diligence to make sure the choices being made aligned to their clients’ values.

Investors should ask their asset manager or investment adviser to disclose how they integrated ESG in their fixed income fund or portfolio and this should also be disclosed in reporting, said Erik Keller, Robeco client portfolio manager fixed income.

“In our United Nations Sustainable Development Goals (UN SDG) credit strategies we screen out companies that have a negative impact on one of the 17 UN SDGs and can report on how the portfolio is positioned towards the 17 UN SDGs,” Keller said.

Stuart Dear, Schroders head of fixed income, said it was important to do all the background work when researching ESG bonds.

“You don’t just buy a bond because it has a green or sustainable label,” Dear said.

One of these labels – sustainability-linked bonds (SLBs) – were a polarising option when it

Continued on page 16

21/07/2021 9:42:58 AM

16 | Money Management July 29, 2021

Fixed income

Continued from page 15 came to fixed income ESG options.

On one hand it offered a way to set performance targets aligned to sustainability strategies, rather than being tied to financing green projects, which still allowed issuers to offer proactive ESG targets.

However, under this structure investors had no idea where the bonds proceeds would go and the interest rate payments would be affected if it did not meet the sustainability objectives.

The performance target was also established for the issuer, so it was more likely suited to the needs of the project, which may not be in line with broader sustainable targets like the Paris Agreement.

That was not to say SLBs were greenwashed, but it was important for advisers to consider the broader implications of what was being invested.

Dear said there was merit to SLBs and the objectives attached made a difference when it came to corporate ESG development, for example.

“The coupons that are paid are actually linked to whether the

company can achieve its stated targets around emissions,” Dear said. “Those types of bonds that are linked to an outcome make better sense than ones that just have a label over the top.”

However, Nelson Ribeirinho, Mirova fixed income portfolio manager, said he felt less comfortable with SLBs as it was harder to tell where the assets were financed.

“As opposed to green bonds where you know exactly what green assets are financed, with SLBs it’s a bit more opaque,” Ribeirinho said.

“I don’t want to be judgemental, but when you see [oil and gas

producers] coming to the market with SLBs, I cannot help myself but to think it’s not the best way to address the ESG challenges within the fixed income space.”

INFLATION IMPACT Inflation had been in the forefront of investment managers’ minds this year as rising inflation was expected to hurt equity markets, but ESG fixed income managers were less worried about being affected by it.

Mike Della Vedova, fixed income division global high yield portfolio manager at T. Rowe Price, said he did not expect inflation to cause issues in sustainable fixed income.

Table 1: Best-rated fixed income funds for ESG integration

Fund

Sector

ESG Rating

PIMCO Global ESG Bond

Global Fixed Interest

9.05

PIMCO Australian Bond

Australian Fixed Interest

8.41

PIMCO Diversified Fixed Interest

Global Fixed Interest

8.41

PIMCO Global Bond

Global Fixed Interest

8.41

PIMCO Global Credit Wholesale

Global Fixed Interest

8.41

PIMCO Income Wholesale

Global Fixed Interest

8.41

MCP Income Opportunities Trust

Australian Credit

8.21

MCP Master Income Trust

Australian Credit

8.21

Yarra Enhanced Income

Australian Fixed Interest

8.12

Pendal Sustainable Australian Fixed Interest

Australian Fixed Interest

7.97

Source: Evergreen Consultants

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21/07/2021 9:43:12 AM

July 29, 2021 Money Management | 17

Fixed income

Table 2: Best-rated fixed income funds for impact investing

Fund

Sector

Impact Rating

Artesian Green and Sustainable Bond

Global Fixed Interest

10.00

Artesian Corporate Bond

Australian Fixed Interest

9.50

PIMCO Global ESG Bond

Global Fixed Interest

9.00

Affirmative Global Bond

Global Fixed Interest

8.50

CFS Affirmative Global Bond

Global Fixed Interest

8.50

Australian Unity Green Bond

Australian Fixed Interest

8.00

Source: Evergreen Consultants

“From a technical perspective, we would expect below-investment grade (sustainable or traditional) to perform well in a higher inflation environment as investor demand for income-generating asset classes increases,” Della Vedova said.

Reznick said inflation pressure was coming from tightness in the value chain and a spike in commodity resources, especially fossil fuels.

“Those that have reduced their carbon intensity through increased energy efficiency in the production process will be

relatively more indemnified from a rise in energy prices than their less energy efficient peers because they are simply consuming less energy to make the same amount of goods and services,” Reznick said.

“As such, lowering one’s carbon intensity in energyintensive industries can be a competitive advantage.

“Also, sourcing energy from non-fossil fuel sources could be a hedge against fossil fuel energy sources.”

However, Ellis and Goodale said any jump in inflation would be a drag, however, on the performance of those fixed income investments with a longer duration.

“The duration in many traditional intermediate-term fixed income indices like the US Aggregate has continued to extend, so this would argue for seeking out ESG fixed income strategies targeting shorter durations or even a strategy that permits broad flexibility including negative duration,” they said.

RATING ESG FUNDS Evergreen Consultants rated ESG factors over the whole spectrum, from ESG integration (the lightest end) all the way to impact investing (the most intensive end) with the Evergreen Responsible Investment Grading (ERIG) Index.

Looking at the extreme ends of the spectrum, when it came to ESG integration (Table 1), the PIMCO Global ESG Bond scored the highest with a rating of 9.05 (out of 10), and six of the top 10 highest rated fixed interest funds were from PIMCO. For impact investing (Table 2), Artesian Green and Sustainable Bond scored a perfect 10, while the Corporate Bond fund scored 9.5, and PIMCO’s Global ESG Bond scored 9.

PIMCO Global ESG bond was the runner up in Money Management’s 2021 Fund Manager of the Year Global Fixed Income award, in May 2021.

Aaditya Thakur, PIMCO portfolio manager, said the firm believed investors should not have to sacrifice performance for their sustainable investment objectives.

13MM290721_14-27.indd 17

“The PIMCO ESG Global Bond fund investment process is fully integrated with our broader investment process, enabling us to target risk-adjusted returns which correspond with our non-ESG-based investment strategies, while delivering positive sustainable impact,” Thakur said.

“The fund is therefore unique in Australia: it offers investors a dedicated ESG solution in fixed interest without necessarily compromising on the key tenets that they have come to expect from a core bond holding in their portfolio.

“The fund’s philosophy is classified by its focus on the three ‘E’s: exclude, evaluate and engage.

“Unlike many other ESG-orientated bond funds in Australia that stop at simply excluding certain investments (‘exclude’), it goes further and seeks to optimise the portfolio towards issuers with the best ESG scores (‘evaluate’) as well as actively seeks to improve ESG practices of issuers it invests in (‘engage’).”

21/07/2021 11:33:37 AM

18 | Money Management July 29, 2021

EOFY

A YEAR OF TWO HALVES As we enter a new financial year, Laura Dew explores the year that was and which asset classes performed best over the period.

LIKE ANY GOOD sporting game, this past financial year was a game of two halves, according to managers.

The first part coincided with the COVID-19 pandemic and tumbling markets with Australia falling into a recession, its first in 30 years. But the second, from November onwards, was characterised by the development of a successful vaccine by multiple firms which caused markets to rocket upwards on the good news.

Alongside this was the rotation from growth stocks into those focused on value, the strongest rotation between the two styles since World War II, and a rotation from short to long duration in bonds.

COVID PANDEMIC AND VACCINE DEVELOPMENT According to FE Analytics, the ASX 200 was largely flat with returns of 0.08% from 1 July, 2020, to 1 November, 2020, and the country fell into its first recession in 30 years in September.

The Reserve Bank of Australia (RBA) also cut rates multiple times, eventually settling on the record low rate of 0.1% in expectation of high unemployment numbers.

However, the development of a successful vaccine by Pfizer and BioNTech in November sparked a shot of growth for markets with the

ASX 200 returning 25% from 1 November, 2020, to 30 June, 2021.

Over the whole financial year, the ASX 200 returned 27%.

The Pfizer drug was followed by other vaccines from Moderna, Johnson and Johnson, and AstraZeneca and the share prices of these companies rose, particularly the smaller biotechnology firms. Between 1 November, 2020, to 30 June, 2021, the share price of German biotech BioNTech rose 156%.

Anthony Gowolenko, portfolio manager at MLC Asset Management, said the performance had been so strong during the past financial year that it had helped long-term numbers.

“It has been a cracking financial year and it smoothed the profile of the two and three-year numbers as well, before that they looked quite dire,” he said.

Shane Oliver, chief economist at AMP Capital, added: “Australian shares were helped by a sharper rebound in the Australian economy, a surge in profits and numerous companies reinstating or increasing their dividends. Of course, this followed a 7.7% loss the previous financial year.

“Bonds performed poorly as bond yields rose and cash had a near zero return reflecting the near zero cash rate.”

Chart 1: Performance of ASX 200 over one year to 30 June 2021

Source: FE Analytics

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21/07/2021 9:42:16 AM

July 29, 2021 Money Management | 19

Strap EOFY

As well as the vaccine, November also saw the culmination of a tumultuous US election between Donald Trump and President Biden. After several nervous days of vote counting, Democratic candidate Joe Biden was crowned victorious which put an end to fears of four more years of Donald Trump in the White House.

In the US, the S&P 500 rose 29% over the financial year while the MSCI World index rose 28%.

According to Bank of America (BofA) global fund manager survey, November also saw respondents make their “most bullish” allocations to equities all year while cash sank to pre-COVID levels and technology saw a sell-off.

Looking at ASX 200 sectors, the best-performing sectors over the year were consumer discretionary (44.7%), financials (39.2%) and information technology which returned 37.6% while the worst was utilities which lost 18.6%.

However, the “trillion-dollar question” during the second half of the year was what the impact would be from rising inflation and whether it would be transitory or permanent.

While inflation remained low for now in Australia, it had risen to the highest level since 2008 in the US at 5.4% in June.

Matt Peron, director of research at Janus Henderson, said: “We continue to believe US inflation will run high for some time but ultimately will not cause the Fed to have to act too aggressively as to bring an abrupt end to the cycle. So, while this may cause the market to consolidate recent gains as market participants take a ‘wait and see’ approach, we think the economy will keep expanding for the foreseeable future and thus the set-up is for continued market gains later this year”.

This had led investors to position themselves in areas of the market which would offer inflation-protection in a high inflation environment and rotate from growth into value equities for the first time in a decade as value stocks and commodities tended to perform better in an inflationary environment.

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According to BofA, allocations to commodities in February were at the highest level since 2011.

Gowolenko said: “Inflation and the resurgence of inflationary forces present challenges and yields might go lower so capital is at risk. In the US, they have been able to maintain quantitative easing for several years whereas the RBA is already starting to taper its bond purchases”.

“We believe it is likely to be more transient than permanent – however, ‘transient’ is open to interpretation: are the supply bottlenecks months or longer than that? On balance, we expect higher inflation prints to moderate as the year unfolds,” said John McIlroy, executive director at Crystal Wealth Partners.

NEXT YEAR AHEAD However, managers were cautious that the next year could be more difficult than the past. This was further complicated by lockdowns across Australia which developed in early July and had an unknown end date, potentially damaging earlier gains. Global returns were also likely to be affected this year by countries, including Australia and emerging markets, which lagged behind in the vaccine rollout.

“For those countries further behind in reaching herd immunity – like Australia – it likely means a continuing reliance on snap lockdowns to keep case numbers down and head off bigger outbreaks that overwhelm the hospital system and send economies backwards,” Oliver said.

“The evidence so far is that snap lockdowns don’t derail the recovery.

And global production schedules point to plenty of vaccines being available later this year enabling Australia and other vaccine laggards to proceed down the same path as other advanced countries later this year or early next in terms of avoiding lockdowns.”

From a property prospective, an extended lockdown could have a negative impact on the office market, as many firms had started to return to reduced capacity for many of its workers. The Australian listed property market had returned 28.1% over one year to 30 June,

Chart 2: Performance of best and worst sectors versus ASX 200 over one year to 30 June 2021

Source: FE Analytics

2021, according to FE Analytics, compared to returns of 19.2% by the global property sector within the Australian Core Strategies universe.

Steven Ralff, managing director at LaSalle Investment Management, said: “It depends on the company – firms will largely move to hybrid working but others will need to be there five days a week. But offices have the longest leases in the industry so that will to have be worked through.

“The tenant is definitely in the better position than the landlord, there is space up for grabs at flexible prices.

“But we are cautiously optimistic on property, central banks are being as accommodative as they can be, balance sheets are in good shape and the pricing is fair.”

Anthony Doyle, cross-asset specialist at Fidelity, said: “Thematics are being challenged in 2021, it will be very uncertain and will be difficult to analyse as a lot of good news is already priced in. The next six months especially will be difficult.

“Before lockdown, we were pretty much back to normal but now we are in a different scenario.

Maybe the last six months will be as good as it gets.”

Looking at how clients should be positioned for this environment, managers suggested allocations such as being overweight cyclicals, high-quality industrial equities and positions in higher-yielding debt.

“We are overweight cyclicals but not dramatically so, we think they can do well,” Stephen Bruce, senior portfolio manager at Perennial

Value Asset Management, said.

“Highly-valued stocks will struggle and so will defensive ones which see a lack of growth, bond yields will put pressure on defensive sectors and very expensive sectors.”

Gowolenko said: “I would allocate to high-quality industrial shares that are exposed to the global economy and have pricing power, those parts of the commodities complex with a low cost of production. They are the ones that can still be profitable and cash generative in an uncertain time”.

McIlroy said: “We’d all be delighted if the market performed as well as it has done over the next year, but in reality, we’d be very fortunate if it did.

“Ensuring a mix of domestic and international shares and property assets underpin growth returns can offset some more defensive positions, given the difficulty with trying to ‘market time’. With international exposures it is important to diversify what is typically a US large-cap centric position with other regional positions such as emerging markets.

“Having a position in commodities, energy, floating rate securities and higher yielding corporate debt as well can be used to support risk adjusted returns with some core fixed income as ballast.

This includes within the mix having some exposure to some assets that can reset their ongoing cash flows to any unexpected inflation outbreak – where costs can be passed onto consumers.”

21/07/2021 9:42:26 AM

20 | Money Management July 29, 2021

Advice

COLLABORATION NEEDED FOR FUTURE FINANCIAL ADVICE

As numerous studies and roundtables have failed to find a successful financial advice model, collaboration between stakeholders could be the solution, writes Neil Macdonald.

FOR YEARS, THE industry has been pondering the financial advice model of the future.

We’ve sat in on thinktanks and joined in roundtables, we’ve made and read submissions and we’ve seen the Financial Services Council’s (FSC’s) green paper ‘Affordable and Accessible Advice’, following on from its 2020 ‘Future of Advice’ report. Various industry groups have lobbied politicians of all persuasions and consulted with the regulators.

To what avail? Let’s start with the positives.

Research has provided us with valuable insights. We know that many consumers both need and want financial advice. We know that people who receive advice value both the advice and their advisers.

More than 90% of our members want to stay in the business.

13MM290721_14-27.indd 20

Industry research also tells us that people prefer to receive personal advice. Even the Australian Securities and Investments Commission (ASIC) has noted many consumers prefer to deal with an individual face-to-face. This allows consumers to build trust and rapport, rather than interacting with a cheaper, digital advice using an algorithm from a large corporate.

These findings appear to have led to a generally-accepted consensus amongst those with a vested interest in the industry that people need affordable access to quality personal financial advice.

Let’s call that a goal.

But there ends the list of positives – because despite years of work, what we have seen is consumers less enabled to access and afford the quality advice they say they want and need, and a

profession so hamstrung by excessive, and sometimes contradictory, regulation and legislation that delivering advice is becoming almost impossible.

HOW HAS THIS HAPPENED? Successive Governments and the regulators appear to have formed a view that consumers must be protected and relieved of financial responsibility, for their own good.

Recent evidence of this ideological standpoint is a joint Australian Prudential Regulation Authority (APRA) and ASIC letter sent to registrable superannuation entities (RSEs) on 30 June, 2021, which conveyed an expectation trustees check sample statements of advice (SoAs) to see that members paying for financial advice from the fund have actually received that advice, a position which

according to some commentators, may breach Privacy Act obligations and which we suggest smacks of interference of the state into the private affairs of the individual.

However, the question we must ask ourselves is: how have the Government and regulators arrived at a view that so insults the intelligence of consumers of financial advice and is so disrespectful of financial advisers?

The answer is: a series of product, fraud and advice-related scandals which tarnished the reputation of financial advisers, almost beyond repair. This led to a profound lack of trust at a Government and regulator level, and amongst Australians who are not financial advice clients. It was fuelled by a mass media which failed to recognise that advisers were made scapegoats.

21/07/2021 9:41:08 AM

July 29, 2021 Money Management | 21

Advice Our industry has been, and probably still is, thick with vested interest power players who, while paying lip service to consulting with consumers and advisers, made decisions in their own self-interests with little,if any, genuine regard for the impact of those decisions on consumers or advisers.

While there were exceptions, just as there are in every profession, for the most part, financial advisers operated honest businesses, providing advice which their clients valued, within an imperfect financial advice model.

When things went wrong, blame was placed not only on the power players but also on small business financial advisers.

And so, we come to the ‘remedies’ meted out by Government and the regulators in response.

The narrow focus of the current Corporations Act, Section 7 on financial product advice was already a long-standing problem.

Failing to effectively address it resulted in various legislation and regulation being tacked on over the last 20 years, without much consideration around how they could be effectively implemented.

Some of the ‘black letter’ legislation is impractical or impossible to efficiently comply with, for example, financial disclosure statements (FDS) resulting in the recent shift to annual advice agreements.

At every twist and turn, ‘solutions’ to problems and failures in the industry have involved tacking on yet another confusing piece of legislation, regulation or ‘guidance’ and introducing business-destroying fees, levies and penalties. While those decisions were made with good intentions and within the context of the times, with hindsight we can see that they have contributed to making advice even less affordable and less accessible.

The Australian Law Reform Commission review of Chapter 7 of the Corporations Act is a positive step, but only if it results in the significant changes necessary to address the issues of the past.

As I write, ASIC just provided feedback on responses to its

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'Consultation Paper 332 Promoting access to affordable advice for consumers’ (CP332) and consulted via a series of roundtables with advisers, licensees, and industry associations – but not with the two consumer groups who made submissions.

Based on the feedback received, the regulator says it has, ‘identified a range of ASIC-led initiatives that will help industry participants to provide good-quality, affordable personal advice to consumers.’

ASIC says it intends to move forward with these initiatives as resources permit.

But with the greatest respect, will these initiatives really help the industry move closer to its goal?

Much more importantly, will these initiatives deliver what consumers have told us they want?

In the words of Albert Einstein: “We cannot solve our problems with the same thinking we used when we created them”.

The time for discrete pondering by different sectors of the industry is over. The time for consultation is over, the time for imposed solutions is over. It is time for genuine collaboration. Only when all players with a vested interest in the industry, particularly consumers, can genuinely collaborate with all other players, will the necessary, fundamental change happen.

We believe there is a once in a generation opportunity to look at the future of financial advice and balance the need for consumer protection with the need to give Australians affordable access to quality personal financial advice.

I suspect what we will find when we do genuinely collaborate, is that we need to tip the financial advice model on its head and think about it from the consumer perspective.

THE SCIENCE OF COLLABORATION Genuine collaboration means working together in a spirit of cooperation for the common good. It requires an innate willingness to work together, and recognise that we have different perspectives.

While this sounds like more art than science, collaboration requires not just people, but also policies, processes and technology.

Chart 1: A system built by stakeholders to improve financial standards

Source: The Advisers Association

Australian collaborations architect, Marek Lis, has created the Platinum Project (Chart 1), which outlines a Big Hairy Audacious Goal (BHAG) as to how Australia might design the best financial services industry in the world in around 18 months.

Lis observed that we have reached a state of stagnation because all stakeholders have not yet clearly defined what success looks like. One of the first steps we therefore need to take is to establish our definition of quality. “By allowing all stakeholders – including consumers – to participate in the creation of the solution, the outcome will be much better than we imagined,” he says.

ALIGNMENT OPTIMISATION TECHNOLOGY But this is no mean feat. Pulling all players into the tent means there will be, as Lis recognises, “hundreds of opinions from thousands of participants”. The more the better – and the most efficient way to deal with this, he says, is via Alignment Optimisation Technology (AOT).

AOT helps synthesise diverse opinions to arrive at a consensus, and work efficiently towards a consensus goal, via an agreed and co-ordinated set of actions.

Although a comparatively new organisational science (and technology), it is already being used by a wide range of Fortune 100 companies in the US. Lis argues that no other

methodology can uncover consensus around quality as effectively, nor as quickly, and no other methodology can effectively pinpoint clear roadmaps.

That’s the high-level art and science of it, but what would it look like for the Australian financial services industry? Lis has broadly mapped out at an indicative timeline for implementation: 1) Aligning opinions (eight months) • Recruitment of all stakeholders: two months • Measuring alignment: six to eight weeks • Convergence of alignment: three weeks • Resolving misalignment: three months 2) Implementation (six months) • Collaborative design, roadmaps and action plans: three months • Action plan implementation and resolution: three months 3) Monitoring drift and constant improvement • Conducted every six months If everyday Australians are going to be enabled to access affordable, quality, personal financial advice when they need it and the Australian financial planning profession is to survive and thrive, we must all set aside our differences and start collaborating on a new model for financial advice now, and not a moment later.

Neil Macdonald is chief executive of The Advisers Association.

21/07/2021 9:40:56 AM

22 | Money Management July 29, 2021

ETFs

A THEMATIC CHANGE Flows into thematic ETFs grew by 29% in the first half of 2021, writes Arian Neiron, as investors seek long-term investment themes.

FUNDS ARE POURING into the thematic exchange traded fund (ETF) sector on the Australian Securities Exchange (ASX) and the acceleration of flows will push thematic funds under management (FUM) to $10 billion by the year’s end. Globally, we have seen an explosion in thematic ETFs being offered to retail investors as they demand more sophisticated and targeted investment strategies.

Thematic ETFs offer investment strategies that capitalise on enduring economic trends and shifts in consumer markets, society, and the environment over time. ETFs based on particular themes differ from traditional market capitalisation ETFs as they track specially designed indices that focus on a particular segment of the market rather than the overall stock market.

The growth of thematic ETFs is the next chapter for the ETF market, which is underpinned by sustainable long-term economic trends. Over the six months to 31 May, 2021, FUM in thematic ETFs grew by 29.3% to $4.4 billion, while FUM in environmental, social and governance (ESG) ETFs jumped 33.7% to $3.72 billion. That growth easily exceeded growth in FUM of ASX-listed market capitalisation ETFs which grew by 15.8% to $67.8 billion.

Examples include clean energy, gaming and technology sectors and these themes are likely to endure over the long term rather than simply be short-term fads.

Our Video Gaming and eSports ETF has been the fastest-growing ETF since we launched in 2013, demonstrating the high level of investor interest in these types of products.

Other thematic ETFs which have taken off in the US include diversity ETFs, capturing themes

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such as gender diversity and racial equality.

PLAY TIME FOR GAMERS The explosion of gaming before and during the COVID-19 pandemic has created significant investment opportunities in global gaming companies such as Tencent, Nintendo, Activision Blizzard, which have been growing as a group at a faster rate than the US tech giants.

Video game engagement is breaking records across a variety of metrics.

Research house Newzoo forecasts that 2021’s global games market will generate revenues of $175.8 billion. By the end of the year, there will be 2.9 billion players worldwide. Positive secular trends are driving the long-term growth of gaming and esports. We are seeing increasing number of gamers and time spent gaming. This will continue driving industry growth over the long term.

Last year’s release of the PlayStation 5 was long awaited and Xbox Series X|S sealed a year of record-breaking growth in 2020.

Newzoo estimates that the games market generated $177.8 billion in 2020, up 23.1% year on year, the highest growth for the games market since Newzoo began tracking revenues in 2012.

The sector’s long-term structural growth story is also supported by macro trends such as demographic shifts. Contrary to the common perception that video game playing is dominated by young people, the average gamer is between 28 and 32 years of age.

They grew up playing video games and continue to do so. They are often well-educated, earn more than the average consumer, and spend their money on video games and related activities. These demographics are replicated across the world.

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E

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ETFs Chart 1: 2021 Global games market, per device and segment with year-on-year growth rate

In terms of how and where we game, the mobile or smartphone segment is the biggest, followed by the consoles. But with advancements in 5G and internet technologies – currently being rolled out in Australia and globally – this could accelerate the growth of mobile gaming as it will allow more sophisticated games to be played on handheld devices. Another supportive trend is the change in consumer preferences, with consumers increasingly going for interactive, not just passive, entertainment. Mixing social media and gaming allows them to bring their friends into the interactive online world.

The industry was already enjoying a steady growth trajectory before the pandemic accelerated the trend last year. Restrictions that have kept many at home and shut down other forms of entertainment have resulted in a bumper year for the sector. Morgan Stanley’s recent research showed that the US game industry, for example, may have pulled forward four years of video game user growth to 2020 as player bases, time spent and in-game revenue soared (Chart 1).

Esports too is a growing trend.

According to 'Newzoo’s Global Esports and Live Streaming Market Report‘, global esports revenues will grow to $1,084 million in 2021, a year-on-year growth of 14.5%, up from $947.1 million in 2020. Like gaming, esports too has been propelled by internet technologies and expanding bandwidth; esports is now so popular that spectator numbers exceed that of many professional sports.

Outside of lounge rooms and on stock exchanges, the sector offers returns which outstrip those on technology. Based on back-testing, ESPO’s index (the MVIS Global Video Gaming and eSports Index), adjusted for ESPO’s management cost of 0.55% p.a., has outpaced the tech-heavy NASDAQ 100 index over the seven-year period since 2014 to 31 March, 2021, with around double the returns.

Importantly, the gaming and esports investment opportunity also presents diversification away from the FAANGM mega-cap tech giants,

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Source: Newzoo

Facebook, Amazon, Apple, Netflix, Google owner, Alphabet and Microsoft.

CLEANING UP POWER Another huge structural growth theme is clean energy and also a recent focus for investors in the wake of the US re-committing to the Paris Agreement. The Paris climate agreement is driving demand for green, renewable energy across the globe away from fossil fuels. This is a significant long-term trend offering huge investment potential.

The US Energy Information Administration (EIA) forecasts that power generation coming from renewable sources, such as wind, solar, hydro, and geothermal, should provide almost half of the world’s electricity generation by 2050. This move to clean energy is being driven by governments adopting renewable energy policies to meet the Paris agreement.

Global temperatures are increasing due to human activities that produce GHG emissions, made up predominantly of carbon dioxide (81%), methane (10%), nitrous oxide (7%) and fluorinated gases (3%) recorded in 2018. 2020 tied for the hottest year on record, matching 2016. Continuing the planet’s long-term warming trend, the year’s globally averaged temperature was 1.02 degrees Celsius warmer than the baseline 1951-1980 mean, according to scientists at NASA’s Goddard Institute for Space Studies (GISS).

The carbon footprint is therefore an important consideration when evaluating investment products which claim to help combat climate

change. In addition, investors must ask: Does the vehicle invest in companies which contribute to reducing industrial carbon emissions? Those companies can be powerful investment opportunities.

In the last 12 months alone (to 31 May, 2021), the S&P Global Clean Energy Select Index had gained 66.8% and is up 35.0% per annum over three years.

The S&P Global Clean Energy Select Index aims to represent the full clean energy ecosystem by including companies from both the clean energy production and the clean energy technology and equipment sides in the various renewable energy segments across the globe. That includes solar and wind energy production, hydro electricity production, biofuel, ethanol and alcohol fuel production, and related technologies and equipment production.

HOPE LIES IN HEALTHCARE The final sector where we are seeing significant investment opportunities is global healthcare.

Even before COVID-19, healthcare spending was rising strongly across nations given ageing demographics and emerging nations’ healthcare systems catching up to developed nations’. Investors are likely to reap the benefits of a long-term expansion in healthcare investment.

Global healthcare expenditure accounted for around 10% of the world’s gross domestic product (GDP), or US$11 trillion (14.9 trillion), as at 2018. With global GDP projected to grow to US$137 trillion by 2030, and healthcare expenditures projected to remain at

10% of GDP, this translates into US$14 trillion in healthcare spending per year by the end of this decade. The combination of global population growth and the prevalence of chronic diseases will contribute strong demand for healthcare.

The COVID-19 pandemic has also highlighted the importance of global healthcare and pharmaceutical products such as vaccines.

Australian investors are generally underweight healthcare stocks relative to international benchmarks.

The local sector is relatively small and is dominated by CSL, therefore an allocation to global healthcare is an important diversifier.

In terms of long-term returns, the performance of global healthcare have been very attractive.

Taking a market capitalisation approach to global healthcare leaves investors with a long tail and potential concentration risks. Active managers make bets on who they think might be tomorrow’s winners based on complex and risky factors such as drug trials, novel science and winning regulatory approvals.

A smart beta, or rules-based approach, that targets companies that consistently deliver growth has the potential to deliver greater rewards to investors over the longer term.

With ASX-listed thematic ETFs, which are accessible, liquid and low cost, investors can position their portfolios to take advantage of these important economic and secular trends that are shaping the future.

Arian Neiron is chief executive of VanEck.

21/07/2021 9:38:34 AM

24 | Money Management July 29, 2021

Advice

ADVISER LESSONS FROM THE UK The UK went through its Retail Distribution Review in 2012, writes Chris Mather, so what can it teach Australia about the evolving financial advice system?

WE MAY NOT be able to physically travel to other parts of the world at the moment, but we can still learn from colleagues located in offshore markets.

This year, BT conducted its UK study tour virtually, with Australian financial advisers able to connect online with colleagues to learn about what’s happening in the UK. It may come as a surprise for some that, despite being on opposite sides of the world, there is a high degree of similarity between the two markets.

The advice gap, impact of regulation, intergenerational

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transfer of wealth and the role of new technologies were just some of the main themes explored and this article unpacks some of the ideas and themes addressed.

An advice gap is the inability for some people to access financial advice. It happens when demand for financial advice from consumers grows, without a commensurate increase in the industry’s capacity to meet this demand.

Like in Australia, a tightening of regulations in the UK is a key reason for the advice gap. In the UK, a regulatory regime called the Retail Distribution Review (RDR), which is similar to our

Future of Financial Advice (FoFA), was introduced in 2012 to tighten industry standards. Like FoFA, RDR meant a shift for the industry from commission-based payments to a fee-for-service model. It also required advisers to have higher qualification standards, similar to Australia’s Financial Adviser Standards and Ethics Authority (FASEA) exam.

While this has helped to increase professionalism among UK financial advisers, it has also led to a shake-out of the market.

This mirrors a similar situation in Australia when FoFA was launched, with many advisers

choosing to leave the market rather than complete qualifications and introduce new systems in the business to meet compliance standards.

An unintended consequence of the RDR was banks exiting financial planning quite fast which resulted in an advice gap.

In both the UK and Australia, the introduction of new regulations also added to the cost of advice, which compounded the advice gap.

In the local market, the Financial Planning Association’s (FPA’s) data indicates the average cost to establish a financial plan is $3,300, with annual costs of $4,300. The

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July 29, 2021 Money Management | 25

Advice

high cost of advice prevents some investors, especially younger ones, from seeing a financial adviser.

Maintaining relationships with younger clients is an issue that needs to be addressed in both the local and UK markets, given the huge amount of wealth that will change hands from baby boomers to Generations X and Y in coming years.

In the UK, low awareness about the benefits of, and need for advice, as well as the lack of a strong culture of savings and investments, are also contributing to the advice gap.

Additionally, many financial advisers are targeting high net worth individuals, making it hard for consumers to find a financial adviser if they do not have a decent amount of savings. This is also true in the Australian market.

BRIDGING THE ADVICE GAP Moves are afoot in both markets, however, to address the advice gap. Structural changes in the UK are part of this. In the UK, most platforms are owned by life insurance companies. But banks are now starting to re-enter the wealth management market, which may help provide consumers with access to affordable financial advice. It’s worth noting this cycle is quite different in Australia, with banks routinely exiting the advice business in recent years.

A large proportion of the retail banking population was underserved for a long time; however, in recent years banks have started to re-enter the advice market in a more aggressive fashion.

In the UK, commonly there is a separation of the investment bank and retail bank when they are part

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of the same entity. This split means many retail banks are sitting on significant balance sheets they cannot lend to the market, leading them to explore other options to drive revenue. HSBC UK has around £60 billion ($111.9 billion) of assets under management to invest on its balance sheet and some of these funds can be put to use to develop its advice practice.

Competitive pressures in the UK are also prompting retail banks to enter the advice space. Banks recognise they are more likely to be able to retain a customer’s business if they are both a retail and wealth management client.

CHANGING ADVICE MODELS A shift in the way advice is delivered is helping to democratise access to advice and address the advice gap locally and in the UK. But more needs to be done to encourage young people to receive financial advice.

To this end, in Australia the Financial Services Council (FSC) has launched a green paper to explore options to simplify the financial advice industry. The Personal Investment Management and Financial Advice Association (PIMFA) is undertaking a similar program of work in the UK. More options for consumers to access digitally-provided, regulated financial advice will also help bridge the advice gap and new technologies are emerging to help service consumers en masse. For instance, HSBC’s UK financial advice clients can use chat functionality on its website to talk to an adviser. Robo-advice models will also help, as will hybrid advice models that combine elements of robo-advice with some face-to-face communication between advisers and clients.

Direct-to-consumer financial platforms are also becoming popular in the UK. These portals broaden options for consumers, especially those with smaller balances and simple requirements. Consumers are able to directly invest in financial products such as managed funds and exchange traded funds (ETFs) through direct-to-consumer portals.

At UK advice practice First Wealth, the emphasis is now on ‘life centred planning’. Other UK practices have moved towards ‘life centred planning’ where previously the conversations with clients focused on investments and their performance but had now shifted more towards the client’s goals, objectives and responsibilities, as well as how advisers can help them prepare with upcoming life transitions.

While it’s encouraging to see new approaches to the way advice is delivered, a commensurate change needs to occur at the regulatory level to support consumers to access financial advice throughout their life and as their circumstances change.

The chief executive of PIMFA, Liz Field, has noted there is an opportunity for regulations to allow for a more fluid approach to encourage consumers to seek advice. For instance, consumers should be able to access simple, digital advice initially and also seek more complex advice through a face-to-face meeting with a financial adviser, and then move back to digital advice at a later stage.

It’s also essential to make the industry more appealing to young advisers to build up the talent pool.

Access to ongoing professional development is part of this and some institutions are founding

learning institutes to give advisers ongoing opportunities to expand their skills.

As this shows, there is no magic bullet when it comes to addressing the advice gap. Actions need to be taken on multiple levels to ensure consumers can access cost-competitive financial advice when they need it through different life stages.

THE TECHNOLOGY REVOLUTION IN ADVICE Having adapted their business models to comply with new regulations such as the RDR, UK advice practices are now better positioned to take advantage of emerging technologies.

Open banking, which was introduced in the UK in 2016, is one important initiative that will drive changes in financial advice.

The regime gives consumers more control over their financial data and is intended to drive competition in financial services, in particular by supporting fintechs and other businesses to offer more innovative products to consumers.

Using scale to drive efficiencies and conduct acquisitions was also a major discussion point and scale enabled a better capacity to invest in an ever-faster spinning wheel of innovation. Cultural fit is also essential to successfully integrate an acquisition.

There are more commonalities between the UK and Australian financial advice markets than many advisers may have first thought. Professionals across both countries have much to learn from the different dynamics playing out in both nations now and into the future.

Chris Mather is head of distribution at BT.

21/07/2021 9:38:10 AM

26 | Money Management July 29, 2021

Alternatives

ALTERNATIVES REAPING REWARDS FOR PATIENT INVESTORS Taking a long/short approach can pay off for investors, writes Jun Bei Liu, as they make increased allocations to alternatives.

THE SHARE MARKET has finally exceeded its pre-COVID high – set back in February 2020 – and has now risen more than 60% – to 7,338 points – from its COVID-19 induced low point on 23 March, 2020.

This is an extraordinary performance by any measure, and shows the importance of staying fully invested in quality companies even when markets dive.

For stock pickers, the COVID-19 induced sell-off provided an opportunity not seen in markets since the Global Financial Crisis – for quality companies to be bought at bargain basement prices. Investors who chose wisely – based on underlying fundamentals rather than market sentiment – have done well.

But it is not plain sailing yet, and markets still remain extremely volatile – oscillating between ‘value’ and ‘growth’ on an almost daily basis.

The underlying trend remains biased towards cyclical beneficiaries such as travel and hospitality and away from the COVID-19 winners and high multiple growth stocks, such as healthcare providers and e-commerce platforms, that have come under pressure from rising bond yields.

But there is no doubt that the outlook for the Australian equity market for the second half of 2021 is positive.

Notwithstanding the current uncertainty in NSW regarding an increase in COVID-19 cases, and subsequent lockdown and stay at home orders. With vaccine supplies due to come through in large quantities as the year progresses, serious outbreaks with the resulting

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threat that hospitals will be overrun will become less common, as will the need for the lock downs.

This is good news for markets and for the economy. But there is more to future share market prosperity than just the re-opening stocks story.

STRONG ECONOMIC FUNDAMENTALS Domestically, the Australian economy is on a firm footing. It is well supported by a Federal Government that is happy to undertake highly-expansionary measures, and which is willing to put near-term spending ahead of the longer-term debt consequences.

Sure, economic indicators are probably close to their peak, but this doesn’t necessarily indicate that the cycle has ended – rather just that the rate of economic improvement has slowed. And traditionally, this circumstance has provided a positive backdrop for share market outperformance.

At the same time – the global recovery is gaining momentum and becoming globally synchronized as the UK, Europe and the US recover, vaccination levels increase, and services, sectors, and borders begin to open.

While a global economic recovery will have a flow on effect on Australia, the local market is also well supported with ultra-low borrowing rates. The cash rate in Australia is now 75 basis points below its pre-COVID levels, and yet the economy is back at its highs.

Business and consumer confidence is also at near record levels, despite ongoing snap lockdowns and restrictions.

Company earnings are picking

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Alternatives Strap

up rapidly and this should continue to provide a strong tailwind for the market particularly if confidence remains robust as we expect to be the case. We are expecting strong revenue recovery across the cyclical sectors although the growth rate might have been tempered somewhat due to extended Sydney lockdown. Rising costs will be a key focus of this reporting season, particularly on labour shortages, though we anticipate much of those input costs to alleviate from current high levels in the next 12 months.

Many of the COVID winners are likely to report reasonable earnings with the latest round of lockdown, though the market is likely to look through and remain focused on the forward earnings.

While there are fears of a correction coming from some quarters – many of these are overblown and it is important for investors to remain focused on the underlying fundamentals of stronger growth, increasing earnings, low interest rates and the conviction to remain fully invested.

This is particularly important while market volatility remains and is real. But this provides excellent opportunities for long/short investors to add value to share market returns.

A LONG/SHORT ADVANTAGE A long/short equity strategy is one that allows investors to benefit in rising and falling markets. Long positions are taken in companies that are expected to outperform, while short positions can be taken to profit from negative share price movements.

In our view, an ideal diversified portfolio, would generally consist of between 60 to 70 long positions and 30 to 40 short positions. At this level, an investment manager can style agnostic – and not be distracted by talk of market rotations favouring growth or value stocks – and rather

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take up a broad-based industry exposure.

By short selling a range of stocks with weak investment characteristics, and reinvesting the proceeds in long positions in preferred stocks, a long/short manager can beat the index and meet investors’ return expectations.

It’s about taking a view. And for a long/short manager, it is the ability to short stocks that actually provides the freedom to buy exposure to some of those high conviction ideas.

Although many take the view that long/short managers have a high turnover, and dodge in and out of investments at a fast rate – this is not necessarily the case. Long only positions, in particular, sometimes take months – or years – before they reap investor rewards. This was particularly the case during COVID-19.

With many of these opportunities it’s just a matter of being patient and constructing a portfolio that can still deliver returns, while having the freedom to continue to pick up those underperforming businesses or high quality assets that are being left behind by the markets, for various reasons.

It is not just about the quick return. Long/short – done right – means being realistic about the return targets and timing.

Take Sydney Airport, for instance, which has recently been the subject of a high-profile takeover bid. The Tribeca Alpha Plus fund has been a holder of Sydney Airport for more than a year. It was sold down sharply at the beginning of the COVID-19 crisis – despite its solid fundamentals and strong competitive position and despite the fact that there is no doubt that eventually, travel will resume.

The fund went long on this one in April last year and the takeover didn’t come until more than a year

JUN BEI LIU

later. By taking a buy and hold strategy – that has lasted beyond a year – we were able to buy cheap and now have a holding worth 70% more than its purchase price.

Treasury Wines is another good example. It was sold off sharply as a result of Chinese sanctions during 2020. We have held Treasury Wines since October last year. We bought in at a time when no-one wanted to touch the company, when trade war talk was at its peak, and negative news about tariffs was rife. We didn’t know when the share price would increase – but we knew there was a substantial amount of intrinsic value that hadn’t been realised. We were happy to buy, and wait until other investors came to see that value. And now we start seeing it coming through quite quickly. We have made more than 40% return on its purchase price in six months and are optimistic for its prospects.

That’s just a couple of examples but this market is full of those opportunities.

OPPORTUNITIES IN ALTERNATIVES It’s something that advisers are increasingly recognising as well. In recent times we are seeing advisers increasing their allocation to alternatives, including long/short equity funds, as they struggle to find income and growth for clients in the more traditional asset classes.

This trend shows no sign of abating.

In a portfolio construction sense, advisers are looking beyond the traditional construct of Australian equities exposure through a portfolio of long only managers, international exposure through international managers topped off with a dash of fixed income.

Instead, we are increasingly

“Although many take the view that long/short managers have a high turnover, and dodge in and out of investments, this is not necessarily the case.”

– Jun Bei Liu seeing more advisers allocating into the alternative space – simply because returns are getting harder to come by in traditional asset classes. Exacerbating this is the correlation between fixed income and equity has been very positive in recent times, which means for many investors in traditional asset classes the risk of allocating capital is increasing.

So advisers are looking for, and allocating to, the alternatives space – and that includes long/ short equities.

Indeed, in recent years we have seen investment in long/short managers gaining traction with Australian investors and advisers. If you look at the top performers, it is the long/short managers that have actually been at the top of the tables, compared to simple long only managers.

That alternatives exposure also helps offset the overall risk for the whole portfolio – long/short funds are not as correlated with other asset classes. Their ability to short and to generate additional alpha, assists with this.

Especially now, when investors are being advised to settle for low or single-digit returns, the alternatives space will continue to be a more important part of the portfolio construction process, and long/short funds have a role to play in this.

Jun Bei Liu is lead portfolio manager of the Tribeca Alpha Plus fund.

21/07/2021 9:37:47 AM

28 | Money Management July 29, 2021

Toolbox

IDENTIFYING ‘TRANSITION WINNERS’ IN A DISRUPTED ECONOMY In an age of disruption, writes Hendrik-Jan Boer, various factors can be applied to establish which companies are the transition winners.

WE NO LONGER live in an era of short-lived industrial cycles driven by the dynamics of manufacturing and the management of tangible capital.

Today, we live in an era of longterm transitions in the key value chains of the modern economy, usually starting with a disruption that has an impact across several different industries.

We think that means investors need to look across traditional industry boundaries to identify the potential “transition winners” in modern value chains. We also believe transition winners are likely to be characterised by strengths built on intangible rather than tangible capital. They will be companies that have: 1) A durable competitive position in their markets; 2) Do little to no harm to society or the environment; and 3) Adapt to change.

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FOCUS ON DISRUPTION AND FAR-REACHING TRANSITIONS IN BROAD VALUE CHAINS This approach is quite different from traditional investment management, which tends to think in terms of industrial sectors and investment styles.

Most foundational investment theory was developed during the age of industrial and manufacturing cycles, and identified the major determinants of performance as asset, sector and style allocation through those cycles.

Over the past 30 years, however, the growth of information technology and services has reduced the relative importance of heavy industry, manufacturing and tangible assets in the economy, and all but smoothed out the traditional industrial cycles.

That is why we believe a focus on disruptions and far-reaching transitions in broad value chains offers a more realistic view of what’s going on in today’s economy.

For example, Amazon would look like an internet and logistics company, but its disruption has so far mainly been felt in the bricksand-mortar retail sector. Fooddelivery apps would look like technology companies, but they are changing the restaurant sector. And nowadays, the performance of an industrialssector stock is more likely to be determined by its differentiating exposures to transitions in its value chains, rather than what it has in common with other industrials stocks: in simple terms, is it making things for the renewable energy industry or the extractive commodity industry?

It is this understanding of the modern economy that informs our

search for potential transition winners that have a durable competitive position in a key value chain, do little to no harm to society and the environment, and can adapt to change. Let’s consider these characteristics and the way they reinforce one another in more detail.

MAINTAIN HIGH PROFITS THROUGH ‘ECONOMIC MOATS’ We think the most socially sustainable way to maintain high profits is through ‘economic moats’. These moats can be built from tangible capital—Amazon has expanded its warehouses at a pace that competitors are unable to match, for example. Nowadays, however, moats are more likely to be built from intangible capital: a lead in a particular technology, a unique consumer offering, protected intellectual property,

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Toolbox Chart 1: Looking for companies that...

Source: Neuberger Berman

an unassailable cost advantage or a hard-to-replicate platform, network or ability to scale. The moat around Netflix, for example, is its huge, hard-to-replicate content library.

In our view, the two most important indicators of quality companies with durable competitive positions are cash flow return on investment (our preferred indicator of economic profitability) and asset growth (our preferred indicator of life-cycle phase and competitive position).

Cash flow return on investment (CFROI) is a ratio that compares a company’s cash flows with its operational capital base. It tells us how efficiently a company generates cashflow from the capital invested in its business compared with its peers. It denotes economic returns, primarily—but also the level of cash a company generates for reinvestment or to strengthen its current position.

Asset growth tells us whether or not a company is operating in a growing addressable market and finding opportunities to invest. A new company, or a company that is trying to take advantage of a new market, will often exhibit high asset growth—it will be building new factories or wind farms, buying new machines, adding computer processing power. But in our view, the long-term success of those investments depends largely on economic moats: a company that builds them quickly and wide is much more capable of achieving the compounding effect of high, stable CFROI reinvested for persistent asset growth over a sustained period.

DO LITTLE TO NO HARM In addition to screening for the financial metrics that describe a company’s competitive position, it is also important to filter out negative outliers on

environmental, social and governance (ESG) criteria. These are companies that we regard as having a substantial ESG tail risk against their valuation or business model: they may have a competitive position today, but if it is not sustainable, we do not believe it can be durable.

This means the exclusion of certain businesses, for example nuclear and thermal coal-based energy generators, weapons manufacturers and military contractors, tobacco manufacturers, private prison operators and gambling businesses. In addition, we set aside any companies that are or have in recent years been involved in major controversies or are in breach of UN Global Compact principles.

We believe exclusion based on ESG scores alone is not enough. A basic, top-down, quantitative ESG assessment is a blunt instrument,

however, and, in our view, only useful for weeding out the very riskiest businesses. We see it as much less useful for differentiating between businesses that pose similar levels of risk, or identifying the most attractive investment opportunities, for two reasons: it is unable to assess the materiality of certain factors to specific companies; and it is backward-looking.

Historical data series can tell us a little about “ESG momentum” by showing how certain metrics have improved. But they offer no insight into a company’s sustainability action plans, let alone the credibility of those plans. They tell us nothing about the likelihood of changes in regulation or consumer attitudes, which could alter a company’s material exposure to certain ESG risks and opportunities.

Continued on page 30

Chart 2: From traditional industries to a broader value-chain lens

Source: Neuberger Berman

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30 | Money Management July 29, 2021

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 is ESG? a) Energy, solar and geothermal Continued from page 29

b) Emerald, sapphire and gold c) Environmentally sustainable growth

For us, high forward-looking ESG momentum is more significant: we see the most attractive opportunities to generate alpha in companies’ active efforts to manage their existing and potential ESG exposures. We believe top-down ESG scores are no substitute for bottom-up analysis and the proprietary insights that come from company dialogue and engagement.

We have seen that ‘doing little to no harm’ and ‘doing good’ can have a direct relationship with sales, margins, cost of capital and ultimately risk and return—but only when the ESG-related questions we ask are materially relevant to specific businesses, and relevant to their future rather than their past.

d) Environmental, social, and governance

TRANSITION WINNERS IN AN AGE OF DISRUPTION

a) Durable competitive position built from company metrics such as

At the start of this paper, we mentioned how we think about companies as potential winners and losers from disruptions and long-term transitions in the key value chains of the modern economy We currently identify five value chain lenses as particularly important.

They are shown in Chart 2, together with the business areas in each one where we believe transition winners are most likely to be found.

We believe the ability to adapt is linked to the ability to generate high CFROI. Businesses with high CFROI are profitable, which usually means that they have established brands and reputations which they can bring to new markets. High CFROI also enables them to be self-financing: it removes the necessity to borrow or sell more equity, which means they can likely continue to invest even in a downturn, or when competitors are retrenching due to external disruption.

CONCLUSION In our view, when identifying transition winners of tomorrow, a combination of high CFROI, persistent asset growth and good performance on material ESG metrics can be markers of a successful company. We believe that positive momentum in these three metrics can be just as important as current performance, as a marker of a company that is successfully adapting to change.

We also conclude that the traditional industry lens does not focus in the right place: disruptions to industries increasingly come from outside those industries; and the relative strength of competitors’ intangible capital is becoming a more important determinant of stock performance than common industry characteristics.

We think that forward-looking analysis of this combination of quality markers, ESG factors and idiosyncratic characteristics is key to identifying the likely transition winners of the new economy. In our view, that also suggests that bottom-up, fundamental insights, including proprietary insights gleaned from dialogue and engagement with company management teams, will continue to gain importance as a key driver of potential excess returns.

Hendrik-Jan Boer is senior portfolio manager and managing director at Neuberger Berman.

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2. What are the attributes for companies to be considered as transition winners in a disrupted modern economy? a) Durable competitive position in their markets b) Do little to no harm to society or the environment c) Adapt to change d) All of the above 3. What is the definition of a present day “economic moat” discussed in the piece? profitability, revenue, assets, liabilities, and growth potential. b) Strong competitive position built from barrier of entry to industry, market competition, pricing power and high demand c) Durable competitive position built from intangible capital such as particular technology, unique consumer offerings or a hard-toreplicate platform d) Defensive competitive position built from government legislations, policies and regulations 4. What are the two most important indicators of quality companies with durable competitive positions? a) Return on investment and earnings per share growth b) Gross profit margin and operating profit margin c) Cash flow return on investment and return on equity d) Cash flow return on investment and asset growth 5. Which one below is NOT a value chain lens that NB uses to identify potential winners and losers in the key value chains of the modern economy? a) Energy conversion b) Access to health care c) Conscious consumers d) Fintech and financial inclusions

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ identifying-transition-winners-disrupted-economy

For more information about the CPD Quiz, please email education@moneymanagement.com.au

21/07/2021 5:28:32 PM

July 29, 2021 Money Management | 31

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

Appointments

Move of the WEEK Kris Walesby Chief executive Mirae Asset Global Investments

Mirae Asset Global Investments has appointed former ETF Securities chief executive (CEO) Kris Walesby as CEO for its Australian operations.

In addition to Walesby’s appointment, Oliver Reynolds also joined as chief operating officer for the region.

Walesby was ETF Securities CEO for

AustralianSuper chief executive, Ian Silk, is stepping down from the role after 15 years and the fund’s chief risk officer, Paul Schroder, has been appointed as CEO. Schroder would start in the role later this year and the board said he was unanimously decided as the best person to lead the industry super fund through its next phase.

The fund’s chair, Dr Don Russel, said Silk was leaving the fund well placed to build on past successes.

Allianz Australia Life Insurance has appointed Allianz Retire Plus founder Adrian Stewart as acting chief executive, as Matt Rady will leave the business.

Stewart would assume responsibilities for Allianz Australia Life Insurance and Allianz Retire Plus, the latter he served as board member for since 2018.

Stewart was formerly head of client management, APAC exJapan for PIMCO and before that, head of Australia and New Zealand for the firm.

Before Stewart joined PIMCO in 2014, he held various senior roles at Macquarie Group, Challenger Financial Services Group and ASGARD Capital Management.

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five years and before moving to Australia in 2015, he was head of capital markets for Europe, Middle East and Africa at Invesco Powershares.

He previously worked in London for various investment managers, including Blackrock.

Walesby left ETF Securities last October,

Significant client interest in alternative assets classes in the Pacific region has prompted Mercer to grow its capabilities and appoint Marcus De Kock as its new alternatives investment director for the region.

De Kock, who joined from Mercer’s UK institutional investment solutions business where he was a senior investment strategist, would be responsible for bringing Mercer’s global alternatives capabilities to asset owners in Australia and New Zealand.

Prior to joining Mercer UK in 2018, De Kock gained 13 years of experience in asset class research, investment advisory and consulting services for institutional investors in the UK. Global asset manager Fidelity International has appointed Ashish Kochar as portfolio manager of the Fidelity Global Equities fund.

Starting in September and based in the London office, Kochar would work on the fund alongside co-portfolio manager Oliver Trimingham.

The appointment followed the departure of Amit Lodha, who stepped down as portfolio manager in June and was another loss for the global equities team

with the company’s founder Graham Tuckwell having returned to Australia and taking on the role of executive chair.

Reynolds was most recently the chief financial officer at Coolabah Capital and worked in senior positions across the XTB Group, Blackrock Asset Management and Westpac.

following the departure of Global Emerging Markets fund manager Alex Duffy in May. Lodha would continue to act as a consultant for Fidelity International following 17 years at the firm.

Adrian Caspar will return to Lifespan Financial Planning and has been appointed as risk and compliance lead.

Caspar, who previously worked for Lifespan between 2011 and 2014, had over 15 years’ experience in financial services with his most recent roles focused on compliance, risk management and governance.

He had also worked for a range of organisations including Avant Mutual, KPMG Australia, Total Financial Solutions and ANZ. Eugene Ardino, Lifespan chief executive, said the appointment was a proactive response to evolving legislative requirements.

AIA has appointed Peter Yates as chair of AIA Australia and Theresa Gattung will continue leading AIA New Zealand as chair.

Yates had served on the AIA Australia board for more than 10 years, and as deputy chair since 2016.

The move would allow Gattung to focus on the New Zealand business and other

interests, following 12 years with AIA Australia after joining as independent director in 2009.

Yates said it was a privilege to lead AIA Australia as chair, having served as deputy chair, as well as chair of CommInsure Life.

Crestone Wealth Management has appointed six new investment advisers to its Brisbane office, focusing on professional advice for high net worth (HNW) and ultra-high net worth (UHNW) Australians.

The new appointments brought the Brisbane office to 21 staff, while the total national adviser base was 91.

The six appointments were: • Chris Mackenzie, formerly private wealth adviser, ANZ Private; • Jason Poppi, formerly associate director, NAB Investor Sales; • Simon Rogers, formerly partner, Perpetual Private; • Darryl Wasserman, formerly private banker, Westpac Private Bank; • Shane Fisher, formerly director, global investment services – Westpac Private Bank and St George Private Bank; and • John Paul Geribello, formerly investment director – Westpac global investment services.

22/07/2021 2:22:46 PM

OUTSIDER OUT

ManagementJuly April29, 2, 2021 2015 32 | Money Management

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

Board roles galore for ‘chair of Australia’

Media no match for quality advice

ANOTHER day and another board appointment for Michael Dwyer and Outsider wonders where he finds the time.

Earlier this month, the former First State Super chief executive was appointed as chair of Bennelong Funds Management, having been appointed as a director at the firm in December 2020.

However, this is far from his only role as he also has several side hustles at other organisations including but not limited to chair of NSW TCorp, director of Iress, a member of the ASIC Consultative Panel and a member of the Global Advisory Council for Tobacco Free Portfolios.

In non-financial related roles, he has the grand title of ‘chair of Australia’ for the United Nations High Commissioner for Refugees, work for which he was recognised with an Order of Australia.

Outsider found himself very impressed with this last role, in particular, given he is barely chair of his own living room.

If Dwyer has too much on his plate

OUTSIDER was shocked to hear during a Parliamentary committee that consuming financial news was not recommended as a substitute for obtaining professional financial advice.

In a brief exchange, Liberal member, Julian Simmonds, asked Fiducian chair Drew Vaughan: “For those without a financial adviser or ones that were deciding whether it was worth having a financial adviser, would you ever advise your members to seek their financial advice or upskill their financial literacy by reading online journalism?”

Now, Outsider never considered himself or any of his contemporaries in the press as capable of giving financial advice, but Outsider felt oddly offended that his worthwhile contributions to advice were unwanted and it left him to wonder why.

Then again, given what the financial press has covered this year – from sexually-charged cryptocurrency investments to the anti-vaccination views of a certain fund manager – perhaps there’s a fair argument the financial press doesn’t have the best judgement for giving advice.

In case you’re left wondering about Mr Vaughan’s view on the matter, his preference was for people to seek professional financial advice. A humbled Outsider agrees.

to take up the next position he is offered, Outsider is more than happy to provide him with his own name and address on a stamped addressed envelope – as long as there is a single malt involved.

Not wimping out of an opportunity OUTSIDER was amused when he caught wind that ex-Centrepoint Alliance CEO Angus Benbow had surfaced at a place one might call ‘worlds apart’ from his previous firm.

You see, Benbow left Centrepoint at the end of May and is now co-CEO and chief risk officer at mixed martial arts gym technology platform Wimp 2 Warrior.

It seems Benbow will be using his tech deployment skills to further transform the already global company.

Outsider wondered what Benbow

OUT OF CONTEXT www.moneymanagement.com.au

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knew about mixed martial arts but stopped abruptly as he felt his muscles pull even just thinking about such a sport and did not want to hurt himself.

Outsider is not sure whether he could make such a leap like Benbow into the deep unknown depths of a completely different sector.

Perhaps that means Outsider will remain a ‘wimp’. But Outsider knows what he likes and what he likes is a job that gives him access to free lunches, when there are no lockdowns of course.

"Cryptocurrency is the greatest illusion in our living history."

"It is sometimes hard to be innovative when you have so much on your plate."

- Hamish Douglass, Magellan chair

- Julie Lander, CareSuper CEO Find us here:

22/07/2021 9:13:31 AM