Money Management | Vol. 34 No 14 | August 13, 2020 by FE Money Management

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

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Vol. 34 No 14 | August 13, 2020

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AMP facing ‘between 5 and 50’ ASIC legal/regulatory issues

LIF

BY MIKE TAYLOR

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LIF, life and tough times for insurers EVERY life/risk adviser knows that 2021 is a crucial year not only for their business but for the broader life insurance industry because that is when the Australian Securities and Investments Commission (ASIC) will review the Life Insurance Framework (LIF). But what has already become clear is that while the Federal Government scheduled the review of LIF back in 2017/18, much has changed including the factors which gave rise to the framework in the first place – specifically commission-based remuneration and so-called policy ‘churn’. Putting aside the impact of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the severe market disruption caused by the COVID-19 pandemic, significant shifts had already begun occurring within both the life insurance and financial planning sectors which have to be acknowledged as fundamentally impacting the fundamentals and therefore ultimately impacting ASIC’s review process. What is clear is that the issue of ‘policy churn’ which acted as the catalyst for the LIF has now been subsumed by the more current issues of thousands of financial advisers exiting the industry, the underlying profitability of some of the major offerings of the life insurers and the reality that the COVID-19 pandemic has significantly impacted the ability of consumers to even afford life insurance. And while the ASIC post-implementation review of the LIF will look primarily at the areas of policy lapses and adviser conduct, there is the reality that the financial services industry is almost united in its belief that commission-based remuneration should continue with consumers being given the choice of how they pay.

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Full feature on page 15

THE Australian Securities and Investments Commission (ASIC) has confirmed that AMP Limited is facing multiple legal/regulatory issues, some of them stemming from the Royal Commission. According to ASIC deputy chair, Matthew Crennan QC, AMP is facing at least five legal issues initiated by the regulator and probably more. Answering questions during a hearing of the House of Representatives Standing Committee on Economic, Crennan

declined to specify the exact number of legal issues but said that it was a “significant number”. Pressed by the committee’s deputy chair, ACT Labor member, Andrew Leigh, Crennan said that it was more than five issues and less than 50. Crennan signalled that at least some of those issues may become public in the next few months. Money Management sought comment from AMP Limited on the issue, but the company declined to formally respond to the issues raised.

Adviser exits due to banks restructuring: FASEA BY JASSMYN GOH

WHILE regulation has been one of the factors driving financial advisers to leave the industry, it is the restructuring across major banks and advice players that has left a large number of advisers leaving the industry, according to Financial Adviser Standards and Ethics Authority (FASEA). As part of the Financial Planning Association (FPA) congress, FASEA chief executive, Stephen Glenfield, spoke at a roundtable discussion and said there was no “magic number” of how many advisers were needed in the industry. “FASEA is a body that was there to put a series of legislative instruments and standards in place. The reduction you’re seeing in adviser numbers are driven by any number of factors, one of which is regulation but if you think about the restructuring across the major banks and advice players there has been an enormous shift in the advice numbers which has left a large number of people leaving the market because the jobs aren’t there,” he said. “The key to the future is that there needs to be demand for advice because demand will drive more business and bring more new entrants to the field.” Continued on page 3

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August 13, 2020 Money Management | 3

News

ASIC asked for formal written response on intra-fund advice BY MIKE TAYLOR

THE Australian Securities and Investments Commission (ASIC) has been asked by a key Parliamentary Committee to deliver a written explanation of the status of intra-fund advice. The chair of the House of Representatives Standing Committee on Economics, Tim Wilson, made the request for a written explanation after strong questioning directed at ASIC commissioner, Danielle Press, by NSW

Liberal backbencher, Jason Falkinski. Falinksi was seeking to get clarity around the status of intra-fund advice and whether it was regarded as personal advice or general advice. Press answered that intra-fund advice was personal advice but was covered by a carve-out. Wilson intervened to ask that ASIC reflect upon early evidence given to the committee and the issues raised by Falinski and then provide a formal written response “to provide clarity around” the issue.

Investment industry failing to learn from its own experience BY OKSANA PATRON

THE investment industry should follow the example of aircraft industry’s structured-learning environments as it is failing to learn from its own experience when it comes to improving its investment committees (IC) practices and governance. Research from not-for-profit group the Thinking Ahead Institute 'Going from good to great‘ found that in case of the aircraft industry learning from experience and errors increased safety enormously and gave birth to innovations such as checklists to improve decision making and dashboards for tracking mission-critical issues. According to co-founder of the Thinking Ahead Institute, Roger Urwin, large asset

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owners were using advanced best-practice governance to unlock the complexities of modern investment, notably when dealing with environmental, social and governance (ESG) considerations. “Retaining a strategic focus is vital for effective board governance and doubly important for investment committees, where there is often a temptation to get lost in the weeds. Key to this discipline is having an effective chairperson,” Urwin said. “This leadership role is crucial in terms of setting and managing overall strategic direction, facilitating the contributions from all committee members and extracting all the benefits of a strong culture.” The Institute suggested that taking an IC from good to great outcomes would be doable with strong leadership and an ambitious strategy and it identified key areas where they could make the biggest gains: • Getting the right people on the IC ‘bus’ is critical, especially in the areas of competency, teamwork and accountability; • Exploiting the opportunities for improved efficiency and collective intelligence, notably: extending the chair role; building the IC teamwork; pinpointing its comparative advantages; restyling the IC process; and developing a richer culture; and • Taking the opportunities this crisis presents, starting with exercising more innovative thinking and practice in the conduct of IC meetings, and applying more innovative thinking to the challenges of the future. “Could investment committees and boards set their sights higher? Absolutely they could. The stakes are too high for them not to take this path. And these current pressurised circumstances make such steps attractive right now,” Urwin said.

Adviser exits due to banks restructuring: FASEA Continued from page 1 When asked if losing advisers who had years of experience was a concern, Glenfield said FASEA’s role was to put in place a framework and structure that was fair and would let advisers meet the new standards if they wished to. “I can’t dictate to people whether they should pursue education, and I fully understand that there will be advisers that decide they don’t want to do it. My role is to present a feasible path for those who want to do it,” he said. He noted that if he had hindsight on the criticism the authority has faced so far and whether he would have taken up the role knowing these, he would have. “The criticism around FASEA was to do with communication and if we had more time, when I joined, we could have better communicated the message of what we were doing,” he said. “If you look at the explanatory memorandum it talked about the FSI, talks about the PJC enquiry and the need for change. “We took for granted that people would have accepted the change was needed. One element of pushback is that there has been a degree of nonacceptance. That change element that people are having trouble with.”

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Editorial

mike.taylor@moneymanagement.com.au

ASIC SHOULD NOT BE THE ULTIMATE ARBITER OF THE FUTURE OF THE LIF

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

Many things have changed in the Australian life insurance industry since the Life Insurance Framework was put in place meaning that the Australian Securities and Investments Commission’s post-implementation review should not be regarded as the sole source of truth.

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

THE AUSTRALIAN Securities and Investments Commission (ASIC) should not be the ultimate arbiter of the future of the Life Insurance Framework (LIF). The decision must ultimately rest with the Government, not the regulatory bureaucrats. As we have written elsewhere in this edition of Money Management, ASIC will next year complete its post-implementation review of the LIF based on the brief handed to it in 2017 but in the intervening period many things have changed. Indeed, since ASIC was handed its post-implementation review brief there have been at least two different ministers covering the Financial Services portfolio, a significant personnel change within the upper echelons of ASIC itself with a new chair (James Shipton) and two new deputy chairs and the exit of at least 6,000 financial advisers, many of them life/risk specialists. Given that the development of the Life Insurance Framework (LIF) was predicated on largely unsubstantiated allegations of high levels of policy “churn” with consequent impacts on premium pricing, two questions arise: What was the real level of churn in 2017/18 and what is it now? Is there any evidence of increased life/risk adviser failure to meet regulatory standards? There is, too, the more pertinent question of whether advice around life insurance should be viewed differently because life insurance is a financial product which most industry veterans agree is “sold, not brought”. Allied to the reality that life insurance is a financial product is

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Tel: 0439 137 814 oksana.patron@moneymanagement.com.au News Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@fefundinfo.com ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Amy Barnett

that in a still largely under-insured Australia, the evidence continues to suggest that most consumers are more than happy to have life/risk advisers paid by way of commission rather than the consumers being forced to reach into their pockets to pay via fee for service. So the threshold question for the Government in looking at the LIF is whether it accepts that the holding of life/risk insurance delivers an important benefit to the economy, and that life/risk advisers are, ultimately, involved in assisting clients to select the most appropriate product to meet their needs. It is entirely appropriate for ASIC to analyse the data around life policy lapse rates and the conduct of life/risk advisers, but it is not appropriate for a regulator to make or have undue input in a policy decision about the nature of life insurance as a product and the economic benefits it may or may not deliver. The Royal Commission into Misconduct in the Banking, Superannuation and Financial

Services Industry was clearly leaning towards recommending ending commissions in the life insurance advice sphere, but it must be remembered that with the trialling of the LIF already on foot it was never within the Royal Commission’s brief to make such a finding. It was also clear from statements made by senior ASIC officials in the aftermath of the Royal Commission that the regulator remained similarly ill-disposed towards commissionbased remuneration. But it must be remembered that ASIC provided much material to the Royal Commission which arguably substantially helped shape its views. For all of these reasons, the future of the LIF must not be a purely regulatory decision. It must be a pragmatic political policy decision reflecting the realities of the life insurance industry in 2020, not the agendas of half a decade ago.

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Mike Taylor Managing Editor

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6 | Money Management August 13, 2020

News

FSC pushes scaled advice model minus SOA requirement BY MIKE TAYLOR

THE Financial Services Council (FSC) has canvassed greater use of scalable advice not constrained by the requirement for a statement of advice (SOA). In a column written by FSC policy manager, Zach Castles, published on page 13, the FSC has made clear its proposal for a twoyear trial of the scalable advice arrangement which would only require a less costly record of advice (ROA). Castles is canvassing the use of scaled advice as the FSC’s way of helping overcome growing adviser departures from the industry. “While no sector in the Australian economy has been spared as the downturn bites, the truth for the financial advice industry is that adviser departures were in train well before COVID-19,” he said. “The industry continues to buckle under spiralling compliance costs and rules for which the true impact has not really been quantified except for one stark projection: just 16,000 financial advisers

could be left in the industry by Christmas next year. “The FSC wants to make first time engagements less costly. A key proposal in the FSC’s Accelerating Australia’s Economic Recovery report, is a two-year trial to make it easier to access scalable advice and less costly for businesses to provide it. Scalable advice would be documented through a ROA allowing clients to seek advice on

a specific subject. “Despite an expectation to be concise and clear, SOAs are unwieldy and often almost incomprehensible because of the legal detail. They require a substantial amount of research and in-depth fact-finds about the client as a legal requirement, the level of which offers the most value for developing strategies that service complex client needs and objectives.

“This is again at considerable cost to the consumer for singleissue and in many instances first-time financial advice. Further reams of paperwork are also provided to clients in the form of the Financial Services Guide and contractual agreements. By contrast, an ROA is shorter and less formal, less costly to produce and usually provided to existing clients to confirm changes to the implementation of advice recommendations. “Such a proposal would still see consumers protected with more flexible access to worldclass financial products and advice. It is a pathway to reduce the unnecessary cost, duplication and paperwork now blockading the advice system and pricing consumes out of meeting advice needs,” Castles wrote. He said that critical to the FSC’s proposal was that it be monitored and the industry work with regulators and Government to demonstrate where it added value so that it could be refined in the interests of consumers over time.

SMSFs revealed as standing on multi-billion dollar COVID precipice SELF-MANAGED superannuation fund (SMSF) trustees are standing on the precipice of an impending 16% decline in the value of their assets by the end of the year and up to 60% by 2029, according to data analysis conducted by research house, Dexx&r. The analysis said the decline would result from combined impacts associated with the COVID-19 pandemic including early release superannuation, depressed equity markets, lower or non-existent dividend returns and lower or zero interest rates. What is more, Dexx&r principal, Mark Kachor points to the limited ability of SMSF members to replenish their superannuation balances, not least because of the $25,000 concessional contribution caps. The firm’s analysis said that, in the short term the COVID-19 pandemic was projected to result in a $108 billion fall by December 2020, equating to a 15.7% drop from $690

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billion in December 2019 to $582 billion in December 2020. “Dividend payments from the most resilient sectors are likely to be suspended in the short term and when reinstated will be at substantially lower levels when compared to those paid over the past ten years,” the report said. “In addition, there will be a significant number of companies that cease trading or dramatically downsize over the coming 24 months,” Kachor said. “Together these two factors will result in a significant fall in the values of equities and dividend flows.” The Dexx&r research also pointed to SMSFs being hit in both the accumulation and pension phases with total SMSF accumulation funds under management (FUM) projected to be $201 billion lower at $146 billion in December, 2029, compared to what might have been the case before COVID-19 of $349 billion.

It said that the decrease in accumulation phase balances was attributable to an estimated $1.5 billion being withdrawn as part of the Government’s hardship early release program, the continued movement of accumulation account balances into pension phase, and depressed equity values and dividend returns. Looking at the pension phase, it said FUM was projected to be $346 billion lower in December, 2029 with the decrease in pension phase balances due to depressed investment returns on FUM over at least the next three years including zero or near zero returns on cash. It said this would combine with a rapid decline in pension account balances as pension drawdowns significantly exceeded income and capital growth in underlying assets and lower pension phase balances being available to participate in the future recovery in equity markets.

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News

Superannuation funds demand regulatory discount equal to early release scheme outflows BY MIKE TAYLOR

THE Federal Government should reduce levies imposed on superannuation funds because of the manner in which they are dealing with the COVID-19 pandemic. In fact, the superannuation funds want the levies they pay the Government reduced by an amount proportionate to the amount of funds which have been withdrawn from the industry under the early release arrangements. That is the bottom line of an Association of Superannuation Funds of Australia (ASFA) submission to the Australian Securities and Investments Commission’s (ASIC’s) latest funding proposals. In that submission it states: “ASFA considers that total levies on the superannuation industry should be reduced due the impacts of the COVID-19 crisis. “The expanded early release scheme in response to COVID-19 has led to a substantial reduction in the assets of APRA-regulated superannuation funds – ultimately, it is expected that total payments under the scheme – as presently designed – will be over $30 billion. “The Federal Government’s expanded early release scheme in response to COVID19 has led to a substantial reduction in the assets of APRA-regulated superannuation funds,” it said.

“Since the inception of the expanded scheme, funds have made payments totalling $25 billion (to 12 July 2020). It is expected that total payments under the scheme – as presently designed – is likely to be much higher (over $30 billion). “The impact on APRA-regulated funds has not been homogenous. Funds with members who are in industries particularly affected by the crisis have been disproportionately impacted. Not surprisingly, funds

which have a heavy concentration of members employed in hospitality, restaurants and clubs have the highest rates of early release so far, at between 15% and 20% of the accounts in such funds. “As such, ASFA considers that total levies on the Superannuation trustees sub-sector should be reduced – by a similar proportion as the reduction in total superannuation assets from the expanded early release scheme,” the ASFA submission said.

How super early access has staunched the SG rivers of gold THE superannuation funds worst hit by the Government’s hardship early release scheme have seen declines of between a quarter and a half in their growth in funds under management (FUM). Analysis of the Australian Prudential Regulation Authority (APRA’s) latest data shows that for some of the worst-hit funds, the early release outflows combined with job losses amongst their members have significantly offset the benefit of their superannuation guarantee (SG) inflows – something which is likely to impact on APRA’s future heatmap analyses. The latest APRA data relating to one of the most-affected funds, HostPlus reveals the

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fund has paid a total of $2,542,472,958 in both initial and repeat early access applications with its latest annual report (2019) stating that it had $44 billion in FUM – an increase of $11 billion over the previous financial year. Thus, for Hostplus the amount so far taken in early release superannuation represents nearly 23% of the amount by which it increased its FUM in what represented a normal year. Similarly, for REST the fund has so far seen $2,651,914,716 withdrawn as a result of the early release regime in circumstances where its latest annual report (2019) showed it had $56 billion in funds under management up

from $51.6 billion the previous year – meaning the early release drawdown had also significantly hit its FUM growth. For HESTA, $1,420,436,488 was taken in hardship early release withdrawals which given its FUM of $50 billion which increased by 13% over the prior financial year, the situation was less significant. APRA has consistently pointed to 10 big funds having been most affected by the early release regime – AustralianSuper, REST, Hostplus, Cbus, Sunsuper, BT, HESTA, MLC, CFS and AMP. The data analysis around the manner in which early release is eroding annual growth in FUM

has come at the same time as superannuation fund executives have confirmed that while there was a significant spike generated by the 1 July start to the second tranche of the early release regime, this had now significantly tapered. They said that they expected that more moderate numbers of early access requests were now expected, not least because the Government had extended the early release regime until the end of December. “I believe a lot of people no longer feel pressured and will wait to see how economic events play out before deciding whether to use the early access option,” one executive said.

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FUTURE

WEALTH MANAGEMENT

WEBINARS

The 6-Part Future of Wealth Management Webinar series has been designed to provide attendees with insight into the ways that our industry is changing and what they can do to position their practices to benefit from opportunities. Following a year of change and turbulence, we are looking to ensure that you have the information you need to make the right decisions for your business and your clients.

PART 1: MANAGED ACCOUNTS WEBINAR

PART 2: PANDEMIC, POLITICS AND ECONOMY (PPE)

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PART 4: PRACTICE MANAGEMENT WEBINAR

11AM, 15TH JULY 2020

11AM, 12TH AUGUST 2020

PART 5: ESG/RESPONSIBLE INVESTMENT WEBINAR

PART 6: WHAT DO YOUR CLIENTS THINK OF YOU? WEBINAR

11AM, 27TH AUGUST 2020

11AM, 15TH SEPTEMBER 2020

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News

Industry funds warn Govt not to use Retirement Review as stalking horse BY MIKE TAYLOR

THE Government needs to immediately release the report of its Retirement Incomes Review panel in circumstances where the entire process must be used to strengthen and not undermine the policy foundations of the superannuation system, according to Industry Super Australia (ISA). In doing so, ISA has questioned the Government’s approach to the Retirement Income Review pointing out that there was little or no consultation with no draft being circulated for stakeholder comment and no data made available for examination by external experts. “In the interests of transparency, it is critical this report is immediately released to the public so its findings can be tested and verified,” ISA said in a formal statement. It said the report should not be used as a stalking horse to

erode superannuation. “The RIR panel must reject dangerous proposals that allow low-income earners to opt-out of super which would only leave them paying more tax now to then have nothing saved for their future,” ISA said. “As too should attempts to raid super to pay for house deposits or mortgages – which would only erode retirement savings and increase house prices – pushing the dream of home ownership further away.” “More than 2.5 million Australians have accessed the government’s early release of super scheme and at least 560,000 Australian have emptied their super accounts forcing them to start saving for retirement again.” ISA said the report represented an opportunity to build on the successful super system with sensible evidence-based reform that helps provide members with a dignified retirement, addresses entrenched

inequalities and tackles under performance while strengthening the default system. “If used as a stalking horse to erode the policies that underpin the system – compulsion, preservation, universality and a strong default system – workers’ retirement savings and the economy will suffer,” it said. “The only way to deliver a dignified retirement is to stick to the legislated increase to the super rate to 12%. The increases are more important than ever after balances were hit through the government’s early release of super scheme and the coronavirus downturn,” the ISA statement said. “Cut the rate and ISA analysis shows more than eight million Australians could be worse off.” “For an average 30-year-old couple working full-time, cutting the super guarantee increase would deprive them of up to $200,000 in super by the time they retire. During retirement they would lose up to 20% of their income or between $7,000 to $10,000 a year. “Breaking the Government’s repeated promises to stick to the legislated increase will not only force workers to either retire with less or work longer – it will undermine super funds’ investment plans to help Australian businesses and build new job creating infrastructure and property projects,” ISA said.

Perpetual in major US acquisition MAJOR investment house, Perpetual has announced the acquisition of 75% of US-based investment business, Barrow, Hanley, Mewhinney and Strauss. The company said the transaction was valued at $465 million with the stake being acquired from BrightSphere Investment Group. Perpetual will be entering a capital raising via an institutional placement and a share placement to fund the acquisition.

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Explaining the move, Perpetual said it would add scale and deliver multiple world-class investment capabilities with funds under management (FUM) of US$44.1 billion ($62.15 billion) across 21 key strategies. The announcement said the acquisition would significantly increase Perpetual’s US distribution reach and accelerate the build-out of the company’s global distribution capabilities.

Senator Jane Hume acknowledges early release impact on insurance SUPERANNUATION fund members need to take into account the impact of accessing the Government’s hardship early release superannuation regime on their insurance inside superannuation entitlements, according to the Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume. While seeking to scotch suggestions that running down balances to below $6,000 would automatically eliminate insurance inside superannuation, Hume acknowledged that people who emptied out their accounts would certainly be impacted. Addressing a Financial Services Council (FSC) life insurance summit webinar session, she said that this meant that people who were considering taking early access to superannuation should take the insurance consequences into account. Hume pointed to the information available on the Australian Securities and Investments Commission (ASIC) but said that people needed to take into account the impact on insurance coverage that withdrawing superannuation balances would have.

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News

Red tape cuts will aid recovery: SMSFA

BY CHRIS DASTOOR

CUTTING red tape for financial advice will aid the economic recovery post-COVID-19 pandemic, says self-managed superannuation fund (SMSF) body, the SMSF Association (SMSFA). The SMSFA said it fully supported the Federal Government’s stated ambition to “grow” Australia out of debt and said cutting red tape that stifled the financial industry should be part of that goal. John Maroney, SMSFA chief executive, said the organisation urged the Government to prioritise financial advice reform by aiming to make it more accessible and affordable.

“The Government’s measures to help alleviate the economic fallout caused by this pandemic have been necessary, but now is the time to consider how the country is going address a deficit that is the largest as a percentage of gross domestic product (GDP) since World War II,” Maroney said. “The financial advice sector will play a crucial role in helping many Australians and businesses recover from this economic crisis, so it’s more important than ever that the Government commits to reform.” Maroney said the economic impact of COVID-19 had highlighted the strains resulting from the system’s costs and

inefficiencies, as well as how many people who need financial advice were being excluded. “The recovery period now provides an opportunity to rethink and design the professional advice framework,” Maroney said. “This includes the provision of ‘strategic advice’ that is decoupled from products and ‘scaled advice’ that could allow broader access to advice for consumers about how to structure their financial affairs. “This is critical because consumers find that advice comes in an ‘all or nothing’ package, demonstrated by the fact temporary relief was required just to ensure someone simply wanting advice on taking money out of super under the COVID-19 relief measures did not have to pay for a comprehensive Statement of Advice that is both time consuming and costly.” Last week, the Actuaries Institute said a regulatory framework was needed for financial advice for retirees in the price range of $200 to $300.

FASEA to hold six exam sittings in 2021 BY JASSMYN GOH

2021 exam sitting

Exam dates

THE Financial Adviser Standards and Ethics Authority (FASEA) has confirmed it will hold six exam sittings in 2021. FASEA said face-to-face sittings would be offered at metropolitan and regional locations throughout the country and would be run over multiple days, up to twice a day. Advisers could also sit the exam remotely at their preferred time during the exam sitting window. The first exam for 2021 would be held from 28 January to 2 February and registration would be open from 5 October, 2020, to 8 January, 2021.

28 January to 2 February 2021

25 March to 30 March 2021

20 May to 25 May 2021

15 July to 20 July 2021

9 September to 14 September 2021

4 November to 9 November 2021

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FASEA chief executive, Stephen Glenfield said: “The 2021 exam schedule together with the 3 remaining exams scheduled for 2020 in August, October and November provide advisers who have yet to pass the exam the choice of a broad range of sitting dates”. He noted 86% of candidates on average passing each exam on the first sitting.

Middle-class growth keeps China as an investment destination CHINA is still a strong investment destination as the nation is preparing for another round of growth as its population becomes wealthier and discretionary consumption increases, according to Premium China Funds Management (PCFM). Jonathan Wu, PCFM chief investment specialist, said investors needed to recognise the way the nation had succeeded in lifting its population out of poverty. “It is an extraordinary historical event with something like half a billion people lifted out of poverty in little more than a generation; hundreds of million more will follow soon,” Wu said. “What is more, China has achieved that demographic change in much the same way as the other major Asian growth economies such as Korea, Japan and Taiwan albeit it has the advantage of an autocratic style of Government.” China’s overall consumption of services was also low by international comparisons standing at 33% of consumer spending compared to 55% in Taiwan and 69% in the US. PCFM identified technology, healthcare, and education as specific growth areas that deserved focus. Wu said that US pharmaceutical expenditure as a percentage of gross domestic product (GDP) stood at 15.2%, while that of France stood at 11.2% and China currently stood at just 5.1%. “So, allowing for China’s population and its growing wealth, you can see the investment potential,” Wu said.

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12 | Money Management August 13, 2020

News

Federal Government’s action will double early release drawdowns BY MIKE TAYLOR

THE Federal Government has added at least a further $30 billion to the amount which will be withdrawn from Australian superannuation funds by extending the timeline on its hardship early release superannuation regime. What is more, at least 60% of that $30 billion will be withdrawn from 10 major funds, the largest of which is AustralianSuper. That is the bottom line of an announcement by the Treasurer, Josh Frydenberg, that the Government will be extending access to the hardship early release scheme from its original 24 September cut-off date to a new time horizon of 31 December. Superannuation fund industry spokespeople have expressed concern at the impact of the Government’s decision which

went totally unflagged to superannuation funds which had been working on the premise that the scheme would finish on its original September date. Australian Institute of Superannuation Trustees (AIST) chief executive, Eva Scheerlinck was quick to point out that the amount withdrawn under the hardship early release scheme had already exceeded the Government’s initial estimates. “The scheme’s impact on retirement outcomes for millions of working Australians is an increasing concern,” she said. “While we acknowledge that the extension of the early release super timeframe may be helpful to those in financial need, it is a great concern that so many Australians are being forced to protect their livelihoods with savings that are meant to help them avoid poverty in retirement,” Scheerlinck said.

Magellan bucks downward market trend for ﬁnancials BY LAURA DEW

MAGELLAN Financial Group is the only listed financial firm to have reported positive returns in the first half of 2020 with returns of 3.1%. Since the start of 2020 to 30 June, the asset manager has seen its share price rise by 3.1% compared to losses of 10.4% by the ASX 200 over the same period. This was a strong rebound for the company which had previously lost 45% in March’s market crash. Earlier in the year, Magellan fund manager Hamish Douglass said he did not consider the markets falls in March as the next Global Financial Crisis and was feeling “excited” about the prospect for cheap valuations. In an announcement to the Australian Securities Exchange in July, the firm said its average funds under management for the full year 2019/20 was $95.5 billion, up from $75.8 billion a year ago. It received $249 million in net inflows during June 2020.

14MM130820_01-13.indd 12

According to FE Analytics, within the Australian Core Strategies universe, the flagship Magellan Global fund returned 0.7% over the six months compared to losses of 4.6% by the global equity sector. The worst-performing listed financial was Challenger which lost 44% over the same period. The firm recently launched an equity raising of $300 million to provide flexibility to enhance earnings. Elsewhere, Macquarie Group lost 12%, Perpetual lost 25%, Centrepoint Alliance lost 30% and IOOF lost 35%. Out of the big four banks, Commonwealth Bank was the bestperforming company with losses of 11% while ANZ and National Australia Bank lost 25% and Westpac lost 26%. There had previously been criticism over whether banks, which were historically strong dividend payers, would be able to maintain dividends in the uncertain environment and what that would mean for retirees who relied on them for income.

“For many Australians, superannuation is the only savings they have, money they have been diligently setting aside so they don’t have to work into old age. Australians who can least afford it shouldn’t have to choose between poverty now or poverty in retirement.” The latest APRA data confirms the likelihood of a further $30 billion being taken from the system under the Government’s extended arrangements, with $6.2 billion having been withdrawn from funds in just the first full week of July after the $10,000 second tranche became available. At that point, APRA said that $25.3 billion had been paid since inception of the scheme. Among the 10 funds doing the heavy lifting on early release are AustralianSuper, REST, Hosplus, HESTA, Cbus, AMP, Colonial First State, National Australia Bank’s NULIS, and Sunsuper.

Chart 1: Share price of Magellan versus ASX 200 over the ﬁrst half of 2020

Chart 2: Share price of listed ﬁnancials over the ﬁrst half of 2020

Source: FE Analytics

5/08/2020 2:06:25 PM

August 13, 2020 Money Management | 13

InFocus

INCREASING ACCESS TO SIMPLER, SPECIFIC ADVICE ON THE ISSUES THAT MATTER MOST The Financial Services Council’s Zach Castles makes the argument for pulling down the barriers to the delivery of scalable advice. UNLOCKING ACCESS TO scalable financial advice – advice for one or more simple or specific things – could help thousands of Australians access personal financial advice for hardship withdrawal, learning more about a term deposit, redundancy or basic cashflow management at potentially the most vulnerable point in their lives. Right now, this is virtually impossible because of expensive and excessive regulation. The average financial advice fee per annum according to Adviser Ratings is $3,600 and the average age of a client is 55. This is because the requirements for producing comprehensive high-risk advice such as asset allocation or wealth strategies are the same for producing low-risk advice such as scalable advice given the voluminous regulations that product providers and advisers must now comply with. The result is an advice gap with entire cohorts of Australians being priced out of receiving basic professional financial advice. Whether you are retiring, have been made redundant, starting out with savings or engaging with your super, greater access to advice could make the difference in financial decision-making about your future. It is vital that consumers base their financial decision-making on professional financial advice that is anchored in their best interests instead of trying to do it themselves.

AFCA 19/20 FINANCIAL YEAR

While no sector in the Australian economy has been spared by the downturn, the truth for the financial advice industry is that adviser departures were underway well before COVID-19. The industry continues to buckle under spiralling compliance costs and rules for which the true impact has not really been quantified except for one stark projection: just 16,000 financial advisers could be left in the industry by Christmas next year. The Financial Services Council (FSC) wants to make first time engagements less costly. A key proposal in the FSC’s Accelerating Australia’s Economic Recovery report, is a two-year trial to make it easier to access scalable advice and less costly for businesses to provide it. Scalable advice would be documented through a record of advice (ROA) allowing clients to seek advice on a specific subject. Despite an expectation to be concise and clear, statements of advice (SOAs) are unwieldy and

often almost incomprehensible because of the legal detail. They require a substantial amount of research and in-depth fact-finds about the client as a legal requirement, the level of which offers the most value for developing strategies that service complex client needs and objectives. This is again at considerable cost to the consumer for single-issue and in many instances first-time financial advice. Further reams of paperwork are also provided to clients in the form of the Financial Services Guide and contractual agreements. By contrast, an ROA is shorter and less formal, less costly to produce and usually provided to existing clients to confirm changes to the implementation of advice recommendations. Such a proposal would still see consumers protected with more flexible access to world-class financial products and advice. It is a pathway to reduce the unnecessary cost, duplication and paperwork

80,546

78%

complaints received

of cases closed

now blockading the advice system and pricing consumers out of meeting essential advice needs. In an age of enhanced consumer protection, licensees and advisers seek a streamlined set of requirements to meet those protections more efficiently. Critical to the FSC’s proposal is our recommendation that it be monitored, and the industry work with regulators and government to demonstrate where this adds value so that it can be refined in the interests of consumers over time. It can provide a test-case for using other tools availed by a vast regulatory net to provide services that are client-focused as well as compliance-focused. In the worst economic crisis since the Great Depression pricing people further out of getting basic financial advice is not an option. Embracing the innovative and entrepreneurial capacity of our financial advice industry to enrich their individual decisions can support our recovery. An Australian Securities and Investments Commission consultation paper in December 2010 noted : “Many Australians, particularly those who have never previously accessed financial advice, want piece-by-piece simple advice rather than holistic advice”. Nearly 10 years on, the regulatory net that has resulted has left consumers stranded, not protected.

$258.6m in compensation awarded

Source: Australian Financial Complaints Authority (AFCA)

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5/08/2020 1:15:48 PM

Together we’ll help your clients through life’s biggest challenges And we’re here to support you as well. Visit our dedicated adviser support hub at adviser.tal.com.au

TAL Life Limited ABN 70 050 105 450 | AFSL 237848

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5/08/2020 2:08:49 PM

August 13, 2020 Money Management | 15

LIF

LIF, LIFE AND TOUGH TIMES FOR INSURERS Mike Taylor writes that less than 12 months out from the Australian Securities and Investments Commission’s review of the Life Insurance Framework, the Australian life insurance industry has rarely known tougher times. EVERY LIFE/RISK ADVISER knows that 2021 is a crucial year not only for their business but for the broader life insurance industry because that is when the Australian Securities and Investments Commission (ASIC) will review the Life Insurance Framework (LIF).

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But what has already become clear is that while the Federal Government scheduled the review of LIF back in 2017/18, much has changed since then, including the factors which gave rise to the framework in the first place – specifically commissionbased remuneration and so-called policy ‘churn’.

Putting aside the impact of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the severe market disruption caused by the COVID-19 pandemic, significant shifts had already begun occurring within both the life insurance and financial planning

Continued on page 16

5/08/2020 2:08:38 PM

16 | Money Management August 13, 2020

LIF

Continued from page 15 sectors which have to be acknowledged as fundamentally impacting the fundamentals and therefore ultimately impacting ASIC’s review process. The factors impacting the ASIC review include: • The balance sheets of the major life insurers have been placed under pressure by a range of factors, not least disability income insurance; • The Life Insurance Code of Conduct has been tightened; • Greater scrutiny applied to policy definitions; and • The educational requirements inherent in the Financial Adviser Standards and Ethics Authority (FASEA) regime have become fundamental to how many life/risk advisers ultimately choose to remain in the industry. On top of this, the industry needs to factor in the fact that the upper echelons of ASIC have experienced an almost complete change in key personnel. When the review of the LIF was first scheduled the ASIC chair was Greg Medcraft and the deputy chair was Peter Kell. Today, ASIC’s chair is James Shipton and he is assisted by two deputy chairs, one of whom is a Queen’s Counsel. What appears not to have changed within ASIC, however, is its negative attitude towards commission-based remuneration, something evidenced in one of its submissions to the Royal Commission. In that submission, ASIC argued that the Life Insurance Framework should be allowed to run its course before it was then subject to the scheduled 2021

14MM130820_15-39.indd 16

post-implementation review. “ASIC will conduct a postimplementation review in 2021 to assess the impact of the reforms,” it said. “Collection of data to inform this review has commenced.” “ASIC considers that if no significant improvement has been made on the findings reported in ASIC REP 413, there would be a compelling case to remove the exemption from the ban on conflicted remuneration currently afforded to the sale of life insurance products altogether”. And therein lies the problem for both the life insurers and organisations such as the Association of Financial Advisers (AFA) and the Financial Planning Association (FPA) in terms of their representational efforts on behalf of life/risk advisers. As both AFA chief executive, Phil Kewin, and FPA chief executive, Dante De Gori, made clear to a recent Financial Services Council (FSC) webinar, prosecuting the case for retaining commission-based remuneration is not going to be easy irrespective of what the data collected by ASIC ultimately shows. The point being made by both men was that how a life/risk adviser was ultimately remunerated ought to come

down to a matter of consumer choice – the selection of fee for service on the one hand, or commission-based remuneration on the other. Hardly surprisingly, the major life insurers are similarly hopeful that ASIC’s post-implementation review of the LIF does not end with the recommendation of changes which would only serve to exacerbate the delicate situation being confronted by life/ risk advisers. The broad attitude of the major life insurers was indicated by TAL chief executive, Brett Clark, who told Money Management that the company was working with the other insurers and the industry to deliver an appropriate outcome. But, reflecting what both the AFA’s Kewin and the FPA’s De Gori said, Clark said it was really all about consumer choice. “We are strong advocates for providing Australians with access to quality and affordable financial advice as this plays a critical role in supporting the financial wellbeing of Australian families now and into the future,” he said. “We believe Australians need more access to high quality financial advice, not less. This is why the sustainability of a high

5/08/2020 2:08:18 PM

August 13, 2020 Money Management | 17

LIF

quality financial advice model is vital and we must ensure that the collection of changes being made to this sector, while improving outcomes for consumers, does not reduce access to those who depend on or benefit from it. “As we look forward to the review of LIF it is important the industry engages widely. There are many stakeholders. We are working together with other insurers, the FPA and the AFA to advocate for a life insurance framework that offers choice, access and positive customer outcomes for the long term. “It is important that the LIF review considers a wider context of change for the life insurance industry, that consumers continue to have choice and access to life insurance advice and products; and that it avoids a narrow review of simply whether life insurance commissions are good or bad,” Clark said. Clark’s views were substantially backed by other key life insurance chief executives, who clearly had an idea to importance of maintaining the viability of life/risk advice practices particularly as Australia struggles to fully emerge from the impact of COVID-19 on the broader economy. ClearView chief executive, Simon Swanson, was succinct in his assessment going even further than Clark in arguing for a substantial maintenance of the status quo. “The LIF rules should stay as they are. We believe that current life insurance commission rates do not encourage or lead to poor behaviour and poor consumer outcomes,” he said. “The life

14MM130820_15-39.indd 17

insurance commission caps under LIF are appropriate and should remain unchanged. “It is unnecessary, and far too early, to consider tinkering with commission caps again, given the LIF reforms are only partly implemented.” MLC Life Insurance acting chief of group and retail partner, Sean Williamson, actually signalled to ASIC that it needed to be careful how it moved on the LIF review to ensure that there were no unintended consequences. “We believe in quality, lifelong financial advice and believe that more Australians would benefit from receiving it,” he said. “We commissioned research last year with Plan For Life that showed that unless risk advisers can remove 20% to 25% of the current cost base for their business, advice will not be profitable, leaving many Australians to make important financial decisions on their own. “While we support the LIF review in 2021 we fear that, without a robust alternative advice funding model, reducing commissions further will result in many Australians being unable to access the benefits of advice,” he said. “Perversely, this could actually increase the risk of Australians relying on insurance arrangements that are not optimised for their circumstances. “We support a sustainable advice sector in which commissions continue to remain an option that supports everyday Australians having access to much-needed financial advice during key life moments like buying a home, starting a family, or transitioning to retirement.”

THE CHALLENGING STATE OF THE MARKET None of the major life insurance chief executives are walking away from the currently challenging state of the market, with TAL’s Clark making the point that there is still some distance to go before local conditions actually stabilise. “The life insurance industry has seen significant change and disruption for some time now, and we are not at the end of that journey,” Clark said. “Ownership structures and the competitive landscape have been re-written, with banks and AMP selling their life insurance businesses alongside other consolidation, and the implementation of regulatory reform continues to change insurance business models as a whole, along with the way consumers access life insurance.” He said the changes to the life insurance industry itself had been significant and impacted every channel through which consumers accessed life insurance, be it through a financial adviser, through their superannuation fund or directly with an insurer. “We have seen life insurance sales through banks effectively cease, volume of direct life insurance shrink considerably, as it will continue to do for the foreseeable future, and new retail advised life insurance reduced by 40%. “The industry has also implemented the insurance in superannuation legislative changes during the last 12 months, which has materially impacted the group insurance model for every insurer and removed life insurance coverage for millions of Australians,”

Continued on page 18

5/08/2020 2:08:07 PM

18 | Money Management August 13, 2020

LIF

Continued from page 17 Clark said. “This significant reduction in life insurance coverage has happened prior to the devastating bushfires and the global COVID-19 pandemic.” “These are significant events in the lives of all Australians, and what has been made clear through these last six months, is the importance of life insurance and the essential role life insurers have in providing our customers and the community with confidence and support when faced with times such as these.” For MLC Life’s Williamson the current situation is as challenging as he has ever seen it in his career. “This is arguably the most testing time that life insurers have faced for a long time. However, the insurers that manage their partners and customers most effectively and invest in their core functions such as claims, underwriting and product will come through this period in best relative shape,” he said. “We need to ensure life insurance is sustainable in the future. What makes it harder is that alongside the commercial challenges there has been and will continue to be significant regulatory disruption to the life insurance landscape, which will result in access to life insurance through banks, direct from insurers, through superannuation funds and financial advisers, becoming more limited. “When we look at adjacent sectors like advice, we know it is not just us being tested – our partners are also having a tough

14MM130820_15-39.indd 18

time. But I remain confident that we will get through these challenging times together.” ClearView’s Swanson admitted that these had been the most difficult conditions he had seen, “due mainly to the industry’s poor financial performance”. “This has been further exacerbated by COVID-19. That said, there is still enormous need for Australians to protect themselves and their families against the risk of sickness, accident, injury, and premature death. Quality life insurance advice and products are critically important, given the uncertainties of life and Australia’s record high levels of household debt,” he said.

INSURANCE INSIDE SUPERANNUATION The insurers who have exposure to insurance inside superannuation have all taken a hit from the Government’s Protecting Your Super legislation together with its Putting Members’ Interests First legislation. According to TAL’s Clark, the bottom line has been a reduction by a third in the number of super fund members who have life insurance through their super. “The collective impact of the

Protecting Your Super (PYS) and Putting Members’ Interests First (PMIF) legislation has been a reduction of around a third of superannuation fund members who have life insurance in place through their superannuation,” he said. “This has increased pressure on premiums for most members who remain insured, and it has limited the availability of life insurance for some of the more vulnerable sections of community who may otherwise not be able to access or afford life insurance cover. “What it has also revealed most importantly, and what has been brought into sharp focus for the future, is the importance of member experience and of ensuring there is understanding amongst members of the benefits and value provided by insurance through superannuation. “Yes, we need to better engage with superannuation fund members. We have been talking about this for some time. Engagement is a function of how we communicate, but also, and more importantly, what members experience. Together with our fund partners, our strategies can deliver a step change in member experience. “To ensure we are playing an

5/08/2020 2:07:54 PM

Weâ&#x20AC;&#x2122;re here for your clients when they need us most

Supporting Australian families through the claims we pay is the most important thing we do

Last year, the TAL Group paid over

2.3 billion

To more than

And we accepted

34,000

96%

Australians...

of claims

in claims...

ÂŠ 2020 TAL Life Limited ABN 70 050 109 450 AFSL 237848 (TAL Life). This page contains a summary of the combined volume and value of claims paid, and the percentage of claims accepted, by TAL Life and Asteron Life & Superannuation Limited between 1 January 2019 and 31 December 2019. The assessment and payment of each claim is subject to the individual policy terms, conditions, limits and exclusions, which are set out in the applicable Product Disclosure Statement and Policy Document.

14MM130820_15-39.indd 19

5/08/2020 2:07:39 PM

20 | Money Management August 13, 2020

LIF

Continued from page 18 active role within that, TAL established a dedicated Member Engagement team which has been working with our fund partners on a number of initiatives to support superannuation funds in better engaging their members in the future. This will be further supported by ongoing investments in digital capabilities to support a more seamless and integrated member experience.”

VIABILITY AND DISABILITY INSURANCE All of the major life company chief executives acknowledged the difficulties with bringing disability insurance back into profitability and the manner in which this has affected the industry’s overall bottom line. MLC Insurance’s Williamson noted that the latest statistics revealed that life insurers had recorded a loss of $1.8 billion for the year ending March 2020, noting that life insurers were having to take significant steps to ensure their sustainability. “The situation has been exacerbated by COVID-19, which will likely cause higher unemployment and underemployment as well as an increasing prevalence of mental illness following government restrictions,” he said. “To date, we’ve already provided premium relief to more than 1,300 customers.” “In coming months and years, we expect insurers will also be receiving and paying an increased level of claims that will be a result of the economic impacts of COVID-19. This will impact a life insurance industry

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already under pressure and place it at further risk,” Williamson said. “As far as the impact on premiums and renewals for retail policies, I think it is still too early to say what this might look like.” Swanson also acknowledged the challenges, particularly around disability income products. “It is a very challenging time for the industry. A large part of this can be attributed to issues surrounding the profitability of Income Protection (IP),” he said. In doing so, he noted the product development work that ClearView had undertaken in an effort to get a cost-effective offering into the market. “ClearView has launched a sustainable IP product, LifeSolutions Indemnity 60. This option, which is available alongside our existing IP indemnity product, can cover up to 60% of a client’s income (up to 75% for six months if the Income Support Benefit applies) at a reduced premium.” TAL’s Clark was forthright on the sustainability issues in the area of disability income insurance products, noting APRA’s March 2020 data showing that, collectively, the industry lost $1.8 billion in the year to 31 March 2020.

However, he made clear that disability products were not something insurers could simply walk away from. “Disability income insurance products meet a critical consumer need to provide income replacement where a customer is unable to work as a result of illness or injury, and the industry must step up and get this right to ensure disability income products remain accessible, affordable and sustainable for consumers,” Clark said. “APRA has intervened in an unprecedented way; however, it is up to life insurers to directly address these issues. There must be a better industry response to the current disability income challenges than simply increasing prices. This critical industry work needs to ensure the long-term sustainability of income protection products for Australian consumers now and into the future. “All of these factors are substantially reshaping the life insurance industry in Australia, along with consumers’ access to life insurance and choice of channel. It is critical that the life insurance industry manages itself well through this period of change, to ensure our products remain good value, and that we can continue to meet our long-term obligations to customers.”

6/08/2020 9:42:02 AM

investmentcentre.moneymanagement.com.au

a part of

FINDING UNDERVALUED OPPORTUNITIES a part of

Laura Dew writes that the Australia small/mid cap sector offers investors exposure to a diverse range of companies with fast-growing prospects. TAKING A SMALL-CAP approach to investing can provide access to a diverse range of opportunities while allowing investors to avoid exposure to the largest sectors such as fossil fuels. The Australian Securities Exchange (ASX) is one of the most concentrated global stockmarkets with the top 10 companies including BHP and CSL making up 50% of the market. This is a factor some investors might want to avoid, particularly from an environmental, social and governance (ESG) perspective as they may prefer avoiding exposure to these large-cap companies from an ethical perspective. In particular, this mood has driven the demand for Ex-20 funds, those active funds which exclude the largest 20 firms on the ASX. Small and mid-cap funds also gave investors the opportunity to get in at an early stage on

companies which large-caps avoid which could go on to big successes. A large-cap fund will tend to ignore a company until is over $50 billion in size. This makes small and mid-caps an under-researched area with the potential to find good opportunities, if managers can find reliable and transparent data. Early small-cap successes include A2 Milk, Afterpay and Aristocrat Leisure which have all since seen significant growth since listing on the stockmarket. According to FE Analytics, within the Australian Core Strategies universe, there are 99 Australian small and mid-cap funds in the Australian equity small/mid cap sector. There is no strict definition of what is classed as a â&#x20AC;&#x2DC;small and mid-capâ&#x20AC;&#x2122; company but most funds would invest in small-cap companies between $500 million and $2 billion while mid-cap is $2 billion to $10 billion. Within the sector, there are also micro-cap funds

Chart 1: Performance of the Australian small/mid cap sector versus Australian equity sector over one year to 30 June 2020

which are usually highly concentrated and consider companies with a market cap below $500 million. The largest fund in the sector was the Bennelong ex-20 Australian Equities fund which has $2.4 billion in funds under management (FUM) followed by Allan Gray Australia Equity which has $1.6 billion. In total, there were only nine funds in the sector which were over $500 million as small and mid-caps tended to deliberately be kept at a small volume of AUM for liquidity purposes. With this in mind, there were also many funds which were significantly smaller including 8IP Australian Small Companies which was $10.4 million, Ausbil Australian SmallCap at $4 million and Eiger Australian Small Companies at $5.4 million. This was one of the downsides of these types of funds as small or mid-cap companies are usually less liquid than large or megacaps which meant the funds could be riskier and/or more volatile than their large-cap counterparts. The companies do not have the same capital or resources which make them more vulnerable to negative events but, at the same time, they may be able to pivot and move their businesses quicker than larger ones.

PERFORMANCE

Source: FE Analytics

14MM130820_15-39.indd 21

The Australian small/mid cap sector has returned 22% over three years to 30 June, 2020, compared to returns of 14% by the large-cap sector. Over one year to 30 June, 2020, it has lost 0.3% but

LAURA DEW

this was a smaller loss than the large-cap sector which lost 5.8%. From an index perspective, the S&P ASX Small Ordinaries has returned 19.4% over three years, lost 6% over one year and lost 9.2% since the start of 2020 compared to returns of 16.3% by the ASX 200 over three years, 8% losses over one year and 10% losses since the start of the year. Small and mid-cap funds have also fared better than large-caps during the pandemic, losing 7.9% since the start of the year to 30 June compared to losses of 9.5% by the large-cap sector. The bestperforming fund since the start of the year was Hyperion Small Growth Companies which returned 5.9% followed by DMP Australian Small Caps Trust Wholesale which returned 2.3%. The sector average was losses of 7.94% There were two further funds, Perennial Value Microcap Opportunities Trust and Ophir Opportunities which returned 1.9% and 1.5% since the start of the year. While only four funds had seen positive returns since the start of the year, this was a larger percentage at 4% of the sector compared to the Australian equity sector which saw just 2.6% of its funds reporting positive returns over the same period. Looking over a longer threeyear time period to 30 June, the best-performing fund was the aforementioned Perennial fund which returned 23% and Ophir fund which returned 20.2%.

5/08/2020 2:07:50 PM

a part of

ACS CASH - AUSTRALIAN DOLLAR

ACS EQUITY - AUSTRALIA EQUITY INCOME

Fund name

Crown Rating

Risk Score

Macquarie Australian Diversified Income

0.46

2.21

2.63

Macquarie Diversified Treasury AA

0.46

2.17

2.61

Fund name

Crown Rating

Risk Score

Lincoln Australian Income Wholesale

2.01

-7.17

5.76

Lincoln Australian Income Retail

1.95

-7.91

5.02

Armytage Australian Equity Income

3.44

-10.33

3.58

103

Plato Australian Shares Income A

3.17

-9.15

3.33

Mutual Cash Term Deposits and Bank Bills B

0.06

1.31

1.92

Mutual Cash Term Deposits and Bank Bills A

0.06

1.29

1.90

Lazard Defensive Australian Equity

-0.02

-6.41

0.94

Pendal Stable Cash Plus

0.07

1.32

1.88

Legg Mason Martin Currie Equity Income X

2.57

-10.02

0.92

100

Australian Ethical Income Wholesale

0.09

1.05

1.76

AMP Capital Equity Income Generator A

1.92

-10.85

0.63

109

Macquarie Treasury

0.04

1.03

1.75

AMP Capital Equity Income Generator

1.93

-10.84

0.62

109

Mercer Cash Term Deposit Units

0.03

1.19

1.73

AMP Capital Equity Income Generator H

1.93

-10.88

0.48

109

IOOF Cash Management Trust

0.03

1.05

1.69

Legg Mason Martin Currie Equity Income M

2.52

-10.56

0.34

100

Mutual Cash Term Deposits and Bank Bills C

0.04

1.03

1.64

ACS EQUITY - AUSTRALIA SMALL/MID CAP

ACS EQUITY - ASIA PACIFIC EX JAPAN Fund name

Crown Rating

Risk Score

Mirae Asset Asia Great Consumer Equity A

4.69

17.91

16.80

Fidelity Asia

5.77

3.83

12.19

Platinum Asia C

6.44

20.43

12.15

TAAM New Asia

7.51

17.07

11.14

SGH Tiger

8.48

-5.32

11.05

102

Cooper Investors Asian Equities

4.89

3.30

10.71

Schroder Asia Pacific Wholesale

4.99

1.93

8.73

Premium Asia

5.25

4.06

8.13

CFS Asian Growth A

4.51

-2.81

7.49

Aberdeen Standard Asian Opportunities

5.93

2.72

7.04

Fund name

Lakehouse Small Companies Ophir Opportunities Ordinary

Crown Rating

Risk Score

-3.22

6.65

23.46

163

1.46

12.53

20.26

116

OC Micro-Cap

2.57

14.59

16.48

131

SGH Emerging Companies Professional Investors

5.12

-3.99

15.51

150

Australian Ethical Emerging Companies Wholesale

6.43

13.96

14.77

105

Australian Ethical Emerging Companies

6.36

13.21

13.97

105

Hyperion Small Growth Companies (apps closed)

1.80

15.32

13.76

105

SGH Emerging Companies

5.13

-4.00

13.64

150

Macquarie Small Companies

-1.38

1.95

13.59

111

Fidelity Future Leaders

0.34

1.23

13.42

102

ACS EQUITY - EMERGING MARKETS

ACS EQUITY - AUSTRALIA Risk Score

Crown Rating

Risk Score

Northcape Capital Global Emerging Markets

4.48

11.76

12.93

Fidelity Global Emerging Markets

4.16

1.69

11.03

Legg Mason Martin Currie Emerging Markets

5.13

4.52

8.92

Fund name

Lincoln Australian Growth Wholesale

2.09

-0.34

14.57

DDH Selector Australian Equities

0.96

-0.24

13.95

111

Lincoln Australian Growth Retail

2.05

-0.73

13.90

CFS Wholesale Global Emerging Markets Sustainability

1.69

-4.06

6.98

Hyperion Australian Growth Companies

5.19

17.68

12.89

CFS FirstChoice Wholesale Emerging Markets

4.98

4.47

6.94

CFS Wholesale Australian Share

2.62

4.25

11.77

3.36

-0.16

6.56

CFS Colonial First State Wholesale Concentrated Australian Share

Schroder Global Emerging Markets Wholesale

2.31

4.45

11.50

3.33

5.50

5.98

Bennelong Australian Equities

1.33

6.15

11.10

116

Macquarie Walter Scott Emerging Markets

DDH Selector High Conviction Equity A

3.55

-1.19

5.74

0.49

-2.34

10.90

114

Macquarie True Index Emerging Markets

BT Wholesale Partner Australian Shares Growth 1

3.75

11.00

10.05

102

OnePath Wholesale Global Emerging Markets Share

4.11

-5.57

4.99

Greencape Broadcap I

1.97

3.65

9.99

Mercer Emerging Markets Shares

4.10

-3.01

4.92

14MM130820_15-39.indd 22

Crown Rating

Fund name

6/08/2020 11:29:29 AM

a part of

ACS EQUITY - GLOBAL

ACS EQUITY - SPECIALIST

Fund name

Crown Rating

Risk Score

Fund name

CFS FC Baillie Gifford W LT Global Growth

8.61

62.40

29.40

Hyperion Global Growth Companies B

2.69

19.17

23.91

CC Marsico Global Institutional

3.18

25.68

Hyperion Global Growth Companies A

2.49

CC Marsico Global B

BT Technology Retail

1.51

28.24

26.55

CFS Wholesale Global Technology & Communications

3.72

30.17

22.70

23.01

Fiducian Technology

2.48

30.92

20.35

18.29

22.34

-0.58

31.02

17.54

2.86

23.99

21.98

Platinum International Health Care C

Loftus Peak Global Disruption

2.65

27.67

21.52

Platinum International Technology C

1.36

21.80

12.82

Custom Portfolio Solutions - Global Growth

1.82

24.61

21.44

CFS Wholesale Global Health & Biotechnology

-4.54

16.83

11.93

Zurich Investments Concentrated Global Growth

-0.06

14.42

20.47

CFS Colonial First State Australian Share Growth

3.50

-2.77

7.55

Platinum International Brands C

0.61

1.15

5.37

AtlasTrend Big Data Big

4.37

24.21

20.04

3.31

-2.31

3.32

155

T. Rowe Price Global Equity

1.72

19.54

18.53

Barwon Global Listed Private Equity BlackRock Concentrated Industrial Share D

3.16

-6.22

2.85

109

ACS EQUITY - GLOBAL SMALL/MID CAP Fund name

Bell Global Emerging Companies

-1.39

5.05

12.54

Prime Value Emerging Opportunities

1.40

18.11

12.48

102

Ellerston Global Mid Small Unhedged

-1.16

13.39

12.15

Mercer Global Small Companies Shares

-0.50

-2.72

5.97

107

Yarra Global Small Companies

-0.01

-6.61

5.43

110

Optimix Wholesale Global Smaller Companies Share Trust B

-1.79

-1.80

5.21

108

Optimix Wholesale Global Smaller Companies Share Trust A

-1.80

-1.94

5.03

108

Lazard Global Small Caps I

-1.66

-3.41

4.29

Pengana Global Small Companies

0.56

0.31

4.06

Microequities Global Value Microcap Ordinary

2.78

-4.16

Crown Rating

Risk Score

ACS FIXED INT - AUSTRALIA / GLOBAL 1m

CFS Colonial First State Wholesale Diversified Fixed Interest

0.66

4.17

4.94

Macquarie Dynamic Bond

1.06

4.32

4.83

BT Wholesale Multi-manager Fixed Interest

0.60

4.06

4.72

UBS Diversified Fixed Income Fund

0.73

3.71

4.71

CFS FirstChoice Wholesale Fixed Interest

0.77

3.33

4.68

106

IOOF MultiMix Diversified Fixed Interest

1.46

4.61

4.52

PIMCO Diversified Fixed Interest

0.84

3.27

4.51

Bendigo Diversified Fixed Interest

0.83

3.88

4.50

PIMCO Diversified Fixed Interest Wholesale

0.85

3.28

4.48

Onepath Wholesale Diversified Fixed Interest Trust

0.77

2.96

4.17

ACS EQUITY - INFRASTRUCTURE

Risk Score

BlackRock Global Listed Infrastructure

-5.30

-1.62

10.33

Fund name

Mercer Global Unlisted Infrastructure

7.39

7.91

9.36

Mercer Australian Sovereign Bond

0.12

4.33

6.02

AMP Capital Global Infrastructure Securities Unhedged Wholesale

0.11

4.19

6.00

-5.05

Macquarie True Index Sovereign Bond Legg Mason Western Asset Australian Bond X

0.53

4.43

5.96

CC JCB Active Bond

0.20

4.55

5.94

QIC Australian Fixed Interest

0.60

4.81

5.90

7.66

Risk Score

Crown Rating

Fund name

-4.11

Crown Rating

Risk Score

Fund name

127

3.75

Crown Rating

ACS FIXED INT - AUSTRALIAN BOND Crown Rating

Risk Score

AMP Capital Global Infrastructure Securities Unhedged A

-5.08

4D Global Infrastructure A

-2.04

-4.44

7.37

AMP Capital Global Infrastructure Securities Unhedged R

-5.08

-4.45

7.35

Macquarie Core Australian Fixed Interest

0.46

4.71

5.83

AMP Capital Global Infrastructure Securities Unhedged H

-5.11

-4.64

7.07

Pendal Government Bond

0.28

4.71

5.83

Magellan Infrastructure Unhedged

-3.73

-6.79

6.96

Future Directions Australian Bond

0.76

4.22

5.80

RARE Infrastructure Income A

0.91

2.82

6.67

OnePath ANZ Fixed Income

0.53

4.21

5.77

ClearView CFML Colonial Infrastructure

-5.13

6.36

Pendal Sustainable Australian Fixed Interest

0.53

5.13

5.77

14MM130820_15-39.indd 23

-4.35

7.39

6/08/2020 11:31:13 AM

a part of

ACS FIXED INT - INFLATION LINKED BOND

ACS FIXED INT - DIVERSIFIED CREDIT

Fund name

Ardea Real Outcome

0.88

5.75

5.53

Ardea Australian Inflation Linked Bond

1.78

2.01

4.81

Macquarie Inflation Linked Bond

1.55

2.01

4.79

Ardea Australian Inflation Linked Bond I

1.79

-0.53

4.09

5.09

Mercer Australian Inflation Plus

0.66

4.73

3.87

3.63

4.77

2.45

3.61

4.56

4.59

Morningstar Global Inflation Linked Securities Hedged Z

0.75

1.96

Mercer Global Credit

1.69

5.05

4.43

Aberdeen Standard Inflation Linked Bond

0.33

0.95

2.82

CFS Wholesale Global Credit

1.01

0.99

4.03

Fund name

Crown Rating

Risk Score

Principal Global Credit Opportunities

0.99

11.18

6.56

Manning Private Debt

0.47

5.77

6.54

Macquarie Core Plus Australian Fixed Interest

1.28

3.66

5.92

PREMIUM ASIA INCOME

1.77

3.89

5.78

CFS Wholesale Global Corporate Bond

1.82

9.05

5.73

UBS Global Credit Fund

1.50

6.05

Pendal Enhanced Credit

0.60

Global Corporate Bond Trust Wholesale

Crown Rating

Risk Score

ACS PROPERTY - AUSTRALIA LISTED ACS FIXED INT - GLOBAL BOND Crown Rating

Risk Score

Fund name

Crown Rating

Risk Score

Crescent Wealth Property Wholesale

-0.64

-1.31

6.53

Fund name

RUSSELL GLOBAL BOND NZD

9.64

15.65

7.75

Freehold Australian Property

0.82

-2.50

6.48

Challenger Guaranteed Income 400 cents pa 30/09/22

0.42

5.25

5.80

AMP Capital Listed Property Trusts

-0.99

-15.87

6.17

141

IPAC SIS - International Fixed Interest Strategy No 2

0.61

4.71

5.57

AMP Capital Property Securities

-1.02

-16.38

5.91

143

Mercer Global Sovereign Bond

0.35

5.59

5.54

AMP Capital Listed Property Trusts A

-1.03

-16.31

5.62

141

GCI Diversified Income Wholesale Unhedged USD

0.74

7.72

5.49

Crescent Wealth Property Retail

-0.74

-2.93

5.37

Schroder Global Corporate Bond Inst

2.16

5.75

5.41

Resolution Capital Core Plus Property Securities A PF

-0.64

-13.19

5.31

135

Colchester Global Government Bond N

-0.73

5.46

4.90

Pendal Property Securities

-1.50

-16.55

4.96

141

Pendal Global Fixed Interest

-0.02

6.05

4.52

Pendal Property Investment

-1.49

-16.58

4.96

141

UBS International Bond Fund

1.03

4.81

4.51

UBS Property Securities Fund

-1.18

-17.51

4.70

158

Colchester Global Government Bond A

0.21

5.08

4.37

Fund name

APN Asian REIT

-2.25

-11.88

8.39

114

Reitway Global Property Portfolio Institutional

-1.10

7.69

7.83

Reitway Global Property Portfolio

-1.16

7.22

7.30

Quay Global Real Estate A

-0.61

-9.83

6.23

101

Quay Global Real Estate C

-0.61

-9.82

6.11

101

ACS PROPERTY - GLOBAL ACS FIXED INT - GLOBAL STRATEGIC BOND Fund name

Dimensional Global Bond Trust NZD

1.12

5.64

5.51

Dimensional Global Bond Trust AUD

1.09

5.06

5.20

Pimco Dynamic Bond C

1.72

1.09

2.56

Crown Rating

Risk Score

Crown Rating

Risk Score

Pimco Dynamic Bond Wholesale

1.70

0.99

2.44

Resolution Capital Global Property Securities Unhedged II

-3.66

-7.06

5.62

103

T. Rowe Price Dynamic Global Bond

0.05

4.46

2.30

Dimensional Global Real Estate Trust Inc AUD

-1.83

-10.61

4.83

130

JPMorgan Global Strategic Bond

1.26

1.60

2.16

BetaShares AMP Capital Global Property Securities Unhedged

-1.92

-8.95

4.82

109

Strategic Fixed Interest

0.31

0.90

1.98

Specialist Property

0.40

-8.96

4.14

121

MacKay Shields Unconstrained Bond

1.14

1.02

1.97

Perpetual Private Real Estate Implemented Portfolio

-0.84

-12.05

3.90

114

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

14MM130820_15-39.indd 24

6/08/2020 11:31:20 AM

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a part of

in partnership with

5/08/2020 3:14:10 PM

26 | Money Management August 13, 2020

Responsible investment

IS YOUR FUND MAKING THEIR VOTE COUNT? Jassmyn Goh finds out why it is important for advisers to interrogate managers on their proxy voting and engagement activities, especially if they label their fund as ‘ESG’ or responsible. ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG) investing is not just about positive and negative screens and though a low regulatory bar for transparency has been set, financial advisers need to be asking fund and portfolio managers the hard questions about engagement. According to the Responsible Investments Association Australasia (RIAA), corporate engagement and shareholder action is the second most popular responsible investment strategy in the country.

14MM130820_15-39.indd 26

However, in Australia, stewardship codes for asset managers and owners to sign up to for a set of practices is only voluntary, meaning transparency on ESG engagement and shareholder action is low. Corporate engagement and shareholder action give power to shareholders to influence corporate behaviour through proxy voting in alignment with the shareholders own ESG charters. While this seems straightforward, many funds vote inconsistently and against their own ethical charters.

VOTING VS PRIVATE MEETINGS In 2019, 10 of the country’s largest superannuation funds supported only 38% of climate resolutions for international and Australian companies, according to Market Forces data. Some funds cited the reason for voting against their own ESG charters was due to the fact that they preferred to talk behind closed doors on issues. RIAA chief executive, Simon O’Connor, told Money Management that proxy voting was the most visible way investors could showcase their ESG intentions and

articulate how important certain issues were to them. “There’s still far too many managers and super funds who are not adequately disclosing or transparently reporting their engagement and voting activities. It is really important for these investments to be held accountable to Australian investors,” O’Connor said. “It’s increasingly important that assets managers can talk publicly about what engagement priorities they have, activities, and outcomes Continued on page 28

5/08/2020 2:13:06 PM

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© NMMT Limited ABN 42 058 835 573, AFSL 234653 (NMMT). This advertisement, provided by NMMT, is for adviser use only and must not be made available to retail clients. It contains general advice only and hasn’t taken any person’s personal circumstances into account. You should consider the appropriateness of this advice for you or your clients. Visit northonline.com.au to obtain the relevant disclosure documents before deciding whether to acquire or vary these products for any person. NMMT is part of the AMP group and can be contacted on 1800 667 841 or north@amp.com.au. If a person decides to acquire or vary a financial product or service, companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium they pay or the value of their investments. Contact AMP for more details. MyNorth is a registered trademark to of NMMT. NMMT issues the interests in and is the responsible entity for MyNorth Managed Portfolios through which MyNorth Sustainable Managed Portfolio is offered. All managed portfolios may not be available across all products on the MyNorth platform and are not available directly to retail clients. The issuer of MyNorth Super and Pension is N.M. Superannuation Pty Limited ABN 31 008 428 322, AFSL 234654 and the issuer of MyNorth Investment and MyNorth Managed Portfolios is NMMT.

14MM130820_15-39.indd 27

5/08/2020 2:13:23 PM

28 | Money Management August 13, 2020

Responsible investment

Continued from page 26 they have. That doesn’t necessarily mean they need to name and publicly write notes on every meeting and companies they speak to because a lot of that is private.” However, O’Connor noted that just because a fund had a strong policy towards an issue, such as climate change, it did not necessarily mean they would support every climate resolution. He cited reasons such as the fact that a resolution might be poorly targeted, and that some resolutions that were planned for an annual general meeting (AGM) would often drive conversations with large institutional investors before the meeting. “Often this has resulted in these companies making concessions and commitments in advance of the AGM that meet a request of the resolution. Then you’ll find a lot of those investors will not vote in favour of the resolution because they’ve already achieved what they hoped to achieve through that engagement,” he said. “The way we are measuring how many investors vote in support of each resolution is a bit of a blunt analysis. The onus is on the investors on why they are voting in a particular way and explaining their practices clearly.” Fidelity International global head of stewardship and sustainable investing, Jenn-Hui Tan, said votes were more understandable when placed in context. Tan said if a fund was having a productive discussion on an issue and were happy the firm they were invested in would meet their target within a certain timeframe, they would not necessarily vote against management.

14MM130820_15-39.indd 28

“You want to be able to reflect the discussion you’re having and the progress you see. You only want to vote against when you don’t think they’re not progressing well but you also want to provide greater transparency around the nature of those discussions,” he said. Tan said there were ‘voting red lines’ in the industry where some investors would always vote a certain way on an issue irrespective of how good or bad management was. “To us that is not an informed way of voting. We want our votes to reflect the discussions we have with management. When we vote we think about the context of everything we are trying to achieve so we don’t have a lot of red lines,” he said. “Red lines are helpful and useful to give a consistent message but they’re not helpful when trying to tailor your approach to companies that are doing better and companies that are doing worse.” Australian Ethical head of ethics research, Stuart Palmer, said private conversations were often helpful with complex issues as conversations could be more open and productive. Palmer said that when speaking behind closed doors companies were less worried that everything that was said would be

“It’s hard to see how they fulfil their role as a responsible investor if they’re not interested in engagement and influence on the voting side.” – Stuart Palmer, Australian Ethical publicly held against them. “But if it never gets elevated beyond the private then companies which choose not to respond and engage meaningfully will see the consequences,” he said. “Part of it is well intentioned to not to be outspoken in public or assertive in engagement, but there’s a growing realisation that if you’re never assertive in public then that’s not a good long-term strategy.”

OUTSOURCING In 2019, Fidelity voted at over 4,300 shareholder meetings globally, had 16,000 engagement meetings with companies, and were actively engaging with over 680 firms. The largest themes the firm voted on were for remuneration, governance structure, and shareholder proposals. Over 23.6% of votes were against management and 71.3% with management. However, not all funds have the capacity to vote on every

agenda and outsourcing proxy voting has been way for funds to get around this by using firms such as Intermediary Outsource Solutions (ISS). O’Connor said many fund managers were asked to consider thousands of resolutions and votes every year and that getting advice from service providers made sense. But the difference was that a proactive asset manager would take that advice and be conscious on how they would vote on key ESG resolutions. “We shouldn’t shy away from scrutiny from NGOs and other stakeholders because fund managers need to be aware that today there is an expectation for them to clearly articulate why they are voting or engaging in a particular way or why they are not voting or engaging in a particular way,” he said. Palmer said his firm used ISS Continued on page 30

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© NMMT Limited ABN 42 058 835 573, AFSL 234653 (NMMT). This advertisement, provided by NMMT, is for adviser use only and must not be made available to retail clients. It contains general advice only and hasn’t taken any person’s personal circumstances into account. You should consider the appropriateness of this advice for you or your clients. Visit northonline.com.au to obtain the relevant disclosure documents before deciding whether to acquire or vary these products for any person. NMMT is part of the AMP group and can be contacted on 1800 667 841 or north@amp.com.au. If a person decides to acquire or vary a financial product or service, companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium they pay or the value of their investments. Contact AMP for more details. MyNorth is a registered trademark to NMMT. The issuer of MyNorth Super and Pension is N.M. Superannuation Pty Limited ABN 31 008 428 322, AFSL 234654 and the issuer of MyNorth Investment and MyNorth Managed Portfolio is NMMT.

14MM130820_15-39.indd 29

5/08/2020 2:13:21 PM

30 | Money Management August 13, 2020

Responsible investment

Continued from page 28 and CGI Glass Lewis for sustainability research and voting advice. “They serve an important role and we use them for international stocks. A good development is that these organisations have introduced different types of recommendations for voting. They have their standard recommendations, sustainability guidelines and recommendations, and some have a suite of recommendations they give for a given resolution in a given AGM. The fund manager then can decide which one to take,” he said. Palmer noted that it would be concerning if there was not any independent judgement or oversight by a fund manager on the votes being cast. “It’s hard to see how they fulfil their role as a responsible investor if they’re not interested in engagement and influence on the voting side,” he said. Robeco senior engagement specialist, Peter van der Werf, said that outsourcing voting did take away a lot of flexibility to make the fund’s own decision. “When you run your own proxy voting with your own analysts you have the ability to assess every single AGM and look for the merit in every proposal. Then you have a truly decisive way to responding to what the companies are putting out there and therefore you’re a truly active owner on every stock you own,” he said. “The same goes with engagement – the more outsourcing you do the thinner the layers become and the more muted the signal you’re sending as an active owner is.” While there were good

14MM130820_15-39.indd 30

reasons to outsource, he stressed there was a difference between completely outsourcing and never looking back at a decision made or never being actively involved in direction and strategy.

ADVISER TIPS One red flag Palmer said advisers needed to look out for when assessing fund engagement was whether the fund had ever divested from a company due to a lack of action. “Divestment definitely needs to be in the toolkit if you’re not achieving the change you think is important. Withdrawing capital from a company is a consequence that companies pay attention to,” he said. He said there were arguments that believed there was no leverage if investors always divested as soon as there was something they did not like. However, the other end of the spectrum was that if investors never divested they lost their capacity to influence. “How meaningful is it if company managers and directors know that you’re never going to sell their stock?” he said. Another red flag advisers should look out for were if funds did not have any exclusions, whether it was a responsible, sustainable, or mainstream fund. “If a manager says they would

continue to be invested in a company that unaddressed their disregard for human rights in a systemic underpayment of workers then I don’t think that’s consistent with a responsible or sustainable model of investment management,” Palmer said. “It goes beyond specific mandates and there’s a growing recognition that capital is not just this passive thing that doesn’t have an influence. It helps shape the future, helps markets and economies with systemic challenges like climate change. So, to ignore that, I think those days are numbered.” A final aspect advisers needed to look for was a fund’s engagement transparency as it was important to disclose reporting to clients on how they were fulfilling engagement responsibilities. AMP Australia head of research and solutions, Leanne Milton, said advisers and clients needed to review a firm’s sustainability or engagement reports to ensure that the manager’s engagement program and voting activities are in alignment with the client’s responsible investment beliefs and policies. “The report should also outline how the manager has taken account of ESG issues in

their practices and processes, the investment decisions that have been made as a result of ESG integration, and the progress and outcomes from the engagement activities,” Milton said. “Advisers and clients should also review fund manager commitments or adherence to relevant external standards and accountability processes, such as reporting against the United Nations Principles for Responsible Investment (UN PRI) commitments or certification of products by the RIAA.” Tan said there was no substitute for due diligence and interrogating fund managers when evaluating their engagement processes. More scrutiny that was brought to the bear, he said, the better the practices in the industry would become. “Advisers should be interrogating fund managers and asking the difficult questions around their engagement and voting practices and getting satisfactory answers that give their ultimate end clients the information they need to make their investment decisions properly,” he said. Tan noted that funds should not be treating ESG in a silo as it had to be integrated across the whole investment management process.

5/08/2020 2:13:42 PM

August 13, 2020 Money Management | 31

Equities

TECH IN A POST-COVID WORLD

It is not enough to take a broad focus on ‘technology’, writes Nick Griffin, as there are three specific sectors showing particular promise in a post COVID-19 world. EARNINGS GROWTH DRIVES stock prices. It’s a truism that holds through all market conditions and all cycles, and the COVID-19 induced market volatility is no exception. It is important for investors to look through the volatility, beyond the short-term gyrations, and to focus on the companies that will be better off on the other side of this crisis. If there has been one consequence of COVID-19 that everyone can agree upon, it is the impact it has had on digital enterprise, and the way it has accelerated the take-up of technology. Zoom, Webex and Microsoft Teams, among others, are now mainstream meeting tools that have become the

14MM130820_15-39.indd 31

mainstay of business continuity. Our children are learning from home with them as well. Digital enterprise is a sector that continues to show promise – along with e-commerce and digital payments – and they are all sectors that are set to be beneficiaries of the brave new COVID-19 world. When it comes to digital enterprise, the current crisis will only accelerate the move to cloudbased systems and software. E-commerce, similarly, has been a growing trend and this crisis means the shift will happen even faster than initially predicted. From that point of view, Amazon and Alibaba are two names that are set to benefit. Given a slowdown in commerce, payments overall will take a hit this

year, but ultimately the shift to digital will only accelerate. PayPal is set to be a beneficiary in this space. Another sector to watch is digital advertising. While there is no doubt that the likes of Google and Facebook will be impacted this year, they are also expected to outperform over the long run. The positioning of our portfolio is reflective of this new reality; and while we have been long-term investors in each of these themes, they should see earnings growth over the next three to five years, despite the backdrop. This is not to downplay the scope and impact of the COVID-19 pandemic on global economies. But however it plays out financially, unlike previous financial market crises, this is essentially a health

Continued on page 32

6/08/2020 10:48:32 AM

32 | Money Management August 13, 2020

Equities Continued from page 31 crisis, and by extension a solvency crisis, for many small businesses across the globe. Consequently, governments and central banks alike have seen little need to worry about moral hazard or sovereign debt levels, instead moving quicker than usual to provide unprecedented levels of stimulus and far-reaching interventions into credit markets which together have provided a strong firewall against any near term solvency concerns. In this environment, it is important not to be distracted by the fiscal stimulus measures being undertaken. Over the medium to long-term it is far more important to correctly identify an area of structural growth, and the

companies set to benefit from that growth, than it is to try to predict the direction of the economy or market. With so many areas of disruption occurring at once post COVID-19, there are a number of opportunities ahead over the medium to long term. One that looms large, is the cloud computing ecosystem â&#x20AC;&#x201C; which includes Infrastructure-as-aService (IaaS) and Software-as-aservice (SaaS). It is probably the biggest theme of the coming digital revolution and there are compelling reasons why its growth is set to accelerate. IaaS is a form of cloud computing that provides virtual computing resources over the internet. IaaS offers a lower cost,

more flexibility and scalability. IaaS implementation can be compared to the railroads of the industrial revolution, but in this instance, providing the infrastructure, speed and computer power without geographical constraints. SaaS, by contrast, is the application layer of cloud computing. When software is hosted in the cloud, the end user can access the application anywhere, anytime over the internet. So if IaaS is the railroad, SaaS is the locomotive, delivering the software product to consumers and business alike. To put the scale of this opportunity into context, worldwide IT spending sits at $2.1 trillion a year. This spending is split between software, devices, IT services, and

Chart 1: Investment by theme

Chart 2: Cloud computing spending

Source: Munro Partners

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Equities Chart 3: A long run of growth ahead

Source: Munro Partners

VOICES OF CEOs A number of recent announcements from the CEOs who at the forefront of digital transformation have described the changes they have seen since COVID-19, emphasising the impact of the digital revolution. Most significantly, Satya Nadella, chief executive of Microsoft, said: “we’ve seen two years’ worth of digital transformation in two months”. He said there were more than 200 million Microsoft Teams meeting participants generating more than 4.1 billion meeting minutes, in a single day. Similarly, Shantanu Narayen, Adobe chief executive, said “the mandate to digitally transform has taken on heightened urgency”. He cited the example of the 175% increase in usage of its cloud-based e-signature solution since the start of their fiscal year and mobile usage exploding with Acrobat Reader installations increasing 43% year-on-year. Finally, [cloud computing for life sciences system] Veeva chief executive Peter Gassner said “doctors are telling us they find digital meetings effective and they look forward to a mix of in-person and digital interactions once things get back to normal”. In Veeva’s case, US remote meetings between pharma and doctors with Veeva Engage – are up more than 30 times from February to April.

data centres. But there is a structural change developing with three of the big IT spends – of software, IT services and data – where they are increasingly being stored in the cloud. You need look no further than a Microsoft 365 subscription for a clear example of this in practice. But despite the huge growth in cloud computing over recent years, it only represents about 5%-6% of the total global IT expenditure. Obviously, there is a very long runway of growth ahead, and there are clear reasons why this growth is here to stay. Cloud computing is a

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one-stop shop that continues to take a bigger share of an increasing IT market spend. Consumers like ‘the cloud’ because it is far more simple, secure and cheaper than traditional methods of software usage. Businesses like the cloud as well. For software companies and corporates globally, the cloud provides real and discernible benefits: companies can run virtually any application or operating system on the infrastructure and they can easily scale their use of the service, be it up or down, depending on demand. It is no wonder that companies

are increasingly migrating to the cloud in some form, and when they do, they are going through the big IaaS vendors including Google, Microsoft, and Amazon, and in the developing world, Alibaba. These four companies are the big winners from the cloud computer trend. They provide scalable, commoditised computing power via their network of data centres and servers. Collectively, they account for 94% of the global IaaS market. Meanwhile, the underlying cloud computing providers are growing strongly and they have attractive business models. They operate on high margins – which can be greater than 90% – they are very scalable and revenue is recurring – with low churn and customers on long-term subscriptions. Additionally, they are paid in advance of providing the service so have a steady secure flow working capital. As the big four IaaS players continue to benefit from the migration of workloads to the cloud over the next five years, they could easily see a doubling of their cloud infrastructure revenues. We would also expect many of them to continue to improve margins as they enjoy the benefits of scale, which will ultimately contribute to sustained earnings growth.

NICK GRIFFIN

Nick Griffin is head of investments at Munro Partners.

6/08/2020 10:48:44 AM

34 | Money Management August 13, 2020

ESG

PANDEMIC PROVES CATALYST IN ESG UPTAKE With the advent of COVID-19 and the inevitable subsequent economic downturn, writes Guillaume Mascotto, will investor interest in ESG investing continue to accelerate, or will it take a back-step? TODAY, THERE IS growing consensus that environmental, social and governance (ESG) is no longer a fad. According to one recent account, global assets incorporating ESG factors to support investment decisions have almost doubled over four years, and more than tripled over eight years, reaching approximately US$41 trillion ($57.6 trillion) in 2020. Moreover, while the focus has been mainly on ESG-specific products, institutional investors are now beginning to think of ESG as integral to meeting their fiduciary responsibilities. The logic is that if ESG factors can be financially material then wouldn’t it make sense to systematically incorporate these factors across the investment complex, rather than just in select ESG products? While such trends were already altering the investment management landscape prior to COVID-19, the virus’ escalation to a global pandemic has hastened the shift in mindset toward sustainable investing. The pandemic and related economic fallout have also supported the notion that investors do not need to make a binary distinction between ESG and returns, especially during periods of market volatility. Indeed, a recent study found that, in Q1 2020, over 90% of sustainable indices outperformed their parent benchmarks.

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There is also a consensus building within the investment community that the ‘theory of the firm’ needs to evolve within an ESG framework. Investors increasingly believe companies should focus on the overall positive effects of their businesses on society and not simply on maximising shareholder value. Traditionally, such a view would have been counterintuitive to many analysts and investors, and it sparks a debate about the definition and scope of fiduciary responsibility. It’s an important issue that rose steadily on the ESG agenda pre-pandemic and one that is sure to continue in the coming months and years.

RESURGENCE OF ‘S’ PILLAR While social issues have always been central to ESG analysis, especially for exposed sectors such as healthcare, technology and consumer, one of the pandemic’s tangible consequences is the social dimension of ESG is now coming into greater focus. While public health is a key social issue within the ESG pillar trilogy, it is important for investors to distinguish between systemic-driven risk (exogenous) and ESG idiosyncratic risk (endogenous). For public health negative externalities to be considered idiosyncratic-driven, investors would need to evaluate whether the issue is triggered by companies’ misconduct or

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August 13, 2020 Money Management | 35

ESG

process quality/asset integrity failures. In the case of COVID-19, available evidence does not establish a link between the cause of the pandemic and companies’ ESG risk management practices (like it did with the 2008 financial crisis). But the pandemic’s societal reverberations will no doubt have an impact on these very ESG fundamentals going forward; more precisely, under the social pillar. Institutional investors are likely to increase focus on companies’ emergency response mechanisms (e.g. telecommuting, distributed management) and employee benefits (e.g. paid sick leave, telemedicine) as a gauge of long-term competitiveness (human capital) and operational integrity (business continuity). While companies could adapt to the ‘working from home-era’, they will also likely face heightened data privacy and security risk. Pre-pandemic, these factors were difficult to quantify but investors now understand they can have material implications for the companies being invested in and therefore need to be quantified and accounted for. Subsequently, and considering the growing issue of ‘green washing’, the post-COVID-19 investment space is likely to result in increased investor ESG due diligence. It is expected that investors will ask for verifiable evidence that ESG considerations, including those flowing from COVID-19, are formally integrated into a manager’s investment process and for support of such claims by stock selection, reporting and portfolio construction.

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RECONCILIATION OF NATURE AND SOCIETY In addition to a growing focus on social issues, the pandemic has shown the intrinsic intertwining of nature, health and finance which, while previously accepted, has since become very apparent. Some observers think the COVID-19 pandemic detracts from the fight against climate change. They fear public and private investment in renewable energy will decline due to lower near-term profits and potential capital reallocation toward social-related risk management priorities. In reality, the drastic mitigation measures put in place to fight the virus may be helping clear the air, too. Just as COVID-19 mitigation measures are likely to remain in place in the near term, their positive effects on the environment and public health may also persist. As a result, investors focused on decarbonising their portfolios may take the opportunity to redouble their efforts, arguing that urgently transitioning toward a lower-carbon economy is, in fact, doable. It is possible the drop in air pollution may be offset as global industries ramp up again to make up for economic losses once the virus is contained. In this context, investors are likely to favour companies that go beyond regulatory compliance and embrace the right long-term strategic direction. In addition to strong social-related risk management programs, this strategic direction could include investment in renewable energy or negative emissions technologies, board-level oversight on environmental performance and executive long-term incentive targets aligned with the International

Energy Agency’s 1.5°C Sustainable Development Scenario.

TAKING AN ESG ACTIVE ‘BARBELL’ STRATEGY Commitment to ESG and impactthemed investing has evolved from a question about why it’s important, to how it can be most efficiently implemented. Despite these gains in sophistication and demand, investors still have questions about ESG investing. First, they question the amount and complexity of ESG data and methodologies. Multiple data service providers employ a variety of evaluation criteria and reporting methods, so there is still no one size fits all solution. Asset managers and asset owners are left reviewing and evaluating companies and securities according to various methodologies. And many times, they add customised reviews to determine a reliable ESG scenario for an investment. Artificial intelligence (AI) and machine learning offer possible ways to deal with this overload of information. The ability to analyse and process exponentially more information than a human at vastly faster speeds, is AI’s core benefit. But investors remain concerned about relying on already confusing and possibly conflicting data, fearing that inserting a machine into a constantly evolving system could exaggerate inherent data ‘spottiness’. Another investor question focuses on whether ESG investing is a reliable source of alpha. There continues to be no consensus on this issue. While some asset managers are working to reduce the risks of ESG exposure, others are aiming to

deliver outperformance through investments in companies sporting high third-party ESG ratings. Amid the variety of approaches to ESG investing and associated challenges to implementation, the COVID-led volatility underscores the importance of active investment solutions to fill in these gaps and to navigate through market cycles. One way to bridge the gap is the adoption of barbell-like strategy centered on delivering alpha through investments in high-quality and attractively valued companies with improving business fundamentals and solid ESG risk management practices. In addition, this approach focuses on issuers which possess long-term competitive advantages as well as solid margins of safety against short-term adverse systemic forces—including rising costs related to COVID-19. Where possible, this approach also tilts toward companies that demonstrate acceleration in ESG growth trends such as clean technology, cybersecurity, global data connectivity, demographic changes and, arguably of greatest importance, healthcare innovation and accessibility. In a post-COVID environment, investors are likely to look for ways to align their investments with the long-term safeguarding of the planet and people’s lives without sacrificing returns. This is where an ESG active ‘barbell’ approach which protects investors against shortterm systemic downside ESG risk and capture long-term ESG upside potential can prove effective. Guillaume Mascotto is head of ESG and investment stewardship at American Century Investments.

5/08/2020 3:04:40 PM

36 | Money Management August 13, 2020

Platforms

PLATFORMS: WHEN ONE SIZE DOES NOT FIT ALL There are ongoing questions, writes Shannon Bernasconi, over how platforms are funded and whether clients are fully understanding of what service they are receiving. THE ONGOING DEBATE around who platforms are actually providing value to continues. Is it the adviser who gains efficiency from the functionality, seemingly at the expense of the client who pays the cost of the platform? Or is it ultimately the platform which makes the profits? Or does the client receive equitable value from that cost that is paid? There is no doubt that platforms provide access to a wide range of investments in an efficient manner, minimising paperwork and providing portfolio and tax reporting and online

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access. They also provide tools for the adviser to efficiently administer the client’s portfolio. But most platforms are products. As a result, the fees are charged from the client’s cash balance by the product provider. So while the adviser recommends the platform to the client, the client is paying for the cost of the platform, and the platform provider controls those fees.

THE VALUE DEBATE – WHO BENEFITS? A better alternative approach would be for a platform solution to be offered as a service with

the service fee charged to the adviser who has the choice of whether to on charge this to the client. This would allow an adviser to partner with the platform solution to make their own business more efficient, while directly controlling the fees the client pays, while still meeting their compliance obligations and providing a transparent service to the client. The value debate is slightly blurred when one considers who is getting the benefits derived from the clients’ assets. In most cases in the market, platforms make money from the investor’s

assets in addition to the administration fees charged to the investor. For example, a cash fee is applied by many of the platforms which often results in the client’s interest earned being less than the administration fee, that is, there is a net charge to hold cash on the platform. Another example of these additional or hidden fees are those associated with products offered to the clients where the platform earns management expenses. Some platforms offer their own managed accounts and whilst they have the right to

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Platforms

“A platform’s purpose should not be to own the adviser’s clients, nor make money from their client’s assets, or hide fees for no service.” charge a fee for that investment expertise, they sometimes also make additional revenue in negotiating rebates or lower expenses on managed funds in the model, that are not passed in full to the investor. In all these cases the client is paying the headline fees, while the platform is also benefiting from an additional revenue channel derived from the client’s portfolio of assets. It begs the question of who really is benefiting and at who’s expense? While not an additional fee, some platforms restrict the menu of assets available and in the cases of bank-aligned platforms, this is even more obvious for the likes of cash and the limited range of bank term deposits made available. Quite simply, most of the platforms in the market have conflicted revenue sources. A platform’s purpose should not be to own the adviser’s clients, nor make money from their client’s assets, or hide fees for no service.

NAKED PRICING AND THE FEE FOR SERVICE PLATFORM As the banks divest away from wealth, and with the flight of advisers from once bank aligned dealer groups to non-aligned, the basis of (vertical integrated) choice of platform has changed. While the ‘headline’ fees clients are paying have fallen, the additional fees – such as per account, management expense/ ICR, cash fees and self managed account model fees - have not in the most part fallen. In some cases they have even increased. There is no doubt that the culling of grandfathered commissions, Standard 3 of the FASEA Code of Ethics, and the

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advent of new technology-led platform solutions for advisers, will enable a shift in the next generation of advisory practices towards naked pricing and fee for service platform solutions away from platform products. The concept of naked pricing strips out fees exchanged between third parties in the value chain of advice and discloses only those fees payable to a client on a clean basis, void of revenue bias or conflict. The increasing prevalence of naked pricing will shift the margin from product – and commissions – to the adviser and will result in a lowering of the client’s overall fees. A key issue with the old pricing model is that it is not clear to a client who is taking what in the value chain. This results in conflicts of interest, and ultimately in the client paying too much for the service being offered. Examples of fees that are exchanged between third parties in the value chain include grandfathered product trail commissions, volume-based bonuses, badged platforms, shelf platform administration/ separately managed account (SMA) fees, cash platform fees, and platform in-house product costs. In a nutshell if we asked the question “why do people pay money for the product?” one could question if those who are typically paying - the investors are well enough informed of the true cost they are paying?

INCREASED MANAGED ACCOUNT EFFICIENCY One area where the technology of platforms is bringing increased value is with managed accounts.

One reason managed accounts are beneficial is their tax effectiveness (franking etc) which comes from the ownership of the assets as compared to a pooled unitised structure. Managed accounts provide greater transparency than some of the pooled investment options. Managed accounts can also reduce the adviser practice administration and increase efficiency. There are also scale benefits with managed accounts as clients get reduced implementation drag and equality in price of the trades. This is even more so with those platforms where the portfolios can be traded into the market intraday and derive execution alpha in appropriately working with market makers for exchange traded funds and managing limit orders into the market. In volatile times, the ability to amend all the clients’ portfolios effectively and efficiently is key. But it is not a functionality all platforms provide, as was borne out in the recent volatility and market turmoil that occurred with the onset of COVID-19. Platforms that were not able to provide bulk rebalancing of portfolios and ease of changes to all client’s portfolios intraday may not be as well regarded by advisers post this pandemic. If the technology of the platform provider did not assist the adviser in this ease of portfolio management in such volatile market times, it is the underlying clients who have suffered as a result of the implementation drag. The second part of the debate is whether platforms, while bringing some of these benefits, are able to meet all of a client’s needs? The ‘battle’ between industry and retail superannuation funds (on platforms) is well-known and hardfought. During the COVID-19 pandemic, with the focus on superannuation and the pros and cons of early release, there have also been many articles about the lack of transparency of the investments in industry super funds.

SHANNON BERNASCONI

COMPARE THE PAIR Advisers must compare the recommended product to other products including industry super funds. Some of the benefits of a transparent superannuation option include allowing the member to have full transparency on the underlying assets held in the member’s name. This is compared to the relatively opaque investment options or asset class investments that are commonly offered by industry - and some retail - products. Another benefit of a retail super offering is that the member receives their own franking credits. This is compared to pooled structures where the member gets an allocation based upon the investment option being a unitised or pooled trust structure. Member direct options in industry super funds do offer the ability to own direct Australian Securities Exchange (ASX) assets, but many limit the range and do not allow managed funds to be self-directed. While the debate around platforms and independence continues to rage, one thing remains clear. For advisers who are looking to earn client trust and help Australians in a time of economic challenge, they are hamstrung by many of the product platforms they use and recommend that continue to act in a manner of bygone and conflicted times. Shannon Bernasconi is managing director of WealthO2.

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38 | Money Management August 13, 2020

REITS

MARKET RALLY CREATES OPPORTUNITY IN GLOBAL LISTED REAL ESTATE The recent rally has seen equity markets recover dramatically from the downturn, but listed real estate trusts have lagged the broader market, writes Chris Bedingfield. THERE HAVE BEEN a number of suggestions put forward for why this is the case. One argument is that real estate is highly exposed to sectors that may be particularly challenged in a post COVID-19 world. Retail and office, which make a significant proportion of the real estate investment trust (REIT) market, are two good examples. However, just like the broader equity market, the real estate universe includes many sectors that are unlikely to be impacted solely by the virus, such as industrial property, single family homes, apartments, data storage and self-storage. Certainly, if we are headed for a deep and protracted global recession, then the performance of REIT indices is justifiable. But the broader equity market is currently telling a different story. Either the recovery is extremely quick, or investors are willing to look past the downturn altogether. Either way, there seem to be inconsistencies. In Australia, retailers such as JB Hi-Fi are down just -7% and Premier Investments -14%, while Scentre Group (a senior creditor to both these businesses) is down around -40%.

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RECENCY BIAS We think a better explanation for the underperformance of REITs is a strong recency bias against real estate. During the Global Financial Crisis (GFC), real estate was one of the worst-performing asset classes â&#x20AC;&#x201C; and for good reasons, including the fact that the GFC began as a real estate crisis in US housing before later morphing into a credit crisis. Real estate relies on credit, and in 2008 many real estate companies were significantly levered (50-60% loan-to-value ratios (LVRs) were not uncommon). Further, since it was almost 80 years since the last major financial crisis, little value was placed on access to liquidity. So when the crisis hit and liquidity was needed, the cupboard was bare and, for many, the only alternative was to sell at painfully depressed prices. Big losses were locked in, and many investors today still remember those costs. But the current climate is different. Overall, across our coverage list, balance sheets are in much better shape than those prior to the GFC. We estimate the average LVR across our portfolio at 26% measured by debt to enterprise

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August 13, 2020 Money Management | 39

Strap REITS

Chart 1: Share of typical rent received in April and May

Chart 2: US REIT performance February 2007 - July 2010

Source: Green Street Advisors, Quay Global Investors Source: NAREIT

value, or 5.4 times measured by net debt/EBITDA. Additionally, all of our companies have significant access to liquidity. And even if they were to fall short, central banks have taken the highly unusual step of buying investment (and sub-investment) grade credit, providing a credit backstop for all industries – including real estate. In our opinion, access to liquidity and credit is generally not a problem. Furthermore, rents are (mostly) being paid, the cost of debt is falling, and the mediumterm supply outlook has improved. Therefore, it’s more about the economy, and it is hard not to conclude that either the equity market is wrong, or there is a significant opportunity in global real estate.

PAYING THE RENT One of the initial concerns following the stay-at-home orders was that tenants would not be able (or willing) to pay rent. Under a worst-case scenario, lack of rent would squeeze the cashflows of real estate owners, which would lead to potential breaches of fixed-charge cover ratios within lending agreements. However, the swift response of governments around the world, including payments to support wages and small businesses, has

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Chart 3 Un-levered REIT returns since Feb peak

ensured rents continue to flow. Indeed, outside of retail, most US REITs have reported mid-90% cash rent collection, as shown in Chart 1 (with May collections generally better than April for apartments, healthcare and malls). Most of the rents not yet paid are on deferral agreements. Only slightly worse cash rent numbers were reported from Europe/UK. Other elements that support REIT pricing in the medium term include interest rates and new supply. It is almost certain interest rates will remain lower for much longer, which means many REITs will generate interest rate savings on future refinancing over time. In addition, new supply (one of the biggest threats to real estate pricing) is likely to abate, leading to much tighter rental conditions over the next few years. Given most listed real estate asset values are now below the cost to build, less future supply should come as no surprise.

REIT ANOMALIES Just like the relationship between equities and real estate at the moment, it seems even within the real estate sector investors cannot decide whether we are having a recession or a recovery, and within the REIT sector itself there are anomalies.

Source: Green Street Advisors, Quay Global Investors

During the last economic downturn, there were significant differences in what sectors outperformed and underperformed, as illustrated by Chart 2. However, we are not seeing the same pattern in this downturn. Traditionally defensive sectors not directly affected by COVID-19, such as manufactured homes and apartments, are performing just as poorly or worse (when adjusted for leverage) than the more economically-sensitive sectors of office and industrial (see Chart 3). Given the high rate of rent collection to date, we see no reason why this should be the case. The opportunity is to buy the sectors where there is a prolonged recession implied in the market price – this offers

investors a skewed bet. If the worst-case economic scenario plays out, this should mostly be reflected in the price – if not, significant upside is potentially available. Where to from here for the market is subject to much debate. While there seems to be a degree of enthusiasm reflected in equity market indices, listed real estate has been a significant underperformer. Across most of our investees, we are seeing solid rent collection with robust balance sheets and good access to credit. Despite this, in some instances many years of share price gains have been erased and we believe this represents opportunity. Chris Bedingfield is principal and portfolio manager at Quay Global Investors.

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40 | Money Management August 13, 2020

Toolbox

ALTERNATIVES FOR INCOME With many fixed income options yielding less than 0%, core alternatives can provide stable income with a low correlation to equities, writes Pulkit Sharma and Jason DeSena. EVEN BEFORE COVID-19, a surfeit of support from central banks around the world had created a global glut of liquidity, contributing to lower interest rates. These monetary policies helped to bolster the prices of stocks and bonds and ensured the flow of credit in economies, but they made it difficult for ordinary investors to get any income from traditional sources like government bonds. The onset of the global pandemic has only supercharged that trend, as central banks have rightly jumped into action to support economies around the

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world. The US Federal Reserve adopted an ultra-loose policy of zero-interest rates and floated a raft of supportive market intervention facilities. Others have lowered their benchmark interest rates one after another, while buying large amounts of government bonds and carrying out large-scale fiscal stimulus. These measures have helped to cushion COVID-19â&#x20AC;&#x2122;s blow but have snuffed out the possibility of interest rates going back up anytime soon. Income, an essential part of a diversified investment portfolio as

a source of liquidity and stability, is no longer readily on offer via an allocation to core fixed income. Core fixed income has historically been used to help dampen equity volatility and churn out modest but steady income, but a zero interest rate world has undermined this dynamic. As a result, investors are increasingly on the hunt for replacement options. Investors in search of yield could add risk within fixed income sectors by allocating to high yield and emerging market (EM) debt, but the additional yield would come

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August 13, 2020 Money Management | 41

Toolbox

ALTERNATIVES WITHIN ALTERNATIVES Alternatives encompass a whole spectrum of investment options, but we can break them down into three broad sub-asset class categories, as illustrated in Chart 1. First are what we think of as return enhancing alternatives, which are more opportunistic but also more volatile. These would include assets such as distressed credit and private equity. The second category of alternatives would be the so-called core complement alternatives, which would still be high return and relatively volatile, if somewhat less risky. These could include assets such as mezzanine loans and hedge funds. Finally we have what is known as the core foundation category of alternatives. These are assets such as core private credit and core real estate, infrastructure and transport. This core foundation category of alternatives is our focus here. Essentially these are assets offering stable income flows forecastable over long time periods with a low margin of error. They include some private credit, wellleased developed market real estate and infrastructure, some real estate mezzanine loans and long-term leases on backbone transportation assets. Even as interest rates have

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RETURN ENHANCERS

Global diversification and tactical/opportunistic returns

CORE COMPLEMENTS

Distressed credit

Special situations

Mezzanine loans

Hedge funds

Added diversification and/or enhanced returns

CORE FOUNDATION

LOWER income/ HIGHER volatility

Chart 1: Alternative asset classes by risk proﬁle and use in portfolio

Private equity

Noncore real assets

Liquid fixed income and equity alternatives

Stable income with lower volatility, diversification and inflation sensitivity

Core private credit Fixed income-like

HIGHER income/ LOWER volatility

at the cost of higher correlation to equities. Given the cloudy postCOVID recovery outlook and high levels of geopolitical uncertainty, many investors don’t want to carry as much public market risk in portfolios either. Alternatives have therefore become an increasingly popular option for investors to consider, but they are by no means an homogenous asset class and investors should be diligent in selecting alternative investments that best fit their risk profile and return objectives. Amongst the benefits of alternatives are their generally lower levels of correlation to public markets as well as to each other.

Core real estate, infrastructure and transport Hybrids

Equity-like

Source: Source: J.P. Morgan Asset Management-Global Alternatives.

fallen or gone negative across developed markets, the relative spreads over sovereign debt of a wide range of core alternatives have remained attractive. Alternatives, particularly the core alternatives, offer investors flexibility in meeting their objectives by generating income from sources that are uncorrelated with equities, complementing existing allocations and improving overall portfolio diversification, albeit at a cost of less liquidity. Core alternatives offer a stable source of income at a meaningful premium to core bonds, with yields ranging from 5% to 9%-plus, and at the same time reduce equity beta, helping to make portfolios more resilient. There are clear differences among the asset classes that fall under our definition of core alternatives, notably in what they are (a real estate property vs a port, example), their purpose within a portfolio and the drivers of their returns. These variations are important as sources of additional diversification, allowing the assets to complement one another when core alternatives are added to a portfolio. Core alternatives are unified by certain traits. Their cashflows are forecastable for long periods of time with a low margin of error. They include well-leased developed market (DM) properties; regulated utilities; other DM infrastructure with transparent, predictable cash flows; and large backbone transportation assets (maritime vessels, aircraft, railcars, etc.) in

long-term contracts with high credit quality counterparties. Private loans are core if they are senior-secured with sufficient lender protections and are made to high credit quality counterparties.

YIELD ALTERNATIVES Just as each opportunity will vary, so will income potential. These variations are largely driven by asset class-specific characteristics. We have grouped core alternatives into three tiers by approximate income potential—5%, 7% and 9%. With typical income levels of 5% we find assets like core real estate, in which greater capital inflows have resulted in more moderate income potential, though still a premium over public markets. Stepping up slightly to an average income level of 7%, we find a few different sub-asset classes. One is private credit, a sub-asset class which in fact encompasses a range of sectors and risk profiles. We find opportunities in niche segments, such as small to midsize corporate lending or nonqualified residential mortgage origination, offering potentially attractive yields while meeting our definition of core. Another sub-asset class in the 7% category is core infrastructure. Infrastructure, a growing institutional asset class, offers attractive yields, particularly in the middle market (avoiding ‘trophy’ assets that attract more bidders). Finally core real estate mezzanine debt is in the 7% category. The core real estate mezzanine lending opportunity

Continued on page 42

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Toolbox

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

Continued from page 41 arose as more restrictive leverage limits on banks and life insurance company lenders opened a gap in the capital structure between equity and senior debt that experienced real estate operators may fill. Moving up the spectrum to average income generation of 9% we find global core transportation assets. A dearth of capital since banks reduced their lending to the sector post-global financial crisis, coupled with specialized operating expertise, creates the potential for higher income through long-term leases on large backbone assets. All this said, we do note that we have seen income potential decline as certain categories of alternative assets have attracted larger capital flows and institutional capital has become more prevalent. Although there will be other factors at play, institutional investors’ growing acceptance will very likely, over time, continue to cause some degree of income compression while simultaneously making markets more liquid.

SIZE DOES MATTER What these alternative asset classes have in common is that they’re all what we refer to as ‘SMS’ – by which we mean that they are scalable, mispriced and scarce. They are scalable because these are multi-trillion dollar markets offering an adequate volume of investment opportunities. Infrastructure is an excellent example. The global average annual infrastructure need is a mammoth US$3.6 trillion ($5 trillion), or 4.9% of gross domestic product (GDP). They are mispriced, with larger spreads over public fixed income relative to historical levels. Even as developed market interest rates have fallen, core alternatives’ spreads have remained attractive, highlighting the stability of their income premium through the market cycle. Core alternatives are scarce because they are challenging to source and/or execute. Even with a large universe of investments in total volume, the private nature of each one creates barriers to entry for those with insufficient networks to source transactions or who lack the expertise to perform due diligence and execute on the opportunities. Given that core alternatives derive the majority of their returns— from 60% to 90%—from income, they can be especially useful to investors looking for a steady stream of cashflows. Core alternatives can also be attractive for investors not looking for distributable income. Because they generate returns driven predominantly by long-term contracted cash flows that are reinvested and thus compound over time, the result is a more consistent long-term outcome than strategies based more on appreciation. Finally, income-driven returns are less subject to timing risk, which can adversely hurt noncore strategies. All these attributes, we believe, make core alternatives— whether at the approximate 5%, 7% or 9% level—attractive components in portfolios at a time of ultra-low for longer interest rates and rock bottom global bond yields. Pulkit Sharma is head of alternative investments and Jason DeSena is alternatives strategist at J.P. Morgan Asset Management.

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1. What is the definition of a ‘core’ alternative assets? Alternative assets which: a) Provide income, diversification to portfolio at a cost of liquidity b) Provide capital return at low beta to equities c) Illiquid assets d) Are central to every portfolio allocation 2. Searching for income beyond government bonds can lead to an increased allocation to emerging market debt or high yield bonds increasing which type of portfolio risk a) Dispersion b) Concentration c) Volatility d) Liquidity 3. When considering an alternative investment why is ‘scalability’ such an important characteristic? a) Small scale means first mover advantage for a niche product b) Assets which are scalable have a larger set of investment opportunities c) A bigger scale means management fees will rise with investor interest d) Scale means larger asset managers could be edged out by smaller more nimble ones 4. Examples of ‘core’ alternative assets are: a) Hedge funds, private credit and distressed debt b) Well leased real estate and regulated utilities c) Private equity and venture capital d) Value add strategies in real estate and infrastructure 5. Some of barriers which have prevented many investors from allocating to alternative investments or increasing their allocation are: a) Insufficient knowledge of the underlying strategies in each asset classes b) The requirement to forego liquidity in return for income and/or capital gains c) Left-sided tail risks, i.e. the threat of large losses in a portfolio d) All of the above

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/alternatives-income

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

5/08/2020 3:07:06 PM

August 13, 2020 Money Management | 43

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

Appointments

Move of the WEEK Kylie O’Connor Head of real estate AMP Capital

AMP Capital has promoted Kylie O’Connor to lead its real estate business and she will join the leadership team. She was currently AMP Capital Real Estate’s chief operating officer (COO) and managing director of separate accounts and would replace Carmel Hourigan who was leaving the business.

Luke Briscoe would take on the role of real estate COO, reporting to O’Connor, where he would oversee the operations of the business. As head of real estate, O’Connor would lead the team which managed more than $28 billion of commercial real estate on behalf of institutional and retail investors.

Iress has appointed research firm Investment Trends chief executive, Michael Blomfield, to the newly-created role of chief commercial officer, responsible for Iress’ business growth objectives including growth at scale. Commencing from 19 October, he would report to Andrew Walsh, IRESS chief executive, and be a member of the leadership team. Blomfield had previously led the equities division at Commonwealth Bank, as well as being Asia Pacific managing director for MF Global.

Europe, Middle East and Asia. As part of the newly-announced APAC senior leadership team, Matthew Harrison would continue in the role of managing director for Australia and New Zealand.

Franklin Templeton has appointed Vivek Kudva as the new head of Asia Pacific (APAC), including India, responsible for the firm’s retail and institutional distribution. The appointment was effective following the completion of Franklin Templeton’s acquisition of Legg Mason on 31 July, 2020. Based in Mumbai, he would report to head of global advisory services, Adam Spector. Kudva had over three decades of industry experience and expertise in asset management and banking, and previously held a similar leadership positions as head of

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Boutique fund manager MapleBrown Abbott (MBA) has appointed Wendy Cox to the newlycreated role of head of finance and HR, while Lata McNulty has been promoted to the newly-created role of chief risk officer. Cox was most recently with RF Capital as a finance consultant and prior to that was financial controller – boutique finance at Challenger. She had also worked with the Commonwealth Bank of Australia, Bank of America Merrill Lynch (now known as Bank of America), Barclays Capital and Deloitte. McNulty would transition to her new role in September for an initial six-month term and would also transition into the role of company secretary by the end of the year. Lonsec has made two senior research hires with Ron Mehmet and Sebastian Lander joining as senior investment analysts.

O’Connor joined AMP Capital in 2015 as fund manager for the AMP Capital Diversified Property fund, before becoming COO in 2018. She had 25 years’ experience in property funds management and previously held senior fund management, audit and advisory roles at Lendlease and Arthur Andersen.

Mehmet would join the fixed income team, having previously held the roles of investment specialist at Perpetual and as head of sector portfolio management at BT Investment Solutions. He would bring his experience as a portfolio manager responsible for over $30 billion in funds under management and extensive knowledge of fixed income and defensive strategies, the firm said. Lander joined the multi-asset team from Julliard Financial Services, where he served as a portfolio manager. Prior to this, he had held a senior investment analyst with Select Investment Partners. Zenith Investment Partners has announced that following its recent purchase of the Chant West superannuation business, it has promoted Chat West’s head of research, Ian Fryer, to the position of general manager – Chant West. In his new role, Fryer would be reporting to Zenith’s chief executive officer, David Wright, and he would retain his current research and client duties. He also joined Zenith’s management committee where he would be

in charge of aligning the two businesses and driving a number of the integration initiatives underway within the group, the firm said. Investors Mutual has announced the appointment of Peter McPhee as its new investment specialist for the Loomis Sayles Global Equity fund, effective immediately. He would work with Investors Mutual’s local sales team and Loomis Sayles’ portfolio managers and investment specialists in the United States to build the profile and awareness of the Loomis Sayles Global Equity fund with financial planning dealer groups, advice businesses, platforms, and asset consultants and research houses. McPhee, who has over 30 years’ experience in funds management and retail distribution and key account relationship management including as head of financial institutions/investment specialist with BNP Paribas Investment Partners and roles at Mercer Investments, would be reporting to Investors Mutual head of retail Wayne McGauley.

5/08/2020 2:43:21 PM

OUTSIDER OUT

Money Management ManagementAugust April 2,13, 2015 44 | Money 2020

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

Looking for love or a money mule? Outsider’s not your man

Hot under the collar over APRA’s climate risk recruitment

OUTSIDER is grateful to be alive and well and living in the Emerald City rather than in Melbourne but, apparently, his relative freedom of movement means that he is missing out on being targeted by romance scammers. Yes, that’s right, apparently romance scammers have been targeting Melbourne on the basis that the Stage 4 restrictions have increased the numbers of lovelorn in that fair city, with the result that they are ripe for being parted from their money. Outsider knows this because the Customer Owned Banking Association (COBA) has told him that romance scams have increased with the arrival of COVID-19 with the scammers looking for victims to act as ‘money mules’ moving stolen funds by using their bank account. “Many unsuspecting Melburnians will welcome the opportunity for a warm conversation or just someone to chat with over the months ahead. But the reality is that the progression from chat to professing love and asking them

OUTSIDER does like a Government backbencher who keeps an eye on the jobs being advertised by the financial services regulators, particularly one as arcane as the Australian Prudential Regulation Authority. And so he doffs his cap to the often-maligned NSW Liberal, Craig Kelly, who appears to have noticed that APRA was recently advertising for the newly-created role of head of climate risk. Outsider assumes that the head of climate risk, when appointed, will be taking a leading role in developing APRA’s policy approach around global warming in circumstances where the regulator has already noted that one-third of financial entities are factoring climate risk into their investment decisions. Those entities are the big banks, the big insurers and the superannuation funds – so organisations not unfamiliar with risks, both political and climate-related. But, of course, global warming is not part of the lexicon of a significant portion of the Federal Coalition and so Outsider completely understands why Kelly would both question such an appointment by APRA and, indeed, what the lucky appointee will actually be paid. Kelly is clearly a man for our times, which probably explains why he used a hearing of the House of Representatives Standing Committee on Economics to explain why it had not advertised for a head of pandemic risk. Outsider will be scanning the job advertisements to see whether the APRA pandemic gig comes up.

for money or to help them move money is far quicker,” the COBA warning said. Now Outsider is not what you’d call a lady’s man. He’s not even what you’d call a man’s man. He’s more what you’d describe as a balding, rotund wannabe bon vivant so he knows that when women call his number for a “warm conversation” something is clearly going to be up and probably not his bank balance. No, for Outsider real romance is an open fire and a bottle of premium single malt. Women are OK, but they’re not as good as the real thing.

If ASIC’s Shipton drops out, how will Parliament ever log in? FOR the record, Outsider is amongst those who believe that Parliament should be sitting in Canberra whether in the Parliamentary chambers of both houses or via digital/video means such as the ubiquitous Zoom or Skype. However, he is prepared to concede that on the evidence available from a recent hearing of the House of Representatives Standing Committee on Economics that the technology crew at Parliament House has some serious mountains to climb to achieve a seamless Zoom rendering of Parliament. If any proof was needed of this, it was the fact that in the middle of explaining some of the regulator’s less glorious achievements over recent

OUT OF CONTEXT www.moneymanagement.com.au

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months, the chair of the Australian Securities and Investments Commission, James Shipton, simply disappeared from the system. Luckily for him, some of his commissioners were on hand to answer the relevant questions, but it was then later discovered that the chair of the actual Parliamentary Committee itself, Tim Wilson, had also dropped out for a period, albeit that his absence was decidedly less noticeable. So, while Outsider thinks that our Federal Parliamentarians should be doing the representative work they were elected to do, he acknowledges that perhaps it is a technological bridge too far and that points of order and questions without notice might lose something if those making them are sporadically and randomly lost in the digital ether. Then, too, he is pretty sure that interjections will lose something if Parliamentarians forget to switch off the mute button.

"Nobody likes me, it can only be my personality."

"Every dollar which came out of young peoples' super balances could have been funded by one press of the computer button at the Reserve Bank."

– US President Donald Trump

– Former Prime Minister and Treasurer Paul Keating

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6/08/2020 10:10:20 AM