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LESS FOLLOWING THE PACK. MORE CONVICTION.
INVESTMENTS AND
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MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY
www.moneymanagement.com.au
Vol. 34 No 16 | September 10, 2020
16
ROBO-ADVICE
Time for digital disruption
19
ESG
Competitor licensees circle MLC/IOOF advisers BY MIKE TAYLOR
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COVID-19 impacts winners and losers in latest Crown Ratings rebalance THE impact of the COVID-19 pandemic and how markets and sectors sought to deal with it has proved crucial to determining the winners and losers in the latest rebalance of the FE fundinfo Crown ratings with March representing the inflection point at which normally reliable strategies fell short while other, highly-specific strategies paid dividends. The result has been that highly-specific strategies such as the Atlas Trend Online Shopping Spree fund has gone from being a relative cellar-dweller to being a 5 Crown fund on the back of returning 44.65% over the three years to 30 June as it surfed the wave of consumers turning to online shopping to meet their needs. The inverse of this phenomenon is that normally reliable strategies such as that pursued by the Legg Mason Martin Currie Real Income Fund struggled amid the market disruption which saw funds in almost every sector take a hit. Virtually all asset classes took something of a hit with equity, bond and multi-asset sector managers all finding themselves in 1 Crown territory. However, while virtually every sector was adversely affected in one way or another, the global small and mid-cap equities sector did better than most, with the global equity sector also doing reasonably well. What also became evident from the latest Crowns rebalance is that the larger investment houses have fared comparatively well in terms of 5 Crown ratings largely because of the breadth of their offerings with Colonial First State Global Asset Management (now First Sentier) receiving nine 5 Crown ratings, while both IOOF and Macquarie had 10 5 Crown funds each. Many portfolio managers within the funds acknowledged that alongside strategy there had been an element of luck, particularly in the crucial period between March and 30 June.
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Full feature on page 21
33
Directors’ duties
Slavery in super funds
FE FUNDINFO CROWN RATINGS
REGULATION
OTHER financial planning licensees are circling IOOF and MLC-aligned financial advisers seeking to lure them into new arrangements in the wake of IOOF’s $1.4 billion acquisition move on MLC Wealth. Almost first out of the blocks was publicly-listed CountPlus with its chief executive, Matthew Rowe, writing directly to MLC Wealth advisers and aligned financial planning businesses offering them a new home under the CountPlus and Count Financial licenses. Money Management has been told that other publicly-listed licensees have made similar approaches to MLC Wealth advisers, particularly those operating businesses under the Godfrey Pembroke license. The offers do not replicate the
sign-on bonuses which were a part of the wealth management battles between the major banks nearly a decade ago, but Money Management understands that beneficial sign-on arrangements are on offer. In making his approach, CountPlus’s Rowe e-mailed a large cohort of MLC advisers pointing to the closure of some of the MLC and IOOF licenses and offering them a stable and conducive new home. “In light of the announcement about IOOF acquiring MLC, and their further announcement that they will be closing and combining a number of licenses, we want to assure you that we are a stable business with a strong balance sheet. We can provide certainty and support at a time when your current licensee is going through Continued on page 3
Trapnell renews call for FASEA to treat life/risk advice differently THE FOUNDER of life/risk focused planning group, Synchron, Don Trapnell has repeated his call for life/risk advice to be treated differently under the Financial Adviser Standards and Ethics Authority (FASEA) requirements. In an analysis of the industry, Trapnell has welcomed the Australian Securities and Investments Commission’s (ASIC’s) use of external consultants to help it understand issues around access to advice, at the same time as pointing to the anomalous situation facing specialist life/risk advisers. Discussing the exodus of life/risk advisers in the current environment, he said that remuneration was one factor together with the general sustainability of the life insurance industry but a greater factor was them being forced to meet educational standards “that bear little relevance to the work they do”. Continued on page 3
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September 10, 2020 Money Management | 3
News
Businesses can afford $1 extra per day for SG increase BY JASSMYN GOH
THE majority of businesses can afford to increase workers’ superannuation by $1 a day per employee, as there has not been a significant wage rise in years, according to a super body. The Association of Superannuation Funds of Australia (ASFA) has said the National Accounts data reinforced the need for the legislated increase in the super guarantee (SG). In the June quarter 2020, corporate profits were up 15% (16% higher than the corresponding quarter last year) while wages and salaries were down 2.5%, according to Australian Bureau of Statistics data. Excluding the mining sector, the quarterly increase in corporate profits was the largest in almost two decades, and the ASX 200 had risen 16% over the same period. ASFA chief executive, Dr Martin Fahy, said: “Once again we see clear evidence that the share of income accruing to business is ballooning while hard pressed workers face the bleak reality of weaker wages for longer. “At $1 a day per employee, the increase in superannuation is affordable for the majority of businesses and is now critical to allow workers to catch up, given they haven’t seen a significant wage rise in years, and with little possibility of
higher wages on the horizon. “Only the scheduled increase in the superannuation guarantee will provide workers with a pay rise next year and help to address the structural imbalances that continue to occur between fat profits and flat wages.”
Competitor licensees circle MLC/IOOF advisers Continued from page 1 significant changes that could impact the level of service you receive,” Rowe’s message said. “CountPlus is an ASX-listed professional network with a client-first culture, a deep understanding of the forces shaping the advice profession, and strong yet pragmatic governance protocols,” it said. “Our approach to compliance is pragmatic, common-sense and designed to keep our advisers safe. We provide the guidance and tools needed to deliver quality advice to clients and believe it’s best to work closely with you to achieve positive client outcomes.” As part of the CountPlus pitch to MLC advisers and those at IOOF, Rowe pointed to the successful manner in which CountPlus had bedded down its acquisition of Count Financial and to the group’s “owner-driver” commercial model. The message went out to the advisers barely hours after IOOF had announced the MLC Wealth transaction to the Australian Securities Exchange (ASX) and before IOOF had managed to fully inform many of its advisers about its new licensing arrangements. IOOF announced to the ASX at the start of September that it had completed the institutional capital raising underpinning the MLC Wealth transaction raising approximately $734 million.
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IOOF flags closure of FSP, EWM and Actuate licenses BY MIKE TAYLOR
IOOF Limited has outlined a reduction in the number of advice businesses operating under its banner from five to two, along with Bridges being transformed to a fully salaried network. The company did so at the same time as announcing its full-year results with a statutory net profit after tax of $147 million and funds under management increasing 46% to $202.3 billion. Under the heading of Australian Financial Services License sustainability the company said that the Bridges network would be transformed to a fully salaried network, that buyer of last resort (BOLR) arrangements would be acquired at market rates, and the closure of FSP, Executive Wealth Management and Actuate. It said that advisers working with the FSP Executive Wealth Management and Actuate licenses would be supported to transition into their choice of IOOF licensees.
Trapnell renews call for FASEA to treat life/risk advice differently Continued from page 1 “It’s a bit like asking qualified carpenters to study plumbing. Both trades need to know where they sit in relation to house construction, but they should not be forced to learn how to build the whole house,” Trapnell said. “It therefore remains our firm belief that we need to work together to arrive at the sensible separation of financial planning advice from life insurance advice.” “ASIC has said it wants Australians to have access to affordable, quality personal financial advice that meets their needs, which implies it is looking for solutions – and I’d go so far as to say that’s what we all want,” he said. “We believe that affordable, quality, personal advice needs to be delivered by advisers who are well-educated and experienced – and by that we mean appropriately educated, in line with the advice being given, and appropriately experienced, in the field in which the adviser works.” “…to our way of thinking, this should translate to financial planners holding appropriate financial planning qualifications and risk advisers holding appropriate life insurance qualifications. It should also allow for advisers to study for FASEA exams that cover the areas in which they work, and not the areas in which they don’t. Only those advisers who want to give both types of advice, and many will, should be qualified in both disciplines.”
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4 | Money Management September 10, 2020
Editorial
mike.taylor@moneymanagement.com.au
FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000
WHY INDIVIDUAL ADVISER LICENSING WOULD HAVE HELPED MLC ADVISERS
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
As MLC advisers contemplate their migration to working under IOOF licenses, they might consider how different the story would be if they were individually licensed.
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
IF EVER THERE was an occasion to reinforce the value of individual financial adviser licensing it was probably IOOF’s acquisition of the MLC Wealth business and everything that went with it. The transaction is, of course, still on foot but what is abundantly clear is that financial advisers within both businesses are facing a period of disruption because the process entails the uncertainty which goes with the closure of licenses as part of a broader general and commercially sensible process of consolidation. It is rare for a wealth manager of the scale of IOOF to acquire a business of similar scale in the form of MLC Wealth but what would have become immediately obvious to the strategists within IOOF is that many Australian Financial Services Licenses (AFSLs) were in the mix and that licenses carry with them legacy and risk. The fewer and newer the licenses, the less the risk. As has been the case with all recent transactions in the Australian wealth management space and particularly in the aftermath of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, IOOF will be shouldering none of MLC’s burden in terms of legacy regulatory issues such as client remediation.
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That will be carried by the seller, National Australia Bank (NAB). It has been a harsh fact of life for all the major banks that they would not have been able to negotiate their exits from wealth management without first agreeing to retain ownership and legal responsibility for their legacy regulatory issues and, in particular, their sizeable remediation bills. Such was the case when the Commonwealth Bank sold Count Financial to CountPlus and it has become commonplace in all such transactions. That is why, notwithstanding its substantial exit from wealth management, the Commonwealth Bank continues to field class action suits when the planning businesses concerned have either been sold or closed down. It can therefore be expected that while IOOF is keen to use the MLC Wealth acquisition to become Australia’s largest financial advice provider, it will be closely scrutinising the compliance records of the financial advisers and planning practices which will move from MLC to what will be entirely IOOF licensing, given that NAB will be retaining ownership of its old AFSLs. Those advisers who IOOF deems to be high risk are likely to be filtered out of the migration process. And that is why individual licensing/registration would have
been beneficial for the financial advisers affected by the transaction. Such an arrangement would have given those advisers more options and, arguably greater choice. That greater choice would have come from individual licensing making them less reliant on their “authorised representative” status and more capable of taking their clients with them to new homes. Of course, the story is somewhat different for aligned practices and the IOOF/MLC transaction is already proving to be advantageous for some. What is already known is that a number of financial planning practices operating under the old MLC Godfrey Pembroke license are already fielding overtures from other major licensees who have spent much of the past 12 months attempting to grow their businesses notwithstanding the general exodus of advisers. Given the Government’s priorities and the fact that establishment of the single disciplinary body recommended by the Royal Commission is at least 12 months in the future, MLC and IOOF advisers will have time to settle in to their new arrangements and reflect on what might have been.
Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@fefundinfo.com ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@moneymanagement.com.au PRODUCTION Graphic Design: Henry Blazhevskyi
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Mike Taylor Managing Editor
2/09/2020 9:36:48 AM
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6 | Money Management September 10, 2020
News
AMP flags possibility of more asset sales BY MIKE TAYLOR
AMP has flagged the possibility of more sales of its assets with the board today announcing a portfolio review. In an announcement on 2 September, the company said it had recently experienced an increase in interest and enquiries with respect to its assets and businesses. “The board remains committed to AMP’s transformation strategy and is confident that this will deliver long-term value for shareholders,” it said. “As updated at the 1H 20 results, following the successful completion of the AMP Life sale, AMP is
making significant progress in driving its strategy – reinventing wealth management in Australia, growing its asset management franchise (including a repivot to private markets and refocusing public markets), and creating a simpler, leaner business.” “However, AMP periodically receives unsolicited interest in its assets and businesses, and recently has experienced an increase in interest and enquiries. “The board has therefore decided to undertake a portfolio review to assess all opportunities in a considered and holistic manner, evaluating the relative merits as well as potential separation costs and
dis-synergies, with a focus on maximising shareholder value. “The review may conclude that AMP’s current mix of assets and businesses delivers the best value for shareholders and may not result in a recommendation to pursue any specific transaction. “Throughout the review, AMP business units will remain focused on implementing the company’s transformational strategy and delivering for clients.” The announcement said Credit Suisse, Goldman Sachs and King & Wood Mallesons had been appointed as AMP’s advisers to manage the review.
More not less financial advice needed in superannuation THERE needs to be more financial advice within superannuation and the Government and the regulators need to think about amending many of the restrictions and impediments to the delivery of that advice. That is one of the key bottom lines of a roundtable of superannuation industry executives conducted by Money Management‘s sister publication, Super Review, with the consensus being that financial advice needs to be an integral offering to superannuation fund members. However, for some superannuation fund executives such as NESS Super chief executive, Paul Cahill, the advice offered by actual funds should only be “in the areas they need to offer advice”. “Funds should not be offering financial planning services for negatively gearing properties and things like that,” Cahill said. “We need to be able to service our members and that means taking members from workbased accumulation to building up a balance in retirement and then across the bridge into retirement.” “So, the advice model should fit around what we need to do to help our members,” he said. However, Deloitte superannuation partner, Russell Mason, said he saw things differently and pointed to the declining relevance of the sole purpose test. He said many superannuation funds had become financial institutions in their own right and on that basis he would like to see funds and the financial advisers they employed allowed to deliver a broad range of advice. “I would like to see the funds and the advisers they employ able to give advice that
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covers my entire financial situation, not just one element of it which may be superannuation, which is likely the most important element,” he said. “I want to be able to get advice that my partner and I can work together on and look at our retirement in a holistic point of view, not thinking that they can only advise me on super now,” Mason said. “Where do I go to get advice about other things?” “So, I think financial planners in the area of super have largely had one hand tied behind their back. I’d like, within the realms of reasonableness, for them to have a greater degree of flexibility. To advise me on the situation without this artificial distinguishing between super and non-super.” TAL chief commercial officer, Andrew Howard, said that it was a fact of life that people contacted superannuation funds seeking simple advice and then were prompted to seek more complex advice and
those situations needed to be addressed. “The funds need to be able to go beyond education and help members act upon their financial future and advice is key to that,” he said. “And so there will be transitions where people go from no insurance to having insurance, size that insurance up or size it back down and we haven’t talked about retirement income yet. “With the retirement income journey and the retirement income review we get into longevity type solutions. These are these are more complex questions for people to answer and there needs to be the ability for funds to help people make those transitions. “So, I think the role of advice in superannuation is really important. It will be different fund by fund as to whether they sort of stick to the journey or whether their members needs could be served by more holistic financial planning and I suspect that’s a fund by fund question,” Howard said.
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31/08/2020 11:52:28 AM
8 | Money Management September 10, 2020
News
Under pressure OnePath increases IP and total and permanent disability premiums for existing customers BY MIKE TAYLOR
MAJOR insurer OnePath has told advisers it will be increasing base premiums to existing customers as it takes its efforts to staunch its losses on income protection a step further. Having earlier this year ceased agreed value and level premium IP cover and increased premiums for new customers, the insurer has gone a step further by foreshadowing a 25% increase in base premiums (both stepped and level) for existing customers. It has also announced a 12.5% increase in premiums for new and existing customers with respect to total and permanent disability (TPD) cover. It told advisers that for existing customers it would be communicating the changes as part of their renewal from 22 September, with the first policy anniversary for the renewals arriving on 3 November, while for new TPD customers, the changes would take effect from 19 September.
In announcing the moves, OnePath said that it was feeling the severity of current challenges and did “not expect them to subside any time soon”. It nominated those challenges as being that: • Life insurers (including OnePath Life) have lost almost $3.5 billion on income protection insurance in the last five years; • We’re seeing higher than expected claims rates and durations, with a significant growth in claims costs across income protection and TPD; • Unemployment, social isolation and financial hardship are expected to contribute further to an increase in the number of people suffering mental health issues, and the length of time they suffer from them; and • We are experiencing interest rates that remain as close to zero as they ever have been in this country’s history, with an uncertain economic outlook.
Adviser who claimed exemplary compliance record banned A former ANZ financial adviser who claimed to have an exemplary compliance record has been banned for five years. The Adelaide-based financial adviser, Francesco Antonio (Tony) Romano was banned by the Australian Securities and Investments Commission (ASIC) from providing financial services and from being involved in the carrying on of a financial services business for five years. ASIC found that Romano failed to provide financial advice that was appropriate and in the best interests of his clients. He also engaged in misleading or deceptive conduct and was found not to be a fit and proper person to provide financial services. It said Romano did not make reasonable enquiries to obtain complete and up-to-date information about his clients and failed to consider his clients’ needs and objectives when giving advice. Romano also recommended that clients make no changes to their investment portfolios despite clients being invested outside the parameters of their risk profile or their self-managed superannuation’s (SMSF’s) investment strategy. This exposed his clients to having an inappropriate high growth asset allocation. ASIC also found that Romano made misleading and deceptive statements in an email to clients in which he falsely claimed that prior to leaving ANZ his files were audited and found to be exemplary. ASIC said the banning was part of its ongoing efforts to improve standards across the financial services industry. ASIC noted that Romano had the right of appeal to the Administrative Appeals Tribunal for a review of ASIC’s decision.
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ASIC grants relief for hardship withdrawals from frozen managed funds THE Australian Securities and Investments Commission (ASIC) has cleared the way for people facing hardship to make withdrawals from management funds. The regulator said it had put in place new relief measures for operators of managed funds to facilitate withdrawals by members facing financial hardship during the COVID-19 pandemic. ASIC said the conditional relief was available through a legislative instrument, which applied to all responsible entities (REs) of registered managed investment schemes that had become ‘frozen funds’. Announcing the move, ASIC said the relief measures would ease some of the statutory restrictions on REs and improve access to investments by members who met specific hardship criteria. ASIC previously granted hardship relief to REs of frozen funds on a caseby-case basis only.
Commenting, ASIC deputy chair, Karen Chester said that at times of extreme market volatility, responsible entities of some managed funds might need to suspend redemptions and freeze funds to protect the interests of the members as a whole. “ASIC recognises that it may be the right thing for responsible entities to freeze their funds in such circumstances, and in doing so protect the interests of all members. But this can be especially problematic for some individual members experiencing financial hardship,” she said. “The hardship relief will make it easier for responsible entities of frozen funds to enable withdrawals by investors suffering hardship. However, in doing so, responsible entities will still have to act in the best interests of members. We encourage responsible entities to consider whether the relief is appropriate for their particular fund.”
2/09/2020 4:17:10 PM
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10 | Money Management September 10, 2020
News
Sam Henderson pleads guilty to qualification dishonesty BY LAURA DEW
FORMER adviser and Royal Commission witness Sam Henderson has pleaded guilty to a ‘rolled up’ charge of dishonest conduct regarding his qualifications. Dishonest conduct was an offence under section 1041G of the Corporations Act 2001, and he was also charged with two counts of making a disclosure document available when it was known to be defective. The Australian Securities and Investments Commission (ASIC) found between 1 July, 2010, and November 2017, Henderson falsely stated he had a Master of Commerce and this information appeared on 115 client presentations, brochures and websites for his company Henderson Maxwell. 1) A book titled One-Page Financial Plan: Everything
you need to successfully manage your money and invest for wealth creation authored by Henderson and published in 2013; 2) An interview conducted by a freelance writer, and a subsequent marketing profile prepared on Henderson to promote the Sydney Graduate School of Management (SGSM) Master of Commerce (Financial Planning) course; and 3) Some of Henderson’s professional biographies and descriptions. A dishonest conduct offence under s1041G of the Corporations Act 2001 carried a maximum penalty in the local court of two years’ imprisonment or a fine not exceeding 120 penalty units, or both. In July 2019, Henderson
BY JASSMYN GOH
was banned by ASIC from providing financial services for three years after it was found he failed to act in the best interest of his clients, provide appropriate advice and prioritise his clients’ interests when providing advice. Henderson would be sentenced in the Downing Centre Local Court on 13 October, 2020.
Delay better than abandoning the next SG increase BY MIKE TAYLOR
THE Federal Government would be better off delaying the next rise in the superannuation guarantee (SG) than cutting it off altogether, according to actuarial research house, Rice Warner. In an analysis published in August, Rice Warner defended the effectiveness of the SG while acknowledging the economic difficulties created by the COVID-19 pandemic. It said that one of the key advantages of the SG regime was that it smoothed costs to Government and improved benefits through real returns, with the resultant retirement incomes self-sufficiency reducing the cost to Government over the long-term. “This hypothesis suggests we should push the SG as high as possible. At 15% over a career, we might get most Australians largely off the Age Pension, but there is a trade-off with other expenditure need,” it said. It pointed to recent research suggesting the SG should be set somewhere within a range of 10% to 15% with the higher number keeping more people off the Age Pension. “We should also note that the steep taper rate on the Age Pension causes a problem for
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Damage to advisers’ mental and financial health ‘catastrophic’
many people entering retirement, even though the impact reduces in later life as they drawdown and spend more of their benefit,” the analysis said. “The current policy of 12% fits neatly into this range. However, following the Global Financial Crisis, in 2014 the government deferred the increase in the SG rate from 9.5% to 10% until 2021. We have only had a 0.5% change in the last 18 years, and it is now only scheduled to get to 12% in 2025. It is likely that there will be further public debate about delaying it further due to the current economic crisis. “It still makes sense for the SG to go to 12% but we need to recognise that wage rises are likely to be low for a few years, and any increase will cut into disposable income for many people. We do want certainty, and it would be better for the government to call for another delay rather than cutting it off altogether at a lower level. “It is time for rational holistic thinking on the subject. Society could accept a delay in these difficult times, but why not think more laterally and tie any future SG increases to the forthcoming personal tax cuts to minimise the impact on disposable income.”
INDUSTRY reform has left financial advisers’ financial and mental health nothing short of “catastrophic” and these consequences need to be documented, according to the United Financial Advisers Association (UFAA). The UFAA said documenting mental health issues could give context for legislators and industry associations to better understand the human consequences of future reform. UFAA chair, Alex Vagliviello, said the legacy of constant change had included industry rationalisation, less competition, reputational damage, decimation of advice business values, exit of advisers and advice becoming unaffordable. “The damage done to the sector in terms of advisers that have left the industry and their financial and mental health has been nothing short of catastrophic,” Vagliviello said. “However, there still exists a tiny slither of time in which to bring the situation back from the brink – especially in the current environment where the services of experienced practitioners have never been so needed by so many people and businesses in financial distress. Losing advisers now would be no different to losing doctors in the face of a pandemic.” Former adviser and industry advocate, Barry J Daniels, said one of the most disappointing aspects of reform was that the government and the industry were not acknowledging and addressing the mental health issues advisers were facing. “Advisers are literally fatigued and the prospects of further reform the final straws – especially for mature age advisers,” he said. “Incessant reform brought about the perfect storm that was further escalated with the demise of practice resale values and buyer of last resort arrangements that were supposed to fund retirement aspirations. “Is it any wonder that once resilient individuals simply find themselves unable to cope?” He noted that there was also angst from advisers with significant borrowings that funded the purchase of practices/books of clients to underpin business growth plans and provide continuity of service to clients of the acquired businesses. “Moreover, constant tinkering with remuneration structures has seen value of practices plummet and the unjust vilification of all advisers for the sins of the few has added to distress. These factors are deterring the next generation from considering a career in advice, further jeopardising the viability of the sector,” Vagliviello said. “Hence the need for these to be documented and put into context before embarking on further change.”
2/09/2020 10:40:26 AM
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24/08/2020 4:43:40 PM
12 | Money Management September 10, 2020
News
David Murray and Boe Pahari exit AMP BY MIKE TAYLOR
DAVID Murray has resigned as chair of AMP Limited and Boe Pahari has stepped down as chief executive of AMP Capital. The company has announced the dramatic changes to the
Australian Securities Exchange (ASX) which follow in the wake of controversy around Pahari’s appointment despite a harassment claim against him. AMP said that AMP Limited chief executive, Francesco De Ferrari, would assume direct leadership of
AMP Capital on an interim basis. It said that John Fraser would also be exiting the board with Debra Hazelton taking the chair. Pahari will resume his previous role within AMP Capital’s infrastructure investment business.
Why AMP will pay a price for its conduct THE controversy surrounding AMP Limited over its internal culture and its handling of sexual harassment allegations against one of most senior executives may have longterm implications for its ability to attract investment and raise capital. That was one of the key bottom lines of a Money Management ESG/Ethical Investment webinar with senior fund managers and financial advisers making clear that there was a price to be paid by companies when their conduct failed to meet investor and community expectations. Money Management directly cited the controversy which had surrounded AMP Limited and AMP Capital and asked whether, in the minds of investors, the products of a company were able to be separated from the company’s own behaviour. While not wishing to directly comment on AMP, the panellists made clear that there were going to be significant consequences for companies who were perceived to be doing the wrong thing. This was exemplified by Nanuk Investment Management chief investment officer, Tom King, who said that while he was not going to speak specifically about AMP Capital, he believed conduct was becoming increasingly important for investors and consumers and “can’t be ignored when looking at individual investments as a manager or as an adviser or as a user of those products”. “We’re seeing a shift there and it’s a very sensible shift,” he said. “It may not be the time now but there are a set of issues that go a little deeper in terms of how risks around governance, ethical behaviour and the nature of products that companies are offering is measured and that is a complex facet of understanding responsible investment products.” “AMP is an example of a large white
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collar company with a relatively small environmental footprint operating out of offices in CBDs and with a governance structure which befits its age and maturity as a business which would score well in terms of assessing ESG risks,” King said. “But there is the question of how you treat businesses that score well on conventional ESG frameworks but don’t align with what people are looking to have their money invested in.” Australian Ethical chief investment officer, David Macri, said it was difficult to separate the product from the company. “And when we do our ethical assessment of companies, generally, we’re looking not just at the product that is being offered but also the culture and how they go about their business,” he said. “It is difficult to assess culture but we have a lot of information at hand – we look at company conduct, we use different types of
sources.” “Regardless of what the product is, if there is severe enough concerns about the conduct of the company we won’t invest in it.” State Street Global Advisors head of investment, Australia, Jonathan Shead, said he was not going to comment on AMP Capital but made clear that companies operating in the ESG space needed to expect scrutiny as to their conduct. “State Street manages about $4.5 trillion in assets and we’re quite well aware that if you’re vocal in the ESG space, which we have been for many years in the institutional market, you’ve got to expect the spotlight to turn on your firm,” he said. “However, we’re also of the view that particularly with a large global firm like ours if you wait until there is no hint of controversy for anyone anywhere in your business you are not fulfilling your fiduciary responsibility to your investors.”
2/09/2020 10:40:14 AM
September 10, 2020 Money Management | 13
News
Six instos to pay $1.05b in FFNS compensation BY OKSANA PATRON
THE Australian Securities and Investments Commission (ASIC) has announced that six of Australia’s largest banking and financial services institutions have paid or offered a total of $1.05 billion in compensation, as at 30 June, 2020, to customers who suffered loss or detriment because of fees for no service (FFNS) misconduct or non-compliant advice. This was an additional $295.9 million in compensation payments or offers by the institutions from 1 January to 30 June, 2020, the regulator said in its update on compensation for financial advice related misconduct. The institutions included AMP, ANZ, CBA,
Macquarie, NAB and Westpac. ASIC commenced the reviews in 2015 to look into: • The extent of failure by the institutions to deliver ongoing advice services to financial advice customers who were paying fees to receive those services; and • How effectively the institutions supervised their financial advisers to identify and deal with ‘non-compliant advice’ – i.e. personal advice provided to a retail client by an adviser who did not comply with the relevant conduct obligations in the Corporations Act, such as the obligations to give appropriate advice or to act in the best interests of the clients, at the time the advice was given.
Reduced pension minimum could disadvantage retirees
Not a good time to ignore alternatives: Cor Capital
BY JASSMYN GOH
RETIREES would be disadvantaged if they took more than the reduced minimum amount as a pension before the reduction in the minimum pension percentage became law on 24 March, 2020, according to the SMSF Association. In an analysis, the SMSF Association’s technical manager, Mary Simmons said pension payments made up to 24 March, 2020, in excess of the new reduced minimum annual payment would be treated as pension payments in 2019/20 and could not be treated as lump sums. The law change was a result of the COVID-19 pandemic. “More importantly, the Australian Taxation Office have confirmed that this treatment also applies where a valid election was in place as far back as 1 July, 2019, requesting that the trustee treat any payment over the minimum pension amount required for the year as a lump sum,” Simmons said. “In this situation, only payments made to a member, after 24 March, 2020, in excess of the reduced minimum annual pension drawdown, can be treated as a lump sum. The need to ensure that a valid election from a member is in place prior to the payment of any lump sum is still required. “Unfortunately, what this means is that some retirees will be disadvantaged. Essentially, it’s just bad luck for any member who took more than the reduced minimum amount as a pension before the change became law on 24 March, 2020, despite having in place a valid election to treat any excess pension payments as lump sum commutations. These members can only treat payments made after 24 March, 2020 as lump sum commutations.” However, Simmons noted that members who chose to receive their pension in the later months of 2019/2020, provided they had a valid election in place prior to receiving the payment, would be able to take advantage of the retrospective nature of the reduction in the annual minimum pension drawdown requirements and can treat any excess pension payments as lump sum commutations.
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GIVEN that a fundamental economic standpoint is clearly one of a high degree of risk and that traditional asset allocations have been heavily tied to equity market growth, now is not the good time to ignore alternatives, Melbourne based investment manager, Cor Capital said. While traditional 60/40 type portfolios could face significant risk as bond and equity correlations increase, this called for increased allocations to alternative strategies to improve risk-adjusted outcomes, setting up a potential golden era for liquid alternatives focused upon absolute returns to improve investor outcomes. Davin Hood, managing director at Cor Capital, said that larger institutions always used a wide range of potential tools to meet uncertain future including alternatives and portfolio hedging such as super funds increasing their internal capabilities around derivatives or introducing long volatility allocations. But for retail investors and financial advisers, the menu of available solutions was relatively narrow, he said. “This is understandable given the pre-requisites for daily liquidity, growing focus on passive separately managed account (SMA) implementation and lower fees. “The attraction of hedge funds and liquid alternatives is their ability to participate less or actively take advantage of negative market environments. This absolute return mindset should focus on the reduction of drawdowns to allow for the power of compounding of returns.” According to Hood, there were “all weather” multi-asset portfolios such as absolute return focused strategies that would fit into the liquid alternative bucket, or as a partial substitute for bonds, and as a core portfolio building block for risk adverse portfolios that avoided added complexity of many opaque hedge fund strategies which could be easily understood by investors – both large and small. “These portfolios which are typically long-only multi-asset portfolios aim to perform within all potential market environments including recession/growth and inflationary/deflationary environments,” Hood said.
2/09/2020 10:39:50 AM
14 | Money Management September 10, 2020
Regulation
WE CAN’T AFFORD TO LOSE HAYNE’S MOMENTUM Labor Senator Deborah O’Neill cautions AMP Limited against its treatment of financial advisers with respect to their buyer of last resort arrangements, arguing that such conduct risks eroding the objectives of the Royal Commission. THE ROYAL COMMISSION into Misconduct in the Banking, Superannuation and Financial Services Industry uncovered truly horrifying practices in Australia’s financial sector, fuelled by a toxic culture of greed, chicanery and outright lies. It seriously challenged the social licence of many of Australia’s most august banking institutions and a new distrust and wariness replaced many Australian’s former confidence in this vital sector of Australian society and economy. Headlines were awash with lurid details of exploitation: stories of Aboriginal children being sold funeral plans, superannuation firms charging fees to deceased customers and disabled Australians conned into debt traps. The Hayne Royal Commission was meant to have closed that chapter in the history of Australia’s financial services industry and ensure a clean break with the bad habits and culture of the past and the establishment of a reformed and honest sector of the future. The Hayne Banking Royal Commission created a public space for the voice of ordinary Australians who had been crying out for help for years, and for citizens speaking truth to power. But when we don’t have a Royal Commission in progress Parliament must be a representative and reception organ of government. We are here to represent the will of the people and to be responsive to accusations of injustice. The Parliamentary Joint Committee on Corporations and Financial
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Services has the power, and indeed the mandate, to investigate and recommend solutions to issues in the financial sector through parliamentary inquiries. Labor’s calls for an inquiry into the much reported, AMP Buyer of Last Resort (BOLR) changes is another case of an investigation, prompted not by lobbyists or interest groups, but by Australian citizens. I was prompted to adopt this position after hearing deeply disturbing accounts from dozens and dozens of AMP-aligned financial advisers who have contacted my office over the past few months. They have told me that their businesses are now worthless, that these retroactive changes have destroyed their equity, mental health and retirement and that many will be forced out of the profession that they love in the middle of a historic recession and pandemic. These AMP agents were the face of AMP across Australia, they thought they had safe contractual arrangements with ‘their’ company, but while they were selling AMP, AMP sold them out. How motivated are our biggest financial service providers to do the ‘right’ thing by their own? Not so motivated to that end it would seem. Trust in an essential ingredient in any successful business. It is even more so in the financial services sector, where Australian’s entrust their life savings and financial future to largely unknown individuals based on their faith in the financial sector and its regulators. Decisions like the BOLR changes only undercut the
narrative that we all hope for post-Hayne. We are in desperate need of a culturally changed, more ethical industry. The Hayne Royal Commission should be a watershed moment in Australian financial services history. We must not let its momentum go to waste. We cannot let the financial services sector drift back to a fraternity like culture, where the abuse of power, the tactics of secrecy, fear, sexism, sexual harassment, celebrated exploitation, and cover up continue to fester unchecked. I remind readers that the Liberal National Party voted against a Banking Royal Commission 27 times. They engaged in a desperate rearguard action to protect what can only be described as the ‘old boys club’. It was wrong then. It is wrong now. Sunlight is a powerful disinfectant; scrutiny must continue to be applied to this sector. It deeply disappoints me that last week the Government members of this committee voted against an inquiry into the disastrous BOLR changes. They chose to protect the powerful AMP and leave the lingering traumatised advisers to the mercies of a long court battle. If AMP can work with Government to evade any serious, sustained scrutiny of their unconscionable behaviour, that sends a signal to the rest of the sector to take their chances. Profit at any price is not commerce. It is exploitation. The recent exits from AMP’s board by John Fraser and David Murray and the demotion of Boe Pahari show that shareholders and investors will no longer
DEBORAH O’NEILL
tolerate executives who perpetrate or seek to deny a culture of corporate sexual harassment. I remain concerned about the retention of Pahari in what is still a significant leadership role. I encourage AMP to show leadership by asking the PJC Committee to undertake the necessary enquiry. Labor believes in an economy that works for all Australians. That is why I, and my colleagues, have championed a Parliamentary inquiry into AMP’s decision regarding its BOLR changes. We want to ensure that those Australians who feel that they have been “done over by the system” can have their say before their elected representatives, and most importantly get back on their feet so they can run a successful business. A Parliamentary Inquiry into AMP’s BOLR changes will serve as a reminder to all financial services providers will be put on notice that they cannot quietly backslide into old, bad habits. We need to ensure that justice is provided to victims of toxic corporate decisions and that in Australia, the land of the fair go, the small businesses that power our economy will never be easy prey.
2/09/2020 4:17:47 PM
September 10, 2020 Money Management | 15
InFocus
HOW IOOF HAS PURCHASED SCALE AND LEADERSHIP IOOF’s acquisition of MLC Wealth has confirmed the multi-billion dollar exit of the major banks from wealth management in Australia at the same time as handing the firm scale leadership in the advice and platforms sectors, Mike Taylor writes. WHEN NATIONAL AUSTRALIA Bank (NAB) acquired MLC Limited in 2000 it paid $4.5 billion for the business. 20 years later it has sold that business to IOOF for just $1.4 billion and, at the same time, has accepted continuing responsibility for the advice remediation and many of the other regulatory issues which flowed both before and after the Royal Commission into Misconduct in the Banking Superannuation and Financial Services Industry. The bottom line for Australia’s four big banks is that their multibillion dollar foray into wealth management has ended more in a whimper than a bang as first ANZ, then Westpac, then the Commonwealth Bank and now NAB have found their way to the exit with the common reprise that they intend to focus on their core business – the business of banking. From all of this, IOOF will emerge as the single largest wealth management business in Australia, followed by the still-troubled AMP Limited and then a raft of mid-sized players such as CountPlus, Centrepoint Alliance and Fiducian. What is more, the exit of the major banks has seen the incidence of vertical integration in the wealth management sector also reduced,
COVID-19 SUPERANNUATION EARLY RELEASE SCHEME
with only the likes of AMP, IOOF, the remnants of Colonial First State and Fiducian still holding to recognisably vertically integrated models. And what will be the financial planning bottom line of the IOOF acquisition of the MLC Wealth business? It will be more advisers working under fewer licenses and therefore fewer brands. That much was made clear by the news that IOOF was scaling back from five to three licenses with the closure of FSP, Executive Wealth Management and Actuate and NAB’s confirmation it will retain legal ownership of MLC’s advice entities for the purposes of advice-related remediation with other assets of the advice entities and related
employees of the advice businesses being transferred to IOOF as part of the transaction. Just as importantly, NAB said that MLC’s aligned advisers will be provided with an opportunity to transfer to IOOF’s licences at the completion of the transaction. While the details remain to be confirmed, this leaves up in the air the future of MLC’s Godfrey Pembroke brand and that of its recently-launched TenFifty Financial Group brand which evolved out of its retirement of its NAB Wealth branding, together with Garvan, Apogee and Meritum. Whatever the number of licenses or the branding, the key for IOOF in pursuing the
transaction was the undertaking by NAB that it would “provide protection to IOOF for certain pre-completion conduct matters via a combination of provisions, warranties and indemnities”. Just as importantly for IOOF is the fact that it will pick up some significant distribution benefits from the transaction with the two companies entering into a strategic partnership covering a range of products and service. The arrangement included the statement: “This will include a referral agreement through which NAB customers will have access to financial advice”. For IOOF, the transaction vaults it to being the largest financial advice business in Australia but also gives it significantly more scale in the superannuation, investment management and platforms space. IOOF’s analysis noted that MLC has 538 advisers and $40 billion in funds under advice, while noting that MLC also operates MLC Wrap and the Plum and Masterkey Business Super. It noted that when the IOOF and MLC businesses were taken together it would give IOOF leadership in the financial advice and platforms market and second place behind QSuper and Sunsuper in the superannuation space.
$32.2b
$7,683
3.3
Payments made
Average payment
Average business days to payment
Source: Australian Prudential Regulation Authority (APRA) COVID-19 Early Release Scheme - Issue 18, to 23 August, 2020.
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2/09/2020 9:38:56 AM
16 | Money Management September 10, 2020
Robo-advice
THE COMING OF AGE OF ROBO-ADVICE A Royal Commission, pandemic and regulatory change have distracted advisers from roboadvice in recent years but Jassmyn Goh finds out if the technology is now finally going to disrupt the industry? THE TERM ‘ROBO-ADVICE’ was once the hot new thing set to disrupt the industry. Fast forward a few years and the financial advice industry has been distracted with constant regulation change, a Royal Commission, and now the COVID19 pandemic. So where does that leave robo-advice? Once touted as the “biggest disrupter” the industry would face, it seems to have stagnated over the years in Australia. Financial Planning Association head of policy, strategy, and innovation, Benjamin Marshan, told Money Management that the sluggish development of roboadvice was due to the fact that in the past it had not been a particularly good experience for clients. “[Robo-advice] was a buzzword and it didn’t really work very well. In a lot of instances there was friction between using the tool and getting money on a regular basis was quite clunky and difficult,” he said. “It was a novelty and didn’t solve problems for clients well and was not particularly exciting so that novelty kind of wore off
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quite quickly.” Marshan noted that from a planner perspective, planners did not know where or how it worked and so did not use the technology much. Quantifeed senior executive strategic partnership, Graeme Brant, said the lack of activity came down largely to the changes in wealth management following the Royal Commission such as large financial institutions exiting the market and many advisers leaving the industry. “We’re in a constant state of regulatory change in the Australian market and I think many people were thinking ‘well, let’s try and have this regulatory change slow down a little before I embark upon something’ and then get their head around the regulatory requirements for roboinvesting,” he said. However, despite this “timing issue” Brant noted that there were misconceptions early on that robo-advice would beat the market and this would have disappointed people. He said robo-advice was about bringing efficiency and scalability rather
2/09/2020 4:18:35 PM
E
September 10, 2020 Money Management | 17
Robo-advice Strap
than beating markets. Investment Trends research director, Recep Peker, said awareness was an issue with the lack of take up and that branding was a key catalyst to drive the technology into the mainstream. He noted robo-advice was widely used in the US and that US firms had spent a lot of time and resources educating and advertising to the market. “If you give them a prompt and ask them about Raiz, Stockspot, Spaceship Voyager, etc. half of online investors have not heard of any of the brands. These are also people who are actually engaged with investments,” he said. “That indicates that part of it is awareness of these things. The reality is that once people are aware then they start to see reasons to start using them. The top thing they say is ‘it’s a good way to start investing, it’s cost effective, and I can get diversification from these service providers’.”
THE ROBO WAY Despite the timing issue Marshan said there would always be things distracting businesses away from modernising and adapting to future opportunities and advisers needed to think about where they would be in five years’ time. He noted that, at the moment, most of the robo-advice technology were “blunt tools” that looked at risk profiling and then categorised clients into blunt investment solutions such as balanced, growth or conservative funds with “not a lot of sophistication” beyond that. However, Marshan said platform architecture was becoming more open and this meant that algorithmic solutions
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were being built into the platform along with platforms making better use of knowledge and experience from investment managers. He said robo-technology was also getting better at the ability to plug in better fact finding, risk profiling, risk capacity, and goalbased type algorithmic questions into the solutions. “You’ll see much more sophisticated solutions that are better catered to clients and the technology will become more attractive to planners and consumers when they get away from just a balanced, growth or conservative fund outcome,” he said. “It will look a lot better in five years time and it will have more attractive propositions in a more cost effective and efficient way.” He said there was a big opportunity for planners to think about how to best serve their clients. Robo could help clients that needed education and support for more simple investment solutions to help them get onto the right track, he said. “If they can afford to invest a little bit on a regular basis then robo-advice tools can help with that through dashboards and data feeds,” Marshan said. “They can start to help a person on their journey from learning about their financial positions and setting simple goals, to help them become a client that can pay for a holistic advice process which unfortunately with regulatory costs is out of reach for most Australians.” Aberdeen Standard Investments (ASI) head of retirement and product strategy, Jason Nyilas, said using roboadvice or ‘bionic’ advice would allow advisers to see more clients
“The cost that goes into full service clients is only increasing not decreasing. Advisers need to find ways to improve efficiencies, and it’s not feasible to just lower fees to be competitive.” – Brett Jollie, Aberdeen Standard Investments using less hours with more value added which made their businesses more profitable. ASI managing director, Brett Jollie, said the cost of being an adviser was going up as advisers were required to end grandfathered commissions to a fee-for-service model, and they were burdened with ever increasing regulatory and compliance costs with some having to study again to complete the Financial Adviser Standards and Ethics Authority (FASEA) educational requirements. “The cost that goes into full service clients is only increasing not decreasing. Advisers need to find ways to improve efficiencies, and it’s not feasible to just lower fees to be competitive. They need to change the way they operate,” Jollie said. “A large number of smaller clients are being dropped as financial advisers don’t have the capacity to service the number of clients they could have under a commission based structure. One of the biggest challenges in a fee-for-service model is being able to continue to provide affordable advice. “One of the solutions, and just about the only solution, is to adopt
Continued on page 18
2/09/2020 4:22:38 PM
18 | Money Management September 10, 2020
Robo-advice
Continued from page 17 the digital advice, robo-advice, or bionic advice. They need to build efficiencies through technology and look at other areas like outsourcing investment management.” Brant said some advisers became “very keen” on roboadvice when they understood the efficiency benefits. However, there were advisers on the other end of the scale who “still felt threatened by technology” as they had established worked practices they did not want to change. “But increasingly there’s a realisation that financial advisers need to make their businesses more efficient, and that has come from the Royal Commission, increased regulatory oversight, and
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the fact that professional indemnity insurance has gone up, and thus the cost of the business,” he said. “I think it comes down to making sure that there’s growth. They’ve got an avenue for growth and often that is having a pipeline of customer that could move from a digital relationship to one of full service as their needs become complicated over time.” Peker said the biggest opportunity robo brought was reducing the cost of advice and being able to provide affordable advice to those that needed it. “Advisers don’t just want to service high net worth clients and the mass affluent. Robo-advice tools that help with investment selection can be quite powerful to save advisers time,” he said. “Our research found the
average planner that used managed accounts to outsource their investment process into that structure saved 13 hours per week for portfolio management tasks. “What robo-advice can enable planners to do is service a segment of the market which isn’t getting advice at the moment with little or no paraplanning.” Ultimately, Jollie said, it would be the clients and the advisers that would benefit from robo-advice. “It’s about improving efficiencies – advisers will be able to able to service more clients, they are able to create more customised solutions, and ultimately provide a better solution and bring down costs,” he said. “From an adviser perspective there are certainly significant benefits here and we’re not crowding out the advisers. They continue to play a very important role in this process. “Ultimately the clients, whether they are accumulation or decumulation because retirement will increasingly play an important part of the market for everyone, will be better off for this.”
WHAT TO LOOK FOR IN A ROBO PARTNER For advisers looking into bringing robo-advice into their offering, Brant said advisers needed to first think about the customer segment they were seeking to service and what their needs were to make sure the robo capabilities aligned with their needs. Brant said customisable solutions were useful as the needs of one adviser group was different
from another and having the breadth of capability to customise would be able to help address the needs of their clients better. He said it was important to workshop with prospective partners to help them understand what it was you were trying to achieve “rather than having robo as a fashionable thing”. The first thing Marshan said advisers needed to do was partner with a robo provider that had the same investment philosophy, style of investing, and way of thinking about advice. “Then you’ve got to have the advice process mapped out, tech stack mapped out, and you’ve got to have a funnel for how you move clients from finding out about you into these robo solutions and then back out of the robo solutions when you’ve graduated them into other advice offerings,” he said. “You can’t just snap your fingers and think it’s going to work for you you’ve got to plan it out and think about how it will work.” However, Brant warned that advisers needed to be wary of robo solutions that were too complicated. “It’s common for people to want a whole lot of functionality and meeting all of the needs under the one platform or journey – that can be a disaster,” he said. “That becomes too complicated and does not become clear for any user group with specific needs what the proposition is. Anything that is trying to do too much at once, can detract from the usefulness of it and impact the success of it.”
2/09/2020 4:22:51 PM
September 10, 2020 Money Management | 19
ESG
HOW MANY SLAVES ARE IN YOUR SUPERFUND?
This is the first reporting period that firms will have to comply with the Modern Slavery Act, writes Liana Brover and Timothy Stamp, so how can businesses ensure they are investing ethically? HOW MANY SLAVES made what’s in your pocket? In your car? Your house? Your supermarket trolley? How about your superfund or your investment portfolio? More than you think. A lot more. And more than none, which is more than we should be willing to tolerate or accept as the ‘cost of doing business’ in the global economy. As awareness of modern slavery has increased, so have questions around how organisations can make impactful change. We have seen these concerns resonate across many boardrooms in working with investor clients to help implement the Modern Slavery Act 2018 requirements for their first reporting period. Investors, particularly superannuation funds, have an opportunity and responsibility to make a significant impact to
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modern slavery through changing practices in their supply chain and investment portfolios.
SLAVERY IN 2020 There are more slaves today than at any other time in history. Why? Slavery is cheap. In economic terms, slavery represents theft of labour where people are treated as disposable assets. Businesses that tolerate or engage in slavery practices have lower labour costs and therefore competitive advantage, albeit an unfair one. But behind the economics there are horrendous violations of human rights. Behind the labels given to these violations, such as “servitude”, “human trafficking”, “forced marriage”, “deceptive recruiting for labour or services” and “the worst forms of child labour”, there are real people subjected to physical and psychological harm.
Like the young children working in the toxic pits of the Democratic Republic of Congo’s artisanal mines gathering the cobalt that is probably powering your smartphone. Like the young men, tricked away from families and onto fishing vessels, abused and forced to work months on end at sea in hazardous conditions, gathering the fish for the sushi roll we had for lunch. Like the women and girls trafficked for sexual exploitation, hidden out of sight, in the shadows of society. Even in Australia there have been reports over the years of people being induced to Australia under foreign visas to work in industries such as agriculture, construction or meat processing only to find themselves exploited with little or no wages, pay deductions for accommodation, confiscation of passports and being housed in awful conditions. The economic turmoil around
the world caused by the COVID-19 pandemic has only exacerbated the problem, pushing vulnerable people into more desperate situations. Every one of the 40.3 million slaves is a real person with their own story of tragedy, and hope. The contrast between their day-to-day lives and ours is so stark it’s incomprehensible. We simply cannot imagine a day in the life of a slave, but we do understand that slavery, in all forms, is wrong. In addition to the moral imperative, there is investment risk, reputational risk, societal, client and member expectation, and of course, compliance with the Modern Slavery Act. As noted in Liechtenstein Initiative’s Blueprint, investors have a key role in influencing practices that will help end slavery: The financial sector cannot end Continued on page 20
2/09/2020 4:27:43 PM
20 | Money Management September 10, 2020
ESG Continued from page 19 slavery alone. Nor, however, will slavery end without the active engagement of the financial sector. As the world’s bankers, investors, insurers and financial partners, financial sector actors have unparalleled influence over global business and entrepreneurialism. They have a unique role to play in investing in and fostering business practices that help to end modern slavery and human trafficking. Finance is a lever by which the entire global economy can be moved. Investors, particularly super funds, have a significant opportunity to change these practices in their supply chain and investment portfolios, which will help achieve Target 8.7 of the UN Sustainable Development Goals to eradicate forced labour and end modern slavery and human trafficking by 2030.
MAKING AN IMPACT THROUGH INVESTMENT Since 2019, Mercer has been working with asset owners to help them understand and address modern slavery risks in their operations, supply chains and investment portfolios, in line with the requirements of the Modern Slavery Act. For many financial services firms, this first reporting period under the Modern Slavery Act is the first time they have been asked to focus, in some detail, on the human rights implications of their business and investment activities. Whilst environmental, social and
governance (ESG) considerations are embedded into the investment activities of many firms, up until now, the focus has predominantly been on environmental and governance issues. The social considerations, such as modern slavery, have not typically had the same level of attention. So it is not surprising there is a lot of interest in better understanding possible connections businesses may have to modern slavery practices and how to address these. There is generally surprise (and relief) that addressing modern slavery risks does not necessarily require immediate termination of suppliers or exiting investments, but rather engagement and using the firm’s influence to increase understanding and change inappropriate practices. However, there are situations where divestment or termination of a supplier or manager may need to be considered. Divestment could be considered if an investee or supplier refuse to engage despite clear unaddressed risk, or where their response or remediation is inappropriate given the seriousness of the allegations. However, such steps should not be taken lightly as such actions can have adverse human rights implications on vulnerable people. Having a structured approach to governance is valuable to planning the short, medium and long-term objectives of an investor’s modern slavery program, and helps to plan implementation of the requirements
in an orderly, considered manner. Supplier and manager questionnaires are a common tool used for collecting data and organisations are utilising these in different ways. Some organisations send standard questionnaires to all suppliers and then use the responses to inform their risk assessment. Other organisations undertake a risk assessment first using modern slavery risk factors and then prioritise sending tailored questionnaires only to the high-risk suppliers and managers. This approach is more efficient and effective in driving focused engagement, targeted at salient risks. Risk assessment methodologies also vary in terms of granularity. For example, in some cases investment portfolios are assessed at the asset class level whilst in other cases there is a more detailed assessment of underlying portfolio holdings. A granular assessment provides more detailed understanding of the portfolio’s specific risks, thereby enabling more targeted engagement. However, this is more time consuming and costly to complete. Complicated organisational and ownership structures and more sophisticated investment practices also impact the complexity of the risk assessment process. Properly identifying these aspects at the outset, prior to commencing the assessment, is important.
The first year has been about raising awareness and building a sound foundation for compliance with the Modern Slavery Act requirements. Significant progress has been made, but there is more to be done. For many firms, next steps will involve taking further measures to embed modern slavery considerations in existing arrangements and policies, amending existing contracts and progressing with their risk assessments. There will also be the challenge of deciding how to effectively engage with high risk suppliers and deal with high risk investments from an investment, human rights, and legal perspective. Whilst risk identification and mitigation are key building blocks, it is informed and targeted engagement that is most likely to foster real positive change. This will require a thoughtful, patient and committed approach as well as having clear escalation arrangements for addressing inadequate responses. In a highly-regulated industry used to compliance requirements, it will be important not to treat modern slavery obligations as a ‘tick the box’ compliance exercise and, in particular, not to lose sight of the overriding purpose of these laws; to use leverage to influence change to remedy adverse practices. To do so, firms will need to engage with their suppliers and investees. The ‘Investor Toolbox on Human Rights’ from the Responsible Investment Association Australasia (RIAA) has some suggestions for conversation starters. Ultimately the Modern Slavery Act is just the first step in the right direction. Investors have an opportunity and responsibility to make a significant impact to modern slavery through changing practices in their supply chain and investment portfolios – but it takes commitment and ongoing engagement to make an impact. Liana Brover is principal, governance consulting and Timothy Stamp is senior associate for responsible investment at Mercer.
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SUPER A NNUATION P OLICY IN V E S TMENT S INSUR A NCE A DMINIS TR ATION
AUSTR ALIA’S LE ADING SUPER ANNUATION M AGA ZINE
Default funds
Well-performing default superannuation funds have little to fear
Superannuation guarantee
A deferral of the rise in the SG might be warranted but should be subjected to a review
SMSF auditing
The COVID-19 pandemic has brought new challenges when auditing SMSFs
Retirement planning
Longevity risk and generating sufficient income are the biggest challenges for advisers
VOLUME 34 - ISSUE 4, SEPTEMBER 2020
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CONTENTS
6
SEPTEMBER 2020 WWW.SUPERREVIEW.COM.AU F IN D U S O N TWITTER @SUPERREVIEW LINKEDIN SUPER-REVIEW FACEBOOK SUPERREVIEW
TOP STORIES & FEATURES
10
4
5 | APRA canvasses COVID-19 super fund exits
The firm’s acquisition of MLC Wealth will boost it to be the second largest super entity with $173 billion in funds under administration.
The coronavirus pandemic might accelerate viability and sustainability issues faced by some superannuation funds, particularly those that are already dealing with challenges.
Superannuation members who switched to cash may need to keep working an extra two to eight years longer before being able to retire.
8 | Deferral of the next SG rise warranted by economic reality
10 | Is superannuation too big to let politicians play with it?
11 | Why compulsion is vital to superannuation
The Government may use the recession as an opportunity not to increase the SG or will move it up to 10% and park it there for five years.
An independent authority such as the Reserve Bank should oversee superannuation rather than be subjected to political gameplaying.
IOOF acquires super scale but not without problems
6 | Switching to cash bigger negative impact than early release
Government back-benchers that believe the super guarantee should be made voluntary for young people are in the same boat as the Flat Earth Society.
2 | Super Review
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D
EDITORIAL
Good default funds have nothing to fear from Govt’s new choice regime
D
Default superannuation funds with good returns and high levels of service to their members have little to fear from the Government’s new choice of superannuation fund regime. Despite the victory lap done by the Assistant Minister for been heard to echo some of that rhetoric, giving a particularly Superannuation, Financial Services and Financial Technology, Senator partisan tone to what should be a reasonably agnostic Jane Hume, and the Financial Services Council (FSC), around the exercise in modernising the superannuation regime. passage of the Government’s choice of superannuation legislation, As the Government moves further towards releasing the report industry default funds have little to fear from the changes. developed by its Retirement Income Review panel it is certain that Indeed, most industry fund executives would have understood the level of political rhetoric around superannuation will increase for many years that the clock was ticking on superannuation and that the divide between the major parties on what should arrangements tightly linked to industrial agreements and awards sensibly be treated as a bipartisan policy area will become wider. with many of them such as AustralianSuper having long since adopted The simple facts of the matter with respect to award-based marketing and communications strategies aimed at membership default funds is that they had their origins in the very beginning well beyond award-based employees. of the processes which led to the creation The celebratory tone adopted by the FSC of the superannuation guarantee (SG) and is hardly surprising in circumstances where reflected the Australian workforce as it existed “The raw data says the organisation had been campaigning for in the late 1990s rather than in the 2020s. well-performing the change for well over a decade on the basis In the intervening 20 years, union membership default funds have that many workers were being forced into the has declined by close to 40%, from nearly 50% little to fear and award-based default fund arrangements to the of the workforce in the mid-1980s to about probably much to gain exclusion of the FSC’s retail fund constituents. 15% in 2019 and this has coincided with radical from the Government’s And, in truth, such arrangements were not changes to the make-up of the workforce choice regime.” universally admired and accepted by all industry including high levels of casualisation and the superannuation funds, with many of those which emergence of the so-called ‘gig’ economy. did not have award default fund status arguing that So, the bottom line for industry funds with they were being placed at a distinct disadvantage to those which did. award default status is that they were dealing with an ever-decreasing In short, in the age of social media and the emergence of funds base from which to draw their SG inflows and an imperative to directly targeting tech-savvy rather than industrial relationsrecruit and retain members by other means. What is more, most of savvy millennials, the awards-based default superannuation them would be fully aware of the fact that, notwithstanding the new regime had begun to look like a serious anachronism. legislation, the activities of trade union delegates and recruiters The problem, of course, is that what should have been a will ensure any drift of industrial membership is minimal. fairly straightforward promulgation of long-standing policy on The pragmatic bottom line is that by almost any measure, the the part of the Morrison Federal Government became more investment performance of industry superannuation funds has been political than it should have been because of the persistent better than that of retail funds over most of the past 15 years. On that niggling and rhetoric of a section of the Liberal/National basis, the raw data says well-performing default funds have little to Party backbench about the future of superannuation. fear and probably much to gain from the Government’s choice regime. And, unfortunately, the Assistant Minister herself has
Mike Taylor, Managing Editor
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3 | Super Review
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NEWS
Super tax change painful for retirees BY OKSANA PATRON
IOOF acquires super scale but not without problems BY MIKE TAYLOR
IOOF is predicting that as a result of its acquisition of MLC Wealth it will rise to be the second largest superannuation entity in Australia with funds under administration (FUA) of $173 billion. According to an investor presentation allied to the MLC Wealth acquisition, MLC will rank just behind the combined QSuper and Sunsuper which boast a total of $188 billion in FUA, and just ahead of AustralianSuper with $172 billion in FUA. It will represent a substantial leap in the rankings for IOOF which up till now has boasted just $70 billion in FUA. What is more, the transaction brings leading superannuation fund asset consultant, JANA under the broad IOOF banner giving it investment servicing reach across both retail and industry superannuation funds. However, the transition of the superannuation businesses are not without challenge, with the briefing document noting “indemnities provided for specific pre-completion matters including tax, breaches of anti-money laundering, regulator fines and penalties, an 80% share of provision of a provision overrun for a remediation program for workplace super and three pieces of litigation (relating to an ASIC [Australian Securities and Investments Commission] action in relation to plan services fees, a class action in relation to grandfathered commissions and a separate class action in relation to the transition of certain accrued default members to MySuper) and certain ongoing regulatory investigations and certain existing investigations in respect of MLC Group including investigations relating to the implementation of planned service fees, late lodgement of significant breach reports and deduction of adviser fees from super accounts of deceased members”.
Investment inside super may be a political “soft target” as it will not be felt directly in voters’ pockets, but will have unfavourable longer-term impact in retirement outcomes, according to Parametric. Parametric said the possibility for government to increase superannuation taxes in response to the ballooning budget deficit caused by COVID-19 could severely hurt member balances at retirement Raewyn Williams, head of research (Australia) and analyst Josh McKenzie, in a paper titled ‘Will retirees pay the price for superannuation tax rises?’ indicated the two most likely tax options which would be increasing the headline tax rate of 15% or reducing the capital gains tax concession from one-third, while the third option assuming limiting the claiming of franking credits for Australian share dividend was scrapped as being “too political risky”. According to the report’s authors, the smallest tax increase (15% to 17.5%) would cause a member to forgo (in today’s dollars) $40,509 in retirement savings but if the tax rate was increased to 25%, then the member could lose $150,448 in retirement savings, ending up with 22% less than expected outcomes under the current tax regime. “The ‘tit for tat’ retirement impact of a super investment tax rise is clear, even if not immediately felt by the super fund member,” they said. “A very small reduction (3%) in the CGT [Capital Gains Tax] discount concession to 30% would shave a negligible $1,545 of the member’s retirement balance of $682,146. Even using our most aggressive assumption (the CGT discount more than halving to 15%), the expected loss to retirement savings is a modest $8,446. “Other more muted changes to the super CGT rules are also possible, such as extending the current one-year holding period rule (for CGT discount eligibility) to three years, capping carry-forward capital losses or limiting the types of assets eligible for CGT discounting.” Parametric stressed that just the possibility of tax increases should send a clear message to the industry – for funds to better manage the tax impacts of their investment decisions. “Our research on the Productivity Commission’s report showed that a genuine after-tax focus could be more valuable to retirees than reigning in fees. So, what if a super fund responded to a higher-tax environment by adopting a genuine after-tax investment management focus to defend retirement outcomes?” Williams and McKenzie asked. “After all, good retirement outcomes are the raison d’etre of super; a way to avoid the enormous fiscal drain from public funding of age pensions in future.”
4 | Super Review
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3/09/2020 1:24:37 PM
NEWS
APRA canvasses COVID-19 super fund exits
Assets under custody drop 7.7% BY JASSMYN GOH
BY MIKE TAYLOR
The extended period of the COVID-19 pandemic may hasten the exit of some superannuation funds, according to the Australian Prudential Regulation Authority (APRA). In an analysis within its latest corporate plan, APRA pointed to the challenges facing superannuation funds as a result of the COVID-19 pandemic and the associated hardship early release superannuation arrangements and noted that the longer the situation continued the greater challenges would be. It then said that the “pandemic and associated impacts will also continue to accelerate viability and sustainability issues facing some superannuation funds, particularly those who were already showing indications of challenges in continuing to be able to sustainably deliver quality outcomes for members”. Elsewhere in its analysis, APRA also noted that beyond the pressures being exerted by the early release scheme, “rising unemployment will continue to impact the cashflow of superannuation funds as contributions are likely to slow and outflows are expected to remain elevated”. “Service continuity within both funds and service providers such as administrators has generally been maintained despite increased member activity, including high call volumes and the need to manage early release applications expeditiously. However, sustaining service levels through an extended period of substantially remote working will require careful management,” the analysis said.
Assets under custody in Australia has declined 7.7% to $3.75 trillion over the six months to 30 June, 2020, according to Australian Custodial Services Association (ACSA) data. ACSA said the fall in assets was largely a result of market valuation impacts and the spike in transactions reflected the level of activity by underlying institutions adjusting their portfolios in response to the COVID-19 pandemic. State Street had the largest decline in assets, down 20.8% to $405.2 billion, followed by a 10.2% decline for HSBC Bank to $179.8 billion, and a 9.3% decline for BNP Paribas to $463.3 billion. Only Netwealth ($31.5 billion) and BNY Mellon ($27.1 billion) increased their assets at 10.5% and 10.2% respectively. J.P. Morgan had the largest amount of assets at $820.2 billion. ACSA chief executive, Robert J Brown, said: “According to a recent ACSA member survey, 82% of asset servicing professionals are working from home. At the same time we have witnessed record volumes of transactions in the market. Despite the obvious challenges, there has been minimal disruption to service provision. “Although our industry is highly automated, there are exceptions. Asset servicing providers have needed to adapt to the social distancing and movement restrictions under public health orders, and this has created challenges for handling physical documents. Mail room and vault access, support for transactions that require wet ink signatures and physical cheques all triggered changes to process for custodians, registries and other key players in the service chain.”
Repeat early release members took out average $16k The average superannuation member fund that used the early access to super scheme twice has taken out $15,854, according Australian Prudential Regulation Authority (APRA) data. APRA data found the average initial application amount was $7,402 and the average repeat application was $8,452. APRA data has showed that applications for the hardship scheme has tapered off with 59,000 applications over the week to 23 August, a drop from 70,000 the previous week. Over the week, 35,000 were initial applications and 24,000 were repeat applications. This has brought the total number of initial applications to 3.1 million and repeat applications to 1.2 million since the start of the scheme. The total amount paid is now at a total of $32.2 billion with 10 funds accounting for $21.2 billion. The top 10 funds that had paid out the most were AustralianSuper ($4.48 billion), Sunsuper (3.26 billion), REST (2.96 billion), Hostplus ($2.8 billion), Cbus ($2.06 billion), HESTA ($1.6 billion), Retirement Wrap ($1.5 billion), MLC Super Fund ($1.91 billion), and Retirement Portfolio Services ($983.6 million). 5 | Super Review
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NEWS
Link declines to provide guidance in face of COVID-19
Switching to cash bigger negative impact than early release of super scheme BY JASSMYN GOH
BY MIKE TAYLOR
Major publicly-listed superannuation administration company, Link Group has reflected the challenging circumstances facing the superannuation financial services sectors reporting a 16% decline in net profit after tax of $144 million. The company reported a statutory net loss after tax of $114 million which it said was largely driven by a $108 million impairment of its corporate markets business. The board declared a final dividend of 3.5 cents per share 50% franked. Within its retirement and superannuation solutions division, the company reported a 6% decline in revenue to $519 million when compared to the prior corresponding period but said that when adjusted for prior year client losses and the impact of regulatory reforms strong underlying member growth helped the division deliver underlying revenue growth of 5%. However, it said that operating EBITDA of $78 million and operating EBIT of $65 million were down 36% and 40% respectively on the prior corresponding period largely reflecting the flow on impact of lower revenue and the high level of operating leverage in the division. The group’s soon-to-retire managing director, John McMurtrie, said Link Group had demonstrated overall resilience in a period of change and multi-faceted challenges. However the company stopped short of giving any guidance, with McMurtrie saying that the future trajectory of the COVID-19 pandemic and its potential economic impacts remained unclear and that “we believe additional financial guidance is not appropriate at this time”.
Superannuation fund members who have switched to cash as a response to the COVID-19 pandemic will experience the greatest adverse impact, and members may need to keep working anywhere between two and eight years longer before retiring, according to Willis Towers Watson. Willis Towers Watson’s latest research on the impact of the virus on retirement adequacy found that while the proportion of members that switched to cash was still reasonably small across the industry, it could be very damaging and was particularly acute for older members. This, the firm’s head of retirement solutions Nick Callil said, reflected the impact of investment returns in what it called the “retirement risk zone” in the years immediately preceding and after retirement date. The impact of the early release of super was higher for younger members with the exception of those with a low earnings base and account balance, where withdrawals were significantly less than the full $20,000. The research noted that younger members were most impacted by periods of unemployment, with lost income in the early years equating to the largest differences at retirement through the powerful force of compound interest. “Some members, particularly higher earners, may choose to retire with a slightly lower retirement income if they are able to maintain their desired lifestyle with the funds available to them. For others, the most obvious action may be to contribute more by way of voluntary member contributions,” Callil said. “However, at a time where unemployment is projected to reach its highest since the great depression, many members will not have the ability or inclination to use available income to support additional contributions even where the need is recognised. “Those who are unable or unwilling to make additional contributions may be forced to work past their preferred retirement age – if such an option is available to them. Clearly, for those approaching retirement, this approach may not be feasible with an additional working life of up to eight years required to achieve pre-COVID-19 adequacy levels.” He noted that funds needed to understand their membership, what their projected retirement adequacy looked like, and how it had changed through this time.
Super gender gap exacerbated with early release
The gender gap in superannuation doubles for women under 34 if they have used the early release of superannuation scheme to combat financial hardship brought by the COVID-19 pandemic, according to data. Data released by the Australian Institute of Superannuation Trustees (AIST) and Women in Super (WIS) found that women who accessed their super through the scheme were even further “behind of the eight ball when it comes to retirement savings”. AIST head of advocacy, Melissa Birks, said: “In normal times, the gender super gap starts to become more evident when many women take a career break to care for their first child in their 30s. Some of these women will now be saving for their retirement pretty much from scratch when they return to work”. The joint analysis found that female applicants aged 25 to 34 had on average a starting balance before the pandemic of $19,906 – 21% less than the average male balance of $25,200. After withdrawing their super, this gap widened to 46%. Women aged 25 to 34 withdrew on average 35% of their balance, compared to 29% for men in the same age bracket. In all age brackets, women withdrew a greater proportion of their account balance when compared to men. AIST and WIS noted that it was estimated that 15% of all applicants had had their super fully wiped out. The two groups called on the Government to commit to a return to pre-COVID-19 super preservation rules from 1 January, 2021, and recommended: • Maintaining the legislated timetable for the superannuation guarantee (SG) to increase to 12%; • Payment of SG on Government paid parental leave; and • Removal of the $450 monthly threshold before SG was payable. 6 | Super Review
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2/09/2020 2:38:36 PM
NEWS
MySuper assets down 3.3%
SG increase needs to go ahead: ASFA
BY JASSMYN GOH
Superannuation benefit payments for the year to June 2020 increased 31.2% from the previous year due to the early release of super scheme, leading to a decline of 0.6% of total super assets and 3.3% for MySuper products, according to data. Australian Prudential Regulation Authority (APRA) data found total super assets in June 2020 stood at $2.86 trillion, compared to $2.88 trillion in June 2019. APRA-regulated assets dropped 0.2% to $1.92 trillion, of which MySuper products dropped 3.3% to $731.3 billion. “Quarterly benefit payments were $37.4 billion, significantly higher than the March 2020 quarter ($21.1 billion) and the June 2019 quarter ($20.5 billion) due to payments made under the Early Release Scheme which came into effect on 20 April 2020,” APRA said. “Amounts transferred to the Australian Tax Office as inactive low balance accounts are also counted in the June 2020 benefit payments figure. Benefit payments for the year to June 2020 were 31.2% higher than to June 2019.” APRA said key statistics for entities with more than four members for the year ended 30 June 2020: June 2019
June 2020
Change
Total contributions
$114.7 billion
$120.6 billion
+5.2%
Total benefit payments
$76.5 billion
$100.4 billion
+31.2%
Net contribution flows
$38.0 billion
$23.5 billion
-38.2%
The increase in the superannuation guarantee (SG) should continue as legislated as the COVID-19 related reductions in employment had disproportionately impacted the young and those on lower incomes, according to the Association of Superannuation Funds of Australia (ASFA). In its Budget submission, ASFA recommended the SG be gradually increased to 12% as the majority of applications of the early release of super scheme were under-35 and while they had a substantial period of years before retirement, they would miss out on the benefits of the compounding of investment returns over many years. ASFA also recommended the Government amend the current legislative framework to include dependent contractors within the scope of the SG. It said as the rise of the gig economy lead to shifts in the structure of the labour markets, a larger proportion of people had some form of independent work arrangements, such as independent contracting, where workers were generally not covered by the SG. The super body also recommended that unpaid SG entitlements be included in the definition of unpaid employment entitlements for the purposes of Fair Entitlements Guarantee (FEG). ASFA said while JobKeeper payments were helping keep businesses solvent, once the program ceased there would likely be a substantial increase in the number of insolvencies. “…it is likely that there will be
continuing cases where there are unpaid contributions when businesses become insolvent. Greater visibility to unpaid employer contributions will be of only limited assistance where the employers do not have any financial capacity to pay given COVID-19 impacts on their businesses,” the submission said. “In ASFA’s view, there is merit in reviewing the treatment of unpaid SG entitlements in insolvency/bankruptcy, with the objective of considering how to achieve the maximum possible recovery on behalf of affected employees. “ASFA estimates that on a regular ongoing basis it would cost around $150 million per year to include unpaid SG in the FEG, with around 55,000 employees a year benefitting. In 2021/22 as a result of COVID-19 related insolvencies the figures might be more like $600 million and 220,000 employees.” The super body also reiterated that the $450 super threshold be removed and proposed measures to improve the productivity of super administration. The measures proposed were: • Change the default communication medium from paper to electronic; • Make advice more accessible and affordable for members; • Centralise data reporting by funds rather than having reporting to multiple agencies and departments; • Address issues inhibiting superannuation fund mergers; • Make it easier for members to make a contribution and to claim a tax deduction; and • Ensure greater stability in policy settings.
7 | Super Review
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ROUNDTABLE
Deferral of the next SG rise warranted by economic reality A focus group of senior superannuation industry executives has agreed that a deferral of the next rise in the superannuation guarantee might be warranted in the economic circumstances but that it should be subject to independent review.
ATTENDING: Mike Taylor (MT) – Managing editor, Money Management and Super Review Paul Cahill (PC) – Chief executive, NESS Super Russell Mason (RM) – Superannuation partner, Deloitte Andrew Howard (AH) – Chief commercial officer, TAL
C
MT: Can we sensibly expect them to proceed with the rise which comes into effect next year when we already know the likelihood that we’re going to have a lot of unemployment and a recession? PC: Look, I think you use the appropriate word there, Mike. It’s a loaded question. You should sensibly, so that automatically makes it a loaded question. But you know we’ve been stuck at 9.5% for god knows how long. I appreciate we’re in times that no one has ever experienced before in their life and probably hopefully never will but the whole increase in the superannuation guarantee (SG) has been kicked around like a political football. My view is the Government will use the opportunity not to increase it or they’ll move it up to 10% and park it there for five years. Put it to sleep. But I can’t see the legislative timetable going through simply because any opportunity to cut something out to help the economy will absolutely be utilised. So, the best case for us is that we get it to 10% and it stays there for a few years while the economy regains its feet. But it wouldn’t surprise me if we were left at 9.5% for a not insignificant amount of time. RM: I think Paul is right, which is a real shame and the question becomes, if the economy is going into recession how quickly will it recover because it would be a shame to delay increases when the economy actually recovers quicker than expected. And there’s already
8 | Super Review
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ROUNDTABLE
been talk of a quicker turnaround than initially expected and I expect that once a vaccine is released things will change very quickly. Also it’s a shame because most people have acknowledged that 9.5% isn’t adequate and that we need to get it to a higher level and, in my view, 12% is the minimum. Technically we should have got there at 1 July last year if we had stuck with the original Labor timetable and now it’s been pushed back. I still believe we need to get to 12% and if the Government does defer next year’s increase I’m hoping that deferral is only for 12 months and not for an extended period of time. MT: Well, you don’t think as someone might have suggested in an editorial recently that the deferral should be subject to review depending on how quickly the economy recovers? RM: If there is a deferral, I think that makes a lot of sense because the bottom line is that we’re in unknown territory and we really don’t know what things will look like in 12 months and, as I say, you know it may recover a lot quicker than expected so that if there is a deferral it would be good to have an independent review of that this time next year to see how appropriate that deferral is. AH: I don’t have much more to add to what Russell and Paul have said except that I think it’s important, and it’s certainly important to the fund partners that we work with, that it’s not lost in the debate that the superannuation system has achieved an enormous amount for Australia. It’s a leading system for saving and you only have to consider where we were before it was put in place. From the point of view of life insurance, it’s a fact that the system itself creates access for more people than otherwise would be the case and it also provides better value for money on life insurance. Those are important points that I think need to be preserved as the debate on the matter is considered.
The poor design that is making early release a problem The Government’s rushed design of its hardship early release regime has caused a cascade or problems for funds and their members. MT: So let’s assume there will be no rise in the SG and we move onto the early drawdown of superannuation which for some people is obviously a necessity and for others possibly not so much the case and there is an argument that says that in the absence of increases in the SG people are going to find it very, very hard to restore their balances. I guess, from your point of view Andrew,
it also raises the question of whether they can restore their balances such that they can continue to have insurance inside superannuation. So Russell, let’s start with you on that issue. RM: Yes, Mike, I think irrespective of whether the increase is delayed or not, it’s going to be difficult for many people to get back to pre-COVID-19 levels and the majority of people will not make additional voluntary contributions so I’m concerned about those that have been disadvantaged in the long-term by drawing down money. I don’t want to criticise them for doing that when they are in dire financial straits. For those people who are in that situation it’s what all of us would do in those circumstances. But
RUSSELL MASON
it’s hard to see those people clawing back that money, especially with the compounding effect over the ensuing years. Increases in the SG will at least help towards part of that clawback, but I think what we need to do when we come out of this is to embark on a strong education program to encourage people to make additional voluntary contributions, make people aware of the impact the drawdowns had, and perhaps there can be some concessions short or medium term for those people who have drawn down and who may want to try to pay the money back into super through additional tax concessions. MT: Andrew, give us your view. I know that TAL and other insurers have actually been quite generous in some instances in trying to help people maintain their insurance cover. How does the early drawdown look from an insurance company perspective? AH: Well a lot of funds that we work with have been active in discussing with us their concerns about individuals potentially losing insurance cover as a result of the early drawdown of super. So far it’s been reasonably
modest, but that’s high on the funds’ minds. Trustees and management teams, from an accumulation point of view and from an insurance point of view, want to know what the funds can do for those members who are going through hardship so one of the things that we’ve been talking to the funds about is implementing access to career services and mental health services because all of this really does wrap into what is a health crisis which is turning into an economic crisis. If you follow the bouncing ball, it could end up giving rise to a social set of problems for us to deal with. The funds feel they have a role to play in that if they can take care of some of the things that relay to how much contributions individuals have but as members, or even non-members, what they can do for them. PC: We’ve had to go to enormous effort to make sure that members who have literally taken their account to zero – and we’ve had plenty of those – don’t lose their insurance. Because of the way the whole early release scheme was designed we’ve had many a member pull out an account balance that was sub-$10,000 and they’ve hit the zero figure and a week later we’ve had a contribution for them, so we had to make sure that the mechanisms are in place so that a member didn’t lose all their insurance. So, it’s little things like that that people don’t consider. You know, this is probably one of the worstdesigned pieces of legislation I’ve seen for the law of unintended consequences. So you know, many of the funds had a member go from an account balance of whatever you like to zeroed-out and closed out. Insurances have gone and if the fund wasn’t really dialled in a lot of insurances which the fund has a fiduciary duty to protect, can be lost, so there’s all sorts of consequences. And what is most perturbing to us is the fact that if, one day, someone does the analysis they’ll find that a lot of these claims aren’t real or fair dinkum. A lot of people are getting money out because the opportunity simply presents itself – and coming back to Russell’s point – when you’re 55 years old taking out $10,000, it isn’t really going to affect your end balance too much in the larger scheme of things. But a 25-year-old taking out $10,000 and doubling down on $20,000 – that’s going to drive a trucksized hole in their retirement income. When you’re 24 years old you think it will be alright and that something will sort itself out later on, but the reality is that the compounding effect of $40,000 over 40 years of work is not insignificant and you know what, it’s not going to be today’s Government’s problem. Continued on page 10
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ROUNDTABLE
T Is superannuation too big to let politicians play with it?
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Superannuation should be placed under an independent authority such as the Reserve Bank rather have it subjected to political game-playing, according to a roundtable of senior industry executives.
As the Australian superannuation industry moves to assets of over $3 trillion it is time to extract politics from the equation and place the sector in the hands of an independent entity such as the Reserve Bank of Australia (RBA). That was one of the issues canvassed in a superannuation focus group conducted by Super Review with NESS Super chief executive, Paul Cahill, actively arguing for the fate of superannuation to be removed from the hands of politicians and into those of a less volatile authority. “I think it is time that the whole superannuation debate is moved to a different level and what I’d love to see is the Reserve Bank get carriage of superannuation,” he said. “Because of its political nature now, and the size of it – $3 trillion going to $8 trillion – it’s too dangerous to leave it to fly by night politicians with an agenda and I include Labor and Liberal in that description,” Cahill said. “You can see the damage that it can do when
it is treated in an incorrect manner,” he said. “It [superannuation] needs to be treated like interest rates or currency and needs to handled by an independent authority such as the Reserve Bank. The Government may put people on the board of the RBA but it is highly independent. “Due to the critical place that superannuation intersects with the economy now, I think it’s time it gets moved off to something like the RBA for carriage of the various legislative requirements,” Cahill said. Deloitte superannuation partner, Russell Mason, said the concept being canvassed by Cahill was not one he had previously contemplated but that he agreed that “as we approach $3 trillion in assets, superannuation is something that is just too large and too important to get wrong”. “So whether it’s the RBA or consolidated with a specialist superannuation regulator which brings the best of the Australian
Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO) together we need to make sure this money is well-regulated.” He said that Deloitte had estimated that by the end of the 2030s, superannuation funds would own over 60% of the assets listed on the Australian Securities Exchange (ASX) which represented a huge amount of money with the capacity to change the shape of corporate Australia. “All that means superannuation will need to be well managed and well-regulated and, as Paul Cahill said, from an independent point of view,” Mason said. TAL chief commercial officer, Andrew Crawford said he believed it was about confidence and the need for fund members to hear different voices talking about confidence in the superannuation system and confidence in the role insurance plays in superannuation.
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ROUNDTABLE
Why compulsion is vital to superannuation
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While some Government backbenchers might argue for the removal of compulsion for young and low-income earners, plenty of evidence exists to prove that compulsion is a necessary component of a successful retirement incomes regime.
MT: There is a suggestion being canvassed by some Government backbenchers that the superannuation guarantee should be made voluntary for young people and low income earners. What does the panel think of that? What’s your view Paul? PC: It’s up there with the Flat Earth Society to be honest with you. If you want people to save for their retirement then, unfortunately, compulsion has historically been proven the best way to do it. If you go to a 25 year old and say you can cash out your super of 9.5% so you can enjoy your life, then I guess that is what they’re going to do. Nine-out-of-10 are going to say ‘thanks very much’. Now there are a lot of smart, welleducated kids that will do the right thing and their parents will probably drive them to do that, but there’s also a great many out there that will take the opportunity to enjoy that money in their youth and, as I get older, I can hardly blame them sometimes. But you know that that will create a generational issue in years to come. You’ll have a sub-class of people who won’t have the same retirement incomes as others. Is that what we’re trying to do in Australian society? I wouldn’t think so. MT: So Andrew, from an insurance point of view, compulsion is one of the things that’s helped drive insurance cover. If people have life insurance cover today, the majority have probably got it as a result of superannuation. Is compulsion the key to that? AH: Well there have been unintended consequences. There have been progressive pieces of legislation back to back that have actually taken some members out of the systems for good reasons. Good consumer reasons. The Protecting Your Super legislation and PMIF legislation were designed for a certain purpose. On the other hand, what we’re seeking as well is the engagement with members because of this legislation and because of the events that are going on in and around the industry and there are high levels of voluntary cover being taken
out within funds that we work with. And, Paul spoke about it, some of things that happen with early release. One of the things that we think might be happening is that people are actually having conversations about their super about; about whether it’s the right thing to take money out of their super, about whether it’s the right thing to keep their super in place because of all the benefits that come with it. And that is probably a positive. We expect that we’ll see more voluntary cover taken out in super going forward than ever before largely because of this heightened awareness and don’t forget that in the middle of all these legislative interventions there’s been a pandemic which also heightens people’s sense of risk about their own health and their ability to earn income. So, it’s complicated. The scenarios that have played out. But there are some positives that have come out of it. There is higher engagement. RM: I strongly believe in our compulsory system. When I entered this industry in the early 1980s about 25% of the workforce were covered by super. They were primarily those lucky enough to work in the public sector for one of the big banks or some global multinationals and they had cover. But for 75% of the workforce, they didn’t and I suspect a minority, a very
small minority, had private superannuation taken out themselves and while our grandparents and great-grandparents got by on the Age Pension I think today if you were to ask people whether they were happy to live on the Age Pension in retirement the answer would be ‘no’. So we’ve come a long way and according to the Mercer Global Pension Index we’re in the top three or four countries in the world. We can’t afford to take a step back. This system has helped a lot of people and in the area of insurance I sit on the claims committees of two or three funds and, like Paul and Andrew, I’ve seen the benefits for people who have made disability claims and been able to make ends meet, to be able to keep their house, to be able to do the basic things that as Australians we all have a right to do. And that is because the superannuation fund has provided a good level of death and disability cover. I think it would be such a retrograde step to take that away or to wind that back when I think since the early 1980s we’ve achieved so much.
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SMSFs
SMSF audit checklist in the age of COVID-19 BY NICHOLAS ALI
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The COVID-19 pandemic has brought unique challenges to self-managed superannuation funds and this checklist is an opportunity to assess the overall health of fund.
An audit may seem a necessary evil, however, it’s an opportunity for an overview of the status of self-managed superannuation funds (SMSFs) – an assessment of the fund’s compliance as well as its overall health. Look at the annual audit as a medical check-up of your fund, which is worthwhile given the unique challenges COVID-19 brings. Below is 14-point checklist to start an audit of an SMSF:
will also be subject to the disregarded small fund assets rule. Thankfully this requirement will not apply from 1 July, 2021, as a change was mooted in the 2019 Federal Budget (it has yet to be passed into legislation, however). Assuming it does become law, from 2021 onwards, a fund will not require an actuarial certificate if it is 100% in pension mode.
1. Check the trust deed
4. Make sure the assets are registered in the correct name
Check the trust deed to ensure it is properly executed, and to make sure the trusteeship and membership align. When a company is trustee, all members must be directors (the principle exception being singlemember funds). With individual trustees, all must be members of the fund (again, single-member funds being the main exception). As a rule – if there has been a change of member or trustee circumstances throughout the year, this is impetus to review the fund’s trust deed.
2. Review the fund’s investment strategy
We are often asked: “What about a term deposit commencing when the fund had individual trustees? Now we’ve changed to a corporate trustee, the financial institution says the ownership of the term deposit will change if the investment is registered in the name of the new company, and accrued interest will be lost. What will the auditor think about this?” In these situations, a declaration of trust may need to be signed by the trustee to satisfy the auditor, stating the term deposit is not registered in the name of the trustee.
5. Are assets recorded at market value?
Check if the fund’s investment strategy is fit for purpose, given recent (and probably continuing) market volatility. Don’t just look at the fund’s strategic asset allocation (its long-term benchmark risk/return nexus). Consider the fund’s ability to take short-term positions away from the benchmark.
It is very important assets are recorded at market value and it is up to the trustees to provide the valuation. Market valuations are important for several reasons, including:
3. Check actuarial certificates and determine if your fund is subject to the disregarded small fund assets rule
• Determining pension payments for the year; • Determining the level of in-house assets; • Payment of lump sums (member accounts need to be valued before a lump sum can be paid); and • Other scenarios, such as estate planning and retirement decisions.
The rules for this changed in the 2017/18 financial year. In short, the SMSF will not require an Actuarial Certificate if:
The Australian Taxation Office (ATO) has also published some very helpful guidelines on valuation of assets.
1) It has been 100% in pension mode for the entire financial year 2) The fund is not subject to the disregarded small fund assets rule.
Disregarded small fund assets is where: • Any member of the SMSF has retirement-phase assets of at least $1.6 million; • The asset does not need to be in the SMSF; and • Measured as at 30 June the previous financial year.
So, if $1 million is in pension mode in your SMSF and you also have, say, $600,000 in an industry fund also paying you a pension as at 30 June, 2019, the SMSF will be subject to the disregarded small fund assets rule in the 2020 financial year. It will require an actuarial certificate, even though the certificate will say the fund was 100% in pension mode (and thus not subject to tax on earnings). In a similar vein, if you started your SMSF pension with $1.5 million and it has now grown to $1.6 million, the fund
6. Limited recourse borrowing arrangements An SMSF can borrow to invest in assets under strict conditions (usually for property). These arrangements are complex but suffice to say if you have a limited recourse borrowing arrangements (LRBA) in place, the property must be held in the name of the holding trust trustee, not the SMSF trustee. • For those SMSFs with LRBAs, the impacts of COVID-19 on rental incomes, contributions by members or other fund income may impact the SMSF’s ability to make loan repayments. • If a commercial lender has provided loan deferral, it is important this is documented to ensure the auditor understands why loan repayments are not being made. Where the lender is a related party, if loan deferrals are to be provided to the fund, such arrangements
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must mirror commercial practices and be undertaken on an arm’s length basis. • It is also important to ensure this information and the actual amendment to loan terms is documented and the documentation retained for audit and other purposes.
7. Make sure related party transactions are at arm’s length terms.
10. Fund expenses cannot be of a personal nature Expenses can only be paid by the fund where they relate to the running of the SMSF and the tax invoice is in the name of the SMSF. No expenses of a personal nature can be paid by the fund.
11. Assemble your benefit payments documentation
Acquisition prices of assets, such as transfers of property, must be at market value, otherwise non-arm’s length income (NALI) provisions may apply. These provisions ensure assets not acquired at market value will be subject to tax on income (and any future realised capital gains) at the top marginal tax rate, irrespective of whether the fund is in pension mode. The ATO is also targeting non-arm’s length expenses; whereby a related party provides a service to their SMSF and does not charge the fund a commercial rate regarding the expense.
Make sure documentation relating to a benefit payment (lump sum or pension) is in place. Pensions must be paid in cash. Lump sums can, however, be paid in-specie. At this stage, if you have paid more than your reduced COVID-19 minimum, you cannot refund the excess back to your fund.
12. COVID-19 documentation requirements: Pension reduction
8. In-house assets to be no more than 5% of overall assets An in-house asset, in general terms, is: • A loan to, or an investment in, a related party of the fund; • An investment in a related trust of the fund; or • An asset of the fund subject to a lease or lease arrangement between the trustee of the fund and a related party of the fund.
In-house assets cannot be more than 5% of the fund’s total assets and are measured on 30 June each year. Ordinarily, the trustees would need to put in place a rectification plan to bring the in-house asset back to within the 5% limit by 30 June, 2021. COVID-19 may mean funds with in-house assets breach the limit, so the ATO has stated they may not take any compliance action if the rectification plan is not executed by 30 June, 2021. The plan would still need to be in place, however, and this is something the auditor is going to want to see.
9. Check the contribution restrictions The types of contributions an SMSF can accept are restricted by several factors: • The age and employment status of the member; • The amount of contributions, known as the contributions cap; and • The member’s total superannuation balance on 30 June of the previous financial year (affecting the member’s eligibility to non-concessional contributions, spouse contributions and government co-contributions).
Trustees need to document a member’s decision to take the reduced pension minimum. The auditor will require this to see why the ordinary minimum was not drawn from the fund in the 2020 financial year.
13. COVID-19 documentation requirements: Rent relief The ATO and the auditor will not take compliance action where an SMSF landlord gives a related party tenant rent reduction in 2020 and 2021 financial years. However, the rent relief must be due to the impact of COVID-19 and must be on arm’s length terms.
14. COVID-19 documentation requirements: Early access to super This is the $10,000 tax-free lump sum payable to fund members who have been adversely impacted by COVID19. It is a self-assessed lump sum, but make sure you are eligible for the payment, as the ATO will vigorously police this scheme and severe penalties apply to those who abuse it. Documentation that shows a loss of employment, or a reduction in earnings, will be important for the auditor to verify accessibility to the scheme. Nicholas Ali is executive manager – SMSF technical support at SuperConcepts.
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SMSFs
Planning for your clients in retirement BY AIDAN GEYSEN
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It is important for advisers to understand and educate their clients on how they can best put their self-managed super fund to good use in retirement.
Fact: retiree clients play a substantial role in self-managed superannuation fund (SMSF) planners’ practice, typically comprising over half of their total SMSF client base, according to the annual Vanguard/ Investment Trends 2020 SMSF report. Also another fact – retirees are one of the most impacted groups in today’s low yield and high volatility investing environment. With those two facts in mind, this report offers some interesting insights into this challenging task faced by today’s advisers, taking a deep dive into how SMSF planners are working with retirees with self-managed funds and the most popular strategies employed to assist investors in this sector. One of the key findings of the report was that SMSF planners are seeing longevity risk and generating sufficient income as their primary challenges when servicing their retiree clients – correlating with the challenging investment environment they are operating in. A vast majority (73%) of these advisers, felt there is a lack of suitable products in the Australian marketplace to assist with these issues. So how are advisers preparing their SMSF retirees for their drawdown years?
Insights on drawdown One of the critical tasks for an adviser with retiree clients, is advising on their draw down strategy, helping to ensure the money doesn’t run out too soon. The average age of retirees in this research was 69, with average accumulated assets of $1.8 million, and an average pre-tax drawdown amount of $70,000 per annum. It was no surprise the research reported
that when determining a draw down strategy for their SMSF retiree clients, a planner’s primary consideration typically starts with their client’s lifestyle, with 70% of advisers reporting they review what their client needs to maintain their lifestyle. Also taken into account widely is the minimum compulsory rate the client has to draw out due to SMSF rules – with 57% of planners factoring this in. There were two drawdown methods which the majority of advisers employ. The most popular, employed by just over half of advisers surveyed, was the bucket approach. This was described as splitting assets into long term and short-term buckets. Some 53% of advisers used this method with retired clients. The ‘income from investments’ approach was advised by 39% of advisers with retiree SMSF clients, described as using income from their investments to cover withdrawals. This strategy suggests that, by only spending the income that has been paid out, the underlying assets are not touched, which means that the strategy should last forever, or at the very least, outlast your retirement. However an income strategy, in particular in the current low yield investment environment, can lead to an alteration of the risk profile of the investor’s portfolio, due to the equity heavy exposure needed to yield enough income to suit investor lifestyles. In fact, Vanguard research suggests while back in 2013 an investor following the 4% spending rule could have used a diversified portfolio of 50% equities and 50% bonds to get that 4% yield. Today that investor would have had to shift their allocation to 100% equities to get the same yield and so the risk has almost doubled.
An alternative method – the total return approach coupled with a dynamic spending strategy So how can advisers implement a retirement income strategy that will support a client’s lifestyle but not create an overreliance on income such as dividends? This is where the total-return approach – a strategy that looks at all sources of return from your portfolio, both income and capital – comes in handy. This approach first assesses an individual or household’s goals and risk tolerance, and sets the asset allocation at a level that can sustainably support the spending required to meet those goals. Unlike an income-oriented strategy which generally utilises returns as income and preserves capital, the totalreturn approach encourages the use of capital returns when necessary. So, during periods where the income yield of a portfolio falls below an investor’s spending needs, the capital value of the portfolio can be spent to make up the shortfall. As long as the total return drawn from the portfolio doesn’t exceed the sustainable spending rate over the long term, this approach can smooth out spending during the volatile periods for markets which inevitably occur. This approach can also require the discipline to reinvest a portion of the income yield during periods where the income generated by the portfolio is higher than the sustainable spending rate – something that can require the valuable guidance provided by an adviser. And while capital returns – best
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SMSFs
represented by the price movement of shares – can be a volatile component of this strategy, taking a long-term view is paramount. A total return approach separates the spending strategy from the portfolio strategy and can allow for better diversification of risk across countries, sectors and securities. The other strategy that planners can employ alongside the total return approach for their clients, is addressing a client’s expenditure through the use of a strategy termed the ‘dynamic spending strategy’. Vanguard combined the two most commonly used approaches to spending – the “dollar plus inflation” rule and the “percentage of portfolio” rule – to find a middle ground. The dynamic spending strategy resolves the portfolio viability risk aspect of the former and addresses the latter’s requirement to regularly adjust one’s rate of expenditure. This strategy sets a maximum and a minimum percentage withdrawal limit for annual expenditure based on the performance of the markets and an investor’s unique goals. As a result, it allows for annual spending to adjust according to market performance while concurrently moderating fluctuations from year-to-year. This means that those who are willing to be flexible in their spending – reducing expenditure in negative return years and spending more in positive return years – materially increases their chances of the portfolio lasting the period of their retirement in comparison to the dollar plus
“SMSF planners are seeing longevity risk and generating sufficient income as their primary challenges when servicing their retiree clients – correlating with the challenging investment environment.”
inflation rule, and also lessen the large fluctuations in expenditure that would result from the percentage of portfolio rule. Vanguard investigated the results that would come from capping spending increases at 5% of the prior year’s income each year – even if a portfolio grows faster than that, and setting the floor at 2.5% irrespective of the extent of a market correction. The calculations are as follows: Take for instance an investor who determined that a sustainable spending rate of 4% was appropriate and spent $40,000 from a $1 million portfolio in year one. If in the following year, market returns were positive and the balance is now $1.1 million, a maximum of $42,000 would be spent (an increase of 5% on the prior year’s $40,000 withdrawal). Without the 5% ceiling, $44,000 would have been drawn (4% of $1.1 million). In a poor year, they should cut spending to the floor of $39,000 ($40,000 less 2.5%) but no more. Applying the ‘cap and floor’ approach to calculate each year’s of a client’s spending can reduce the variability in retirement income while balancing the likelihood that an investment portfolio can last the distance required.
Moving a client’s investment strategy to a total-return approach allows for the separation of an investment strategy from their spending strategy and enables a planner to help a retiree client better tailor their spending strategy to their retirement goals. This, alongside staying the course and taking the longer-term view instead of focusing on the current market volatility, can help ride out this health pandemic with more confidence.
Most retirees on track Finally, the Vanguard/Investment Trends SMSF report showed that 70% of planners are confident their SMSF retiree clients will not require the Age Pension in the future, particularly those who are under 65 years old. Of their clients still in accumulation phase, advisers felt that some 79% were on track to achieving their retirement goals. Some 84% of advisers reported their retiree clients were drawing down in a sustainable manner. Of the remaining 16% the most popular advice provided to these clients in order to correct this was to review their budget, expenses and spending habits, downside their home and explore the Age Pension entitlements, to return to paid employment and to use higher income generating investments. Aidan Geysen is head of investment strategy at Vanguard Australia.
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ROLLOVER THE OTHER SIDE OF SUPERANNUATION
Fighting without fighting to see off tiresome Tim Nobody has kept industry funds executives and their helpers busier than the chair of the House of Representatives Standing Committee on Economics, Tim Wilson. That would be the same Tim Wilson with connections to the Institute of Public Affairs (IPA) and the same Tim Wilson who championed the Coalition’s campaign against the Federal Opposition’s franking credits policy, including controversially utilising a Parliamentary Committee of Inquiry, something which some have suggested helped Tim’s relative, Wilson Asset Management boss, Geoff Wilson. So, anyone who visits the website of Wilson’s committee will note that he has been prodigious in using its Review of the Four Major Banks and Financial Institutions to place questions on notice interrogating industry superannuation funds about almost every facet of the operations, including any cross-overs which may have occurred. So far as Rollover can tell, Wilson’s efforts have uncovered some interesting detail but nothing particularly juicy about the industry funds, but what has particularly taken Rollover’s eye is the manner in which IFM Investors has seen him off by adopting the old Bruce Lee kung fu tactic of “fighting without fighting”. Apart from telling Wilson that many of his questions are outside the committee review’s terms of reference, it has answered most of his inquiries without telling him anything he probably did not already know.
JUMPING THE GUN ON ANNOUNCING AN ENGAGEMENT Rollover believes that its just common knowledge that politics and ego are part and parcel of any merger process between superannuation funds. And so whenever Rollover hears about a merger between funds he expects that messaging will reflect at least some ego and a good deal of politics. And such proved to be the case with respect to the putative merger between NGS Super and Catholic Super with Catholic Super’s chief executive, Greg Cantor, appearing to have surprised his friends at NGS Super by the alacrity with which he
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decided to announce the merger to the always hungry media. Rollover gathers that while the guys at NGS Super were a bit miffed, they were happy to go along with the early-than-anticipated announcement on the basis that such events are all part and parcel of superannuation fund marriages. From where Rollover sits, the merger looks like one of the more sensible to be announced in recent times given that NGS Super covers those working in non-Government schools, while Catholic Super covers those working in the Catholic non-government schools system. What can possibly go wrong?
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ASFA, Annastasia, borders and vaccines Rollover is offering a big shout out to Association of Superannuation Funds of Australia chief executive, Dr Martin Fahy, for his continued optimism with respect to his organisation’s national conference. Anyone making inquiries about the conference will find that it is still scheduled to held from 3-5 February in Brisbane – something which is probably already giving rise to some raised eyebrows amongst those who might or might not attend the event. The last time Rollover looked Queensland Premier, Annastasia Palaszczuk was still holding firm on keeping the border closed to almost anyone living south of the Tweed River and, so far as anyone can tell, there is not likely to be a COVID-19 vaccine available in Australia until perhaps the second half of 2021, if then. So as Rollover has asked before, what do the people at ASFA know that others don’t know and why do they remain optimistic? Rollover’s advice to ASFA is that they should do what everyone else has so far done, accept the inevitable and hold a virtual conference.
F IND U S O N
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FE fundinfo Crown Ratings
COVID-19 IMPACTS WINNERS AND LOSERS IN LATEST CROWN RATINGS REBALANCE In one of the first full-market assessments since the start of the COVID-19 pandemic, the latest FE fundinfo Crown Ratings rebalance has revealed a picture of outcomes driven as much by luck as strategy, Mike Taylor writes. THE IMPACT OF the COVID-19 pandemic and how markets and sectors sought to deal with it has proved crucial to determining the winners and losers in the latest rebalance of the FE fundinfo Crown ratings with March representing the inflection point at which normally reliable strategies fell short while
other, highly-specific strategies paid dividends. The result has been that highlyspecific strategies such as the Atlas Trend Online Shopping Spree fund have gone from being a relative cellar-dweller to being a 5 Crown fund on the back of returning 44.65% over the three years to 30 June, 2020, as it surfed the wave of
METHODOLOGY FE fundinfo Crown Fund Ratings are a quantitative rating determined using FE fundinfo’s performance scorecard process which analyses a fund’s performance over the last three years. The score is made up of three components – alpha, relative volatility, and a consistently good performance. The funds examined were within the Australian Core Strategies universe and had at least a three-year track record. The funds are assigned ratings based on their total scores, according to the following distribution: • The top 10% – 5 FE fundinfo Crowns; • The next 15% – 4 FE fundinfo Crowns; • The next 25% – 3 FE fundinfo Crowns; • The next 25% – 2 FE fundinfo Crowns; and • The bottom 25% – 1 FE fundinfo Crown.
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consumers turning to online shopping to meet their needs. The inverse of this phenomenon is that normally reliable strategies such as that pursued by the Legg Mason Martin Currie Real Income Fund struggled amid the market disruption which saw funds in almost every sector take a hit. As we report elsewhere in this coverage of the Crown Ratings, virtually all asset classes took something of a hit with equity, bond and multi-asset sector managers all finding themselves in 1 Crown territory. However, while virtually every sector was adversely affected in one way or another, the global small and mid-cap equities sector did better than most, with the global equity sector also doing reasonably well. What also became evident from the latest Crowns rebalance is that the larger investment houses have fared comparatively well in terms of 5 Crown ratings largely because of the breadth of
their offerings with Colonial First State Global Asset Management (now First Sentier) receiving nine 5 Crown ratings, while both IOOF and Macquarie had 10 5 Crownfunds each. Many portfolio managers within the funds acknowledged that alongside strategy there had been an element of luck, particularly in the crucial period between March and 30 June. That was certainly acknowledged by Atlas Trend founder and chief executive officer, Kevin Hua, who said the fund had actually benefitted from the COVID-19 pandemic because of the drive towards online shopping, particularly during lockdown. “Lately, the fund has killed it because of COVID-19 and the thematic that people will shop online whether it is out of desire or necessity,” Hua said. “There are names like Amazon, Walmart and Target that have benefitted from COVID-19.”
3/09/2020 10:37:07 AM
22 | Money Management September 10, 2020
FE fundinfo Crown Ratings
WHICH SECTORS PRODUCED THE MOST 5 CROWNS? THE GLOBAL SMALL and mid-cap equities sector has the greatest percentage of 5 Crown funds in this edition of FE fundinfo Crown ratings, with three of the 22 funds in the sector (13.6%) holding the highest honour. The three funds that held 5 Crowns were the Bell Global Emerging Companies, Ellerston Global Mid Small Unhedged and Prime Value Emerging Opportunities funds – all of which retained their status during the rebalance. The global equity sector had the most 5 Crown funds overall with 26 out of the 260 funds receiving 5 Crowns. While it had 25 funds in the last rebalance, only 13 retained their position this time round. Three of those came from Zurich – the Concentrated Global
Growth, Global Growth Share Scheme and Unhedged Global Growth Share Scheme funds. The other 5 Crown funds in the global equity sector were AtlasTrend Big Data Big, Carnegie Worldwide Equity Trust, CC Marsico Global, Custom Portfolio Solutions Global Growth, Hyperion Global Growth Companies, Insync Global Capital Aware, Intermede Global Equities, Legg Mason Martin Currie Global Long-Term Unconstrained, Magellan Global and T. Rowe Price Global Equity. Under the FE fundinfo Crown Rating methodology, the top 10% of funds regardless of sector were awarded 5 Crowns. Six other sectors achieved having over 10% of its funds being in the 5 Crown category: mixed asset – growth (12.87%), mixed
asset – flexible (12.12%), global property (12.07%), mixed asset – aggressive (11.48%), fixed interest inflation linked bonds (11.11%) and Australia small and mid cap equity – Australia small/mid cap (11%). In the mixed asset – growth sector, 13 of the 101 funds held 5 Crowns with 11 of those retaining them from the last rebalance in March. IOOF had four funds which retained 5 Crowns – the MultiMix Balanced Growth, MultiMix Growth, MultiSeries 70 and MultiSeries 90, while BlackRock had three which were the Scientific Diversified Growth, Scientific Wholesale Diversified Growth and the Tactical Growth fund.
In the mixed asset – flexible sector, there were 66 funds in total with eight holding 5 Crowns. Only one of those funds, the BT 1960s Lifestage fund, retained its position as the rest were upgraded. BT’s four other Lifestage funds, covering the 70s-00s, were downgraded from 5 to 4 Crowns. By Chris Dastoor
FUNDS THAT JUMPED FROM THE LOWEST RATING TO THE HIGHEST RATING THERE HAVE BEEN seven funds that have made drastic performance improvements since the last FE fundinfo Crown Fund Rating rebalance by receiving a 5 Crown rating in June, up from a 1 Crown rating last December. The funds were APSEC Atlantic Pacific Australian Equity, Atlas Trend Online Shopping Spree, BlackRock Concentrated Industrial Share, Legg Mason Martin Currie Tactical Allocation, Macquarie Capital Stable,
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Pengana International Ethical, Reitway Global Property Portfolio. The Atlas Trend Online Shopping Spree fund over the three years to 30 June, 2020, returned 44.65% and the fund’s founder and chief investment officer, Kevin Hua, said the fund had actually benefitted from the COVID19 pandemic. Atlas looks to set up funds that focus on big trends and thematics that were structural in nature and ecommerce and online shopping was one of them. The Online Shopping Spree fund was launched in 2015 when 8% of global sales were online and now that had risen to mid-teens. Since the fund’s inception to 31 July, 2020, it has returned 77.76%, according to FE Analytics. “Lately, the fund has killed it because of COVID-19 and thematic that people will shop online whether it is out of desire or necessity,” Hua said. “There are names like Amazon, Walmart and Target that have benefitted from COVID-19.” The fund, since the start of the year has returned 17.2% Hua said what had taken the team by surprise was the adoption of moving to online
sales from traditional offline stores like Walmart and Target. “They’ve been able to grow online sales pretty aggressively and see it as a real growth part of the engine of the business and we bought the names hoping it would happen,” he said. “We’ve been pleasantly surprised by the speed of change of these businesses especially since Walmart is a massive business. The fact that they’ve turned their business into really a partly online business has been pretty extraordinary over the last five years.” During the global sell-off induced by the pandemic in March, Hua said the fund did not change much of their allocations as they picked positions for the long-term. However, the fund trimmed some positions in Amazon and Apple. “One of the challenges going forward are valuations in terms of understanding how some of these valuations are going to be justified,” he said. Looking towards the future, Hua said there were pockets of opportunities in more bespoke names focused on apparel, online food delivery, online streaming, and products of that nature. By Jassmyn Goh
3/09/2020 12:14:15 PM
September 10, 2020 Money Management | 23
FE fundinfo Crown Ratings
CROWN RATING DOWNGRADES IRRESPECTIVE OF ASSET CLASS NO ASSET CLASS was exempt from poor performance in this edition of the FE fundinfo Crown Ratings with equity, bond and multi-assets sectors all seeing high volumes of 1 Crown-rated funds. Within the Australian Core Strategies universe, the worstaffected sectors were both mixed asset ones with the mixed asset – moderate and mixed asset – cautious sectors both seeing over 40% of their funds receive a 1 Crown rating. In the mixed asset – moderate sector, 55% of funds received a 1 Crown rating. There were 65 funds in this sector and 36 funds
were only rated with 1 Crown. There were seven funds which were downgraded from 2 Crowns to 1 but the majority had retained their 1 Crown rating. The downgraded funds were Optimix Wholesale Moderate Trust, AXA Generations Defensive, Advance Moderate Multi Blend, Russell Conservative, BT Wholesale Multi-manager Conservative, Perpetual Select Investments Diversified and AMP Experts Choice Conservative. In the cautious sector, some 41% of funds received only 1 Crown and the three funds which were downgraded were MyNorth Index Defensive, Bendigo Wealth
Defensive Wholesale and Onepath Wholesale Capital Stable Trust. The performance of these two sectors compared to just 6% of funds in the mixed asset – aggressive sector receiving a 1 Crown rating and 7% in the mixed asset – growth sector, indicating investors were being penalised by remaining in the balanced or cautious version which is often a default option for investors. Meanwhile, the Australian equity income sector saw 44% of funds receive a 1 Crown rating and the diversified credit sector had 40% of its funds with 1 Crown. The diversified credit sector included two funds, Bentham
High Yield and PIMCO Capital Securities Wholesale, which were downgraded from 5 Crowns to 1. There was just one fund in the Australian equity income sector which received a downgrade in this rebalance. This was the IML Equity Income fund which had previously been rated as 2 Crowns in the previous edition of the report. The sector with the highest volume of 1 Crown funds was the global equity sector at 58 funds, however this only represented 22% of the total sector. By Laura Dew
FROM FIRST TO WORST THERE ARE FOUR funds that have gone from 5 Crowns to just 1 in the latest rebalance of the FE fundinfo Crown ratings. BMO LGM Global Emerging Markets, Bentham High Yield, Legg Mason Martin Currie Real Income and PIMCO Capital Securities Wholesale all saw the significant drop-off. Two of the funds – Bentham’s and PIMCO’s – sat in the diversified credit sector, while the BMO fund sat in the emerging markets equity sector. The Legg Mason fund was an Australian equity fund, but it sought to provide a growing income stream by investing diversified assets such as Australian real estate investment trusts (AREITs), utilities and infrastructure. Its strategy was built around listed real assets sustaining dividends, matching the cost of living and being less volatile than the broader equity market and was subsequently hit hard by the reduction of dividends due to the COVID-19 pandemic. Martin Currie chief investment officer, Reece Birtles, and portfolio manager, Will Baylis, had
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previously written to Australian Securities Exchange (ASX) companies reminding them of the “power of dividends” for retirees. “In such difficult economic times, and with an uncertain market outlook, the benefits of both dollar income and franking credits to retirees cannot be underestimated,” they said. “Retirees are key beneficiaries of these dividends, and they have worked hard to have sufficient capital to fund their own retirement.” However, the Real Income fund had noted that it was wellpositioned to meet the challenges currently faced in the market. “During the COVID-19 related broad market sell-off in March, real assets saw unprecedented GFC-like [Global Financial Crisis] market falls and were, unusually, one of the weakest sectors,” the fund said. “However, given that real assets are used every day – even in a recession – and form the tangible building blocks of society, they are the first companies to benefit as State and Federal Governments ease restrictions.” By Chris Dastoor
3/09/2020 1:18:52 PM
24 | Money Management September 10, 2020
FE fundinfo Crown Ratings
CFSGAM SEES NINE FUNDS GIVEN TOP CROWN RATING THERE HAS BEEN a significant turnaround for Colonial First State Global Asset Management (CFSGAM) with nine of their funds receiving a 5 Crown rating compared to just three previously. In April, only the CFS Wholesale Global Credit, CFS Colonial First State Wholesale Diversified fund and CFS Colonial First State Wholesale Balanced fund received 5 Crowns. However, in August’s ratings, the nine funds, representing 19% of total CFSGAM funds, were: CFS Wholesale Global Emerging Markets Sustainability, CFS Colonial First State Wholesale Diversified, CFS Wholesale Australian Share, CFS Colonial First State Wholesale Global Property Securities, CFS US Select High Yield, CFS US Short Duration High Yield, CFS Colonial First State Wholesale Balanced, CFS Colonial First State Wholesale Concentrated Australian Share and CFS High Quality US High Yield.
The CFS Wholesale Global Credit fund was downgraded from 5 Crowns to 2. Perry Clausen, global chief investment officer at First Sentier Investors (formerly known as CFSGAM) said: “Our high-quality specialist investment teams share a philosophy of active investment, integrating responsible investment principles, and seeking to deliver superior, riskadjusted returns over market cycles with lower volatility. “Strong downside capture is an important aspect and it is during periods of higher market volatility, as we have experienced more recently, where our investment teams and strategies have pleasingly set themselves apart from others.” Both IOOF and Macquarie had 10 5 Crown-rated funds each, up from nine and six in April’s survey respectively. These represented 20% and 14% of their total rated funds. Legg Mason had five funds which were 5 Crown-rated, up from three in April.
Hyperion Asset Management saw all three of its funds receive 5 Crown ratings with two receiving an upgrade. The Hyperion Australian Growth Companies fund was upgraded from 3 to 5, the Small Growth Companies was upgraded from 4 to 5 and the Global Growth Companies fund retained its 5 Crown rating. Mark Arnold, chief
investment officer at Hyperion, said the company had focused on investing in modern businesses with a strong value proposition. He highlighted these companies had been growing their market share during the pandemic which had helped the funds’ performance. By Laura Dew
WHICH GROUPS ONLY HAVE ONE CROWN? THERE ARE 18 management groups that saw all of their funds only receive 1 Crown in the August rebalance of the FE fundinfo Crown ratings. PM Capital Limited (five), Allan Gray (three), BNP Paribas Asset Management Australia Limited (two), Mason Stevens Asset Management (two) and Orbis Investment Management (two) all had multiple 1 Crown funds. Both PM Capital and Allan Gray had funds which were previously rated as 4 Crowns but had now been downgraded to 1. These were the PM Capital Long Term Investment and Global Companies funds and the Allan Gray Australia Equity fund. The PM Capital Australian Companies, Asian Companies and Allan Gray Australia Stable fund retained their 1 Crown rating from the previous edition while the PM Capital Enhanced Yield and Allan Gray Australia Balanced were both rated for the first time.
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One of the funds dismissed the negative drop in the rebalance, noting its investment horizon aimed for five to seven years and that was the more relevant window to view performance through. The 13 companies that had its single fund rated 1 Crown were from Alluvium Asset Management, Altrinsic Global Advisors, Atlas Funds Management, Bateau Asset Management, Gleneagle Asset Management,
JBS Investments, LGM Investments, Life Settlements Funds, MacKay Shields, Morphic Asset Management, Optimal Fund Management, Sandon Capital and Supervised Investments Australia. Colonial First State (CFS) had the most one Crowns with 18, but that only comprised a fifth (21.4%) of its total funds. CFS declined to comment on performance but said in a statement: “CFS offers a very wide range of investment options for its members to choose from. “Each option has its own characteristics and will be impacted by markets in unique ways which is why it’s important to consider the full spectrum CFS offers.” OnePath and AMP Capital both had 17 funds which compromised 37.7% and 19.5% of its total range, respectively. By Chris Dastoor
3/09/2020 10:38:17 AM
BE BETTER INFORMED:
FE fundinfo Crown Fund Ratings are highly respected and widely recognised across the UK, European, and Asian markets. Now, available in Australia in partnership with Money Management, FE fundinfo’s quantitative ratings are designed to help advisers identify funds which have displayed superior performance in terms of stockpicking, consistency and risk control.
A one Crown rating represents a fund that falls into the fourth/ bottom quartile
Two Crowns demonstrates funds that place in the third quartile
Three Crowns demonstrates funds that sit in the second quartile
Four Crowns are given to funds that have placed between 75-90% of their sector peers
Five Crowns are awarded to funds that place in the top 10%
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2/09/2020 2:28:44 PM
26 | Money Management September 10, 2020
FE fundinfo Crown Ratings
SEVEN FUNDS CONSISTENTLY GIVEN TOP RATING WHILE HIGH-PERFORMING FUNDS over a period of time look great, there are few funds that can consistently outperform and there are only seven funds that have been given a 5 Crown rating in every ratings rebalance since August 2017. The funds are Macquarie Australian Small Companies, Cromwell Phoenix Opportunities, IOOF MultiMix Growth, IOOF Balanced Investor Trust, Crescent Wealth Property Retail, Legg Mason Western Asset Conservative Income X, and IOOF Strategic Cash Plus. Two of the seven funds were in the Australia small/mid cap sector with Macquarie Australian Small Companies performing best at 44.4%, and followed by Cromwell Phoenix Opportunities at 28.4%, over the three years to 30 June, 2020. The Macquarie Australian Small Companies latest factsheet said its three largest contributors were mineral companies as gold and copper prices rallied. “The recovery in the Australian and global markets continued throughout July, with some June
quarter data beating expectations and some positive results regarding the early-stage development of a COVID-19 vaccine,” it said. “Despite this, economic uncertainty increased as many economies, including the US and Australia, struggled to contain a resurgence in case numbers and
enforced unprecedented lockdown measures in areas deemed to be hotspots.” Crescent Wealth Property Retail fund was the only consistently top-rated property fund which returned 16.98%. Two were under the cash enhanced – Australian dollar sector with Legg Mason Western Asset
Conservative Income X returning 6.39% and IOOF Strategic Cash Plus returning 5.35%. IOOF’s MultiMix Growth fund returned 23.7% and the third IOOF fund that had been consistently top rated was its Balanced Investor Trust fund at 20.3%. By Jassmyn Goh
Chart 1: Funds that have consistently been top rated
Source: FE Analytics
FROM NOTHING TO SOMETHING THERE ARE 10 funds that have received 5 Crowns in their very first rating in the latest FE fundinfo Crown rating rebalance, having previously held an insufficient track record to qualify for a rating. Colonial First State (CFS) and Simplicity both had three newly-rated 5 Crown funds, along with Eley Griffiths Group Emerging Companies, GQG Partners Global Equity, Legg Mason Brandywine Global Income Optimiser, and Perennial Value Microcap Opportunities Trust. The three CFS funds were the CFS High Quality US High Yield, US Select High Yield and US Short Duration High Yield funds. Simplicity, which was a NZ firm that offered KiwiSaver accounts as well as managed funds, saw its three mixed asset funds – Growth, Balanced and Conservative – all receive 5 Crowns. It was a good year for the Legg Mason Brandywine funds, which also saw the Global Opportunistic Fixed Income and Global Fixed Income Trust funds nominated for the Money Management Fund Manager of the Year awards in
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the global fixed income category. Brian Kloss, Legg Mason Brandywine Global Income Optimiser portfolio manager, said the success of the fund could be attributed to a differentiated approach that sought to provide attractive income, capital preservation and growth over a market cycle for strong riskadjusted total returns. “Last year, the fund had been positioned for global growth with a focus on high real-yielding opportunities, including select emerging markets, peripheral European countries, and commodity sensitive economies and their currencies,” Kloss said. “Given low real yields and increasing price risk, we saw little value in core developed markets, believing these sovereign bonds were trading at a significant premium to intrinsic value. “We also were positioned for longer-term weakness in the US dollar.” Laird Abernethy, GQG Partners Australia and New Zealand managing director, said the outperformance of the GQG fund was due to the
team developing accurate and differentiated insights into companies which provided the best platform to generate alpha. “To develop these insights we have built an analyst team that fosters independent thinking,” Abernethy said. “In addition to traditional analysis we have analysts with investigative journalist backgrounds that help source the multiple perspectives that galvanise our differentiated insights.” Andrew Smith, Perennial head of smaller companies and microcaps, said the advantage of the Perennial Value Microcap Opportunities fund was it covered stocks missed by the broader investment community. “Marley Spoon is a good example which we added to the portfolio in the sharp March sell-off [and] Genetic Signatures is another which we added late in 2019,” Smith said. By Chris Dastoor
3/09/2020 1:17:56 PM
September 10, 2020 Money Management | 27
Active management
TURNING THE TIDE FROM PASSIVE INVESTMENT
As investment management firms seek to differentiate themselves to attract clients, Julian Morrison explores what steps firms can take to stop the flood of clients to passive management. EVERY INVESTMENT MANAGEMENT firm claims to be different from its competitors. They have a superior investment team, or an innovative investment strategy, or both. But all too often these claims fail to live up to expectations. The superior investment team and innovative strategy fail to deliver the kind of results that clients expect. Over the past 15 years, 84% of large cap Australian equity active managers underperformed the ASX 200 benchmark. This shouldn’t be a surprise in an
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environment where herd behaviour is prevalent and where fund managers tend to hold similar positions. In some cases, the belowaverage performance results from being positioned very similarly to the market index while charging an active fee. If so, underperformance may be the most likely outcome – even over the longest time periods. Some investors may realise that this isn’t worth the fee and instead opt for a cheap, passive approach to investing. That seems fair enough. Why pay for something that isn’t offering you
a sustainable advantage over passive investing? How can an active fund manager address this situation? By offering an investment approach that separates it from the herd and offers clients something distinct. If it is not distinct from passive investing, it should be available very cheaply. The approach also needs to be transparent, so investors understand what the manager is doing and are then able to invest with both money, and trust. Lastly, if the approach is both distinct and transparent, it cannot have a sustainable
advantage unless there is a barrier to entry. The investment approach must therefore be difficult to replicate in order to maintain its advantage. Many people are uncomfortable with stepping outside their investment comfort zone and truly being different, typically because of poorlyaligned incentives and investment psychology. This is precisely what allows a contrarian approach to be difficult to replicate and to maintain distinct advantages Continued on page 28
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28 | Money Management September 10, 2020
Active management
Continued from page 27 over more pedestrian strategies in a competitive market. Our research has found that four key principles can foster the kind of outside the box thinking that leads to innovative and contrarian investing and overcome any barriers and challenges fixed in the minds of investors.
ALIGNMENT OF INTERESTS For investors, alignment of interest is critical when selecting a fund manager or adviser to work with. This alignment of interest between fund manager and client ensures that decisionmaking focuses on investment outcomes, rather than being driven by self-interest. There has been plenty of discussion around fund manager career risk (the threat of being fired by a client or employer for underperformance versus peers). The risk is that the manager places their best interests – keeping their job – ahead of their clients’ best interests which revolve around long-term investment outcomes. The desire for job security limits the investment approach. This can lead to scenarios such as a fund manager failing to proceed with an unpopular but outstanding investment opportunity because it carries too great a risk of looking wrong and increases the likelihood of them losing their job or client. It encourages career-safe decisions ahead of the best investment decisions. But the irony is that while appeasing clients and limiting their career risk, managers ultimately deliver an average
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performance, destroy their value proposition and they may well get fired anyway. Simple measures can create an alignment of interest. Employee ownership, co-investment and performance fees can play powerful roles. Employee ownership by portfolio managers should be specific to the strategy they are responsible for so that alignment is not diluted. Co-investment in the fund, or having ‘skin in the game’, can further reassure investors. Put simply, investors know that if the fund underperforms and loses money for them, the portfolio managers themselves also lose out. Performance fees are another way of aligning interest. As long as they are structured fairly, performance fees can create a much stronger link between what investors pay and the performance they get in return. In turn, portfolio managers do better when their clients do better.
THINKING LIKE A LONGTERM BUSINESS OWNER The second principle is to think like a long-term business owner. It’s a simple concept but one
that is often lost on investors who focus on short-term-profit seeking and who are susceptible to ’noise’. As a result, rigorous valuation and the risk of overpaying while investing don’t get appropriate attention. Of the top 50 members on last year’s Financial Review Rich List, that included business owners like Anthony Pratt, Gina Rinehart, Harry Triguboff, Hui Wing Mau and Scott Farquhar, 70% of members held more than half their money in a single business. Their wealth was built by seeing a long-term business opportunity and by taking equity, or founding capital, in that business for a bargain price. Those people recognised the prospects of the business opportunity when the broader investment community didn’t. They bought their equity cheaply and saw it multiply many times over the long term. The same principle can apply to investing. One may acquire equity in existing businesses at a bargain price when they are out of favour with the majority of the investment community and therefore competition to buy the shares (and the share price
itself) are very low. But investors often prefer the most popular shares, anticipating a near-term rise in price, without the mindset of a long-term business owner. Demonstrating this, the average holding period of shares listed on the Australian Securities Exchange (ASX) is typically only 12 to 15 months. The constant flow of information on companies, markets and economies also creates confusion and ‘noise’, making it harder for investors to make rational decisions. A business owner shuts out the noise – investors should do the same. An investment represents investment in a business and the same diligence should apply as when purchasing a private business. The relationship between price and value, and the risk of overpaying, needs to be assessed and a business owner should never forget that.
AVOIDING OVERCONFIDENCE AND ACCEPT UNCERTAINTY Thirdly, it’s important to avoid overconfidence and to accept uncertainty. Commonly-held beliefs and intuitive assumptions
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September 10, 2020 Money Management | 29
Active management
about the art of investing can lead to overconfidence in interpreting information. A willingness to rely on accepted ‘truths’ is fraught with danger, while the level of uncertainty in investing is often underestimated. A number of hypotheses have become embedded in investment thinking around expected returns, yet there is ample evidence to contradict them. A flawed bias in expected returns can lead to overpaying for investments and a permanent loss of capital. One example is that a reasonable expectation for real (after inflation) long-term average returns is 4% to 6% per annum. Many of the assumptions in finance are based on studying the past 100 years in the hope that it represents normality. The truth is that we simply do not know if this is the case. Another hypothesis is that broad share markets always grow, in real terms, given time. This may not be true either. Between 1900 and 2000, the median real dividend growth rate across 16 developed markets was 0.7% – and this excludes Argentina and Russia that were excluded from the survey in ‘Triumph of the Optimists’ (Princeton University Press) because investors lost all their capital in these markets. The belief that a 20-year perspective is enough when investing in the share market also doesn’t hold true. A look at the S&P 500 over time shows roughly three cycles over 95 years with the average cycle length being about 30 to 40 years. The 20-year perspective also doesn’t hold true for the US
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“When it comes to investments, the influence of social validation and authority can lead investors into trouble.” bond market. A 20-year perspective may be just enough to get one into trouble! Similarly, there is no hard and fast evidence to support the popular hypotheses that it is better to invest in a country with high economic growth or that high growth in an industry is good for investments. In the words of Mark Twain: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
OPPOSING CONSENSUS The final principle for contrarian investing focuses on opposing consensus. Doing the opposite of what everyone else is doing can be psychologically challenging and it can feel uncomfortable to many investors. It’s natural for humans to seek social validation to justify our decision making. We also take comfort in the perception of authority. But when it comes to investments, the influence of social validation and authority can lead investors into trouble. In October 1929, Irving Fisher was a respected economist, Yale professor and adviser to several investment trusts when he made a prediction that: “Stock prices have reached what looks like a permanently high plateau”. Shortly after that insight, the US market began a collapse of about 90% and didn’t regain its
1929 peak until 1954. An analysis by the International Monetary Fund of the accuracy of economic forecasters found they failed to predict 148 out of the past 150 recessions. Share market analysts are also good at explaining what has just happened and extrapolating that into the future but that often proves a poor predictor of the future. Close to home we can look at the fall from grace of Babcock and Brown (B&B) in 2008. From the middle of 2007 until April 2008, when the first cracks began to appear in B&B, nine analysts on record had the company as a ‘buy’. By the time the first analyst broke ranks and changed that recommendation the stock had already lost more than half its value. In this case, shunning the consensus would have provided a distinct advantage. In short, you cannot do the same as everybody else and expect a better-than-average result. Contrarian investing may appear unpopular, or uncomfortable. But, ironically, it is the unpopular and uncomfortable that can make contrarian investing such a rewarding and sustainable strategy. Julian Morrison is head of research relationships and national key accounts at Allan Gray Australia.
2/09/2020 10:46:31 AM
30 | Money Management September 10, 2020
Emerging markets
THE LONG-TERM IMPLICATIONS OF COVID-19 FOR EMERGING MARKETS The consequences of COVID-19 could have long-term effects on emerging markets, writes Patrick Russel. IN THE WAKE of the global COVID19 economic slump, and associated negative impact on global supply chains, tourism, and export demand – we have seen profound central bank easing. Indeed, the breadth of central bank easing across global capital markets is totally unprecedented with a net 153 policy rate cuts in the past six months, since COVID-19 became a pandemic. As such, widespread policy rate cuts have been matched by equally aggressive bouts of money printing – referred to as quantitative easing (QE) – and new fiscal policies (including direct loans to companies, and substantially increased unemployment benefits). The aggressive policy response to COVID-19, especially QE, continues to be led by the US, Europe, Japan, and other developed markets. Away from rate cuts, emerging market (EM) policy initiatives in terms of gross domestic product (GDP) continue to be comparatively restrained. EM central banks are very mindful of potential currency vulnerabilities if they attempt aggressive QE – without reserve currencies. Additionally, many EM governments have a general commitment to conservative fiscal policy (some dictated by legislation), typically as a result of past experiences during episodes of economic/fiscal crises. This has led to a much milder monetary and
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fiscal response from EM to the economic shock of COVID-19 relative to developed markets. With limited unemployment benefits and an inability to control social distancing for sustained periods, the EM working population will go back to work almost by necessity – otherwise there is a risk of widespread civil unrest. Further, given EMs much younger populations (median age 28), the death rate would seem to be materially lower in any case at this stage, given approximately 97% of COVID-19 deaths occur in people aged over 55 years and 75% above 70 years. Accordingly, despite rising cases and tragic deaths, lockdowns have started to ease across most EM countries – even the worst hit COVID-19 country, Brazil, announced a winding back over the past two months. Whilst we do not rule out the possibility of national lockdowns recurring (under second wave risks) – our base case for EMs is a continuance of surgical/localised lockdowns to try and contain the virus – which have a much lower negative economic impact.
LONGER-TERM IMPLICATIONS FOR EMS In our view, the long-term COVID19 implications on the EM will be material and we see a number of structural/geopolitical changes:
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September 10, 2020 Money Management | 31
Emerging markets Strap Chart 1: G20 Fiscal Response to COVID-19 (% of GDP) 14
2. Healthcare – increased focus on prevention Increased focus on hygiene will see minimum standards raised, in both advanced and emerging economies. This is likely to see a permanent upshift in the annual demand for preventative healthcare items such as rubber gloves. Prior to COVID-19, India used just four gloves per capita per annum which has now increased to 30 gloves per capita per annum, which translates to 30 billion pieces per annum, and adds nearly 10% to incremental global demand from just one country. We note that following SARS in 2003, the ongoing normalised annual rate of growth was in fact higher than pre-SARS. We see this recurring under COVID-19. The Malaysian rubber glove companies have been a long-standing core holding in our EM strategy. They remain a superb ‘hedge’ should the global pandemic worsen, and we believe the market is still under-estimating the earnings upside from the sector. 3. Travel – will be reduced for some time International air transport, which has been severely impacted by travel bans, has historically recovered to normalised growth within a year after a pandemic. However, given the severity of COVID-19 and its true global impact,
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12
10
INDIA
MEXICO
RUSSIA
KOREA
TURKEY
INDONESIA
SPAIN
FRANCE
UK
CANADA
JAPAN
CHINA
US
2
AUSTRALIA
4
BRAZIL
6
ITALY
SOUTH AFRICA
8
GERMANY
1. The continued rise of technology COVID-19 has accelerated the adoption of technology across a range of applications and industries. Consumers and corporations are being forced to adopt technology just to survive in the current climate. By some estimates, we have seen the equivalent of three to five years of digital disruption in just three to five months and we believe we are still in the early stages of this megatrend. While e-commerce is an obvious play on this theme, we also see opportunities in the leading EM semiconductor, memory, factory automation, IT services, and telco companies.
0
Source: BCA, IMF
we expect travel to be significantly curtailed for some time. While there are selective opportunities in quality monopoly assets which we see as offering favourable risk-reward, our view on the transport sector more generally is that it will remain challenged for some time to come. 4. China – becoming more isolated We see COVID-19 imposing lasting damage on China – at a basic level it will make it harder for the country to attract foreign capital, and accelerate the “de-globalisation/onshoring” of supply chains that was already underway due to the ongoing trade dispute with the US. China’s loss will be Taiwan, South Korea, South East Asia and India’s gain. With further evidence of the realignment of global supply chains, there are selective opportunities across EMs that we believe will be the beneficiaries of this trend. 5. Individual emerging markets – winners and losers The EMs are not a homogeneous group and the economic and healthcare outcomes from COVID19 will vary widely. Amongst the worst-hit markets have been Brazil, Russia and South Africa, which Northcape classifies as ‘least preferred’ markets on a
top-down basis. Conversely, several markets which have had better COVID-19 outcomes, such as Taiwan, Korea, Malaysia, and Thailand, which rank amongst our ‘most preferred’ sovereigns. We also have a favourable view on markets such as India, where a lot of pain has been worn, but there is light at the end of the tunnel, and we view equity valuations as attractive.
SUMMARY In the short-term, we don’t know how COVID-19 and the capital markets impact will play out as this is tightly linked to the ‘medical outcomes’, which are nearimpossible to predict. Ultimately, we do believe that this pandemic will pass, and an effective vaccine should be found – however, it will likely be at least 24 months away. This will see economic growth for EM normalise gradually over the next two years. From a strategic investment standpoint, we believe investors need to focus on absorbing the COVID-19 growth shock and the sustained impact of the US-China tensions. Our focus is on investing in: • Companies with no or very low levels of debt; • Companies that generate strong internal free cashflows;
• Low exposure to commoditylinked companies and petrocountries (Russia and Middle East), whose prospects are tethered to China; • Sizeable underweighting of China which in our view will be the largest long-term casualty of COVID-19 and US trade/IP/human rights restrictions; • Overweight countries that benefit from foreign direct investment (FDI) pivoting from China; • Overweight in healthcare – especially preventative items; • Overweight towards selective technology and telecoms companies. From our experience, using indiscriminate sell-offs in highquality stocks to add to a portfolio is a better strategy than undertaking ‘catch-up buying’ when markets turn – because in our view the recovery will be sharply to the upside. It can be hard to stomach at the time, but the best returns will be made buying into “doom and gloom” when valuations are attractive on a long-term basis. Patrick Russel is emerging market equity strategy director, portfolio manager and analyst at Northcape Capital.
1/09/2020 5:05:40 PM
32 | Money Management September 10, 2020
Regulation
DEFENDING DIRECTORS’ DUTIES Working as a director in financial services can come with regulatory risk, writes David Court, so it is important to know how to manage those responsibilities and avoid any penalty. WHEN CONSIDERING REGULATORY compliance and enforcement in the financial services industry, it is common to focus on the entity that holds the Australian financial services licence (AFSL) and the large number of specific obligations that apply to it. However, directors of AFSL holders are also concerned to know what their own liability is if the company fails to comply with its legal obligations or the financial services business ceases to be financially viable. This article looks at what the implications of these events
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happening are for the directors and what steps they can take to put them in the best position to defend any legal claims against them that might arise. These laws apply to any director which is defined as being anyone who is formally appointed as a director (whether executive or non-executive) and also any ‘shadow’ directors – a person who is not formally a director but who acts in that position or on whose instructions or in accordance with whose wishes the formallyappointed directors or the company are accustomed to act.
DIRECTORS’ DUTIES The directors of an AFSL holder have, like the directors of any other company, the powers and duties as set out in the Corporations Act 2001 and under general corporate law concepts. These include the power to exercise all the powers of the company other than those exercisable in a general meeting of shareholders. Given the wide management powers available to directors it is not unexpected that they are also subject to a range of duties imposed by law and obligations owed to the company, the
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Regulation
shareholders and third parties such as clients or creditors. Directors’ duties include (but are not limited to): • Not to use information gained because of their position to benefit themselves or others or cause damage to the company; • Not to act recklessly or in an intentionally dishonest manner; and • To act in good faith and in the best interests of the company. These duties are fiduciary. That is, they are duties to act in the best interests of the company, rather than the best interests of the director personally. Directors must also act with care and diligence in the discharge of their duties. The standard that is applied is that which a reasonable person holding the position would apply. There is a defence to the charge that a director failed to act with due care and skill if the director shows that the board were making a business decision in the discharge of their duties. It is not necessary in order to prove a breach of duty for it to be shown that a director, in failing to perform with due care and skill, acted dishonestly, or engaged in deliberate wrongdoing or acts of what the law refers to as “moral turpitude”.
DIRECTORS’ LIABILITY The consequences of breaches of directors’ duties (against the directors personally) range from pecuniary penalties to disqualification. For example, a director who fails to exercise due care and diligence in the discharge of their duties can attract significant monetary penalties. If the company suffers damage as a result of the contravention, a court may also make a compensation order against the director. Therefore, directors may find
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themselves in a position where they have caused detriment to the company by placing the company in a position where it is at risk of adverse regulatory outcomes or claims from clients, creditors or other affected persons. Having done so, they may then be the subject of action in their personal capacities (either from the Australian Securities and Investment Commission (ASIC), liquidators, shareholders, clients or other affected persons) on the basis that they have breached their duties.
FINANCIAL SERVICES LAW ISSUES The obligations under an AFSL are personal to the licensed entity and are not directly binding on the directors. Despite the above, a breach of the financial services laws by the licensed entity could result in liability for the directors under the principles set out above. Note also that for AFSL holders that operate registered managed investment schemes and superannuation funds there are specific duties that are imposed on the directors personally. ASIC also has the power under the financial services laws to make banning orders against any person (with the directors of a non-compliant AFSL holder being an obvious starting point for ASIC) in a wide range of circumstances. Such orders prevent the person from providing financial services.
INSOLVENT TRADING* A company is insolvent if it is unable to pay all its debts when they fall due – determined on a cashflow basis. A director has a positive duty to prevent insolvent trading by the company and they face significant personal monetary and potential criminal consequences (not to mention adverse professional consequences) if they allow the
“It is inherent in the role of a director that they may attract personal liability for the legal contraventions and insolvency of the company.” company to trade whilst insolvent. The legislation requires a director of a company to prevent the company from incurring a debt if: • The company is already insolvent at the time the debt is incurred; or • By incurring that debt, or by incurring a range of debts including that debt, the company becomes insolvent, and, at the time of incurring the debt, there are reasonable grounds for suspecting that the company is already insolvent, or would become insolvent by incurring the debt. A director has a defence if it is proved that, at the time the debt was incurred, the director: • Had reasonable grounds to expect that the company was solvent and would remain solvent even if it incurred the debt; • Had reasonable grounds to believe that a competent and reliable person who was responsible for providing adequate information about the company’s solvency was fulfilling that responsibility, and the director expected that, based on the information that person provided to the director, the company was, and would remain, solvent even if it incurred the debt; • Because of illness or other good reason did not take part in the management of the company at that time; • Took all reasonable steps (such as appointing an administrator) to prevent the company incurring the debt.
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Continued from page 33 A director must ensure that proper financial records are kept by the company and take reasonable steps (ASIC’s Regulatory Guide RG 217 Duty to prevent insolvent trading: Guide for directors contains some useful practical guidance in this regard) to remain properly and fully informed about the financial affairs of the company at all times so that they can reasonably form a view about the company’s present financial viability and the impact of incurring any further debts. In a liquidation of the company, directors can be held personally liable for the unpaid debts incurred by the company whilst it was insolvent. Such amounts can be recovered as a debt due to the company (or to the relevant creditor if that creditor has brought the proceedings with the liquidator’s consent). If a director contravenes this duty then the director may also be subject to civil and criminal penalties or disqualification from managing a corporation (the operation of the insolvent trading laws have been partially suspended during the period of the COVID-19 pandemic.)
DIRECTOR PENALTIES UNDER TAXATION LAWS The directors of a company are responsible for making sure the company meets its pay as you go (PAYG) withholding and superannuation guarantee (SG) obligations under taxation legislation. If the company fails to meet a PAYG withholding or SG liability in full by the due date then the directors will become personally liable for director
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penalties equal to the unpaid amounts. Directors in this situation will receive a directors penalty notice from the Australian Tax Office (ATO) which essentially gives them three options of paying the debt, appointing an administrator or winding up the company. A director will have a defence and not be liable for a director penalty if they: • Did not take part (and it would have been unreasonable to expect them to take part) in the management of the company during the relevant period because of illness or for some other good reason; • Took all reasonable steps, unless there were no reasonable steps they could have taken, to ensure that one of the three actions described above happened.
MANAGING LIABILITIES It is inherent in the role of a director that they may attract personal liability for the legal contraventions and insolvency of the company. The risk is real and there have been high-profile cases where boards of directors have been subject to successful legal action from regulators and
shareholders (typically backed by class action litigation funders) – and a significant proportion of these have involved the financial services industry. The major risks for a director are that the company contravenes the law, is allowed to trade while insolvent or fails to discharge its taxation obligations. In each of those situations the director can be personally liable for losses incurred by other persons and can face civil and criminal penalties. In order to manage and mitigate these risks directors can take a number of actions: • Obtain directors and officers indemnity insurance cover; • Obtain indemnities from the shareholders or some other related entity of substance; • Carefully manage the company cashflow and ensure that they receive regular, up to date and reliable cash flow forecasts; • Adopt and maintain effective legal and regulatory compliance arrangements; and • Appoint an administrator to the company if it appears that it is, or soon will be, insolvent. David Court is a partner at Holley Nethercote.
1/09/2020 5:05:05 PM
September 10, 2020 Money Management | 35
Toolbox
THE GREAT CURRENCY DIFFERENTIALS There are four stark differences in the effect this year’s financial crisis is having on currency, writes Francesca Fornassi, compared to during the Global Financial Crisis. MUCH HAS BEEN written about comparisons between the Global Financial Crisis (GFC) in 2009 and that of today. Having worked in the currency markets since the late 1990s, I can see four stark differences between 2009 and 2020 and the factors influencing currencies.
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1. T HE CURRENT FISCAL EASING IS LARGER THAN IN 2009, BUT VERY DIFFERENT IN NATURE Although the size of the fiscal stimulus is likely to be more than double the stimulus implemented in 2009, its composition is going to be very different.
In 2009, public investment made up 31% of fiscal spending versus 7% now. If we exclude China, the allocation to public investment in emerging markets and developed markets falls to 1% and 0%, respectively. Even in China, the definition of ‘public investment’ has changed from
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Toolbox
Continued from page 35 projects such as transport, urban pubic facilities, water and environmental projects to ‘new infrastructure’ projects including 5G, industrial internet and data centres. Instead, the key area of focus in 2020 is supporting household revenue and businesses. This suggests that sectors and countries linked to the ‘old infrastructure’ spending, such as commodity exporters, are unlikely to experience the same bounce in 2020 or beyond that they did in the years that followed 2009.
2. T HE BROAD LEVEL OF LEVERAGE IS HIGHER Another key difference between 2009 and today is that the non-financial world has seen a notable increase in public and private debt. According to the Bank of International Settlements (BIS), in the last three years, the average leverage in the world has increased to 234% of gross domestic product (GDP) vs a figure of 205% in the three years running up to the GFC. As can be seen in Chart 1, emerging market debt has witnessed the sharpest rise from 116% to 186%, i.e. a 60% increase in leverage. This increase in leverage is in sharp contrast to early 2000 when emerging market leverage was on a declining trend. It is very likely that over the next few years we will witness a resumption of steady net downgrades as rating agencies absorb the notable further deterioration in debt dynamics that is likely to take place.
3. CHINA AND GLOBALISATION WILL PLAY A MORE MUTED ROLE IN SUPPORTING THE REBOUND Beyond the level of leverage, there has been another slow but
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steady change in the structure of the global economy that is likely to make the comparisons with 2009 more difficult. In 2001, the inclusion of China in the World Trade Organisation (WTO) gave momentum to a further shift towards globalisation, causing a boom in global trade (see Chart 2). Over this period, China’s share in global export markets rose from 2.5% in 2000 to roughly 11% in 2015, supporting a significant expansion in China’s production capacity and fuelling strong growth in commodities prices. This trend, coupled with a significant allocation to ‘old infrastructure’ spending as part of the fiscal package in 2009, supported growth in many commodity exporting countries as well as in countries that are part of the Chinese production chain, many of which are in the emerging market space. In 2020, it is unlikely that the same dynamic will play out again.
4. TREND GROWTH IS LOWER, PARTICULARLY IN EMERGING MARKETS Possibly the most important difference between 2009 and 2020 is that trend growth at the global level – which we define as the fiveyear moving average of total factor productivity (TFP) and population growth – is much lower than it was prior to the GFC (see Chart 3). At a global level, trend growth has fallen from 2.1% to 1%, due to meaningful drops in both population and TFP growth. The decline has been most aggressive in emerging markets where TFP is estimated to have fallen by 65% versus only 35% in developed markets. Although measures of TFP need to be taken with some caution, some of the declines are remarkable. TFP in Latin America appears to be negative at -1.4%. With population growth moderating from 1.2% in 2009 to 0.9% in 2019 it suggests that trend growth in Latin America is actually negative. Our sense is that in the
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September 10, 2020 Money Management | 37
Toolbox
Chart 1: BIS EM vs DM
Source: Insight Investment
absence of structural reform, these trends are unlikely to reverse, as they are likely linked to the changing role of China in the global economy and peak globalisation. Quite the contrary, the notable increase in government debt we are likely to experience in the next few years as a result of the COVID-19 crisis is likely to put further downward pressure on trend growth.
SO WHAT DOES THIS MEAN FOR CURRENCIES? Currencies tend to be driven by both cyclical and structural factors. While structural factors refer to the underlying economic factors that can be expected to lead to better growth prospects in the future, such as sound macroeconomic policies, level of government debt etc, cyclical factors tend to be linked to interest rate differentials and global growth. With interest rate differentials compressed to zero in developed markets and close to all-time lows in Australia and many emerging markets, global growth is likely to play a more dominant role. As such, an
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Chart 2: Global trade as a share of GDP
Source: Insight Investment
improvement in growth prospects is likely to put pressure on the US dollar. That said, our sense is that this decline is going to be more muted and with greater dispersion amongst currencies as the structural factors have notably deteriorated for a number of different currencies. More specifically, our sense is that there are a number of characteristics that will support countries’ endeavours to keep interest rates low and help to differentiate them from others that are likely to be less successful, which could also translate into currency weakness: • Being a net creditor to the world. One of the reasons Japan has managed to successfully keep interest rates low in spite of high levels of government debt is that it is a net creditor to the rest of the world – not only does it run an 3.6% current account surplus, but it is a net creditor to the world to the tune of 68% GDP – thereby limiting the impact of the international perception of the sustainability of its policies. Countries that rely on external
Chart 3: Structural Health GFP vs COVID
Source: Insight Investment
financing and are net debtors, are likely to be more vulnerable to changes in sentiment and perceptions of their own sustainability; • Maintaining institutional credibility. Venturing into quantitative easing may not have led to a structural decline in the quality of policymaking in developed markets, but the risks of a slip into unorthodox policies such as pure monetary financing and capital controls for countries with less
Continued on page 38
3/09/2020 9:57:28 AM
38 | Money Management September 10, 2020
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CPD QUIZ This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development.
Continued from page 37 institutional strength are not negligible – see Argentina’s return to monetary financing of the fiscal deficit. For less developed countries, venturing into the world of quantitative easing and aggressive liquidity injections, it will be critical for authorities to credibly commit to an exit plan; • An independent central bank able and willing to sustain the local bond market. Central bank demand is a crucial tool in maintaining low interest rates at a time of great fiscal issuance. The response by central banks, particularly in developed markets, has been very aggressive. Three potential issues could limit the use of this tool: i. Not all countries have independent central banks able to purchase unlimited amounts of domestic government bonds. The recent question marks around the European Central Bank's ability to purchase sufficient amounts of eurozone peripheral debt is a very good example of this issue. ii. The ability for central banks to absorb any losses on the assets bought. This limitation is likely to be a function of both the seigniorage a central bank earns as well as the ability for the sovereign to recapitalise it. iii. Central banks need to be comfortable that inflation remains consistent with the medium-term objective. While some degree of inflation overshoot may be desirable from both the debt sustainability and the monetary policy perspectives, an excessive rise in inflation would be problematic and limit both the ability and desire to implement financial repression – especially for central banks with inflation targets; and • The extent of foreign currency liabilities. US dollar-denominated debt of non-banks outside the US has doubled since 2009 and currently stands at $12 trillion of which $3.8 trillion are owed by emerging markets. Although the level of external debt for the median emerging market economy is still distinctly lower than in the late 1990s and stands at just over 200% of FX reserves – roughly half of the peak in the late 1990s – there has been a deterioration in this trend as the outstanding value is now more than double the level in 2010 and currently stands at roughly 18% of emerging market GDP. Even in the case of countries that have historically been able to match USD debt with a stream of USD income, a sharp drop in revenues can leave them meaningfully exposed. A combination of factors suggests to us that even in a period of successful financial repression at the global level there is likely to be notable differentiation from country to country and that these differences are likely to be more pronounced than in the past. With greater relative performance between currencies as markets differentiate more, this could provide opportunities for alpha strategies. The low volatility of recent years and subdued trading ranges have made it more difficult to add value. But careful judgement will be needed, to determine which currencies will benefit and which are vulnerable in the current environment. Francesca Fornasari is head of currency solutions at Insight Investment.
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1. With regards to fiscal easing in 2020 versus 2009, which of the following statements is true: a) A larger proportion of current fiscal spending is focused on public investment versus 2009 b) Current fiscal measures are focused on supporting consumers and businesses c) Given the focus of current fiscal easing, sectors likely to benefit include commodity exporters and businesses in the traditional infrastructure value chain 2. With respect to global average (private and public) debt levels: a) Developed market debt has outpaced emerging market debt and risen more sharply b) In the last three years, average leverage in the world has increased to 234% of GDP versus a figure of 205% in the three years preceding the global financial crisis c) There will likely be no action taken by rating agencies in response to changing debt dynamics 3. Which of the following is false? a) The inclusion of China in the World Trade Organisation in 2001 provided momentum for further globalisation and a boom in trade b) China’s increasing share in global export markets from 2000 to 2015 saw significant expansion in China’s production capacity and fuelled strong growth in commodities prices c) China’s increased production capacity and 2009’s fiscal focus on traditional infrastructure spending had negligible impact on many emerging market economies heavily reliant on commodity exporting 4. With regards to trend growth, which of the following is correct: a) Trend growth is a function of total factor productivity and population growth b) The scale of decreases in total factor productivity have been consistent across developed and emerging markets c) The likely increases in government debt owing to COVID-19 is likely to alleviate trend growth decline 5. Currencies are driven by: a) Country-specific underlying structural economic factors expected to lead to better growth prospects b) Cyclical factors which tend to be linked to interest rate differentials and global growth c) Both A and B
TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ great-currency-differentials For more information about the CPD Quiz, please email education@moneymanagement.com.au
3/09/2020 9:57:39 AM
September 10, 2020 Money Management | 39
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Appointments
Move of the WEEK Dr Joe Fernandes Chief investment officer Australian Unity
Australian Unity’s Wealth and Capital Markets (WCM) business has appointed Dr Joe Fernandes as chief investment officer (CIO), from 7 September, 2020. He would lead and guide Australian Unity’s investments team which included joint venture partnerships with Platypus Asset Management, Altius Asset Management, and Acorn Capital. The stand-alone CIO position was new to the business and followed chief executive Esther Kerr-Smith’s decision to separate the role from the WCM chief executives’ responsibilities to “enhance accountabilities
Paul O’Sullivan will succeed David Gonski as the chair of ANZ at the finalisation of the full year results on 28 October, following Gonski’s decision to retire from the board. O’Sullivan was currently chair of Western Sydney Airport Corporation, chair of Optus and a director of Coca Cola Amatil. He had previously held senior executive roles with Singapore Telecommunications and was chief executive of Optus between 2004 and 2012. He was also a director of the St George and Sutherland Medical Research Foundation, the National Disability Insurance Agency and St Vincent’s Health Australia. O’Sullivan said his focus as chair would be to continue the work the bank had been doing to improve operations. Raiz Invest is undergoing a leadership restructure with Brendan Malone, group chief
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and to create a more clearly delineated investment decision-making function”. Fernandes had over two decades of experience in senior investment management leadership roles, including 17 years with Colonial First State (CFS), CFS Global Asset Management (now First Sentier Investments) and First State Investments. Most recently, he had held several independent advisory roles in superannuation and wealth management. He would report to Kerr-Smith who was appointed WCM as chief executive in July.
operating officer, appointed to lead the Australian business. He would remain in the group COO role, which he took over in March, and would also now be chief executive officer of Raiz Invest Australia. Chair Tony Fay said: “Brendan will manage the day-to-day running of the business and will continue to drive the strategy to grow revenue per customer through new products and services”. BNY Mellon Investment Management has appointed Rebecca Chu as head of Taiwan for its new office in Taipei. The firm was granted a Securities Investment Consulting Enterprise (SICE) licence, and BNY said the location of the new office would strengthen relationships with clients in Taiwan and increase brand awareness of the business.
Kerr-Smith said Fernandes’ leadership experience would improve the firm’s investment capability during a period of heightened economic uncertainty. “Joe’s key priority will be the ongoing stewardship and development of Australian Unity’s investment activities,” Kerr-Smith said. “This will include capturing investment opportunities that align with our strategic agenda as a provider of health, wealth and care products and services that both meet the wellbeing needs of our members and customers, and deliver community and social value.”
Chu was formerly vice president, institutional distribution, after joining the firm in 2016 from CTBC Investments, and had previously worked for Cathay Life in its foreign fixed income team. She had also worked for Nanshan Life in diversified roles that included bond investing, portfolio management, credit analysis, valuation, currency risk hedge and risk evaluation. In addition to Chu, BlackRock’s Jessie Chen was appointed as business development manager. BNY Mellon had six other Asia Pacific offices: Hong Kong, Singapore, Shanghai, Sydney, Tokyo and Seoul. In July 2019, BNY Mellon appointed Taiwan Cooperative Securities Investment Trust as its master agent in Taiwan. Omni Bridgeway has appointed Tim DeSieno as global director
of distressed debt and senior investment manager. DeSieno would be based in New York and responsible for developing the firm’s global distressed debt business, which the firm said would be a key part of its strategic growth. He would also help identify and manage distress-related litigation funding opportunities in emerging markets globally, with a focus on Latin America. DeSieno had over 30 years’ experience advising institutional investors in managing their distressed debt investments around the globe, and was most recently a senior partner at Morgan, Lewis and Bockius. His work for clients included junk bond workouts in the 1980s/1990s, the Asian currency crisis in 1998, the Global Financial Crisis in 2008 and the financial fall out of the COVID-19 pandemic.
3/09/2020 10:53:19 AM
OUTSIDER OUT
ManagementSeptember April 2, 2015 40 | Money Management 10, 2020
A light-hearted look at the other side of making money
Has Harvey gained a ticket for World Travel? OUTSIDER confesses that a number of years ago he, or someone purporting to be him, described Equity Trustees’ somewhat peripatetic Harvey Kalman as “Harvey World Travel”. And it is true that whenever Outsider runs into Harvey he is usually in travel mode which suggests to your less widelytravelled correspondent that Mr Kalman has more than his fair share of frequent flyer points earned, of course, in doing the business of the company. And it is with this in mind that Outsider wishes his heartiest congratulations to Harvey for being promoted to a new position as managing director (UK and
Europe) and global head of business development fund services for Equity Trustees. Now Outsider does not know how that compares to Harvey’s previous and longrunning role as executive general manager corporate trustee services and global head of funds services but he suspects it means that when border restrictions are lifted, Kalman will once again be joining the jet set. In the meantime, Outsider has every intention of taking advantage of any lifting of the border restrictions twixt NSW and Victoria so he might further interrogate Kalman, preferably on a fairway or two.
ASIC happy to help the watchdog watching ASIC OUTSIDER feels sure that financial advisers will be heartened by the news that the Australian Securities and Investments Commission has 2,237 employees and that over the next four years it intends investing in its people and their capability at all the regulator’s offices across Australia. And for those advisers who might worry that ASIC is not pulling its weight, Outsider is here to tell you that the regulator has used its latest four-year corporate plan to tell you that it will be doing its utmost to help the forthcoming Financial Regulator Assessment Authority intended to review and report on its performance. ASIC said it was currently pursuing two initiatives to further enhance its performance reporting, by better measuring the efficiency of its activities and by assessing the impact of key projects and regulatory interventions – something Outsider fears probably involves a financial advice shadow shop and possibly a taskforce. “As the Government moves forward with the establishment of the Financial Regulator Assessment Authority to review and report on ASIC’s and APRA’s performance, we will also actively support the new body in assessing our effectiveness,” it said. Outsider certainly hopes that ASIC is not implying that it can influence a Government body intended to watch the watchers – ASIC and the Australian Prudential Regulation Authority. Surely not.
Pulling on the gloves for a sucker punch AS an old rugby player, once-in-a-while cricketer and very indifferent midhandicap golfer, Outsider knows better than most how difficult it is to step up to first grade. And thus, he was somewhat amused when a little-known Queensland Liberal National Party backbencher decided to take on two former firstgraders – former Labor Prime Ministers Paul Keating and Kevin Rudd – on the question of superannuation policy. It seems that Queensland Senator Gerard Rennick took umbrage at Keating’s suggestion that the campaign being waged on superannuation policy was being prosecuted by a “baby-faced Liberal” something which prompted the tyro politician who hails from that centre of progressive thought, the Darling Downs, to challenge Keating to a debate. ‘It’s time your arrogance and ignorance were called out,” Rennick wrote to Keating on his Senate letterhead. “I am more than happy to debate you publicly as to why it’s time for a new way of thinking in Australia and why
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your legacy should be confined to the dustbin of history where it belongs.” Outsider believes Rennick really meant that Keating’s legacy should be “consigned” to the dustbin of history but doubtless the former Prime Minister got the point. Outsider confesses that he doesn’t know much about Rennick (why would he) but a quick search of his profile indicates that he has earned a Masters degree in taxation law and “he has repeatedly accused the Australian government’s Bureau of Meteorology of falsifying climate data, and tampering with climate data to ‘perpetuate global warming hysteria’”. Should be an interesting debate. Could someone buy the jumbo box of popcorn please.
"I think it's a once-in-a-generation transaction."
"The dance of the elephants has started."
– IOOF chief executive Renato Mota's unbiased view on IOOF's deal to buy the MLC Wealth business from NAB.
– Grant Halverson, payments expert at McLean Roche, as Paypal enters the buy now, pay later market.
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