Money Management | Vol. 34 No 19 | October 22, 2020

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SMALL CAPS

A riskier world

20

INSURANCE

34

Life insurance amid COVID-19

Infrastructure investing

Will the cost of PI drive advice firm consolidation?

BUDGET

BY MIKE TAYLOR

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Ironing out the wrinkles in the Budget’s new super approach THE financial services centrepiece of the Federal Budget was the Government’s changes to superannuation within its Your Future, Your Super package scheduled to begin from 1 July, next year.

But the industry has promptly called from extensive consultations in circumstances where many of the proposals have been identified as flawed and difficult to implement in their current form.

The difficulty for the Government is that the Productivity Commission’s (PC’s) proposals had already been revealed as being flawed at the time of their initial release in 2017 and their final public release in January 2019.

And the single most significant flaw is the continuing reality that there is no certainty that the superannuation fund which was deemed to be the top performer in January 2019 would have maintained that position 12 months’ later in January 2020.

Indeed, Money Management's sister publication, Super Review, in September 2019 ran the numbers on what would happen if the Federal Government adopted the PC’s recommendations with the analysis covering which funds would have made it into a “best in show” superannuation top 10 across three six-months periods – December 2017, June 2018 and December 2018.

That analysis showed that only two funds made it onto the list across all three periods.

In the wake of the Government’s Budget announcement superannuation fund actuaries have run similar exercises and found similar outcomes across one, three, five, and 10-year timeframes with the disturbing bottom line that members who selected the bestperforming MySuper product in 2015 would have found themselves better off in 87% of other products in the intervening period.

What the actuaries also found was that, while the rule is that “past performance is no indicator of future performance”, people selecting superannuation funds would have been on safer ground selecting a fund based on its relative performance over 10 years rather than one, three or even five years.

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36

TOOLBOX

Full feature on page 16

THE West Australian financial planning firm which had its Australian Financial Services License (AFSL) suspended for at least 10 weeks to allow it to secure professional indemnity (PI) insurance may represent the tip of the iceberg.

Financial planning group executives have told Money Management that PI insurance has become increasingly difficult to secure and that the West Australian firm, Ballast Financial Management, will probably not be the last to come to the notice of the regulator.

Importantly, in the context of obtaining PI cover, a director and responsible manager of Ballast, Wayne Blazejczyk, was in January banned by the Australian Securities and Investments Commission from providing

financial services for five years for failing to meet best interests obligations.

The senior planning executives said obtaining PI cover was difficult but would have proved really difficult for any business regarded as having compliance issues.

“The PI market is the hardest I have ever seen, insurers are withdrawing from the market and the new underwriting requirements are extensive for this cycle,” the chief executive of CountPlus, Matthew Rowe said.

“It is all about the quality of your risk management processes, access to a balance sheet and your capital keel, systems and real time data driven supervision and monitoring,” he said. “You can’t just say you have these things, you need to prove that you Continued on page 3

There is a future for level premiums: panel

BY JASSMYN GOH

THE changes through individual disability income insurance (IDII) will not be the death knell of level premiums, a panel has agreed.

Speaking at the Association of Financial Advisers (AFA) Vision Conference, TAL chief executive, Brett Clark said it would be strange if there was not a future for level premiums.

“If you look at every global life insurance market, level premiums are a very significant and strong part of the market.

Australia is unique in its uptake and in some ways has a reliance on step premiums. I would hope there was a future in level premiums, that’s our intent, but there are complications around level premiums,” he said.

Continued on page 3

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October 22, 2020 Money Management | 3

News

New report confirms dire situation facing insurers

BY MIKE TAYLOR

THE full gravity of the problems facing the Australian life insurance industry has been laid bare in a new report from major consultancy KPMG portraying falling revenues and profits and only difficult solutions.

KPMG’s annual review of the industry has confirmed an aggregate loss of $1.3 billion with the challenging conditions which had marked the previous 12 to 18 months continuing with life insurance direct premium income reducing by 6.1% to $17.3 billion.

It showed that losses on risk products grew by $1 billion and on non-risk products by $1.1 billion.

KPMG said that, across the sector, more than 40% of firms recorded losses while a total of 81% had worse figures that the previous year.

Commenting on the grim report, KPMG Insurance lead partner, David Knells, said it was always likely to be a tough 12 months

for the life industry coming from a low base in 2018-19 and with the full effect of regulatory changes kicking in this year.

“Profits have fallen, or losses worsened, on almost every metric and then two-thirds through the financial year, the COVID-19 crisis started, the fall impact of which will be seen next year,” he said.

“The life insurance industry now faces additional significant challenges in responding to the impacts of the health crisis, while addressing serious and ongoing profitability issues,” Knells said. “Progress towards a more sustainable position requires action on multiple fronts. Critical work in addressing the future product design must be accompanied by a coherent strategy including issues such as: the pricing of in-force books; effective claims and expense management; and targeted distribution strategies.”

On a brighter note, the KPMG analysis noted that life insurance companies remained well capitalised.

Will the cost of PI drive advice firm consolidation?

There is a future for level premiums: panel Continued from page 1

Continued from page 1 have them and also that you are taking a zero tolerance approach to non-compliance.”

“The days of a tick a box renewal applications are over, insurers are rationing capital and are being selective in who they back,” Rowe said.

Other planning group executives agreed with Rowe that the already tight PI market had proved even tighter over the past 18 months, with it now not being unusual for firms to pay as much as two or three times turnover to secure PI cover.

“Some of the luckier ones with good compliance records may be paying 1.8 to 2.5 times turnover, but they are the exception rather than the rule,” he said.

Rowe said he was aware of a lot of anecdotal discussions around small and mid-sized AFSL’s not being renewed and attributed this to the simple fact there wasn’t the capital in the insurance pool willing to be deployed to underwrite financial advice risk for underresourced players.

“We have renewed our PI with a reduced deductible and guaranteed rates for the next 18 months that give certainty to Count Financial advisers, I suspect we will be one of the few players that will achieve this outcome,” he said.

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“While interest rates don’t make it easy and we’ve seen some pricing pressure on level premiums as a result of that and how it works, within this five-year piece with the income protection that needs to be worked through as well. So certainly not straightforward but it would be strange to me if it wasn’t part of the future.

“Level premiums give a certain expectation that we haven’t been able to fulfil so we have to deal with that in terms of the way we describe it and explain it.”

Also on the panel, AIA chief executive, Damien Mu, agreed that there was a future for level premiums and that what had worked well were fixed term level products as it gave clients more certainty.

“Fixed terms can give more certainty where we are not over pricing products because of a degree of

uncertainty, and we can factor that life might change, but have certainty whether it is five, 10, 15, 20 years that matches a client’s needs,” he said.

“That can be done and should be done. When we step back, it’s thinking about how it works in the whole ecosystem, against best interest duty, pricing, affordability etc. It has to be part of the future but we haven’t had a proper level premium for a fixed term product in the Australian market.”

MLC chief of life insurance, Sean McCormack, also agreed and said what had not changed was that Australians still had insurance needs for the longterm and the whole basis of level premiums was putting protection in place for the long-term.

“We’ll see more and more level premium contacts for fixed terms and that will become more of the norm. I don’t agree that the changes though IDII represent the death knell of level premium,” McCormack said.

15/10/2020 10:38:10 AM

4 | Money Management October 22, 2020

Editorial

mike.taylor@moneymanagement.com.au

FASEA CODE UNCERTAINTY MUST END

FE Money Management Pty Ltd

The consultation around the Financial Adviser Standards and Ethics Authority code of ethics must end and the Government must put a definitive timetable on the establishment of a single disciplinary body.

Discussions around the Financial Adviser Standards and Ethics Authority (FASEA) code of ethics have been going on for almost three years, the code itself has held legal status since February, last year, yet uncertainty remains.

A reflection of that remaining uncertainty was FASEA’s release in early October of a further draft guide covering the code which brings the level of guidance issued by the authority around the code to nearly 100 pages and this is before the consultation process has even finished. No one should regard this as acceptable.

It is particularly unacceptable in circumstances where financial advisers are being asked to adhere to a code which has been operational but about which there exist continuing important differences of opinion about how it should be interpreted, particularly around Standard 3.

It is in these circumstances that it is hardly surprising financial planning licensees are taking a significantly cautious approach to the code and urging that their authorised representatives do likewise.

None of this is, of course, helped by the fact that the Government chose to scrap well-advanced moves to have the industry establish code-monitoring bodies to, instead,

pursue the recommendation of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services for the establishment of a single disciplinary body.

If the Government had stuck with its original plans, at least two codemonitoring bodies would already be in place and one suspects a good deal of the current uncertainty would have already been addressed.

This has not occurred and the priority being given by the Government to dealing with the COVID-19 pandemic means that it will likely be at least nine months before a single disciplinary body is established and longer still before it properly up and running.

In the meantime, the financial planning industry is being expected to muddle along living with a code of ethics which lacks final and broadlyaccepted definitive guidance, an Australian Securities and Investments Commission (ASIC) which has signalled a largely non-interventionist approach and a FASEA which has clear funding only up until the next Federal Budget in May, 2021.

The future of FASEA is uncertain not only because of the eventual establishment of the single disciplinary body but because this month’s Budget papers provided funding guidance for the authority

only up until next year’s Budget.

Of course, it would make good sense for FASEA to be subsumed into a single disciplinary body and from a political perspective this would allow the Government to conveniently deal with many of the issues which have surrounded FASEA, particularly ongoing industry criticism of its board and the manner in which the organisation has gone about its task.

But nine months is a long time in both politics and the financial services industry and the absence of single disciplinary body and the certainty it would bring is unacceptable notwithstanding the revised timetables outlined by the Government and the assurances issued by the Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume, most recently at the Association of Financial Advisers virtual annual conference.

As things currently stand, it will be at least the second half of 2021 before the final building blocks are put in place and there is every chance that Australia will be in the midst of the run-up to another Federal Election campaign.

The industry needs more certainty than this.

Mike Taylor Managing Editor

Level 10 4 Martin Place, Sydney, 2000 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 Tel: 0439 137 814 oksana.patron@moneymanagement.com.au News Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@fefundinfo.com ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@moneymanagement.com.au Account Manager: Damien Quinn Tel: 0416 428 190 damien.quinn@moneymanagement.com.au PRODUCTION Graphic Design: Henry Blazhevskyi

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9/10/2020 2:54:33 PM

6 | Money Management October 22, 2020

News

BOQ sells St Andrew’s insurance

BY MIKE TAYLOR

THE Bank of Queensland (BOQ) has announced that it is selling St Andrew’s Insurance for $23 million.

The bank has announced to the Australian Securities Exchange (ASX) that the insurance business is being sold to investment company, Farmcove Investment Holdings.

It said the sale was consistent with BOQ’s refreshed

strategy to deliver group simplification benefits.

Commenting on the transaction, BOQ managing director, George Frazis said the sale of St Andrew’s represented an important strategic milestone for the bank.

“We are delighted to have secured a buyer that has a longterm vision for the business which includes meeting the continued obligations of policyholders,” he said. “The

divestment enables us to focus on our niche customer segments while simplifying our business model.”

Farmcove managing director, Matt Lancaster said that the company had a long horizon in mind with respect to the investment in St Andrew’s.

“St Andrew’s has insured more than 600,000 Australians over its two decade history and we look forward to seeing the company deliver simple and cost

effective insurance options for more Australians over the coming decades as an independent, Australian-owned competitor,” he said.

How Magellan is positioning for a Joe Biden win

BY LAURA DEW

MAGELLAN chief investment officer Hamish Douglass has outlined how the firm is preparing the Magellan Global fund in expectation of a win for Democratic presidential nominee Joe Biden.

The US election was set to take place on 3 November and currently, Biden was forecast to beat Republican and sitting President Donald Trump.

While Douglass said investors “did not need to panic” about a potential change in political leadership, there were steps the firm was taking in their portfolios.

In a webcast, he said: “We have to be mindful as there will be an increase in the corporate taxation rate under Biden so we

have less exposure to US companies.

Democrats will push through healthcare reform and further regulate drug pricing so we have minimal healthcare exposure, we only have one healthcare company which is [Swiss firm] Novartis which has only modest exposure to the US healthcare risk.

“There’s a huge decarbonisation agenda and the Democrats have been clear that you will see a lot of investment in renewables under Biden. We are positively skewed to that happening and have 10% invested in three US utilities as they will benefit from this investment and have been performing well.”

While a Democratic victory was forecast, he admitted there could be “extreme market volatility” in the short term if Trump tried to

Chart 1: Performance of Magellan Global fund versus global equity sector over one year to 30 September 2020

Source: FE Analytics

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challenge the result.

As well as the presidential election, Douglass said it was important to watch which party was in control of Senate. The Senate was currently held by the Republican party but Democrats would only need four extra seats to gain control. If Biden won the presidential election, this would give the Democratic party a ‘trifecta’ of control in the White House, Senate and House of Representatives.

If this was the case, the Democrats could potentially have the Senate rules changed to give them more power.

Douglass said: “The Democrats have the lower house and Biden is expected to take the White House but it is a much closer call which party will win the Senate. If Biden wins and Democrats get the lower house as well then the markets won’t react as the Republicans will try to block most of the radical legislation that would be put through.

“If Republicans retain the Senate then nothing will happen as there will be gridlock in Washington and the market will be delighted with that outcome.

“But if Democrats look to change Senate rules and remove filibustering, that could spook the markets as they would wonder what the agenda was. We are unlikely to see a radical Left agenda from the Democrats but markets might still be concerned and there could be a negative reaction.”

The Magellan Global fund returned 7.6% over one year to 30 September, versus returns by the global sector of 3.6%, according to FE Analytics.

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8 | Money Management October 22, 2020

News

Federal Court orders ANZ to pay $10 million in penalties

BY JASSMYN GOH

ANZ Banking Group has been ordered to pay $10 million in penalties by the Federal Court of Australia after the bank engaged in “unconscionable conduct” and breached its obligations as a financial services licensee.

The court found between August 2003 and September 2015, ANZ charged certain fees to personal and business customers in relation to periodic payments including: • Fees charged for periodic payments that could not be made due to insufficient funds in the customer’s account (non-payment fees); and • Transaction fees charged for successful periodic payments (transaction fees).

The Australian Securities and Investments Commission (ASIC) said ANZ was not entitled to charge non-payment fees or transaction fees to customers where the periodic payment was made between two accounts held in the same customer name (same-name fee).

ASIC deputy chair, Daniel Crennan, said: “The outcome and penalty imposed by the court is a strong deterrent message and reflects

ASIC’s position that ANZ lacked contractual entitlement to charge these particular fees.

ASIC, through its Office of Enforcement, has held ANZ to account for this conduct.

“ASIC acknowledges the cooperative approach taken by ANZ to this litigation, which allowed the matter to be efficiently resolved by the court. It is in the public interest that parties to regulatory litigation cooperate where possible.”

ANZ also admitted that around 11 July, 2011, the bank knew there was a risk they were not entitled to charge same-name fees to non-loan retail and commercial customers after receiving communications from its external lawyers.

However, the bank continued to charge them until September, 2015.

The court declared that the bank: • Engaged in unconscionable conduct on 327,895 occasions, in contravention of s12CB of the Australian Securities and Investments Commission Act 2001 (ASIC Act); • Breached its general obligation to comply with the financial services laws, in contravention of s912A(1)(c) of the Corporations Act 2001

(Corporations Act); and • Failed to do all things necessary to ensure that the financial services covered

by ANZ’s Australian financial services licence were provided efficiently, honestly and fairly, in contravention of s912A(1)(a) of the Corporations Act. The bank also admitted it did not make remediation payments to customers who were charged same-name fees between 11 July, 2005, and 31 December, 2007, and the court declared that it: • Engaged in unconscionable conduct on two occasions, in contravention of s12CB of the ASIC Act; • Breached its general obligation to comply with the financial services laws, in contravention of s912A(1)(c) of the Corporations Act; and • Failed to do all things necessary to ensure that the financial services covered

by ANZ’s Australian financial services licence were provided efficiently, honestly and fairly, in contravention of s912A(1)(a) of the Corporations Act.

Did large funds withstand the COVID-19 sell-off?

BIG does not mean best as most of the largest active Australian equity funds have not beaten the sector average return so far this year and have not recovered losses from the global sell-off in March induced by the COVID-19 pandemic, according to data.

FE Analytics data found the largest funds within the Australian Core Strategies universe were Dimensional Australian Core Equity Trust ($2.7 billion), IOOF Strategic Australian Equity ($2.08 billion), IPAC SIS Australian Share Strategy No 3 (4.05 billion), IML Australian Share ($1.9 billion), and IPAC SIS Australian Share Strategy No 1 ($1.86 billion).

Since the start of 2020 to 30 September, 2020, none of these funds had made a return, and only one had beat the sector average of a loss of 8.21%.

The top-performing fund was the IPAC SIS Australian Share Strategy No 1 at a loss of 6.78%, with a max drawdown of -30.9% for the same period.

IPAC SIS Australian Share Strategy No 3 came in at second at loss of 10.13% and a max drawdown of -31.62%, followed by Dimensional Australian Core Equity Trust at a loss of 11.08% with a max drawdown of -34.4%, IOOF Strategic Australian Equity at a loss of 14% with a max drawdown of -33.66%, and IML Australian Share at a loss of 15.9% with a max drawdown of -30.7%.

Dimensional had the largest max drawdown and had its largest sector allocation towards materials at 23.1%, followed by financials (21.67%), consumer discretionary (9.5%), industrials (8.74%), and healthcare (8.5%), according to its latest factsheet.

Its top holding was Commonwealth Bank of Australia at 5.25%, followed by BHP Group (4.63%), CSL (4.45%), Fortescue Metals

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(2.54%), and National Australia Bank (2.34%).

Over the three years to 30 September, 2020, only the two IPAC funds managed to beat the sector average of 14.88%, at 19.2% and 16.08% respectively.

Dimensional followed at 12.7%, IOOF at 7.75%, and IML at 0.47%.

Chart 1: Largest active Australian equity fund returns versus sector since start of the year to 30 September 2020

Source: FE Analytics

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8/10/2020 1:36:50 PM

10 | Money Management October 22, 2020

News

Budget signal on FASEA’s future funding

BY MIKE TAYLOR

THE future funding of the Financial Adviser Standards and Ethics Authority (FASEA) will be a matter for next year’s Budget, but the Government has signalled that the authority will not be gaining any significant further resources in the meantime.

The Budget papers reveal that FASEA is expected to carry a staff of 10 over the 2020/21 financial year, which appears to be slightly down on the number of positions outlined in the authority’s 2019 annual report.

At the same time, the Budget papers point to funding for the authority being slightly up to $4.2 million across the Budget period.

Because of the size of FASEA, and unlike major agencies such as the Australian Securities and Investments Commission

(ASIC) and the Australian Prudential Regulation Authority (APRA), the Budget documents have not provided estimates beyond the current financial year.

The funding and staffing position signalled in the Budget will reinforce speculation that FASEA might ultimately be folded into the new single disciplinary body structure which was one of the key recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry.

Importantly, key industry stakeholders including the Financial Planning Association (FPA) have signalled their support for making FASEA part of a larger entity handling regulation in the sector.

In its 2019 annual report, FASEA said it

received industry funding of $3.9 million annually under a contract which expires on 30 June, 2021, and noted that funding was intentionally short-term to cover the establishment of FASEA and its initial period of operation to enable it to fulfil its legislative timelines.

“It is contemplated by the funding agreement that prior to the termination of the Funding Agreement, separate arrangements will be put in place for the financial services industry as a whole to provide ongoing funding to FASEA to enable it to perform its functions under the Corporations Act beyond the expiry of this Agreement,” the 2019 annual report said.

Subsequent to that report, the Government announced its intention to pursue the establishment of the single disciplinary body.

Who’s makes the complex simple?

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FASEA releases draft guide for code of ethics

BY CHRIS DASTOOR

THE Financial Advisers Standards and Ethics Authority (FASEA) has released the draft Financial Planners and Advisers code of ethics 2019 guide for consultation.

The draft guide provided an explanation of the intent and application of the Code’s values and standards and was released after consultation with stakeholders in 2019 and early 2020.

It used ‘fundamental’ questions to help advisers understand the code and highlighted the requirement for advisers to exercise their

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professional judgement in the best interests of their clients.

The draft guide built on the Preliminary Response to Submissions released in December 2019 and the case study examples contained in FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance.

Stephen Glenfield, FASEA chief executive, said the code of ethics provided an ethical framework of values and standards to assist advisers in exercising their professional judgement in the best interests of their clients.

“FASEA understands that advisers and other

stakeholders are seeking additional support in understanding the practical application of the code of ethics and welcomes stakeholder feedback on this draft guide,” Glenfield said.

All feedback and submissions on the draft guide should be submitted through FASEA’s dedicated consultations email until 2 November, 2020.

14/10/2020 1:02:44 PM

October 22, 2020 Money Management | 11

News

Sceptical welcome for FASEA’s latest code tweaks

BY MIKE TAYLOR

ADVISERS have delivered a sceptical welcome to the Financial Adviser Standards and Ethics

Authority’s (FASEA) release of the draft code of conduct resulting from its industry consultation process.

The draft code, released earlier this month, resulted from FASEA’s consultation with key industry stakeholders over the past 12 months but initial feedback delivered by advisers to Money Management suggests that they remain suspicious of the process.

However, the new draft code does seek to create greater clarity around key issues and particularly with respect to the contentious Standard 3.

One problem for advisers is that

they or their licensees have less than a month to respond with submissions due to close on 2 November.

The draft also seeks to bring greater clarity around the treatment of clients and referral arrangements between accountants and advisers, the status of referral fees and the issue of which clients can and cannot be regarded as wholesale clients.

However, while there are some clearer explanations, Standard 3 looks likely to remain the subject of significant debate within the financial planning industry in circumstances where on the one

hand it says that it does not preclude any particular form of remuneration but, elsewhere, states; “certain forms of remuneration will always fail to meet the requirements of the code of ethics.

“Advisers will not breach Standard 3 merely by being a duly remunerated employee of an entity that lawfully provides retail financial advice and services, provided the provision of that advice services is in the best interests of the client and complies with the other provisions of the code,” it said.

Stakeholders have until 2 November, this year, to respond to the draft code.

Who else, but Elston.

Elston Group ACN: 130 771 523 EP Financial Services Pty Ltd ABN 52 130 772 495 AFSL: 325 252 © 2019

23/9/20 8:52 pm

Walesby leaves ETF Securities ‘with immediate effect’ ETF Securities chief executive, Kris Walesby is leaving the company immediately with the company’s founder Graham Tuckwell having returned to Australia and taking on the role of executive chair.

The company announced the significant change saying Tuckwell would be playing a more active strategic role in defining the future direction of the business.

19MM221020_01-15.indd 11

“As part of this new business structure, the role of Australian CEO is no longer required and the incumbent, Kris Walesby is leaving with immediate effect,” the announcement said.

The announcement said the company had established a senior management team that would take on expanded responsibilities and be responsible for the daily operation of the firm, reporting directly to Tuckwell.

Kanish Chugh has been appointed as head of distribution.

He will be responsible for growing the client base by building and strengthening partnerships with institutions, financial intermediaries, retail customers and self-directed self-managed superannuation fund investors.

Evan Metcalf has been appointed as head of product. He will be responsible for the development and management of

products, as well as the management of capital markets relationships and the oversight of investment research.

Finally, Cliff Man has been appointed as head of portfolio management. He will be responsible for portfolio management, as well as for business intelligence and the oversight of the information technology functions of the company.

15/10/2020 10:07:17 AM

12 | Money Management October 22, 2020

News

SMSF Association defends increasing size of SMSFs

BY MIKE TAYLOR

DESPITE the misgivings of some accountancy organisations, the SMSF Association has reinforced its belief that increasing the size of self-managed superannuation funds (SMSFs) from four to six members will drive benefits, including lower fees.

While major accountancy group, CPA Australia has warned of unintended consequences such as increased disputation between SMSF members, the SMSF Association has claimed that allowing more members will not only allow lower fees but also offer greater investment choice and improve estate planning.

At the same time, however, the SMSF Association has acknowledged that few people are likely to take advantage to the proposed legislative changes.

“While acknowledging any substantial take-up of this option is unlikely – about 93% of SMSFs have only one or two members – we believe increasing membership from four to six will provide additional flexibility and choice without raising any substantial integrity or administration issues for the SMSF sector,” SMSF Association chief executive, John Maroney said.

“We believe this is strengthened

by the fact that any administrative risks that may currently exist with four member SMSFs have not been detrimental to the sector. It will allow families with five and six members the option to establish an SMSF together or allow the remaining members of a family to join a fund that is an unavailable to larger families who must have separate funds.

“Our only note of caution is that any SMSF adding extra members should be properly planned and accompanied by specialist SMSF advice to reduce any potential risks.”

On the issue of costs, Maroney said including more members is likely to have positive effect on fees because SMSFs are typically charged on a fixed administration

basis regardless of the number of members and without consideration of the account balance.

“Pooling superannuation balances in one SMSF can therefore avoid the costs of running separate SMSFs. Furthermore, if the pool of assets is increased in an SMSF through including more members, then the SMSF will become more cost-efficient as the fees reduce as a percentage of the total assets of the fund.

“With regards to pooling superannuation balances, an increase in SMSF members means individuals can enjoy the benefits of consolidating assets, increase investment opportunities and have greater flexibility to diversify.

“Importantly, SMSFs can have different investment strategies for

different members. This means engaged superannuation members can have control over their assets and can choose a risk profile that is entirely appropriate to them, not one designed for a collective range of individuals.”

From an intergenerational perspective, Maroney said if children and family members have knowledge about and are part of how their parents’ affairs, finances and superannuation are being managed, this familiarity can facilitate improved and more timely engagement with superannuation and estate planning across the generations.

“The Association notes the possibility that allowing larger SMSFs, especially where adult children are members of the same SMSF as their parents, could give rise to opportunities of elder abuse and complex estate planning disputes. However, even without larger SMSFs, these problems can occur and can be driven by non-members.”

“We believe this amendment should be regarded as a non-controversial change to the SMSF sector that promotes more choice and flexibility in the system without posing any significant integrity issues, especially if consumers seek specialist SMSF advice.”

One major industry fund does charge for intrafund advice AT least one major industry superannuation fund has been directly charging members for the provision of intrafund advice.

Amid complaints from some financial advisers about the nature of intrafund advice and how it is funded by superannuation funds, UniSuper has told a key Parliamentary Committee that it actually charged members a fee, although the fee might not cover the actual cost. “…our members are charged a fee for the delivery of intrafund advice services,” the fund has told the House of Representatives Standing Committee on Economics.

“While there is no legal obligation to charge members for intrafund advice, we believe it is important that those who receive the service pay for the advice they receive. There is no legal requirement for these charges to cover the cost in part or in full of delivering these services and the service is paid for through a combination of explicit personal charges as well as collective charging,” it said.

The fund revealed that it had 12 advisers specifically allocated to the

19MM221020_01-15.indd 12

provision of intrafund advice and that the revenue generated by them from that activity in 2019/20 was $808,272.

UniSuper also revealed that like all companies providing financial advice it was confronted by the need to hold professional indemnity (PI) insurance but that this was wrapped up in the cost of its broad range of insurances.

“Our financial lines’ insurance policies include a combined policy for Directors’ and Officers’ Liability, Professional Indemnity (PI) and Financial Institutions’ Crime Insurance,” it said.

“Cover for our financial planning activities is embedded within the PI component of cover. Over the years, we have sought advice from an insurance broker to split the premium across items covered. We have been told splitting is highly subjective and that it would be highly unlikely to obtain standalone PI cover for financial advisers for less than what we pay for the combined policy,” UniSuper said.

“We have not disclosed the premium for the policy on the basis that we are required to keep this information confidential.”

14/10/2020 5:57:03 PM

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12/10/2020 28/09/2020 3:43:12 9:45:19 PM AM

14 | Money Management October 22, 2020

News

AMP confirms revamp as advisers numbers continue to drop

BY OKSANA PATRON

THE latest Australian Securities and Investments Commission (ASIC) Financial Adviser Register (FAR) has highlighted further losses of advisers, with current adviser roles on the FAR dropping to below 21,500, according to HFS Consulting.

At the same time, the numbers of planners working at the biggest groups reached its lowest levels in five years, falling to around 13,200 from 14,500 last year, according to Money Management's TOP Financial Planning Groups Ranking.

Additionally, in 2018 the largest financial groups had jointly around 16,000 planners.

AMP, which saw altogether a combined loss of another 500 advisers spread among its four planning groups (AMP FP, Charter Financial Planning, Hillross Financial Services and ipac securities) counting year-on-year, said it was revamping its adviser network.

“AMP continues to work on completing the reshape of its adviser network, which is reducing the overall number of practices, as we focus on moving forward with a core group of practices which are sustainable in the long term,” an AMP spokesperson said in a statement to Money Management.

As far as the remaining banking groups were concerned, Commonwealth Bank of Australia, which last year declared it would close Financial Wisdom by June 2020 after it had sold Count Financial to CountPlus, saw a sharp decline in number of planners to around 250, which represented an almost 50% drop compared to a year before.

Similarly, ANZ currently has only one group, ANZ Financial Planning which had around 180 advisers on its book compared with almost 240 advisers two years ago.

The full ranking of Money Management’s TOP Financial Planning Groups is available online.

Perth adviser charged with dishonest conduct

BY JASSMYN GOH

AR Wealth and Finance financial adviser, Rahul Goel, has been charged with four counts of dishonest conduct when dealing with vulnerable superannuation members by the Perth Magistrates Court.

This followed investigations by the corporate watchdog that alleged between April 2019 and July 2019, Goel contravened sections 1041G(1) and 1311(1) of the Corporations Act 2001 by engaging in dishonest conduct while carrying on a financial services business via his company AR Wealth and Finance.

19MM221020_01-15.indd 14

The Australian Securities and Investments Commission (ASIC) said Goel had acted dishonestly in relation to hardship and other applications to super funds on behalf of his customers.

Goel had been placed on bail and was not allowed to leave Australia, he must surrender his passport, and could not apply for any further passport or international travel document.

If convicted, each offence carried a maximum penalty of 15 years of imprisonment. The matter had been listed for mention on 4 December, 2020.

Millennials to see $68t inheritance windfall

BY LAURA DEW

MILLENNIALS are most likely to use inheritance to top up their pension pots, with their generation likely to benefit from the largest wealth transfer in history.

Millennials – those born between 1980 and 2000 – were likely to receive some $68 trillion in inheritance from the baby boomer generation before them.

According to deVere Group, 71% of millennials globally would use this inheritance to boost their retirement income while other priorities included purchasing property, increasing sustainable investments or committing to good causes.

Nigel Green, deVere chief executive, said millennials were often falsely stereotyped for their sense of entitlement and thought to be more financially reckless than other generations.

“But with seven-out-of-10 saying that their number one priority of the inheritance boom is to top up their pension pots, this myth is busted,” Green said.

“A windfall from the richest generation in history will be welcomed and needed by millennials – but seemingly not to be wasted. This is very encouraging.”

However, he warned, millennials should avoid relying on an inheritance to solve their financial problems.

“Waiting on a windfall should not be anyone’s plan A – it could come too late and other circumstances could make this a financially dangerous plan,” Green said.

14/10/2020 5:56:27 PM

October 22, 2020 Money Management | 15

InFocus

FINANCIAL ADVICE CRUCIAL FOR AUSTRALIA’S ECONOMIC RECOVERY Financial Services Council policy manager – advice, Zach Castles, argues that regulatory pragmatism can help reduce the cost of financial advice.

IN SEPTEMBER, THE Australian Securities and Investments Commision (ASIC) granted a no-action position on fee disclosure statements and renewals for advice businesses in Victoria working under Stage 4 COVID-19 restrictions.

This is the result of joint advocacy by the Financial Services Council (FSC), the Financial Planning Association and the Association of Financial Advisers, stemming from members of our Advice Board Committee sharing their experience of particular hardship in Victoria.

The FSC has welcomed the pragmatic approach taken by ASIC as the sector responds to the needs of consumers during these difficult times.

It’s a small and temporary change that potentially has huge ramifications for the duration of the restrictions. It strikes at deeper issues raging within the massive legislative-compliance net entangling thousands of advice businesses and professionals across Australia.

Advice businesses, like all businesses, plan business activity: from employing or dismissing staff, running at a profit or loss, paying tax and attracting consumers. There is no end date to the uncertainty the pandemic is wreaking on the livelihoods of these businesses, as it is for millions of Australians.

Stage 4 restrictions have made it difficult for advice businesses to comply with what are technical and prescriptive obligations, such as the fee disclosure and renewal obligations the no-action position covers. The temporary closure of

19MM221020_01-15.indd 15

schools and daycare centres forces staff to choose essential care responsibilities over performing vital compliance functions within advice businesses to meet these obligations. Travel restrictions and the limited capacity for the use of technology exacerbate the pressure such businesses face, potentially forcing them to close and ultimately deprive consumers of professional advice.

This step from ASIC, and the preceding clarity on electronic renewals announced recently - also the result of advocacy by the FSC and advice associations – will enable advice businesses to conduct their operations with technological or electronic alternatives.

This is vital because millions of Australians are reconsidering their financial positions. Many are accessing their super, or facing

redundancy and unemployment, others are entering retirement.

Industry has been meeting these needs and adapting their operations to do so.

However, too many consumers are being priced out of receiving critical financial advice when they need it most due to unacceptably high advice costs.

Let’s be clear – regulation is the largest contributor to the cost of advice. On top of this, advice businesses across Australia are fielding emerging challenges as well as old ones. Lockdowns, working from home and escalating pressure on the mental health of the advice profession is occurring as businesses continue to ready compliance systems for the passage of Royal Commission legislation and adapt to other tectonic shifts reimagining the financial advice landscape. These

include the transition to open banking, the acceleration of fintech, and the largest proliferation of state assistance to consumers and businesses seen since the Second World War. All such developments will shape the innovation, expertise and products that deliver quality advice for millions of consumers, and the very issues they need advice on. Many such issues are quite small and simple but are held back by regulations that lack sophistication.

Our consumer protection framework is functioning, but for it to be sustainable it must work much more efficiently. Ironically, we have reached a situation in which regulatory pragmatism is preventing consumer detriment, not necessarily the regulation itself.

That regulators are assessing industry concerns, and now taking no-action positions and granting relief or clarity within their powers is encouraging.

ASIC recently extended the COVID-19 relief it announced in June for providing flexibility in the use of statements of advice and records of advice. It is another example of regulatory pragmatism now having to manage rather than resolve the gargantuan complexity and confusion besetting the provision of financial advice.

There is still much work to be done to achieve a simpler and less costly advice system in Australia.

As the focus on every possible measure to support our economic recovery shifts into full-gear, next month the FSC launches Rice Warner’s ground-breaking Future of Advice report to start that conversation.

14/10/2020 5:56:15 PM

16 | Money Management October 22, 2020

Budget

IRONING OUT THE WRINKLES IN THE BUDGET’S NEW SUPER APPROACH

Mike Taylor writes that the Government’s Your Future, Your Super Budget announcement might look good at first blush but contains a number of wrinkles which need to be ironed out.

THERE WAS SO much the financial planning industry might have hoped for from the 2020 Federal Budget, not least the tax deductibility of financial advice and greater clarity around the future of the Financial Adviser Standards and Ethics Authority (FASEA) but, in the end, it was all about superannuation.

The only significant financial services inclusion in the Federal Budget proved to be the Government’s Your Future, Your Super package which is scheduled to be implemented by 1 July, 2021, meaning that there

19MM221020_16-35.indd 16

will be yet another Federal Budget before it actually becomes law.

And, already, there are loud calls from the broader financial services industry about the need for significant consultation around the Government’s new superannuation policy position in circumstances where some of the underlying assumptions have already been proved not to add up.

Those assumptions have been drawn from the somewhat vague findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the

recommendations of the Productivity Commission following its review into superannuation.

Not unimportantly, the Government’s Budget policy formula is also broadly consistent with a submission put to it by the Financial Services Council (FSC) emanating out of that organisation’s Accelerating Economic Recovery document developed earlier this year.

So, what did the Treasurer, Josh Frydenberg announce on Budget night?

According to Frydenberg, the new Your Future, Your Super package which commences on 1

15/10/2020 10:04:36 AM

October 22, 2020 Money Management | 17

Budget

July, next year, “will improve the superannuation system by: • Having your superannuation follow you: preventing the creation of unintended multiple superannuation accounts when employees change jobs.

• Making it easier to choose a better fund: members will have access to a new interactive online YourSuper comparison tool which will encourage funds to compete harder for members’ savings.

• Holding funds to account for underperformance: to protect members from poor outcomes and encourage funds to lower costs the Government will require superannuation products to meet an annual objective performance test. Those that fail will be required to inform members. Persistently underperforming products will be prevented from taking on new members.

• Increasing transparency and accountability: the Government will increase trustee accountability by strengthening their obligations to ensure trustees only act in the best financial interests of members. The Government will also require superannuation funds to provide better information regarding how they manage and spend members’ money in advance of Annual Members’ Meetings.

One of the foundations of the Government’s policy position is

19MM221020_16-35.indd 17

the Productivity Commission’s (PC’s) 2018 report ‘Assessing the efficiency and effectiveness of superannuation’ authored in part by former PC deputy chair, Karen Chester who is now a deputy chair of the Australian Securities and Investments Commission (ASIC).

A central element of that PC report was a revamping of the default selection system with the PC’s own synopsis of its recommendations being as follows: • Members should only be defaulted once, and move to a new fund only when they choose. Members should also be empowered to choose their own super product from a ‘best in show’ shortlist, set by a competitive and independent process. This will bring benefits above and beyond simply removing underperformers.

• All MySuper and choice products should have to earn the ‘right to remain’ in the system under elevated outcomes tests. Weeding out persistent underperformers will make choosing a product safer for members.

• All trustee boards need to steadfastly appoint skilled board members, better manage unavoidable conflicts of interest, and promote member outcomes without fear or favour.

• Regulators need clearer roles, accountability and powers to confidently monitor trustee conduct and enforce the law when it is transgressed. A strong member voice is also needed.

“Relying on disclosure only to influence behaviour puts the onus on consumers, rather than the regulators, to deal with underperformance.”

– Eva Scheerlinck Sound familiar? It should. There is significant congruence between the PC’s 2018 position on superannuation and the Government’s new policy approach.

However, the difficulty for the Government is that the PC’s proposals had already been revealed as being flawed at the time of their initial release in 2017 and their final public release in January 2019.

And the single most significant flaw is the continuing reality that there is no certainty that the superannuation fund which was deemed to be the top performer in January 2019 would have maintained that position 12 months’ later in January 2020.

Indeed, Money Management’s sister publication, Super Review, in September 2019 ran the numbers on what would happen if the Federal Government adopted the PC’s recommendations with the analysis covering which funds would have made it into a “best in show” superannuation top 10 across three six-months periods – December 2017, June 2018 and December 2018.

That analysis showed that only two funds made it onto the

EVA SCHEERLINCK

Continued on page 18

15/10/2020 10:04:44 AM

18 | Money Management October 22, 2020

Budget

Continued from page 17 list across all three periods.

In the wake of the Government’s Budget announcement superannuation fund actuaries have run similar exercises and found similar outcomes across one, three, five and 10-year timeframes with the disturbing bottom line that members who selected the bestperforming MySuper product in 2018 would have found themselves better off in 87% of other products in the intervening period.

What the actuaries also found was that, while the rule is that “past performance is no indicator of future performance”, people selecting superannuation funds would have been on safer ground selecting a fund based on its relative performance over 10 years rather than one, three or even five years.

This, of course, would give the advantage to industry funds which have been acknowledged across all data bases as having outperformed the retail funds over the long haul.

Deloitte superannuation partner, Russell Mason, also suggests that the Government’s stapling approach appears to play into the hands of the funds which represent the first port of all for young people entering the workforce such as big retail industry fund, REST or liquor and hospitality industry fund, HostPlus.

“People might end up pursuing careers in the law or banking but it is not unusual for them to start their lives packing shelves at Woolworths or pulling beers at the local pub,” he said.

“That means that their first fund selection might be either REST or HostPlus and stapling means

19MM221020_16-35.indd 18

they would then need to make a distinct choice with respect to another fund such as LegalSuper or UniSuper.”

For its part, major superannuation investment consultancy, JANA, has pointed to unintended consequences flowing from the Government’s approach.

JANA principal consultant, Matthew Griffith, suggests that imposing an annual performance test and blocking underperforming funds from taking on new members has the potential to reduce innovation and promote index-hugging on the part of superannuation funds.

“We fear that the drive to be within 0.50% of an index benchmark will result in an “averageness” mindset that might blunt enthusiasm for adopting points of difference which may be truly beneficial to members over the longer term,” he said.

Deloitte’s Mason also suggests that the benefits delivered to members by superannuation funds is about more than just investment returns, with factors

such as insurance inside superannuation needing to be taken into account, particularly with respect to people working in dangerous occupations.

It is these factors which have prompted the major superannuation industry organisations such as the Association of Superannuation Funds of Australia (ASFA) and the Australian Institute of Superannuation Trustees (AIST) to strongly urge the Government to allow significant consultations before proceeding with the changes.

ASFA chief executive, Dr Martin Fahy, said that in the absence of the release of the Retirement Income Review and the lack of specificity in the Budget papers, it was unclear how the changes would work in practice or what the implications would be for competition, efficiency and incumbents in the sector.

“We need to avoid reducing the complexity of MySuper to a singularity without any reference to the nuance of member

15/10/2020 10:04:58 AM

October 22, 2020 Money Management | 19

Budget

Table 1: Super fund comparative performance over five years

Fund

Fund Size: 2015

2016

2017

2018

2019

2020

Cumulative

Rest MySuper - Core Strategy

$32,184

1.82%

11.07%

8.76%

5.96%

-1.05%

28.96%

TelstraSuper - MySuper Balanced

$3,296

1.31%

11.44%

8.28%

7.07%

-1.81%

28.52%

Commonwealth Bank Group Super MySuper - Balanced

$3,829

3.31%

9.04%

6.53%

7.52%

-0.46%

28.44%

CareSuper - MySuper Balanced

$7,665

4.45%

11.70%

10.10%

6.88%

0.22%

37.59%

AustralianSuper - MySuper Balanced

$56,824

4.54%

12.44%

11.08%

8.67%

0.52%

42.63%

Catholic Super - Balanced (MySuper)

$3,792

5.73%

11.78%

9.80%

5.02%

0.52%

36.99%

Cbus - Growth (Cbus MySuper)

-

5.47%

11.85%

10.95%

6.99%

0.75%

41.08%

UniSuper Accum - MySuper Balanced

-

5.91%

9.60%

10.45%

9.88%

0.87%

42.10%

Hostplus MySuper - Balanced

$14,562

5.00%

13.20%

12.50%

6.80%

-1.85%

40.17%

BUSSQ MySuper - Balanced Growth

$2,462

7.00%

9.76%

8.79%

4.89%

2.46%

37.31%

Source: SuperRatings MySuper universe

preferences and long-term fund performance,” he said.

Fahy said the devil would be in the detail and that ASFA was committed to working with the Government on the issue.

AIST chief executive, Eva Scheerlinck also bemoaned the lack of detail in the Government’s proposals and urged consultation.

“We are concerned that millions of members could be stapled to an underperforming fund with the scheme relying on disclosure to get people to switch to a better fund,” she said.

“We know from research – including that produced recently

by ASIC – that mandated disclosure and warnings have been proven to ineffective in influencing consumer behaviour.

Moreover, relying on disclosure only to influence behaviour puts the onus on consumers, rather than the regulators, to deal with underperformance.”

“We have seen how poorly disclosure works in the electricity market, where

19MM221020_16-35.indd 19

consumers remain for years on uncompetitive pricing plans, despite being warned that there are better deals elsewhere.

“It also needs to be noted that not all super funds are the same, even high-performing ones. That is, some are specifically tailored to workplaces in particular highrisk workplaces, and the stapling proposed does not address the risk of changing industries and having insurance that is no longer appropriate.

“Moreover, stapling to one fund for life will provide even greater structural incentives for marketing super to young, disengaged Australians where they could be sold into potentially underperforming funds. And if you are stapled to a dud fund, it won’t matter how many workplaces you go to, you will still be in a dud fund, whereas under the existing default system, most disengaged workers will be automatically placed into a default fund, which on average outperforms.

“In a compulsory super system, good disclosure is essential, and this includes providing simple, accessible tools for consumers to make informed decisions about their super. But for all the shortcomings of disclosure described above, naming and shaming won’t go anywhere near to fixing systemic underperformance in our super system, which is a job for the regulators.

“So, there is a real danger when you are stapling people to a product and relying only on disclosure alone to protect their interests.”

In the meantime, superannuation fund executives will not have been reassured by the alacrity with which Australian Prudential Regulation Authority (APRA) deputy chair, Helen Rowell sought to tie the Government’s Budget measures to the authority’s performance heatmap approach in circumstances where funds are still questioning the accuracy of the formula.

15/10/2020 10:29:41 AM

20 | Money Management October 22, 2020

Small/mid caps

EXPLORING THE SMALL/MID-CAP FRONTIER As investors search for growth in the new (postCOVID-19) world, Chris Dastoor writes, small/ mid-caps are the frontier – although it will require experienced trailblazers to navigate.

IN THE FRONTIER of equities, small and mid caps are the untamed Wild West – they have great potential for riches and rewards but there are plenty of unknown risks and volatility for those unfamiliar with the landscape.

Small and mid-cap equities offer greater exposure to a wider variety of lesser-known growth companies, rather than concentrating on the smaller amount of major players.

Small caps have greater potential for growth as they are less mature than large caps, but the sparse yet abundant nature of opportunities means it is important to be able to pick and choose quality investments.

According to FE Analytics, within the Australian Core Strategies (ACS) universe, the global small/mid-cap sector returned 5.16%, while its Australian counterpart returned 4.2% over the year to 30 September, 2020 (see Chart 1).

In that same time period, the global and Australian equities

19MM221020_16-35.indd 20

sectors reported 3.45% returns and 6.63% losses, respectively.

However, when looking at the past six months, Australian small/ mid-caps returned 40.36%, followed by global small/mid-caps (19.85%), Australian equities (18.64%) and global equities (11.02%).

Tim Hall, Fairview portfolio manager, said small-caps were trading on a valuation discount, compared to the large-cap sector.

“According to the investment banks, small caps are presenting at least twice the levels of earnings growth of the big caps,” Hall said.

“Within the small caps sector, the opportunity to tap into the longstanding thematic of digitisation and disruption is larger than many investors expect.”

VOLATILITY While the sector reported outperformance, this came with increased volatility.

Over the previous year to 30 September, 2020, out of the 37 sectors listed in the ACS universe,

14/10/2020 5:55:22 PM

October 22, 2020 Money Management | 21

Small/mid Strap caps

the Australian small/mid-cap sector was the fifth most volatile, with a volatility of 26.26 while the global small/mid-cap sector was the 11th most volatile (20.28).

As with any sector, Hall said small and mid caps were best utilised as part of an overall investment portfolio, given the higher volatility in returns.

“Stock selection is absolutely paramount in the small-cap space because the risk parameters are higher,” Hall said. “Knowing the risks and opportunities which exist in the sector, a sensible way for investors to access small caps is via active managers.”

However, Stephen Wood, Eiger Capital portfolio manager, said volatility was less of a factor if an investor invested in a fund with a sensible strategy.

“We’re of the view that if you do sensible things, you can get the risk of the portfolio down to a level where it is consistent with the ASX 100, let alone the ASX Small Ordinaries index.

“There’s more to small caps than just generating a bit of alpha

or wealth creation; you have to be careful you don’t end up with something that’s a bucking bronco.”

DEFENSE Although small caps had a reputation for growth, which subsequently came with the risk of volatility, it was still possible to approach the sector with a defensive mindset.

Nick Cregan, Fairlight Asset Management portfolio manager, said there were plenty of defensive opportunities in the space.

“Does that conflict with each other? Well yes, would be the answer,” Cregan said. “The market has, to a large degree, been very focused on growth assets – the growth end of the small-cap market.”

Cregan said he did not believe you needed to be “swinging for the fences” in order to generate a good return over and above the index.

“The reason for that is in our index there’s quite a few businesses that are very low quality and don’t make much money through the cycle,” Cregan said. “By avoiding

Chart 1: Performance of Australian and global small/mid-cap sectors versus the broader equity counterparts over the past year to 30 September 2020

“There’s more to small caps than just generating a bit of alpha or wealth creation; you have to be careful you don’t end up with something that’s a bucking bronco.”

– Stephen Wood, Eiger Capital that part of the market, you can harvest the small-cap premium without taking on undue risk.”

Even in the small-cap sectors, it was still possible to screen out firms that required a lot debt.

“That keeps us out of utilities and property trusts; we don’t like highly-cyclical businesses and that keeps us out of banks, oil, gas and mining, or businesses that fail our ESG [environmental, social and governance] screening,” Cregan said.

“We don’t like single points of failure, so biotech and unproven technologies are all screened out.

“The characteristics we’re looking for are high recurring revenues and customers that are locked into a business model.

“We typically find them in the consumer, media, light industrial, niche technology, and healthcare space.”

US AGAINST THE WORLD

Source: FE Analytics

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As with equities, investors could choose between focusing at home, here in Australia, or having a broader investment base by looking globally.

Robert Calnon, OC senior investment analyst, said staying within Australia allowed a stricter focus on a defined range of equities.

“We have a team of four, we can travel around our market

inside a day – we can be in either Brisbane or Perth for a day or half a day,” Calnon said.

“If you’re a global team, you certainly can’t do it with a team of four, you’d probably need a team of 40 if you’re truly a global investor.

“But you’d have a spend a lot of days on a plane which is also impossible in a COVID environment.”

Calnon said it was less efficient to be in a global product versus a fund focused on the concentrated Australian small/ mid-cap market.

“We can develop an edge, we can develop relationships with management, we can have a focus on the 100 stocks we look at, rather than maybe 5,000 stocks that you can be investing in global small caps,” Calnon said.

“There’s a cultural alignment speaking to Australian managers about an Australian business to Australian investors.

“Whereas if you’re a US fund and looking at a company in France and it’s run by a Brit… those conversations can be very different, as is the relationships you develop.”

Greg Dean, Cambridge Global Asset Management principal and portfolio manager, said there was strong adviser interest for global small caps.

Continued on page 22

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22 | Money Management October 22, 2020

Small/mid caps

Continued from page 21 “If you’re looking at it from the perspective of allocators, it’s no secret that fee budgets are under pressure,” Dean said.

“Global small caps are an area within global equities where people are really finding it hard to replicate or do it themselves.

“A lot of the internalisation of large-cap equity management is freeing out budget to invest in the more labour intensive but also potentially more opportunistic area which is global small caps.

“You need a team that’s staffed, resourced and experienced in order to exploit the opportunity so we’re seeing a lot of momentum for allocators who are growing.”

However, Wood said investing only in Australian small caps still allowed for global opportunities as there were global companies invested in the Australian Securities Exchange (ASX).

“Take some of the stocks that have really come through COVID19 with completely transformed and enhanced business models like Corporate Travel, Redbubble, Marley Spoon – they’re all global businesses,” Wood said.

“Yes, it’s listed here, but what you get out of the Australian small/mid-cap space is that you get some traditional businesses… but it’s also going to include global small/mid-caps.

“Within the Australian space there are an awful lot of global opportunities.”

ACTIVE V INDEX As with other equity sectors, there was also the choice between active management or simply following an index-tracking

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exchange traded fund (ETF) with both having their own advantages.

Dean said because of the apprehension due to volatility in the sector, choosing an active manager was the best way to secure higher returns.

“Not every business is a great business and [small caps] are 10 times the size of the large-cap universe,” Dean said.

“We have the benefit of being able to be selective, but active management means avoiding business that aren’t growing or aren’t run by smart, honest and capable people.

“Different to large companies, a couple of people can really make the difference between compounding above average and compounding at a negative number, and that’s where the risk does come in.

“We manage that risk by looking at businesses we understand, trying to evidence long-term track records, identify strong balance sheets and not overpaying for them.”

Hall said active management was necessary because of the sheer number of mispriced opportunities in the small-cap sector.

“We’ve witnessed over the last five years a 30% reduction in the number of analysts’ earnings estimates,” Hall said.

“But moreover, the analysts aren’t updating those numbers as regularly and certainly we saw during COVID-19, not only did companies pull guidance but there was also a couple of investment banks that pulled in analyst estimates because the outlook was so uncertain.

“That gives us an incredible

opportunity because the premise of our investment process is around company contact.

“We’ll hold over 600 company management meetings on an annual basis, with the expressed intention of trying to identify or unearth insights that we can then use to understand which opportunities are mispriced.”

Thong Nguyen, BetaShares senior portfolio manager, said they agreed with active managers that passive investment could be inefficient in this context, but it was possible for passive funds to adapt.

“We agree with the active managers that there are better ways to gain exposure to small-cap stocks than by a passive exposure that aims to track the ASX Small Ords Index,” Nguyen said.

“This is because this segment of the market is inefficient and less researched than large-cap stocks; where we differ is in what that ‘better way’ is, and how to access small caps.”

“Small caps can be extremely

risky and volatile, and many have business models that are yet to be proven over the long run and a big part of successful smallcap investing involves avoiding the losers.”

Small/mid-cap ETFs had the same advantages as other ETFs as they were an easy to buy, liquid asset.

Nguyen said their small-cap strategy, despite being a passive one, was still able to utilise screens to remove companies which could be a drag on longterm performance.

“These screens aim to identify companies with positive earnings and a strong ability to service debt,” Nguyen said.

“Relative valuation metrics, price momentum and liquidity are also evaluated as part of the stock selection process.

“The result is a tailored portfolio of typically between 50 and 100 small-cap stocks, which aims to outperform the Small Ords Index.”

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_FP ad Test.indd 23

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24 | Money Management October 22, 2020

Wealth management

THE INDUSTRY NEEDS SMARTER REGULATION As a part of its wealth management series, Money Management speaks to financial planning groups and asks them to share their views on the industry in a new environment. This month, Money Management spoke to Infocus managing director, Darren Steinhardt, and Roy McKelvie, non-executive director and chair.

MONEY MANAGEMENT: WHAT are the strengths of your business and how has COVID-19 impacted it?

Darren Steinhardt: We are first and foremost an advice business, we have a proud 26-year history with an advisory network of 200 advisers around the country.

In addition to our advisory network we also have an infrastructure arm to our business. We run our own IT platform, which is a real differentiator when compared to our competitors, but for us technology is such a fundamental and vital piece of the

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infrastructure to the business and as such it is something into which we will continually invest.

This technology provides us with a degree of – I suppose nimbleness – that is not necessarily available to others in the industry; for example as an IT business we are able to build and evolve our IT infrastructure to enhance operational efficiency in the face of an ever-changing regulatory landscape.

We have invested heavily over many years to build this IT infrastructure, including a digital advisory engagement solution.

This solution has come into its

own during the COVID-19 lockdowns; pre-COVID-19 we had around a quarter of advisers using this solution on a regular basis but post-COVID-19 this figure jumped to nearly 100%.

And as a licensee partner, we want to help advisers grow and evolve their businesses; we are good at assisting with revenue growth as well as efficiency growth, this is where IT really comes in.

MM: Is it easy to onboard new advisers right now?

DS: We want to grow with advisers that align to our culture and quality standards. We had healthy growth

over FY21 Q1 welcoming an additional nine advisory practices to our network and discontinuing the partnership with one firm; we received 78 inquiries during the period and we are continuing a conversation with many of them, so there are still many advisers knocking at our door to have a conversation about potential partnership.

However, we need to be wise as to who we welcome into our network, we are charged with responsibility of looking after now over $7.5 billion of clients’ money (and growing) and we take our professional responsibilities very

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October 22, 2020 Money Management | 25

Wealth management

DARREN STEINHARDT

seriously, so we need to make sure that we maintain the quality of advisers within our network at a high standard.

The process we adhere to when engaging with potential new advisers to our network is robust, including an interview with each member of our leadership team so they [prospective advisers] get the opportunity of speaking to the individuals they would be working with on a day to day basis (i.e. someone from the professional standards team, from research, from business services or business development team).

So there are around seven or eight different people involved in the process, and every person has got the authority and the right to veto, if they do not feel comfortable with the prospective adviser for any reason, they have the authority to disengage.

Looking forward, I think that there will still be an opportunity for one adviser practices, but not for those small one adviser practices. If a firm is only turning over a few hundred thousand in revenue then the costs are probably going to be too high and margins too small for them to be sustainable.

We are certainly not seeking to partner with small advisory practices, unless we can see strong grounds for growth.

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MM: What is your view on regulation across the financial services sector?

DS: It is exceptionally overregulated, very much overregulated. I think the Australian Securities and Investments Commission (ASIC) does a wonderful job with the resources that it has, but there appear to be many things that it cannot do due to insufficient resources. For example, the supervision and engagement with the mid-sized to large Australian financial services licenses (AFSLs) is robust, but the smaller end of town does not receive the same attention. This raises a concern that I have around self-licensing, I fully support it, but there is a risk that self-licensed firms would become almost ungoverned or unregulated because ASIC does not have the resources to get to them.

Roy McKelvie: Sadly regulation is driven by politicians and politicians react to things that happen so what actually happens is you have well-intentioned views that the purpose of regulation is to protect both clients and, indeed, to protect the industry but the problem is that regulation is often happening in reaction to particular events. In particular, in the financial planning industry, they react to events where inappropriate things are done by people that disadvantage ordinary citizens. And when that happens quite rightly our politicians say well we need to act to protect people, and that is all fine.

The problem is that politicians seem to confuse the volume of regulation, with the effectiveness of regulation. I think all the legitimate players in the industry want and understand the need for proper regulation and in fact

“There is a risk that self-licensed firms would become almost ungoverned or unregulated because ASIC does not have the resources to get to them.� – Darren Steinhardt welcome it, as we welcome it. The issue is the volume of regulation, a lot of which is unnecessary, duplicates and/or complicates other regulation. So you have one regulator implementing and governing the adoption of its rules in a certain way, while another that has slightly different standards and expectations, requires the adoption of a completely different set of rules.

What we have now is politicians who think that if we have lots and lots of regulation we will protect people, but the people who are bad apples in the industry can fill in a form as well as anybody else; if the bad apples are really determined to do something they are going to find a way to do it.

What I think the industry needs is the smarter regulation, it needs more effective regulation, it needs to use tools of technology to allow regulation to achieve the purpose of overarching goals to protect the citizens, to protect clients, and often this not the case. People need public policy, particularly in financial services, so we need to educate those public policymakers to make sure that we can use the technology, to drive smart regulation, regulation that does not increase the costs to the industry and ordinary citizens, and that still provides that appropriate level of protection for citizens and protection for the industry.

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26 | Money Management October 22, 2020

Equities

WHY VALUE MATTERS WHEN GROWTH IS ON A TEAR Jacob Mitchell writes why market extremes are indicating a market rotation might be on the cards between value and growth.

VALUE IS DEAD. It’s a phrase anyone following the financial press would have heard regularly in recent times.

It’s certainly not the first market environment in which value has been killed off by a swathe of commentators and it won’t be last.

It comes as no surprise that value-style investors are challenged during this period of record-breaking market extremes. This year alone the S&P 500 has had 22 record closes and the tech-heavy NASDAQ has had 45 record closes. This is during a period in which the index has never been so top-heavy, with a handful of mega-cap tech stocks leading the market.

Chart 1 illustrates market leadership over the last 30 years, recently breaching the extremes of the dot-com bubble. US market cap concentration (yellow) is now very high and market breadth (the measure of stocks outperforming the index) is very low. Currently just 30% of stocks in the S&P 500 are outperforming.

In light blue, you can see the rolling performance of traditional value stocks relative to the market. This provides an insight into how lower multiple stocks have performed on a sectorneutral basis. We currently see this metric also at historical extremes – in negative territory on a three-year rolling return basis.

As the market has herded into a very narrow selection of stocks,

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multiple dispersion has likewise reached extraordinary levels.

Investors are prepared to pay substantially more for stocks they like (perceived winners) relative to stocks they don’t like (perceived losers) across every sector.

EVEN GREAT BUSINESSES CAN DE-RATE Many may argue these nose-bleed valuations of businesses at the top of the market will stand the test of time, because they’re applied to great stocks; new age businesses, disruptors and the leaders of seismic structural change.

We don’t disagree that disruption is real and many at the forefront of change will be great businesses, but this does not automatically make them great investments at today’s elevated valuations. It would be foolish to ignore the fact that as the dot-com bubble burst even great businesses such as Microsoft and Cisco de-rated.

In 1999, Microsoft was trading at a peak multiple of around 85 times earnings. It was then, and still remains, a great business but 85 times earnings was not the right price to pay. By 2011 the market de-rated this great business to an earnings multiple of less than 10 times. Throughout this period, Microsoft’s earnings continued to grow but its share price fell and underperformed the index because the market de-rated the stock.

Those who invested in Microsoft

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October 22, 2020 Money Management | 27

Equities Strap

Chart 1: Market leadership over the last 30 years

Source: Factset, Antipodes

at those excessive multiples would not have broken-even on their investment until 2014.

THE EMERGENCE OF A MARKET ROTATION? Recent share market volatility during September is a reminder of the risky game being played by investors who continue to pour capital into growth and momentum alone.

We know the market extremes outlined above have previously signalled major turning points, where the less popular, lower multiple stocks begin outperforming the popular market leaders trading on extended valuations.

A rotation, or compression in extreme multiple dispersion, can occur with a cyclical rebound in economic activity or a change in investment preferences, much like that experienced following

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the ‘tech wreck’.

The emergence of China and the very large investment boom that followed triggered a resources super-cycle that lasted more than a decade. Here we saw a major shift in the market narrative in which the lower multiple losers – or value stocks of the dot-com boom – became the new market darlings.

Today’s narrow narrative can turn as economies cyclically recover from COVID-19 and stimulus switches from personal income to infrastructure investment. Lower multiple stocks – or value – can outperform in this environment.

A mild cyclical recovery may be here sooner than many realise as datapoints around a vaccine suggest a positive outcome in the next six months. A vaccine would be material to the economically sensitive parts of the market that

benefit from re-opening.

We also see a major tailwind for an emerging cycle shift in decarbonisation, with Europe leading the charge. Europe’s multi-trillion “New Green Deal” announced in 2019 paves the way for a super-cycle in power infrastructure, equivalent to incremental investment worth 2% of gross domestic product (GDP) per annum for the next 10 years. It is our opinion that long-term investors will be served well by gaining exposure to the beneficiaries of decarbonisation trends. Many of these are great cyclical business, currently trading on very low multiples.

Attempting to place a timeframe on a major cycle shift is futile, but while markets can stay irrational for long periods of time, they can also adjust in the blink of an eye.

For perspective it is worth

Continued on page 28

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28 | Money Management October 22, 2020

Equities

Continued from page 27 considering the historical price performance of value vs growth.

Chart 2 captures the sharp rotation from the dot-com bubble as market preferences quickly shifted from growth to value.

What could the outperformance of value look like given today’s new historical extremes, coupled with positive news of a vaccine or an investment cycle in real assets?

The rubber band on falling rates and the melt-up in growth appears very stretched.

IDENTIFYING TOMORROW’S MARKET WINNERS Investors shouldn’t buy lower multiple cyclicals simply because they’re cheap, as some businesses may be available at cheap valuations because they are

in structural decline.

What we do is simple. We search the world for great businesses, that are attractively priced and have embedded growth opportunities which the market is currently overlooking.

A great example right now is Volkswagen Group.

As the focus of the media and the Robinhood investors has been on Tesla, investors have forgotten that ‘diesel-gate’ (Volkswagen’s emissions scandal) forced Volkswagen to get on the front foot of electrification. Antipodes believes VW may emerge as one of the largest manufactures of EVs within the next few years. Here we have a scale incumbent that has

already made the investment in developing an electric range but will also benefit from a rebound in the global autocycle. VW is also a great way to get exposure to the strong China rebound. This business comes at an incredibly cheap multiple – around six times our internal future earnings assumptions and roughly a 30% discount to book.

Alibaba is another great business we view as being attractively priced. It may surprise some readers that we’d list an e-commerce giant as a potential winner in a value-oriented market.

We see Alibaba benefitting from long-term secular growth trends where earnings can compound

Chart 2: Global sector neutral composite valuation of expensive rel. cheap

Source: Factset, Antipodes

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October 22, 2020 Money Management | 29

Equities

Chart 3: Rolling 24-Month Relative Performance of Value vs. Growth

Source: Morningstar Direct

20-25% per annum over our investment horizon, while the company is valued at a very attractive 20 times earnings.

China adopted e-commerce very early, at a time when retail was just beginning to modernise.

Consequently, the leading retailers in China are ecommerce companies, and they have a huge scale advantage. Alibaba is 14 times the size of the largest offline player and hugely dominant across all retail. This is very different to the US market where Amazon’s retail business is only half the size of Walmart. The accelerated adoption of e-commerce in China in the wake of COVID-19 and the opportunity for Alibaba to service the some one billion people in Tier 3 and below cities are tailwinds for growth.

Alibaba is one of those rare

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companies servicing China’s low and high income consumers.

Incomes in lower tier cities have increased to a level where discretionary spending typically accelerates; these are China’s emerging consumers. Alibaba also services China’s wealthier urban population, roughly the size of the US, where incomes are growing 15% per annum.

Both are examples of what we believe are great businesses trading at attractive valuations, and businesses we believe have the potential to outperform.

RIGHT NOW, VALUE IS MORE IMPORTANT THAN EVER There are many investors who today continue to chase growth and momentum. Blinded by the attraction of short-term gains,

they ignore the importance of some of the strongest attributes of value-style investing – longterm portfolio stability and capital preservation.

Much is said about value traps.

But given how extreme multiple dispersion is today there will be just as many growth traps as there are value traps, and this extreme multiple dispersion leaves us confident that the longterm future market leaders are most likely to be today’s misunderstood lower multiple stocks.

A value-style exposure in investment portfolios is now more important than ever for anyone wanting a smoother journey to achieving their long-term investment goals.

Jacob Mitchell is chief investment officer at Antipodes Partners.

14/10/2020 1:01:53 PM

30 | Money Management October 22, 2020

Infrastructure

LISTED VS UNLISTED: WHAT’S THE DIFFERENCE? While investors may know they should consider infrastructure in portfolios, writes Steven Klempster, they may be in the dark over the different types available to them.

THE LOCKDOWNS EXPERIENCED by most economies around the world have highlighted the fact that basic infrastructure – including electricity and gas, running water and sewage, and even the almost total reliance on communications services – is essential to our societies.

For investors, the current crisis has opened up an enormous opportunity, with infrastructure investment having an important role to play in the global recovery.

There are a number of benefits for investors in infrastructure as an asset class including its potential lower volatility, higher earnings stability through long-term steady cashflows and dividends, inflation protection and portfolio diversification characteristics

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relative to broader equities.

Investors usually access such assets in two ways; either by investing in securities listed on global exchanges, or by investing directly in the assets themselves and/or through pooled investment vehicles.

It’s common to hear the question ‘why listed?’ when it comes to investing in infrastructure. While some argue in favour of one approach over the other, we believe infrastructure is a homogenous asset class, and as such, the optimal allocation between listed and unlisted infrastructure is driven by individual investor circumstances.

For a rational investor, we believe listed should be considered equally and alongside unlisted when considering an allocation to

infrastructure. Inherent in this decision are a number of factors including fees, liquidity and portfolio rebalancing requirements, risk exposures, diversification, cashflows, opportunity sets and perhaps most importantly, riskadjusted valuations, as opposed to splitting the asset class by method of accessing equity.

Some of the common arguments used for investing either through listed or unlisted approaches include:

Assets owned by listed and unlisted infrastructure are different Despite the common assumption that listed and unlisted infrastructure are distinct asset classes, we see the physical

characteristics of assets owned by listed and unlisted investors as similar, if not the same.

1) Similar assets can be accessed via both listed or unlisted markets For example, access to an airport asset owned in an infrastructure fund of unlisted assets can be very similar to, if not the same as, access to an airport asset owned in the listed market.

Melbourne Airport is owned by unlisted investors, while Sydney Airport is owned by listed investors.

Other key listed airports include Frankfurt Airport, Paris Airports and Tokyo Haneda Airport, while unlisted airports include Brussels Airport and Bristol Airport. On a passenger traffic basis, eight of the world’s top 20 airports and 15 of the

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October 22, 2020 Money Management | 31

Infrastructure top 50 airports are owned, partlyowned, or operated by listed airport companies and groups.

The same applies to other sectors such as tollroads and water utilities.

2) Some assets have equity stakes in both listed and unlisted markets Investors can access different infrastructure opportunities – such as Vienna Airport, Heathrow Airport, M1 Eastern Distributor, Ontario’s 407 Express Toll Route, Queensland Motorways in Australia, APRR (France) and Aleatica (Mexico) – through both listed and unlisted routes.

Given the inherent similarities in the types and physical characteristics of both listed and unlisted infrastructure assets, it is difficult to differentiate infrastructure on the basis of ownership. As such, the immaterial difference between the physical nature and characteristics of the assets owned by listed and unlisted investors suggests they are largely homogenous, as opposed to distinctly different by nature.

Regulators treat listed and unlisted infrastructure businesses differently The regulators of infrastructure businesses are the same, regardless of who owns them. As monopoly providers of essential services, infrastructure businesses are regulated to guarantee certain outcomes, such as the provision of fair and transparent pricing, and adherence to rules around service quality, capital expenditure, maintenance and upkeep.

As regulated infrastructure businesses are subject to long-term rules governing their rate of return on equity (ROE), it is only prudent that a core component of a listed infrastructure investor’s research involves analysing regulatory documents and speaking with regulators around the world. One common observation is that there is only one regulator for monopoly assets within a specific sector and jurisdiction, meaning that listed and unlisted investors do not have an advantage over one other from a regulatory perspective.

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Regulators rarely pay attention to the ownership of the asset, except for some focus on capital structures which have some bearing on returns.

Investing in unlisted infrastructure is like buying private equity Some argue that unlisted infrastructure investors have better control as they have direct ownership and management of assets, inferring it is akin to buying private equity. However, it must be highlighted that it is difficult for unlisted infrastructure to outperform on purchase price or general market moves alone. Unlisted valuations generally trade at substantial premiums to the listed market and unlisted buyers must assume this premium when they compete for new assets.

It is certainly true private equity has greater active ownership of assets compared to public equity investing, for example, by exerting greater influence through board seats, incentives, alignment of management, and control over costs and of cashflow.

A number of other common arguments in favour of unlisted investments include less focus on short-term earnings, less time spent by management on investor relations and roadshows, and quicker decisions by a smaller number of owners. However, the impact of private equity on returns has proven less prominent. In addition, the historical returns need to be seen in the context of higher fees and greater risk due to typically higher debt levels.

Some assets are only available to listed infrastructure investors There is some truth to this observation. Generally speaking, the types of infrastructure assets owned by listed and unlisted investors varies between sectors, with some either underowned or not owned at all by unlisted investors.

For example, many large regulated utilities (such as large city gas or electricity distribution networks, or large, long-distance pipeline infrastructure) are more

difficult to access for an unlisted investor. This is not to say it is impossible, but there is only a finite amount of capital that unlisted investors – whether individually or by consortium – can and will commit to single infrastructure investments, and so ownership of these larger assets becomes more difficult.

In addition, we believe there is a quality bias in favour of the listed market as the largest assets, more often than not, need to be listed.

Looking around the world, we find some of the largest airports, distribution and transmission networks, pipeline networks and water utilities are typically owned in listed markets.

Unlisted infrastructure performs better than listed It is sometimes argued that unlisted infrastructure has outperformed listed infrastructure and is less volatile. However, there are several information and valuation asymmetries that make comparing the returns and volatility of listed and unlisted infrastructure problematic.

Listed infrastructure is priced and valued daily, and is therefore influenced by market sentiment.

Unlisted infrastructure values meanwhile are based on periodic valuations of underlying assets, which typically occur on a quarterly, semi-annual or annual basis.

Unlisted infrastructure volatility calculations are based on valuation movements, which are typically a manager’s or independent thirdparty auditor’s best estimate of the expected future cashflows to investors of an infrastructure asset discounted to their present value.

To put this into the listed perspective, this is analogous to an investment manager taking their valuation model for a listed company and calculating the volatility from quarterly or annual movements in their internal valuations, irrespective of share price performance. Accordingly, these valuations are not equivalent to a market price, even on a quarterly basis, as they lag the market and are inherently smoothed.

Our research suggests these differences in performance do not persist over the medium to long term, and rather, the underlying performance of listed versus unlisted infrastructure is highly comparable.

Against this backdrop, we can see how listed and unlisted infrastructure are complementary.

Over the past decade, unlisted infrastructure has outperformed listed infrastructure, but listed (when valued quarterly, like unlisted) has actually exhibited slightly lower volatility. Past performance is not an indicator of future performance, and so, without a crystal ball, there is a strong argument for blending allocations between listed and unlisted, given they own the same types of assets.

For investors, the allocation to infrastructure as an asset class is the first question. Further questions should revolve around desires such as increasing a balanced portfolio’s inflation protection, reducing its volatility and increasing its diversification. Additionally we know investors like the potential for strong and consistent cashflow of unlisted infrastructure and so suggest they should look to at the high dividend yield of strong listed infrastructure companies too.

Only once an investor has decided to allocate to infrastructure should they consider how they wish to direct capital to listed and unlisted exposures. They will need to have a view on a number of factors including the opportunity set, diversification requirements, fees, liquidity and portfolio rebalancing requirements, and riskadjusted valuations. Indeed, blending listed and unlisted infrastructure investments has shown to actually reduce asset portfolio volatility.

Advisers are well-placed to help clients with these considerations and identify the best approach for them to gain exposure to infrastructure investments and the potential offered as the world recovers from the COVID-19 pandemic.

Steven Kempler is a portfolio manager at Maple-Brown Abbott.

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32 | Money Management October 22, 2020

Technology

PROTECTING DATA IN A REMOTE WORKING ENVIRONMENT Institutional investors need to be on high alert as COVID-19 has triggered a wave of significant cyber attacks and data breaches, writes George Takesian.

BY OCTOBER 2020, Australia has already tirelessly battled not only horrific bushfires but a global pandemic too. While these events have drastically impacted the everyday life of Australians and businesses, at the same time, we have seen a spike in cyber attacks which can affect anyone, particularly the vulnerable and distracted.

The Australian Department of Foreign Affairs and Trade and the Australian Cyber Security Centre have come together to denounce these cyber attackers who are “seeking to exploit the pandemic for their own gain”. In particular, the recent attacks have highlighted data vulnerabilities for investors. It goes to show that the saying ‘never let your guard down’ remains relevant – especially in a crisis.

RISKS FOR INVESTMENT MANAGERS AND SUPER FUNDS According to NTT’s 2020 ‘Global Threat Intelligence Report’, in Australia, financial services was the third-most targeted industry with 13% of cyber attacks. Since the COVID-19 pandemic began, we have seen a further increase in cyber attacks in the industry; resulting in attempted, and actualised, incidents of fraud and data breaches. Scammers are targeting not only the large players in the market (i.e. the big

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four banks) as they have in the past, but are now targeting smaller organisations, including boutique investment management firms and small superannuation funds. Some of the most worrying trends for the investment management and super fund industry include: Spear phishing Spear phishing attacks are fraudulent emails targeted at a specific individual, organisation or business. GreatHorn’s ‘2020 Phishing Attack Survey’ found that US organisations are remediating on average nearly 2,000 phishing attacks every month, with more than half of all respondents saying their enterprise has seen an increase in phishing attacks through email since the start of the pandemic.

While most of these have been, and remain, laughable due to the spelling inaccuracies and the ludicrousness of the requests, spear phishing attempts have become significantly more sophisticated in the last year.

Recently we have seen multiple instances of scammers, who clearly have knowledge of how the industry works, targeting organisations through their third parties. They often pose as a member of the finance or accounting team at an investment manager or super fund, and target the appointed fund

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October 22, 2020 Money Management | 33

Technology

“The recent increase in attempted cyber attacks have highlighted security vulnerabilities for the financial services industry, heightened by the ongoing remote working environment.” administrator or custodian to gain information regarding the organisation’s bank accounts.

The scammers often know details about these third-party relationships. This can happen when a corporate email account has been compromised (which is also increasing in frequency) but generally, it should be noted that information regarding third-party fund administrators and custodians can usually be found publicly online.

Manipulation of instructions sent via email The most troubling trend we are seeing is the interception and manipulation of emailed instructions. As with spear phishing, the most-successful attempts have been between investment managers and super funds and their third parties.

Recent incidents include manipulated cash payment instructions (such as for settlements of collateral movements), application and redemption requests, and capital call and distribution notices. This has involved scammers intercepting emails between organisations, changing just the bank account details, and then sending on the email with a near-identical email address and with the original recipient’s name displaying.

This has been observed across multiple asset classes, for instance, attempted fraudulent $100+ million capital calls for direct infrastructure assets, and in relation to lesser settlement and redemption request for equities and fixed income funds and mandates.

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WHAT CAN BE DONE TO MITIGATE THE RISK? No organisation, regardless of size, has unlimited resources – and the increasing sophistication of cyber attacks means that no organisation can be 100% secure.

Unfortunately, data breaches present enormous financial and reputational risk for businesses.

A few of the baseline steps that organisations should take to help protect themselves include: Conduct an IT security risk assessment – Performing an IT risk assessment helps to identify key assets and corresponding vulnerabilities and threats. There are a number of external IT security consultants in Australia who can assist, and there are also great resources online (such as NISTbased risk assessment templates).

Use secure transfer protocols – Secure web portals or SFTP are recommended, but if sending confidential data via email attachments, then attachments should be encrypted. While not nearly as secure, it will at least create an extra hurdle for scammers.

Employ multi-factor authentication (MFA) – Not only for remote access to the network but also to key applications hosted externally and mobile email. Many of the instances we have seen where email accounts have been compromised are where MFA is not employed for email accessible on mobile phones.

Conduct penetration testing – Penetration testing can help to identify exploitable vulnerabilities, including for online web portals, applications and networks which may contain proprietary and confidential client data.

Deliver comprehensive staff cyber security training – Employees are an organisation’s greatest line of defence, but can also be their greatest weakness.

All the controls in the world will not prevent data breaches if employees are not aware of threats. Research from KnowBe4 found that when organisations implemented phishing testing and subsequent training, within 90 days employees that clicked a simulated phishing email link or opened an infected attachment during a testing campaign was cut in half from 37% to 14%.

Perform adequate due diligence on third parties – While onsite due diligence is difficult in the current environment, in-depth due diligence should be performed on key third parties annually and should include a review of data security measures.

The recent increase in attempted cyber attacks have highlighted security vulnerabilities for the financial services industry, heightened by the ongoing remote working environment.

Particularly, with the greater sophistication of these attempted cyber attacks and our growing dependence on digital tools, the likelihood of serious data breaches occurring has never been greater – or the consequences never more costly.

No organisation can be 100% secure from a cyber attack; however, implementing proactive and robust practices such as these may help minimise the potential risk of cyber attacks.

George Takesian is principal at Mercer.

14/10/2020 2:07:30 PM

34 | Money Management October 22, 2020

Insurance

HOW COVID-19 IS ACCELERATING THE INSURANCE CLAIMS MODEL Life insurance has been very much in the spotlight during the COVID-19 pandemic, writes Don Stevenson, and both insured and insurer benefit from a personalised claims philosophy.

AT ITS HEART, life insurance should be simple. The insurer is paid a fair price in good faith for a policy which has been clearly explained. When the unexpected happens, the insurer responds quickly and fairly, and treats the insured with respect.

Both parties win.

However, as the Hayne Royal Commission revealed, not all providers were seen by the community to hold up their end of the bargain. Some of the most shocking case studies were engaged in wilful wrongdoing and claim avoidance, but these were a minority of the industry as a whole.

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Equally, however, the structure of the industry and providers’ business models were also responsible. Opaque policies and convoluted claims processes combined with conflicted commission and remuneration structures often resulted in inappropriate outcomes for Australian consumers. The effect was that trust in life insurance diminished.

The good news is that the majority of life insurers are working hard to address the issues identified in the Royal Commission, and to comply with the Life Insurance Framework.

While COVID-19 is still a monumental challenge, it may also be accelerating positive change in many areas.

HOW DID THE INDUSTRY END UP HERE? There is no simple answer to this question, unfortunately. In addition to the conflicted remuneration and commission structures, the fact that life insurance is dominated by a relatively small number of key players, and that financial services in Australia are highly vertically integrated, have all contributed to the problems highlighted by Commissioner Hayne.

Despite calls for bans on commissions, there are strong arguments for why they should be retained – it’s not a black and white issue. In many cases, work done by a distributor or broker is not charged as a separate fee. If it was, the argument goes, fewer Australians would seek or have access to life insurance, and the widespread problem of underinsurance would become worse.

Indeed, many of the larger insurers continue to argue, post Royal Commission, that the removal of commissions will serve only to reduce competition

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October 22, 2020 Money Management | 35

Insurance

in the market, increase consumer risk and ultimately empower large institutions.

At the same time, the necessity of finding ways to control conflicts of interest within a commission structure is clear.

There are risks inherent in a sales-driven, commission culture for both consumers and insurers.

For consumers, it’s the risk that unscrupulous brokers can be financially rewarded for recommending unsuitable, but more profitable products. But for the insurer, commission structures aren’t nirvana either.

In some ways they can create a disconnect between how a sales force is rewarded, and how a claims department could traditional be viewed as “successful” – that is keeping costs down (and paying as few claims as possible is one way of doing that).

This is not to say that claims departments aren’t empathetic to claimants, or that they are eager to reject claims – but when performance targets are linked to the number of claims closed and healthy loss ratios, there is a clear incentive to make the claims process difficult. And this often makes the process adversarial.

THE END OF PAINFUL PAPERWORK It’s fairly standard across the industry that in order to lodge a claim you need to fill in a ‘paper’ claim form. Because these forms need to cover many variables, they are inevitably really (really) long, plus the claimant has to provide a lot of information the insurance company already has. This makes for a repetitive and frustrating process, especially for someone

19MM221020_16-35.indd 35

who is already going through significant injury or illness.

A study by the University of Melbourne pointed to a growing body of research which indicates the claims process itself is actually responsible for heightened anxiety, stress and depression. The process is even described as the cause (or contributing factor) in secondary mental health claims on top of the initial claim.

Heightened anxiety was attributed to the stress of needing to undergo numerous medical assessments and delays in processing benefits.

Psychological distress and poor mental health were also seen to be more prevalent in those who make a claim versus those with the same injuries that don’t claim.

As COVID-19 has disrupted how insurers operate, sending paper forms via snail mail has become more of a challenge with delays from Australia Post as well as delays in getting claim forms to workers who are now remote.

One approach, which is gaining more popularity through COVID19, is the use of tele-claims. This lets you capture the information you need and nothing that you don’t. It’s also much quicker and there are less follow ups for additional information.

ACCESSING TREATMENT THROUGH COVID-19 Another significant area of disruption from a claim’s perspective is the ability for claimants to access medical treatment and support. In addition to physical distancing and travel restrictions, there has also been increased demand on many medical professions which has

reduced their capacity. This is in addition to problems that clients in regional areas may have accessing specialised healthcare.

Part of the solution to this is a more flexible treatment process that leverages digital healthcare solutions. Mental health is a great example and we’re seeing digital solutions perform equally (if not better) than their analogue alternatives.

Tele-psychology, be it by phone, webcam, email or text message, has been around in one form or another for more than 20 years, but COVID19 has escalated its adoption as more people become comfortable with using video conferencing for a variety of reasons.

The ease and convenience of scheduling a therapy appointment online and talking with a therapist from the privacy of your own home is, for some, a much better way to access mental health support.

A SHIFT IN MINDSET There is a growing view that the role of insurers isn’t just a financial settlement but that they should also focus on providing support and outcomes not just money. The reality is that most people who suffer a serious illness or accident, or have a family member die early, have never before dealt with such an event.

They often have no experience with the hospital system, have never organised a funeral and are unsure of what is required and how to do it. An insurer should also provide the emotional and logistical support here too. This is consistent with a report from PwC on the changing expectations of consumers as a result of COVID19. The report noted: “In a world dealing with a

global emergency, however, customers (and indeed, employees) are in need of even more when it comes to their relationships – in particular, a certain amount of compassion and care will go a long way to gaining loyalty. This means businesses being present when customers or staff need them, and supporting them in meaningful, human and relevant ways.”

This requires a personal relationship with the insured, one which is not adversarial, but which seeks to support. If both insured and insurer are transparent and fair from the beginning, the outcomes are far more likely to be better for both parties.

This needs to be more than just supporting the claimant – it also means a close relationship with employers, medical professionals and other service providers as well. Because good relationships mean that when a problem with an employee is identified, even if it appears to be a relatively minor problem, the insurer can reach out early and offer support before events spiral out of control.

Without strong relationships, or if the relationship is adversarial, claimants are less likely to work with the insurer to find win-win solutions – which means everyone loses.

Ultimately, it is the claims experience which determines whether an insurer’s reputation thrives or dies so a simple, transparent and fair claims process is a great way to help demonstrate the value of life and income insurance and rebuild trust in the industry.

Don Stevenson is head of claims at Integrity Life.

15/10/2020 10:08:19 AM

36 | Money Management October 22, 2020

Toolbox

THE PUSH FOR SUSTAINABLE INFRASTRUCTURE POST COVID-19

As Governments worldwide try to revive their economies after the pandemic, infrastructure can be crucial to helping countries to recover, writes Nick Langley.

THE COVID-19 PANDEMIC has meaningfully hit most countries in the world, bringing with it a toll on human lives and livelihoods. As governments worldwide move to mitigate the public health crisis and support economies through monetary and fiscal policy, many are asking whether governments will stimulate their economies with investments in infrastructure.

While we expect some infrastructure investment as a means of stimulus, we expect it to focus on smaller projects aimed at increasing the money supply and getting money into various smaller communities and regional centres.

Yet, longer term, there are several positive drivers for infrastructure as an asset class.

The need to lower carbon emissions is not going away; nor is the importance of upgrading and

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building new infrastructure to achieve lower emissions targets.

And part of the world’s response to the pandemic, increasing the urgency of balancing stakeholders in business operations, also looks to be a positive for infrastructure’s outlook. Partly, this is because infrastructure companies are wellpositioned to manage a balance of stakeholder and shareholder interests that is a key tenet of the corporate response to the pandemic. The tilt toward managing stakeholder interests has been accentuated by the crisis, as companies have found themselves needing to help employees, customers and the general public during difficult times.

Infrastructure companies have been balancing stakeholders and shareholder interests for a long time. A utility, for example, interacts closely with a regulator,

which, as one of its key stakeholders, looks after the customers who are connected with the utility. The UK water space, for example, has grown to recognise the importance of customers as key stakeholders and to value its interaction with them accordingly.

Some concession companies, like toll roads, have contracts or concession agreements with a government, which acts as a key stakeholder in almost all the company does.

Infrastructure companies are uniquely positioned to manage the balance between stakeholders and shareholders and navigate risks that develop as investors and regulators seek more of this balance in the market. We expect many other corporations will look to the infrastructure sector to understand how best to undertake that going forward.

GREEN NEW DEALS Globally, climate change is more and more registering as a critical concern. According to a 2019 survey by YouGov, a majority of people across many nations think it may cause severe economic damage and threaten the sustainability of cities.

Opinions vary from region to region and can involve some drastic scenarios. Still, overall, we are starting to see some momentum build among the voting public for climate issues to be taken seriously by governments.

Taking climate change seriously will require substantial investment. In terms of what projects are currently being tackled and what will need to be tackled, we look at Australia as a case study. Under a business-as-usual emissions forecast, we see a

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October 22, 2020 Money Management | 37

Toolbox

Chart 1: Plenty of room for emissions reductions outside electricity

Source: Rare Infrastructure

considerable reduction in emissions. The decrease, which will be nowhere near net-zero by 2050, is mainly attributable to projected lower emissions in the electricity sector (Chart 1). Missing from this scenario, however, are the tremendous opportunities for reducing emissions in other sectors. To meet net-zero by 2050, the world will have to invest in reducing emissions in infrastructure.

We expect a significant global push for a commitment to zero emissions by 2050. How will the world get there? More and more state entities are making commitments. Europe, in particular, has made a commitment to go green on electricity generation via renewables, electric vehicles (EVs) and energy conservation.

The EU seeks to be net-zero by 2050, and recent fiscal stimulus includes many green initiatives.

Across the US, seven states have committed to net-zero by 2050.

Another four have committed to at least 50% renewable energy in their energy mix, and the pace of that development is increasing. In Australia, all states and territorial

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Chart 2: Global annual average power sector investment

Source: Rare Infrastructure

governments have committed to net-zero by 2050, even as the federal government continues to drag its heels.

Climate change initiatives focused around repairing and upgrading infrastructure around the building sector are compelling.

The US loses 7,000 Olympic size swimming pools of water every single day from leaking pipes and burst water mains. Bringing water infrastructure up to standard will require a massive amount of capital. Buildings will need to be made more efficient, and transport, manufacturing and agriculture sectors will also require significant investment.

How much investment will be needed? The International Energy Agency produces an annual report on the projected amount of capital required in energy networks. The report focuses on two different cases: a baseline case, reflecting current stated public policies, and a sustainable case, which effectively accounts for spending required to lower emissions enough to keep with the UN’s climate change target of 1.5%–2% of warming. The report shows a baseline case of roughly $1.3 trillion needed to be spent

Chart 3: Lower interest rates should drive utilities multiple expansion

Source: Bloomberg Finance

annually on a global basis over the next 20 years and $1.7 trillion in the more sustainable case (Chart 2).

Much of this spending will be on networks, transmission and distribution and will be concerned with changing the way we use electricity and gas and other energy grids. This will mean growth in the underlying asset base for infrastructure companies and regulators, providing attractive returns to equity holders to help fund that growth. It is these areas, in particular, we think infrastructure investors should be most interested in and excited by.

COVID-19 RESPONSE While public policy will play a significant role, we expect the world will rely on the private sector to fund many of these initiatives, in particular with userpays and regulated infrastructure.

The policy response to the COVID-19 crisis, which has been to increase government borrowing as well as the size of central bank balance sheets, is reinforcing central banks’ accommodative stances developed over the past 18 months. The high level of borrowing

by governments and the loading of assets on central bank balance sheets has helped lower long-term interest rates, and expectations should in our view, keep both low for a long period of time.

We can see the impact of a lower-term premium on the financial markets, in particular utilities, by looking at the correlation between the sector’s next-12-month price/earnings (P/E) multiples and expectations of long term Treasury yields (Chart 3).

As the exhibit shows, the utilities P/E increased steadily as Treasury yield expectations declined (note the P/E axis is inverted). While the current environment has resulted in a material divergence (likely related to the market risk premium included in the cost of capital implied by the utilities P/E multiple), we believe this will reconnect, with Treasury yield expectations and next-twelvemonth utilities P/E multiples moving higher; hence the 19x–21x peer group expectation.

However, there is upside risk to utilities P/Es should the market Continued on page 38

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38 | Money Management October 22, 2020

Toolbox

CPD QUIZ Continued from page 37 begin to factor in an extended period of Federal Reserve quantitative easing and therefore lower bond yields for the foreseeable future. The upside scenario could result in utilities P/Es trading at 25x.

An inverse P/E ratio such as we show here also offers a form of earnings-based capitalisation rate similar to what one might find in the real estate sector. A falling utilities cap rate is important because it indicates that investors are requiring a lower return on equity or return on capital from utility companies.

This means those companies will be better able to attract capital to spend on their networks to help effect some of the network adaptation and mitigation against climate change moving forward. We believe this will help utilities act as a critical element of the private sector lining up to help fund much of the spend the world will need on infrastructure to combat climate change.

INFRASTRUCTURE OPPORTUNITIES A specialised knowledge of the infrastructure sector, with a rigorous approach to environmental, social and governance (ESG) analysis, will be necessary to manage risks and capitalise on opportunities as green infrastructure grows. The sector has very attractive tailwinds and attributes, but there are several risks that investors need to be mindful of.

The direction of public policy over time should have a large impact on the valuations of the underlying companies. New regulations may, for example, shorten the time natural gas spends as a bridge fuel — as the lowest GHG emitter of the fossil fuels and hence a bridge to a world where energy demand is met entirely by renewables. In such a case, pipelines will see less growth and lose value, resulting in potentially stranded — obsolete and unprofitable — assets.

This is an issue we have done a lot of work to understand since it will likely entail relative value opportunities in which companies running trunk or mainline pipes will fare better than those with smaller lateral systems.

As such, we believe it will be helpful to be in the listed infrastructure space where capital can be allocated more nimbly.

A corollary insight might apply to toll roads, where the growth of autonomous vehicles, rather than requiring many new roads to be built or stranding existing roads, will markedly increase capacity on existing roads, increasing their value.

For new infrastructure that will need to be built, it is important to differentiate between greenfield and brownfield expansion. Greenfield expansion (building completely new assets) bears a greater risk than brownfield expansion (building extensions onto existing assets); the riskiest part of greenfield expansion is whether demand and use of the asset will materialise once it is built. The distinction suggests to us a preference for listed infrastructure over unlisted, given the listed players are generally the incumbents and more given to less risky brownfield expansion.

In the listed markets, there is some volatility from time to time, as we have seen through the COVID-19 pandemic. But over the long-term, the returns allowed by the regulators have come through in the returns reported by the companies and the returns received by investors. This gives us, as investors, confidence that as a bow-wave of investment into infrastructure to support climate change initiatives grows, we will see appropriate returns for shareholders.

Nick Langley is portfolio manager at RARE Infrastructure.

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

1. Short -term infrastructure stimulus spending will be about: a) Getting people back to work b) Smaller projects dotted around the country c) Focused on SMEs and local communities d) All of the above 2. Climate change: a) Is all about large scale shifts in weather patterns and therefore has nothing to do with infrastructure investing b) Is a problem for governments not investors c) Will require substantial investment in order to meet net-zero targets by 2050 d) Is a critical concern, but now it is too late - there is nothing that can be done 3. The United Nations climate change warming target is: a) 0.5%-1% b) 1%-1.5% c) 1.5% -2% d) 2%-3% 4. How much capital spending does the International Energy Agency forecast is required by energy networks globally to meet sustainable development? a) $1.7 trillion needs to be spent annually over 20 years b) $1 trillion needed to close down coal fire power plants c) $500 Billion needs to be spent annually on solar and wind development d) $100 million needs to be spent annually on batteries 5. Changes in the direction of public policy should: a) Drive climate change action towards Net-zero by 2050 b) Have a large impact on the valuations of the underlying assets. c) Create opportunities for the private sector, d) All of the above

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ push-sustainable-infrastructure-post-covid-19 For more information about the CPD Quiz, please email education@moneymanagement.com.au

14/10/2020 1:00:13 PM

October 22, 2020 Money Management | 39

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

Appointments

Move of the WEEK Jessica Cairns ESG and sustainability manager Alphinity Investment Management

Global equities boutique fund manager Alphinity Investment Management has added to its environmental, social and governance (ESG) investment and research capabilities with the appointment of Jessica Cairns.

She was appointed to the newly-created role of ESG and sustainability manager, which the firm said would support its effort to integrate

Murray Hills, a founder, managing director and chief executive of Perth-based financial planning group Sentry Group who stepped down from his role in June after 15 years, has been appointed as an executive chair of financial services group PMM Group.

Prior to Sentry, Hills was managing director and CEO of the DKN Financial Group and he was also an inaugural and past associate member of the Financial Planning Association (FPA) and a fellow, life member and past National President of the Association of Financial Advisers (AFA).

PMM, which had been operating for 10 years, comprised four advisory practice subsidiaries and was a full service national financial advice business offering comprehensive and integrated solutions to individuals and business clients.

Industry superannuation fund Vision Super has promoted its chief investment officer, Michael Wyrsch, as its deputy chief executive but he will also continue to manage the investments function in his current role.

The fund’s chief executive, Stephen Rowe, said Wyrsch had reduced investment management costs and improved results in his CIO role.

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ESG-related matters across its domestic and global equities funds, including the Alphinity Sustainable Share fund.

Cairns’ most recent role was senior sustainability advisor at Transurban, where she was responsible for the company’s response to the Taskforce on Climate-related Financial Disclosure (TCFD).

Retail employee industry super fund REST has appointed Michael Bargholz, Deep Kapur and Anne Anderson to its five-person board investment committee.

Bargholz’s and Kapur’s appointments were effective from 1 September, 2020, while Anderson’s was effective from 9 October.

Bargholz was most recently chief executive – Australia with investment manager Pendal Group from 2016 to 2018. Before that, he held various executive positions at Fidelity International as managing director, and chief executive at Alliance Bernstein.

Kapur was a Professor of Practice with the Monash Business School, a member of the School Executive Committee, and concurrently director of the Monash Centre for Financial Studies.

He had over 28 years’ experience in the investment industry including senior roles with Salomon Smith Barney, Citigroup Global Markets and Daiwa Capital Markets.

Anderson had over 35 years’ experience in financial markets and was most recently managing director, and head of fixed income and investment solutions – Australia at UBS Asset Management.

She joined UBS in 1993 and before that had spent 10 years in other finance and corporate treasury roles.

She had served as a member of the Australian Office of

Prior to that, she spent four years as a case manager at the Infrastructure Sustainability Council of Australia, where she was responsible for helping infrastructure teams achieve better infrastructure sustainability.

Her appointment followed that of research analysts, Jacob Barnes and Andrey Mironenko, who were appointed earlier in the year.

Financial Management with the Commonwealth Treasury Advisory Board and was current chair of St Joseph’s College Foundation.

CommInsure’s group insurance business, managing relationships with major industry fund and master trust clients.

MLC Life Insurance has added three new members to its life insurance team: Emily Wu, Suzie Brown and Craig Harrison, as the company expands its partnerships with superannuation funds.

Wu was appointed as general manager – fund partnerships and would be focused on acquisitions of new fund partners and managing existing relationships.

She had previously held product and legal roles at AIA Australia and CommInsure, as well experience working with large industry funds, master trusts and government funds.

Brown was appointed general manager – MLC Wealth and corporate partnerships and her role would be to manage the partnership with MLC Wealth and build out their corporate distribution capabilities.

She was previously the general manager of distribution at Integrity Life and had management experience with large industry super funds, master trusts, platforms and corporates.

Harrison was appointed general manager – product, pricing and proposition (group), and would lead the firm’s group product and pricing functions.

He also previously worked for

Aberdeen Standard Investments (ASI) has promoted two members of its Australian equities portfolio management team: Natalie Tam and Camille Simeon.

Tam was appointed to deputy head of Australian equities, while Simeon was appointed to investment director.

Tam joined ASI in 2005 from Deutsche Bank where she worked as a research analyst covering the media sector. Simeon joined ASI as an equities investment manager in 2008 from Citigroup where she was vice president of institutional research sales in Australia and New York.

Eaton Vance has announced the appointment of Eric Stein as chief investment officer, fixed income, of Eaton Vance Management, effective 1 November, 2020.

He would replace Payson Swaffield who had announced his plans for retirement.

In his new role, Stein would be responsible for overseeing the management of investment strategies for EVM and its affiliate Calvert Research and Management across the income markets and multi-asset income solutions for individual and institutional clients.

15/10/2020 11:06:07 AM

OUTSIDER OUT

40 | Money Management Management October April 2, 2015 22, 2020

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

Not alarm bells, just a wake-up APRA believes in global warming, what about the Govt? call on the US election OUTSIDER must admit to currently having more than a passing interest in the outcome of the US Presidential election but he is clearly not as invested as a number of the online delegates to the Association of Financial Advisers virtual annual conference.

How else does one explain the conference chat box carrying comments reflecting a delegate’s hope that Democrat candidate, Joe Biden would lose while picking up on President Donald Trump’s disparaging descriptor of Biden as “Sleepy Joe”.

He feels sure that President Trump’s campaign chiefs will be delighted that their messaging is gaining cut through… in Australia.

Now Outsider agrees that the outcome of the US election will have an impact on markets and Australian financial advisers are wise to be paying attention, but he is pretty sure that it won’t significantly change the landscape in the Land of Oz. What is more, the major fund managers have already factored in both outcomes.

Indeed, Outsider’s quick check of what the fund managers were thinking suggests that most are factoring in a Biden victory, including Magellan’s Hamish Douglass, who says he is factoring a higher taxation environment in the US and therefore lowered his exposure to US companies.

In the meantime, Outsider suggests that advisers forget Sleepy Joe and wake up to the reality that they need to position their clients to ride Australia’s economic recovery which may have already started.

OUTSIDER has noted it before but its probably worth noting again that while the politicians squabble over climate change in the so-called “Canberra bubble” the nation’s financial services regulators believe it exists and are exhorting insurers to take it into account in policy definitions and premium pricing.

If anyone wanted proof of that they could have read Australian Prudential Regulation Authority (APRA) executive board member, Geoff Summerhayes’ speech to a business roundtable dealing with disaster resilience and safer communities.

And while some Coalition backbenchers may struggle with the notion of global warming, Summerhayes made clear that APRA does not and, in doing so, he welcomed the fact that last summer’s Australian bushfires had served to focus attention on the issue.

“If one positive has emerged from last summer’s bushfires, it’s been that they have refocused the public debate around how to ensure Australia is better prepared for future such disasters. Last week, the Senate released its interim

report into the fires. In addition, the Bushfire Royal Commission, with its focus on practical resilience, mitigation and hazard reduction measures, is another important step towards better protecting lives, property and the Australian economy,” he said.

“While not a substitute for global action to reduce the emissions fuelling rising temperatures, the Royal Commission provides an important opportunity to make increasing the physical resilience of the community to natural disasters a national priority. The Treasurer Josh Frydenberg underscored this in last week’s Budget address when he foreshadowed more announcements on disaster and mitigation funding following the release of the Royal Commission’s Final Report.”

“To repurpose a line from a speech I delivered last June on the subject of climate change adaptation, we either buy now or we pay more.”

Outsider does not expect Summerhayes to be invited to address any conservative thinktanks any time soon.

A virtual conference shared is a virtual conference halved OUTSIDER likes to think of himself as seasoned when it comes to conference reporting.

As soon as he walks in, he knows where the more inconspicuous coffee stands are so he doesn’t stand in a huge line when there’s a break, which booths have the best phone chargers, reusable cups and socks, and where all the convenient outlets are.

At around the afternoon of the second day, Outsider is often fairly weary from the early mornings and frantic reporting but usually gets a second wind after walking around the exhibition hall, chatting to

OUT OF CONTEXT

delegates (or himself) could focus for two whole days online.

The conference had back-toback sessions and Outsider’s back bore the brunt of it (along with his concentration) as breaks were few and there was no walking to the coffee stand or sleuthing around booths for free notebooks.

As Outsider looked at his surroundings – the four walls of his home, self-made tea, and no one to talk to – he sighed and thought this was indeed not the same as an in-person conference. Not even the magic trick the AFA’s virtual drinks reception host could conjure a laugh

"I call it 'vomit-buying', I would buy something and then walk around and try not to throw up."

– Pengana chief investment officer, Rhett Kessler

www.moneymanagement.com.au

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delegates (who all seem to look like him along with most of the speakers), afternoon teas, drinks receptions, and the novelty of staying at a hotel.

However, this year all the conferences were looking to ‘pivot’ thanks to the virus that shall not be named. Some were putting out webinars every few weeks, some were delaying until next year, and some were trying to replicate days long conferences online.

When Outsider heard that the Association of Financial Advisers was holding its two-day conference online he was dubious as to whether

out of Outsider.

Outsider congratulates the AFA for pivoting and trying out this new style of conference but will make sure that next time he outsources at least some of the work to his younger colleagues.

"It would be nice if the grown-ups were in charge for a change."

– Sunsuper’s chief economist, Brian Parker, on the US election

Find us here:

15/10/2020 1:08:56 PM

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HATE PLASTIC? CHANGE GE

PLASTICS. Single-use plastics are polluting our planet and should be banned. But not all plastic is bad. It depends how we use it. It can be recycled to build sus tainable robot s, wind turbines, and even lighter cars. Sustainable investing starts with an understanding of sustainability.

Go to www.understandingSI.com/AU THE NUMBER 1 IN SUSTAINABLE INVESTING *

*Broadridge Market Analysis, 2020. Brand survey on independent asset managers amongst >850 European fund selectors

Important information This document is distributed in Australia by Robeco Hong Kong Limited (ARBN 156 512 659) (‘Robeco’) which is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order 03/1103. Robeco is regulated by the Securities and Futures Commission under the laws of Hong Kong and those laws may differ from Australian laws.

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