FS Private Wealth vol12i04

The Journal of Family Office Investment

Opinion

Investing in an open-ended private fund

Volume 12 Issue 04 Whitepaper

Is India the next China?

WEALTH WITH PURPOSE Phil Harkness and Tracy Conlan, Mutual Trust

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Contents

www.fsprivatewealth.com.au Volume 12 Issue 04 | 2023

1

COVER STORY

WEALTH WITH PURPOSE Phil Harkness and Tracy Conlan, Mutual Trust

16 SECTOR REVIEW

23

Financial Standard’s research team examines the continued weakness of the Australian dollar versus the US dollar, as well as analysing the mixed performance of both local and international equities.

HIGHLIGHTS Welcome note Christopher Page

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IN THIS ISSUE HNWS INCREASE DIGITAL ENGAGEMENT

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Australia’s most affluent investors are increasing their access to a growing range of reporting tools.

BUFFETT REVEALS SUCCESSION PLAN

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Warren Buffett has laid out plans for Berkshire Hathaway and his fortune.

AUSTRALIA’S WEALTH GAP DEEPENS

8

The gap between those with the most and those with the least has blown out over the past two

Featurette Strength in numbers

12 Follow Financial Standard on social media

decades, with the average wealth of the highest 20% growing at four times the rate of the lowest.

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Contents

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06 Published by a Rainmaker Information company.

A: Level 7, 55 Clarence Street, Sydney, NSW, 2000, Australia T: +61 2 8234 7500 F: +61 2 8234 7599 W: www.financialstandard.com.au Associate Editor Chloe Walker chloe.walker@financialstandard.com.au Design & Production

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News

CQS SOLD TO MANULIFE LGT CRESTONE OPENS PRINCELY FAMILY FUND

News

FAMILY OFFICE EXECUTIVES TAKE THE REINS MA FINANCIAL ISSUES FIRST RMBS

News

PENGANA LAUNCHES PRIVATE CREDIT FUND AUSTRALIAN FARMLAND VALUES IN DECLINE

Mary-Clare Perez mary-clare.perez@financialstandard.com.au Technical Services Roger Marshman roger.marshman@rainmaker.com.au Ian Newbert ian.newbert@rainmaker.com.au Fiona Brillantes fiona.brillantes@rainmaker.com.au Advertising Michael Grenenger michael.grenenger@financialstandard.com.au Director of Media and Publishing Michelle Baltazar michelle.baltazar@financialstandard.com.au

09 10 14

Opinion

ADVOCATING SLOW AND STEADY WEALTH BUILDING

By Jill Nes, BMF Wealth

News

AUSSIES LARGELY UNSURE OF LEGACY PLAN INSTO INJECTS FURTHER $530M IN QUALITAS

News

AUSTRALIAN UNITY SELLS TO FORTNUM ALPINE CAPITAL LAUNCHES IN MELBOURNE

Managing Director Christopher Page christopher.page@financialstandard.com.au FS Private Wealth: The Journal of Family Office Investment ISSN 2200-4971 All editorial is copyright and may not be reproduced without consent. Opinions expressed in FS Private Wealth are not necessarily those of Financial Standard or Rainmaker Information. Financial Standard is a Rainmaker Information company.

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16

Cover story

WEALTH WITH PURPOSE Phil Harkness and Tracy Conlan, Mutual Trust The chief executive and head of strategy of one of the country’s oldest and most prominent multi-family offices share how they work with clients to create intergenerational wealth with purpose.

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Opinion

INVESTING IN AN OPEN-ENDED PRIVATE FUND

By Scott Thomas, Hamilton Lane

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Contents

www.fsprivatewealth.com.au Volume 12 Issue 04 | 2023

WHITEPAPERS

26

Compliance

SETTING UP A NEW FINANCIAL SERVICES FIRM

By Lynda Dowling, Webull Securities This paper provides an overview of what it entails to set up a brand-new financial services firm in Australia.

33

Compliance

UNFAIR CONTRACT TERMS LAW CHANGES

By Rachelle Hare, Blaze Business & Legal Changes to the current unfair contract term laws in Australia were introduced over the past 12 months.

40

Ethics & Governance

FAMILY OFFICES AND B CORPS

By Lee Tonitto, Social Change Headquarters Family offices and B Corps are two distinct concepts that, while separate, can be interdependent regarding certain aspects of their operations, especially when it comes to shared values and a growing emphasis on impact-driven investments and legacy.

46

TECHNOLOGIES FIGHTING CLIMATE CHANGE

By Tom Atkinson, AXA Investment Managers Innovations in engineering and digital technology are helping drive progress towards global climate goals while providing numerous investment opportunities along the way.

Investment

TRUTHS REVEALED ABOUT PRIVATE MARKETS

Technology

55

Investment

IS INDIA THE NEXT CHINA?

By James Stewart and Luke Smith, Ausbil Investment Management With India on track to exceed China’s growth compared to where it was 20 years ago, there will be a profound impact on commodities demand looking ahead.

By Mario Giannini, Hamilton Lane This paper provides compelling reasons, research findings and market data as to why private markets are an extremely worthwhile investment opportunity.

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For more news and updates, visit www.fsprivatewealth.com.au

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FS Private Wealth

Welcome note

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Christopher Page managing director Financial Standard

For generations to come I

t’s widely accepted by historians that the trend of naming generations began in the 20th century. The writer Gertrude Stein first coined the term ‘lost generation’ for those who were born between 1880 and 1900 and affected by World War I. Born in 1859, lost generation member W.L. Baillieu was a successful businessman who made his wealth in property and finance. In 1921, Baillieu and his four brothers set up Mutual Trust, an enterprise to safeguard and grow the family fortune.

After more than a century and seven official generations, Mutual Trust has become one of Australia’s leading multi-family offices. With over 200 employees and four offices located in Melbourne, Sydney, Adelaide, and Perth, the company serves hundreds of families both locally and internationally.

In this edition, Mutual Trust chief executive Phil Harkness and head of strategy Tracy Conlan emphasise the significance of creating and sustaining multi-generational wealth with a united

purpose (pg. 16). They also provide valuable insights on Australian family offices from a recent report conducted in partnership with the University of Adelaide.

Elsewhere, BMF Wealth chief executive Jill Nes discusses renowned investors’ strategies (pg. 9), and Russell Investments senior portfolio manager Richard Palmer highlights key considerations when investing in open-ended private asset funds (pg. 24).

We have a range of whitepapers that cover crucial topics such as setting up a new financial services firm, changes in unfair contract terms, the interdependence between family offices and B Corps, and a guide to technologies fighting climate change (pg. 46). Additionally, our sector reviews provide valuable insights on currency hedging and emerging market stocks (pg. 22).

In today’s uncertain economic climate, we hope that these expert opinions will help you make informed decisions to increase and safeguard your wealth, for generations to come. fs

The quote

In today’s uncertain economic climate, we hope that these expert opinions will help you make informed decisions to safeguard and increase your wealth, for generations to come.

Christopher Page managing director, Financial Standard

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News

www.fsprivatewealth.com.au Volume 12 Issue 04 | 2023

HNWs increase digital engagement

LGT opens Princely fund Clients of LGT Crestone can now access the Princely family fund, known as the ‘Princely Strategy’, developed by its parent entity two decades ago.

The Global Investible Markets (GIM) fund, which is worth US$18.6 billion, is only accessible to LGT Crestone (LGT) clients.

The fund is aimed at providing broad diversification and exposure to global private markets and alternative assets with lower volatility.

“We are excited to offer our clients the opportunity to invest in the Princely Strategy alongside the Princely Family, a co-investment approach that provides a unique alignment of interests between our clients and LGT Crestone’s owner, LGT,” LGT Crestone chief executive Michael Chisolm said.

“This is a compelling offer for our high-net-worth and ultrahigh-net-worth clients, who are continually looking for investment products that can provide attractive returns without high correlation to global share markets.”

While the Princely Strategy still invests in traditional asset classes, it has a relatively high exposure to private markets assets, including private equity, which have historically been a source of outperformance to public markets and are not otherwise easily accessible.

“We expect our Australian clients will be attracted to the long-term investment philosophy supported by an extensive performance track record,” Chisolm said.

“Due to the scale of the Princely Strategy, an investment in this fund allows for almost immediate exposure to diversified, mature private markets portfolios across private equity, private debt, real estate and infrastructure, while having ESG and climate considerations integrated at all levels within the investment process.” fs

Chloe Walker

A The quote

While HNWs use many digital portals, it still is the case that when they want to see their singular numbers, they need their own spreadsheet, or they rely on advisers to actually provide that fuller picture for them.

ustralia’s most affluent investors are increasing their access to a growing range of reporting tools, providing an opportunity for advisers to improve their services, research suggests.

According to Praemium and Investment Trends’ latest report, digital engagement between advisers and their HNW clients is becoming increasingly important, particularly considering the next generation of digitally native heirs.

However, Investment Trends head of research Irene Guiamatsia said that HNWs still struggle with a ‘whole of portfolio’ reporting piece.

“For example, one in two HNWs have said to us that they use their own spreadsheet,” Guiamatsia said.

“While HNWs use many digital portals, whether it’s with a platform, or with a bank, it still is the case that when they want to see their singular numbers, they need their own spreadsheet, or they rely on advisers

to actually provide that fuller picture for them.”

The research also noted tax reporting, simplicity around access, and record keeping as the top digital features HNWs appreciate.

“The end-client has shared with us that having their tax reporting taken care of is really important,” Guiamatsia said.

“These top three features really speak to the fact that there’s a simplicity that comes with using a digital portal and there’s also a time-saving component, or perhaps an accessibility component that comes with it.”

When it comes to the improvements HNW investors would like to see their digital experience, tax-reporting was at the top of the list.

“Tax reporting was the number one benefit that HNWs saw,” Guiamatsia said.

“They actually want to see a lot more of that and perhaps more streamlined data feeds with the ATO and what have you.” fs

CQS sold to Manulife Investment Management, Hintze, retains fund Cassandra Baldini

Australian billionaire Michael Hintze has divested a significant portion of his multi-billion-dollar asset management firm to Canadian giant Manulife Investment Management.

Under the acquisition, expected to close in early 2024, Manulife will own London-based CQS’s US$13.5 billion credit platform and its brand for an undisclosed amount.

According to a statement, the transaction does not include specific related mandates. Notably, Hintze will hold onto his Directional Opportunities Fund and use the asset to launch a separate firm and continue as its manager.

CQS will continue to be led by chief executive Soraya Chabarek, senior partner and chief investment officer for the credit division Craig Scordellis, and senior partner and chief executive for asset-backed securities (ABS) Jason Walker.

The $955 billion Manulife said both its clients

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and CQS’s will gain access to enhanced complementary global investment solutions.

Further, it will retain CQS’s rigorous investment philosophy and process and bring its differentiated capabilities to new investors while scaling its distribution footprint across broader client segments and geographies.

“We are pleased to enter into this agreement, which we see as mutually beneficial to both firms as well for those who have been investing with CQS for decades,” said Manulife president and chief executive Paul Lorentz.

“CQS brings to our portfolio a proven investment process, robust performance, expertise across market cycles, and a culture that has attracted both talent and flows into the firm. We are very excited for the opportunity as CQS’s capabilities are a complement to our existing fixed income and multiasset solutions business and a powerful addition to our global credit offering.” fs

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News

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Family office executives take investment reins

MA issues first RMBS MA Financial’s lending business, MA Money, has completed its inaugural residential mortgagebacked securities (RMBS) issuance, amounting to $500 million.

The transaction was initially launched at $400 million but was later increased due to high demand from domestic and offshore investors.

“This transaction represents the largest inaugural non-bank RMBS issuance by lender in Australian history, and we are very proud of setting this milestone and achievement,” MA Financial joint chief executive Chris Wyke said.

“It really does reflect the strong conservative underwriting practices that we do have in building out our residential loan book within the MA Money business.”

Wyke said MA Money’s ambition is to be a regular RMBS issuer in the term market.

“We will continue to take a proactive approach and engage with investors to share our growth strategy and expand our investor base,” he said.

Already, MA Money treasurer Akeshni Gour said the group is particularly pleased with the quality of institutional investors participating.

“We want to be a meaningful and innovative leader… And these proceeds will bolster MA Money’s capacity to achieve future growth,” Gour said.

In 2022, RBA head of domestic markets Jonathan Kearns said the RMBS market provides an important source of funding for Australian lenders.

“The past couple of years have been far from boring for securitisation,” Kearns said.

“It is pleasing to see that the securitisation market has played its part in a resilient financial system that mitigated the impact of the pandemic on the economy.” fs

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Chloe Walker

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The numbers

60%

The number of family offices that will facilitate access to a broader range of financial services over the next year.

mproved professionalisation has seen a “significant transformation” in the family office sector, with executives increasingly empowered to manage family assets in-house, according to a new study by Ocorian.

As part of the study, conducted earlier in the year, Ocorian commissioned independent research company PureProfile to interview 134 family office investment managers working for family offices across the globe.

It found 60% of family offices will facilitate access to a broader range of financial services and solutions over the next three years.

Over 70% of respondents said these third parties will provide access to an increasingly globalized network of administration centres, and 44% said they will bring sophisticated regulatory expertise.

“Traditionally, wealthy families entrusted investment managers to manage their assets, but falling returns driven by the financial crisis

in 2008 and the impact of the COVID-19 pandemic has prompted the switch to alternative approaches and directly employing professionals,” Ocorian said.

According to the study, family offices have reacted by recruiting professionals with a wide range of skills including investment analysts, financial planners, legal experts, and technologists.

Family offices have also embraced advanced data analytics, artificial intelligence, and machine learning to enhance their investment decisionmaking processes.

Commenting on the findings, Ocorian global head business development - private client Lynda O’Mahoney said family offices, once primarily perceived as entities that manage the wealth of affluent families, have undergone a significant transformation in recent years.

“The trend towards the professionalisation of family offices is likely to continue,” O’Mahoney said. fs

Buffett reveals succession plan Warren Buffett laid out plans for Berkshire Hathaway (Berkshire) and his fortune in a rare letter published on the company’s website.

The legendary investor announced the gifting of 2.4 million Class B shares of Berkshire Hathaway stock (totalling about US$876 million) to charitable foundations run by his children, including The Susan Buffet Foundation, The Sherwood Foundation, The Howard G. Buffett Foundation, and NoVo Foundation.

This is the second year that Buffett has made additional gifts to the family foundations around Thanksgiving time, supplementing lifetime pledges he made back in 2006.

“At Thanksgiving, I have much to be thankful for…”

Buffett said. “At 93, I feel good but fully realise I am playing extra innings.”

Buffett revealed that his three children, Howard, Susan and Peter, are the executors of his will and

will be trustees of the charitable trust that will receive nearly all of his wealth.

“They were not fully prepared for this awesome responsibility in 2006, but they are now,” Buffett said.

Buffett said the testamentary trust will be self-liquidating after a decade or so and operate with a lean staff.

To the extent possible, it will be funded by Berkshire shares.

“Berkshire – one of the largest and most diversified companies in the world – will inevitably encounter human errors in judgment and behaviour, these occur at all large organizations, public or private,” Buffett said.

“But these mistakes are unlikely to be serious at Berkshire and will be acknowledged and corrected.

We have the right chief executive to succeed me and the right board of directors as well.”

In May 2023, Buffett named named Berkshire vice chair Greg Abel, who heads the company’s noninsurance businesses, as his likely successor. fs

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News

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Australia’s wealth gap deepens further

Farmland value declines Australian farmland values have reached an inflection point in 2023 following a sustained period of strong growth, according to Rural Bank’s report.

This year, it found the median price of farmland was only 0.1% higher compared to 2022, marking a distinct shift from the previously four half-yearly periods which saw year-on-year growth between 16-23%.

“The number of farmland transactions continued to decline in the first half of the year, down to its lowest level in the past 28 years,” it said.

According to the report, the number of transactions in Australia was 27% lower than the second half of 2022. This was the fourth consecutive half in which transaction volume declined - a period of which transaction volume halved.

Across the states, Western Australia (WA), New South Wales (NSW), and South Australia (SA) saw the strongest year-on-year growth in the first half of the year.

While Victoria experienced modest growth, both Queensland and Tasmania saw a collective 27.8% decline in median price.

Positively, median price growth in cropping regions generally kept pace with recent years.

“Demand was likely sustained into early 2023 following another strong winder crop in 2022,” Rural Bank said.

“In contrast, demand in grazing regions was weakened by declining livestock prices.”

The report noted the major drivers of farmland valuescommodity prices, seasonal conditions, and interest rates- all moved towards settings less supportive of fueling strong demand for land purchases and are expected to continue to remain less favourable for price growth in the second half of 2023. fs

Chloe Walker

T The quote

The number of farmland transactions continued to decline in the first half of the year, down to its lowest level in the past 28 years.

he gap between those with the most and those with the least has blown out over the past two decades, with the average wealth of the highest 20% growing at four times the rate of the lowest, new research suggests.

A new report by the Australian Council of Social Service (ACOSS) and the University of New South Wales (UNSW) shows from 2003 to 2022, the average wealth of the highest 20% rose by 82%.

What’s more, the average wealth of the highest 5% rose by 86%, leaving the middle 20% (with a 61% increase) and the lowest 20% (with a 20% increase) in the dust.

The largest contributor to the overall increase in wealth inequality over the period was superannuation, ACOSS said.

While not as concentrated in the hands of the wealthiest households as shares or investment property, the over-

all value of superannuation rose much faster than other assets, driven by compulsory contributions. It grew by 155%, compared with an overall increase in wealth of 74% over the period.

“Contrary to the public image of ‘mum and dad’ property investors, investment housing is very unequally shared: the wealthiest 20% hold 82% of all investment property by value,” it said.

“They owned 78% of all shares and other financial investments, with an average value of $563,000. These forms of wealth deliver substantial capital gains each year to individuals with the highest incomes.”

The report also shows that while the government’s COVID-19 response reduced income inequality, the impact was only temporarily.

In 2020-21, the average income of the lowest 20% grew by 5.3%, predominantly due to the introduction of COVID income supports. fs

Pengana launches first global private credit fund Pengana Capital Group introduced its first diversified global private credit investment fund for Australian wholesale and sophisticated investors, with several offerings for retail investors to follow.

The Pengana Diversified Private Credit Fund offers Australian investors greater access to global private credit and will target a total net return equivalent to the Reserve Bank of Australia (RBA) cash rate plus 8%.

It follows a $200 million commitment from Washington H. Soul Pattinson as part of a joint venture with the fund manager, announced in 2023.

Pengana Capital Group chief executive Russel Pillemer said the initial investment “was an important piece in solving the challenges of bringing a truly diversified global private credit offering to market.”

“In order to offer our investors a truly global private credit return experience from day one, this initial investment allowed us to build out the foundations of a portfolio that we can bring to market,” he said.

In July 2023, Pengana announced the appointment of Mercer as investment advisor for its private credit suite.

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Since then, the fund manager said it has been working closely with Mercer to secure global private credit opportunities.

“Our alliance with Mercer provides extensive global reach and the ability to target some of the best private credit managers,” Pengana Credit chief executive Nehemiah Richardson said.

“We are pleased to bring a solution to market that unlocks the opportunity for wholesale investors and are excited about launching some compelling retail offerings in the near future.”

Richardson said the portfolio is highly diversified and specifically designed to deliver low volatility and attractive risk-adjusted returns.

“Growth in global private credit has been strong for the last 15 years,” Richardson said.

“Private credit has grown rapidly as global banks have retreated from corporate lending due to increasingly stringent regulatory requirements, providing one of the most compelling risk/return investments.” fs

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Opinion

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Jill Nes chief executive BMF Wealth

Advocating slow and steady wealth building I

nvesting wisely is a key to building and maintaining wealth over time. Many successful investors have left behind valuable insights that can guide aspiring individuals in their pursuit of financial prosperity. In this article, we delve into the investment strategies of renowned investors Howard Marks, Warren Buffett, Stanley Druckenmiller, and Ray Dalio. By understanding their approaches, we can glean important lessons on how to get rich and, more importantly, stay rich.

fundamentals. He looks for businesses with a sustainable competitive advantage, strong management, and a longterm perspective. Buffett is known for his patience, discipline, and ability to stay focused on the big picture, rather than being swayed by short-term market fluctuations.

Key lesson: Invest in undervalued companies with strong fundamentals, adopt a long-term perspective, and remain patient and disciplined.

1. Howard Marks

3. Stanley Druckenmiller

Howard Marks, co-founder of Oaktree Capital Management, emphasises the significance of risk management in investment. Marks believes that a successful investor must have a deep understanding of market cycles and the ability to identify mispriced assets. He advocates for a contrarian approach, buying when others are selling and selling when others are buying. By carefully managing risk and patiently waiting for opportunities, Marks has consistently achieved exceptional returns.

Key lesson: Prioritise risk management, understand market cycles, and take contrarian positions when warranted.

Stanley Druckenmiller, a highly successful hedge fund manager, is known for his ability to navigate market trends and capitalise on opportunities.

Druckenmiller believes that successful investing requires being flexible and adapting to changing market conditions. He emphasises the importance of risk management and adjusting portfolio positions based on evolving economic indicators. Druckenmiller’s track record demonstrates his ability to anticipate market movements and generate substantial returns.

Key lesson: Be flexible and adapt to changing market conditions, prioritise risk management, and use economic indicators as a guide.

2. Warren Buffett Warren Buffett, the chair and chief executive of Berkshire Hathaway, is widely regarded as one of the most successful investors of all time. Buffett follows a value investing approach, seeking undervalued companies with solid

FS Private Wealth

4. Ray Dalio Ray Dalio, the founder of Bridgewater Associates, has achieved remarkable success by employing a systematic approach to investing. Dalio believes in

The quote

Invest in undervalued companies with strong fundamentals, adopt a long-term perspective, and remain patient and disciplined.

the power of diversification and leveraging the benefits of uncorrelated assets. His investment philosophy is based on understanding economic cycles and employing a risk-parity strategy to balance risk across asset classes. Dalio also emphasises the importance of maintaining a culture of radical transparency and embracing mistakes as learning opportunities.

Key lesson: Diversify investments across uncorrelated assets, understand economic cycles, and foster a culture of radical transparency.

The investment strategies of Marks, Buffett, Druckenmiller, and Dalio offer invaluable insights into the world of wealth creation and preservation. To get rich and stay rich, it is crucial to prioritise risk management, adopt a long-term perspective, be flexible in adapting to market trends, diversify investments, and embrace a culture of continuous learning. By incorporating these principles into your investment approach, you can increase your chances of achieving financial prosperity and maintaining wealth over time. Remember, successful investing requires discipline, patience, and a commitment to continuous improvement. fs

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News

www.fsprivatewealth.com.au Volume 12 Issue 04 | 2023

Aussies largely unsure of legacy plan

Qualitas gets further $530m Karren Vergara

An unnamed institutional investor has injected an additional $530 million into a Qualitas strategy, bringing it closer to its total $1 billion commitment.

Qualitas’ Private Income Credit Fund (QPICF) now has $750 million in total. Qualitas said that the balance of $250 million is subject to further approvals and conditions and there is no certainty that it will be activated in whole or in part.

As previously flagged, Qualitas co-invests up to $30 million over the life of the $1 billion mandate.

Another unnamed insto committed $750 million into the Qualitas Construction Debt Fund II in August 2023.

In the same month, Qualitas secured a second commitment of $700 million from a subsidiary of the Abu Dhabi Investment Authority (ADIA). The sovereign wealth fund now invests a total of $1.4 billion in the Qualitas Diversified Credit Investments (QDCI).

In August 2022, ADIA was granted options in which it can acquire up to a maximum of 32,630,374 new ordinary shares in Qualitas. If exercised, it effectively enables ADIA to acquire up to 9.99% of the business.

For the 2023 financial year, the ASX-listed firm saw its top and bottom-line surge by more than 80% year on year. Revenue jumped to $73.4 million while net profit after tax hit $22.5 million.

Funds under management increased by 77% during the period to reach $7.5 billion as at August 23, driven by six institutional mandates totalling $3.2 billon.

Qualitas now has $8 billion in FUM. fs

Chloe Walker

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The numbers

14%

The proportion of Aussies with a plan to leave a legacy.

hile 67% of Australians feel confident they’ll be able to leave a legacy when they pass away, only 14% actually have a plan in place to do so.

In June, Generation Life commissioned global research company Censuswide to conduct a study of 2000 adult Australian consumers to gain both quantitative and qualitative insights into what legacy means to them.

The respondent base had quotas of at least 15% retirees, 15% over-50 (aged 50-84), 15% high-net-worth-individuals (HNWIs), and 15% ultra-high-networth-individuals (UHNWIs).

While $224 billion each year in inheritance is expected to be passed between generations by 2050, it seems much of this could be lost during transfer, with 1 in 5 (20%) Australians over-50 worried about additional costs and legal fees impacting their ability to leave a legacy.

Australians also have a heavy reliance across the population on wills (49%), and superannuation (34%) as vehicles to leave a legacy.

While wills are largely fit for purpose, the fact they can be legally disputed can cause issues in more complex family situations- a challenge for wealthier people in particular.

Superannuation, of the other hand, is not intended to be a wealth transfer tool, and the tax implications can be an issue when its used as an intergenerational wealth transfer vehicle to transfer wealth to non-dependants, it said.

The research also found that saving for a happy retirement is Australia’s number one financial goal, however 23% of those aged over-50 are worried that they’ll run out of money in their older years.

What’s more, over-50s are trying to plan their financial legacy on their own, with just 18% relying on the expertise and support of the nation’s financial advisers.

Generation Life chief executive Grant Hackett said this research shows that people are overwhelmed by investment options so choose to take no action.

“With the support of a financial adviser, you can build, protect, leave and preserve the legacy that’s right for you,” Hackett said. fs

La Trobe University appoints lead for $200m fundraising campaign Following an extensive national recruitment process, Margo Powell has been appointed as La Trobe University’s chief advancement officer to drive fundraising.

Joining from Queensland University of Technology, Powell brings over 20 years’ experience in not-forprofit organisations across the arts, health and medical research, and higher education sectors.

La Trobe vice-chancellor professor Dewar said Powell’s appointment comes during a significant phase of the university’s ambitious Make the Difference campaign.

Launched in 2017, the campaign aims to raise $200 million by 2027 to fund scholarships, research, and facilities.

“I warmly welcome Margo Powell to La Trobe as chief advancement officer; an important leadership

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role for the University which oversees our fundraising and alumni engagement programs,” Dewar said.

“Her leadership will be critical in maintaining the strong momentum we have developed in recent years to increase engagement with our alumni and take our fundraising program to the next level.”

Meanwhile, Powell said: “I’m thrilled at the prospect of leading La Trobe’s alumni and advancement team and collaborating closely with the senior leadership team, University Council and extensive alumni community to help realise the University’s strategic ambitions.”

“As someone deeply committed to diversity and inclusion and the transformative role that universities play in our communities, I am very excited to be joining La Trobe...”

Powell will commence in the role on January 15. fs

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Women to take on more executive roles

Keppel moves down under The Singaporean investment giant’s private fund, the Keppel Education Asset Fund (KEAF) has acquired two education assets in Sydney for $198 million.

Backed by institutional investors, including a large sovereign wealth fund and pension funds, KEAF’s investment objective is to make strategic investments in education-related assets, including those in the kindergarten to 12th grade (K12), higher education as well as research and tertiary education segments in the Asia Pacific.

Keppel, as the sponsor, has committed $78 million to KEAF. “The demand for quality schools and campuses in Asia Pacific continues to be well supported by macrotrends including rapid urbanisation, an expanding middle class and rising affluence, as well as a continued focus on high-quality education,” Keppel Corporation chief executive of fund management and chief investment officer Christina Tan said.

“The education market is a resilient one, with education assets offering stable returns and inflation-adjusted rentals.”

The two assets include an existing purpose-built campus located in Kensington (currently fully leased by the University of New South Wales), and a seven-story commercial building located in North Sydney, soon to be converted to a K12 independent school campus.

Tan said that the two latest assets in Sydney, as well as the other assets in KEAF’s portfolio, enjoy long leases with established tenants, and offer investors attractive risk-adjusted returns and yield steady cashflows.

“With Keppel’s robust network on the ground, we have developed a strong deal flow pipeline of over $3 billion in education assets,” Tan said. fs

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Chloe Walker

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The quote

We expect that single family offices offering lifestyle advantages, in addition to competitive compensation, will continue to attract highly accomplished female executives.

organ Stanley’s Single Family Office Compensation report has highlighted a rise in female leaders in single family offices, reflecting a broader trend in the professionalisation of family office teams.

It found that while more than twothirds of family office executives are men, female representation is increasing or approaching parity in several senior positions, notably the chief financial officer and chief operating offer roles.

When it comes to the role chief executive role however, 28% were female in comparison to 72% of males.

“We expect that single family offices offering lifestyle advantages, in addition to competitive compensation, will continue to attract highly accomplished female executives,” Morgan Stanley head of family office resources platform and partner management Valerie Wong Fountain said.

“Greater flexibility and a better worklife balance are increasingly prized in the post-pandemic environment.”

As assets under management (AUM) and complexity increase, the report said families are more likely to hire experienced non-family professionals.

According to the report, nearly all family offices provide tax compliance and planning, estate planning, legal services, financial planning, succession planning, insurance and risk management, and family governance.

Family governance, a new area included in the survey, is provided by 85% of family offices.

Interestingly, more than 90% of firms reported that they gave employees salary increases in the past 12 months, a rise over 2021 reported family office data.

Over half (54%) of bonus paid for 2022 were comparable to bonuses paid for 2021, and 32% reported that bonuses paid for 2022 were higher than those paid for 2021.

The use of long-term incentive (LTI) plans in single family offices also continues to grow. fs

GCI establishes real estate arm Global Credit Investments (GCI) launched a new real estate capital offering, appointing a managing director to lead it.

Led by David Stone, GCI’s real estate team aims to leverage a diverse range of high-quality Australian real estate assets to deliver flexible credit solutions to business owners, property investors and property developers.

It will focus on loan facilities ranging from $10 million to $50 million, with short to medium terms of up to two years.

Stone brings two decades of experience in the property sector to the team, having most recently served as chief executive of Central Real Capital.

Stone said that GCI’s real estate deal proposition is unique in its approach.

“We source first mortgage opportunities across most real estate asset classes on the East Coast of Australia,” he said.

“The team work closely with borrowers when assessing transactions, so we have a clear and defined purpose of funds, an in-depth knowledge of the proposed real estate collateral and an understanding of ‘the end game’.”

Meantime, GCI co-founder and managing director Gavin Solsky said the introduction of GCI’s real estate platform bolsters its capability to help clients unlock the transformational power of private credit.

He added that Stone’s appointment comes amid ongoing demand for private credit in Australia, driven by increased banking regulation and a desire by growing businesses to secure flexible, pragmatic financing solutions.

“Combining David’s real estate experience with GCI’s corporate underwriting skills provides us with a unique capability to craft solutions for clients,” Solsky said. fs

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Strength in numbers ETFs are pulling in investors of all profiles, underscoring the growth phenomenon that begs the question, can passive funds be all things to everyone?

Karren Vergara reports.

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etween 1980 to 2014, J.P. Morgan analysed members of the Russell 3000 Index, essentially a pool of 13,000 small- to large-cap stocks, to determine which companies substantially outperformed the market and maintained their value.

About 5200 or 40% of these companies “catastrophically” lost their value over the period, the research found, slashing 70% of their valuation never to be recovered again. Worse, still, the median stock underperformed the market by -54%. What’s most interesting is that only 7% of stocks outperformed by over two standard deviations from the mean.

Citing the study, Collaborative Fund partner and author Morgan Housel says that the 7% of components that performed extremely well were more than enough to offset the duds.

“That is the kind of thing you’d expect from venture capital,” he says.

But it wasn’t. It’s what happened inside a diversified index.

“Most public companies are duds, a few do well, and a handful become extraordinary winners that account

for the majority of the stock market’s return,” Housel writes in The psychology of money.

For example, in 2018, Amazon drove 6% of the S&P 500’s returns while Apple was responsible for almost 7% of the index’s returns.

Spare a thought for those who invested in individual companies that flopped.

Think, Blockbuster, Polaroid Corporation, Travelzoo, and Readers Digest.

Those who invested in an index fund, on the other hand, would not have suffered the same devasting blows as the laws of diversification would have smoothed out their overall risk.

This is largely summarised in the late Harry Markowitz’s Modern Portfolio Theory (MPT), which posits that rather than looking at the risk of each individual asset, a diversified portfolio is less volatile than the total sum of its individual parts. In short, “don’t put all your eggs in one basket”.

Nothing encapsulates the essence and relevance of this theory today more than exchange-traded funds (ETFs) and managed funds. Yet, by virtue of their one-two punch of diversification

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The quote

Rather than looking at the risk of each individual asset, a diversified portfolio is less volatile than the sum of its individual parts.

and low-cost benefits, it is ETFs that investors are turning to.

Locally, Australia’s ETF industry ended financial year 2023 with $150 billion in funds under management, according to Betashares.

For the rest of the calendar year, FUM is tipped to hit $160 billion.

The bad news is that on an absolute basis, Betashares found, is that growth has tapered off since FY21, largely fuelled by economic uncertainties.

The good news, though, is that on a relative basis, the industry has never been in a stronger position compared to unlisted active funds which have been plagued by outflows in recent times.

John Dyall, head of investment research at Rainmaker Information, has witnessed stomachchurning redemptions from managed funds in the year to March.

Unit trusts bled $45 billion – not as movement in AUM but as “real money that real people have decided to take out of the system”.

“By analysing the monthly net

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funds flow, you could tell the funds flows were not from retail investors or people operating under the advice of a financial planner. Because of large monthly flows from specific products, it appeared there was a large and significant divestment plan,” he says.

Exchange-traded products (ETPs), on the other hand, gained $10 billion.

Spoilt for choice The menu for innovative ETFs might be exploding, but the bulk of inflows or 80%, according to Betashares senior investment strategist Cameron Gleeson, are in core funds which are the low-cost, diversified ETFs. “There is a lot of noise about how this environment is ideal for active management, investors however, are in fact gravitating towards passive and core ETFs,” he says.

Five years ago, Gleeson says the top asset class for ETF inflows was global equities. That has changed. Today, investors are flocking to cash and fixed income.

“Betashares’ Australian High Interest Cash ETF, which holds cash across a number of bank accounts, has been the number one ETF for net inflows this year and recently passed $3 billion in assets under management,” Gleeson says.

As the 10-year Australian government bond yield ticked above 4%, many investors see fixed income ETFs as an attractive investment for both yield and relative safety in an equity downturn.

“Investors remain somewhat cautious about global equities, so we expect a continued preference for Australian equities, fixed income and cash,” he says.

Jackson Millan, chief executive of Aureus Financial, says in this market, there are a lot of asset classes that are overvalued.

“Our clients are typically time-poor business owners. We don’t want to come off as saying what we know what the market is going to do. We want to show clients a tried-and-true philosophy of asset allocation that they can stick to for the rest of their lives without being tactical or trying to outsmart the market,” he says.

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“As a result, the index and ETF passive-based approach works very well for us.”

This strategy ties in with the firm’s broader philosophy which is a preference for low-cost investments with a dash of active management. Incidentally, the advice firm has started to use some thematic ETFs in portfolios such as the Vaneck Morningstar Wide MOAT ETF. “The reason is it’s very low cost in comparison to most other active managers and it comes in an ETF format that’s easy for us to implement for clients,” he says.

For Millan it’s very much a fee-based conversation with clients as he wants to make sure that they get good, consistent performance without overpaying for management. It also largely comes down to client FUM. “For lower FUM clients, we use diversified ETFs, typically with Vanguard, because it is low cost, clients understand it, and it has a simple investment strategy,” he says.

The second group of clients are those who want more of a bucket strategy.

“They would be closer to drawdown phase or they want to have that level of transparency around exactly where their money is going. For these clients, we implement a segmented asset allocation approach, and invest sectorspecific funds directly,” he says.

When choosing among ETFs the performance factor cannot be overlooked.

“Obviously, past performance isn’t an indicator of future performance. But when we look at the data, we realised that 80% of all returns are delivered by asset allocation. And we’ve seen that at other times, the best-performing active managers, over periods of time can become the worst performing.

“You just have to look at the stats of the top quartile versus bottom quartile performance over 10-15-year periods.

It’s not something that we subscribe to as a business and it’s not really an area that we want to play,” Millan says.

Prisoner’s dilemma Rupal Bhansali, the chief investment officer of active fund manager Ariel Investments, says during this turbu-

The quote

There is a lot of noise about how this environment is ideal for active management, investors however, are in fact gravitating towards passive and core ETFs.

13

lent period underscored by high inflation, rising interest rates and geopolitical tensions, active managers perform better and provide downside protection that passive managers cannot.

“Passive investors operate by riding on the coattails of active investors, who perform the arduous task of assessing fair prices.

If others follow the same logic, over time markets become inefficient, an inferior outcome for everyone,” she says.

“In a market dominated by passive investors, investing becomes reflexive, driven by flows instead of fundamentals.”

Without the counterbalance of active, Bhansali says that “passive tends to become a victim of its own success”. More money managed passively means more price distortion – which the market penalises with losses.

“In a period of increasing inflows, managers of passive funds bid up prices without regards to whether they are overpaying,” she says.

By now, it should be clear that passive can only deliver on its promise of positive returns at low cost when active predominates and is able to do its job of calibrating fair prices.

“Of late, however, the opposite is happening – passive is dominating. With that dominance comes the risk of owning overvalued stocks and contributing to price distortion and market inefficiency,” Bhansali says.

RMIT University associate professor Angel Zhong points out that while ETFs have become popular investment vehicles and can influence market dynamics, their impact is generally seen as a reflection of broader market trends rather than a distortion of the market or the value of individual companies. fs Editors note: This is a truncated version of a special feature that appeared in Financial Standard Volume 21, Number 15.

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News

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Australian Unity sells advice arm to Fortnum

Melbourne firm launches Chloe Walker

Newly formed RE Capital Advisory has teamed up with stockbroking giant Wentworth Securities (Wentworth) to launch Alpine Capital, an emerging company advisor, stockbroker, and wealth management platform.

The new team at Alpine Capital includes RE Capital Advisory founders Charles Reed and James Emerson and Wentworth Securities director Malcolm Nutt, head of wealth management Thomas Schoemaker, and head of institutional sales Phil Cawood.

Reed said the decision to bring the two businesses under a newly refreshed brand an easy one, considering his longstanding relationship with Wentworth Securities.

“We’d already done a number of transactions with Wentworth, and in fact we had already worked with Phil (Cawood) when we were all PAC Partners together...”

Reed said over the past few years he’s noticed more and more interest in these deals from family offices, high-net-worth-individuals (HNWIS) and ultra-high-net-worthindividuals (UHNWIs).

“We see family offices, HNWIs and UHNWIs participate at this in the market, but oftentimes without direction,” he said.

“The Wentworth team provide that direction - they have great experience dealing with companies in the early stage; be it a stage of revenue, business model, or profitability, and are able to do the appropriate due diligence, select the right deals, but also handhold their own investors on the private capital side is critical.”

The intends to market an emerging company pharmaceutical in the coming weeks - the first IPO under the Alpine Capital banner. fs

Andrew McKean

A The quote

Unattractive fund managers notched up an extra 0.17% in monthly returns, eclipsing those deemed more conventionally attractive.

ustralian Unity entered into a strategic alliance, selling its financial advice business to AZ NGAowned advisory firm Nestworth and Fortnum Private Wealth.

AZ NGA, through Nestworth, will acquire Australian Unity’s employed adviser and corporate superannuation services business.

Concurrently, Fortnum is set to purchase Australian Unity Personal Financial Services (PFS), the entity holding the advice AFSL. The private wealth company will continue to provide licensing and business support for PFS’s network of 155 self-employed financial advisers.

As part of the deal, Nestworth will also become the “preferred provider” of financial advice to members and staff of Australian Unity.

The “augmented advice group” will support the financial wellbeing of approximately 60,000 Australians.

It will manage over $40 billion in funds under advice, $200 million in life insurance premiums, and leverage a network of 400 advisers across Australia.

Australian Unity wealth and capital markets chief executive Esther Kerr said the transaction will enable its advice business to increase scale and reach more Australians under AZ NGA’s Nestworth and associated Fortnum, while providing a greater level of access for Australian Unity members and staff.

“This is about the next phase of growth for a business we’ve built over 20 years. It will help ensure more Australians in future access high quality, affordable advice that benefits them,” Kerr said.

“Nestworth and Fortnum are the right partners and home for Australian Unity’s dedicated advisers and support teams in their next phase of growth. We are also delighted that Australian Unity members and staff will continue to enjoy access to this growing advice network.”

Separately, Australian Unity Healthcare Property Trust (AUHPT) has announced the successful completion of its first issuance of senior, unsecured, six-year fixed rate A$ Medium Term Notes (A$MTN), raising $275 million. fs

Ugly fund managers are investment darlings According to a study by Shanghai Jiao Tong University, having a face only a mother could love pays off in funds.

In the first economics study to employ a deep learning model to quantify facial attractiveness, unattractive fund managers notched up an extra 0.17% in monthly returns, eclipsing those deemed more conventionally attractive.

The study posited that while good-looking managers might be hired for marketing purposes, their counterparts are likely recruited for their skills alone.

It also claimed that unattractive fund managers exhibit greater skill, evidenced by their tendency to allocate more capital to their strongest investment ideas and their superior abilities in market timing and stock selection.

“We find that good-looking managers trade more

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excessively, prefer lottery-like assets and stocks with higher return volatility. They also exhibit more optimism when conducting market analysis in their periodic reports,” the study said.

“These facts imply that good-looking managers could suffer overconfidence.”

However, while “comely managers” may lag in performance, they excel in drawing more fund inflows, suggestive of higher performance chasing for funds they lead.

The study further revealed that attractive managers are more likely to climb the corporate ladder, afforded a higher probability of promotion.

Moreover, these managers were found to “serve more firms,” indicative that they have greater bargaining power in the labour market.

Interestingly, they also tend to gravitate toward smaller fund companies. fs

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Dexus debuts new fund

RW Capital launches Pets Fund

Cassandra Baldini

A second closed-ended opportunity fund from Dexus will provide wholesale investors with exposure to investments in property repositioning, development, special situations, and credit opportunities.

Dexus Real Estate Partnership 2 (DREP2) follows the launch of Dexus’s first closed-ended opportunity fund, DREP1, which came to market in 2021.

According to Dexus, DREP2 is expected to be substantially larger than DREP1, with the first capital close predicted in the first half of 2024.

As such, DREP fund manager Jason Howes said the new offering is expected to generate significant investor interest.

“Responding to market conditions and continued demand for opportunitystyle investments, we expect DREP2 will attract substantial investor interest from domestic and international investors, particularly from high-net-worth investors and family offices looking for enhanced returns from Australian real estate investments,” he said.

Dexus also announced that DREP1 has acquired residential properties in Melbourne, including 41 recently completed apartments in stage one of a development in the Melbourne CBD. Additionally, DREP1 has purchased 79 apartments in a recently completed unit development in Central Melbourne.

Dexus explained the deal assessment process for DREP1 is rigorous, with only 4% of potential opportunities moving to execution. Capital that has been deployed is distributed across credit (38%), repositioning (27%), development (23%), and special situations (12%). fs

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Chloe Walker

T The quote

These businesses are cashflow positive and we’ve done very well out of our investment to date.

he White family office has launched a $40 million capital raise for a new investment fund in the pet accommodation sector.

The RW Capital Pets Fund plans to invest in a series of pet boarding facilities nationwide and will partner with Pet Resorts Australia (Pet Resorts) to manage these new facilities.

RW Capital’s vice president Matthew Falk said the family office requires three to five years to obtain a portfolio of assets, invest resources into bringing them up to high standards, and market them effectively.

“These types of facilities are typically owned by mum and dad operators who are passionate about what they do, but a lot of the time lack the funds to market these things or to renovate them to the standard that they’d like to,” he said.

“Hence, we’d like to step in, buy these facilities, and make money available for them to reach their full potential.”

Falk said the overall return target for the fund is 20% per annum, in line with investments RW Capital has already made in the sector. With a

minimum investment of $100,000, the fund will pay out a dividend of 6% to 8% in its first year.

RW Capital managing director Dan White, who has been a personal investor with Pet Resorts for close to 15 years, said he is excited to be partnering with an “experienced operator with a proven track-record.”

“There has been a large increase in the number of pet animals in Australia in recent years, particularly over the COVID-19 pandemic,” he said.

“These businesses are cashflow positive and we’ve done very well out of our investment to date.”

White stated that the assets are wellprotected due to their licensing.

“There’s downside protection because it’s not easy to get licenses to operate pet resorts, so there’s some inherent value there. It’s a really interesting space.”

As RW Capital’s business has grown, it has increasingly attracted institutional capital such as superannuation and pension funds from overseas.

“We feel very privileged to work with a diverse range of investors,” White said. fs

EG grows private wealth strategy Following its decision to tap into the private debt market, EG Funds (EG) has appointed a director of business development to expand its fast-growing private wealth division.

EG Private Wealth, spearheaded by director Rodney Walt, partners with private investors and family offices to uncover commercial property syndication opportunities.

In May, the real estate investment fund joined forces with private credit provider Msquared Capital in an aim to further diversify the portfolio of high-networth (HNW) investors.

As reported by Financial Standard, Australia’s private credit boom shows no signs of slowing down, as fund managers swoop in on the opportunities a rapidly rising interest rate environment presents.

“As lending declines from the major banks, we

have recognised a funding gap within the market,” Walt said on the joint venture.

“That’s why private debt has been viewed as the ideal opportunity for our investors.”

Mark Weingarth, who will step into the newly created role of EG Private Wealth director of business development, said it is an incredibly exciting time to join the group as the division focuses on scale and growth.

“EG is a dynamic business with very astute leadership, confident of delivering great outcomes for new and existing investors,” Weingarth said.

Weingarth brings over 15 years of experience in wealth management, including asset management, structured investments, and commercial property.

Prior to joining EG, Weingarth served as Charter Hall’s NSW state manager for private wealth and capital raising. fs

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WEALTH WITH PURPOSE Phil Harkness and Tracy Conlan, Mutual Trust In the realm of Australian family offices, a stark reality emerges: 70% risk dropping the ball on wealth transfer.

To curb this trend, Mutual Trust chief executive Phil Harkness and head of strategy Tracy Conlan are dedicated to helping clients create and preserve purposeful multigenerational wealth. Chloe Walker writes.

M

oney can’t buy happiness is a popular adage – but how you spend it just might. According to recent Harvard Business School research, if money isn’t making you happy, “it’s likely that you’re not spending it in the right way.”

And Mutual Trust chief executive Phil Harkness and head of strategy Tracy Conlan couldn’t agree more.

As managing partner and partner of one of the country’s leading multi-family offices, Harkness and Conlan are dedicated to helping clients achieve what matters most, by taking the time to understand the core purpose of their wealth.

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“Mutual Trust is a purpose-driven company,” Harkness says.

“We pride ourselves on caring for our families, our people, and our communities - not just their finances.”

This ethos has persisted since 1921, when William Lawrence (WL) Baillieu and his four brothers first started the firm. Together, the five brothers decided to pool all their resources and behave as one unit, working together in the spirit of ‘mutual trust’.

Since its founding, Mutual Trust has gone through significant changes, including expanding its services and merging with the Myer Family Office in 2017.

Today, it boasts over 200 employees, four offices in Mel-

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bourne, Sydney, Adelaide, and Perth that serve several hundred families nationally and those scattered across the globe.

“Although our values remain relevant after a century, we like to think of ourselves as a modern, multi-disciplinary family office,” Conlan says.

“We provide everything families need under one roof, with experts in family advisory, wealth management, succession, trustee, investments, property, philanthropy, agriculture, and tax and accounting.

“We’re pretty confident that there isn’t anyone else in Australia that’s doing the full breadth of what we do.”

Harkness attests to this, having been a personal client of Mutual Trust for many years.

“I became a client of McInnes Graham and Gibbs in 1987, and that firm merged with Mutual Trust in 2006,” he explains.

“My family and I have always found great value in gathering each quarter for our family meetings with a team of experts focused on our needs and our circumstances. They all understand what matters most and they work to help us execute our family strategy.”

Before joining the firm as its chief executive, Harkness spent over three decades in professional services.

In 1980, after completing his bachelor’s degree in Agricultural Science from Latrobe University, Harkness started his career with Bunge, a global agribusiness company. Later, he decided to pursue an MBA from the University of Melbourne.

Harkness then went on to spend 33 years in management consulting, where he worked with various firms such as Boston Consulting Group (BCG), A.T. Kearney, and EY. At EY, Harkness ran both the management consulting practice for Oceania and the strategy consulting practice for Asia Pacific.

As the lead partner of these divisions, Harkness developed an offering for EY around the topic of purpose.

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“I became the global leader of an offering which was called ‘purpose-led transformation’,” Harkness says.

“Essentially, we worked with large corporations around the world and helped them to determine their organisational purpose.”

This, he says, refers to a “meaningful and enduring reason for a company to exist”, which is in line with its long-term financial performance, provides a clear context for decision-making, and unifies all stakeholders.

With such a passion for purpose-fuelled results, it was only a matter of time before Harkness was asked to head up the newly merged multi-family office.

“I was approached about this role in 2017, and since I was already a client, I knew the firm from the outside and liked it,” Harkness says.

“I thought there was a good opportunity, especially with the two firms coming together, to really do something fabulous with Mutual Trust.”

Impressed by Conlan’s exceptional talent during their time working together at EY, Harkness didn’t waste time getting her on board.

Conlan, who spent her formative years at McKinsey specialising in strategy within financial services, is known for her prowess as a strategy consultant.

After McKinsey, Conlan assumed leadership roles at prominent institutions such as Commonwealth Bank of Australia, Deloitte Australia, and EY. “At EY I was in Phil’s strategy consulting team and, when he left to become the chief executive of Mutual Trust, he invited me to come along,” Conlan says.

“Initially, I was brought in to help define Mutual Trust’s purpose.

We ran 17 workshops across the whole organisation, including the board, and spent quite some time, about six months, creating that purpose of wealth statement and understanding.

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“I liked what I saw so much I stayed.”

Harkness and Conlan, alongside other respected experts within the Mutual Trust leadership team, work hard to ensure the success of family offices - a cause they believe is more important to achieve than ever before.

Recent research conducted by Mutual Trust alongside the University of Adelaide reveals family enterprises that are associated with wealthy families employ 6.32 million Australians.

“As a result, they pay $294 billion in wages every year - that’s just over 48% of the total private sector wage bill,” Harkness says.

Family offices also play an important role in the local private equity and venture capital sector, Harkness says, providing 7% of its total funding.

“The largest 350 family offices in Australia manage between $515 billion and $690 billion, so call it $600 billion, of wealth outside of their operating businesses. This, in addition to managing their own operating businesses,” he states.

Family offices also make substantial contributions to all sorts of educational support, poverty alleviation, scientific research, technological advancements, arts, health orientated and philanthropic activities.

It’s estimated the wealthy family sector tips around $1 billion each year into these causes, Harkness says.

“For every one percentage point improvement in the annual return on the wealth managed by Australian family offices, good things happen,” he says.

“For every extra 1% return on their wealth, we get an additional 40,000 full-time jobs and an additional $3-$4 billion in wages, $6$7 billion contribution to Australia’s GDP, and $300 to $350 million in direct taxes, excluding personal income tax.”

Harkness calls this the ‘leverage effect’; “When these families are doing well, they go out and invest in our communities.”

Clearly, the success of Australian family offices matters.

“By that, we mean the successful intergenerational transfer of wealth, within the context of a harmonious family, that has a clear direction and a clear understanding of their purpose and wealth,” Conlan says.

The largest intergenerational wealth transfer of $3.5 trillion is currently underway and is predicted to span two decades. Furthermore, Mutual Trust research suggests the number of wealthy families is growing rapidly; between 2020 and the start of 2025 their numbers are expected to have increased by 28.5%.

“As a result, the Australian family office sector will become more prominent as seen in other countries like the US and Europe,” Harkness says.

However, it’s not a foregone conclusion that these wealthy families will prosper through to the next generation and beyond. In fact, Harkness says the odds are stacked against family offices being successful.

Mutual Trust research suggests local family offices have a 70% likelihood of failure, mainly caused by a lack of communication or a breakdown of trust among family members.

While lack of communication explains 60% of the failures, 25% of the failures are explained by insufficient preparation of the next generation to manage money.

Additionally, 12% of the failures result from not d not defining the purpose of their wealth, while failures, and poor investment advice explains 3%.

“We have plenty of well-educated people around that go to good

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universities and do different things, but we don’t actually get taught how to manage money, and that’s huge,” Harkness says.

“So, these kids will get the money and then don’t know how best to use it.

“In our view, you’ve got this kind of lopsided world out there which is obsessed with investment advice and yes, it really matters.”

According to Harkness, the advice side of wealthy families is wellmanaged from a macro point of view; however, without a balanced focus on family dynamics as well, this is where the failure occurs, and this is a cause for concern.

“Even though wealthy families are important to the social and economic prosperity of Australia, there is no guarantee that they can successfully transfer their wealth to the next generation,” Harkness says.

“This is a cause for concern for all of us and the nation - really, it’s in everyone’s interest that these families are well-advised by experts who know what they’re doing.”

When it comes to the 30% of family offices that are successful, Harkness says it’s unsurprising they have a lot in common.

“Following the independent research, we were delighted to discover that the positive practices of those families align closely with our own practices that have been in place for decades,” he says.

The first step, Conlan explains, is to determine the purpose of the family’s wealth.

At Mutual Trust, this process involves covering five different areas that matter most to clients, such as entrepreneurship, family unity and harmony, learning and engagement, community impact, and financial prosperity.

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The quote

Even though wealthy families are important to the social and economic prosperity of Australia, there is no guarantee that they can successfully transfer their wealth to the next generation.

Conlan explains entrepreneurship can involve a legacy family business or nourishing the entrepreneurial spirit of different family members.

“Most wealthy families at some point, if not now, have a family business that created the wealth, so this is a very important part of what matters most to a lot of families,” Conlan says.

“By asking a series of questions in one-on-one interviews and in workshops with that family, we uncover what’s important to them, and then create a strategy that encompasses ways of furthering that entrepreneurial element.”

This could include sponsoring a family member who wants to start out on their own or wants to extend the existing business, Conlan says.

Family unity and harmony is also crucial for the success of a family, yet it is an area where many families struggle, she says.

“To achieve this, it is important to agree on the purpose of wealth and how it will be achieved. It is also essential to have a clear understanding of each family member’s role in the family and in the family’s strategy. By doing so, individual needs as well as the family’s needs can be met,” Conlan says.

To ensure transparency, a form of governance such as a family charter and a family committee should be established.

“This allows everyone to understand what has been agreed upon and how they will move forward,” she explains.

“Additionally, fostering good conflict resolution and problem-solving skills within the family is vital to keep everything on track.”

The next aspect Mutual Trust focuses on is learning, engagement, and fulfilment. This is where family members can express their individual aspirations, which may differ from the expectations set by the family.

“We provide a forum for individuals to share their goals and receive support from the family to achieve them,” she says.

In addition to personal aspirations, Mutual Trust also helps individual family members create a personal development plan, formal education plan, and identify specific learning experiences or career paths that can help them achieve their goals.

“We make sure that everyone in the family is aware of individual aspirations and goals,” Conlan says.

“This helps to ensure that the purpose of wealth is put to good use and helps achieve individual learning, engagement, and fulfillment.”

Community impact can be achieved through collective or individual efforts, such as direct donations, leveraging talents, networks, or business opportunities.

“It is also an excellent approach to involve younger generations in the family to help them realize the value of wealth and its potential impact on the community and the economy,” Conlan says.

“This approach also helps build shared interests among family members who may have different individual aspirations but can come together on the community side.”

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Conlan says the last pillar, financial prosperity, is critical because it allows for good investments that can fund all the other important elements. However, she says financial prosperity alone is not sufficient to ensure overall well-being and successful intergenerational transfer of wealth.

“The other facets also contribute to the collective aspirations of individuals and their families. Therefore, a family strategy is needed to determine the purpose of wealth and how to achieve it,” Conlan says.

“This involves a work plan that considers all the facets of wellbeing. At our company, we work with families to develop such plans and help them achieve their goals.”

To equip the next generation, Mutual Trust hosts a regular ‘Rising Gen’ program. It also runs an initiative curated to celebrate the role of women in families and communities called ‘Merlyn’s Circle’.

As many family clients are global, Mutual Trust is a member of the international multi-family office network, the Wigmore Association. Other members of the Wigmore Association include German family office HQ Trust, USbased family office Pitcairn, Mexico’s leading family office Promecap, and pioneer of the Brazil family office Turim.

Conlan adds that the global market is growing significantly in terms of the number of wealthy people and the size of their wealth.

According to the Credit Suisse Global Wealth Databook, Australia ranks eighth in the world when it comes to the number of wealthy people, which is significant relative to its adult population.

“Australia is very attractive in that sense as a market, so really, our strategy is in fact one of growth,” Conlan says.

“Therefore, we’re focusing on the things that we believe will enable wealthy families to thrive and be successful over multiple generations, so that they can grow their wealth even further.”

At the same time, Harkness emphasises that Mutual Trust is a flexible organisation that adapts to the current economic state.

“Anyone that’s in the wealth management business right now would be kidding themselves if they didn’t say they’re nervous about all the macro-economic and geopolitical issues going on around the world right now,” he says.

However, Harkness says Mutual Trust’s ability to adapt has allowed them to remain in business for over 100 years.

“Firms that last for a decade or more are surprisingly rare, and the ones that do often get absorbed into other companies or rebrand,” he says.

“Mutual Trust’s ability to stay relevant and adapt is a testament to its resilience and experience.

“Understanding the issues of Australian family offices and fostering innovation in this space is crucial as there is a lot at stake. Therefore, will be making it our business to innovate with the services we provide to our clients, and to do that, we’ll need to stay contemporary around what sort of problems we’re trying to solve.” fs

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Understanding the issues of Australian family offices and fostering innovation in this space is crucial as there is a lot at stake.

22

Sector reviews

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Alternatives

Prepared by: Rainmaker Information Source: Rainmaker, Future Fund

What to currency hedge?

John Dyall

T

VOLATILITY ROLLING THREE YEARS PA

20%

15%

10%

MSCI World TR Index UH AUD

5%

MSCI World Index Hedged AUD 50% hedged

0% OCT 2022

VOLATILITY ROLLING THREE YEARS PA

16%

Bloomberg Global Agg. Index Hedged Bloomberg Global Aggregate Index AUD UH Int. FI 50% hedged

14% 12% 10% 8% 6% 4% 2% 0%

OCT 2022

OCT 2020

OCT 2018

OCT 2016

OCT 2014

OCT 2012

OCT 2010

OCT 2008

OCT 2006

Source: Rainmaker, Factset, RBA

Figure 1. Shenzhen CSI 300 Index 5% 4%

Managed funds

Bloomberg Barclays Australia (5-7)

2% 1% 0% -1% -2% -3% -4% 1YR

3YRS

5YRS

10YRS

Figure 2. Chinese equities held by overseas investors 8% 7% Cash rate

6%

Inflation

5% 4% 3% 2% 1% 0% -1% 2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

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Super funds

3%

2004

economic growth combined with raging inflation and this has forced central banks to increase official interest rates.

While this has boosted investment returns from cash deposits, it hasn’t been favourable to fixed interest investments due to the inverse relationship between interest rate yields and bond prices.

As a result, superannuation funds fixed interest products on average underperformed the benchmark index on their fixed interest investments over one, three and five years to end of August 2023. Meanwhile equivalent managed funds outperformed both super funds and the benchmark index over these same time periods.

Interestingly over 10 years to August 2023, the super fund index outperformed the managed funds index by 40 basis points but still underperformed the benchmark index by 70 basis points. fs

2003

he bumpy ride for fixed interest investments isn’t yet over. Recall that in the 2022 financial year the sector had one of its worst performances - Australian fixed interest as measured via Bloomberg Barclays Australia index delivered -10.6%. Even though things improved in the 2023 FY, global bonds still posted 1% while global equities’ positive 20%.

For the month of September alone, the fixed interest index lost -1.6%. For some investors this might come as a shock given fixed interest investments are supposed to guarantee regular income. Yet they’ve turned out to be volatile, high risk and likely to deliver negative returns.

The problem of course is what happens to the underlying capital value of the bond investment.

Setting the scene, major nations across the globe are continuing to face sluggish

OCT 2020

18%

Prepared by: Rainmaker Information

Fixed interest ain’t T

OCT 2018

Figure 2. Median dividend yield vs CPI

Fixed interest

Pooja Antil

OCT 2016

OCT 2014

OCT 2012

OCT 2010

OCT 2008

OCT 2006

he continued weakness of the Australian dollar versus the US dollar brings to mind the hidden risk in all international portfolios: currency risk and whether to hedge or not.

Generally, in international equities currency is seen as a “risk” that can be “hedged” away. And yes, while it sounds good when said by a marketing person to an investor, that doesn’t make it so.

Currency hedging is the process that ensures an Australian investor gets pretty much the same return as a foreigner in that country when they invest in that international asset. But in fact leaving the currency unhedged is a great stabilizer of returns for the Australian investor.

Over rolling three years, it can be seen that the volatility of currency hedged international equities portfolios is much higher than currency unhedged portfolios. When currency exchange rates are stable there is not much

difference between the two. When exchange rates are volatile being unhedged diversifies the risk of rapidly changing capital values and smooths out returns.

But this is not true for all asset classes.

Fixed interest shows how the same currency strategy has the opposite effect when it comes to portfolio volatility. The main returns driver of fixed interest is the coupon. Capital values only change rapidly when the level of interest rates change or, when the security has a credit focus, credit spreads get wider or narrower.

This is why most international fixed interest portfolio are currency hedged back into Australian dollars. It’s a way of making returns between equivalent foreign and domestic securities the same when they have a similar risk profile (of duration and credit).

It also means that Australian investors have a much wider pool of potential investments compared with Australia-only securities. fs

Figure 1. Best dividend stocks, October 2023 25%

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Sector reviews

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Australian equities

Prepared by: Rainmaker Information Source: Factset

Mixed signals Alex Dunnin

A

Figure 1. ASX index growth since Mar 2020 - size segments 200 CUMUATIVE VALUE

190

Mid caps

180 170

Top 20, 50, 100, 300

160 150 140

Small caps

130 120 110 100 SEP-23

JUN-23

MAR-23

15.4% 14.2%

Energy 9.1%

Comm Services Utilties

5.3%

Resources

4.1%

Industrials

3.6%

Financials

2.8%

Financials ex A-REITs

2.8%

Materials

2.5%

Consumer staple

1.2%

A-REITs

0.9%

Health Care -8.2%

Source: Factset

Figure 1. Rolling 12-month returns, market indices 60% 40% 20% 0% -20% -40%

MSCI EM

MSCI Brazil

MSCI China

MSCI Taiwan

MSCI India

S&P 500

-60% OCT-23

SEP-23

AUG-23

JUL-23

JUN-23

MAY-23

APR-23

MAR-23

FEB-23

JAN-23

DEC-22

NOV-22

OCT-22

SEP-22

AUG-22

months and a 4.8% dip since the year’s outset, according to MSCI’s China index.

Conversely, MSCI country indices for Taiwan, Brazil, and India yielded returns of 17.8%, 16.5%, and 12.6%, respectively, since the year’s commencement. While these offset some challenges posed by Chinese equities, they collectively constitute only 33.5% of the index.

Another influence in emerging markets is currency dynamics. Amidst geopolitical volatility and warnings of global economic slowdowns, investors seek refuge in the US dollar.

The repercussions of a strong USD include capital outflows from foreign investors, increased costs for emerging markets in servicing dollar-denominated debt, and inflationary pressures from elevated costs of imported materials and goods. fs

JUL-22

FS Private Wealth

DEC-22

E

SEP-22

23.3%

IT Consumer discr

Prepared by: Rainmaker Information

Emerging disparities merging markets have experienced a mixed performance over the year-todate. On one hand, the MSCI Emerging Markets index displayed a 12.4% return over the 12 months ending in October. However, delving deeper reveals a decline of 0.3% over the last six months.

Examining the index’s journey from the beginning of the year to the end of October shows a 5.2% return, seemingly reasonable in isolation. Yet, against the wider context of the S&P 500’s blockbuster 18.6% return during the same period, the underlying challenges become apparent.

A significant factor weighing down these returns has been China, constituting the highest country allocation with nearly a third of the index. Unfortunately, Chinese stocks recorded a 6.6% decline over the past six

JUN-22

Figure 2. ASX sector returns YTD 2023, end-Sep

International equities

Sanjesh Pinnapola

MAR-22

DEC-21

SEP-21

JUN-21

MAR-21

DEC-20

SEP-20

JUN-20

fects of the Russian invasion of Ukraine to send inflation hypersonic.

That led to recessionary fears that ushered in lacklustre economic growth to the point that forecasters were tipping tepid times ahead.

Against this landscape it’s not too much of a surprise to observe that stock markets, even in Australia, changed gears from growth to value. Australia’s ASX responded delivering only around 4% in the first nine months of 2023.

This is a far cry from the annualised 15% pa most of the size-based indexes have delivered since March 2020. But reflecting how the value-oriented investment style now predominates, the midcap 50 index delivered returns one-third better at an annnualised 20%.

The surprise might be the paltry annualised outcome from small caps albeit that index rarely delivers, which is why it’s one of the few areas where active funds management still adds value. fs

MAR-20

ustralia’s stock market is sending mixed signals. While it finished the financial year with an incredibly robust 14% return, just half a year prior it was lamenting calendar year 2022 returns of a dismal -2%. The previous calendar year for 2021 was meanwhile one of its best ever as it came in at around 18%.

We all know by now the geopolitical forces that have buffeted world stock markets through this time launched itself upon us. For those needing a quick recap the shock of the pandemic caused the market to crash before the liquidity steroid injection into global economies triggered the mother of all rebounds.

This spurred supply chain tensions that sparked supply-side price rises that sowed the seeds for inflation’s return, though we didn’t know it at the time. When the global economy did return to life there was a commodities boom that combined with the ef-

23

Figure 2. Currency depreciation against USD, since Mar-22 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% -14.0% CHINESE YUAN

TAIWANESE DOLLAR

KOREAN WONG

INDONESIAN RUPIAH

INDIAN RUPEE

BRAZILIAN REAL

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Opinion

www.fsprivatewealth.com.au Volume 12 Issue 04 | 2023

Richard Palmer senior portfolio manager Russell Investments

Investing in an open-ended private assets fund W

hen considering an investment in an open ended or semi-liquid private assets fund, it is critical to ask certain key questions of the potential manager to ensure that the strategy aligns with the investor’s goals.

While the following is not an exhaustive list, it can be a good start to help an investor gain confidence in a potential investment.

1. Track record One of the most important questions to ask a manager of private assets is their experience managing private assets. Evergreen funds are no different.

Managing an evergreen fund presents unique challenges to management of traditional private assets, and you want to make sure that your manager has the relevant experience, preferential fees and terms, exposure to a diversified group of quality assets, and proprietary analysis and insight. While the structure of evergreen funds is unique, the underlying investments are the same as traditional closed-end funds.

2. Deal flow It is important to understand where the manager is sourcing their deal flow from, and how those sources have evolved over time. It is also important to understand the size of the deal flow and whether that can accommodate the manager’s projections for growth of strategy.

3. Data In the private markets, there is perhaps no greater differentiator than data. One of the hallmarks of the public market is instant access on data companies, for essentially any investor. The same ability is not extended to every eligible investor in the private markets.

4. Investment team Central to understanding a manager’s ability to successfully construct any private markets fund is confidence in the professionals who are managing the assets.

Ultimately, this comes down to having confidence in the team that is actively sourcing and providing recommendations for investments into deals, and their process for doing so.

5. Portfolio management While it is important for the manager to have a large investment team that is located in the markets in which they are investing, for an evergreen portfolio is it also critical to have a portfolio management team dedicated specifically to the strategy. Managing an evergreen private assets fund requires a dynamic approach to portfolio management, different from what is required for traditional, closed-end funds.

6. Liquidity/risk management One of the hallmark elements of an ev-

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The quote

Managing an evergreen private assets fund requires a dynamic approach to portfolio management, different from what is required for traditional, closed-end funds.

ergreen fund is the availability of semi-regular liquidity. Because liquidity is not an aspect of diligence on traditional closed-end funds, it is important for an investor to understand how the manager of an evergreen fund strategy approaches liquidity in their offering.

7. Portfolio composition For any private assets fund, a critical component is the portfolio construction, and evergreen funds are no different. It is important for an investor to understand the portfolio construction philosophy of the fund, why certain investment types and strategies are included, and what the expectations are for those allocations.

8. Deployment When considering an investment into an evergreen fund, a managers ability to deploy the capital raised over the course of a constant fundraising period is a crucial point to consider.

As capital is being invested into the fund on a regular basis, a manager needs to be able to deploy that capital regularly and swiftly to avoid an oversized cash balance that can weigh on performance. fs

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25

Compliance:

26

Setting up a new financial services firm in Australia

33

Unfair contracts terms law changes

By Lynda Dowling, Webull Securities

By Rachelle Hare, Blaze Business & Legal

26

Compliance

www.fsprivatewealth.com.au Volume 12 Issue 04 | 2023

CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: This paper is essential for those thinking of establishing a financial services business. Apart from regulatory obligations and deciding whether to purchase or apply for an AFS licence, clarity around services, products, and intended clients is critical. Finding the right staff with the right attitude is a must.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Setting up a new financial services firm in Australia Tasks, time and tenacity

T Lynda Dowling

his paper provides an overview of what it entails to set up a brand-new financial services firm in Australia. It is not an easy feat, and those involved need a unique set of skills, especially tenacity.

It is based on a case study detailing what was required to establish Australian financial services firm Webull Securities (Australia) Pty Ltd (Webull), initially a startup providing financial services to retail investors, and later to wholesale clients, on behalf of its large US parent entity in accordance with its strategy to be licensed and launched in several regions globally.

The initial key items considered were as follows: • What did the firm wish to do in relation to financial services? s What types of financial services and financial products did the firm wish to offer? s How would these financial services be provided (e.g. app only/ app and desktop etc.)? s To what types of clients did the firm want to position its services and products?

• Considerations for the firm necessary to achieve its goal; namely: s appointing a CEO and chief compliance officer (CCO) s setting and working within a budget

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s obtaining an Australian financial services (AFS) licence s ascertaining the support functions required s determining the number of employees needed.

• How to get everything done in the anticipated timeframe?

• Measures of success.

What did the firm wish to do in relation to financial services?

As a primary considerations, senior executives agreed upon the Australian firm’s strategic aims. These were to: • within a year (or less if possible), secure an AFS licence from the Australian Securities and Investments Commission (ASIC), then launch the firm accordingly • become a trading participant of the Australian Securities Exchange (ASX) and Cboe Australia Pty Ltd (Cboe) and gain market share.

• create a name for the Australian company and have the company incorporated in Australia and registered with ASIC • appoint an external legal firm to assist with company creation etc.

What types of financial services and products did the firm wish to offer?

As some financial services and financial products can be complex

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and involve more regulation scrutiny than others, it was imperative to consider all relevant factors accordingly when selecting the financial services and financial products to ensure that everything was captured within the firm’s risk framework and evidenced to relevant regulators accordingly.

It was agreed that in its first year, the firm would aim to provide the following services to clients.

27

For the Australian entity, it was decided that the aim was to be licensed for providing financial services to: • retail clients (as defined under section 761G of the Corporations Act 2001 (Corporations Act)) • wholesale clients.

Considerations for the firm in order to achieve its goal Appointing a CEO

General financial product advice for the following classes of financial products

• Deposit and payment products limited to basic deposit products and deposit products other than basic deposit products • Derivatives • Interests in managed investment schemes excluding investor directed portfolio services • Securities.

The candidate needed a financial services background and the ability to ‘hit the ground running’. The CEO spent time determining the Australian firm’s concept, undertaking a detailed analysis of its competitors and the market, including the various generations of investors.

Thus, with the business concept and structure agreed, the CEO was able to prepare a detailed business plan accordingly within critical timelines.

Appointing a chief compliance officer (CCO)

Deal in financial products

1. Issuing, applying for, acquiring, varying, or disposing of a financial product in respect of the following classes of financial products: a. Standard margin lending facility b. Derivatives 2. Applying for, acquiring, varying, or disposing of a financial product in respect of the following classes of financial products: a. Deposit and payment products limited to basic deposit products and deposit products other than basic deposit products b. Interests in managed investment schemes excluding investor-directed portfolio services c. Securities d. Derivatives.

How would financial services and financial products be provided?

With the new Australian entity becoming part of an already well-established and reputable online trading firm which had been in the US for a few years, it was agreed for consistency that all new entities would provide services and products by way of: • the firm’s mobile app • desktop.

It was imperative for the Australian entity that initially, clients were able to trade on a self-directed trading platform. In time, the Australian entity hoped to establish a trading desk whereby clients would be able to speak directly to trading representatives.

What types of client did the firm want?

Establishing the client base early on was critical and dovetailed with the need to gain the relevant AFS licence. This was because the particular client category dictated what information the firm needed to provide ASIC as part of the AFS licence application process.

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One of the first tasks for the new CEO was to appoint a chief compliance officer (CCO). The CCO would work closely with the CEO on key requirements pertaining to the set-up of the new firm, and build out requisite compliance frameworks, policies, procedures, and other regulatory requirements.

Setting a budget

Along with the business plan created by the CEO and approved by senior executives, a detailed budget was created in conjunction with the business plan.

Licensing

With the business plan and budget agreed by senior executives, the following licensing options were considered: a) Apply directly to ASIC for the firm’s own AFS licence b) Purchase an AFS licence, or c) Become an authorised representative on a third-party’s AFS licence.

The firm’s preference was to apply to ASIC directly for its own AFS licence. However, as a back-up, should the firm not gain an AFS licence, or the application took far too long (it can take up to 12 months to gain an AFS licence), then options b) and c) would be considered.

Key lessons for those thinking of obtaining an AFS licence

It is important to identify key lessons for those who may be interested in obtaining an AFS licence either by applying directly to ASIC or going through the ‘back door’ and essentially purchasing an AFS licence or becoming an authorised representative on a third-party’s AFS licence (known in the industry as ‘hiring an AFS licence’).

These are outlined in the following discussion.

Upon an applicant going through a thorough AFS licence application process and having met all of ASIC’s stringent licensing requirements, then ASIC will issue an AFS licence.

Lynda Dowling, Webull Securities Lynda is chief compliance officer within the local Australian entity of global fintech Webull, and played a key role helping the firm start up from scratch in Australia. She has over 20 years’ compliance experience supporting highperformance businesses in investment banking, stockbroking, domestic commercial banking, and inter-dealer broking. Lynda holds the Governance Risk and Compliance Institute senior accreditation of Certified Compliance and Risk Professional (CCRP).

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28

Compliance

Note: These licensing requirements are as per ASIC’s Licensing Kit, comprising: • Regulatory Guide 1 AFS Licensing Kit: Part 1—Applying for and varying an AFS licence • Regulatory Guide 2 AFS Licensing Kit: Part 2—Preparing your AFS licence or variation application • Regulatory Guide 3 AFS Licensing Kit: Part 3—Preparing your additional proofs.

It can be quite common in the financial services industry to purchase an AFS licence, however, there are key advantages and disadvantages.

Some key pros and cons are highlighted in the following sections.

Disadvantages of purchasing an AFS licence

Some AFS licence applications can be lengthy and difficult, depending on the licence authorisations being applied for. The average turnaround from ASIC to grant an AFS licence is between eight and 12 months, but some cases have been identified in the financial services industry where it has seen it take up to 12 months (and more).

With most AFS licence applications, firms usually need external legal assistance which can be costly and ongoing. For example, if the AFS licence application is taking a significant amount of time, the process would usually involve ongoing questions from ASIC’s licensing section that would potentially need the assistance of a law firm.

In accordance with ASIC’s website page FS01 Application for AFS Licence, application fees can range quite substantially, with costs further blown out if a law firm is needed to help with the application.

As part of the AFS licence application process, key individuals such as officers of the firm (directors) need to meet ASIC’s very granular “fit and proper person” regime. This can be particularly onerous if a global firm with directors of the Australian entity located overseas applies for an AFS licence, as relevant overseas probity checks have to be provided to ASIC in the preferred manner.

A responsible manager for the new AFS licence must be appointed for each licence authorisation being sought. This could cause the applicant having to appoint several responsible managers in order to have all of the AFS licence authorisations covered from a supervisory competency capacity.

Advantages and other items to consider when purchasing an AFS licence

Purchasing an AFS licence would usually be much quicker (a few weeks), as this process entails the buyer of an existing AFS licence essentially ‘inheriting’ the company then notifying ASIC accordingly by submitting to the Regulator a Change of Control Notice. However, whereas this may be quicker, the buyer would need to ensure that the existing AFS licence contains all authorisations required to prevent an AFS licence variation which is just as onerous sometimes as a new application.

Purchasing an AFS licence may not always be cheaper. Depending on the type of AFS licence being sought, some sellers in the industry charge quite significant prices (for instance, up to and more than $1 million). In addition, there is no official marketplace for the selling of AFS licences—essentially, it tends to be a word-of-mouth process.

Further, some legal firms would possibly be aware of who was selling an AFS licence. Either way, purchasing an existing AFS licence, on the whole, certainly not as onerous as applying for a new one.

The buyer of an AFS licence would ‘inherit’ key items, functions and requirements of the existing AFS licensee, such as:

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• employees to include existing ASIC responsible managers • internal frameworks • relevant systems for the business • the existing client base.

However, it is important to note that simply inheriting a company with its existing AFS licence could pose other problems for the buyer because the buyer inherits any of the company’s ongoing matters. For instance: • any ongoing litigations the company is going through • key ongoing client complaints/disputes that are with the Australian Financial Complaints Authority (AFCA) • regulatory breaches that have occurred and any civil penalties, enforceable undertakings, licence conditions etc. imposed on the firm.

Fortunately, Webull gained its AFS licence in under five months, so the firm did not need to consider other licensing options.

What support functions are required?

With any new firm, a fundamental item to consider is the type of support required for the business and if this will be provided locally, or offshore (if a global firm).

Essential support functions include: • IT • auditing • legal • compliance, along with monitoring and surveillance systems • client onboarding and know-your-customer (KYC) obligations.

• clearing and settlement • operations • finance • payroll • trading and systems.

It is important to note that for any material function that is outsourced, the AFS licensee needs to take into consideration ASIC Regulatory Guide 104 Licensing: Meeting the general obligations, where the regulator sets out the following key requirements pertaining to outsourcing: • A service level agreement (SLA) must be in place for each outsourced item • Measures need to be in place to ensure due skill and care is taken when choosing suitable service providers • The licensee can and will monitor the ongoing performance of service providers • The licensee will deal appropriately with any actions by service providers that breach SLAs. Bonds and guarantees

Depending on what is being outsourced, the service provider may require a large bond/bank guarantee (for instance, in the case of outsourcing clearing and settlement services).

For Webull’s new Australian entity, the firm kept outsourcing to a minimum, comprising functions that could not be undertaken inhouse. For example, clearing and settlement to a well-known ASX clearing and settlement participant.

What number of employees were needed?

With any start-up, budgets are key, as they may be quite constrained.

This needs to be considered when a firm is seeking to put together

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its team. For example, a tight budget may necessitate recruiting just a few staff initially who have the right qualities (for instance, a resilient mindset) and fit in with the firm’s goals and workplace culture.

The CEO and CCO worked together as sole operators for around the first seven months before the following lead appointments were made: • Head of IT • Senior project manager • Head of product.

Getting it all done in the anticipated timeframe Having a stringent and robust plan locked in, and with an anticipated launch of within a year (with all relevant regulatory authorisations in place) was quite daunting.

In Webull’s case, an ‘all hands-on deck’ approach combined with all employees having a clear understanding of what was required helped manage the magnitude of this situation effectively.

As the Australian entity was part of a global group, it was fortunate enough to gain support from other regions, and use already-implemented functions (for instance, its app). However, this still involved a large amount of work to have things tailored specifically for the Australian market.

The following sections summarise what each initial appointee focused on in the first few months.

CEO

Upon commencing in November 2021, the CEO liaised continually with global executives regarding the firm’s business plan, ascertained expectations, managed the budget, and worked closely with each initially appointed individual to cement the firm’s strategic approach.

Global executives had previously appointed a local external legal firm to assist with registering the business and to gain an AFS licence, whereby the CEO took over this task to help the law firm prepare the AFS licence application and register the firm and its related entities.

From each day onwards, the CEO was involved in all aspects of the firm’s creation, including: • sourcing key service providers • holding numerous meetings with potential service providers • working with domestic and overseas government agencies such as the Australian Taxation Office, and US Internal Revenue Service • liaising with regulators • interviewing employees • working with the CCO on building out the firm’s required frameworks etc.

• gaining relevant insurances for the firm (e.g. professional indemnity insurance, and later building premises insurance) • working with the firm’s US clearer, and with regional offices accordingly • sourcing the firm’s authorised deposit-taking institutions

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(ADIs) which resulted in the ADI being used globally • reaching out to the global auditor who had been appointed by the group chief financial officer, and helping the CCO appoint requisite surveillance providers.

CCO

When the CCO commenced, her first task was to assist the CEO and external legal firm in the AFS licence application, with the sole aim of getting it lodged before the Christmas holiday period (due to the upcoming summer holidays).

The application was lodged successfully within the set timeframe, whereby the CCO focused on the following requirements and related tasks over the 2021 period: • Compiling the firm’s “fit and proper person” items required to support the AFS licence application • Creating Webull’s compliance and risk framework, with key regulatory obligations being the firm’s key policies and procedures, and management supervision plan; the latter comprising a: a) detailed business overview of the firm’s operations b) risk matrix (documenting the firm’s identified risks, and control mechanisms etc.) c) granular compliance monitoring and testing program d)supervisory framework • Preparing significant disclosure documentation such as product disclosure statements, financial services guides and target market determinations • Drafting relevant agreements and terms of business for internal legal and external legal review • Fulfilling Capital Adequacy Procedures (in preparation for the firm’s aim of being an ASX participant) • Submitting necessary regulatory applications such as: a) ASX and Cboe trading participant applications b) Australian Transaction Reports and Analysis Centre (AUSTRAC) approval for a digital currency exchange (in case the firm decided to offer digital assets at a later period) c) approval of an automated order processing (AOP) system from ASIC d)Core Capital Approval as per ASIC Market Integrity Capital Rules 2021.

• Helping each section build out their own operating procedures • Creating key content for the firm’s Australian website • Assisting with the annual external audit on the firm.

The CEO and CCO came from large well-known financial institutions which were licensees and market participants. Their experience and expectations helped Webull implement high standards in relation to its main frameworks and create the right workplace culture.

Moreover, this accorded with a fundamental directive from the firm’s senior executives globally.

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The quote

With most AFS licence applications, firms usually need external legal assistance which can be costly and ongoing.

Head of IT

It was critical that this individual was highly experienced in all aspects of IT required by an AFS licensee.

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Compliance

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Webull Securities’ staff the ASX’s ‘ring the bell’ event for the company becoming a trading participant.

Upon commencing, the head of IT focused on putting together the firm’s business continuity plan and other essential IT frameworks required by an AFS licensee and market participant.

The head of IT worked closely with the CEO, colleagues and other sections, some in different regions, on important projects, along with key service providers in preparation for the firm becoming a market participant. Further, they were instrumental in implementing pivotal IT systems from scratch for Webull’s permanent offices.

Senior project manager

It was an important requirement for the Australian entity to appoint a project manager to collaborate with the firm’s overseas developers on building the app for Australian purposes, creating all key mechanisms required for progress reporting etc., and working with all individuals on the relevant requirements the firm needed in relation to project management.

• ensuring the app and products aligned with the expectations of Australian investors (from various age cohorts) • instigating community education, marketing campaigns etc.

• building the firm’s local website.

• sourcing artificial intelligence (AI) providers for facial biometrical client onboarding, anti-money-laundering (AML) services, and payment services.

Measures of success The following sections outline the milestones around Webull’s successful launch of its Australian operations.

AFS licence granted

In May 2022, the firm’s AFS licence application was approved by ASIC and a draft version sent accordingly, with the final AFS licence received in June 2022. This was no mean feat for the firm, especially as the timeframe was much shorter than expected by senior management, and even surprised the industry.

Head of product

The head of product was another high-priority appointment, whereby they worked very closely with the project manager in accordance with the firm’s aim of: • providing a number of financial products within a short timeframe,

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Approval of digital currency exchange

A related entity to Webull Securities was approved by AUSTRAC to operate as a digital currency exchange, however, as at the time of writing, this product is currently not provided by the group in any region.

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Permanent offices

Marketing campaigns

Now that the firm had its AFS licence, permanent offices could be sought. On that, the CEO and CCO found suitable permanent offices for the firm within a sought-after location within the Sydney CBD.

In anticipation of the firm’s launch date of 17 December 2022, marketing campaigns were developed by the firm’s marketing team, with all other employees involved along the way. In addition, a marketing framework was created by the CCO, reviewed, and approved by the CEO and implemented accordingly.

Importantly, this included instances where the firm might interact with finfluencers/key opinion leaders (KOLs), given ASIC’s current focus on such people possibly breaching the Corporations Act in terms of: • providing unauthorised financial product advice • dealing by arranging, and • misleading or deceptive conduct.

Launch date agreed for the business

It was determined that an ideal launch date for the Australian Webull app would be in December 2022. This initial launch would comprise offering US Securities (to include fractional shares) to retail investors.

Recruit other key personnel

In preparation for the firm’s launch in December 2022, the following positions were filled: • Head of client success, client success managers, and associates • Compliance officer • Finance manager.

Head of client success

It was imperative to recruit a head of client success to build out the client services function for a financial services firm and train up, where relevant, the new client services representatives, increase client services numbers, work with IT in relation to the call centre set-up for clients, and develop the app accordingly to allow clients to contact client services in a seamless manner.

Launch and further measures of success

The firm was launched on 17 December 2022, initially offering US securities, exchange-traded funds (ETFs), fractional shares and exchange-traded options. There were a total of 11 local employees at the time.

Trading participant of the ASX and Cboe

Relevant applications were lodged with both exchanges (ASX and Cboe) in January 2023 along with the necessary items to support each application. Following on, in May 2023, Webull was accepted as a trading participant by each exchange.

On 27 July 2023, the ASX held a ‘ring the bell’ event for the official membership of Webull Securities as a trading participant.

Build the app for Australian purposes

The app was put through a development loop, refined and tailored for Australian investors. All employees were involved in every aspect of the user experience (from the account opening process through to trading and settlement in US securities) along with granular pre-production testing, ensuring everything was ready for a December launch.

Create the firm’s local website

While this project was led by head of product, all sections of the business were heavily involved in creating Webull’s Australian website, from graphics to all text (including relevant agreements, disclosure documents, disclaimers etc.) to ensure it aligned with Australian investors’ requirements and expectations.

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Depending on what is being outsourced, the service provider may require a large bond/ bank guarantee.

With an AFS licence in place, the CCO was then able to register the firm with AFCA as part of its external dispute resolution (EDR) obligations. The CCO also registered the firm and subsequent related entity with AUSTRAC and lodged relevant information, for instance, the firm’s auditors etc., with ASIC.

A compliance officer was appointed to undertake the firm’s AML monitoring and trade monitoring, with another compliance officer appointed in June 2023.

A finance manager was recruited shortly afterwards to put together the firm’s finance framework, work with the outsourced payroll provider, work with the firm’s ADI and clearer in relation to all finance matters, and later recruit an assistant accountant and credit officer.

The quote

Key registrations for the firm

Compliance officer

Finance manager

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AOP system approved by ASIC

In preparation for becoming a trading participant using an industrywide recognised AOP, the CCO worked with CEO and head of IT to prepare and lodge the required application to ASIC in February 2023. This was approved by the regulator in April 2023.

Additional financial products released

From launch to the date this paper was written (September 2023), the following financial products were made available within a nine-month timeframe: • Cash management account • Standard margin lending facility (US securities and Australian securities) • Australian Securities, partly paid securities and warrants • Hong Kong and China Connect Securities • Smart Portfolio ETF Balancing.

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Compliance

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. What action(s) did the author find helpful in relation to establishing a start-up? a) Lock in targeted client categories early for product and service offerings b) Outsource as much as possible to achieve cost efficiencies c) Avoid an ‘all hands-on deck’ approach as it will create confusion d) Treat budgets as a lower-priority item as they hold little weight at start-up stage 2. What key consideration(s) does the author highlight regarding purchasing an AFS licence? a) The purchaser is relieved of the duty to ensure the licence contains all authorisations to prevent any variation b) The purchaser ‘inherits’ ongoing matters such as regulatory breaches, complaints and litigations c) Purchasing an AFS licence is always cheaper than applying to ASIC d) Purchasing an AFS licence is often only marginally quicker than applying to ASIC 3. Once its AFS licence is in place, a firm must register with: a) the ASX b) Cboe c) AFCA d) All of the above 4. What point(s) does the author suggest firms keep in mind when looking to apply for an AFS licence? a) Aspects such as global location of key individuals can complicate satisfying ASIC’s “fit and proper person” test b) Appointment of multiple responsible managers may be required to fulfil all AFS licence authorisations c) External legal assistance is often needed for applications, which can be a costly and protracted process d) All of the above

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Before the end of 2023, Webull will also be providing: • Moneybull—an intuitive auto-sweep feature, where clients’ unallocated cash is automatically channelled into a USD money market trust fund, helping to ensure clients receive an enhanced yield • ASX and Cboe warrants.

Additional employees recruited

Over time, the firm recruited the following additional employees: • Compliance officer • Credit risk officer • Operations • Product manager • Marketing manager • Trading representatives (accredited designated trading representatives).

As at the date of this paper being written, the firm is already planning its 2024 pipeline, with the aim of offering further financial products. In addition, it has just finalised putting in place the essential items required to offer financial services to institutional clients.

Industry recognition

Eleven months in from launch, the firm was voted the winner of the Adam Smith Awards Asia 2023 award for Best Investing Solution, recognising excellence and achievement in the corporate treasury space.

Final thoughts and considerations It was an exciting journey to be involved in the creation of a new Australian financial services firm. In terms of optimising the process and ‘going the distance’, it pays to: • be organised • determine the business concept as soon as possible • create a very granular business plan • hire employees who hold a variety of skill sets that can be useful across a small start-up • have determination, drive and believe in the firm’s strategy. fs

5. In terms of vetting marketing campaigns, it is important to ensure that any activities involving finfluencers/key opinion leaders avoid breaching the Corporations Act. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Changes to the unfair contract terms regime have ushered in massive penalties for businesses found to have unfair terms in their standard form contracts. This paper discusses the scope of these amendments, and clarifies what constitutes a standard form contract and an ‘unfair’ contract term.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Unfair contract terms law changes A comprehensive guide

I

Rachelle Hare

t is illegal to include an unfair contract term in a consumer or small business standard form contract, and the courts now have the power to impose serious financial penalties for businesses (and individuals) who breach these laws.

Changes to the current unfair contract terms laws in Australia were introduced over the past 12 months, with penalties for failure to comply with these changes coming into effect as of 9 November 2023.

These changes were brought in by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (UCT Reform Act) through its amendments to: • the Competition and Consumer Act 2010 (Competition and Consumer Act), of which Schedule 2 comprises the Australian Consumer Law (ACL) which contains laws to protect consumers and small businesses from unfair terms in standard form contracts (unfair contract terms laws) • the Australian Securities and Investments Commission Act 2001 (ASIC Act).

While the relevant legislative changes include amendments to the unfair contract terms regime under the ASIC Act, which regulates standard financial services contracts, these specific changes are out-

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side the scope of this paper. However, it is still worth being familiar with what these changes entail because the unfair contract terms laws may apply to all standard form contracts that are not defined as “financial services contracts”.

Key takeaways 1. The unfair contract terms laws in Australia have changed. Businesses may have penalties imposed from $50 million per unfair contract term (that is, they may be much higher), and individuals from $2.5 million.

2. These legislative changes are particularly important for those in the financial and superannuation sectors, as they broaden the unfair contracts regime that already applies. The financial and superannuation sectors are particularly vulnerable due to the nature of their contracts, often characterised by standard terms and significant bargaining power imbalances.

3. Where financial services agreements and related contracts are not caught by the ASIC Act requirements, they may fall within the amended definitions of “standard form contracts” with “small businesses” or “consumers” under the unfair contract terms laws governed by the Australian Competition and Consumer Commission (ACCC). An example may be a standard form contract used by a broker to engage a client.

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Compliance

The quote

The financial and superannuation sectors are particularly vulnerable due to the nature of their contracts, often characterised by standard terms and significant bargaining power imbalances.

4. All businesses that are captured by the unfair contract terms laws should assess and modify any standard form contracts to align with the new legislation so they can avoid incurring any penalties (see recommendations at the end of this paper).

Changes to the unfair contract terms laws (now fully in effect) It has been a long 12 months since the latest raft of changes to this legislation, and all businesses and individuals are expected to be aware of the prohibition of unfair contract terms in standard form contracts in Australia.

We are still finding, however, that many businesses (and even more individuals) have not heard about the changes or the massive penalties that are now in place.

Impact of these changes on businesses

The changes to the unfair contract terms regime, particularly the increased penalties, will have a significant impact on businesses. As mentioned, businesses that meet the criteria and have not reviewed their contract terms may incur such penalties.

It is essential for businesses to review their contracts to ensure they are compliant with the new legislation. This includes asking: 1. Is this a standard form contract?

2. Is the standard form contract with a small business or consumer?

3. Does the standard form contract contain any unfair contract terms?

Consider We expect that the federal government will vigorously pursue penalties for larger businesses to ‘make a point’, and superannuation providers and financial institutions are in the firing line. Where their standard form contracts are not captured by the ASIC Act, they are likely to be captured by the unfair contract terms law. We fully expect to see some significant court cases brought against notable institutions in the next six months. With penalties starting at $50 million for only one unfair contract term in a standard form contract, and the likelihood that one contract may contain a number of unfair terms, we predict they will have a substantial bearing on the industry in the near future.

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The penalties: • aim to protect small businesses and consumers considered less likely to be able to negotiate • range from $2.5 million for individuals and $50 million for companies • apply per unfair contract term, not per contract.

2. Expanded Scope of unfair contract terms laws

The UCT Reform Act also expands the scope of the unfair contract terms laws. It applies to a wider range of contracts due to significant changes to the definitions of “small businesses”.

Did you know?

Small businesses are now protected from unfair contract terms if they have 100 or fewer employees or make less than $10 million in annual turnover.

What are the unfair contract terms laws?

Much has been written about the differences between the previous and the new unfair contract terms laws. However, most businesses did not pay too much attention to the requirements for their contracts.

This needs to change as the penalties that commenced on 9 November 2023 are massive.

Following is a summary of the main elements of the unfair contract terms laws, as they are now, with all changes having commenced.

Note: The laws apply to both consumer contracts and small business contracts.

Terms in standard form contracts with small business or consumers are void if unfair

A term of a small business contract or a consumer contract is void under the unfair contract terms laws if: • it is a standard form contract, and • the term is “unfair”.

Consider There is no element of reliance—the other party does not need to have relied on the unfair term or suffered any loss in doing so.

Small business contracts

What did the changes entail?

1. Penalties for unfair contract terms

Over the last several years, the federal government has passed various Acts to strengthen protections against unfair contract terms.

Most recently, the UCT Reform Act introduced exceedingly large penalties for unfair contract terms and expanded the scope of the unfair contract terms regime.

These penalties apply to businesses and individuals that include unfair contract terms in their standard form contracts.

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A small business contract is a contract for a supply of goods or services, or a sale or grant of an interest in land, where: • at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 100 persons (up from 20 persons under the previous legislation), or • has a turnover for the last income year of less than $10 million.

Consumer contracts

A consumer contract is a contract for the supply of goods

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or services or a sale or grant of an interest in land, to an individual, wholly or predominantly for personal, domestic or household use or consumption.

Standard form contracts

Standard form contracts are contracts where there are limited opportunities for the consumer or small business to negotiate the terms of the contract and where one of the parties has all or most of the bargaining power relating to the transaction. The party rebutting an allegation that the contract is a standard form contract—which would most likely be an adviser or their client—must prove that it is not standard form (there is a positive presumption that the contract is a standard form contract).

A court must take the following characteristics into account in making its decision, including: • whether one of the parties has all or most of the bargaining power relating to the transaction • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties • whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented • whether another party was given an effective opportunity to negotiate the terms of the contract • whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.

In determining if the contract is a standard form contract, a court must consider whether a party has used the same or a similar contract before, and the number of times this has occurred.

A standard form contract is a pre-written contract offered by one party on a ‘take it or leave it’ basis, often without negotiation. It is commonly used in industries such as telecommunications, finance, domestic building, gyms, motor vehicle rentals, travel, and utilities for the supply of goods and services to consumers.

In deciding whether a contract is a standard form contract, the court considers factors such as: • the bargaining power of the parties • whether the contract was prepared without discussion • whether the other party had an opportunity to negotiate • whether the terms consider the specific characteristics of the other party or the transaction.

Is a term “unfair”?

The unfair contract terms laws protect consumers and small businesses from unfair terms in standard form contracts.

An unfair term is one that: • gives a significant advantage to one party • is not necessary to protect the advantaged party’s legitimate interests, and • would cause harm, whether financial or otherwise, to the disadvantaged party if enforced.

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Compliance

Some examples of potentially unfair terms include terms that allow one party to: • avoid or limit their responsibilities • unilaterally end the contract • penalise the other party for breaking or terminating the contract, or change the terms without agreement.

As per section 24(1) of the ACL, under the unfair contract terms laws, a term is unfair if: a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Section 24(2) of the ACL states that in determining whether a term of a contract is unfair: … a court may take into account such matters as it thinks relevant, but must take into account: a) the extent to which the term is transparent; b) the contract as a whole.

There are a number of factors to consider when deciding whether a term is potentially unfair. The fairness of a term must be considered in the context of the contract as a whole.

Section 25 of the ACL and section 12BH of the ASIC Act provide the following examples of the kinds of terms of a consumer contract or small business contract that may be unfair. These include: a) a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract; b) a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract; c) a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract; d) a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract; e) a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract; f) a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract; g) a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract; h) a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning; i) a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents; j) a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent; k) a term that limits, or has the effect of limiting, one party’s right to sue another party;

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Rachelle Hare, Blaze Business & Legal Rachelle is the owner, managing director and principal practitioner at Blaze Business & Legal, a combined commercial law and business advisory firm.

As a senior commercial and contract lawyer with over 23 years’ experience in top-tier private practice and government, Rachelle assists a wide range of clients across different industries and sectors, including financial services and superannuation.

Her expertise includes contractual, legal, business and risk advisory, management consulting, compliance management, policies and procedures, and procurement strategy.

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Compliance

The quote

All businesses and individuals are expected to be aware of the prohibition of unfair contract terms in standard form contracts in Australia.

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s but will only apply to that varied term as if the contract

l) a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract; m)a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract; and n) a term of a kind, or a term that has an effect of a kind, prescribed by the regulations.

(as varied) had been made on the date of variation; and • not apply to existing standard form contracts made before 9 November 2023.

Note: Different versions of these unfair contract terms laws existed before this time, so they may still apply—it is just the penalty provisions that may not be applicable.

To which contracts do the unfair contract terms laws apply?

Exceptions to unfair contract terms law (exclusion of certain contracts)

With regard to standard form contracts with consumers or small businesses, the amendments to the unfair contract terms laws will: • apply to all new standard form contracts made on or after the commencement date (9 November 2023); • apply where an existing standard form contract (signed before the Commencement Date) is renewed on or after 9 November 2023—from the date on which the renewal takes effect • apply to a term of a standard form contract that is varied after 9 November 2023: s from the date that the variation takes effect,

The ACCC’s website states that unfair contract terms laws do not apply to: • terms that are specifically required or permitted by another law • terms that set out the price to be paid • terms that define the product or service being supplied • company constitutions • commercial contracts for shipping goods by sea.

These exceptions ensure that certain terms necessary for the contract’s operation are not subject to the unfair contract terms laws.

The unfair contract terms laws do not apply to certain categories of contracts. These include:

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• the operating rules of licensed financial markets such as ASX Limited • the operating rules of licensed clearing and settlement facilities • real-time gross settlement systems approved as payment and settlement systems by the Reserve Bank of Australia • certain life insurance contracts • contracts connected with financial markets.

Do the unfair contract terms laws apply to contractors and subcontractors?

The new laws may capture contractors and large subcontractors where small companies acting as clients fit within the legislative definition of a “small business”. For example, a mining joint-venture company contracting with a large contractor which provides its own standard terms and conditions.

This effectively switches around the penalties, which may then apply to the contractor or subcontractor.

The contractor and subcontractor may also be caught if it puts forward an unfair term for inclusion in the cli-

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ent’s standard form contract—an unintended consequence perhaps, but one to watch out for.

Penalties under the new laws Under the new laws, unfair contract terms will be subject to penalties.

The new maximum financial penalties that may be imposed on the party that submitted each unfair contract term from 10 November 2023 are the greatest of: • $50,000,000 • 3 x the value of the “reasonably attributable” benefit obtained from the conduct, if the court can determine this, or • if a court cannot determine the benefit, 30% of adjusted turnover during the breach period.

Multiple contract terms that contravene the legislation may lead to multiple instances of the party incurring a penalty.

The quote

In determining whether it is a standard form contract, a court must consider whether a party has used the same or a similar contract before, and the number of times this has been done.

Consider As mentioned, this is per term, not per contract. Thus, penalties could potentially be astronomical (for instance, a minimum of $50 million x 10 unfair terms).

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Compliance

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Under the unfair contract terms law, penalties for companies are: a) capped at a $2.5 million blanket amount b) 50% of adjusted turnover during the breach period c) $50 million for each unfair contract term d) twice the value of the “reasonably attributable” benefit 2. As prescribed by the relevant legislation, an unfair contract term: a) is unnecessary to protect the legitimate interests of the advantaged party b) causes harm (financial or other) to a party if it were applied or relied on c) limits the evidence one party can use as proof in contract proceedings d) All of the above 3. Which of the following characteristics and/or situations apply to standard form contracts? a) The terms of the contract must account for the specific characteristics of the particular transaction b) Neither party to the contract has any scope for negotiation c) There is a burden of proof on the party challenging whether a contract is in fact in standard form d) A court doesn’t consider that a party has used the same or a similar contract before, and the associated frequency 4. The amendments to the unfair contract terms laws will apply to: a) businesses that have 20 or fewer employees b) new standard form contracts made on or post-9 November 2023 c) consumer contracts only d) terms defining products or services supplied 5. Contractors and subcontractors are indemnified from penalties for unfairness in relation to small-business client standard form contracts. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Either party can take court action to allege that a term contravenes the relevant legislation. The ACCC or ASIC may also commence an action against a party to enforce the requirements of the legislation.

Things to consider In light of the increased maximum penalties and expanded scope in relation to breaches of these provisions, as well as the possibility that they may also apply to contractors and large subcontractors, all parties that use standard form contracts should take action to minimise applicable risks.

Further, all businesses that issue contracts must take note of the changes brought into effect by the UCT Reform Act.

Recommendations • Consider whether any clients or suppliers fall within the broader threshold for “small business”.

• Assess which standard form contracts you currently use in your business. This will include purchase orders, website terms and conditions, services contracts, and many others.

• Engage an experienced commercial lawyer to undertake a review to identify any potential unfair contract terms and seek to amend them.

• Consider whether you are a contractor or a large subcontractor that provides its own standard terms or whether you are able to insert your business’s terms into the client’s standard terms, as you may be caught by the UCT Reform Act amendments.

• Assess any of your precedent contracts as soon as possible so as to identify and amend unfair contract terms.

• Put in place a process of assessment before any contract is entered into, renewed or varied going forwards, as any unfair terms in these documents will need to be considered and revised.

• For contractors and large subcontractors, in respect of clauses they often put forward to smaller clients (e.g. business integrity or cybersecurity), check whether this is likely to constitute an unfair term.

• Hold multiple internal training sessions over the next 12 months and beyond, particularly to inform about possible ways your company could be in breach of the legislation (e.g. a business could contravene the legislation even if standard form contracts are negotiated).

A lawyer can advise on whether any terms are likely to be considered unfair and can help to amend any contract clauses so there is less chance of contravening the unfair contract terms laws.

Conclusion The changes to the unfair contract terms laws are significant and are expected to have a substantial impact on businesses in Australia post9 November 2023. It is crucial for businesses to understand these changes and review their contracts to ensure they are compliant.

Failure to do so could result in substantial penalties.

Businesses should seek legal advice to ensure they understand the changes and that their contracts are compliant.

Resources from government agencies such as the ACCC and ASIC, as well as legal advice from law firms, are available to help businesses navigate these changes and ensure their contracts are less likely to be found to contain unfair terms. fs

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Ethics & Governance:

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Family offices and B Corps

By Lee Tonitto, Social Change Headquarters

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Ethics & Governance

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Family offices and B Corps value a positive purpose regarding investing, community, legacy and governance.

Further, a concern for reputation, accountability and transparency is strengthened by the B Corp philosophy gaining greater traction with younger family office cohorts.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Family offices and B Corps Why the two are interdependent

F Lee Tonitto

amily offices are private companies that manage investments and wealth for ultra-high-net-worth (UHNW) individuals and families. They often have a multigenerational focus, aiming to preserve and grow wealth across generations.

Benefit corporations (B Corps) are businesses that have undergone a rigorous independent assessment and certification process to meet high standards of verified social and environmental performance, transparency, and legal accountability. B Corps prioritise purpose and social impact alongside profits.

This certification demonstrates a commitment to using business as a force for good, focusing on sustainability, ethical business practices, and positive contributions to society and the environment.

Traditionally, family offices have focused on financial returns, but as younger generations take control, there is a growing trend towards sustainable and socially responsible investments. These offices are increasingly aligning their investment strategies with environmental, social, and governance (ESG) principles, considering factors beyond just financial returns.

Family offices and B Corps are two distinct concepts that, while separate, can be interdependent regarding certain aspects of their operations, especially when it comes to shared values and a growing emphasis on impact-driven investments and legacy. Further, family offices and B Corps are interdependent in the sense that both are

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guided by a shared ethos of purpose-driven business and responsible wealth management.

This paper explores the B Corp philosophy and certification process, the connections between B Corps and family offices, and the mutual benefits this can bring.

B Corp certification: Harmonising purpose and profit Companies can seek B Corp certification through B Lab, a not-forprofit organisation headquartered in Berwyn, Pennsylvania USA, that believes companies should work for the good of the planet and society.

B Corps measure their impact across the areas of: • workers • customers • governance • the environment • community.

One of B Lab’s overarching tenets is inclusive and robust stakeholder governance, as highlighted on its website: The failure of shareholder primacy is increasingly acknowledged by business and finance leaders around the world. Many are now calling for a shift to corporate governance that prioritizes all stakeholders … This kind of corporate governance ensures that companies are required to consider the interest of all of their stakeholders—customers, workers, suppliers, communities, investors, and the environment—in their decision making.

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Put simply: stakeholder governance ensures we have better businesses that are accountable to people and planet.

This wider applications of this position was reflected in a 2016 Harvard Business School paper Corporate purpose and financial performance which found that purpose delivered a competitive advantage as opposed to a profit-centric focus.

The report constructed a “measure of corporate purpose” based on approximately 500,000 survey responses in relation to employee perceptions of their employer within a sample of US companies. Though this measure of purpose was not related to financial performance, it found that: … high purpose firms come in two forms: firms that are characterized by high camaraderie between workers and firms that are characterized by high clarity from management … firms exhibiting both high purpose and clarity have systematically higher future accounting and stock market performance … Taken together, these results suggest that firms with employees that maintain strong beliefs in the meaning of their work experience better performance.

B Lab offers B Corp certification to companies which meet the following criteria/agenda while seeking revenues: • Demonstrate high social and environmental performance by achieving a B Impact Assessment score of 80 or above and passing our risk review. Multinational corporations must also meet baseline requirement standards.

• Make a legal commitment by changing their corporate governance structure to be accountable to all stakeholders, not just shareholders, and achieve benefit corporation status if available in their jurisdiction.

• Exhibit transparency by allowing information about their performance measured against B Lab’s standards to be publicly available on their B Corp profile on B Lab’s website.

There are over 7,200 B Corp corporate members, and more than 150,000 firms across 160 industries which use B Lab impact assessments. A large number of B Corps originated from family businesses.

One of the initial B Lab founders was Andrew Kassoy, a former private equity specialist, who previously worked for MSD Capital (now DFO Management), helping to manage the capital of the Michael Dell (founder and CEO of Dell Technologies) family office.

Some well-known B Corps include: Patagonia, Etsy, Ben & Jerry’s, and Australian online learning provider Moodle. B Lab receives backing from sources such as the Rockefeller Foundation; and billionaire social entrepreneur, philanthropist, film producer and eBay’s first president, Jeff Skoll; and Ford.

The family office-B Corp connection Shared ethos of purpose

Family offices, especially those rooted in family legacies, often prioritise continuity, reputation, and governance.

B Corps are committed to balancing profit with social and environmental impact. This focus on purpose helps align their goals and values.

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Values alignment

Family offices are increasingly interested in sustainable and impact investing, and B Corps operate inherently with a focus on social and environmental impact. This alignment allows family offices to find businesses that resonate with their values and investment goals.

Next-generation values

As younger generations become more involved in family offices, there is a growing emphasis on sustainable investing and social impact. Similarly, B Corps accord with the values of younger generations who increasingly prioritise purpose-driven work and responsible business practices.

This makes family offices more likely to invest in or support B Corps, fostering a mutually beneficial relationship.

Further, as younger generations take over family office management, their values and priorities often shift towards social responsibility and sustainability. B Corps provide an avenue for these younger cohorts to invest in companies that align with their beliefs while still aiming for financial returns.

Accountability and transparency

B Corp certification demands high standards of social and environmental performance, accountability, and transparency. Family offices, aiming for continuity and reputation, are increasingly transparent in their operations to help maintain trust among stakeholders. This focus supports responsible practices and reinforces their commitment to positive impact.

Legacy and purpose

Family offices often seek to pass down values, culture, and business practices, while B Corps strive to create a positive legacy through their impact on society and the environment. B Corps emphasise purpose-driven business practices that align with the desire to create a positive legacy for future generations. Both entities share a commitment to leaving a positive and enduring impact on society, making them complementary in terms of legacy-building.

In his ‘What is the Purpose and value of a family office? A global overview’ article of April 2023, US business and brand strategist Martin Roll perceives legacy as a way for family offices to “stay connected to the past, present and future”, and to provide “a sense of purpose and direction” to help navigate the challenges and opportunities they face over time.

Further, Roll believes that legacy helps to: • ensure family office continuity and identity • enhance a family office’s reputation and build stakeholder, employee, client, and partner trust • facilitate a smooth transition of leadership and management between family office generations, while preserving business interests • establish a governance and decision-making framework within family offices by providing a set of guiding principles to enable informed decisions and maintain focus on long-term goals

Lee Tonitto, Social Change Headquarters Lee is a senior adviser at Social Change Headquarters.

She has worked with leading organisations in an ESG advisory capacity, including AMP, Count Financial, Revlon and Unilever.

Drawing on over 25 years’ nonexecutive director and C-Suite experience in the consumer goods, financial services, and education sectors, Lee supports organisations on their responsible business journey to help improve their social and environmental performance. She is an accredited B Corp consultant, Global Reporting Initiativetrained and a Trace Carbon Fellowship fellow.

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The quote

Family offices and B Corps are interdependent in the sense that both are driven by a shared ethos of purposedriven business and responsible wealth management.

• serve as a foundation for philanthropic activities by inspiring family offices to “give back to the community and create a positive impact beyond their business interests”.

Impact investing

Impact Investing Australia sees impact investing as: … a growing field of investment that is helping to finance solutions to some of society’s biggest challenges.

The B Corp community provides networking opportunities and resources for family offices looking to engage in impact-driven investing. It connects them with a diverse group of like-minded businesses and investors focused on social and environmental causes.

Moreover, B Corps have a proven commitment to social and environmental impact, offering investment opportunities that align with the values of family offices.

Alignment with ESG principles

Many ESG principles are now at the core of how family offices are looking to invest, particularly given the next generation’s focus on these themes. B Corps are

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explicitly committed to social and environmental performance, and the certification process ensures adherence to these principles.

UHNW families are also trending toward private market investments, fulfilling a desire to have greater control and direct involvement in investments, many of which are aligned with ESG principles.

Next-generation momentum

Much of this ESG alignment has been driven by younger members of family offices.

According to institutional-client brokerage service provider IG Prime’s What are family office strategies postpandemic? findings published 4 October 2022: This rise in ‘sustainable investing’ attention can be partially attributed to the succession of wealth from current holders to their children, with the next generation caring more about the impact of their investments on environmental and social causes.

Further, a 2023 survey by credit investment manager Aeon Investments, found that:

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Nearly two out of five (39%) family-office executives strongly agree that younger family members are driving increased interest in sustainable investment and another 58% slightly agree.

Philanthropy and community engagement

Family offices will often place a premium on philanthropic activities, helping to administer charitable trusts addressing specific needs, and engendering a clear sense of purpose.

Legacy can serve as a foundation for philanthropic activities.

It can inspire family offices to give back to the community and create a positive impact beyond their business interests.

B Corps incorporate community and environmental concerns into their operations, extending their positive impact beyond profit.

Long-term perspective

B Corps and family offices adopt a long-term view. Family offices focus on preserving and growing wealth for future generations. B Corps emphasise sustainable business practices that benefit future generations by addressing societal and environmental challenges.

cation and life experience. There also needs to be representative governance founded on a set of shared values.

In terms of integrating the B Corp philosophy into its operations, the company’s website states: We want to be a firm who attracts and retains talented advisers to deliver a client experience based on integrity, service, and long-term outcomes.

What does B Corp status mean in practical terms?

Lorica Partners leverages the B Corp accreditation process as a barometer to gauge what it is doing right, ways for improvement, and to reflect on matters such as: • employees’ leave entitlements (e.g. maternity/parental leave) • selection of suppliers • how office space is selected beyond simply the cost of rent • providing investment solutions which align with people’s values • how its recommendations and decisions accord with philanthropic activities.

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The B Corp community provides networking opportunities and resources for family offices looking to engage in impactdriven investing.

WE Family Offices Keeping up with technology and regulations

Family offices have to ensure that they stay abreast of new and changing regulations. This can be a completely new area for some of them. They have had to learn quickly and appoint partners and advisers to ensure they fulfil this new remit. As mentioned, these efforts are often led by the next generation.

According to IG Prime’s What are family office trends in 2023? report, other challenges faced by family offices include: … the need to upgrade technology, deal with cybersecurity threats, attract talent in an increasingly competitive environment, and successfully bridge a major generational transition in which trillions of dollars are changing hands worldwide.

B Corp case studies Lorica Partners

Lorica Partners is a Sydney-based independent investment advisory and wealth management practice, serving client families locally and overseas. It became B Corp certified in 2022.

It offers services to family offices that require a high level of expertise to manage and administer their oftencomplex financial affairs, including: • next-generation capacity building • strategy • decision-making • maintaining fair processes • comprehensive management, reporting and administration.

For Lorica Partners, plans for preserving family wealth should take a very long-term view—potentially up to 100 years for some families. The family must invest in human and intellectual capital, not just financial capital. This requires a focus on physical and emotional wellbeing, edu-

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US-based WE Family Offices (WE) became certified as a B Corp in 2018. WE was founded to support financially successful families to sustain their success both via human capital and financially.

“In order to do this, WE needed to create a company culture that was about service to these families and making a difference—making sure that (with) everything we touched, whether it was clients, employees or members of the community, we were making the world a better place,” WE’s CEO and managing partner Mel Lagomasino said.

“This meant our whole philosophy from day one would be about how we balance for-profit with purpose.”

To be a certified B Corp, a company’s standards and measures of success must focus on factors like social and environmental performance, public transparency and legal accountability.

“Becoming a B Corporation means we have external validation that we balance meeting the needs of our stakeholders (the families we serve, the talent we hire, the communities we live in) with the needs of our shareholders; balancing the need to do good and do well,” Lagomasino said.

Lagomasino elaborated on how WE does that.

“First, as fiduciary advisers, we put our clients’ interests above our own. We are paid only by our clients, with a simple, transparent advisory fee that removes any actual or potential conflicts of interest that arise from sales-based compensations. We are founding members of the Institute for the Fiduciary Standard, and since the founding of our firm, we’ve been proud to support legislative efforts to hold all advisers accountable to the fiduciary standard, ensuring their interests are aligned with the families whom they serve.

“We also seek to attract and develop employees who share our commitment and thrive in our independent environment, free from any financial services firm, bank

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. In what area(s) do the priorities and motivations of family offices and B Corps often intersect? a) Placing importance on achieving a positive and enduring legacy b) Segregating investments from personal preferences c) Taking a medium-term perspective regarding operations d) Prioritising current over future generations 2. What action(s) does B Lab advocate as an unequivocal part of corporate governance? a) Maintaining shareholder primacy, but attaching stringent conditions to this ‘privilege’ b) Including and considering all stakeholders in the decisionmaking process c) Avoiding any legal commitments so companies can show they are ‘as good as their word’ d) Mandating a minimum B Impact Assessment score of 65% for companies seeking accreditation 3. As per case studies cited, how can a company integrate a B Corp philosophy in its operations? a) Giving employees paid time off work to do charitable volunteering b) Using criteria apart from rental costs when choosing office space c) Selecting suppliers based on their ethical standing d) All of the above

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or broker. To create a culture where employees feel valued and to express our company’s values, we enhanced our employee benefits programs to offer better work-life balance and more ways to support community involvement like paid time off to volunteer and a charitable matching program.

“We focus on helping families sustain wealth through generations, often with investments that are a direct reflection of who they are and what they do as a family.”

Lagomasino explained that becoming a Certified B Corp does not change how WE does business. Instead, it provides a way to validate the belief that companies that effectively apply ethical, sustainable business practices perform better and become more successful over the long run.

“We are pleased to formalise our commitment to doing good while also doing well, and we believe our certification as a B Corp will only enrich the ways in which we serve our clients, employees and community,” she said.

The future While family offices and B Corps are distinct entities, they are increasingly interdependent due to a shared emphasis on sustainable and socially responsible investments, values-driven decision-making, and the desire to leave a positive legacy for future generations. The rise of impact investing and the emphasis on purpose beyond profits have created a natural intersection between these two concepts.

As both entities navigate the challenges and opportunities of a changing world, their alignment in values and goals can lead to collaborative efforts that drive positive change on multiple fronts. B Corp certification makes the aspiration clear. fs About Social Change Headquarters Social Change Headquarters is a profit-for-purpose consultancy that empowers businesses to improve their social and environmental performance and increase their impact. Specialists in social impact and sustainability, we help organisations identify and articulate their purpose and theory of change, and develop a sustainability strategy and implementation roadmap. Certified B consultants, we work with businesses to become B Corp certified, identifying areas of focus, implementing impact improvement initiatives, and benchmarking their progress.

4. As discussed by the author, family offices and B Corps share values in the areas of: a) reputation and governance b) sustainability and impact investing c) giving back to the community d) All of the above 5. According to findings cited, a sense of purpose helps an organisation gain a competitive advantage in addition to making a profit. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Technology:

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Technologies fighting climate change and biodiversity loss

By Tom Atkinson, AXA Investment Managers

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: This paper identifies investment opportunities from climatefocused innovations in transport, renewables, energy, agriculture and waste management. It discusses the uptake of and obstacles to technologies aiming to secure a net-zero future and counter deteriorating biodiversity.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Technologies fighting climate change and biodiversity loss An investor’s guide

T Tom Atkinson

he Earth’s biodiversity is deteriorating at an alarming rate, causing damage not only to the natural world but to wider society and the global economy, which often relies upon it as a resource used directly by people and businesses.

Thankfully, innovations in engineering and digital technology are helping drive progress towards global climate goals. In addition, consumer momentum and government policy are helping to spur on the development of technologies able to make an impact.

For example, the introduction of the US Inflation Reduction Act (IRA) in August 2022 should spearhead a new wave of growth and innovation and go some way in helping the private sector—and investors—decarbonise energy, transportation, agriculture and other emissions-intensive sectors.

The legislation has earmarked billions in new spending and tax breaks designed to increase clean energy investment, cut healthcare costs, and raise tax revenues. Overall, some US$43 billion in IRA tax credits will aim to cut emissions by making electric vehicles (EVs), energy-efficient appliances, rooftop solar panels, and home batteries more affordable.

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Europe responded with its own Green Deal Industrial Plan, aiming to create a more supportive environment for scaling up the European Union’s manufacturing capacity for net-zero technologies and products.

This backdrop should drive profits for the companies delivering game-changing tools which secure widespread adoption. Further, it will create opportunities for portfolios if investors can closely track some of the key areas where this impact can be greatest.

As well as protecting the planet, greater sustainability means more sustainable future economic growth, and this growth depends on technology. The following sections of this paper highlight some of the most exciting technological advances aiming to secure a net-zero future.

Low-carbon transport Globally, the combination of robust policy support in key markets, a wave of new product launches and continued technological innovation is supportive of the rapid adoption of EVs. Ditching combustion engines is vital, as passenger cars are the largest contributor to transport sector carbon emissions. Thankfully, many major automobile makers are taking notice. Ford and Jaguar Land Rover, for example, have committed to having all-electric ranges in the next decade.

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Consumer appetite for EVs is accelerating. According to the International Energy Agency (IEA), more than 10 million EVs were sold worldwide in 2022, and sales are expected to grow by another 35% in 2023, accounting for 18% of the global car market.

The IEA expects EVs to account for 60% of total new car sales across China, Europe and the US by 2030, helping avoid the need for up to five million barrels of oil each day. Separate research shows that globally, revenues from EV sales are forecasted to hit an annual growth rate of 10.07% between 2023 and 2028.

What’s more, the whole EV supply chain should benefit from an increasing adoption rate in the coming years—longer-lasting batteries, private and public charging stations, semiconductors which can minimise power loss and support performance, and so on.

Battery performance and longevity are often hurdles for EVs. Typically, vehicles can drive between approximately 100 to 300 miles [160 to 480 km]—model dependent—before recharging is required. However, specialists including Chinese group CATL, and Korean group Samsung SDI are pioneering technology [for batteries to increase the range of EVs].

The latter is currently developing a high-capacity solidstate battery that enables an EV to drive much further on a single charge, and it expects to commercialise this breakthrough soon, which could be a gamechanger for the industry. Only a few years ago, this seemed unrealistic.

Smart energy and renewables Given the number of government commitments to achieving net-zero targets within the next three decades, the world would need to increase renewable energy capacity by three or four times. Thankfully, renewable energy costs are generally becoming cheaper than fossil fuels, and the backdrop for clean energy growth—for instance, wind, solar and batteries—is very positive.

We think growth in both technologies will be driven by their already-compelling economics—including continued improvements in efficiency and technology, and likely ongoing policy support from governments.

BloombergNEF expects annual wind installations to rise by circa 50% between 2022 and 2030, while solar should increase by even more, at around 85%.

Looking at solar power, one analysis valued the global market size at US$197.2 billion in 2021 and anticipates it to grow to some US$368.6 billion by 2030—a compound annual growth rate of 7.2%.

Among the leaders in this area is First Solar, the largest utility-scale solar photovoltaic (PV) systems [capturing and converting sunlight into electricity] manufacturer in the Western Hemisphere, which has developed a technology to increase the energy yield of its solar panels.

Then there are specialists in the residential solar sector such as Enphase, which uses cutting-edge microinverter technology to turn sunlight more efficiently into electricity at the household scale.

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Ultimately, the long-term goal will be to see homes and businesses become independent from the traditional power grid. Current market penetration is low, but solar is the cheapest form of renewable energy and, as such, the growth potential is considerable.

The storage solution Moving away from coal- and gas-fired power generation and adopting renewable energy sources means essentially transitioning the grid. But wind and solar are intermittent forms of energy, and it is not possible to control when they are on and when they are off. As such, large-scale storage is needed to even that out. This is where battery energy storage systems (BESS) offer a compelling solution, and the companies involved in this technology such as NextEra Energy and Sungrow are growing as hardware prices fall.

According to consultancy McKinsey, more than US$5 billion was invested in BESS in 2022, nearly a threefold rise from 2021. It expects the global BESS market will reach between US$120 billion and US$150 billion by 2030, over double its current size—and that utility-scale BESS, which already accounts for the bulk of new annual capacity, will grow around 29% p.a. until 2030.

Agriculture and waste management Corporations are developing products aimed at having a positive impact on biodiversity preservation—and the wider environment—and this is especially true in the agriculture, waste and sustainable materials sectors.

Agricultural technology (or ‘agritech’) describes the use of technology across the agriculture sector—from horticulture to aquaculture—with the aim of improving crop yields, farming performance and boosting profitability in a climate- and biodiversity-friendly manner.

The market is rapidly expanding. The global agritech market was valued at more than US$22 billion in 2022 and expected to grow at an annual compound rate of 13.1% between 2022 and 2032. Globally, the sector is expected to reach US$75.8 billion by 2032.

Agritech spans genetics, big data, machine learning and even artificial intelligence (AI). For example, UK animal genetics company Genus breeds pigs and cattle through selective breeding, which can produce highquality meat and milk more efficiently and sustainably.

The group is also using gene editing to help grow resilience to costly diseases in farm animals like porcine reproductive and respiratory syndrome.

Elsewhere, US group Valmont deals in precision irrigation where sensors look for signs of drought or heat stress in soil. US giant John Deere has developed its See & SprayTM Select system which, via computer vision and machine learning, specifically targets weeds in corn, soybean, and cotton.

AI has also been identified as a potentially crucial tool for streamlining the identification and processing of recyclable materials, with large potential productivity

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The long-term goal will be to see homes and businesses become independent from the traditional power grid.

Tom Atkinson, AXA Investment Managers Tom is a portfolio manager of the AXA ACT Biodiversity strategy and the AXA ACT Clean Economy strategy. He is also a member of the Finance for Biodiversity Foundation’s Positive Impact working group.

Prior to AXA, Tom was a global research analyst at Newton Investment Management.

His qualifications include an MSc in Environment and Development from the London School of Economics and Political Science, and CFA Charterholder.

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Technology

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Which of the following statements in relation to electric vehicles (EVs) is correct? a) Batteries are being developed to enable travelling longer distances before recharging b) E Vs are predicted to comprise 60% of new car sales in China, Europe and the US by 2030 c) Some major car manufacturers are moving to an all-electric range in the next 10 years d) All of the above 2. In terms of waste management initiatives: a) most carbon capture and storage companies have reached critical mass b) the use of green hydrogen in steelmaking has gained substantial traction c) circularity and recyclability of batteries is a key issue/concern d) battery energy storage systems will be aided by the trend of offshoring in the US 3. Which of the following hurdles apply to smart energy and renewables? a) Renewable energy still struggles to compete cost-wise with fossil fuels b) Wind and solar are unable to be controlled as to when they are on and off c) Solar energy’s market penetration has made strong inroads earlier than expected d) Wind installations are predicted to rise around 85% between 2022 and 2030 4. Nowadays, agritech encompasses: a) big data b) machine learning c) artificial intelligence d) All of the above 5. The author believes that climate change and biodiversity loss will likely be countered by an array of incremental technological solutions. a) True b) False

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gains that could benefit investors. Norwegian group Tomra, for example, provides advanced collection and sorting systems, and food processing, by employing sensor-based sorting and grading technology which uses deep learning [A type of machine learning where computers are ‘taught’ to think like humans], a subset of AI. US group Li-Cycle recycles lithium-ion batteries, which are used in EVs and battery energy storage systems, and should benefit from the trend of onshoring in the US. There have been big questions around circularity and recyclability of batteries, but this firm is providing a solution by recovering critical materials, including cobalt and nickel, from all types of lithium-ion batteries and reintroducing them back into the supply chain.

The next big thing As time moves on, technologies will evolve. It may well be the real climate tech breakthrough is still on the horizon. There is exciting progress being made in several areas such as sustainable aviation fuel (made from cooking oil, municipal waste or woody biomass) and carbon capture and storage (CSS)—where CO₂ is caught before it goes in the atmosphere.

Most CCS companies are still small but some, like Norwegian firm Aker, have listed on stock exchanges, and others are either already part of a larger group or likely to be bought if they can prove efficacy.

Then there is direct air capture technology which extracts CO₂ directly from the atmosphere at any location. Another area of interest is green steel—steel manufactured by a process which emits fewer greenhouse gases than conventional steelmaking, often by using green hydrogen [created from renewable energy] instead of fossil fuels. This could help deliver the 50% reduction in emissions from steel manufacturing needed by 2050, though it remains a long way from being deployed at a substantial scale. All this technology is critical to reaching net zero.

Equally, analytical and big data technologies are supercharging our understanding of the complex and multifaceted ways in which biodiversity is being damaged, and helping guide how a response might best be structured.

Ultimately, there will not be a single technological ‘silver bullet’, but rather a multitude of solutions which truly take the fight to climate change and biodiversity loss. We believe all efforts which can improve processes, efficiency, design and construction across industries will add to CO₂ reduction efforts and, in turn, create new potential investment opportunities. fs Note: References to companies are for illustrative purposes only and should not be viewed as investment recommendations.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Investment:

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Truths revealed about private markets

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Is India the next China?

By Mario Giannini, Hamilton Lane

By James Stewart and Luke Smith, Ausbil Investment Management

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: The private markets universe has greatly expanded, yet confusion remains about what it entails. This paper clarifies the role of private equity as part of private markets, and explains key differences between private and public market governance, investment philosophy, management and fees.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Truths revealed about private markets

T Mario Giannini

his paper provides compelling reasons, research findings and market data as to why private markets are an extremely worthwhile investment opportunity. Further, it dispels some common assumptions and misconceptions around private markets.

Truth #1

Over the past several decades, there has been an exponential expansion in private market investments opportunities. At the same time, there has been a deluge of incorrect information circulating in investor circles.

This may stem from the fact that, for many decades, only institutional investors and very ultra-high-net-worth (UHNW) investors had access to private markets. Further, this asset class had complex regulatory and structural hurdles. This left a large swathe of investors and advisers on the sidelines, many of whom grew sceptical about the potential residing in private markets.

There is also often confusion about what ‘private markets’ actually means. The largest segment of private markets is private equity, which includes buyout, venture capital and growth equity strategies.

Because private equity represents such a significant portion of private market activity, these terms are sometimes used interchangeably—which has unwittingly muddied the waters.

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Still, there is much more to private markets than private equity. For instance, the next-largest slice of the private markets pie is private credit, followed by real estate and infrastructure.

As an asset class, an important turning point for private equity was the Global Financial Crisis, which caused investors considerable pain even though private equity experienced unprecedented growth.

This sounds counterintuitive, we know. But remember that between October 2007 and March 2009, the stock market dropped more than 50%, and investors were losing faith in public markets, real estate and hedge funds. During the same period, private equity-backed firms were continuing to attract investors and performed remarkably well, especially in comparison to their public market counterparts.

Private market assets under management (AUM) grew to US$9.7 trillion in 2022 thanks to an increasing number of private equity funds and assets, not to mention a larger universe of investors keen on testing the waters.

Today, there are also fewer concerns over investing in private markets, such as asymmetric information [when one party has more knowledge than the other party in a transaction] and manager risk.

This, in turn, has increased investor appetite for private equity—especially among those investors who are looking to outperform the public markets but previously thought private equity was out of reach.

As we look more closely, it is easy to see why private equity investing is on an upward trajectory. With more than 95,000 private companies in existence globally with annual revenues over US$100

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Figure 1. The growth of US$1 invested in public equities versus private equities MSCI World used as a proxy for public equities

Source: Hamilton Lane data via Cobalt, Bloomberg (January 2023)

million, private equity investment opportunities abound.

What many people may not realise is how this compares to the universe of public companies—as of February 2022, there were just 10,000 public companies with the same annual revenues.

We believe that private market growth—both in size and revenue—will continue. We also believe that HNW investors would be wise to continue educating themselves about private equity and how it may align with their investment objectives.

Truth #2 There is a notion among investors that private equity is too risky, relative to public equities. As it turns out, this generalisation fails to account for a number of important factors, such as the: • wide array of target companies to choose from in private equity markets • minimal likelihood of catastrophic losses • power of a well- diversified portfolio.

The key takeaway for investors who are considering the risk-return trade-off for private equity is that it can represent a target-rich environment, the market potential of which is dramatically larger compared to publicly traded companies.

Additionally, not all private market opportunities are the same. Investors can choose from small-cap growth to large-cap value, and everything in between. This is because each portfolio is designed with a different objective in mind, which translates to a wide array of investment opportunities—each with different risk-return profiles.

An investor may be more concerned about a catastroph-

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ic loss, whereby companies experience a 70% decline in value from their peak, coupled with minimal recovery.

Within a buyout fund, these types of losses can be infrequent. Why? Buyout managers do not build overly concentrated portfolios because they understand the power of diversification to potentially mitigate risk exposure.

The private markets universe is less concentrated and larger today than any other time in history. Between 2000 and 2022, the private market landscape ballooned from US$600 billion in assets under management (AUM) to US$9.7 trillion in AUM. Also consider that US$1.00 invested in public equities in 2018 would be worth US$1.23 in 2022, while that same dollar invested in private equity would have grown to US$2.24 (see Figure 1).

We should also highlight how private markets have a long track record of performing during up and down markets. This includes outperforming the public markets almost every year between 2002 and 2022. Further, Hamilton Lane’s proprietary market data, which spans 27 years, found that that the average private equity buyouts are returning 6x more, and growth equity 11x more.

Further, the US Securities and Exchange Commission’s Asset Management Advisory Committee in 2022 recommended expanding HNW investor access to private investments. The committee’s report showed that private equity, private debt and private real estate investments often outperformed public investments and added diversification to a portfolio.

This should give HNW investors a greater degree of confidence, especially since private market investing is one of the best ways to play in the large, growing universe of smaller companies worldwide.

Mario Giannini, Hamilton Lane Mario is chief executive of Hamilton Lane, a member of its board of directors and a co-chair of its various investment committees.

He is responsible for the firm’s strategic direction, management structure and process. Mario plays a significant role in providing client services and marketing the firm’s products and services.

He holds a BA from California State University, a Master of Laws from the University of Virginia and a Juris Doctor from Boston College.

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Figure 2. All private equity 10-year rolling time-weighted returns

The quote

The private markets universe is less concentrated and larger today than any other time in history.

Source: Hamilton Lane data via Cobalt, Bloomberg (January 2023)

Looking ahead, we anticipate that private markets will continue to attract a much larger share of HNW investors’ wallets than they have traditionally represented, so much so that a traditional 60/40 equity/fixed income portfolio may soon be a thing of the past.

What’s more, we are convinced that by 2042, investors may have portfolios with 50% allocated to private equity, while still managing their levels of risk, return and duration.

Truth #3 Within investor circles, there is a perception that private markets are an expensive asset class. There is no denying it. Headline fees are generally higher in private markets than in other asset classes. All else equal, higher fees create a drag on the net performance. Those fees must make it hard for private markets to outperform other asset classes, right? Or do they?

Let us start by addressing private markets’ fund fees. Private market managers charge a management fee, which varies over the course of the fund’s life. The management fee for closed-end private equity funds is typically 1.5%–2% of the committed capital during the investment period (usually the first three to five years) of the fund.

By way of background, a closed-end private equity fund is a type of investment fund that pools investor capital and uses it to invest in private companies or assets.

The fund issues a fixed number of shares that typically have a finite lifespan.

As the fund completes its investment period, the management fee generally decreases. Following the investment period, management fees are customarily charged on net invested capital (often a smaller amount than committed capital).

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The fee may include a step down. A common stepdown is a 10% fee reduction. Rather than being based on the committed capital, the fee is calculated on a smaller amount—namely, the net invested capital. This is a different construct than mutual fund fees, which are usually assessed on net asset value (NAV).

An additional component of a private market fee structure is carried interest, sometimes referred to as a performance fee or ‘carry’. Carried interest is the percentage of investment profits—typically 20% for private equity funds—that the fund manager keeps for themselves.

The manager must exceed a minimum return threshold—usually 8%—to earn their carried interest. While performance fees can be substantial, they are not new to the asset class and have largely stayed consistent for the past several decades.

So are the high fees justified by high performance? Let us explore private markets’ performance data in more detail to find out.

Hamilton Lane has developed a comprehensive database of private markets fund performance, encompassing over 50,000 funds and more than US$16.9 trillion of private capital, as of 31 March 2023. Most importantly, Hamilton Lane tracks the net returns of private markets funds after management fees and carried interest are accounted for.

This data suggests the majority of private equity funds have outperformed stocks, especially over the past 20 years (see Figure 2). In fact, only in vintage year 2000 was this not the case.

What we have found compelling is private equity’s consistent outperformance relative to public markets.

Over nearly all 10-year time periods since the turn of the century, private equity has bested traded equities.

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Figure 3. The composition of the private markets: NAV by strategy USD in billions

The quote

Over nearly all 10year time periods since the turn of the century, private equity has bested traded equities.

Source: Hamilton Lane data (January 2023)

We also see that buyout transactions—that is, when private equity funds completely acquire a company—have outperformed global public equities in every vintage year by an average of 1,079 bps. Private credit has outperformed public leveraged loans in every vintage year by an average of 625 bps. It is worth remembering that this is all net of fees and carry charged by fund managers.

Truth #4 There is no denying that private markets are often misunderstood. Private equity refers to an investment model where institutional investors, UHNW individuals, and other accredited investors pool their money to invest in privately held companies or acquire controlling stakes in public companies. Private equity firms are responsible for managing these investments on behalf of their investors.

Private markets comprise private equity, private credit, and real assets. Because private equity—which includes buyout, venture capital and growth equity strategies— tends to represent the largest segment of private markets (see Figure 3), the terms ‘private markets’ and ‘private equity’ are sometimes used interchangeably.

Over the years, private equity was the exclusive province of institutional and accredited investors, and only recently are investors and advisers starting to better understand it. The following sections touch upon some key facts about private equity.

Private equity misconception: It’s all about the leverage With the mounting data supporting the cause for private equity, there has been an increase in investor interest.

Notwithstanding the evidence supporting the argument

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that private equity has a strong risk-return profile, there is still a notion that private equity is more about leverage, engineering financial returns or intricate corporate transactions.

Some people look at private equity and assume it is a game of replacing management teams, cutting costs, and then selling the company at a price that does not reflect its intrinsic value. In this scenario, it seems like everyone loses except the private equity firms.

This type of scenario makes for a riveting story, but it does not reflect reality—especially today. Private markets have evolved over the past decades, and one key reason private equity does better than public equity is because of different governance structures.

Private equity governance: A longterm, active management philosophy Establishing governance structures includes everything from creating strong boards of directors with clearly expressed roles and responsibilities to hiring the right management team and creating the right incentive structure.

In private equity, when a fund buys a company, they control both the company and the board. This makes it easier for management to create a capital structure that gives companies the flexibility to adjust—no matter the market conditions. This is especially true for buyout deals, where private equity firms take a controlling interest in a private company.

Private equity firms typically have a management team and a board of directors that oversee the portfolio company’s operations and investments. The board of directors usually includes both internal and external members, including representatives from the private eq-

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. In terms of composition, the private markets universe is: a) equal in number to public companies with annual revenues over US$100 million b) weighted primarily towards large-cap value stocks c) at its least concentrated than any other point in time d) yet to attune itself to the increasing number of smaller companies, globally 2. The largest private markets segment is: a) private equity b) real estate c) private credit d) infrastructure 3. Based on performance data cited, private market equity funds: a) outperformed the S&P 500 and MSCI World in most cases since the year 2000 b) experienced unprecedented growth during the GFC c) employing buy-out transactions bettered global public equities in every vintage year d) All of the above 4. In comparing their governance structures and investment philosophy with public companies: a) private equity firms are more typically medium-term investors b) private companies’ management teams tend more to outsource business operations c) compensation of private company managers is largely based on rapid stock price growth d) private equity firms often have substantial stakes in a company, providing motivation to keep improving

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uity firm, independent directors, and possibly representatives from the portfolio company.

Private equity firms have a fiduciary responsibility to their investors, meaning they are legally obligated to act in their investors’ best interests. This includes making investment decisions that they believe will generate positive returns, as well as ensuring that the portfolio companies operate ethically and in compliance with laws and regulations.

To ensure good governance, private equity firms often implement various measures, such as: • conducting due diligence on potential investments • implementing strong risk management policies and procedures • monitoring the performance of portfolio companies.

Additionally, private equity firms may engage with management teams to improve governance practices and implement best practices for financial reporting, stakeholder engagement, and the like.

In short, private equity firms are typically long-term investors as well as managers who are actively involved in the day-to-day operations of the business.

As opposed to stock price, there is a tendency in private equity to focus on operational efficiency and growth.

Because private equity firms typically have huge stakes in the company, they are all motivated and aligned for one very specific thing.

That is, improving the company.

How does this compare to public companies? Often, public companies’ management teams are less involved in the business’s operations to the same extent as they are with private companies.

It is also common to see public company managers compensated based on cash or rapid stock price appreciation, translating to a substantial payout for options holders. However, this does not mean that the actual company is performing well.

When it comes to investing, the past is no guarantee of the future, but the data is compelling. By most measures, in the private equity world, there are more companies, stronger growth, better governance models, and overall better use of leverage. fs

5. Which of the following statements in relation to private market fees is correct? a) Fund managers must exceed a minimum return threshold to earn carried interest b) Fees can include a step-down component calculated on net investment capital c) Management fees often decrease closer to the end of the investment period d) All of the above Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: India’s economy is expected to replicate China’s growth.

Increasing momentum in India’s manufacturing and infrastructure means more opportunities for investors, particularly as its demand for commodities increases and a young consumer class gains ascendency.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Is India the next China?

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significant pressures on its wages. Minimum wages in China have risen to an equivalent US$360 per month compared to that of India which are approximately US$145 per month.

India provides significant cost savings opportunities for large manufacturing operations, and we are seeing a shift in investment flows in the near term towards such favoured jurisdictions, and beyond China.

Figure 1. Foreign direct investment: India versus China $350

BILLIONS

$300 $250 China

$200

India

$150 $100 $50

2022

2020

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

$0 1982

ndia is one of the world’s largest countries by population, on par with China at 1.4 billion people, and on a similar growth path to China—but some 20 years behind.

India’s economy is expected to trace the growth shown

by China, and this will manifest in infrastructure and building development and other expansion that is rich in commodity demand—and investment opportunities.

Prior to the 1990s, China and India were seen as relative equals on the global stage. Both fell into the category of emerging market economies, characterised by stagnant low levels of GDP, a lack of foreign direct investment (FDI), and with minimal investment in critical infrastructure. Many issues plagued the two nations and hindered economic progress. However, in the early 1990s, China turned its focus to the manufacturing sector where it became a major centre for global manufacturing, subsequently seeing it reach heights that significantly outpaced India.

China received significant FDI after the 1990s which saw its growth opportunities outpace that of India’s (see Figure 1). Increased investment led to infrastructure spend and a noticeable uptick in the Chinese economy, one that can be replicated in India as the rest of world looks to decouple from a relatively sole reliance on China.

There is particular focus from the international community on an internalisation of critical operations and a desire to diversify risk. India could be a clear beneficiary of this trend.

With India having trailed China’s growth trajectory for the past 30 years, there is disparity in the quality of life experienced between these two countries. China, having become more developed, has seen

1980

I

James Stewart and Luke Smith

Source: World Bank, World Development Indicators

China has grown to dominate manufacturing, exports and resources markets with its aggressive expansionary policies and growth strategies over the past three decades. This has been led by its push to urbanise its population and raise the average standard of living from subsistence towards that of developed nations.

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The quote

While China was building manufacturing, India was evolving into one of the world’s leading outsourcing and service economies.

James Stewart, Ausbil Investment Management James is an equities analyst, covering natural resources, at Ausbil and co-portfolio manager of its Global Resources Fund. Previously, he was a mining specialist with Regal Funds Management.

Prior to this, James was responsible for regional resources coverage for UBS in Singapore, and worked with CLSA. James holds Bachelor of Engineering and Bachelor of Commerce, a Graduate Diploma in Applied Finance (FINSIA), and is a CFA Charterholder.

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China has been spectacularly successful at achieving this goal, as measured in terms of the overall population movement from agrarian to urban life. Interestingly, between the late 1960s and the early 1980s, India was ahead on the urbanisation of its populace.

With this urbanisation has come rising incomes, helping support a growing wealth base, and fuelling consumer spending and investment. The disparity in urbanisation levels is reflected in the monthly average wage. China has seen a rapid rise in average wages over the past two decades compared to the relatively stagnant level of Indian wages.

While not the sole factor, the rise in average wages in China has created an internal market for goods, services and resources, at the same time as China has rapidly expanded its manufacturing and external trade activity, driving similar disparities in GDP growth.

While China was building manufacturing, India was evolving into one of the world’s leading outsourcing and service economies. This outsourcing market had smaller long-term growth opportunities compared to that of China’s globally dominant manufacturing sector.

Demographic differences Asia accounts for more than half of the world’s consumers, with China’s consumer class estimated at around 899 million people and India’s with around half that at 473 million people (see Figure 2).

In terms of demographics, the median age of a Chinese consumer is 39, while India’s is only 30 years of age.

The youth advantage is a key driver of potential in India. By 2030, India is expected to have 357 million consumers below the age of 30, making them the largest young consumer market globally.

In contrast, China’s consumers are ageing, with the

number of those 45 years and over expanding, with China expected to become the largest senior consumer market in the world. By contrast, India will be home to one-fifth of the world’s youth consumers by 2030.

China is entering an era dominated by an ageing population. The rising ratio of dependants to workers along with rising health costs for the growing elderly cohort may lead to constraints on economic growth. In contrast, India will be able to reap the demographic rewards for its significantly more youthful population mix through superior productivity in the decades ahead.

However, in order to maximise the high growth potential associated with a young population, there will need to be improvements in education, enhancements in healthcare, significant infrastructure development, and the standard of living will have to rise. All of this will have a multiplier effect on economic growth, much as it did in the early growth phases for China’s path from agrarian to urbanised economy.

Production differences China is the leading manufacturer of steel products, electronic equipment, cements and fertilisers globally, all of which have a direct link to underlying commodity demand. China continues to maintain its strong commodity-based growth profile, driving significant global demand for all major commodities worldwide, and consuming over half (50%) of the world’s iron ore, copper, aluminium, nickel and zinc.

As a major manufacturing hub, China requires significant volumes of commodities in order to produce product for the global economy. For example, China imports large volumes of iron-ore in order to manufacture steel and other metal products. China’s iron ore and steel consumption is largely a function of its infrastructure spending.

Figure 2. Population breakdown: India versus China 1,400

MILLIONS

1,200

524

Poor & Vulnerable $<12/day

1,000

950

800

600 899

400 Consumer class $>12/day

200

473

0 CHINA

INDIA

Source: World Data Pro, 2023

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China and India differ over what they have produced historically, as China placed emphasis on manufacturing while India placed a greater importance on being the world’s global outsourcing hub, building a more serviceorientated economy.

As India continues to move further away from this service focus to one that increasingly includes manufacturing, it will become a larger consumer of the world’s commodities.

In order for India to continue to grow, it requires infrastructure. This means India needs steel. While relatively independent on iron ore, India needs to import large volumes of metallurgical coal [also called met coal or coking coal, and used to produce coke, the main source of carbon in steelmaking] for the production of steel.

India’s share of global commodity demand is increasing across the board as the economy moves towards manufacturing, with India absorbing more than 5% of the worlds alumina [also known as aluminium oxide, a white, crystalline compound used as a base for producing aluminium], aluminium, bauxite and zinc.

High-demand products such as consumer electronics, household appliances, mobile phones and footwear have become popular items increasingly manufactured in India due to the cost advantages. This is expected to place significant upward pressure on overall resources demand.

Demand for commodities In terms of steel, India has outlined a strong pipeline of infrastructure spending over the next five years, with approximately US$1.4 trillion of investment planned for over 7,400 key projects, including rail, airports and roads.

This spending is on top of both private and government-subsidised housing plans that have been implemented in the post-COVID world. These infrastructure and property projects clearly have direct impact on commodity consumption.

Figure 3. India’s share of global commodity demand (2023) 25%

23%

SHARE OF GLOBAL DEMAND

20% 17%

15% 11%

10% 7%

6%

5%

5%

6%

6% 2%

*Note Coal and Iron Ore reflect seaborne import share, all others are global production basis.

Source: Kallanish, Credit Suisse, UBS

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ZINC REFINED

ZINC CONS

COPPER REFINED

ALUMINIUM

ALUMINA

BAUXITE

STEEL

IRON ORE*

THERMAL COAL*

MET COAL*

COPPER CONS

0.3%

0.2%

0%

The forecast growth profile sees demand for steel continue to rise as the Indian economy forges ahead through infrastructure spend. India consumed approximately 125 million tonnes of steel in 2022, which is around 6.5% of the world’s total consumption. Currently, China accounts for around 54% of global steel demand while India only accounts for 7% (see Figure 3). Various experts forecast that Indian steel demand will double in the coming decade as a result, increasing India’s importance within the commodities complex.

Both iron ore and metallurgical coal consumption remain elevated as a result of this steel demand. Metallurgical coal and iron ore are essential ingredients in the production of steel. Typically, steel is smelted in a blast furnace by combining iron ore and metallurgical coal with oxygen. In order to create 1 tonne of steel, 1.6 tonnes of iron ore and 0.8 tonnes of metallurgical coal is needed, apart from any additional base metals like zinc or nickel.

In terms of bulk materials, namely iron ore and metallurgical coal, there are some interesting differences between China and India. While India represents roughly 10% of the global consumption of iron ore, it is relatively self-sufficient, given that it has an adequate supply of domestic sources.

This means it is able to meet most of its internal demand for iron ore with its own resources. Given this, India is not expected to be a large net consumer of seaborne iron ore in the coming years. This compares to China which represents roughly 60%–70% of the seaborne iron ore market.

On the flipside, India has limited domestic sources of metallurgical coal and is required to import this material to support its steel manufacturing industry. As a result, metallurgical coal represents the most dominant source of external commodity demand for the country (see Figure 3). This compares to China which has significant domestic sources of metallurgical coal, as does Mongolia to the north.

India’s lack of domestic sources of metallurgical coal requires the importation of large volumes for its steel production, compared to China which has a large degree of self-sufficiency.

The world demand outlook therefore flips here compared to iron ore, with India accounting for around 23% of global metallurgical coal demand compared to China at around 19%, based on 2022 data. India’s accelerating steel demand is likely to see it become an increasing component of the seaborne market as a result.

It is worth noting that at this early stage, base metal (aluminium, copper, zinc and nickel) import demand is marginal from a global perspective, given the early stage of India’s economic development. Copper is worth mentioning as the metal expected to generate incremental demand growth as a function of the expected take-off in economic expansion that will come with increasing urbanisation, and an increasing consumer class in India.

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The quote

India’s share of global commodity demand is increasing across the board as the economy moves towards manufacturing.

Luke Smith, Ausbil Investment Management Luke is an equities analyst, covering natural resources, at Ausbil and co-portfolio manager of its Global Resources Fund. Previously, he was a director, senior energy analyst at Commonwealth Bank Institutional Equities.

Other prior roles include a commercial mining analyst with IndiEnergy, an oil and gas analyst with ABN Amro, and a corporate finance analyst with Woodside Petroleum. Luke holds a Bachelor of Science.

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Which of the following statements best reflects the economic state of play and wider investment prospects regarding India and/or China’s economies? a) Pre-1990, India had maintained much higher levels of GDP than China b) Foreign direct investment into India has been climbing gradually since 2006 c) There is a general global reluctance to move away from sole reliance on China d) Around 2020, foreign direct investment into India was roughly on par with China 2. Based on data cited, which of the following factors is an investment consideration regarding India’s steel-making capacity and initiatives? a) India accounts for around 19% of global iron ore consumption, and will have to import greater quantities to become self-sufficient b) India accounts for around 54% of global steel demand, which has plateaued for the time being c) India needs to import large quantities of metallurgical coal, which will increase in tandem with its demand for steel d) Expert consensus is that India’s demand for steel will quadruple in the next decade 3. Which of the following statements regarding demographic trends in India and/or China is correct? a) India’s youth consumer market is on an upward trajectory b) Minimum wages in India and China are almost on par c) China’s ageing population has largely stabilised d) India has always lagged China in terms of urbanisation

The acceleration of India’s economic growth, and the investment in infrastructure and property required to support this growth, will see it rise as one of the world’s leading buyers of commodities, metallurgical coal in particular.

Within the S&P/ASX 200, the main beneficiaries of this boom in demand will be the metallurgical coal producers like BHP, Whitehaven Coal and Coronado Resources. There remains considerable upside opportunity for companies that will be able to meet India’s metallurgical coal demand in the coming years due to a notable level of underinvestment in metallurgical coal production.

Because of India’s internal reserves of iron ore, demand for Australian product is only expected to be incremental, and a marginal contributor for the likes of BHP, Rio Tinto and Fortescue Metals.

Like many countries, India is attempting to accelerate growth through economic stimulus in order to move beyond the impacts of the pandemic. In February 2023, India announced a CAPEX increase of 33% to 10 trillion rupees for FY23. This announcement was directly targeted towards employment spend and an increase in infrastructure spending.

Of India’s 7.2% projected GDP figure for FY23, 3.3% is to be spent on capital investment, bringing the total spend to almost 50% of GDP. Again, this follows a similar path to how China was able to navigate the Global Financial Crisis of 2007, and emerge as the world’s leading growth powerhouse.

China continues to consume more than half of the world’s key commodities, making this demand the major predictor of price moves. India sits in a similar position to where China was 20 years ago, with significant growth potential.

Ultimately, India will play an integral role in the global economy as it transitions into a competitive investible jurisdiction. Compounded by its young population, and their desire to urbanise, we are going to see incredible demand, for both jobs and infrastructure, feed through the economy.

With India on track to exceed Chinese growth compared to where it was 20 years ago, there will be a profound impact on commodities demand looking ahead. fs

4. What factor(s) augurs well regarding foreign direct investment in India? a) Increased momentum in relation to urbanisation and a growing consumer class b) The need to increase domestic infrastructure, reflected in India’s investment initiatives c) The cost advantages of manufacturing high-demand consumer goods in India d) All of the above 5. Historically, China has focused on increasing manufacturing, while India has concentrated on the global outsourcing and service markets. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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