Financial Standard Volume 18 Number 12

www.financialstandard.com.au

22 June 2020 | Volume 18 Number 12

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Jennifer Wu J.P. Morgan

MAX Awards

ETP Forum

08

Featurette:

14

Feature:

32

Victims of Financial Fraud

Fixed income

Dina Kotsopoulos BT

Opinion:

Events:

Events:

Profile:

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www.financialstandard.com.au

07

12

22

Jennifer Wu J.P. Morgan

MAX Awards

ETP Forum

08

Featurette:

14

Feature:

32

Victims of Financial Fraud

Fixed income

Dina Kotsopoulos BT

Opinion:

Outdated definitions see clients in crisis Elizabeth McArthur

October last year ASIC called on life insurIthenersdesign” to address what it termed a “problem with of total and permanent disability (TPD) insurance.

That problem was the activities of daily living (ADLs) definition. When claims were assessed under this narrow definition, 60% were declined.

The regulator suggested, but did not mandate, that insurers move away from using ADLs. But this is yet to happen, says Health & Finance Integrated managing director William Johns.

He’s still seeing clients who are unable to work and desperate for help have claims rejected under ADLs. The ADLs, Johns says, are particularly discriminatory to those trying to make a TPD claim because of mental illness or brain injury.

“Every time I have someone with mental illness and I’m claiming for them I know I’m going to go into battle for them – especially on TPD,” Johns says.

Johns says there has been instances in which insurers have said they have no option but to use ADLs (because, for example, a diagnosis only emerged after someone lost their job) and are actually ignoring the alternative, which is instrumental activities of daily living (IADLs).

While ADLs only include the basic selfcare tasks of feeding, continence, transferring, dressing, toileting and bathing, the IADLs include using the telephone, shopping, preparing food, doing housekeeping, using transportation, managing medication and handling finances.

Johns points out that Centrelink assessments broadly use IADLs, saying it’s ridiculous that a product you pay for can have a higher threshold of access than the welfare system.

“The taxpayer is pledging they are going to pay you a lifetime annuity for the rest of your life. That can amount to millions of dollars.

They have to use an extremely high threshold and even they use IADLs,” he says.

For example, he says that suicidal ideation is something that is taken extremely seriously in the psychiatric profession but it’s something that’s very difficult to make a successful TPD claim for.

A spokesperson for BT said its life insurance business continues to consult with industry and regulators regarding the use of ADLs. Hannover Re said it is working towards the removal of the ADL definition from policies.

A spokesperson for TAL said it is working with super funds to develop alternatives to ADLs. “In 2018 TAL worked with Cbus to develop its ‘Everyday Working Activities’ definition which has an 86% claims acceptance rate. This definition was recently updated to address members with mental illness,” the spokesperson said.

However, Johns says if insurers are serious about protecting people with mental illness they all need to completely scrap the ADLs and at least use the expanded IADLs. Jewish House chief executive Rabbi Mendel Kastel has also run into the limitations of ADLs in his work. Jewish House assists those in crisis, offering a “hand-up, not a handout”.

“In many cases these people are homeless or at risk of homelessness. They might have serious mental health challenges. Being able to access some money to get them back on their feet is really important,” Kastel says.

Kastel has engaged Johns to help people get access to their insurance, and through that he too has seen that the ADLs are far too simple.

Clinical neuropsychologist Jane Lonie sees the flip side of ADLs, often assessing patients for TPD claims and not always with all the information about what it takes for claims to be paid.

She says the letter of instruction provided to physicians varies depending on the referrer (whether it’s an adviser, lawyer or insurer). The specific industry designated criteria that the claim will be assessed against is not always specified within the letter of engagement or instruction.

“When you’re talking about somebody with an acquired brain injury or dementia, unless they are right at the most severe end of the spectrum those basic ADLs will be intact,” Lonie says.

When asked whether this group could hold down a job, Lonie says “absolutely not”.

“It’s totally inappropriate to be measuring occupational function, the ability to hold down a job, on the basis of rudimentary skills like toileting.”

For Johns, it’s time for insurers to align their processes with society’s view of mental health.

“The people who are being denied under ADLs not so long ago might have been institutionalised,” Johns says.

“Before they shut the institutions, I would have been arguing with an insurer that my client who has been institutionalised deserves a TPD payout and the insurer would have told me they meet the ADLs.” fs

22 June 2020 | Volume 18 Number 12 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

Events:

Events:

Profile:

FASEA extension passes, welcomed Elizabeth McArthur

William Johns

managing director Health & Finance Integrated

The extension to the FASEA education requirements passed June 17.

The assistant minister for superannuation, financial services and financial technology Senator Jane Hume tweeted that her promise of an extension for financial advisers had been kept.

Advisers will now have until 1 January 2022, an additional year, to pass the FASEA exam.

They will get an additional two years to meet FASEA’s qualification requirements, with the new deadline for advisers to meet the education standards 1 January 2026.

The legislation to allow financial advisers the extension was contained in an omnibus bill which hit a snag last week when it was bounced out of the Senate and back to the House of Representatives after Centre Alliance Senator Rex Patrick sought an amendment.

The amendment Patrick sought deals with a loophole that allows some large corporations on an ‘exempted companies’ list to not file financial Continued on page 4

ASIC warns funds to clean up adverts Kanika Sood

The Australian Securities and Investment Commissions has asked 13 managed funds to fix their advertising, and is threatening the wider sector with enforcement action for misleading claims.

ASIC says it forced seven responsible entities and 13 funds with a total of $2.5 billion in assets to take “corrective action”, including culling old advertising, product disclosure statements and webpages comparing products to lower-risk products.

The regulator also asked the seven responsible entities to clarify actual withdrawal terms, and freeze applications until all the changes were made.

ASIC’s action comes after it reviewed managed funds disclosure and marketing material during the COVID-19 pandemic.

The three areas it was seriously concerned about were: funds talking up one aspect (like higher returns) while comparing themselves to others without giving a balanced indication of key differences and risks.

Continued on page 4

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News

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

MySuper goes back-to-back in the black

Editorial

Harrison Worley

Jamie Williamson

F

Editor

Last fortnight I touched on the Financial Planning Association of Australia’s recommendation that the AFSL regime be overhauled.

Calling for individual registration, the FPA pushed for an independent body to oversee advisers’ employment, education and conduct history and take action when required. Licensees would no longer oversee the advice given by representatives and instead shift to regulating financial products.

It’s the FPA’s belief that such a system would reduce costs and also help to combat any potential conflict in views between the licensee and the adviser who has the personal relationship with their client.

The policy raised a few questions, in our office at least.

An obvious one in my mind was: does ASIC and its Financial Adviser Register not already provide the bulk of this service?

Also, licensees provide essential services to advisers, such as compliance capability and professional development resources, at a cost that reflects the scale of the AFSL, meaning surely costs would rise for advice firms if these services are no longer on offer and they must find an alternative, yes?

But we weren’t the only ones with questions - it seems the FPA didn’t let licensees in on its new way of thinking before going public.

Centrepoint Alliance, Countplus, Easton Wealth, Fitzpatricks, Fortnum and Paragem found gaps too, putting out a joint statement saying the policy is “ill-considered” and demonstrates a “fundamental lack of understanding”.

In response, they were told there would still be a place for them in offering technology solutions and other services that practices rely on.

Now, if I am understanding the FPA’s proposal correctly – and I may not be as the FPA declined to answer further questions put to it by this publication in a timely manner – I fail to see how such a system is in the best interests of consumers.

When you boil it down, cost reduction doesn’t seem a realistic outcome. And if costs increase for the advisers then they increase for the client, and if they increase too much more Australians will be priced out of the advice market as will the advisers themselves.

But the FPA would have made quite a pretty penny from its partnerships with licensees over the years and that tap would surely slow on the back of this, so at least it can’t be accused of furthering its own interests with this policy. That’s something, I guess.

On a separate note, this issue of Financial Standard marks the final edition for our colleague Harrison Worley who has been with us for the past two years, most recently covering all things superannuation.

As he makes the move to the world of public relations, it’s bittersweet; we couldn’t be prouder or happier for him to take the next step in his career, but he will be missed.

We wish him all the best in his next chapter. fs

The quote

The MySuper index has fallen back only to where it was 12 months ago.

or the second consecutive month, Australia’s MySuper options have generated positive returns, after a couple of negative months due to the COVID-19 pandemic.

Latest Rainmaker research shows the average return for MySuper products in May was 2.1%, which followed the 3.2% return posted in April.

The result followed returns of -3.3% and -9.5% in February and March, as the crisis began to violently shake financial markets.

Cumulatively, MySuper products have returns -7.2% so far this year, according to Rainmaker.

For the year to date, Rainmaker’s SelectingSuper MySuper index is still in negative territory, with a return of -1.9%. However, over 12 months the index has returned 0.6%.

The index is based on a sample of 20 not-forprofit MySuper products which report daily unit prices. The funds which make up the index represent about two-thirds of the MySuper market.

Further, Rainmaker pointed out all returns in the index were positive in May, ranging from a high of 3.3% to 1.4%.

The good news keeps coming for members in MySuper products, with Rainmaker reporting that the average fall for MySuper products from the peak of the market prior to the pandemic taking hold was 8.5% as at the end of May 31. In the same space of time, the ASX fell 20%, meaning those in MySuper products were hit with less than half the force of the equity market.

Rainmaker said the results were driven by the ASX, which returned 4.4% in May, as well as the positive performance of inter-

national shares, with the MSCI All Countries AUD index returning 3.5%. AREITs have also played their part, chipping in a 7% return.

“These results mean that despite the impact of the CFC on the real economy, its impact on returns of diversified default super funds is relatively subdued,” Rainmaker said.

“The MySuper index has fallen back only to where it was 12 months ago.”

Rainmaker executive director of research and compliance Alex Dunnin said that while the nation had fallen into recession, the super’s performance results should spur members of MySuper funds.

“There’s a long [way] to go however, but given that during the GFC returns got as low as -21% these results are remarkable,” Dunnin said.

Dunnin said the results differed from the economy’s latest figures because “the real economy is not the financial markets into which super funds invest”.

“Super funds would be very surprised to see how robust share markets are right now,” he said.

“All those government stimulus packages are making investors very confident of a likely post-COVID recovery.

“There’s been lots of unhelpful speculation regarding superannuation recently. Ironically none of it concerns actual super investment returns. Yet they are what really matter.”

However, Dunnin said that the good returns were not shared by everybody, pointing out some funds have been hit harder than others.

“Members should use this time as an opportunity to ask themselves if they really trust their su-per fund. But don’t just look at the short-run, look at the rolling medium term three or five-year period,” he said. fs

FPA accuses ASIC of price gouging Eliza Bavin

The Financial Planning Association of Australia has hit back at the corporate regulator accusing it of price gouging after increasing the industry funding levy for financial advisers by 38%.

The FPA has urged the corporate regulator to reconsider the 38% increase to the ASIC industry funding levy as the nation enters its first recession in 29 years.

The calls come after ASIC released for consultation its Cost Recovery Implementation Statement 2019-20 (CRIS), which was prepared based on its planned regulatory work and budgeted allocation of costs at the beginning of the 2019–20 year.

ASIC estimated the industry funding levy for 2019-20 will be $1571 per adviser, a 38% increase on the previous year.

The corporate watchdog is looking to recoup $40.17 million from 3051 AFS licensees with 22,652 advisers.

While ASIC states that the indicative levies for 2019–20 are an estimate, the FPA said a 38% cost increase per adviser is excessive and last financial year the final levy amount was even higher than the estimate.

FPA chief executive Dante De Gori described the increased levy as “fee gouging” and an unreasonable demand of financial advisers given the current economic environment.

“Financial planners were hit with a 22% increase in 2017-18.

Now ASIC estimates the levy will increase by 38% for 2019-20,” De Gori said.

“No matter which way you look at this, it is excessive at a time

when financial planning professionals are working hard to help their clients through extraordinary circumstances.”

De Gori said financial advisers are already under a great deal of pressure to meet new education requirements, await outcomes on the FASEA extension from an “unpredictable parliament” and overhaul their business models to meet regulatory requirements.

“As small businesses, financial planning practices also face the challenges that COVID-19 has created for the wider SME sector,” he said.

“ASIC’s fee hike does nothing to support them or their clients during this difficult time.”

ASIC also announced that measures designed to make financial advice more accessible to Australians during the COVID-19 pandemic will be removed.

ASIC has set an end date of October 15 for the COVID-19 relief measures including relief to facilitate advice to individuals financially affected by COVID-19 about ERS, relief extending the period for giving Statements of Advice and relief to allow a Record of Advice to be given instead of a Statement of Advice in certain circumstances.

De Gori said the industry was not consulted on the decision, and had been a big help for Australians to have more affordable access to advice.

“ASIC had asked us to canvas members on their use of these relief measures and we are still in the process of compiling this feedback,” De Gori said. fs

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News

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

01: Jane Hume

FASEA extension passes

assistant minister for superannuation financial services and financial technology

Continued from page 1 records with ASIC. He argued an amendment to the omnibus bill was necessary so that these companies were not allowed to engage in aggressive tax minimisation.

On June 15 Patrick said he would not back down on the amendment.

If the FASEA extension had not passed, advisers would have had to complete the FASEA exam by the end of this year to remain practicing. Only about half the advisers on the ASIC Financial Adviser Register have sat the exam so far.

The Stockbrokers and Financial Advisers Association chief executive Judith Fox welcomed the news.

“Brokers and advisers have been put through the wringer, with the bill having been stymied multiple times by unrelated amendments from Labor and crossbench Senators being attached to it that were not supported by the government,” Fox said.

FASEA itself also welcomed the new certainty around the exam and education extension.

“FASEA welcomes the certainty the extension of timeframes provides to existing advisers seeking to pass the Exam and meet the higher education standards. FASEA notes the strong performance of nearly 8000 advisers who have sat the exam and received results to date, with a majority of 86% successfully passing”, FASEA chief executive Stephen Glenfield said. fs

Senator criticises lazy superannuation system Jamie Williamson

S The quote

It’s very complicated and because of that compulsory nature of superannuation, it has made a lot of the providers quite lazy.

ASIC warns funds to clean up adverts Continued from page 1 ASIC was also concerned about funds downplaying their risk of capital loss, and giving investors the impression that they can withdraw money on short notice, where the liquidity of the fund assets doesn’t support the claim.

It did not name the responsible entities or the funds it asked to take correction action — or even their asset classes only mentioning ‘high yield’ strategies were on its radar.

Traditionally, funds that have made comparisons to term deposits have included property syndicates and private credit including mortgage lending, a source said.

“ASIC will continue to monitor the advertising and disclosure by managed funds during COVID-19. We are aware of a number of funds that are promoting (implicitly or expressly) their products as ‘high yield‘ or ‘low risk’ when that is not the case,” it said.

“ASIC is considering enforcement action where inappropriate, false or misleading statements could end in significant financial harm to investors.”

In recent years, ASIC has stepped into financial products’ advertising several times, including this year when it asked Mayfair 101 to stop advertising debenture products in comparison to term deposits this year.

In 2018, the regulator asked super fund Spaceship and trustee Tidswell to pay $12,600 each and remove a statement from the fund’s website claiming its GrowthX option “measure companies”.

In reality 79% of the fund was tracking an index without any quantitative analysis in June 2017. fs

enator Jane Hume 01 has said the compulsory nature of superannuation allowed super funds to become lazy, creating inefficiencies in the system.

Speaking on the My Millennial Money podcast, the assistant minister for superannuation, financial services and financial technology said that despite the Australian super system being the envy of the world in a lot of ways, it’s actually like comparing apples with oranges.

“There isn’t a system out there that replicates ours. But it’s not a perfect system; it’s not without its problems,” Hume said.

Some of these problems stem in large part from the fact super is compulsory, she said, which has in turn made providers lazy.

“I think there are some inefficiencies in our system that can be fixed, because it’s a passive system, because it’s compulsory, people don’t actually engage in what their money is going into. It’s very complicated and because of that compulsory nature of superannuation, it has made a lot of the providers quite lazy,” she said.

“There’s things that have been allowed to proliferate like multiple accounts, high fees, persistent underperformance of a number of funds… and also things like insurances that people might not necessarily understand, know that they have, potentially can’t claim on even if they did know they had it.”

Hume then provided an update as to the Pro-

ductivity Commission’s recommendation for a best-in-show list and, in doing so, casted doubt over whether the proposal will actually eventuate.

“The problem with best-in-show is that it’s a little bit complicated to explain. It was one solution to changing the default mechanism, but I think that there are other ways and other things we should consider when we look at changing default too,” Hume said.

“And Josh Frydenberg’s going to have a lot more to say on that later in the year.”

Hume also confirmed about 1.78 million people have now applied to access their super under the government’s early release of super scheme.

This equates to about $14.5 billion in withdrawals, she said.

“That initiative has been working very well, which is a terrible thing to say, as that’s 1.78 million stories of financial distress. But a lot of those people would never have engaged with the superannuation system before and are turning their mind to their super for the first time,” Hume said.

Hume went on to say she doesn’t believe it’s accurate to say the ERS is the reason for concerns around super fund liquidity.

“If $14.5 billion has come out of super, putting that into perspective, it’s about half of 1% of the entire system… and so much of the money that was in super was liquid. A balanced fund invests around 25% in ASX-listed shares, so it’s not as if the funds were going to have trouble getting their hands on the cash,” she said. fs

ISA plays devil’s advocate on SG Harrison Worley

A piece of internal analysis put together by ISA senior analyst Bruce Bastian shows that the cost of increasing the superannuation guarantee may be borne at least in some part by workers, with employers taking the rest of the impact.

Bastian noted many commentators have argued the increase will have either a complete or near-complete pass-through to wages, with a 2.5% drop a direct result of the SG’s legislated 2.5% increase to 12%.

However his study, which analysed almost three decades of wage data from all public and private federal enterprise bargaining agreements made since October 1991 – covering around 38% or Australian workers in 2018 – appeared to show there is no one-toone relationship with wages and the super guarantee, quashing arguments that an increase in mandated savings would ultimately result in a wage reduction to the same effect.

However, Bastian’s analysis did point to “costs being shared between employers and employees”. Though he did note the extent varies over time, and added interactions with the tax and transfer system are important, pointing to estimates of a reduction in working life disposable income of 0.1% to 1% being exchanged for a 4% to 20% increase in disposable retirement incomes.

Designed to open the peak body’s internal discussions on the issue, slides explaining the analysis’ motivations point out there are a number of channels by which increases in the SG can be funded, including lower wages, costs being borne by employers through a reduction in profits, by consumers through increases in prices and via lower equilibrium employment.

“Ultimately, who bears the cost will depend critically on competitive factors such as labour supply and demand elasticities and factor substitution, but also on institutional factors such as employment protection legislation, minimum wage determinations and the degree of unionization,” the analysis read.

In a letter to the committee accompanying the analysis, ISA chief executive Bernie Dean said that consistent with the organisation’s earlier testimony to the committee, the relationship between the SG and wages is widely contested.

He added that ISA’s internal modelling team was tasked with presenting a range of scenarios and trade off positions.

“It should not be assumed that ISA accepts those wage trade-off positions,” Dean said.

“Largely that work has concluded there is no basis to support a direct one-to-one trade off with wages.” fs

News

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

Men gamble ERS payment away While women who access their super early are more likely to spend on essential items like supermarket shopping and utility bills, men have gone on a gambling binge.

Men’s spending on gambling was 93% higher than women’s. Men who accessed their super early spent an extra $290 a fortnight gambling, coming off a pre-COVID base of $56 a fortnight.

With access to pubs and clubs restricted as part of the measures to curb the spread of COVID-19, the online gambling industry has emerged as something of a winner.

There was a 110% increase in online gambling spending in the first week of June, compared to a normal week before the COVID-19 pandemic.

Food delivery spending increased by 248% and alcohol and tobacco spending went up 39%.

Across both genders, illion and AlphaBeta calculated that 15% of the super money was spent on debt repayment.

“The high levels of discretionary spending from people who accessed their superannuation early further demonstrates that this money was used to increase spending – as opposed to being the lifeline for which it was intended,” AphaBeta director Andrew Charlton said.

The researchers said that total spending per person is now only 2% below normal levels and that discretionary spending got an extra boost from COVID-19 restrictions easing and the Queen’s birthday long weekend. fs

Sam Henderson to face court Kanika Sood

Sam Henderson’s claims he had a Master of Commerce to prospective clients has seen him charged with dishonesty offences, with ASIC referring the case to the public prosecutor.

ASIC announced Henderson has been charged with three counts of dishonest conduct and two counts of knowingly giving a defective disclosure document.

Maxwell falsely claimed he had the qualification in PowerPoint presentations he gave to prospective clients for six years (from 2010 to 2016). He also mentioned the degree on his website for nearly four years, from October 2012 to August 2016.

The phantom qualification also appeared on Henderson Maxwell brochures from 2013 to 2016 and in an information memorandum dated May 2011.

“ASIC also alleges that Mr Henderson breached s952D(2)(a)(ii) of the Corporations Act in 2014 and 2016 by giving at least two clients a Financial Services Guide, containing the false representation that he held a Master of Commerce (Financial Planning).”

The charges were mentioned at the Downing Centre Local Court on June 9. Henderson did not enter a guilty plea and the matter will be next heard on August 4.

The Commonwealth Director of Public Prosecutions is prosecuting this matter, following a referral of a brief of evidence from ASIC. Each s952D(2)(a)(ii) Corporations Act offence carries a maximum penalty of five years’ imprisonment and/or a fine of up to 200 penalty units.

The three counts of dishonesty that he has been charged with equal to a fine of up to 4,500 penalty units or 10 years imprisonment for each dishonest conduct offence. fs

5

01: James Carey

head of group insurance MetLife

Life insurance activity rises: MetLife Eliza Bavin

N The quote

Our research found that half of Australians claim COVID-19 has had a negative impact on their personal finances.

ew research from MetLife found one in four Australians, or 28%, have undertaken some form of activity with regard to life insurance since the outbreak of COVID-19.

Additionally, that number increased to 40% for people aged 18-34.

MetLife said the “activity” has primarily consisted of doing online research and “speaking to family and friends” about it.

The report said consumers are also actively thinking about their superannuation, with two-thirds (66%) of people still wanting to hear from their fund about their investments and what they can do to protect their super.

Additionally, more than half (52%) are keen to receive information regarding life insurance inside their super.

Head of group insurance at MetLife Australia James Carey01 said the spike in interest in super and insurance was understandable, given the ongoing financial stress being felt by many as a result of COVID-19.

“Our research found that half of Australians claim COVID-19 has had a negative impact on their personal finances,” Carey said.

“Although the number of people reporting a ‘very negative’ impact has eased since March, there is still a lot of uncertainty when it comes to job security and financial wellbeing, particularly amongst younger Australians.”

Carey said financial providers, including superfunds and advisers, have a key role to play in helping consumers navigate this uncertainty.

“Consumers are continuing to look to their financial providers to guide them, particularly on topics like super investment performance and early access to their super balance,” he said.

Since the outbreak of COVID-19, MetLife said it has experienced a marked increase in enquiries for life and income protection insurance.

“While it’s encouraging to see so many Australians, particularly those in the younger age bracket, take active steps to secure their financial situation, the increase in enquiries we’ve experienced over the past few months suggests many consumer don’t fully understand what is and isn’t covered by different insurance products,” Carey said.

“For example, income protection will cover you if you’re unable to work due to illness or injury but doesn’t protect against redundancy – which is what many consumers have been worried about since the COVID-19 lockdown began.

“There is an important opportunity right now for financial providers to educate consumers to ensure they have the right protection for their situation.” fs

Industry fund drops Rio Tinto amid sacred site destruction Harrison Worley and Elizabeth McArthur

Rio Tinto has been excluded from two portfolio options of a major industry superannuation fund following its destruction of 46,000 year old Indigenous heritage sites at Juukan Gorge last month.

First State Super has dropped Rio Tinto from the diversified socially responsible investment (SRI) and single sector SRI Australian equities options it offers its 800,000 members, following urgent meetings with the mining giant.

The $100 billion super fund said it is “extremely concerned” about the events at Juukan Gorge, and engaged with Rio Tinto as soon as it became aware of the event.

“We sought urgent meetings with the company and questioned them on the adequacy of their governance, community engagement and policies surrounding significant sites and cultural heritage,” a First State Super spokesperson told Financial Standard.

After meeting with Rio Tinto, the fund determined that it no longer met the requirements to satisfy inclusion in its SRI investment options, and said it would be excluded from both portfolios as a result.

The super fund acknowledged that Rio Tinto has both

publicly apologised for the distress its actions caused and commissioned an independent review to investigate the circumstances surrounding the incident.

“First State Super will continue to monitor this issue as it unfolds and maintain our active engagement with Rio Tinto to ensure that there is appropriate accountability for its actions and that changes are instituted to reduce the risk of this type of issue happening again,” the spokesperson said.

“We will engage with other mining companies that operate in Indigenous and heritage areas to ensure that their governance, community engagement and policies in place are adequate to ensure we do not see a repeat of what has occurred at Juukan Gorge.”

Market Forces asset management campaigner Will van de Pol also condemned Rio Tinto’s actions, and said the Juukan Gorge rock shelters were a site of “incredible cultural significance” to Puutu Kunti Kurrama and Pinikura traditional owners, dating back 46,000 years.

Reportedly, Rio Tinto’s main competitor BHP Billiton has halted plans to expand its South Flank iron ore mining operation which may destroy up to 86 significant Aboriginal heritage sites in the central Pilbara dating back 15,000 years. fs

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News

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

Rest climate trial delayed Rest member Mark McVeigh’s day in court with his $57 billion industry superannuation fund over its management of climate change risk has been delayed.

New orders were made in the Federal Court pushing the trial date back from July 20 to November 2.

Mediation in the case is to occur by August 28, however Financial Standard understands this is unlikely to result in settlement.

The case, in which McVeigh is represented

by Equity Generations Lawyers principal lawyer David Barnden, could set a precedent for super funds.

The case will question what trustee duties apply when it comes to climate change.

Justice Nye Perram is overseeing the case, which is still in the discovery phase. Rest has to provide documents to McVeigh in relation to the fund’s approach to climate change prior to mediation.

Previously released discovery orders indicated that Rest’s asset consultant JANA would also have to hand over information.

Documents created by the investment committee or general manager of investments that evidence consideration of JANA building a capability to stress test portfolios for climate change risk in 2019 were requested by McVeigh.

Stress testing, assessing the potential impact of scenarios on a portfolio, is just one element of the information McVeigh wants his super fund to provide around its approach to climate change.

A pre-trial case management hearing will occur on September 2, before a three day trial set down for November 2. fs

01: Cristean Yazbeck

managing director Hamilton Blackstone Lawyers

ASIC mainly concerned with media releases: Lawyer Elizabeth McArthur

H The quote

ASIC no longer wishes to work with licensees and planners. It has a vendetta against them.

Life sector salaries revealed Profusion Group’s June 2020 insurance salary guide found that the most highly paid professionals in life insurance claims across retail and group was claims teams manager who make between $120,000 and $150,000.

Client services consultants and claims administrators can expect to earn between $55,000 and $60,000.

Claims assessors make between $80,000 to $100,000, depending on experience, and senior claims assessors can make up to $120,000.

Technical claims consultants make $120,000 to $135,000, dispute claims consultants make between $100,000 to $130,000 and rehabilitation consultants between $100,000 and $125,000.

Profusion acknowledged that acquisitions and restructures at life insurers has created uncertainty in the industry and claims assessors may look to make a lateral move for this reason or because they want exposure to a greater variety of life insurance products.

Chief underwriting officers can make between $250,000 and $350,000 but assistant underwriters can expect to start on a salary of just $55,000 to $70,000.

With experience, underwriters can make up to $120,000. Senior underwriters make between $120,000 to $180,000. fs

amilton Blackstone Lawyers managing director Cristean Yazbeck01 has argued that ASIC is mainly concerned with its own reputation and the media releases it can put out in relation to action on financial advisers.

Yazbeck said in a paper that after ASIC came out of the Royal Commission worse for wear and he has observed the regulator “flexing their muscles” on the financial advice industry.

“I’ve observed several instances of ASIC conducting its functions outside its powers, and/or without proper process,” he said.

“It’s all about the media release. And, yes, ASIC is on record (I have the emails!) where they have asked licensees to ‘choose’ or ‘negotiate’ their outcome, but on the condition that the outcome is one on which ASIC can issue a media release.”

ASIC’s media releases name financial advisers who are banned from the industry and AFSLs that are cancelled. In some circumstances, those fighting an ASIC action can keep their name out of a media release pending appeal.

“ASIC needs to show the world how tough it is,” Yazbeck said.

He offered an example of a client who moved to voluntarily cancel their AFSL (for commercial reasons) but ASIC advised it wished to cancel the AFSL for alleged breaches.

Even though the AFSL was cancelled, the regulator allegedly said in an email that it wanted to cancel the AFSL because of the risk the licensee would breach its obligations in the future.

Yazbeck theorised that the true motive was for the regulator to be able to put out a media release naming the AFSL. “ASIC no longer wishes to work with licen-

sees and planners. It has a vendetta against them,” he said.

“ASIC’s ‘shoot first, ask questions later’ approach has crippled the industry. One mistake, and you’re out! Recent experiences show that they’ll keep looking until they find something.”

Yazbeck’s paper argued that advisers were made sacrificial lambs by Australia’s largest institutions during the Future of Financial Advice (FOFA) reforms, and are still feeling the consequences.

“The big end of town, led by their industry bodies, successfully watered down FOFA to the rubble we were forced to live with, and which is now, some six to seven years later, being cleaned up. But not before they extracted one last golden egg out of the goose,” Yazbeck said.

“Vested interests trumped clients’ interests.

Revenue streams were protected. Planners were the ‘pawns’, the ‘sacrificial lambs’ in product providers’ pursuits to maintain and protect their revenue streams.”

It is Yazbeck’s opinion that financial advisers were saddled with a regulatory burden that was negotiated in the institutions’ favour.

The Royal Commission and the FASEA regime, Yazbeck said, have resulted in even more regulation adding to this burden.

Yazbeck argued that through the Royal Commission and FASEA, as with the FOFA reforms before, advisers find their livelihoods in a strangle hold by big business.

He points to platforms turning off fees and AMP’s Buyer of Last Resort changes as examples of this and, he added, the Royal Commission’s focus on advisers and licensees ignored the ways product providers and platforms “set the rules” for advisers using them. fs

VicSuper disputes fee hike claim Harrison Worley

The $23 billion industry superannuation fund has responded to a claim its members will face increased financial advice fees upon its mega-fund merger with First State Super.

Following reports in the Australian Financial Review that internal documents seen by the publication indicated VicSuper expects the cost of the “most simple form of complex advice given to a single member” could rise by 37% to $3500”, the industry fund told Financial Standard that members would not be subjected to a “fee hit” as asserted in the article.

According to the fund, more than 22,500 members will instead receive fee relief, in the form of a 20% decrease in administration and investment fees upon completion of the merger.

“A recent Australian Financial Review article incorrectly suggested that VicSuper members would face a ‘fee hit’ after the upcoming merger with First State Super,” VicSuper and First State Super said.

“Following the merger, administration and investment

fees will in fact decrease by 20% for over 225,000 VicSuper accumulation members.”

Turning their attention to specific claims about the cost of accessing advice, VicSuper and First State Super said less than 2% of the Victorian fund’s members receive financial advice each year.

“All members will still be able to receive intra-fund advice on specific topics at no cost,” VicSuper said.

The funds said comprehensive advice will also be available for all members in-house on a user-pays basis at an average cost of $2500, “which is consistent with the industry average”.

“In addition, members will have access to a broad range of in-house advice and support services to assist them with their more complex financial needs, including estate planning and aged care advice,” the funds said.

“Both First State Super and VicSuper strongly believe in the important role financial advice plays in helping our members to achieve a better retirement outcome.” fs

Opinion

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

7

01: Jennifer Wu

global head of sustainable investing JP Morgan Asset Management

Is ESG immune to COVID-19?

OVID-19 is a sustainable investing paraC dox. It has rightly diverted the immediate attention of corporate boardrooms and policymakers to crisis management, slowing governments’ ability to focus on ESG agendas. At the same time, it has tragically underscored how connected human beings and societies are to nature. If one part of the ecosystem falls ill, the immunity of the whole system is compromised.

The virus is in part a symptom of our collective, chronic mistreatment of nature, in the sense that environmental degradation played at least a partial role in exacerbating our public health vulnerabilities. Equally urgent and salient, the importance of social and governance factors in company and government management have been made all too clear.

This pandemic will transform the tenets of sustainable investing (environment, social and governance factors), accelerating some aspects and reshaping others.

There are material implications for the E, S and G on the horizon.

First, the environment. The first thought is often of lockdown-induced drops in pollution, although these are fleeting by definition.

ESA or NASA satellite images show substantial drops of nitrogen dioxide concentrations in many countries, down a dramatic 50% in Paris, Rome, Milan and Madrid. But these short-term environment benefits mask a worrying loss of momentum in the fight against climate change.

Indeed, COVID-19 has led to the cancellation of many climate demonstrations and more importantly to the postponement of the COP 26 Climate Conference to 2021. This is an important setback as more than ever the clock is ticking for the climate.

A rapid increase in fossil fuel consumption as economies start to reopen and recover over the mid to long term is a concern, but there are reasons to be optimistic about this. The cost of producing and storing electricity from renewable power such as wind and solar is becoming increasingly competitive which will soften the reality of economic-recovery-linked GHG emission rises.

Given the significant volatility in oil price changes just in the last few weeks, increasing pressure on oil dependant nations to diversify their revenue sources also bodes well for a greener future, IEA predicts revenues to drop by as much as 80% for the largest producers.

On the policy front, postponement of climate risk mitigation policies should prove temporary as governments and companies will need to step up their climate adaptation measures to be better prepared for the next crisis.

Second, when it comes to the critical social dimension, more than any other crisis before,

COVID-19 magnifies inequality. Between families and workforces who have access to adequate healthcare, education and technology – and those who do not.

The US Bureau of Labour Statistics shows that 61.5% of the workers with earnings greater than the 75th percentile have the ability to work from home, only 9.2% of those earning less than the 25th percentile have the ability to do so.

COVID-19 not only increases inequality within societies but also between countries, as poor emerging countries are hurt the most – luckily so far not so much by the pandemic itself but more by the economic consequences of the lockdowns measures taken globally.

It is on the economic front that the situation is worst, as many poor countries rely on financial flows/remittances from their diaspora in rich countries. For a country like Senegal, these remittances account for 10% of GDP and 62% of these flows come from countries which have implemented lockdowns which means that these flows are drying up.

Most countries have implemented measures to cushion the impact of the crisis on their population, but generous unemployment benefits and other similar mechanisms only apply to those who have an official work contract. This is not as helpful in emerging countries with informal economies.

In the long run, the social consequences of COVID-19 will shift supply and demand dynamics meaningfully.

There may be greater job displacement due to increased automation. Many estimates already suggest around one third of the global workforce will have their jobs disrupted by AI and automation over the next decade, peaking at moments of economic downturn. Whilst automation replaces many workers stuck at home as a result of COVID restrictions, their jobs could be lost to tech forever.

As a consequence, governments will face the risk of heightened populism arising from the huge disparities among workers. Corporations will need to step up their investments in their human capital through continuous trainings, improving the health and safety condition of workers. These measures will inevitably increase unit labour costs but should help a more skilled workforce ensure growth sustainability over time.

Similarly, we can expect to see more techenhanced healthcare delivery and systems worldwide.

Providers now are racing to adopt virtualised treatment approaches that eliminate the need for physical meetings. Already Microsoft have launched a Healthcare Bot service to deliver medical care on the frontlines of the COVID-19 response to help with screening.

The quote

In the long run, the social consequences of COVID-19 will shift supply and demand dy­namics meaningfully.

Changes to supply chains are also coming.

Goods and services are having to be sourced locally in many economies due to lockdowns.

While this could be good news from the perspective of carbon emission reduction, it could also mean bad news for emerging markets facing prolonged unemployment as demand for their previously exported goods dries up and the workforce cannot upskill quickly as economies transition to a more equal service and manufacturing mix.

Finally, when it comes to the dimension of governance, the virus has been a giant stress-test of global corporate resilience. The sudden evaporation of income in many sectors together with the need to completely and rapidly reorganise value chains and customer interaction has proven deeply disruptive for many businesses.

Unsurprisingly, companies with the best governance are on firmer footing. Defensive capital allocation strategies have been rewarded as ample balance sheet cash has suddenly become more prized than current dividend yields, which now look vulnerable. Indeed, markets are pricing dividend cuts of respectively 22% in the US, 30% in Japan, 45% in Europe and 51% in the UK. In this context companies with a higher governance score have outperformed their peers globally thi year by a wide margin. Indeed, according to MSCI data, the MSCI World Governance Quality index is down 7.5% YTD while MSCI World is down 16% YTD. For the long term, boards will have to ensure the company’s own sustainability and financial resilience is strong. The recession will force companies to confront challenging capital allocation questions where compromise will be required. Beleaguered companies are right to hold higher cash reserves in this unprecedented crisis, but trickier moral questions about the role of capital allocation in a healthy capital market system lie ahead in the longer-term.

COVID-19 calls on us not to abandon the tenants of sustainable investing, but to speed them up. The ESG agenda is more importantly globally than it has ever been, as something that strengthens the resilience of our societies and companies.

While policymaker initiatives may be understandably diverted in the short-term, there is no time to waste for investors. Indeed, private investors can fill in the gap with a long-term perspective as governments are in crisis management mode. Early indication from investment flows, which reflect stronger inflows to sustainable investment funds in Q1 2020 than in the entirety of 2019, suggest this is happening already.

For all stakeholders’ sakes, it is time for investors to step up. fs

8

Roundtable| Victims of Financial Fraud Featurette

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

Picture: Orlando Chiodo

Last man standing The Trio Capital collapse in 2009 saw about 6000 investors lose approximately $176 million in superannuation. It was the largest theft of super in Australian history.

Most were compensated but one group was left out in the cold. A decade later, the fight for justice continues. Elizabeth McArthur writes.

John Telford was riding his bicycle to university in 1985 when he was hit by a car. He had a broken neck and a broken back and spent eight months in hospital.

In 1998, 13 years after the accident, Telford was awarded $1.4 million in compensation in the Supreme Court.

After a long period in and out of hospital recuperating from his injuries, Telford had been left with recurring pain which impacted him every day. The accident was life changing and the compensation he received from the driver’s insurer reflected that.

Along with the favourable judgement, Telford was given clear instructions that this money was supposed to last him a lifetime.

“I was informed that I was required under law to place my money into superannuation and set the fund up so that I would be provided an ongoing disability pension,” Telford says.

“The money was to last me the rest of my life.

Because of the compensation they introduced a preclusion period, which meant I could not go onto welfare until 2026.”

At the time of the settlement, Telford says he completely agreed the preclusion period which would stop him accessing Centrelink was fair.

He says himself that he lives modestly - getting by on $1.4 million seemed perfectly reasonable to him.

In fact, he would have to make do with much less.

Telford lost about $600,000 of that compensation money in the collapse of Trio Capital.

Part of his money had been invested in Trio after he found a financial adviser to help him set up a self-managed super fund, as he had been advised to do after winning his compensation case.

He looked into a few financial advisers before settling on one who had good credentials to his name.

However, the financial adviser’s qualifications weren’t the only consideration of importance for Telford. He also chose the adviser because he was in a town nearby and the carpark was right outside his office door.

“Even 30 years since the accident, I still have considerable pain. Everything I do, I have to consider whether I can sit down and what transport is available,” Telford explains.

“He had accreditation to his name. But one of the reasons I chose him was availability.”

At first, when it became clear that the money was gone, Telford blamed this financial adviser.

But now he says he knows better. In fact, he now believes the adviser was a victim of the fraud too.

“The nature of the fraud was that it was out of sight,” he says.

Financial advisers who put clients in Trio often had money in the scheme themselves, they often advised friends and family into it – and they had no way of knowing what was really going on, he says.

The advice from ASIC at the time of the Trio

The money was to last me the rest of my life.

Because of the compensation they introduced a preclusion period, which meant I could not go onto welfare until 2026.

John Telford

collapse was that those who lost money in SMSFs or as direct investors should seek legal advice and consider legal action against their financial adviser.

When Telford first heard this he thought about it in the terms of his car accident. But, he found out the process is actually “degrading” and destroys the livelihood of the financial adviser – often seeing them publicly named and shamed.

“I’m okay. I live very conservatively. I haven’t had a holiday since the day I was compensated,” Telford says.

“But that’s not the point. The point is that, whether someone has lost $600,000 or $5000, the issue at hand is still valid. I know people who lost $10,000 and that amount is enormous, life altering to them.”

Telford met other people who had lost money in the Trio collapse, he started following what ASIC and politicians had to say about it and he started doing his own research.

The Victims of Financial Fraud (VOFF) group was soon formed; meeting regularly in what was originally a fight for compensation. At first, it was a fight they seemed likely to win.

Trio Capital fell apart in earnest in 2009. It is considered one of the three big financial collapses in Australian history, the others being Westpoint and Storm Financial.

Over 6000 investors were affected by the collapse. The federal government compensated about 5000 investors who had been exposed to

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

Trio Capital through APRA regulated super funds to the tune of about $55 million.

VOFF represents part of a group of the 1000 or so investors that were left uncompensated. A decade after the collapse, they’re still fighting.

Many others have given up.

Telford has become an investigative reporter in his quest for answers. In 2018, he penned the Trio Fraud Manual. It is a 118 page long document detailing the political complexities that circle around the Trio collapse and the people involved.

Don Fox lost money from his SMSF in the Trio Capital collapse, though he no longer likes to say how much.

Fox was part of a group called the Association of ARP Unitholders (ARP), which worked alongside VOFF. None of the group had any success getting their money back, nor did they have much success getting answers on how the collapse happened under the regulator’s nose.

About three years ago, Fox saw the writing on the wall and accepted that compensation was likely never going to materialise for him or for other SMSF and direct investor victims of Trio.

“It just went on and on and on. We were led up garden paths. There were no return phone calls,” he says.

“But I take my hat off to John Telford. He’s still in there fighting and we wish him all the luck.”

The ARP group members were mostly based north of Sydney and were “business people, not mugs”, as Fox says. Some of the members lost such significant savings in the collapse that they ended up on Centrelink.

The fight for Telford and VOFF has always been, and remains, not just about compensation but a fight for recognition.

The actions of ASIC and then Assistant Treasurer Bill Shorten were salt in the wound for those who lost their retirement savings in Trio Capital.

Shorten would become Minister for Financial Services and Superannuation and see the APRAregulated super funds that lost money in Trio Capital compensated.

Meanwhile, those in SMSFs and direct investors were told by Shorten that they were “swimming outside the flags”.

This comment still stings for many of the victims – and it also doesn’t really make sense.

Telford points out that he was told to set up a super fund with his compensation money that could pay him a disability pension for the rest of his life – how then, he asks, could he have been swimming outside the flags?

Another VOFF member, who spoke to Financial Standard but preferred not to be named, had worked in banking her whole career and still found herself caught up in Trio Capital. She says there were no warning signs.

Victims of Financial Fraud | Featurette

Tens of thousands were wiped from her SMSF. She describes the stress as crushing.

Yet, she too, empathises with the financial advisers who advised people into Trio. She highlights the story of Ross Tarrant as being the story of another victim – not, as it was portrayed by ASIC, that of a perpetrator.

Tarrant owns an accounting and financial advice business in Wollongong. The firm had more than $23 million of clients’ money in the Astarra Strategic Fund, promoted by Trio Capital.

He was banned by ASIC for a period of seven years in 2011.

In 2015, an appeal by Tarrant to the Federal Court to overturn the ban was dismissed and he was ordered to pay ASIC’s legal costs.

Tarrant declined to speak to Financial Standard for this story, sharing that he had a negative experience of the media after ASIC’s press releases about him.

But Telford and other VOFF members say that Tarrant was unfairly thrown under the bus. Telford says Tarrant was one of 155 advisers in Trio and has suggested that perhaps he became a scapegoat because he had recommended Trio to the Australian Workers Union.

The VOFF members say they now harbour no ill-will to financial advisers, including Tarrant.

In the lead up to the Royal Commission, Telford set himself to researching (not that he ever stopped) so that he could make submissions. He made a Freedom of Information Request (FOI) in relation to the lawsuit brought against Tarrant

by ASIC. Telford managed to get a copy of correspondence between the solicitors representing Tarrant and the Attorney General’s office. He said this offered insight into how aggressive ASIC’s handling of the case had been.

Eric Koelmeyer, a financial adviser at CK Partners, is a fan of Telford’s work and of his compassionate approach to the financial advice profession.

Koelmeyer, despite being a financial adviser and well educated in the financial system, found himself the victim of a scheme. He lost about $90,000 in the Timbercorp collapse of April 2009.

“John’s personal story and that of his friends is heartbreaking. They all trusted the regulator,” Koelmeyer says.

“If you wanted to run an investment scam, the best place in the world to do it is Australia it seems.”

His experience has left him deeply concerned for the welfare of consumers.

“ASIC needs to go after the people who came up with these schemes that have collapsed, and it needs to use the bankruptcy laws and the criminal laws of each state and at a federal level to find the assets that they have squirrelled away and thieved from investors,” Koelmeyer says.

If you wanted to run an investment scam, the best place in the world to do it is Australia it seems.

Eric Koelmeyer

9

For Telford, there’s no intention to stop the fight.

VOFF still holds meetings about twice a year and roughly 60 people still turn up to each one.

Their stories are heartbreaking. Telford says he knows of two suicides directly related to the Trio collapse.

As part of his investigative work, he put in an FOI to try and find out whether ASIC knew about these deaths. He thought if the regulator had knowledge that lives were lost as a result of financial fraud, surely they would have to do something.

The FOI, which Telford shared with Financial Standard, says the family of the victim who died shared that he felt betrayal, despair and shame after the Trio fraud.

Telford wanted to know whether the government or ASIC would acknowledge suicide deaths caused by financial frauds.

He got a reply saying that no documents were in the scope of his request.

“It’s swept under the carpet,” he says.

The stories of how the fraud impacted people vary, but there is a common theme – shame.

Koelmeyer felt that pain too.

“When you’ve been punched in the guts like that the honest truth is there’s a part of you that feels like a failure, you feel absolutely tied up in knots. There’s a part of you that is just so tired of fighting,” he says.

While Telford dove in to investigating and organising, he witnessed the many ways other VOFF members have been impacted.

“I know one lady who is part of our group who keeps the money she lost a secret. She’s embarrassed, she doesn’t want anyone from her church group to know about it,” Telford says.

The Royal Commission was cold comfort for VOFF. Telford says he was not surprised by the stories of institutional misconduct.

“The Royal Commission had 27 case studies, there are thousands of people around the country with stories though,” he says.

But, one silver lining of the commission was that it connected VOFF with other groups such as the Bank Warriors. They’ve found a united purpose in advocating for consumer rights and more transparent regulatory action.

One thing Kenneth Hayne said, in a speech he gave after the Royal Commission, has stayed with Telford. Hayne described a Royal Commission as independent, neutral, public and yielding a reasonable report.

An independent, neutral and public report on what happened with Trio is what Telford wants to see.

“If there was a group of people who could produce that independent report that might be something that lays down a better way to proceed in the future if there’s a crisis,” he says.

“The way the government handled Trio, it’s like they can get away with anything.” fs

10

News

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

Super funds shamed on ERS

01: Christian Obrist

head of iShares Australia BlackRock

Elizabeth McArthur

At a hearing of the House of Representatives Standing Committee on Economics that was supposed to focus on ME Bank’s recent troubles, the super funds performing poorly in terms of early release copped surprise criticism.

APRA had advised that early release payments should be paid to members by super funds within five business days after the member is approved for early release by the Australian Tax Office.

Labor MP Andrew Leigh expressed concern that chair of the commission Liberal MP Tim Wilson was only enquiring about conflicts of interests in industry superannuation funds and not in retail funds.

“I have not written to ASIC and APRA because those matters were dealt with during the Royal Commission,” Wilson said.

When the topic of early release of super came up, Leigh pointed out that some retail funds have performed quite badly in terms of APRA’s five day timeline.

Leigh specifically named ASGARD and Future Super as having failed to pay out over half of early release requests within the five day timeline.

About 46.2% of ASGARD’s early release requests were paid within the five days with the fund paying out more than $57 million. Future Super paid out 46.3% of $12 million in early release payments within the five days.

The APRA data shows a number of non-retail funds not named by Leigh also failed to meet the five day timeline in more than half of cases. fs

ETF leaders push for reform Ally Selby

I The quote

We just want people to understand what they are investing in.

Taper rates need revamp: Boal

n a proposal to US stock exchanges in midMay, major ETP issuers pushed for a new taxonomy for the product types.

The “industry coalition” proposed ETPs be separated in four categories; exchange-traded funds (ETFs), exchange-traded notes (ETNs), exchange-traded commodities (ETCs) and exchange-traded instruments (ETIs).

In a virtual media roundtable on June 4, head of iShares Australia Christian Obrist 01 argued Australia’s large retail investor market would benefit from clearing categorisation instead of using the term ETF as a “catch-all”.

“We just want people to understand what they are investing in,” Obrist said.

“The danger is that everything gets canvassed as an exchange traded fund, an ETF, when in fact, there are many different expressions.”

There are various products that are listed on an exchange and categorised as an ETF, however, they often have vastly different investment objectives, he said.

“Whether that’s an exchange traded note, which is really a debt security issued by a corporate entity or an ETC, an exchange traded commodity, which could be physical or synthetic, again [these have] very different risk profiles,

and also very different investment objectives,” Obrist said.

Leveraged and inverse products, also lumped in the ETF bucket, can be beneficial over the short-term, he said, however, over a longer time frame there is a decay in the value of these products.

The proposal categorises ETFs as products with shares listed on a national exchange issued by an open-end management investment company and registered under the Investment Company Act. This includes funds that trans on an in-kind or cash basis, as well as active ETF strategies.

ETNs are described in the proposal as debt securities issued by a corporate issuer (not by a pooled investment vehicle) that is linked to the performance of a market index and trades on an exchange.

ETCs however, would include pooled investment vehicles with shares that invest in assets other than securities and futures, with exposure to traditional commodities and non-financial commodity futures.

The proposal notes that ETIs would also include pooled investment vehicles, debt issuers, or similar financial instruments that that have embedded structural features designed to deliver a return other than the full unlevered return of the underlying index. fs

Kanika Sood

A new paper authored by Rice Warner chief executive Andrew Boal and published by Actuaries Institute says current taper rates may be encouraging middleincome earners to spend their retirement savings too quickly and live on the Age Pension alone.

People with $300,000 to $800,000 in retirement savings could benefit from a more equitable taper rate, longevity protection products (especially deferred lifetime annuity style products) and lowcost access to financial advice and information.

As of January 2017, annual pensions fall by $78 or every $1000 in assets over relevant thresholds.

This was a change from the previous rate of $39.

“The current taper rate creates a potential ‘trap’ for retirees who don’t draw down and spend their retirement savings fast enough,” Boal said.

“If the retiree draws down and spends the minimum amount each year, the annual taper rate would need to be close to $39 for the retiree to receive total additional retirement payments higher than the accumulated reduction in the person’s net take home pay,” the paper reads.

At the current taper rate of $78, the retiree could be as much as $40,000 worse off, the paper estimates.

As balances grow, it becomes even more important for retirees to understand how to maximise their superannuation to improve retirement outcomes, spend appropriate amounts to ensure a good standard of living and safely draw down while being mindful of longevity risks, the Actuaries Institute said. fs

38 staff punished over AUSTRAC scandal Eliza Bavin

Westpac has confirmed 38 staff copped a range of remuneration consequences as a result of the banks investigations into the AUSTRAC scandal.

In a statement, the bank confirmed it should have recognised the faults in its systems earlier.

“The report noted that, with the benefit of hindsight, and noting the boards escalating focus in the area, directors could have recognised earlier the systematic nature of some of the financial crime issues Westpac was facing,” it said.

“The panel also noted that reporting to the board on financial crime matters was at times unintentionally incomplete and inaccurate.”

Westpac’s chair John McFarlane said, in his experience since joining the bank, Westpac deeply regrets the matter.

The bank said the failure concerning International Funds Transfer Instructions (IFTIs) non-reporting occurred due to a “mix of technology and human error” dating back to 2009.

“The failure properly to adhere to AUSTRAC guidance for child exploitation risk in respect of some products occurred due to deficient financial crime processes, compounded by poor individual judgements,” the bank said.

Westpac chief executive, Peter King, said the management accountability assessment, conducted with external assistance, looked back over ten years and where fault was identified, appropriate action has been taken.

“Consequences that have been applied to individuals include significant remuneration impacts and disciplinary actions. A number of relevant staff had already left the company,” King said.

“A range of remuneration consequences were applied to 38 individuals. Consequences applied to prior year awards, including withheld FY19 short term variable reward, totalled approximately $13.2 million.”

In addition, King said cancelled FY20 short term variable reward, including for the chief executive and group executives, is valued at approximately $6.9 million assuming an outcome of 50% of target opportunity.

“Remuneration and disciplinary actions took into consideration decisions already taken and announced, the level of direct managerial responsibility or accountability for the compliance failures, and the level of culpability for failings,” King said.

“While the compliance failures were serious, the problems were faults of omission. There was no evidence of intentional wrongdoing.”

McFarlane said the bank’s remediation program focused on strengthening all aspects of nonfinancial risk management.

“We accept the recommendations of the Advisory Panel report and we are implementing them as part of the remediation plan, which is already well advanced,” McFarlane said.

“We have established a new Board Legal, Regulatory & Compliance sub-committee, appointed a deeply experienced executive to a new executive position directly responsible for financial crime compliance, and made a number of other organisational changes.

“We will have no tolerance for controllable negative events.

Our transformation program has begun and will bring deep cultural change.” fs

Excerpt

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

11

Financial Standard Guide to ESG Investing Environmental, social and governance (ESG) investing has never been more prominent in investors’ minds. It’s for this reason Financial Standard has launched a dedicated guide to all things ESG, authored by Rachel Alembakis.

As a general definition, ESG integration is the systematic and explicit inclusion of material ESG metrics into the traditional investment analysis and decision making process. There is a broad spectrum of strategies that fall under the ESG investing umbrella. These strategies can be – and frequently are – combined, and can be applied to both active investing strategies and passive investing strategies. Here are some of the most commonly used strategies.

Negative screening/exclusion is the strategy of removing potential investments in companies and/or sectors that are deemed as posing risk on ESG metrics. Common exclusions include tobacco, controversial weapons, nuclear power, gambling, alcohol, fossil fuels, and human rights. Some of these screens are norms based, like not investing in companies that produce weapons that contravene the UN Convention on Cluster Munitions. The benefits of this approach is that product providers can communicate what isn’t acceptable from an ESG perspective and it can be calibrated to screen out what isn’t wanted. The drawbacks is that negative screens can concentrate portfolios, leading to additional, unwanted risk, or excluding companies that potentially could enhance return.

Positive screening/inclusion is the opposite of negative screening - increasing investments in companies and/or sectors that are deemed to have stronger performance on ESG metrics.

This can take a variety of forms. For example, best of sector funds will assess which companies in a given sector perform the best on ESG metrics and include top quartile performers.

This allows investors to have exposures across sectors, but reduce risk for poor performance against ESG indicators, such as removing heavy carbon emitting companies from the mining and extraction sector, but still remaining invested in better performing mining and extracting companies.

A second example are funds and indices that measure company performance against the Sustainable Development Goals (SDGs) – 17

global environmental, social and economic goals designed to improve people and planet by 2030, and invest in companies that align to SDG targets and accomplishments. Other examples include funds that invest in renewable energy, healthcare, or technology.

Positive screens can also be norms-based to include criteria developed through international bodies such as the UNGC (United Nations Global Compact), ILO (International Labour Organisation), UNICEF (United Nations Children’s Fund) and the UNHRC (United Nations Human Rights Council).

Negative and positive screening are strategies of both passive and active managers. Many index providers have indices built to various screens that can be the basis of quantitative strategies and exchange traded funds (ETFs). Meanwhile, fundamental qualitative analysts will use ESG data to construct various portfolios that have either negative or positive – and sometimes both screens applied.

Engagement is the process of communicating with invested companies’ management and boards with the aim of a) increasing knowledge for analysis and investment decision-making and b) informing companies of investor expectations on performance, specifically on ESG grounds.

Engagement is a widespread tool in Australia, particularly for funds that own a diversified universe of Australian companies, or an index. The composition of the ASX200 includes companies that have exposures to a broad range of environmental, social and corporate governance risks and opportunities, and most investors will hold a swathe of the ASX200. Therefore, engagement becomes a tool by which investors can assess and contribute to long-term investment return and corporate growth for investors who are universal owners.

Impact investing is investments that explicitly target positive performance on social and/ or environmental metrics as well to financial performance. This is an emerging and relatively small piece of the overall ESG investing universe in

The quote

These strategies can be – and frequently are – combined, and can be applied to both active investing strategies and passive investing strategies.

Australia. According to the Social Impact Investing Taskforce, created by the Department of the Prime Minister and Cabinet in 2019 for the purpose of investigating barriers to social impact investment, the impact investing sector is small in Australia – managed impact investments grew from around $1.2 billion in mid-2015 to $5.8 billion at the end of 2017.

However, this area is a source of great interest by family offices, endowments, foundations and high net worth investors who are interested in seeking values as well as value.

These identified strategies can be combined together. In particular, engagement is generally a tool used by investors across strategies. Fund managers will inform companies of their views on their ESG performance and cite their research as justification for why they are positively or negatively screen out of a process. For example, State Street Global Advisors president and chief executive officer Cyrus Taraporevala wrote in his 2020 annual letter to company directors, explaining the company’s ESG approach and offering directors an opportunity to speak with analysts. Further, in 2020, Taraporevala announced that State Street will begin voting against board members of companies that they have deemed laggards.

Other large, global fund managers are taking similar action in terms of establishing their own ESG approaches, engaging with directors publicly and privately.

These identified strategies can be found across asset classes as well, although the application of ESG data can vary asset class to asset class.

For example, ESG data can be applied as a tool to assess return and risk in an equity portfolio, but the primary concern of a bond portfolio is the issuer’s ability to pay, which means that there is a different balance of material issues that impact on the investment between the E, the S, and the G. fs This is an excerpt from the newly launched Financial Standard Guide to ESG Investing, supported by State Street Global Advisors. To read a copy of the guide visit www.financialstandard.com.au/guide-to-esg-investing.

Key ben 14 efits and opport unities

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t its heart, ESG investi ng is rooted management in traditio theory – nal portfo the risk and of assets lio to genera return of an investm a combination te the highes ent for a t expected specific level expands rate of return of risk. ESG the scope on of inform investing can be demon ation for fundamentally consideration strated to show longer minimising and analys portfolio term alpha is, and risk. generation while The followi ng table compares publisher data from of supera Rainmaker nnuation median perfor Inform comparison mance of service, Select ation, the the top 50 options versus ingSuper, workplace benchmark rating superannuati workplace growth and on superannuati ESG balanced on ESG option indexes. range across The top 50 s in the Select growth, balanc ingSuper ed and other database options.

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12

Roundtable Events | MAX Awards

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

Michelle Baltazar, Financial Standard

Caitriona Wortley, Allianz Retire+

Jean Kittson, Master of Ceremonies

Christopher Page, Rainmaker Group

James Waterworth, BlackRock

Louise Eyres, Vanguard Australia​

Celebrating excellence in sales, marketing and advertising The most outstanding efforts in financial services marketing, advertising and sales were recognised in the 2020 Financial Standard MAX Awards, presented via virtual ceremony on June 11.

The MAX (Marketing, Advertising and Sales Excellence) Awards recognises the leading individuals, teams and organisations in Australia’s multi-trillion dollar superannuation and investment management industries.

The awards celebrate the achievements of these individuals acknowledging those whose campaigns achieved the greatest ROI, growth, branding awareness and social impact.

In 2020, there were 105 finalists battling it out for 21 awards. Collectively they received more than 17,500 votes - up significantly from last year’s 14,000 votes.

Big winners in the 25th annual awards include BlackRock, Legg Mason, Vanguard and Zurich.

BlackRock’s national iShares specialist James Waterworth took out Executive of the

Year – Distribution. BlackRock continues to be a dominant player in the exchange traded funds investment space, with a 15% growth in FUM in the 12 months to March 2020, according to Rainmaker data.

Meanwhile, Legg Mason head of marketing Felicity Nicholson was named Executive of the Year – Marketing.

The award for Distribution Team of the Year went to Allianz Retire+.

Vanguard and Zurich took home two gongs each.

Vanguard was awarded Integrated Campaign of the Year and Website of the Year, while Zurich took out Marketing Team of the Year and Print Campaign of the Year – Trade.

In receiving the award, Zurich head of marketing Melanie Ware commended the broader Zurich team, particularly during their transition with OnePath over the past 12 months.

Rainmaker managing director Christopher Page took the opportunity to congratulate both the winners and the finalists in the 2020

The numbers

17,500 Number of votes cast in the 2020 MAX Awards.

MAX Awards, adding that this year saw a record number of votes.

He went on to note the awards have evolved to reflect changes in the wealth management space over the years, and now to reflect the current environment.

Echoing this, Financial Standard executive director of media Michelle Baltazar said: “There’s a lot of work that goes on behind the scenes just to be shortlisted, so we’re delighted to be able to recognise this year’s MAX awardees, despite COVID-19.”

“We also want to show our support and encourage all our winners to step up and help more Aussies recover and rebuild their wealth in these challenging times.”

Financial services sales and marketing professionals have an important role to play as the industry continues on its growth trajectory to meet the $11 trillion mark by 2038.

According to the latest Rainmaker Roundup report, the Australian investment market stood at $2.7 trillion as at March 2020. fs

MAX Awards | Events

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

13

The full list of winners and finalists are as follows: Executive of the Year - Distribution James Waterworth - BlackRock Cesar Farfan - Perennial Value Management Michael Angwin - BMO Global Asset Management Shaun Thomas - GSFM Steve Williams - RARE Infrastructure

Agency Campaign of the Year T. Rowe Price - Fundamental Media Allianz Retire+ - Marketing Pulse BT - Media Lab Capital Group - Ptarmigan Media Pendal Group - uberbrand

Agency Executive of the Year Claire Zipeure - Media Lab Giada Dorgia - Fundamental Media Haissam Aoun - Marketing Pulse Laura Cremona - Benedictus Michelle Reed - Ptarmigan Media

Agency of the Year Ptarmigan Media Fundamental Media Media Lab uberbrand Universal McCann

Community Initative of the Year La Trobe Financial Australian Ethical First State Super RARE Infrastructure Zurich

Creative Agency of the Year RADAR Sydney Ascender Design OMG! Creative The Creative Works The Pure Agency

Digital Campaign of the Year Praemium Allan Gray Australian Ethical First Sentier Investors Vanguard Australia

Distribution Team of the Year

Allianz Retire+ Franklin Templeton Investments RARE Infrastructure State Street Global Advisors (managed funds) UBS Asset Management

Executive of the Year - Marketing Felicity Nicholson - Legg Mason Adele Welsh - Praemium Fiona Lake - Allianz Retire+ Imbi Field - T. Rowe Price Russell Walsh - MetLife

Financial Education Campaign of the Year TAL Australian Ethical BT Cashwerkz iShares by BlackRock

Integrated Campaign of the Year Vanguard Australia Capital Group Fidelity International Macquarie Group Zurich

Marketing Campaign of the Year Consumer Suncorp Budget Direct La Trobe Financial QSuper Trilogy

Marketing Campaign of the Year Industry Pendal Group AIA Franklin Templeton Investments Praemium Robeco

Marketing Team of the Year Zurich Franklin Templeton Investments Macquarie Group T. Rowe Price Vanguard Australia

Australian Ethical, acceptance video

Print Campaign of the Year Consumer Sunsuper Budget Direct Greater Bank Suncorp Travelmarvel Allianz Retire+

Print Campaign of the Year - Trade Zurich Allianz Retire+ Macquarie Group MLC T. Rowe Price

Product Launch of the Year

RARE Infrastructure GAM Investments Legg Mason QS Investors Responsible Investment Fund Legg Mason BetaShares Emerging Markets Fund T. Rowe Price

Public Relations Agency of the Year BlueChip Communication Madden & Associates OneProfile Pritchitt Partners The Ideas Suite

Social Media Campaign of the Year Australian Ethical Capital Group First State Super Pendal Group Viridian Advisory

Video Campaign of the Year BT Colonial First State HUB24 J.P. Morgan Praemium

Website of the Year Vanguard Australia Allan Gray First Sentier Investors Netwealth RARE Infrastructure

BlueChip Communication, acceptance video

14

Feature | Fixed income

OUT WITH THE OLD Fixed income investors had been touting the market was headed for a crash well before COVID-19 swept over Australian shores.

When it did, it put the spotlight on this sometimes underestimated market. Eliza Bavin writes.

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

Fixed income | Feature

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

W

hile almost everyone agrees having a fixed income segment in your portfolio offers diversity and a safety net, it may not come as a shock that in the lead up to the most recent market crash, those portions were not large enough.

Similarly, it may come as no surprise that many investors, financial advisers, and everyday Australians don’t view fixed income as a particularly interesting investment choice, despite it being incredibly important.

Perhaps this is due to the fact that the big four banks dominate the Australian market, or because it is viewed as a solely passive investment that is meant to be set and left.

However, if there was one thing the recent market volatility taught us, it’s that fixed income is necessary – we just need to figure out how to compete on the global scale.

Domination of the big four There is no doubt, amongst almost every investor, that Australian fixed income market is lacking diversity and this is due to the stronghold the big four banks have.

Mark Mitchell, director at Daintree Capital, says this has been an ongoing issue that he feels has stifled the local market.

“It has been a longstanding complaint of fixed income investors in Australia that the market is largely dominated by financials with only modest amounts of corporate and residential mortgage backed securities (RMBS) issuance,” Mitchell says.

“A lot of that is driven by the fact that corporates have historically been able to get funding from both domestic and foreign banks operating in Australia or have been able to issue larger size deals with longer tenors in offshore markets.”

Robeco’s managing director and head of client portfolio managers, fixed income based in the Netherlands, Maurice Meijers 01 says the current market circumstances allow for plenty of stock picking opportunities but describes the Australian fixed income market as “narrow”, resulting in a lack of breadth.

01: Maurice Meijers

02: Chris Siniakov

03: Gopi Karunakaran

managing director and head of client portfolio managers, fixed income Robeco

managing director of Australian fixed income Franklin Templeton

portfolio manager – interest rate and credit strategist Ardea Investment Management

“To truly benefit from the valuation opportunities in credit markets, an active, flexible and unconstrained strategy will likely yield the best results,” he says.

“One reason for this is that some sectors or segments of the market are better represented in one region than another.”

Franklin Templeton is one company that takes a particularly active approach and managing director of Australian fixed income Chris Siniakov02 says that while the banks do have a tight grip, if you’re active there is always opportunity.

“The banks have certainly got a strong foothold here, but they have a strong foothold in other parts of the world as well,” Siniakov says.

“Unfortunately, in places like Australia the banks are heavy intermediaries, so they play that function and it is an important role, but they dominate it.”

Siniakov says this has resulted in our capital markets not prospering in the way they might in somewhere like the US. But while we might be slow to change, Siniakov says it is coming. He points out that a decade ago there was always an element of international companies coming to Australia and borrowing from the Australian market.

“Some international companies’ issued bonds in Australian dollars, such as European industrials and US financials, so a pretty vanilla credit space,” Siniakov says.

“But over the last 10 or 12 years that has expanded much more broadly, even just geographically.”

Siniakov says those who issue on the Australian market include Latin America, the Africas and most importantly for us, the Asia Pacific region.

“I think this is where it will continue to evolve.

As the Asian economy grows and reaches its potential over the coming decades they will increasingly become greater participants in global financial markets,” he says.

“Australia will be a beneficiary from that in terms of diversification of individual countries, industries and companies across the Asia region.”

Siniakov says there is plenty of opportunities in the future, but it’s just a very slow burn.

“It takes a long time for this sort of new opportunity to grow within the traditional context.”

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DESIGNED TO DELIVER IN ALL MARKET CYCLES Discover more at franklintempleton.com.au/australianfixedincome ©2020 Franklin Templeton. All rights reserved.

Read full disclaimer at www.franklintempleton.com.au/australianfixedincome

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To truly benefit from the valuation opportunities in credit markets, an active, flexible and unconstrained strategy will likely yield the best results.

Maurice Meijers

15

Gopi Karunakaran03 , portfolio manager – interest rate and credit strategist at Ardea Investment Management, feels that while there may be a perception of good diversity from Australian fixed income portfolios holding a large number of different bonds, the reality is not as good.

“This is because the performance of those bonds is largely driven by the same narrow set of underlying risk/return drivers,” he says.

“We saw this lack of diversity play out in the March quarter when many segments of the Australian fixed income market became highly correlated around the same themes, like recession fears, and all incurred losses together as equities fell.”

Genuine risk diversification, Karunakaran points out, comes from investments that have different underlying risk/return drivers.

The issue is that those opportunities lie overseas, and with the big banks having a monopoly on the local offerings, investors have fewer options.

Troy Theobald04 , financial adviser and founder of Robina Financial Solutions, says this has been an ongoing issue for himself and his clients.

“The issue lies in that the fixed income sector moves in the same direction. You could have a number of different managers, but they’re not really giving you diversity in the underlying investment,” Theobald says.

“That is what you need to look through and question, and the worry is around what other risk people are walking into if they then move to other areas.”

Asmita Kulkarni05 , director – investment strategy at Fiig Securities, says in comparison to offshore markets, like the US and Europe, Australia is also dominated by government and semi-government bank bonds.

“If you look at how pension funds are structured and look at the OECD global pension statistics, it shows that compared to the rest of the world Australian pensions are more invested in equities,” she says.

“That’s because of structural elements like dividends and franking credits, so we tend to put a lot more into equity and property.”

Kulkarni says Fiig has been originating a number of various bonds for companies that need access to capital and have been bringing those to market.

16

Feature | Fixed income

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

04: Troy Theobald

05: Asmita Kulkarni

06: Jay Sivapalan

financial adviser and founder Robina Financial Solutions

director – investment strategy Fiig Securities

head of Australian fixed interest Janus Henderson

She says we will likely start seeing a lot more of that, as we move forward.

“Hopefully the government is also considering broadening the corporate bond market and potentially making it exchange traded,” Kulkari said.

“We are lacking in terms of offerings, but that is somewhat driven by demand, so hopefully as we educate more investors we should start to see more corporate issues in our market.”

“We have had a few companies issue local deals in recent years, but you wouldn’t call it a market just yet.”

Innes says our domestic credit default swap market is also fairly illiquid compared with global competitors, with many single-name contracts hardly worth looking at given the difficulty in executing in reasonable size.

Accessing corporate bonds

It seems Australian fixed income investors are almost forced to look offshore if they want to find the best options.

“Australian investors are spoilt for choice when it comes to high quality, local managers,” Louise Watson08 , managing director and head of distribution for Australia and New Zealand at Natixis Investment managers, says.

“However, when considering a whole of portfolio approach they should also consider the benefits of global diversification.”

Global mangers offer diverse insights across multiple characteristics and are often well placed to complement local manager’s skill.

“We believe current valuations in global fixed income markets could offer compelling opportunities, especially for global, active managers,” she says.

Alessandro Pagnai is vice president, portfolio manager and head of the mortgage and structured finance team at Loomis, Sayles & Company, based in the US. He leads the group in developing investment strategies for mortgage pass-through, assetbacked, residential and commercial mortgagebacked securities.

Pagnai says a well-functioning securitisation market can help jumpstart the economy, something that is high on the list of priorities for nations around the world given the current circumstances.

“First, keep in mind that most securitisations are designed to eliminate idiosyncratic risk for investors by pooling together hundreds or thousands of loans and transforming previously illiquid loans into liquid securities,” he explains.

“A well-functioning securitisation market plays an important role for both borrowers and lenders; it provides lenders with liquidity and balance sheet capacity, enabling the flow of credit to households and businesses of all sizes.”

Pagnai says this ultimately lowers the borrowing costs for consumers and businesses, providing a flow of credit to support the financing of houses, cars and other goods and services which can ultimately help get the economy back up and running.

But, he says, after the GFC investors have been naturally fearful of entering the US housing market.

“The large-scale, low-cost access to AAA funding that enabled private securitisation to compete with government-backed options has not returned to the market and we do not anticipate it will,” Pagnai says.

Australia has been slowly adopting longer term corporate debt and a greater diversity of names, but it has taken a decade or two to get there.

Jay Sivapalan06 , head of Australian fixed interest at Janus Henderson says we still have some way to go to match the deepest and most diverse bond markets such as the US or Europe.

“High yield and loans markets are also more liquid and larger, including broader in diversity of industries and issuers offshore,” he says.

“Looking forward, with a growing savings system increasing its proportion of assets to the pension phase, a very natural and healthy place for relatively safe income is corporate debt.”

Sivapalan believes Australia’s corporate debt market is catching up, but it needs to be more inclusive of a greater range of industries, longer tenors and a wider participation by investor segments.

“Low risk options are plentiful in the Australian marketplace as is investment grade corporate debt,” he says.

“By the very nature of our banking system and maturity of the corporate bond market, Australia does have less available options in very long tenor corporate debt and lacks a fully developed high yield market.”

The list of fixed income investors who feel the Australian market is lacking goes on and on, but there is always an exception to the rule, and the exception in this case is Garreth Innes 07, head of Australian fixed income at Aberdeen Standard Investments.

“When it comes to the corporate bond market, the profile closely resembles the actual economic output of Australia – not a whole lot of manufacturing, but strong representation from banks, property trusts and couple of supermarkets and telcos,” Innes says.

Innes does concede however, that not all of the newer options have come from domestic sources.

“The market has enjoyed the recent introduction of a number of global champions that have decided to issue in Australian dollars; tech giants like Apple and Intel, a host of US and European banks and global auto manufactures,” he says.

And Innes must still admit the local market has been lacking particularly, he says, in the high yield space.

“Most Australian companies that have a subinvestment grade credit rating head over to the US to launch their bonds, as the US high yield market is much deeper and liquid,” Innes says.

Competing on the global scale

Looking forward, with a growing savings system increasing its proportion of assets to the pension phase, a very natural and healthy place for relatively safe income is corporate debt.

Jay Sivapalan

“Instead, the RMBS market that emerged consists of a large variety of smaller sectors representing niche exposures to various portions of the single-family housing market.”

He says this includes loans to self-employed borrowers, that have been through some form of modification, and to investors who rent the underlying home.

“This variety allows an investor to choose the portions of the consumer and housing stock that they believe are fundamentally attractive and can provide a diversified source of return to an investor’s portfolio,” Pagnai says.

However, Franklin Templeton’s Siniakov says that it is unlikely Australian retail investors will be able to access these more niche asset classes, as it’s simply too difficult in our current domestic market.

“The challenge for retail investors is that they actually need intermediaries between them and the eventual market and asset classes,” he says.

“The value chain; financial advisers, research houses, fund managers, we’ve all got a role to play in educating but also taking responsibility for the decisions on what the ultimate exposure to this asset class is, and I don’t think there is any getting around that.”

But in the US, Pagnai believes the residential mortgage market will continue to thrive, despite the current economic issues facing the world.

“Market valuations typically overreact during periods of high uncertainty, discounting much more pain than will likely materialise. As uncertainty fades, prices often come roaring back,” he says.

“Recoveries have yielded outsized returns; holding and adding to credit allocations through downturns has been rewarded handsomely in the past. Security-specific opportunities open up.

“Fear, forced selling and other factors create dispersions that credit pickers can potentially capitalise on.”

Pagnai says an interesting sector to watch within securitised credit is consumer assetbacked securities (ABS).

Employment figures are generally a key driver of performance for these assets and with unemployment at historic highs, the short-term outlook for many parts of the sector is bleak.

“While remittance data lags, early indications already show declines in prepayments and increases in payment extensions,” Pagnai says.

“However, we believe payment modifications and government stimulus payments to consumers will limit actual loan losses. This may very well be a rewarding contrarian bet to make.”

Watson agrees the securitised credit market is certainly one example of where investors can capitalise on mispricing in credit markets.

“We believe the speed of the recovery will vary globally and there will be a divergence in performance of sectors and regions,” she says.

“There is a strong opportunity to create value both by investing Credit Dislocations strategies

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Franklin Templeton Investments Australia Limited (ABN 87 006 972 247) (Australian Financial Services Licence Holder No. 225328) issues this publication for information purposes only and not investment or financial product advice. It expresses no views as to the suitability of the services or other matters described herein to the individual circumstances, objectives, financial situation or needs of any recipient. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial or other professional advice before making an investment decision. Investments entail risks, the value of investments and the income from them can go down as well as up and investors should be aware they might not get back the full value invested. Past performance does not guarantee future results and income distributions may vary over time. A Product Disclosure Statement (PDS) for the Fund is available at www.franklintempleton.com.au or by calling 1800 673 776. © 2020 Franklin Templeton Investments. All rights reserved.

18

Feature | Fixed income

which have the ability to rotate when opportunities emerge through the recovery, along with individual credit sectors which are supported by government stimulus.”

Brian Matthews is the managing principal for the Payden & Rygel Global Income Fund, based in the US. He says the securitisation market in the US allows for significant investment opportunity when compared to Australia, or the rest of the world for that matter.

“The securitisation market in the US is broad in scope, including collateral types such as consumer and commercial ABS, residential and commercial mortgages, and collateralised loan obligations,” Matthews says.

“This opportunity set allows investors to achieve objectives across both the credit quality and maturity spectrum.”

Matthews says the maturation of the securitisation market has fostered interest from the global community, improving both transparency and liquidity.

“In recent years, Australian investors have increasingly viewed the US securitisation market as a good opportunity to improve diversification and reduce correlation within a portfolio that more readily contains traditional asset classes such as corporate credit or equities.”

Looking outside the banks While it is fair to say the Australian market is somewhat lacking, it hasn’t stopped others from taking a different approach.

Crescent Wealth is Australia’s only APRAregulated Islamic compliant super fund, actively avoiding investments in industries such as gambling, alcohol, tobacco, weaponry, and importantly interest-earning organisations.

As chief investment officer Jason Hazell09 explains, there are opportunities to have a fixed income element to a portfolio while avoiding the banks and insurers.

“As you can imagine, the asset allocation of Crescent Wealth is quite different than your average super fund,” he says.

“Beyond the banks and insurers, we also avoid highly leveraged sectors of the economy and we have particular debt to total asset limits in our portfolio that we can’t go above.

“We also try to avoid speculation, so we like to invest alongside our companies with a longterm perspective.”

Hazell says these limitations lead the fund to have a bias towards tangible assets, particularly those with a strong community benefit and positive social impact.

In the fixed interest space, Crescent instead invests in sukuks; an Islamic financial certificate that complies with Sharia law that is similar in fashion to a bond, however involves asset ownership instead of debt obligations.

“Sukuk is essentially a certificate sold from a Sharia compliant bank or company and

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

07: Garreth Innes

08: Louise Watson

09: Jason Hazell

head of Australian fixed income Aberdeen Standard Investments

managing director and head of distribution for Australia and New Zealand Natixis Investment managers

chief investment officer Crescent Wealth

Fixed income lends itself incredibly well to active management, and I think good active managers have shown that over the decades.

Chris Siniakov

rather than paying interest it pays a profit share,” he explains.

“So, I own a portion of the access or activity that you are planning to use the money for. It still behaves likes a bond in that you are contractually obliged to buy that act from me at the end of the contract.”

Sukuks are not issued anywhere in Australia however and come from emerging markets, like the Middle East, Malaysia and Saudi Arabia.

In a sense, sukuk is similar to emerging market sovereign debt, Hazell says, issued by an Islamic compliant bank that is already Sharia compliant in its own business.

Despite already having a somewhat of a default tendency towards ESG, green sukuks have started entering the market, and Hazall says the Australian government should look to issue its own.

“It’s never done so before but it would open up funding sources offshore from Muslim countries who are interested in investing in Australia,” Hazell says.

“It would be fascinating to see the Australian government issue a green sukuk.”

Hazell says we’re starting to get to a point where superannuation is being opened up for the Muslim community, and despite the strict rules the fund abides by, its conservative nature helped it weather the recent downturn nicely.

“We have a lower risk portfolio, we hold more cash, we exclude negative social impact areas which I think is common sense anyway,” he says.

“Australia is obviously headed in that direction but the market is very slow. So, we’re ahead of that curve and ethical funds have done really well in the COVID-19 downturn.”

Even locally, there are some non-bank options available for investors looking to enter the corporate loan market.

Metrics Credit Partners managing partner Andrew Lockhart says the company set out to create a product that gave a broad range of investors exposure to private market loan assets that was in a vehicle that could be traded to give liquidity.

As a result, it was the first corporate loan lender in Australia to list an investment trust on the ASX in 2017.

“We needed to find a way that investors could get the liquidity from the asset class and still get exposure and generate income,” he says.

“We launched the listed vehicle on the exchange so investors could buy and sell units in the fund to allow for that liquidity.”

Lockhart says that by moving just slightly along the risk curve from bank term deposits and government bonds to corporate loans, investors could obtain reliable returns between 4-10% a year.

He says that corporate loans have a low correlation to other major asset classes including equities, government bonds, hybrids and term deposits, providing an excellent source of portfolio diversification for investors.

“They also have good security, being ranked ahead of equities should something go wrong with the company,” Lockhart says.

“In contrast to most fixed income and term deposits, they can also provide daily liquidity if invested in through an ASX vehicle.”

Regardless of conditions in equity markets, Lockhart explains, Australian corporates still have to borrow and refinance their loans and continue to pay interest on current loans.

Time to redefine The fixed income market in Australia is going through a phase of change, and the once stock standard defensive allocation is gaining a raft of new options.

Siniakov believes we need to redefine portfolio construction and bring return expectations back down to earth.

He says it’s unfortunate that fixed income in seen as “boring” with its purpose in life to just act as the safety net for the other segments of a portfolio.

“We’re always looking across to our cousins in equities and think ‘what are you doing?’,” he jokes.

“They’re looking at a company like BHP and decidingto buy or sell and waiting for the share price to go up or down, but I could lend money to BHP instead for the near term if I only have short term confidence or years if I’m feeling more confident.”

Fixed income, he says, allows you to take the exposure that you really seek and avoid those that you’d prefer not to have.

“Fixed income lends itself incredibly well to active management, and I think good active managers have shown that over the decades,” Siniakov says.

Globally, we are now in a near-zero cash rate environment, but the expectations Australians have for returns has not changed to suit the current environment.

While it’s not entirely appealing, investors and consumers need to realign their expectations when it comes to their investments.

“A lot of allocation theory is based on research from the mid-1960s and a lot has changed since then. In some areas people are using traditional models that were developed 50 years ago for a different set of financial markets,” Siniakov says.

“I really implore everyone to rethink the way we should be allocating client assets across the spectrum and change the mix of equities and fixed income.”

Theobald says this is exactly what he has been doing with his clients, encouraging them to have a three-year cash buffer, ensuring there are aspects of their portfolio that won’t see negative returns.

“We’d rather reduce risk and the chance of a negative return from that component of the portfolio,” he says.

“That gives our clients certainty and they’re more comfortable understanding that the rest of the portfolio has got a more balanced approach.” fs

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Franklin Templeton Investments Australia Limited (ABN 87 006 972 247) (Australian Financial Services Licence Holder No. 225328) issues this publication for information purposes only and not investment or financial product advice. It expresses no views as to the suitability of the services or other matters described herein to the individual circumstances, objectives, financial situation or needs of any recipient. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial or other professional advice before making an investment decision. Investments entail risks, the value of investments and the income from them can go down as well as up and investors should be aware they might not get back the full value invested.

20

International

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

SEC slams pump, dump scheme

01: Helena Fiestas

co-head of SRI research, BNP Paribas

Elizabeth McArthur

The US Securities and Exchange Commission (SEC) has filed a complaint against Jason Neilson, saying he pumped up the price of Arrayit Corporation before dumping stock.

In a series of social media posts, Neilson allegedly said Arrayit had a special “approved” COVID-19 test. The SEC said the company had no such test.

Neilson also failed to mention in the posts that he had a large holding in Arrayit himself.

Nielsen also allegedly created the false impression of high demand for Arrayit stock by placing and subsequently canceling several large orders to purchase shares in a tactic known as “spoofing.”

According to the SEC, Nielsen made approximately US $137,000 in six weeks through the pump and dump scheme.

The regulator suspended trading in Arrayit following the suspicious trading activity on 13 April 2020.

“We allege that Nielsen engaged in multiple forms of deception to exploit investors amidst the COVID-19 pandemic,” said SEC director of the San Francisco regional office Erin Schneider.

“Investors should be aware of the potential for stock manipulation, including through claims regarding products or services related to COVID-19.”

The SEC encouraged consumers to research pump and dump scams and the warning signs of investment fraud.

In April 2020, the SEC issued a special alert to “main street investors” warning them of scammers looking to profit from the uncertainty surrounding COVID-19. fs

Global firms partner to identify responsible lobbying Eliza Bavin

A The quote

This project will help us further refine our dialogue with companies, as how they influence policymaking can help avoid catastrophic consequences – not least financial.

US GDP to contract 6.5% The US Federal Reserve has projected rates will remain near zero through 2022 and GDP will contract 6.5% as a result of COVID-19.

The Fed also pledged to maintain at least the current pace of asset purchases, which is around US$80 billion per month.

As part of a commitment “to using its full range of tools to support the US economy in this challenging time”, Fed chair Jerome Powell indicated the central bank would continue to review the asset purchase forward guidance and that they have been studying the international evidence on yield curve control.

Stephen Miller, investment strategy consultant at GSFM, said the Fed’s statement assuages any nascent fears that rising long-term bond yields may at some stage lead to a ‘tipping point’ for the prices of risky assets.

“Steeper yield curves generally indicate confidence in the economic outlook,” he said.

“Higher long-end yields and steeper curves had reflected abating deflation fears (with some medium-term inflation risk), and confidence that the policy authorities have the economic challenges of the COVID-19 crisis in hand whether through monetary or fiscal measures.”

The Fed forecast US unemployment will fall to 9.3% in the final three months of the year from 13.3% in May, and decline to 6.5% in 2021.

US GDP was projected to contract by 6.5% this year before rebounding 5% next year. fs

P7, BNP Paribas Asset Management, and the Church of England Pensions Board have announced a new framework that enables investors to assess to what extent corporate lobbying is aligned with the goals of the Paris Agreement on Climate Change.

The primary aim of this project, instigated by the investors and coordinated by Chronos Sustainability, is to develop a framework for assessing corporate lobbying in a relevant, systematic and credible manner.

Chronos said the goal is to provide a means by which companies, investors and other stakeholders can ensure that all efforts are directed towards activities that positively support attainment of the Paris Goals.

Helena Fiestas 01, BNP Paribas co-head of SRI research, said: “As shareholders, we expect that when companies engage with public policymakers they will support cost-effective policy measures to mitigate climate change risks and support an orderly transition to a carbon-neutral economy by 2050 at the latest.”

“In recent months, BNPP AM has engaged with companies, and filed resolutions, to request greater transparency on their lobbying practices and to be consistent with the goals of the Paris Agreement. This project will help us further refine our dialogue with companies, as how they influence policymaking can help avoid catastrophic consequences – not least financial.”

The project will identify the ways in which companies and their proxies exert influence on

the policy process – in support of or seeking to defuse or delay climate-related regulation – and define how these activities should be managed and overseen by companies.

The research will assess gaps in current practitioner approaches to lobbying, and will develop a means for analysing, assessing and comparing corporate practices on lobbying.

Charlotta Sydstrand, Sweden’s AP7 Pension Fund sustainability strategist, said there is an urgent need for action to address climate change risks as a material investment issue for current and future generations.

“AP7 has identified that weaknesses in current climate policy globally pose a risk to the long-term value growth of our pension portfolios,” Sydstrand said.

“We find it unacceptable that at this point in time companies still counteract ambitious climate policy, either directly or through their business organisations. We are championing this research project in order to provide greater understanding of what good practice looks like when it comes to lobbying on climate issues.”

The project aims to bring additional understanding to and improve the role of corporations in the policymaking process.

It is intended that the framework will be ready by the autumn, and feed into preparation for 2021 engagement plans.

The development of the framework will be led by Dr Rory Sullivan of Chronos Sustainability, supported by Dr Richard Perkins of the London School of Economics and Political Science. fs

SEC charges COVID-19 microcap scammers Ally Selby

Five people and six offshore entities have been charged over an alleged fraudulent scheme which sought to capitalise on the COVID-19 pandemic from the illegal sale of microcap stocks.

The US Securities and Exchange Commission allege the scheme, boosted by promotional campaigns, generated more than $37 million (US$25 million) from penny stock sales.

One such promotion wrongly claimed that a heated clothing company could produce medical quality facemasks in response to the coronavirus pandemic, while another claimed the securities of an automated kiosk provider for fitness centres had increased by as much as 300% despite its lack of business activity and revenue.

The SEC has filed an emergency action and frozen the assets of the defendants involved in the scheme, which it says has been running since at least January 2018.

The SEC alleges Canadian citizens Nelson Gomes and Michael Luckhoo-Bouche, as well as others, enabled corporate controllers to conceal their identities while dumping their

company’s stock into the market for unsuspecting investors to purchase.

The complaint also charged several others, including Shane Schmidt, Douglas Roe and Kelly Warawa, with fraudulently dumping shares of one of the microcaps.

SEC Boston director Paul Levenson encouraged investors to be extra vigilant when investing in microcaps in the current environment.

“Microcap stocks can be particularly vulnerable to manipulative schemes, and investors should be alert to the heightened risks that exist during this national emergency,” “The SEC will continue to act quickly to protect investors from investment scams, including those seeking to capitalise on the COVID-19 crisis.”

The complaint has charged the defendants and the offshore entities with violating antifraud and registration provisions of federal securities laws, and is seeking “permanent injunctions, conduct based injunctions, disgorgement of allegedly ill-gotten gains plus interest, civil penalties, and penny stock bars”. fs

News

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

21

Executive appointments 01: Sally Auld

JBWere appoints advice GM JBWere has followed up last week’s appointment of a new chief investment officer with a new general manager of advice.

Andrew Bird, who was most recently JBWere’s head of advice for Victoria, is moving into the role of general manager, advice after three and a half years with the company.

Bird replaces Neville Azzopardi, who resigned in March along with the firm’s chief investment officer James Wright.

“Andrew joined JBWere in September 2016 and his career spans more than 30 years across roles based in Melbourne, Tokyo, London, Jakarta and Singapore,” JBWere chief executive Justin Greiner said in an email to employees, which also says the appointment was made after a global search.

“During this time, Andrew worked for leading Australian and international institutions, including Fidelity, Schroder’s, Citi Private Bank, Credit Suisse, Templeton Global, UBS and Lippo.”

On June 5, JBWere hired J.P. Morgan’s chief economist and head of Australia and New Zealand fixed income and FX strategy Sally Auld 01 as its new chief investment officer.

Auld commences in the role on September 7.

“Attracting a professional of Sally’s calibre is a real coup for JBWere and more importantly our clients – it reinforces our focus on delivering market leading insights and broadening our proprietary investment capability,” Greiner said.

“We were clear in our search for the next chief investment officer that we wanted a candidate who would complement the substantial expertise that we have built in our investment team.”

Former Fidelity sales head joins boutique Andrew Mathie has joined Atticus Wealth as its head of distribution.

Atticus Wealth was founded in 2015 and currently provides SMAs to two financial planning groups Australian Financial Planning Group (AFPG) and Keystone Wealth. Atticus’ off-the-shelf SMAs are currently offered through HUB24 and Macquarie platforms and have about $400 million in assets.

Mathie’s arrival at the company in March comes as it looks to expand into customised, white-labelled SMAs to independent advisers across the country.

“Clearly there has been a structural shift out of institutional licensees towards IFAs. Managed accounts were growing pre-COVID but they have become even more important for advisers since then,” Mathie said.

He said Atticus can help IFAs through its commercial agreements with platforms and fund managers, via its investment committee in conducting due diligence on manager selection (which the licensees do themselves) for SMAs. He said Atticus can also fast-track the process of implementing SMAs from the usual two or three years to just 12 months.

Mathie was Fidelity International’s Australian

Industry fund adds investments officer A $2.2 billion superannuation fund has welcomed a new investments officer, joining from Commonwealth Superannuation Corporation.

Gina Dowley joined AvSuper in April in the role of investments officer, bringing more than 20 years’ experience in superannuation.

She replaces Kong Lau who AvSuper confirmed has taken on a senior role in its member services team.

Dowley joined from the Commonwealth Superannuation Corporation where she was part of the investment operations treasury team.

AvSuper chief executive Michelle Wade said Dowley brings wisdom, a different perspective and knowledge to the role.

“Gina is a team player, very experienced in investment operations and reconciliations, and is well regarded in the industry,” Wade said.

head of wholesale sales, reporting to managing director Alva Devoy, for nearly two years before leaving in August 2019.

Fidelity, in February, filled Mathie’s role by hiring Simon Glazier, who was Ellerston Capital’s head of intermediated distribution and marketing since 2015.

Commonwealth Super names new chief Commonwealth Superannuation Corporation (CSC) has named a new chief executive, hiring a former industry fund chief.

Damian Hill02 , who was chief executive of Rest for 12 years, will now lead the $50 billion government fund.

His appointment comes as CSC’s current chief executive Peter Carrigy-Ryan retires.

Carrigy-Ryan has been chief executive since 2011 when CSC was founded and was employed by predecessor super entities to CSC since 2004.

CSC said that Carrigy-Ryan was critical to the founding of CSC and the development of its offerings to members.

CSC chair Patricia Cross said that Hill was selected after a long and thorough recruitment process facilitated by an independent global executive search consulting firm.

“He has a proven track record, having performed successfully as the chief executive of a major superannuation fund, and has been a highly regarded and active participant in the industry over many years,” Cross said.

“He brings a great depth of experience and knowledge to CSC, and his particular customer focus will complement the many initiatives we have implemented over the past few years.”

Hill said he looks for forward to working for the organisation, delivering retirement outcomes for members of the public service and Australian defence force.

“I am really looking forward to working at CSC. It is responsible for both defined benefit and defined contribution super schemes, and there will be significant challenges in every aspect of managing a large complex organisation like CSC,” he said.

RealIndex taps former RF Capital exec Realindex has appointed Ron Guido as a senior qualitative portfolio manager.

Guido’s role is newly created, and sees the firm’s team grow to 14, 11 of which are investment professionals.

A former BlackRock portfolio manager, Guido has also served as chief investment officer of Callisto Asset Management and as a portfolio manager and senior qualitative analyst at Fidelity International. Previously, he served as vice president of State Street Global Advisors’ advanced research centre.

Realindex chief executive Andrew Francis said he is delighted to welcome someone of Guido’s caliber to the firm, which he said has been “steadily” growing for the past few years.

“He’s [Guido’s] a highly experienced investment professional who will add significant portfolio

02: Damian Hill

management and research skills to the business,” Francis said.

“For over a decade, Ron has worked in the field of systematic equity strategies for some of the largest institutional asset managers in the world.”

QIC appoints executive director Ravi Sriskandarajah will join QIC as executive director, client solutions and capital on September 14 and will be based in the Brisbane headquarters.

His appointment comes as Brian Delaney heads towards retirement in December after eight years at QIC. Sriskandarajah will report to QIC chief executive Damien Frawley and join the executive committee.

In his most recent role, he was BMO Global Asset Management’s Asia Pacific managing director based in Hong Kong.

Last year, he was also appointed the chief executive of LGM Investments, an emerging and frontier markets boutique under BMO’s banner.

Prior to joining BMO in 2013, he headed BlackRock’s Australian institutional business as a managing director.

“I am very pleased to welcome Ravi to QIC. As we navigate through the current complex operating environment and beyond, Ravi’s appointment will ensure we continue to put clients at the centre of our business and set us up for future success,” QIC chief executive Damien Frawley said.

“Ravi’s appointment follows a comprehensive recruitment process, and beyond his significant experience, Ravi is a fantastic cultural fit for QIC.” New role for AMP Capital ESG head Ian Woods will provide specialist consultancy on climate change and responsible investment to Chronos Sustainability.

He will be Chronos’ climate change and sustainable investment specialist for Australia and New Zealand.

Woods has been at AMP Capital for more than 18 years. He was head of ESG investment research for seven years and was previously head of sustainable funds and an ESG investment research analyst.

He is still consulting with AMP Capital, after having departed the lead ESG role in December 2019.

Woods was also a founder of the Australia/ New Zealand Investor Group on Climate Change (IGCC) and was deputy chair until 2019.

Chronos Sustainability chief executive Rory Sullivan said Woods’ experience made him an agent of change in the sector.

“There are few specialists with Ian’s far reaching coverage of the asset class spectrum, in the context of responsible investment,” Sullivan said.

“His global expertise and regional knowledge will be hugely valuable to our clients, partners and stakeholders and will enable us to continue to drive progress, raise industry standards, and inform global best practice in sustainable investment.” fs

22

Roundtable Events | ETP Forum

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

Image from 2019 Best Practice Forum event.

Best Practice Forum on Exchange Traded Products 2020 Adapting to the current environment, the 2020 Best Practice Forum on Exchange Traded Products is now available as a video on demand series.

This year’s Best Practice Forum on Exchange Traded Products, delivered as a video on demand series, takes place against a backdrop of unprecedented volatility in most asset classes as COVID-19 swept across the globe and knocked down economies.

Despite the ongoing uncertainty, exchange traded products continued to attract inflows and reported record trading volumes. By traded value, they had already surpassed 2018’s total by April end this year with $33.9 billion traded.

“The most astonishing thing about this funds growth is that it happened during a global pandemic, with record volatility, and significant uncertainty around the global oil market,” ASX senior manager investment products Andrew Weaver said.

Weaver said the profile of ETF investors is slowly shifting from those who buy and hold ETFs to those who also use them to take tactical exposures.

This is evidenced by inflows into niche ETFs that fell into favour as markets fell (such as the BetaShares Australian Strong Bear ETF) as well the average size of ETF trades which has come down from about $25,000 to about $19,000 in the last five years, according to ASX data.

“We’ve already had more trades in [2020] than

in 2018…the volumes just keep going up and up…BBOZ trading at $1.9 billion in March and $1.4 billion in April is really showing that ETFs are becoming tactical financial products as well as the traditional buy and hold wealth management style product,” he said.

In March, when stock market volatility was at its worst ETF trading rose to more than 7% of the daily cash equities trading on three days, including accounting for about 9% of the total on March 30.

“Usually it sits at around 2-3%, which [the rise to 7%] is really encouraging because it shows that the Australian market is sort of catching up to the US market where ETFs boast nine of the top-10 traded products at any point in time by average daily value traded,” he said.

Since Financial Standard’s last ETP Forum, the corporate regulator has also lifted the ban on listing of new active ETFs using internal market making following its review. The ASX will soon put out its guidance on the changes but Weaver summarised the changes to active ETFs using internal market making as: stopping the use of external sources to calculate indicative net asset value and rely solely on publically available sources, and establishing barriers in trading.

In addition to tallying up higher inflows and trading volumes, the ETP industry also became

Lending money is a pendulum that swings between the lender and the borrower at different times in the cycle and in a post-COVID environment.

Andrew Schwartz

more competitive in the March quarter according to research from Rainmaker head of investment research John Dyall.

It improved on Herfindahl-Hirschman Index (HHI), which measures the concentration of players in a particular market and hence its competitiveness, on all broad-based measures including managers’ share by total assets as well as revenue. “…What you really want in a competition is for every team to have a chance of winning at the end of the day. If you have managers which are dominating too much, then the market becomes less competitive, they become price markers [and] there is less power in the hands of the consumers,” Dyall said.

“To take the [AFL] analogy a bit further, you want the Western Bulldogs to have a chance at winning every year because…it’s good for the game. And that’s an analogy [I am] trying to string together here and say this is why we want a competitive exchange traded products market here in this country.”

A score of 2500 and above on the HHI indicates a high-concentration market, followed by moderate concentration for a score of 15002500, unconcentrated for a score of 100-1500 and highly-competitive for a score of less than 100.

ETP Forum | Events

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

The Australian ETP market ranks as “moderately concentrated” on most measures except for competitiveness in managers’ share of the revenue where at 1418, it is “unconcentrated”.

Moving past the big picture view of the industry, this year’s other presentations focused on opportunities in Asian equities and local commercial real estate debt for Australian investors.

The year ahead offers mixed opportunities in sub-asset classes of commercial real estate debt, according to Qualitas managing director and chief investment officer Andrew Schwartz .

Its listed fund, the Qualitas Real Estate Income Fund (QRI), invests in about 30 loans predominately in Sydney, Melbourne and Brisbane. About 97% of which have a first mortgage and 98% of which have a personal guarantee. It had a return of just under 6%, as at 12 months to April calculated at NTA. Schwartz said while 2019 can only be described as a fiercely competitive year, the manager chose to stay within acceptable loan to value ratios although it did compete on the price.

“In a post-COVID environment, we are currently experiencing more favourable pricing of loans, better loan to value ratios and less competition,” Schwartz said in his presentation.

“Lending money is a pendulum that swings between the lender and the borrower at different times in the cycle and in a post-COVID environment. It has certainly swung more in favor of the lender at this particular point of time.”

Commercial real estate debt is loans made by typically mid-sized property developers and investors instead of mum and dad borrowers.

The CRE market in Australia is $295 billion, according to APRA at December end. Australian banks are the dominant players with 93% slice of the total capital.

Within CRE’s sub-asset classes, industrial assets are a favourite asset class for Qualitas right now, residential assets will be temporarily affected but will hold up over the long-term, while retail/ hospitality/leisure assets will be under pressure over the next few years as they bear the brunt of COVID-related volatility in income.

“This [residential loans] will continue to be a defensive asset class and although in the short term we expect residential to be affected by a lack of immigration [which government expects to reduce by 85% over the next 12 months], our view is that this not a permanent decrease in the levels of immigration,” he said.

Coming into COVID, the residential market was showing signs of equilibrium and with lower levels of construction and continuing organic growth, he added.

Qualitas expects this to continue in a postCOVID environment once the immigration resumes.

“We consider industrial to be a favorite asset class at this point in time. As many of us are working from home and have discovered online and need more just-in-time procurement and logistics and we think that industrial will highly benefit from this shift,” Schwartz said.

He reminds investors that land will be in limited supply despite COVID-19.

“And when dealing with an [inner] city such as Melbourne Sydney or Brisbane, real estate particularly, land and infield land is a finite asset and has physical presence,” he said.

“It existed before COVID, it exists during COVID and will exist after COVID and it represents a very strong form of security for these loans.”

Meanwhile, Fidelity International cross asset

investment specialist Anthony Doyle delved into the Reserve Bank of Australia’s stimulatory monetary and fiscal policy to build a case for investing in Asian equities.

Summing up this year’s major macroeconomic themes, Doyle said, this year has seen central banks ease monetary as well as fiscal stimulus and higher unemployment.

There’s more to come in geopolitical factors affecting world economies, in form of a US election later in the year, potentially Brexit, potentially an almost-rerun of debt crisis in Northern and Southern Europe and further volatility in oil prices.

“I certainly don’t think we have seen all the curve balls for the remainder of the year…,” he said.

Starting his presentation on a light note, he pulled up Google search trends for the terms “recession”, “loan” and “toilet paper” and “buy/ sell shares”.

Searches for all terms were on the uptick but in a notable measure of investor sentiment, searches for “sell shares” remain at levels seen since 2004 but “buy shares” shot up drastically this year.

“Australians have been Googling the term “buy shares” at a rate that is truly unprecedented relative to search history going back to 2004. In terms of sell shares, it’s close to the long term average,” Doyle said.

“That would suggest that Australians are wondering if this is an opportunity to potentially pick up some good value in the equity market in order to generate long-term returns for their investment portfolio.”

He said the central banks are nudging Australians towards higher-risk investments by squeezing the returns out of safer bets like cash, term deposits and sovereign debt.

He said it is not inconceivable for the RBA to keep the cash rate very low for the next five years given the deterioration in the labour market. As a result, Australians will be looking increasingly at equities markets. “…The [RBA’s] playbook is they essentially want to make the cost of credit cheaper via loan for households or businesses and essentially what they want you to do is, take more risk,” Doyle said.

“So they want you to go out and start a business or they want to make it easier for businesses to employ labour and for households, they want you to go out and spend [because the Australian economy is 60% consumption driven]… to boost economic growth and boost inflation.”

Portfolio balancing effect is a part of how monetary policy works for central banks, he explains. “[It is] the effect where, if they [the central banks] buy a billion-dollars’ worth of bonds off a superannuation fund, that fund now has cash that it may invest in the equity market,” Doyle said. “[They are also doing that] on the retail level, by making the returns on cash and term deposits so poor that essentially they want the investors to move on the risk spectrum towards higher-returning asset classes but don’t forget these asset classes will come with higher volatility as well.”

Doyle sees the portfolio rebalancing effect in times of stimulatory central bank policy as a big theme for Australians in the time ahead “I saw this in UK and the Europe in the decade post GFC and I think Australia is now going to experience this as well and as a result Australians will look further afield for opportunities within their diversified portfolios of assets,” he said.

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One of the places where Doyle recommends Australians look is the Asian equities markets.

He points to developed worlds’ high levels of household debts, central bank rates which are at the effective lower bound and economies that are finding it hard to grow.

“Over the course of this year, we have seen the Asian region has led the developed world out of the current crisis, predominantly because the Asian region was the first into the crisis and has subsequently been the first out in terms of emerging markets…,” he said. “…We are quite geared in into the Asian economy so if the Asian economy is growing relatively faster than the rest of the world then Australia should benefit from this as well.”

Emerging markets and developing economies grew from contributing 36% of the world’s total gross domestic product in late 1990s to over 54% of it by 2010. They are expected to contribute about 62% of the global economy by 2022.

According to Doyle: “The reason why economic growth is important is that it generally equates to higher growth in incomes [for the average person].”

Of the next one billion people who will enter the global middle class, 90% or 900 million will come from Asia according to Fidelity International and Brookings Institution.

The end result will be that 65% of the cohort will be residents of Asia by 2030.

“This is the law of large numbers and this is likely to continue going forward. The current crisis that we find ourselves is significant but not enough to derail those long-term structural themes,” Doyle said.

Yet their share of the MSCI All Country World Index is only around 11.6%. Within that, China only represents 3.7%.

“The reason is [that] you have these huge behemoths in the US in terms of the tech stocks like Alphabet, Facebook and Apple that are absolutely massive and they subsequently have a very large portion of the index,” he said.

“So if you are looking for emerging markets exposure, it is best to get as close as you can to the emerging market by taking a direct exposure or a direct investment.”

Fidelity’s Global Emerging Markets Fund (Managed Fund) (ASX: FEMX) holds 30 to 50 holdings that are diversified and have low overlap with the index.

“Our suggestion for investors is that they allocate to a vehicle like this with an outlook of seven years, possibly more,” Doyle added.

“For me, I think it should be a structural allocation within a balanced portfolio something that hopefully you will never need to sell but you should remember that investing in emerging markets will come with a higher risk… it speaks to the value of doing core, fundamental, bottom up research.” fs PROUDLY SPONSORED BY

24

Between the lines

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

IRESS bid too low: Shareholder

01: Richard Stacker chief executive Charter Hall Industrial

Kanika Sood

Billionaire investor and OneVue shareholder Alex Waislitz says IRESS’s offer to acquire OVH for 40 cents a share is a far cry from the company’s actual value.

Waislitz’s Thorney Opportunities and related companies started buying stock in the company in August last year at 44 cents a share and gradually built their position, including buying at as low as 11 cents a share in late March.

They now own 14.96% of the company.

Speaking in a video update for shareholders of Thorney Opportunities (TOP) , Waislitz said IRESS’s bid of 40 cents a share only takes OVH back to pre-COVID levels when the company was operationally strong. “..We are happy that they [IRESS] have recognised the opportunity but we don’t think that price reflects the true value and the strategic value of what Connie [Mckeage] has built,” he said.

“So, whilst we are happy to engage with them, we don’t think the price on the table is sufficient to reward either TOP or TEK [Thorney Technologies, another ASX- listed investment vehicle ] shareholders for what we’ve identified.

“Great that it’s recovered on the basis of the bid but still not enough to satisfy us in what we know is a [sic] industry with great tailwind.”

Waislitz said Thorney likes OVH, will keep investing in it and doesn’t want to sell out too cheaply.

“OneVue is a good company, it’s probably not a well understood company,” he said. fs

Charter Hall invests in logistics property Eliza Bavin

The quote

We were able to acquire the property off-market, further evidencing our track record for securing both off-market and on-market prime long WALE assets.

C

harter Hall announced the acquisition of a $115 million logistics property.

The company secured the property for its Charter Hall Prime Industrial Fund (CPIF) and Charter Hall Direct Industrial Fund No.4 (DIF4) for $115 million reflecting a 4.75% core cap rate.

The distribution facility has 43,000sqm, of which around 40,000sqm is used for warehouse accommodation with the remaining 3000sqm being occupied as office accommodation.

The facility was originally developed in 2008 for the tenant as its national distribution centre, and has entered into a new 12-year lease to commence at expiry of their current lease in August 2020.

The lease provides for annual rental escalations of 3.25%, with a mid-term market review in 2026.

Charter Hall’s industrial & logistics chief executive Richard Stacker01 said the acquisition is consistent with the funds.

Rainmaker Mandate Top 20

“We were able to acquire the property offmarket, further evidencing our track record for securing both off-market and on-market prime long WALE assets,” Stacker said.

“Our $10 billion industrial and logistics portfolio continues to grow via a $1.3 billion pre-leased development pipeline and selective acquisitions and is now 90% located on the Eastern Seaboard.”

Fund manager of CPIF Richard Mason said: “The acquisition provides a rare opportunity to secure a major logistics facility in the tightly held Western Sydney growth corridor.”

Miriam Patterson, fund manager for direct property, said: “This acquisition enhances the quality of DIF4’s growing industrial portfolio which is approaching $800 million with a portfolio WALE of circa 10 years.”

“The attractive 3.25% per annum rent reviews adds to the long-term sustainable income growth potential of the portfolio.” fs

Note: Latest alternatives investment mandate appointments

Appointed by

Asset consultant

Investment manager

Mandate type

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Ashmore Investment Management Limited

Alternative Investments

50

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Perennial Value Management Limited

Private Equity

19

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Challenger Limited

Alternative Investments

AustralianSuper

Frontier Advisors; JANA Investment Advisers

Brookfield Australia Investments Limited

Infrastructure

569

Care Super

JANA Investment Advisers

Coolabah Capital Institional Investments Pty Limited

Alternative Investments

152

Care Super

JANA Investment Advisers

Siguler Guff & Company, LP

Private Equity

6

Christian Super

JANA Investment Advisers

Alphinity Investment Management Pty Ltd

Not Disclosed

97

Christian Super

JANA Investment Advisers

Other

Not Disclosed

2

Construction & Building Unions Superannuation

Frontier Advisors

Wellington Management Australia Pty Ltd

Other

GSFM Pty Limited

Redpoint Investment Management Pty Ltd

Various

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Alternative Investments

113

Hostplus Superannuation Fund

JANA Investment Advisers

Kayne Anderson Capital Advisors, L.P.

Alternative Investments

25

Hostplus Superannuation Fund

JANA Investment Advisers

Other

International Private Equity

10

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Australian Private Equity

9

Hostplus Superannuation Fund

JANA Investment Advisers

ROC Capital Pty Limited

International Private Equity

7

Local Government Super

Cambridge Associates; JANA Investment Advisers

TCW Australia Pty Ltd

Hedge Fund

135

Maritime Super

JANA Investment Advisers; Quentin Ayers

Ardea Investment Management Pty Limited

Alternative Investments

129

Maritime Super

JANA Investment Advisers; Quentin Ayers

IFM Investors Pty Ltd

Infrastructure

26

MTAA Superannuation Fund

Whitehelm Capital

State Street Global Markets

Currency Overlay

90

WA Local Government Superannuation Plan

Willis Towers Watson

Other

Other

Amount ($m)

1

208 8,956

20 Source: Rainmaker Information

News

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

25

Products 01: Laird Abernethy

Global boutique reduces fees GQG Partners has reduced the management fees for its GQG Partners Global Equity Fund and the GQG Partners Emerging Markets Equity Fund.

Management fees for the global equities fund has been reduced from 0.90% to 0.75%, and management fees for the emerging markets equities fund has going from 1.10% to 0.96%.

Laird Abernethy01, GQG Partners’ managing director of Australia & New Zealand, said the decision to lower fees is in line with the firm’s client alignment philosophy.

“GQG Partners was founded with the objective of becoming the most client-aligned investment boutique around,” Abernathy said.

“How better can we demonstrate that alignment than through sharing the proceeds of our growth with our investors who made it happen?”

Abernathy said as the business and the funds grew, the operational overheads decreased.

“We are adjusting the fees downwards accordingly,” he said.

“Prior to reducing fees, our funds were already below the median within their respective categories.

Our overriding objective is to compound our clients’ assets over the long term; fees can make a meaningful impact on long term returns.

“We believe that the highest quality of management does not need to correlate with the highest level of fees.”

GQG Partners is an independent US-based boutique equities manager focused on global and emerging markets equities strategies.

The firm manages $59 billion of discretionary and advisory assets worldwide, as at 31 May 2020, with more than $4 billion of that representing 30 institutional investors in Australasia.

Eaton Vance launches ESG offerings Eaton Vance Management has launched a range of equity separate account strategies offered through its responsible investing subsidiary.

Professional and institutional investors can now access the Calvert ESG Leaders Strategies series, a suite of equity separate account strategies which invest in the common stocks of selected companies which the responsible investing house considers as a leader in ESG characteristics.

According to the firm, the series’ investment process has three main components, including stock selection, portfolio optimisation, and corporate engagement.

Calvert said the strategies seek to use corporate engagement to strengthen how portfolio companies manage material ESG exposures and processes and to enhance investment returns.

“Calvert’s proprietary, industry-leading research system enables us to identify companies that are leading their peers in managing financially material ESG risks, and which may be poised to take advantage of business opportunities based on their knowledge of and commitment to meaningful ESG practices,” Calvert president and chief executive John Streur said.

Centuria launches bond calculator Centuria Capital Limited’s investment bond business, Centuria Life, launched a bespoke investment bond calculator.

The LifeGoals Investment Forecaster Tool (LIFT) is one of the most sophisticated investment bonds calculators available in Australia as it incorporates metrics such as franking levels, stock turnover, the percentage of income versus growth, and the different treatment of capital gains.

LIFT calculates returns after tax and fees and provides a detailed output summary. It also enables investors and advisors to model an income stream after 10 years.

Centuria joint chief executive John McBain said: “Centuria is wellknown throughout the property industry for both our listed and unlisted real estate funds yet we also have a 40-year history in investment bonds.”

“This calculator is our way of simplifying the concept of investment bonds to help illustrate the long-term benefits and opportunities for individual investors and their advisers.”

LIFT is available for individual investors as well as financial advisers, with two tailored versions available.

“Financial materiality is a critical component of ESG analysis. We believe understanding the connection between sustainability factors and business success sets these companies apart and positions them to maneuver efficiently and effectively in an evolving world.”

Calvert vice president and co-manager of the series Jade Huang said her and fellow co-manager Chris Madden the firm conducted a quantitative review of ESG leaders’ past performance in developing the strategies.

The results revealed that companies which achieved top ESG scores in financial material factors historically produced stronger financial performance than those with weaker ESG scores.

“Additionally, we found that by optimising the portfolios, we could position the strategies to achieve positive environmental and societal impact by increasing exposure to companies with healthier environmental footprints and better gender diversity,” Huang said.

New private trades platform for family offices Hedge fund billionaire Paul Tudor Jones backed Clearlist Holdings is partnering with ShareNett Holdings to develop a platform for family offices to transact in private markets securities.

Sharenett, which is a network of over 400 family offices and ultra-high-net-worths around the world, said the launch is a part of its strategy to become the leading regulatory compliant distribution platform for illiquid investment opportunities. “[We are]creating a super-distribution hub that will level the playing field for family offices by giving them unique access to appealing investment opportunities across the entire spectrum of private assets,” ShareNett chief executive and chair Clifford H. Friedman said.

“ShareNett has developed a robust institutional solution that provides a path for families to overcome the inherent challenges of seeking primary and secondary liquidity in private markets.”

ShareNett allows non-us investors to join their network, meaning Australian HNWs can get access to the new platform.

The company will collaborate with GTS Securities LLC on the launch of the ClearList initiative, where GTS will make capital commitments for ClearList to facilitate liquidity, which according to ShareNett, is a first in the trading of private market securities.

Aberdeen Standard launches new fund Aberdeen Standard Investments (ASI) has launched a new global small caps fund, offering access to highgrowth opportunities and portfolio diversification.

ASI said the fund aims to provide investors and financial advisers with access to a high-conviction, professionally managed portfolio of quality global smaller company investment opportunities.

“We are delighted to be making our Global Smaller Companies strategy available in Australia,” said Brett Jollie02 , managing director of ASI Australia.

“It’s a further demonstration of our focus

02: Brett Jollie

on bringing our suite of world-leading global investment capabilities to meet the needs of Australian investors.”

Jollie said Australian investors often have a high exposure to larger companies in their offshore portfolios.

“By adding exposure to smaller companies investors can introduce additional long-term capital growth opportunities while diversifying investment risk,” he said.

The Aberdeen Standard Global Smaller Companies Fund is co-managed by Alan Rowsell and Kirsty Desson, who have 24 years and 20 years’ investment experience respectively and are part of a team of nine covering global small caps.

The UK version of the fund has £1.16 billion in assets under management as at end May 2020, and an annualised return of 14% (net of fees) over the five years to 31 May 2020.

CMC Markets introduces derivatives platform CMC Markets has launched a new derivatives platform to provide access to thousands of single stock CFDs in Australia, the US, Europe and Asia.

CMC said the platform has been developed to allow seamless integration with existing systems, including an API integration with trading and market data software Iress Pro and ViewPoint.

Institutional and professional partners will be able to access ASX shares and other stocks in a range of global markets from a single account, as well as to trade open and closing auctions, US pre- and post-market and algorithmic orders.

Head of institutional at CMC Markets APAC Andrew Wood said: “We are hearing from our institutional and professional partners that their clients’ expectations are evolving, wanting access to a greater number of markets, products and also data and new technology that will help them execute trades more effectively and successfully.”

“The Prime Derivatives platform provides our partners with direct access to primary exchanges, Multilateral Trading Facilities (MTFs) and other markets through a system that can easily plug into their existing network.”

Wood said the platform was built to meet the requirements of professional traders, small funds and proprietary trading firms.

“The new platform provides a range of flexible and easy-to-use orders so traders can better manage their trade entry, exit and risk across multiple assets and multiple markets,” Wood said.

“There has been unprecedented market activity this year across global markets driven by the COVID-19 pandemic, and with that comes opportunities, in particular for intra-day traders.

“Our new platform opens up a range of popular products and trading features for partners and their clients in times of volatility including short-selling and hedging.”

CMC said trades will be directed via smart order routers to a range of venues including both displayed (lit) and non-displayed liquidity (dark) primary exchanges and MTFs, among other execution venues. fs

26

Managed funds

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12 PERIOD ENDING – 30 APRIL 2020

Size 1 year 3 years 5 years

Size 1 year 3 years 5 years

Fund name

Fund name

Managed Funds

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

AUSTRALIAN EQUITIES

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

COMBINED PROPERTY

Australian Unity Platypus Aust Equities

119

3.4

2

12.0

1

10.3

2

Investa Commercial Property Fund

Bennelong Australian Equities Fund

457

0.7

6

9.2

2

9.2

6

Australian Unity Diversified Property Fund

Bennelong Concentrated Aust Equities

6,012

12.5

2

14.5

1

14.5

2

290

11.0

3

14.5

2

16.4

1 3

692

3.2

3

9.1

3

13.1

1

Lend Lease Aust Prime Property Commercial

5,188

9.6

4

13.0

3

13.6

1,033

10.2

1

8.7

4

9.2

5

Lend Lease Aust Prime Property Industrial

1,094

13.1

1

12.6

4

11.9

4

Greencape Broadcap Fund

562

0.7

5

7.7

5

8.2

7

DEXUS Property Fund

10,790

2.9

5

9.4

5

11.7

5

Greencape High Conviction Fund

503

0.0

8

7.2

6

7.2

10

AB Managed Volatility Equities Fund

823

0.6

7

7.2

7

8.2

8

Alphinity Sustainable Share Fund

101

-3.9

17

7.1

8

6.8

12

8

-2.7

13

6.1

9

10.1

3

46

-1.9

10

6.0

Hyperion Australian Growth Companies Fund

SGH Australia Plus Fund Chester High Conviction Fund Sector average

10

Resolution Capital Global Prop Securities Fund (Unh)

311

-0.5

8

7.5

6

7.2

10

15,836

0.9

6

7.4

7

9.9

6

Quay Global Real Estate Fund

160

-6.6

10

6.7

8

7.7

8

Cromwell Direct Property Fund

347

0.2

7

5.9

9

7.7

9

Australian Unity Property Income Fund

254

-4.6

9

5.7

10

8.9

7

ISPT Core Fund

363

-9.4

1.7

3.9

Sector average

1,234

-14.0

0.9

4.2

S&P ASX 200 Accum Index

-9.1

1.9

3.5

S&P ASX200 A-REIT Index

-20.3

-1.8

3.0

INTERNATIONAL EQUITIES

FIXED INTEREST

Zurich Concentrated Global Growth Loftus Peak Global Disruption Fund BetaShares Global Sustainability Leaders ETF T. Rowe Price Global Equity Fund Franklin Global Growth Fund Nikko AM Global Share Fund

24

16.4

4

20.6

1

Macquarie True Index Sovereign Bond Fund

333

11

6.3

1

4.8

7

89

16.9

2

20.2

2

Pendal Government Bond Fund

966

7.8

10

6.1

2

4.8

9

613

19.9

1

18.5

3

Principal Global Credit Opportunities Fund

143

11.9

2

6.1

3

5.7

1

3,260

11.3

11

17.3

4

13.9

3

Macquarie Enhanced Global Bond Fund

215

12.5

1

6.1

4

5.1

2

268

16.5

3

16.9

5

14.5

1

Macquarie Australian Fixed Interest Fund

205

7.0

14

5.9

5

5.0

3

Nikko AM Australian Bond Fund

87

8.9

21

15.9

6

12.6

6

Apostle Dundas Global Equity Fund

938

13.5

9

15.6

7

11.2

14

Zurich Unhedged Global Growth Share Fund

358

9.6

18

15.2

8

12.1

Evans and Partners International Fund

7.3

143

6.7

19

5.8

6

4.8

8

Pendal Fixed Interest Fund

1,041

8.6

8

5.8

7

4.4

30

9

Macquarie Enhanced Australian Fixed Interest

1,583

6.8

17

5.8

8

4.7

11

58

9.8

14

15.1

9

14.0

2

Vanguard Australian Gov Bond Index Fund

C WorldWide Global Equity Trust

355

14.7

7

15.1

10

12.5

7

QIC Australian Fixed Interest Fund

Sector average

644

3.0

9.6

8.9

Sector average

900

MSCI AC World ex AU Index

3.0

10.0

9.0

Bloomberg Ausbond Composite

Note: The performance figures for diversified funds are net of fees, performance figures for sector specific funds are adjusted for fees.

570

7.1

12

5.8

9

4.6

17

1,635

6.7

18

5.6

10

4.7

15

3.5

3.6

3.6

9.0

6.0

4.4

Source: Rainmaker Information

Not all dynamic asset allocation funds smell sweet ollowing the Global Financial Crisis, it was F obvious to many in the funds management industry – and to many financial advisers as

Dial tones

By John Dyall john.dyall@ financialstandard .com.au www.twitter.com /JohnDyall

well – that portfolios built almost entirely on equity risk would lead to periods of dramatic drawdowns.

This is fine, more or less, when a portfolio is cash flow positive and has many years to run before cash drawdowns begin. It is not so fine when the portfolio is in the decumulation phase. Losses can take many more years to recover – if at all – when assets are being sold to meet living expenses.

The solution was a type of fund that has many names: adaptive asset allocation, dynamic asset allocations real return, flexible asset allocation, absolute return, alternative strategies, multi-sector flexible and the like. For the sake of this column we will call them dynamic asset allocation funds, or DAA for short. Their commonality lies in the fact that they are benchmarked against cash or inflation. They invest in multiple asset classes and vary asset allocation according to how cheap or expensive the portfolio believes them to be. They may or may not incorporate other strategies. The expectation is they would produce returns in excess of inflation over medium time frames.

Their real objective was to provide long term returns you would expect from a balanced multi-asset class fund (say 70% equities and property) returns with lower volatility. The reality has been somewhat different and a disappointment to many investors, particularly during the period of the equities bull market.

From a sample of 16 of these funds the average three-year return to March was 2% p.a. after average management fees of 1% p.a. with volatility of 5.5% p.a.

But averages often obscure a wide range of outcomes. Returns varied from a high of 8.2% p.a. with a volatility of 6.7% p.a. to a low of -5.7% p.a. with a volatility of 4.6% p.a.

You would expect these funds to really shine in the area of Sharpe ratios (which reward lower volatility for a given level of returns) and Sortino ratios (which favour funds that offer better capital protection). These ratios compare the return above the risk-free rate of return (in our example the bank bill rate) with the volatility taken to achieve that return. Using our sample, the average Sharpe ratio was 0.1 and the Sortino ratio was 0.2. On the face of it these achieved ratios are not great but they are what they are. Ratios vary greatly over time depending on what happens in financial mar-

kets, so the question is what these funds should be compared with.

If you consider volatility to be the most appropriate equalising factor then a good proxy would be the Vanguard Conservative Index Fund, since it achieved a similar volatility of 4.7% p.a. Well, it had a return twice that of the average at 4% p.a. after management fees of 0.29% p.a. (two-thirds less than the sample average). Its Sharpe and Sortino ratios were both around 0.5. On the face of it this is a better option than the average of the sample.

Choosing a regular multi-asset fund with a defined strategic asset allocation is a relatively straightforward affair with fees probably being the greatest determinant of future returns.

Choosing a suitable DAA fund is different.

There is a wide range of outcomes in our sample and in my experience the fund managers don’t explain their returns very well. One thing they might well say is that their fund is a diversifier that fits well with the rest of the portfolio.

Beware of any marketing material showing an efficient frontier. Instead, ask to see a regression of their fund’s returns against bonds and equities. You do not want to be paying active management fees for something you can get much cheaper. fs

Super funds

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12 PERIOD ENDING – 30 APRIL 2020

Workplace Super Products

1 year % p.a. Rank

3 years

5 years

SS

% p.a. Rank % p.a. Rank Quality*

MYSUPER / DEFAULT INVESTMENT OPTIONS

27

* SelectingSuper [SS] quality assessment

1 year % p.a. Rank

3 years

5 years

SS

% p.a. Rank % p.a. Rank Quality*

PROPERTY INVESTMENT OPTIONS

Australian Ethical Super Employer - Balanced (accumulation)

0.7

1

5.8

1

5.2

22

AAA

Prime Super (Prime Division) - Property

1.6

1

12.9

1

17.6

1

AAA

UniSuper - Balanced

0.1

3

5.7

2

6.0

2

AAA

CareSuper - Direct Property

0.7

3

7.1

2

9.3

2

AAA

QSuper Accumulation - Lifetime Aspire 1

0.0

6

5.6

3

6.0

4

AAA

Telstra Super Corporate Plus - Property

1.4

2

7.0

3

9.2

3

AAA

State Super (NSW) SASS - Growth

0.5

2

5.5

4

5.7

7

-

Rest Super - Property

-0.8

6

6.6

4

8.1

4

AAA

AustralianSuper - Balanced

-1.0

15

5.5

5

6.2

1

AAA

TASPLAN - Property

0.6

4

6.3

5

AAA

0.1

4

5.2

6

5.2

23

AAA

Acumen - Property

-1.4

9

6.0

6

7.5

5

AAA

Media Super - Balanced

-0.7

12

5.2

7

5.8

6

AAA

Intrust Core Super - Property

-8.0

18

5.5

7

7.2

6

AAA

First State Super Employer - Growth

-0.4

8

5.2

8

5.4

16

AAA

Australian Catholic Super Employer - Property

-1.0

7

5.3

8

5.7

13

AAA

TASPLAN - OnTrack Build

-0.6

11

5.1

9

AAA

Catholic Super - Property

-3.3

11

4.9

9

6.9

7

AAA

Mercy Super - MySuper Balanced

-1.7

23

5.0

AAA

NGS Super - Property

-1.3

8

4.6

10

6.1

11

AAA

SelectingSuper MySuper/Default Option Index

-2.5

SelectingSuper Property Index

-11.3

VicSuper FutureSaver - Growth (MySuper)

10

3.9

5.6

9

4.6

AUSTRALIAN EQUITIES INVESTMENT OPTIONS

1.1

3.6

FIXED INTEREST INVESTMENT OPTIONS

Media Super - Australian Small Companies

-5.2

3

5.5

1

4.8

5

AAA

Australian Catholic Super Employer - Bonds

6.8

1

5.3

1

4.3

2

AAA

ESSSuper Beneficiary Account - Shares Only

-2.5

1

5.5

2

5.4

1

AAA

GESB West State Super - Mix Your Plan Fixed Interest

6.0

2

4.9

2

3.9

3

-

UniSuper - Australian Shares

-5.4

6

5.3

3

4.7

6

AAA

UniSuper - Australian Bond

5.8

3

4.7

3

3.7

4

AAA

FirstChoice Employer - Colonial First State Imputation

-5.3

5

4.5

4

3.6

35

AAA

First State Super Employer - Australian Fixed Interest

5.4

8

4.5

4

3.6

6

AAA

FirstChoice Employer - FirstChoice Australian Small Companies

-9.6

63

4.1

5

5.4

2

AAA

Mine Super - Bonds

5.0

12

4.3

5

3.4

7

AAA

Intrust Core Super - Australian Shares

-5.2

4

3.6

6

5.3

3

AAA

AMG Corporate Super - AMG Australian Fixed Interest

4.8

15

4.3

6

3.3

12

AAA

Media Super - Australian Shares

-6.8

10

3.2

7

4.1

19

AAA

Vision Super Saver - Diversified Bonds

5.7

5

4.1

7

3.4

8

AAA

StatewideSuper - Australian Shares

-7.7

34

3.2

8

5.2

4

AAA

GESB Super - Mix Your Plan Fixed Interest

5.1

10

4.0

8

3.1

16

AAA

AustralianSuper - Australian Shares

-7.2

22

3.2

9

4.6

8

AAA

Sunsuper Super Savings - Diversified Bonds Index

5.6

6

3.9

9

3.6

5

AAA

Prime Super (Prime Division) - Australian Shares

-6.7

9

3.1

10

4.5

10

AAA

AMP Flexible Super Emp - Super Easy Australian Fixed Interest

4.7

16

3.8

10

2.9

24

-

SelectingSuper Australian Equities Index

-8.6

1.8

3.2

SelectingSuper Australian Fixed Interest Index

INTERNATIONAL EQUITIES INVESTMENT OPTIONS Integra Super CD - OnePath Global Shares

2.1

3.2

3.7

AUSTRALIAN CASH INVESTMENT OPTIONS

6.9

1

10.7

1

10.3

1

-

AMG Corporate Super - Vanguard Cash Plus Fund

1.5

1

1.8

1

1.9

3

AAA

AustralianSuper - International Shares

6.8

2

10.5

2

9.2

2

First State Super Employer - International Equities

3.2

7

9.6

3

8.0

7

AAA

GESB West State Super - Cash

1.4

4

1.8

2

2.0

1

-

AAA

GESB West State Super - Mix Your Plan Cash

1.4

4

1.8

2

2.0

1

-

Media Super - Passive International Shares

3.6

3

9.6

4

8.0

6

AAA

Intrust Core Super - Cash

1.5

2

1.7

4

1.9

4

AAA

Virgin Money SED - Indexed Overseas Shares

3.2

6

9.3

5

AAA

NGS Super - Cash & Term Deposits

1.4

3

1.7

5

1.8

6

AAA

WA Super - Global Shares

1.1

21

9.0

6

8.5

3

AAA

AMG Corporate Super - AMG Cash

1.3

7

1.6

6

1.8

5

AAA

Mercer CS - Mercer Passive International Shares

2.6

10

8.6

7

7.8

8

AAA

Virgin Money SED - Cash Option

1.1

18

1.6

7

AAA

Sunsuper Super Savings - International Shares Index (unhedged)

1.4

18

8.5

8

8.1

5

AAA

State Super (NSW) SASS - Cash

1.0

25

1.6

8

1.7

9

-

AMP Flexible Super Emp - Super Easy International Share

2.6

11

8.5

9

7.6

9

-

Energy Super - Cash Enhanced

1.1

15

1.6

9

1.7

11

AAA

LUCRF Super - International Shares

3.4

4

8.4

10

6.5

29

AAA

Sunsuper Super Savings - Cash

1.2

10

1.5

10

1.7

8

AAA

SelectingSuper International Equities Index

-2.2

5.7

5.7

SelectingSuper Cash Index

Notes: Investment options are sorted by their three year net performance results. All performance figures are net of maximum fees.

WORKPLACE SUPER | PERSONAL SUPER | RETIREMENT PRODUCTS

Compare superannuation returns across asset classes using over 27 years of industry insights and research with SelectingSuper’s performance tables.

Simply visit selectingsuper.com.au/tools/performance_tables

0.8

1.2

1.4 Source: SelectingSuper www.selectingsuper.com.au

28

Economics

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

RBA does the expected Ben Ong

T

he Reserve Bank of Australia’s (RBA) policy decision confirmed what everyone else is expecting.

RBA governor Philip Lowe and his board kept Australia’s monetary policy settings unchanged – the targets for the official cash rate at 0.25% and the yield on three-year Australian government bonds of around 25 basis points.

While it’s still early days, the Australian central bank and the Morrison government’s largesse have moderated earlier expectations for a sharp contraction in the domestic economy.

The earlier than expected flattening of the COVID-19 curve and the consequent gradual lifting of social interaction restrictions and lockdown measures are starting to have a positive impact on confidence.

So much so, that on May 28, Governor Lowe told the Senate Select Committee on COVID-19 that: “The evidence so far is that our mid-March package is working as expected and it is helping build the necessary bridge to the recovery ... With the national health outcomes better than earlier feared, it is possible that the economic downturn will not be severe as earlier thought.”

Australians, all, let us rejoice! For this relatively more optimistic assessment came only three weeks and a bit after the RBA revealed its forecasts: “In the baseline scenario, output falls by around 10% over the first half of 2020 and by around 6% over the year as a whole.

This is followed by a bounce-back of 6% next year.” “…the unemployment rate peaks at around 10% over coming months and is still above 7%at the end of next year.”

“Inflation remains below 2% over the next few years … expected to turn negative temporarily in the June quarter … Further out, in the baseline scenario inflation is 1-1.5% in 2021 and gradually picks up further from there.”

In his June statement, Lowe noted that: “The Australian economy is going through a very difficult period and is experiencing the biggest economic contraction since the 1930s.

In April, total hours worked declined by an unprecedented 9% and more than 600,000 people lost their jobs, with many more people working zero hours. Household spending weakened very considerably and investment plans are being deferred or cancelled.” “…the outlook, including the nature and speed of the expected recovery, remains highly uncertain and the pandemic is likely to have long-lasting effects on the economy.”

Like I said, it’s still early days, Murphy’s Law could still take hold in the form of a second wave that would prompt the re-enforcement of isolation and lockdown measures, and the brewing tensions between the US and China and Australia and China.

Would the RBA be forced to respond with ZIRP (zero interest rate policy) or NIRP (negative interest rate policy) then?

As early as late 2019, Lowe has ruled out sending interest rates below zero and more recently declaring on a Financial Services Institute webcast that: “I said previously that it was extraordinarily unlikely that we would have negative interest rates, and there’s been no change to that thinking.”

A second wave could force the RBA into NIRP but with the government at the ready and willing to lend a helping hand, expect the official cash rate to remain at 0.25% in the immediate future. fs

Monthly Indicators

May-20

Apr-20

Mar-20

Feb-20

Jan-20

Consumption Retail Sales (%m/m)

-

-17.67

8.47

0.60

Retail Sales (%y/y)

-

-9.18

10.07

1.83

1.95

-35.29

-48.48

-17.85

-8.22

-12.52

Sales of New Motor Vehicles (%y/y)

-0.41

Employment Employed, Persons (Chg, 000’s, sa) Job Advertisements (%m/m, sa) Unemployment Rate (sa)

-

-594.28

0.68

22.92

15.82

0.50

-53.35

-10.23

1.00

-2.79

-

6.22

5.23

5.10

5.28

Housing & Construction Dwellings approved, Tot, (%m/m, sa)

-

2.68

-0.66

1.26

-0.46

Dwellings approved, Private Sector, (%m/m, sa)

-

-1.82

-2.63

20.26

-14.31

Housing Finance Commitments, Number (%m/m, sa) - Housing Finance Commitments, Value (%m/m, sa)

-

Survey Data Consumer Sentiment Index

88.10

75.64

91.94

95.52

93.38

AiG Manufacturing PMI Index

41.60

35.80

41.60

44.30

45.40

NAB Business Conditions Index

-23.76

-33.65

-21.99

0.16

-0.09

NAB Business Confidence Index

-19.97

-45.48

-65.19

-2.15

0.74

Trade Trade Balance (Mil. AUD)

-

8800.00

10446.00

4176.00

Exports (%y/y)

-

-6.48

7.44

-8.00

-2.03

Imports (%y/y)

-

-19.32

-8.56

-6.68

-2.25

Mar-20

Dec-19

Sep-19

Jun-19

Quarterly Indicators

5054.00

Mar-19

Balance of Payments Current Account Balance (Bil. AUD, sa)

8.40

1.72

7.26

4.87

-2.76

% of GDP

1.66

0.34

1.44

0.98

-0.56

Corporate Profits Company Gross Operating Profits (%q/q)

1.11

-3.47

-1.15

5.20

1.97

Employment Average Weekly Earnings (%y/y)

-

3.24

-

3.02

-

Wages Total All Industries (%q/q, sa)

0.53

0.53

0.53

0.54

0.54

Wages Total Private Industries (%q/q, sa)

0.38

0.45

0.92

0.38

0.39

Wages Total Public Industries (%q/q, sa)

0.45

0.45

0.83

0.46

0.46

Inflation CPI (%y/y) headline

2.19

1.84

1.67

1.59

1.33

CPI (%y/y) trimmed mean

1.80

1.60

1.60

1.60

1.50

CPI (%y/y) weighted median

1.70

1.30

1.30

1.30

1.40

Output

News bites

Australia in recession The Australian Bureau of Statistics (ABS) released its March quarter 2020 National Accounts report that showed the economy contracted by 0.3% in the first three months of the year. Although still not technically in recession – defined as two straight quarters of negative growth – Federal Treasurer Josh Frydenberg conceded that the economy is already in recession “… on the basis of the advice that I have from the Treasury Department about where the June quarter is expected to be.” Using the same metric, Australia’s March 2020 quarter contraction is better than the US (-1.3%); the Eurozone (-3.8%); Japan (-0.9%); the UK (-2.0); and China (-9.8%), among others. Year-on-year, real GDP growth slowed from 2.2% in the December 2019 quarter, but to a still positive rate of 1.4%.

US employment US employment increased by 2.5 million in the month of May, a sharp V-shaped rebound from the 20.7 million jobs lost in the previous month and better than market expectations for a reduction of an additional eight million jobs. There were large hiring in the leisure and hospitality, construction, education and health services, and retail trade but while government jobs continued to decline. The US unemployment rate dropped to 13.3% in May versus 14.7% in April and market expectations for a continued climb to 19.8%, despite the increase in the participation rate to 60.8% from the 47-year low of 60.2% recorded in the previous month.

ECB PEPP At its June 4 Governing Council meeting, the central bank raised the size of its Pandemic Emergency Purchase Program (PEPP) by €600 billion to a total of €1,350 billion, extended the duration of the program by six months to June 2021 – or “until it judges that the coronavirus crisis phase is over” – and maturing principal repayments on securities purchased under PEPP re-invested until at least the end of 2022. The Eurosystem staff macroeconomic projections show real GDP growth dropping to -8.7% this year from +1.2% in 2019 and HICP inflation to decelerate from1.2% in 2019 to 0.3% in 2020. fs

Real GDP Growth (%q/q, sa)

-0.31

0.52

0.55

0.61

Real GDP Growth (%y/y, sa)

1.39

2.16

1.80

1.56

0.45 1.73

Industrial Production (%q/q, sa)

-0.09

1.25

0.39

1.07

0.59

Survey Data Private New Capex, Total, Chain, Vol, (%q/q, sa)

Financial Indicators

-1.65

05-Jun

-2.58

-0.55

-1.43

-1.46

Mth ago 3 mths ago 1Yr Ago 3 Yrs ago

Interest rates RBA Cash Rate

0.25

0.25

0.75

1.50

1.50

Australian 10Y Government Bond Yield

1.09

0.86

0.78

1.48

2.39

Australian 10Y Corporate Bond Yield

1.97

2.14

1.64

2.37

3.05

Stockmarket All Ordinaries Index

6116.5

11.65%

-5.50%

-5.08%

S&P/ASX 300 Index

5968.3

11.14%

-6.04%

-5.43%

5.60% 4.71%

S&P/ASX 200 Index

5998.7

10.94%

-6.21%

-5.66%

4.24%

S&P/ASX 100 Index

4951.4

10.77%

-6.69%

-5.86%

3.69%

Small Ordinaries

2704.2

14.14%

-0.61%

-1.94%

14.26%

Exchange rates A$ trade weighted index

58.80

A$/US$

0.6983 0.6445 0.6605 0.6986 0.7483

57.80

57.00

60.00

63.80

A$/Euro

0.6172 0.5945 0.5903 0.6203 0.6651

A$/Yen

76.63 68.70 70.46 75.45 82.65

Commodity Prices S&P GSCI - commodity index

325.54

274.17

365.27

398.56

371.72

Iron ore

100.26

83.06

90.12

98.32

55.70

Gold

1683.45 1699.55 1659.60 1335.05 1279.95

WTI oil

39.50

24.56

45.90

51.57

Source: Rainmaker /

47.40

Sector reviews

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

Australian equities

Figure 1: Australia real GDP growth

CPD Program Instructions

Figure 2: Contributions to GDP growth

6

CONTRIBUTIONS TO GDP GROWTH

PERCENT

Household consumption Q1 2020

Inventories

4

Q4 2019

Government consumption

2

Imports

0

Public investment

Exports

Prepared by: Rainmaker Information Source: Thompson Reuters /

Quarterly change

Private investment

Annual change

-2

-1.0

1989

1993

1997

2001

2005

2009

2013

-0.8

-0.6

-0.4

-0.2

2017

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

PERCENTAGE POINTS

Australia in recession Ben Ong

T

echnically, we’re not there yet but Federal Treasurer Josh Frydenberg opted not for a stay of execution and acknowledged that Australia’s 29-year recession-free run is over.

“Well, the answer to that is yes. And that is on the basis of the advice that I have from the Treasury Department about where the June quarter is expected to be.”

Frydenberg’s statement comes after the Australian Bureau of Statistics (ABS) released its March quarter 2020 National Accounts report that showed the economy contracted by 0.3% in the first three months of the year.

But unlike in 2000, 2008 and 2011, when Australia dodged a recession – two consecutive quarters of negative growth – this time, there’s no escape.

“Clearly, with this once in a century pandemic, the impact on the economy has been very severe, the impact in the June quarter

International equities Prepared by: FSIU Sources: Factset Prepared by: Rainmaker Information Source:

will be even more severe,” Frydenberg said.

The details of the National Accounts underscore the fallout from the pandemic – and subsequent restrictions and lockdown measures imposed by nearly all governments on planet earth.

Had it not been for the 1.3% contribution from imports, Australia would have been grieving a much worse March quarter. Then again, that contribution was because of the 6.2% drop in imports over the March quarter – due to frozen international supply chains and domestic business operations.

What mattered big time though is the rescue packages – more specifically, JobSeeker and JobKeeper schemes and of course, the RBA’s monetary policy accommodation.

So much so that, while the June quarter National Accounts will for sure and for certain confirm a technical recession in the domestic economy, Australia remains better than all the rest.

Using the same metric – quarter on quarter growth rate – Australia’s 0.3% contraction in the March 2020 quarter is top of the pops compared with the US (-1.3%); the Eurozone (-3.8%) – Germany (-2.2%), France (-5.3%), Italy (-5.3); Japan (-0.9%); the UK (-2.0); China (-9.8%).

This justifies the Reserve Bank of Australia’s (RBA) positive outlook for the domestic economy. “…it is possible that the depth of the downturn will be less than earlier expected. The rate of new infections has declined significantly and some restrictions have been eased earlier than was previously thought likely. And there are signs that hours worked stabilised in early May, after the earlier very sharp decline. There has also been a pick-up in some forms of consumer spending.”

The gradual relaxation of restrictions around the world should help underpin a shallower contraction/growth rebound in the September quarter.

We’ll be right, mateys!!! fs

Figure 1: Japanese real GDP growth

Figure 2: Japanese inflation

6

4

4

3

2

2

0

1

-2

0

-4

-1

Annualised quarterly growth rate Quarterly

-6

-2

Annual

Headline inflation Core-core inflation (ex food and energy)

-3 2012

2013

2014

2015

2016

2017

2018

2019

2020

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Japan reopens for business Ben Ong

I

t was a magnificent Monday, 25 May 2020, for Japan for on this day Prime Minister Shinzo Abe declared the country’s state of emergency over.

We salute you our Japanese brothers and sisters for Japan has flattened its coronavirus curve despite the government not having constitutional powers to imposed draconian compulsory lockdown measures enacted in many other nations across the globe.

All Abe was constitutionally allowed to do when he first declared the state of emergency on April 7 in seven prefectures (and later expanded to all of Japan on the 16th of the same month) was invoke the Japanese’ sense of community spirit and asked to limit social contacts by 70% -80%, for non-essential workers to work from home and companies to reduce shifts for workers who cannot work online.

It couldn’t have come soon enough for an economy that’s now in deep recession.

Japanese GDP plunged at an annualised rate of 7.2% in the December quarter – as private spending tanked after the government lifted the consumption tax from 8% to 10% in October 2019 – the COVID-19 pandemic lopped another 3.4% (annualised) off the economy.

So much so that Japan’s consumer price inflation measures have U-turned away from the Bank of Japan’s (BOJ) ever-so-elusive 2.0% target. The country’s annual headline inflation rate weakened to 0.2% in April (from 0.4% in March); core-core inflation decelerated to 0.2% (from 0.6%); and most notably, core inflation of 0.4% in March turned into deflation of 0.1% in April.

Abe’s lifting of the state of emergency has had immediate positive effects. The Nikkei-225 index rose by 1.7% on the day to 20,741.65 points – a whopping 25.3% rally

Australian equities CPD Questions 1–3

1. What was Australia’s GDP growth in the first three months of 2020? a) +0.3% b) +0.1% c) -0.1% d) -0.3% 2. Which economy contracted the least in the March 2020 quarter? a) Australia b) China c) US d) UK 3. The RBA expects the Australian downturn to be more severe than earlier expected. a) True b) False

CPD Questions 4–6

Core inflation (ex-food)

-8

The Financial Standard CPD Program has been developed for professionals governed by the Corporations Act 2001 and hold an AFS Licence which provides an obligation to undertake continuous professional development (CPD). Test your knowledge with the following questions.

[See next page for instructions on how to submit your answers].

International equities

ANNUAL RATE %

PERCENT

29

from the 2020 low recorded on the 19th of March and more than halving its deep 30.0% loss for the year to 12.3%.

Similarly, easing social distancing rules and lockdown restrictions in other nations – and some semblance of financial market stability – have reduced safe-haven buying in the yen. The Japanese currency has depreciated by 5.2% versus the US dollar to ¥107.65 from this year’s high of ¥102.01 (the US dollar buys more yen).

Still, Abe isn’t taking any chances, declaring that, “the path to reclaiming a complete normal while suppressing infections will take some time”.

Given this, Abe announced a supplementary budget relief package worth more than ¥100 trillion (US$929 billion) in addition to April’s ¥117 fiscal stimulus – which together amounts to about 40% of the country’s GDP – to ensure that Japan would remain in business long after it has reopened for business. fs

4. What was Japan’s annualised quarterly growth rate in the December 2019 quarter? a) -0.6% b) -1.7% c) -2.2% d) -7.2% 5. Which Japanese CPI inflation measure turned negative in April? a) Headline inflation b) Core inflation c) Core-core inflation d) All of the above 6. Easing social restrictions and gradual reopening in many economies and relative stability in the financial markets have reduced safe-buying in the Japanese yen. a) True b) False

30

Sector reviews

Fixed interest

Fixed interest

CPD Questions 7–9

7. By how much did the ECB increase its PEPP at its June 4 meeting? a) €200 billion b) €400 billion c) €500 billion d) €600 billion 8. When is PEPP scheduled to expire? a) September 2020 b) December 2020 c) March 2021 d) June 2021 9. The ECB upgraded its 2020 GDP growth forecasts at its June meeting. a) True b) False Alternatives CPD Questions 10–12

10. What is the World Bank’s revised 2020 world GDP growth forecast? a) +2.4% b) Zero growth c) -5.2% d) -7.7%

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

Figure 1: Eurozone GDP growth

Figure 2: Markit Economics Eurozone PMI

4.0

65 PERCENT

60

INDEX

55

2.0

50 45

0.0

40 35

-2.0

30 25

-4.0

Prepared by: Rainmaker Information Prepared by: FSIU Source: Trading Economics Sources: Factset

Quarterly change

Manufacturing

20

Annual change

Composite

15

Services

10

-6.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

MAR17

JUL17

NOV17

MAR18

JUL18

NOV18

MAR19

JUL19

NOV19

MAR20

ECB PEPP targets Eurozone growth Ben Ong

W

hen the going gets tough… …the European Central Bank (ECB) gets more policy provision going.

At its June 4 Governing Council meeting, the central bank raised the size of its Pandemic Emergency Purchase Program (PEPP) by €600 billion to a total of €1,350 billion, extended the duration of the program by six months to June 2021 – or “until it judges that the coronavirus crisis phase is over” – and maturing principal repayments on securities purchased under PEPP re-invested until at least the end of 2022.

No doubt this is in response to the ECB’s gloomier revision to its macroeconomic outlook, revealed by ECB president Christine Lagarde in late May when she told his audience at ‘European Youth Dialogue 2020’ conference that the “mild” [a 5% contraction] scenario is already outdated and to expect an actual outcome of a

11. What does the latest chart of the JP Morgan Global PMI indicate? a) V-shaped recovery b) U-shaped recovery c) L-shaped recovery d) W-shaped recovery

Alternatives

decline in the single currency region’s economic growth of between 8% (medium) and 12% (severe) this year.

The revised Eurosystem staff macroeconomic projections have now been put in black and white.

New forecasts show real GDP growth to dropped from +1.2% in 2019 to -8.7% in 2020 (downgraded from +0.8 predicted in March 2020) before recovering to +5.2% in 2021 (from +1.3%) and +3.3% in 2022 (from 1.4%).

The ECB also lowered its HICP inflation predictions from 1.2% in 2019 to 0.3% in 2020 (from the 1.1% forecast in March 2020), before climbing to 0.8% in 2021 (from 1.4%) and 1.3% (from 1.6%) in 2022.

This is hardly surprising given the sharp 3.2% (year-on-year) drop in Eurozone GDP in the March 2020 quarter that followed a 1.0% growth in the December 2019 quarter.

Despite the recent improvement in the IHS

Figure 1: MSCI Developed and Emerging Market Equities

Figure 2: JP Morgan Global PMI

105

55

100 95

12. Developed equities outperform emerging equity markets this year to date. a) True b) False

Markit Eurozone PMI surveys – composite PMI increased to a reading of 31.9 in May from a record low of 13.6 in the previous month; manufacturing PMI rose to 39.4 in May (from 33.4 in April); services s PMI went up to 30.5 in May (from 12.0 in April) – private sector activity remained in deep contraction territory.

So much so that Markit Economics expects Q2 GDP “to fall at an unprecedented rate, down by around 10% compared to the first quarter” and “to slump by almost 9% in 2020”.

The grim-er growth forecast has already prompted Germany – the poster boy of fiscal responsibility – to announce a €130 billion fiscal stimulus package – more than the expected €80b to €00.

Hopefully, it would change dissenter nations’ – Austria, Denmark, the Netherlands, Sweden – stance against the European Commission’s recent proposal for a €750 billion recovery plan and a 2021-27 budget of €1.1 trillion. fs

45

INDEX (JAN 2020 = 100)

90

40

85 35

80

Prepared by: Rainmaker Information Prepared by: FSIU Source: Sources: Factset

INDEX

50

75

MSCI Developed

70

MSCI Emerging

30

Composite Services

25

65 JAN20

Manufacturing

20 FEB20

MAR20

APR20

MAY20

JUN20

JAN17 APR17 JUL17 OCT17 JAN18 APR18 JUL18 OCT18 JAN19 APR19 JUL19 OCT19 JAN20 APR20 JUL20

Emerging markets lifts with the rising tide Ben Ong

I

Go to our website to

Submit

All answers can be submitted to our website.

t has been four months (five at most) sincethe coronavirus started infecting and slaying citizens of planet earth.

Under house arrest and in solitary confinement – forced upon society by social distancing measures and lockdown restrictions – it seemed like eternity.

Equity market investors were correct in divesting stocks in their investment portfolios – paralysis in business, household and overall economic activity won’t do company profitability any favours but instead lead to losses and, by extension, reduced dividend payouts or utter elimination of dividends altogether, and at worst company dissolution.

Such was the fear among share market investors that both developed and emerging equity markets suffered heavy selling. In the year to March 23, the MSCI equity index dropped by 30.5% while the MSCI emerging equity mar-

ket index declined by 27.3% (see Figure 1).

However, despite grim economic forecasts for 2020, both developed and emerging equity markets have reduced their year-to-date losses to a mere 2.8% and 6.1%, respectively.

In its June 2020 ‘Global economic Prospects’ report, the World Bank (WB) sees world GDP growth dropping from an estimated +2.4% in 2019 to -5.2% this year (a sharp 7.7 percentage point revision from its January 2020 forecast).

The WB downgraded its 2020 GDP growth forecasts for advanced economies by 8.4 percentage points to -7.0%.

It expects emerging market and developing economies to contract by 2.5% this year – the first contraction in at least 60 years – “due to the negative spill overs from weakness in major economies, alongside the disruptions associated with their own domestic outbreaks”.

The massive monetary and fiscal stimulus measures enacted in developed economies explain the recovery in their stock markets.

In contrasts, emerging market economies have limited firepower, compounded by currency depreciation brought on by the pandemic, as well as reduced foreign direct investment and remittances by workers working abroad.

It could be that the gradual easing of social isolation and lockdown restrictions and re-opening of economies are lifting all equity market boats.

So much so, that preliminary indication from the latest JP Morgan Global PMI indices – manufacturing, services and composite – show a Vshaped rebound in private sector activity.

However, be wary that continued gains in the equity markets could be reversed if the easing of lockdown rules and social isolation measures brings about a second wave of infection.

In which case, the V could become a W. fs

Sector reviews

www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

31

Property

Property

CPD Questions 13–15

Prepared by: Rainmaker Information Source: Federal Government, Grattan Institute, ACOSS

n June 4, Prime Minister Scott Morrison O announced the HomeBuilder scheme, providing eligible owner-occupiers (including first home buyers) with a grant of $25,000 tax-free to build a new home or substantially renovate their existing home.

The package is the latest step in the government’s efforts to boost the economy, assisting the residential construction market by creating work for builders. The construction industry has seen 7% of its workforce slashed in the three months to June, according to the Grattan Institute.

It will run through to December 31 and construction must begin within three months of a contract date.

It is anticipated it will cost about $680 million in total, covering about 27,000 grants.

To be eligible, applicants must be an Australian citizen aged 18 years and over and not be buying or already own a property via a company or trust.

They must also be on an income of less than $125,000 for singles and no more than $200,000 for couples.

For those renovating their home, they must

HomeBuilder package announced, criticised Jamie Williamson

spend a minimum of $150,000 up to a maximum of $750,000 on a home previously valued at less than $1.5 million. Meanwhile, any new homes being built must be worth less than $750,000, including the land value.

Importantly, the grant is applicable to all dwelling types including house and land packages and off the plan purchases. However, it does not apply to those looking to build or renovate an investment property.

It also does not apply to owner-builders, and all contracts must be at arm’s length, meaning an applicant cannot engage a relative to undertake the work.

Any renovations must be to improve the accessibility, safety and livability of the dwelling, the government said. Additions that are not connected to the home do not qualify, including pools, tennis courts, saunas or sheds.

Master Builders Australia chief executive Denita Wawn said the HomeBuilder scheme will be a lifeline for the building industry.

However, Grattan criticised the package as “straight-out retail politics” and “bad econom-

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ics” that will result in a lot of money spent to save few jobs.

Grattan program director Brendan Coates said the new grants will encourage tradespeople to inflate their prices and will only benefit those who were already planning to renovate.

The Australian Council of Social Service also rejected the HomeBuilder package, calling it a wasted opportunity to address the lack of adequate social housing.

“There is no argument that the construction sector needs a shot in the arm, but this money will not go where it is most needed. It will largely benefit those on middle and higher incomes undertaking costly renovations, without any related social or environmental benefits,” ACOSS chief executive Cassandra Goldie said.

People will be saddled with significant debts that they may not end up being able to afford, especially given the uncertainty of the job market, she added.

“We are in a recession, with more and more people struggling to pay rent, which will only lead to greater homelessness,” Goldie said. fs

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14. The HomeBuilder grant is applicable to which of the following? a) Building or renovation of an investment property b) House and land packages c) Owner builders d) Additions that are not connected to the home, such as a tennis court 15. ACOSS rejects the HomeBuilder scheme on the basis that it fails to address the lack of adequate social housing. a) True b) False

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13. Eligibility for the HomeBuilder scheme includes which of the following? a) Applicants must be on an income of less than $150,000 for couples b) New homes being built must be worth more than $750,000 c) Renovators must spend a minimum of $150,000, to a maximum of $750,000 d) Applicants must be on an income of less than $90,000 for singles

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www.financialstandard.com.au 22 June 2020 | Volume 18 Number 12

MOVE TO YOUR OWN BEAT Dina Kotsopoulos was destined for a career in music, but fate had other plans. Now the head of platforms at BT, she reflects on her sliding doors moment. Ally Selby writes.

rom a young age, Dina Kotsopoulos dediF cated herself to music, with a career in the arts mapped out in the stars. She topped off countless hours of practice with a university degree set to catapult her to the behind-the-scenes world of music.

It’s not often that a part-time job at a contact centre can tempt someone away from the world of late nights and bright lights, but somehow for Kotsopoulos it did.

Soon after, Kotsopoulos was catapulted into a world which some might describe as music’s polar opposite; financial services.

Now the head of platforms at BT, Kotsopoulos has risen from that first contact centre role to a national leadership position in relative lightning speed.

“At 21 years of age I had to decide whether to go back on the path I had always wanted or to follow this new, evolving passion,” Kotsopoulos says.

“Much to my parents dismay at the time I decided to stay on at BT and completely changed the career path I had in my mind my whole life.”

A decision, which she says, has been the best of her life. However, her new path was not without challenges.

“There was a period where I was definitely a bit of an outlier,” Kotsopoulos says.

“Everyone that I was working with in the contact centre at the time had studied finance and understood the industry and economics and I didn’t have that kind of a background.

“For me, it was as much a challenge as it was a bit of fear, because I felt like I was a fish out of water.”

Despite this fear and sense of doubt, Kotsopoulos fell in love with the world of financial services.

“I felt as though I was really helping people and I realised financial health is one of the most important things in life,” she says.

“I knew I could really have an influence on people’s lives; like I was adding value every single day.”

It’s kept Kotsopoulos at BT throughout her career thus far, spending 13 years with the financial services firm.

“I freak out when I hear that because I can’t believe I have been here for that long,” she says.

“I recall that when one of my trainers in the contact centre introduced herself, she said: ‘Hi, I’m Leanne and I have been here six years’, and I thought, six years! Why would you stay in the one place for six years?

“And now 13 years later, here I am; I’m loving it and I’m evolving. All the leaders I have had and the trust they had in me, and the opportunities they have given me, have kept me here with the business.”

This type of undying loyalty is usually rare, especially during one’s early career – but Kotsopoulos says it’s all about finding a business that believes in you, just as much as you believe in it.

“From a cultural perspective, you have to feel as though you’ve got an opportunity to add something to the customer’s experience,” she says.

“And within the company, you have to feel as though you’re supported, you have to feel trusted - that’s certainly been a big thing for me.

“I wake up in the morning and I know that if I go to work, I’m supported. I know that if I need flexibility, I’ll get it. I know that if I want to have a challenging conversation, that I can have it without any negative consequences.”

Now, having studied a MBA, and with supportive mentors by her side, that sense of doubt has evaporated. She argues its not just culture that breeds success; it’s also a bit of hard work.

“I never shield away from a challenge,” Kotsopoulos says.

“I think particularly in an industry that has faced so many challenges over the past five to 10 years, whether it be the FOFA reforms or the Royal Commission, or regulatory changes – you have to be resilient, you have to work hard both for your customers and for the business.”

These traits; resilience, passion, hard work, dictate all that Kotsopoulos does.

“Whether it’s creating a new product or service, or responding to regulatory change, or just trying to nail a recipe on the weekend over a glass of wine, I am all in,” she says.

“I have definitely benefited from my passion, resilience and hard work.”

It’s something that financial services professionals have always strived to do, she says, however the Royal Commission highlighted what happens when they get it wrong.

“I think the Royal Commission was a really pivotal moment for the financial services industry; it unearthed a lot of things that we need to improve on,” Kotsopoulos says.

It’s made all financial services organisations think differently about how they operate, she adds.

“We’ve absolutely taken all those learnings to heart and we have been improving ourselves, and evolving our products and services, to really put the customer at the centre of everything that we do,” Kotsopoulos says.

As markets crash and economic uncertainty lingers, Australia’s advisers have stepped up to the challenge, she says.

“I think of my Mum and Dad through this COVID-19 crisis - they have a small business, they are struggling, and they are turning to a financial adviser to help them through this,” Kotsopoulos says.

“Advisers have really upped the ante in terms of engagement; they want to communicate more, they want to engage more, and they’re asking us to help them do that.”

It could have gone one of two ways, she says.

“Advisers could have used the COVID-19 crisis as a reason to not be able to service their clients effectively,” Kotsopoulos says.

“But instead, they are trying to ensure that they keep that connec-

Whether it’s creating a new product or service, or responding to regulatory change, or just trying to nail a recipe on the weekend over a glass of wine, I am all in.

Dina Kotsopoulos

tion with their clients because they know that their value is absolutely amplified in circumstances like this.”

The crisis, despite its related health and economic challenges, has highlighted the true value of financial advice, Kotsopoulos says.

“People that have had a financial adviser for a long time and have found a really good one, absolutely know the value of advice, particularly in times like this,” she says.

“I think those that haven’t had a financial adviser are probably nervous about their livelihoods, they’re nervous about their homes, they’re nervous about their families.

“And I hope they turn to a financial adviser because they can add so much value.”

As for Kotsopoulos, while the world of music may seem a distant memory to her current reality, it remains a major, valuable part of her life.

“I’ve got my guitar and piano set up in my apartment and on the weekends I have a bit of a jam and go to concerts,” she says.

And if she were living life with a backing track, Kotsopoulos says the soundtrack to The Sound of Music would be her pick.

“It always brings happiness and hope,” she says.

“And I think we all need a bit of that right now.” fs

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