vol18 n19 28 September

www.financialstandard.com.au

28 September 2020 | Volume 18 Number 19

07

11

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Macquarie

Sinead Rafferty Fidante

Impact investing

Feature:

Profile:

Product showcase:

09

Publisher’s forum: Australian Ethical

Opinion:

Featurette:

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Australian equities

Brett Cairns Magellan

Fidelity Asia Fund

Sericulture, the ancient Chinese process of turning silk cocoons into thread exquisite enough for embroidery, takes years of dedication and care to master.

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Learn more at fidelity.com.au/fidelity-asia-fund Morningstar Awards 2020 © Morningstar, Inc. All Rights Reserved. Awarded to Fidelity International for 2020 Morningstar Australia Fund Manager of the Year.

This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters and seek independent financial advice before acting on the information. You should also consider the Product Disclosure Statement for the Fidelity Asia Fund before making any decision about whether to acquire the product. This can be obtained by contacting Fidelity on 1800 119 270 or online at www.fidelity.com.au. Investments in small and emerging markets can be more volatile than investments in developed markets. Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (‘Fidelity Australia’). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. ©2020 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.

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07

11

22

Macquarie

Sinead Rafferty Fidante

Impact investing

Feature:

Profile:

Product showcase:

09

Publisher’s forum: Australian Ethical

Advisers needed as aged care costs soar Ally Selby

proposed death tax by former Prime MinA ister Paul Keating has shone a spotlight on the need for greater aged care expertise in financial advice as costs continue to rise.

The HECS-style mechanism would see the government advance loans to every Australian so as to meet their residential aged care or in-home care needs, with the loan repaid from their estate upon their death.

“We are not forcing anyone out of their home in old age, we’re not obliging aged persons to negatively mortgage their home, you’re not asking members of families to chip in and pay for their relatives in their accommodation or their care,” Keating said.

Aged Care Gurus principal Rachel Lane says the proposal has both benefits and disadvantages.

“In some ways, it’s good, because there are people who can’t use the pension loan scheme or get a reverse mortgage because of the nature of their accommodation; people who live in retirement villages or granny flats,” she says.

“But it does potentially open up the system to rorting and I don’t know how you would stop that.”

Aged Care Steps director Louise Biti warns it may be viewed as a death tax and lends itself to people trying to divest assets and pass them on to the kids before they get to aged care and or an estate, leaving no assets to recover the debt from.

This could lead to substantial levels of elder abuse if not managed effectively, she said, leaving older people exposed by having given away all their assets in anticipation of what may or may not happen.

Instead, Lane argues conversation should shift towards fairer means testing and better funding.

“We need to ensure our senior Australians are paying a price that is fair and receiving a standard of aged care that as a society we accept is good enough,” she says Since 1975, government expenditure on aged care has nearly quadrupled, with Treasury’s Intergenerational Report projecting expenditure would nearly double again as a share of the economy by 2055, from 0.9% to 1.7% of GDP. However, this was prior to both COVID-19 and the Royal Commission into Aged Care Quality and Safety.

“The Royal Commission is going to recommend a substantial increase in funding for aged care to address concerns around service quality

and staffing, so the cost is going to be even higher,” the Grattan Institute’s program director for household finances Brendan Coates warns.

The problem, he believes, is that Australians are saving for a rainy day – the chance of ending up in aged care - when in fact the government is on the hook for most of the costs.

“Everyone self-insures; they set aside enough money to pay for aged care in the case that they happen to be the person that needs it and that’s one of the key drivers of why people are not spending their money in retirement today,” Coates said.

Biti explains that aged care providers can receive anywhere up to $112,000 annually per resident to cover ongoing costs, with those with minimal assets typically paying around $19,000 and those with substantial assets forking out up to $48,000 per year. The rest is paid by the government.

While she agrees the government should support those who genuinely cannot afford aged care themselves, she argues that for those who can, it should be our own responsibility.

“Whether we like what Paul Keating said or not, it’s an idea that’s out there that’s worth thinking about and looking at how it could be put into practice,” Biti said.

“It’s only when you raise lots of ideas that you can come up with a good solution.”

In the past, aged care wasn’t really on the radar of financial advisers, Biti said, which has resulted in there only being around 100 to 200 specialist advisers in the country. Others, while not specialists, may have offered some advice to clients by accessing support services.

“We now have financial advice businesses in Australia which opened 20 to 30 years ago with 50 to 60 year old clients, and these clients are now getting into aged care, so it’s starting to very much impact the client base of those businesses,” she said.

Lane believes advisers need to upskill in retirement living and aged care advice, and argues that while it may be complicated, it is an undeniable growth opportunity.

“More than 1.3 million people accessed aged care services last year and by 2050 that’s projected to grow to about 3.5 million,” she said.

“It’s about understanding that a significant portion of your client base is going to need this type of advice over the coming years, or if your clients do not need this advice for themselves, they’re going to need it for their parents.” fs

28 September 2020 | Volume 18 Number 19 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

Opinion:

Featurette:

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32

Australian equities

Brett Cairns Magellan

Stakeholders mull merger costs Jamie Williamson

Rachel Lane

principal Aged Care Gurus

Superannuation industry stakeholders are in talks with the prudential regulator to devise a lower cost option for fund mergers, with smaller funds currently facing the potential of being priced out of merger opportunities.

Appearing as part of a session on super mergers, PwC partner Catherine Nance has said it’s not unusual for the total cost of a super fund merger to reach 10 basis points, a cost that has a greater impact on smaller funds as they could see their reserves wiped out overnight.

As such, Nance confirmed that some industry participants are currently discussing alternatives with APRA. “A few of us are talking to APRA about finding a lower cost option, particularly for smaller funds to move into larger ones,” Nance confirmed.

Of the roughly 180 super funds currently operational, Nance said half are less than $1 billion in size and a further 60 are less than $10 billion.

Continued on page 4

Fees should reflect skill Eliza Bavin

Active managers should only charge fees in line with the returns generated from the investment manager’s skills, according to Sharon Fay, chief responsibility officer at AllianceBernstein.

Speaking at the JANA Annual Conference, Fay said not all active strategies deserve active fees.

“It’s important to isolate the true value of an active strategy and pay fees commensurate on that value,” Fay said.

“You need to calculate how much of the returns is from beta, how much is from exposure to factors like growth or value, and what’s remaining from those returns that can be associated to manager skill and active management.”

Prime alpha, Fay said, is very persistent and if a manager has been able to achieve higher returns over time the likelihood of them being able to continuously deliver the same is very high.

“If you’re going to employ active strategy, you need to ensure the fees you’re paying are Continued on page 4

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News

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

NAB fined over fees for no service misconduct

Editorial

Annabelle Dickson

Jamie Williamson

T

Editor

Just how much should individual members of a superannuation fund’s leadership team be taking home?

It’s a question that’s popped up from time to time but never really inspired any vigorous debate. The discussion is back on the agenda thanks to COVID-19, spurred by none other than AustralianSuper chief executive Ian Silk.

Silk is advocating for a review and subsequent reduction of executive remuneration in the wake of the pandemic; for salary packages to better reflect the poorer investment performance seen this year.

However, on September 10, Hostplus chief executive David Elia fronted the House of Representatives Standing Committee on Economics and, when pressed by committee chair Tim Wilson, did not necessarily agree.

Elia confirmed the $55 billion fund was undertaking salary reviews and the variable component of those arrangements would be impacted as a result of performance, but offered nothing in the way of base salaries.

Asked whether the review would take into account the fact that a vast cohort of Hostplus members have seen their income all but dry up at one point or another this year, Elia commented that nothing had changed for the super industry and that they were “getting on with the job”.

For those of you playing at home, a recent investigation by News Corp found Elia was the highest paid super fund chief executive last financial year, raking in $1.19 million. Silk is the second-highest paid on $1.06 million.

So how should a super fund executive’s pay be determined?

A recent poll by Financial Standard asked whether super executives should be taking home million-dollar salaries. About 43% of respondents said remuneration should be tied to fund size and investment performance.

This is interesting on a number of fronts, but particularly because a quick flick through the annual reports of some of the smallest funds shows those chief executives making bank.

For example, according to its last annual report, the chief executive of a $2.8 billion super fund is paid close to half a million dollars – about half of what Silk is paid despite his fund representing about 1.5 % of the size of AustralianSuper.

Given Rainmaker data to end of March ranks that fund’s MySuper option at 43rd out of 50 for one-year performance and 30th for three years, it’s hard to believe such a salary has truly been earned.

The next most popular response at 26% was that super fund executives should be compensated similar to public servants, which was followed by those that said they didn’t care so long as member outcomes were positive (15%).

Finally, just 14% of respondents said milliondollar salaries are justified because leading a super fund is a big job. I wonder if we could guess who those respondents are… fs

The quote

Customers should never have been charged for a service that was not received.

he Federal Court of Australia has fined National Australia Bank $57.5 million over deceptive and misleading conduct.

The proceedings commenced in 2018 and were initially brought by ASIC against NAB units NULIS and MLC Nominees for the charging of plan service fees to MLC MasterKey Business and Personal Super fund members between 2012 and 2018.

The NAB trustees admitted to misleading or deceptive and false or misleading representations, as well as consequential breaches of the ASIC Act and the Corporations Act. NULIS and MLC ceased charging the plan service fees in November in 2018 and affected members have been compensated with a total $117 million paid by May 2019.

Judge David Yates ordered MLC to pay $49.5 million and NULIS $8 million, noting that MLC’s contraventions were more severe.

NAB group executive, legal and commercial services Sharon Cook, said: “With this legal matter resolved and important lessons learned, we are now moving forward and are focused on serving our customers well.”

“Customers should never have been charged for a service that was not received, and NULIS and MLCN should have made it clearer that customers could switch off the Plan Service Fee.” The judgement noted that while MLC Nominees was trustee, it deducted around $59 million from 313,078 linked members’ accounts while NULIS deducted over $12.8 million from 144,033 linked members with both trustees paying the sum to advisers.

The fine came just weeks after APRA issued

new directions and imposed licence conditions on NULIS. The directions and additional licence conditions require NULIS to record how it considers members’ best interests and priority covenants when making decisions that materially affect members.

APRA said this measure would improve NULIS’ practices and ensure APRA is able to better assess whether members’ best interests are being sufficiently considered by NULIS. Further, the new directions and conditions will address prudential concerns APRA identified in its supervision of NULIS, corroborated in an independent report by Deloitte.

NULIS will be required to undertake timely remediation by implementing improvements in its governance and control environment and appointing an independent expert to report on compliance with its licence conditions.

APRA said NULIS had agreed to these provisions.

The new directions and licence conditions follow an investigation into matters at NULIS uncovered by the Royal Commission.

APRA did not conclude that NULIS breached the Superannuation Industry Act 1993 but the regulator said its investigation did raise serious questions about the adequacy of NULIS’ internal processes for ensuring that members’ best interests were prioritised.

The Royal Commission formed the view that NULIS’ decisions in regards to moving certain groups of members into MySuper products, grandfathering certain fee arrangements and the charging of fees to members for services that were not provided may not have been in members’ best interests. fs

Superannuation fund boss remuneration on the agenda Karren Vergara

Two major superannuation funds are reviewing their remuneration structures as a result of COVID-19, which will potentially see many executive pay reduce, a public hearing found.

Hostplus chief executive David Elia appeared before the House of Representatives Standing Committee on Economics yesterday, answering questions about the impact the global pandemic is having on executive pay.

Chair Tim Wilson pointed out AustralianSuper chief executive Ian Silk’s stance, which is advocating for remuneration to be reviewed and consequently reduced on the back of the COVID-19 pandemic and weaker investment performance.

Elia did not outright agree or disagree with this reasoning, but mentioned that Hostplus’s remuneration committee will meet next week and review salaries.

“There is obviously a fixed base salary, and then there’s a variable component. And there is no doubt that those variable elements will certainly be impacted as a consequence of the performance of the fund, particularly the area of over investment returns,” he said.

Wilson pressed if the remuneration committee will consider other extenuating factors, like many Hostplus members who work in hospitality losing their income as a result of the pandemic, which should be factored in when reducing bonuses.

Elia said that “we are getting on with the job” and that the super fund has not put its hand up for JobKeeper. “[Ultimately] we are focused on continuing to work for the benefit of our members. Certainly our industry has not been impacted. Our job is to invest money. Our job has also been to assist the government in relation to its early release scheme payments…,” he said.

An investigation by News Corp found Elia was the highest paid chief executive last financial year, earning $1.19 million. He is followed by Silk, who received $1.06 million, while QSuper’s chief Michael Pennisi was paid $1.02 million.

Among the highest-paid chief investment officers, News Corp found UniSuper’s John Pearce was the highest paid among his peers at $1.73 million, while AustralianSuper’s Mark Delaney earned $1.63 million and Damian Graham from First State Super’s received $1.33 million. fs

News

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

Netwealth takes stake in fintech

01: Sam Sicilia

chief investment officer Hostplus

Annabelle Dickson

Wealth management company Netwealth has announced its investment and partnership with data solutions fintech Xeppo.

Netwealth purchased a 25% stake in Xeppo with the option to increase its holding to 50% in the future but noted the investment is not initially “financially material” but instead will further the company’s proposition.

Xeppo’s technology specialises in data reconciliation to support wealth management, accounting and mortgage industries resulting in users to better manage client relationships, new business and monitor compliance.

Its primary focus includes customer relationship management, workflow, marketing capacity and tools and reporting to provide licensee and practice management insight which in turn reduces the amount of technology systems advice firms need to use.

Netwealth joint managing director Matt Heine said a key element of Netwealth’s strategy is to enrich data which underpins its current and future technology.

“From our recent research, we found that advice firms on average use between 12 and 15 technology systems in their business, all of which have different data models, significant data discrepancies and often overlap from a features perspective,” he said.

Xeppo chief Paul Campbell said Netwealth’s focus on innovation made perfect sense for the partnership. fs

3

Hostplus can’t be killed Elizabeth McArthur

H The quote

There was never going to be a liquidity problem.

ostplus chief investment officer Sam Sicilia01 has firmly rebutted speculation that COVID-19 and the early release of super scheme could have caused a liquidity crisis, detailing a series of extreme events that wouldn’t “kill the fund”.

“There was never going to be a liquidity problem,” Sicilia said.

He slammed media speculation on Hostplus’ liquidity position after the hospitality and tourism industries were hit hard by COVID-19 and the fund had almost $2 billion in early release requests.

Sicilia shared Hostplus’ stress-testing scenarios for adverse events that require liquidity.

“These are five scenarios that we apply cumulatively… and the question is does the fund survive?” Sicilia said.

The first of those scenarios was 10% of the fund being redeemed or 30% of the fund being redeemed in one year. The scenario asked

whether the fund could recover within the following seven years.

The second scenario adds to scenario one and assumes the fund has zero returns for the entire seven-year period.

The third scenario builds on the first two, adding that members do not contribute for the entire seven years.

“Say SG is switched off or there’s a pandemic and your industry stops working for the entire seven-year period,” Sicilia said.

“For Hostplus either a 10% or 30% redemption and zero returns over a whole seven-year period and zero member contributions over the seven-year period does not kill the fund. Things aren’t looking great and the SAA is out of shape, but at no point is this a terminal event.”

For a fourth scenario, Sicilia added to the last three that all the fund’s commitments were immediately called and there were no distributions from assets for seven years. He said Hostplus would survive that scenario too. fs

STRENGTHEN YOUR CORE A critical decision for advisers is the choice of core exposures, which serve as the long-term foundation of client portfolios, independent of market cycles.

It’s more important than ever to ensure your clients’ portfolio core matches asset allocation objectives, demonstrates compelling value, and contributes to the portfolio’s overall stability.

ETFs are compelling investment vehicles for core exposures, making it simple for advisers to construct a liquid, transparent and cost-effective foundation for their clients’ portfolios.

Explore the range of BetaShares Core portfolio ETF solutions at

WWW.BETASHARES.COM.AU/CORE-SOLUTIONS

BetaShares Capital Ltd (ABN 78 139 566 868 AFSL 341181). Investors should read the relevant PDS at www.betashares.com.au and consider whether the product is right for their circumstances.

Investing involves risk.

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News

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

01: Karen Chester

Stakeholders mull merger costs

deputy chair ASIC

Continued from page 1 “Our view is that over the next three to five years, we will get down to 30-50 super funds; five to 10 in the mega range, 20-30 in the midsized and five to 10 smaller funds that will still be left, because there is a role for smaller funds,” she said.

She said this means there is currently about $1.5 trillion in assets in play when it comes to potential industry consolidation over the coming years.

“If you’re talking about $1.5 trillion in play, the 10bps is an awful lot of money to wash up against the wall to get a consolidated, rationalised industry,” she said.

However, she did say merger costs can also be an impediment to larger funds too. Where a large fund is “like an elephant swallowing a pea”, that fund will incur costs when undertaking due diligence on the smaller fund.

“It’s very hard for them to prove that’s actually in the best interests of their members, because they’re not going to see a cost saving but they will see a cost to do it,” she explained.

“I think there is a whole bigger issue around the cost of merging at the moment.” fs

Fees should reflect skill Continued from page 1 commensurate to the value you’re receiving,” Fay said.

In addition, Fay said investors need to focus on long-term investing goals which have only been re-affirmed due to the COVID-19 pandemic.

“The focus needs to be on long-term investing goals. For pension plans that mean generating cash flows in excess of the inflation rate and not investing against short term downturns in the market,” Fay said.

Fay said, for a portfolio of 70% equities and 30% fixed income, it would take approximately five years to recoup the COVID-19 market losses.

Whereas, if at the height of the volatility the investor switched the portfolio to 70% fixed income and 30% equities, it would take eight years to get back those losses.

“It’s important to know what you can and can’t forecast and understand that the bear case for highest-risk assets is not always the case with bull assets,” she said.

“There is a place for meaningful allocation to passive strategies but I wouldn’t be putting all my eggs in that basket.”

Separately at the JANA conference, chief executive of MIP, Macquarie Infrastructure and Real Assets, Karl Kuchel said COVID-19 has only served to accelerate the growing trend towards digital infrastructure.

“We look at COVID-19 as being an accelerator of a data growth trend that was already wellestablished. I think investors have recognized that digital infrastructure is a key component of a diversified infrastructure portfolio,” Kuchel said.

“It’s now being accepted by a large group of infrastructure investors as providing diversification benefits and potentially a higher growth outlook.

It makes sense to have that sort of exposure in a general infrastructure portfolio.” fs

ASIC cleans up misleading ‘cash plus’ funds Kanika Sood

A The quote

Funds should be “true to label”. This is not a nice-to-have.

SIC found 14 ‘cash’ funds with $7 billion in assets had confusing or inappropriate labelling, resulting in changes to names, asset allocations or in one case, even a closure.

The corporate regulator found some funds that labelled themselves as ‘cash funds’, had asset holdings akin to a bond or diversified fund and hence, higher risk and lower liquidity as compared to cash.

It took particular note of ‘cash plus’ or ‘cash enhanced’ labelling, where ASIC found 50% and 70% respectively of assets were not cash or cash equivalents, and actually fixed-income securities and mortgages.

ASIC did not name any funds, but Financial Standard previously reported Vanguard, Western Asset and UBS are among the managers who have dropped the ‘cash plus’ or ‘enhanced cash’ name from their marketing in recent months. Meanwhile, more recent launches have dropped the tags from their name.

To identify the 14 ‘cash’ miscreants, ASIC started with surveillance of 350 funds with over $65 billion in total assets, initially looking at PDS and other public disclosure and then sending notices to 20 responsible entities to get further information on asset allocation, liquidity, maturity profile and resilience.

This was followed by targeted surveillance of 37 managed funds (from 20 responsible entities) with $21 billion in assets, focusing on two questions: were they ‘true to label’ and did the

fund liquidity advertised to investors match that of the underlying assets.

It narrowed it down to funds in fixed income, mortgage and property sectors (which ASIC says were largely appropriately labelled) from which it whittled down to 22 funds (with over $15 billion) that used ‘cash’, ending in 14 funds ASIC identified as inappropriate.

The whole exercise resulted in: nine funds (across seven REs) changing names voluntarily, one fund proposing to change asset allocation, three REs conducting or committing to reviews, and one winding up its fund.

ASIC said it will continue to monitor the outcomes and consider appropriate regulatory action, including enforcement action where necessary.

“Funds should be “true to label”. This is not a nice-to-have. It’s a must-have for responsible entities in meeting their legal obligations to their investors, especially in times of market volatility,” ASIC deputy chair Karen Chester01 said.

“Inappropriate labelling of a fund can mislead investors into believing that the fund is much safer or more liquid than it actually is.

Put simply, a fund should not use terms such as “cash” or “cash enhanced” unless its assets are predominantly in cash and cash equivalents.”

‘Being “true to label” is also fundamental for a competitive marketplace. If consumers cannot rely on product labels, then it is difficult for funds to compete on a fair basis – disadvantaging both compliant fund managers and end-consumers,’ she said. fs

Aussie small caps outperform Karren Vergara

Rainmaker’s July Wholesale managed funds performance report reveals the best and worst fund managers, pointing out stellar performances from the likes of Lakehouse Capital, SG Hiscock and OC Funds Management.

While the ASX Small Ordinaries Index returned 6.5% over a three year period, Lakehouse Small Companies Fund earned a whopping 26.2%, followed by the SG Hiscock Emerging Companies Fund (19.1%) and OC Micro-cap Companies Fund (18.6%).

For large-cap Aussie equities, Bennelong’s Australian Equities Fund (13.6%) topped the leagues table, followed by its Concentrated Australian Equities (12.4%) and Greencape’s Broadcap Fund (11.2%).

Australian fixed-interest funds had 35 out of 42 products returning between 5.1% p.a. and 6.6% p.a. over three years. The remainder returned between 1.6% p.a. and 3.6% p.a.

The nature of fixed interest returns means that

fixed-income managers behave very differently to equities managers, the report read, noting that fixed interest has an upper limit on returns.

“Generally speaking, returns above the benchmark can only be achieved by playing around with interest rate risk and credit risk.

“Credit, for example, is an easy place to goose returns. Through time, credit securities produce higher yield than highly rated government bonds.

So long as there is not a credit crunch the fund will show a higher return than the benchmark. This is not skill, it is gaming the system,” Rainmaker said.

In the large-cap international equities sector, Loftus Peak Global Disruption Fund (23.1%), Zurich Concentrated Global Growth (23%) and BetaShares Global Sustainability Leaders (22%) were the best performers.

Across growth funds, IOOF’s Multimix Growth Trust (7.9%), Vanguard’s High Growth Index Fund (7.5%) and its Growth Index Fund (7.1%) comprised the top three. fs

News

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

ASIC delays RG97 for two years

01: Tom Waterhouse

chief investment officer Waterhouse VC

Karren Vergara

ASIC said it is pushing back the timeframe when superannuation funds and managed investment product issuers are required to update their product disclosure statements, which originally applied to PDSs issued on or after 30 September 2020.

Now, PDSs given on or after 30 September 2022 must comply with the new requirements, which must reflect more clarity in areas such as the disclosure of performance fees, significant event notice requirements, and the identification and treatment of derivative costs.

The changes are also applicable to issuers of investment life insurance products, and operators of investor directed portfolio services (IDPSs) and managed discretionary account (MDA) services.

“Trustees can choose to opt-in to the regime from 30 September 2020 for PDSs and 1 July 2020 for periodic and exit statements,” ASIC superannuation senior executive leader Jane Eccleston wrote.

Trustees choosing to opt-in must make a written record that includes the date of election and the PDS/product to which the election applies.

Periodic and exit statements with reporting periods commencing on 1 July 2021 must comply.

Eccleston added that the extension will give super funds and product issuers more time and flexibility in light of COVID-19.

Further, she flagged that ASIC will continue to develop its proposals on disclosure by platforms. fs

5

Tom Waterhouse turns to funds management Kanika Sood

T The quote

The family’s experience, reputation and capital give it access to deals in the market that a normal fund manager would not appreciate or have access to.

he horse racing scion is touting a managed fund that invests in gambling companies to wholesale investors.

Waterhouse VCs gambling takes long-term stakes in listed and unlisted businesses related to gambling, focusing on three themes: dominant scale operators in regulated markets, service providers to gambling businesses and ancillary businesses (like media and video gaming) that overlap with gambling.

It is priced at 2% p.a. in management fees and 20% in performance fees above a high watermark (set for individual investors) and a buy/sell spread of +/- 1% of the net asset value, according a memorandum of information.

Minimum investment size is listed as $100,000. Investors are allowed one redemption each quarter, gated at 25% of their investment in the fund.

The website lists Waterhouse as the chief investment officer, with investment analysts: Michael Donohue and Rey Vakili.

A monthly update touted returns of nearly 223% since its inception to July end, saying a $100,000 return would have grown to $322,570.

Waterhouse is a cornerstone investor in the fund and the MOI touts being able to “invest on the same terms as the Waterhouse family” as one of its attractions.

“Tom Waterhouse 01 will be a cornerstone investor in the fund. To this end, investors would be putting money into deals that Tom is going into and at the same rate.” “…The family’s experience, reputation and capital give it access to deals in the market that a normal fund manager would not appreciate or have access to.”

SAXO Capital Markets (Australia) is acting as the custodian. fs

6

News

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

Charter Hall REIT acquires portfolio

01: Marisa Broome

chair Financial Planning Association of Australia

Annabelle Dickson

The Charter Hall Long WALE REIT (CLW) has entered into an agreement to acquire a portfolio of petrol stations in New Zealand and will undertake an equity raise to fund the purchase.

CLW is acquiring a 49% interest a portfolio of 70 long weighted average lease expiry (WALE) BP Oil New Zealand service stations for NZ$130.8 million bringing the total portfolio value to $3.8 billion.

The REIT will undertake a fully underwritten $60 million institutional placement and a nonunderwritten share purchase plan of $10 million to assist in funding the acquisition.

The balance of funding for the transaction will be funded from available borrowing capacity.

The placement will be issued at a fixed price of $4.87 per security which is a 3.2% discount to the last closing price on September 9.

Eligible shareholders will be able to subscribe for up to $30,000 at the same price as the placement price minus the latest quarterly distribution of 7.2 cents per security.

The BP portfolio has an initial yield of 6.25% with the properties currently all leased and a WALE of 20 years.

The lease structure has annual consumer price index increases plus up to 0.5% in the first five years and comprises the majority of BP’s owned convenience properties in New Zealand.

CLW fund manager Avi Anger said the portfolio represents an extension of Charter Hall’s strong relationship with BP and enhances the portfolio WALE. “This is an exciting opportunity for CLW to invest in the New Zealand market in a diversified portfolio of high quality properties leased to a high quality tenant with long WALE leases,” he said.

The majority (78%) of the petrol stations are in metropolitan and commuter locations around half of which are in Auckland. fs

Capital raising measures revised Eliza Bavin

The Australian Securities Exchange (ASX) has revised its temporary emergency capital raising measures that were put in place to assist companies during the COVID-19 crisis.

The ASX said the measures will be tightened as a result of the stabilisation of market conditions.

“From 15 September 2020, any entity wishing to rely on the measures must satisfy ASX that it is raising capital predominantly for the purpose of addressing the existing or potential future financial effect on the entity from the COVID-19 health crisis, and/or its economic impact,” the ASX said.

“Since their introduction, the measures have facilitated a wider range of capital raisings for entities affected by current market dislocation.”

The emergency measures were implemented back in March in response to the extreme market volatility being experienced.

It introduces two class order waivers to help listed entities affected by COVID-19 to raise urgently needed capital.

The ASX said the waivers will remain in place until 30 November 2020. fs

Advice too expensive, hard to access: FPA Ally Selby

N The quote

We want more Australians to seek financial advice but to do that they need to be able to ac­cess it and afford it.

ew research has revealed COVID-19 has altered Australian spending behaviour, with more households in a fragile financial position than ever before and facing reduced access to financial advice.

The research from CoreData, presented at the Financial Planning Association of Australia’s (FPA) ‘Uncovering the Value of Financial Planning Advice’ virtual event held earlier this month, drew on key industry players and experts to discuss the increasing demand for quality and affordable financial advice.

According to the findings, four in five Australians took action to protect their personal finances from the impact of COVID-19, including reducing their discretionary spending (63.5%), reducing spending on essentials (47.8%), cancelling memberships (36.7%), seeking additional work (16.9%) and applying for financial support or a loan (12.8%).

FPA chair Marisa Broome 01 said the results highlight the extraordinary and life changing circumstances we are living through.

“It’s affecting every facet of our lives. Our health, our work, our emotions, our friendships, our travel plans, our life plans and of course our financial circumstances,” she said.

“Money plays such a critical role in our ability to live the life we want, especially in the face of challenging and unplanned circumstances.”

The research from CoreData also found that those that acknowledged they needed to strengthen their financial position in the wake of COVID placed affordable advice and support from a financial planner of utmost importance, as well as tips and advice from companies on how to reduce bills (31.9%).

Speaking during the event, Australian Government Financial Literacy Board chair Paul Clitheroe noted that current frameworks restrict advisers to only be able to offer their services to high net worth individuals or those who can afford advice.

“That satisfies [roughly] the top 10 or 20% of the population of Australia,” he said.

“What do we do for the other millions of people who want to talk about everything from their credit cards, to investing a hundred dollars, to talking about [whether they should] put a thousand dollars in super or [towards paying off their] mortgage? That remains the challenge.”

Broome agreed, confirming that financial advice is both expensive and often hard to access for most Australians.

“We want more Australians to seek financial advice but to do that they need to be able to access it and afford it,” she said.

“I passionately believe that helping Australians to build their financial capability and understanding is critical not just to them individually but to the nation.” fs

Super funds accused of chest beating on climate change Elizabeth McArthur

Two major industry superannuation funds have this week made bold statements about their stance on climate change, but critics argue it may be “virtue signalling” with little substance.

UniSuper announced it is committed to achieving net zero absolute carbon emissions in its investment portfolio by 2050.

The $83 billion fund said it already has $8 billion invested in ESG strategies and that it will now divest all companies deriving more than 10% of revenue from thermal coal mining.

“The announcement is long on rhetoric and short on detail.

While UniSuper acknowledges that more needs to be done, this policy creates more questions than answers,” Market Forces Asset Management Campaigner Will van de Pol said.

“Without a clear plan to reduce exposure to all fossil fuel production and infrastructure to zero, UniSuper’s new climate policy fails to live up to the fund’s own promise of industry leadership on climate action.”

The fund will also assess material medium and long term investments against a shadow carbon price, but Market Forces pointed out it has failed to provide details of the carbon price that will be used, or how and when it will be reviewed and increased over time.

Market Forces was also critical of UniSuper’s ongoing investments in Woodside, Santos, Oil Search and Origin Energy and said the fund has made no commitment to drop these investments.

“Given many fossil fuel producers UniSuper invests in have expansion plans that are totally inconsistent with the Paris climate goals, the fund must be anticipating these companies will announce plans to wind down production in line with the Paris goals, or else the fund is heralding significant divestments in the coming year,” van de Pol said.

Aware Super, formerly known as First State Super, also released a statement on climate change. The fund said it is time for investors to act “decisively and urgently” on the matter.

Like UniSuper, Aware Super has committed to divesting companies that derive more than 10% of revenue from thermal coal and to achieving net zero emissions by mid-century.

“Aware Super’s position on climate change is not based on ideology but on data and research that tells us we need to act, and to act now,” Aware Super investment committee chair Rosemary Kelly said. fs

Product showcase

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

7

01: Roy Leckie

executive director, investment and client service Walter Scott & Partners

Patience is a virtue s global equities stage a recovery from the A battering they’ve taken – alongside just about every other asset class – so far this year, investors who have stayed the course look set to prosper.

And while the next decade will be a bumpy ride, it will see heightened demand for investment managers that have stood the test of time, capable of producing healthy returns in a sustainable way.

That’s where Walter Scott & Partners comes in.

Walter Scott is a fabled Scottish investment manager who founded Walter Scott & Partners in 1983 with a clear vision: to focus on global equi­t ies for institutional clients the world over, and to pro­tect and enhance their investments in a way that would benefit both the client and the community.

There’s probably nobody better placed to tell the story of Walter Scott & Partners than executive director, investment and client service Roy Leckie 01, who has spent the last 25 years with the firm after having joined as a graduate.

Leckie explains that Walter Scott’s recipe for success comes down to two key ingredients; a tried and tested investment philosophy, and the right corporate culture that allows that investment philosophy to be put into practice.

“We believe successful investing rests upon identifying, researching, analysing, valuing, buying and holding a certain type of company – the type of company that can deliver sustainably over the long term superior rates of internal wealth creation,” he says.

“It’s internal wealth creation that ultimately drives investor return, so really it’s all about capturing the awesome power of compound growth.”

Walter Scott & Partners offers bespoke equity portfolio management, employing the same philosophy and process irrespective of the mandate.

Locally, the group’s offerings have been distributed by Macquarie Investment Management as part of its Professional Series for more than 15 years, with Australian investors able to access Walter Scott’s Global Equity Fund and its Emerging Markets Fund.

Leckie explains that because of the nature of the types of companies Walter Scott invests in, the firm seeks to offer downside protection during bear markets or stressful market conditions.

“The companies we invest in tend to be very financially robust and they tend to operate a long way from break-even levels. We look for businesses with foundations that have helped them succeed and indeed prosper during the

most stressful stock market and economic periods,” he says.

“So, a key characteristic of our performance has been that it has protected value during down markets.”

And, Leckie says, it all comes down to the work of the Walter Scott research team, led by co-heads of research Alan Edington and Alex Torrens. Comprising a further 17 individuals, the research team is described as “generalists with a global perspective”, underpinning the long-term, bottom up investing, stewarding and growing of clients’ money that Walter Scott does.

“It’s really only through detailed, exhaustive and rigorous market research that we can hope to find the sort of companies that we want to own for clients,” Leckie says.

He argues that the funds management industry spends far too much time trying to forecast or predict things beyond its control, be it economic growth, interest rates, oil prices or which countries, or sectors, or factors are going to perform well.

“We really only have two things within our control as investors, and that is what companies you own and how much you pay for them,” Leckie asserts.

“And those challenges are best addressed through rigorous, fundamental, classical investment research.”

It’s an approach that hasn’t wavered since 1983, no matter the highs, lows and forces of change endured.

When Leckie reflects on the past 20 years, he points to three trends in particular that have arisen; the emergence of the digital economy, the rise of China, and the rapidly increasing interest in investing in line with environmental, social and governance principles.

“We have a new type of company leading, with the digital economy obviously at the forefront of today’s investment markets. China is a lot more important today than it was, and the focus on ESG – which is a very good thing – has been a big change,” he says.

“Just as the amount of noise and news and data and content that pervades has changed.”

As such, Walter Scott must bring a skillset that cuts through that noise, he says: “Focus on what’s really important, assess it, analyse it, research it and draw inference from it.”

Still, despite the many shifts that have occurred in the world, the firm’s investment philosophy – or core investment beliefs – remain unchanged. What has changed however, is how Walter Scott makes the most of it.

“We’ve tried to develop and improve the process of how we put the philosophy into practice gradually through time. For example, we have

The quote

We really only have two things within our control as investors, and that is what companies you own and how much you pay for them.

housed the research team in a new, functional building very close to our existing office, and we’ve expanded our networks across academia, across industry, across a range of different organisations to help us augment our own investment research,” Leckie explains.

Walter Scott has also improved the structure of their team, with the introduction of coheads of research, and desk assistants, to accrue greater efficiency and transparency.

“We are making continuous improvements that will hopefully allow us to continue seeking to meet client expectations when it comes to investment performance,” Leckie says.

And that means greater capacity to capitalise on opportunities as they present themselves going forward. However, Leckie is conscious challenges remain.

He says the COVID-19 pandemic has brought about an unprecedented amount of policy support, which has served to mask a number of underlying fragilities across the global corporate sector.

“In our view, now is not the time to be thinking about investing passively,” he warns.

“We believe it is now the time for real discerning stock picking, avoiding balance sheet risk, avoiding valuation risk, and being very, very careful about the qualities of the companies that you own.”

What these uncertain times have reinforced, he says, is the need for investment managers to be cognisant of the responsibility they have at all times to put client interests front and centre of all decision-making.

“I think we need to retain the right balance between confidence and humility in all we do, and we have to be patient,” he says.

“Our investment philosophy works – it requires time, but it works.” fs This information has been provided by Macquarie Investment Management Australia Limited (ABN 55 092 552 611 AFSL 238321) the issuer and responsible entity of the Walter Scott Global Equity Fund and Walter Scott Emerging Markets Fund referred to above. This is general information only and does not take account of investment objectives, financial situation or needs of any person. It should not be relied upon in determining whether to invest in the Funds. In deciding whether to acquire or continue to hold an investment in a Fund, an investor should consider the Fund’s product disclosure statement. The product disclosure statement is available on our website at macquarieim.com/pds or by contacting us on 1800 814 523. This information is intended for recipients in Australia only.

Other than Macquarie Bank Limited (MBL), none of the entities noted in this document are authorised deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities, unless noted otherwise.

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News

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

Boutique extends GBST partnership

01: Kendra Banks

managing director Australia and New Zealand SEEK

Kanika Sood

Warakirri Asset Management has extended its partnership with after-tax investment-focused service provider GBST for its superannuation clients to include international indices.

Warakirri and GBST have worked together for a decade, providing custom after-tax benchmarks for Australian equity portfolios to superannuation funds.

It will now also use GBST to provide after-tax services based on the global MSCI after-tax benchmarks index series, for which GBST is the first globally accredited provider, the boutique said.

“Warakirri is a leading provider of aftertax reporting and performance analytics to superannuation funds and fund managers in Australia,” Warakirri managing director Jim McKay said.

“We have been benchmarking Australian equities portfolios on an after-tax basis since 2007, and through our long-term relationship with GBST, we are pleased to extend our services to include global benchmarks and performance analytics for the Australian superannuation industry.”

GBST business solutions executive Kathy Taylor-Hofmann said: “We are committed to helping superannuation funds improve member outcomes through tax-aware investing.”

“So, it is fantastic to extend our after-tax benchmark offering and existing relationship with Warakirri to cover both after-tax S&P domestic, and now MSCI global, benchmarks.” fs

ERS tab hits $33.3bn Ally Selby

The government’s early release of superannuation scheme has paid out $33.3 billion since its inception, with an additional $340 million disbursed over the week to September 13 alone.

During the week to September 13, super funds received 42,199 applications for payments, of which 24,512 were initial requests and 17,687 were repeat applications.

Super funds paid out 45,628 applications during the period, with 96.1% of payments made during five business days.

Initial applications now total 3.2 million, while repeat applications total 1.3 million since the scheme’s inception.

The average payout is $7676 and $8413 when considering repeat applications only. Since the scheme’s inception, 98% of applications have been paid out.

During the week, 152 of 175 super funds made early release payments, while 140 of these also reported repeat applications.

Among the funds that made payments, 66% completed more than 90% of payments within five business days. Less than 2% of payments were made to members within nine business days.

Since the scheme’s inception on April 20, AustralianSuper has coughed up the most in payments ($4.5 billion), followed by Sunsuper ($3.2 billion), REST ($3 billion) and Hostplus ($2.8 billion). fs

Finance job ads perk up Karren Vergara

H

The quote

NSW job ad volumes growth slowed across August, dropping from 6.3% month-on-month growth in July to 1.7% in August.

iring activity in the banking and finance sectors is starting to pick up, after dropping 48% in April and May, latest job advertisements data show.

A SEEK analysis between July and August shows demand in financial planning, compliance and risk, and banking increased by 7% month on month.

However, the sectors trail behind advertising, arts and media (16% growth), consulting and strategy (13%), human resources (12%), and legal (11%) in terms of the number of jobs advertised for the period.

Between April and May, job ads for the banking and finance sectors dropped by 48%. Retail and consumer products, and hospitality and tourism were the hardest hit industries, declining -55% and -59.6% respectively.

SEEK Australia and New Zealand managing director Kendra Banks 01 said there are currently three distinct rates of recovery emerging across Australia.

“The first group are the states that have fully rebounded or have job ad rates comparable to

pre-COVID levels – this includes Western Australia, South Australia, Tasmania and Northern Territory.

“The second group are the states that are continuing to recover towards pre-COVID levels, which are Queensland, New South Wales and the Australian Capital Territory.

Unsurprisingly this leaves Victoria as the state which declined significantly for a second month, where stage four restrictions continue to have a major impact on businesses and hiring,” she said.

Overall, the national month-on-month decrease of 2% in job ads was dragged down by Victoria.

Excluding Victoria, the rest of Australia saw a 1.8% increase in job ad volumes in August compared to July.

“New South Wales job ad volumes growth slowed across August, dropping from 6.3% month-on-month growth in July to 1.7% in August. Queensland and the Australian Capital Territory showed a slight decline after both states had strong growth in July,” she said. fs

AMP, OnePath top worst-performing super funds list Retail superannuation funds provided by AMP and OnePath continue to charge high fees and deliver poor returns for members, the latest Fat Cat report shows.

For the sixth year in a row, AMP continued to dominate robo-adviser Stockspot’s Fat Cat list, which assessed 600 products offered by 100 of the largest super funds.

After accounting for performance net of fees for the last five years, 12 of AMP’s products appeared in this year’s worst-performing or “Fat Cat” list, followed by OnePath and Macquarie, which had 11 and five products named respectively.

In the “Fit Cat” category or the bestperforming funds, UniSuper (7), IOOF (5) and AustralianSuper (4) rated highly in terms of the best value for money and performance Among the balanced funds, AMP Capital’s Dynamic Markets (-2.2% p.a.) was the only product in the red. OnePath’s OptiMix Conservative (1.7% p.a.), Zurich’s Capital

Stable (1.9% p.a.), OnePath’s Balanced (2.2% p.a.) and MLC Inflation Plus Portfolios’ Moderate Portfolio 2 (2.4%) were the worst performers on a per annum basis.

The best balanced funds were: WA Local Government’s Sustainable Future (6.9% p.a.), AustralianSuper - Conservative Balanced (6.2% p.a.), IOOF’s MultiMix Moderate (5.7% p.a.) and Public Sector Super’s Income Focused (5.7% p.a.).

In the aggressive growth funds category, which invest in at least 80% of growth assets like shares and property, AMP Capital’s Premium Growth (0.6% p.a.) topped the Fat Cat list, followed by six OnePath products, such as Select Leaders and OptiMix Balanced, which returned between 1.4% p.a. and 2.9% p.a.

The best aggressive growth funds were: Prime Super’s Alternatives (9% p.a.), UniSuper’s Sustainable High Growth (9% p.a.) and High Growth (8.7% p.a.), Cbus’ High Growth and Hostplus’ Shares Plus (8% p.a.). fs

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Publisher’s forum

www.financialstandard.com.au 14 September 2020 | Volume 18 Number 18 28 19

01: Michael Murray equities analyst Australian Ethical Investment

9

What do the stocks Cochlear, Fisher & Paykel Healthcare and Healius have in common? They’re all part of the healthcare portfolio managed by Australian Ethical, one of the top-performing fund managers in the country.

The group’s equities analyst Michael Murray explains why these shares made the grade and names the leading trends driving the growth of healthcare businesses.

Given the scale and pace that new technologies are reshaping

Why we focus on healthcare companies

the sector, Murray believes the need for better medical devices, including respiratory and ventilation products, will continue beyond the short-term demand arising from the pandemic.

Michelle Baltazar Director of Media & Publishing

Opportunities abound in healthcare due to the COVID-19 pandemic – now and into the future. ll our investment decisions are guided by A the Australian Ethical Charter, which is a list of 23 positive and negative principles that has been in place since our founding in 1986.

As a result of the Charter, we tend to be overweight in several sectors we believe will have long-term benefits for society. Education, information technology and renewable energy are a few examples – but in this article I will look at the healthcare sector.

Healthcare has been a great sector to invest in over the past decade. Just looking at Australia, the S&P/ASX 300 Health Care Accumulation index has provided a compound return of around 20% over 10 years. Large companies like CSL stand out in the index, but there have been a range of stocks in the sector that have delivered outstanding returns for investors over the 10-year period.

There are several macroeconomic tailwinds that tend to drive above-GDP growth in healthcare spending. One that’s familiar to most people is demographics, with the ageing population helping to steadily increase demand for healthcare services.

Another trend that is linked to ageing is the wealth effect, whereby people prioritise healthcare spending as they accumulate wealth – and that’s something we see globally, not just in Australia.

Another interesting tailwind is the sheer pace of technological development in the healthcare sector. For example, there is a transformation underway in cancer care where immunotherapy drugs are generating improved outcomes for patients as well as creating new investment opportunities.

Plenty to choose from Healthcare encompasses a broad spectrum of companies, setting it apart from more homogenous sectors like banking. We like to break healthcare down into three main areas: health services, medical device manufacturers and pharmaceuticals.

We have been able to find compelling investment ideas in a range of different areas and our process is relatively index unaware. That means we don’t simply own the largest companies in the benchmark – instead, we focus on the most attractive opportunities. We also own lesser known companies in the small and micro-cap end of the market, which can create opportunities to capitalise on the experience we have built covering the sector in depth over a long time.

Some of the characteristics we look for are companies with durable intellectual property and a long runway of growth into global markets.

We also look for robust business models that we think will give companies a recurring revenue stream over time. We’re also conscious of the role governments play in the healthcare sector for individual companies – for better or worse. A positive example is the federal government’s decision to index diagnostic radiology services from 1 July 2020, which has helped some of the companies we are invested in.

The quote

We don’t simply own the largest companies in the benchmark – instead, we focus on the most attractive opportunities.

Three companies we invest in Cochlear is a good example of a medical device provider we have invested in over the long term. It’s an Australian company that manufactures implants that simulate the workings of the inner ear. However, the implant is an elective procedure which means Cochlear’s earnings fell during the initial COVID shutdown in March.

And the company was also hit with an unfavorable litigation outcome earlier this year, which meant it needed to come to the market to raise capital.

We were happy to participate, with Cochlear just one of a number of companies we helped recapitalise during the COVID period.

Cochlear’s share price has lagged some of its healthcare peers, yet we continue to see this as a very strong franchise that will be relatively unaffected by COVID over the long term.

Another one of our long-standing positions is Fisher & Paykel Healthcare, which specialises in humidification equipment used in patient ventilation. At the height of the global shutdown and stock market volatility earlier this year it was one of the few companies with an appreciating share price. We reduced some of our holdings in the stock at the time but we continue to maintain a position.

While there has been a spike in demand for its ventilation-related product, Fisher & Paykel Healthcare has developed a new respiratory product which has a much wider application throughout hospitals called ‘nasal high flow’.

As COVID has progressed it has become more and more important for treating people who present with symptoms in hospitals.

Overall, we think Fisher & Paykel Healthcare has longevity beyond the current pandemic with a high level of recurring revenue and ongoing growth from new products.

Finally, we also hold Healius, which was formerly known as Primary Health Care. It’s a company that has underperformed over the long term and we have seen that as an opportunity to acquire the stock at attractive prices.

Because Healius has a pathology business it has played a major role in the testing for COVID-19, which has helped it get through the pandemic relatively well.

Its balance sheet is also vastly improving as a result of the sale of its medical centre business. Assuming the company executes on its strategy, Healius should emerge from this pandemic as a pure play diagnostic and day hospital company trading at a healthy discount compared with its competitors. fs Past performance is not a reliable indicator of future performance.

This information is of a general nature and is not intended to provide you with financial advice or take into account anyone’s personal objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances and read the financial services guide and relevant product disclosure statement available on our website.

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www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

Products 01: Nathan Bell

Tasplan raises IP premiums The cost of income protection cover via Tasplan will go up by 7.3% at the end of September.

Tasplan attributed the increase to the trio of recent legislative reforms, current economic environment and increase in insurance benefits being paid to members.

It said it has fewer insured members covered by its group insurance policies after changes under Protecting Your Super and Putting Members’ Interest First legislations.

For example, a 40 year-old member with income protection (two-year benefit) via the fund under the office occupational rating and a 30 day waiting period, will now pay $7.32 in net costs per $100 of monthly cover.

The same profile of cover previously cost $6.82 net – a rise of 7.3%.

Tasplan’s net cost of insurance to members depends on their age, type of cover, the member’s occupation rating (general, office or professional), waiting period (30, 50 or 90 days) and benefit period.

Gross cost includes a member’s insurance premium plus an admin fee of 4% of the premium.

Net cost is gross cost minus tax deduction of up to 15% of the premium.

Its group insurer for IP, death as well as total permanent disability (TPD) cover is MetLife.

Tasplan is due for 1 April 2021 merger with MTAA Super, creating a $22 billion fund.

In January, MTAA Super increased the cost of death and TPD cover for its members (its group insurer is also MetLife). Members between the ages of 27 and 55 were to see the cost per week of their death and TPD cover increase from $7.47 to $9.06, Financial Standard reported at the time.

New ETF set to debut on ASX A new growth ETF which mirrors a strategy with a 20-year track record is set to list on the ASX early next month, aiming to achieve returns of 2% per annum above the S&P/ASX 200 benchmark at a 0.97% management fee.

Intelligent Investor’s Australian Equities Growth Fund, set to list on the ASX under the ticker code IIGF, has reached its minimum listing requirements and is expected to debut on the ASX on October 5.

The fund has a limited initial offer of $100 million, with a minimum investment of $2500 (1000 units). The portfolio will consist of 10 to 35 ASXlisted investments, with a maximum holding in any one share of 15%.

Managed by portfolio manager Nathan Bell01, the fund’s top holdings include online classifieds business Frontier Digital Ventures, investment management firm Pinnacle, employment marketplace Seek, developer RPM Global Holdings and digital audio technology company Audinate.

The fund also invests in heavily discounted cyclicals, including Star Entertainment and Crown Resorts.

These deep value stocks have significant growth upside, Bell said, yet to be factored into their share price in the COVID environment.

Lifespan adds MDAs to BT Panorama Lifespan Financial Planning has launched 30 managed discretionary account model portfolios on BT Panorama.

The portfolios will be available to Lifespan’s advisers who use BT Panorama. Lifespan has over 250 advisers, the company said.

The offering includes portfolios with different risk profiles and strategic asset allocation, with the option to blend tactical asset allocation.

“We’re looking to boost the availability of MDAs to the adviser community, as advice business and adviser use of managed accounts and portfolios increases. Adding 30 of our model portfolios to one of the fastest-growing retail platforms in Australia is a great way to do that,” said Lifespan chief executive Eugene Ardino02 .

“We will also be making our bespoke MDA and model portfolio options available to the broader adviser community via Lifespan Partnership, our support service for existing self-licensees and those advice businesses wanting to transition to their own individual AFSL,” Ardino said.

“Star’s current market capitalisation of just $2.5 billion means investors are getting the Sydney and Gold Coast casinos for a steal, and this is what value investors call a big margin of safety,” he said.

“The company’s share price could more than double over the next few years, which is why it’s also a key portfolio holding.”

Bell’s stock selection is heavily focused on investing in owner-managed businesses; those that have skin in the game, which he believes is one of the most reliable ways to outperform the market.

“The owner/managers’ ability to increase competitive advantages during a downturn, has been instrumental in these companies taking market share off competitors that have pulled back on critical investments and marketing during COVID,” he said.

This is reflected in the portfolio’s holding in Frontier Digital Ventures and Pinnacle Investment Group, he said, as well as its holding in 360 Capital.

Pinnacle insiders own a 50.58% stake in the business, while managing director Ian Macoun controls over 10%, he said. Similarly, 360 Capital managing director Tony Pitt owns a 29.07% stake in his funds management group.

Watermark sheds market neutral fund The Watermark Market Neutral Trust, which has been running for eight years, will transition to Dalton Street Capital around October 16.

Dalton intends to keep the existing investment strategy and external service providers steady, it said in a letter to investors.

Meanwhile, Watermark will keep running its long/short strategy which has about $233 million in total across two vehicles – a $203 million LIC called the Australian Leaders Fund (ALF) and the $30 million unlisted managed fund called the Watermark Absolute Return Fund.

The market neutral fund’s new manager, Dalton Street Capital has had an eventful year.

Its old distribution partner was Prodigy Investment Partners, a now defunct multi-boutique business set up as a joint venture between former MLC executive and current Koda Capital Founder Steve Tucker and Western Australian broker Euroz.

Euroz decided to pull out of the JV in March deciding the business wasn’t scaling up, leaving Prodigy’s three boutiques (Dalton Street Capital, Flinders Investment Partners and Equus Point Capital) in a lurch.

Dalton’s funds were initially set to a winding up but a newly setup Sydney multi-boutique, Mantis Funds, threw it a lifeline and got the responsible to reverse its decision to wind up the Dalton Funds.

Dalton was set up in 2016 by former Credit Suisse heads Alan Sheen, and Nick Selvaratnam, who left the business in 2018.

MSCI launches UN SDG alignment tool MSCI has launched a tool that assesses companies’ compatibility with the United Nations Sustainable Development Goals.

The MSCI SDG Alignment Tool examines a company’s operations, products, services,

02: Eugene Ardino

policies and practices, and determines its net contribution (both positive and negative) towards addressing the UN’s 17 goals.

Using publicly available information, the tool found that 54% of MSCI ACWI constituents were mostly aligned to the SDGs; many were compatible with the eighth SDG goal (decent work and economic growth).

Goals seven (clean energy), 12 (sustainable consumption and production) and 13 (climate action) had the highest percentage of companies (8%-9%) that are misaligned with the SDGs, mainly because they still rely on fossil fuels.

Across all SDGs, nearly 40% the 8550 companies assessed had a greater number of alignments than misalignments. A larger share of developedmarket companies (60.9%) were aligned with more SDGs. “This finding may suggest that companies in highly industrialised nations face greater pressure to mitigate their effect on the environment and society, and report on those efforts, compared to their counterparts in developing economies,” MSCI head of ESG research and executive director Olga Emelianova said.

MSCI head of ESG Remy Briand, said there is increasing demand from investors to channel capital to help deliver on these goals, but the fragmented data around the extent to which a company’s products and operations are aligned to a particular SDG remains an obstacle.

He pointed out that companies can both overstate and understate their commitments to particular SDGs, which could undermine efforts by institutional investors to advance sustainable development.

Robo advice solution set to launch Nucleus Wealth and Arrow Financial Advice have partnered to launch a white label digital advice platform, set to feature actively managed portfolios and over 30 ESG filters.

This will make it the most comprehensive robo advice service in the Australian market, and possibly the world, Nucleus Wealth and Arrow said.

Arrow chief executive Michael Voss said the new offering, Nucleus Wealth Fusion, would help service the low balance market and build relationships with clients from the very beginning of their nest egg building journey.

“Arrow has been looking to provide a digital offering to our clients for a while now, as we are seeing increasingly fewer options for low balance clients to get advice, and consumers wanting more and more to interact with companies digitally,” he said.

Nucleus Wealth Fusion will feature a simple and thorough online onboarding experience with personal investment advice and ID verification, and will also offer clients dynamic risk management and stock selection.

The platform will also boast more than 30 ethical and portfolio filters for customisation, and will also offer clients investments through personal, joint, company, trust, super and SMSF accounts. fs

Opinion

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

11

01: Sinead Rafferty

investment specialist Fidante Partners

The income conundrum for retirees in a post-COVID world ith central bankers around the world comW mitting to keep interest rates low for many years to come, this creates an issue for retirees looking for income. Traditional defensive assets such as cash and fixed income which typically form a large percentage of retiree portfolios are producing levels of income significantly below historical averages.

In Australia, the RBA is keeping the threeyear yield for government bonds at 0.25%, in what is known as yield curve control. Interest rates have been suppressed for the last decade, however what is unique about the current economic climate, is that with inflation yet to emerge and central bankers focused on generating growth and employment, their signalling to the market has moved further out - lower for much longer.

For many retirees this low yielding environment presents a dilemma and could pose several questions: 1.

Should a retiree reduce their level of spending?

2. Should they consider a higher allocation to riskier assets such as shares? or 3. Contemplate or be forced to adopt a total return approach to investing and start drawing down their capital.

For many retirees, funding their lifestyle with a combination of capital and income could be the most palatable solution. Depending on the retiree’s circumstance, this approach may well be inevitable to meet their minimum withdrawal rate.

Taking a total return approach and considering the capital return (if relevant) as well as the distribution exposes a retirement portfolio to different considerations and potential risks.

Some of these include the need to: • Decide on an appropriate allocation to cash for liquidity purposes • Understand the correlation between the assets in your portfolio • Diversify sources of income across equities, credit and bonds • Consider the sectoral and geographical exposure of the portfolio

Keeping sufficient cash to meet living expenses For retirees, cash can provide an important liquidity buffer to meet ongoing expenses. Proponents of the bucket approach to portfolio construction advocate for two to three years of living expenses to be kept in cash or shortterm deposits. With low interest rates the norm

Sector concentration is increasing in domestic equities

for the last few years and central bankers indicating that this is likely to persist for many more it is tempting to move up the risk curve in search of higher returns. What the recent crisis reminded us is that there are times of market stress whereby the return of capital takes precedence over return on capital.

Is your portfolio appropriately diversified?

Bonds typically form the backbone of a defensive portfolio however the correlation between bonds and shares has increased in recent years.

This is due to artificially low interest rates which have reduced the diversification benefits for parts of the market such as government bonds. Investing in fixed income now needs a very selective approach to achieve the desired risk-reward trade-off.

The size of the global bond market dwarfs that of the share market and the range of opportunities within the asset class are broad. For example, government bonds provide lower risk and lower return whereas high yield credit and private debt provide higher potential return with higher risk. Investors need to consider what building block they are looking to fill in their portfolio. Diversifying within the fixed income market can provide investors with income and more stability in times of market stress.

This can include exploring other parts of the market such as credit, private debt and assetbacked securities. Combining these types of assets with traditional fixed income such as nominal bonds may provide a better risk-adjusted return.

Look more broadly across the market for dividend yield Unlike bonds, whereby coupon payments must be paid unless the issuer defaults, dividends are far from guaranteed. Investors in blue chip stocks often look at the historic yield as a guide to future payouts but if the company’s profits fall or it needs to improve its balance sheet these dividends can be cut, deferred or abandoned altogether. Some of the previously high paying stocks on the Australian market have done this in recent months which is troubling for income seeking investors. However, dividends are not annuities and therefore are not guaranteed. In the current recession dividends could be subdued at least in the shortterm. Those seeking dividends and franking credits may need to look more broadly across the Australian share market.

The quote

With no silver bullet apparent and the RBA indicating that low interest rates are here to stay the need for financial advice is greater than ever.

The big four banks and the major miners represent approximately 28% of the ASX100. The performance of this small number of companies is likely to determine the outcome for many traditional Australian equity portfolios.

By diversifying into global shares, Australian investors can access a more diverse range of industries and sectors and help to reduce home bias. One example is the US market, whose top five performing companies, the FAANG stocks, have increased their dominance during the crisis. They have been more COVID-safe than other sectors, benefitting from trends such as working from home and online purchases. Although emerging, Australian tech companies do not benefit from the sheer size and scale of their global counterparts. Investing in global shares does come with currency risk however, so any allocation must be appropriate for the individual’s risk preferences.

Taking a global investing approach reduces portfolio exposure to regional or sectoral issues as the pandemic will affect some regions for longer and some sectors profoundly. For example, from the beginning of 2020, the Chinese CSI 300 index is up 15% , bottoming out at -15% , while the S&P500 is down 2% having fallen as low as -31% . Another notable aspect of the crisis is that factor volatility rose more than stock-specific volatility. For example, avoiding the travel sector was more important than whether you chose Flight Centre over Webjet.

Unlike the GFC, when Australian banks offered handsome returns to investors as they sought capital to improve their balance sheets, and the cash rate was much higher, Australian banks are currently well capitalised by comparison and are not offering outsized term deposit rates.

Retirees and others looking for income need a different approach and total return investing can help to achieve this outcome while overcoming the behavioural bias of not dipping into the original pool of capital. The adage of diversification becomes even more important as investors must consider whether they have achieved this both within and among asset classes. With no silver bullet apparent and the RBA indicating that low interest rates are here to stay the need for financial advice is greater than ever. fs

12

News

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

Hostplus awards mandate

01: Ben Chan

regional managing director, Asia Ontario Teachers’ Pension Plan

Annabelle Dickson

Hostplus has awarded a private equity mandate with the aim of helping it ride out COVID-19 induced volatility in global markets.

Natixis Investment Managers private equity subsidiary Flexstone Partners won the mandate from Hostplus.

The fund awarded the US$100 million private equity mandate to invest in Flexstone’s Global Opportunities IV strategy, providing direct exposure to over 40 co-investments in US and European and private companies.

Flexstone managing partner Eric Deram said the mandate will benefit Hostplus members from the “crucial buffer” that private equity investments provide.

The fund established a relationship with Flexstone in 2014 with a mandate with Caspian which later merged into Flexstone.

In addition, Hostplus invested in Flexstone’s US private equity emerging managers program in 2018.

Hostplus chief investment officer Sam Sicilia said the fund was pleased to award the mandate as private equity has provided some of the most attractive risk-adjusted opportunities this year.

“This investment will play an important role in contributing to our quest to identify and secure appropriately diverse sources of return,” Sicilia said.

Commenting on the mandate, Natixis Investment Managers managing director of Australia and New Zealand Louise Watson said: “Hostplus’ decision to award its private equity mandate to Flexstone shows the fund’s genuine and ongoing interest in private markets to meet the investment and retirement income needs of its members.” fs

ASIC relaxes IPO red tape Karren Vergara

A former executive of Lazard Asset Management has moved to a $10 billion Sydney-based boutique to lead its operations.

Melanie McQuire is the new chief operating officer at Maple-Brown Abbott, responsible for the firm’s operating and technology strategy, as well as its platform.

McQuire reports to chief executive and managing director Sophia Rahmani.

Additionally, she will oversee product and platform management across Maple-Brown Abbott’s Australian managed investment schemes, UCITS platform and institutional and high-net-worth mandates.

McQuire spent over eight years at Lazard in a similar role. Prior to that worked at Macquarie Bank and ING Investment Management.

Before Rahmani, who was appointed chief in July 2019, said that McQuire’s appointment significantly builds on what is already a strong team, at a time where Maple-Brown Abbott is focusing on continuing to evolve, diversify and grow.

“Melanie has outstanding experience in the financial services industry, as a chief operating officer for a global investment firm and equities product manager, as well as her work with separately managed accounts,” Rahmani said. fs

Global pension fund doubles down on APAC Jamie Williamson

A

The quote

I’m excited to add new asset classes and broaden our pool of expertise across Asia Pacific.

major Canadian pension fund is increasing its presence in Asia Pacific, establishing a new office focused on opportunities in Australia and New Zealand.

Ontario Teachers’ Pension Plan Board (OTPP) opened a new office in Singapore, marking the fund’s commitment to the region.

The new office will target opportunities in Australia, New Zealand and the Association of Southeast Asian Nations (ASEAN). The fund’s existing office in Hong Kong will now focus on Greater China, South Korea and Japan.

The $212 billion fund said its presence in the region is critical to its future growth, with $15.5 billion already invested across Asia Pacific in public and private equity, and infrastructure.

The office will house the Ontario Teachers’ Infrastructure and Natural Resources team, led by managing director, INR, APAC Bruce Crane. Crane was appointed to the role last month, joining from the Ontario Municipal Employees Retirement System (OMERS) where he was managing director, infrastructure.

“Asia Pacific offers numerous emerging and developed markets across two continents. Expanding our local capabilities will allow us to further generate returns to deliver on our pen-

sion promise,” OTPP regional managing director, Asia, Ben Chan 01 said.

In addition to the new office, the fund also recently expanded to late-stage venture and growth equity investments in companies using disruptive technology. It also has plans to expand its capabilities via the new office, including private capital direct investment and high conviction equities.

“I’m excited to add new asset classes and broaden our pool of expertise across Asia Pacific,” Chan said.

“In particular, I’m delighted to welcome Bruce to the team – he brings an exceptional depth of expertise in direct investments along with an acute understanding of the region.

“We look forward to growing our team in the coming months and see this as a great opportunity to attract new regional talent as well as bring in existing global talent.”

In addition to broadening its geographic reach in APAC, OTPP said it is also adding a local senior member to the fund’s Global Strategic Relationships (GSR) department.

This individual will develop and cultivate key partnerships in the region and assure that teams work across asset classes to enhance deal flow and strategic positioning, the fund said. fs

Victorian advisers see relief Ally Selby

The corporate watchdog has shifted to a no-action position on fee disclosure statements and renewal notice obligations for financial advice businesses in Victoria.

The no-action applies to AFS licensees and representatives where their business is solely, or substantially, located in Victoria.

Businesses that have otherwise been impacted by Victorian lockdowns will also be taken into account.

As part of the no-action, ASIC said it wouldn’t be taking regulatory action against AFSLs or their representatives for a breach of sections 62G, 962K and 962S of the Corporations Act. For breaches of 962S for pre-FOFA clients, only those with a fee disclosure statement (FDS) due between August 2 and October 26 will apply for the no-action, or for an instance where the FDS has not been given to the client on, or prior to, October 26 and it is given to the client by December 7.

ASIC will not take regulatory action in relation to 962G and 962K for post-FOFA clients in the case that the FDS or renewal notice is due between August and October 26, or in the case that the FDS or renewal notice was not given to the client or timeframes required by sections 962G and 962K.

However, ASIC noted that it does not have exemption or modification powers in relation to FDS and renewal notice obligations.

“This means that relying on this no-action position does not prevent an ongoing fee arrangement (OFA) terminating in relation to postFOFA clients, where the FDS or renewal notice is not given to a client, or has not been given within the prescribed timeframes (s962F of the Corporations Act),” the watchdog said.

“Where an OFA terminates, the AFS licensee or representative must stop charging fees to the client (s962P of the Corporations Act) and inform the client in writing that the arrangement has terminated.”

The licensee or representative must then enter into a new OFA with the client, ASIC said.

It also noted the no-action position was not intended to impact the rights of third parties to take action in relation to any contravention.

“ASIC will continue to monitor the appropriateness of the no-action position, having regard to the ongoing impact of COVID-19 and the Victorian Government’s announcements in relation to restrictions in Victoria,” the regulator said.

“This no-action position may be withdrawn at any time.” fs

News

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

13

Executive appointments 01: Alan Sheen

Capital Group hires from BlackRock The $2.6 trillion global manager has hired from BlackRock to fill a newly-created role whose remit includes the Australian market.

London-based Alexandra Haggard will be Capital Group’s head of product and investment services for in Europe and Asia including Australia, tasked with strategy and expansion of the firm’s investment services in the region.

She was most recently BlackRock’s global head of equity product, and the head strategic pricing for Europe, Middle East and Asia. Prior to this, she was the chief executive of British consultant Stamford Associates and EMEA managing director for product and marketing at Russell Investments.

In her new role at Capital, Haggard reports to the firm’s head of Asia and Europe client group Guy Henriques.

“Investing in our Asia and Europe business is a strategic priority in Capital Group’s long-term growth plans. We’ve made significant strides in growing our business across both regions and plan to continue building on these efforts to serve clients in the years ahead,” Henriques said.

“Bringing exceptional leaders like Alexandra on board with deep industry knowledge of product development and product management will be key to delivering investment services that meet the needs of our clients. We warmly welcome Alexandra to Capital Group.”

Haggard said of her appointment: “I am delighted to join a firm focused on long-term investing and with more than 85 years of investment experience. I look forward to supporting the growth plans for Asia and Europe, including channel expansion for our financial intermediary and institutional client base.”

Industry fund chief to step down The head of a $5 billion superannuation fund is stepping down at the end of 2020.

BUSSQ chief executive Linda Vickers is retiring from the role and will be succeeded by chief operating officer Damian Wills.

Vickers has been with the super fund for more than 20 years. BUSSQ appointed her as its first employer relations consultant; she rose up the ranks to become chief operating officer and the fund’s chief executive in August 2016.

BUSSQ chair Paula Masters said: “Linda leaves BUSSQ in strong shape, and well-placed to build on its record of above average returns for members over the medium to longer term.”

Under her watch, the industry super fund has returned members an average of 9.76% per annum since inception and currently has 83,000 members.

“Since Linda joined BUSSQ as employer services manager in 1998 she has helped steer the group through the Y2K scare, the dot.com crash, the September 11 terror attacks, a global financial crisis and now the COVID-19 pandemic,” Masters said.

Wills takes the reins from 1 January 2021. He has been chief operating officer since October 2016.

Masters congratulated Wills, who she describes

AMP hires people, culture lead AMP Australia has appointed former a Woolworths human resources executive as head of people and culture.

Gillian Davie 02 has over 25 years’ experience in human resources with experience in rapid growth, right sizing, turnarounds, transformation, crisis management, acquisition.

She is currently a nonexecutive director of The Scout Association of Australia, chair of Women on Boards and a board/ committee member of Hills United Football Club.

She was previously chief people officer at NetComm Wireless, director of human resources at Masters Home Improvement and general manager – human resources at Countdown in New Zealand.

A spokesperson for AMP said: “With 25 years in people and culture roles, Gillian has led workforces through change, rebuilding and transformation – experiences gained in large and complex businesses both domestically and overseas.”

as having a long track record in the superannuation industry and has proven to the board that he has the leadership and strategic vision to guide BUSSQ into what is a complex but exciting future.

HESTA adds to leadership team HESTA has announced the appointment of a head of portfolio management in a new investment leadership team.

Alan Sheen 01 has been named as head of portfolio management, the newest addition to the new-look senior investment leadership team announced earlier this year.

Sheen joins HESTA after seven years at Dalton Street Capital, where he was chief investment officer and managing partner.

Previously, he was a director and head of proprietary trading at Credit Suisse and has also held chief investment officer roles at Austock Asset Management and Challenger Funds Management.

Chief investment officer Sonya Sawtell-Rickson said the appointment marks a significant step forward in the implementation of the fund’s investment strategy.

“Our investment strategy builds on our past success by strengthening our internal team’s capabilities to manage in-house our significant and growing asset pool while continuing to maintain great relationships with our investment partners,” Sawtell-Rickson said.

“Alan is a highly skilled investment professional and leader with 25 years’ experience in financial services, including leading large teams to invest across a vast range of functions and asset classes.”

Reporting to the Sawtell-Rickson, Sheen will lead internal and implemented teams across growth, defensive and unlisted asset classes.

The appointment is one of the two new “heads of” roles announced in March and follows Stephanie Weston joining the fund as head of portfolio design in June.

HESTA chief executive Debby Blakey said it was vital for the investment team to have the right blend of experience, capabilities and seniority to ensure the fund’s growth is strong and sustainable.

“HESTA has a long, impressive history of strong investment performance and innovation and we have ambitious plans to continue to build on this success as a leading global investor,” Blakey said.

Sheen has relocated from Sydney to Melbourne and commenced in the new role on 28 September 2020.

Realindex appoints portfolio manager First Sentier Investors’ systematic equities manager Realindex Investment has appointed a former BlackRock executive to the newly created role of senior quantitative portfolio manager.

Joanna Nash has 13 years’ experience in quantitative investment and joins from Acadian Asset Management where she was a senior portfolio management.

She previously spent over a decade at BlackRock where she was a portfolio manager within scientific

02: Gillian Davie

equities, vice president of Australian equities and head of sustainable investment in Australia.

Prior to her time at BlackRock, Nash was a senior quantitative analyst at Commonwealth Bank and a consultant at NERA Economic Consulting.

Realindex chief executive Andrew Francis welcomed Nash to the team and said she is an in impressive investment professional.

“She brings significant experience in quantitative investment management and product development. Moreover, Joanna’s experience in sustainable investment will be valuable, as clients increasingly look to us for systematic strategies that take into account environmental, social and governance considerations,” Francis said.

Nash has also been a lecturer at the University of Technology Sydney in financial econometrics and at New York University teaching foundations of finance.

Commenting on her appointment Nash said: “I am pleased to be joining such a high-calibre team of professionals, and look forward to playing a key role in the growth of Realindex’s quantitative investment strategies. With the increased focus on sustainable investing by clients, I’m looking forward to adding to Realindex’s capabilities.”

Realindex manages $25.8 billion in assets under management across a number of funds invested in Australian, global and emerging market equities.

Global equities manager hires GM A boutique fund manager has hired a former Bank of America executive to help expand its global equities offering.

Rhys Cahill joins Talaria Capital on November 16 as general manager of business after spending more than 15 years at Bank of America Merrill Lynch.

Cahill was most recently the bank’s chief operating officer for global markets across Australia and South East Asia. For nearly eight years he oversaw the Aussie equities, research, fixed income, currencies and commodities business.

Prior to that he was chief operating officer of equities for three years, and managed the equity finance and corporate actions division for over four years.

Cahill said: “Talaria’s purpose and values, the strength of the leadership team and their unique approach to global equity investing has been instrumental in me wanting to join. I am excited to be part of the team, and look forward to contributing to the next phase of growth for the business.”

Chief executive Jamie Mead said this announcement is another important milestone in Talaria’s growth, and further recognition of the value it delivers for people and communities.

Talaria runs the Global Equity Fund, Global Equity Fund – Hedged and Global Equity Fund – Foundation Units.

Funds under management has grown by about 71% over the last two-and-a-half years to $502 million at the end of June 2020. fs

14

News

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

Women receive worse advice

01: Bryce Quirk

general manager of advice relationships Colonial First State

Karren Vergara

Financial advisers tend to give female clients poorer advice and recommend riskier assets compared to male clients, a new study shows.

Women are significantly more likely to receive undiversified financial advice than men, researchers from the Hong Kong University of Science and Technology found.

Between 2018 and 2019, the academics led by professor Utpal Bhattachary, trained men and women to pose as potential clients of 65 Hong Kong securities firms and financial planners that cater to retail investors.

They found a male client was offered undiversified advice 13.5% of the time, while a female client was more than twice as likely at 36.8% to receive advice that did not diversify across asset classes, products or geography.

The advisers recommended riskier products such as complex insurance products, stocks, REITs and warrants to women, and to allocate their money to local securities. Across both sexes, advisers recommended to 38% of clients to invest in individual, risky securities only.

Another worrying finding was advisers working in securities firms that earn revenues from trade commissions are more likely to recommend products that trade frequently.

Since these firms tend to compete more with one another on service charges than on personalised service, these advisers do not differentiate between clients on the basis of clients’ attributes, the paper entitled Do Women Receive Worse Financial Advice? reads.

The researchers suggested that the gender differences in advice quality are not just a response to client characteristics, rather the incentives of the adviser. fs

Hedge funds in the green Ally Selby

The global hedge fund industry surged 2.5% in August, lifting the average strategy to sit comfortably in the green year to date.

That’s according to eVestment, which found that the average hedge fund had returned 2.21% since the beginning of the year.

This is up from -0.27% the industry had achieved in July following the financial turmoil created by the COVID-19 pandemic.

Almost every hedge fund eVestment tracks posted positive returns during August, with event driven-activist strategies outperforming their peers.

These strategies returned 7.88% in August, lifting their year to date returns to 3.25%. However, this is far from the results achieved by the average event driven-activist strategy in 2019 (17.46%).

The best-performing strategies that eVestment tracks were convertible arbitrage funds, returning 6.89% year to date. The average convertible arbitrage fund returned 2.64% in August and 9.05% in 2019.

“Nearly 90% of convertible arbitrage managers are positive for the year with those posting positive returns seeing average gains near 10%,” eVestment said. fs

CFS partnership to sustain advice industry Annabelle Dickson

C

The quote

Our goal is to drive more graduates and more people into the financial planning industry.

olonial First State has entered into a partnership with graduate coaching provider Striver in order to drive graduates into the financial advice industry.

The partnership will see CFS assisting university graduates with support through education, mentoring and connections to get a head start in their careers.

CFS general manager of advice relationships Bryce Quirk 01 said for the advice industry to thrive long-term and service the growing demand, they have to compete for talent and increase capacity by attracting graduates.

“There is a fundamental lack of awareness among students and graduates about the benefits of working in financial planning and helping improve people’s financial wellbeing,” he said.

CFS said a recent study showed just 28% of students enrolled in tertiary financial advice courses end up working for a financial advice firm.

“Our goal is to drive more graduates and more people into the financial planning industry. The more we support high-quality talent to enter the advice profession, the more the sector will thrive – delivering better outcomes for people seeking financial advice,” Quirk said.

Striver expects to place 240 students into financial services firms over the next 12 months and has already partnered with IOOF and its subsidiaries, Zurich, Netwealth, BT and Madison Financial Group.

Striver chief executive and founder Alisdair Barr said through the partnership with CFS it wants to bring greater awareness of financial advice as a career path to bring better graduates to the profession.

“The majority of advice businesses that we work for are passionate about what they do and love to see people achieve what's important to them. But we don't, as a collective, talk about what a great profession financial planning can be as a career,” he said. fs

Increased superannuation guarantee equals increased fees Eliza Bavin

New research from the University of Sydney suggests that raising the superannuation guarantee to 12% will send fees through the roof.

The study conducted by Cameron Murray, economist and research fellow at the University of Sydney, found that increasing the SG will charge the typical worker and extra $28,000 over their lifetime.

The research said at the current 9.5% compulsory contribution rate, Australia’s superannuation system is already an unbelievably expensive retirement income system.

The super industry employs 55,000 people and costs $34 billion in fees each year to deliver only $40 billion in retirement incomes, it said.

As such, the research concluded that increasing the compulsory super contributions rate to 12% of wages will do little to support retirement incomes while adding substantially to the economic cost of the superannuation system.

“The economic cost of super to members comes in the form of direct fees, which are around 1% of super balances on average, as well as the foregone investment returns from those fees,” Murray said.

“For a typical earner with a 40-year work-life they can expect to have a real super balance

of $743,000 at retirement, having paid about $108,000 in fees over their lifetime.”

However, Murray said even when taking into account the increased super balance due to SG rise, the worker will still be worse off.

“Those fees could have earnt an additional $74,000 in investment income, meaning the total economic loss is $182,000 over a lifetime,” he said.

“Raising the compulsory super contribution rate to 12% will see funds charge this typical earner an extra $28,000 in fees over their lifetime, losing an addition $20,000 of investment income.”

Additionally, Murray found that even if super funds were to vastly improve their investment performance, it will still not make up the losses members will cop in fees.

“Even if funds improve their performance and fees fall by half, the compulsory rate increase will see this typical worker lose an extra $16,000 to fees over their working life, and around $10,000 of investment income,” Murray said.

“The super system is one of the most economically inefficient ways to support retirement incomes. Raising compulsory contributions will only add to these costs, creating even more jobs for blow-hard spreadsheet monkeys who pay themselves from our retirement savings.” fs

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Feature | Australian equities

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

THE LONG AND SHORT OF IT Long/short fund managers enjoy great media attention as well as scrutiny. With the promise of diversified alpha and double-digit past returns, should you consider making an allocation? Kanika Sood reports.

Australian equities | Feature

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

V

iridian Advisory has about $200 million invested in its standalone Australian equities portfolio on behalf of its advice clients, and its chief investment officer Piers Bolger01 splits this across passive strategies and about seven active managers.

Bolger is a longtime user of long/short strategies and currently allocates about 25% of Viridian’s total Australian equities to two such funds: Solaris Australian Equity Long/Short Fund and the Ausbil 130/30 Focus Fund.

“I see two roles for them in our portfolio.

One is the ability to return alpha in positive and negative markets and two, which I think is probably more important, is the diversification that a manager brings to the total portfolio,” he says.

Long/short managers are a small – and often much glorified – subset of wider Australian equities managers. Instead of just betting on stocks they think will go up over time, these managers also seek to profit from stocks they think will tumble.

On the way, they can add leverage to their bets and take views on the best net exposure to the ASX. But they are not necessarily the panacea to diversifying returns, Bolger says.

He says a portfolio’s short positions don’t usually deliver the same upside as its long positions, poor risk management on the short side can completely derail the portfolio, and fees don’t come close to other styles of investing.

Yet Viridian has used long/short managers for Australian equities from day one.

An advice firm that takes an opposing view on long/short strategies is Crestone Wealth Management.

“We use them sparingly…in percentage terms, they would be a very small part of our overall alternatives allocation,” says Crestone senior analyst for alternatives Martin Randall02 .

And then there are those who have used them in the past but have since sworn off, like Hamilton Wealth Partners managing partner Will Hamilton.

“We’ve had the view that there is one winner and that’s the fund manager. The fees were incredibly high and they didn’t provide the downside protection when we needed it,” says Hamilton.

What exactly is a long/short fund?

It is worth breaking down the types of long/ short funds available to investors in Australia.

There are three main ones: active extension, market neutral and variable beta.

Both funds that Viridian uses fit in the “active extension” category, which is often also called something like “130/30” or “120/20”.

In simple terms, a 130/30 manager will target 100% net exposure to the market while building long and short parts of its portfolio.

01: Piers Bolger

02: Martin Randall

03: Kristiaan Rehder

chief investment officer Viridian Advisory

senior analyst, alternatives Crestone Wealth Management

portfolio manager Kardinia Capital

It is allowed to take short positions with up to 30% of their total portfolio, which lets it put an extra 30% in the long side (remember it’s targeting net 100%).

The second category, “market neutral” is the polar opposite of the first one in that it targets 0% net exposure to market. So the goal is to have long and short balance each other.

This is the strategy Crestone’s Randall uses.

Lastly, “variable beta” includes managers who are not married to 100% or 0% net market exposure of the first two categories but want to be able to move around, for example taking the fund from 25% net short to 75% net long.

Together all three (and more often the last two) are loosely termed as “absolute return” strategies.

In practice, allocators often home active extension strategies in their equities portfolios (since they have 100% net market exposure), market neutral in their alternatives portfolios (since they have 0% net market exposure ) and variable beta straddles the two (since their mandate allows them to be have a variable net market exposure).

There could be a fourth fantasy category – an actively-managed fund that takes shortonly positions.

There are passive ETFs from BetaShares that short entire indices, with the option of choosing leverage. They have proven popular with Australian investors during COVID-19, and prompted similar products from another issuer ETF Securities.

But an active fund that seeks to add value via short positions alone may be a hard sell for local portfolios.

“Theoretically, yes because there is ample hunting ground for [short] managers. It will be a tough one to have as a long-term holding… even BEAR is used as a tactical allocation. So, in Australia, probably not [but] in underlying global multi strategy, possibly,” Randall says.

Long-short funds in Australia don’t tend to run net short often, as Kardinia Capital portfolio manager Kristiaan Rehder03 says from his experience running a variable beta fund.

“It happens rarely. The first time was back in 2000 and then we hadn’t been net short until the middle of the hot sell-off that we saw in February and March this year,” Rehder says.

“And this is more of an educated guess…but most absolute return funds [and] I suspect many of our peers wouldn't go net short [often].”

Rehder says a perennial net short portfolio may be limited by the fact that the companies that don't grow tend to go out of business or get taken over, limiting the opportunity set.

A period of quiet after activity The concept of shorting is not new. In fact, it has been around for 411 years (the first short seller was a disgruntled East India Company employee and shareholder), but the longeststanding long/short funds are only 21 years old

A lot of people have the perception that if the market goes down, they go up.

However, the performance of market neutral funds are driven by the manager’s stock selection rather than market movements.

Quan Nguyen

17

(strategies from Antares and K2, both founded in 1999).

Traditionally, Australian long/short talent came from family offices and a few larger managers (such as AMP Capital’s quantitative team and MLC’s Antares).

The year of 2018 was glorious for long/short fund managers, as they rapidly raised hundreds of millions for new vehicles on the back of track records of double-digit returns.

L1 Long Short (ASX: LSF) ended up with a $1.35 billion for its global long/short strategy while some ex Macquarie stock pickers set up their own boutique and inched towards $1 billion in total assets in just a couple of months.

Both managers also struggled to perform before perking up during COVID volatility.

The two years since have been quieter, with no headline-grabbing capital raises and a dip in total assets.

Zenith Investment Partners currently rates 11 market neutral funds and 22 long/short funds in Australian equities.

FUM in these Australian equities long/short funds fell 25% from February 2019 end to August end this year. Meanwhile, market neutral strategies’ FUM fell 9% in the period, according to Zenith data.

Zenith head of equities Quan Nguyen 04 termed the flows as “flat” for market neutral and “stable” for long/short.

He posits three reasons to the stalling in flows.

Before COVID, as markets kept climbing up, investors found little motivation to veer away from market beta (such as through a passive ETF). During COVID, they sought liquidity during COVID-19 and took money out of equities-like exposures akin to an ATM machine.

And since then, as stock markets climbed up once again, investors may have gone back to just seeking market beta.

“In general, the return profile of market neutral funds are not correlated to the market.

When the markets were doing so well, people were happy with just beta, even with a passive fund. Variable beta funds were in the same position because they don’t typically participate fully in market movements. However, active extension funds, with betas being close to one, performed well," he says.

Despite it, new products are coming to the market.

Nguyen says at least 11 new Australian equities long/short or market neutral strategies have been assigned Zenith ratings in the last two years, including from Sage, Milford Asset Management, Australian Eagle, Atlantic Pacific, Harvest Lane, Platypus, Investors Mutual and Karara.

One part where a gap remains is funds that chase shorting opportunities in small caps, especially when the index is considered inefficient.

“It is very hard to short some of these stocks.

The costs can be high and they are more

18

Feature | Australian equities

susceptible to short squeezes than large cap stocks," he says.

Long/short strategy performance For all their financial alchemy, how do returns from these funds stack up?

Say, five years ago you put $100 each in a long/short fund, a market neutral fund, and an ETF tracking the S&P/ASX 300 index.

How much do you think each investment would be worth now?

According to data collected by Zenith Investment Partners’ Nguyen, an average performing long/short fund would have turned the $100 into $151 while an average-performing market neutral fund would have turned $100 to $131.

Meanwhile the index would have swelled $100 into $144 in the period – meaning the average long/short fund beat it [10.2% p.a. versus 8.8% p.a.] but market neutral did worse than the equity index [6.4% versus 8.8%]. (Note: Market neutral funds are usually no benchmarked to equities indices).

“A lot of people have the perception that if the market goes down, they go up. However, the performance of market neutral funds are driven by the manager’s stock selection rather than market movements. It is a key point that people miss,” Nguyen says.

“Market neutral generally protected relative to the market, didn’t suffer as large drawdowns and bounced back relatively strongly.”

The caveat, of course is the average returns from Zenith are from funds that it rates, and hence may be better of the lot.

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

04: Quan Nguyen

05: Michael Malseed

06: Raewyn Williams

head of equities Zenith Investment Partners

associate director, manager research Morningstar

managing director, research Parametric Portfolio Associates

In reality, returns can vary widely from fund to fund, and across various time periods.

“There is a big dispersion of returns. From Jan 1 to March 23, ASX200 was down 31% and there was range of performance: Auscap was down 56%, Regal was down 45% and L1 was down 42% but Bronte was up 9% and Munro was up 8.5%,” says Morningstar associate director, manager research Michael Malseed 05 , mentioning many funds it doesn’t rate.

“Then to August 23 when the market was up 26%, Auscap was up 63%, Regal was up 57% and L1 was up 49% but Bronte and Munro didn’t have the same upside.

“Volatility is a lot higher than [long-only funds].

The investors want long/short strategies to smooth out volatility. That is not what we have seen.”

Malseed offers a five-point guide for advisers mulling whether or not these strategies have a place in their portfolios.

“One, look at the fund’s risk management profile [size of short positions and liquidity] because short positions have an asymmetrical return profile of either returning 100% or going down to zero,” he says.

“Two, look at the skill of the people running it and then especially at shorting skill because it is a unique skill set and few managers in the market have a consistent track record in the area.

Four, you have to ask, what is the history of the [fund’s] net exposure to understand how much market beta you are expecting to capture.

“Lastly, fee structure in this category can be tricky, especially if there is an absolute return benchmark. For a high base fees plus perfor-

Long opportunities in COVID-19 Antares investment manager John Guadagnuolo 09 says COVID-19 was an opportunity to identify and invest in companies that will emerge stronger.

“We had a specific strategy to deal with COVID. We took the view that [while] we are very much aware of the cost in terms of lives and hopes, pandemics are part of life - we generally emerge from them and what we tried to do was invest on the basis of that,” says Guadagnuolo, who is the portfolio manager of Antares’s mid cap fund and deputy of an ASX 200 fund. Both are long-only, concentrated funds.

“We positioned ourselves into companies that we felt benefitted from COVID on a long-term basis. What do I mean by that – companies whereby there was a change in the market structure that aided them to get ahead of their competitors,” he says.

He cites as an example, Qantas and student consulting services provider IDP. “Qantas had a pretty strong ownership which Virgin did not. The pandemic obviously stopped travel and airlines around the world suffered. [But] Qantas is a long-term beneficiary because its relative position is strong to allow it to survive and then, recommence operations whereas Virgin was not strong enough to that," he says.

“We think IDP is better placed than smaller, undercapitalised local competitors…We believe that the study will be an important part of reopening economies because there will be a very strong demand for people leaving emerging countries to study in developed markets and IDP is listed, and has the capital to survive.”

While the mid-cap space has greater focus on growth than on income, Guadagnuolo thinks COVID-19 will force companies to think carefully about their dividend payout ratios in the future.

“I think what you're seeing through COVID, these companies have had high payout ratios which have been particularly susceptible to the impact of business disruption," Guadagnuolo says."

[They will be] hoping to keep a bit more capital to help them navigate such events in the future.”

mance fees, the manager may be delivering relatively high equity market beta.”

Fees and benchmarks

Ten years ago long/short managers were demanding traditional two plus 20. Now its base of 1-1.3% plus performance.

Alex Donald

If you, like Hamilton, think long/short strategies are pricey – in some good news, it used to be worse in the past.

“Ten years ago long/short managers were demanding traditional two plus 20. Now its base of 1-1.3% plus performance,” says Alex Donald, head of funds management at Ironbark Asset Management, which has been distributing long/ short strategies for a decade.

Donald adds that long/short funds have evolved from being structures as fund-of-funds to single manager strategy, owing to a desire for lower fees and daily liquidity.

What is fair for a long/manager to charge investors is a tricky question. And often tied to the fund’s chosen benchmark and level of leverage [generally 150% and 220-250% for more aggressive ones].

Active extension strategies usually peg themselves to S&P/ASX 200 or 300 (charging performance fees above that), and market neutral strategies charge them above RBA cash rate or a similar absolute hurdle. Variable beta strategies’ benchmarks are a mixed bag.

Just the RBA cash rate as a hurdle for collecting performance fees was disliked by nearly all interviewees.

“I don’t personally think the cash rate is necessarily a good hurdle. It depends on what level of growth they are looking to return and their alpha when unlevered,” Crestone’s Randall says.

“We generally challenge managers on benchmarks…but it’s not necessarily a conversation that is happening even overseas.”

Is it easier to negotiate fees in a long/short strategy than in a vanilla strategy, as the former have more room to fall? Not necessarily because the question of capacity puts the ball in the manager’s court.

“I can’t really say between the two. For any asset class (alternative or not), the fees can very much depend on the capacity and availability for clients. If the fund has limited supply, it is harder to negotiate fees,” Randall says.

After-tax efficiencies Most investors understand the broad strokes of how capital gains tax (CGT) works for long-only positions in ASX-listed stocks in a superannuation context – you ideally hold it for at least a year to get a 33.3% CGT discount and there are limitations on recouping tax losses.

But for short positions, trimming the tax bill may be a bit harder, according to Raewyn Williams 06 , managing director of research at aftertax focused implementation manager Parametric Portfolio Associates.

She says: “The securities lending is tax neutral to the lender under specific tax rules. For the borrower (the fund with the long-short portfolio), CGT applies to the gain or loss, calculated as

Australian equities | Feature

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

the difference between what the fund originally received under the short sale and what it paid to buy the equities later to repay the loan…”

“From an after-tax perspective, there’s ability to adjust timing of trades on the long side (extend the holding period beyond one year) to qualify for the CGT discount concession, but not on the short side (where the securities lending and repayment occurs within one year). So in that sense you lose something in tax efficiency on the short side, versus the long side.

“Another way to say this is that you need to generate more pre-tax ‘alpha’ on the short side than on the long side to get similar after-tax returns.”

She reminds funds with short positions to ensure they have similar structures on both long and short sides (for example both portions either in an SMA or in trust) of the portfolio to offset eligible tax liabilities, and to eke out clearly who gets the value of the franking credits from the dividend.

What the borrower fund pays as a ‘manufactured dividend’ as part of the securities lending arrangement the fund uses is also important, she notes.

“A manufactured dividend is usually structured so that cash payable by the fund to the lender when stock out on loan pays a dividend (to compensate the lender for not receiving the actual dividend) excludes the value the franking credits attached and the tax rules can simply assign the actual franking credits to the lender,” Williams says.

“But if a non-orthodox arrangement is used, it’s important to specify who’ll get the value of the franking credits, which can make a big difference to after-tax returns.”

Institutional appetite For all their promises, long/short strategies are not very popular with superannuation funds.

Frontier Advisors, which advises on over $375 billion of local institutional assets, says its clients don’t use absolute return strategies in Australian equities. Willis Tower Watson says it does not have data or research on institutional usage of long/short strategies in Australia.

One asset consultant whose clients have used absolute return strategies in Australian equities in the past is JANA. But even JANA’s clients have only used them “sparingly” and are unlikely to increase allocations in the future.

07: Anthony Ballard

08: Greg Barnes

09: John Guadagnuolo

senior consultant and head of Australasian equities JANA

head of public markets Sunsuper

investment manager Antares

“[These] have been mostly limited to ‘growth alternatives’ or ‘equity strategy’ asset classes rather than pure Australian equities exposures…because funds are predominantly seeking beta from their Australian equities asset class, with absolute return strategies by design exhibiting lower levels of market beta,” JANA senior consultant and head of Australasian equities Anthony Ballard07 said.

“Sentiment is muted due to typical portfolio role…limiting interest. We expect only moderate interest for a subset of clients going forward, given these strategies’ portfolio role, a greater level of strategy complexity, and relatively expensive pricing against a backdrop of industry fee and competitive pressures.”

APRA’s heat maps have thrown a spanner in the works, as their focus on performance and fees may leave super funds with absolute return strategies shortchanged on both counts.

“In general, relatively expensive fee structures (vs vanilla equities) will add to fee comparison pressures, and additionally the lower beta absolute return approach will likely be detrimental from a comparative relative return perspective (vs vanilla equities) in times of strong Australian equities asset class performance,” he says “These factors are both important considerations for funds going forward in the context of the APRA Simple Reference Portfolio (SRP) which creates a heat map benchmark of passive equities for absolute return strategies.

Despite the high fees, added complexity, APRA heat maps, and the confusion in classifying them, a few superannuation funds are taking the plunge.

One of them is the $70 billion Sunsuper, which is in the process of adding a long/short manager to its Australian equities portfolio after mulling it over for two years. [It has exposure to market neutral in its alternatives portfolio].

Its head of public markets Greg Barnes08 said the decision was driven by the potential to add higher alpha (even after fees), high net exposure, good tracking error and double sufficient returns.

Sunsuper opted for an active extension strategy (as opposed to variable beta), a quantitative investment team (as opposed to fundamental stock pickers) and a mandate (as opposed to pooled structure).

By relaxing the short constraint, it allows managers to express the full range of their views from positive views or going overweight stocks, the negative views with underweight stocks and getting a much more symmetrical spread.

Greg Barnes

19

It is starting with a potential 5% allocation from its Aussie equities portfolio and may consider adding a long/short manager to its global equities allocation down the line as well. “[We chose active extension because] by relaxing the short constraint, it allows managers to express the full range of their views from positive views or going overweight stocks, the negative views with underweight stocks and getting a much more symmetrical spread,” Barnes said “[The mandate] gives us much greater control over the parameters and the way that that manager goes about managing the fund. Importantly, it means that the securities never leave our custody. So the management agreement is [that the manager is] managing the fund but we're responsible for the underlying security.

“So they never leave [the super fund’s control], which means that we can move very quickly terminate any management agreement that's in place,” he says, adding that on the fee front maximum yearly performance fee payouts are also capped.”

Sunsuper already has a stock lending program in place, and says it will be able to use its larger stock holdings to lend (as the first port of call) to the long/short manager it recruits, reducing the manager’s cost of borrowing stock to short.

“That process allows us to sweat our assets a little bit more as well. So we should be getting a higher return from some of those passive investments in the portfolio,” Barnes says.

What is next?

Long/short funds have their fans and detractors.

How this appetite shifts in a post COVID-19 world is yet to be seen. And anyone’s guess is as good as yours.

“That’s like asking which way the market will go [and I] don’t think I can call the market. If the market keeps going strong, active extension may have demand but market neutral and variable beta not so much” Nguyen says.

Ironbark’s Donald suggests managers should get ready for a more informed clientele, who wants to take a look under the hood.

“There is a strong search for negative beta and it will come from market neutral funds," he says. "Investors have become more discerning about net exposure and the level of leverage." fs

20

News

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

End of the SCT edges closer

01: Jane Hume

assistant minister for financial services, superannuation and financial technology

Elizabeth McArthur

The Superannuation Complaints Tribunal (SCT) will cease to exist at the end of this year, with the Australian Financial Complaints Tribunal (AFCA) seeking to handle any remaining complaints currently with the SCT. AFCA has opened consultation on changing its rules to allow it to consider any complaints currently with the SCT that are unlikely to be finalised by the end of the year.

The amendment will allow AFCA to consider matters that are before the Federal Court on appeal from the SCT that are not finalised too.

AFCA has been receiving super complaints since 1 November 2018, but the SCT remained operational to wind up matters that had already been filed with it before that date.

Ahead of the SCT’s legislated end date, AFCA must update its rules so that it can oversee existing SCT matters.

In addition, AFCA has proposed two technical changes to the rules that govern the tribunal.

These proposed changes seek to clarify which Australian Bureau of Statistics reports are used to index AFCA’s monetary limits and to correct a reference to legislation.

A legislative cross reference to the definition of “CDR [Consumer Data Right] Participant” in AFCA’s rules was written incorrectly. However, the proposed change will not change the extent of AFCA’s jurisdiction to deal with complaints against CDR participants, or otherwise. fs

IPO Wealth ordered to wind up

Amnesty unearths $588m unpaid super Karren Vergara

O

The quote

We know that in the past, calculating the super guarantee has been very complicated.

ver half a billion dollars of unpaid superannuation has been reunited with workers, as employers take advantage of the amnesty period to “wipe the slate clean”.

About 24,000 employers have admitted to underpaying staff approximately $588 million in superannuation, with many coming forward before the September 7 Superannuation Guarantee Amnesty deadline.

The office of Senator Jane Hume 01, Assistant Minister for Superannuation, Financial Services and Financial Technology, confirmed to Financial Standard that 393,000 workers will benefit from the initiative.

Using the ATO’s data, some 17,000 (55%) of businesses lodged their application for the SG Amnesty in the final week before the deadline.

About 7000 were received on the last day.

Hume said: “The Superannuation Amnesty was a one-off opportunity for employers to disclose and pay previously unpaid superannuation guarantee charges. It was about reuniting Australians with money that is rightfully theirs, making sure every dollar that is owed to workers goes back to them.”

The SG Amnesty was a one-off opportunity for employers to disclose and pay previously unpaid super dating back to July 1992, plus 10% interest, without penalties.

Around $440 million has been transferred to super funds, including $132 million in late payment offsets of 10% each year that the payment was outstanding. A further $33 million is subject to agreed payment plans for businesses facing hardship.

“We know that in the past, calculating the super guarantee has been very complicated.

The Superannuation Amnesty prompted honest businesses to take a look back through their records and check they’d done the right thing by their employees,” Hume said.

The Association of Superannuation Funds of Australia deputy chief executive Glen McCrea commended the success of the amnesty.

“In combination with the additional integrity measures legislated early last year, it will help get more money in people’s superannuation accounts for their retirement where it belongs,” he said.

“Every additional dollar in people’s superannuation account will have an impact on the adequacy of people’s retirement.” fs

Eliza Bavin

The Supreme Court of Victoria has made a winding up order for Mayfair 101’s IPO Wealth fund.

In response to the decision, Mayfair said it was disappointed with the outcome and believes it will result in negative ramifications for unitholders.

The embattled company said it had been taking proactive measures to generate a more favourable outcome for unitholders that could have avoided liquidation.

Mayfair 101 managing director James Mawhinney said: “As the founder of IPO Wealth I am devastated by the result. I have personally engaged with almost every single unitholders and have eternal empathy for the situation they now find themselves in.”

“My team and I have worked tirelessly to prevent the erosion of value that this process will result in.”

Mayfair said it was noted in the proceedings that a number of false and misleading statements were made about Mawhinney and the IPO Wealth Holdings group.

“These statements have ultimately been used to serve the interests of the other parties, rather than those of unitholders,” Mayfair said.

“Multiple defamatory allegations were made by counsel for Dye & Co in these proceedings which are categorically refuted and will be challenged.

Any claims of impropriety are categorically rejected by Mawhinney.” fs

Financial services laws under review Jamie Williamson

Following on from the Royal Commission, the Australian Law Reform Commission has been tasked with reviewing financial services laws with a view to simplify laws regulating the industry.

As part of its response to the Royal Commission final report, the government has asked the ALRC to inquire into the potential simplification of laws, namely provisions of the Corporations Act 2001 (Cth) and the Corporations Regulations 2001 (Cth), among other legislative instruments.

There are three key focuses of the review, each of which will be covered in an individual interim report.

The first will focus on the appropriate use of definitions in corporations and financial services legislation and is due by 30 November 2021, covering the consistent use of terminology and appropriate design of definitions.

The second will cover regulatory design and the hierarchy of primary law provisions, regulations, class orders and standards and is due by 30 September 2022. This will examine how legislative complexity can be appropriately managed over time, how delegated powers should be expressed

in legislation, and how best to maintain regulatory flexibility to address unforeseen or unprecedented situations.

A third interim report is due by 25 August 2023 and will focus on the potential reframing or restructuring of Chapter 7 of the Corporations Act. This will involve identifying ways of making Chapter 7 clearer, coherent and effective.

The final report is due to the Attorney-General by 30 November 2023.

The ALRC is not tasked with recommending policy changes in terms of the actual content of financial services providers’ obligations, but instead to facilitate a more adaptive, efficient and navigable framework within the existing settings.

“The ultimate goal is to achieve meaningful compliance with the substance and intent of the law,” according to the ALRC. The government has directed the ALRC to undertake the review with the findings of the Royal Commission, Australian Government Competition Policy Review, Financial System Inquiry, Treasury’s 2017 ASIC Enforcement Review Taskforce and the Productivity Commission’s 2014 report in mind. fs

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22

Roundtable| Impact investing Featurette

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

Headwinds abound at AAP 2.0 Were the recent efforts by philanthropists and investors to save the newswire an example of impact investing or of virtue signalling?

Ally Selby and Rachel Alembakis

Australian Associated Press has launched a public campaign for donations to save the struggling newswire. It comes only a month after it was re-established as a not-for-profit, having been saved from certain closure by a consortium of 35 philanthropists and investors.

The newswire’s GoFundMe campaign has already racked up more than $119,000 in donations, from approximately 1600 donors. The top donation, so far, has been $5000, while the lowest was $5. Contributions to the crowdfunding campaign are not charitable, and therefore, not tax deductible.

It also follows the Morrison government saying it will provide $5 million in funding to the Australian Associated Press under its Public Interest News Gathering program.

“The COVID-19 pandemic has triggered unprecedented challenges for Australia’s regional media sector, with severe declines in advertising revenue threatening the sustainability of many news outlets,” Minister for communications, cyber safety and the arts Paul Fletcher said.

“Public interest journalism is important now, more than ever. This $5 million in funding will allow AAP to continue delivering its important news service for communities Australia-wide.”

Fletcher said the funding would also provide the newswire with more opportunities to secure additional private investment to support its longterm sustainable.

Yet, the consortium that funded the purchase of the newswire from Nine and News Corp have not, to newly appointed chair Jonty Low’s knowledge, invested in or donated more to the newswire themselves.

AAP has, however, been in touch with all the original donors asking them to circulate links for the crowdfunding campaign within their own networks.

Interestingly, Samuel Terry Asset Management’s Fred Woollard - one of the consortium’s original donors - told Financial Standard that he was not aware of the newswire reaching out to any of his peers for further donations following the GoFundMe launch.

“They have not done so but I wouldn't be surprised if they did,” he says “The original business plan was that it would take a little while to get to cash break even.”

Financial Standard revealed earlier this year that only a handful of the consortium’s funders would receive some financial gain from their investment, after handing out upwards of $1 million in unsecured loans at the end of the financial year.

These loans, the consortium’s founders Nick Harrington and John McKinnon originally hoped, would be paid back after the newswire became profitable; at the time, forecasted to be after three years.

Meantime, the majority of the philanthropists involved in the AAP consortium, the likes of Wilson Asset Management’s Geoff Wilson, Australian Impact Investments' Kylie Charlton, and Woollard, would receive no return on their investment.

We often say that when a Newswire subscriber sneezes the newswire catches the cold.

Emma Cowdroy

However now, just a month after its relaunch, AAP chief executive Emma Cowdroy01 says the newswire faces unforeseen headwinds.

“We often say that when a Newswire subscriber sneezes the newswire catches the cold,” she says.

“The industry, quite frankly, is on its knees; between COVID-19 and the worst advertising market in modern history for newspapers, the industry has taken a further downturn.”

Cowdroy has worked at AAP as its group general counsel for the past 20 years, before nabbing the chief executive role.

In the newswire’s first month of operation as a not-for-profit she has witnessed a major shift in the contract duration terms she writes.

“We are in the process of transferring or novating contracts across as part of the sale and purchase arrangements of the transition,” Cowdroy says.

“I used to write contracts for three years … I am now writing them for three months,” she says.

Perhaps, this is because competition too has started to heat up within Australia’s newswire market.

“For 85 years we've been the only newswire in Australia and having decided that they would shut us down in March, News Corp then announced a month later that they were going to set up their own newswire service,” Cowdroy says.

The service, NCA NewsWire, is purportedly “independent” from the rest of the company, with staff across major cities providing content to both News Corp’s own mastheads - the likes of The Australian and news.com.au - as well as other media organisations.

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

Impact investing | Featurette

01: Emma Cowdroy

02: Sandy Blackburn

chief executive AAP

founder and managing director Social Outcomes

“No one can really say what's going to happen when they enter [the market], but the one thing I can say is that they signed a six month non-compete, we've got four and a half months left of that ... but the threat of entry can have a significant effect on the market as well,” Cowdroy says.

AAP currently supplies daily news coverage to over 400 media outlets across Australia, over 255 of which are in regional Australia.

Notable clients of the AAP newswire service include The Guardian, SBS, the ABC, Daily Mail, Seven, West Australian Newspaper, Australian Community Media’s newspapers and Australian Radio Network, to name a few.

While not all of AAP’s clients have requested the aforementioned short-term, three month contract, those that have are some of the newswire’s biggest clients, Cowdroy reveals.

And so, in a bid to build brand awareness, the GoFundMe campaign was launched, Low explains.

“Not many people understand what a newswire does; unless you work in the media or you have a direct understanding of how media works, you just take for granted what a newswire does and what the reach of a newswire is,” she says.

“So the crowdfunding campaign is both an education and branding exercise, if you like.”

With News Corp’s offering set to launch in the coming months, Cowdroy agrees that it is high time for AAP to stop “hiding its light under a bushel”.

“We need to promote our brand so that when people see the AAP logo they know that it represents a badge of accuracy, trust and factual reporting,” she says.

“I think that's what people are so desperate for in Australia at the moment.”

In a similar vein, StartSomeGood.com co-founder and chief executive Tom Dawkins, who specialises in supporting not-for-profit organisations in their fundraising activities, champions the use of crowdfunding campaigns to raise awareness.

“It’s not just a source of capital, but also a source of community intelligence … [used as] evidence that is then taken to impact investors and grant funders and those that like to make decisions based on data - not just hope, aspiration, and inspiration,” he says.

To Dawkins, approaching crowdfunding can be a strategic way of translating social value into brand awareness, which can then be channeled into commercial and financial investment.

“Financial capital doesn’t just emerge out of nowhere,” he says.

“It represents some level of social capital based on some degree of trust and hope.”

However, he maintains that if crowdfunding were to become a recurring strategy for the newswire, transparency on spending will be key.

“With crowdfunding, as in most things, people prefer a higher level of specificity, or clarity around what’s been done,” Dawkins says.

“What’s fascinating about this campaign is that it has very little clarity, rather than a 10,000-metrehigh aspirational statement about independent media, nothing about what this amount of money makes possible that is not available in other ways.”

Swinburne University of Technology’s Centre for Social Impact researcher Krystian Seibert agrees, noting that while AAP is entitled to use a GoFundMe as part of its revenue mix, crowdfunding campaigns themselves can be bound by consumer and fundraising laws.

“You can’t say anything misleading or deceptive, so you need to be careful how you frame the wording of a campaign,” he says.

“For any organisation pursuing such a transaction it’s important to be open and transparent about the nature of the deal and how it’s structured.”

He dubs the AAP deal a “layered transaction”; one that uses different layers of financing to fund the business.

These include impact investing, which will see a return if the business turns a profit; philanthropy, which has no financial return; and crowdfunding, which can also be considered a type of philanthropic support.

Typically, crowdfunding will appear early in a notfor-profit’s development in place of venture capital, as it tests its product or service fit with the wider community. Once these organisations are more established, they will move to gain funding from larger philanthropists and impact investing vehicles.

AAP has done this in reverse.

Sandy Blackburn 02, founder and managing director of Social Outcomes, an impact investment and social research intermediary, also notes that in addition to the timing being unusual, AAP’s decision to target consumers – and not its clientele – is also, in itself, unique.

“The difference that’s interesting is that when a social enterprise does a crowdfunding campaign, it’s usually only successful when they have a community in place; if you have a client base procuring services or buying products, you have a pre-existing community,” she explains.

For AAP, their community would have been the media outlets themselves, as opposed to the public, she says.

“They are hoping that people are keen to support one of the pillars of Australian democracy, and looking at the crowdfunding site at the moment, it would seem that the public are willing to support that, even if they’re not getting anything out of it directly, which is normally the case,” Blackburn says.

Traditionally, crowdfunding involves a cause that people have history with, she says, however “supporting our democracy isn’t one of those”.

“We’ve never had to pay to have one of the pillars of the media propped up before,” Blackburn says.

The funds raised from the campaign will go back into business development, Low says whatever is needed to “push out more stories, more images and more material”.

I think they should be more transparent, even though many impact investment deals often have little detail in the public domain.

Sandy Blackburn

23

However, she maintains that all funding options are “on the table”.

“We are intending to diversify our revenue; in addition to the traditional wholesale subscription revenue, we are also looking into corporate and small office revenue streams,” Low says.

“There will also be the crowdfunding revenue stream, there will be government support - federal and state we hope - and then philanthropy.”

AAP 2.0 is also yet to make a decision on whether or not to make its financial reports public.

“There is no doubt that we want to keep the community informed about what we are doing and how important it is, but we haven’t made a decision on that just yet,” Low says.

While public knowledge of the business balance sheet is still on the cards, AAP is in discussions with several of the consortium’s investors and philanthropists for an update on the newswire.

“We are still going through a number of meetings with the consortium; with the investors,” Cowdroy says.

“They are all very happy to engage with us and speak to us and hear about our plans for the future and be kept advised about what's going on at AAP.” While consortium members may be in the know, Blackburn believes the public also has a right to clear reporting around the use of proceeds.

"I think they should be more transparent, even though many impact investment deals often have little detail in the public domain,” she says.

“In this instance, transparency about the use of funds is important as the public in general have a stake in ensuring AAP continues to support well researched journalism for the benefit of democracy in Australia."

Woollard has not yet had an update from AAP on how the business is going, but is set to meet with company management in the coming weeks.

“I am a fund manager by trade, we own shares in companies, we give them money and if they are a public company they make an ASX announcement about how they are doing,” Woollard says.

“I don't see why charities of any kind would be different; most of the charities we donate money to tell their donors how they're going.”

For Woollard, like many of the consortium’s original funders, donating to save the struggling newswire was viewed “entirely as part of a charity budget”.

“Each year I give away a certain amount of money to different charities I like and I viewed this entirely as part of that,” he explains.

He believes that in any other democracy, a newswire similar to AAP would be financed by the government, as it is a “public good”.

“I believe it would be a serious negative for Australian democracy and Australian media diversity if AAP were to collapse,” he says.

Similarly, Wilson believes that AAP has democratised philanthropic support for independent journalism with its GoFundMe initiative.

“Independent journalism plays a critical role in society, so the more the merrier,” he says. fs

24

Between the lines

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

Super fund tops up mandate

01: Andrew Proebstl

chief executive legalsuper

Kanika Sood

UniSuper recently added about $300 million to its allocation to Tribeca Alpha Plus Fund and now has a total of roughly $630 million invested via the fund, Financial Standard understands.

Tribeca Alpha Plus has been running since 2006 but had a rough start to last year, as returns stalled Liu’s long-standing co-portfolio manager Sean Fenton left to start his own boutique, called Sage Capital.

Fenton’s April 2019 departure cost the fund two team members (Peter Moore and James Delaney, who crossed over to Sage), almost instantaneous rating cuts from Zenith and Morningstar, and a $600 million outflow from a single institutional client.

By August last year, the fund was down to $331 million – a third of its pre-April size.

Liu took over as the sole portfolio manager following Fenton’s departure, hired two analysts and the fund has since restored to abovebenchmark returns.

The fund delivered 3.37% in the year ending August, 2020 better than its benchmark S&P/ASX 200 Accumulation Index’s -5.08%.

Ratings have started to come back as well, with an approved from Zenith and investment grade from Lonsec.

UniSuper stuck with Tribeca through the leadership changes and last year’s underperformance, after allocating to the Tribeca strategy since late 2017. fs

Super fund terminates AMP Capital mandate Jamie Williamson

The quote

Consequently legalsuper transferred the mandate for our Balanced Socially responsible option into the Pendal Group’s Sustainable Balanced Fund.

A

nother superannuation fund has pulled its mandate with AMP Capital’s Ethical Leaders Balanced Fund, appointing another investment manager to its Balanced Socially responsible option.

Legalsuper has terminated AMP Capital as investment manager of its Balanced Socially responsible option, transferring the investment into the Pendal Group’s Sustainable Balanced Fund.

In a statement to Financial Standard, legalsuper chief executive Andrew Proebstl01 said: “legalsuper has advised members of our decision to terminate our $40 million investment in AMP Capital’s AMP Capital Ethical Leaders Balanced Fund due to concerns with investment performance and recent reports about culture at AMP.” “Consequently legalsuper transferred the mandate for our Balanced Socially responsible

Rainmaker Mandate Top 20

option into the Pendal Group’s Sustainable Balanced Fund.”

It follows QSuper pulling its mandate as of July 1 this year. The fund opted to take management of its socially responsible option in-house.

“This change is in response to our members’ requests for a more holistic socially responsible investment option that targets a positive impact on certain environmental and social issues, while avoiding investments that have a negative impact,” QSuper told members.

Separately, AMP Capital recently sold its stake in Adven, a provider of clean energy solutions.

AMP Capital global co-head of asset management David Rees said: “In recent months, Adven has demonstrated its robustness, proving highly resilient to COVID-19. Our exit concludes a successful investment for our clients, and we wish the new owners continued success in driving the business forward.” fs

Note: Latest equities investment mandate appointments

Appointed by

Asset consultant

Investment manager

Mandate type

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Perennial Value Management Limited

Australian Equities

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Macquarie Investment Management Australia Limited

Australian Equities

AvSuper Fund

Frontier Advisors

Other

International Equities

65

AvSuper Fund

Frontier Advisors

WaveStone Capital Pty Ltd

Australian Equities

86

Care Super

JANA Investment Advisers

IFM Investors Pty Ltd

Australian Equities

20

Care Super

JANA Investment Advisers

GQG Partners (Australia) Pty Ltd

International Equities

104

Energy Industries Superannuation Scheme - Pool A

Cambridge Associates; JANA Investment Advisers

Hyperion Asset Management Limited

Australian Equities

100

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Australian Equities

158

Labour Union Co-operative Retirement Fund

Frontier Advisors

Other

International Equities

Macquarie Investment Management Australia Limited

Independent Franchise Partners, LLP

Global Equities

23

Maritime Super

Other

Australian Equities

86

Mirae Asset Global Investments (Australia) Pty Ltd

Other

Australian Equities

446

NGS Super

Frontier Advisors

Other

International Equities

NGS Super

Frontier Advisors

Uniting Ethical Investors Limited

Ethical/SRI Australian Equities

NGS Super

Frontier Advisors

Neuberger Berman

International Equities

Retail Employees Superannuation Trust

JANA Investment Advisers

First State Investments

International Equities

SuperTrace Eligible Rollover Fund

Internal

RBC Capital Markets

International Equities

Warakirri Asset Management Pty Ltd

Northcape Capital Pty Ltd

Emerging Markets Equities

Warakirri Asset Management Pty Ltd

Northcape Capital Pty Ltd

Global Equities

Warakirri Asset Management Pty Ltd

Northcape Capital Pty Ltd

Australian Equities

JANA Investment Advisers; Quentin Ayers

Amount ($m) 10

461

1 46 303 Source: Rainmaker Information

Super funds

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19 PERIOD ENDING – 31 JULY 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 UniSuper - Balanced

25

* SelectingSuper [SS] quality assessment

1 year % p.a. Rank

3 years

5 years

SS

% p.a. Rank % p.a. Rank Quality*

PROPERTY INVESTMENT OPTIONS -0.1

13

7.1

1

6.6

3

AAA

Prime Super (Prime Division) - Property

-3.6

12

7.2

1

13.9

1

AAA

0.2

10

6.8

2

6.7

2

AAA

CareSuper - Direct Property

1.3

2

7.1

2

9.2

2

AAA

-0.8

23

6.7

3

AAA

Telstra Super Corporate Plus - Property

0.0

4

6.8

3

8.7

3

AAA

Australian Ethical Super Employer - Balanced (accumulation)

0.0

11

6.6

4

7

AAA

Rest Super - Property

-0.4

5

6.1

4

8.6

4

AAA

Virgin Money SED - LifeStage Tracker 1974-1978

-1.9

34

6.6

5

AAA

HOSTPLUS - Property

0.4

3

6.1

5

7.4

6

AAA

smartMonday PRIME - MySuper Age 40

-3.6

51

6.5

6

5.5

27

AAA

TASPLAN - Property

1.5

1

6.0

6

AAA

Vision Super Saver - Balanced Growth

1.5

2

6.5

7

6.2

6

AAA

Acumen - Property

-1.0

7

5.5

7

8.0

5

AAA

First State Super Employer - Growth

0.6

6

6.3

8

6.0

11

AAA

Catholic Super - Property

-1.0

6

5.4

8

7.2

7

AAA

Lutheran Super - Balanced Growth - MySuper

0.9

4

6.2

9

5.9

15

AAA

Equip MyFuture - Property

-2.7

10

4.5

9

6.4

8

AAA

Cbus Industry Super - Growth (Cbus MySuper)

0.4

7

6.2

10

6.7

1

AAA

Sunsuper Super Savings - Property

-1.9

8

4.4

10

5.3

13

AAA

Rainmaker MySuper/Default Option Index

-1.6

Rainmaker Property Index

-11.7

AustralianSuper - Balanced TASPLAN - OnTrack Build

5.2

6.2

5.2

AUSTRALIAN EQUITIES INVESTMENT OPTIONS

2.1

3.9

FIXED INTEREST INVESTMENT OPTIONS

UniSuper - Australian Shares

-4.3

3

8.3

1

6.4

2

AAA

Australian Catholic Super Employer - Bonds

5.1

1

5.9

1

4.6

2

AAA

ESSSuper Beneficiary Account - Shares Only

-0.3

1

7.3

2

6.3

5

AAA

AMG Corporate Super - AMG Australian Fixed Interest

4.3

5

5.0

2

3.8

10

AAA

Prime Super (Prime Division) - Australian Shares

-5.1

6

6.4

3

6.2

6

AAA

UniSuper - Australian Bond

3.2

23

4.9

3

3.8

7

AAA

AustralianSuper - Australian Shares

-7.6

18

6.0

4

5.9

10

AAA

Vision Super Saver - Diversified Bonds

4.9

2

4.7

4

4.0

3

AAA

MTAA Super - Australian Shares

-6.6

10

5.9

5

6.0

9

AAA

Mine Super - Bonds

3.0

26

4.7

5

3.8

9

AAA

Vision Super Saver - Australian Equities

-6.6

8

5.9

6

5.2

23

AAA

First State Super Employer - Australian Fixed Interest

3.0

28

4.6

6

3.7

12

AAA

Virgin Money SED - Indexed Australian Shares

-7.9

20

5.8

7

AAA

GESB Super - Mix Your Plan Fixed Interest

3.6

13

4.4

7

3.5

19

AAA

First State Super Employer - Australian Equities

-7.9

19

5.8

8

5.7

12

AAA

Intrust Core Super - Bonds (Fixed Interest)

3.5

17

4.4

8

3.9

5

AAA

Sunsuper Super Savings - Australian Shares Index

-8.3

29

5.7

9

5.4

18

AAA

HOSTPLUS - Diversified Fixed Interest

3.1

24

4.3

9

4.6

1

AAA

Intrust Core Super - Australian Shares

-4.6

4

5.7

10

6.5

1

AAA

Sunsuper Super Savings - Diversified Bonds Index

3.8

10

4.2

10

3.9

4

AAA

Rainmaker Australian Equities Index

-8.3

Rainmaker Australian Fixed Interest Index

2.8

4.8

4.8

INTERNATIONAL EQUITIES INVESTMENT OPTIONS UniSuper - Global Companies in Asia

4.0

3.2

AUSTRALIAN CASH INVESTMENT OPTIONS

7.4

9

13.9

1

10.6

2

AAA

AMG Corporate Super - Vanguard Cash Plus Fund

1.0

5

1.7

1

1.9

1

AAA

UniSuper - Global Environmental Opportunities

19.8

1

13.7

2

10.9

1

AAA

Intrust Core Super - Cash

1.1

4

1.6

2

1.8

2

AAA

AustralianSuper - International Shares

10.9

2

12.9

3

9.2

4

AAA

AMG Corporate Super - AMG Cash

1.1

1

1.6

3

1.8

3

AAA

WA Super - Global Shares

7.4

8

11.8

4

9.1

5

AAA

NGS Super - Cash & Term Deposits

1.1

3

1.6

4

1.7

4

AAA

Equip MyFuture - Overseas Shares

8.6

3

11.8

5

8.2

9

AAA

Virgin Money SED - Cash Option

0.9

11

1.5

5

AAA

Media Super - Passive International Shares

3.3

21

11.0

6

7.6

16

AAA

Energy Super - Cash Enhanced

0.9

15

1.4

6

1.6

7

AAA

First State Super Employer - International Equities

3.0

25

10.9

7

7.7

15

AAA

Sunsuper Super Savings - Cash

0.9

8

1.4

7

1.6

5

AAA

Virgin Money SED - Indexed Overseas Shares

3.3

23

10.8

8

AAA

Media Super - Cash

1.0

7

1.4

8

1.5

12

AAA

UniSuper - International Shares

8.4

5

10.8

9

8.9

6

AAA

First State Super Employer - Cash

0.9

12

1.4

9

1.5

13

AAA

LUCRF Super - International Shares

7.6

7

10.6

10

7.0

21

AAA

Rest Super - Cash

1.0

6

1.4

10

1.6

11

AAA

Rainmaker International Equities Index

1.2

7.5

6.3

Rainmaker Cash Index

Notes: T ables include Australia’s top performing superannuation products that also have a AAA SelectingSuper Quality Assessment rating.

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

0.6

1.2

1.3 Source: Rainmaker Information www. rainmakerlive.com.au

26

Managed funds

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19 PERIOD ENDING – 31 JULY 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

Bennelong Australian Equities Fund

576

Bennelong Concentrated Aust Equities Greencape Broadcap Fund Alphinity Sustainable Share Fund AB Managed Volatility Equities Fund AMP Sustainable Share Fund

6.3

2

13.6

1

11.2

3

Australian Unity Diversified Property Fund

883

7.7

1

12.4

723

2.9

5

11.2

2

14.3

1

Investa Commercial Property Fund

5,946

7.0

3

3

10.3

5

Lend Lease Aust Prime Property Industrial

1,089

12.3

2

162

-4.5

18

10.9

4

8.6

9

Lend Lease Aust Prime Property Commercial

1,014

-3.1

13

9.9

5

9.0

6

DEXUS Property Fund

289

14.1

1

14.8

1

17.2

1

12.6

2

13.7

2

12.3

3

11.5

4

5,154

5.2

4

11.4

4

12.7

3

10,284

-0.4

7

8.1

5

10.8

5

15

-2.3

11

9.8

6

6.7

23

Resolution Cap. Global Prop. Sec. Series II

348

-5.6

8

7.8

6

5.4

14

406

0.4

7

9.3

7

8.6

11

AMP Listed Property Trusts Fund

119

-14.4

20

7.7

7

7.0

9

Aberdeen Standard Australian Equities Fund

46

-4.0

16

9.2

8

7.6

14

ISPT Core Fund

Chester High Conviction Fund

55

3.5

4

8.5

9

9

2.8

6

8.5

Greencape High Conviction Fund

SGH Australia Plus Fund Sector average

10

11.5

2

16,028

1.3

6

7.0

8

9.6

6

Quay Global Real Estate Fund

163

-11.7

15

6.5

9

5.5

13

Pendal Property Securities Fund

373

-16.3

26

6.5

10

6.3

11

450

-9.3

4.3

5.3

Sector average

1,244

-15.2

2.6

4.3

S&P ASX 200 Accum Index

-7.7

5.2

6.0

S&P ASX200 A-REIT Index

-21.3

2.0

4.4

INTERNATIONAL EQUITIES

FIXED INTEREST

Loftus Peak Global Disruption Fund

98

29.5

2

23.1

1

Principal Global Credit Opportunities Fund

173

13.1

1

7.1

1

6.3

1

Zurich Concentrated Global Growth

29

15.1

8

23.0

2

Macquarie True Index Sovereign Bond Fund

613

3.5

52

6.3

2

4.9

20

BetaShares Global Sustainability Leaders ETF

705

23.0

3

22.0

3

3,830

21.5

5

21.1

4

14.9

1

Pendal Government Bond Fund

Franklin Global Growth Fund

301

21.9

4

19.9

5

14.7

2

Macquarie Australian Fixed Interest Fund

Apostle Dundas Global Equity Fund

979

12.4

13

18.5

6

11.5

8

Schroder Fixed Income Fund

99

10.1

16

18.4

7

12.4

4

367

9.9

17

17.7

8

11.5

9

T. Rowe Price Global Equity Fund

Nikko AM Global Share Fund Zurich Unhedged Global Growth Share Fund Evans and Partners International Fund

Legg Mason Brandywine Global Inc Optimiser Fund

45

12.2

2

6.3

3

896

4.4

31

6.3

4

5.0

13

210

4.5

29

6.2

5

5.2

6

2,353

4.6

27

6.2

6

4.9

18

UBS Global Credit Fund

118

8.3

3

6.2

7

6.2

2

AMP Capital Wholesale Australian Bond Fund

963

4.3

32

6.1

8

5.0

9

58

3.7

38

17.7

9

13.5

3

Nikko AM Australian Bond Fund

185

4.0

38

6.1

9

5.0

11

Zurich Global Growth Share Fund

198

10.3

15

17.6

10

11.6

7

Pendal Fixed Interest Fund

958

5.1

20

6.0

10

4.6

42

Sector average

728

2.4

10.4

7.9

Sector average

946

3.6

4.4

4.1

MSCI World ex AU - Index

5.8

11.4

10.0

Bloomberg Barclays Australia Breakeven

4.3

6.4

5.4

Note: The performance figures for diversified funds are net of fees, performance figures for sector specific funds are adjusted for fees.

Source: Rainmaker Information

Skew you guys, I’m going home nyone who is a close reader of these columns A knows what a sucker/well-informed expert I am for a fresh way of analysing fund performance.

Dial tones

By John Dyall john.dyall@ financialstandard .com.au www.twitter.com /JohnDyall

Recently I was looking at products considered alternative strategies. You might know them better as hedge funds or total return funds.

These are not to be confused with dynamic asset allocation funds (also known as Multisector Flexible), whose “secret sauce” is how they allocate among asset classes to smooth out volatility.

Alternative strategies, however, derive most of their returns from activities that sit outside the long-only strategies of traditional equities and bonds managers. An example is a global macro manager that actively trades around political or economic events, such as Brexit or the US elections.

As such their toolbox may include long or short positions on options, futures, currencies, equities, bonds, and commodities. They are less beholden the direction of markets and should – ideally – make money in both up and down markets.

Often macro events are binary in that they can have one of two outcomes, so it is very important that strategies in play at any point in time are more or less independent of each other and that no positions are so large that if they went wrong they would – figuratively – sink the boat.

Now when a strategy is binary it is impossible to apply normal probability distributions against the outcomes. After all, you can’t go back and repeat the experiment.

What you do instead is count the number of wins and losses that a manager has had over a period of time (where a win is a return greater than the cash rate over the same period). This is known as the hit rate, but it is also called the omega ratio.

You can do this on a time period basis with any fund that has a clearly defined benchmark indexIn my experience, very good funds have a hit rate of around 60%. If the hit rate is higher than that you would be looking at other factors to help explain the performance, such as strong style or industry positions.

The other thing you do is consider the size of the wins to the size of the losses. Why? Consider our example with a hit rate of 60%. If the size of the individual losses and wins was the same, the manager would be making money, particularly if they make a lot of bets that are independent of each other.

If, however, the size of losses was much greater than the size of the wins the net result (after taking into account the 60% success ratio) could still be a loss. This is a reference to the re-

turns asymmetry or returns skew of the payoffs.

Skew is one of those difficult to conceptualise terms used in investment management. Take an Australian equities funds manager as an example. Instead of a 60% hit rate it has a 50% hit rate. To make money for the investor the average size of the wins must be greater than the size of the losses. This shows positive skew.

With negative skew you have fewer losses, but the size of each of those losses is greater than the more frequent wins.

Is the hit rate more important than the skew?

Well, put simply, in an ideal world an investment would have both a positive hit rate and positive skew. The actual size of each would depend on the types of bets the manager was making.

What is more important is that your fund manager know these things. If they don’t, and keep talking stock picks or strategy wins when things are good, and going silent or just trying to explain things away when the returns are not so hot, it’s time to take a serious look at your investment.

And the reason I’ve put all this down in a column is that I would prefer it if these questions were asked upfront, before the investment is made.

If they don’t know just quote South Park’s Cartman: “Skew you guys, I’m going home.” fs

International

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

BlackRock wins $7.1bn mandate

01: Catherine Savage

chair Guardians of New Zealand Superannuation

Karren Vergara

BlackRock has secured a $7.1 billion (£4bn) mandate from a UK pension scheme.

The investment manager will provide asset allocation and manager-selection decisions across all asset classes for the Civil Aviation Authority Pension Scheme (CAAPS), a defined benefit scheme for workers in the aviation industry.

BlackRock will build custom portfolios for the two constituents of the scheme: the Civil Aviation Authority and National Air Traffic Services. It will also provide trustees with training, guidance and transition management services.

CAAPS has some 14,000 members and $12.8 billion (£7.25bn) of assets.

Independent chair of CAAPS Joanna Matthews said after a thorough review of the fiduciary manager market with the help of an independent consultant IC Select, BlackRock was selected as it is “a good cultural fit and they clearly demonstrated the strength of their investment offering and the scale and depth of their resources”.

Sarah Melvin, head of UK at BlackRock, commented that the fund manager is looking forward to helping members achieve their longterm investment goals.

“A vast number of schemes are currently navigating an uncertain global environment, and more and more making the decision to outsource.

Our problem-solving approach to fiduciary management has resonated very well with CAAPS and we are thrilled that they have chosen BlackRock as their partner to manage their growth portfolios,” Melvin said.

She added that BlackRock’s platform Aladdin will play a central role in understanding the risk and return characteristics driving funding levels. fs

UBS makes strategy shift Ally Selby

UBS announced a shift within its $3.6 trillion (US$2.6 trillion) wealth management business, set to see the wealth manager advise private clients to invest in sustainable assets over more traditional solutions.

UBS claims it is the first major global financial institution to make this shift.

The firm’s global wealth management co-president Iqbal Khan said the shift towards sustainable products and services is “only just beginning”.

“We believe sustainable investments will prove to be one of the most exciting and durable opportunities for private clients in the years and decades ahead,” he said.

The wealth manager believes a 100% sustainable portfolio can deliver similar or potentially higher returns compared to traditional portfolios, and can also offer strong diversification for clients invested globally.

“COVID-19 has put the exclamation point on one of the most important shifts in financial services in a generation,” UBS global wealth management co-president and UBS Americas president Tom Naratil said. fs

27

NZ Super Fund posts positive result Annabelle Dickson

D

The quote

We also expect the fund to earn back these losses – and then some – in subsequent years as markets recover.

espite delivering single digit returns, the NZ Super Fund managed to outperform the average returns of Australian MySuper products and the Future Fund.

The $44.8 billion fund recorded a return of 1.73% for the year ending June 30 underperforming its benchmark reference portfolio which returned 3.82%.

Comparatively, Australian MySuper products delivered an average return of -0.9% last financial year according to the Rainmaker MySuper investment performance index.

In addition, $161 billion Future Fund posted the same return over the same period.

NZ Super chief executive Matt Whineray said: “In recent years we’ve been upfront about the potential for the super fund to suffer reductions in value when markets drop. That was clearly apparent in March when the Fund saw the second biggest monthly reduction in its history, of 12.27%.”

However, NZ Super chair Catherine Savage 01 said the underperformance was due to the long-term strategy of the fund.

“Given the NZ Super Fund has a long-term horizon with no substantial withdrawals un-

til the 2050s, the fund’s portfolio is heavily weighted towards equities and with a market shock like COVID-19, we expect the value of the fund to fall sharply,” she said, “Yet we also expect the fund to earn back these losses – and then some – in subsequent years as markets recover.”

The fund has returned 9.63% per annum since inception, 12.60% over 10 years and 8.52% over five years compared to the benchmark returns of 8.42%, 10.32% and 7.52% respectively.

“As always, we’re constantly reassessing what constitutes fair value for the various markets we operate in, so as to most effectively invest the fund for the good of New Zealand,” Whineray said.

“Market pricing indicates interest rates will remain very low for an extended period, meaning that expected returns on all assets are below our long run expectations.”

Separately, the NZ Super Fund recently appointed Rosemary Vilgan to the Board of Guardians. Vilgan is also chair of the Commonwealth Bank employees super fund.

She is also a former chief executive of QSuper and has previously acted as chair of the Association of Superannuation Funds of Australia. fs

Global banks cop huge losses Eliza Bavin

Global banks have cumulatively lost around US$635.33 billion in market capitilisation between December 2019 and August 2020, according to research from Buy Shares.

The data indicated that 14 of the world’s largest major global banks have suffered huge market losses as a result of the COVID-19 economic shutdowns.

The research said the US’s Wells Fargo was the biggest loser, suffering a -56.24% change in market capitilisation, followed by Spain’s Banco Santander at -46.16%.

The data showed that JP Morgan still held a solid market capitalisation of $437.2 billion in December 2019 and $305.44 billion as of August 2020.

Other notable banks to take a percentage hit were the Bank of China (-23.68%), BNP Paribas (-26.2%) and MUFG (-23%).

Buy Shares said banks went into the pandemic

stronger and it might take time before they return to normal profitability.

“The pandemic led to a slump in various sectors of the economy and it was evident under the stock markets. The crisis generated massive instability and high volatility in global capital markets,” it said.

“The financial sector was among the most impacted leading to the drop in market capitalisation.”

Many Chinese institutions made the list including, the Industrial & Commercial Bank of China (-27.65), China Construction Bank (-18.95) and the Agricultural Bank of China (-23.31%).

Japanese banks also made a heavy presence with the Japan Post Bank (-19.18%), Mizuho Financial Group (-11.33%) and Sumitomo Mitsui Financial Group (-20.59%).

Together, the total losses amount to US$635.33 billion in market capitilisation during the COVID-19 outbreak. fs

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28

Economics

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

First recession in 29 years Ben Ong

I

t was good – so good – while it lasted. But as the saying goes, “nothing lasts forever”.

It had been more than a generation since Australia experienced “the recession we had to have” back in 1990/91.

The Australian economy withstood the US savings and loan crisis of the early 1990’s, the Asian currency crisis/Russian debt default/Long-Term Capital Management (LTCM) collapse in 1997/98, September 11 and the subsequent recession there in 2001, and the Global Financial Crisis of 2008 that subsequently many world economies into a recession.

But now it’s all over.

Not that we need to be informed – we were already feeling it deep right through our bone marrows – but the Australian Bureau of Statistics’ (ABS) latest National Accounts report made it official, Australia is in recession!

Australian economic growth contracted by 7.0% in the June quarter – the biggest fall on record since 1959 and worse than market expectations for a 5% -6% fall – that followed a 0.3% decline in the March 2020 quarter, satisfying the technical definition of a recession.

The details of the National Accounts show exactly what one expects of an economy in lockdown.

Household consumption – which accounts for around 60% of national output – dropped by 12.1% in the June quarter and subtracted 6.7% from overall growth.

This is despite the 2.2% increase in household income during the period, “reflecting a rise in non-labour income (consisting of investment income, earnings from unincorporated businesses and social assistance benefits)

The Reserve Bank of Australia (RBA) and the Morrison government’s stimulus measures may have put money in our hands but with restrictions and business shutdowns, we have nowhere to spend them on.

Then again, even without the restrictions and shutdowns, the uncertainty with regards to the extent and duration of the pandemic and its negative consequence on the economy, particularly the outlook for employment, would still prompt households to reduce spending and increase savings. This is underscored by the surge in the household savings ratio to 19.8% in the June 2020 quarter from 6.0% in the previous one.

The same COVID-19 uncertainty has also prompted a 6.5% dropped in private business investment in the June quarter.

The weakness in domestic and international demand and the disruption to supply chains around the world are highlighted by the 10.6% fall in exports in the second quarter and the even sharper 19.1% drop in imports.

Australia’s overall economic growth would have been much deeper had it not been for the government spending.

Government consumption contributed 0.6 percentage points to June quarter growth; public investment contributed 0.1 percentage point.

Although the lockdown in Victoria will continue to be a drag on overall economic growth in the third quarter (perhaps even beyond), the relative relaxation of restrictions in most other Australian states and in other parts of the world and most especially, the return to growth of China, suggest better economic growth readings for the domestic economy going forward. fs

Monthly Indicators

Aug-20

Jul-20

Jun-20 May-20 Apr-20

Consumption Retail Sales (%m/m)

-

3.18

2.72

16.86

Retail Sales (%y/y)

-

12.04

8.52

5.79

-28.78

-12.84

-6.44

-35.29

Sales of New Motor Vehicles (%y/y)

-17.67 -9.18 -48.48

Employment Employed, Persons (Chg, 000’s, sa) Job Advertisements (%m/m, sa) Unemployment Rate (sa)

-

114.72

228.38

-264.14

-607.40

1.56

19.15

41.01

0.65

-53.11

-

7.49

7.45

7.08

6.37

Housing & Construction Dwellings approved, Tot, (%m/m, sa)

-

8.48

-4.91

-3.91

2.49

Dwellings approved, Private Sector, (%m/m, sa)

-

11.99

-4.25

-15.89

-2.23

Housing Finance Commitments, Number (%m/m, sa) - Housing Finance Commitments, Value (%m/m, sa)

-

Survey Data Consumer Sentiment Index

79.53

87.92

93.65

88.10

75.64

AiG Manufacturing PMI Index

49.30

53.50

51.50

41.60

35.80

NAB Business Conditions Index

-5.78

0.27

-7.41

-24.57

-34.14

NAB Business Confidence Index

-8.02

-14.16

0.54

-21.46

-45.96

Trade Trade Balance (Mil. AUD)

-

4607.00

8149.00

7262.00

Exports (%y/y)

-

-20.31

-14.92

-16.99

-6.11

Imports (%y/y)

-

-15.62

-19.35

-23.04

-16.28

Jun-20

Mar-20

Dec-19

Sep-19

Quarterly Indicators

7882.00

Jun-19

Balance of Payments Current Account Balance (Bil. AUD, sa)

17.74

9.02

2.18

7.53

4.66

% of GDP

3.79

1.78

0.43

1.49

0.94

Corporate Profits Company Gross Operating Profits (%q/q)

14.97

1.44

-3.47

-1.15

5.20

Employment Average Weekly Earnings (%y/y)

-

-

3.24

-

3.02

Wages Total All Industries (%q/q, sa)

0.08

0.53

0.53

0.53

0.54

Wages Total Private Industries (%q/q, sa)

-0.08

0.38

0.45

0.92

0.38

Wages Total Public Industries (%q/q, sa)

0.00

0.45

0.45

0.83

0.46

Inflation CPI (%y/y) headline

-0.35

2.19

1.84

1.67

1.59

CPI (%y/y) trimmed mean

1.20

1.80

1.60

1.60

1.50

CPI (%y/y) weighted median

1.30

1.60

1.20

1.20

1.20

Output

News bites

Australian consumer sentiment Australian consumer sentiment also improved but like its business counterpart, it showed that pessimistic consumers still outnumber optimistic ones. The survey was also taken before Victorian premier Dan Andrews’ announcement extending the lockdown by another two weeks from 13 September. The Westpac/Melbourne Institute index of consumer sentiment jumped by 18% to a reading of 93.8 in September from 79.5 in August and the 29-year low of 75.6 in April. But as Westpac chief economist, Bill Evans notes: “The disappointment with that announcement could have been expected to dampen the 14.9% surge in confidence in Victoria, although frustration at the extended lockdown measures would likely still be more than outweighed by the clear success they have had in containing the virus”.

ECB keeps policy steady At its September 10 meeting, the European Central Bank’s (ECB) governing council decided to keep interest rates unchanged – repo rate at 0.00%; marginal lending facility rate at 0.25%; deposit facility rate at -0.50% – continue to buy up to €1,350 billion worth of debt under its pandemic emergency purchase programme (PEPP), maintain net purchases under the asset purchase programme (APP) at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of 2020, and continue providing liquidity through its targeted longer-term refinancing operations (TLTRO III).

Australian business confidence The NAB business confidence index improved to a reading of -8 points in August from -14 in the previous month. The August figure is even more spectacular when compared with the record low -66 points recorded five months before (March). The latest score indicates that pessimism still rules and as the survey notes: “Confidence is negative in all industries...Given the size of the current economic shock, confidence remains tightly bunched across industries outside of the mining sector”. Worse, Australian business conditions fell back to a reading of -6 from 0 in July, driven by declines in employment (-11 points), profitability (-4 points) and trading (-3 points) over the month. fs

Real GDP Growth (%q/q, sa)

-7.00

-0.26

0.55

0.51

0.76

Real GDP Growth (%y/y, sa)

-6.26

1.56

2.28

1.82

1.56

Industrial Production (%q/q, sa)

-3.42

0.19

0.48

0.67

1.07

Survey Data Private New Capex, Total, Chain, Vol, (%q/q, sa)

Financial Indicators

-5.89

-2.06

-2.68

-1.33

-0.38

04-Sep Mth ago 3mths ago 1yr ago 3yrs ago

Interest rates RBA Cash Rate

0.25

0.25

0.25

1.00

1.50

Australian 10Y Government Bond Yield

0.89

0.83

1.02

0.92

2.61

Australian 10Y Corporate Bond Yield

1.58

1.63

1.96

1.85

3.20

Stockmarket All Ordinaries Index

6108.8

-0.94%

-0.05%

-8.22%

S&P/ASX 300 Index

5905.5

-1.59%

-0.93%

-9.34%

5.99% 4.42%

S&P/ASX 200 Index

5925.5

-1.86%

-1.11%

-9.58%

3.92%

S&P/ASX 100 Index

4879.2

-2.23%

-1.29%

-10.16%

3.41%

Small Ordinaries

2759.3

3.38%

1.76%

-2.80%

13.01%

Exchange rates A$ trade weighted index

62.60

A$/US$

0.7246 0.7150 0.6979 0.6790 0.7954

61.90

58.80

58.90

66.30

A$/Euro

0.6142 0.6082 0.6152 0.6157 0.6677

A$/Yen

77.04 75.75 76.07 72.11 87.11

Commodity Prices S&P GSCI - commodity index

347.11

346.67

316.00

403.72

386.38

Iron ore

127.53

115.55

98.85

91.57

75.80

Gold

1926.30 1977.90 1700.05 1546.10 1320.40

WTI oil

39.69

41.67

37.42

56.22

Source: Rainmaker /

47.30

Sector reviews

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

Australian equities

Figure 1: A$ exchange rate 0.9500

A$/US$

INDEX

73

16 ANNUAL CHANGE %

14

69

12 10

0.8500 65

0.8000

8 6

61

0.7500

4 2

0.7000

Prepared by: Rainmaker Information Source:

CPD Program Instructions

Figure 2: China GDP growth

0.9000

57

0.6500

A$/US$

0.6000

A$ TWI-RHS

2015

2016

2017

2018

-4 -6

49

0.5500 2014

0 -2

53

2019

2020

-8

2021

05

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20

Aussie dollar rising Ben Ong

F

inancial markets view the A$ as a risk currency – it’s sold off in times of heightened uncertainty – and has a high growth beta – only bought in times of global prosperity.

So Virginia, how do we explain the rise and rise of the Australian dollar at a time when uncertainty is at its extreme – that even fiscal and monetary authorities put “extent and duration of the pandemic” caveats on their forecasts – and the global economy is in recession.

The A$/US$ exchange rate ended the month of August at US$0.7396 – the highest since late 2018, a 5.2% appreciation from the start of 2020 and a sharp 28.5% jump from the 17-year low of US$0.5755 it recorded on March 23 this year.

The A$’s significant reversal is best portrayed in Figure 1.

Currency experts are (again) extrapolating further appreciation in the local currency to around US$0.80. Their rationales were rational enough:

International equities

The Fed’s shift into a lower for longer strategy suggests that Australian interest rates would be at a premium over US rates going forward, enticing investors to buy A$ to avail of the premium.

This flows from the Fed’s new-found tolerance for higher inflation which, in currency markets, directs a cheaper US currency – exchange rate adjusts for consumer price differences.

China, Australia’s biggest trading partner, is back in recovery with economic growth expanding by 3.2% in the year to the June 2020 quarter following the March quarter’s 6.8% contraction. The latest official PMI survey shows both manufacturing and non-manufacturing activity remaining in expansion in August – the sixth straight month since they contracted in February.

China’s recovery is boosting commodity prices. Although still 17.9% lower from the start of 2020 to date, the S&P GSCI commodity price index has soared by 56.9% from the 17-year level it plumbed in April this year.

For sure and for certain, these factors are propelling A$ momentum, supporting forecasts for continued appreciation.

But that’s only if the Australian currency operates in vacuum - all things being equal - and current market dynamics continue into their merry way into the future.

The point is that there’s no point extrapolating the direction of the currency. This is because a currency’s appreciation or depreciation sets in train certain dynamics that would return fundamentals to equilibrium.

The RBA wouldn’t want an outsized A$ appreciation – it assumed an A$/US exchange rate of US$0.72 in its August 2020 “baseline scenario” – for it erodes the country’s export competitiveness and puts downward pressure on domestic inflation, prompting it into a counter action.

Forecasting currency direction in quite times is difficult. Forecasting during periods of uncertainty is even more difficult. fs

Figure 1: Real GDP growth

Figure 2: IHS/CIPS UK PMI

10.0

1.26 ANNUAL CHANGE %

1.24

5.0

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].

Australian equities CPD Questions 1–3

1. According to currency experts how high would the AUD appreciate versus the USD? a) US$0.80 b) US$0.85 c) US$0.90 d) US$1.00 2. What is/are the rationale/s behind calls for continued AUD appreciation? a) Australia interest rate premium over the US b) Recovery in China’s economy c) Higher commodity prices d) All of the above 3. The RBA’s baseline scenario (in its August 2020 projections) assumed an AUD/USD exchange rate of US$0.80. a) True b) False

US$/EURO

1.22 1.20

0.0

29

1.18 1.16

-5.0

1.14 -10.0 -15.0

Prepared by: FSIU Sources: Factset Prepared by: Rainmaker Information Source:

-20.0

Aus

1.12

US

1.10

Euro

1.08

International equities

UK

1.06

CPD Questions 4–6

-25.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

1.04 1.02 2017

2018

2019

2020

Second wave in the UK Ben Ong

W

hile most major nations around the world plunged into a recession as a result of the virtual freezing of social and economic activity in efforts to contain the spread of the coronavirus pandemic, June quarter National Accounts figures show the UK contracted the most.

UK GDP growth shrank by 21.7% in the year to the June quarter. Using the same measure, economic growth in the Eurozone declined by 14.7%; Japan’s GDP dropped by 10%; that of the United States fell by 9.1%; and, Australia by 6.3%. See Figure 1.

The UK has followed the script dictated by the pandemic in much of the world.

On March 23, the government imposed strict lockdown measures, giving “bobbies” power to fine people leaving their homes for “non-essential” reasons. These restrictions were then gradually eases in stages: 13 May - some restrictions on who could go to work and meetings with per-

sons from different households were eased; June 15 – re-opening of “non-essential” businesses; July 4 – social distancing gap lowered from two metres to one “to allow businesses to be able to reopen”.

The relaxation of restrictions in the UK (and aided by monetary and fiscal stimulus measures) – like in most other nations around the world – sparked a recovery in economic activity, underscored by the rebound in the IHS/CIPS purchasing managers indices. See Figure 2.

The composite PMI continues to strengthen, rising to a reading of 59.1 in August – a 72-month high and the fourth straight month of improvement since the record low reading of 13.8 recorded in April – as both the manufacturing (up to 55.2 in August – the fastest in six years) and services sectors (up to 58.8 – the best reading in five years) continued to gain momentum.

Not surprisingly, the FTSE-100 has also recovered. The benchmark index has rallied

by 17.2% from the nine-month low recorded in March.

However, the index remains 22.4% lower this year to date, reflecting investors’ continued sense of caution amid the lingering uncertainty surrounding the pandemic – and recent reports of hiccups in the UK/Euro Brexit negotiations – so much so that the Bank of England and the Exchequer remain on their toes.

The BOE kept the Bank Rate unchanged at its July meeting and declared that it stands ready to take further actions if necessary. At the same time, the Chancellor of the Exchequer Rishi Sunak announced a package of measures to support the labour market.

Fiscal and monetary authorities may need to do more should the government reimpose tougher restrictions.

Already, the government has banned gatherings of more than six people to try in efforts to contain the emerging second wave. fs

4. Which economy shrank the most in the year to the June 2020 quarter? a) US b) Eurozone c) UK d) Japan 5. Which UK PMI measure indicated that UK economic activity continued to expand in August? a) Composite PMI b) Manufacturing PMI c) Services PMI d) All of the above 6. The BOE lowered the Bank Rate at its July meeting. a) True b) False

30

Sector reviews

Fixed interest CPD Questions 7–9

7. What was the ECB’s policy decision at its September meeting? a) T he ECB kept monetary policy settings unchanged b) T he ECB lowered the repo rate to negative c) T he ECB increased the PEPP d) T he ECB increased TLTRO III 8. According to revised projections, what would be the Eurozone’s GDP growth this year? a) +3.2% b) +5.0% c) -8.0% d) -8.7% 9. Lagarde announced that the bank will start targeting the euro exchange rate a) True b) False Alternatives CPD Questions 10–12

10. What is/are the reasons behind the recent decline in oil prices? a) OPEC+ decision to raise output b) OPEC+ members’ noncompliance to quotas c) Aramco lowered price of oil exported to Asia and the US d) All of the above 11. According to the IEA, what would keep oil prices from rising in the near term? a) Oil market is in the middle of a second wave or steady first wave b) Re-imposition of restrictions c) Still weak global demand d) All of the above 12. To date, crude oil prices remain lower than they were at the start of 2020. a) True b) False

Go to our website to

Submit

All answers can be submitted to our website.

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

Fixed interest

Figure 1: ECB interest rates 2.25

Figure 2: US$/Euro exchange rate 1.26

RATE (%)

2.00

Marginal lending facility

1.50

1.18

Deposit facility

1.00

1.22 1.20

Repo rate

1.25

Prepared by: Rainmaker Information Prepared by: FSIU Source: Sources: Factset

US$/EURO

1.24

1.75

1.16

0.75

1.14

0.50

1.12

0.25

1.10

0.00

1.08

-0.25

1.06

-0.50

1.04

-0.75

1.02

2011

2012

2013

2014

2015

2016

2017

2018

2019

2017

2020

2018

2019

2020

ECB keeps it steady Ben Ong

T

hey came, they deliberated, they … well … didn’t do anything.

At its September 10 meeting, the European Central Bank’s (ECB) governing council decided to keep interest rates unchanged – repo rate at 0.00%; marginal lending facility rate at 0.25%; deposit facility rate at -0.50% – continue to buy up to €1,350 billion worth of debt under its pandemic emergency purchase programme (PEPP), maintain net purchases under the asset purchase programme (APP) at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of 2020, and continue providing liquidity through its targeted longer-term refinancing operations (TLTRO III).

This made sense given the positive tweak in the latest ECB staff macroeconomic projections for the single currency region.

Alternatives

The September forecasts show Eurozone GDP contracting by 8.0% in 2020 – better than the 8.7% slump predicted in June. Growth projections for the year 2021 and 2022 were unchanged at 5.0% and 3.2%, respectively. Euro area economic growth dropped by 14.7% in the year to the June quarter, that followed a 3.2% decline in the March quarter and a 1.0% expansion in December 2019. See Figure 1.

The ECB staff maintained its 2020 HICP inflation forecast at 0.3% but lifted it to 1.0% (from 0.8%) for 2021 and unchanged at 1.3% the year after. Preliminary estimates show Eurozone inflation falling by 0.2% in the year to August after rising by 0.4% in the previous month.

The ECB’s decision was less dovish than financial markets and economists expect, especially given the renewed appreciation in the euro currency – to which ECB president Christine Lagarde explained that while it was discussed the bank does not target the exchange

Figure 2: World oil demand and supply & the oil price

Figure 1: Crude oil prices 100

20 US$/BARREL

15

80

5 0

40

Brent

20

-5

West Texas Intermediate

-10 -15

0

-20

-20

-25

-40 2016

IEA forecast

ANNUAL CHANGE %

10

60

Prepared by: Rainmaker Information Prepared by: FSIU Source: IEA / Sources: Factset

rate. The euro has appreciated by 5.8% against the US dollar this year to date and by 11.1% from the 2020 low recorded on March 20. See Figure 2.

There are certainly downside risks to these forecasts in light of the resurgence of cases of infections in and renewed restrictions in the region. But the ECB staff has already pencilled these into its projections.

“The baseline rests on a number of critical assumptions concerning the evolution of the pandemic. The resurgence of infections seen in some European regions in recent weeks is assumed to broaden and intensify over the next few quarters, requiring a continuation of containment measures and/or behavioural changes by economic agents. By virtue of the experience gained on how to deal with the pandemic, these responses are assumed to become more efficient, implying lower economic costs than in the initial wave.” fs

Demand less supply (12mth moving average)

-30 2017

2018

2019

2020

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

The second oil price discounting wave Ben Ong

D

on’t look now but it appears that it’s not the coronavirus that’s doing a second wave.

Saudi Arabia is also taking a second bite on oil price discounting.

Bloomberg reports that, Saudi Arabia’s state producer, Saudi Aramco, has cut its key Arab Light grade of crude pricing by a “larger-than-expected amount for shipments to Asia, its main market. It also lowered pricing for U.S. buyers”.

The first wave of discounting happened in early April after the OPEC+ talks collapsed due to Russia’s dissent, prompting Saudi Arabia to unilaterally announce an increase in production and at the same time, offered discounts to its oil customers.

The eventual agreement by OPEC+ at the 10th (Extraordinary) OPEC and non-OPEC Ministerial Meeting on 12 April 2020 to adjust downwards overall crude oil production by 9.7

million barrels per day – equivalent to 10% of global supply – along with, according to OPEC, a “conformity level of 95% in June 2020, the highest since the inception of the Declaration of Compliance in January 2017, tilted crude oil’s supply/demand equation in favour of higher prices (at best) or stable prices at current prices (at worst). See Figure 1.

But this failed to stop US oil futures contracts expiring on April 21 for May delivery sinking to minus US$36.98 a barrel as oil storages filled up and therefore, nowhere to stock the oil to be delivered in May. With planes, trains and automobiles all at a virtual standstill and factories in lockdown at the time, the planet is drowning in oil.

The easing of restrictions in many economies around the world, especially in China, in the second quarter of this year, and the OPEC+ cuts in production, sent oil prices higher.

WTI oil prices soared to US$42.96 per barrel in August from the record low negative US$36.98 in April.

Brent oil rocketed to US$46.01 from April’s US$9.12 a barrel. See Figure 2.

Good as they may be, crude oil prices remain down this year to date – WTI oil by 35.1% and Brent by 38.0%.

This is because, as Keisuke Sadamori, International Energy Agency (IEA) director for energy markets and security, puts it, the oil market outlook remains in the middle of either a second wave or steady first wave of the covid-19 pandemic. The reimposition of restrictions would further curtail demand for oil, and by extension, oil prices.

Weak global oil demand and price discounting from the world’s key oil producer, Saudi Arabia, suggest continued low oil prices.

At time of print, oil prices were down 4% on expectations Libyan crude will soon re-enter the market. fs

Sector reviews

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

31

Property

Property

CPD Questions 13–15

Prepared by: Rainmaker Information Source: RiskWise

ith no end in sight to historically low interW est rates, it is becoming increasingly more affordable to buy a house than rent in many areas.

New analysis shows renters with secure employment and access to a deposit are better off buying a house than paying someone else’s mortgage.

“When it comes to houses, the preferred dwelling option in most areas of the country, in many cases it is cheaper to buy than rent, and rent money is dead money. Whereas, if you buy a house you can start building equity straight away, particularly when you take a long-term strategic view, and if you are in a good position to negotiate well and buy a ‘Grade A’ property that will serve your family to many years to come,” RiskWise chief executive Doron Peleg said.

The research shows interest-only repayments for both owner-occupiers and investors are lower than the annual rental cost in most of the Australian Bureau of Statistics’ 88 areas at the statistical area level 4 (i.e. SA4s). Therefore, funding costs are now lower than rental payments across all states and territories.

Rent money increasingly becoming dead money Jamie Williamson

Further, in all states and territories – excluding Sydney and Melbourne – even the principal and interest repayments are lower than the annual rent, assuming the buyer has a 20% deposit and using interest rates on new loans funded in June 2020.

For example, in Brisbane the median house price is $559,975 and sees a median rental yield of 4.3% and rent of $23,995. According to the research, looking at the annual difference between rent and buy, an owner-occupier paying interest only would come out $10,915 better off.

Meanwhile, an owner-occupier paying principal and interest would save $1567.

For an investor, interest only repayments would save them $9799, while principal and interest sees a saving of $1447.

Buying a house in Darwin sees the biggest savings; a median house price of $473,861 with a rental yield of 5.4% and annual rent of $25,541, repaying principal and interest would save $6557.

“No interest rate rises are expected in the foreseeable future and the intense competition between the banks is only going to intensify, meaning that buyers are in a very strong position to con-

www.financialstandard.com.au T: +61 2 8234 7500 F: +61 2 8234 7599 A: Level 7, 55 Clarence Street, Sydney, NSW, 2000, Australia

tinue enjoying ultra-low interest rates,” Peleg said.

Further, in all capital cities interest-only loans were cheaper than rental payments which meant funding costs were simply lower than the rental payments.

In addition, in some areas, even when taking into consideration full mortgage repayments (principal and interest), the repayments were still lower than paying rent, RiskWise said.

Over the medium and the long term, Peleg said solid price growth is highly likely for houses, particularly due to a systematic undersupply in the inner- and middle-ring suburbs, and more affordable outer areas of CBDs. “What this all means is now is the time to buy if you are a first home buyer or an owner-occupier, as this current slowdown in the property market is only temporary, with houses in popular areas likely to experience solid capital growth in the medium to long term,” Peleg said.

“Once the COVID-19 issue fades, most likely in 2021, the traditional connection between low interest rates and an increase in dwelling prices is likely to reassert itself.” fs

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13. What is RiskWise’s outlook for the housing market? a) Low interest rates are unlikely to correlate with price growth in 2021 b) Solid price growth is highly likely in the medium to long-term c) Price growth is likely to continue to slow for some time yet d) It is not possible to predict which way the market is heading 14. RiskWise analysis indicates which trend in most areas? a) Interest-only repayments for owneroccupiers are higher than annual rental costs b) Interest-only repayments for investors are well above annual rental costs c) Interest-only repayments for owneroccupiers are lower than annual rental costs d) Annual rental costs are lower than interestonly repayments for investors 15. In many areas, it is becoming increasingly more affordable to buy a house than to rent. a) True b) False

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32

Profile

www.financialstandard.com.au 28 September 2020 | Volume 18 Number 19

CALCULATED RISK TAKER Magellan Financial Group chief executive Brett Cairns hasn’t traditionally been one for the limelight. Here, he shares his journey to now and the risks he’s taken along the way.

Kanika Sood writes.

agellan has captured column inches right M from its start in 2007, but its current chief executive Brett Cairns has largely stayed out of the headlines. It took him a little longer than some of his colleagues to enter funds management however, having first navigated a brief career in chemical engineering and a longer one in investment banking.

An interesting shift, but not unusual for the Cairns family. Cairns’ younger brother Troy also made the jump from science to investment banking to funds management and is now a portfolio manager at Aussie equities boutique Quest Asset Partners.

Growing up, his mother worked as a hairdresser and father as an accountant, who later became the chief financial officer of a large fabric importing business.

“It’s partially where I get some of the finance interest from… a lot of the import required currency hedging. So he would talk a little bit about that in the early days,” Cairns says.

Cairns attended Birrong Boys High, where math and science were particular areas of interest, and he followed through on that with an undergraduate degree in chemical engineering (which he finished with first class honours) at Sydney University, followed by a post doctorate in the subject.

“I enjoyed chemical engineering a great deal and got a lot out of it…But as I worked my way through it, [I] came to the conclusion that [I] probably didn’t want to work in the industry, because if I was ever going to do something in that space it was going to be more academic,” he says.

“I always had an interest in finance...It’s not uncommon for engineers or others, particularly [of] quantitative background, to find a way into finance.”

While studying, Cairns also enjoyed swimming and then water polo - the sport would eventually lead him to Magellan.

But first, Cairns commenced his career in financial services at Citibank in the early 1990s, working in its market risk management area while doing a masters of business administration.

While there, he was headhunted to join Credit Suisse, which at the time was focusing on derivatives. Finally, Cairns rose to head Merrill Lynch’s debt capital markets in Australia during an eightyear stint before joining Babock & Brown.

His introduction to Magellan came via its cofounder Chris Mackay. The two met as teenagers while playing water polo, and when Mackay and Hamish Douglass were working together at Schroders, Cairns met the latter as well.

Cairns joined the Magellan board in 2007 as a non-executive director and, when Mackay stepped down as chair [he set up a new funds management business, MFF] in 2013, Cairns moved first into a non-executive chair and then an executive chair role.

Five years into the chairmanship, Cairns and then chief executive Douglass swapped roles so Douglass could focus on investments.

The duo’s public personas are in sharp contrast to each other. Both are exacting and detail oriented but Douglass comes across as forthright and aggressive (for example, at Magellan’s annual roadshows) while Cairns is mild mannered.

“We both do push along things. I do it a bit differently – we’ve both got different styles.

Hamish has had to adapt over the years… since Magellan first started because he was at the front of, particularly the investment side of things, explaining and sort of arguing the cases, and the investment process,” Cairns says.

In that time, Magellan has taken some big bets, including listing its funds as ETFs which until then were largely limited to passive strategies, and which involved working out a new portfolio disclosure regime with ASIC and the ASX to protect Magellan’s investment ideas.

It recently revealed a new suite of lower-cost funds, and has been working on a retirement income product. As this profile went to print, the firm invested about $150 million for a 40% stake (but 4.99% voting interest) in a new investment bank staffed by industry heavyweights.

On the flip side, Cairns has ruled out going into unlisted assets or looking at a fixed income house in past interviews. Magellan’s funds are long-only and it has never, in its 13-year history, dropped fees on its retail funds.

To an outsider, the company can seem risk averse and risk tolerant at the same time.

“It’s a throwaway line I pinched from [late baseball legend] Yogi Berra, you don’t want to make the wrong mistake. What he means by that is, you don’t want to do something that can put you in peril, blow you up essentially,” Cairns says when asked how he thinks about risk taking.

“The active ETF, while we spent time and money and effort on that, it wouldn’t have been the end.

“We don’t want to go and gear ourselves massively to go and take a big punt on something.”

The firm now employs about 130 staff. When it comes to hiring, Cairns says it wants people who are dynamic, ready to roll up their sleeves and not looking for a structured environment.

“We want people who think and act like business owners rather than approaching their job as hired people who are there to just clip the coupon. One of the terms we use is “rent seekers”,” he says.

“We are pretty diligent. I’m trying to keep the bureaucracy out of what we’re doing.”

For leading the company, Cairns was paid $1.5 million in FY20, not including variable remuneration of $772,500, which he was eligible for but waived.

He owned 1.1 million shares in MFG at July 28, which would have been worth about $65 million at time of writing. He also holds units in many Magellan-owned funds.

I’ve got a range of interests. For me, the key to this is interest…I am not going to do something that I am bored by.

Brett Cairns

How he invests hits the news sometimes, including a $7.5 million purchase of a subpenthouse in Sydney’s The Rocks, reported by Domain in 2017.

“I’ve invested my own money for some time as well…So I’ve got a range of stocks and I’ve got to be a little careful in that because obviously conflicts start to creep in. So a lot of what I have been doing recently is back into the funds,” he explains.

He also invests in some unlisted companies, within and outside financial services. One example is a startup called HealthMatch, which connects patients with drug trials. The investment was via venture capital firm Tempus Partners, at which he serves as a non-executive director.

In his spare time, he still likes to swim and describes himself as a ‘pretty ordinary golfer’ who is starting to focus on getting better.

He has three children, including twins who are studying commerce degrees - but there was no pressure on them to go down the finance route, he says.

“No not at all…I mean I started in engineering and you don’t really know where you going to end up. They’ve got a good education and a few options up their sleeves,” Cairns says.

But what of his own future?

“I am very keen to continue doing this. And then we will see where we collectively can go,” he says.

“I’ve got a range of interests. For me, the key to this is interest…I am not going to do something that I am bored by.” fs

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