Financial Standard Volume 18 Number 07

www.financialstandard.com.au

14 April 2020 | Volume 18 Number 07

07

12

22

Praemium

Cash in COVID-19

Emerging markets

09

14

32

Harry Cator SG Hiscock & Company

Life insurance

Matthew Rowe CountPlus

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Opinion:

News:

Feature:

Featurette:

Profile:

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www.financialstandard.com.au

07

12

22

Praemium

Cash in COVID-19

Emerging markets

09

14

32

Harry Cator SG Hiscock & Company

Life insurance

Matthew Rowe CountPlus

Product showcase:

Opinion:

Will ESG investing survive COVID-19?

Justin Cleveland and Rachel Alembakis

SG investing, which has been increasingly E distancing itself from the traditional investing space, is being tested as the COVID-19 crisis continues.

While some ESG indexes and funds saw less direct impacts of the market downturn, due to limited investment in things like energy, they were hardly immune.

According to Rainmaker data through the end of March, Australian equities across the ASX 200 were down 20.7% while the MSCI Australia ESG Leaders was down 21.3%.

Rainmaker head of investment research John Dyall says it’s hard to say which specific areas of ESG performed well or were more vulnerable.

“ESG equities will be more represented in some market sectors than others,” he says.

“Like firearms, tobacco, gaming, or alcohol.”

Before the market crash the future of ESGfocused investing looked bright.

There had been a significant amount of positions advertised seeking either someone with a specialty in ESG investing or someone with some experience in the arena.

Kim Farrant joined Hostplus as head of ESG in February, bringing a background in responsible investing with VicSuper and dealing with climate change at EY. Hostplus had integrated ESG into its process for many years but had been managed by the head of equities, she says.

The same was true for Aberdeen Standard Investments.

“By integrating ESG factors into our investment processes, we aim to provide better investment outcomes for our clients,” ASI ESG investment director, APAC Danielle Welsh-Rose says.

For the most part, hiring has slowed as organisations brace for the economic fallout from COVID-19.

What is clear from our conversations, however, is that there is still a focus on incorporating ESG thinking along the investments chain.

Australian Catholic Superannuation and Retirement Fund recently appointed an ESG officer in Louise Bradshaw.

The fund’s chief investment officer Michael Block says that ESG has always been a focus but grown more important recently.

“The hope is that eventually ESG will be mainstreamed into everything we do,” he says.

“ESG will be part of the investment strategy, manager selection and so on.”

Data from the last 15 months of executive movements bears out this trend.

While there were several positions that were ESG-specific, including the three mentioned here, significantly more investment specialists mentioned a focus on ESG concerns in their biography or background.

It’s an area that companies value for both the perceived value – reassuring clients that they are looking out for their best interests – and actual value – attracting new business by positioning the business as ethical and taking advantage of investment opportunities that were at the time providing better returns than non-ESG indexes.

The next step appears to be upskilling existing resources to incorporate ESG thinking in new ways and across asset classes. Farrant at Hostplus, for example, will manage ESG integration across the fund’s asset classes.

“ESG is going to be more important so it is incumbent upon us to increase staff knowledge of ESG issues,” Block says.

ASI is doing the same, according to Welsh-Rose.

“We develop and conduct internal training processes on ESG research and stewardship activities, run by the ESG investment team,” she says.

“We also attend many of our investment meetings to update the investment team on topical ESG matters, and provide structures for engagement to be undertaken by the investment teams.”

As the markets stabilise in the hopefully nottoo-distant future and return to a growth pattern, hiring will also likely pick up.

Liza McDonald, head of responsible investment at First State Super, says that the value comes not just in the returns but also from the ethical duty as responsible owners.

“We consider ESG risk and opportunities as part of our due diligence process and it is also part of our overall investment assessment,” she says.

McDonald added that finding the right people for an ESG-focused fund, regardless of their role, comes from getting people who understand what they do and how it is integrated through the entire business.

And most importantly, ESG can’t be a topdown initiative; it must be incorporated in everything a business does.

“If the ESG team is sitting in marketing or communications that is an indicator that it may not be central to the organisation’s approach.” McDonald says. fs

14 April 2020 | Volume 18 Number 07 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

News:

Feature:

Featurette:

Profile:

NFP slowdown returns revealed Jamie Williamson

Danielle Welsh-Rose

ESG investment director Aberdeen Standard Investments

While the ASX fell close to 30% in March, Rainmaker analysis shows the investment returns for 15 of Australia’s leading not-for-profit superannuation funds weren’t nearly as bad.

Latest analysis from Rainmaker shows the average investment return for 15 of Australia’s not-for-profit superannuation funds in the month of March was -9%.

While not naming names, Rainmaker compiled a tally of March investment returns from 15 MySuper products run by NFP funds – including some of the country’s largest – that declare daily unit prices and crediting rates.

The analysis shows returns across the 15 funds ranged from -5.4% to -12.6% during March, equating to an average return of -9% for the month.

Going back to February 20, the range of returns for the same funds to March end was -8.6% to -16.1%. The average return for the period was -12.1%.

Continued on page 4

360k flock to early super release Eliza Bavin

The Australian Taxation Office has confirmed over 361,000 Australians have registered their interest to access their superannuation savings early.

Speaking to Financial Standard an ATO spokesperson said that while official applications for the COVID-19 early release don’t open until April 20, the organisation has seen a large amount of interest for the scheme.

“Currently people are able to register their interest with the ATO to be notified when application form becomes available,” the spokesperson said.

“As at the end of April 2, we’ve had 361,000 registrations of interest.”

The ATO said registrations are for the sole purpose of enabling it to notify individuals of the availability of the application form.

Meanwhile, the ATO released a joint statement with the Tax Practitioners Board (TPB) as they work together to assist professionals navigate Continued on page 4

2

News

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

Bigger balances, bigger blow

Editorial

Jamie Williamson

S

Jamie Williamson

Editor

Are you ok?

It’s a strange question to put into writing, and it’s a question that isn’t asked nearly enough – at least, asked with sincerity and a desire to hear the answer.

I’ve found myself asking this much more frequently of late as stress levels resulting from the knowns and unknowns of all that’s going on in the world continue to build. I’ve also been on the receiving end of it quite a few times too.

And it’s a difficult one to answer, because when I put it into perspective, I have nothing to complain about; I am healthy and still working and for that I am grateful.

But COVID-19 and the associated social distancing measures still has an impact, it’s just under the surface. And knowing that so many others have it worse than me stops me from speaking up.

I’m not one to take pity on myself, nor open up to others and expect them to. But I realise that at a time like this it’s important to be transparent about how we’re coping and to support one another in whatever way we can.

It’s in this way that we’ve probably never been more connected, both literally and figuratively.

For example, working from home, my team and I conduct our morning news meeting via Microsoft Teams and all other communication for the day is done in the group chat that accompanies it.

We are also producing more content now than ever, meaning more meetings more frequently.

But we’re missing out on the in-person interaction that is so vital not only to a team’s success but also to our individual and collective mental health.

And so, I introduced weekly trivia. Each Friday afternoon, when all is said and done for the working week, we log into Microsoft Teams and do a 20-question round of trivia, taking turns at being quiz master.

It’s our version of Friday afternoon drinks, even though we never did Friday afternoon drinks pre-isolation.

And, once the winner has been declared, whoever wants to stick around for a chat can and does.

It’s not seamless; internet connections are glitchy and there is sometimes still emails to be answered, but it works for us.

So often it is the relationships you have at work, whether it be colleagues or clients, that bring the most joy and make the biggest difference to your workday.

This issue features plenty of discussion of the economic impact of COVID-19, but let’s not forget that behind the unemployment numbers are people who have lost their daily routine, financial security and social outlet.

My thoughts are with all those effected, and I hope they get the support they need, financially and however else they require.

This year is likely to be the toughest many of us will face. Let’s remember to look out for one another. fs

The quote

There isn’t a fund that will not be impacted by this scheme.

peaking to Financial Standard, Hostplus chief executive David Elia has said it’s the super funds with higher average account balances that should be worried about the impact of the early release scheme.

Hitting back at public commentary suggesting the fund will be disproportionately impacted by the government’s early release measures, Elia said Hostplus’ low average account balances will work in the fund’s favour when it comes to paying out members.

“If you’re a fund with a higher average account balance, you’re going to expect to pay out more on average than a Hostplus-type fund would by virtue of the fact that our members are young, low paid, and most come in under the $450 threshold,” he said.

“So, when you really look at the details of the data, I think you end up forming a completely different view.”

Hostplus’ average account balance overall is about $37,000.

Elia said critics are forgetting that Hostplus has been a public offer fund for quite some time, with more than 300,000 of its 1.1 million members now sitting in the public offer division.

“I can understand how people from afar can be a little ill-informed and may have reached those kind of conclusions… We’ve got 570,000 members who have account balances of less than $10,000 or

less and represent $1.2 billion in FUM,” he said.

“It’s one of the lowest paid sectors in our economy so by virtue of that these members don’t have a lot of money and are therefore most vulnerable.”

The average account balance among those members is about $2200, Elia said.

“Half the membership of Hostplus account for less than 2% of funds under management.

It’s a lot of money but it’s not a lot of money relative to the size of the fund,” he said.

Elia also dismissed talk of liquidity issues.

“Speaking on behalf of probably the majority of funds, it’s not a liquidity issue. We’ve got billions and billions of dollars in listed assets and we haven’t had to sell one single listed asset [as at March 31] but we may need to, depending on what the demand is,” Elia said.

“We’re sitting on a few billion dollars in cash and we’ve still got cash coming in, so we’re going to be well positioned to meet members demands – we just don’t know how many members will [gain early access].”

And this isn’t an issue unique to Hostplus, a fact Elia said seems to have eluded some commentators to now.

“It’s not just hospitality workers that have been stood down - it’s every other company that feeds off that. It’s manufacturing, it’s services companies; it’s got its tentacles all over the place.

There isn’t a fund that will not be impacted by this scheme,” he said. fs

Super funds face penalties over early release scheme failures Elizabeth Mcarthur

Treasurer Josh Frydenberg has confirmed superannuation funds that fail to appropriately handle early release during the COVID-19 crisis will face penalties.

Asked by Financial Standard how the government would handle funds that might face liquidity issues as a result of the new early release rules, Frydenberg said that the government expects such a situation should not arise in the first place.

“The government expects that superannuation trustees have managed their legal obligations responsibly over the years to ensure that they have appropriate liquidity to deal with market volatility and other demands on the fund driven by membership changes or payments,” Frydenberg said.

“Due to government reforms, APRA has a number of tools at its disposal to deal with superannuation funds, including the ability to direct mergers, which could be used where a fund is unable to meet the needs of members.”

Funds being “directed” to merge is not off the table, Frydenberg said.

“The government expects APRA to exercise those powers in circumstances where it is in the best interest of fund members to do so,” he added.

Frydenberg and the Morrison government are positioning the early withdrawals from super as a “Team Australia” moment and have been clear that super funds are expected to get on board.

“Superannuation is a great Australian asset, with around $3 trillion in savings. There is more than $300 billion in cash across the system and last year, due to the compulsory nature of superannuation, there was almost $120 billion of contributions into the system,” Frydenberg said.

“Superannuation funds cannot expect the government to both compel Australians to contribute 9.5% of their salaries and at the same time avoid their own contribution to this Team Australia moment.”

He added that government spending can only go so far and that the new measures, which allow Australians negatively impacted by the COVID-19 economic slowdown to access up to $20,000 of their super early, will help cushion the blow for many Australians.

“Early access to superannuation in the case of hardship already exists now,” Frydenberg said.

“The government has extended this relief to help people get access to their money if they have been significantly impacted by the coronavirus.”

So many have been impacted by whole industries shutting down in response to COVID-19 that 360,000 registered with the Australian Tax Office to access their super early in just three days.

Finance Minister Mathias Cormann was asked on ABC News Breakfast whether he was worried that 360,000 people were already trying to access their super.

“No, it doesn’t worry us,” Cormann said.

“It is easily feasible for superannuation funds to release some of that cash to its owners to help Australians through this period.”

He added that APRA is also confident the early release will not have negative consequences for the super system as a whole.

“APRA has made it very clear that this can easily be done without any systemic impact on our superannuation system.

It should be done. This is an unprecedented situation that we find ourselves in and we’ve got to use every way to support Australians through this period,” he said.

The government’s resolve that super funds must get on board with the cause comes despite the fact that the super sector was not consulted about the early release measures.

“The government acted swiftly and with limited consultation when designing some support measures, but we are now working closely with agencies and regulators to ensure we help those who need to tap into super now, and protect the longterm interests of all members,” Industry Super Australia chief executive Bernie Dean said. fs

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News

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

01: Peter Johnston

NFP slowdown returns revealed

executive director AIOFP

Continued from page 1 Rainmaker executive director of research Alex Dunnin said given the ASX fell by 21% in March and by 29% from February 20 to March end, the returns seen are remarkable.

“MySuper products are currently sitting on an average rolling 12-month return of -3%. For context, the average rolling 12-month return for the MySuper index during the Global Financial Crisis got as low as -20%,” he said.

“The YTD MySuper index return to March end is -6%.”

Rainmaker’s analysis does not include the performance of the retail sector.

“It should be noted that retail funds hold high allocations to equities so they are likely to be more exposed to equities market falls,” Dunnin said.

This was seen in February’s reported returns where retail funds fell behind the NFP cohort for the first time in many months, he adds.

“In times when equities perform well, retail performs well. In times when equities don’t perform well, the NFP funds perform well,” Dunnin explained.

“But there is a lot of water to go under the bridge yet.”

After the GFC, it took just two years for MySuper products to recover, Dunnin added.

“It’s encouraging that so far the CFC fall isn’t as deep and this in its own way is actually quite encouraging,” he said. fs

COVID-19 sparks renewed fight for commissions Elizabeth McArthur

T The quote

Unless the government extends concessions to the advice industry... small business and consumers will significantly suffer in the short to medium term and tax payers in the long term.

360k flock to early super release Continued from page 1 their clients through the crisis.

The ATO and TPB said as the country confronts the COVID-19 crisis, many professionals would have seen impacts to clients and their own business.

“We know you are working hard to support your clients while dealing with the impacts to your own business,” the statement said.

“These are trying times, and we at the ATO, TPB and your professional associations are committed to supporting you through this difficult period.”

The statement said the intention of the government relief package is to help the economy withstand and recover from the economic impacts of the crisis.

“Some advisers may be grappling with the tax consequences associated with the stimulus payments, and wondering what will attract our attention,” the organisations said.

“We also know that some businesses are already making changes to their business structures and employment arrangements following the stimulus announcements.”

The organisations stressed that it is not acceptable to backdate or artificially change a business structure or employment arrangements to obtain a benefit or payment.

“The ATO and TPB will take firm and swift action should this be the case,” they said.

“We understand these situations can be difficult to navigate and we encourage anyone who needs advice to seek assistance from us.“ fs

he COVID-19 pandemic and subsequent economic slowdown has spurred a fight among financial advisers to retain commissions, amid news big institutions are turning them off earlier than the law requires.

The Association of Independent Financial Professionals (AIOFP) has made a submission on the implementation of the Royal Commission recommendations calling for the banning of grandfathered commissions to be pushed back by two years to help advisers through the COVID-19 crisis.

The proposed new date for the banning of grandfathered commissions would be 1 January 2023.

The AIOFP also requested that ASIC “stop its current activity of encouraging manufacturers to terminate grandfathered revenue before the legislated 1 January 2021.”

The association has previously accused ASIC of prompting institutions to turn off grandfathered commissions early, even when a High Court challenge of the grandfathered commissions ban was on the cards.

“LIF, FASEA, the banning of grandfathered revenue and resultant structural change has led to 23 suicides (COVID -19 death toll is currently 22 at the time of writing), thousands of experienced advisers leaving the industry and threatened the existence of thousands of small business owners and their mostly women employees and their families,” AIOFP said in the submission.

“Unless the Federal Government extends concessions to the advice industry like they have done to other sectors, small business and con-

sumers will significantly suffer in the short to medium term and tax payers in the long term.”

The AIOFP’s renewed fight comes as AMP wrote to customers on 30 March 2020 saying that it would turn off grandfathered commissions before the January 1 deadline.

“The majority of grandfathered adviser commissions on AMP products will cease, and the benefit will be returned to customers in a manner that will depend on how the commissions are currently charged on relevant products,” the letter from AMP managing director of superannuation, retirement and platforms Lara Bourguignon said.

Meanwhile, Colonial First State general manager, advice relationships Bryce Quirk wrote to advisers on 3 March 2020 to let them know grandfathered commissions would be turned off on managed investment funds and FirstChoice Employer Super.

AIOFP executive director Peter Johnston 01 told Financial Standard: “We find it bizarre that advisers and consumers must plead with both the regulator and the treasurer to follow the law and only ban grandfathered revenue after the legislated date of 1 January 2020.”

He said that he fears the turning off of these commissions will not result in more money in the consumer’s pocket at all.

“The Royal Commission has clearly demonstrated that institutions cannot be trusted when dealing with policy holders and will give shareholders and executive bonuses preference,” Johnston said.

“No doubt the institutions will find many ‘administrative’ reasons for extracting large fees from the revenue leaving little for consumers.” fs

Super fighting a war on three fronts: KPMG Harrison Worley

New analysis from KPMG shows superannuation trustees are facing three competing sets of problems as they deal with unprecedented challenges As a result of the government’s Early Release Scheme (ERS), super funds find themselves implementing the means to fulfil their new responsibilities to members, while also finding their resources stretched as they deal with high volumes in their call centres.

KPMG partner Damian Ryan said funds also have to be conscious of the pressure on third-party service providers, noting their capacity was also being tested by the current scenario.

“One of the key challenges is how do super funds actually do their administration?” Ryan said.

“That creates an additional challenge in this environment, because you’re not only controlling what’s happening in your own trustee office, but you’re also worried about what’s the ability of your service provider to deliver in a challenging environment.”

Ryan admits though that the government’s JobKeeper program may provide funds with some relief from the Early

Release Scheme, as more Australians remain employed.

However Ryan is adamant the well publicised liquidity issues facing super funds still persist, noting the specific profile of each fund would determine the extent to which it is affected by the pandemic and any of the impacts of the government’s range of initiatives in response.

Ryan said trustees find themselves having to reconsider the levels of liquidity they require, even if they hold enough liquidity to satisfy their regulatory requirements.

“If you’re a fund or a trustee, you are investing for the long-term knowing that you don’t need the liquidity until a member dies, retires or reaches another condition of release. So it’s a 20, 30 or even 40 year relationship with your member,” he pointed out.

“Although pandemics are one event that could happen, you’ve also got to say ‘Well, what’s the likelihood of that?’”

Finally, KPMG highlights insurance in super as the third major issue facing the sector, referencing the issues posed by pandemic exclusions within group insurance policies which have recently caused a stir. fs

News

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

New ASX tech on hold again

01: Geoff Lloyd

chief executive MLC Wealth

Harrison Worley

The Australian Stock Exchange has been forced to delay the replacement of its CHESS system.

The impact of COVID-19 is continuing to spread, with the outbreak now forcing the delay of the ASX’s CHESS replacement system.

Originally slated to go-live from April 2021, the CHESS replacement will now be delayed, with the new implementation timetable yet to be decided.

The ASX said it will consult with stakeholders about a new timeline in June.

However it isn’t all bad news for the CHESS replacement, with the ASX confirming it will retain the target of opening an industry test environment (ITE) in July.

“The re-plan will provide additional time for users to complete their operational readiness activities and to consider the rule changes that accompany the new system,” the ASX said.

“It will also increase the time available for back office software developers to familiarise themselves with key aspects of the new system in a productionlike testing environment, and enable them and ASX to complete software development and testing.”

ASX deputy chief executive Peter Hiom said the industry needed to focus on the challenges before it given the current environment of heightened volatility.

“In light of recent events, ASX is replanning the implementation of the CHESS replacement system,” Hiom said.

“We are conscious of the importance of providing a new schedule, and the need to get the valuable input of CHESS users.

“We will therefore wait until June to consult on the new timetable when we expect everyone will have more time to consider the replan and better assess the implications of COVID-19. We will then announce the new schedule.” fs

Trust in advisers lifts as pandemic fear ensues Ally Selby

A The quote

Advisers are clearly well positioned to be their clients’ supportive and trusted guide.

CareSuper leads super satisfaction Latest Roy Morgan research shows CareSuper has the highest current satisfaction rating among Australia’s super funds, despite well-publicised issues following an administrator switch.

According to February data from Roy Morgan’s Superannuation Satisfaction Report, the industry fund improved its customer satisfaction rating by more than nine percentage points over the last year.

It wasn’t alone in registering a strong year, with OnePath improving its rating by more than 11 percentage points, while Colonial First State also improved by more than nine percentage points.

However, the new results haven’t done much to alter the dynamic between industry funds and their retail counterparts, with industry funds making up eight of the top 10 most satisfying super funds.

Roy Morgan chief executive Michele Levine said the firm expected the current level of satisfaction among super fund members may not be beaten for some time, given many funds will have taken performance hits as a result of the COVID-19 pandemic.

“As we can see from the year-on-year satisfaction data, 2019 was a fruitful year for super funds, not only in the returns they were delivering clients, but also by significant increases in customer satisfaction ratings,” Levine said. fs

5

dvisers are the most trusted source of information surrounding the impacts of COVID-19, above government sources and the media, according to research coming out of MLC Wealth.

It’s a key finding of a survey of over 1600 MLC clients and members of the general public.

The survey found investors and clients of the wealth management business were most concerned about the economic impacts of the coronavirus (8.5/10 concern level), as well as market volatility and its ramifications on their investments and superannuation (8.2/10 concern level).

The health and wellbeing of the community (7.8/10 concern level) and family members (7.7/10 concern level) also rated highly as key areas of concern.

MLC Wealth chief executive Geoff Lloyd 01 said the research highlighted the financial and emotional support that advice professionals bring to their clients.

“Advised Australians, including our clients and those with financial advisers in other groups, told us their adviser was their primary source of truth for information on the pandemic, suggesting many see their adviser as a ‘life coach’ in moments that matter, like now,” he said.

“MLC’s enduring belief is that good financial advice is worth it. This research shows

that in moments like these, clients share this view.”

Lloyd said the current period of uncertainty was an opportune time for advisers to step up and address their client’s needs.

“These are very tough times for Australians, in particular - but not limited to - those who’ve never experienced a major market downturn, and those nearing or in retirement,” he said.

“This leads to next-level responsibility for financial advisers in addressing client needs.”

Advisers should continue to deliver timely and relevant communication, information and strategies to help their clients during this time of hardship, he said.

“Advisers are clearly well positioned to be their clients’ supportive and trusted guide,” Lloyd said.

For those without advisers, TV news, online, government information and radio were the main ways to access information on the impacts of COVID-19. Super funds made the top four of their most trusted sources.

To collate this information, MLC Wealth conducted two sentiment surveys, one of the general population with 1014 respondents, and one of its own clients and members with 642 respondents.

Respondents were aged between 35-80 years old, and completed the survey in the week beginning March 16. fs

Super fund merger delayed Eliza Bavin

Two industry super funds have pushed back the date for their merger due to the COVID-19 global crisis.

Tasplan and MTAA Super were initially scheduled to merge on 1 October 2020, but have now extended the timeline to finalise the deal until 31 March 2021.

The funds said they reached the decision together after a joint recommendation between MTAA chief executive Leeanne Turner and Tasplan chief executive Wayne Davy to the chairs of both boards.

They said sustained market volatility and concerns about supplies of specialist services were key factors behind the extension.

Despite the new timeline, Turner said the decision behind the merger and the benefits to members of both funds remain unchanged.

“We still believe the merger is in the best interest of members of both funds,” Turner said.

“A combined fund will provide greater efficiencies, improved products and services, increased capability, and better value to members. So, we remain fully committed to the merger — just with an extended time.”

Turner acknowledged that recent restrictions as a result of COVID-19 have put extra strain on people.

“Clearly things have changed rapidly for all Australians in the last few weeks. We recognise the pressure that this is putting on our members and our staff, both at work and at home,” she added.

“We think extending the merger timeline will ease stress and help our staff better manage workloads and their personal arrangements.”

Davy said member support is a key priority for both funds, with members expressing concern about market volatility and financial hardship.

“Understandably, members are concerned about their retirement savings. And we’ll likely see an increase in the number of people facing financial difficulties in the coming weeks and months,” Davy said.

“By extending our merger timeline we can focus on getting members the service, advice, and support they need right now.

That’s always been a priority for us, but now it’s more important than ever.” fs

6

News

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

Chant West takes Zenith to court

01: Sally Loane

chief executive Financial Services Council

Kanika Sood

Chant West Holdings has filed proceedings in the Supreme Court of New South Wales after Zenith Investment Partners’ subsidiary pulled out of a planned $12 million purchase of its superannuation business.

CW Bidco Pty Limited (the Zenith and Five V Capital’s company for the acquisition) on March 31 sent Chant West a letter seeking to immediately terminate their February 18 sales agreement saying that Chant West’s business had a “material adverse impact” from the market environment.

Chant West contested Zenith and Five V Capital’s claims, citing its positive EBITDA for first half of FY20 and positive outlook for the second half EBITDA. This morning, Chant West said it filed proceedings against CW Bidco. It is seeking court orders on post COVID correction performance which is the bone of contention between the buyer and the seller. “[Proceedings]…seeking an order to specific performance against CW Bidco compelling it to complete the sale of the Chant West business on the terms as agreed under the business sale agreement (BSA) dated 18 February 2020…”

Chant West said in company filings on April 6..

Chant West says it expects the application to be heard on an urgent basis.

Separately, the company has received buyer interest for its financial planning software business Enzumo.

Enzumo was not a part of the sale to Zenith. Its potential buyer was not named but Chant West clarified it is not Zenith of Five V Capital. fs

Charterhill founder incarcerated Ally Selby

The founder of Charterhill Group, which collapsed in 2014, has been sentenced to 10 years imprisonment, and will serve at least six of these behind bars.

Charterhill Group, run by George Nowak, provided a “one stop shop” for SMSF clients; providing financial advice on establishing SMSFs, purchasing investment properties, property management, insurance and taxation.

The charges against the former director concern the misappropriation of $1.2 million in assets.

Part way through the criminal trial at the District Court of South Australia, Nowak pleaded guilty to 17 counts of aggravated deception and one count of dishonest dealings with documents.

In a statement, ASIC said the judge Sophie David described Nowak’s offences of being of the utmost seriousness, arguing he had significantly impacted his victims lives in order to fund his lavish lifestyle.

Worse still, ASIC commissioner Danielle Press said Nowak had acted deliberately.

‘Mr Nowak deliberately misled his clients and used their funds for his own benefit,” she said.

“Mr Nowak dishonestly and deliberately breached his clients’ trust.

“The Court’s sentence reflects the seriousness of this conduct and the impact it had on Mr Nowak’s clients.” fs

No exclusions for frontline workers Eliza Bavin

ustralia’s life insurers have committed to A ensure frontline healthcare workers will not be prevented from obtaining life insurance

The quote

This is part of helping these Australians to have peace of mind for themselves and their fam­ilies while continuing their vital service to our community.

cover due to COVID-19.

The Financial Services Council said the commitment comes on behalf of participating life insurance FSC member companies.

“Frontline healthcare workers are a group who could be exposed to contracting COVID-19 and to this end, participating life insurers are making a commitment that their exposure, or potential exposure, will not of itself be used to decline an application for cover, charge a higher premium or apply a COVID-19 pandemic risk exclusion,” the FSC said.

Assistant minister for superannuation, financial services and financial technology, Senator Jane Hume, welcomed the announcement.

“Our frontline workers are doing an amazing job in this crisis, and it’s vital that we’re ensuring their work won’t adversely affect their life insurance cover,” Hume said.

“I thank the FSC and insurers for their responsiveness on this issue.”

FSC chief executive Sally Loane01 said in developing the commitment, the FSC ensured a broad definition of a frontline healthcare worker.

“This means not only doctors, nurses and hospital staff but also those who may potentially be exposed to COVID-19 such as police, pharmacists, paramedics and age care workers,” Loane said.

“While not everyone will be able to get new cover for other unrelated reasons, this commitment means potential exposure to COVID-19 alone won’t affect the cover these workers can get with participating life insurers.”

Loane said she hopes this measure will help reduce any anxiety that the healthcare workforce may feel when working on the frontline.

“This is part of helping these Australians to have peace of mind for themselves and their families while continuing their vital service to our community,” she said.

The FSC added that for those who had life insurance cover in place prior to March 11, FSC member insurers have confirmed there are no exclusions unless the individual has not followed government travel advice. fs

Not at the bottom, yet: Research Harrison Worley

Retail investors believe the market has further to fall before it hits the bottom, yet remain optimistic about the future.

Latest Investment Trends research shows retail investors hold a positive view of the future, despite feeling that we haven’t yet seen the market bottom out as a result of the COVID-19 pandemic.

The firm’s current data shows Australian retail investors are almost as concerned now as they were in December 2011, when they recorded their highest level of post-GFC concern for the state of the world’s investment markets.

Currently, investor concern registers at 7.2 out of 10, half a point away from the high of 7.7 reached three weeks ago.

Investment Trends chief executive Michael Blomfield said the slowdown in China had previously consumer investors’ thoughts, but that now their attention has turned to concerns about Australia’s level of debt and the health of the local economy.

“Aussies are worried about the underlying economy more than they are about volatility and near-term returns,” Blomfield said.

However, their concerns seem somewhat conflicted with their expectations. Blomfield said

Australian investors still see growth on the horizon.

“The average return expectations for the All Ords for the 12 months ahead has returned to positive territory in recent days, and now sits at 1.5%, excluding dividends,” he pointed out.

“Along with these muted return expectations, the dividend yield that retail investors expect to receive has fallen to 3% from what had been an incredibly persistent 4% over the past years.”

Investment Trends said its data showed Aussie retail investors haven’t been concerned enough to flee the market, with “the vast majority” of Australian retail investors reporting that they either sat out of the market’s volatility or bought shares to lower their cost base in the fortnight to April 3.

“Perhaps even more importantly, in the fortnight ahead, 26% of retail investors intend to increase their exposure to Aussie equities while 12% intend to reduce their exposure,” Blomfield said.

“On a net basis, retail remain buyers of the market, even with the volatility we’ve seen.”

However the Investment Trends chief said the road ahead was long, and pointed out that over the past three weeks, 80% of retail investors haven’t yet wavered from their view that the market has not yet reached its bottom. fs

Product showcase

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

7

01: Damian Cilmi

head of investment managers and governance Praemium

From trend to tried-and-true

With investors increasingly conscious of where their money is going, Praemium is equipping advisers with the right tools to help clients invest with their hearts. here’s a website you can go to that will tell T you what the biggest trend was the year you were born. Going back to 1941, you’ll find things like painted on stockings, baggy jeans, bowl cuts, legwarmers and crocheted everything.

While many have (thankfully) faded into the depths of history, some have stood the test of time or proved inspiration for the new generations and the next to come.

Often when we discuss trends it’s with the assumption that what we’re referring to is a shortterm fad, but this isn’t always the case.

So, at what point does a trend stop being a trend only to forever more be considered an enduring, essential part of life?

This is the precipice ESG investment is approaching.

And, as Praemium head of investment managers and governance Damian Cilmi 01 will tell you, there’s a number of reasons for it.

Firstly, there is a growing awareness among investors of their environmental footprint which has led people, particularly millennials, to question the ways in which they might be unconsciously contributing to climate change.

“We have millennials who are now approaching their forties and are a very articulate group when it comes to what they want to see in terms of their own investment values and ethical considerations,” Cilmi says.

“As an investor segment they are expected to grow over the coming years, particularly as they will likely be the main recipients of the largest generational wealth transfer.”

Another key driver is the increased adoption of ESG considerations by industry superannuation funds which has seen Australia cement itself as one of the largest ethical investors in the world.

“Super funds are listening to their members about what’s important to them and they’ve implemented a number of exclusions within their own investment portfolios,” Cilmi says.

But what about when it comes to investing outside of super?

A longstanding strategy has been to use preexisting managed funds that incorporate a level of ESG screening, perhaps excluding what’s commonly referred to as ‘sin stocks’ such as alcohol, tobacco, gambling and weapons.

Specialist investment managers like Australian Ethical have proved leaders in this space, for example.

“We’ve also seen an expansion into this space throughout a number of ETFs – they’ve gone

and mimicked some of those features and we’ve also seen some thematic ETFs emerge, be it clean energy, clean water or the like,” Cilmi explains.

This is a movement that really started in the United States, as with ETFs in general, and is now coming to other markets, he adds.

And then there’s separately managed accounts, or SMAs. “SMAs provide the ability for investors to customise their portfolios to reflect their own investment preferences,” Cilmi explains.

While managed accounts technology has always allowed for advisers to exclude or lock specific stocks – a feature that has proved popular – it also requires for each individual stock to be locked. In terms of time, it also requires the adviser to undertake extensive research so as to identify which stocks do and don’t meet client preferences.

“What we started to see was people start to use the exclusion functionality to impart their clients’ ethical considerations on their portfolios…but the issue we faced was how could the adviser do the research and implement the action with scale,” Cilmi says.

For example, when looking at alcohol stocks, there are a couple of obvious companies in Australia but there are hundreds of stocks – some of which the adviser might not have even heard of and would therefore miss when excluding stocks.

“And then if you’re dealing with global equities, it becomes even more difficult given how many companies operate in the space worldwide. That research piece can be a real challenge for advisers,” Cilmi adds.

It is pain points like these that have seen platforms move to leverage their existing technology to take their solutions to the next level.

As any business owner will tell you, data is everything and it’s the ability to integrate data across systems that has been perhaps the biggest technological development – particularly in financial services - in recent years.

Recognising this, earlier this year Praemium rolled out a suite of ESG solutions, including a new screening functionality for advisers.

The screening tool is underpinned by comprehensive ESG research and analysis provided

by Sustainalytics, providing a more intuitive means by which advisers can tailor client portfolios to their individual ethics and values.

Using the technology, Praemium users can select from nine screening criteria and bulk exclude stocks against the criteria selected. These

The quote

Technology can really demystify what’s in a portfolio. A lot of people don’t realise what they’re actually invested in.

categories include adult entertainment, animal testing, controversial weapons, gambling, tobacco and three fossil fuel options.

“This provides a real engagement opportunity for informed and well-prepared advisers to provide advice and support to help investors align their investment goals with their personal ethics,” Cilmi says.

“Technology can really demystify what’s in a portfolio. A lot of people don’t realise what they’re actually invested in.”

With only about 60% of the 85% of investors that want their portfolios aligned to their values actually taking the plunge, this tool can really help advisers cut through the confusion clients so often have around ESG investing and close that gap, he adds.

And while client feedback played a distinct role in the shaping of the new solution, their demands also happened to align with Praemium’s broader business strategy.

“There was a definitive top-down approach to all of this. We are making a concerted effort to engage with managers, increase the number of pre-built investment options and also build out other ESG screening factors and tie them all together into a thematic for the group,” Cilmi explains.

Not only is it giving advisers more time to connect with their clients and gain a better understanding of what’s important to them, it’s also helping advisers meet new regulatory obligations.

Under the new FASEA Code of Ethics, advisers must discuss a client’s ethical considerations as part of fact finding and, where a client indicates a preference, the adviser is required to do all they can to satisfy that preference.

For institutions, in 2019 APRA outlined the fiduciary duty to consider ESG issues in the management of funds as a result of changing investor demand and developing awareness.

With such momentum behind this style of investing and with companies themselves adopting an ethical mindset, you can be assured ESG is here to stay.

It’s clear the desire to invest in line with ethics and values is only going to grow – and so too are the opportunities for financial advisers. fs Brought to you by

Watch the video on www.fsitv.com

8

News

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

ATO simplifies WFH deductions

01: Dante De Gori

chief executive FPA

Kanika Sood

Australians working from home during the COVID-19 shutdown will now be able to claim 80 cents per hour for the rest of this financial year, after changes made by the Australian Taxation Office.

The new shortcut method allows workers to claim 80 cents an hour of work from home and covers all deductible running expenses including electricity, depreciation in things like home office furniture and computers, phone, internet, stationery and cleaning.

It will be in place for expenses from March 1 to June 30 this year.

Workers will have to keep records on hours of work through methods such as timesheets or diary notes. On their myGov or tax agent return statement, they must note ‘COVID-hourly rate’.

Australians using this method can’t claim any additional expenses deductions.

“The short cut deduction method will make it easier for many Australians who are working from home for the first time due to COVID-19 when it comes to accurately completing their tax return,” Minister for Housing and Assistant Treasurer Michael Sukkar said in a statement.

“The ATO has undertaken to review these arrangements in line with COVID-19 developments to see if they are required for the next financial year.

“These new arrangements do not prohibit Australians from making a standard working from home claim using the two standard approaches should they wish to do so.” fs

FPA launches practice benchmarking tool Ally Selby

T The quote

The FPA READY Index has been designed to give you a clear picture of the capability of a practice relative to its peers in these extraordinary times.

Not safe to launch: APRA Harrison Worley

APRA has suspended the issuance of new licences to budding superannuation funds, banks and insurers.

In a letter to licence applicants the prudential regulator said it was concerned new entrants to banking, superannuation and insurance would fail if they were launched during the COVID-19 crisis, noting even those which take-off under normal circumstances often don’t get off the ground.

With the regulator concerned new entrants won’t survive the winter, it said the issuance of new licences would be suspended for at least six months.

“In licensing new entrants to the prudentiallyregulated segments of the financial system, APRA aims to achieve an appropriate balance between financial safety and other important considerations to the community – efficiency, competition, contestability and competitive neutrality,” APRA’s letter read.

“Experience has shown that it is challenging for new entrants to succeed even under normal economic conditions, which is why APRA does not consider it prudent to license APRA-regulated entities at this time.”

The prudential regulator said it would continue to review its approach as the operating environment stabilises, and added current license applicants will be advised when it begins to grant licenses again.

APRA confirmed it would continue to assess current licence applications to ensure it minimises the delay on launching when it lifts the hold. fs

he Financial Planning Association of Australia has launched an online index set to allow financial planners to benchmark the success of their business relative to their peers.

In partnership with global market research consultant CoreData, the FPA READY Index will enable financial advisers to benchmark their businesses to assess which areas of their practice are thriving and which need more work.

FPA chief executive Dante De Gori01 said the new tool would allow financial advisers to strengthen their systems and processes at a time when they need it most.

“As the COVID-19 pandemic creates increasing volatility in financial markets and uncertainty among investors, financial planners need to ensure their practices are firing on all cylinders as they service new and existing clients,” he said.

“FPA professional practices have risen to the challenge of this unfolding economic crisis by supporting Australians through what may be the most difficult period in their financial lives.

“The FPA READY Index has been designed to give you a clear picture of the capability of a practice relative to its peers in these extraordinary times.”

FPA professional partnerships manager Ken Whitton said the benchmarking tool would al-

low advisers to develop forward-looking plans for their practices.

“The FPA READY Index will provide a comprehensive assessment of the success of your business,” he said.

“Practices will now have the opportunity to compare their businesses against their peers and really evaluate, assess and understand how they are positioned for the future.”

The index will allow practices to clearly identify the strengths and weaknesses of their businesses, the FPA said, focusing on five key areas, as well as revenue growth and profit margins.

These include risk and compliance, efficiency and technology adoption, aspirations, differentiation to meet client needs, and yield.

The process only takes 20 minutes, with advisers prompted to answer questions on their business online.

De Gori said the new tool would help secure the sustainability of the country’s financial advice practices.

“In the evolving nature of our profession, this sort of technology and innovation will further elevate the services we offer as the peak professional body and ensure FPA professional practices maintain strong, sustainable business models set for long-term growth,” he said. fs

Super should shape up on unlisted valuations: WTW Elizabeth McArthur

Superannuation funds, including AustralianSuper, Hostplus and Rest, have been slashing the value of their unlisted assets - now Willis Towers Watson is interrogating why.

In a new paper, Willis Towers Watson senior investment consultant Nick Kelly said the question of whether to devalue unlisted assets is nothing new; investors had to consider whether to devalue these assets during the Global Financial Crisis.

“But what may surprise some is that there is very little consistency in the way Australian super funds and other unlisted asset owners manage the valuation process,” Kelly said.

“The bottom line is that any decision on valuations, including not doing anything, needs a governance overlay.”

Super fund fiduciaries face a quandary of maintaining a medium to long-term investment horizon in their portfolios while members have the ability to switch investment options or funds on a short-term basis.

Because unlisted assets aren’t valued daily, trustees must walk a fine line in determining what is equitable, transparent and defensible.

“The speed at which markets have declined during this pandemic turned economic crisis is far faster than that experienced during the GFC,” Kelly said.

“During periods of heightened volatility, super funds are often swamped with members looking to switch out of higher growth, equity heavy options to lower risk, cash and bond options.”

The government’s new early access to super program has added another element to the problem.

Liquidity issues, Kelly said, are inextricably linked with the challenges around the valuation of unlisted asset.

Funds that have internalised asset management capabilities may have an easier time with valuations but where management of unlisted assets has been outsourced things can become more complicated.

Independent valuations do not relieve the trustee of the responsibility to ensure values are consistent, he said.

“It is widely accepted that during periods of heightened volatility, and where we expect significant movement in unlisted asset valuations, that the frequency of valuations should be increased,” Kelly said, “At the moment though, things are all over the place.”

Monthly, quarterly or annual valuations are occurring - adding to the noise and to member confusion.

“Regardless of what valuation a fund or institutional investor gets from its investment manager, trustees and executives remain ultimately responsible for the unit price they strike for members and beneficiaries,” Kelly said.

“Yes, [trustees] should revisit the valuations more frequently; as significant value swings are likely to occur while there are large numbers of transactions across their membership accounts.” fs

Opinion

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

9

01: Harry Cator

director SG Hiscock & Company

What can we learn from past crises?

30 years we have witnessed a numIsuchnbertheasofthepastcrises.

Some can be considered epic – sharemarket crash in October 1987, or the Global Financial Crisis – while others would now be classified as a side show – including the “great bond massacre” of 1994.

The massive shock to the global economy caused by the COVID-19 pandemic clearly falls within the category of epic.

To help understand the current situation, it is important to distinguish between event-based corrections and those driven by structural change. COVID-19 is an event-driven correction – fast and furious.

On the positive side, history shows the timing and speed of recovery when the event passes to be sooner and more exuberant than when structural change is afoot.

However, for investors and their advisers still trying to navigate through the current situation, what are some of the lessons to be learnt from past crises?

Lessons learnt

There are only five asset classes – equities, bonds, property, cash/currency and commodities – and every product is linked to these five in some way. Investors shouldn’t assume that there is some new “class/product” that will diversify away their risk. It does not exist.

Furthermore, when these five asset classes correlate to one, risk models “melt” and prove to be highly ineffective and dangerous.

Liquidity is critical. If there is no buyer, then assets are momentarily worthless.

Price earnings multiples must mean something. When buying a company on 200x price earnings (PE) multiples, you are paying for earnings 200 years ahead! Even if the share price falls by 90%, it still trades on a PE of 20x – hardly cheap.

Structured products invariably blow up when tested against the sword of reality. Mathematical simulations can create whatever outcome you tell the computer you want. It doesn’t make them true.

When markets are gorging at the table of greed, SELL. And when the table is empty of all diners and the fear of the end is apparently nigh, BUY. Debt is a fabulous slave but a furious master. There are only three ways to reduce debt: sell assets, earn profits or raise fresh capital. By the time the crisis hits the only real option is to raise fresh capital, usually at a massive discount to the then share price, which is highly dilutive to existing shareholders.

A confluence of events is typically needed to cause a major crisis. In the current crisis we had extended valuations, the belief that

Central Bank “put” options would ensure everlasting euphoria in global financial markets, the peak in the globalisation of trade, and all ends of the risk spectrum rallying together.

The change in the rate of change (either accelerating or decelerating) is what markets reward/penalise, not static numbers.

If nothing else, investors should always remember: • When you feel that you have hit your philosophical use by date then markets have probably peaked • When you first put fresh money to work during a crisis, expect to lose 10–15% - you can never pick the bottom. But within 12–18 months you are likely to be rewarded.

• Being too early in your “call” can be career limiting. fs

Navigating out of the crisis For investors and their advisers, the key to navigating out of any crisis is to understand the causes of the crisis, and then establish triggers to guide you through the “fog of fear”.

Some of the triggers to consider include: • The AUD/USD cross rate. The Australian dollar is regarded as the global barometer of growth and is currently predicting a major global economic fallout in the next six months. The proximity of the AUD/USD cross rate to the all-time low set in April 2001 suggests that significant economic slowdown has been priced in.

• The Chicago Board of Exchange Volatility Index (VIX). Its current level has exceeded that reached at the nadir of the GFC - there is a lot of fear priced into markets. We need to see this stabilise to determine whether we have hit bottom. A period of the VIX above 50 but below current highs of 80+ typically indicates a bottoming-out in markets.

• The interaction between government bond yields and equity prices. These two asset classes need to perform in an inverse manner to ensure normal transmission has been resumed. One variation of this measure is known as the Equity Risk Premium.

• Corporate bond yield spreads over equivalent duration government bond yields. When the spread is high then much fear has been priced in. While it is not at the extreme level reached in 2009 at the peak of the panic in the GFC, the current spread indicates a significant change in investors’ attitude to risk.

• Share price levels. When they hit the level reached at the bottom of the market in the prior crisis, this is a good indicator for an actual level of “cheap”.

On the policy front, all governments and central banks of the largest economies are alert to what they must do to avert a deep, prolonged recession. On this occasion, even the IMF has joined the liquidity injection party. There will be failures and fall out, but the stimulus and zero rates provide significant impetus for a sharp recovery in markets when COVID-19 subsides.

Where there is certainty is in China. The “powers that be” can execute unilateral control.

When China “re-opens”, expect Australian equities to outperform the rest of the world and the AUD/USD cross rate to jump dramatically.

Epic The quote

When China “re-opens”, expect Australian equities to outperform the rest of the world and the AUD/USD cross rate to jump dramatically.

• October 1987 – the largest one day fall (20.5%) in living memory in the US equity market.

• 14 December 1989 - the beginning of the end of the great Japanese domination of world financial markets. Japan today is 65% below the level it reached on this date.

• 1989-1991 - Australia’s last recession and near-death experience of Westpac and ANZ banks (CBA yet to be listed).

• April 2000 - the Dot Com Crisis. The Nasdaq plunged by 85%, wiping some US $5 trillion permanently from the wealth of those exposed to the space.

• 1 December 2007 - global equity markets peaked ahead of the Global Financial Crisis (GFC). The US equity market fell by 45% with many global financial institutions going to the wall and/or needing government bail outs. European debt crisis followed.

Significant • 15 September 1992 - George Soros forced British Pound out of the Exchange Rate Mechanism (ERM) as the currency breaches the lower currency exchange limit mandated by the ERM. • July 1997 - Asian Currency Crisis. The collapse of the Thai Baht due to lack of foreign currency reserves sparked fears of financial contagion in the region. South East Asian markets went into meltdown.

Side show • 1994 - the “Great Bond Massacre”.

Investors learnt for the first time since the 1970s that government bond prices can actually fall and that you can lose money investing in bonds.

• August 1998 - Russian Debt Crisis and the “termination” of long term capital management (LTCM), massively geared enterprise buying up illiquid Russian debt assets.

10

News

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

Retail super fund slashes fees

01: Jo-Anne Bloch

acting chief executive Mercer

Harrison Worley

In an effort to protect the super savings of its members, FairVine Super has launched the FairGo initiative, which sees the fund slash fees for the rest of the year for members who have lost their job at the hands of the pandemic.

The initiative will cut the costs payable across administration, investment management and indirect fees to 0.6% for the rest of the year, meaning a $450 saving over the next eight months for members with a $100,000 balance.

FairVine Super executive chair Sangeeta Venkatesan said she was hopeful other funds would soon follow suit and do the same for their members.

“There is a lot of uncertainty right now, particularly when it comes to superannuation. Pair this with an abundance of people losing their jobs, and it’s clear that every extra dollar counts,” Venkatesan said.

“We’re not simply deferring fees for six months – we’re waiving 50% of the fees altogether. With the federal government now granting early access to super for those affected by COVID-19, we thought it was important to balance this with an initiative enabling people to put money back into their super fund.”

Members who have lost their job simply need to notify the fund of their change in circumstance, and FairVine will then fund 50% of the fees paid back into their account until either 31 December 2020 or they receive a super contribution from an employer, whichever is sooner.

Venkatesan said the fund is well aware of the impact the pandemic is having on women.

“They’re on the front line fighting this virus, with two-thirds of the global health workforce being female,” Venkatesan pointed out.

“They also make up the majority of carers, teachers, and childcare workers - all of whom have had their livelihoods threatened.” fs

Former Madison adviser banned ASIC has used its newly sharpened teeth to permanently ban former Adelaide financial adviser James Gibbs from having any involvement in financial services and credit businesses.

Gibbs is the first person to be permanently banned under recent extensions to ASIC’s banning powers as a result of the February passage of the Stronger Regulators Act. Previously, the ban only served to stop people from providing financial services or engaging in credit activities.

The former Madison Financial Group adviser was sent to prison for 10 years in July 2019, with a non-parole period of seven years. ASIC said it moved to permanently ban Gibbs because of the “serious dishonesty offences” he committed in relation to dealing with property and documents.

Gibbs is able to appeal the ban through the Administrative Appeal Tribunal.

Gibbs’ offences saw the former adviser use around $5 million of client funds to prop up his own business, pay off his credit card debts and gamble.

His clients trusted him with the operation of their self-managed superannuation funds, and in some cases, Gibbs had almost complete control of clients’ affairs - enabling him to conduct unauthorised transactions. fs

Early access nightmare for administrators Elizabeth McArthur

T The quote

There is already hardship access available today however, the current processes do not lend themselves to large volumes.

he government’s plan to allow early access to super for those who have lost jobs and livelihoods as a result of COVID-19 is an enormous hurdle with a strict deadline – one that administrators admit they might struggle to meet.

Speaking to Financial Standard, Link Group chief executive John McMurtrie said applying the early access provision cannot be compared to the implementation of past regulatory changes.

“Implementing regulatory changes is something we manage frequently, however the challenge lies in the speed and breadth of change that the early access changes will need to be implemented,” McMurtrie said.

“We are currently working with super funds and the ATO to understand the best solution to managing both the volume and the speed at which this needs to be implemented,” McMurtrie said.

“There is already hardship access available today however, the current processes do not lend themselves to large volumes and there will need to be some adjustments to both technology and processes to accommodate.”

Some Treasury communications are already directing people who have lost their jobs as a result of COVID-19 and want early access to their retirement savings to the MyGov website, with no clear mention of how long super fund mem-

bers may actually have to wait for that money.

However, the official deadline given to super funds is 20 April 2020.

“We are working tirelessly to have this in place for April, although this tight deadline restricts the amount of changes we’re able to make to our current processes,” McMurtrie said.

“There will obviously be a large number of people who will seek early access to their super in this difficult time, and coupled with the tight timeline, this poses a challenge to the industry as a whole.”

Mercer acting chief executive Jo-Anne Bloch01 told Financial Standard that Mercer has established a team to develop its approach to early release payments.

“Our goal is to be ready to make these payments by mid-April, when the ATO starts approving requests,” Bloch said.

“We are working with the ATO and our trustees to ensure we can make payments to members as soon as practicable. There are still a number of details that are yet to be worked through with the ATO and, until these are worked through, we cannot provide a definitive turnaround time for these payments.”

Bloch said Mercer is already experiencing high volumes of calls.

“We are already experiencing significant volumes of calls, and anticipate this will increase considerably as a result of the stimulus package,” she said. fs

Asset devaluation continues Eliza Bavin

Another industry super fund has reduced the value of its unlisted assets as the impact of the COVID-19 pandemic worsen.

Hostplus has devalued assets within its property and infrastructure portfolios by a range of 7.5%-10% depending on the individual investment and the age of its most recent independent valuation.

The funds private equity and venture capital investments have also been devalued, for similar considerations, by 15% on average.

In a letter the fund reassured its members and investors that it is doing everything it can in the current circumstances.

“We are actively monitoring these unprecedented circumstances to ensure that your hard-earned retirement savings continue to be well managed,” Hostplus said.

“In doing so, it is our duty and our objective to ensure that we do everything possible to ensure that all members and investors are treated equitably during these extraordinary times.”

The fund said that while the full economic effects of COVID-19 will not be fully understood for some time, it is clear certain infrastructure and property assets such as airports, toll roads, and shopping centres have been materially affected by the current crisis.

“As a result, and taken as a broad category of assets, Hostplus’ unlisted investments would expectantly and realistically experience lower valuations in the current climate than they would ordinarily have had prior to the emergence of

COVID-19 a few short months ago,” Hostplus said.

“With this in mind, we have worked closely with our investment managers and asset consultant to determine appropriate impacts on the valuations of these unlisted assets so as to ensure that these assets are measured and appropriate for the current circumstances.”

Hostplus said that while asset devaluations are being experienced across all sectors of the economy, the current decreases in valuation for its own unlisted assets investment are less extreme compared to the “current heightened volatility” in listed markets.

“It is that long-term price stability which is a key positive attribute of our strategic investment in unlisted assets,” the fund said.

“These revaluations have already been included in the fund’s unit pricing and are reflected in account balances.”

Hostplus said, along with its professional asset managers and asset consultant, it will continue to monitor investment markets closely to ensure the pricing of its unlisted assets remain appropriate for the circumstances as they evolve and to ensure that all asset values reflect “fair value” across all account balances.

The news comes after AustralianSuper and UniSuper both devalued their unlisted assets in late-March..

It’s been a tough time for super funds, who have also had hundreds of millions wiped from their books in the share market volatility. fs

News

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

01: Scott Morrison

02: Josh Frydenberg

03: John Maroney

Prime Minister

Treasurer

chief executive SMSFA

11

Extraordinary stimulus provides wage subsidy for millions Elizabeth McArthur

O

n March 30 Prime Minister Scott Morrison01 announced $130 billion of spending over the next six months to support the livelihoods of Australians who lose their jobs and income as a result of COVID-19.

The government anticipates as many as six million Australians could be left without income as a result of COVID-19.

The package comprises a $1500 a fortnight “JobKeeper” payment designed to enable employers to keep employees on through the crisis.

Companies will be paid the wage subsidy in what is an effort to keep employees linked to their employers.

“In addition to the JobKeeper package, we are extending the job seeker payments,” Morrison said.

The government has altered the threshold for JobSeeker payments, so that those with partners earning what was previously above the threshold will now be eligible.

Treasurer Josh Frydenberg02 said: “Australia is facing a war on two fronts. As the Prime Minister said we are facing a health crisis and an economic crisis.”

“Extraordinary times call for extraordinary measures.”

He said the JobKeeper payments represent 70% of the median wage and 100% of the median wage in the industries hardest hit.

Frydenberg said for people on minimum wage in tourism, hospitality and retail the $1500 payment will be 100% of their wage.

Payments will begin on 1 May 2020 and be back paid until March 30.

To be eligible businesses have to register with the Australian Tax Office and be able to prove their revenue has fallen by 30%. The payment will be available for full-time and part-time workers, sole traders and casuals who have been with their employer for a year or more.

“This measure is being delivered through the ATO,” Morrison said.

“This is an absolute guarantee of payment that will assist them in supporting their payrolls... this is a payment per employee.”

Frydenberg responded to a question about whether the government can guarantee that employers will pass on the money to employees by saying that there is an alignment of interests between employees and employers in this case.

When asked whether more could be done to help those in big cities afford rent, Morrison said there is a moratorium on evictions for commercial and residential leases and further rental assistance is being considered.

The UK has instituted a similar system in response to COVID-19. However, Morrison argued the Australian system is different because it keeps employees formally “on the books” of employers.

“This isn’t money for people to go away and do nothing. This is about keeping people connected to their business,” he said.

“It’s about keeping people in jobs.”

Morrison said the payments will apply to New Zealanders on 444 visas and not-for-profits.

Individuals will not be eligible for the job seeker payment through Centrelink and a job keeper payment through their employer. Morrison said part of the purpose of the job keeper payment was take some pressure off Centrelink.

“There is no superannuation guarantee on this payment,” Morrison confirmed.

Frydenberg said employers who have been forced to shut up shop as a result of COVID-19 and have stood down or retrenched workers, could actually bring those workers back on the books with this payment.

However, Morrison clarified that in instances where redundancies have been formalised and redundancy payments paid the issue may be more complicated.

The government is drafting the legislation and plans to recall parliament early. Morrison said the legislation will take at least a week to draft and the opposition will have to be briefed.

“We must work together to make this work and to make it go as far as possible. We still do not know the many challenges we will face in the months ahead. Our goal is to protect the lives and livelihoods of Australians,” Morrison said.

“Many countries in the months ahead and beyond that may see their economies collapse. Some may seem them hollow out. In the very worst of circumstances we could see countries themselves fall into chaos. This will not be Australia.”

The announcement of the new payment was welcomed by many as not only relief for those who have lost their jobs but for small businesses.

The SMSF Association said the JobKeeper payments, coupled with the already announced stimulus package, would be vital for support.

“It not only throws a much-needed lifeline to the many small to medium-sized enterprises that have seen their revenue dry up in recent weeks,” SMSF Association chief executive John Maroney03 said.

“It will help retain links between employers and employees during these dire times that will be essential to ensure business recovers as quickly as possible once COVID-19 is under control,”

The quote

Extraordinary times call for extraordinary measures.

The Australian Small Business and Family Enterprise Ombudsman agreed that the package is a lifeline for those who need it most.

Small businesses that have experienced a decline in turnover of 30% or more will be eligible to register for the $1500 payment on the ATO’s website.

“The job keeper payment will play a critical role in assisting small businesses that have been impacted by the COVID-19 crisis,” ombudsman Kate Carnell said.

“Crucially, it will allow small businesses to continue trading and paying their staff. It will also ensure small businesses stay connected with their staff, who have been stood down, so they can re-engage their team when trading conditions return to normal.

She called the payment “generous” as it is the equivalent of 70% of the median wage.

Carnell also praised the way the government has repositioned the Centrelink JobSeeker payment - formerly known as NewStart - in light of COVID-19.

Sole traders and those with partners earning up to $79,000 are now eligible for JobSeeker payments. Previously, partners had to be earning less than $48,000 in order for an employed person to be eligible for JobSeeker payments.

“The government is taking unprecedented steps to shield small businesses from the devastating impacts of COVID-19 and this JobKeeper package gives the sector the hope that they need,” Carnell said.

“My office will continue to work with the small business community and to advocate for any further measures that will support them during this difficult time.”

Moody’s indicated it had a positive view that this latest stimulus could keep the Australian economy overall in better shape than some.

“The announcement of a third package of fiscal stimulus by the Australian government, which is focused on sustaining employment, should help to partly offset the negative impact of the coronavirus outbreak on growth,” said vice president of Moody’s Investor Services Martin Petch.

Markets reacted not only to the stimulus, but to pre-emptive rumours that a wage subsidy or guarantee could be on the table.

The ASX rose by 7% in the hours before the market closed on Monday, March 30. It was the most the market had rallied in 40 years.

Commentators said the market moved from pricing in a possible recession to believing the $130 billion spend could be enough to save us. fs

12

News

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

01: Simon Doyle

02: Alex Vynokur

head of fixed income Schroders

chief executive BetaShares

Return of the king Eliza Bavin

H

olding cash as part of your portfolio may not be sexy, but in uncertain times investors are rushing back to the old faithful.

In January, Financial Standard published a piece on cash management and all those who held cash also held the same mentality; cash may seem boring, but when the market crashes you’ll be glad you had it.

Now, just a couple months on, and the 10year bull run in equities is over.

So, Financial Standard checked back in with Simon Doyle 01, head of fixed income at Schroders, and Alex Vynokur02 , chief executive at BetaShares, for their updated thoughts now that the market has changed.

“I’ve always found it a bit frustrating when the mentality is that if you’re holding cash you’re not invested,” Doyle said.

“I think it’s only when you’ve got periods like this that when people sit back and wish they did have cash and didn’t own all these other investments that didn’t are seemingly falling apart around them.”

The problem is, Doyle said, a lot of people don’t appreciate cash until it’s too late.

“It’s a bit like home insurance. I think there is an inherent value that is often not appreciated particularly in an environment when the yield on cash was so low,” he said.

“I think these periods can act as a good reminder of the different value and risk of everything in a portfolio.”

As Doyle explained, a cash holding can provide certainty in uncertain times, and actually gives investors more opportunities when those uncertain times arise.

“If you’re uncomfortable holding expensive assets, then as we have seen they don’t stay expensive forever,” he said.

“Those same assets are becoming cheap because prices have fallen. Having that liquidity in these periods can enable you to start re-deploying that cash.”

“It is a very important tool in the generation of long-term wealth.”

A month ago markets were at peak, and that has unravelled very quickly.

Doyle said on the institutional side, many of the larger super funds are switching the cash and more defensive options and as the dust starts to settle, we will start to see more of those strategic decisions being made.

“From an individual investor perspective, the time to hold cash was probably a month or two ago,” Doyle said.

“Now is more the time to start to think about putting that cash to work in the market.”

Doyle said you want to hold cash when risk

in markets is high, and that point was about a month ago because markets were so high.

Now, that they have fallen, and those assets are cheaper, the risk has come down with it.

“Even though volatility is high, the actual risk of owning equities is actually lower than it was a couple of months ago,” Doyle said.

“It’s a shame that it has to come about in this way because you have seen a lot of wealth destruction through this period, but we have been through a ten-year period of markets performing quite well.”

In an environment where markets appear to be priced for perfection, it is important to recognise that a catalyst can come.

“We had no insight into what would cause markets to fall, the catalyst can never be anticipated,” Doyle said.

“We were all focused on trade, or Iran, and it was none of those things in the end. That’s always the way with these things.”

This is exactly why building a solid portfolio is so important.

“We build portfolios because of uncertainty, that means we want equities for growth, bonds for insurance, credit for income and cash for liquidity, certainty and optionality,” Doyle said.

“If we build portfolios based off what has done well the last few years, then that is backwards looking. We want to always be positioned for the uncertainty that might lie ahead.”

Doyle said this lesson has been learnt before, after the GFC, when objective based portfolios came about.

But, 10 years on, after a record winning bull market, some of those lessons had been too readily forgotten.

“As an industry, we really started to adopt these very equity-focused models, and I think that is a very dangerous model to be following because equities don’t always go up, and sometimes they don’t go up for a long time,” Doyle said.

“I think the last 10 years, prior to February, was the exception and not the rule.”

So, will the the ‘COVID-crash’ change the way investment managers construct their portfolios?

According to Doyle, perhaps. But, he said, there is a lot in institutional pressure in Australia coming from policy-makers and regulators, particularly on the superannuation front, to adopt a standardised model.

“There is a push for a portfolio to be built around a strategic asset allocation that is quite rigid and equity dominated,” Doyle sale.

“There is a bit of a ‘pull to peer’, in that those funds that differentiate too much run the risk of underperforming, but they are also the funds that have probably done quite well during this period.”

The quote

It’s a bit like home insurance. I think there is an inherent value that is often not appreciated particularly in an environment when the yield on cash was so low.

For advisers, Doyle thinks there will be more a push coming from clients to make sure the risk balance in portfolios are more aligned with their objectives.

That is not to say, that once this volatility is all said and done, that people should not invest in equities.

“The danger too is that there is a balancing act,” Doyle said.

“What I think has been wrong is the focus on equity-heavy portfolios, but what we don’t want is a completely switch to very defensive portfolios either.”

Vynokur said he has noticed a change in investor behaviour since the volatility began.

“We have seen a mixed response. We’ve seen people taking cash out and buying the dip, so to speak, and vice versa with people who are basically increasing their cash holdings,” Vynokur said.

“They took some risk off the table, basically, early on when the volatility induced by the coronavirus had started creeping into the market.”

By taking funds out of the cash ETF when the volatility began, those investors were able to put the money back into the cheaper equities that were on the table.

Vynokur said the benefit of liquidity allows investors to move with the ebbs and flows of the market, particularly in times when it is so volatile.

“Overall, it is been a story of positive growth when investors have the ability to be competitive during a time like this.”

Vynokur described the arrival of COVID-19 as a ‘black swan’ event, pushing investors to rethink their priorities and approach to trading.

“This has absolutely been a black swan event, which has come out of nowhere,” he said.

“But that, ultimately, is the very reason why a lot of the wiser investors are always trying to keep their powder dry, because you never know what is around the corner.”

The vast number of advisers, Vynokur said, have been very well prepared for something to tip the market over.

“Having said all that, of course, it’s still very difficult for clients to look at their balance and see how far it has declined,” Vynokur said.

“From our perspective it is critical to keep the focus on the big picture, and focus on the long term and not actually getting into panic.

“I think it is very important for investors to be able to step back and focus on the long-term objective of wealth accumulation.”

Will we see a return to more defensive portfolios once the markets have settled? Only time will tell, but it is fair to say that attitudes towards cash have changed about as drastically as the share market since the start of this year. fs

News

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

13

Executive appointments 01: Peter King

Westpac names new chief executive Westpac has confirmed acting chief executive Peter King 01 will take on the role permanently to steer the bank through ongoing uncertainty.

Westpac chair John McFarlane said King has agreed to take on the role for the next two years.

“I believe we need a chief executive in place now, not later, and with full, rather than acting authority,” McFarlane said.

“I have built a strong relationship with Peter since we first met. He understands the bank, its business and its finances, and has the confidence of the management team, as well as my own and that of the board.”

King has worked at the bank for the last 25 years. Westpac will continue its search for a more long-term replacement during King’s tenure.

“We are focused on responding to the COVID19 outbreak and supporting our customers and protecting our people. We have a critical role to play alongside government and our regulators in supporting Australians and New Zealanders and our countries’ financial systems,” King said.

King added that his medium-term priorities remain to drive performance through the bank’s various lines of business, sharper accountability and digital transformation.

In addition, McFarlane said the board and King have decided that all group executive short-term variable rewards are cancelled for 2020 in recognition of collective accountability for the financial crimes that led to the AUSTRAC action last year.

Schroders appoints regional leadership Schroders has promoted from within to appoint leaders for its Asia Pacific operations.

Schroders country head for Australia Chris Durack has been appointed co-head of Asia Pacific, in a move designed to support the firm’s growth in the region.

Durack will retain his position as chief executive of Schroders Australia, and take the regional reins in the second quarter alongside Singapore country head, Susan Soh. Durack and Soh step into the vacancy left behind after the promotion of Lieven Debruyne from chief executive Asia Pacific to global head of distribution earlier this year.

Additionally, the firm has appointed former Pictet Asset Management managing director Noriaki Kurose as country head of the firm’s Japanese office.

Schroders Group chief executive Peter Harrison said the appointments underlined the firm’s commitment to the region.

“Schroders recognises the importance of the Asia Pacific region, which has seen rapid growth and offers continued opportunities for our clients,” Harrison said.

“Our focus on the region is a key part of our ongoing strategy, so it is critical for us to ensure we have best-in-class leadership, ensuring we can meet the needs of new and existing clients.”

VFMC appoints risk chief The Victorian Funds Management Corporation has named its new chief risk officer, following the departure of Bryony Hayes in January.

In a statement to Financial Standard, VFMC chief executive Lisa Gray confirmed acting chief risk officer Lucy Carr02 has been officially appointed to the role on a permanent basis.

Carr took on the role on an interim basis before Hayes left, joining VFMC from Vanguard where she was head of human resources and, previously, head of enterprise risk management.

She has also previously held senior risk roles with AXA, prior to its acquisition

by AMP, and EY. “Lucy has extensive risk and operational management experience across the funds management, insurance, superannuation and consulting/advisory sectors,” Gray said.

“We are delighted for a leader of Lucy’s depth and breadth in financial services to be joining our strong and capable team at VFMC. It adds further impetus to our evolving transformation.”

Hayes exited VFMC earlier this year after close to seven years in the role.

She has since been appointed chief risk officer at TelstraSuper, taking on the role in February.

Debruyne said he was “pleased” to hand leadership of the region to Durack and Soh. “With their combined wealth of industry and client engagement experience, our strong performing business across Asia Pacific is well positioned for the next stage of growth,” Debruyne said.

Separately, the firm has been preparing to bring a private equity fund to Australia later this year, with plans afoot to use a fund-of-fund structure to invest in externally-managed private equity funds.

The offering sits under the Schroder Adveq brand, which manages about $15 billion globally in primary, secondary and co-investments in the private markets.

ClearView appoints head of advice A former Westpac operations manager has been appointed to lead the financial advice capabilities of the listed wealth manager.

ClearView has confirmed its appointment of Nick Howell as the firm’s new head of advice.

“Nick’s appointment is part of our strong ongoing commitment to our practices and quality financial advice,” ClearView Financial Advice and Matrix Planning Solutions chief executive Allison Dummett told Financial Standard.

“Professional compliance and advice support is more important than ever and, as a licensee that is growing, we will continue to build our resources and expertise.”

Most recently advice review operations manager at Westpac, Howell previously spent more than three years at the bank’s wealth management arm, BT Financial Group, where he was a compliance and assurance manager and financial adviser team lead.

Earlier, he spent more than eight years at Westpac and St George across various roles, including two years as an advanced financial planner, having kicked off his career as a planner Empire Financial Planning in 2010.

Howell’s appointment wraps up a month of significant change at ClearView.

In late March it was rated for the first time ever by credit rating issuer Fitch, picking up a long-term issuer default rating of BBB alongside a stable outlook.

According to Fitch, both ClearView Wealth and the firm’s operating subsidiary ClearView Life Assurance are stable, with the life assurance arm also receiving a BBB long-term IDR, in addition to an insurer financial strength rating of BBB+.

Just days prior, it awarded a $1 billion platform mandate to HUB24, as it transitions away from its own platform.

The deal will see ClearView migrate $1 billion from its WealthSolutions platform to HUB24, however the firm will not close the offering. It will transition to HUB24, rather than operate a fullyoutsourced CV-issued platform.

As part of the deal, ClearView’s primary

02: Lucy Carr

superannuation life insurance portfolio will be transferred to the HUB24 Super Fund, though the portfolio will continue to be administered by ClearView.

In March ClearView overhauled the pricing of its LifeSolutions stepped and hybrid income protection products, in a move designed to help it battle what it dubbed “extremely difficult market conditions”.

Facing higher expected income protection claims costs, “substantial” reinsurance cost increases and the full impact of the most recent reduction in interest rates, ClearView managing director Simon Swanson said the firm will adjust premium rates ahead of an expected “wave” of changes across the life industry over the next six months.

Former Link FS COO in new role The former chief operating officer for Link Fund Solutions has a new role in client relationship management.

Justin Christopher was chief operating officer at Link Fund Solutions for just under two years, leaving the role in November 2019.

Now, he has a new position with Calastone.

Christopher stepped into the role of director, client relationship management for Australia and New Zealand in March.

“I am excited to be joining Calastone at such a pivotal time when the need for automaton and straight through processing is key to organisations,” Christopher said.

“I look forward to working with the exceptional team in Australia and building upon the relationships, products and industry leading services for the benefits of our clients and broader industry.”

Prior to his role at Link, Christopher was managing director, custody services at One Investment Group and head of clearing, custody services and product for BNP Paribas Securities Services Australia and New Zealand.

Calastone chief executive Julien Hammerson recently provided a business update in light of COVID-19, saying that the company had moved to remote working from March 16.

“In a further effort to support the international efforts to ‘flatten the curve’ I have asked our client facing teams to manage all client interaction through digital channels, through which I am confident we can continue to provide the support and high service levels that you have come to expect from us,” Hammerson said.

Separately, Link Group recently conducted the first virtual shareholder meeting as part of its response to COVID-19.

“As governments and businesses respond to the COVID-19 to ensure the health and safety of its people, it is clear that digital meeting technology is now more crucial than ever before.

It is an essential tool for business continuity,” Link Group corporate markets co-chief executive Lysa McKenna said. fs

14

Feature | Life insurance

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

THE WILD RIDE Three months ago, the life insurance industry was prepping itself for a raft of upcoming regulatory reforms intended to reset the market. Then COVID-19 hit. Eliza Bavin and David Thornton write.

Life insurance | Feature

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

T

he state of the nation’s life insurance industry is concerning.

Prior to the outbreak of COVID-19 insurers were already struggling to keep costs down as tighter regulation pushed them up.

Consumers were tired of rising premiums but there is little that could be done to avoid it.

“It’s clear this is not sustainable for anyone – insurers are making losses from these products and consumers are paying considerably more,” TAL chief executive Brett Clark01 says.

In a clear example of this, earlier this year ClearView was forced to revise its pricing across its Life Solutions stepped and hybrid income protection products, as the insurer battled to remain profitable in “extremely difficult market conditions”.

“We want to see the industry return to profitability as quickly as possible and our focus is on long-term sustainability,” ClearView chief executive Simon Swanson02 said at the time.

“We made a number of changes to our LifeSolutions product series including revised pricing and the removal of Agreed Value benefit types for new business.”

Swanson says ClearView is well positioned to respond despite the extreme regulatory pressures casting a cloud over the industry however, he does admit righter regulation has had a significant impact on the industry, and not just for insurers.

“What the reforms have done has made life insurance and risk advice capital intensive for an adviser,” Swanson says.

“There is a debate in the industry about how best interest duty is defined. Is it defined as the first-year premium or as a five to 10-year premium?”

Swanson believes a lot of financial advisers are not pleased when insurers offer discounts on first year cover because it discounts the commission they receive.

“Then you’re exposing an adviser to a clawback in year two when the premium potentially rises 50%,” he says.

“That’s not a good position for anyone to be in.”

One of the biggest issues, PPS Mutual chief executive Michael Pillemer03 says, is that the

01: Brett Clark

02: Simon Swanson

03: Michael Pillemer

chief executive TAL

chief executive ClearView

chief executive PPS Mutual

benefit payments to claimants is out of whack with their actual earnings.

“I think a lot of insurers have been out there chasing market share, and because of that a lot of things have slipped,” he says.

Pillemer says the large number of major insurers offering upfront premium discounts is something which inevitably leads to a high member turnover rate.

“When you do that, offer discounts for new business, you are disadvantaging your existing members,” Pillemer explains.

“There is no reason why an existing member should have a premium that is higher than a new member under the exact same circumstances.”

MLC’s chief of group and retail partners Sean McCormack04 admits insurers have been quite focused on top line results.

“The two biggest factors that determine adviser insurer selection are price and the comprehensiveness of cover, which has led insurers to add additional benefits to products,” he says.

This is not something that popped up over the last year or so, but rather a phenomenon that has taken place in the Australian insurance market over the last decade.

“It has now reached the point where obviously the regulator had to intervene,” McCormack says.

And intervene it did.

“In a drive for market share, life companies have been keeping premiums at unsustainably low levels, and designing policies with excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work,” APRA board member Geoff Summerhayes said in December.

For consumers, the costs of policies have been deceptively attractive, with deep first and second year ‘honeymoon’ discounts.

The discounts come off, and they’re joined by aged-based increases, inflation-linked increases, and general premium increases as the industry attempts to cover its losses.

And it doesn’t end there, with a string of further regulatory changes on the cards.

The Financial Accountability Regime (FAR) will require companies to nominate ‘accountable persons’ for all their business functions and map their responsibilities.

It’s clear this is not sustainable for anyone – insurers are making losses from these products and consumers are paying considerably more.

Brett Clark

15

The FAR will also introduce new obligations for companies and accountable persons, like the obligation to cooperate with the regulators.

Regulation of claims handling will bring a new focus to claims, like the obligation to conduct the service ‘efficiently, honestly and fairly’ and have adequate training in place for claims managers.

“This could be a positive for the industry,” MetLife chief executive Richard Nunn05 says.

“Our claims managers are critical to our business so it’s important that we have great training and professional development for them.”

MetLife, Nunn says, is well-advanced on this with its claims academy program, which includes self-directed modules ranging from insurance basics to sophisticated medical concepts.

But it is the review of life insurance commissions next year and the extra pressure that will put on advisers, that is at the forefront for many industry professionals.

“It’s really important that as an industry we start to talk about the value of advice and the value of life insurance to make sure that the outcome of this review is that consumers have the choice on how they want to pay for advice,” Nunn says.

Donna Lee Powell06 , adviser at DLP Life Design, says the additional challenges that have been placed on financial advisers in recent times have been overwhelming, to say the least.

“I appreciate why these additional measures have been put in place and agree that our profession needed change,” she says.

“However, in my opinion, these reforms and additional pressures do not benefit my clients as I have always provided quality and ethical advice.

“They have just driven up the prices I charge and slowed down our ability to get client work completed.”

Powell says her biggest concern with LIF is that the general public does not appreciate the value of insurance and what advisers provide until it’s sometimes too late.

“Seeing both outcomes with clients can be quite difficult, having insurance can really change someone’s life,” Powell says.

“With LIF, we will see less cover for Australian’s which in turn is only going to put more financial pressure on the government, and let’s

Supporting advisers and their clients through uncertain times.

Information is general only and does not take into account your personal situation, needs or objectives. Before deciding whether to acquire, or continuing to hold, any of our products, please read the PDS available at metlife.com.au. Life insurance products are issued by MetLife Insurance Limited ABN 75 004 274 882 AFSL 238096.

16

Feature | Life insurance

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

04: Sean McCormack

05: Richard Nunn

06: Donna Lee Powell

chief of group and retail partners MLC

chief executive MetLife

financial adviser DLP Life Design

face it, that’s the last thing they need right now.”

Australian consumers also suffer from a lack of engagement.

A recent report commissioned by ASFA and the FSC found that not only has disengagement with super been a longstanding issue, there is even less awareness of insurance within super.

The report found that only 23% of people knew exactly what life insurance cover they have through their super, 21% knew they had cover but were unaware of the details, 33% knew that weren’t covered and 23% were unsure.

These statistics are concerning, but not a shock to those in the industry.

Powell believes Australians in general are under-insured.

“So often I see that until someone is in a position to claim or have experienced someone close to them die, or become sick or injured, they do not value insurance,” Powell says.

“Maybe it’s the mentality of ‘it will never happen to me’.”

It’s this that demonstrates there is a clear role for insurance in super and without this vital safety net of cover, the quality and lifestyle of many Australians and their dependents would be compromised in the event of sickness, injury or death.

However, there is opportunity to improve the current system and actions that trustees with their insurers can implement now.

“The future of default insurance in super needs to change to meet the rapidly changing regulatory environment, provide better member outcomes and keep pace with member expectations,” AIA Australia says.

“There are clear opportunities to reset the default insurance benefit design to be appropriate for a broader reach of the membership and ensure insurance in super remains fit for purpose, especially for the most disengaged of members.”

This may be some way off though as the benefits (or disadvantages) of the recent Protecting Your Super and Putting Members’ Interests First reforms - which have also seen members incur significant premium hikes, some as much as 60% - are still yet to be seen.

The future is straightforward With a concoction of complex issues stemming from a prolonged period without change, the solution is actually quite simple.

“We should just charge the right premium to make the products sustainable. That’s how it should be, and the actual terms are there,” Swanson says.

“We have lost the principle of insurable interest; which is to be able to put a person back in the position they were in before the incident happened, and that is a fairly straightforward principle, I think.”

David Spiteri07, life insurance specialist at Centrepoint Alliance, agrees that change will first come to the products on offer.

“I can see insurers designing products with

very minimal benefits and features as to what we currently have today,” he says.

“They will be very basic however the client will have the opportunity to build their policy with additional features and benefits as an option.”

An example of this, Spiteri explains, could be an income protection policy with the standard definition of disability that is required by APRA. An optional benefit may be available to expand the standard definition to the current three-tiered definition that most retail insurers currently have.

“This would reduce premiums significantly and clients will only pay for benefits and features that they want added,” Spiteri says.

The trouble is, Swanson says, advisers are the ones who will get smashed.

“What’s going to happen is premium rates will go up, advisers get hit and they will have to shop around again,” Swanson explains.

When super funds started, most were occupation-based, but as times have changed and people change professions more readily, that is no longer the case.

“It’s hard to design a life insurance product that can apply to the whole country,” Swanson says.

“So, this portability of career, if you can call it that, means group life insurance has sort of lost its soul in a sense.”

As the revamp of the system hits advisers all at once, it can cause teething issues but, Swanson says, it’s important for the industry to go back to its roots.

“Everything was happening at the same time, it’s like a perfect storm,” he says.

“But we have to get back to the essence of insurance.

“Regulatory intervention is appropriate, and it is incumbent upon the industry to move quickly, otherwise we risk having a strike of capital.”

Companies have lost money and shareholders are dissatisfied so, Swanson says, it is time for action.

“We get to clean the industry up, return to sustainability of products.”

“The point is, in the APRA intervention people will have to redesign their products and I don’t think everyone has really got their head around that yet and the consequences of that.”

There is a generational seismic shift occurring, according to McCormack, in the way advisers need to act at the same time as adhering to many new regulations.

“Advisers are under a lot of pressure at the moment; their costs are increasing as compliance demands are going up and their margins are reducing,” McCormack explains.

“We are absolutely in support of the LIF reforms. We just have to be really careful, because we don’t want a reduction in the supply of advice that is so significant it worsens under-insurance in this country.”

There is an important system in operation, in that the provision of good insurance advice

We have lost the principle of insurable interest; which is to be able to put a person back in the position they were in before the incident happened.

Simon Swanson

protects Australians and can offset those costs being felt elsewhere.

“This change doesn’t have to happen in isolation,” McCormack says.

“There are consequences to the reduced supply of insurance advice which needs to be debated and discussed. If it is not commissioned, then advisers will charge a fee and I am not convinced consumers would embrace that model.”

The key thing, he says, is to ensure the system is as efficient as possible.

Having a streamlined system will help everybody and reduce complexity for everyone involved.

“When an adviser prepares their advice, submits their application to us, or for an existing client amend the policy, that process has to be quick and easy and it has to be digitally enabled,” McCormack says.

“I think the regulator has been very clear in terms of expectations. Life insurers and boards need to form a view as to what’s appropriate.”

Sometimes, the first step can always be the hardest, particularly in a system that has been stagnate for some time.

“I think the first mover disadvantage is real, but I welcome APRA’s move into the market,” McCormack says.

“It means that all life insurers are on a level playing field when it comes to dealing with the issues. So, we are very supportive of what the regulator has done.”

However, the role of the adviser in the provision of good life insurance advice is still vital to the community, McCormack believes.

While advice has had its challenges over the last few years, and there’s been a series of measures put in place, without it Australians will only get life insurance one of two ways.

“They’ll be defaulted into it through their employer arrangements with superannuation or they’ll be confronted with their own mortality by an adviser who can lead them to take cover,” McCormack says.

A changing regulatory environment can bring hardship for some advisers and opportunities for others, Spiteri believes.

“The innovative advisers have implemented additional service offerings for clients which has created diversification of their income stream,” he says.

“From what I have seen many “pure” risk advisers have implemented a claims management service whereby the newly introduced service will handle, manage, and monitor a claim from start to finish.

“Of course, advisers already do this for their existing clients but now the service has been extended to the general public.”

Integrity Life chief underwriter Scott Hodgson08 says advisers are a central pillar for their design process and key to seeing change in the industry.

Our mantra for this is ‘listen, learn, act’,” Hodgson says.

MetLife Protect, a smart solution for your clients.

MetLife Protect enables you to tailor cover to protect what truly matters for your clients. It helps you work with your clients to build different options that suit their specific goals and objectives.

To find out why MetLife Protect is a smart solution, contact your local MetLife BDM or visit metlife.com.au/advisers.

Information is general only and does not take into account your personal situation, needs or objectives. Before deciding whether to acquire, or continuing to hold, any of our products, please read the PDS available at metlife.com.au. Life insurance products are issued by MetLife Insurance Limited ABN 75 004 274 882 AFSL 238096.

18

Feature | Life insurance

“In addition, we do rigorous customer research with policyholders as well as their family and friends.

“There are very few changes we make, or products we develop, or process we implement that hasn’t been pressure tested by advisers and clients alike.”

By ensuring efficiencies in the process, especially around applications, pre-assessment and quoting, Integrity Life intends to maintain sustainable pricing.

“Going forward, policy changes should be as simple as internet banking has become,” Hodgson says.

“The use of underwriting engines is widespread but not yet fully optimised, and the need to engage with the medical profession to obtain information is a major bottleneck.

“We’re fortunate to have some great technology, but the whole industry has a way to go on this front.”

Hodgson believes life insurance needs to return to its roots and concentrate on being the ‘glue of commerce’.

This, he says, is the only way the industry will be able to stay not only relevant, but successful.

“If Australians can take risks to start businesses, work and achieve - all the while with the life insurance industry providing that safety net and backstop – then we will be fulfilling our social purpose,” Hodgson says.

“Claims are the fulfilment of our promise to policyholders, and they must be set up for success by the establishment of long term, sustainable and appropriate contracts, and by the provision of advice to do so.”

Technology is a massive factor for all the big players to work more closely with advisers and customers, and it is set to bring them into the 21st century.

MetLife says it has been leveraging technology to improve the customer experience for some time now.

“We’ve used digital to significantly improve the application journey and we’ve digitised our applications process, which makes it much more efficient,” Nunn says.

“We’ve streamlined questions so that we only ask those that are relevant for the individual customer, which can’t be done with paper-based applications.”

Nunn says MetLife has also used robots to help automate certain repeatable processes that don’t need the human touch, such as routing incoming emails.

“This is freeing up our people to focus on customer focused work that needs a personal approach like claims assessing,” he explains.

“Everything is also now designed around the needs of customer, and everything is enabled for people to have greater mobility, the new ‘norm’ is that everything is accessible anytime, anywhere.”

Improved technology and its integration into the life insurance market is still only one aspect,

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

07: David Spiteri

08: Scott Hodgson

life insurance specialist Centrepoint Alliance

chief underwriter, Integrity Life

with Nunn still putting the emphasis on advice.

“Since the beginning, we’ve worked closely with advisers to first build our retail proposition, MetLife Protect, and have continued to partner with them to optimise our product to serve client needs,” he says.

Nunn says that while the industry is facing headwinds and ongoing change, MetLife is well placed to respond to evolving customer needs and deliver a sustainable and valuable service.

“I believe that life insurance will continue to evolve to meet consumer’s needs,” he says.

“A one size fits all model won’t work, and with greater consumer engagement, there are interesting times ahead.

“Overlay this with the ongoing regulatory change, and the industry will look quite different in just a few years’ time.”

Despite the challenges, the industry has been ready and willing to adapt in the face of regulatory change and things were all on track to do so.

Then the crisis came COVID-19 has caused dramatic change in every country, every sector and for every person, and as the virus spreads people are flooding to insurers.

“Now more than ever, our purpose is to support our customers to secure their financial future and this is guiding us through these difficult times,” Nunn says.

“We are an important safety net for people, and we are particularly reminded of this right now. Of course, the health and safety of our people and our customers is our priority.

“There is no question that these are difficult times, and I’ve been really encouraged to see our people stepping up to look after each other and our customers.”

The industry must ensure it remains fully operational so it can efficiently service the needs of policyholders and business partners while prioritising the health and safety of its people, Swanson says.

“It must continue to effectively manage and pay claims and, importantly, find ways to help people maintain cover,” he says.

“The coronavirus threat is not only a health crisis, it is an economic crisis.”

Swanson says that during these uncertain times, unfortunately, lapse rates will increase, and insurers need to provide the same type of support they offered during the bushfires and floods, earlier in the year.

“It is going to be a difficult year for every industry. Even before the economic challenges and disruption caused by coronavirus, the life insurance industry was grappling with income protection losses, heightened lapse rates and subdued new business,” he says.

As with any crisis, Swanson says, there are opportunities to better support customers, advisers and staff, strengthen relationships, and come together.

As an adviser, Powell says, it has been a heart-

I think we have seen, from COVID-19, that it has heightened people’s consciousness around insurance and has forced people to better understand their cover.

Michael Pillemer

breaking time, but people are less concerned about their portfolio performance than one might think.

“It’s more around their businesses being shut down or the sadness around a lot of my single widows and women who are in isolation alone and often have just lost their jobs,” she explains.

“We are getting a number of calls from new clients wanting insurance however, I am fearful that people are also seeking life cover through the direct channels without truly understanding what they are buying and how the cover works.”

Pillemer from PPS Mutual agrees that there has been an uptick in interest around insurance since the pandemic broke out.

He says the heightened concern and interest is a positive in bringing attention to the importance of proper life insurance, but people still need to seek out good advice.

“I think we have seen, from COVID-19, that it has heightened people’s consciousness around insurance and has forced people to better understand their cover,” he says.

“This has, in a way, brought home the importance of insurance. We are seeing a lot more interest from people who might have been sitting on the fence.”

Centrepoint’s Spiteri says he has seen the rush to advice about life insurance, but not for the same reasons.

“There is a greater interest in life insurance by consumers, however I feel it may be for the wrong reasons,” he says.

“Over the past few weeks since the outbreak we have seen many clients lose their job in which firstly causes health insurance policies to be the first expense that clients tend to cancel followed by life insurance.”

Spiteri says many advisers are now fielding calls from their clients either wanting to cancel or reduce their policies due to affordability.

“In saying this many existing clients are double checking their life insurance policies to ensure that they are covered for the coronavirus pandemic.

“Thankfully all insurers got on the front foot to communicate to clients and advisers that they are covered.”

For the time being, while the crisis continues, ASIC and APRA have reprioritised their goals, pushing many regulatory reviews back to focus attention on COVID-19.

This has given insurers, advisers and customers alike some more time to deal with the impacts of the crisis and prepare for the regulatory changes.

While there is plenty to be concerned about, seeing our major institutions like the banks, super funds and insurers, stepping up to the plate to do all they can is a small silver lining in otherwise dark days. fs Editor’s note: Please be aware that some of the interviews used in this article were conducted prior to the outbreak of COVID-19.

Supporting advisers and their clients through uncertain times.

At MetLife, we believe it is our role to support advisers and their clients with the assistance they need at this time.

To find out how MetLife can help you and your clients face today’s challenges, call your local MetLife BDM, or visit metlife.com.au.

Information is general only and does not take into account your personal situation, needs or objectives. Before deciding whether to acquire, or continuing to hold, any of our products, please read the PDS available at metlife.com.au. Life insurance products are issued by MetLife Insurance Limited ABN 75 004 274 882 AFSL 238096.

20

News

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

01: Jason Teh

02: Julia Lee

chief investment officer Vertium Asset Management

chief investment officer Burman Invest

No time to look back Eliza Bavin

I

n rough times it can seem beneficial to look back at past experiences and think ‘If I got through that, I can get through this’, but if you ask the fund managers and traders of the world, the consensus is this time does not compare to 1987 or 2008.

Those dealing with the daily grind of stock markets have seen and experienced the highest of highs, and conversely, the lowest of lows.

From the 1987 stock market crash to the 2008 Global Financial Crisis, what is so different about this situation that has investors so spooked?

The main consensus; the COVID-19 outbreak is not something that anyone could have anticipated.

Speaking to Financial Standard Jason Teh01, chief investment officer at Vertium Asset Management said the coronavirus outbreak is very different from anything we have seen in markets before.

“The crash in 1987 was because the bubble popped. The markets were so high, inflation was rising; it wasn’t sustainable,” Teh said.

“The GFC is slightly more similar to what we are seeing with COVID-19, because it will likely amount to a global recession.”

However, that is where the similarities end between the coronavirus and the GFC, he said.

“The GFC was ultimately caused by the US government refusing to bail-out the Lehman Brothers. After they did that it became apparent how much of a stake it had in all the banks, so the knock on effects was the cause of the crisis,” Teh said.

Part of the exaggerated reaction to this crash is because of the shock value, he added.

“The world snapped. It’s similar to world wars in a way, because no one can really pinpoint the exact moment a world war starts, but once it is declared the markets also react with volatility,” he said.

“Every asset class, across the board is reacting to the upcoming slowdown as a result of this ‘social distancing’; the market is trying to figure out the real risk.”

In the past there were signs that something bad was coming, so traders had months to change their investment view.

The outbreak of an unknown pandemic could not be anticipated.

Ilya Spivak, Daily FX head strategist for APAC said part of the worry is that the global economy was only just starting to show signs of recovery post-GFC. “What we have now is intense worry about a global credit crisis and recession after the coronavirus outbreak struck an economy already weakened by two years of trade war and an aggressive Fed rate hike cycle,” Spivak said.

The quote

Assuming the collateral damage from the shutdowns is limited by government action, growth should rebound once the virus comes under control and so too should share markets.

“If the slowdown punctures any bubbles built up through the ultra-accommodative post-GFC period, a credit crisis may ensue. That probably explains markets’ rush for liquidity in spite of central banks’ latest firefighting efforts.”

Spivak said looking to the past can be helpful, particularly if you focus on the direction of the US dollar through previous crisis.

“In 1987, rates were going up and so it made sense that USD was rallying on fairly conventional grounds,” he said.

“That it would soar in 2008, even as the Fed was cutting rates to 0% and launching QE was perhaps less obvious to many market participants, and highlighted the Greenback’s role as a ‘liquidity haven’.”

“We are seeing something very similar in the current situation; USD has been rising through the deterioration in Fed policy bets since late 2018 and ultimately renewed rate cuts from mid-2019.”

Larry Shover, chief investment officer at Efficient Advisors based in the US, said there are ways in which the crash of ’87 and that of 2020 are similar.

Shover said they both happened very quickly and so far, have really only wiped out gains from the previous year.

“It is important to note, however, that the crash of 1987 was largely driven by trading mechanics, and not by any actual economic recession,” he said.

Back in 1987 the market was dealing with a frothy performance, but the interest rate environment was vastly different than today, Shover said.

“The change between then and now on the regulation side is that we now have tight trading curbs that prevent a free-fall of that magnitude from happening as rapidly,” he said.

“Unlike 1987, 2000, or 2020, the crash of 2008 actually happened well into a US recession, and months after the collapse of two Bear Stearns hedge funds & Lehman Brothers that signalled the start of the GFC.” Henry Jennings, senior market analyst at Marcus Today, said the biggest difference between the GFC and today is back then no one knew who to trust.

“The balance sheets of US banks were hidden and toxic; it was the banks that had a virus and it was hard to know who had it so they just stopped doing business until the virus passed,” Jennings said.

“The solution was flood the banks with liquidity and money to bail them out and ensure that everyone knew who had the disease and how insulated they were from it.”

What we are facing now, Jennings said, is a health virus and so requires that cool heads to prevail.

“The stock market jumping around is a distraction from the main game of stopping the

spread and getting people confident,” he said.

“Unfortunately, this crisis is showing the worst effects of globalisation and the US health system and it will be a disaster in the US.” Traders, Jennings said, are hardwired into looking to buy dips which are the cause of much of this volatility.

“I had no money to invest in the market, so it hurt less personally, this time I am 33 years older and have far more skin in the game. Lucky I love my job, as it looks like I will be working longer,” he said.

As Julia Lee 02 , chief investment officer at Burman Invest, pointed out, March 2020 has been the worst month so far for the Australian share market since the 1987 crash.

“Back in October 1987, the All Ords lost 42%. The market bottomed out months later on 10 February 1989,” Lee said.

“In 1987 there was little signs of volatility until the Black Monday fall.

“It was not uncommon to see moves of 5% either up or down after such an event, but in 1988 after a month moves normalised even though market kept creeping lower until 10 February 1989.”

This time may prove to be quite different, as there are currently no signs the market is set to steady. However, Shane Oliver, AMP Capital’s chief economist said the crash we are currently experiencing is not just due to COVID-19.

Over-valuation in the market has played a part.

“The 1987 crash was basically an unwinding of a massive run up in the market that had led to overvaluation against the world of higher interest rates and bond yields at the time,” Oliver said.

“The selling looks to have been triggered by a monetary tightening in the US but was accelerated as market falls triggered more falls as a result of so-called portfolio insurance at the time.”

Oliver said the 1987 crash had no economic fallout at the time, with growth continuing in the US and Australia at a solid pace.

So, once the falls ended the market just started to grind back up again.

“The ‘coronavirus crash’, if you call it that, is a bit different because coronavirus threatens a big disruption to economic activity which is clearly very hard for investors to price in how deep and long the recession will be,” Oliver said.

“But, assuming the collateral damage from the shutdowns is limited by government action, growth should rebound once the virus comes under control and so too should share markets.

So, in this sense it may be similar.”

Oliver believes what the world is facing now is a cross between 1987, the GFC and perhaps even the events of 9/11.

What we do know is that market crashes are inevitable; it is just when they will occur that we don’t. fs

Products

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

21

Products 01: Jacob Mitchell

Lonsec recommends PCFM fund Lonsec has upgraded its rating of a flagship Premium China Funds Management offering, recognising the firm’s heritage in Chinese equities.

The firm’s Premium Asia Fund has been handed a recommended rating by the research house, who said it took a “positive view” of PCFM’s “long heritage as a Chinese equity specialist”.

“Portfolio manager Renee Hung is considered to be an experienced Asian equity investor, who has established a pleasing track record in managing the fund over an extended period,” Lonsec pointed out.

“Additionally, Lonsec has gained a greater appreciation for the investment process which encourages idea sharing and accountability.”

Premium China Funds Management executive director and chief investment specialist, Jonathan Wu said the firm was pleased with the result, and took it as a reward for its performance in the sector, including its current performance amid the impact of the COVID-19 crisis.

Funds with a focus on Chinese equities are actually well positioned currently, according to Antipodes Partners chief investment officer Jacob Mitchell 01.

Mitchell recently told Financial Standard that Asian and Chinese equities have been relative outperformers during the current period of volatility, arguably because China’s response included a relatively quick shutdown, which could lead the nation to a quicker recovery.

“It’s also starting to warm up. It’s going to take a while before that makes a difference to the spread of the virus, but it seems like most of the science indicates that given the common child is a coronavirus, these things are less likely to spread in a warmer environment,” he said.

Vanguard launches simplified platform Vanguard launched a new investment platform designed to simplify the investing experience and provide low-cost access to the firm’s most popular products.

The global funds management giant’s new Vanguard Personal Investor offering will allow Australians to invest in the firm’s Australian-listed ETFs brokerage free, in a move Vanguard said is aligned to its “ongoing commitment” to lower the cost of investing.

The platform will charge investors 0.2% of their total account balance annually, up to a maximum of $600.

The “simple and straightforward” offer is being delivered alongside a new website, which provides investors with access to a “wide range” of managed funds and ETFs, Australian shares, and an integrated cash account.

Vanguard Australia managing director Frank Kolimago 02 said the new website and offer represents an “important step” toward provision a range of investment products and services direct to local investors.

“For more than 20 years Vanguard has helped

VanEck rejigs China A-shares ETF VanEck Australia is changing the index of China A-shares ETF and, as a result, will stop investing via its NYSE-listed counterpart.

The VanEck Vectors China CSI 300 ETF (CETF) currently tracks CSI 300 index which covers the 300 largest and most liquid stocks on China A-shares market.

The Australian fund is a feeder fund that invests in a NYSE-listed VanEck fund (PEK); both were the first A-shares funds in their respective markets.

On February 26, the board of the NYSE-listed fund decided to change the reference index by May this year. They opted for an index from MarketGrader.

But VanEck’s Australian team opted for an index from FTSE, which tracks the 50 largest companies by full market capitalisation in the mainland Chinese market.

“VanEck in Australia has determined CETF should maintain a broad exposure.

To do this CETF will cease investing in the United States fund and will instead directly hold a portfolio of China A-shares but the fund will incur one-off costs to reconstitute its holdings.

These will be borne by the fund,” VanEck managing director and head of Asia Pacific Arian Neiron said in a letter to investors.

The changes come into effect on April 23. .

Australians work toward their financial goals, but we recognise that we could make investing with us a more seamless experience,” Kolimago said.

“Both the new website and Vanguard personal investor offer are important steps forward in helping investors attain better outcomes in meeting their financial goals.”

Kolimago said that while the firm is launching the new offer during a time when market volatility is high, he is confident the challenge will pass.

“And Personal Investor will help long term investors to be well positioned to benefit when it does,” he said.

Australian shares will be accessible through the platform for $19.95 of 0.15% per trade whichever is greater.

The offer’s roll out will be phased, with SMSF account access set to be introduced at a later date, as well as the ability for financial advisers and their clients to access the platform. Eventually, the firm will add international shares to the brokerage service, and holds long-term plans to develop a superannuation offer.

“The Personal Investor offer caters for investors looking to access Vanguard’s broad range of products directly,” Kolimago said.

“We will continue to work closely with financial advisers to support their clients on their investment journeys.”

Both current and new Vanguard investors are eligible to open an account.

“Some people procrastinate about starting on the investing journey because they are daunted by the often-complicated process of investing,” Kolimago said.

“The delivery of our first-class digital experience is a step towards demystifying the investment process.”

Kolimago described the platform as “intuitive and uncomplicated”, and said it takes just minutes to register and invest in the firm’s popular products.

Lonsec, BTFG partner Lonsec has partnered with BTFG to make its listed and retirement managed portfolios available on BT Panorama.

Lonsec said BT Panorama users will now have access to all three of Lonsec’s managed portfolios, with the multi-asset managed portfolios already available on the platform.

Lonsec chief investment officer Lukasz de Pourbaix said he is pleased with the partnership, especially given the current volatile market conditions.

“This has been the most challenging market we’ve seen in a generation,” Pourbaix said.

“For financial advisers and their clients, it really emphasises the need for professionally managed investment solutions that can manage risks and take advantage of opportunities as they arise.”

Lonsec said the listed managed portfolios provide investors with capital growth and income by investing in exchange-traded securities and individual stocks across a range of asset classes.

02: Frank Kolimago

The retirement managed portfolios are objectives-based and focused on delivering an attractive and sustainable level of income.

Lonsec said its multi-asset portfolios are designed for investors seeking a diversified portfolio aimed at generating growth.

They invest across a diversified range of Australian equities, global equities, property, infrastructure, fixed interest, and alternatives.

Cash account to shutter A cash management account distributed by Colonial First State and issued by Bankwest is set to terminate effective June.

The BWA Cash Management Account offered a variable rate of 0.40% per year, and acted as a central account for a usually advised client to manage their investment-related cashflow.

Users could receive their salary, interest payments, dividends, distributions, share sale proceeds or rent from an investment property into the account.

The product is set to terminate on June 30, after a review by CFS and Bankwest.

A CFS spokesperson said the decision was taken in 2019, as CFS prepared to separate from CBA, and is unrelated to the current market environment.

Clients have been advised to nominate alternative cash management accounts, or other means to withdraw their funds by May 15.

Accounts will be closed around May 29.

CFS and Bankwest are reminding clients to expect longer-than-usual withdrawal periods, and to reset their automated transactions.

The product was offered by BWA Managed Investments (BWAMI), which is a specialist cash management business.

BWAMI’s other product, the BWA cash management trust was terminated June last year, after being in operation for about 14 years.

It had about $170 million at June 2018 end.

It charged 60bps in annual management fees, which was paid to CFS as the responsible entity.

A report from Macquarie (which also offers a cash management product) published earlier this month said that 93% of advisers recognise the value of cash management services, but just 50% are able to offer those services to their clients.

Despite the demand, cash management accounts have had a tough time over the last two years, as the central bank cut the official cash rate five times since January 2019.

In March Netwealth and HUB24 cut their cash rates to zero following the Reserve Bank’s rate cut to 0.50%.

At the next rate cut, the two platforms stayed on hold instead of pushing cash management account rates to the negative territory.

At the same time, banks are lifting term deposit rates. Commonwealth Bank has lifted its 12-month TD rate by 60bps to 1.7% and a further 25 banks followed suit, including Westpac and NAB. The highest rate comes from Judo Bank at 2.15% for five years. fs

22

Roundtable| Emerging markets Featurette

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

The impact of COVID-19 on emerging markets Emerging markets, which in recent times were on the tip of every investor’s tongue and making somewhat of a comeback, are now cowering in the shadow of the rapidly spreading coronavirus. Ally Selby looks at the challenges and opportunities presented by the pandemic.

As the world falls into a recession, COVID-19 will have a disproportionate impact on emerging markets, with investors rushing to sell down their riskier, offshore assets and safeguard their wealth amid plunging global markets.

The MSCI Emerging Markets Index ended 2019 up 18.4%. So far in the COVID-19 sell-off the benchmark has fallen as much as 30%.

Yet, in its latest equities report, Morningstar found that the Asian and emerging market bourses had performed surprisingly better than their developed counterparts during the COVID19 sell off.

“In broad terms, Asia and emerging markets strategies have fared better than more diversified global equities portfolios, driven by the underperformance of the US and European share markets,” Morningstar said.

“It is noteworthy that the best performers over the period have been strategies which lagged the strong bull-run in 2019.”

This is likely due to the fact that China makes

up slightly more than one third of the emerging markets benchmark, which has only fallen 11.9% during the COVID-19 sell-off.

That’s compared to the blows suffered by the Aussie benchmark (-36.5%), the MSCI World benchmark (-33.3%) the S&P 500 (-33.4%), and the Dow (-35.9%).

These dramatic falls, accompanied by nauseainducing swings of volatility, have most investors feeling palpably anxious.

But market dislocation can create opportunities, especially for the active investor, according to LGM Investment’s Global Emerging Markets Fund lead portfolio manager, Rishi Patel.

“Emerging markets are borrowers and developed markets are lenders; whenever events like these happen money flows back home and that has a disproportionate impact on emerging markets,” he said.

“But a massive dislocation in the short term in emerging markets will lead to a lot of attractiveness in the asset class.

China markets have really not corrected to factor in whatever has happened in China, while global markets have corrected a lot more.

Rishi Patel

“Once we stabilise, money will come back into emerging markets.”

Sarah Shaw01, global portfolio manager and chief investment officer at 4D, believes markets will recover rapidly when they are no longer shadowed by the coronavirus.

“All emerging markets have been sold-off; no one has been immune,” she said.

“When countries get on top of the virus we would expect a fast and significant re-rating towards fair value.”

Platinum Investment Management investment specialist Douglas Isles 02 said China’s swift action to control the pandemic has seen its bourse bounce back relatively unscathed.

“China is the largest emerging market, and indeed the second largest market in the world,” he said.

“Given the swift and decisive actions that appear to have contained the virus, likely coupled with lower starting valuations, the Chinese market has held up well.

“US and Australia in contrast were at all time

Emerging markets | Featurette

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

highs, with some very over-priced stocks.”

He believes Chinese equities will continue to be an investment opportunity going forward.

“China has been a great investment opportunity for several years now and remains so,” Isles said.

The firm’s international fund earned 18% per annum from its Chinese investments, he said.

“This is well ahead of what global markets delivered, and it remains overlooked by many, particularly the more interesting domestic companies,” Isles added.

“But thinking in terms of an index, or a market, is not helpful when so much change is taking place.”

In contrast, Patel said the Chinese market was not an investment opportunity, as the bourse had not corrected significantly as expected.

“China markets have really not corrected to factor in whatever has happened in China, while global markets have corrected a lot more,” he said.

“If this was something like SARS, which was a contained event; it happened between one or maybe two quarters, there would be dislocation, asset prices would come off, and that would be an opportunity for long term capital to be deployed.

“But as this has progressed, things have obviously evolved in a much different way.”

Investors, who may have thought that the pandemic could be a buying opportunity in China, are now looking elsewhere, Patel said.

“The question is whether you should deploy more capital in some of the other markets now, which have dislocated in a greater way than China,” he said.

But, Fidelity International investment director Catherine Yeung 03 believes China has some incredible opportunities for the long-term investor.

“When people think China, they think growth, consumption and beneficiaries from the rising consumer, but there is a lot going on in the country that the virus has overshadowed,” she said.

“For example, regulatory changes that have opened up the capital markets, as well as technological advancements and innovation going on in China.”

There are investment opportunities in both high growth and old economy sectors, she argued.

“China has been very much out of favor in regards to investor sentiment towards DM, EM, China and US trade, and Chinese debt,” Yeung said.

“But from a valuation perspective, China as a whole looks very attractive. There are certain brands like Alibaba, Tencent and Kweichow Moutai, which are trading at really high multiples, but we’re still not seeing across the board sentiment in China.

“A lot of value orientated sectors, or old economy sectors, are still lagging those high growth areas and high growth names where the earnings visibility has a bit of certainty.”

Isles also believes valuations are attractive in China.

“When we look around the world, the key issue

01: Sarah Shaw

02: Douglas Isles

03: Catherine Yeung

chief investment officer 4D

investment specialist Platinum Investment Management

investment director Fidelity International

in equity markets in recent years has been an incredible divergence between defensive and growth stocks,” he said.

“Interestingly, Chinese growth and defensive stocks have remained reasonably priced, investors tending in recent years to worry about industrial slowdown, financial reform and the trade war, and even giants like Tencent do not fully reflect their potential in their stock prices.”

Yeung warned the worse could still come.

“You’ve got to take into consideration whether there will be reinfection, or the second derivative of this,” she said.

“I think employment is going to be so key across all markets and the credit market is also key to look out for, in terms of what we should do next.”

The risk of a second derivative or reinfection in China could lead to opportunities in other emerging markets, Patel said.

“Governments and boards of companies are going to start questioning whether it is prudent to have such a large concentration of supply chains in one particular region or one particular country,” he said.

“Companies like Apple may ask suppliers to relocate in several other geographies; set up factories in China, Thailand and Mexico.

“Supply chains right now are optimised for cost efficiency, but they are not optimised for resiliency.”

Yeung recommends investors look to individual companies rather than markets for opportunities once bourses rebound.

“I don’t think its EM versus DM; Aussie equities versus Asian equities, I think it’s very stock specific and I think we are going to see more volatility,” she said.

“If a company has reasonably attractive earnings visibility, good brand power, good market positioning, and if they are trading at interesting levels then it could be an option for investors to get back in or add to their positions.”

Patel also believes emerging markets investors should focus on individual companies rather than the benchmark.

“Just ignore the index; it does not really represent the true picture of emerging markets,” he said.

“Our focus and way of constructing a portfolio is always bottom up; focus on companies that generate a lot of cash, which reward you as a minority shareholder.”

There are many companies owned by large families or the state in emerging markets, which may generate a lot of cash but will not distribute this to shareholders, Patel said.

“Emerging markets therefore requires active management, with a focus on cash generation and governance,” he said.

“Governance has to be front and centre of investment strategy.”

Isles argues generalisations about “poor” corporate governance in emerging markets should be taken with a grain of salt.

I don’t think its EM versus DM; Aussie equities versus Asian equities, I think it’s very stock specific and I think we are going to see more volatility.

Catherine Yeung

23

“Our team has been travelling to Asia to look at companies for over 30 years, so I would treat warily the often sweeping generalisations we hear about governance in other countries,” he said.

“Sound corporate governance is vital to companies’ long term viability, growth and profitability in emerging markets just as much as in developed.”

Corporate governance has improved, somewhat surprisingly so in China, Yeung said.

“What we’re beginning to see, and again, this is something that people are often shocked about, is that governance is improving from an ESG perspective in China,” she said.

“We’re seeing a set of enterprises with better quality assets, that are better managed, really focus on rewarding minority shareholders. And this is coming through in terms of dividend yield.”

This shift towards better corporate governance is reshaping the Chinese investor, she said.

“If we see equity and fixed income being viewed as a long-term investment case for mainland Chinese investors, then you can only see the growth and dynamics of the market and the reshaping of the investor base,” Yeung said.

“This is ultimately great for Aussie investors or English investors or foreign investors, because as a result of this total return strategy, we’re seeing better run companies coming through.”

Shaw believes infrastructure to be an opportune investment in both developed and emerging markets once sentiment improves.

“Infrastructure investors are spoilt for choice at these levels. Emerging markets have come into this downturn relatively undervalued and with thematics supportive of the long term opportunity set,” she said.

“We remain very excited about the emergence of the middle class in developing economies whereby we believe infrastructure is one of the clear and early winners of the idle class as it is needed to drive the evolution.

“I believe once investors gain some confidence in the market again that infrastructure, and emerging market infrastructure, would benefit as it is very attractively positioned at the moment from a fundamental quality and value perspective.”

However, the best time to invest in any market, particularly emerging markets, is when people are fearful, Isles argues.

“Make no mistake, there will be some businesses unable to survive the crisis, but others will likely come out stronger on the other side,” he said.

“Emerging markets are a diverse opportunity set, and rather than thinking about EM vs DM, [investors] should simply be thinking about investing in companies where the stock price adjustments have been too severe relative to the business’ long term prospects.”

As at March 31, the MSCI Emerging Markets Index was down 23.60% year to date, net of returns. fs

24

Mandates

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

Regal fund hands back money

01: Jim McKay

managing director Warakirri Asset Management

Warakirri appoints exclusive manager for equities Kanika Sood

N

orthcape Capital will now manage Warakirri Asset Management’s equities strategies ($300 million in Aussie equities, $75 million in international equities) as the sole manager under a new strategic partnership.

The two also have plans to introduce emerging market equities funds. Warrakirri will continue to do the ethical overlays for Australian and global equities offerings.

Their relationship goes back 15 years, when Warakirri first mandated Northcape.

So far, Northcape has been one of managers under the old multi-manager structure.

For example, in Australian equities it will now take the cake from five other managers (Alliance Bernstein, Cooper Investors, Greencape Capital, Allan Gray, Sterling Equity, Ubique Asset Management).

All of Warakirri’s equities funds under

management that Northcape will take over is non-institutional.

“We are excited to announce this partnership and importantly it provides our existing clients with the expertise of one of Australia’s leading investment managers,” Warakirri managing director Jim McKay01 said.

“Northcape has been the investment manager for part of our multi-manager client offerings for fifteen years and we have seen their investment approach perform through all market cycles.

We are delighted to appoint them to solely manage our existing client’s investments going forward.

“More broadly, this is an important step to assist in driving our growth ambitions and a key focus of the partnership is to provide new client groups with access to Northcape’s capabilities.” fs

The quote

This is an important step to assist in driving our growth ambitions and a key focus of the partnership is to provide new client groups with access to Northcape’s capabilities.

Rainmaker Mandate Top 20

Phil King’s Regal Funds Management has returned money to external investors for one of its global equities funds, but will continue to run the strategy internally.

The Regal Global Equity Income Fund used a quantitative approach to screen for relative value opportunities in the global options and futures markets, and was open to wholesale investors with the minimum investment size set at $100,000.

The strategy will continue to run internally, with plans to “possibly” open it back to external investors down the line.

The amount it returned to investors is less than $10 million.

“We are being cautious with extreme levels of volatility in the market,” Regal Funds Management chief executive Brendan O’Connor told Financial Standard.

“We are focused on our core business at the moment.”

Regal manages about $2 billion across all its strategies, with almost all of its funds reporting double digit returns since inception.

In recent years it has looked to diversify its offering, with a partnership with agricultural manager Kilter Rural, an ASX-listed fund-offunds, a resources sector royalties fund with Gresham.

Elsewhere, Regal’s high performance hedge fund posted a 32% decline in February with the firm forced to reassure clients. fs

Note: Selected bond and cash mandates appointed last 2 quarters

Appointed by

Asset consultant

Investment manager

Mandate type

Alcoa of Australia Retirement Plan

JANA Investment Advisers

Ardea Investment Management Pty Limited

Fixed Interest

60

Alcoa of Australia Retirement Plan

JANA Investment Advisers

BlackRock Investment Management (Australia) Limited

Global Fixed Interest

30

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

IFM Investors Pty Ltd

Cash

361

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Ardea Investment Management Pty Limited

Fixed Interest

110

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

IFM Investors Pty Ltd

Cash

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Coolabah Capital Institional Investments Pty Limited

Fixed Interest

AustralianSuper

Frontier Advisors; JANA Investment Advisers

IFM Investors Pty Ltd

Cash

AvSuper Fund

Frontier Advisors

Macquarie Investment Management Australia Limited

Global Fixed Interest

Care Super

JANA Investment Advisers

Apollo Global Management, LLC

Global Fixed Interest Credit

151

Care Super

JANA Investment Advisers

Marathon Asset Management (Australia) Limited

International Fixed Interest

69

Christian Super

JANA Investment Advisers

Macquarie Investment Management Australia Limited

Fixed Interest

Club Plus Superannuation Scheme

JANA Investment Advisers

Janus Henderson Investors (Australia) Limited

Enhanced Cash

Goldman Sachs & JBWere Superannuation Fund

UBS Asset Management (Australia) Ltd

Cash

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Australian Fixed Interest

24

Intrust Super Fund

JANA Investment Advisers

Western Asset Management Company Pty Ltd

Fixed Interest

68

legalsuper

Willis Towers Watson

Macquarie Investment Management Australia Limited

International Fixed Interest

Maritime Super

JANA Investment Advisers; Quentin Ayers

Other

Fixed Interest

QSuper

Willis Towers Watson

JP Morgan Asset Management (Australia) Limited

Fixed Interest

Telstra Superannuation Scheme

Albourne Partners; JANA Investment Advisers

Self

Cash

Telstra Superannuation Scheme

Albourne Partners; JANA Investment Advisers

Self

Australian Fixed Interest

Amount ($m)

70

127 2

207 3

Source: Rainmaker Information

International

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

PE firm shelves acquisition

01: Michelle Meyer

senior US economist Bank of America

Kanika Sood

Melbourne private equity firm BGH Capital and the Ontario Teachers’ Pension Plan have shelved the proposed acquisition of an Australia New Zealand dental practice chain as COVID-19 shutdowns impact the latter’s operations.

Abano Healthcare Group, which is listed on the New Zealand stock exchange, in November agreed to BGH and the Canadian pension fund acquiring all of its shares for $5.70 a share.

The transaction was approved by the courts and shareholders.

However, Abano told shareholders that the transaction was off as a “material adverse change” had occured in the business since COVID-19.

Abano’s New Zealand practices have been closed since March 24. Most staff in both countries have or will be stood down but some practices may operate to offer emergency services.

The two parties terminated their scheme implementation agreement, with no breaking fees.

Abano’s board now intends to engage with BGH and the Canadian pension fund to see if they can agree on an alternative potential transaction.

“The Abano board and management team will continue to assess alternative options for the company, with a view to maximising shareholder value. This includes an intention to engage with Bidco [Adams NZ Bidco Limited, the partnership between BGH and Ontario Teachers’ Pension Plan for the acquisition], which has indicated that it is willing to explore whether there is an alternative potential transaction,” the company said in a statement.

“To date, there have been no discussions as to the price and terms of such a transaction and there is no assurance that a transaction will proceed. The Board will update shareholders when it has further clarity.” fs

US faces deepest recession on record Ally Selby

T The quote

This will be the deepest recession on record, nearly five times more severe than the post-war average.

Shortseller to pay $900,000 The New South Wales supreme court has ordered Bonitas Research and its principal Matthew Wiechert to pay about $900,000 in damages and costs to ASX-listed Rural Funds Management.

Texas-based Bonitas, last August, published a report alleging RFF was overstating its net assets and fudging profits with dubious valuations of its assets or fabricating rental income.

RFF dragged it to court last year saying Bonitas’s claims were false and won in the judgement handed down in February. Damages were to be declared in March.

The court, this week, set the costs payable by Bonitas and Wiechert at $530,201 and damages at $368,974, declaring they had contravened both the Corporations Act and the ASIC Act. Interestingly, Bonitas had declined to appear in court for the December 9 hearing.

A letter sent from Wiechert to Rural’s lawyers stated the intention and showed confidence that Bonitas thought it could not be sued in Australia.

Instead, Wiechert reminded his opponent of the US’s strong freedom of speech laws and Rural’s connection to the US through its investors and hung in the possibility of a defamation suit in the US. fs

25

he US is now facing a COVID-19 triggered recession that will be the worst on record, according to Bank of America economists.

The analysis came as about 6.65 million people filed for unemployment in the US in the week ending April 3 - the highest level of claims received by the country’s Labor Department in its history.

Slashing the banks US economic forecasts, Bank of America senior US economist Michelle Meyer01 wrote in a note to the bank’s clients that GDP would contract for the next three quarters, declining by 10.4%.

“This will be the deepest recession on record, nearly five times more severe than the post-war average,” she said.

She predicts job losses will continue to skyrocket, totalling between 16-20 million in the next two months.

“The pain is unlikely to subside quickly as many states have reported major backlogs of applications,” Meyer said.

“The staggering job losses could send the unemployment rate as high as 15.6%, much higher than in previous downturns.”

According to the Department of Labor, nearly all claims cited the spreading coronavirus as the reason for their unemployment.

“The COVID-19 virus continues to impact the number of initial claims. Nearly every state providing comments cited the COVID-19 virus,” it said.

Meyer believes more fiscal stimulus – in addition to the US$2 trillion announced – is

required to pull the country out of a recession.

“We think there is more to come,” Meyer said.

“Given the severity of the downturn, we think more fiscal stimulus will be needed.”

These could include payroll tax cuts and rebates, more unemployment benefits, an infrastructure bill and additional funding for small businesses.

She predicts US fiscal stimulus could total between US$3-5 trillion; or 15-25% of GDP. Despite this, State Street Global Market’s multi-asset class strategist Marija Veitmane believes US stocks will continue to outperform. “[The] US is weeks behind many European and Asian countries in terms of fighting the coronavirus outbreak,” she said.

“It virtually guarantees horrific infections rate and death headlines, as well as economic weakness and earnings collapse reports.

“Despite this, we expect US stocks to perform better than the rest of the world.”

The nature of US stocks is key to their outperformance, she argued.

“US stock indices have higher than average allocation to technology and health care sectors – two best performing sectors this year,” Veitmane said.

“Consequently, it has lower weighting in energy and financial sectors - the weakest so far.

“Also, US stocks on average have much stronger balance sheets and profitability, which should make them a relative (!) safe haven now.” fs

Ontario Teachers’ takes stake in desal plant Elizabeth McArthur

The $201 billion Ontario Teachers’ Pension Plan along with Morrison & Co, on behalf of the Utilities Trust of Australia have acquired The Infrastructure Fund’s ownership stake in the Sydney Desalination Plant.

Following the transaction, Ontario Teachers’ ownership of the plant will increase to 60% while UTA’s interest (managed by Morrison & Co) will increase to 40%.

Ontario Teachers’, UTA and The Infrastructure Fund acquired Sydney desalination plant in 2012 through a 50-year lease from the government of New South Wales.

“Sydney Desalination Plant has been a great investment for Ontario Teachers’, and this incremental acquisition demonstrates our commitment as long-term, dedicated and constructive owners,” said Ontario Teachers’ senior managing director, infrastructure and natural resources Dale Burgess.

“Australia remains an important investment destination for us, particularly as we look to expand our portfolio in the Asia-Pacific region in the coming years.”

The pension fund is continuing to work side-by-side with Morrison & Co and SDP’s management team to ensure SDP fulfils its essential purpose of providing water supply security to the community it serves, he added.

“At Morrison & Co, we aim to invest in businesses that serve our communities’ most vital long-term needs. SDP fits that bill.

It’s a high-quality and well-managed core infrastructure asset that addresses the challenge of providing water supply security in a changing global climate,” Morrison & Co head of Australia and New Zealand Paul Newfield said.

“We are committed, long-term investors and look forward to working together with Ontario Teachers’ and SDP’s management team to ensure SDP continues to fulfill this critical role.”

Chief executive of Sydney Desalination Plant Philip Narezzi said: “We look forward to continuing to work with both Ontario Teachers’ and Morrison & Co in ensuring that SDP continues to be a world-class desalination facility that provides reliable and sustainable drinking water to Sydney residents whenever it is required.” fs

26

Managed funds

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07 PERIOD ENDING – 29 FEBRUARY 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

GROWTH

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

CAPITAL STABLE

IOOF MultiMix Growth Trust

660

12.4

1

10.5

1

7.9

2

IOOF MultiMix Moderate Trust

606

8.9

1

7.5

2

6.0

1

Fiducian Growth Fund

139

10.7

2

9.5

2

7.4

3

BlackRock Scientific WS Diversified Stable

64

9.0

3

6.8

3

5.3

3

MLC Wholesale Horizon 6 Share Portfolio

256

8.8

4

9.2

3

7.0

4

Macquarie Capital Stable Fund

31

8.0

5

6.1

4

4.4

8

Fiducian Ultra Growth Fund

195

9.5

3

8.8

4

8.2

1

IOOF MultiMix Conservative Trust

697

7.5

9

5.8

5

4.9

5

MLC Wholesale Horizon 5 Growth Portfolio

528

7.5

5

7.7

5

5.8

5

Dimensional World Allocation 50/50 Trust

498

6.1

4

5.8

6

5.3

4

21

6.3

10

7.4

6

Fiducian Capital Stable Fund

285

7.5

12

5.7

7

4.5

7

Russell High Growth Fund - Class A

118

6.9

6

7.2

7

5.7

6

Perpetual Diversified Growth Fund

112

5.6

13

5.6

8

4.1

10

Russell Growth Fund - Class A

MLC Horizon 3 Conservative Growth Portfolio

9

4.3

9

Pendal Active High Growth Fund

391

6.8

7

6.9

8

5.4

7

Pendal Active Growth Fund

63

6.4

8

6.8

9

4.9

10

Russell Portfolio Series - Growth - Class A

48

6.3

9

6.7

10

5.4

8

8.1

6.4

Sector average

238

8.2

BALANCED IOOF MultiMix Balanced Growth Trust

1095

5.5

7

5.5

Pendal Active Moderate Fund

188

6.3

8

5.4

10

AMS Moderately Conservative Fund

239

6.3

6

5.3

11

4.7

Sector average

333

5.9

5.0

4.2

6

CREDIT 486

11.3

1

9.5

1

7.2

3

Principal Global Credit Opportunities Fund

145

13.4

1

6.0

1

5.4

1

1886

11.1

2

9.4

2

7.2

2

Pendal Enhanced Credit Fund

397

7.2

3

5.6

2

4.6

4

83

10.4

3

8.9

3

6.8

7

Metrics Credit Partners Div. Aust. Senior Loan Fund

2329

5.0

7

5.1

3

4.9

2

Ausbil Balanced Fund

337

10.2

4

8.8

4

6.9

5

PIMCO Global Credit Fund

169

8.8

2

4.8

4

4.4

5

Macquarie Balanced Growth Fund

120

9.4

7

8.7

5

6.4

8

Mason Stevens Credit Fund

119

6.6

4

4.7

5

4.7

3

BlackRock Tactical Growth Fund

727

9.4

6

8.5

6

6.8

6

PIMCO Income Fund

1003

4.6

8

4.2

6

Responsible Investment Leaders Bal

519

9.2

8

8.2

7

5.2

16

PIMCO Australian Short-Term Bond Fund

362

6.1

6

4.1

7

3.3

12

1138

8.7

9

7.8

8

5.3

15

Franklin Australian Absolute Return Bond

323

4.6

9

4.1

8

3.9

9

BT Multi-Manager Balanced Fund

31

7.4

14

7.7

9

Perpetual Credit Income Fund

543

3.8

15

4.0

9

4.1

7

Zurich Managed Growth Fund

99

7.1

15

7.6

JPMorgan Global Bond Opportunities Fund

544

6.3

5

3.9

10

4.1

6

Sector average

824

4.8

3.6

3.5

SSGA Passive Balanced Trust Fiducian Balanced Fund

Vanguard Managed Payout Fund

Sector average

819

7.6

10

5.4

7.0

5.5

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

8

Source: Rainmaker Information

OPINION

We are not in competition with industry superannuation funds he recent wave of mass job losses combined T with the government allowing early access to superannuation has become a perfect storm

01: Josh Dalton

director Dalton Financial Partners

situation for certain industry super funds, especially those with a lot of casual members and exposure to industries such as hospitality.

Most of these funds carry a high level of unlisted investments in their ‘flagship’ strategies and with inflows coming to a grinding halt, could need government assistance to provide liquidity if early access withdrawals are greater than expected.

This is an extremely unfortunate situation and one that is difficult to ‘stress test’ for.

In recent weeks I’ve noticed a lot of financial advisers have been quick to jump on this opportunity to criticise and denounce industry funds for misleading members and having too much exposure to unlisted investments. In some cases, it’s as though they are almost celebrating this as some sort of victory or ‘I told you so’ moment.

In our industry, there appears to be a lot of advisers who still see the industry funds as competition. This will definitely be the case when it comes to advisers who have built their business model around attracting assets under management.

This public criticism doesn’t help our cause, as it may give the impression that advisers are threatened by these funds and we are not truly ‘product neutral’.

I do agree that industry funds need to do a better job with providing investment transparency and that they have blurred the lines when it comes to what constitutes a ‘balanced strategy’.

You could also argue that members may not really understand the risks (including liquidity) of the investment strategies promoted.

However, the issue here is an unexpected event causing substantial early withdrawals from super, not investment failure.

It also doesn’t help when members switch to cash irrationally.

This can be an issue when there is too much focus on investment returns and the majority of members are unadvised and don’t really understand the nature of the investments or how to react in situations like this.

Despite criticism, I think that a healthy exposure to unlisted investments makes a lot of sense in a long-term scheme like superannuation. If you have the inflows, why wouldn’t you seek to maximise member returns by access-

ing larger scale investments and projects that might otherwise be out of reach?

This is one of the advantages I cite when talking to clients about the pros and cons of industry super funds. I can’t access the same investments in retail platforms.

I also think a healthy exposure to unlisted assets reduces portfolio volatility, which is important for giving investors a smoother ride.

Industry funds have always been a good option for our younger clients, but it’s important to make sure they understand the underlying investment strategy.

There was a time when I also used to view industry funds as competition, but advice is evolving and we are no longer ‘representatives’ of the retail fund sector.

Part of this evolution is being completely impartial when we give advice, but this can be difficult to do with an AUM-focused business model. Your own agenda can get in the way of providing unbiased advice.

At the end of the day, industry funds are just another product we can consider when advising clients. We need to set our agendas aside and assess all products on their individual merits. fs

Super funds

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07 PERIOD ENDING – 29 FEBRUARY 2020

Workplace Super Products

1 year % p.a. Rank

3 years

5 years

SS

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

GROWTH INVESTMENT OPTIONS UniSuper - Sustainable High Growth

Retirement Products

11.7

1

8.4

3

AAA

UniSuper Pension - Sustainable High Growth

8.8

32

10.6

2

7.5

14

AAA

Equip Pensions - Growth Plus

HOSTPLUS - Shares Plus

10.3

5

10.1

3

8.8

2

AAA

Australian Ethical Super Pension - Growth

AustralianSuper - High Growth

10.0

6

9.8

4

8.0

7

AAA

Club Plus Industry Division - High Growth

7.3

97

9.8

5

8.0

6

Vision Super Saver - Just Shares

8.3

45

9.7

6

7.4

Media Super - High Growth

9.6

10

9.7

7

Intrust Core Super - Growth

7.9

66

9.7

First State Super Employer - High Growth

9.3

19

Cbus Industry Super - High Growth

8.7

36

7.6

1 year % p.a. Rank

3 years

5 years

SS

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

GROWTH INVESTMENT OPTIONS

1

SelectingSuper Growth Index

* SelectingSuper [SS] quality assessment

17.0

Equip MyFuture - Growth Plus

27

18.8

1

12.9

1

9.4

3

AAA

9.5

21

11.7

2

8.2

14

AAA

11.5

3

10.9

3

7.3

38

AAA

Vision Income Streams - Just Shares

9.2

24

10.9

4

8.3

13

AAA

AAA

Media Super Pension - High Growth

11.1

4

10.9

5

8.8

9

AAA

18

AAA

HOSTPLUS Pension - Shares Plus

11.0

5

10.7

6

9.5

1

AAA

7.8

12

AAA

Cbus Super Income Stream - High Growth

9.5

18

10.7

7

9.3

4

AAA

8

7.9

11

AAA

Intrust Super Stream - Growth

8.8

36

10.7

8

8.8

8

AAA

9.7

9

7.5

15

AAA

AustralianSuper Choice Income - High Growth

10.8

6

10.7

9

8.9

6

AAA

9.6

10

8.2

5

AAA

TASPLAN Tasplan Pension - Growth

11.8

2

10.6

10

8.2

15

AAA

SelectingSuper Growth Index

8.4

7.8

6.2

BALANCED INVESTMENT OPTIONS

8.6

6.8

BALANCED INVESTMENT OPTIONS

HESTA - Eco-Pool

11.5

3

9.8

1

8.6

3

AAA

UniSuper Pension - Sustainable Balanced

15.6

1

10.9

1

8.0

11

AAA

UniSuper - Sustainable Balanced

13.9

1

9.6

2

7.0

12

AAA

HESTA Income Stream - Eco

12.3

2

10.6

2

9.3

2

AAA

Media Super - Growth

9.0

15

9.3

3

7.6

6

AAA

Media Super Pension - Growth

10.4

10

10.6

3

8.7

4

AAA

AustralianSuper - Balanced

9.8

8

9.3

4

7.8

4

AAA

AustralianSuper Choice Income - Balanced

10.5

9

10.1

4

8.6

5

AAA

WA Super - Sustainable Future

12.5

2

9.0

5

6.9

15

AAA

TASPLAN Tasplan Pension - Balanced

11.7

4

9.8

5

7.7

14

AAA

Australian Ethical Super Employer - Balanced (accumulation)

10.5

4

8.8

6

6.7

22

AAA

Cbus Super Income Stream - Growth (Cbus Choice)

9.3

30

9.5

6

8.7

3

AAA

Mercy Super - MySuper Balanced

7.2

71

8.6

7

8.8

1

AAA

Media Super Pension - Balanced

9.3

31

9.5

7

8.0

8

AAA

State Super (NSW) SASS - Growth

9.2

10

8.5

8

6.7

21

AAA

Vision Income Streams - Balanced Growth

8.4

50

9.2

8

7.5

22

AAA

9

7.7

5

AAA

Australian Catholic Super RetireChoice - Socially Responsible

11.8

3

9.2

9

6.3

51

AAA

10

AAA

Intrust Super Stream - Balanced

8.1

69

9.1

10

7.6

18

AAA

Cbus Industry Super - Growth (Cbus MySuper)

8.4

27

8.5

TASPLAN - OnTrack Sustain

10.3

5

8.5

SelectingSuper Balanced Index

7.3

6.8

5.5

CAPITAL STABLE INVESTMENT OPTIONS QSuper Accumulation - QSuper Balanced

9.9

1

8.2

VicSuper FutureSaver - Socially Conscious

9.8

2

TASPLAN - OnTrack Control

9.7

3

AustralianSuper - Conservative Balanced

8.5

Energy Super - SRI Balanced

8.0

7.4

6.0

7.2

1

11.2

1

9.1

1

7.9

2

6.2

7.7

AustralianSuper Choice Income - Conservative Balanced

9.4

5

8.3

Cbus Super Income Stream - Conservative Growth

9.1

6

8.3

5

7.4

4

6.5

AAA

Energy Super Income Stream - SRI Balanced

9.8

3

8.0

8

7.1

5

22

AAA

TASPLAN Tasplan Pension - Moderate

10.3

Mercy Super - Conservative

6.0

57

6.7

6

2

AAA

UniSuper Pension - Conservative Balanced

TASPLAN - OnTrack Maintain

8.9

4

6.7

7

AAA

State Super (NSW) SASS - Balanced

7.5

11

6.6

8

5.4

13

StatewideSuper - Conservative Balanced

6.1

50

6.6

9

5.9

NGS Super - Balanced

5.9

60

6.5

10

5.6

5.9

5.0

AAA

QSuper Income - QSuper Balanced

4

AAA

3

AAA

3

5.0 7.1

4.1

CAPITAL STABLE INVESTMENT OPTIONS

1

SelectingSuper Capital Stable Index

SelectingSuper Balanced Index

8.0

1

AAA

2

7.4

3

AAA

3

7.5

2

AAA

8.2

4

5.6

19

AAA

2

7.6

5

AAA

8.1

11

7.5

6

6.5

7

AAA

NGS Income Stream - Balanced

6.8

33

7.3

7

6.3

8

AAA

AAA

MyLife MyPension - Conservative Balanced

7.2

27

7.2

8

6.9

5

AAA

6

AAA

Media Super Pension - Moderate Growth

8.4

7

7.2

9

5.5

26

AAA

7

AAA

StatewideSuper Pension - Conservative Balanced

6.1

62

7.2

10

6.5

6

AAA

SelectingSuper Capital Stable Index

Notes: Please note that all figures reflect net investment performance, i.e. net of investment tax, investment management fees and the maximum applicable ongoing management and membership fees.

The 2020 ratings are in Are you working with AAA rated super funds?

For more information visit www.selectingsuper.com.au

6.2

5.3

4.4

Source: SelectingSuper www.selectingsuper.com.au

28

Economics

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

Cash splash Ben Ong

“Whatever it takes and for however long it takes”! his is the collective battle cry of governT ments and central banks the world over as they try to calm nerves and get ahead of the coronavirus that’s paralysed economic activity on the planet.

Fiscal and monetary authorities are splashing cash, printing money and throwing everything at their disposal to try to prevent the certainty of a global recession from turning into a global depression.

According to Factset:“A Reuters poll of 40 economists showed a median 80% chance of recession this year, the highest level on record, up 50 bps in the past two weeks. The prior high was 60% in the months running up to the collapse of Lehman Brothers in 2008.”

The latest policy responses according to Factset: “ECB added €750B to its QE program, bring its planned purchases for the year to over €1T. Fed unveiled another facility to boost liquidity, aimed at money-market mutual funds. Also announced new swap lines with more central banks to help ease strains of dollar funding.

BOE announced an emergency 15 bp rate cut to bring its rate to 0.1%. Also boosted QE program by £200B to a total of £645B. BOJ was back in the market today with unscheduled bond purchases and bought a record amount of ETFs …

Central banks in Brazil, Taiwan, Indonesia, the Philippines in South Africa all cut rates.

And at home: “RBA cut cash rate by 25 bp to 0.25% and announced a government bond buying program to anchor 3Y yield around 0.25%. Central bank established term funding facility for banks worth at least A$90B, which would allow access to fund-

Monthly Indicators

Feb-20

Jan-20

Dec-19 Nov-19

Oct-19

Consumption

ing of up to 3% of existing outstanding credit.

Access to additional funding contingent on banks increasing lending to businesses. RBA will also continue to conduct one-month and three-month repo operations to provide liquidity. Australia’s bank regulator, APRA, acknowledged banks may need to deploy some of their current large capital buffers to facilitate lending to Australia’s economy. Separately, Australia’s government said it would buy $15B of RMBS to facilitate small loans to consumers and small businesses.”

More stimulus measures were announced only days later, underscored by the US$2 trillion fiscal package in America and the Fed announcing an open-ended QE and the Australian government’s $130 billion JobKeeper packaged aimed at keeping Australians employed.

So far, so good. Equity markets have responded positively to each and every additional stimulus announced.

But as we’ve witnessed over the past several weeks, one day’s (or one week’s) big gains could be wiped out in a day or three.

This extreme volatility will continue to persist until a breakthrough against the virus is announced. As US Fed chair Jerome Powell recently declared: “If we get the virus spread under control fairly quickly, then economic activity can resume … The virus is going to dictate the timetable here.”

The longer it takes, the more countries will keep their borders closed and their domestic communities in lockdowns, freezing international trade, business operations and shopping by households.

Most economists expect the global economy to rebound in the second half of 2020 – under the presumption, of course, that the coronavirus is licked by then – but what if it’s not? fs

Retail Sales (%m/m)

-

-0.28

-0.65

1.00

0.03

Retail Sales (%y/y)

-

1.96

2.60

3.20

2.21

-8.22

-12.52

-3.76

-9.75

-9.11

Sales of New Motor Vehicles (%y/y)

Employment Employed, Persons (Chg, 000’s, sa)

26.71

12.88

29.23

35.67

-24.15

Job Advertisements (%m/m, sa)

0.71

4.05

-5.57

-1.78

-1.14

Unemployment Rate (sa)

5.10

5.29

5.06

5.17

5.30

Housing & Construction Dwellings approved, Tot, (%m/m, sa)

-

0.35

0.96

5.12

-4.51

Dwellings approved, Private Sector, (%m/m, sa)

-

-15.26

3.91

10.41

-6.22

Housing Finance Commitments, Number (%m/m, sa) -

-

-

-

-

Housing Finance Commitments, Value (%m/m, sa)

-

-

-

-

-

Survey Data Consumer Sentiment Index

95.52

93.38

95.10

97.00

92.80

AiG Manufacturing PMI Index

44.30

45.40

48.30

48.10

51.60

NAB Business Conditions Index

0.37

2.00

3.04

4.46

4.14

NAB Business Confidence Index

-3.55

-1.03

-1.99

-0.07

1.80

Trade Trade Balance (Mil. AUD)

-

5210.00

5376.00

5656.00

Exports (%y/y)

-

-0.19

8.30

5.18

4.85

Imports (%y/y)

-

-1.70

5.58

-2.79

1.33

Dec-19

Sep-19

Jun-19

Quarterly Indicators

4024.00

Mar-19 Dec-18

Balance of Payments Current Account Balance (Bil. AUD, sa)

0.96

6.50

4.58

-1.88

-6.72

% of GDP

0.19

1.29

0.92

-0.38

-1.39

Corporate Profits Company Gross Operating Profits (%q/q)

-3.45

-0.61

4.46

2.07

3.71

Employment Average Weekly Earnings (%y/y)

3.24

-

3.02

-

Wages Total All Industries (%q/q, sa)

0.53

0.53

0.54

0.54

2.48 0.62

Wages Total Private Industries (%q/q, sa)

0.45

0.92

0.38

0.39

0.46

Wages Total Public Industries (%q/q, sa)

0.45

0.83

0.46

0.46

0.46

Inflation CPI (%y/y) headline

1.84

1.67

1.59

1.33

1.78

CPI (%y/y) trimmed mean

1.60

1.60

1.60

1.50

1.80

CPI (%y/y) weighted median

1.30

1.30

1.30

1.40

1.80

Output

News bites

Australia JobKeeper payment Australian Prime Minister Scott Morrison unveiled a wage subsidy scheme – dubbed Jobkeeper – worth around $130 billion aimed at keeping around six million Australian workers in their jobs. Under the programme, the government will subsidise payment of around 70% of the median wage or up to $1500 a fortnight for each employee a firm retains for six months, backdated to March 1. The government’s latest (and biggest ever stimulus package in history) has economists chopping their forecasts GDP contraction by as much as 80% and their unemployment rate predictions nearly halved from 16% to just around 8.5%.

America US$2 trillion stimulus It didn’t happen overnight, but it did happen. The White House and the US Senate reached a deal to

unleash a stimulus package worth around US$2 trillion. According to Factset: “Highlights include: $250B in direct payments to Americans; $367B in small business loans that can be forgiven if employees are retained; a $500B loan and loan guarantee program for industries, cities and states that with help from Fed can produce ~$4T in total liquidity; $150B for state and local stimulus funds; $130B for hospitals; and expanded unemployment benefits.”

This complements the Fed’s earlier largesse -- from an inter-meeting 50 bps cut in the fed funds rate on March 3, followed by 100 bps reduction on March 15.

China’s V-shaped rebound China bounces back into expansion. As if reports that China hasn’t recorded no domesticallytransmitted cases of the coronavirus for several days running isn’t good news enough, the latest purchasing managers’ survey from the National Bureau of Statistics provides an early indication of the resumption and/or return to growth in economic activity. The official manufacturing PMI surged to a reading of 52.0 in March from a record low reading of 35.7 in the previous month due to improvements in all of the index’s subcomponents. The official non-manufacturing PMI recorded an even bigger jump – 52.3 in March from February’s record low of 29.6 – that’s also due to a noticeable improvement in demand and business confidence. fs

Real GDP Growth (%q/q, sa)

0.53

0.55

0.60

0.50

Real GDP Growth (%y/y, sa)

2.19

1.82

1.62

1.75

0.16 2.17

Industrial Production (%q/q, sa)

1.53

0.48

1.37

0.39

0.39

Survey Data Private New Capex, Total, Chain, Vol, (%q/q, sa)

Financial Indicators

-2.79

-0.44

-0.93

-1.76

1.51

27-Mar Mth ago 3 mth ago 1Yr Ago 3 Yrs ago

Interest rates RBA Cash Rate

0.75

0.75

0.75

1.50

Australian 10Y Government Bond Yield

0.92

0.84

1.31

1.78

1.50 2.71

Australian 10Y Corporate Bond Yield

2.08

1.63

2.08

2.71

3.27

Stockmarket All Ordinaries Index

4874.2

-27.65%

-29.73%

-21.61%

S&P/ASX 300 Index

4798.2

-27.45%

-29.24%

-21.14%

-15.81% -15.74%

S&P/ASX 200 Index

4842.4

-27.27%

-29.01%

-21.08%

-15.74%

S&P/ASX 100 Index

4018.1

-27.22%

-28.95%

-20.54%

-15.79%

Small Ordinaries

2013.0

-29.33%

-31.68%

-26.10%

-14.71%

Exchange rates A$ trade weighted index

57.00

A$/US$

0.6127 0.6577 0.6983 0.7070 0.7615

58.10

59.00

60.70

66.70

A$/Euro

0.5541 0.5986 0.6255 0.6283 0.6996

A$/Yen

66.29 72.33 76.52 78.04 84.09

Commodity Prices S&P GSCI - commodity index

261.54

367.90

440.27

434.74

376.71

Iron ore

88.49

86.58

91.55

85.72

80.80

Gold WTI oil

1617.30 1652.00 1511.50 1309.70 1257.55 21.84

47.17

61.76

59.39

Source: Rainmaker /

47.02

Sector reviews

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

Australian equities

Figure 1: All ordinaries index 7

62

0.7200

DAILY CHANGE %

A$/US$

INDEX

0.7000

5

30 March 2019

4 3

0.6800

A$/US$

59

0.6600

A$ TWI - RHS

58 57 56 55

0.6200

1 0

0.6000

-1

0.5800

-2

54 53 52 51

0.5600 NIKKEI-225

FTSE-100 EURO STOXX-50 MSCI WORLD

S&P 500

61 60

0.6400

2

Prepared by: Rainmaker Information Source: Thompson Reuters /

CPD Program Instructions

Figure 2: A$/US$ exchange rate

6

ALL ORDS

50

JAN20

FEB20

MAR20

APR20

Great Scott to the rescue Ben Ong

I

would have named him Super Scott but I’ve already used that moniker in reference to former European Central Bank (ECB) president Marion Draghi when he did “whatever it took” to save the splintering of the single currency region from splintering due to the “Grexit” contagion.

Australian Prime Minister Scott Morrison may have been just politicking when he announced several bushfire recovery measures —topped by a A$2 billion funding for the establishment of the National Bushfire Recovery Agency – for one can read between the lines of their pronouncements that he and Treasurer Frydenberg still wanted to have the bragging rights to bringing the budget back into surplus.

Not anymore. The coronavirus has forced Morrison to make good on the statement he made even before the last embers of the bushfire were extinguished, “The surplus is of no focus for me whatsoever. What matters to me is the human

International equities

cost and meeting whatever cost we need to meet”.

That cost has just increased after the Morrison government’s announcement of a A$130 billion wage subsidy scheme to keep us, Australians all, in our jobs. According to the AFR: This equates to “6.65 per cent of GDP. Total fiscal stimulus so far is $214 billion, or more than 11 per cent of GDP … Combined with the $105 billion from the Reserve Bank and other fiscal measures the total stimulus tally is now $320 billion, equating to 16.4 per cent of GDP”.

Wait there’s more … to come. “Residential and commercial landlords will be banned for six months from evicting tenants affected by the economic shock from the coronavirus.

Banks will act as a backstop by offering loan repayment deferrals to help landlords. State and federal governments will in turn provide tax relief, such as lifting land taxes, to landlords for waiving or reducing rents”, according to Factset.

Figure 1: US jobless claims & unemployment rate TOTAL CLAIMS

RATE %

3000000 2500000

7

40

6

35 30

Jobless claims Unemployment rate - RHS

1500000

4

20

3

10

500000 0 1975

1980

1985

1990

1995

2000

2005

2010

2015

27 March 2020

1

0

0

T

he US Economic Policy Institute’s (EPI) early estimate of initial unemployment claims in the country, if not right on the dot, was way inside the ballpark.

EPI estimated 3.4 million workers filed for unemployment in the week ended March 21, that it says “dwarf every other week in history, as can be seen by comparing the projection against the trend in initial claims back to 1967”.

This is around a million more than the US Labor Department’s official estimate of 3.3 million but still “dwarf every other week in history … back to 1967”.

In as much as initial jobless claims provide a leading indicator of the unemployment rate, Federal Reserve Bank of St. Louis President James Bullard’s prediction that the US unemployment rate could hit 30% in the second quarter appears to be on target – eyeballing the charted positive correlation between initial job-

less claims and the unemployment rate shows that even Bullard’s grim forecast appears to be an under-estimation.

In spite of these, Wall Street rallied -- Dow +6.38%, S&P 500 +6.24%, Nasdaq +5.60%, Russell 2000 +6.30%. Perhaps it’s because claims came in a million less than expected; perhaps, it’s because of the Senate’s approval of the US$2 trillion stimulus package; perhaps, it’s the Fed’s unlimited QE and new facilities to support corporate credit and commitment to get credit flowing; perhaps it’s fund managers and investment companies rebalancing their exposure to equities – because the recent equity market correction placed them into overweight positions – or investors covering their short positions. Perhaps, perhaps, perhaps.

The overriding question is, are these measures enough to sustain market confidence, and more importantly, limit the contraction in the economy.

CPD Questions 1–3

1. What is the latest stimulus measure announced in Australia? a) Establishment of the National Bushfire Recovery Agency b) Open-ended QE by the Reserve Bank of Australia c) Wage subsidy scheme d) Negative interest rates 2. How much has the government spent on stimulus to date? a) A$2billion b) A$130billion c) A$214 billion d) A$320 billion

International equities NASDAQ COMPOSITE

S&P 500

RUSSELL 2000

DJIA

US labour market gets stung by the virus Ben Ong

Australian equities

2

5 2020

DAILY CHANGE %

5

25

15

1000000

1970

45

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].

3. Economists believe the wage subsidy scheme will lower the peak unemployment rate from the predicted 16% to around 8.5%. a) True b) False

50

2000000

Prepared by: FSIU Sources: Factset Prepared by: Rainmaker Information Source:

Perhaps, even more depending on the progression or death of the coronavirus.

Morrison may have thrown the budget surplus under a bus but not a single Australian has put him to task over this.

Au contraire, the government’s biggest ever stimulus package has economists chopping their forecasts GDP contraction by as much as 80% and their unemployment rate predictions nearly halved from 16% to just around 8.5%.

So much so that the All Ordinaries index surged by 6.6% on the day the government announced its latest cash splash – outperforming the S&P 500’s 3.4% gain on the same day and the MSCI developed equity market index’s 2.4% pick-up.

The A$/US$ exchange rate rose by half a percent and the A$ trade weighted index gained 0.93% on the day.

Mighty Mo’s splurge might not stop Australia from registering its first recession in 28 years but it’ll keep it short and shallow. fs

Figure 2: US equity indices

3500000

29

Not so, according to the latest report from Factset: “Multiple reports have discussed concerns that the ~$2T economic stimulus package will not be enough. The NY Times said the deal was not economic stimulus at all, but rather a series of survival payments that will last only a few months. WSJ touched on a similar dynamic, noting that until the spread of the coronavirus is contained, the economic damage will persist.”

How quickly the coronavirus is murdered is the key. As US Fed chair Jerome Powell declares, “If we get the virus spread under control fairly quickly, then economic activity can resume …

The virus is going to dictate the timetable here.”

And if I may add, the coronavirus will dictate the depth of the recession, the height of the unemployment rate and the amount of additional dollars spent to bribe it to go away.

By the end of March, more than 10 million Americans had filed for unemployment benefits. fs

CPD Questions 4–6

4. What is Bullard’s prediction for the US unemployment rate by Q2? a) 10% b) 20% c) 30% d) 40% 5. Which US equity index rallied following the release of the report showing initial jobless claims? a) DJIA b) S&P 500 c) Nasdaq composite d) All of the above 6. Initial jobless claims have a positive correlation with the unemployment rate. a) True b) False

30

Sector reviews

Fixed interest CPD Questions 7–9

7. Which Markit/CIPS UK PMI remained in expansion territory in March? a) Composite b) Manufacturing c) Services d) None of the above

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

Fixed interest

Figure 1: Markit/CIPS UK PMI 60

Figure 2: BOE Bank Rate Target 6.0

INDEX

PERCENT

55

5.0

50

4.0

45

3.0

9. UK Prime Minister Boris Johnson’s approval rating plummeted after he announced draconian lockdown measures. a) True b) False Alternatives CPD Questions 10–12

10. Which economic and/ or survey stat indicates a rebound in Chinese economic activity? a) Retail sales b) Official manufacturing and non-manufacturing PMI c) Industrial production d) All of the above 11. Which Chinese economic indicator/s rebounded in the January-February period? a) Retail sales b) Industrial production c) Fixed asset investment d) None of the above

Prepared by: Rainmaker Information Prepared by: FSIU Source: Sources: Factset

2.0

Services Composite

35

1.0

30

0.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Lockdowns: The cheaper alternative Ben Ong

“Australia is following in the COVID-19 footsteps of the UK and experts are warning the floodgates are likely to open soon.” his statement - printed by the AFR - talked T about the rising number of infections in the UK and how “Australia will also suffer as many severe cases and deaths as the UK”.

As at April 6, the UK has 41,907 cases of infection and 4313 deaths. As at the same date, Australia had 5635 cases and 34 deaths.

Just like the UK, fiscal and monetary authorities here (and elsewhere) are trying to mitigate the fallout on the functioning of the general economic activity.

Just like the UK, Australian economic activity will slow. The latest UK Markit/CIPS figures show composite PMI down to a reading of 37.1 in March from 53.0 in February; manufacturing down to 48.0 from 51.7; services down to

Alternatives

35.7 from 53.2. However, Australia has gone into an almost total lockdown earlier than its Motherland. ÜK Prime Minister Boris Johnson announced “draconian” social isolation measures on March 24 at the same time that ScoMo’s implementing ever more stringent lockdowns on Australian society (now at Stage 3 social restrictions).

If, indeed, Australia is following in the UK’s footsteps, that’s well and good – even better because Australia isn’t waiting until the number of infections gets out of control, when frontline responders are themselves infected and medical supplies (like ventilators) become scarce.

The Bank of England has cut interest rates by a total of 65 bps in March – 50bps on March 11 and 15 bps on March 19 and increased its bond purchases by £200 billion to £645 billion – while the UK Treasury reportedly plans to spend as much as 15% worth of the UK’s national output.

Go to our website to

Submit

All answers can be submitted to our website.

To limited avail, raising speculations for more stimulus.

But Johnson’s draconian – by western standards – shutdown regulations gave Britons hope.

So much so that, according to the latest YouGov poll, Boris’ net approval rating jumped to +20 in March from minus 7 in the previous month.

Fiscal and monetary authorities can only do so much to limit the economic fallout from the coronavirus.

The clue is in tackling the root of the problem – the continued spread of infections that’s scaring the beejesus out of consumers and businesses from spending – who are hesitant to spend and invest no matter how much money is thrown their way given the threat of death. With many shops and businesses shuttered, there’ll be little to spend money on anyway.

In the last week of March, credit card spending in grocery stores and supermarkets went up 74% year on year. fs

Figure 2: China Official PMI

Figure 1: Retail sales

60

15

INDEX

10

ANNUAL CHANGE %

50

5 0

40

-5 -10

Offficial Manufacturing

Prepared by: Rainmaker Information Prepared by: FSIU Source: IEA / Sources: Factset

Non-manufacturing

30

-15 -20

20

-25 2014

12. The Chinese government and the PBOC have begun to slowly wind back their stimulus programs as the economy improves. a) True b) False

10Y GILTS

Manufacturing

40

JAN17 APR17 JUL17 OCT17 JAN18 APR18 JUL18 OCT18 JAN19 APR19 JUL19 OCT19 JAN20 APR20

8. How many basis points has the BOE cut interest rates in total in March? a) 0 bps b) 50 bps c) 65bps d) 100bps

Bank Rate

2015

2016

2017

2018

2019

2020

2013

2014

2015

2016

2017

2018

2019

2020

First in, first out Ben Ong

S

lowly but surely, the wheels of industry – even social life itself – are grinding to a halt.

But I digress.

Just as the rate of infections from the coronavirus grow exponentially by the day, fiscal and monetary authorities in an increasing number of countries around the world increase their spending – and tighten social interaction — to try and get ahead of the debilitating consequence of the increasing number of infections from the corona virus.

One country after another is closing its borders, limiting (if not entirely) preventing person to person contact.

No pain, no gain! China’s – the epicentre of the virus – actions provide a guide map on what happens next.

China quarantined and locked down activity of about 60 million inhabitants of Wuhan in Hubei province – what other countries are

now progressively moving towards – if memory serves me right, in early February. This is at the same time that the Chinese government and the People’s Bank of China (PBOC) were rolling out stimulus measures – what other fiscal and money authorities are implementing now.

While it didn’t prevent Chinese economic activity indicators from contracting (big time): Industrial production dropped by 13.5% (year-on-year) in the January-February period following a 6.9% expansion in December; fixed asset investment plunged by 24.5% over the same period (following a 5.4% gain); and, retail sales sank by 20.5% (after growing by 8.0% at the end of 2019), reports are that, as at March 20, China had not recorded no domestically-transmitted cases of the virus for a second day running.

It gets even better.

China’s National Bureau of Statistics (NBS) latest purchasing managers’ survey provides an

early indication of the resumption and/or return to growth in economic activity.

The official manufacturing PMI surged to a reading of 52.0 in March from a record low reading of 35.7 in the previous month due to improvements in all of the index’s sub-components.

The official non-manufacturing PMI recorded an even bigger jump – 52.3 in March from February’s record low of 29.6 – that’s also due to a noticeable improvement in demand and business confidence.

Still, the PBOC and the government are not letting their guard down.

The central bank cut its seven-day repo rate by 20 bps to 2.2% on 30 March and pledged to use multiple policy tools to maintain market liquidity.

China’s politburo announced that it would introduce more policies and measures to mitigate the fallout from the coronavirus’ infection. fs

Sector reviews

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

31

Property

Property

CPD Questions 13–15

Prepared by: Rainmaker Information Source: AMP Capital

fter experiencing the biggest fall in prices A in 40 years last year, things were looking up for Australia’s property market. That is, until COVID-19 hit.

The pandemic and associated economic shutdowns now pose a significant threat to the outlook for property prices, according to AMP Capital chief economist Shane Oliver in an update in late March.

The first impact we’ll see, Oliver says, is on property transactions as social distancing is likely to result in delays.

According to Oliver, clearance rates and sales momentum started to slow in March.

“This may reflect an increasing desire on the part of buyers and sellers to put property transactions on hold to avoid being exposed to the virus unnecessarily,” he said.

“Social distancing policies will only intensify this. On its own this may crash transactions but may just flatten price gains.”

However, the biggest risk is posed by the recession Australia is likely to enter.

Past large share market falls have resulted in

How could COVID-19 impact house prices?

Jamie Williamson

a mixed impact on property prices, Oliver said.

The housing price was actually boosted by the 1987 crash as investors moved from cash to property, he notes.

“But the key is what happens to unemployment as this often forces sales and crimps demand,” he said.

In 1987 the economy remained strong and unemployment fell, however recessions in the early 1980s and 1990s saw average house prices fall across capital cities by up to 8.7% as unemployment grew.

While not a recession, house prices fell by 7.6% during the Global Financial Crisis due to an almost 2% rise in unemployment, Oliver said.

“Our base case is for a rise in unemployment to around 7.5% which is likely to drive a 5% or so dip in prices ahead of a property market recovery into next year and the economy bounces back and pent up demand is unleashed again helped by ultra-low interest rates,” Oliver said.

“Government and RBA measures to help struggling businesses and households through the coronavirus shutdown should help in preventing a really big rise in unemployment.”

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However, if the recession pushed unemployment out to 10% or more, then Australia faces the rise of tripping up the underlying vulnerability of its housing market flowing from high household debt and high house prices, he said.

Oliver noted some recent trends that give some reassurance this won’t happen.

These includes greater supply of dwellings since 2015 – though Sydney still suffers from high vacancy rates – and the belief that talk of mortgage stress is overstated.

Oliver said Australia’s interest-only loans have dropped from nearly 40% to just 18% of all loans and there has been no surge in forced sales and non-performing loans. Most of the increase in debt has gone to older, wealthier Australians who are better placed to service the loans too, he added.

All in all, a rise in unemployment of 10% or more could wreak havoc on serviceability, leading to falling house prices and less spending in the wider economy which would see property prices fall further.

But part of this would just be a reversal of the 9% bounce in average capital city prices seen since mid-last year, Oliver said. fs

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14. What does Oliver cite as the biggest risk the property market now faces in light of the COVID-19 pandemic? a) A decline in clearance rates b) A likely recession in Australia c) Falls in the share market d) The lack of opportunity for buyers to view properties 15. Oliver sees the unemployment rate as key in terms of where the property market is likely to head this year. a) True b) False

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13. Which of the following statements accurately reflects Shane Oliver’s commentary? a) Past large share market falls have resulted in a minimal impact on property prices b) Property prices are nearly always boosted by a big fall in the share market c) Past large share market falls have resulted in a mixed impact on property prices d) House prices increased during the 2008 Global Financial Crisis

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Profile

www.financialstandard.com.au 14 April 2020 | Volume 18 Number 07

A CALL TO ARMS The current environment is a true test for Australia’s financial advisers to stand up and restore trust in the profession. And Countplus chief executive Matthew Rowe is leading the call to arms. Ally Selby writes.

ow, more than ever, is the time for financial NThat’s advisers to truly make a difference. according to Countplus chief executive Matthew Rowe who believes advisers have the best opportunity in front of them to restore the sector’s reputation given what’s going on right now in markets.

“This is when real advisers stand up. This is when they demonstrate value. This is when they give their clients peace of mind,” Rowe says.

“This will be when financial advisers restore a lot of trust and respect; because of the work they’re doing right now, every single day, with their clients.”

Rowe, who came out of retirement to lead Countplus in early 2017, lives and breathes financial advice. He is steadfast that advisers, who suffered through the Royal Commission, can come out on the other side of this period of volatility and uncertainty too.

While sympathetic of the pressures of new education and ethics standards, Rowe believes this pain will help advisers “make a decent profit, decently”.

“What I believe in, is that the right people will get through this pain, and will come out the other side, and we will not only be a much stronger industry, but also a recognised profession,” he says.

“There will be standards in place that you have to meet; there will be barriers to entry in terms of needing to have a degree and other qualifications, and as a result, clients will get better advice.”

Rowe is adamant that a client’s best interests and the interests of shareholders should not be mutually exclusive.

“I think in the last 10 years there’s been a number of big institutions that lost sight of that,” he says.

On that, he believes that financial advisers should be running the industry, not the banks.

“I don’t think banks should be running financial advice businesses, they’ve shown that they’re not good at it,” Rowe says.

“There’s been a lot of pain through this transition following the Royal Commission; a lot of people have lost their jobs in wealth management, and a lot of clients have been hurt through massive adviser exits.”

Rowe is working to turn that around.

In 2011, Countplus sold its financial advice business Count Financial to the Commonwealth Bank for $373 million.

The business bled red under the bank’s management, for a period losing more than $13 million a year, with red tape, compliance checklists and bureaucracy to blame.

After almost a decade of this Countplus bought Count Financial back for just $2.5 million in late 2019.

And in under three months, the business turned a profit.

“The changes we’ve made enabled advisers to deliver twice as much advice in that period,

compared to the same time last year when CBA owned the business,” Rowe says.

It all comes down to Countplus being led by advice practitioners, he explains.

“We are all practitioners first; we’re not corporate guys, we’re not product distribution salespeople, we’re not bankers,” Rowe says.

“Wealth management and financial advice should be run by people who’ve actually been involved in the profession and who have at some stage in their life sat in front of a client and actually done the job. That’s what we’ve been building at Countplus.”

Rowe’s father himself was a financial planner, and he has fond memories of growing up surrounded by his father’s colleagues.

“I can remember stories of how these guys had really helped a lot of people and I saw it as something I was suited to because of my background in accounting and understanding of tax and financial structures,” Rowe says.

“I just thought it was a great opportunity to become self-employed, help people and get paid for it.”

After departing a role at NAB as a business banking manager, Rowe led his own financial advisory and accounting firm Hood Sweeney for 16 years.

During this time, he also served as the chair of the Financial Planning Association, the Australian representative for the Financial Planning Standards Board, and the chair of charitable organisations Youth Opportunities Association and the Future2 Foundation.

He also played a critical role in the development of the Code of Ethics during his time with FASEA as a director and representative for financial services practitioners.

His greatest regret is not taking more people with him on the journey.

“Make sure you pause and look back and bring as many people with you as possible if you’re going be in a leadership position,” Rowe says.

“If I could have my time again as the chair of the FPA, I probably would have tried to bring more people with us on the journey around banning conflicted revenue commissions, because it just continues to be a pain point.”

The industry should never have had to face what happened to it in the Royal Commission, he says.

“I think if we could have brought more people along with us voluntarily, rather than being forced to pass that through legislation, we would have got better outcomes,” Rowe says.

And while regulation has a role to play in ensuring stronger outcomes, he believes what the industry is experiencing now it nothing compared to the technological shift to come.

In his opinion, this revolution - supercharged by a period of COVID-19-induced isolation and Australia’s corporate world transitioning to work from home - will see the end of platforms as we know them.

“I believe the next major technology revolution that’s about to take place in financial advice is that there’ll be software available for financial advisers

Financial advice should be run by people who’ve actually been involved in the profession and who have at some stage in their life sat in front of a client and actually done the job.

Matthew Rowe

to run client portfolios and replace wraps,” Rowe says.

“It will be a subscription service… where you pay a flat monthly fee and accountants then pass that on to their clients.”

As such, percentage-based fees structures are headed out the door, he says.

“Instead, it will be a naked pricing model, which will be a technology led solution, directly from the adviser desktop to the fund managers and the investments,” Rowe says.

While this will present challenges for some, if not all advisers, Rowe fiercely believes in the future of advice.

“My hope for the future of advice is that financial advisers see themselves as a recognised profession,” he says.

“A profession with certain rules and education standards, codes of ethics that deal with conflicts of interests, and is not tied to product distribution.”

This shift will benefit every aspect of the advice ecosystem, he argues.

“If we can move away from this whole product sales and distribution focus, it will be great for clients, great for advisers and do you know what, a really strong and independently focused advice group will actually be really good for product people as well,” Rowe says.

“We’ll end up having more clients and there will be more product solutions needed. It’s just that they’ll be a best of breed product solution, not that they just get sold because they are part of a distribution team.”

A revolution is brewing, and the financial advice sector is primed to thrive, Rowe says.

It just has to step up to the challenge. fs

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